-----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, I8hjC7E1Y8yFx/T7Pz2Ab1x3io7wzQZBl41BfrXuUlRb2CK8evT7fDsgP2VwLyUP Jk1XPpZ1R7pyIrxO4dze4w== 0000910680-97-000296.txt : 19971023 0000910680-97-000296.hdr.sgml : 19971023 ACCESSION NUMBER: 0000910680-97-000296 CONFORMED SUBMISSION TYPE: S-2 PUBLIC DOCUMENT COUNT: 6 FILED AS OF DATE: 19971022 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: TII INDUSTRIES INC CENTRAL INDEX KEY: 0000277928 STANDARD INDUSTRIAL CLASSIFICATION: SWITCHGEAR & SWITCHBOARD APPARATUS [3613] IRS NUMBER: 660328885 STATE OF INCORPORATION: DE FISCAL YEAR END: 0629 FILING VALUES: FORM TYPE: S-2 SEC ACT: SEC FILE NUMBER: 333-38467 FILM NUMBER: 97699184 BUSINESS ADDRESS: STREET 1: 1385 AKRON ST CITY: COPIAGUE STATE: NY ZIP: 11726 BUSINESS PHONE: 5167895000 MAIL ADDRESS: STREET 1: 1385 AKRON STREET CITY: COPIAGUE STATE: NY ZIP: 11726 S-2 1 REGISTRATION STATEMENT ON FORM S-2 As Filed with the Securities and Exchange Commission on October 22, 1997 Registration No. 333 - ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM S-2 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------ TII INDUSTRIES, INC. (Exact name of registrant as specified in its charter) Delaware 66-0328885 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) ---------- 1385 Akron Street, Copiague, NY 11726 (516) 789-5000 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) Timothy J. Roach, President TII Industries, Inc. 1385 Akron Street Copiague, NY 11726 (516) 789-5000 (Name, address, including zip code, and telephone number, including area code, of agent for service) ---------- Copies to: Richard A. Rubin, Esq. Stephen H. Kay, Esq. Parker Chapin Flattau & Klimpl, LLP Squadron, Ellenoff, Plesent 1211 Avenue of the Americas & Sheinfeld, LLP New York, New York 10036 551 Fifth Avenue Telephone: (212) 704-6000 New York, New York 10176 Telecopy: (212) 704-6288 Telephone: (212) 661-6500 Telecopy: (212) 697-6686 --------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as practicable after the effective date of this Registration Statement. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. |_| If the registrant elects to deliver its latest annual report to security-holders, or a complete and legible facsimile thereof, pursuant to Item 11(a)(1) of this form, check the following box. |_| (facing page continued on next page) If this Form-is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. |_| __________ If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. |_| __________ If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. |_| __________ If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. |_| CALCULATION OF REGISTRATION FEE ================================================================================ Title Of Each Proposed Proposed Class Of Maximum Maximum Securities Amount Offering Aggregate Amount Of To Be To Be Price Offering Registration Registered Registered(1) Per Share(2) Price(2) Fee - -------------------------------------------------------------------------------- Common Stock, $.01 par value 2,875,000 $7.53 $21,648,750 $6,560.23 ================================================================================ (1) Includes 375,000 shares subject to the Underwriters' over-allotment option. (2) Estimated solely for the purpose of calculating the registration fee on the basis of, pursuant to Rule 457(c), the average of the high and low reported sales prices per share of the registrant's Common Stock on The Nasdaq National Market on October 21, 1997. THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. - -------------------------------------------------------------------------------- ================================================================================ INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. ================================================================================ SUBJECT TO COMPLETION, DATED OCTOBER __, 1997 2,500,000 Shares [LOGO] Common Stock All of the 2,500,000 shares of Common Stock offered hereby are being offered by TII Industries, Inc. ("TII" or the "Company"). The Company's Common Stock is included for trading on the Nasdaq National Market under the symbol "TIII." On October 21, 1997, the last sale price of the Common Stock on the Nasdaq National Market was $7 5/8 per share. See "Price Range of Common Stock." For a discussion of certain material factors that should be considered in connection with an investment in the Common Stock, see "Risk Factors" commencing on page 7 hereof. --------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ================================================================================ Price to Underwriting Proceeds to Public Discount (1) Company (2) - -------------------------------------------------------------------------------- Per Share...................$ $ $ Total (3)...................$ $ $ ================================================================================ (1) The Company has agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended. See "Underwriting." (2) Before deducting offering expenses estimated to be approximately $500,000 payable by the Company. (3) The Company has granted the Underwriters a 30-day option to purchase up to 375,000 additional shares of Common Stock solely to cover over-allotments, if any, on the same terms and conditions as the shares offered hereby. If the option is exercised in full, the total Price to Public, Underwriting Discount and Proceeds to Company will be $ , $ and $ , respectively. See "Underwriting." --------------- The shares of Common Stock are offered by the several Underwriters named herein, subject to receipt and acceptance by them, and subject to their right to reject any order in whole or in part. It is expected that delivery of such shares will be made at the offices of Rodman & Renshaw, Inc., New York, New York on or about November , 1997. --------------- Rodman & Renshaw, Inc. The date of this Prospectus is , 1997 [Photograph] [Photograph] TII's Unique Gas Tube The Company's Broadband NID Overvoltage Surge Protectors Product Line [Photograph] [Photograph] The Company's recently developed One of the Company's Coaxial Overvoltage Surge Protectors custom-designed Fiber Optic Enclosures CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK, INCLUDING PURCHASES OF THE COMMON STOCK TO COVER SOME OR ALL OF A SHORT POSITION IN THE COMMON STOCK MAINTAINED BY THE UNDERWRITERS AND THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING." IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP MEMBERS (IF ANY) OR THEIR RESPECTIVE AFFILIATES MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 103 OF REGULATION M. SEE "UNDERWRITING." PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and the Company's financial statements, and the notes thereto, appearing elsewhere in this Prospectus. Unless the context otherwise requires, the terms "TII" or the "Company" refer to TII Industries, Inc. and its subsidiaries. See "Risk Factors" for a discussion of certain factors that should be considered by prospective investors. This Prospectus contains forward-looking statements that involve known and unknown risks and uncertainties that may cause the Company's actual results to be materially different from those anticipated or discussed herein. Factors which may cause such differences are discussed in cautionary statements accompanying such forward-looking statements and under the caption "Risk Factors" in this Prospectus. Unless otherwise indicated, all financial and share information set forth in the Prospectus assumes (i) a public offering price of $7 5/8 per share and (ii) no exercise of the Underwriters' over-allotment option. THE COMPANY TII designs, manufactures and markets overvoltage surge protectors, network interface devices ("NIDs"), station electronics and fiber optic products for use in the communications industry. The Company sells its products to telephone operating companies ("telcos"), original equipment manufacturers ("OEMs"), cable television ("CATV") providers and competitive access providers of communications services. The Company believes that the performance of its products, together with its commitment to quality and service, has fostered strong customer loyalty, leading four of the five Regional Bell Operating Companies ("RBOCs") and most of the 1,300 independent telcos to specify one or more of the Company's overvoltage surge protectors for use at their subscriber station locations. TII has been a leading supplier of subscriber station overvoltage surge protectors to U.S. telcos for over 25 years. The Company believes that its proprietary overvoltage surge protectors offer superior, cost-effective performance features and characteristics, including high reliability, long life cycles and advanced protection against adverse environmental conditions. Overvoltage surge protectors are mandated in the United States by the National Electric 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. While similar requirements exist in most other developed countries, a significant portion of the world's communications networks remains unprotected from the effects of overvoltage surges. The Company also markets a complete line of NIDs tailored to customer specifications. NIDs house the Federal Communications Commission ("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, which, among other things, allow a telco to remotely test the integrity of its lines, thereby minimizing costly maintenance dispatches. To address the demand for voice, high-speed data and interactive video services, telcos and other communications providers are expanding and upgrading their networks to accommodate the higher bandwidth necessary to transmit these services. To meet its customers' needs, TII has introduced a state-of-the-art broadband NID product line specifically designed to house the telcos' technology of choice, whether traditional twisted pair lines or high-bandwidth coaxial cable or fiber optic lines. The features and functionality of the Company's broadband NIDs were instrumental in the Company recently winning two major telco contracts. As an integral part of the Company's broadband NID product line, the Company recently developed a high-performance patented coaxial overvoltage surge protector to safeguard coaxial cable lines. While providing superior overvoltage surge protection, the Company's in-line coaxial overvoltage surge protector is virtually transparent to the signal on the network, permitting high-bandwidth signals to be transmitted without adversely affecting the signal. The Company also markets its coaxial overvoltage surge protector to CATV providers. Proposed revisions to the NEC, currently anticipated to take effect in 1999, would require 3 overvoltage surge protection on all new or existing CATV lines intended to carry voice, data or interactive video services. The Company also produces and sells a line of fiber optic products, including custom-designed enclosures and LIGHTRAX(R), a unique fiber optic management system used to route sensitive fiber optic cable throughout a facility. Communications is one of the fastest growing industries in the world today. The Company's strategy is to participate in the rapid growth of the communications industry by: (i) growing its core business by capitalizing on its reputation as a manufacturer of quality, high-performance products; (ii) introducing new and innovative products that are complementary to its current products; (iii) expanding into new markets, including CATV, international and wireless markets; and (iv) investing in production facilities to increase its manufacturing capacity, strengthen its technical capabilities, improve operating efficiencies and reduce costs. As a result of the Company's strong customer relationships, industry expertise and commitment to quality, the Company has recently been awarded four significant new contracts and contract extensions: o In April 1997, the Company entered into a multi-year contract extension to provide overvoltage surge protectors to Ameritech Corporation. o In July 1997, the Company was awarded a contract to provide new broadband NID products to the Puerto Rico Telephone Company ("PRTC"). o In September 1997, the Company won a multi-year contract to provide new broadband NID products to a RBOC. o In October 1997, the Company was awarded a contract to supply custom designed fiber optic enclosures and splice trays to a RBOC . The Company was organized under the laws of the State of Delaware in 1971. The Company's principal executive office is located at 1385 Akron Street, Copiague, New York 11726 and its telephone number is (516) 789-5000. 4 The Offering Common Stock Offered by the Company.............2,500,000 shares Common Stock to be Outstanding after the Offering(1)................................10,101,139 shares Use of Proceeds.................................To purchase additional equipment and leasehold improvements and for working capital and general corporate purposes. See "Use of Proceeds." Nasdaq National Market Symbol..................."TIII" _____________________ (1) Excludes the following shares reserved for issuance: (i) 1,505,401 shares subject to outstanding stock options granted to officers, directors, employees and consultants under the Company's stock option plans at a weighted average exercise price of $5.04 per share and an additional 187,500 shares subject to future grants under such plans; (ii) 300,000 shares issuable upon conversion of $750,000 of indebtedness due to an unaffiliated third party and 100,000 shares subject to an option granted to the holder of such indebtedness at an exercise price of $2.50 per share; and (iii) 80,000 shares subject to warrants granted for consulting and financial services at a weighted average exercise price of $6.46 per share. See "Capitalization" and Note 9 of Notes to Consolidated Financial Statements. 5 Summary Financial Data (In thousands, except per share data)
June 25, 1993 June 24, 1994 June 30, 1995 June 28, 1996 June 27, 1997(1) ------------- ------------- ------------- ------------- ---------------- Selected Statement of Operations Data: Net sales ......................... $ 33,474 $ 40,147 $ 43,830 $ 44,513 $ 50,675 Gross profit ...................... 8,589 10,832 13,048 12,557 9,254 Operating income (loss) ........... 1,987 3,066 3,602 3,856 (892) Net income (loss) ................. 1,212 2,389 2,942 3,737 (856) Selected Per Share Data: Net income (loss) per share-fully diluted ........................... $ 0.28 $ 0.41 $ 0.51 $ 0.47 $ (0.12) Weighted average shares outstanding - fully diluted .................. 5,865 7,943 8,402 8,179 7,430
As of June 27, 1997 ------------------- Actual As Adjusted(2) --------- -------------- Selected Balance Sheet Data: Working capital ...............................$19,655 $36,978 Total assets .................................. 42,823 60,146 Long-term debt and obligations under capital leases, including current portion ........... 2,841 2,841 Stockholders' investment ...................... 33,011 50,334 - --------------- (1) Includes non-recurring charges of $3.0 million ($2.9 million of which was charged to cost of sales), which consisted of an increase to the allowance for inventory, severance related costs and costs to close or relocate certain production processes. Exclusive of these charges, the Company would have reported a gross profit of $12.2 million, operating income of $2.1 million, net income of $2.0 million and fully diluted net income per share of $0.26. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." (2) Adjusted to reflect the sale by the Company of the 2,500,000 shares of Common Stock offered hereby and the receipt of the estimated net proceeds therefrom. See "Use of Proceeds" and "Capitalization." 6 RISK FACTORS In evaluating the Company and its business, prospective investors should carefully consider the following risk factors in addition to other information included in this Prospectus. RISK OF LOSS OF NEW CONTRACTS The Company has recently been awarded contracts with a RBOC and the PRTC for various products within its newly developed broadband NID product line. To meet the delivery commitments established in these contracts, the Company must expand production in order to begin volume deliveries of these products during the second and third quarters of fiscal 1998. The broadband NID product line has required, and will continue to require, significant capital investment in production and test equipment, molds and fixtures, as well as the maintenance of sufficient inventory levels, for much of which the Company is dependent upon timely performance by outside vendors. The Company must also complete leasehold improvements to its facilities in the Dominican Republic and, to a lesser extent Puerto Rico, and train the workforce necessary to manufacture these products. Should the Company's vendors fail to timely deliver the required equipment, molds, fixtures or inventory components, or should the Company fail to complete the leasehold improvements or train its workforce within the time constraints of the contracts, the Company could lose these contracts. The loss of these contracts, especially after the Company makes significant expenditures, could have a material adverse effect on the Company. See "Business-Recent Contracts." DEPENDENCE UPON KEY CUSTOMERS; LACK OF LONG TERM COMMITMENTS Direct sales to the Company's RBOC customers, their known distributors and OEMs known to use the Company's products as components in equipment manufactured for RBOCs have historically accounted for a substantial majority of the Company's net sales. The U.S. telephone industry is highly consolidated with the five RBOCs and GTE Corporation servicing over 85% of all subscriber lines. In most instances, the Company's sales are made under open purchase orders received from time to time from its customers pursuant to master supply contracts. Certain of such contracts permit the customer to terminate the contract due to the availability of more advanced technology or the Company's inability to deliver a product that meets the specifications on time, and certain supply contracts provide that the RBOC may terminate the contract at any time upon notice. While four out of the five RBOCs specify one or more of the Company's overvoltage surge protectors for use at their station locations, the loss of one or more RBOCs as purchasers of the Company's products, or a substantial diminution in the orders received from such purchasers, could have a material adverse effect on the Company. See "Business-Marketing and Sales." MAINTENANCE OF INVENTORY LEVELS TO RESPOND TO CHANGING CUSTOMER NEEDS The Company maintains significant levels of inventories to meet the rapid delivery requirements of its customers. The introduction or announcement by the Company or its competitors of products embodying new technologies, improvements on existing technologies, or changes in industry standards or customer requirements, could render the Company's existing products obsolete or unmarketable. Most of the contracts under which the Company supplies its products enable the customer to reduce or cease purchases with little or no advance notice. There can be no assurance that one or more of the Company's customers will not limit, defer or cease purchases of the Company's products which could also result in inventory write-downs or allowances, charges to earnings or otherwise have a material adverse effect on the Company. See "Selected 7 Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Consolidated Financial Statements. NEW PRODUCT INTRODUCTION AND EVOLVING INDUSTRY STANDARDS The market for the Company's products is characterized by changing technology, evolving industry standards, changes in customer requirements and product introductions and enhancements. The Company's success will depend, in large measure, upon its ability to rapidly identify and develop new, competitively priced products to keep pace with continuing changes in technology and customer preferences. Although, there can be no assurance that the Company will be able to timely respond to changing industry and customer needs, the Company continually seeks to improve its existing products and develop new products and enhancements to meet the needs of its customers and the marketplace. The Company believes that its future success will also depend in part upon its ability to enhance its current product offerings and develop new products that address its customers' needs for additional functionality and new technologies. Product development cycles can be lengthy and are subject to changing requirements and unforeseen factors which can result in delays. In addition, new products or features, when first released by the Company, may contain defects that, despite testing by the Company, are discovered only after a product has been installed and used by customers. Delays, undetected defects or product recalls could have a material adverse effect on the Company. See "Business-Products." COSTS ASSOCIATED WITH PRODUCTION OF NEW PRODUCTS When the Company begins commercial production of new products, it typically incurs increased costs. These increased costs result from, among other things, the hiring of temporary personnel, the outsourcing of certain production processes, initial purchases of materials in smaller than usual quantities, lower initial manufacturing yields for the new products and additional freight and expediting costs. The failure of the Company to adequately control these increased production costs could have a material adverse effect on the Company. See "Business-Competition." TECHNOLOGICAL CHANGE IN OVERVOLTAGE SURGE PROTECTION The Company's overvoltage surge protectors are based principally on gas tube technology. Solid state surge protectors have been developed for use within the telecommunications industry as a competitive technology to gas tubes. While solid state overvoltage surge protectors are faster at reacting to surges, gas tube overvoltage surge protectors have generally remained the station overvoltage surge protection technology of choice by most telcos because of the gas tube's ability to repeatedly withstand significantly higher energy surges than solid state overvoltage surge protectors. However, as communications equipment becomes more complex, the speed of the protector in reacting to a surge may be perceived to be more critical than its energy handling capabilities. Further, solid state protectors can be combined with gas tubes into a hybrid overvoltage surge protector module. While generally more expensive and complex than gas tube surge protectors, the hybrid surge protector can provide the speed of a solid state protector with the energy handling capability of a gas tube overvoltage surge protector. Although the Company has developed solid state and hybrid surge protectors, the development by competitors of solid state overvoltage surge protectors with increased energy handling capabilities or lower cost, more reliable hybrid surge protectors could have a material adverse effect on the Company. See "Business-Products" and "-Competition." 8 COMPETITION The Company is subject to significant competition with respect to all of its products. The Company's gas tube overvoltage surge protectors compete with other companies' gas tube overvoltage surge protectors, as well as with solid state and hybrid overvoltage surge protectors. Currently, the Company sells most of its subscriber overvoltage surge protectors in NID housings assembled by the Company or OEMs. Most NIDs sold in the United States are produced by competitors of the Company, some of which also market overvoltage surge protectors and station electronics. In addition, other suppliers to telcos could enter the market and compete with the Company. Furthermore, the Telecommunications Act of 1996 permits the RBOCs, which are presently the principal users of the Company's products, to manufacture telecommunications equipment. Accordingly, the RBOCs could decide to manufacture and supply their own NIDs rather than purchase them from outside suppliers. Most of the Company's competitors and many of those who could enter the Company's market are well-established suppliers to the telcos and are, or are part of, large corporations which have substantially greater assets, financial resources and larger sales forces, manufacturing facilities and research and development staffs than those of the Company. See "Business-Competition." INDUSTRY CONSOLIDATION AND PRICING PRESSURE The telcos have been going through a period of consolidation, including, for example, the merger of SBC Communications into Pacific Telesis Group, the merger of NYNEX Corporation into Bell Atlantic Corporation, and the recent announcement by the government of Puerto Rico that it is considering the divestiture of PRTC, possibly to another RBOC. As a result of this consolidation and the telcos' resulting purchasing power, together with the strength of certain of the Company's competitors, the pricing pressures in the markets in which the Company competes have increased. In virtually all instances in which the Company has master supply contracts, including with the RBOCs, such contracts do not establish minimum purchase commitments but govern other terms and conditions, including price. The Company's supply contracts generally prohibit the Company from increasing the price of its products sold thereunder for stated periods of time. Accordingly, any significant increase in the Company's costs during such periods without offsetting price increases could have a material adverse effect on the Company. In addition, certain of the Company's RBOC supply contracts contain declining price provisions. Such contractually mandated reductions in product selling prices could adversely affect gross margins of the Company if it cannot achieve corresponding reductions in unit manufacturing costs. See "Business-Raw Materials." To offset this pressure on the Company's profit margin, the Company intends to continue to develop new products with improved margins, enter new markets where the Company believes its products can achieve higher margins and improve operating efficiencies and reduce manufacturing costs. There can be no assurance that the Company will be successful in its efforts. See "Business-Manufacturing." OFFSHORE MANUFACTURING Except for its fiber optic products which are produced in North Carolina, the Company manufactures its products in facilities in Puerto Rico and the Dominican Republic. As a result, the Company is subject to certain risks of doing business outside the mainland of the United States, such as the potential for delays and added delivery expenses in meeting rapid delivery schedules of its customers. Additionally, the Company's Dominican Republic operations are subject to potential currency fluctuations, labor unrest and political instability, restrictions on the transfer of funds, export duties and quotas and U.S. customs and tariffs, and the potential for U.S. government sanctions, such as embargos and restrictions on importation, should certain 9 political or social events occur. Any such delays, unrest or sanctions could have a material adverse effect on the Company. See "Business-Manufacturing" and "-Properties." INTERNATIONAL SALES Although to date, the Company's export sales have not been material, the Company intends to expand its sales and marketing efforts in foreign countries which could pose certain risks, such as complying with multiple and potential conflicting regulations and product specifications, export and import limitations, tariffs, differences in intellectual property protection, currency fluctuations, overlapping or different tax structures, political and economic instability and trade restrictions. There can be no assurance that these efforts will be effective or that the Company will achieve significant international sales. See "Business-Marketing and Sales." EXPIRATION OF LEASE FOR PUERTO RICO MANUFACTURING FACILITY The Company's facilities in Puerto Rico have been operated under a lease agreement with the Puerto Rico Industrial Development Company ("PRIDCO") which has expired. The Company and PRIDCO have continued operating under the terms of the lease while they have been negotiating a new lease. While the Company believes it will be able to renegotiate this lease on commercially reasonable terms, there can be no assurance that it will be able to do so. The inability to renegotiate the lease would cause the Company to relocate to other facilities in Puerto Rico. The costs associated with any such relocation and attendant disruption of the Company's business operations could have a material adverse effect on the Company. See "Business-Properties." DEPENDENCE ON COMPONENT SUPPLIERS Although the Company generally uses standard and widely available components and supplies in the manufacture of its products, a gel used to seal the terminals of its new modular station protectors is currently available from a single source and the Company generally purchases many of its components and supplies from a single or limited number of sources in order to obtain quantity purchase discounts and maintain standardization and quality control over such components. Certain components and supplies are obtained from manufacturers located outside the United States which could subject the availability and control thereof to changes in government policies, tariffs, import restrictions and other factors beyond the Company's control. The Company has no contracts with suppliers of the components utilized in the manufacture of its products which extend for more than one year. While the Company has experienced no material difficulties or delays in obtaining components or supplies in the past and believes that substantially all raw materials it uses will continue to be available in adequate quantities at competitive prices, there can be no assurance that the Company will not experience delays in delivery, the absence of components or supplies or increases in prices in the future which could have a material adverse effect on the Company. See "Business-Raw Materials." PATENT PROTECTION AND INFRINGEMENT RISKS; LICENSE AGREEMENTS Although the Company has patent protection on certain of its products or components thereof, it relies primarily on trade secrets and nondisclosure agreements to protect its proprietary rights. There can be no assurance that these protections will be adequate to protect its proprietary rights, that others will not independently develop or otherwise acquire equivalent or superior technology and obtain patent or other protections thereon, or that the Company can maintain its technology as trade secrets. Also, there can be no assurance that any patents the Company possesses will not be invalidated, circumvented or challenged. In 10 addition, the laws of some foreign countries do not protect the Company's proprietary rights to the same extent as the laws of the United States and may require modifications to be made to the Company's products in order to obtain any necessary foreign patents or government approvals, which could effect the Company's ability to increase its international sales. The failure of the Company to protect its intellectual property rights could have a material adverse effect on the Company. See "Business-Patents and Trademarks." While the Company believes its present products and technology do not infringe the patents or intellectual property rights of others and is not aware of any threatened patent or intellectual property infringement claims against it, there can be no assurance that such claims will not be asserted against the Company in the future. Should the Company decide to, or be forced to, litigate such claims, such litigation could be expensive and time consuming, could divert management's attention from other matters or could otherwise have a material adverse effect on the Company, regardless of the outcome of the litigation. An adverse determination in any such proceeding or failure to obtain a license from a prevailing claimant on satisfactory terms could prevent the Company from manufacturing and selling products covered by the patent or intellectual property in question, which also could have a material adverse effect on the Company. In addition to protecting its trade secrets, know-how and proprietary rights to technology, the Company has obtained, and may in the future be required to obtain, licenses to patents or other proprietary rights of third parties. Pursuant to certain of such licenses, the Company will be obligated to pay royalties to third parties, including minimum royalties. No assurance can be given that any licence required under any patent or other proprietary rights would be made available to the Company on acceptable terms, if at all. If the Company does not obtain any required licenses it could experience delays in product development or interruptions of product sales while it attempts to design around blocking patents, or it could find that the development, manufacture or sale of products which require such licenses is foreclosed. See "Business-Patents and Trademarks." GOVERNMENT REGULATION While the telecommunications industry is subject to regulation in the United States, primarily by the FCC and various other state public service or utility commissions, and in other countries, such regulations do not typically apply directly to the Company. However, federal and state regulatory agencies and commissions regulate the telcos and other communication access providers who use the Company's products. The effects of such regulations, which are under continuous review and subject to change, could adversely affect the Company's customers and, therefore, the Company. DEPENDENCE ON KEY MANAGEMENT AND PERSONNEL The Company's success depends to a significant degree upon the continuing contributions of its key management and technical personnel. In particular, the Company's business would be materially adversely affected if it were to lose the services of Timothy J. Roach, the Company's President and Chief Executive Officer. The Company does not carry key man insurance on the life of Mr. Roach. While the Company currently has a five-year employment agreement with Mr. Roach which is automatically renewed annually, the loss of his services or the services of certain of the Company's key management or technical personnel could have a material adverse effect on the Company. See "Business-Research and Development" and "Management." 11 Furthermore, the Company's Revolving Credit Agreement with The Chase Manhattan Bank (the "Revolving Credit Agreement") requires that Mr. Roach continue to actively manage the Company's day-to- day operations and that Mr. Roach, Alfred J. Roach, Chairman of the Board of Directors, and certain others continue to own in the aggregate at least 7.5% of the outstanding Common Stock. After giving effect to the completion of this offering, such persons would own 12.9% of the Company's outstanding Common Stock (12.4% assuming that the Underwriters' over-allotment option is exercised in full) as of September 30, 1997. BROAD DISCRETION OF MANAGEMENT TO ALLOCATE OFFERING PROCEEDS The Company intends to use the net proceeds of this offering to purchase equipment and leasehold improvements and for working capital and general corporate purposes. The Company is not currently able to precisely estimate the allocation of the net proceeds among these uses. The Company's management will have broad discretion to allocate the net proceeds of this offering and to determine the timing of expenditures. See "Use of Proceeds." NO DIVIDENDS The Company intends to retain any future earnings for use in its business, and therefore, does not anticipate paying any cash dividends in the foreseeable future. In addition, the Company's Revolving Credit Agreement prohibits the Company from declaring and paying any dividends. See "Price Range of Common Stock," "Dividend Policy" and "Management's Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources." POTENTIAL VOLATILITY OF STOCK PRICE The market price of the Common Stock has at times been, and may in the future be, subject to wide fluctuations. Factors that may adversely affect the market price of the Common Stock include, among other things, quarter to quarter variations in operating results, changes in earnings estimates by analysts, announcements regarding technological innovations or new products, announcements of gains or losses of significant customers or contracts, prospects in the communications industry, changes in the regulatory environment, market conditions and the sale or attempted sale of large amounts of the Common Stock into the public markets. See "Price Range of Common Stock." SHARES ELIGIBLE FOR FUTURE SALE Sales of a substantial number of shares of Common Stock in the public market following this offering could adversely affect the market price for the Common Stock. As of the date of this Prospectus, but giving effect to the completion of this offering, 8,772,976 shares of Common Stock (9,147,976 shares if the Underwriters' over-allotment option is exercised in full) will be freely transferable without restriction under the Securities Act of 1933, as amended (the "Securities Act"). The remaining 1,328,163 shares of Common Stock are owned by persons who may be deemed to be "affiliates" of the Company and are presently eligible for sale under Rule 144 ("Rule 144") promulgated under the Securities Act subject to Rule 144's volume and other limitations. Of such shares, 500,000 shares are presently subject to an effective and current registration statement under the Securities Act and, as such, are freely tradeable without such limitations. In addition, 300,000 shares issuable upon conversion of convertible indebtedness will, if and when converted, be eligible for immediate sale under paragraph (k) of Rule 144 without any volume or other limitation. See "Capitalization" and "Shares Eligible for Future Sale." 12 The Company has registered, for future issuance under the Securities Act, 1,692,901 shares of Common Stock subject to its stock option plans (of which 1,505,401 shares were subject to outstanding options). Any such shares issued upon the exercise of options by persons who are not affiliates of the Company will be freely transferable upon issuance and any such shares issued to affiliates will be eligible for sale under Rule 144 without any further holding period but subject to certain volume and other limitations. Holders of warrants to purchase 80,000 shares of Common Stock have the right, under certain circumstances, to require the Company to file a registration statement under the Securities Act to enable such holders to sell shares of Common Stock following the exercise of such warrants. In addition, certain of such holders have certain piggyback registration rights which have been waived in connection with this offering. The Company (except with respect to issuances upon exercise of outstanding options, warrants and convertible securities), and its executive officers and directors (who own an aggregate of 1,328,163 shares of Common Stock and the right to acquire an additional 536,570 shares upon the exercise of options which become exercisable within 180 days of the date of this Prospectus), have agreed not to sell or otherwise dispose of any shares of Common Stock for a period of 180 days after the date of this Prospectus without the prior written consent of Rodman & Renshaw, Inc. ("Rodman"). See "Underwriting." ANTI-TAKEOVER CONSIDERATIONS The affirmative vote of the holders of at least 75% of the Company's outstanding shares of capital stock entitled to vote thereon is required to authorize any merger or consolidation of the Company or any of its subsidiaries with another entity, or a sale, lease or exchange by the Company of all or substantially all of the assets of the Company and its subsidiaries taken as a whole, if the other party to the transaction owns 10% or more of the Company's voting stock in the election of directors (other than a person who was such holder on December 3, 1979), or the dissolution of the Company, unless such merger, consolidation, sale, lease or exchange (or a dissolution substantially consistent therewith) was approved by the Company's Board of Directors prior to the other party to the transaction acquiring such 10% interest. Mr. Alfred J. Roach is the only person known to be a beneficial owner of 10% or more of the Company's voting stock at December 3, 1979. Also, the Board of Directors is divided into three classes, each of which is elected in successive years for three year terms. Accordingly, any persons seeking to acquire voting control of the Company solely through the election of directors would have to elect directors at two annual stockholders' meetings in order to elect a majority of the Board. Additionally, the Company's Certificate of Incorporation permits the Company's directors to issue shares of Preferred Stock in one or more series and to designate the terms of each series without further stockholder action. The Company also is subject to Section 203 of the Delaware General Corporation Law (the "DGCL") which, subject to certain exceptions, prohibits a Delaware corporation from engaging in any of a broad range of business combinations with an "interested stockholder" for a period of three years following the date that such stockholder became an interested stockholder. These provisions could serve to impede or prevent any attempts by outside persons or business concerns to obtain control of the Company or have a depressive effect on the price of the Common Stock. See "Description of Capital Stock." 13 USE OF PROCEEDS The net proceeds from the sale of the Common Stock offered hereby are estimated to be approximately $17.3 million ($20.0 million if the Underwriter's over-allotment option is exercised in full) after deducting the underwriting discount and estimated offering expenses payable by the Company. The Company intends to use approximately $8.5 million to purchase additional equipment and leasehold improvements primarily to increase its manufacturing capacity for gas tube overvoltage surge protectors and thermoplastic molding for its recently awarded broadband NID contracts. The balance of the net proceeds will be used for working capital and general corporate purposes. Pending such uses, the Company intends to invest these funds in short-term, investment grade, interest-bearing securities. The Company believes that funds anticipated to be generated from operations, together with available cash, marketable securities and borrowings available under the Company's Revolving Credit Agreement are adequate to finance the Company's operational and capital needs for the foreseeable future. See "Management's Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources." 14 PRICE RANGE OF COMMON STOCK The following table sets forth, for each fiscal quarter of the Company since the beginning of the Company's 1996 fiscal year, the high and low sales prices of the Company's Common Stock on the Nasdaq National Market where the Common Stock is traded under the symbol "TIII": Fiscal Year Ended June 28, 1996: High Low --------- --------- First Quarter............................... $ 10 1/8 $ 6 5/8 Second Quarter.............................. 8 7/8 6 3/4 Third Quarter............................... 9 1/8 6 1/4 Fourth Quarter.............................. 7 3/4 5 7/8 Fiscal Year Ended June 27, 1997: First Quarter............................... $ 7 1/8 $ 4 1/2 Second Quarter.............................. 7 1/8 5 1/4 Third Quarter............................... 7 4 1/8 Fourth Quarter.............................. 6 4 5/16 Fiscal Year Ending June 26, 1998: First Quarter............................... $ 9 1/2 $ 5 1/8 Second Quarter through October 21, 1997..... 8 5/16 7 3/8 The last reported sale price of the Common Stock on October 21, 1997, as reported by the Nasdaq National Market was $7 5/8 per share. As of September 30, 1997, there were approximately 620 holders of record of the Common Stock. DIVIDEND POLICY 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 Revolving Credit Agreement prohibits the payment of dividends. See Note 6 of Notes to Consolidated Financial Statements. 15 CAPITALIZATION The following table sets forth the capitalization of the Company as of June 27, 1997 and as adjusted to give effect to the sale by the Company of the 2,500,000 shares of Common Stock offered hereby: As of June 27, 1997 -------------------- As Actual Adjusted -------- -------- (In thousands) Current portion of long-term debt and obligations under capital leases ...................................... $ 537 $ 537 Long-term debt ......................................... 839 839 Long-term obligations under capital leases ............. 1,465 1,465 -------- -------- Total debt .................................... 2,841 2,841 -------- -------- Stockholders' investment: Preferred Stock, par value $1.00 per share; 1,000,000 authorized and issuable in series: no shares outstanding ............................ -- -- Common Stock, par value $.01 per share; 30,000,000 shares authorized; 7,448,473 and 9,948,473 (as adjusted) shares issued (1) ..... 75 99 Warrants outstanding ............................. 159 159 Capital in excess of par value ................... 29,052 46,351 Retained earnings ................................ 3,999 3,999 Valuation adjustments to record marketable securities available for sale at fair value ... 7 7 Less: 17,637 common shares in treasury, at cost . (281) (281) -------- -------- Total stockholders' investment ................... 33,011 50,334 -------- -------- Total capitalization .................... $ 35,852 $ 53,175 ======== ======== - -------------- (1) Excludes the following shares which were reserved for potential future issuance at June 27, 1997: (i) 1,661,207 shares subject to outstanding stock options granted to officers, directors, employees and consultants under the Company's stock option plan at a weighted average exercise price of $4.98 per share and an additional 187,500 shares subject to future grants under such plans; (ii) 300,000 shares issuable upon conversion of $750,000 of indebtedness due to an unaffiliated third party and 100,000 shares subject to an option granted to the holder of such indebtedness at an exercise price of $2.50 per share; and (iii) 230,000 shares subject to warrants granted for consulting and financial advisory services at a weighted average exercise price of $7.14 per share. See Note 9 of Notes to Consolidated Financial Statements. 16 SELECTED FINANCIAL DATA (In thousands, except per share data) The following selected consolidated financial data as of June 28, 1996 and June 27, 1997 and for the three fiscal years in the period ended June 27, 1997 has been derived from the financial statements of the Company which have been audited by Arthur Andersen LLP, independent public accountants, as indicated in their report with respect thereto, and are included elsewhere herein. The selected consolidated financial data as of June 25, 1993, June 24, 1994 and June 30, 1995 and for the two fiscal years in the period ended June 24, 1994 are derived from audited financial statements not included elsewhere herein. The selected consolidated financial data set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements and related notes thereto included elsewhere herein.
