-----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, I6FoXiOhfl04DYjVv5KId7djjEPYWg0mi/C98bapF1B06X6GwHn2t2cuuYrlYjU/ aIsbeBTLiI01AlKaVF01dg== 0000910680-97-000263.txt : 19970926 0000910680-97-000263.hdr.sgml : 19970926 ACCESSION NUMBER: 0000910680-97-000263 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19970627 FILED AS OF DATE: 19970925 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: 10-K SEC ACT: SEC FILE NUMBER: 001-08048 FILM NUMBER: 97685600 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 10-K 1 FORM 10-K FOR YEAR ENDED 6/27/97 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended June 27, 1997 Commission file number 1-8048 TII INDUSTRIES, INC (Exact Name of registrant AS specified in its charter) State of incorporation: DELAWARE I.R.S. Employer Identification No.66-0328885 1385 Akron Street, Copiague, New York 11726 (516) 789-5000 Securities registered under Section 12(b) of the Exchange Act: None Securities registered under Section 12(g) of the Exchange Act: Common Stock, $.01 par value Indicate by check mark whether the registrant (l) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.[X] The aggregate market value of the voting stock of the registrant outstanding as of September 12, 1997 held by non-affiliates of the registrant was approximately $53,000,000. While such market value excludes the market value of shares which may be deemed beneficially owned by executive officers and directors, this should not be construed as indicating that all such persons are affiliates. The number of shares of the Common Stock of the registrant outstanding as of September 12, 1997 was 7,513,640. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's Proxy Statement relating to its 1997 Annual Meeting of Stockholders are incorporated by reference into Part III of this report. PART I ITEM 1. BUSINESS GENERAL TII Industries, Inc. has been a leading supplier to United States telephone operating companies ("Telcos") of overvoltage surge protectors for over 25 years. Overvoltage protectors are required by the National Electric Code to be installed on the subscriber's home or office telephone lines to prevent injury to telecommunication users and damage to telecommunication equipment due to overvoltage surges caused by lightning and other hazardous electrical occurrences. Building on its sales and marketing base, the Company has added a line of network interface devices (NIDs) to establish a separation point between Telco property and subscriber property in response to Federal Communication Commission and state public service commission requirements. In addition, through a subsidiary acquired in September of 1993, the Company has begun producing, selling and marketing a line of fiber optic enclosure products. The Company markets its products to the Regional Bell Operating Companies ("RBOCs"), independent phone companies and original equipment suppliers who sell to the global telecommunication marketplace. The Company's strategy is to develop new products which are complementary to its current products, expand into new markets and capitalize on its reputation as a quality manufacturer. The Company is a Delaware corporation organized in 1971. Unless the context otherwise requires, the term "Company" or TII as used herein refers to TII Industries, Inc. and its subsidiaries. The Company's principal executive office is located at 1385 Akron Street, Copiague, New York 11726 (telephone number (516) 789-5000) and its principal operations office is located at Rd. 165, Kilometer 1.6, Toa Alta, Puerto Rico 00953 (telephone number (787) 870-2700). FORWARD-LOOKING STATEMENTS In order to keep the Company's stockholders and investors informed of the Company's future plans, this Report contains (and, from time to time, other reports and oral or written statements issued by the Company or on its behalf by its officers contain) forward-looking statements concerning, among other things, the Company's future plans and objectives that are or may be deemed to be "forward-looking statements". The Company's ability to do this has been fostered by the Private Securities Litigation Reform Act of 1995 which provides a "safe harbor" for forward-looking statements to encourage companies to provide prospective information so long as those statements are accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those discussed in the statement. The Company believes that it is in the best interests of its stockholders to take advantage of the "safe harbor" provisions of that Act. Such forward-looking statements are subject to a number of known and unknown risks and uncertainties that could cause the Company's actual results, performance or achievements to differ materially from those described or implied in the forward-looking statements. These factors include, but are not limited to, general economic and business conditions, including the regulatory environment applicable to the telecommunications industry; competition (see "Competition"); potential technological changes (see "Research and Development"), including the Company's ability to timely develop new products and adapt its existing products to technological changes (see "Products" and "Research and Development"); potential changes in customer spending and purchasing policies and practices, as well as the Company's ability to market its existing, recently developed and new products (see "Marketing and Customers"); the risks inherent in new product introductions, such as start-up delays, uncertainty of customer acceptance; dependence on third parties for its product components (see "Raw Materials"); the Company's ability to attract and retain technologically qualified personnel (see "Employees"); the renewal of the Company's lease for its manufacturing facilities in Puerto Rico on satisfactory terms or ability to find replacement facilities in Puerto Rico (see "Properties"); the retention of the tax benefits provided by its Puerto Rico and Dominican Republic operations (see "Certain Tax Attributes" and "Management's Discussion and Analysis of Financial Condition and Results of Operations-Income Taxes"); the Company's ability to fulfill its growth strategies (see "Research and Development"); the availability of financing on satisfactory terms to support the Company's growth (see "Management's Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources"); and other factors discussed elsewhere in this report and in other Company reports hereafter filed with the Securities and Exchange Commission. 2 PRODUCTS TII is the premier manufacturer of overvoltage protection devices based on gas tube technology. This core gas tube technology represents the foundation upon which certain new products and technological enhancements of the Company's traditional products are based. The Company's research and development efforts are focused on the development of additional products for its overvoltage surge protection, NIDs and fiber optic product lines. OVERVOLTAGE SURGE PROTECTORS. The Company designs, manufactures and markets overvoltage protectors primarily for use by the Telcos on the subscriber's home or office telephone lines. These overvoltage protectors differ in power capacity, application, configuration and price to meet the Telco's varying needs. The heart of the TII overvoltage protector is a proprietary two or three electrode gas tube. Overvoltage protection is provided when the voltage on a telephone line elevates to a level preset in the gas tube, at which time the gases in the tube instantly ionize, momentarily disconnecting the phone or other equipment from the circuit while safely conducting the hazardous surge into the ground. When the voltage on the Telco's line drops to a safe level, the gases in the tube return to their normal state, returning the phone and other connected equipment to service. The Company's gas tubes have been designed to withstand multiple high energy overvoltage surges while continuing to operate over a long service life with minimal failure rates. One of the Company's most advanced overvoltage protectors, embodied in its Totel Failsafe(R) series, combines the Company's three electrode gas tube with a thermally operated, failsafe mechanism, encapsulated in an environmentally sealed module. The three electrode gas tube is designed to protect the equipment from hazardous overvoltage surges and the failsafe mechanism is designed to insure that, under sustained overvoltage conditions, the protector will become permanently grounded. The sealed module is designed to prevent damage to the protector from moisture and industrial pollution. Another advanced overvoltage protector, jointly manufactured with Raychem Corporation (Raychem), is the sealed modular station protector (MSP). This product is designed to withstand multiple high energy surges and be virtually impervious to moisture and pollution by combining TII's Totel Failsafe protection element with Raychem's proprietary gel technology which seals all wire termination points. In October 1996, TII was granted a US patent for its new coaxial transmission line surge arrestor. The patent provides broad coverage for overvoltage protection on coaxial cable, which is becoming an alternate method of providing high-bandwidth signals to residential and business users. TII's gas tube coaxial surge protector is an in-line protector which is virtually transparent to the network in which it is installed. TII also designs, manufactures and markets special purpose models of powerline protectors, utilizing the Company's gas tubes and solid state protection technology, principally for use by the Company's Telco customers. TII's powerline protectors protect the connected Telco equipment against damage or destruction caused when overvoltage surges enter equipment through the powerline. 3 Overvoltage protectors sold separately 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 which typically contain wire terminals to connect a subscriber's telephone, one or more overvoltage protectors and a demarcation point to clearly separate the Telco's wires from the subscriber's wires. NIDs were developed to establish a separation point between Telco property and subscriber property in response to Federal Communication Commission and state public service commission requirements. Certain Telcos have also begun installing various station electronic products in NIDs, through which the Telcos are able to remotely test the integrity of their lines. To meet increasing customer demand for advanced voice, video and data services, Telcos are expanding and upgrading their network infrastructure. In response, TII has recently developed a line of patented broadband network interface devices ("BNIDs). TII's BNIDs are designed to be installed by Telcos at homes and businesses to provide multiple access lines, advanced overvoltage protection and remote electronics. Designed with future technologies in mind, the Company's BNIDs can also accommodate TII's patented Coaxial overvoltage protector, as well as high performance fiber optic connectors, produced by the Company's subsidiary TII-Ditel. This will allow for future upgrades by Telcos to broadband services over twisted pair, coaxial or fiber optic lines. 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 special purpose station electronic products that are included in NIDs or sold separately. Most subscriber electronic devices are designed to be installed with an overvoltage protector, typically in a NID. The Company's station electronics products include maintenance termination units designed to interface with the Telco's central office test equipment, offering the Telco remote testing capabilities. With this product installed at the subscriber's home or business, a Telco can determine whether a defect or fault is in Telco or subscriber-owned equipment before dispatching a maintenance vehicle. Another product automatically identifies the calling party on a party line (located primarily in rural areas of the United States and Canada) without operator assistance. The Company also designs, manufactures and markets other products, including plastic housings, wire terminals, enclosures, cabinets and various hardware products principally for use by the Telco industry. Station electronics and other products sold separately, accounted for approximately 6%, 11% and 9% of the Company's net sales in fiscal 1997, 1996 and 1995, respectively. 4 FIBER OPTIC PRODUCTS. The Company's fiber optic product lines, sold and marketed under the name TII-Ditel, include closures, splice trays, high performance cable assemblies, and the LIGHTRAX cable management system. Using its own manufactured products, as well as purchased components, the Company's fiber subsidiary provides a totally protected environment for Telcos inside cable systems from points along the long distance network to both the central office and customer premise locations. The fiber subsidiary develops niche markets by concentrating on a technical method of generating sales. Technical personnel work closely with the engineering staffs of its customers to provide applications help and formulate unique solutions to fiber issues. Primary customers for the fiber division include the RBOCs, original equipment suppliers and interexchange carriers. Sales of fiber optic products represented approximately 6%, 3% and 3% of the Company's net sales during fiscal 1997, 1996 and 1995, respectively. MARKETING AND CUSTOMERS The Company sells to Telcos both directly and through distributors. TII also sells to long distance carriers, cable television providers and telecommunication equipment manufacturers, including other NID suppliers, which incorporate the Company's protectors into their products for resale to Telcos. 