June 25, 1993 June 24, 1994 June 30, 1995 June 28, 1996 June 27, 1997(1) ------------- ------------- -------------- ------------- ---------------- Statements of Operations Data: Net sales ..................... $ 33,474 $ 40,147 $ 43,830 $ 44,513 $ 50,675 Cost of sales ................. 24,885 29,315 30,782 31,956 41,421 -------- -------- -------- -------- -------- Gross profit ............... 8,589 10,832 13,048 12,557 9,254 -------- -------- -------- -------- -------- Operating expenses Selling, general and administrative ............. 5,232 5,666 6,827 5,881 7,061 Research and development ... 1,370 2,100 2,619 2,820 3,085 -------- -------- -------- -------- -------- Total operating expenses 6,602 7,766 9,446 8,701 10,146 -------- -------- -------- -------- -------- Operating income (loss) . 1,987 3,066 3,602 3,856 (892) Interest expense .............. (875) ) (711) ) (718) ) (416) ) (287) Interest income ............... -- -- -- 191 314 Other income .................. 100 34 58 106 72 -------- -------- -------- -------- -------- Income (loss) before provision for income taxes .............. 1,212 2,389 2,942 3,737 (793) Provision for income taxes ....... -- -- -- -- 63 -------- -------- -------- -------- -------- Net income (loss) ................ $ 1,212 $ 2,389 $ 2,942 $ 3,737 $ (856) ======== ======== ======== ======== ======== Selected Per Share Data: Net income (loss) per share- fully diluted .............. $ 0.28 $ 0.41 $ 0.51 $ 0.47 $ (0.12) ======== ======== ======== ======== ======== Weighted average of shares outstanding-fully diluted .. 5,865 7,943 8,402 8,179 7,430
17
June 27, 1997 ------------------------------- June 25, 1993 June 24, 1994 June 30, 1995 June 28, 1996 Actual As Adjusted(2) ------------- ------------- ------------- ------------- ------------ ------------- (In thousands) Selected Balance Sheet Data: Working capital .............. 10,212 6,734 15,947 23,801 19,655 36,978 Total assets ................. 28,066 29,378 34,414 42,823 42,823 60,146 Long-term debt and obligations under capital leases, including current portion . 10,263 7,552 2,767 2,739 2,841 2,841 Stockholders' investment ..... 12,439 15,137 25,183 33,862 33,011 50,334
- --------------- (1) Includes non-recurring charges of $3.0 million ($2.9 million of which was charged to cost of sales), which consisted of an increase to the allowance for inventory, severance related costs and costs to close or relocate certain production processes. Exclusive of these charges, the Company would have reported a gross profit of $12.2 million, operating income of $2.1 million, net income of $2.0 million and fully diluted net income per share of $0.26. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." (2) Adjusted to reflect the sale by the Company of the 2,500,000 shares of Common Stock offered hereby and the receipt of the estimated net proceeds therefrom. See "Use of Proceeds" and "Capitalization." 18 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with Selected Financial Data and the Consolidated Financial Statements and notes thereto appearing elsewhere in this Prospectus. OVERVIEW TII designs, manufactures and markets overvoltage surge protectors, NIDs, station electronics and fiber optic products for use in the communications industry. The Company has been a leading supplier of overvoltage surge protectors to U.S. telcos for over 25 years. The Company's net sales have increased from $29.7 million in fiscal 1992 to $50.7 million in fiscal 1997, a compound annual growth rate of 11.2%. During fiscal 1997, the Company's overvoltage surge protectors, NIDs, station electronics and other products, and fiber optic products contributed 65%, 23%, 6% and 6% of the Company's revenues, respectively. While it is expected that the Company's overvoltage surge protectors will continue to account for a majority of the Company's net sales for the foreseeable future, the Company expects that its NID and fiber optic product lines will contribute a greater percentage of net sales in the future. Notwithstanding the growth in the Company's sales, the Company's results of operations were adversely affected by several factors in fiscal 1997, resulting in a net loss of $856,000. During the third quarter of fiscal 1997, Access Network Technologies ("ANT"), a joint venture between Lucent Technologies, Inc. ("Lucent") and Raychem Corporation ("Raychem") was dissolved. The Company had entered into a strategic agreement with ANT in 1995 to develop and manufacture advanced overvoltage surge protectors . The first products introduced by the joint venture combined TII overvoltage surge protectors with a proprietary gel sealing technology from Raychem that makes these products virtually impenetrable by weather. Following such dissolution, the Company increased its allowance for the inventory which was produced for ANT. The Company and Raychem have agreed to continue to manufacture and market the products without the participation of Lucent. In addition, during the third quarter of fiscal 1997, the Company put into effect certain measures to reduce costs and enhance profitability. These measures included the reduction of personnel, movement of certain production processes to the Company's lower cost facility in the Dominican Republic, outsourcing certain manufacturing steps, re-aligning the Company's sales and marketing force and the discontinuation of certain lower margin products. These actions resulted in non- recurring charges of $3.0 million ($2.9 million of which was charged to cost of sales), which consisted of an increase to the allowance for inventory, severance related costs and costs to close or move certain production processes. Absent these charges, the Company would have reported a gross profit of $12.2 million, operating income of $2.1 million, net income of $2.0 million and fully diluted net income per share of $0.26. During the fourth quarter of fiscal 1997, the Company incurred manufacturing expenses associated with the accelerated production startup of several new products, including the Company's new broadband NIDs. These additional manufacturing expenses included the hiring of temporary personnel during the initial phases of production, the outsourcing of certain production processes, initial purchases of materials in smaller than usual quantities for which volume discounts were not available and additional freight and other expediting costs. Additionally, results were also adversely affected by continuing expenditures relating to the Company's movement of certain production processes to the Company's lower cost facility in the Dominican Republic. 19 The Company expects that such costs and additional manufacturing expenses will continue during the first half of fiscal 1998. RESULTS OF OPERATIONS FISCAL YEARS ENDED JUNE 27,1997, JUNE 28,1996 AND JUNE 30, 1995 NET SALES Net sales for fiscal 1997 increased by $6.2 million (13.8%) to $50.7 million from $44.5 million for fiscal 1996. Sales of overvoltage surge protectors increased by $4.3 million over the prior year's sales, principally as a result of increased sales of the Company's recently introduced modular station protector. NID sales increased by $2.2 million due to increased purchases by telco customers. Sales of fiber optic-related products increased by $1.6 million primarily due to wider acceptance of the LIGHTRAX(R) product line. These increases were partially offset by a decline of $1.9 million in sales of station electronics and other products, including the absence in fiscal 1997 of $875,000 of shortfall payments received from AT&T Corporation ("AT&T") in fiscal 1996 as a final payment under a contract that expired pursuant to which AT&T was obligated to make certain payments to the extent it failed to make certain purchases from the Company. Net sales for fiscal 1996 increased by $700,000 (1.6%) to $44.5 million from $43.8 million for fiscal 1995 as the Company shipped principally the same mix of product to its customers during these periods. GROSS PROFIT Gross profit for fiscal 1997 decreased by $3.3 million (26.3%) to $9.3 million from $12.6 million for fiscal 1996. Gross profit as a percentage of sales decreased for fiscal 1997 to 18.3% (24.0% before the non- recurring charges) from 28.2% for fiscal 1996. Excluding the shortfall payment received from AT&T without any related cost of sales, the Company's fiscal 1996 gross profit margin would have been 26.8%. The Company's fiscal 1997 gross profit margin was impacted by the non-recurring charges of $2.9 million and higher raw material and manufacturing overhead costs. Furthermore, during the fourth quarter of fiscal 1997, gross profit was adversely affected by manufacturing costs associated with the accelerated production startup of several new products, including the Company's new broadband NIDs, and continuing expenditures relating to the movement of certain production processes to the Company's lower cost facility in the Dominican Republic. The Company expects these additional costs to continue during the first half of fiscal 1998 and that gross profit as a percentage of sales should continue to be impacted during the fiscal year. Gross profit for fiscal 1996 decreased by $491,000 (3.8%) to $12.6 million from $13.0 million for fiscal 1995 and gross profit as a percentage of sales decreased for fiscal 1996 to 28.2% from 29.8% due primarily to increases in raw material and other manufacturing costs. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses for fiscal 1997 increased by $1.2 million (20.0%) to $7.0 million from $5.9 million for fiscal 1996. As a percentage of sales, selling, general and administrative expenses increased for fiscal 1997 to 13.9% from 13.2% for fiscal 1996. The increase resulted primarily from legal costs of an action in which the Company was a plaintiff and from personnel, promotion and other costs associated with the Company's increased efforts to win supply contracts for its new broadband NID product line. Selling, general and administrative expenses for fiscal 1996 decreased by $946,000 (13.9%) to $5.9 million from $6.8 million for fiscal 1995 principally due to administrative staff and expense reduction. As 20 a percentage of sales, selling, general and administrative expenses decreased for fiscal 1996 to 13.2% from 15.6% for fiscal 1995. RESEARCH AND DEVELOPMENT Research and development expenses for fiscal 1997 increased by $265,000 (9.4%) to $3.1 million from $2.8 million for fiscal 1996. As a percentage of sales, research and development expenses for fiscal 1997 decreased to 6.1% from 6.3% for fiscal 1996. The fiscal 1997 increase related primarily to increases in costs associated with the development of the new broadband NID product line and, to a lesser extent, increases in costs associated with the development of new overvoltage surge protectors. Research and development expenses for fiscal 1996 increased by $201,000 (7.7%) to $2.8 million from $2.6 million for fiscal 1995. As a percentage of sales, research and development expenses for fiscal 1996 increased to 6.3% from 6.0% for fiscal 1995. Staff increases and higher costs associated with developing new overvoltage surge protectors for the ANT joint venture contributed to the fiscal 1996 increase. INTEREST EXPENSE Interest expense for fiscal 1997 decreased by $129,000 (31.0%) to $287,000 from $416,000 for fiscal 1996 due to reduced debt levels and the reduction of amortization of debt origination costs that ceased in September 1996. Interest expense for fiscal 1996 decreased by $302,000 (42.1%) to $416,000 from $718,000 for fiscal 1995 as debt levels declined significantly due to cash received from the exercise of warrants and options in the fourth quarter of fiscal 1995 and the first quarter of fiscal 1996. PROVISION FOR INCOME TAXES In fiscal 1997, the Company accrued a net provision of $63,000 for income taxes resulting from the settlement of an examination of the Company's federal income taxes for fiscal years 1994 and 1995. NET INCOME As a result of the foregoing, the Company incurred a net loss of $856,000 for fiscal 1997 versus net income of $3.7 million for fiscal 1996 and $2.9 million for fiscal 1995. Net loss per share equaled $0.12 per share for fiscal 1997 versus fully diluted net income per share of $0.47 and $0.51 in fiscal years 1996 and 1995, respectively. INCOME TAXES Due to its election to operate under Section 936 of the Internal Revenue Code of 1986, as amended (the "Code"), the availability of certain net operating loss carryforwards and exemptions from income taxes in Puerto Rico and in the Dominican Republic, the Company has not been required to pay United States federal, Puerto Rico or Dominican Republic taxes on most of its income. The Company calculates its credit under Section 936 utilizing the economic activity based credit. Based on fiscal 1997 levels of qualified wages, fringe benefits and depreciation in Puerto Rico, the Company's economic activity based credit limitation is approximately $3.5 million per annum. The amount of the economic activity based Section 936 credit limitation available for fiscal 1997 will be sufficient to offset the U.S. federal income tax on Puerto Rico possession income for the Company's 1997 fiscal year, as computed after utilization of the Company's available net operating loss carryforwards of approximately $334,000. 21 Legislation enacted in the Small Business Job Protection Act of 1996 repealed the Section 936 credit for taxable years beginning after December 31, 1995 for the Company's 1997 fiscal year. However, since the Company had elected the Section 936 credit, it is eligible to continue to claim a Section 936 credit for an additional 10 years under a special grandfather rule subject to a maximum limitation. If, however, the Company adds a substantial new line of business, it would cease to be eligible to claim the Section 936 credit beginning with the taxable year in which such new line of business is added. Based on the Company's current level of Puerto Rico possession income and business plans, the Company believes that it will be eligible to claim a Section 936 credit under the grandfather rule. The Company is subject to United States federal and applicable state income taxes with respect to its non-Puerto Rico operations. As of June 27, 1997, the Company's U.S. subsidiaries have approximately $3.9 million of net operating losses available for use through 2012, and $5.4 million of net operating losses subject to an annual maximum utilization of $380,000 per year due to an ownership change under Section 382 of the Code. See Note 8 of the Notes to Consolidated Financial Statements. LIQUIDITY AND CAPITAL RESOURCES The Company's cash, cash equivalents and marketable securities decreased from $8.9 million at the end of fiscal 1996 to $3.8 million at the end of fiscal 1997, while working capital decreased to $19.7 million at the end of fiscal 1997 from $23.8 million at the end of fiscal 1996. During fiscal 1997, $352,000 of cash was used in operations, primarily to fund increases in inventories (approximately $4.4 million or $1.5 million net of $2.9 million of allowances established). While the Company had a net loss of $856,000, such loss included non-cash charges, including $1.9 million for depreciation and amortization. Cash of $1.9 million was used in investing activities for capital expenditures of $4.3 million offset, in part, by proceeds from sales and maturities of marketable securities in excess of amounts reinvested of $2.4 million. Financing activities used $424,000 of cash for the payment of long-term debt and obligations under capital leases. The Company has no commitments for capital expenditures, but expects to purchase new equipment and leasehold improvements in the normal course of business. The Company is a party to a Revolving Credit Loan Agreement with The Chase Manhattan Bank which, at June 27, 1997, entitled the Company to have outstanding borrowings of up to $4.0 million, reducing by $400,000 each calendar quarter thereafter. As a result of the non-recurring charge of $3.0 million and the increased level of investment in capital equipment during fiscal 1997, the Company was not in compliance with the debt service ratio, capital expenditure and net income covenants contained in its Revolving Credit Agreement. There is no loan amount outstanding under the agreement and the Company has received a waiver with respect to such non-compliance. See Note 6 of Notes to Consolidated Financial Statements for further information concerning this facility, including various financial maintenance covenants. Funds anticipated to be generated from operations, together with available cash, marketable securities, the availability of borrowings under the Company's Revolving Credit Agreement and the proceeds of this offering are considered to be adequate to finance the Company's operational and capital needs for the foreseeable future. However, the Company may seek additional financing for the acquisition of new product 22 lines or additional products for its existing product lines should any such acquisition opportunity present itself. Any such financing may involve borrowings from banks or institutional lenders or the sale and issuance of debt or equity securities from private sources or in public markets. The Company's ability to obtain such financing will be affected by such factors as its results of operations, financial condition, business prospects and restrictions contained in credit facilities. There can be no assurance that the Company will be able to, or the terms on which it may be able to, obtain any such financing. IMPACT OF INFLATION The Company does not believe its business is affected by inflation to a greater extent than the general economy. The Company monitors the impact of inflation and attempts to adjust prices where market conditions permit. Inflation has not had a significant effect on the Company's operations during any of the reported periods. NEW ACCOUNTING PRONOUNCEMENTS In February 1997, the Financial Accounting Standards Board issued a new accounting pronouncement, SFAS No. 128, "Earnings Per Share," which will change the current method of computing earnings per share. The new standard requires presentation of "basic earnings per share" and "diluted earnings per share" amounts, as defined. SFAS No. 128 will be effective beginning with the Company's quarter ending December 26, 1997 and, upon adoption, all prior-period earnings per share data presented will be restated to conform with the provisions of the new pronouncement. Application earlier than the Company's quarter ending December 26, 1997 is not permitted. The impact on previously reported primary and fully diluted earnings per share will be immaterial. In June 1997, the Financial Accounting Standards Board issued a new accounting pronouncement, SFAS No. 130, "Reporting Comprehensive Income," which is effective for financial statements with fiscal years beginning after December 15, 1997. Earlier application is permitted. SFAS No. 130 establishes standards for the reporting and display of comprehensive income and its components in a full set of general- purpose financial statements. The Company expects to adopt SFAS No. 130 in fiscal 1998 and believes such adoption will not have a material impact on its financial position or results of operations. 23 BUSINESS TII designs, manufactures and markets overvoltage surge protectors, network interface devices ("NIDs"), station electronics and fiber optic products for use in the communications industry. The Company sells its products to telcos, OEMs, CATV providers and competitive access providers of communications services. The Company believes that the performance of its products, together with its commitment to quality and service, has fostered strong customer loyalty, leading four of the five RBOCs and most of the 1,300 independent telcos to specify one or more of the Company's overvoltage surge protectors for use at their subscriber station locations. TII has been a leading supplier of subscriber station overvoltage surge protectors to U.S. telcos for over 25 years. The Company believes that its proprietary overvoltage surge protectors offer superior, cost-effective performance features and characteristics, including high reliability, long life cycles and advanced protection against adverse environmental conditions. Overvoltage surge protectors are mandated in the United States by the 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. While similar requirements exist in most other developed countries, a significant portion of the world's communications networks remains unprotected from the effects of overvoltage surges. The Company also markets a complete line of NIDs tailored to customer specifications. NIDs 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, which, among other things, allow a telco to remotely test the integrity of its lines, thereby minimizing costly maintenance dispatches. To address the demand for voice, high-speed data and interactive video services, telcos and other communications providers are expanding and upgrading their networks to accommodate the higher bandwidth necessary to transmit these services. To meet its customers' needs, TII has introduced a state-of-the-art broadband NID product line specifically designed to house the telcos' technology of choice, whether traditional twisted pair lines or high- bandwidth coaxial cable or fiber optic lines. The features and functionality of the Company's broadband NIDs were instrumental in the Company recently winning two major telco contracts. As an integral part of the Company's broadband NID product line, the Company recently developed a high-performance patented coaxial overvoltage surge protector to safeguard coaxial cable lines. While providing superior overvoltage surge protection, the Company's in-line coaxial overvoltage surge protector is virtually transparent to the signal on the network, permitting high-bandwidth signals to be transmitted without adversely affecting the signal. The Company also markets its coaxial overvoltage surge protector to CATV providers. Proposed revisions to the NEC, currently anticipated to take effect in 1999, would require overvoltage surge protection on all new or existing CATV lines intended to carry voice, data or interactive video services. The Company also produces and sells a line of fiber optic products, including custom-designed enclosures and LIGHTRAX(R), a unique fiber optic management system used to route sensitive fiber optic cable throughout a facility. Communications is one of the fastest growing industries in the world today. The Company's strategy is to participate in the rapid growth of the communications industry by: (i) growing its core business by capitalizing on its reputation as a manufacturer of quality, high-performance products; (ii) introducing new and innovative products that are complementary to its current products; (iii) expanding into new markets, including 24 CATV, international and wireless markets; and (iv) investing in production facilities to increase its manufacturing capacity, strengthen its technical capabilities, improve operating efficiencies and reduce costs. INDUSTRY OVERVIEW Communications is one of the fastest growing industries in the world today. The growing dependence of individuals, businesses, universities and governments on communications systems has been driven by numerous factors including: (i) the advent, improvement and dramatic increase in the use of electronic equipment over communications lines, such as personal computers, modems, fax machines and answering machines; (ii) the increasing use and availability of on-line information services such as the Internet, e-mail and interactive video; (iii) the need to transmit vast amounts of information quickly and more accurately; and (iv) changes in the workplace including the growth of the small office/home office market. The expanded utilization of communications networks has created a need for the communication service providers (principally telcos) to keep pace technologically. The increased transmission of high-speed data and video has caused telcos and other communications access providers to expand and upgrade their networks to broaden the bandwidth of their transmission lines over traditional twisted pair copper lines and to install higher capacity coaxial cable and fiber optic lines. The transmission of high-speed data and interactive video require the transmission line to carry significantly more information than a traditional voice line. Rapid expansion in the communications industry has primarily occurred since the landmark settlement in 1984, which resulted in AT&T's spin-off of the then seven RBOCs, as well as rulings later in that year by the FCC that further facilitated the direct connection of subscriber-owned communications equipment to the telcos' networks. Providing customers with unencumbered access to the telcos' networks has dramatically increased the demand for customer premise equipment with more advanced features and functionality which, in turn, has accelerated the need for more and higher performing communication access lines. The Telecommunication Act of 1996 further increased competition within the U.S. communications marketplace, requiring the local telephone companies to provide access to local networks by CATV providers, wireless communications companies and competitive access providers. As a result of these changes, the number of telephone access lines in the United States has increased from 111 million at the end of 1983 to 165 million at the end of 1996. Worldwide telephone access lines have increased from 371 million at the end of 1983 to 700 million at the end of 1996. By the year 2000, the number of access lines is expected to increase to almost 200 million in the United States and to approximately 925 million worldwide. In order to provide their subscribers with enhanced communication services and share in the growth of communications, CATV providers have begun to expand and upgrade their networks. At the close of 1996, over 63 million households in the United States subscribed to CATV and by the end of 2000, CATV subscribers are expected to grow to over 68 million. The growth in communications has also spawned a rapidly expanding wireless communications market, including cellular, microwave, satellite and digital personal communications systems. While these services transmit signals through the air, the signal ultimately is transmitted over coaxial cable at the cell site, microwave station, satellite antenna or satellite dish, making them vulnerable to lightning and other hazardous 25 overvoltage surges. The cellular market has grown from less than 100,000 subscribers in 1985 to approximately 44.0 million at the end of 1996. The Company is well positioned to take advantage of this growth because its products are integral to the construction and maintenance of communications networks. Growth Strategy The Company intends to participate in the rapidly growing communications industry by leveraging its growing base of business and reputation for quality and reliability, introducing new and innovative products, expanding into new markets, and continuing to invest in production facilities. GROWING ITS CORE BUSINESS. The Company believes that, as a leading supplier of overvoltage surge protectors to the U.S. telephone industry for over 25 years, its overvoltage surge protectors provide significant growth opportunities, as well as an important core technology for the development and introduction of new and innovative products. The Company intends to capitalize on its reputation as a manufacturer of quality, high-performance products to increase sales of its core products. INTRODUCING NEW AND INNOVATIVE PRODUCTS. Capitalizing on its close relationships, the Company's strategy is to continue to work closely with customers to help define their requirements and develop new and innovative products. Employing this strategy, the Company recently introduced a broadband NID product line to address the telcos' requirement for a single NID to accommodate voice, high-speed data and interactive video services. EXPANDING INTO NEW MARKETS. In addition to providing overvoltage protection on coaxial lines in broadband NIDs, the coaxial overvoltage surge protector is intended to be an integral part of comprehensive protection systems being designed for the rapidly expanding wireless communications market, including cellular, microwave, satellite and digital personal communications systems. Although international sales to date have not been significant, the Company believes international markets offer substantial opportunities for its overvoltage surge protectors since a significant portion of the world's communications networks remains unprotected from the destructive effects of overvoltage surges. INVESTING IN PRODUCTION FACILITIES. During fiscal 1997, the Company continued to upgrade and improve its manufacturing facilities to enable it to mass produce its new broadband NIDs to meet anticipated sales levels under recently awarded contracts. The Company intends to continue investing in production facilities to increase its manufacturing capacity, strengthen its technical abilities, improve operating efficiencies and reduce costs. RECENT CONTRACTS As a result of the Company's strong customer relationships, industry expertise and commitment to quality, the Company has recently been awarded four significant new contracts and contract extensions: o In April 1997, the Company entered into a multi-year contract extension to provide overvoltage surge protectors to Ameritech Corporation. 26 o In July 1997, the Company was awarded a contract to provide new broadband NID products to the Puerto Rico Telephone Company. o In September 1997, the Company won a multi-year contract to provide new broadband NID products to a RBOC. o In October 1997, the Company was awarded a contract to supply custom designed fiber optic enclosures and splice trays to a RBOC. PRODUCTS Overvoltage Surge Protectors. The Company designs, manufactures and markets overvoltage surge protectors primarily for use by telcos on their 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 telcos' loss of revenue due to subscriber outages; and (iv) reduce the telco costs to replace or repair damaged telco-owned equipment. Overvoltage surge protectors differ in power capacity, application, configuration and price to meet varying needs. In the United States, overvoltage surge protectors are required by the NEC to be installed on the subscriber's telephone lines. While similar requirements exist in most other developed countries, a significant portion of the world's communications networks remains unprotected from the destructive effects of overvoltage surges. GAS TUBE PROTECTORS The Company's gas tubes represent the foundation upon which most of the Company's current 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 telephone line elevates to a level preset in the gas tube, at which time the gases in the tube instantly ionize, momentarily disconnecting the phone or other equipment from the circuit while safely conducting the hazardous surge into the ground. When the voltage on the telcos line drops to a safe level, the gases in the tube return to their normal state, returning the phone and other connected equipment to service. The Company's gas tubes have been designed to withstand multiple high energy overvoltage surges while continuing to operate over a long service life with minimal failure rates. 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. The TFS module's protector element is environmentally sealed to prevent damage to the protector from severe moisture and industrial pollution. Another advanced overvoltage surge protector, jointly manufactured with Raychem, combines the Company's TFS protection element with Raychem's proprietary gel technology making this modular surge protector virtually impervious to environmental contamination while providing advanced overvoltage surge protection. 27 COAXIAL PROTECTORS In October 1996, TII was granted a U.S. patent for its new coaxial transmission line surge protector. The patent provides broad coverage for its in-line overvoltage surge protection on coaxial cable, an alternate method of providing high-bandwidth signals. TII's gas tube coaxial surge protector is an in-line protector that provides superior overvoltage surge protection for the connected equipment while remaining virtually transparent to the signal on the network. This permits high-bandwidth signals to be transmitted without adversely affecting the signal. The coaxial overvoltage surge protector is also intended to be marketed to CATV providers and to the rapidly expanding wireless communications market, including, cellular, microwave, satellite and digital personal communications systems. SOLID STATE AND HYBRID OVERVOLTAGE SURGE PROTECTORS Using purchased solid state components, the Company has developed a line of 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 telcos believe important in protecting certain of their sensitive equipment, they have lower energy handling capability than gas tubes. When an overvoltage surge exceeds the energy handling capacity of the solid state protector, it fails in a shorted mode causing the telephone to cease operating. Therefore, the Company principally targets customers for its solid state surge protectors in regions where there is a low incidence of lightning, the source of the highest voltage surges on a communications line. As communications equipment becomes more complex, speed of the protector to react to a surge may be perceived to be more critical than energy handling capabilities. In response, the Company is also combining solid state protectors with the Company's gas tubes in hybrid overvoltage surge protectors. While generally more expensive and complex than gas tube surge protectors, the hybrid surge protector can provide the speed of solid state protectors with the energy handling capability of a gas tube surge protector. AC POWERLINE PROTECTORS TII's powerline surge protectors utilize the Company's gas tubes and solid state surge protection technology, and are principally for use 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. Overvoltage surge protectors sold separately from NIDs accounted for approximately 65%, 65% and 68% of the Company's net sales during the Company's fiscal years 1997, 1996 and 1995, respectively. NETWORK INTERFACE DEVICES. The Company designs, molds, assembles and markets various NIDs. NIDs 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, which, among other things, allow telcos to remotely test the integrity of their lines, thereby minimizing costly maintenance dispatches. To address the demand for voice, high speed data and interactive video services, telcos and other communication providers are expanding and upgrading their networks to accommodate the higher bandwidth necessary to transmit these services. In response, TII has recently developed a line of patented broadband NIDs designed to enclose the telcos' technology of choice needed to accommodate higher bandwidth signals, whether traditional twisted pair lines or high-bandwidth coaxial cable or fiber optic lines. The Company's 28 broadband NID product line is modular in design and thus facilitates expansion to accommodate additional access lines subscribers may request in the future. For use in various markets, the NID product line currently consists of enclosures which will accommodate up to two, four or six access lines and the Company is presently developing enclosures which will accommodate up to twelve and twenty-five access lines. Designed with future technologies in mind, the Company's broadband NIDs also accommodates TII's patented coaxial overvoltage surge protector, as well as high-performance fiber optic connectors, produced by, among others, the Company's subsidiary, TII-Ditel. NID sales represented approximately 23%, 21% and 20% of the Company's net sales during fiscal 1997, 1996 and 1995, respectively. STATION ELECTRONICS AND OTHER PRODUCTS. The Company designs, manufactures and markets station electronic products. Most subscriber electronic devices are designed to be installed with an overvoltage surge protector, typically in a NID. The Company's station electronics products include maintenance termination units designed to interface with the telco's central office test equipment, offering the telco remote testing capabilities. With this product installed at the subscriber's home or business, a telco can determine whether a defect or fault is in telco-owned or subscriber-owned equipment before dispatching a costly maintenance vehicle. Another product automatically identifies the calling party on a party line (located primarily in rural areas of the United States and Canada) without operator assistance. The Company also designs, manufactures and markets other products, including plastic housings, wire terminals, enclosures, cabinets and various hardware products principally for use by the telco industry. Station electronics and other products sold separately from NIDs, accounted for approximately 6%, 11% and 9% of the Company's net sales in fiscal 1997, 1996 and 1995, respectively. FIBER OPTIC PRODUCTS. The Company's fiber optic product lines, sold and marketed primarily to the RBOCs, OEMs and long distance companies under the name TII-Ditel, include enclosures, splice trays, high performance cable assemblies, and LIGHTRAX(R), a unique fiber management system used to route sensitive fiber optic lines throughout a facility in which the fiber optic cable is being installed. The Company integrates these products with purchased fiber optic components to design and produce customized fiber optic cable assemblies for the various interconnection points which join and extend fiber optic lines. TII-Ditel makes products used to connect the telcos' local and long distance networks to telco central offices as well as to route fiber optic lines throughout subscriber locations. TII-Ditel develops markets for its products by encouraging its technical personnel to work closely with the engineering staffs of its customers to provide applications assistance and formulate unique solutions to consumer needs. Sales of fiber optic products represented approximately 6%, 3% and 3% of the Company's net sales during fiscal 1997, 1996 and 1995, respectively. RESEARCH AND DEVELOPMENT As the telcos and other communications providers upgrade and expand their networks to provide advanced telecommunication services, new product opportunities continue to arise for the Company. Currently, the Company's research and development ("R&D") and related marketing efforts are focused on several major projects including: 29 o Expanding the broadband NID product line to address anticipated future requirements of the telcos and other competitive access providers. o Further developing coaxial cable overvoltage surge protectors for telcos, CATV providers and wireless broadband communication markets. o Expanding the Company's fiber optic product line of enclosures and fiber optic cable management systems to meet the growing needs of existing and potential customers. o Designing custom overvoltage surge protectors for OEMS for installation throughout telco and other communication networks. o Designing gas tube, solid state and hybrid overvoltage surge protectors for the varying specifications of the worldwide communications markets. The Company's R&D department currently consists of 24 persons skilled and experienced in various technical disciplines, including physics, electrical and mechanical engineering, with specialization in such fields as electronics, metallurgy, plastics and fiber optics. The Company maintains computer aided design equipment and laboratory facilities, which contain sophisticated equipment, in order to develop and test its existing and current products. The Company's R&D expense was $3.1 million, $2.8 million, and $2.6 million during fiscal 1997, 1996 and 1995, respectively. All of such R&D was Company sponsored. MARKETING AND SALES Prior to selling its products to a RBOC or other telco, the Company must undergo a potentially lengthy product qualification process. Thereafter, the Company continually submits successive generations of current products as well as new products to such customers for qualifications. The Company believes that its 25 years as a leading supplier of overvoltage surge protectors, its current designation as a supplier to four of the five RBOCs of subscriber overvoltage surge protectors and its strategy for developing products by working closely with its customers provide a strong position from which it can market its current and new products. The Company sells to telcos primarily through its national sales force, as well as through a network of distributors. TII also sells to long distance carriers, CATV providers and OEMs, including other NID suppliers, which incorporate the Company's overvoltage surge protectors into their products for resale to telcos. 30 The following customers accounted for more than 10% of the Company's consolidated revenues during one or more of the years presented below: For Year Ended --------------------------------------------- June 30, June 28, June 27, 1995 1996 1997 --------------------------------------------- Siecor Corporation (1) 30% 26% 20% NYNEX Corporation (2) 13% 15% 18% Keptel, Inc. (1) * 12% 11% - --------------- * Asterisk denotes less than 10% for the period presented. (1) Siecor Corporation and Keptel, Inc. are OEMs that supply NIDs to RBOCs. Siecor Corporation and Keptel, Inc. are required by certain RBOCs to purchase TII overvoltage surge protectors for inclusion into their NIDs. (2) Subsequent to June 27, 1997, NYNEX Corporation merged into Bell Atlantic Corporation. Purchases of the Company's products are generally based on individual customer purchase orders for delivery within thirty days under general supply contracts. The Company, therefore, has no material firm backlog of orders. The Company's international sales equaled approximately $1.3 million in fiscal 1997 (3% of net sales), $1.6 million in fiscal 1996 (4% of net sales), and $1.0 million in fiscal 1995 (2% of net sales). International sales have been made primarily to countries in the Caribbean, South and Central America, Canada and Western Europe. Additionally, the Company believes that certain of its products which are sold to distributors and OEMs are embodied in products which are sold abroad. The Company requires foreign sales to be paid for in U. S. currency. International sales are affected by such factors as exchange rates, changes in protective tariffs and foreign government import controls. The Company believes international markets offer substantial opportunities. While the Company intends to devote additional sales and marketing efforts toward increasing its international sales, there can be no assurance that these efforts will be effective or that the Company will achieve significant international sales. MANUFACTURING The Company produces its overvoltage surge protectors, NIDs and station electronics at its facilities in Puerto Rico and the Dominican Republic. The Company's facilities in Puerto Rico and the Dominican Republic have been ISO 9002 accredited since October 1994 and June 1995, respectively. The ISO establishes global standards for manufacturing and quality. The Company manufactures its fiber optic products at its facility in North Carolina. The Company believes that the vertical integration of its manufacturing processes gives the Company both cost and delivery advantages. The manufacture of the Company's gas tubes requires vacuum ovens, specialized test equipment and various processes developed by the Company. TII produces a substantial portion of its NIDs and other plastic enclosures in its thermoplastic molding facility in Puerto Rico. Many of the Company's products contain numerous metal components produced with the Company's metal stamping and forming equipment. 31 As a result of the award of new contracts, including contracts for the Company's broadband NIDs, the Company has begun the expansion of its manufacturing facilities to increase its gas tube overvoltage surge protector and thermoplastic molding capacities, as well as, to purchase the necessary molds, test equipment and other equipment necessary to meet the anticipated needs under these contracts. See "Risk Factors-Risk of Loss of New Contracts." The Company's fiber optic products are assembled principally from outside purchased components and plastic parts molded at its facility in North Carolina. TII uses a statistical process control method within its manufacturing and engineering operations to establish quality standards, qualify vendors, inspect incoming components, maintain in-process inspection and perform final testing of finished goods. RAW MATERIALS The Company uses stamped, drawn and formed parts made out of a variety of commonly available metals, ceramics and plastics as the primary components of its gas tubes, overvoltage surge protectors, NIDs, other molded plastic housings and fiber optic products. In manufacturing certain protectors and station electronic products, the Company purchases commonly available solid state components, printed circuit boards and standard electrical components such as resistors, diodes and capacitors. In jointly manufacturing the modular overvoltage surge protector with Raychem, the Company utilizes a proprietary gel which is supplied exclusively by Raychem. While the Company has no contracts with suppliers of the components utilized in the manufacture of its products which extend for more than one year, the Company believes that the raw materials it uses will continue to be available in sufficient supply at competitive prices. COMPETITION 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 are faster reacting to surges, gas tube overvoltage surge protectors have generally remained the subscriber overvoltage surge protection technology of choice 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. 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. While 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 telecommunication market, solid state surge protectors may gain market share from gas tube surge protectors, especially where high speed response is critical. Solid state and gas tube protectors are produced from different raw materials, manufacturing processes and equipment. The Company has begun developing and marketing overvoltage surge protectors incorporating purchased solid state protectors on a limited basis. TII, as well as other companies, have begun combining solid state protectors with gas tubes into a hybrid surge protector module. While more expensive and complex than gas tube surge protectors, the hybrid surge protector can provide the speed of a solid state protector with the energy handling capability of a gas tube surge protector. Hybrid surge protectors have been field tested against gas tube and solid state surge protectors 32 by several telcos. To date, to the Company's knowledge, telcos have not seen significant enough improvement in protection of equipment or field life of the protector to switch to the more expensive hybrid surge protectors. Currently, the Company sells most of its subscriber overvoltage surge protectors to the telcos in NID housings produced by the Company or OEMs, who purchase the surge protectors from the Company. Most NIDs sold in the United States are produced by competitors of the Company, some of which also market overvoltage surge protectors and station electronics. In addition, other suppliers to telcos could enter the market and compete with the Company. The fiber optic market is characterized by innovation, rapidly changing technology and new product development. The Company's success in this area depends upon its ability to identify customer needs, develop new products and keep pace with continuing changes in technology and customer preferences. The Telecommunications Act of 1996 permits the RBOCs, which are presently the principal users of the Company's products, to manufacture telecommunications equipment. Accordingly, the RBOCs could decide to manufacture and supply themselves with NIDs rather than purchase from outside suppliers. Most of the Company's competitors and many of those who could enter the Company's market are well established suppliers to the telcos, have a reputation for quality and service and are, or are part of, large corporations which have substantially greater assets, financial resources and larger sales forces, manufacturing facilities and research and development staffs than those of the Company. While most telcos evaluate, test and approve the overvoltage surge protector and station electronics separately from the NID, the Company believes there is a competitive advantage in offering the customer all of the components of the NID including, the enclosure, the overvoltage surge protector, the demarcation point and the station electronics. Principal competitive factors include price, technology, delivery, quality and reliability. The Company believes that its sales, marketing and R&D departments, its high quality, low-cost production facilities, and its overvoltage surge protection technology enable it to maintain its competitive position. PATENTS AND TRADEMARKS The Company owns or has applied for a number of patents relating to certain of its products or components thereof, and owns a number of registered trademarks which are considered to be of value principally in identifying the Company and its products. However, to maintain its industry position, the Company relies primarily on technical leadership, trade secrets and nondisclosure agreements of its proprietary rights. 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. The Company has entered into a license agreement with Citel S.A. pursuant to which the Company is the sole licensee of a patent related to its coaxial overvoltage surge protector. Pursuant to this agreement the Company has agreed to pay a one-time payment and a royalty based on net revenues subject to minimum annual payments. The term of the licensing agreement continues until the expiration of the patent under the license in 2004 and may be terminated earlier according to the provisions therein. TII, DITEL, LIGHTRAX and Totel Failsafe are registered trademarks of the Company. 33 REGULATION While the telecommunications industry is subject to regulation in the United States, primarily by the FCC and various other state public service or utility commissions, and in other countries, such regulations do not typically apply directly to the Company. However, federal and state regulatory agencies and commissions regulate most of the telcos and other communications access providers who use the Company's products. The effects of such regulations, which are under continuous review and subject to change, could adversely affect the Company's customers and, therefore, the Company. The NEC requires that an overvoltage surge protector listed by Underwriters Laboratories or another qualified electrical testing laboratory be installed on virtually all subscriber telephone lines. Listing by Underwriters Laboratories has been obtained by the Company where required. Compliance with applicable federal, state and local environmental regulations has not had, and the Company does not believe that compliance in the future will have, a material adverse effect on its earnings, capital expenditures or competitive position. EMPLOYEES On September 30, 1997, the Company had approximately 1,000 full-time employees, of whom 898 were engaged in manufacturing and 44 in engineering and new product development, with 58 being employed in executive, sales and administrative positions. Of these employees, approximately 260 are employed at the Company's Puerto Rico facilities and approximately 675 are employed at its Dominican Republic facilities. Additionally, the Company has approximately 100 temporary employees of which approximately 85 were employed in connection with the start-up of the Company's new broadband NID product line. 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. PROPERTIES The Company manufactures its non-fiber optic products in its facilities in Puerto Rico and the Dominican Republic. The Company's facility in Puerto Rico is in Toa Alta, approximately 20 miles southwest of San Juan, in two single story buildings which, together with several smaller buildings, contain an aggregate of approximately 43,000 square feet. These facilities also contain certain of the Company's warehousing facilities and certain of its administrative, research and development, quality assurance, sales and executive offices. These facilities are operated under a lease agreement with the Puerto Rico Industrial Development Company ("PRIDCO") which has expired. The Company and PRIDCO have continued operating under the terms of the lease while negotiating a new lease. While the Company believes it will be able to negotiate this lease on commercially reasonable terms, there can be no assurance that it will be able to do so. See "Risk Factors-Expiration of Lease for Puerto Rico Manufacturing Facility." The Company also leases a building consisting of approximately 73,000 square feet, in San Pedro De Macoris, Dominican Republic under a lease which expires on November 1, 1998. This facility houses certain of the Company's manufacturing activities. 34 The Company leases a single story facility in Hickory, North Carolina of approximately 10,000 square feet under a lease expiring December 1998. This facility houses its fiber optic manufacturing facilities as well as certain research and development and administrative offices. In addition, the Company occupies a single story building and a portion of an adjacent building, consisting of an aggregate of approximately 14,000 square feet in Copiague, New York under a lease which expires in July 1998. These facilities house the Company's principal research and development activities and certain of its marketing, administrative and executive offices, as well as a warehouse for customer products. The Company believes that its facilities and equipment are well maintained and adequate to meet its current requirements. The Company believes that the leases on each of the Dominican Republic, North Carolina and New York facilities could either be renewed at competitive rates or facilities adequate to meet its needs could be readily obtained. LEGAL PROCEEDINGS The Company is not a party to any material pending legal proceedings. 35 MANAGEMENT The executive officers and directors of the Company are as follows: Name Positions ---- --------- Alfred J. Roach................... Chairman of the Board and Director Timothy J. Roach.................. President and Chief Executive Officer, Vice Chairman of the Board and Director C. Bruce Barksdale................ Senior Vice President and Director Paul G. Sebetic................... Vice President - Finance and Chief Financial Officer Virginia M. Hall.................. Vice President - Administration Dare P. Johnston.................. Vice President - Fiber Optic Operations James A. Roach.................... Vice President - Marketing and Sales Dorothy Roach..................... Secretary and Director James R. Grover, Jr.(1)........... Director Joseph C. Hogan(1)(2)............. Director William G. Sharwell(2)............ Director - -------------------- (1) Member of Audit Committee. (2) Member of Compensation Committee Alfred J. Roach, 82, has served as Chairman of the Board of Directors and a director of the Company and its predecessor from its founding in 1964, and was Chief Executive Officer of the Company from the Company's founding until January 1995. Since September 1983, Mr. Roach has also served as Chairman of the Board of Directors of American Biogenetic Sciences, Inc. ("ABS"), a biotechnology research company. Mr. Roach devotes a majority of his time to the affairs of ABS. Timothy J. Roach, 50, has served the Company in various capacities since December 1973. He has been President of the Company since July 1980, Chief Operating Officer since May 1987, Vice Chairman of the Board since October 1993, Chief Executive Officer since January 1995 and a director since January 1978. Mr. Roach was a Captain in the United States Air Force for four years prior to joining the Company and is a graduate of Harvard University's Business School Program for Management Development. Mr. Roach has also served as Treasurer, Secretary and a director of ABS since September 1983. Mr. Roach devotes substantially all of his time to the affairs of the Company. 36 C. Bruce Barksdale, 66, has been a Vice President of the Company since August 1971, serving as Senior Vice President (responsible for customer and product development) since October 1993, and a director of the Company since 1974. Mr. Barksdale holds a Bachelor of Science degree in Electrical Engineering from the University of South Carolina. Paul G. Sebetic, 33, has been Vice President-Finance and Chief Financial Officer of the Company since October 1996. Mr. Sebetic joined the Company in April 1996 as Corporate Controller. From November 1992 until joining the Company, Mr. Sebetic held various financial management positions with V Band Corporation, a telecommunications equipment manufacturer, serving as Controller since August 1995. From February 1991 through August 1992, Mr. Sebetic was the Financial Controller of the European operations of MacDermid Inc., a specialty chemical manufacturer. Mr. Sebetic is a Certified Public Accountant and holds a Masters of Business Administration in Finance from New York University. Virginia M. Hall, 44, has served the Company in various capacities since February 1976, serving as Vice President-Administration since December 1993 and Vice President-Contract Administration from September 1990 until December 1993. Dare P. Johnston, 56, has been Vice President - Fiber Optic Operations since December 1993. Ms. Johnston joined the Company in September 1993 with the Company's acquisition of TII-Ditel, Inc., a designer, manufacturer and supplier of fiber optic products. Prior to joining the Company, Ms. Johnston served in various capacities with TII-Ditel, Inc. since January 1989, serving as President since September 1990. Prior to joining Ditel, Inc., Ms. Johnston was employed by NCNB National Bank of North Carolina since 1973, where she served as Senior Vice President since October 1983. Ms. Johnston holds a Bachelor of Arts degree in English from Duke University. James A. Roach, 44, has served the Company in various capacities since January 1982, serving as Vice President-Marketing and Sales since July 1987. Dorothy Roach, 74, has been Secretary of the Company for more than the past five years, served as Treasurer of the Company for more than five years prior to relinquishing that position in December 1993 and, except for a brief period, has been a director of the Company since 1964. James R. Grover, Jr., 78, has been a director of the Company since 1978. Mr. Grover has been engaged in the private practice of law in the State of New York since 1974, and has been General Counsel to the Company for more than the past five years. Dr. Joseph C. Hogan, 75, has been a director of the Company since January 1974. Dr. Hogan served as Dean of the College of Engineering of the University of Notre Dame from 1967 to 1981, following which he performed various services for the University of Notre Dame until 1985, where he remains Dean Emeritus. From 1985 until his retirement in 1987, Dr. Hogan was a Director of Engineering Research and Resource Development at Georgia Institute of Technology. He is past President of the American Society of Engineering Education. Dr. Hogan is also a director of ABS. William G. Sharwell, 75, has been as a director of the Company since October 1995. Mr. Sharwell was President of Pace University in New York from 1984 until his retirement in 1990. He was Senior Vice President of American Telephone & Telegraph Company (now AT&T Corporation) between 1976 and 1984, and previously served as executive Vice President of Operations of New York Telephone Company (now Bell 37 Atlantic Corporation). Mr. Sharwell serves as an independent general partner of Equitable Capital Partners, L.P. and Equitable Capital Partners (Retirement Fund), L.P., registered investment companies under the Investment Company Act of 1940. He is also a director of ABS. Alfred J. Roach and Dorothy Roach are married. Timothy J. Roach is their son and James R. Roach is their nephew. There are no other family relationships among the Company's directors and executive officers. The Company's Board of Directors presently consists of seven directors divided into three classes. C. Bruce Barksdale, Dr. Joseph C. Hogan and William G. Sharwell serve as Class I directors, James R. Grover, Jr. and Dorothy Roach serve as Class II directors and Alfred J. Roach and Timothy J. Roach serve as Class III directors. The term of office of Class III directors continues until the Company's 1997 Annual Meeting of Stockholders scheduled to be held in December 1997, the term of office of Class I directors continues until the next succeeding annual meeting of stockholders and the term of office of Class II directors continues until the second succeeding annual meeting of stockholders, and in each case until their respective successors are elected and qualified. At each annual meeting directors are chosen to succeed those in the class whose term expires at that meeting. Officers hold office until their successors are chosen and qualified. Any officer elected or appointed by the Board of Directors may be removed at any time by the Board. EXECUTIVE COMPENSATION SUMMARY COMPENSATION TABLE The following table sets forth, for the Company's three fiscal years ended June 27, 1997, information concerning the compensation paid by the Company to Timothy J. Roach who served as the Company's Chief Executive Officer, and each of the four other most highly compensated persons who were serving as executive officers of the Company, at the end of the Company's fiscal year ended June 27, 1997 (the "Named Executive Officers"):
LONG-TERM COMPENSATION ------------ ANNUAL COMPENSATION SECURITIES NAME AND ---------------------------- UNDERLYING ALL OTHER PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS (#) COMPENSATION - ------------------ ---- ------ ----- ----------- ------------ Timothy J. Roach ........... 1997 $193,985 $ 6,976 50,000 $ 7,521(1) Chief Executive Officer 1996 171,618 -- -- 7,586 1995 143,677 -- 200,000 7,282 Alfred J. Roach ............ 1997 $150,000 $ 200(2) 50,000 -- Chairman of the Board . 1996 150,000 200(2) -- -- 1995 150,000 200(2) 200,000 -- Dare P. Johnston ........... 1997 $129,825 $ 4,017 -- -- Vice President - ...... 1996 120,779 -- 10,000 -- Fiber Optics Operations 1995 107,692 77,071 20,000 --
38
LONG-TERM COMPENSATION ------------ ANNUAL COMPENSATION SECURITIES NAME AND ---------------------------- UNDERLYING ALL OTHER PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS (#) COMPENSATION - ------------------ ---- ------ ----- ----------- ------------ James A. Roach.............. 1997 $111,564 $44,209 -- -- Vice President-Marketing 1996 106,440 24,347(3) 10,000 -- 1995 100,098 39,554(3) 20,000 -- Paul G. Sebetic............. 1997 $105,254 $ 3,503 25,000 -- Vice President-Finance 1996 14,615(4) -- -- --
- --------------- (1) Includes (i) $1,172 representing the dollar value to Mr. Roach of the portion of the premium paid by the Company on split dollar life insurance policy during such year with respect to the deemed term life insurance portion of the premiums and (ii) $6,349, representing the annual premium paid by the Company on long-term disability insurance maintained by the Company for the benefit of Mr. Roach. (2) Required to be paid under Puerto Rico law. (3) Commissions based on sales. (4) Mr. Sebetic joined the Company in April 1996. OPTION GRANTS IN LAST FISCAL YEAR The following table contains information concerning options granted during the Company's fiscal year ended June 27, 1997 to the Named Executive Officers:
Potential Realizable Value at Assumed Number of Percent of Annual Rates of Stock Securities Total Options Price Appreciation For Underlying Granted to Exercise Option Term Options Employees in Price Per Expiration ----------------------- Name Granted Fiscal Year Share Date 5% 10% - ---- -------- ------------- ------- ----- ---- ---- Alfred J. Roach.................. 50,000 13% $4.50 7/24/06 $141,501 $358,592 Timothy J. Roach................. 50,000 13% 4.50 7/24/06 141,501 358,592 Paul G. Sebetic.................. 15,000 4% 4.50 7/24/06 42,450 107,578 10,000 3% 5.25 10/22/06 33,017 83,671
Each option was granted at an exercise price equal to the market value of the Company's Common Stock on the date of grant and is exercisable during a ten year term (subject to early termination in certain instances) with respect to 20% of the number of shares subject to the option in each annual period, on a cumulative basis, commencing one year after the date of grant. 39 AGGREGATE OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUE TABLE No options were exercised by any of the Named Executive Officers during the Company's fiscal year ended June 27, 1997. The following table contains information with respect to the fiscal year-end value of unexercised options held by the executive officers named in the Summary Compensation Table:
Number of Shares of Common Stock Underlying Unexercised Options at Value of Unexercised In-the-Money June 27, 1997 Options at June 27, 1997 -------------------------------- -------------------------------- Name Exercisable Unexercisable(1) Exercisable Unexercisable(1) - ---- ----------- ---------------- ----------- ---------------- Alfred J. Roach................... 120,360 170,000 $201,170 $167,500 Timothy J. Roach.................. 120,000 170,000 175,000 167,500 Dare P. Johnston.................. 30,000 20,000 9,000 13,500 James A. Roach.................... 25,000 20,000 22,600 13,500 Paul G. Sebetic................... - 25,000 - 23,750
- ---------------- (1) Represents the closing price of the underlying Common Stock at fiscal year-end minus the option exercise price. REMUNERATION OF DIRECTORS Non-employee directors receive a fee of $1,000 for each meeting of the Board held and members of Committees of the Board receive a fee of $500 for attending each meeting of the Committee of the Board on which such director serves. Non-employee directors are also granted options to purchase 10,000 shares of the Company's Common Stock under the Company's 1994 Non-Employee Director Stock Option Plan at the time such person becomes a non-employee director and immediately following each annual meeting of stockholders at which directors are elected. Each option granted is exercisable for period of ten years subject to earlier termination at specified times following a non-employee director's cessation of service) at an exercise price equal to 100% of the fair market value on the date of grant of the shares subject thereto. EMPLOYMENT AGREEMENTS The Company and Timothy J. Roach are parties to an Amended and Restated Employment Agreement, effective as of August 1, 1997, pursuant to which Mr. Roach is to serve as the Company's President, Chief Executive Officer and Chief Operating Officer. The Agreement provides for a five-year term presently ending July 31, 2002, with automatic one-year extensions on each July 31 during the term unless either party gives notice of termination at least 90 days prior to such July 31 that the term of the Agreement is not to be extended. Under the Agreement, Mr. Roach is presently entitled to an annual salary of $250,000 per year, subject to increases and bonuses at the discretion of the Board of Directors. In addition, the Agreement requires the Company to provide Mr. Roach (whose principal place of business is the Company's executive offices in Copiague, New York) with an allowance to reimburse him for the cost of maintaining a place of abode in Puerto Rico, where the Company maintains its principal manufacturing facilities, not to exceed 20% of his then salary and to continue to maintain insurance benefits provided Mr. Roach at levels and terms no less favorable than are currently in effect. Mr. Roach has agreed, among other things, not to disclose 40 confidential information of the Company and not to directly or indirectly engage, during the term of the agreement and for two years thereafter, in any activity which is competitive with the Company's business. In consideration for such covenant, Mr. Roach is to receive, for each year during the two-year period following termination of his employment, an amount equal to his highest salary rate in effect at any time during the one-year period preceding the date of such termination unless Mr. Roach's employment is terminated by reason of his death, voluntary termination other than for "good reason" (in general, adverse changes in his powers, duties, position or compensation or certain changes in the location where his duties are to be performed) or disability, as defined, for cause, as defined, and he is not capable of providing day-to-day services to a competitor. In the event of termination of employment by reason of death or disability, as defined, Mr. Roach or his beneficiary is entitled to receive a continuation of his compensation for a period of one year and two years, respectively. In the event Mr. Roach terminates his employment "for good reason", the Company will also be required to pay him a sum equal to three times the amount of his highest annual salary and highest bonus, for the current, or two preceding fiscal years, subject to reduction, as to any amount that would constitute a "parachute payment" under the Code, as amended, to the maximum amount that would not constitute such a "parachute payment." In the event of the termination of Mr. Roach's employment other than for cause, all outstanding stock options then held by Mr. Roach shall fully vest. Dare P. Johnston is a party to an Employment Agreement, dated September 23, 1993, with the Company's subsidiary, TII-Ditel Inc., under which Ms. Johnston is to serve as President/General Manager of the Ditel Fiber Optic Division of the Company. The Agreement, as extended, provides for a term expiring April 30, 2000. Under the Agreement, Ms. Johnston's current annual salary is $133,000 per annum, subject to review at the end of each year of employment, with Ms. Johnston to receive a salary increase of up to 10% per year but not less than the percentage increase of a consumer price index. In the event of the termination of Ms. Johnston's employment by the Company other than for cause, death, disability or by Ms. Johnston following a reduction in rank or authority, Ms. Johnston will be entitled to receive all compensation that she would have received for the remaining term of her Agreement, but not less than six months' compensation, in a lump sum, and all outstanding options then held by Ms. Johnston shall fully vest. Ms. Johnston has agreed not to disclose confidential information of the Company during or after her employment and that, during the term of her employment and, for a period of two years thereafter, not to directly or indirectly engage in certain activities which are competitive to the Company. Paul G. Sebetic is a party to an Employment Agreement, dated May 1, 1997, with the Company under which Mr. Sebetic is to serve as Vice President-Finance. The Agreement provides for a term expiring April 30, 2000. Under the Agreement, Mr. Sebetic's salary is presently $110,000 and is subject to review at the end of each year of employment, with Mr. Sebetic to receive a salary increase of 10% per year but not less that the increase in a consumer price index. Mr. Sebetic is also to receive $6,000 per year as an allowance to reimburse him for the cost of maintaining a place of abode in Puerto Rico. In the event of the termination of Mr. Sebetic's employment by the Company, other than for cause, death, disability or by Mr. Sebetic following a reduction in rank or authority, Mr. Sebetic will be entitled to receive all compensation that he would have received for the remaining term of his Agreement, but not less than six months' compensation, in a lump sum, and all outstanding options held by Mr. Sebetic shall fully vest. Mr. Sebetic has agreed not to disclose confidential information of the Company during or after his employment and that, during the term of his employment and, for a period of two years thereafter, not to directly or indirectly engage in certain activities which are competitive to the Company. 41 COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The members of the Compensation Committee currently are Joseph C. Hogan and William G. Sharwell. Mr. Sharwell was elected to the Committee in August 1996 to replace James R. Grover, Jr., who served on the Committee with Dr. Hogan during all of the Company's fiscal year ended June 30, 1996. The Company has retained Mr. Grover as legal counsel during the Company's last fiscal year and is retaining him during the Company's current fiscal year. Fees paid Mr. Grover for services rendered to the Company during the Company's fiscal year ended June 27, 1997 were $30,000. STOCK OPTION PLANS The Company currently maintains a 1995 Stock Option Plan (the "1995 Plan"), which enables the Company to grant options to purchase Common Stock to employees of, and consultants to, the Company and its present and future subsidiaries and a 1994 Non-Employee Director Stock Option Plan (the "Non-Employee Director Plan"), which provides for the automatic grant of options to nonemployee directors at the time a person becomes a non-employee director and immediately following each annual meeting of stockholders at which directors are elected. See "Management-Renumeration of Directors." Options to purchase 974,661 shares of Common Stock also remain outstanding under the Company's 1983 Stock Option Incentive Plan and 1986 Stock Option Plan, each of which have terminated except with respect to outstanding options thereunder. After giving effect to option exercises to date, the 1995 Plan presently enables the Company to grant options to purchase 494,800 shares of Common Stock, of which options to purchase 382,300 shares are presently subject to outstanding options. The Company intends to seek stockholder approval of an amendment to the 1995 Plan to increase the number of shares of Common Stock subject thereto by 500,000 shares. The 1995 Plan permits the grant of either "incentive stock options" which are designed to qualify for the favorable tax treatment afforded under Section 422A of the Code ("ISOs") or non-qualified stock options ("NQSOs"). Options granted to consultants may only be granted as NQSOs. The exercise price of an option granted under the 1995 Plan cannot be less than the fair market value of the Common Stock on the date of grant (except that, in the case of ISOs granted to an employee who possesses more than 10% of all classes of stock of the Company, the option exercise price may not be less than 110% of such fair market value). The 1995 Plan is presently administered by the Company's Compensation Committee which, among other things, is empowered (as is the full Board of Directors) to determine, within the limits of the 1995 Plan, which employees and consultants are to be granted options, whether an option granted is to be an ISO or a NQSO, the number of shares of Common Stock to be subject to each option, the exercise price of each option, the term of each option (which may not exceed ten years, except that the term of an option granted to an employee who possesses more than 10% of all classes of stock of the Company may not exceed five years), the dates at which and terms under which an option may be exercised, whether to accelerate the date or the event for exercise of any option and the form of payment of the exercise price and any withholding taxes. 42 CERTAIN TRANSACTIONS Since fiscal 1982, the Company has leased equipment from PRC Leasing, Inc. ("PRC"), a corporation wholly-owned by Alfred J. Roach, Chairman of the Board of Directors and a director of the Company. On July 18, 1991, as an inducement to the Company's then bank lenders to restructure the Company's long-term bank loan, among other things, the Company acquired certain equipment and replaced its leases for other equipment with a new lease. The equipment lease (as subsequently amended, the "Equipment Lease") has a term expiring July 17, 1999 (subject to an automatic extension until July 17, 2001, unless terminated by either party upon at least ninety days written notice prior to the scheduled renewal period) and provides for rentals at the rate of $200,000 per year. The Company believes that the rentals charged by PRC are comparable to the rentals which would have been charged by unrelated leasing companies for similar equipment. 43 PRINCIPAL STOCKHOLDERS The following table sets forth information, as of September 30, 1997, with respect to the beneficial ownership of Common Stock by (i) each person (including any "group", as that term is used in Section 13(d)(3) of the Securities Exchange Act of 1934) known by the Company to own more than 5% of the outstanding shares of Common Stock; (ii) each director of the Company; (iii) each Named Executive Officer; and (iv) all executive officers and directors of the Company as a group. The Company understands that, except as noted below, each beneficial owner has sole voting and investment power with respect to all shares attributable to such owner.