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. EXPORT SALES The Company's export 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). Export sales have been made primarily to countries in the Caribbean, South and Central America, Canada and Western Europe. The Company requires foreign sales to be paid for in U.S. currency. Foreign sales are affected by such factors as exchange rates, changes in protective tariffs and foreign government import controls. MANUFACTURING The Company produces its overvoltage protectors, NIDs and station electronics at its facilities in Puerto Rico and the Dominican Republic. The Company manufactures its fiber optic products at its facility in North Carolina. The manufacture of the Company's gas tubes requires vacuum ovens, specialized test equipment and various processes developed by the Company. TII produces a substantial portion of its NIDs and other plastic enclosures in its thermoplastic molding facility. All of the Company's products contain numerous metal components produced with the Company's metal stamping and forming equipment. The Company believes that this vertical integration of its manufacturing processes gives the Company both cost and delivery advantages. The Company's fiber optic products are assembled principally from outside purchased components and, to a lesser extent, 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 lot control and perform final testing of finished goods. RAW MATERIALS The Company uses stamped, drawn and formed parts made out of a variety of commonly available metals, ceramics and plastics as the primary components of its gas tubes, overvoltage protectors, NIDs, other molded plastic housings and fiber optic products. In manufacturing certain protectors and station electronic products, the Company purchases commonly available solid state components, printed circuit boards and standard electrical components such as resistors, diodes and capacitors. In manufacturing its modular station protector, the Company utilizes Gelguard(R) (a registered trademark of Raychem Corporation) which is supplied exclusively by Raychem. The Company has no contracts with suppliers of the components utilized in the manufacture of its products which extend for more than one year. The Company believes that all raw materials it uses will continue to be available in sufficient supply from a number of sources at competitive prices. 5 PATENTS AND TRADEMARKS The Company owns or has applied for a number of patents relating to its products, and owns a number of registered trademarks which are considered to be of value principally in identifying the Company and its products. While the Company considers these important, it believes that, because of technological advances in its industry, its success depends primarily upon its sales, engineering and manufacturing skills. RESEARCH AND DEVELOPMENT As the Telcos upgrade and expand their networks to provide 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: * Developing broadband network interface devices (BNID) to address anticipated future requirements of the Telcos. * Developing coaxial overvoltage protectors for the cable TV and broadband communication markets. * Expanding the Company's fiber optic product line of enclosures and fiber optic cable management systems to meet the growing needs of existing and potential customers. * Designing custom overvoltage protectors for original equipment manufacturers for installation throughout Telco and other communication networks. * Designing gas tube, solid state and hybrid overvoltage protectors for the worldwide telecommunication markets. The Company's research and development ("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 new products. The Company's R&D expense was $3,085,000, $2,820,000, and $2,619,000 during fiscal 1997, 1996 and 1995, respectively. COMPETITION The Company faces significant competition, including competition from NID manufacturers which have introduced their own line of overvoltage protectors. The Company expects competition to continue in overvoltage protectors and NIDs as well as the Company's other products. Principal competitive factors include price, technology, delivery, quality and reliability. Most of the Company's competitors have substantially greater assets and financial resources, as well as larger sales forces, manufacturing facilities and R&D staffs, than the Company. 6 The Company's gas tube overvoltage protectors not only compete with other companies' gas tube overvoltage protectors, but also with solid state overvoltage protection devices. While solid state protectors are faster reacting to surges, gas tube overvoltage protectors have generally remained the subscriber overvoltage protection technology of choice by virtually all Telcos because of the gas tube's ability to repeatedly withstand significantly higher energy surges while adding virtually no capacitance to the communication line. Solid state overvoltage protectors are used principally in Telco's central office switching centers where speed is perceived to be more critical than energy handling capabilities. While the Company believes that, for the foreseeable future, both gas tube and solid state devices will continue to be used as overvoltage protectors within the telecommunication market, solid state protectors may gain market share from gas tube protectors, especially where high speed response is critical. Solid state and gas tube devices are produced from different raw materials, manufacturing processes and equipment. The Company has begun developing and marketing overvoltage protectors incorporating purchased solid state devices on a limited basis. 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 Company believes that its present sales, marketing and R&D departments, its high quality low-cost production facilities, and its present protection technology, enable it to meet the competition. REGULATION The National Electrical Code requires that an overvoltage protector listed by Underwriters Laboratories or another qualified electrical testing laboratory be installed on virtually all subscriber telephone lines. Listing by Underwriters Laboratories has been obtained by the Company where required. Compliance with applicable federal, state and local environmental regulations has not had, and the Company does not believe that compliance in the future will have, a material effect on its earnings, capital expenditures or competitive position. CERTAIN TAX ATTRIBUTES The Company is incorporated in Delaware with its principal operations office located in the Commonwealth of Puerto Rico. Its income would normally be subject to income tax by both the United States and Puerto Rico. However, as explained more fully below, the Company does not pay United States federal or Puerto Rico income tax on most of its income. The Company 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 the U.S.), the Company would not be entitled to offset the related tax on such income with the Section 936 tax credit. 7 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. 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, the Company's 1997 fiscal year. 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). 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 does 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 also has been granted exemptions under Puerto Rico's Industrial Incentive Act of 1963 until June 2009 for income tax and property tax purposes. In each case, the level of exemption is 90%. The Company also has substantial net operating loss carryforwards available through fiscal 1998 to offset any remaining Puerto Rico taxable income. There are no limitations on the Company's ability to utilize such net operating loss carryforwards to reduce its Puerto Rico income tax. Furthermore, the Company's subsidiary operating in the Dominican Republic is exempt from taxation in that country. 8 EMPLOYEES On September 12, 1997, the Company had approximately 985 employees, of whom 881 were engaged in manufacturing and 44 in engineering and new product development, with the balance being employed in executive, sales and administrative activities. Of these employees, approximately 300 are employed at the Company's Puerto Rico facilities and approximately 615 are employed at its Dominican Republic facilities. The Company has not experienced any work stoppage as a result of labor difficulties and believes it has satisfactory employee relations. RECENT DEVELOPMENTS 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. ANT AGREEMENT. In August 1995, TII entered into a long-term strategic agreement with Access Network Technologies (ANT) to develop and manufacture advanced protectors for sale into the global telecommunication market. ANT was a joint venture between Lucent Technologies, Inc. and Raychem Corporation. The first products introduced by the joint venture, MSPS, combined TII's overvoltage protection with a proprietary gel sealing technology (from Raychem) that makes these products impenetrable by weather. During the third quarter of fiscal 1997 ANT dissolved. The Company and Raychem have agreed to continue to manufacture and market the products, without Lucent Technologies. ITEM 2. 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 a single story building which, together with several smaller buildings, contain an aggregate of approximately 43,000 square feet of space. 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 buildings are leased under an agreement with the Puerto Rico Industrial Development Company ("PRIDCO") which expired. The Company and PRIDCO have continued operating under the terms of the lease while they have been negotiating an extension of the lease. The Company believes it will be able to extend on terms substantially similar to those contained in the existing leases. The Company also leases a building consisting of approximately 73,000 square feet, in San Pedro De Macoris, Dominican Republic under a lease which expires on November 1, 1998. This facility houses certain of the Company's manufacturing activities. 9 The Company leases a single story, 10,000 square foot facility in Hickory, North Carolina under a lease expiring December 1998, which 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 another 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. ITEM 3. LEGAL PROCEEDINGS The Company is not a party to any material pending legal proceedings. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of fiscal 1997. Part II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Common Stock trades on the Nasdaq Stock Market - National Market System under the symbol "TIII". The following table sets forth, for each quarter during fiscal 1997 and fiscal 1996, the high and low sales prices of the Company's Common Stock. Fiscal 1997 High Low ---- --- First Quarter Ended September 27, 1996 7 1/8 4 1/2 Second Quarter Ended December 27, 1996 7 1/8 5 1/4 Third Quarter Ended March 28, 1997 7 4 1/8 Fourth Quarter Ended June 27, 1997 5 7/8 4 5/16 Fiscal 1996 High Low ---- --- First Quarter Ended September 29, 1995 10 1/8 6 5/8 Second Quarter Ended December 29, 1995 8 7/8 6 3/4 Third Quarter Ended March 29, 1996 9 1/8 6 3/8 Fourth Quarter Ended June 28, 1996 7 3/4 5 7/8 As of September 12, 1997, the Company had approximately 620 holders of record of its Common Stock, exclusive of stockholders whose shares were held by brokerage firms, depositories or other institutional firms in street name for their customers. 10 To date, the Company has paid no cash dividends. For the foreseeable future, the Company intends to retain all earnings generated from operations for use in the Company's business. Additionally, the Company's borrowing arrangements prohibit the payment of dividends until such indebtedness has been repaid in full. ITEM 6. SELECTED FINANCIAL DATA The following selected consolidated financial data has been derived from the Company's consolidated financial statements for the five years ended June 27, 1997. The following Selected Financial Data should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations, and the Consolidated Financial Statements and the related notes thereto. June 27, June 28, June 30, June 24, June 25, 1997(1) 1996 1995 1994 1993 -------- -------- -------- -------- -------- (amounts in thousands except per share data) STATEMENTS OF OPERATIONS DATA - ----------------------------- Net sales $ 50,675 $ 44,513 $ 43,830 $ 40,147 $ 33,474 ======== ======== ======== ======== ======== Operating (loss) income ($ 892) $ 3,856 $ 3,602 $ 3,066 $ 1,987 ======== ======== ======== ======== ======== Net (loss) income ($ 856) $ 3,737 $ 2,942 $ 2,389 $ 1,212 ======== ======== ======== ======== ======== Net (loss) income per share-Primary ($ 0.12) $ 0.48 $ 0.52 $ 0.45 $ 0.28 ======== ======== ======== ======== ======== Net (loss) income per share-Fully Diluted ($ 0.12) $ 0.47 $ 0.51 $ 0.41 $ 0.28 ======== ======== ======== ======== ======== BALANCE SHEET DATA - ------------------ Working capital $ 19,654 $ 23,801 $ 15,947 $ 6,734 $ 10,212 ======== ======== ======== ======== ======== Total assets $ 42,823 $ 42,823 $ 34,414 $ 29,378 $ 28,066 ======== ======== ======== ======== ======== Long-term debt and capital leases, including current portion $ 2,841 $ 2,739 $ 2,767 $ 7,552 $10,263 ======== ======= ======= ======= ======= Stockholders' investment $33,011 $33,862 $25,183 $15,137 $12,439 ======== ======= ======= ======= ======= - -------------- (1) Includes 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. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." 