Amount and Percentage of Outstanding Shares Owned(1) Name and Address Nature of ----------------------------------------- of Beneficial Before After Beneficial Owner Ownership Offering Offering ---------------- --------- -------- -------- Alfred J. Roach................................ 893,600(2) 11.6% 8.7% Dorothy Roach.................................. 60,704(3) * * Timothy J. Roach............................... 651,013(4) 8.4% 6.4% Overseas Private Investment Corporation.................................. 400,000(5) 5.0% 3.8% C. Bruce Barksdale............................. 28,998(6) * * James R. Grover, Jr............................ 35,600(7) * * Joseph C. Hogan................................ 34,330(8) * * William G. Sharwell............................ 35,000(9) * * Dare P. Johnston .............................. 34,000(10) * * James A. Roach................................. 39,488(11) * * Paul G. Sebetic ............................... 7,000(12) * * All executive officers and directors as a group (11 persons)...................................1,863,733(13) 23.0% 17.6%
- --------------- (1) Asterisk indicates that the percentage is less than one percent. Percent of Class assumes the issuance of the Common Stock issuable upon the exercise of options or conversion of indebtedness (to the extent exercisable or convertible on or within 60 days after September 30, 1997) held by such persons or entity but (except for the calculation of beneficial ownership by all executive officers and directors as a group) by no other person or entity. (2) Includes 150,360 shares subject to options held under the Company's 1986 and 1995 Stock Option Plans. Excludes the shares owned by Mr. Roach's wife, Dorothy Roach, reflected below in this table, as to which shares Mr. Roach disclaims beneficial ownership. Mr. Roach's address is Route 2-Kennedy Avenue, Guaynabo, Puerto Rico 00657. 44 (3) Includes 8,960 shares subject to options held under the Company's 1986 Stock Option Plan. Excludes the shares owned by Mrs. Roach's husband, Alfred J. Roach, reflected above in this table, as to which shares Mrs. Roach disclaims beneficial ownership. Mrs. Roach's address is Route 2-Kennedy Avenue, Guaynabo, Puerto Rico 00657. (4) Includes 968 shares owned by Mr. Roach's wife (who has sole voting and dispositive power with respect to the shares owned by her and as to which Mr. Roach disclaims beneficial ownership); and 150,000 shares subject to options held under the Company's 1986 and 1995 Stock Option Plans. Mr. Roach's address is c/o the Company, 1385 Akron Street, Copiague, NY 11726. (5) Represents 300,000 shares issuable upon conversion of $750,000 of indebtedness and 100,000 shares issuable upon the exercise of an option. Overseas Private Investment Corporation's address is 1615 M Street, N.W., Washington, DC 20527. (6) Includes 78 shares owned by Mr. Barksdale's children and 21,000 shares subject to options held under the Company's 1983 Employee Incentive Stock Option Plan and 1986 Stock Option Plan. (7) Includes 25,000 shares subject to options held under the Company's 1994 Non-Employee Director Option Plan. (8) Includes 34,250 shares subject to options held under the Company's 1986 Stock Option Plan and 1994 Non Employee Director Stock Option Plan. (9) Represents 35,000 shares subject to options held under the Company's 1986 Stock Option Plan and 1994 Non Employee Director Option Plan. (10) Represents 34,000 shares subject to options held under the Company's 1986 Stock Option Plan. (11) Includes 1,000 shares owned by Mr. Roach's wife (who has sole voting and dispositive power with respect to the shares owned by her and as to which Mr. Roach disclaims beneficial ownership) and 31,000 shares subject to options held under the Company's 1986 Stock Option Plan. (12) Includes 5,000 shares subject to options held under the Company's 1995 Stock Option Plan. (13) Includes 533,570 shares subject to options. 45 DESCRIPTION OF CAPITAL STOCK The following is a summary of certain provisions of the Company's Amended and Restated Certificate of Incorporation (the "Certificate of Incorporation") and By-laws, as amended, copies of which have been filed as exhibits to the Registration Statement of which this Prospectus forms a part. The following discussion is qualified in its entirety by reference to such exhibits. The authorized capital stock of the Company consists of 30,000,000 shares of Common Stock, $.01 par value per share (the "Common Stock"), and 1,000,000 shares of Preferred Stock, $ 1.00 par value per share, issuable in series (the "Preferred Stock"). As of the date of this Prospectus, there were issued and outstanding 7,601,139 shares of Common Stock and no shares of Preferred Stock. COMMON STOCK Each holder of Common Stock is entitled to one vote per share on all matters submitted to a vote of stockholders. Subject to the rights of holders of Preferred Stock, the holders of Common Stock are entitled to receive dividends when, as and if declared by the Board of Directors out of funds legally available therefor and, in the event of the liquidation, dissolution or winding up of the Company, to share ratably in all assets remaining after the payment of liabilities. There are no preemptive or other subscription rights, conversion rights, or redemption or sinking fund provisions with respect to the Common Stock. All of the Company's presently issued and outstanding Common Stock are fully paid and non-assessable. PREFERRED STOCK The Preferred Stock is issuable in one or more series from time to time at the discretion of the Board of Directors. The Board is authorized, with respect to each series, to fix its designation, powers, preferences (including with respect to dividends and on liquidation), rights (including voting, dividend, conversion, sinking fund and redemption rights) and limitations. Shares of Preferred Stock issued by action of the Board of Directors could be utilized, under certain circumstances, as a method of making it more difficult for a party to gain control of the Company without the approval of the Board of Directors. The Company presently has no plans or arrangements for the issuance of any Preferred Stock. CERTAIN PROVISIONS OF THE CERTIFICATE OF INCORPORATION AND BY-LAWS Supermajority Vote Required for Certain Transactions The Company's Certificate of Incorporation requires the affirmative vote of the holders of at least 75% of the outstanding shares of capital stock of the Company entitled to vote thereon to authorize (i) any merger or consolidation of the Company or any of its subsidiaries with or into another entity; (ii) any sale, lease or exchange of all or substantially all of the assets of the Company and its subsidiaries taken as a whole if, as of the record date for determining stockholders entitled to vote on a matter in (i) or (ii), the other party to the transaction beneficially owns 10% or more of the Company's outstanding capital stock entitled to vote in the election of directors (other than a person who beneficially owned at least 10% of the Company's voting capital stock at December 3, 1979); or (iii) the dissolution of the Company. The supermajority voting requirement does not apply to a transaction with a person or entity who became such 10% beneficial owner after the Company's Board of Directors approved the transaction in (i) or (ii) or as to a dissolution of the Company if such dissolution is substantially consistent with such an approved transaction. 46 Classification of Board of Directors and Removal of Directors The Certificate of Incorporation and By-laws of the Company divide the Board of Directors into three classes, designated Class I, Class II and Class III, respectively, each class to be as nearly equal in number as possible. The term of Class I, Class II and Class III directors will expire at the 1998, 1999 and 1997 annual meetings of stockholders, respectively, and in all cases directors elected will serve until their respective successors are elected and qualified. At each annual meeting of stockholders, directors will be elected to succeed those in the class whose terms then expire, each elected director to serve for a term expiring at the third succeeding annual meeting of stockholders after such directors election, and until the directors successor is elected and qualified. Thus, directors elected stand for election only once in three years. The Certificate of Incorporation and By-laws of the Company also provide that Directors may be removed only for cause by stockholders. Amending the Foregoing Provisions The Company's Certificate of Incorporation and By-laws further provide that the affirmative vote of the holders of at least 75% of the Company's outstanding voting stock is required to make, alter or repeal, or to adopt any provision inconsistent with, the foregoing provisions of the Company's Certificate of Incorporation or By- laws. Section 203 of the Delaware General Corporation Law The Company is subject to the provisions of Section 203 of the DGCL. In general, this statute prohibits a publicly held Delaware corporation from engaging, under certain circumstances, in a "business combination" with an "interested stockholder" for a period of three years after the date of the transaction in which the person becomes an interested stockholder, unless (i) prior to the date at which the stockholder became an interested stockholder, the board of directors approved either the business combination or the transaction in which the person becomes an interested stockholder; (ii) the stockholder acquires more than 85% of the outstanding voting stock of the corporation (excluding shares held by directors who are officers or held in certain employee stock plans) upon consummation of the transaction in which the stockholder becomes an interested stockholder or (iii) the business combination is approved by the board of directors and by at least 66 2/3% of the outstanding voting stock of the corporation (excluding shares held by the interested stockholder) at a meeting of stockholders (and not by written consent) held on or subsequent to the date such stockholder became an interested stockholder. An "interested stockholder" is a person who, together with affiliates and associates, owns (or at any time within the prior three years did own) 15% or more of the corporation's voting stock. Section 203 defines a "business combination" to include, without limitation, mergers, consolidations, stock sales and asset based transactions and other transactions resulting in a financial benefit to the interested stockholder. Anti-Takeover Effects The foregoing provisions of the Company's Certificate of Incorporation and By-laws and the effects of Section 203 of the DGCL could discourage potential acquisition proposals and could delay or prevent a change in control of the Company. These provisions are intended to enhance the continuity and stability of the Board of Directors and the policies formulated by the Board of Directors and to discourage certain types of transactions that may involve an actual or threatened change in control of the Company. These provisions are also designed to reduce the vulnerability of the Company to an unsolicited acquisition proposal and to discourage certain tactics that may be used in proxy fights. However, such provisions may discourage third parties from making tender offers for the Company's shares. As a result, the market price of the Common Stock may not benefit from any 47 premium that might occur in anticipation of a threatened or actual change in control. Such provisions also may have the effect of preventing changes in the management of the Company. LIMITATION ON DIRECTORS' LIABILITY In accordance with the DGCL, the Certificate of Incorporation provides that the directors of the Company shall not be personally liable to the Company or its stockholders for monetary damages for breach of fiduciary duty as a director except (i) for any breach of the director's duty of loyalty to the Company and its stockholders; (ii) for acts or omissions not in good faith or which involve intentional misconduct, or knowing violation of law; (iii) under Section 174 of the DGCL, which relates to unlawful payments of dividends and unlawful stock repurchases and redemptions; or (iv) for any transaction from which the director derived an improper personal benefit. This provision does not eliminate a director's fiduciary duties; it merely eliminates the possibility of damage awards against a director personally which may be occasioned by certain unintentional breaches (including situations that may involve grossly negligent business decisions) by the director of those duties. The provision has no effect on the availability of equitable remedies, such as injunctive relief or rescission, which might be necessitated by a director's breach of his or her fiduciary duties. However, equitable remedies may not be available as a practical matter where transactions (such as merger transactions) have already been consummated. The inclusion of this provision in the Certificate of Incorporation may have the effect of reducing the likelihood of derivative litigation against directors, and may discourage or deter stockholders or management from bringing a lawsuit against directors for breach of their duty of care, even though such an action, if successful might otherwise have benefited the Company and its stockholders. INDEMNIFICATION The Certificate of Incorporation and By-laws provide that the Company shall indemnify its officers, directors, employees and agents to the extent permitted by the DGCL. Section 145 of the DGCL provides that the Company may indemnify any person who was or is a party, or is threatened to be made a party, to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than a "derivative" action by or in the right of the Company) by reason of the fact that such person is or was a director, officer, employee or agent of the Company, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement in connection with such action, suit or proceeding if such person acted in good faith and in a manner such person reasonably believed to be in or not opposed to the best interests of the Company, and, with respect to any criminal action or proceeding, had no reasonable cause to believe was unlawful. A similar standard of care is applicable in the case of derivative actions, except that no indemnification shall be made where the person is adjudged to be liable to the Company, unless and only to the extent that the Court of Chancery of the State of Delaware or the court in which such action was brought determines that such person is fairly and reasonably entitled to such indemnity and such expenses. TRANSFER AGENT AND REGISTRANT The transfer agent and registrar for the Common Stock is Harris Trust Company of New York, Wall Street Plaza, 88 Pine Street, New York, New York 10005. SHARES ELIGIBLE FOR FUTURE SALE Sales of a substantial number of shares of Common Stock in the public market following this offering could adversely affect the market price for the Common Stock. As of the date of this Prospectus, but giving effect 48 to the completion of this offering, 8,772,976 shares of Common Stock (9,147,976 shares if the Underwriters' over-allotment option is exercised in full) will be freely transferable without restriction under the Securities Act of 1933, as amended (the "Securities Act"). The remaining 1,328,163 shares of Common Stock are owned by persons who may be deemed to be "affiliates" of the Company and are presently eligible for sale under Rule 144 ("Rule 144") promulgated under the Securities Act subject to Rule 144's volume and other limitations. Of such shares, 500,000 shares are presently subject to an effective and current registration statement under the Securities Act and, as such, are freely tradeable without such limitations. In addition, 300,000 shares issuable upon conversion of convertible indebtedness will, if and when converted, be eligible for immediate sale under paragraph (k) of Rule 144 without any volume or other limitation. The Company has registered, for future issuance under the Securities Act, 1,692,901 shares of Common Stock subject to its stock option plans (of which 1,505,401 shares were subject to outstanding options). Any such shares issued upon the exercise of options by persons who are not affiliates of the Company will be freely transferable upon issuance and any such shares issued to affiliates will be eligible for sale under Rule 144 without any further holding period but subject to certain volume and other limitations. Holders of warrants to purchase 80,000 shares of Common Stock have the right, under certain circumstances, to require the Company to file a registration statement under the Securities Act to enable such holders to sell shares of Common Stock following the exercise of such warrants. In addition, certain of such holders have certain piggyback registration rights which have been waived in connection with this offering. The Company (except with respect to issuances upon exercise of outstanding options, warrants and convertible securities), and its executive officers and directors (who own an aggregate of 1,328,163 shares of Common Stock and the right to acquire an additional 536,570 shares upon the exercise of options which shall become exercisable within 180 days of the date of this Prospectus), have agreed not to sell or otherwise dispose of any shares of Common Stock for a period of 180 days after the date of this Prospectus without the prior written consent of Rodman. See "Underwriting." 49 UNDERWRITING The Underwriters named below (the "Underwriters"), for whom Rodman & Renshaw, Inc. ("Rodman") is acting as Representative, have severally agreed to purchase from the Company, and the Company has agreed to sell to the Underwriters, the respective number of shares of Common Stock set forth opposite their names below: Underwriter Number of Shares ----------- ---------------- Rodman & Renshaw, Inc...................... -------- Total...................................... 2,500,000 ========= The Underwriting Agreement provides that the obligations of the several Underwriters thereunder are subject to approval of certain legal matters by counsel and to various other conditions. The nature of the Underwriters' obligations is such that they are committed to purchase and pay for all of the shares of Common Stock offered hereby if they are purchased. The Representative has advised the Company that the Underwriters propose to offer the shares of Common Stock initially to the public on the terms set forth on the cover page of this Prospectus. The Underwriters may allow to selected dealers a concession of $____ per share, and such dealers may reallow a concession not in excess of $______ per share to certain other dealers who are members of the National Association of Securities Dealers, Inc. After the public offering, the offering price and other selling terms may be changed by the Underwriters. The Common Stock is included for quotation on the Nasdaq National Market. The Company has granted to the Underwriters an over-allotment option, exercisable for 30 days from the date of this Prospectus, to purchase up to an aggregate of 375,000 additional shares of Common Stock to cover over-allotments, if any, at the same price per share as the initial shares to be purchased by the Underwriters. If the Underwriters exercise such over-allotment option, then each of the Underwriters will be committed, subject to certain conditions, to purchase such additional shares in approximately the same proportion as set forth in the above table. The Underwriters may exercise such option only to cover over-allotments made in connection with the sale of the shares of Common Stock offered hereby. All executive officers and directors of the Company have agreed that for a period of 180 days from the date of this Prospectus, they will not offer for sale, sell, solicit an offer to buy, contract to sell, distribute, grant any option for the sale of or otherwise transfer or dispose of, directly or indirectly, any shares of Common Stock or any securities convertible into, exercisable for or exchangeable for any shares of Common Stock without the prior written consent of Rodman on behalf of the Underwriters. The Company has agreed to indemnify the Underwriters against certain liabilities, including civil liabilities under the Securities Act, or to contribute to certain payments that the Underwriters may be required to make in respect thereof. Certain of the Underwriters and selling group members that currently act as market makers for the Common Stock may engage in "passive market making" in the Common Stock on the Nasdaq National Market 50 in accordance with Rule 103 of Regulation M during the distribution of the Common Stock. In connection with this offering, certain of the Underwriters and selling group members also may engage in transactions that stabilize, maintain or otherwise affect the market price of the Common Stock. The Underwriters may also create a short position for the account of the Underwriters by selling more Common Stock in connection with this offering than they are committed to purchase from the Company, and in each case may purchase Common Stock in the open market following completion of this offering to cover all or a portion of such short position. The Underwriters may also cover all or a portion of such short position, up to 375,000 shares of Common Stock, by exercising the over-allotment option referred to above. In addition, the Representatives may impose "penalty bids" under contractual arrangements with the Underwriters, whereby selling concessions allowed to syndicate members or other broker-dealers in respect of the Common Stock sold in this offering for their account may be reclaimed by the syndicate if such shares are repurchased by the syndicate in stabilizing or covering transactions in the open market. These activities may stabilize, maintain or otherwise affect the market price of the Common Stock which may be higher than the price that might otherwise prevail in the open market. Neither the Company nor any of the Underwriters makes any representation or prediction as to the direction or magnitude of any effect that the transactions described above may have on the price of the Common Stock. None of the transactions described in this paragraph is required, and, if they are undertaken, they may be discontinued at any time. Such transactions may be effected on the Nasdaq National Market or otherwise. The foregoing is a summary of the principal terms of the Underwriting Agreement described above and does not purport to be complete. Reference is made to a copy of such agreement which is filed as an exhibit to the Registration Statement of which this Prospectus forms as part. See "Available Information." The Company is a party to an agreement with Rodman pursuant to which Rodman is rendering financial advisory services to the Company for a three-year term which began on July 1, 1996, subject to termination by either party on ten days notice to the other. For its financial advisory services, Rodman is receiving a fee of $3,000 per month and is being reimbursed for its reasonable out-of-pocket expenses. The Company also agreed, subject to certain exceptions, to indemnify and hold Rodman and each of its affiliates, stockholders, directors, officers, employees and controlling persons against liabilities incurred by them relating to or arising out of their activities under the agreement. In connection with entering into the agreement, the Company granted to Rodman warrants to purchase, until July 15, 2001, an aggregate of 20,000 shares of the Company's Common Stock at an exercise price of $6.15 per share, 120% of the closing price of the Common Stock on the Nasdaq National Market on the date of grant. Rodman subsequently transferred the warrants to certain of its employees. The warrants afford the holders thereof the right to require the Company to register the shares issuable upon exercise of the warrants under the Securities Act pursuant to a demand registration right. LEGAL MATTERS The validity of the Common Stock offered hereby will be passed upon by Parker Chapin Flattau & Klimpl, LLP, New York, New York. Certain legal matters will be passed upon for the Underwriters by Squadron, Ellenoff, Plesent & Sheinfeld, LLP, New York, New York. EXPERTS The consolidated financial statements and Schedule, included or incorporated by reference in this Prospectus and elsewhere in the Registration Statement, of which this Prospectus is a part, have been audited by Arthur Andersen LLP, independent public accountants, as indicated in their reports with respect thereto, and are 51 included herein in reliance upon the authority of said firm as experts in accounting and auditing in giving said reports. INFORMATION INCORPORATED BY REFERENCE The Company's Annual Report on Form 10-K for its fiscal year ended June 27, 1997 heretofore filed by the Company with the Commission (File No. 1-8048) pursuant to Section 13(a) of the Exchange Act are incorporated herein by reference. Any statement contained in a document incorporated or deemed to be incorporated by reference herein shall be deemed to be modified or superseded for purposes of this Prospectus to the extent that a statement contained herein or in any other subsequently filed document which also is incorporated by reference herein modifies or supersedes such statement. Any statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of this Prospectus. The Company will provide, without charge, to each person (including any beneficial owner) to whom a copy of this Prospectus is delivered, upon the written or oral request of any such person, a copy of any document incorporated by reference in this prospectus (other than exhibits unless such exhibits are expressly incorporated by reference in such documents). Requests should be directed to TII Industries, Inc., 1385 Akron Street, Copiague, New York 11726, (516) 789-5000, Attention: Paul G. Sebetic, Vice President-Finance. ADDITIONAL INFORMATION The Company is subject to the informational requirements of the Exchange Act and, in accordance therewith files reports, proxy statements and other information with the Commission. Such reports, proxy statements and other information filed by the Company can be inspected and copied at the public reference facilities maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's Regional Offices located at 7 World Trade Center, Suite 1300, New York, New York 10048 and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of such material can also be obtained at prescribed rates from the Public Reference Section of the Commission, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. The Commission maintains a Web site (http://www.sec.gov) that contains reports, proxy and information statements and other information electronically filed through the Commission's Electronic Data Gathering, Analysis and Retrieval system ("EDGAR"). The Common Stock is traded on the Nasdaq National Market and such reports and other information can also be inspected at the offices of the National Association of Securities Dealers, Inc., 1735 K Street, N.W., Washington, D.C. 20006. The Company has filed with the Commission, Washington, D.C. 20549, a Registration Statement on Form S-2 under the Securities Act with respect to the shares of Common Stock offered hereby. This Prospectus does not contain all of the information set forth in the Registration Statement and the exhibits and schedules thereto. For further information with respect to the Company and the Common Stock offered hereby, reference is made to the Registration Statement and the exhibits and schedules filed therewith. Statements contained in this prospectus as to the contents of any contract or any other document referred to are not necessarily complete, and in each instance reference is made to the copy of such contract or other document filed as an exhibit to the Registration Statement, each such statement being qualified in all respects by such reference. A copy of the Registration Statement may be inspected without charge at the Commission's principal office, and copies of all or any part of the Registration Statement may be obtained from such office upon the payment of the fees prescribed by the Commission. 52 TII INDUSTRIES, INC, AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page Number Report of Independent Public Accountants F-2 Consolidated Balance Sheets - June 27, 1997 and June 28, 1996 F-3 Consolidated Statements of Operations for the Three Years in the Period Ended June 27, 1997 F-4 Consolidated Statements of Stockholders' Investment for the Three Years in the Period Ended June 27, 1997 F-5 Consolidated Statements of Cash Flows for the Three Years in the Period Ended June 27, 1997 F-6 Notes to Consolidated Financial Statements F-7 to F-18 F-1 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To TII Industries, Inc.: We have audited the accompanying consolidated balance sheets of TII Industries, Inc. and subsidiaries as of June 27, 1997 and June 28, 1996, and the related consolidated statements of operations, stockholders' investment and cash flows for each of the three years in the period ended June 27, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of TII Industries, Inc. and subsidiaries as of June 27, 1997 and June 28, 1996, and the results of their operations and their cash flows for each of the three years in the period ended June 27, 1997, in conformity with generally accepted accounting principles. Arthur Andersen LLP San Juan, Puerto Rico September 19, 1997. Stamp No. 1454624 of the Puerto Rico Society of Certified Public Accountants has been affixed to the original copy of this report. F-2 TII INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS AS OF JUNE 27, 1997 AND JUNE 28, 1996 (Dollars in Thousands)
June 27, June 28, 1997 1996 -------- -------- ASSETS Current Assets Cash and cash equivalents $ 247 $ 2,883 Marketable securities available for sale 3,552 5,999 Receivables 7,388 7,084 Inventories 15,574 14,032 Prepaid expenses 402 388 -------- -------- Total current assets 27,163 30,386 -------- -------- Fixed Assets Property, plant and equipment 37,812 33,018 Less: Accumulated depreciation and amortization (23,768) (22,029) -------- -------- Net fixed assets 14,044 10,989 -------- -------- Other Assets 1,616 1,448 -------- -------- TOTAL ASSETS $ 42,823 $ 42,823 ======== ======== LIABILITIES AND STOCKHOLDERS' INVESTMENT Current Liabilities Current portion of long-term debt and obligations under capital leases $ 537 $ 363 Accounts payable 5,833 5,185 Accrued liabilities 1,138 1,037 -------- -------- Total current liabilities 7,508 6,585 -------- -------- Long-Term Debt 839 853 Long-Term Obligations Under Capital Leases 1,465 1,523 -------- -------- 2,304 2,376 -------- -------- Commitments and Contingencies (Note 11) Stockholders' Investment Preferred Stock, par value $1.00 per share; 1,000,000 authorized and issuable in series (Note 10) Series A Cumulative Covertible Preferred Stock, 100,000 shares authorized; no shares outstanding at June 27, 1997 and June 28, 1996 -- -- Series B Cumulative Redeemable Preferred Stock, 20,000 shares authorized; no shares outstanding at June 27, 1997 and June 28, 1996 -- -- Common Stock, par value $.01 per share; 30,000,000 shares authorized; 7,448,473 and 7,446,975 shares issued at June 27, 1997 and June 28, 1996, respectively (Note 9) 75 75 Warrants outstanding 159 120 Capital in excess of par value 29,052 29,046 Retained earnings 3,999 4,855 Valuation adjustment to record marketable securities available for sale at fair value 7 47 -------- -------- 33,292 34,143 Less - Treasury stock, at cost; 17,637 common shares (281) (281) -------- -------- Total stockholders' investment 33,011 33,862 -------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' INVESTMENT $ 42,823 $ 42,823 ======== ========
See notes to consolidated financial statements F-3 TII INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE YEARS IN THE PERIOD ENDED JUNE 27, 1997 (Dollars in Thousands, except per share data)
June June June 27, 1997 28, 1996 30, 1995 -------- -------- -------- Net sales $ 50,675 $ 44,513 $ 43,830 -------- -------- -------- Cost of sales 41,421 31,956 30,782 Gross profit 9,254 12,557 13,048 -------- -------- -------- Operating expenses Selling, general and administrative 7,061 5,881 6,827 Research and development 3,085 2,820 2,619 -------- -------- -------- Total operating expenses 10,146 8,701 9,446 -------- -------- -------- Operating (loss) income (892) 3,856 3,602 -------- -------- -------- Interest expense (287) (416) (718) Interest income 314 191 -- Other income 72 106 58 -------- -------- -------- (Loss) income before provision for income tax (793) 3,737 2,942 Provision for income taxes 63 -- -- -------- -------- -------- Net (loss) income $ (856) $ 3,737 $ 2,942 ======== ======== ======== Net (loss) income per share - primary $ (.12) $ .48 $ .52 ======== ======== ======== Weighted average number of common and common equivalent shares outstanding - primary 7,430 7,853 7,989 ======== ======== ======== Net (loss) income per share - fully diluted $ (.12) $ .47 $ .51 ======== ======== ======== Weighted average number of common and common equivalent shares outstanding - fully diluted 7,430 8,179 8,402 ======== ======== ========
See notes to consolidated financial statements F-4 TII INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' INVESTMENT FOR THE THREE YEARS IN THE PERIOD ENDED JUNE 27, 1997 (Dollars in thousands)
Valuation Adjustment to record Marketable Capital Securities Class B in excess Retained available Preferred Common Common Warrants of par (Deficit) for sale at Treasury Stock Stock Stock Outstanding value Earnings fair value Stock ------- ------- ------- ------- ------- ------- ------- ------- BALANCE, June 24, 1994 $ 2,763 $ 38 $ 4 $ 120 $14,317 ($1,824) $ 0 ($ 281) ------- ------- ------- ------- ------- ------- ------- ------- Issuance of Common Stock from exercise of private placement Warrants and Unit Purchase Options net of $571 of expenses -- 16 -- -- 6,802 -- -- -- Exercise of stock options -- 1 -- -- 275 -- -- -- Unrealized gain on marketable securities available for sale -- -- -- -- -- -- 10 -- Net profit for the year -- -- -- -- -- 2,942 -- -- ------- ------- ------- ------- ------- ------- ------- ------- BALANCE, June 30, 1995 2,763 55 4 120 21,394 1,118 10 (281) Issuance of Common Stock from exercise of private placement Warrants and Unit Purchase Options net of $128 of expenses -- 12 -- -- 5,421 -- -- -- Conversion of Class B Common Stock -- 4 (4) -- -- -- -- -- Redemption of Series A Preferred Stock (2,763) -- -- -- -- -- -- -- Exercise of stock options -- 4 -- -- 2,231 -- -- -- Unrealized gain on marketable securities available for sale -- -- -- -- -- -- 37 -- Net profit for the year -- -- -- -- -- 3,737 -- -- ------- ------- ------- ------- ------- ------- ------- ------- BALANCE, June 28, 1996 -- 75 -- 120 29,046 4,855 47 (281) Exercise of stock options -- -- -- -- 6 -- -- -- Warrants issued for financial Advisory services -- -- -- 39 -- -- -- -- Unrealized loss on marketable securities available for sale -- -- -- -- -- -- (40) -- Net loss for the year -- -- -- -- -- (856) -- -- ------- ------- ------- ------- ------- ------- ------- ------- BALANCE, June 27, 1997 $ 0 $ 75 $ 0 $ 159 $29,052 $ 3,999 $ 7 ($ 281) ======= ======= ======= ======= ======= ======= ======= ======= See notes to consolidated financial statements
F-5 TII INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE YEARS IN THE PERIOD ENDED JUNE 27, 1997 (Dollars in thousands)
June 27, June 28, June 30, 1997 1996 1995 -------- -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net (loss) income ($ 856) $ 3,737 $ 2,942 -------- -------- -------- Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities Depreciation and amortization 1,745 1,727 1,761 Increase in allowance for inventory 2,896 568 30 Amortization of other assets, net 180 278 241 Changes in assets and liabilities Increase in receivables (304) (951) (554) Increase in inventories (4,438) (2,322) (2,901) (Increase) decrease in prepaid expenses and other assets (362) (257) (895) Increase (decrease) in accounts payable and accrued liabilities 787 (242) (225) -------- -------- -------- Net cash (used in) provided by operating activities (352) 3,052 669 -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (4,267) (549) (3,060) Purchases of marketable securities available for sale (24,488) (6,533) -- Proceeds from sales and maturities of marketable securities available for sale 26,895 1,645 1,327 -------- -------- -------- Net cash used by investing activities (1,860) (5,437) (1,733) -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from exercise of options and warrants 6 7,656 7,094 Payment of long-term debt and obligations under capital leases (430) (1,969) (10,824) Proceeds from issuance of long-term debt -- -- 6,039 Redemption of Preferred Stock -- (2,763) -- -------- -------- -------- Net cash (used in) provided by financing activities (424) 2,924 2,309 -------- -------- -------- Net (decrease) increase in cash and cash equivalents (2,636) 539 1,245 Cash and Cash equivalents, at beginning of year 2,883 2,344 1,099 -------- -------- -------- Cash and Cash equivalants, at end of year $ 247 $ 2,883 $ 2,344 ======== ======== ======== SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS: Capital leases entered into $ 533 $ 1,938 $ 52 ======== ======== ======== Valuation adjustment to record marketable securities available for sale at fair value ($ 40) $ 37 $ 10 ======== ======== ======== Cash paid during the period for income taxes $ 42 $ 0 $ 0 ======== ======== ======== Cash paid during the period for interest $ 241 $ 174 $ 762 ======== ======== ========