11 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with Selected Financial Data and the Consolidated Financial Statements and notes thereto appearing elsewhere in this Report. Key financial information follows: June 27, 1997 June 28, 1996 June 30, 1995 (amounts in thousands) Net sales $ 50,675 $ 44,513 $43,830 Cost of sales (as a percentage of sales) 81.7% 71.8% 70.2% Selling, general and administrative expenses $ 7,061 $ 5,881 $ 6,827 Research and development $ 3,085 $ 2,820 $ 2,619 Interest expense $ 287 $ 416 $ 718 Net (loss) income ($ 856) $ 3,737 $ 2,942 FISCAL YEARS ENDED JUNE 27, 1997, JUNE 28, 1996 AND JUNE 30, 1995 Net sales for fiscal 1997 increased by $6.2 million or 14% to $50.7 million from $44.5 million in fiscal 1996. Sales of overvoltage surge protectors increased $4.3 million over last year's sales, principally as a result of increased sales of the Company's recently introduced Modular Station Protector. Network Interface Device sales increased $2.2 million due to increased purchases by Telco customers. Fiber related products increased from $1.5 million in 1996 to $3.1 million in fiscal 1997 due to wider acceptance of recently introduced products. These increases were partially offset by a decline of $1.9 million in sales of station electronics and other products. In fiscal 1996, AT&T Corporation (AT&T) paid the Company $0.9 million as a final payment under a contract that expired in fiscal year 1996, the absence of which contributed to the decline in other sales in fiscal 1997. Net sales for fiscal 1996 increased by $0.7 million from $43.8 million in fiscal 1995 as the Company shipped principally the same mix of product to its customers during these periods. During the third quarter of fiscal 1997, the Company initiated a program to improve its operational efficiency in order to reduce costs and enhance profitability. This plan included the reduction of personnel, moving certain production processes to lower cost areas, outsourcing certain manufacturing steps, re-aligning its sales and marketing forces and ceasing the sale of certain lower margin products. This program 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. Of the charges, $2.9 million was charged to cost of sales. Cost of sales as a percentage of sales increased in fiscal 1997 to 81.7% (76.0% before the non-recurring charges) from 71.8% in the year earlier period, as a result of the one time charges and higher raw material and manufacturing overhead costs. Additionally, the Company's gross 12 profit margin in fiscal 1996 was positively impacted by 1.4 percentage points by the inclusion in sales of the final AT&T payment without any related cost of sales. Furthermore, during the fourth quarter of fiscal 1997, cost of sales was adversely affected by manufacturing costs associated with the accelerated production startup of several new products, including the Company's new broadband network interface device (BNIDs), and continuing transition expenditures relating to the Company's cost reduction plan. The Company expects these additional costs to continue during the first half of fiscal 1998. Accordingly, cost of sales, as a percentage of sales, should continue to be impacted during the fiscal year. During fiscal 1996, cost of sales, as a percentage of sales, increased to 71.8% from 70.2% in fiscal 1995 due primarily to increases in raw material and other manufacturing costs. Selling, general and administrative expenses for fiscal 1997 increased $1.2 million or 20% to $7.0 million, or 13.9% of sales, from $5.9 million in fiscal 1996. The increase resulted primarily from legal costs in an action in which the Company was a plaintiff and from costs associated with the Company's heightened efforts to win supply contracts for its new BNID product line. During fiscal 1996, selling, general and administrative expenses decreased to $5.9 million, or 13.2% of sales, from $6.8 million, or 15.6% of sales, during fiscal year 1995 principally due to administrative staff and expenses reductions. Research and development expenses increased by 9% to $3.1 million in fiscal 1997 and by 8% to $2.8 million in fiscal 1996 due principally to increases in costs associated, in the case of fiscal 1997, with the development of the new BNID product line, and, to a lesser extent, increases in costs associated with the development of new overvoltage protection devices, and, in the case of fiscal 1996, several new products including the new overvoltage protection devices for the ANT joint venture. Interest expense in fiscal 1997 declined by $129,000 to $287,000 from $416,000 in fiscal 1996 due to reduced debt levels declined and the absence of amortization of debt origination costs that ceased in September 1996. Interest expense in fiscal 1996 declined by $302,000 to $416,000 from $718,000 in 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. The Company accrued a provision for fiscal 1997 for the settlement of an investigation performed by the Internal Revenue Service, resulting in a net provision of $63,000 for the year. The Company incurred a net loss of $856,000 during fiscal 1997, versus net income of $3.7 million during fiscal 1996 and $2.9 million during fiscal 1995. Fully diluted net loss per share equaled $.12 per share in fiscal 1997 versus fully diluted net income per share of $.47 and $.51 in fiscal years 1996 and 1995, respectively. During fiscal years 1996 and 1995 the Company received sales shortfall payments of $875,000 and $777,000 respectively, under an agreement with AT&T (See AT&T Agreement). Sales shortfall payments associated with the AT&T Agreement, which had a positive impact on the Company's net profit in fiscal years 1996 and 1995, concluded in fiscal 1996. INCOME TAXES Due to its election to operate under Section 936 of the Internal Revenue Code, the availability of certain net operating loss carryforwards and exemptions from income taxes in Puerto Rico and in the Dominican Republic, the Company has not been required to pay any United States federal, Puerto Rico or Dominican Republic taxes on most of its income. The Company calculates its 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 13 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 carryforwards of approximately $334,000. Legislation enacted in the Minimum Wage/Small Business Job Protection Act of 1996 repeals the Section 936 credit for taxable years beginning after December 31, 1995. 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 after October 13, 1995, it would cease to be eligible to claim the Section 936 credit beginning with the taxable year in which such new line of business is added. 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. See Note 7 of the Notes to Consolidated Financial Statements. The Company is subject to United States federal and applicable state income taxes with respect to its non-Puerto Rico operations. LIQUIDITY AND CAPITAL RESOURCES The following table sets forth the Company's working capital, current ratio and total debt to equity ratio as of the following dates: As of -------------------------------------- June 27, June 28, June 30, 1997 1996 1995 -------- -------- -------- (dollars in thousands) Working capital $ 19,654 $ 23,801 $ 15,947 Current ratio 3.62 4.61 3.44 Total liabilities to equity ratio .30 .27 .37 During fiscal 1997, $0.4 million 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 $0.9 million, 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 ($4.3 million) offset, in part, by $2.4 million in proceeds from sales and maturities of marketable securities in excess of amounts reinvested. Financing activities used $.4 million of cash for the payment of long term debt and obligations under capital leases. 14 As a result of the non-recurring charge of $3.0 million and the heightened 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 from compliance to retain the borrowing availability. The Company has no commitments for capital expenditures, but expects to purchase new equipment and incur leasehold improvements in the normal course of business, subject to the maximum amounts permitted under its Revolving Credit Agreement. Funds anticipated to be generated from operations, together with available cash, marketable securities and borrowings available under the Company's Revolving Credit Agreement, are considered to be adequate to finance the Company's operational and capital needs for the foreseeable future. However, the Company may seek additional financing for the acquisition of new product 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 assurances 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. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS. Not applicable. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA See Index to Consolidated Financial Statements on page F-1. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III The information called for by Part III (Items 10, 11, 12 and 13 of Form 10-K) is incorporated herein by reference to such information which will be contained in the Company's Proxy Statement to be filed pursuant to Regulation 14A of the Securities Exchange Act of 1934 with respect to the Company's 1997 Annual Meeting of Stockholders. 15 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORT ON FORM 8-K (a) Exhibits, Financial Statements and Schedule 1. Financial Statements See Index to Consolidated Financial Statements on page F-1. 2. Financial Statement Schedules The following consolidated financial statement schedule is filed herewith; Page ---- Report of Independent Public Accountants S-1 Schedule II - Valuation and Qualifying Accounts S-2 Information required by other schedules called for by Regulation S-X is either not applicable or the information required therein is included in the financial statements or notes thereto 3. Exhibits 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. 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). 16 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). 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. 10(b)(2)*+ Amended and Restated Employment Agreement dated as of May 1, 1997 between the Company and Carl H. Meyerhoefer. 10(b)(3)(A)*+ Employment Agreement dated September 23, 1993 between the Company and Dare P. Johnston. 10(b)(3)(B)*+ Extention dated as of June 2, 1997 to the Employment Agreement dated September 23, 1993 between the Company and Dare P. Johnston. 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). 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). 17 11* Calculation of earnings per share. 21* Subsidiaries of the Company. 23* Consent of independent public accountants. 27* Financial data schedule (filed electronically only). - -------------------------- * Filed herewith. + Management contract or compensatory plan or arrangement. (b) Report on Form 8-K No Reports on Form 8-K were filed during the last quarter of the year ended June 27, 1997. UNDERTAKING The undersigned hereby undertakes to furnish to the Securities and Exchange Commission, upon request, all constituent instruments defining the rights of holders of long-term debt of the Registrant and its consolidated subsidiaries not filed herewith. Such instruments have not been filed since none are, nor are being, registered under Section 12 of the Securities and Exchange Act of 1934 and the total amount of securities authorized under any of such instruments does not exceed 10% of the total assets of the Registrant and its subsidiaries on a consolidated basis. 18 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. TII INDUSTRIES, INC. -------------------------- (Registrant) September 24, 1997 By /s/ Paul G. Sebetic -------------------------- Paul G. Sebetic, Vice President-Finance and Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. September 24, 1997 /s/ Alfred J. Roach -------------------------- Alfred J. Roach, Chairman of the Board of Directors and Director September 24, 1997 /s/ Timothy J. Roach -------------------------- Timothy J. Roach, President, Chief Executive Officer and Director September 24, 1997 /s/ Paul G. Sebetic -------------------------- Paul G. Sebetic, Vice President-Finance and Chief Financial Officer September 24, 1997 /s/ C. Bruce Barksdale -------------------------- C. Bruce Barksdale, Director September 24, 1997 /s/ Dorothy Roach -------------------------- Dorothy Roach, Director September 24, 1997 /s/ Joseph C. Hogan -------------------------- Joseph C. Hogan, Director September 24, 1997 /s/ James R. Grover, Jr. -------------------------- James R. Grover, Jr., Director September 24, 1997 /s/ William G. Sharwell -------------------------- William G. Sharwell, Director 19 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 each of the Three Years in the Period Ended June 27, 1997 F-4 Consolidated Statements of Stockholders' Investment for each of the Three Years in the Period Ended June 27, 1997 F-5 Consolidated Statements of Cash Flows for each of the Three Years in the Period Ended June 27, 1997 F-6 Notes to Consolidated Financial Statements F-7 to F-16 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. 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 F-7 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. (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 ======= ======= F-8 (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 ====== ====== (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 F-9 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. 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 F-10 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 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-11 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. 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: F-12
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. 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. F-13 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. (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. F-14 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 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-15 (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-16 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To TII Industries, Inc.: We have audited, in accordance with generally accepted auditing standards, the consolidated balance sheets of TII Industries, Inc. and subsidiaries as of June 27, 1997 and June 28, 1996, and related consolidated statements of operations, stockholders' investment and cash flows for each of the three years in the period ended June 27, 1997, included in this Form 10-K and have issued our report thereon dated September 19, 1997. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule for the years ended June 27, 1997, June 28, 1996 and June 30, 1995, listed under Item 14(a) of this Form 10-K is the responsibility of the Company's management, is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. Arthur Andersen LLP San Juan, Puerto Rico September 19, 1997. Stamp No. 1454625 of the Puerto Rico Society of Certified Public Accountants has been affixed to the original copy of this report. S-1 SCHEDULE II TII INDUSTRIES, INC. AND SUBSIDIARIES - --------------------------------------- VALUATION AND QUALIFYING ACCOUNTS - ---------------------------------------- ADDITIONS BALANCE BALANCE AT CHARGED TO AT BEGINNING OF COST AND END OF YEAR EXPENSES DISPOSITIONS PERIOD ---------- ---------- ---------- ---------- CLASSIFICATION June 27, 1997 Inventory Reserve $2,034,000 $2,896,000 $2,500,000 $2,430,000 ========== ========== ========== ========== June 28, 1996 Inventory Reserve $1,466,000 $ 568,000 $ 0 $2,034,000 ========== ========== ========== ========== June 30, 1995 Inventory Reserve $1,166,000 $ 300,000 $ 0 $1,466,000 ========== ========== ========== ========== S-2 EXHIBIT INDEX ------------- 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. 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). 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. 10(b)(2)*+ Amended and Restated Employment Agreement dated as of May 1, 1997 between the Company and Carl H. Meyerhoefer. 10(b)(3)(A)*+ Employment Agreement dated September 23, 1993 between the Company and Dare P. Johnston. 10(b)(3)(B)*+ Extention dated as of June 2, 1997 to the Employment Agreement dated September 23, 1993 between the Company and Dare P. Johnston. 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). 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. 21* Subsidiaries of the Company. 23* Consent of independent public accountants. 27* Financial data schedule (filed electronically only). - -------------------------- * Filed herewith. + Management contract or compensatory plan or arrangement. EX-4 2 EX.4(A)(1)(B) - 5TH AMEND.& WAIVER TO CRE. AGR. FIFTH AMENDMENT AND WAIVER dated as of September 23, 1997 to the Revolving Credit Loan Agreement dated January 31, 1995, as amended by the FIRST AMENDMENT dated as of August 3, 1995, the SECOND AMENDMENT AND WAIVER dated as of November 10, 1995, and AMENDMENT OF REVOLVING CREDIT LOAN AGREEMENT dated December 27, 1995 and the FOURTH AMENDMENT AND WAIVER dated as of May 2, 1997 (the "Loan Agreement") among TII INTERNATIONAL, INC., a Delaware corporation with offices located 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 (formerly known as 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, 1996, as amended by a letter dated February 1, 1996 (collectively, the "Lease Agreement") by and between the Borrower and CHASE EQUIPMENT LEASING, INC. (formerly known as 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 FIFTH AMENDMENT AND WAIVER, to amend and waive compliance with certain provisions of the Loan Agreement and the Lease Agreement (by incorporation) to reflect the 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 Article VII. Negative Covenants. Section 7.09. Capital Expenditures. Compliance with Section 7.09 of the Loan Agreement is hereby waived for the fiscal year ended June 30, 1997 to permit the Borrower to incur consolidated capital expenditures in excess of $3,500,000, provided, however, that consolidated capital expenditures did not exceed $4,850,000 for the fiscal year ended June 27, 1997. 2. Waiver of Article VII. Negative Covenants. Section 7.13. Tangible Net Worth. Compliance with Section 7.13 of the Loan Agreement, as amended by the Amendment of Revolving Credit Loan Agreement dated December 27, 1995, is hereby waived for the fiscal year ended June 27, 1997 to permit the Consolidated Tangible Net Worth of Industries and its Subsidiaries to fall below $34,000,000, provided, however, that Consolidated Tangible Net Worth did not fall below $31,700,000 for such fiscal year end. 3. Amendment to Article VII. Negative Covenants. Section 7.13. Tangible Net Worth. Section 7.13 of the Loan Agreement, as amended by the Amendment of Revolving Credit Loan Agreement dated December 27, 1995, is hereby further amended by replacing the Periods and Amounts therein with the following: "Period Amount 6/27/97 - 6/25/98 $31,200,000 6/26/98 - 6/24/99 $33,700,000 and for each comparable fiscal period thereafter commencing with the fiscal year ending 6/25/99 through the day before the following fiscal year end date, the sum of the prior year's required Consolidated Tangible Net Worth plus $2,000,000." 4. Waiver of Article VII. Negative Covenants. Section 7.16. Consolidated Net Loss. Compliance with Section 7.16 of the Loan Agreement is hereby waived to permit the Borrower to incur a Consolidated Net Loss for the Fiscal Quarters ended March 28, 1997 and June 27, 1997, provided, however, that such losses did not exceed $2,326,000 and $200,000 for the respective fiscal periods. 5. Waiver of Article VII. Negative Covenants. Section 7.17. Debt Service Ratio. Compliance with Section 7.17 of the Loan Agreement is hereby waived for the Fiscal Quarter ended June 27, 1997 to permit the Debt Service Ratio to be less than 1.35 to 1.0, provided, however, that such ratio did not fall below 0.05 to 1.0 for such period. 6. Waiver of Article VI. Affirmative Covenants. Section 6.01. Corporate Existence, Solvency, Properties, Etc. Compliance with Section 6.01 of the Loan Agreement is hereby waived to permit TII-Ditel, Inc. (formerly known as Ditel, Inc.) to be insolvent as of the Fiscal Year ended June 30, 1997. Compliance with Section 6.01 of the Loan Agreement is hereby further waived to permit the dissolution of TII Industries NC, Inc. and TII Electronics, Inc. 7. Amendment to Article VI. Affirmative Covenants. Section 6.01. Corporate Existence, Solvency, Properties, Etc. Section 6.01 of the Loan Agreement is hereby amended by deleting the phrase "and further provided that Ditel, Inc. may be insolvent from the Closing Date through January 31, 1996, at which time it must be solvent and continue to be solvent" and substituting therefor the following: "and further provided that TII-Ditel, Inc. may be insolvent from the Closing Date through July 1, 1998, at which time it must be solvent and continue to be solvent." 8. Amendment to Article VI. Affirmative Covenants. Article VI of the Loan Agreement is hereby amended by the addition of the following Section: "Section 6.15. TII-Ditel, Inc. Not later than 60 days from the date hereof, Industries shall provide the Bank with all of the capital stock of TII-Ditel, Inc. owned by Industries, (which shall constitute not less than 99.6% of the outstanding capital stock of TII-Ditel, Inc.), together with executed but undated stock powers, stock pledge agreement, legal opinion, and such other corporate documentation as shall be required by the Bank." 9. Waiver of Article VII. Negative Covenants. Section 7.01. Indebtedness. Compliance with Section 7.01 of the Loan Agreement is hereby waived to permit the Borrower to enter into a certain Master Lease Purchase Agreement dated January 12, 1996 by and between the Borrower and ChemLease Worldwide, Inc. (now known as Chase Equipment Leasing, Inc.). 10. Other Waivers - Loan Agreement. (a) Compliance with the Loan Agreement is hereby waived to permit the restatement of Industries' charter documents prior to the date hereof; and (b) Compliance with the Loan Agreement is hereby waived to permit the change of name of the corporation formerly known as Ditel, Inc. to TII-Ditel, Inc. 11. Waiver of Article VI. Affirmative Covenants. Section 6.11. Notices. Compliance with Section 6.11 of the Loan Agreement is hereby waived to permit the Borrower's failure to promptly notify the Bank of the occurrence of the breaches, defaults or Events of Default described in paragraphs 1 through 6 above. 12. Waivers - Lease Agreement. The Bank's waivers of compliance with the financial covenants described above granted in this FIFTH AMENDMENT AND WAIVER are hereby granted by Leasing with respect to the Borrower's compliance with the terms and provisions of the Lease Agreement. This FIFTH 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 effect in accordance with the original terms thereof. This FIFTH AMENDMENT AND WAIVER herein contained 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 Company and Industries hereby represent and warrant that, after giving effect to this FIFTH AMENDMENT AND WAIVER, no Event of Default or default exists under the Loan Agreement, the Lease Agreement or any other related documents. This FIFTH 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 FIFTH AMENDMENT AND WAIVER. This FIFTH 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 this FIFTH AMENDMENT AND WAIVER to be duly executed by their duly authorized officers all as of the day and year first above written. TII INTERNATIONAL, INC. TII INDUSTRIES, INC. By: /s/ Paul Sebetic By: /s/ Paul Sebetic -------------------------- -------------------------- Name: Paul Sebetic Name: Paul Sebetic Title: Vice President Title: Vice President THE CHASE MANHATTAN BANK CHASE EQUIPMENT LEASING, INC. By: /s/ Christopher Zimmerman By: -------------------------- -------------------------- Name: Christopher Zimmerman Name: Title: Vice President Title: 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 FIFTH 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 INDUSTRIES, INC. TII CORPORATION By: /s/ Paul Sebetic By: /s/ Paul Sebetic -------------------------- -------------------------- Name: Paul Sebetic Name: Paul Sebetic Title: Vice President Title: Vice President TII-DITEL, INC. TELECOMMUNICATIONS INDUSTRIES, INC. By: /s/ Paul Sebetic By: /s/ Paul Sebetic -------------------------- -------------------------- Name: Paul Sebetic Name: Paul Sebetic Title: Vice President Title: Vice President TII DOMINICANA, INC. By: /s/ Paul Sebetic -------------------------- Name: Paul Sebetic Title: Vice President EX-10 3 EX.10(B)(1) - AMENDED EMP. AGR. (T. ROACH) AMENDED AND RESTATED -------------------- EMPLOYMENT AGREEMENT -------------------- TIMOTHY J. ROACH AND TII INDUSTRIES, INC. ----------------------------------------- AGREEMENT, dated as of the 1st day of August, 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 Timothy J. Roach of P.O. Box 764, Stony Brook, New York 11790 (hereinafter designated and referred to as the "Employee"). WHEREAS, the Company and the Employee entered into an Employment Agreement, dated as the 7th day of August, 1992, pursuant to which Employee agreed to serve as the President, Chief Operating Officer, Chief Executive Officer of the Company and Co-Chairman of its Board of Directors; and WHEREAS, the Employee has subsequently been elected Chief Executive Officer in lieu of Assistant Chief Executive Officer and Vice Chairman in lieu of Co-Chairman of the Board; and WHEREAS, the Company desires to continue the employ of the Employee as President, Chief Operating Officer and Chief Executive Officer of the Company and as Vice Chairman of its Board of Directors in accordance with the provisions hereinafter set forth; and WHEREAS, the Employee is willing to continue such employment by the Company, in accordance with the 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 commencing on August 1, 1997 and ending on July 31, 2002; provided, however, on July 31, 1998, and each subsequent July 31, the term shall automatically be extended for an additional period of one year (such that the length of the term will be five years) unless either the Company or the Employee shall give the other party at least 90 days' written notice prior to such July 31 that such party shall not desire that the then term hereof be so extended, in which event the term hereof shall not thereafter be extended beyond the then current expiration date thereof. Notwithstanding the foregoing, this Agreement shall be subject to earlier termination in accordance with paragraph 9. 2. Employment: Subject to the terms and conditions and for the compensation hereinafter set forth, the Company hereby agrees to employ the Employee for and during the term of this Agreement as its President, Chief Operating Officer and Chief Executive Officer. The Employee further agrees to serve, if so elected, as a director and as Chairman or as Vice Chairman of the Company's Board of Directors. The Employee's powers and duties shall be determined by the Board of Directors of the Company (the "Board of Directors") from time to time in accordance with the Company's By-Laws but, in any event, shall be those of an executive nature which are appropriate for a President, Chief Operating Officer and Chief Executive Officer and, if the Employee is elected to such positions, Chairman or Vice Chairman of the Board, and the Employee does hereby accept such employment and agrees to use his best efforts and, subject to paragraph 6, to devote substantially all of his full business time during the term of this Agreement to the performance of his duties upon the conditions hereinafter set forth. The Employee shall report to the Board of Directors. 