See notes to consolidated financial statements F-6 TII INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BUSINESS: TII Industries, Inc. and subsidiaries (the "Company") are engaged in the design, manufacture and sale of overvoltage surge protectors, network interface devices, station electronics, and fiber optic enclosure products. The majority of the Company's consolidated sales for each of the three years ended June 27, 1997 resulted from sales of overvoltage protector products, which are primarily manufactured in the Company's plants in Puerto Rico and the Dominican Republic. FISCAL YEAR: The Company reports on a 52-53 week year ending on the last Friday in June. CONSOLIDATION: The consolidated financial statements include the accounts of TII Industries, Inc. and its majority-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. USE OF ESTIMATES: The preparation of financial statements in conformity with generally accepted accounting principles 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 financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from such estimates. MARKETABLE SECURITIES: The Company categorizes its marketable security investments as available-for-sale securities, reported at fair value. Unrealized gains and losses of available-for-sale securities are reported as a separate component of stockholders' investment. At June 27, 1997 and June 28, 1996 the portfolio consisted of federal backed agency bonds and notes and other liquid investment grade investments with maturities ranging from three months to one year. The primary investment goal being near-term liquidity and safety of principal. INVENTORIES: Inventories are stated at the lower of cost (materials, direct labor and applicable overhead expenses on the first-in, first-out basis) or market. PROPERTY AND EQUIPMENT: Depreciation of property and equipment is recorded on the straight-line method over the estimated useful life of the related property and equipment (generally 10 years). Leasehold improvements are amortized on a straight-line basis over the term of the respective leases, or over their estimated useful lives, whichever is shorter. REVENUE RECOGNITION: Sales are recorded as products are shipped and title passes. OTHER ASSETS: The Company follows the policy of deferring certain patent costs which are amortized on a straight-line basis over the lesser of the life of the product or the patent. Included within other assets is the cash surrender value of approximately $50,000 relating to key-man life insurance policy with a face amount in excess of $2,000,000. F-7 NET (LOSS) PROFIT PER COMMON SHARE: Net (loss) profit per common and common equivalent share is calculated using the weighted average number of common shares outstanding and the net additional number of shares which would be issuable upon the exercise of dilutive stock options and warrants assuming that the Company used the proceeds received to purchase additional shares (up to 20% of shares outstanding) at market value, retire debt and invest any remaining proceeds in U.S. government securities. The effect on net (loss) profit of these assumed transactions is considered in the computation. PENDING ACCOUNTING PRONOUNCEMENTS: The FASB issued SFAS No. 128, Earnings per Share, which will be effective with the Company's consolidated financial statements for the fiscal year ending June 28, 1998. Under this standard, the Company will replace its disclosure of primary earnings per share with basic earnings per share and fully diluted will be replaced with dilutive earnings per share. Basic earnings per share excludes dilution and is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding for the period. Upon adoption of the standard, prior period amounts must be restated. The impact on previously reported primary and fully diluted earnings per share will be immaterial. STATEMENTS OF CASH FLOWS: All highly liquid instruments including those with an original maturity of three months or less are considered cash equivalents. The Company had cash equivalents of approximately $84,000 and $2,305,000 at June 27, 1997 and June 28, 1996, respectively. RECLASSIFICATIONS: Certain reclassifications have been made in the accompanying consolidated financial statements for the years ended June 28, 1996 and June 30, 1995 to conform with the presentation used in the June 27, 1997 consolidated financial statements. FAIR VALUE OF FINANCIAL INSTRUMENTS: The carrying amounts of cash, receivables, accounts payable, and accrued liabilities approximate fair value because of the short-term nature of these items. The carrying amount of the long term debt approximates fair value because the interest rate this instrument bears is equivalent to the current rates offered for debt of similar nature and maturity. (2) COST REDUCTION PLAN: During the third quarter of fiscal year 1997, the Company put into effect certain measures in accordance with a plan to reduce costs and enhance profitability. This plan included the reduction of personnel, movement of certain production processes to the Company's lower cost facility in the Dominican Republic, outsourcing certain manufacturing steps, re-aligning its sales and marketing forces and ceasing the sale of lower margin products. This action resulted in non-recurring charges of $3.0 million, which consisted of an increase to the allowance for inventory, severance related costs and costs to close or move certain production processes. F-8 (3) RECEIVABLES: Receivables consist of the following: June 27, June 28, 1997 1996 -------- -------- (amounts in thousands) Trade receivables $ 6,897 $ 6,685 Other receivables 544 521 ------- ------- 7,441 7,206 Less: allowance for doubtful accounts (53) (122) ------- ------- $ 7,388 $ 7,084 ======= ======= (4) INVENTORIES: Inventories consisted of the following: June 27, June 28, 1997 1996 ------- ------- (amounts in thousands) Raw materials $ 7,426 $ 6,973 Work-in-process 4,584 4,879 Finished goods 5,994 4,214 ------- ------- 18,004 16,066 Less: Allowance for inventory (2,430) (2,034) ------- ------- $15,574 $14,032 ======= ======= (5) ACCRUED LIABILITIES: Accrued liabilities consist of the following: June 27, June 28, 1997 1996 (amounts in thousands) Payroll, incentive and vacation $ 672 $ 603 Accrued payroll taxes 91 153 Legal and professional fees 135 113 Accrued rent 100 100 Other 140 68 ------ ------ $1,138 $1,037 ====== ====== F-9 (6) LONG-TERM DEBT: The composition of long-term debt is as follows: June 27, June 28, 1997 1996 (amounts in thousands) Unsecured subordinated note payable on July 19, 2001, bearing interest at 10%. Convertible into Common Stock at a conversion price of $2.50 per share. $750 $750 Installment notes payable through 2004, bearing interest ranging from 8.0% to 9.5%. Secured by assets with net book value of approximately $299. 103 116 ---- ---- 853 866 Less current portion (14) (13) ---- ---- Long-term debt $839 $853 ==== ==== The Company is also a party to a Revolving Credit Loan Agreement with Chase Manhattan Bank, which, at June 27, 1997, entitled the Company to have outstanding borrowings of up to $4,000,000, reducing by $400,000 each calendar quarter thereafter. At June 27, 1997 and June 28, 1996, there were no outstanding borrowings under the revolving loan facility. Loans bear interest at (a) the greater of 1% above the bank's prime rate, 2% above a certificate of deposit rate or 1.5% in excess of a federal funds rate or (b) 3% above the LIBOR rate for periods selected by the Company. A commitment fee of 1/4 of 1% is payable on the unused portion of the bank's commitment. Loans are secured primarily by the Company's accounts receivable and continental United States assets. The loan agreement requires the Company to maintain a minimum net worth of $31,400,000, current ratio of 1.25 through fiscal 1997 and 1.50 thereafter, debt service ratio of 1.35 and maximum ratio of debt to equity of 1.0, all as defined, limits capital expenditures generally to $3,500,000 per annum and lease obligations to $400,000 per annum (excluding rentals for the Company's Dominican Republic facilities and the Company's equipment lease with PRC Leasing, Inc.). In addition, the Company may not incur a consolidated net loss for any two fiscal quarters in any four consecutive quarters and may not pay cash dividends or repurchase capital stock without the consent of the bank. The Company received a waiver from compliance with the debt service ratio, capital expenditure and net loss covenants for fiscal 1997. F-10 Future minimum payments for long term debt are as follows: Fiscal year Amount 1998 $ 14,000 1999 15,000 2000 17,000 2001 768,000 2002 17,000 Thereafter 22,000 --------- Total minimum payments 853,000 Less: current portion (14,000) --------- $ 839,000 ========= (7) Obligation under capital leases: The Company leases equipment and vehicles for its operations. These leases have been capitalized using interest rates ranging from 7.9% to 14.9%. Future minimum payments under these leases are as follows: Fiscal year Amount 1998 $ 654,000 1999 652,000 2000 557,000 2001 288,000 2002 89,000 Thereafter 51,000 ---------- Total minimum lease payments 2,291,000 Less: Amount representing interest (303,000) ---------- Present value of net minimum lease payments 1,988,000 Less: Current portion of obligations under capital lease (523,000) ---------- $1,465,000 ========== (8) INCOME TAXES: The Company's policy is to provide for income taxes based on reported income, adjusted for differences that are not expected to ever enter into the computation of taxes under applicable tax laws. The Company has elected the application of Section 936 of the US Internal Revenue Code (Code), and presently intends to continue to operate in a fashion that will enable it to qualify for the Section 936 election. Under that section, as long as the Company (on a non-consolidated basis) has cumulatively derived, in its current and two preceding tax years, at least 80% of its gross income from sources within Puerto Rico and at least 75% of its gross income from the active conduct of a trade or business within Puerto Rico, as defined in the Code, the Company is entitled to a federal tax credit in an amount equal to the lesser of the United States federal tax attributable to its taxable income arising from the active conduct of its business within Puerto Rico or the economic activity based credit limitation. To the extent the Company has taxable income arising from United States sources (e.g., income from investment or operating activity in F-11 the U.S.), the Company would not be entitled to offset the related tax on such income with the Section 936 tax credit. The economic activity limitation on the amount of allowable credits under Section 936 is based upon qualified wages paid for services performed in Puerto Rico, fringe benefits, depreciation deductions and taxes in Puerto Rico. Based on fiscal 1997 levels of qualified wages, fringe benefits, depreciation and taxes in Puerto Rico, the Company's economic activity based credit limitation is approximately $3,550,000 per annum. The amount of the economic activity based Section 936 credit limitation available for fiscal 1997 will be sufficient to offset the United States federal income tax on Puerto Rico source income for the Company's 1997 fiscal year, as computed, after utilization of the Company's available net operating loss carry-forwards of approximately $334,000. Legislation included in the Minimum Wage/Small Business Job Protection Act of 1996 repealed the Section 936 credit for taxable years beginning after December 31, 1995. However, since the Company's Section 936 election was in effect for its fiscal 1996 tax year, it is eligible to continue to claim a Section 936 credit until the year ended June 2006 under a special grandfather rule. If, however, the Company adds a substantial new line of business, the Company would cease to be eligible to claim the Section 936 credit beginning with the taxable year in which such new line of business is added. Because the Company uses the economic activity limitation, possession income eligible for the Section 936 credit in any tax year beginning after December 31, 2001 and before January 1, 2006 is subject to a cap equal to the Company's average inflation-adjusted possession income for the three of the five most recent years ending before October 14, 1995 determined by excluding the years in which the Company's adjusted possession income was the highest and the lowest. In lieu of using a five-year period to determine the base period years, the Company may elect to use its last tax year ending in 1992 or a deemed taxable year which includes the first ten months of the calendar year 1995. The Company's Section 936 credit for each year during the grandfather period would continue to be subject to the economic activity limitation (as discussed above). This legislation is effective for the Company's 1997 fiscal year. Based on the Company's current level of possession income and business plans, the Company believes that it will be eligible to claim a Section 936 credit under the grandfather rule discussed above. As long as the Company's election under Section 936 is in effect, the Company may not file a consolidated tax return with any of its subsidiaries for United States income tax purposes, and the filing of consolidated returns is not permitted under Puerto Rico income tax laws. Consequently, should the Company itself sustain losses, those losses could not be used to offset the federal taxable income of its subsidiaries; and, conversely, should the Company's subsidiaries sustain losses, those losses could not be used to offset the federal taxable income of the Company. The Company has exemptions until June 2009 for Puerto Rico income tax and Puerto Rico property tax purposes. The level of exemption is 90% for all purposes. The Company also has net operating loss carryforwards available through fiscal 2004 to offset any remaining Puerto Rico taxable income. There are no limitations on the Company's ability to utilize such net operating loss carryforwards to reduce its Puerto Rico income tax. Furthermore, the Company's United States based subsidiary operating in the Dominican Republic is exempt from taxation in that country. F-12 In each of the years in the three-year period ended June 27, 1997, the Company's U.S. based subsidiaries either generated operating losses or had net operating loss carryforwards available to offset taxable income; therefore, for each of these years there is no federal income tax provision. At June 27, 1997, the Company had net operating loss carryforwards aggregating approximately $15,126,000 which expire periodically through 2006, and along with its subsidiaries had consolidated net operating loss carryforwards aggregating approximately $24,439,000 which expire periodically through 2012 and general business tax credit carryforward of approximately $343,000 which expire periodically through 2012. As a result of a private placement in fiscal 1993 there was an ownership change within the meaning of Section 382 of the Code, which limits the ability of the Company and its subsidiaries to utilize their net operating losses and tax credit carryforwards. The maximum amount of net operating loss and tax credit equivalent carryforwards which may be utilized in any year (and which is utilized to offset income prior to the utilization of a credit available under Section 936 of the Code) is approximately $334,000 per year for the possessions corporation and approximately $380,000 per year for the United States subsidiaries. The effect of the ownership change is somewhat mitigated with respect to the Company as a result of its Section 936 election since United States federal income tax is payable only to the extent such tax exceeds the Company's Section 936 credit. In addition, net operating losses generated subsequent to the ownership change are not subject to limitations and may therefore be fully utilized. As of June 27, 1997, the Company's United States subsidiaries have approximately $2,060,000 of net operating losses that were generated subsequent to the ownership change and remain available for use through 2012. In addition, the Company's United States subsidiaries have available approximately $1,852,000 in unused Section 382 annual net operating loss limitation carryforwards. Temporary differences between income tax and financial reporting assets and liabilities (primarily inventory valuation allowances, property and equipment and accrued employee benefits) and net operating loss carryforwards give rise to deferred tax assets in the amount of approximately $3,695,000 for which an offsetting valuation allowance has been provided due to the uncertainty of realizing any benefit in the future. (9) COMMON STOCK: The Company is authorized to issue 30,000,000 shares of Common Stock. On September 27, 1995, 321,284 shares of Class B Stock were converted into Common Stock resulting in a reduction in outstanding Class B Stock to a level that all remaining Class B Stock were automatically converted into Common Stock. On December 4, 1996, at the 1996 Annual Meeting of Stockholders, stockholders voted to approve an amendment to the Company's Certificate of Incorporation which removed the Company's Class B Stock and Class C Stock from shares which the Company is authorized to issue. EMPLOYEE STOCK OPTION PLANS: The Company's 1995 Stock Option Plan (the "1995 Plan") permits the Compensation Committee of the Board of Directors to grant, until September 2005, options to employees, officers, consultants and certain members of the Board of Directors. 500,000 shares were reserved for issuance under the 1995 Plan. Option terms (not to exceed 10 years), exercise prices (at least 100% of the fair market value of the Company's Common Stock on the date of grant) and exercise dates are determined by the Compensation Committee. Options are also outstanding under the Company's 1983 Stock Option Incentive Plan and 1986 Stock Option Plan, although no further options may be granted under these plans. F-13 A summary of activity under the employee stock option plans and information relating to shares subject to option under the employee stock option plans for the years ended June 27, 1997, June 28, 1996 and June 30, 1995 follows:
June 27, 1997 June 28, 1996 June 30, 1995 ---------- ---------- ---------- Shares under option at beginning of period 1,238,207 1,269,387 501,415 Options granted during period 383,000 113,200 868,000 Options exercised during period (1,500) (80,380) (94,028) Options canceled/expired during period (83,500) (64,000) (6,000) ---------- ---------- ---------- Shares under option at end of period 1,536,207 1,238,207 1,269,387 ========== ========== ========== Options exercisable at end of period 648,344 501,454 336,634 Shares available for future grant at end of period 112,500 469,000 126,257 Exercise price per share for options exercised during period $2.50-4.63 $2.50-6.09 $2.50-4.63 Exercise price per share for options outstanding at end of period $2.50-9.38 $2.50-9.69 $2.50-9.69
The 1994 Non-Employee Director Stock Option Plan covers an aggregate of 200,000 shares of Common Stock and provides (i) Non-Employee Directors are granted options to purchase 10,000 share of Common Stock annually upon their re-election to the Board; (ii) all options granted vest in full immediately following their grant; (iii) the term of options granted shall be for a term of ten years; and (iv) the period following termination of service during which an Outside Director may exercise an option shall be twelve months, except that an option shall automatically terminate upon cessation of service as an Outside Director for cause (such twelve month period being the same period following an Outside Director's death or disability during which an option may be exercised). The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation. Accordingly, no compensation cost has been recognized for the stock option plans as Accounting Principles Board (APB) Opinion 25 and related interpretations in accounting for stock options plans is followed. If the Company had elected to recognize compensation cost based on the fair value of the options granted at grant date as prescribed by SFAS No. 123, net (loss) income would have been (increased) reduced to the pro forma amounts indicated in the table below. F-14 Fiscal Year Ended June 27, 1997 28, 1996 -------- -------- Net (loss) income As reported ($856,000) $3,737,000 Pro forma ($1,161,000) $3,629,000 Primary (loss) income per share As reported ($0.12) $0.48 Pro forma ($0.16) $0.46 The fair value of stock options granted during fiscal years 1997 and 1996 were determined by using the Black Scholes option-pricing model which values options based on the stock price at the date of grant, the expected life of the option, the estimated volatility of the stock, expected dividend payments, and the risk free interest rate over the expected life of the option. The following assumptions were used in the pricing model: risk free interest rate of 6.2%; expected dividend yield of 0%; expected option life of seven years and expected volatility of 42.9%. The weighted average fair value of options granted during fiscal 1997 and 1996 were $2.58 and $3.44, respectively. Under SFAS 123, stock options granted prior to fiscal year 1996 are not required to be included as compensation in determining pro forma net earnings. OTHER OPTIONS AND WARRANTS OUTSTANDING: The holder of the Company's unsecured subordinated note (see Note 5) has an option to purchase up to 100,000 shares of Common Stock on or before July 18, 2001 at $2.50 per share. This option is non-transferable and non-assignable and can be canceled by the Company prior to its expiration if, with the prior written consent of the holder, the Company's $750,000 ten-year convertible unsecured note payable is prepaid. The Company also has an outstanding option to purchase up to a maximum of 150,000 shares of Common Stock on or before August 31, 1997 at $7.50 per share. The Company also has warrants outstanding which allow the holder to purchase 60,000 shares of Common Stock at an exercise price of $6.56 per share which expire in August 1998. During July 1996, the Company granted to a financial advisory firm a warrant to purchase 20,000 shares of Common Stock at an exercise price of $6.15 per share, which expires in July 2001. (10) PREFERRED STOCK: The Company is authorized to issue up to 1,000,000 shares of Preferred Stock in series, with each series having such powers, rights, preferences, qualifications and restrictions as determined by the Board of Directors. At June 27, 1997, the Company had authorized 100,000 shares of Series A Cumulative Convertible Redeemable Preferred Stock (Series A Preferred Stock), of which no shares were outstanding. During the 1996 fiscal year all 27, 626 shares were redeemed by the Company for the liquidation value and required redemption amount of $2,763,000. F-15 (11) AGREEMENT WITH AT&T: On September 13, 1988, the Company and AT&T Corporation entered into an agreement (the 1988 Agreement) settling all disputes related to a prior agreement which the Company considered to have been breached. The 1988 Agreement provided for annual payments to the Company which were subject to reduction as a result of AT&T purchases. During fiscal 1996 and 1995, the Company received payments of $875,000 and $777,000, respectively, for the sales shortfall corresponding to the contract years ended December 31, 1995 and 1994, respectively. These receipts are included in net sales. As of June 28, 1996, there are no remaining payments scheduled to be received. (12) SIGNIFICANT CUSTOMERS, EXPORT SALES AND FOREIGN COMPONENTS OF INCOME: SIGNIFICANT CUSTOMERS: The following customers accounted for more than 10% of the Company's consolidated revenues during one or more of the years presented below: Percentage of Net Sales for Year Ended ------------------------------- June 27, June 28, June 30, 1997 1996 1995 ------------------------------- Siecor Corporation(a) 20% 26% 30% NYNEX 18% 15% 13% Keptel, Inc.(a) 11% 12% * * Asterisk denotes less than 10% for the period presented. (a) Siecor Corporation and Keptel, Inc. are telecommunication equipment companies that supply Network Interface Devices to Regional Bell Operating Companies. Several Regional Bell Operating Companies have standardized on TII station protectors and require Siecor and Keptel to purchase TII station protectors for inclusion into their Network Interface Devices. EXPORT SALES: For each of the three years ended June 27, 1997 export sales were less than 10% of consolidated net sales. FOREIGN COMPONENTS OF INCOME: Certain immaterial subsidiaries and components of the Company operate outside the United States and Puerto Rico. (13) COMMITMENTS, CONTINGENCIES AND RELATED PARTY TRANSACTIONS: The Company leases real property and equipment with terms expiring through December 1998. Substantially all of the real property leases contain escalation clauses related to increases in property taxes. The leases require minimum annual rentals, exclusive of real property taxes, of approximately $94,000 and $17,000 in fiscal years 1998 and 1999, respectively. The Company has no lease commitments beyond 1998. Since fiscal year 1982, the Company has leased equipment from PRC Leasing, Inc. (PRC), a corporation owned by the Chairman of the Board of the Company. As required by a loan restructuring in July 1991, all leases with PRC were replaced by an agreement to lease certain F-16 equipment as a group at the rate of $200,000 per year. The lease was amended in February 1993 to extend its term until July 17, 1996 and provide for extensions until July 17, 1999 and July 17, 2001 unless canceled by either party upon notice prior to the scheduled renewal period, with rentals at the rate of $200,000 for each year of the lease. At June 27, 1997, accrued rent owed under this agreement totaled $100,000. Although neither the Company nor PRC is obligated to renew the equipment lease, it is the Company's intention to seek renewals of the equipment lease for at least the next four years. The equipment under lease from PRC was purchased by PRC at various times since 1982 when the Company began leasing equipment from PRC. The Company is advised that PRC employs a depreciation schedule that fully depreciates assets over a maximum of 10 years or the asset's useful life, whichever is shorter, and that the original cost of assets under lease to the Company at June 27, 1997 was approximately $2,803,000 with a current carrying value of approximately $150,000. All equipment under lease has been of good quality and most, if not all, equipment is expected to remain usable by the Company for at least four more years. From time to time, new purchases of equipment by PRC may replace or be added to the equipment under lease. It is both the Company's and PRC's intention that these purchases will be to maintain the level of performance of the equipment and not increase the rentals paid by the Company. Rental expense, including property taxes, for fiscal 1997, 1996 and 1995 was approximately $682,000, $636,000 and $613,000, respectively, including $200,000 each year relating to the equipment leases with PRC. (14) PROFIT SHARING PLAN: During fiscal 1997, the Company established a defined contribution pension plan through a 401(k) profit sharing plan. The plan covers substantially all employees and requires the Company to match employees' contributions up to specified limitations and subject to certain vesting schedules. F-17 (15) QUARTERLY RESULTS (UNAUDITED): The following table reflects the unaudited quarterly results of the Company for the fiscal years ended June 27, 1997 and June 28, 1996:
Fully Diluted Net Income Gross Operating Net Income (Loss) Net Sales Profit Income (Loss) Per Share ----------- --------- ----------- ----------- -------- Quarter Ended - -------------- 1997 FISCAL YEAR September 27, 1996 $12,040,000 3,184,000 $ 806,000 $ 752,000 $ 0.10 December 27, 1996 12,957,000 3,353,000 856,000 905,000 0.12 March 28, 1997(1) 12,535,000 357,000 (2,391,000) (2,325,000) (0.31) June 27, 1997 13,143,000 2,360,000 (163,000) (188,000) (0.03) 1996 FISCAL YEAR September 29, 1995 $ 9,600,000 2,566,000 $ 448,000 $ 439,000 $ 0.06 December 29, 1995 11,241,000 3,111,000 955,000 895,000 0.11 March 29, 1996(2) 12,136,000 4,190,000 1,852,000 1,781,000 0.22 June 28, 1996 11,536,000 2,690,000' 601,000 622,000 0.08
- -------------------------------------------------------------------------------- (1) Includes non-recurring charges of $3.0 million, which consisted of an increase in the allowance for inventory, severance related costs, and costs to close or move certain production processes. (2) Includes payment received from AT&T Corporation of $875,000 in the third quarter of fiscal 1996 for shortfalls of purchases by AT&T from the Company under the Company's 1988 Agreement with AT&T. F-17 ======================================= ======================================= NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFERING MADE HEREBY, AND, IF GIVEN OR TII INDUSTRIES, INC. MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE [LOGO] COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES 2,500,000 Shares OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY Common Stock SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATES AS OF --------------------------- WHICH SUCH INFORMATION IS FURNISHED. PROSPECTUS --------------------------- ----------------- TABLE OF CONTENTS Page ---- Prospectus Summary.................. 3 Risk Factors........................ 7 Rodman & Renshaw, Inc. Use of Proceeds.....................14 Price Range of Common Stock.........15 Dividend Policy.....................15 Capitalization......................16 Selected Financial Data.............17 Management's Discussion and Analysis of Financial Condition and Results of Operations..........19 , 1997 Business............................24 Management..........................36 Principal Stockholders..............44 Description of Capital Stock........46 Shares Eligible for Future Sale.....48 Underwriting........................50 Legal Matters.......................51 Experts.............................51 Information Incorporated by Reference..........................52 Additional Information..............52 Index to Consolidated Financial Statements........................F-1 ======================================= ======================================= II-1 PART II. INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. It is estimated that the following expenses will be incurred in connection with the proposed offering hereunder. All of such expenses will be borne by the Company. Registration fee - Securities and Exchange Commission.....................................................$ 7,000 NASD filing fee.................................................. 2,667 Nasdaq Listing Fees.............................................. 15,000 Legal fees and expenses.......................................... 200,000 Accounting fees and expenses..................................... 50,000 Transfer agent fees and expenses................................. 20,000 Blue sky fees and expense (including counsel fees)............... 20,000 Printing and engraving expenses.................................. 150,000 Miscellaneous.................................................... 35,333 ----------- Total....................................$ 500,000 =========== ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Section 145 of the General Corporation Law of the State of Delaware (the "DGCL") provides, in general, that a corporation incorporated under the laws of the State of Delaware, such as the registrant, may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding (other than a derivative action by or in the right of the corporation) by reason of the fact that such person is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such action, suit or proceeding if such person acted in good faith and in a manner such person reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe such person's conduct was unlawful. In the case of a derivative action, a Delaware corporation may indemnify any such person against expenses (including attorneys' fees) actually and reasonably incurred by such person in connection with the defense or settlement of such action or suit if such person acted in good faith and in a manner such person reasonably believed to be in or not opposed to the best interests of the corporation, except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation unless and only to the extent that the court determines such person is fairly and reasonably entitled to indemnity for such expenses. Article XII of the registrant s By-laws provides that the registrant shall so indemnify such persons. In addition, Article 12 of the registrant's Restated Certificate of Incorporation as amended, provides, in general, that no director of the registrant shall be personally liable to the registrant or any of its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any II-2 breach of the director's duty of loyalty to the corporation or its stockholders; (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; (iii) under Section 174 of the DGCL (which provides that under certain circumstances, directors may be jointly and severally liable for willful or negligent violations of the DGCL provisions regarding the payment of dividends or stock repurchases or redemptions), as the same exists or hereafter may be amended; or (iv) for any transaction from which the director derived an improper personal benefit. Reference is made to Section _____ of the Underwriting Agreement filed as part of Exhibit 1 hereto. ITEM 16. EXHIBITS: Exhibit Number Description 1.* Form of Underwriting Agreement 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(b) By-laws of the Company, as amended. Incorporated by reference to Exhibit 4.02 to Amendment No. 1 to the Company's Registration Statement on Form S-3 (File No. 33- 64980). 4(a)(1)(A) Revolving Credit Loan Agreement dated January 31, 1995 among TII International, Inc. ("International"), the Company and Chemical Bank (the "Bank"). Incorporated by reference to Exhibit 4.1(a) to the Company's Current Report on Form 8-K dated January 31, 1995 (date of earliest event reported) (File No. 1-8048). 4(a)(1)(B) First Amendment dated as of August 3, 1995 to the Revolving Credit Agreement among International, the Company and the Bank. Incorporated by reference to Exhibit 4(a)(1)(B) to the Company's Annual Report on Form 10-K for the fiscal year ended June 28, 1996 (File No. 1-8048). 4(a)(1)(C) Second Amendment dated as of November 10, 1995 to the Revolving Credit Agreement among International, the Company and the Bank. Incorporated by reference to Exhibit 4(a)(1)(C) to the Company's Annual Report on Form 10-K for the fiscal year ended June 28, 1996 (File No. 1-8048). 4(a)(1)(D) Third Amendment dated as of December 27, 1995 to the Revolving Credit Agreement among International, the Company and the Bank. Incorporated by reference to Exhibit 4(a)(1)(D) to the Company's Annual Report on Form 10-K for the fiscal year ended June 28, 1996 (File No. 1-8048). 4(a)(1)(E) Fourth Amendment dated May 2, 1997 to the Revolving Credit Agreement among International, the Company and the Bank. Incorporated by reference to Exhibit 4 to the II-3 Company's Quarterly Report on Form 10-Q for the fiscal quarter ended March 28, 1997 (File No. 1-8048). 4(a)(1)(F) Fifth Amendment and Waiver dated as of September 23, 1997 to the Revolving Credit Agreement among International, the Company and the Bank. Incorporated by reference to Exhibit 4(a)(1)(F) to the Company's Annual Report is Form 10-K for the fiscal year ended June 27, 1997 (File No. 1-8048). 4(a)(1)(G)* Sixth Amendment and Waiver dated as of October 17, 1997 to the Revolving Credit Agreement among International, the Company and the Bank. 4(a)(2) Joint and Several Guaranty of Payment dated January 31, 1995 executed in favor of the Bank by the Company and TII Industries NC, Inc., TII Dominicana, Inc., TII Electronics, Inc.(since dissolved), Ditel, Inc.(now TII-Ditel, Inc.), TII Corporation and Telecommunications Industries, Inc., direct or indirect subsidiaries of the Company. Incorporated by reference to Exhibit 4.1(b) to the Company's Current Report on Form 8-K dated January 31, 1995 (date of earliest event reported) (File No. 1-8048). 4(a)(3) Pledge Agreement dated January 31, 1995 between International and the Bank. Incorporated by reference to Exhibit 4.1(c) to the Company's Current Report on Form 8-K dated January 31, 1995 (date of earliest event reported) (File No. 1-8048). 4(a)(4) Security Agreement dated January 31, 1995 between the Company and the Bank. Incorporated by reference to Exhibit 4.1(d) to the Company's Current Report on Form 8-K dated January 31, 1995 (date of earliest event reported) (File No. 1-8048). 4(a)(5) Assignment of Accounts Receivable Agreement dated January 31, 1995 executed by the Company in favor of the Bank. Incorporated by reference to Exhibit 4.1(e) to the Company's Current Report on Form 8-K dated January 31, 1995 (date of earliest event reported) (File No. 1-8048). 4(a)(6) Stock Pledge Agreement dated January 31, 1995 between the Company and the Bank. Incorporated by reference to Exhibit 4.1(f) to the Company's Current Report on Form 8-K dated January 31, 1995 (date of earliest event reported) (File No. 1-8048). 4(a)(7) Security Agreement dated January 31, 1995 between Ditel, Inc.(now TII-Ditel, Inc.), an indirect subsidiary of the Company, and the Bank. Incorporated by reference to Exhibit 4.1(g) to the Company's Current Report on Form 8-K dated January 31, 1995 (date of earliest event reported) (File No. 1-8048). 10(a)(1)+ 1983 Employee Incentive Stock Option Plan of the Company, as amended. Incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended September 27, 1996 (File No. 1-8048). 5# Opinion of Parker Chapin Flattau & Klimpl, LLP as to the legality of the Common Stock being offered and consent 10(a)(2) 1986 Stock Option Plan of the Company, as amended. Incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended September 27, 1996 (File No. 1-8048). II-4 10(a)(3)+ 1994 Non-Employee Director Stock Option Plan, as amended. Incorporated by reference to Exhibit 99.01 to the Company's Registration Statement on Form S-8, No. 33-64965. 10(a)(4)+ 1995 Stock Option Plan. Incorporated by reference to Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended September 27, 1996 (File No. 1-8048). 10(b)(1)+ Amended and Restated Employment Agreement dated as of August 1, 1997 between the Company and Timothy J Roach. Incorporated by reference to Exhibit 10(b)(1)+ to the Company's Annual Report is Form 10-K for the fiscal year ended June 27, 1997 (File No. 1-8048). 10(b)(2)+* Amended and Restated Employment Agreement dated as of May 1, 1997 between the Company and Paul G. Sebetic. 10(b)(3)(A)+ Employment Agreement dated September 23, 1993 between the Company and Dare P. Johnston. Incorporated by reference to Exhibit 10(b)(3)(A)+ to the Company's Annual Report is Form 10-K for the fiscal year ended June 27, 1997 (File No. 1-8048). 10(b)(3)(B)+ Extension dated as of June 2, 1997 to the Employment Agreement dated September 23, 1993 between the Company and Dare P. Johnston. Incorporated by reference to Exhibit 10(b)(3)(B)+ to the Company's Annual Report is Form 10-K for the fiscal year ended June 27, 1997 (File No. 1-8048). 10(c)(1)(A)+ Equipment Lease dated July 18, 1991 between PRC Leasing, Inc. ("PRC") and the Company. Incorporated by reference to Exhibit 10(b)(57) to the Company's Current Report on Form 8-K for the month of July 1991 (File No. 1-8048). 10(c)(1)(B)+ Amendment dated July 18, 1992 to Equipment Lease dated July 18, 1991 between the Company and PRC. Incorporated by reference to Exhibit 10(b)(67) to the Company's Annual Report on Form 10-K for the fiscal year ended June 25, 1993 (File No. 1-8048). 10(c)(1)(C)+ Second Amendment dated February 25, 1993 to Equipment Lease dated July 18, 1991 between the Company and PRC. Incorporated by reference to Exhibit 10(b)(7) to the Company's Annual Report on Form 10-K for the fiscal year ended June 25, 1993 (File No. 1-8048). 10(c)(1)(D) Restated Third Amendment dated December 14, 1993 to Equipment Lease dated July 18, 1991 between the Company and PRC. Incorporated by reference to Exhibit 4(d) to Amendment No. 2 to the Schedule 13D filed by Alfred J. Roach (File No. 1-8048). 10(d)(1) Lease Contract dated December 15, 1989 between the Company and Puerto Rico Industrial Development Company. Incorporated by reference to Exhibit 10(c)(1) to the Company's Annual Report on Form 10-K for the fiscal year ended June 29, 1990 (File No. 1-8048). II-5 10(d)(2) Consolidated Contract of Lease Renewal and Construction dated February 1, 1994 between TII Dominicana, Inc., a subsidiary of the Company, and The Industrial Development Corporation of the Dominican Republic. Incorporated by reference to Exhibit 10(g)(2) to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1995 (File No. 1-8048). 11 Calculation of earnings per share. Incorporated by reference to Exhibit 11 to the Company's Annual Report is Form 10-K for the fiscal year ended June 27, 1997 (File No. 1-8048). 21 Subsidiaries of the Company. Incorporated by reference to Exhibit 21 to the Company's Annual Report is Form 10-K for the fiscal year ended June 27, 1997 (File No. 1-8048). 23(a)* Consent of Arthur Andersen LLP 23(b)# Consent of Parker Chapin Flattau & Klimpl, LLP (to be included in Exhibit 5) 24* Powers of Attorney of certain officers and directors of the registrant. - ---------- * Filed herewith. + Management contract arrangement. # To be filed by amendment. II-6 ITEM 17. UNDERTAKINGS. The undersigned registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement; (i) To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933; (ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement; (iii) to include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement; provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not apply if the registration statement is on Form S-3, Form S-8, and the information required to be included in a post-effective amendment by those paragraphs is contained in periodic reports filed by the registrant pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 that are incorporated by reference in the registration statement. (2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. The undersigned registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in the form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of the registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the provisions described under Item 15 above, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense II-7 of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. II-8 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-2 and has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the Town of Copiague, State of New York, on the 22nd day of October, 1997. TII INDUSTRIES, INC. By: /s/ Timothy J. Roach -------------------------- Timothy J. Roach, President Pursuant to the requirements of the Securities Act of 1993, this Registration Statement has been signed below by the following persons in the capacities and on the 22nd day of October, 1997. Signature Title --------- ----- /s/ Alfred J. Roach Chairman of the Board - -------------------------- Alfred J. Roach /s/ Timothy J. Roach President, Chief Executive - -------------------------- Officer and Director Timothy J. Roach /s/ Paul G. Sebetic Vice President-Finance - -------------------------- (Principal Financial Officer and Paul G. Sebetic Principal Accounting Officer) /s/ C. Bruce Barksdale Director - -------------------------- C. Bruce Barksdale /s/ Dorothy Roach Director - -------------------------- Dorothy Roach /s/ Joseph c. Hogan Director - -------------------------- Joseph C. Hogan /s/ James R. Grover, Jr. Director - -------------------------- James R. Grover, Jr. /s/ William G. Sharwell Director - -------------------------- William G. Sharwell II-9 EXHIBITS: Exhibit Number Description - -------------- ----------- 1.* Form of Underwriting Agreement 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(b) By-laws of the Company, as amended. Incorporated by reference to Exhibit 4.02 to Amendment No. 1 to the Company's Registration Statement on Form S-3 (File No. 33- 64980). 4(a)(1)(A) Revolving Credit Loan Agreement dated January 31, 1995 among TII International, Inc. ("International"), the Company and Chemical Bank (the "Bank"). Incorporated by reference to Exhibit 4.1(a) to the Company's Current Report on Form 8-K dated January 31, 1995 (date of earliest event reported) (File No. 1-8048). 4(a)(1)(B) First Amendment dated as of August 3, 1995 to the Revolving Credit Agreement among International, the Company and the Bank. Incorporated by reference to Exhibit 4(a)(1)(B) to the Company's Annual Report on Form 10-K for the fiscal year ended June 28, 1996 (File No. 1-8048). 4(a)(1)(C) Second Amendment dated as of November 10, 1995 to the Revolving Credit Agreement among International, the Company and the Bank. Incorporated by reference to Exhibit 4(a)(1)(C) to the Company's Annual Report on Form 10-K for the fiscal year ended June 28, 1996 (File No. 1-8048). 4(a)(1)(D) Third Amendment dated as of December 27, 1995 to the Revolving Credit Agreement among International, the Company and the Bank. Incorporated by reference to Exhibit 4(a)(1)(D) to the Company's Annual Report on Form 10-K for the fiscal year ended June 28, 1996 (File No. 1-8048). 4(a)(1)(E) Fourth Amendment dated May 2, 1997 to the Revolving Credit Agreement among International, the Company and the Bank. Incorporated by reference to Exhibit 4 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended March 28, 1997 (File No. 1-8048). 4(a)(1)(F) Fifth Amendment and Waiver dated as of September 23, 1997 to the Revolving Credit Agreement among International, the Company and the Bank. Incorporated by reference to Exhibit 4(a)(1)(F) to the Company's Annual Report is Form 10-K for the fiscal year ended June 27, 1997 (File No. 1-8048). 4(a)(1)(G)* Sixth Amendment and Waiver dated as of October 17, 1997 to the Revolving Credit Agreement among International, the Company and the Bank. 4(a)(2) Joint and Several Guaranty of Payment dated January 31, 1995 executed in favor of the Bank by the Company and TII Industries NC, Inc., TII Dominicana, Inc., TII Electronics, Inc.(since dissolved), Ditel, Inc.(now TII-Ditel, Inc.), TII Corporation and Telecommunications Industries, Inc., direct or indirect subsidiaries of the Company. Incorporated by reference to Exhibit 4.1(b) to the Company's Current Report on Form 8-K dated January 31, 1995 (date of earliest event reported) (File No. 1-8048). 4(a)(3) Pledge Agreement dated January 31, 1995 between International and the Bank. Incorporated by reference to Exhibit 4.1(c) to the Company's Current Report on Form 8-K dated January 31, 1995 (date of earliest event reported) (File No. 1-8048). Exhibit Number Description - -------------- ----------- 4(a)(4) Security Agreement dated January 31, 1995 between the Company and the Bank. Incorporated by reference to Exhibit 4.1(d) to the Company's Current Report on Form 8-K dated January 31, 1995 (date of earliest event reported) (File No. 1-8048). 4(a)(5) Assignment of Accounts Receivable Agreement dated January 31, 1995 executed by the Company in favor of the Bank. Incorporated by reference to Exhibit 4.1(e) to the Company's Current Report on Form 8-K dated January 31, 1995 (date of earliest event reported) (File No. 1-8048). 4(a)(6) Stock Pledge Agreement dated January 31, 1995 between the Company and the Bank. Incorporated by reference to Exhibit 4.1(f) to the Company's Current Report on Form 8-K dated January 31, 1995 (date of earliest event reported) (File No. 1-8048). 4(a)(7) Security Agreement dated January 31, 1995 between Ditel, Inc.(now TII-Ditel, Inc.), an indirect subsidiary of the Company, and the Bank. Incorporated by reference to Exhibit 4.1(g) to the Company's Current Report on Form 8-K dated January 31, 1995 (date of earliest event reported) (File No. 1-8048). 10(a)(1)+ 1983 Employee Incentive Stock Option Plan of the Company, as amended. Incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended September 27, 1996 (File No. 1-8048). 5# Opinion of Parker Chapin Flattau & Klimpl, LLP as to the legality of the Common Stock being offered and consent 10(a)(2) 1986 Stock Option Plan of the Company, as amended. Incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended September 27, 1996 (File No. 1-8048). 10(a)(3)+ 1994 Non-Employee Director Stock Option Plan, as amended. Incorporated by reference to Exhibit 99.01 to the Company's Registration Statement on Form S-8, No. 33-64965. 10(a)(4)+ 1995 Stock Option Plan. Incorporated by reference to Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended September 27, 1996 (File No. 1-8048). 10(b)(1)+ Amended and Restated Employment Agreement dated as of August 1, 1997 between the Company and Timothy J Roach. Incorporated by reference to Exhibit 10(b)(1)+ to the Company's Annual Report is Form 10-K for the fiscal year ended June 27, 1997 (File No. 1-8048). 10(b)(2)+* Amended and Restated Employment Agreement dated as of May 1, 1997 between the Company and Paul G. Sebetic. 10(b)(3)(A)+ Employment Agreement dated September 23, 1993 between the Company and Dare P. Johnston. Incorporated by reference to Exhibit 10(b)(3)(A)+ to the Company's Annual Report is Form 10-K for the fiscal year ended June 27, 1997 (File No. 1-8048). 