2 3. Compensation: (A) Salary: During the term of this Agreement, the Company agrees to pay the Employee, and the Employee agrees to accept, a salary of not less than Two Hundred Fifty Thousand Dollars ($250,000) per year (as same may be increased from time to time as hereinafter provided), payable in accordance with the Company's payment policies for executive officers, for all services rendered by the Employee hereunder. (B) Bonus: As additional compensation, the Company may pay the Employee periodic bonuses as determined by the Board of Directors. (C) Increases: The Employee's annual salary and other benefits provided for hereunder are subject to periodic increases (but not decreases) at the discretion of the Board of Directors (or the Compensation Committee of the Board of Directors or other committee of the Board of Directors so authorized). 4. Expenses: (A) The Company shall reimburse the Employee for all reasonable and actual business expenses incurred by him in connection with his service to the Company upon submission by him of appropriate vouchers and expense account reports in accordance with the Company's expense reimbursement policies. (B) The Company and the Employee both acknowledge that the discharge of the Employee's duties has required, and will similarly require in the future (without increasing the time required to be spent), his presence in the Commonwealth of Puerto Rico from time to time. Accordingly, 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, which shall in no event 3 exceed 20 percent of the Employee's then salary computed in accordance with 3(A) above. The Company acknowledges that the Employee is a resident of Suffolk County in the State of New York and that the Employee shall not be required to change his residence. 5. Benefits: (A) Insurance: In addition to the salary and bonus to be paid to the Employee hereunder, the Company shall continue to maintain family medical and dental insurance, split dollar life insurance on the Employee's life (but in the aggregate amount of not less than $500,000), and long term disability insurance, in each case, at levels and on terms no less favorable to the Employee than are currently in effect for the Employee. The Employee and his dependents shall also be entitled to participate in such other benefit plans and arrangements as are hereafter extended to executive employees of the Company and their dependents in accordance with the terms of such plans or arrangements. (B) Vacation: The Employee shall be entitled to take up to four weeks of paid vacation annually at a time or times mutually convenient to the Company and the Employee. 6. Business Time: During the term of this Agreement, the Employee shall devote substantially all of his full business time, attention and energy and render his best efforts and skill to the business of the Company; provided, however, that the Company recognizes that the Employee may pursue other business activities not in competition with the business of the Company, including serving as an officer and director of American Biogenetic Sciences, Inc. ("ABS"), a publicly-held corporation, so long as the Employee's discharge of his duties to ABS and other non-competitive business activities does not have a material adverse impact on the discharge of his duties to the Company. 4 7. Discoveries, etc.: (A) The Company shall be the owner, without further consideration, 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, discovered or conceived by the Employee in connection with the Employee's performance of his duties pursuant to this Agreement or relating to the business of the Company (hereinafter designated and referred to as "Property Rights"), and the Company shall be entitled to utilize and dispose of the Property Rights in such manner as it may determine. (B) The Employee agrees to and shall promptly disclose to the Company all Property Rights (whether or not patentable) made, discovered or conceived of by him, alone or with others, at any time during his employment with the Company. Any such Property Rights will be the sole and exclusive property of the Company, and the Employee will execute any assignment reasonably requested by the Company of his right, title or interest in any such Property Rights. In addition, the Employee will also provide the Company with any other instrument or document reasonably requested by the Company, at the Company's expense, as may be necessary or desirable in applying for and obtaining patents with respect to such Property Rights in the United States or any foreign country. The Employee also agrees to cooperate reasonably 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, whether or not he is employed by the Company at the time; provided, however, if the Employee is not employed by the Company at such time, he will be entitled to receive reasonable compensation for his time in this regard on a per diem basis (computed by dividing his annual salary rate in effect immediately prior 5 to his cessation of employment with the Company (or, if greater, at the highest annual salary rate in effect at any time during the one-year period preceding the date of such termination) by 242 days), as well as reimbursement of all reasonable out-of-pocket expenses actually and reasonably incurred by him in connection with the performance of such services. The Employee's obligation under this subparagraph 7(B) shall continue for a period of one year following the termination of his employment. (C) This paragraph 7 shall not be applicable to any inventions or discoveries made by the Employee outside of the scope of his employment and which are unrelated to the business of the Company. 8. Confidential Information; Non-competition: (A) The Employee acknowledges the time and expense incurred by the Company and its subsidiaries in connection with developing proprietary and confidential information in connection with their businesses and operations. The Employee agrees that he will not, without the consent of the Board of Directors, at any time divulge, communicate or use to the detriment of the Company or any of its present or future subsidiaries (collectively, the "Group"), or misappropriate in any way, any confidential information or trade secrets relating to the Group, including, without limitation, business strategies, operating plans, acquisition strategies and terms and conditions (including the identities of, and any other information concerning, possible acquisition candidates), projected financial information, market analyses, personnel information, trade processes, manufacturing methods, know-how, customer lists and relationships, supplier lists and relationships, or other non-public proprietary and confidential information relating to the Group. The foregoing shall not apply to information which, (i) after it is disclosed to the Employee by the Company, is 6 published or becomes part of the public domain through no fault of the Employee (disclosure in his capacity as President, Chief Operating Officer or Chief Executive Officer of the Company believed in good faith to be for the benefit of the Company shall not be deemed fault), or (ii) which is disclosed to the Employee after the Employee is no longer employed by the Company by a third party who was not known to the Employee to be under any obligation of confidence or secrecy to the Company with respect to such information at the time of disclosure to the Employee. (B) During the term of this Agreement and for the two-year period thereafter, the Employee shall not, directly or indirectly, for himself or on behalf of any other person, firm or entity, employ, engage or retain any person who at any time during the preceding 12-month period was an employee of or consultant to any member of the Group or contact any supplier, customer or employee or consultant from the Group for the purpose of diverting any such supplier, customer, employee or consultant from any member of the Group or otherwise interfering with the business relationship of any member of the Group with any of the foregoing. (C) During the term and for the two-year period thereafter, the Employee shall not, directly or indirectly, engage in, or serve as, a principal, partner, joint venturer, member, manager, trustee, agent, stockholder, director, officer or employee of, or consultant or advisor to, or in any other capacity, or in any manner, own, control, manage, operate, or otherwise participate, invest, or have any interest in, or be connected with, any person, firm or entity (a "Competitor") that engages in, directly or indirectly, the manufacture and sale of surge protector devices or fiber optics products, in either case, for the telephone industry, or any other activity which is the same as or similar to, or competitive with, the business of any member of the Group conducted within the preceding 12 months; provided, however, that in the case of said two-year period following the term 7 hereof, such restriction shall not apply to activities in which no member of the Group was involved at the end of the term hereof. (D) If the Employee's employment is terminated (i) by reason of the Employee's Disability pursuant to subparagraph 9(B), (ii) by the Company for Cause pursuant to subparagraph 9(C) but only for the portion of the two-year period referred to below that Employee is capable, but for the provisions of this paragraph 8, of providing day to day services to a Competitor, or (iii) by the Employee for Reason pursuant to subparagraph 9(D), in consideration for his covenants contained in this paragraph 8 and not as severance pay, the Employee shall be entitled to receive, for each year of the two-year period following the date his employment so terminates, an amount equal to the Employee's annual salary at the rate in effect immediately prior to his cessation of employment with the Company (or, if greater, at the highest annual salary rate in effect at any time during the one-year period preceding the date of such termination). Such amounts shall be in addition to any amount otherwise payable under this Agreement and shall be paid in equal monthly installments, with the first such installment commencing on the last day of the month in which the Employee's employment so terminates. (E) The Employee acknowledges that his employment by the Company and agreements herein (including the agreements of paragraphs 7 and 8) are, in light of the circumstances under which they are effective, including any payments to be made to him under subparagraph 8(D), reasonable, and the Company acknowledges that such payments are an essential inducement to the Employee's agreeing to the provisions of this paragraph 7 and 8. Accordingly, the Executive shall be bound by paragraphs 7 and 8 to the maximum extent permitted by law, it being the intent and spirit of the parties that the foregoing shall be fully enforceable (assuming full payment provided for in 8 subparagraph 8(D) is made). However, the parties further agree that, if any of the provisions hereof shall for any reason be held to be excessively broad as to duration, geographical scope, property or subject matter, such provision shall be construed by limiting and reducing it so as to be enforceable to the maximum extent compatible with the applicable law. (F) The Employee acknowledges that the remedy at law for any breach of the provisions of paragraphs 7 and 8 would be inadequate. Therefore, the Employee agrees and consents that if he violates the provisions of paragraph 7 or 8, the Company, in addition to any other rights and remedies available under this Agreement or otherwise, shall be entitled to an injunction to be issued or specific performance to be required restricting the Employee from committing or continuing any such violation. 9. Termination: (A) Death: In the event of the Employee's death during the term of his employment, the Employee's designated beneficiary or, in the absence of such beneficiary designation, his estate, shall be entitled to payment of all compensation accrued through the date of death and a continuation of the Employee's annual salary at the rate in effect immediately prior to his death (or, if greater, at the highest annual salary rate in effect at any time during the one-year period preceding the Employee's date of death) for a period of one year from the date of death. In addition, the Employee's beneficiary and/or dependents shall be entitled, for the same one-year period, to continuation, at the Company's expense, of such benefits as are at the time of the Employee's death being provided to them under subparagraph 5(A) hereof and any additional benefits as may be provided during such one-year period to dependents of the Company's executive officers in accordance with the terms of the Company's policies and practices. In addition, any stock option 9 granted to the Employee which has not, by its express terms, vested shall be deemed to have vested as of the date of his death and shall thereafter be exercisable by the Employee's beneficiary or estate for the maximum period of time allowed for exercise thereof under the terms of such option. (B) Disability: (a) In the event the Employee shall suffer a Disability (as defined below) for a period of at least six consecutive months or nine months in the aggregate in any 12-month period, the Company shall have the option at any time thereafter to notify the Employee of the Company's election to terminate the Employee's employment hereunder for Disability. Such termination will become effective on the date fixed by the Board of Directors in a written notice of termination to the Employee (but not less than 30 days after such notice is given), unless the Employee shall have returned to perform his duties prior to the effective date of such termination. The Employee's compensation, as provided for hereunder, shall continue to be paid during any period of Disability prior to and including the date on which the Employee's employment is terminated for Disability. All obligations of the Company hereunder (except as otherwise provided in this Agreement) shall cease upon the effectiveness of such termination, provided that (and regardless of whether the Employee shall die prior to the expiration of the two-year period provided for in this subparagraph 9(B)) (i) the Employee (or the Employee's designated beneficiary or, in the absence of such beneficiary, his spouse or, upon his death, his estate) shall be entitled (x) to all compensation accrued through the date of termination of employment and (y) a continuation of the Employee's annual salary (at the rate in effect immediately prior to his termination by reason of Disability or, if greater, at the highest annual salary rate in effect at any time during the one-year period preceding the date of termination by reason of Disability) from the date of termination of employment to the 10 expiration of two years from the date of such termination for Disability and (ii) such termination shall not affect or impair any right the Employee may have under any policy of long term disability insurance or benefits then maintained on his behalf by the Company. In addition, for a period of two years following termination of the Employee's employment for Disability, the Employee and his dependents, as the case may be, shall continue to receive the benefits set forth under subparagraph 5(A) hereof, as well as any additional benefits as may be provided during such two-year period to executive employees or their dependents during such period in accordance with the terms of the Company's policies and practices. Any stock option granted to the Employee which has not, by its express terms, vested shall be deemed to have vested on the date of such termination of employment and shall thereafter be exercisable by the Employee, his beneficiary, conservator or estate, as applicable, for the maximum period of time allowed for exercise thereof under the terms of such option. (b) "Disability" as used herein shall mean the inability of the Employee, due to physical or mental illness, injury or disease to substantially perform his normal duties as President, Chief Operating Officer and Chief Executive Officer. (C) By the Company For Cause: (a) The Company shall have the right, before the expiration of the term of this Agreement, to terminate this Agreement and to discharge the 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 and be limited to (i) the Employee's conviction of a felony involving moral turpitude; and (ii) the continued and willful failure by the Employee to substantially and materially perform his duties hereunder (which shall not include 11 any business judgment made in good faith by the Employee) which failure is not cured in accordance with the third sentence of clause (b) below. (b) If the Company elects to terminate the Employee's employment for Cause under clause (a) (i) above, such termination shall become effective five days after the Company gives written notice of such termination to the Employee. In the event the Company intends to discharge Employee under clause (a)(ii) above, the Board of Directors shall provide the Employee with reasonable notice (but not less than 30 days) of its intention to effect a termination for Cause. Any such notice shall be in writing and shall specify the grounds for the existence of Cause, and provide the Employee with an opportunity of not less than 30 days following his receipt of such notice to cure same. In the event of a termination of the Employee's employment for Cause in accordance with the provisions of subparagraph 9(C), the Company shall, except to the extent provided in subparagraph 8(D), have no further obligation to the Employee, except for the payment of all compensation accrued through the date of such termination and any other benefits to which he or his dependents may be entitled by law. (D) By the Employee for Reason: The Employee shall have the right to terminate his employment at any time for "good reason" (hereinafter "Reason"). The term "Reason" shall mean (i) the failure to elect or appoint, or re-elect or re-appoint, the Employee to, or removal or attempted removal of the Employee from, his position as President, Chief Operating Officer and Chief Executive Officer with the Company, except in connection with the proper termination of the Employee's employment by the Company by reason of Cause or Disability; (ii) a reduction in the Employee's salary or benefits (other than his discretionary bonus under subparagraph 3(B) above); (iii) an adverse change in the nature or scope 12 of the authorities, powers, functions or duties normally attached to the Employee's position with the Company; (iv) the Company's failure or refusal to perform any obligations required to be performed by it in accordance with this Agreement after a reasonable (not less than 10 days) notice and an opportunity to cure same; or (v) a change in the location at which substantially all of the Employee's duties with the Company are to be performed to a location that is not within a 20-mile radius of Copiague, New York, where the Employee is currently performing substantially all of his duties. An election by the Employee to terminate his employment under the provisions of this subparagraph 9(D) shall not be deemed a voluntary termination of employment of the Employee for the purpose of interpreting the provisions of any of the Company's employee benefit plans, programs, or policies. (E) Severance: (a) If the Employee's employment hereunder shall be terminated by the Company for any reason other than for Cause or Disability (it being expressly agreed that termination at the end of the term of this Agreement, even if based on a notice not to extend the term of this Agreement pursuant to paragraph 1, or termination as a result of the Employee's death shall not be deemed termination by the Company) or by the Employee for Reason, the Employee shall thereupon be entitled to receive as severance pay, in a lump sum, an amount equal to the product of: (A) three (or such lesser number as equals the remaining period of the term of this Agreement, rounded to the nearest tenth) and (B) the sum of the Employee's annual salary rate in effect immediately prior to his cessation of employment with the Company (or, if greater, the highest annual salary rate in effect at any time during the one-year period preceding the date of such termination) and the most recent bonuses paid or payable in respect of the Company's most recent fiscal year ended prior to the date of such termination (or, if greater, the bonuses paid in respect of the Company's current fiscal year 13 or next most recent fiscal year ended prior to the date of such termination). In addition, the Employee and his dependents shall continue to receive the benefits set forth in subparagraph 5(A) hereof, as well as any additional benefits as may be provided during the two-year period following the date of such termination to executive officers or their dependents during such period in accordance with the Company's policies and practices. Furthermore, any stock option granted to the Employee which has not, by its express terms, vested shall be deemed to have vested on the date of such termination of employment, and shall thereafter be exercisable for the maximum period of time allowed for exercise thereof under the terms of such option, assuming, in the case of the Employee's termination of employment for Reason that the Employee's employment with the Company had been terminated by the Company other than for Cause. (b) Notwithstanding any other provision of this paragraph 9, if it is determined that part or all of the compensation or benefits to be paid to the Employee under this Agreement in connection with the Employee's termination of employment, or under any other plan, arrangement or agreement, constitutes a "parachute payment" under section 280G(b)(2) of the Internal Revenue Code of 1986, as amended, then, the amount constituting a parachute payment, which would otherwise be payable to or for the benefit of the Employee, shall be reduced, but only to the extent necessary, so that such amount would not constitute a parachute payment. Any determination that a payment constitutes a parachute payment shall be made as promptly as practicable (but no more than 30 days) following the Employee's termination of employment by the independent public accountants that audited the Company's financial statements for the fiscal year preceding the year in which Employee's employment was terminated, whose determination shall be final and binding in all cases. Unless the Employee receives notice that a payment (or payments) will 14 constitute a parachute payment within 30 days of the date the Employee's employment terminates hereunder, no payment (or payments) shall be deemed to constitute a parachute payment. If the determination made pursuant to this clause (b) results in a reduction of the payments that would otherwise be paid to the Employee, the Employee may elect, in his sole discretion, which and how much of any particular entitlement shall be eliminated or reduced (giving effect to any payments and benefits that may have been received prior to such termination) and shall advise the Company in writing of his election within 10 days of the determination of the reduction in payments. If no such election is made by the Employee within such 10-day period, the Company shall determine which and how much of any entitlement shall be eliminated or reduced and shall notify the Employee promptly of such determination. Within 10 days following such determination and the elections hereunder, the Company shall pay to, or distribute to or for the benefit of, the Employee such amounts as are then due to the Employee under this Agreement and shall timely pay to, or distribute to or for the benefit of, the Employee in the future such amounts as become due to the Employee under this Agreement. (F) Resignation or Expiration of Term : In the event the Employee resigns without Reason prior to the expiration hereof or if the term expires in accordance with the proviso contained in paragraph 1, he shall, subject to paragraph 8 (D), be entitled to receive only compensation accrued through such resignation date or expiration date, as the case may be, and such benefits to which he is entitled by law. (G) Extension of Benefits: Any extension of benefits following the termination of employment provided for herein shall be deemed to be in addition to, and not in lieu of, any period for benefits continuation provided for by law at the Company's, the Employee's or his dependents' expense. 15 10. Indemnification: The Company hereby agrees to indemnify and hold the Employee harmless to the extent of any and all claims, suits, proceedings, damages, losses or liabilities incurred by the Employee and arising out of any acts or decisions done or made in the authorized scope of his employment hereunder. The Company hereby agrees to pay all expenses, including reasonable attorney's fees, actually incurred by the Employee in connection with the defense of any such action, suit or proceeding and in connection with any appeal thereon, including the cost of court settlements. Nothing contained herein shall entitle the Employee to indemnification by the Company in excess of that permitted under applicable law or limit the Employee's entitlement to indemnification under the Company's Certificate of Incorporation, By-Laws, statute, common law or any other contract to which the Employee and the Company may now or in the future be parties, or to which the Employee may be or may become a third party beneficiary. 11. Mitigation: The Employee shall not be required to mitigate the amount of any payment provided for in this Agreement by seeking other employment or otherwise, nor shall the amount of any payment provided for in this Agreement be reduced by any compensation earned by the Employee as the result of employment by another employer after the date of his termination or otherwise. 12. 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 subsequent breach hereof. 13. Governing Law: The validity of this Agreement or of any of the provisions hereof shall be determined under and in accordance with the laws of the State of New York, without regard to the principles of conflicts of law. 14. Notice: Any notice required to be given pursuant to the provisions of this Agreement shall be in writing and shall be delivered in person or by registered or certified mail to the respective parties at their addresses set forth on the first page of this Agreement (or such other address as the party to receive notices has given by notice hereunder to the other party). Any such notice by 16 personal delivery shall become effective upon receipt and any notice by registered or certified mail shall become effective five business days after mailed. 15. Assignment: This Agreement shall be binding upon the Company, its successors (including any transferee of the goodwill of the Company) or assigns. 16. Miscellaneous: This Agreement contains the entire understanding between the parties hereto relating to the subject matter hereof 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. 