10(b)(3)(B)+ Extension dated as of June 2, 1997 to the Employment Agreement dated September 23, 1993 between the Company and Dare P. Johnston. Incorporated by reference to Exhibit 10(b)(3)(B)+ to the Company's Annual Report is Form 10-K for the fiscal year ended June 27, 1997 (File No. 1-8048). 10(c)(1)(A)+ Equipment Lease dated July 18, 1991 between PRC Leasing, Inc. ("PRC") and the Company. Incorporated by reference to Exhibit 10(b)(57) to the Company's Current Report on Form 8-K for the month of July 1991 (File No. 1-8048). Exhibit Number Description - -------------- ----------- 10(c)(1)(B)+ Amendment dated July 18, 1992 to Equipment Lease dated July 18, 1991 between the Company and PRC. Incorporated by reference to Exhibit 10(b)(67) to the Company's Annual Report on Form 10-K for the fiscal year ended June 25, 1993 (File No. 1-8048). 10(c)(1)(C)+ Second Amendment dated February 25, 1993 to Equipment Lease dated July 18, 1991 between the Company and PRC. Incorporated by reference to Exhibit 10(b)(7) to the Company's Annual Report on Form 10-K for the fiscal year ended June 25, 1993 (File No. 1-8048). 10(c)(1)(D) Restated Third Amendment dated December 14, 1993 to Equipment Lease dated July 18, 1991 between the Company and PRC. Incorporated by reference to Exhibit 4(d) to Amendment No. 2 to the Schedule 13D filed by Alfred J. Roach (File No. 1-8048). 10(d)(1) Lease Contract dated December 15, 1989 between the Company and Puerto Rico Industrial Development Company. Incorporated by reference to Exhibit 10(c)(1) to the Company's Annual Report on Form 10-K for the fiscal year ended June 29, 1990 (File No. 1-8048). 10(d)(2) Consolidated Contract of Lease Renewal and Construction dated February 1, 1994 between TII Dominicana, Inc., a subsidiary of the Company, and The Industrial Development Corporation of the Dominican Republic. Incorporated by reference to Exhibit 10(g)(2) to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1995 (File No. 1-8048). 11 Calculation of earnings per share. Incorporated by reference to Exhibit 11 to the Company's Annual Report is Form 10-K for the fiscal year ended June 27, 1997 (File No. 1-8048). 21 Subsidiaries of the Company. Incorporated by reference to Exhibit 21 to the Company's Annual Report is Form 10-K for the fiscal year ended June 27, 1997 (File No. 1-8048). 23(a)* Consent of Arthur Andersen LLP 23(b)# Consent of Parker Chapin Flattau & Klimpl, LLP (to be included in Exhibit 5) 24* Powers of Attorney of certain officers and directors of the registrant. - ---------- * Filed herewith. + Management contract arrangement. # To be filed by amendment. EX-1 2 EX.1. FORM OF UNDERWRITING AGREEMENT 2,500,000 Shares TII INDUSTRIES. INC. Common Stock UNDERWRITING AGREEMENT _____________, 1997 Rodman & Renshaw, Inc. c/o Rodman & Renshaw, Inc. 225 Liberty Street 2 World Financial Center New York, New York 10281 On behalf of the Several Underwriters named in Schedule I attached hereto. Ladies and Gentlemen: TII Industries, Inc., a Delaware corporation (the "Company") proposes to sell to you and the other underwriters named in Schedule I attached hereto (the "Underwriters"), for whom you are acting as the Representative, an aggregate of 2,500,000 shares (the "Firm Shares") of the Company's Common Stock, $.01 par value per share (the "Common Stock") to be issued and sold by the Company. In addition, the Company proposes to grant to the Underwriters an option to purchase up to an additional 375,000 shares (the "Option Shares") of Common Stock for the purpose of covering over-allotments in connection with the sale of the Firm Shares. The Firm Shares and the Option Shares are together called the "Shares." 1. Sale and Purchase of the Shares. On the basis of the representations, warranties and agreements contained in, and subject to the terms and conditions of, this Agreement: (a) The Company agrees to issue and sell the Firm Shares, to the several Underwriters, and each of the Underwriters agrees, severally and not jointly, to purchase at the purchase price per share of Common Stock of $_____ (the "Initial Price"), the aggregate number of Firm Shares set forth opposite such Underwriter's name in Schedule I attached hereto. The Underwriters agree to offer the Firm Shares to the public as set forth in the Prospectus. (b) The Company grants to the several Underwriters an option to purchase all or any part of the number of Option Shares at the Initial Price. The number of Option Shares to be purchased by each Underwriter shall be the same percentage (adjusted by the Representative to eliminate fractions) of the total number of Option Shares to be purchased by the Underwriters as such Underwriter is purchasing of the Firm Shares. Such option may be exercised only to cover over-allotments in the sales of the Firm Shares by the Underwriters and may be exercised in whole or in part at any time on or before 12:00 noon, New York City time, on the business day before the Firm Shares Closing Date (as defined below), and from time to time thereafter within 30 days after the date of this Agreement, upon written or telegraphic notice, or verbal or telephonic notice confirmed by written or telegraphic notice, by the Representative to the Company no later than 12:00 noon, New York City time, on the business day before the Firm Shares Closing Date or at least two business days before any Option Shares Closing Date (as defined below), as the case may be, setting forth the number of Option Shares to be purchased and the time and date (if other than the Firm Shares Closing Date) of such purchase. 2. Delivery and Payment. Delivery by the Company of the Firm Shares to the Representative for the respective accounts of the Underwriters, and payment of the purchase price by certified or official bank check or checks payable in New York Clearing House (next day) funds to the Company, shall take place at the offices of Rodman & Renshaw, Inc., at 225 Liberty Street, 2 World Financial Center, New York, New York, 10281, at 10:00 a.m., New York City time, on the third business day following the date on which the public offering of the Shares commences (unless such date is postponed in accordance with the provisions of Section 10(b)), or at such time and place on such other date, not later than 10 business days after the date of this Agreement, as shall be agreed upon by the Company and the Representative (such time and date of delivery and payment are called the "Firm Shares Closing Date"). The public offering of the Shares shall be deemed to have commenced at the time, which is the earlier of (a) the time, after the Registration Statement (as defined in Section 4 below) becomes effective, of the release by you for publication of the first newspaper advertisement which is subsequently published relating to the Shares or (b) the time, after the Registration Statement becomes effective, when the Shares are first released by you for offering by the Underwriters or dealers by letter or telegram. In the event the option with respect to the Option Shares is exercised, delivery by the Company of the Option Shares to the Representative for the respective accounts of the Underwriters and payment of the purchase price by certified or official bank check or checks payable in New York Clearing House (next day) funds to the Company shall take place at the offices of Rodman & Renshaw, Inc. specified above at the time and on the date (which may be the same date as, but in no event shall be earlier than, the Firm Shares Closing Date) specified in the notice referred to in Section 1(b) (such time and date of delivery and payment is called the "Option 2 Shares Closing Date"). The Firm Shares Closing Date and the Option Shares Closing Dates are called, individually, a "Closing Date" and, together, the "Closing Dates." Certificates evidencing the Shares shall be registered in such names and shall be in such denominations as the Representative shall request at least two full business days before the Firm Shares Closing Date or the Option Shares Closing Date, as the case may be, and shall be made available to the Representative for checking and packaging, at such place as is designated by the Representative, on the full business day before the Firm Shares Closing Date or the Option Shares Closing Date, as the case may be. 3. Public Offering. The Company understands that the Underwriters propose to make a public offering of the Shares, as set forth in and pursuant to the Prospectus (as defined in Section 4 below), as soon after the effective date of the Registration Statement and the date of this Agreement as the Representative deems advisable. The Company hereby confirms that the Underwriters and dealers have been authorized to distribute or cause to be distributed each preliminary prospectus and are authorized to distribute the Prospectus (as from time to time amended or supplemented if the Company furnishes amendments or supplements thereto to the Underwriters). 4. Representations and Warranties of the Company. The Company represents and warrants to, and agrees with, the several Underwriters that: (i) The Company has filed with the Securities and Exchange Commission (the "Commission") a registration statement, and may have filed one or more amendments thereto, on Form S-2 (Registration No. 333-_____), including in such registration statement and each such amendment a related preliminary prospectus (a "Preliminary Prospectus"), for the registration of the Shares and the Option Shares, in conformity with the requirements of the Securities Act of 1933, as amended (the "Act"). In addition, the Company has filed or will promptly file a further amendment to such registration statement, in the form heretofore delivered to you. As used in this Agreement, the term "Registration Statement" means such registration statement, as amended, and any registration statement filed pursuant to Rule 462(b) of the Act, on file with the Commission at the time such registration statement becomes effective (including the prospectus, financial statements, exhibits, and all other documents filed as a part thereof or incorporated by reference directly or indirectly therein (such incorporated documents being herein collectively "Incorporated Documents")), provided that such Registration Statement, at the time it becomes effective, may omit such information as is permitted to be omitted from the Registration Statement when it becomes effective pursuant to Rule 430A of the General Rules and Regulations promulgated under the Act (the "Regulations"), which information ("Rule 430 Information") shall be deemed to be included in such Registration Statement when a final prospectus is filed with the Commission in 3 accordance with Rules 430A and 424(b)(1) or (4) of the Regulations; the term "Preliminary Prospectus" means each prospectus included in the Registration Statement, or any amendments thereto, before it becomes effective under the Act, the form of prospectus omitting Rule 430A Information included in the Registration Statement when it becomes effective, if applicable (the "Rule 430A Prospectus"), and any prospectus filed by the Company with your consent pursuant to Rule 424(a) of the Regulations; and the term "Prospectus" means the final prospectus included as part of the Registration Statement, except that if the prospectus relating to the securities covered by the Registration Statement in the form first filed on behalf of the Company with the Commission pursuant to Rule 424(b) of the Regulations shall differ from such final prospectus, the term "Prospectus" shall mean the prospectus as filed pursuant to Rule 424(b) from and after the date on which it shall have first been used. (ii) When the Registration Statement becomes effective, and at all times subsequent thereto to and including the Closing Dates, and during such longer period as the Prospectus may be required to be delivered in connection with sales by the Underwriters or a dealer, and during such longer period until any post-effective amendment thereto shall become effective, the Registration Statement (and any post-effective amendment thereto) and the Prospectus (as amended or as supplemented if the Company shall have filed with the Commission any amendment or supplement to the Registration Statement or the Prospectus) will contain all statements which are required to be stated therein in accordance with the Act and the Regulations, will comply with the Act and the Regulations, and will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading, and no event will have occurred which should have been set forth in an amendment or supplement to the Registration Statement or the Prospectus which has not then been set forth in such an amendment or supplement; if a Rule 430A Prospectus is included in the Registration Statement at the time it becomes effective, the Prospectus filed pursuant to Rules 430A and 424(b)(1) or (4) will contain all Rule 430A Information; and each Preliminary Prospectus, as of the date filed with the Commission, did not include any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading; except that no representation or warranty is made in this Section 4(a)(ii) with respect to statement or omissions made in reliance upon and in conformity with written information furnished to the Company as stated in Section 7(b) with respect to any Underwriter by or on behalf of such Underwriter through the Representative expressly for inclusion in any Preliminary Prospectus, the Registration Statement, or the Prospectus, or any amendment or supplement thereto. Each of the Incorporated Documents complies in all material respects with the requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the rules and regulations thereunder. 4 (iii) The Company has not distributed and will not distribute, prior to the later of the Option Shares Closing Date and the completion of the Underwriters' distribution of the Common Stock, any offering material in connection with the offering and sale of the Common Stock other than a Preliminary Prospectus, Prospectus or the Registration Statement. (iv) Neither the Commission nor the "blue sky" or securities authority of any jurisdiction have issued an order (a "Stop Order") suspending the effectiveness of the Registration Statement, preventing or suspending the use of any Preliminary Prospectus, the Prospectus, the Registration Statement, or any amendment or supplement thereto, refusing to permit the effectiveness of the Registration Statement, or suspending the registration or qualification of the Firm Shares or the Option Shares nor has any of such authorities instituted or threatened to institute any proceedings with respect to a Stop Order. (v) Any contract, agreement, instrument, lease, or license required to be described in the Registration Statement or the Prospectus has been properly described therein. Any contract agreement, instrument, lease, or license required to be filed as an exhibit to the Registration Statement has been filed with the Commission as an exhibit to or has been incorporated as an exhibit by reference into the Registration Statement. (vi) The Company has no subsidiary or subsidiaries and does not control, directly or indirectly, any corporation, partnership, joint venture, association or other business organization, except for those listed on Schedule II hereto and for those permitted to be excluded pursuant to Item 601, Exhibit 21 or Regulation S-K (each such corporation singly a "Subsidiary" and collectively, the "Subsidiaries"). Each of the Company and each of the Subsidiaries is a corporation duly organized, validly existing, and in good standing under the laws of the jurisdiction of incorporation, with full corporate power and authority, and all necessary consents, authorizations, approvals, orders, licenses, certificates, and permits of and from, and declarations and filings with, all federal, state, possession, local, foreign and other governmental authorities and all courts and other tribunals, to own, lease, license, and use its properties and assets and to carry on its business as now being conducted and in the manner described in the Prospectus. Each of the Company and each of the Subsidiaries is duly qualified to do business and is in good standing in each jurisdiction in which its ownership, leasing, licensing, or character, location or use of property and assets or the conduct of its business makes such qualification necessary. Neither the Company nor any Subsidiary owns, leases or licenses any property or conduct any business outside the United States of America, except as described in the Prospectus. (vii) The authorized capital stock of the Company consists of 30,000,000 shares of Common Stock, of which 8,099,440 shares are outstanding and 1,000,000 5 shares of Preferred Stock, $1.00 par value per share (the "Preferred Stock"), none of which are outstanding. Each outstanding share of Common Stock and each outstanding share of capital stock of each Subsidiary has been duly and validly authorized and issued, fully paid, and non-assessable, without any personal liability attaching to the ownership thereof and has not been issued and is not owned or held in violation of any preemptive rights of shareholders and, in the case of the Subsidiaries, is owned of record and beneficially by the Company, free and clear of all liens, security interests, pledges, charges, encumbrances, stockholders' agreements, and voting trusts. There is no commitment, plan, preemptive right or arrangement to issue, and no outstanding option, warrant, or other right calling for the issuance of, shares of capital stock of the Company or of any Subsidiary or any security or other instrument which by its terms is convertible into, exercisable for, or exchangeable for capital stock of the Company or of any Subsidiary, except as may be properly described in the Prospectus. There is outstanding no security or other instrument which by its terms is convertible into or exchangeable for capital stock of the Company or of any Subsidiary, except as may be properly described in the Prospectus. (viii) The consolidated financial statements of the Company and the Subsidiaries included in the Registration Statement and the Prospectus fairly present, with respect to the Company and its Subsidiaries the financial position, the consolidated results of operations, and the other information purported to be shown therein at the respective dates and for the respective periods to which they apply. Such financial statements have been prepared in accordance with generally accepted accounting principles (except to the extent that certain footnote disclosures regarding any stub period may have been omitted in accordance with the applicable rules of the Commission under the Exchange Act) consistently applied throughout the periods involved, are correct and complete, and are in accordance with the books and records of the Company and the Subsidiaries. The accountants whose report on the audited financial statements is filed with the Commission as a part of the Registration Statement are, and during the periods covered by their report(s) included in the Registration Statement and the Prospectus were, independent certified public accountants with respect to the Company and the Subsidiaries within the meaning of the Act and the Regulations. No other financial statements are required by Form S-2 or otherwise to be included in the Registration Statement or the Prospectus. There has at no time been a material adverse change in the financial condition, results of operations, business, properties, assets, liabilities, or future prospects of the Company or any Subsidiary from the latest information set forth in the Registration Statement or the Prospectus, except as may be properly described in the Prospectus. (ix) There is no litigation, arbitration, claim, governmental or other proceeding (formal or informal), or investigation before any court or before any public body or board pending, threatened, or in prospect (or any basis therefor) 6 with respect to the Company, any Subsidiary, or any of their respective operations, business, properties, or assets, except as may be properly described in the Prospectus or such as individually or in the aggregate do not now have and will not in the future have a material adverse effect upon the operations, business, properties, assets or financial condition of the Company. Neither the Company nor any of the Subsidiaries is involved in any labor dispute, nor is such dispute threatened, which dispute would have a material adverse effect upon the operations, business, properties, assets or financial condition of the Company or the Subsidiaries. Neither the Company nor the Subsidiaries is in violation of, or in default with respect to, any law, rule, regulation, order, judgment, or decree; nor is the Company or the Subsidiaries required to take any action in order to avoid any such violation or default. (x) The Company and each of the Subsidiaries has good and marketable title in fee simple absolute to all real properties and good title to all other properties and assets which the Prospectus indicates are owned by it, and has valid and enforceable leasehold interests in each of such items, free and clear of all liens, security interests, pledges, charges, encumbrances, and mortgages (except as may be properly described in the Prospectus). No real property owned, leased, licensed or used by the Company or the Subsidiaries lies in an area which is, or to the knowledge of the Company or the Subsidiaries will be, subject to zoning, use or building code restrictions which would prohibit, and no state of facts relating to the actions or inaction of another person or entity or his or its ownership, leasing, licensing or use of any real or personal property exists or will exist which would prevent, the continued effective ownership, leasing, licensing or use of such real property in the business of the Company or the Subsidiaries as presently conducted or as the Prospectus indicates it contemplates conducting (except as may be properly described in the Prospectus). (xi) Neither the Company nor any of the Subsidiaries, nor to the knowledge of the Company and the Subsidiaries, any other party, is now or is expected by the Company to be in violation or breach of, or in default with respect to, complying with any term, obligation or provision of any contract, agreement, instrument, lease, license, indenture, mortgage, deed of trust, note, arrangement or understanding which is material to the Company and the Subsidiaries or by which any of its properties or business may be bound or affected, and no event has occurred which with notice or lapse of time or both would constitute such a default, and each such contract, agreement, instrument, lease, license, indenture, mortgage, deed 7 of trust, note, arrangement or understanding is in full force and is the legal, valid and binding obligation of the parties thereto and is enforceable as to them in accordance with its terms. The Company and each of the Subsidiaries enjoys peaceful and undisturbed possession under all leases and licenses under which it is operating. Neither the Company nor any of the Subsidiaries is a party to or bound by any contract, agreement, instrument, lease, license, indenture, mortgage, deed of trust, note, arrangement or understanding, or subject to any charter or other restriction, which has had or may in the future have a material adverse effect on the financial condition, results of operations, business, properties, assets, liabilities or future prospects of the Company or any of the Subsidiaries. Neither the Company nor any of the Subsidiaries is in violation or breach of, or in default with respect to, any term of its certificate of incorporation (or other charter document) or by-laws or of any franchise, license, permit, judgment, decree, order, statute, rule or regulation. (xii) The Company and each of the Subsidiaries has filed all federal, state, local, possession and foreign tax returns which are required to be filed through the date hereof, or have received extensions thereof, and have paid all taxes shown on such returns and all assessments received by it to the extent that the same are material and have become due. The Company has made adequate charges, accruals and reserves in its applicable financial statements in respect of all federal, state, possession and foreign income and franchise taxes for all periods as to which the tax liability of the Company has not been finally determined. (xiii) All patents, patent applications, trademarks, trademark applications, trade names, service marks, copyrights, copyright applications, franchises, and other intangible properties and assets listed in the Registration Statement under "Business-Patents and Trademarks" (all of the foregoing being collectively herein called "Intangibles") that the Company and the Subsidiaries own, possesses or have pending, or under which they are licensed, are in good standing and uncontested. There is no right under any Intangible necessary to the business of the Company or the Subsidiaries as presently conducted or as the Prospectus indicates the Company or the Subsidiaries contemplates conducting (except as may be so described in the Prospectus). Neither the Company nor any of the Subsidiaries has infringed, is infringing, or has received any notice of infringement with respect to asserted Intangibles of others. To the knowledge of the Company and each of the Subsidiaries, there is no infringement by others of Intangibles of the Company or the Subsidiaries. To the knowledge of the Company and the Subsidiaries, there is no Intangible of others which has had or may in the future have a materially adverse effect on the financial condition, results of operations, business, properties, assets, liabilities or future prospects of the Company and the Subsidiaries. (xiv) Neither the Company nor any of the Subsidiaries nor any director, officer, agent, employee or other person associated with or acting on behalf of the Company or any of the Subsidiaries has, directly or indirectly: used any corporate funds for unlawful contributions, gifts, entertainment, or other unlawful expenses relating to political activity; made any unlawful payment to foreign or domestic government officials or employees or to foreign or domestic political parties or campaigns from corporate funds; violated any provision of the Foreign Corrupt Practices Act of 1977, as amended; or made any bribe, rebate, payoff, influence 8 payment, kickback, or other unlawful payment. No transaction has occurred between or among the Company and any of its officers or directors or any affiliates or affiliates of any such officer or director, except as described in the Prospectus. (xv) The Company has all requisite power and authority to execute, deliver and perform this Agreement. All necessary corporate proceedings of the Company have been duly taken to authorize the execution, delivery and performance of this Agreement. This Agreement has been duly authorized, executed, and delivered by the Company, is the legal, valid and binding obligation of the Company, and is enforceable as to the Company in accordance with its terms. No consent, authorization, approval, order, license, certificate or permit of or from, or declaration or filing with, any federal, state, possession, local, foreign or other governmental authority or any court or other tribunal is required by the Company for the execution, delivery or performance by the Company of this Agreement (except filings under the Act which have been or will be made before the applicable Closing Date and such consents consisting only of consents under "blue sky" or securities laws which have been obtained at or prior to the date of this Agreement). No consent of any party to any contract, agreement, instrument, lease, license, indenture, mortgage, deed of trust, note, arrangement or understanding to which the Company is a party, or to which any of its respective properties or assets are subject, is required for the execution, delivery or performance of this Agreement, and the execution, delivery and performance of this Agreement, will not violate, result in a breach of, conflict with, accelerate the due date of any payments under, or (with or without the giving of notice or the passage of time or both) entitle any party to terminate or call a default under any such contract, agreement, instrument, lease, license, indenture, mortgage, deed of trust, note, arrangement, or understanding, or violate or result in a breach of any term of the certificate of incorporation (or other charter document) or by-laws of the Company, or violate, result in a breach of, or conflict with any law, rule, regulation, order, judgment or decree binding on the Company or to which any of its operations, business, properties or assets are subject. (xvi) The Firm Shares and the Option Shares are duly and validly authorized. The Firm Shares, when issued and delivered in accordance with this Agreement, and the Option Shares, when delivered in accordance with this Agreement, will be duly and validly issued, fully paid, and non-assessable, without any personal liability attaching to the ownership thereof, and will not be issued in violation of any preemptive rights of shareholders, optionholders, warrantholders and any other persons and the Underwriters will receive good title to the Firm Shares and Option Shares purchased by them, respectively, free and clear of all liens, security interests, pledges, charges, encumbrances, shareholders' agreements and voting trusts. 9 (xvii) The Common Stock, the Preferred Stock, the Firm Shares and the Option Shares conform to all statements relating thereto contained in the Registration Statement or the Prospectus. (xviii) Subsequent to the respective dates as of which information is given in the Registration Statement and the Prospectus, and except as may otherwise be properly described therein, there has not been any material adverse change in the assets or properties, business or results of operations or financial condition of the Company or any of the Subsidiaries, whether or not arising from transactions in the ordinary course of business; neither the Company nor any of the Subsidiaries has sustained any material loss or interference with its business or properties from fire, explosion, earthquake, flood or other calamity, whether or not covered by insurance; since the date of the latest balance sheet included in the Registration Statement and the Prospectus, except as reflected therein, neither the Company nor any of the Subsidiaries has undertaken any liability or obligation, direct or contingent, except for liabilities or obligations undertaken in the ordinary course of business; and the Company has not (A) issued any securities or incurred any liability or obligation, primary or contingent, for borrowed money, (B) entered into any transaction not in the ordinary course of business, or (C) declared or paid any dividend or made any distribution on any of its capital stock or redeemed, purchased or otherwise acquired or agreed to redeem, purchase or otherwise acquire any shares of its capital stock. (xix) Neither the Company nor any of the Subsidiaries, nor any of their officers, directors or affiliates (as defined in the Regulations), has taken or will take, directly or indirectly, prior to the termination of the underwriting syndicate contemplated by this Agreement, any action designed to stabilize or manipulate the price of any security of the Company, or which has caused or resulted in, or which might in the future reasonably be expected to cause or result in, stabilization or manipulation of the price of any security of the Company, to facilitate the sale or resale of any of the Firm Shares or the Option Shares. (xx) The Company has obtained from each of its executive officers and directors and principal shareholders, their enforceable written agreement, in form and substance satisfactory to counsel for the Underwriters, that for a period of 180 days from the date on which the public offering of the Shares commences they will not, without the prior written consent of Rodman & Renshaw, Inc., offer, pledge, sell, contract to sell, grant any option for the sale of, or otherwise dispose of, directly or indirectly, any shares of Common Stock or other securities of the Company (or any security or other instrument which by its terms is convertible into, exercisable for, or exchangeable for shares of Common Stock or other securities of the Company, including, without limitation, any shares of Common Stock issuable under any employee stock options), beneficially owned by them, except with respect to Shares being sold in connection herewith or their being a beneficial owner of any such Shares; 10 (xxi) The Company is not, and does not intend to conduct its business in a manner in which it would be, an "investment company" as defined in Section 3(a) of the Investment Company Act of 1940 (the "Investment Company Act"). (xxii) No person or entity has the right to require registration of shares of Common Stock or other securities of the Company because of the filing or effectiveness of the Registration Statement, except such person or entities from whom written waivers of such rights have been received prior to the date hereof. (xxiii) Except as may be set forth in the Prospectus, neither the Company nor any of the Subsidiaries has incurred any liability for a fee, commission or other compensation on account of the employment of a broker or finder in connection with the transactions contemplated by this Agreement. (xxiv) No transaction has occurred between or among the Company or any of the Subsidiaries and any of their respective officers or directors or any affiliates of any such officer or director, that is required to be described in and is not described in the Registration Statement and the Prospectus. (xxv) The Common Stock, including the Shares, are authorized for quotation on the Nasdaq National Market. (xxvi) Neither the Company nor any of the Subsidiaries nor any of their affiliates is presently doing business with the government of Cuba or with any person or affiliate located in Cuba. If, at any time after the date that the Registration Statement is declared effective with the Commission or with the Florida Department of Banking and Finance (the "Florida Department"), whichever date is later, and prior to the end of the period referred to in the first clause of Section 4(a)(ii) hereof, the Company commences engaging in business with the government of Cuba or with any person or affiliate located in Cuba, the Company will so inform the Florida Department within ninety days after such commencement of business in Cuba, and during the period referred to in Section 4(a)(ii) hereof will inform the Florida Department within ninety days after any change occurs with respect to previously reported information. (xxvii) Except as described in the Prospectus: (i) there are no outstanding loans, advances or guaranties of indebtedness by the Company which are required to be described in the Prospectus to or for the benefit of any of its "affiliates," as such term is defined in Rule 405 under the Act, or any of the officers or directors of the Company, or any of the members of the "immediate family" (as that term is defined in Item 404(a) of Regulation S-K under the Act) of any of such officers or directors, or any of the "associates" (as that term is defined in Rule 405 under the Act) of any of such officers, directors or family members; and (ii) there are no material agreements or understandings between the Company and any of the 11 members of the immediate family of any of the officers or directors of the Company, or any of the associates of any of such officers, directors or family members. (xxviii) The Company maintains a system of accounting controls sufficient to provide reasonable assurances that (i) transactions are executed in accordance with management's general or specific authorization; (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain accountability for assets; (iii) access to assets is permitted only in accordance with management's general or specific authorization; and (iv) the recorded accountability for assets is compared with existing assets at reasonable intervals and appropriate action is taken with respect to any differences. (xxix) Except as would not, individually or in the aggregate, result in a material adverse change (i) the company is not in violation of any federal, state, possession, local or foreign law or regulation relating to pollution or protection of human health or the environment (including, without limitation, ambient air, surface water, groundwater, land surface or subsurface strata) or wildlife, including without limitation, laws and regulations relating to emissions, discharges, releases or threatened releases of chemicals, pollutants, contaminants, wastes, toxic substances, hazardous substances, petroleum and petroleum products (collectively, "Materials of Environmental Concern"), or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of Materials of Environmental Concern (collectively, "Environmental Laws"), which violation includes, but is not limited to, noncompliance with any permits or other governmental authorizations required for the operation of the business of the Company under applicable Environmental Laws, or noncompliance with the terms and conditions thereof, nor has the Company received any written communication, whether from a governmental authority, citizens group, employee or otherwise, that alleges that the Company is in violation of any Environmental Law; (ii) there is no claim, action or cause of action filed with a court or governmental authority, no investigation with respect to which the Company has received written notice, and no written notice by any person or entity alleging potential liability for investigatory costs, cleanup costs, governmental responses costs, natural resources damages, property damages, personal injuries, attorneys' fees or penalties arising out of, based on or resulting from the presence, or release into the environment, of any Material of Environmental Concern at any location owned, leased or operated by the Company, now or in the past (collectively, "Environmental Claims"), pending or, to the best of the Company's knowledge, threatened against the Company or any person or entity whose liability for any Environmental Claim the Company has retained or assumed either contractually or by operation of law; and (iii) to the best of the Company's knowledge, there are no past or present actions, activities, circumstances, conditions, events or incidents, including, without limitation, the 12 release, emission, discharge, presence or disposal of any Material of Environmental Concern, that reasonably could result in a violation of any Environmental Law or form the basis of a potential Environmental Claim against the Company or against any person or entity whose liability for any Environmental Claim the Company has retained or assumed either contractually or by operation of law. 5. Conditions of the Underwriters' Obligations. The obligations of the Underwriters under this Agreement are several and not joint. The respective obligations of the Underwriters to purchase the Shares are subject, in the Representative's sole discretion, to each of the following terms and conditions: (a) The Prospectus shall have been timely filed with the Commission in accordance with Section 6(a)(i) of this Agreement. (b) No order preventing or suspending the use of any preliminary prospectus or the Prospectus shall have been or shall be in effect and no order suspending the effectiveness of the Registration Statement shall be in effect and no proceedings for such purpose shall be pending before or threatened by the Commission, and any requests for additional information on the part of the Commission (to be included in the Registration Statement or the Prospectus or otherwise) shall have been complied with to the satisfaction of the Representative. (c) The representations and warranties of the Company contained in this Agreement and in the certificates delivered pursuant to Section 5(d) shall be true and correct when made and on and as of each Closing Date as if made on such date and the Company shall have performed all covenants and agreements and satisfied all the conditions contained in this Agreement required to be performed or satisfied by it or them at or before such Closing Date. (d) The Representative shall have received on each Closing Date a certificate, addressed to the Representative and dated such Closing Date, of the chief executive or chief operating officer and the chief financial officer of the Company to the effect that the persons executing such certificate have carefully examined the Registration Statement, the Prospectus and this Agreement and that the representations and warranties of the Company in this Agreement are true and correct on and as of such Closing Date with the same effect as if made on such Closing Date and the Company has performed all covenants and agreements and satisfied all conditions contained in this Agreement required to be performed or satisfied by it at or prior to such Closing Date. (e) The Representative shall have received at the time this Agreement is executed and on each Closing Date, signed letters from Arthur Andersen LLP addressed to the Representative and dated, respectively, the date of this Agreement and each such Closing Date, in form and scope reasonably satisfactory to the Representative, with reproduced copies or signed counterparts thereof for each of the Underwriters confirming 13 that they are independent accountants within the meaning of the Act and the Regulations, that the response to Item 10 of the Registration Statement is correct in so far as it relates to them and stating in effect that: (i) in their opinion the audited financial statements and financial statement schedules included or incorporated by reference in the Registration Statement and the Prospectus and reported on by them comply as to form in all material respects with the applicable accounting requirements of the Act, the Exchange Act and the related published rules and regulations thereunder; (ii) on the basis of a reading of the amounts included in the Registration Statement and the Prospectus under the heading "Summary Financial Data" which would not necessarily reveal matters of significance with respect to the comments set forth in such letter, a reading of the minutes of the meetings of the shareholders and directors of the Company, and inquiries of certain officials of the Company who have responsibility for financial and accounting matters of the Company as to transactions and events subsequent to the date of the latest audited financial statements, except as disclosed in the Registration Statement and the Prospectus, nothing came to their attention which caused them to believe that: (A) the amounts in "Summary Financial Data," and included or incorporated by reference in the Registration Statement and the Prospectus do not agree with the corresponding amounts in the audited financial statements from which such amounts were derived; or (B) with respect to the Company, there were, at a specified date not more than five business days prior to the date of the letter, any decreases in net sales, income before income taxes and net income or any increases in long-term debt of the Company or any decreases in the capital stock, working capital or the shareholders' equity in the Company, as compared with the amounts shown on the Company's audited Balance Sheet for the fiscal year ended June 27, 1997 included in the Registration Statement or the audited Statement of Operations, for such year; and (iii) they have performed certain other procedures as a result of which they determined that information of an accounting, financial or statistical nature (which is limited to accounting, financial or statistical information derived from the general accounting records of the Company) set forth in the Registration Statement and the Prospectus and reasonably specified by the Representative agrees with the accounting records of the Company. References to the Registration Statement and the Prospectus in this paragraph (e) are to such documents as amended and supplemented at the date of such letter. 