17. Obligations of a Continuing Nature: It is expressly understood and agreed that the covenants, agreements and restrictions undertaken by or imposed on the Employee or the Company hereunder, which are stated to exist or continue after termination of the Employee's employment with the Company, shall exist and continue in accordance with their terms for the respective periods of time set forth herein. 18. Severability: The parties agree that if any of the covenants, agreements or restrictions contained herein is 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 any others. IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the day and year first above written. TII INDUSTRIES, INC. By: /s/ Alfred J. Roach ------------------------ Alfred J. Roach Chairman of the Board /s/ Timothy J. Roach ------------------------ Timothy J. Roach 17 EX-10 4 EX.10(B)(2) - AMENDED EMP. AGR. (C. MEYERHOEFER) AMENDED AND RESTATED -------------------- EMPLOYMENT AGREEMENT -------------------- CARL H. MEYERHOEFER AND TII INDUSTRIES, INC. -------------------------------------------- AGREEMENT, dated as of the lst 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 Carl H. Meyerhoefer residing at 27 Stonywell Court, Dix Hills, NY 11746 (hereinafter designated and referred to as "Employee"). WHEREAS, the Company and the Employee entered into an Employment Agreement, dated as of the 1st day of July, 1993, as extended, pursuant to which Employee agreed to serve as the Vice President-Research & Development; and WHEREAS, 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 to agree to any specific term or condition or to any continuation of your 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 in charge of the Research and Development department with the title of Vice President - Research & Development; his duties shall be determined by the President and/or Board of Directors from time to time; and shall include responsibility for the support and further development of the Company's core products as well as the development and expansion of the Company's product lines into new areas of endeavor in cooperation with, among others, the efforts of the Company's Marketing and Sales, Manufacturing and Finance Departments under the direction of the President, his designee and/or Board of Directors; Employee shall also have the authority and responsibility for the staffing of the Research and Development Department of the Company, with the advice and consent of the President, and in accordance with the Company's established employment guidelines and budgets; and the Employee does hereby accept such employment and agrees to use his best efforts and to devote all his normal business time, during the term of this Agreement, to the performance of his duties faithfully, diligently and to the best of his abilities upon the conditions hereinafter set forth. Employee shall report to the President or his designee, of the Company. 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 visit customers, and vendors, and various industry associations as required to fulfill his 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, Twenty-Nine Thousand, and Eighty dollars ($129,080.00) payable every two weeks, less all applicable taxes, 2 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 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 for all reasonable and actual business expenses incurred by him in connection with his service to the Company, upon submission by him 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, which allowance shall not exceed twenty percent of the Employee's then salary computed in accordance with 3 above. Company acknowledges that Employee is a resident of the State of New York and that Employee shall not be required to change his residence. The Company and the 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 maintenance, gasoline, traffic violation fines etc. Repairs for other than routine maintenance shall be the responsibility of the Company. 3 6. Benefits: In addition to the salary to be paid to Employee hereunder, the Company shall provide medical and dental insurance and such other benefits, in accordance with the Company's Plan. 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 full normal business time, attention and energy and render his 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 employment by the Company will require that 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 and trade secrets, which are of vital importance to the success of the Company's business; (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 training, experience and expertise, some of his services to the Company will be special and unique. (B) Employee agrees that during the term of this Agreement, he 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 competitive with any 4 business then being conducted by the Company or its subsidiaries. For the purpose hereof, "substantial security holder" shall mean ownership, directly or indirectly, of more than 5% of any class of securities of a company or partnership interest in any partnership. 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 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 all Property Rights (whether or not patentable) made, discovered or conceived of by him, alone or with others, at any time during his employment with the Company, whether on the Company's or his 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 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 5 Property Rights will be the sole and exclusive property of the Company, and Employee will execute any assignments requested by the Company of his 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, services marks, secret processes, discoveries or improvements, during his employment by the Company. Employee's cooperation after his employment is subject to his 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 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 capacity with the Company he will be entrusted with knowledge 6 of such trade secrets and, in recognition of the importance thereof and in consideration of his employment by the Company hereunder, agrees that he 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 this Agreement. 11. Irreparable Harm: Employee agrees that any breach or threatened breach by Employee of provisions set forth in Sections 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. The Company agrees that any breach or threatened breach by the Company of Sections eight (8), nine (9) and ten (10) of this Agreement that would cause the Employee irreparable harm, the Employee 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 employment for any reason, he shall return all property of the Company which is then in or thereafter comes into his possession, including, but not limited to, documents, contracts, agreements, plans, photographs, 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 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 appropriate 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 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 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, 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 or provided that the violation can be cured (ii) admission or conviction of a serious crime involving moral turpitude or (iii) if the President determines that employee has committed a demonstrable act (or omission) of malfeasance seriously detrimental to this 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 13 [C], 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. 9 [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 the amount of Compensation pursuant to Section 3 hereof and bonuses pursuant to the Company's executive bonus incentive plan, if any, 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 dependents') participation in any medical, dental and other insurance plans shall be continued, or equivalent benefits provided to him or them by the Company, at no cost to him 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 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. Arbitration: Any controversy or claim arising out of or relating to this Agreement or the breach thereof, shall be settled by arbitration to be held in New York City, New 10 York, in accordance with the Commercial Arbitration Rules of the American Arbitration Association effective January 1, 1993. Judgment upon the award rendered by the arbitrators may be entered in any Court having jurisdiction thereof. 16. 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. 17. 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: Carl H. Meyerhoefer 27 Stonywell Court Dix Hills, NY 11746 18. 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. 11 19. 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. 20. 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 exist and continue on both parties irrespective of the method or circumstances of such termination from employment or termination of this Agreement. 21. 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 any 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. 22. Representation: Employee represents and warrants that he has the legal right to enter into this Agreement and to perform all of the duties and obligations on his part to be performed hereunder in accordance with its terms and that he is not a party to any agreement or understanding, written or oral, which prevents him from entering into this Agreement or performing all of his duties and obligations hereunder. In the event of a breach of such 12 representation or warranty on his part or if there is any other legal impediment which prevents him from entering into this Agreement or performing all of his 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 is not a party to any agreement which prohibits or limits his ability (i)to fulfill his duties and responsibilities contemplated herein including his ability to develop products which may compete with any entity or (ii) to accept employment with the Company. 23. Descriptive Headings. The paragraphs headings contained herein are for reference purposes only and shall not in anyway 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 /s/ Carl H. Meyerhoefer ------------------------- Employee Carl H. Meyerhoefer 13 EX-10 5 EX.10(B)(3)(A) - EMP. AGR. (DARE P. JOHNSTON) EMPLOYMENT AGREEMENT AGREEMENT, dated as of the 23rd day of September, 1993 by and between DITEL INC., a North Carolina corporation, having a place of business at Hickory, North Carolina 28603 (hereinafter designated and referred to as "Company") , and Dare P. Johnston residing at 709 36th Avenue North, East Hickory, North Carolina 28601 (hereinafter designated and referred to as "Employee" or "her). WHEREAS, the Company desires to employ the Employee as President/General Manager of the Ditel Fiber Optic Division of the Company; WHEREAS, Employee is willing to accept 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 September 23, 1993 and automatically terminating on September 22, 1996 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 in charge of the Ditel Fiber Optic Division of the Company with the title of President/General Manager; her duties shall be determined by the Chairman of the Board or designee from time to time; and shall include responsibility for among other things, the support and further development of the Ditel Fiber Optics Division's current fiber optic hardware products, the further development and expansion of the fiber optic hardware product lines and the prudent management and use of the Company's anticipated increase of $250,000 in working capital during the first year of this Agreement and $100,000 during the second year of this Agreement, in cooperation with, among others, the efforts of the Company's research and development, marketing and sales, and finance departments. The Ditel Fiber Optic Division of the Company is intended to be the principal manufacturing and distribution center for the Company's fiber optic hardware product lines and may include the following operations: administration, order entry, accounting, applications engineering, manufacturing, assembly, materials control, purchasing, quality control and distribution. Various of these departments, as well as marketing, sales, research and development, order entry, invoicing and customer service may be fully or partially integrated with existing departments of TII Industries, Inc. or its subsidiaries (hereinafter designated and referred to as "TII") order to better coordinate activities as well as control costs. Further, the Company or TII may from time to time, enter into marketing/product development agreements in the fiber optic field with other companies. Such companies may supply products and/or subassemblies for use in manufacturing and/or resale of a fiber optic hardware product. All such sales will be credited to the Ditel Fiber Optic Division. Employee shall have the authority and responsibility for the staffing of the facility in North Carolina, with the advice and consent of the Chairman of the Board, and in accordance with the Company's established employment guidelines and budgets. The Employee does hereby accept such employment and agrees to use such reasonable efforts and to devote all normal business time, during the term of -2- this Agreement, to the performance of her duties faithfully, diligently and to the best of her abilities upon the conditions hereinafter set forth. Employee shall report to the Company's Board of Directors and Chairman of the Board or his designee. 