14 (f) The Representative shall have received on each Closing Date from Parker Chapin Flattau & Klimpl, LLP, counsel for the Company, an opinion, addressed to the Representative and dated such Closing Date, and in form and scope satisfactory to counsel for the Underwriters, with reproduced copies or signed counterparts thereof for each of the Underwriters, to the effect that: (i) The Company is a corporation duly organized, validly existing, and in good standing under the laws of the State of Delaware, with full corporate power and authority to own, lease, license and use its properties and assets and to conduct its business in the manner described in the Prospectus. To the knowledge of such counsel, the Company has no subsidiary and does not control, directly or indirectly any corporation, partnership, joint venture, association or other business organization except for those listed on Schedule II attached hereto and those permitted to be excluded in a registration statement pursuant to Item 601, Exhibit 21 of Regulation S-K (each such corporation singly a "Subsidiary" and collectively, the "Subsidiaries"). Each of the Subsidiaries has been duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation, with full corporation power and authority to own, lease, license and use its properties and assets and to conduct its business in the manner described in the Prospectus. To the knowledge of such counsel, the Company has all necessary consents, authorizations, approvals, orders, certificates and permits of and from, and declarations and filings with, all federal, state, possession, local, foreign and other governmental authorities and all courts and other tribunals, to own, lease, license and use its properties and assets and to conduct its business in the manner described in the Prospectus. The Company and each of the Subsidiaries is duly qualified to do business and is in good standing, in each jurisdiction where the failure to be so qualified could have a material adverse effect on the operating condition (financial and otherwise) or business of the Company and each of the Subsidiaries. Neither the Company nor any Subsidiary owns, leases or licenses any property or conducts any business outside the United States of America, except as may be described in the Prospectus. (ii) The Company has authorized, issued and outstanding capital stock as set forth in the "actual" column of the capitalization table under the caption "Capitalization" in the Prospectus. The certificates evidencing the Shares are in due and proper legal form. Each outstanding share of Common Stock has been duly and validly authorized and issued, fully paid, and non-assessable, without any personal liability attaching to the ownership thereof, and has not been issued and is not owned or held in violation of any preemptive right of shareholders. To the knowledge of such counsel, all of the capital stock of the Subsidiaries is owned of record and beneficially by the Company, free and clear of all liens, security interests, pledges, changes, encumbrances, stockholders' agreements and voting trusts. To the knowledge of such counsel, there is no commitment, plan, or arrangement to issue, and no outstanding option, warrant, or other right calling for 15 the issuance of, any share of capital stock of the Company or any security or other instrument which by its terms is convertible into, exercisable for, or exchangeable for capital stock of the Company, except as may be properly described in the Prospectus. To the knowledge of such counsel, there is outstanding no security or other instrument which by its terms is convertible into, exercisable for or exchangeable for capital stock of the Company, except as may be properly described in the Prospectus. (iii) To the knowledge of such counsel, there is no litigation, arbitration, claim, governmental or other proceeding (formal or informal), or investigation before any court or before any public body or board pending, threatened, or in prospect (or any basis therefor) with respect to the Company, any of the Subsidiaries or any of their respective operations, businesses, properties, assets, or financial condition except as may be properly described in the Prospectus or such as individually or in the aggregate do not now have and will not in the future have a material adverse effect upon the operations, business, properties, assets, or financial condition of the Company or any of the Subsidiaries. To the knowledge of such counsel, neither the Company nor any of the Subsidiaries is involved in any labor dispute, nor is such dispute threatened, which dispute would have a material adverse effect upon the operations, business, properties, assets or financial condition of the Company or any of the Subsidiaries. Neither the Company nor any of the Subsidiaries is in violation of, or in default with respect to, any law, rule, regulation, order, judgment, or decree, except as may be properly described in the Prospectus or such as in the aggregate do not now have and will not in the future have a material adverse effect upon the operations, business, properties, assets, or financial condition of the Company or any of the Subsidiaries; nor is the Company or any of the Subsidiaries required to take any action in order to avoid any such violation or default. (iv) To the knowledge of such counsel, neither the Company, any of the Subsidiaries, nor any other party is now or is expected by the Company or any of the Subsidiaries to be in violation or breach of, or in default with respect to, complying with any term, obligation or provision of any contract, agreement, instrument, lease, license, indenture, mortgage, deed of trust, note, arrangement or understanding which is material to the Company or any of the Subsidiaries or by which any of its properties or businesses may be bound or affected and no event has occurred which with notice or lapse of time or both would constitute such a default. (v) Neither the Company nor any of the Subsidiaries is in violation or breach of, or in default with respect to, any term of its certificate of incorporation (or other charter document) or by-laws. (vi) The Company has all requisite power and authority to execute, deliver and perform this Agreement and to issue and sell the Shares. All necessary 16 corporate proceedings of the Company have been taken to authorize the execution, delivery and performance by the Company of this Agreement. This Agreement has been duly authorized, executed and delivered by the Company, is the legal, valid and binding obligation of the Company and (subject to applicable bankruptcy, insolvency, and other laws affecting the enforceability of creditors' rights generally) is enforceable as to the Company in accordance with its terms. No consent, authorization, approval, order, license, certificate or permit of or from, or declaration or filing with, any federal state, possession, local, foreign or other governmental authority or any court or other tribunal is required by the Company, for the execution, delivery or performance by the Company of this Agreement (except filings under the Act which have been made prior to the Closing Date and consents consisting only of consents under "blue sky" or securities laws). To the knowledge of such counsel, no consent of any party to any contract, agreement, instrument, lease, license, indenture, mortgage, deed of trust, note, arrangement or understanding to which the Company is a party, or to which any of their respective properties or assets are subject, is required for the execution, delivery or performance of this Agreement; and the execution, delivery and performance of this Agreement will not violate, result in a breach of, conflict with, or (with or without the giving of notice or the passage of time or both) entitle any party to terminate or call a default under any such contract, agreement, instrument, lease, license, indenture, mortgage, deed of trust, note, arrangement or understanding, in each case known to such counsel, or violate or result in a breach of any term of the certificate of incorporation (or other charter document) or by-laws of the Company, or violate, result in a breach of, or conflict with any law, rule, regulation, order, judgment, or decree binding on the Company or to which any of its operations, businesses, properties or assets are subject. (vii) The Firm Shares and the Option Shares are duly and validly authorized. Such opinion delivered at each of the Closing Dates shall state that each Share, as the case may be, to be delivered on that date is duly and validly issued, fully paid, and non-assessable, with no personal liability attaching to the ownership thereof, and is not issued in violation of any preemptive rights of shareholders, and the Underwriters have received good title to the Shares purchased by them from the Company for the consideration contemplated herein and in good faith and without notice of any adverse claim within the meaning of the Uniform Commercial Code, free and clear of any liens, security interests, pledges, charges, encumbrances, shareholders' agreements, voting trusts and other claims. The Common Stock, the Preferred Stock, the Firm Shares and the Option Shares conform to all statements relating thereto contained in the Registration Statement or the Prospectus. (viii) To the knowledge of such counsel, any contract, agreement, instrument, lease or license required to be described in the Registration Statement or the Prospectus has been properly described therein. To the knowledge of such counsel, any contract, agreement, instrument, lease or license required to be filed 17 as an exhibit to the Registration Statement has been filed with the Commission as an exhibit to or has been incorporated as an exhibit by reference into the Registration Statement. (ix) Insofar as statements in the Prospectus purport to summarize the status of litigation or the provisions of laws, rules, regulations, orders, judgments, decrees, contracts, agreements, instruments, leases or licenses, such statements have been prepared or reviewed by such counsel and to the knowledge of such counsel, accurately reflect the status of such litigation and provisions purported to be summarized and are correct in all material respects. (x) The Company is not an "investment company" as defined in Section 3(a) of the Investment Company Act and, if the Company conducts its business as set forth in the Prospectus, will not become an "investment company" and will not be required to be registered under the Investment Company Act. (xi) To the knowledge of such counsel, no person or entity has the right to require registration of shares of Common Stock or other securities of the Company because of the filing or effectiveness of the Registration Statement except such persons or entities from whom written waivers of such rights have been received prior to the Closing Date. (xii) The Registration Statement has become effective under the Act. No Stop Order has been issued and no proceedings for that purpose has been instituted or are threatened, pending, or to such counsel's knowledge, contemplated. (xiii) The Registration Statement, any Rule 430A Prospectus, and the Prospectus, and any amendment or supplement thereto (other than financial statements and other financial data and schedules which are or should be contained in any thereof, as to which such counsel need express no opinion), comply as to form in all material respects with the requirements of the Act and the Regulations. To the knowledge of such counsel, the conditions for the use of Form S-2 have been satisfied with respect to the Registration Statement. (xiv) Such counsel has no reason to believe that any of the Registration Statement, any Rule 430A Prospectus, or the Prospectus, or any amendment or supplement thereto (other than financial statements and other financial data and schedules which are or should be contained in any thereof, as to which such counsel need express no opinion), contains any untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading. (xv) To the knowledge of such counsel, since the effective date of the Registration Statement, no event has occurred which should have been set forth in 18 an amendment or supplement to the Registration Statement or the Prospectus which has not been set forth in such an amendment or supplement. (xvi) The agreement of each officer, director and principal stockholder of the Company, stating that for a period of 180 days from the date on which the public offering of the Shares commences, such officer, director and principal stockholder will not, without the prior written consent of Rodman & Renshaw, Inc., offer, pledge, sell, contract to sell, grant any option for the sale of, or otherwise dispose of, directly or indirectly, any shares of Common Stock (or any other securities of the Company or any security or other instrument which by its terms is convertible into, exercisable for, or exchangeable for shares of Common Stock or other securities of the Company, including, without limitation, any shares of Common Stock issuable under any employee stock options), beneficially owned by such individual has been duly and validly authorized, executed and delivered by such individual and constitutes the legal, valid and binding obligation of such individual enforceable against such individual in accordance with its terms. In addition, such counsel shall state that such counsel has participated in the preparation of the Registration Statement and the Prospectus and in conferences with officers and other representatives of the Company, representatives of the Representative and representatives of the independent accountants of the Company, at which conferences the contents of the Registration Statement and the Prospectus and related matters were discussed and, although such counsel has not independently verified and is not passing upon and does not assume any responsibility for the accuracy, completeness or fairness of the statements contained in the Registration Statement and the Prospectus (except as specified in the foregoing opinion), on the basis of the foregoing and relying as to materiality upon the representations of executive officers of the Company after conferring with such executive officers, no facts have come to the attention of such counsel which lead such counsel to believe that the Registration Statement at the time it became effective contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, or that the Prospectus, except for the financial statements and other financial and statistical data included therein as to which counsel need express no opinion, as amended or supplemented on the date thereof contained any untrue statement of a material fact or omitted to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. In rendering their opinion as aforesaid, counsel may rely upon an opinion or opinions, each dated the Closing Date, of other counsel retained by the Company as to laws of any jurisdiction other than the Federal laws of the United States, the General Corporate Law of the states of Delaware and New York, provided that (1) each such local counsel is reasonably acceptable to the Representative and (2) such reliance is expressly authorized by each opinion so relied upon and a copy of each such opinion is addressed to the Representative and is in form and substance reasonably satisfactory to them and their counsel. In addition, such counsel may rely, as to matters of fact, to the extent such counsel deems proper, on certificates of responsible officers 19 of the Company, provided that executed copies of such certificates are provided to the Representative. (g) The Representative shall have received on each Closing Date from Morgan& Finnegan, patent counsel to the Company, an opinion, addressed to the Representative and dated such Closing Date, and in form and scope satisfactory to counsel for the Representative with respect to such patent matters as the Representative may reasonably require. (h) The Representative shall have received on each Closing Date from McConnell Valdez and ____________________, local counsel to the Company, an opinion, addressed to the Representative and dated such Closing Date and in form and scope satisfactory to counsel for the Representative with respect to such matters as the Representative may reasonably require. (i) All proceedings taken in connection with the sale of the Firm Shares and the Option Shares as herein contemplated shall be satisfactory in form and substance to the Representative and its counsel, and the Underwriters shall have received from Squadron, Ellenoff, Plesent & Sheinfeld, LLP, a favorable opinion, addressed to the Representative and dated such Closing Date, with respect to the Shares, the Registration Statement and the Prospectus, and such other related matters, as the Representative may reasonably request, and the Company shall have furnished to Squadron, Ellenoff, Plesent & Sheinfeld, LLP, such documents as they may reasonably request for the purpose of enabling them to pass upon such matters. 6. Covenants of the Company. (a) The Company covenants and agrees as follows: (i) The Company shall use its best efforts to cause the Registration Statement to become effective as promptly as possible. If the Registration Statement has become or becomes effective with a form of prospectus omitting Rule 430A information, or filing of the Prospectus is otherwise required under Rule 424(b), the Company will file the Prospectus, properly completed, pursuant to Rule 424(b) within the time period prescribed and will provide evidence satisfactory to you of such timely filing. The Company shall notify you immediately, and confirm such notice in writing, (A) when the Registration Statement and any post-effective amendment thereto become effective, (B) of the receipt of any comments from the Commission or the "blue sky" or securities authority of any jurisdiction regarding the Registration Statement, any post-effective amendment thereto, the Prospectus, or any amendment or supplement thereto, and (C) of the receipt of any notification with respect to a Stop Order. The Company shall not file any amendment of the Registration Statement or supplement to the Prospectus unless the Company has furnished the Representative a copy for their review prior to filing and shall not file any such proposed amendment or supplement to which the Representative reasonably object. The Company shall use its best efforts to prevent the issuance 20 of any Stop Order and, if issued, to obtain as soon as possible the withdrawal thereof. (ii) During the time when a prospectus relating to the Shares is required to be delivered hereunder or under the Act or the Regulations, comply so far as it is able with all requirements imposed upon it by the Act, as now existing and as hereafter amended, and by the Regulations, as from time to time in force, so far as necessary to permit the continuance of sales of or dealings in the Shares in accordance with the provisions hereof and the Prospectus. If, at any time when a prospectus relating to the Shares is required to be delivered under the Act and the Regulations, any event as a result of which the Prospectus as then amended or supplemented would include any untrue statement of a material fact or omit to state any material fact necessary to make the statements therein in the light of the circumstances under which they were made not misleading, or if it shall be necessary to amend or supplement the Prospectus to comply with the Act or the Regulations, the Company promptly shall prepare and file with the Commission, subject to the third sentence of paragraph (i) of this Section 6(a), an amendment or supplement which shall correct such statement or omission or an amendment which shall effect such compliance. (iii) The Company shall make generally available to its security holders and to the Representative as soon as practicable, but not later than 45 days after the end of the 12-month period beginning at the end of the fiscal quarter of the Company during which the Effective Date (or 90 days if such 12-month period coincides with the Company's fiscal year), an earnings statement (which need not be audited) of the Company, covering such 12-month period, which shall satisfy the provisions of Section 11(a) of the Act or Rule 158 of the Regulations. (iv) The Company shall furnish to the Representative and counsel for the Underwriters, without charge, signed copies of the Registration Statement (including all exhibits thereto, Incorporated Documents and amendments thereto) and to each other Underwriter a copy of the Registration Statement (without exhibits thereto or Incorporated Documents) and all amendments thereof and, so long as delivery of a prospectus by an Underwriter or dealer may be required by the Act or the Regulations, as many copies of any preliminary prospectus and the Prospectus and any amendments thereof and supplements thereto as the Representative may reasonably request. (v) The Company shall cooperate with the Representative and its counsel in endeavoring to qualify the Shares for offer and sale under the laws of such jurisdictions as the Representative may designate and shall maintain such qualifications in effect so long as required for the distribution of the Shares; provided, however, that the Company shall not be required in connection therewith, as a condition thereof, to qualify as a foreign corporation or to execute a general 21 consent to service of process in any jurisdiction or subject itself to taxation as doing business in any jurisdiction. (vi) For a period of five years after the date of this Agreement, the Company shall supply to the Representative, and to each other Underwriter who may so request in writing, copies of such financial statements and other periodic and special reports as the Company may from time to time distribute generally to the holders of any class of its capital stock and to furnish to the Representative a copy of each annual or other report it shall be required to file with the Commission. (vii) Without the prior written consent of the Representative, for a period of 180 days from the date on which a public offering of the Shares commences, the Company shall not issue, sell or register with the Commission or otherwise dispose of, directly or indirectly, any securities of the Company (or any securities convertible into or exercisable or exchangeable for securities of the Company), except for the issuance of the Shares pursuant to the Registration Statement. (viii) If the Company elects to rely on Rule 462(b), the Company shall both file a Rule 462(b) Registration Statement with the Commission in compliance with Rule 462(b) and pay the applicable fees in accordance with Rule 111 promulgated under the Act by the earlier of (i) 10:00 p.m., Eastern Standard Time, on the date of this Agreement or (ii) the time confirmations are sent or given, as specified by Rule 462(b)(2). (ix) On or before completion of this offering, the Company shall make all filings required under applicable securities laws and by the Nasdaq National Market. (x) Prior to each Closing Date and for a period of 25 days thereafter, the Representative shall be given reasonable written prior notice of any press release or other direct or indirect communication and of any press conference with respect to the Company, the financial condition, results of operations, business, properties, assets, liabilities of the Company, or this offering. (b) The Company agrees to pay, or reimburse if paid by the Representative, whether or not the transactions contemplated hereby are consummated or this Agreement is terminated, all costs and expenses relating to the registration and public offering of the Shares including those relating to: (i) the preparation, printing, filing and distribution of the Registration Statement including all exhibits thereto, each preliminary prospectus, the Prospectus, all amendments and supplements to the Registration Statement and the Prospectus, and any documents required to be delivered with any Preliminary Prospectus or the Prospectus, and the printing, filing and distribution of the Agreement Among Underwriters, this Agreement and related documents; (ii) the preparation and delivery of certificates for the Shares to the Underwriters; (iii) the registration or qualification of the 22 Shares for offer and sale under the securities or Blue Sky laws of the various jurisdictions referred to in Section 6(a)(v), including the fees and disbursements of counsel for the Underwriters in connection with such registration and qualification and the preparation, printing, distribution and shipment of preliminary and supplementary Blue Sky memoranda; (iv) the furnishing (including costs of shipping and mailing) to the Representative and to the Underwriters of copies of each preliminary prospectus, the Prospectus and all amendments or supplements to the Prospectus, and of the several documents required by this Section to be so furnished, as may be reasonably requested for use in connection with the offering and sale of the Shares by the Underwriters or by dealers to whom Shares may be sold; (v) the filing fees of the National Association of Securities Dealers, Inc. in connection with its review of the terms of the public offering; (vi) the furnishing (including costs of shipping and mailing) to the Representative and to the Underwriters of copies of all reports and information required by Section 6(a)(vi); (vii) inclusion of the Shares for quotation on the NASDAQ National Market System; and (viii) all transfer taxes, if any, with respect to the sale and delivery of the Shares by the Company to the Underwriters. Except as otherwise contemplated by Section 9 hereof, the Underwriters will pay their own counsel fees and expenses to the extent not otherwise covered by clause (iii) above, and their own travel and travel-related expenses in connection with the distribution of the Shares. 7. Indemnification. (a) The Company agrees to indemnify and hold harmless each Underwriter and each person, if any, who controls any Underwriter within the meaning of Section 15 of the Act or Section 20 of the Exchange Act against any and all losses, claims, damages and liabilities, joint or several (including any reasonable investigation, legal and other expenses incurred in connection with, and any amount paid in settlement of, any action, suit or proceeding or any claim asserted), to which they, or any of them, may become subject under the Act, the Exchange Act or other Federal or state law or regulation, at common law or otherwise, insofar as such losses, claims, damages or liabilities arise out of or are based upon any untrue statement or alleged untrue statement of a material fact contained in any preliminary prospectus, the Registration Statement or the Prospectus or any amendment thereof or supplement thereto, or arise out of or are based upon any omission or alleged omission to state therein such fact required to be stated therein or necessary to make such statements therein not misleading. Such indemnity shall not inure to the benefit of any Underwriter (or any person controlling such Underwriter) on account of any losses, claims, damages or liabilities arising from the sale of the Shares to any person by such Underwriter if such untrue statement or omission or alleged untrue statement or omission was made in 23 such preliminary prospectus, the Registration Statement or the Prospectus, or such amendment or supplement, in reliance upon and in conformity with information furnished in writing to the Company by the Representative on behalf of any Underwriter specifically for use therein. In no event shall the indemnification agreement contained in this Section 7(a) inure to the benefit of any Underwriter on account of any losses, claims, damages, liabilities or actions arising from the sale of the Shares upon the public offering to any person by such Underwriter if such losses, claims, damages, liabilities or actions arise out of, or are based upon, a statement or omission or alleged omission in a preliminary prospectus and if, in respect to such statement, omission or alleged omission, the Prospectus differs in a material respect from such preliminary prospectus and a copy of the Prospectus has not been sent or given to such person at or prior to the confirmation of such sale to such person. This indemnity agreement will be in addition to any liability which the Company may otherwise have. (b) Each Underwriter agrees, severally and not jointly, to indemnify and hold harmless the Company, each person, if any, who controls the Company within the meaning of Section 15 of the Act or Section 20 of the Exchange Act, each director of the Company, and each officer of the Company who signs the Registration Statement, to the same extent as the foregoing indemnity from the Company to each Underwriter, but only insofar as such losses, claims, damages or liabilities arise out of or are based upon any untrue statement or omission or alleged untrue statement or omission which was made in any Preliminary Prospectus, any Rule 430A Prospectus, the Registration Statement or the Prospectus, or any amendment thereof or supplement thereto, which were made in reliance upon and in conformity with information furnished in writing to the Company by the Representative on behalf of any Underwriter for specific use therein; provided, however, that the obligation of each Underwriter to indemnify the Company (including any controlling person, director or officer thereof) shall be limited to the underwriting discount applicable to the Shares purchased by such Underwriter hereunder. For all purposes of this Agreement, the amounts of the selling concession and reallowance set forth in the Prospectus constitute the only information furnished in writing by or on behalf of any Underwriter expressly for inclusion in any Preliminary Prospectus, any Rule 430A Prospectus, the Registration Statement or the Prospectus or any amendment or supplement thereto. (c) Any party that proposes to assert the right to be indemnified under this Section will, promptly after receipt of notice of commencement of any action, suit or proceeding against such party in respect of which a claim is to be made against an indemnifying party or parties under this Section, notify each such indemnifying party of the commencement of such action, suit or proceeding, enclosing a copy of all papers served. No indemnification provided for in Section 7(a) or 7(b) shall be available to any party who shall fail to give notice as provided in this Section 7(c) if the party to whom notice was not given was unaware of the proceeding to which such notice would have related and was prejudiced by the failure to give such notice but the omission so to notify such indemnifying party of any such action, suit or proceeding shall not relieve it from any liability that it may have to any indemnified party for contribution or otherwise than under 24 this Section. In case any such action, suit or proceeding shall be brought against any indemnified party and it shall notify the indemnifying party of the commencement thereof, the indemnifying party shall be entitled to participate in, and, to the extent that it shall wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel reasonably satisfactory to such indemnified party, and after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof and the approval by the indemnified party of such counsel, the indemnifying party shall not be liable to such indemnified party for any legal or other expenses, except as provided below and except for the reasonable costs of investigation subsequently incurred by such indemnified party in connection with the defense thereof. The indemnified party shall have the right to employ its counsel in any such action, but the fees and expenses of such counsel shall be at the expense of such indemnified party unless (i) the employment of counsel by such indemnified party has been authorized in writing by the indemnifying parties, (ii) the indemnified party shall have reasonably concluded that there may be a conflict of interest between the indemnifying parties and the indemnified party in the conduct of the defense of such action (in which case the indemnifying parties shall not have the right to direct the defense of such action on behalf of the indemnified party), or (iii) the indemnifying parties shall not have employed counsel to assume the defense of such action within a reasonable time after notice of the commencement thereof, in each of which cases the fees and expenses of counsel employed by the indemnified party shall be at the expense of the indemnifying parties. An indemnifying party shall not be liable for any settlement of any action, suit, proceeding or claim effected without its written consent, which consent shall not be unreasonably withheld or delayed. 8. Contribution. In order to provide for just and equitable contribution in circumstances in which the indemnification provided for in Sections 7(a) and (b) is due in accordance with its terms but for any reason is held to be unavailable from the Company or the Underwriters, the Company and the Underwriters shall contribute to the aggregate losses, claims, damages and liabilities (including any investigation, legal and other expenses reasonably incurred in connection with, and any amount paid in settlement of, any action, suit or proceeding or any claims asserted, but after deducting any contribution received by the Company from persons other than the Underwriters, persons who control the Company within the meaning of the Act, officers of the Company who signed the Registration Statement and directors of the Company, who may also be liable for contribution) to which the Company and one or more of the Underwriters may be subject in such proportion as is appropriate to reflect the relative benefits received by the Company on the one hand and the Underwriters on the other from the offering of the Shares or, if such allocation is not permitted by applicable law or indemnification is not available as a result of the indemnifying party not having received notice as provided in Section 7 hereof, in such proportion as is appropriate to reflect not only the relative benefits referred to above but also the relative fault of the Company on the one hand and the Underwriters on the other in connection with the statements or omissions which resulted in such losses, claims, damages, liabilities or expenses, as well as any other relevant equitable considerations. The relative benefits received by the Company and the Underwriters shall be deemed to be in the same proportion as (x) the total proceeds from the Offering (net of underwriting discounts but before deducting expenses) received 25 by the Company from the sale of the Shares, as set forth in the table on the cover page of the Prospectus (but not taking into account the use of the proceeds of such sale of Shares by the Company), bear to (y) the underwriting discount received by the Underwriters, as set forth in the table on the cover page of the Prospectus. The relative fault of the Company and the Underwriters shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact related to information supplied by the Company or the Underwriters and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and the Underwriters agree that it would not be just and equitable if contribution pursuant to this Section 8 were determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to above. Notwithstanding the provisions of this Section 8, in no case shall any Underwriter (except as may be provided in the Agreement Among Underwriters) be liable or responsible for any amount in excess of the underwriting discount applicable to the Shares purchased by such Underwriter hereunder, provided, however that no person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. For purposes of this Section 8, each person, if any, who controls an Underwriter within the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act shall have the same rights to contribution as such Underwriter, and each person, if any, who controls the Company within the meaning of the Section 15 of the Act or Section 20(a) of the Exchange Act, each officer of the Company who shall have signed the Registration Statement and each director of the Company shall have the same rights to contribution as the subject in each case to the immediately preceding sentence of this Section 8. Any party entitled to contribution will, promptly after receipt of notice of commencement of any action, suit or proceeding against such party in respect of which a claim for contribution may be made against another party or parties under this Section, notify such party or parties from whom contribution may be sought, but the omission so to notify such party or parties from whom contribution may be sought shall not relieve the party or parties from whom contribution may be sought from any other obligation it or they may have hereunder or otherwise than under this Section. No party shall be liable for contribution with respect to any action, suit, proceeding or claim settled without its written consent. The Underwriters' obligations to contribute pursuant to this Section 8 are several in proportion to their respective underwriting commitments and not joint. 9. Termination. This Agreement may be terminated with respect to the Shares to be purchased on any Closing Date by the Representative by notifying the Company at any time prior to the purchase of the Shares: (a) in the absolute discretion of the Representative at or before any Closing Date: (i) if on or prior to such date, any domestic or international event or act or occurrence has materially disrupted, or in the opinion of the Representative will in the future materially disrupt, the securities markets; (ii) if there has occurred any new outbreak or material escalation of hostilities or other calamity or crisis the effect of which on the financial markets of the United States is such as to make it, in the judgment of the Representative, inadvisable to proceed with the Offering; (iii) if there shall be such a material adverse 26 change in general financial, political or economic conditions or the effect of international conditions on the financial markets in the United States such as to make it, in the judgment of the Representative, inadvisable or impracticable to market the Shares; (iv) if trading in the Shares has been suspended by the Commission or trading generally on the New York Stock Exchange, Inc., the American Stock Exchange, Inc. or the Nasdaq National Market System has been suspended or limited, or minimum or maximum ranges for prices for securities shall have been fixed, or maximum ranges for prices for securities have been required, by said exchanges or by order of the Commission, the National Association of Securities Dealers, Inc., or any other governmental or regulatory authority; or (v) if a banking moratorium has been declared by any state or federal authority, or (b) at or before any Closing Date, if any of the conditions specified in Section 5 shall not have been fulfilled when and as required by this Agreement. If this Agreement is terminated pursuant to any of its provisions the Company shall not be under any liability to any Underwriter, and no Underwriter shall be under any liability to the Company, except that (y) if this Agreement is terminated by the Representative or the Underwriters because of any failure, refusal or inability on the part of the Company to comply with the terms or to fulfill any of the conditions of this Agreement, the Company will reimburse the Underwriters for all out-of-pocket expenses (including the fees and disbursements of their counsel) incurred by them in connection with the proposed purchase and sale of the Shares or in contemplation of performing their obligations hereunder and (z) no Underwriter who shall have failed or refused to purchase the Shares agreed to be purchased by it under this Agreement, without some reason sufficient hereunder to justify cancellation or termination of its obligations under this Agreement, shall be relieved of liability to the Company or to the other Underwriters for damages occasioned by its failure or refusal. 10. Substitution of Underwriters. If one or more of the Underwriters shall fail (other than for a reason sufficient to justify the cancellation or termination of this Agreement under Section 9) to purchase on any Closing Date the Shares agreed to be purchased on such Closing Date by such Underwriter or Underwriters, the Representative may find one or more substitute underwriters to purchase such Shares or make such other arrangements as the Representative may deem advisable or one or more of the remaining Underwriters may agree to purchase such Shares in such proportions as may be approved by the Representative, in each case upon the terms set forth in this Agreement. If no such arrangements have been made by the close of business on the business day following such Closing Date: (a) if the number of Shares to be purchased by the defaulting Underwriters on such Closing Date shall not exceed 10% of the Shares that all the Underwriters are obligated to purchase on such Closing Date, then each of the nondefaulting Underwriters shall be obligated to purchase such Shares on the terms herein set forth in proportion to their respective obligations hereunder; provided, that in no event shall the maximum number of Shares that any Underwriter has agreed to purchase pursuant to Section 1 be 27 increased pursuant to this Section 10 by more than one-ninth of such number of Shares without the written consent of such Underwriter, or (b) if the number of Shares to be purchased by the defaulting Underwriters on such Closing Date shall exceed 10% of the Shares that all the Underwriters are obligated to purchase on such Closing Date, then the Company shall be entitled to an additional business day within which it may, but is not obligated to, find one or more substitute underwriters reasonably satisfactory to the Representative to purchase such Shares upon the terms set forth in this Agreement. In any such case, either the Representative or the Company shall have the right to postpone the applicable Closing Date for a period of not more than five business days in order that necessary changes and arrangements (including any necessary amendments or supplements to the Registration Statement or Prospectus) may be effected by the Representative and the Company. If the number of Shares to be purchased on such Closing Date by such defaulting Underwriter or Underwriters shall exceed 10% of the Shares that all the Underwriters are obligated to purchase on such Closing Date, and none of the nondefaulting Underwriters or the Company shall make arrangements pursuant to this Section within the period stated for the purchase of the Shares that the defaulting Underwriters agreed to purchase, this Agreement shall terminate with respect to the Shares to be purchased on such Closing Date without liability on the part of any nondefaulting Underwriter to the Company and without liability on the part of the Company, except as provided in Sections 6(b), 7, 8 and 9. The provisions of this Section shall not in any way affect the liability of any defaulting Underwriter to the Company or the nondefaulting Underwriters arising out of such default. A substitute underwriter hereunder shall become an Underwriter for all purposes of this Agreement. 11. Miscellaneous. The respective agreements, representations, warranties, indemnities and other statements of the Company or its officers, and of the Underwriters set forth in or made pursuant to this Agreement shall remain in full force and effect, regardless of any investigation made by or on behalf of any Underwriter or the Company or any of the officers, directors or controlling persons referred to in Sections 7 and 8 hereof, and shall survive delivery of and payment for the Shares. The provisions of Sections 6(b), 7, 8 and 9 shall survive the termination or cancellation of this Agreement. This Agreement has been and is made for the benefit of the Underwriters, the Company and their respective successors and assigns and, to the extent expressed herein, for the benefit of persons controlling any of the Underwriters, or the Company, and directors and officers of the Company, and their respective successors and assigns, and no other person shall acquire or have any right under or by virtue of this Agreement. The term "successors and assigns" shall not include any purchaser of Shares from any Underwriter merely because of such purchase. All notices and communications hereunder shall be in writing and mailed or delivered, or by telefax or telegraph if subsequently confirmed by letter, (a) if to the Representative, to Rodman & Renshaw, Inc., 225 Liberty Street, 2 World Financial Center, New York, New York 10281, Attention: John J. Borer, III, Managing Director, telecopy: (212) 416-7439/49, (b) if to the 28 Company, to the Company's agent for service as such agent's address appears on the cover page of the Registration Statement. This Agreement shall be governed by and construed in accordance with the laws of the State of New York without regard to principles of conflict of laws. This Agreement may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. All pronouns and any variations thereof shall be deemed to refer to the masculine, feminine, or neuter, singular or plural, as the identity of the person or persons or entity or entities require. All section headings herein are for convenience of reference only and are not part of this Agreement, and no construction or inference shall be derived therefrom. Please confirm that the foregoing correctly sets forth the agreement among us. Very truly yours, TII INDUSTRIES, INC. By: _________________________________ Name: ___________________________ Title: __________________________ 29 Confirmed on behalf of itself and as the Representative of the several Underwriters named in Schedule I annexed hereto: RODMAN & RENSHAW, INC. By:______________________________ Name: John J. Borer, III Title: Managing Director 30 SCHEDULE I Number of Firm Shares to be NAME OF UNDERWRITER Purchased - ------------------- --------- Rodman & Renshaw, Inc................................. Total 2,500,000 ============ 31 SCHEDULE II Subsidiaries of the Company Name State of Jurisdiction of Corporation - ---- ------------------------------------ TII Corporation Delaware TII International, Inc. Delaware Telecommunications Industries, Inc. New York TII Dominicana, Inc. Delaware Crown Tool & Die Company, Inc. Puerto Rico TII-Ditel, Inc. North Carolina 32 EX-4 3 EX.4(A)(1)(G) - 6TH AMENDMENT TO CREDIT AGREEMENT SIXTH AMENDMENT AND WAIVER dated as of October 17, 1997 to the Revolving Credit Loan Agreement dated January 31, 1995 (the "Agreement"), as amended by the First Amendment dated as of August 3, 1995, the Second Amendment and Waiver dated as of November 10, 1995, Amendment of Revolving Credit Loan Agreement dated December 27, 1995, the Fourth Amendment and Waiver dated as of May 2, 1997, and the Fifth Amendment and Waiver dated as of September 23, 1997 (the Agreement together with each of the amendments, the "Loan Agreement") among TII International, Inc., a Delaware Corporation with offices at 1385 Akron Street, Copiague, New York 11726 (the "Borrower"), TII Industries, Inc., a Delaware corporation with offices at 1385 Akron Street, Copiague, New York 11726 ("Industries") and The Chase Manhattan Bank (f/k/a Chemical Bank), a New York State Banking corporation with offices at 395 North Service Road, Suite 302, Melville, New York 11747 (the "Bank") and to the Master Lease Purchase Agreement Number 00009, dated January 12, 1998, as amended by a letter dated February 1, 1996 (the "Lease Agreement") by and between the Borrower and Chase Equipment Leasing, Inc. (f/k/a ChemLease Worldwide, Inc.) ("Leasing"). Capitalized terms used but not otherwise defined herein shall have the meanings set forth in the Loan Agreement. WHEREAS, the Lease Agreement provides that the financial covenants contained in any credit facility provided by the Bank to the Borrower shall apply to the Lease Agreement as continuing covenants; and WHEREAS, the Borrower and Industries have requested and the Bank and Leasing have each agreed, subject to the terms and conditions of this Sixth Amendment and Waiver, to amend and waive compliance with certain provisions of the Loan Agreement and the Lease Agreement (by incorporation) to reflect requests made by the Borrower to the Bank and Leasing in the manner hereafter set forth; NOW, THEREFORE, In consideration of the premises and of other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows: 1. Waiver of and Amendment to Article 7, Negative Covenant, Section 7.16. Compliance with Section 7.16 of the Loan Agreement is hereby waived for the Fiscal Quarter ending September 26, 1997, provided that the Consolidated Net Loss during such Fiscal Quarter does not exceed Five Hundred Thousand and No/100 Dollars ($500,000). The Borrower, Industries and the Subsidiaries will be permitted to Incur (i) a Consolidated Net Loss for fiscal Quarter ending December 26, 1997 provided that such loss for such Fiscal Quarter does not exceed Five Hundred Thousand and No/100 Dollars ($500,000) and (ii) a Consolidated Net Loss (excluding extraordinary gains) for four Fiscal Quarters in the four Fiscal Quarter period ending March 27, 1998; and two Fiscal Quarters in the four Fiscal Quarter period ending June 26, 1998. 2. Waiver of and Amendment to Article 7, Negative Covenants. Section 7.17 Debt Service Ratio. Compliance with Section 7.17 of the Loan Agreement is hereby waived for the Fiscal Quarter ending September 26, 1997 to permit the Debt Service Ratio of Industries and its subsidiaries to be no less than -0.6 to 1 for such Fiscal Quarter. The Borrower, Industries and the Subsidiaries will be permitted to have a Debt Service Ratio of not less than (i) -0.7 to 1 for the Fiscal Quarter ending December 26, 1997; (ii) -0.7 to 1 for the Fiscal Quarter ending March 27, 1998 and (iii) -0.1 to 1 for the Fiscal Quarter ending June 26, 1998. 3. Amendment to Article 8. Events of Default. Section 8.01(n). Section 8.01(n) is hereby deleted in its entirety and replaced with the following: (n) (i) the Roach Family Member shall cease to own 7.5% of all voting stock in Industries, or (ii) Timothy J. Roach shall cease to actively manage the day-to-day operations of the Borrower and the Guarantors; 4. Amendment to Article 6. Affirmative Covenants applicable to the Loans. Article 6. Of the Loan Agreement is hereby amended by the addition of the following section: Section 6.16. Equity Offering. Borrower, Industries and the Subsidiaries agrees that in the event that Borrower, Industries and/or the Subsidiaries complete one or more equity offering (whether private or public or a combination thereof) in an amount equal to or greater than $3,500,000 in the aggregate (collectively, the "Equity Offering") the Bank and the Borrower, Industries and the Subsidiaries will agree to a modification of the existing negative covenants contained in Article 7 of this Loan Agreement to reflect the equity raised as a result of the Equity Offering, provided that if no agreement is reached within 45 days following completion of the Equity Offering, the Bank, in its sole discretion, may terminate the commitment and declare all amounts outstanding pursuant to this Loan Agreement, the Note and the other Financing Documents to be immediately due and payable. The Bank may require another such modification for each Equity Offering that occurs after such a modification. 2 Expenditures Section 7.09 shall be modified by adding the following language to the end of the existing covenant: except that during fiscal years ending June 26, 1998 and June 25, 1999, the Borrower, Industries and the Subsidiaries shall be permitted to make capital expenditures (including capital leases) for property, plant, machinery and equipment in an amount not to exceed $10,000,000 in the aggregate during such Fiscal Years, provided that (i) the capital expenditures incurred during Fiscal Year ending June 26, 1998 shall not exceed $6,000,000 and (ii) the Equity Offering is completed by December 26, 1997, and raises gross proceeds (before discounts, commissions and expenses) of at least $7,000,000. THIS SIXTH AMENDMENT AND WAIVER shall be construed and enforced in accordance with the laws of the State of New York. Except as expressly amended or waived hereby, the Loan Agreement and the Lease Agreement shall remain in full force and affect in accordance with the original terms thereof. This Sixth Amendment and Waiver herein is limited specifically to the matters set forth above and does not constitute directly or by implication a waiver or amendment of any other provision of the Loan Agreement or the Lease Agreement or any breach, default or Event of Default which may occur or may have occurred under the Loan Agreement or the Lease Agreement. The Borrower and Industries hereby represent and warrant that, after giving effect to this Sixth Amendment and Waiver, no Event of Default or defaults exists under the Loan Agreement, the Lease Agreement or any other related documents. THIS SIXTH AMENDMENT AND WAIVER may be executed in any number of counterparts, each of which shall constitute an original but all of which, when taken together, shall constitute but one Sixth Amendment and Waiver. THIS SIXTH AMENDMENT AND WAIVER shall become effective when duly executed counterparts hereof which, when taken together bear the signatures of each of the parties hereto shall have been delivered to the Bank and Leasing. IN WITNESS WHEREOF, the Borrower, Industries, the Bank and Leasing have caused 3 this Sixth Amendment and Waiver to be duly executed by their duly authorized officers all as of the date and year first above written. TII INTERNATIONAL, INC. BY: /s/ Paul G. Sebetic ------------------------------------- Paul G. Sebetic, Vice President TII INDUSTRIES, INC. BY: /s/ Paul G. Sebetic ------------------------------------- Paul G. Sebetic, Vice President THE CHASE MANHATTAN BANK BY: /s/ Christopher G. Zimmerman ------------------------------------- Christopher G. Zimmerman, Vice President CHASE EQUIPMENT LEASING, INC. BY: /s/ Raymond P. Masalitis ------------------------------------- Raymond P. Masalitis, Vice President 4 CONSENT The undersigned, as Guarantors of the obligations of TII International, Inc. Hereby Consent to the execution and delivery by TII International, Inc. and TII Industries, Inc. of this Sixth Amendment and Waiver and hereby confirm that they remain fully bound by the terms of the Joint and Several Guaranty of Payment dated January 31, 1995 to which they are a party. TII INTERNATIONAL, INC. BY: /s/ Paul G. Sebetic ------------------------------------- Paul G. Sebetic, Vice President TII INDUSTRIES, INC. BY: /s/ Paul G. Sebetic ------------------------------------- Paul G. Sebetic, Vice President TII DITEL, INC. BY: /s/ Paul G. Sebetic ------------------------------------- Paul G. Sebetic, Vice President TII CORPORATION BY: /s/ Paul G. Sebetic ------------------------------------- Paul G. Sebetic, Vice President 5 TELECOMMUNICATIONS INDUSTRIES, INC. BY: /s/ Paul G. Sebetic ------------------------------------- Paul G. Sebetic, Vice President TII DOMINICANA, INC. BY: /s/ Paul G. Sebetic ------------------------------------- Paul G. Sebetic, Vice President 6 EX-10 4 EX.10(B)(2) - P. SEBETIC EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT AGREEMENT, dated as of the 1st day of May, 1997 by and between TII INDUSTRIES, INC., a Delaware corporation, having a place of business at 1385 Akron Street, Copiague, New York 11726 (hereinafter designated and referred to as "Company"), and Paul G. Sebetic residing at 59 Highland Avenue, Sea Cliff, NY 11579 (hereinafter designated and referred to as "Employee" or ["him"] ["her"]). WHEREAS, Company desires to continue to employ the Employee as Vice President, Finance of the Company; and WHEREAS, the Employee is willing to continue such employment by the Company, all in accordance with provisions hereinafter set forth; NOW THEREFORE, in consideration of the promises and mutual covenants herein contained the parties hereto agree as follows: 1. Term: The term of this Agreement shall be for a period of three (3) years commencing May 1, 1997 and automatically terminating on April 30, 2000, subject to earlier termination as provided herein or unless extended by mutual consent of both parties in writing sixty (60) days prior to the end of the term of this Agreement or any extension thereof, but nothing herein shall require the Company or Employee to agree to any specific term or condition or to any continuation of Employee's employment beyond the end of the term of this Agreement. 2. Employment: Subject to the terms and conditions and for the compensation hereinafter set forth, the Company employs the Employee for and during the term of this Agreement. Employee is hereby employed by the Company as Vice President, Finance. The Employee does hereby accept such employment and agrees to use [his] [her] best efforts and to devote all normal business time, during the term of this Agreement, to the performance of [his] [her] duties faithfully, diligently and to the best of [his] [her] abilities upon the conditions hereinafter set forth. Employee shall report to the President or his designee. Employee's primary place of work shall be on Long Island, New York and Employee agrees to spend such time, from time to time, at the Company's other facilities and to visit customers, and vendors, and various industry associations as required to fulfill [his] [her] duties and responsibilities as contemplated herein. 3. Compensation: During the term of this Agreement, the Company agrees to pay Employee, and Employee agrees to accept, annual salary of One Hundred, Ten Thousand dollars ($110,000.00) payable every two weeks, less all applicable taxes, for all services rendered by Employee hereunder. Employee's annual salary shall be reviewed at the end of each year of employment hereunder and shall receive an increase of up to 10% per year but not less than the percentage of increase of the Local Component of the National Consumer Index issued by the United States Department of Labor unless financial factors of the Company deem otherwise as determined by the President. In addition, Employee shall be eligible to participate in the Company's Executive Bonus Plan should the Company adopt one. 4. Expenses: [A] The Company shall reimburse Employee, not less often than monthly, for all reasonable and actual business expenses incurred by [him] [her] in connection with [his] [her] service to the Company, upon submission of appropriate vouchers and expense account reports. [B] The Company shall provide the Employee with an allowance to reimburse him for the cost of maintaining a place of abode in the Commonwealth of Puerto Rico, in the amount of Six Thousand Dollars ($6,000.00) per year. Company acknowledges that Employee is a resident of -2- the State of New York and that Employee shall not be required to change his residence. Company and Employee both acknowledge that the discharge of the Employee's duties will require his presence in the Commonwealth of Puerto Rico from time to time. 5. Company Car: The Company shall provide Employee with a Company car for Employee's use for business purposes in accordance with standard Company guidelines. This car shall be insured and registered with the Motor Vehicle Department by the Company. Employee is responsible for proper maintenance, gasoline, traffic violation fines, etc. Repairs for other than routine maintenance shall be the responsibility of the Company. 6. Benefits: The Company shall provide medical and dental insurance and such other benefits, in accordance with the applicable Company benefit plans, as such plans may exist from time to time. The Employee shall be entitled to annual vacation in accordance with the Company's policy. 7. Extent of Service: The Employee during the term of this Agreement shall devote [his] [her] full normal business time, attention and energy and render [his] [her] best efforts and skill to the business of the Company. 8. Restrictive Covenant: [A] Employee acknowledges that: (I) the business in which the Company is engaged is intensely competitive and that [his] [her] employment by the Company will require that [she] [he] have access to and knowledge of confidential information of the Company, including , but not limited to, certain of the Company's confidential plans for the creation, acquisition or disposition of products, expansion plans, product development plans, methods of pricing, special customer requirements for service, information on methods of servicing the customer, operational information such as formulas, financial status, and plans and personnel information, which are of vital importance -3- to the success of the Company's business, and are "trade secrets" of the Company; (ii) the direct or indirect disclosure of any such confidential information to existing or potential competitors of the Company would place the Company at a competitive disadvantage and would cause damage, financial and otherwise, to the Company's business; and (iii) by [his] [her] training, experience and expertise, some of [his] [her] services to the Company will be special and unique. Employee understands and agrees that such trade secrets give or may give the Company a significant competitive advantage. Employee further recognizes that the success of the Company depends on keeping confidential both the trade secrets already developed or to be acquired and any future developments of trade secrets. Employee understands that in [his] [her] capacity with the Company [he] [she] will be entrusted with knowledge of such trade secrets and, in recognition of the importance thereof and in consideration of [his] [her] employment by the Company hereunder, agrees that [he] [she] will not, without the consent of the President in writing, make any disclosure of trade secrets now or hereafter possessed by the Company to any person, partnership, corporation or entity either during or after the term hereunder, except to such employees of the Company or its subsidiaries or affiliates, if any, as may be necessary in the regular course of business and except as may be required pursuant to any court order, judgment or decision form any court of competent jurisdiction. The provisions of this Section 8[A] shall continue in full force and effect notwithstanding any termination of this Agreement. [B] Employee agrees that during the term of [his] [her] employment with the Company and for a period of two years thereafter [he] [she] will not directly or indirectly become affiliated as an officer, director, employee or consultant or as a substantial security holder with any other company or entity whose business is directly or indirectly competitive with any business then -4- being planned or conducted by the Company or its divisions and subsidiaries. For the purpose hereof, "substantial security holder" shall mean ownership, directly or indirectly, of more than 3% of any class of securities of a company or partnership interest in any partnership or indebtedness of any such entity in excess of $25,000. The provisions of this Section 8[B] shall continue in full force and effect notwithstanding any termination of this Agreement. 9. Discoveries, etc.: [A] The Company shall be the owner, without further compensation, of all rights of every kind in and with respect to any reports, materials, inventions, processes, discoveries, improvements, modifications, know-how or trade secrets hereafter made, prepared, invented, discovered, acquired, suggested or reduced to practice (hereinafter designated and referred to as "Property Rights") by Employee in connection with Employee's performance of [his] [her] duties pursuant to this Agreement, and the Company shall be entitled to utilize and dispose of such in such manner as it may determine. [B] The Employee agrees to and shall promptly disclose to the President or his designee all Property Rights (whether or not patentable) made, discovered or conceived of by [him] [her], alone or with others, at any time during [his] [her] employment with the Company, whether on the Company's or [his] [her] own time and irrespective of whether on or off the Company's premises, provided only that such Property Rights (1) relate to or are useful in any phase of the business in which the Company may be engaged during the period of employment, or (2) relate to any subject matter or problems within the scope of Employee's employment, or (3) relate to or involve the use of any data or information of which the Employee has been or may become informed by reason of employment with the Company. The Employee hereby appoints the Company as Employee's -5- attorney-in-fact to execute in accordance with the laws of any country patent applications, assignments or other documents considered necessary or desirable by the Company. Any such Property Rights will be the sole and exclusive property of the Company, and Employee will execute any assignments requested by the Company of [his] [her] right, title or interest in any such Property Rights without further demand or consideration, and, in addition, the Employee will also provide the Company with any other instruments or documents requested by the Company, at the Company's expense, as may be necessary or desirable in applying for and obtaining patents with respect thereto in the United States and all foreign countries. The Employee also agrees to cooperate with the Company in the prosecution or defense of any patent claims or litigation or proceedings involving inventions, trade secrets, trademarks, service marks, secret processes, discoveries or improvements, during [his] [her] employment by the Company. Employee's cooperation after [his] [her] employment is subject to [his] [her] availability and the Company agrees to reimburse Employee for loss of income and expenses incurred in connection therewith. Said cooperation shall not be withheld by Employee. 10. Confidential Information: Employee recognizes and acknowledges that the Company, through the expenditure of considerable time and money, will acquire, has developed and will continue to develop in the future, information, skills, confidential information, know-how, formulae, technical expertise and methods relating to or forming part of the Company's services and products and conduct of its business, and that the same are confidential and proprietary, and are "trade secrets" of the Company. Employee understands and agrees that such trade secrets give or may give the Company a significant competitive advantage. Employee further recognizes that the success of the Company depends on keeping confidential both the trade secrets already developed or to be acquired -6- and any future developments of trade secrets. Employee understands that in [his] [her] capacity with the Company [he] [she] will be entrusted with knowledge of such trade secrets and, in recognition of the importance thereof and in consideration of [his] [her] employment by the Company hereunder, agrees that [he] [she] will not, without the consent of the President in writing, make any disclosure of trade secrets now or hereafter possessed by the Company to any person, partnership, corporation or entity either during or after the term hereunder, except to such employees of the Company or its subsidiaries or affiliates, if any, as may be necessary in the regular course of business and except as may be required pursuant to any court order, judgment or decision from any court of competent jurisdiction. The provisions of this Section shall continue in full force and effect notwithstanding any termination of the Agreement. 11. Irreparable Harm: Employee agrees that any breach or threatened breach by Employee of provisions set forth in Section Eight (8), Nine (9), and Ten (10) of this Agreement, would cause the Company irreparable harm and the Company may obtain injunctive relief against such actual or threatened conduct and without the necessity of a bond. 12. Return of Company Property: Employee agrees that following the termination of [his] [her] employment for any reason, [he] [she] shall return all property of the Company which is then in or thereafter comes into [his] [her] possession, including, but not limited to, documents, contracts, agreements, plans, photographs, customer lists, books, notes, electronically stored data and all copies of the foregoing as well as any other materials or equipment supplied by the Company to the Employee. -7- 13. Termination: [A] Death: In the event of the Employee's death during the term of [his] [her] employment, this Agreement shall automatically terminate on the date of death, and Employee's estate shall be entitled to payment of Employee's salary until date of death. All other benefits and compensation described herein shall terminate on the date of death unless otherwise stipulated in the applicable Company plan. [B] Disability: In the event the Employee, by reason of physical or mental incapacity, shall be disabled for a period of at least two (2) consecutive months or three (3) months in the aggregate in any twelve (12) month period of this Agreement or any extension hereof, the Company shall have the option at any time thereafter to terminate Employee's employment and to terminate this Agreement. Such termination to be effective ten (10) days after the Company gives written notice of such termination to the Employee, and all obligations of the Company hereunder shall cease upon the date of such termination unless otherwise stipulated in the appropriate Company plan. "Incapacity" as used herein shall mean the inability of the Employee to perform [his] [her] normal duties. [C] Company's Rights to Terminate This Agreement: [a] The Company shall have the right, before the expiration of the term of this Agreement and during any extension hereof, to terminate this Agreement and to discharge Employee for cause (hereinafter "Cause"), and all compensation to Employee shall cease to accrue upon discharge of the Employee for Cause. For the purposes of this Agreement, the term "Cause" shall mean the Employee's (I) violation of the Company's written policy or specific written directions of the President or his designee, and/or Board of Directors, which directions are consistent with -8- normally acceptable business practices or the failure to observe, or the failure or refusal to perform any obligations required to be performed in accordance with this Agreement, (ii) if the President determines that Employee has committed a demonstrable act (or omission) of malfeasance seriously detrimental to the Company (which shall not include any exercise of business judgment in good faith). [b] If the Company elects to terminate Employee's employment for Cause, the Company shall first give Employee written notice and a period of ten (10) days to cure such Cause, and if such Cause is not cured in said ten (10 ) days, such termination shall be effective five (5) days after the Company gives written notice of such failure to cure to the Employee. In the event of a termination of the Employee's employment for Cause in accordance with the provisions of Section 11[C][b], the Company shall have no further obligation to the Employee, except for the payment of salary through the date of such termination from employment. [c] Notwithstanding anything in this Agreement to the contrary, the Company may terminate the Employee's employment for reasons other than Cause. [D] Employee's Right to Terminate This Agreement: [a] If the Company elects to reduce in rank or authority the Employee's duties under this Agreement, without the mutual agreement of the Employee, the Employee shall first give Company written notice and a period of ten (10) days to cure same, and if same is not cured in said ten (10) days Employee may terminate this Agreement effective five (5) days after the Employee gives written notice of such failure to cure. [E] Severance: In the event the Employee's employment hereunder shall be terminated by the Company for other than Cause, death or disability, or by the Employee pursuant to Section 13 [D] hereof, (1) the Employee shall thereupon receive as severance pay in a lump sum -9- the amount of Compensation pursuant to Section 3 hereof and bonuses which the Employee would have received for the remaining term of this Agreement (including any extension of the Agreement mutually agreed upon by the parties), provided, however, that in no event shall such lump sum payment be less than six months compensation and bonus; and (2) the Employee's (and [his] [her]) dependents') participation in any medical, dental and other insurance plans shall be continued, or equivalent benefits provided to [him] [her] or them by the Company, at no cost to [him] [her] or them, for a period of one year from the termination; and (3) any options granted to the Employee which have not, by the terms of the options, vested, shall be deemed to have vested at the termination of employment, and shall thereafter be exercisable for the maximum period of time allowed for exercise thereof under the terms of the applicable Company stock option plan(s), provided that such period shall not be less than 90 days following such termination. An election by the Employee to terminate [his] [her] employment under the provisions of Section 13[D] shall not be deemed a voluntary termination of employment of the Employee for the purpose of interrupting the provisions of any of the Company's employee benefits plans, programs or policies. 14. Waiver: Any waiver by either party of a breach of any provision of this Agreement shall not operate as or be construed as a waiver of any other breach or default hereof. 15. Governing Law: The validity of this Agreement or of any of the provisions hereof shall be determined under and according to the laws of the State of New York, and this Agreement and its provisions shall be construed according to the laws of the State of New York, without reference to its choice of law rules. -10- 16. Notice: Any notice required to be given pursuant to the provisions of this Agreement shall be in writing and by facsimile or registered or certified mail or equivalent (i.e., Federal Express) and mailed to the following addresses: Company: TII Industries, Inc. 1385 Akron Street Copiague, New York 11726 Attention: Timothy J. Roach President Employee: Paul G. Sebetic 59 Highland Ave. Sea Cliff, NY 11579 17. Assignment: The Employee's assignment of this Agreement or any interest herein, or any monies due or to become due by reason of the terms hereof, without the prior written consent of the Company shall be void. This Agreement shall be assignable and binding to a corporation or other business entity that succeeds to all or substantially all of the business of the Company through merger, consolidation, corporate reorganization or by acquisition of all or substantially all of the assets of the Company and which assumes Company's obligations under this Agreement. 18. Miscellaneous: This Agreement contains the entire understanding between the parties hereto and supersedes all other oral and written agreements or understandings between them. No modification or addition hereto or waiver or cancellation of any provision shall be valid except by a writing signed by the party to be charged therewith. 19. Obligations of a Continuing Nature: It is expressly understood and agreed that the covenants, agreements and restrictions undertaken by or imposed on either party hereunder, which are stated to exist or continue after termination of Employee's employment with the Company, shall -11- exist and continue on both parties irrespective of the method or circumstances of such termination from employment or termination of this Agreement. 20. Severability: Employee agrees that if any of the covenants, agreements or restrictions on the part of Employee are held to be invalid by any court of competent jurisdiction, such holding will not invalidate any of the other covenants, agreements and/or restrictions herein contained and such invalid provisions shall be severable so that the invalidity of any such provision shall not invalidate nay others. Moreover, if any one or more of the provisions contained in this Agreement shall be held to be excessively broad as to duration, activity or subject, such provisions shall be construed by limiting and reducing them so as to be enforceable to the maximum extent allowed by applicable law. 21. Representation: Employee represents and warrants that [he] [she] has the legal right to enter into this Agreement and to perform all of the duties and obligations on [his] [her] part to be performed hereunder in accordance with its terms and that [she] [he] is not a party to any agreement or understanding, written or oral, which prevents Employee from entering into this Agreement or performing all of [his] [her] duties and obligations hereunder. In the event of a breach of such representation or warranty on [his] [her] part or if there is any other legal impediment which prevents [him] [her] from entering into this Agreement or performing all of [his] [her] duties and obligations hereunder, the Company shall have the right to terminate this Agreement in accordance with Section 13[C] [a]. Without limiting the foregoing, Employee represents and warrants that [he] [she] is not a party to any agreement which prohibits or limits [his] [her] ability to fulfill [his] [her] duties and responsibilities contemplated herein. -12- 22. Descriptive Headings: The paragraph headings contained herein are for reference purposes only and shall not in any way affect the meaning or interpretation of this Agreement. IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the day and year first above written. TII INDUSTRIES, INC. By: /s/ Timothy J. Roach ----------------------------- Timothy J. Roach President, CEO and Vice Chairman of the Board Employee: /s/ Paul G. Sebetic -------------------------------- Paul G. Sebetic -13- EX-23 5 EX.23.01 - CONSENT OF ARTHUR ANDERSEN ARTHUR ANDERSEN [Letterhead] _______________________________ Arthur Andersen LLP October 22, 1997 _______________________________ American International Plaza Mr. Paul G. Sebetic 12th Floor Chief Financial Officer 250 Munoz Rivera Avenue Hato Rey TII Industries, Inc. P.O. Box 362260 1385 Akron Street San Juan PR 00936-2260 Copiague, New York 11726-2996 809 754 3905 Dear Mr. Sebetic: As independent public accountants, we hereby consent to the use of our report (and to all references to our Firm) included in or made a part of this registration statement. Very truly yours, /s/ Arthur Andersen LLP EX-24 6 EX.24 - POWER OF ATTORNEY POWER OF ATTORNEY Know all men by these presents, that each individual whose signature appears below constitutes and appoints Timothy J. Roach and Paul G. Sebetic, and each of them, acting individually or jointly, his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign the Registration Statement to which this Power of Attorney is being filed as an exhibit (the "Registration Statement"), or any other registration statement for the same offering that is to be effective upon filing pursuant to Rule 462(b) under the Securities Act of 1933, as amended, and any and all amendments (including post-effective amendments) to the Registration Statement or such other registration statement, and to file each of the same with all exhibits thereto, and all documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in- fact and agent, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 22nd day of October, 1997. /s/Alfred J. Roach --------------------------- Alfred J. Roach POWER OF ATTORNEY Know all men by these presents, that each individual whose signature appears below constitutes and appoints Timothy J. Roach and Paul G. Sebetic, and each of them, acting individually or jointly, his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign the Registration Statement to which this Power of Attorney is being filed as an exhibit (the "Registration Statement"), or any other registration statement for the same offering that is to be effective upon filing pursuant to Rule 462(b) under the Securities Act of 1933, as amended, and any and all amendments (including post-effective amendments) to the Registration Statement or such other registration statement, and to file each of the same with all exhibits thereto, and all documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in- fact and agent, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 22nd day of October, 1997. /s/Timothy J. Roach --------------------------- Timothy J. Roach POWER OF ATTORNEY Know all men by these presents, that each individual whose signature appears below constitutes and appoints Timothy J. Roach and Paul G. Sebetic, and each of them, acting individually or jointly, his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign the Registration Statement to which this Power of Attorney is being filed as an exhibit (the "Registration Statement"), or any other registration statement for the same offering that is to be effective upon filing pursuant to Rule 462(b) under the Securities Act of 1933, as amended, and any and all amendments (including post-effective amendments) to the Registration Statement or such other registration statement, and to file each of the same with all exhibits thereto, and all documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in- fact and agent, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 22nd day of October, 1997. /s/ Paul G. Sebetic --------------------------- Paul G. Sebetic POWER OF ATTORNEY Know all men by these presents, that each individual whose signature appears below constitutes and appoints Timothy J. Roach and Paul G. Sebetic, and each of them, acting individually or jointly, his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign the Registration Statement to which this Power of Attorney is being filed as an exhibit (the "Registration Statement"), or any other registration statement for the same offering that is to be effective upon filing pursuant to Rule 462(b) under the Securities Act of 1933, as amended, and any and all amendments (including post-effective amendments) to the Registration Statement or such other registration statement, and to file each of the same with all exhibits thereto, and all documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in- fact and agent, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 22nd day of October, 1997. /s/ C. Bruce Barksdale --------------------------- C. Bruce Barksdale POWER OF ATTORNEY Know all men by these presents, that each individual whose signature appears below constitutes and appoints Timothy J. Roach and Paul G. Sebetic, and each of them, acting individually or jointly, his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign the Registration Statement to which this Power of Attorney is being filed as an exhibit (the "Registration Statement"), or any other registration statement for the same offering that is to be effective upon filing pursuant to Rule 462(b) under the Securities Act of 1933, as amended, and any and all amendments (including post-effective amendments) to the Registration Statement or such other registration statement, and to file each of the same with all exhibits thereto, and all documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in- fact and agent, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 22nd day of October, 1997. /s/Dorothy Roach --------------------------- Dorothy Roach POWER OF ATTORNEY Know all men by these presents, that each individual whose signature appears below constitutes and appoints Timothy J. Roach and Paul G. Sebetic, and each of them, acting individually or jointly, his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign the Registration Statement to which this Power of Attorney is being filed as an exhibit (the "Registration Statement"), or any other registration statement for the same offering that is to be effective upon filing pursuant to Rule 462(b) under the Securities Act of 1933, as amended, and any and all amendments (including post-effective amendments) to the Registration Statement or such other registration statement, and to file each of the same with all exhibits thereto, and all documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in- fact and agent, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 22nd day of October, 1997. /s/Joseph C. Hogan --------------------------- Joseph C. Hogan POWER OF ATTORNEY Know all men by these presents, that each individual whose signature appears below constitutes and appoints Timothy J. Roach and Paul G. Sebetic, and each of them, acting individually or jointly, his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign the Registration Statement to which this Power of Attorney is being filed as an exhibit (the "Registration Statement"), or any other registration statement for the same offering that is to be effective upon filing pursuant to Rule 462(b) under the Securities Act of 1933, as amended, and any and all amendments (including post-effective amendments) to the Registration Statement or such other registration statement, and to file each of the same with all exhibits thereto, and all documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in- fact and agent, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 22nd day of October, 1997. /s/James R. Grover, Jr. --------------------------- James R. Grover, Jr. POWER OF ATTORNEY Know all men by these presents, that each individual whose signature appears below constitutes and appoints Timothy J. Roach and Paul G. Sebetic, and each of them, acting individually or jointly, his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign the Registration Statement to which this Power of Attorney is being filed as an exhibit (the "Registration Statement"), or any other registration statement for the same offering that is to be effective upon filing pursuant to Rule 462(b) under the Securities Act of 1933, as amended, and any and all amendments (including post-effective amendments) to the Registration Statement or such other registration statement, and to file each of the same with all exhibits thereto, and all documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in- fact and agent, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 22nd day of October, 1997. /s/William G. Sharwell --------------------------- William G. Sharwell -----END PRIVACY-ENHANCED MESSAGE-----