3. Compensation: During the term of this Agreement, the Company agrees to pay Employee, and Employee agrees to accept the following compensation: (i) annual salary of one Hundred Thousand Dollars ($100,000) 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; (ii ) at the signing of this Agreement the Company agrees to pay Employee a bonus of seventy five thousand dollars ($75,000) and; one year from the date of this Agreement a second bonus for seventy five thousand dollars, ($75,000) provided Employee has not voluntarily terminated her employment with the Company, each such bonus less all applicable taxes; (iii) an annual bonus, payable one hundred (100) days after the close of the Company's fiscal year equal to one percent (1%) of the Ditel Fiber Optic Division's sales over one million dollars ($1,000,000) with a cap equal to the Employee's immediately previous years salary. 4. Expenses: The Company shall reimburse Employee, not less often than monthly, for all actual business expenses incurred in connection with her service to the Company, upon submission of appropriate vouchers and expense account reports. 5. Automobile Allowance: The Company shall provide Employee with one thousand dollars ($1,000) per month for Employee's car expenses. The Employee shall be responsible for lease payments, insurance and registration expenses, all maintenance and gasoline. -3- 6. Benefits: The Company shall provide medical and dental insurance and such other benefits, in accordance with the Company's Plan, as it exists from time to time. The Employee shall be entitled to annual vacation in accordance with the Company's policy. 7. Restrictive Covenant: [A] Employee acknowledges that (i) the business in which the Company is engaged is intensely competitive and that her employment by the Company will require that she 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 are of vital importance 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 her experience and expertise, some of 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 her capacity with the Company she will be entrusted with knowledge of such trade secrets and, in recognition of the importance thereof and in consideration of her employment by the Company hereunder, agrees that -4- 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 7 [A] shall continue in full force and effect notwithstanding any termination of this Agreement. [B] Employee agrees that during the term of her employment with the Company and for a period of two years thereafter 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 involved in the manufacture or production of fiber optic equipment in the telecommunications or related fields or directly competitive with any business then 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 provision of this Section 7[B] shall continue in full force and effect notwithstanding any termination of this Agreement. 8. 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 -5- "Property Rights") by Employee in connection with Employee's performance of 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 her, alone or with others, at any time during her employment with the Company, whether on the Company's or 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 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 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, services marks, secret processes, discoveries or improvements, during her employment -6- by the Company. Employee's cooperation after her employment is subject to 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. 9. Irreparable Harm: Employee agrees that any breach or threatened breach by Employee of provisions set forth in Sections seven (7) and eight (8) 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. 10. Return of Company Property: Employee agrees that following the termination of her employment for any reason, she shall return all property of the Company which is then in or thereafter comes into 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. 11. Termination: [A] Death: In the event of the Employee's death during the term of 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 and the second bonus in accordance with Section 3 shall be prorated until date of death and paid to Employee's estate. All other benefits and compensation described herein shall terminate on the date of death unless otherwise stipulated in the appropriate 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 months in the aggregate in any twelve (12) month period of this Agreement or any extension hereof, the -7- 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 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, 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 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 -8- of Section 13 [C], the Company shall have no further obligation to the Employee, except for the payment of salary through the date of such termination from employment. [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. 12. 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. 13. 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. 14. 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: Dare P. Johnston 709 36th Avenue North East Hickory, North Carolina 28601 -9- 15. 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. 16. 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. 17. 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 exist and continue on both parties irrespective of the method or circumstances of such termination from employment or termination of this Agreement. 18. 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 -10- invalidate any 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. 19. Representation: Employee represents and warrants that she has the legal right to enter into this Agreement and to perform all of the duties and obligations on her part to be performed hereunder in accordance with its terms and that she is not a party to any agreement or understanding, written or oral, which prevents Employee from entering into this Agreement or performing all of her duties and obligations hereunder. In the event of a breach of such representation or warranty on her part or if there is any other legal impediment which prevents her from entering into this Agreement or performing all of her duties and obligations hereunder, the Company shall have the right to terminate this Agreement in accordance with Section 11[C][a]. Without limiting the foregoing, Employee represents and warrants that she is not a party to any agreement which prohibits or limits her ability (i) to fulfill her duties and responsibilities contemplated herein or (ii) to accept employment with the Company. 20. Stock Option: Employee and the Company agree to execute a stock option agreement that Employee shall have a right to purchase an aggregate of 50,000 shares of Common Stock of TII in accordance with TII's 1986 Stock Option Plan ("Plan"), exercisable at the rate of 50% on the first anniversary of the Employee's commencement of employment, and 50% on the second anniversary of the Employee's commencement of employment. The options will be exercisable at the closing price of such shares on the day of commencement of employment under this Agreement. The options will be subject to all of the terms and conditions of the Plan and Employee hereby agrees to -11- all such terms and conditions. 21. Descriptive Headings: The paragraphs headings contained herein are for reference purposes only and shall not in anyway 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. DITEL, INC. By: /s/ Timothy J. Roach ------------------------ Timothy J. Roach Chairman of the Board /s/ Dare P. Johnston --------------------------- Employee Dare P. Johnston -12- EX-10 6 EX.10(B)(3)(B) - 2ND EXTENSION EMP.AGR.(JOHNSTON) SECOND EXTENSION TO EMPLOYMENT AGREEMENT SECOND EXTENSION TO EMPLOYMENT AGREEMENT dated as of June 2, 1997 to "EMPLOYMENT AGREEMENT" dated as of September 23, 1993 (the "Employment Agreement") between Dare P. Johnston (hereinafter referred to as the Employee) and TII-Ditel (A Division of TII Industries, Inc.), (hereinafter referred to as the "Company"). WITNESSETH WHEREAS, on August 14, 1995, the parties extended the term of the Agreement until September 23, 1999; WHEREAS, the parties desire to amend and extend the Employment Agreement; NOW, THEREFORE, in consideration of the premises, the Company and the Employee hereby agree as follows: 1. Section 1 "Term" shall be amended to extend the Agreement for an additional three years, from May 1, 1997 to April 30, 2000. 2. Section 3 "Compensation" shall be replaced, in its entirety, by the following: Compensation: During the term of this Agreement, the Company agrees to pay Employee, and Employee agrees to accept, annual salary of One Hundred, Thirty-Three Thousand dollars ($133,000.00) 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 1 0% 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 Chairman. In addition, Employee shall be eligible to participate in the Company's Executive Bonus Plan should the Company adopt one. 3. A new Section 11[C][c] shall be added as follows: Notwithstanding anything in this Agreement to the contrary, the Company may terminate the Employee's employment for reasons other than Cause. 4. A new Section 11[E] shall be added as follows: [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 Second Extension to Employment Agreement Page 2 of 2 11[D] hereof, (1) the Employee shall thereupon receive as severance pay in a lump sum the amount of salary and bonuses pursuant to the Company's executive bonus incentive plan, if any, 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 salary and bonus; and (2) the Employee's (and her dependents') participation in any medical, dental and other insurance plans shall be continued, or equivalent benefits provided to her or them by the Company, at no cost to 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 execisable 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 her employment under the provisions of Section 11[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. 5. Except as specifically set forth herein, all the terms and conditions of the Employment Agreement shall remain in full force and effect. IN WITNESS WHEREOF, this instrument has been executed and delivered as of the date fist written above. TII-DITEL (A Division of TII INDUSTRIES, INC.) /s/ Timothy J. Roach ------------------------------ By: Timothy J. Roach Chairman of the Board /s/ Dare P. Johnston ------------------------------ Employee Dare P. Johnston EX-11 7 COMPUTATION OF EARNINGS PER SHARE TII INDUSTRIES, INC. AND SUBSIDIARIES EXHIBIT 11 - COMPUTATION OF EARNINGS PER SHARE
Three Months Ended Year Ended June June 27, 1997 28, 1996 27, 1997 28, 1996 ----------- ----------- ----------- ----------- PRIMARY EARNINGS PER SHARE Shares used in computing earnings per share: Weighted average number of shares of common stock outstanding 7,431,000 7,424,000 7,430,000 6,741,000 Weighted average number of shares of class B common stock outstanding -- -- -- 370,000 Weighted average number of shares of Series A preferred stock outstanding -- -- -- 79,000 Incremental shares attributed to common stock equivalents - options and warrants -- 403,000 -- 663,000 ----------- ----------- ----------- ----------- 7,431,000 7,827,000 7,430,000 7,853,000 =========== =========== =========== =========== Net (loss) income ($ 188,000) $ 622,000 ($ 856,000) $ 3,737,000 =========== =========== =========== =========== Earnings per common and common equivalent share ($ 0.03) $ 0.08 ($ 0.12) $ 0.48 =========== =========== =========== =========== FULLY DILUTED EARNINGS PER SHARE Shares used in computing earnings per share: Weighted average number of shares outstanding 7,431,000 7,424,000 7,430,000 6,741,000 Weighted average number of shares of class B common stock outstanding -- -- -- 370,000 Weighted average number of shares of Series A preferred stock outstanding -- -- -- 79,000 Incremental shares attributed to common stock equivalents - options and warrants -- 403,000 -- 689,000 OPIC loan -- 300,000 -- 300,000 ----------- ----------- ----------- ----------- 7,431,000 8,127,000 7,430,000 8,179,000 =========== =========== =========== =========== Earnings: Net (loss) income ($ 188,000) $ 622,000 ($ 856,000) $ 3,737,000 Add: Interest expense reduction -- 19,000 -- 75,000 ----------- ----------- ----------- ----------- ($ 188,000) 641,000 (856,000) 3,812,000 =========== =========== =========== =========== Earnings per common and common equivalent share ($ 0.03) $ 0.08 ($ 0.12) $ 0.47 =========== =========== =========== ===========
EX-21 8 EX.21 - LIST OF SUBSIDIARIES EXHIBIT 21 Subsidiaries of the Registrant The following is a list of the Registrant's subsidiaries as of September 19, 1997 (exclusive of subsidiaries which, as of June 27, 1997, if considered in the aggregate as a single subsidiary, would not constitute a significant subsidiary within the meaning of Rule 1-02(w) of Regulation S-X) : State of Jurisdiction Name 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 EX-23 9 EX.23 - CONSENT OF ARTHUR ANDERSEN LLP EXHIBIT 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report dated September 19, 1997, included in this Annual Report on Form 10-K, into the Company's previously filed Registration Statements on Form S-8 (Nos. 2-71781, 2-90852, 33-2555, 33-11449, 33-26930, 33-37310, 33-53180, 33-59096, 33-64965, 33-64961, 33-64967) and previously filed Registration Statement on Form S-3 (File No. 33-64980). Arthur Andersen LLP San Juan, Puerto Rico September 19, 1997 EX-27 10 FDS -- FYE 6/27/97
5 0000277928 TII INDUSTRIES, INC. 1,000 YEAR JUN-27-1997 JUN-29-1996 JUN-27-1997 247 3,552 7,388 53 15,574 27,163 37,812 23,768 42,823 7,508 0 0 0 75 32,936 33,011 50,675 50,675 41,421 10,146 0 0 287 (793) 63 (856) 0 0 0 (856) (0.12) (0.12)
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