UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington. D.C. 20549
FORM 10-K
(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended December 31, 2011
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OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from to
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Commission
File Number 001-08048
TII
NETWORK TECHNOLOGIES, INC.
(Exact name of registrant as specified in
its charter)
Delaware
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66-0328885
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(State or other jurisdiction of
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(I.R.S. Employer Identification No.)
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incorporation or organization)
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141 Rodeo Drive, Edgewood, New York 11717
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(Address of principal executive offices) (Zip Code)
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(631) 789-5000
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(Registrant’s telephone number, including area code)
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Securities registered under Section 12(b)
of the Exchange Act:
Title of each class
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Name of exchange on which registered
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Common Stock, $0.01 par value
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The NASDAQ Stock Market LLC
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Securities registered under Section 12(g)
of the Exchange Act: None
Indicate by check mark if the registrant
is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes
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No
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Indicate by check mark if the registrant is not required to
file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes
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No
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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
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No
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Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant
to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files). Yes
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No
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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.
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Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.
Large accelerated filer
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Accelerated filer
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Non-accelerated filer
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Smaller reporting company
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Indicate by check mark whether the Registrant
is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes
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No
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The aggregate market value of the voting
stock and non-voting common equity of the registrant outstanding as of June 30, 2011, the last business day of the registrant’s
most recently completed second quarter, held by non-affiliates of the registrant was approximately $32,800,000. While such market
value excludes the market value of shares that may be deemed beneficially owned by executive officers and directors, this should
not be construed as indicating that all such persons are affiliates.
The number of shares of the Common Stock of
the registrant outstanding as of March 30, 2012 was 14,864,615.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement relating to its
2012 Annual Meeting of Stockholders are incorporated by reference into Part III of this Report.
TII NETWORK TECHNOLOGIES, INC.
AND
SUBSIDIARIES
TABLE OF CONTENTS
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PAGE
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PART I
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Item 1
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Business
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5
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Item 1A
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Risk Factors
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12
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Item 1B
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Unresolved Staff Comments
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17
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Item 2
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Properties
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17
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Item 3
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Legal Proceedings
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17
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Item 4
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Mine Safety Disclosures
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17
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PART II
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Item 5
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Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
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18
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Item 6
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Selected Financial Data
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18
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Item 7
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Management’s Discussion and Analysis of Financial Condition and Results of Operations
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19
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Item 7A
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Quantitative and Qualitative Disclosures About Market Risks
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27
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Item 8
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Financial Statements and Supplementary Data
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28
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Item 9
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Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
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53
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Item 9A
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Controls and Procedures
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53
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Item 9B
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Other Information
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53
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PART III
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Item 10
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Directors, Executive Officers and Corporate Governance
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*
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Item 11
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Executive Compensation
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*
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Item 12
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Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
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*
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Item 13
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Certain Relationships and Related Transactions, and Director Independence
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*
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Item 14
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Principal Accounting Fees and Services
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*
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PART IV
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Item 15
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Exhibits and Financial Statement Schedules
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54
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* The information required
by Part III (Items 10, 11, 12, 13 and 14) of Form 10-K is incorporated herein by reference to the information called for by those
items which will be contained in our Proxy Statement to be filed pursuant to Regulation 14A of the Securities Exchange Act of
1934 with respect to our 2012 Annual Meeting of Stockholders. Notwithstanding the foregoing, information appearing in the section
“Audit Committee Report” in our Proxy Statement shall not be deemed to be incorporated by reference in this Report.
Forward-Looking Statements
Certain statements in this Annual Report
on Form 10-K are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995.
When used in this Report, words such as "may," "should," "seek," "believe," "expect,"
"anticipate," "estimate," "project," "intend," "strategy" and similar expressions
are intended to identify forward-looking statements regarding events, conditions and financial trends that may affect our future
plans, operations, business strategies, operating results and financial position. Forward-looking statements are subject to a number
of known and unknown risks and uncertainties that could cause our actual results, performance or achievements to differ materially
from those described or implied in the forward-looking statements as a result of several factors, including, but not limited to,
those factors discussed below and elsewhere in this document. We undertake no obligation to update any forward-looking statement
to reflect events after the date of this Report. Among those factors are:
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exposure to increases in the cost of our products, including increases in the cost of our petroleum-based
plastic products and precious metals (see “Business – Manufacturing” and “Business – Raw Materials”);
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general economic and business conditions, especially as they pertain to the telecommunications
industry;
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potential changes in customers’ spending and purchasing policies and practices, which are
affected by customers’ internal budgetary allotments that have been, and may continue to be, impacted by the current economic
climate (see “Business – Marketing and Sales”);
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pressures from customers to reduce pricing without achieving a commensurate
reduction in costs (see “Business – Marketing and Sales” and
“Business – Manufacturing”);
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our ability to market and sell products to new markets beyond our principal copper-based telephone
operating company (“Telco”) market (see “Business – Marketing and Sales”) which has been declining
over the last several years due principally to the impact of alternate technologies (see “Business – Competition”);
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our ability to timely develop products and adapt our products to address
technological changes, including changes in our principal market (see “Business – Products” and “Business
– Product Development”);
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the ability of our contract manufacturer to obtain raw materials and components used in manufacturing
our products (see “Business – Raw Materials”);
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competition in our principal market and new markets into which we have been seeking to expand (see
“Business – Competition”);
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our dependence on, and ability to retain, our “as-ordered” general supply agreements
with certain of our principal customers, our ability to receive orders under such general supply agreements and our ability to
win new contracts (see “Business – Marketing and Sales”);
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our dependence on third parties for certain product development (see “Business – Product
Development”);
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our dependence on our contract manufacturer for most of the production of our products and for
obtaining the components needed for the production of our products (see “Business-Manufacturing”);
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the potential effects of our contract manufacturer producing most of our products in China and
Mexico, including that on-time delivery could be interrupted as a result of third party labor disputes, political factors or shipping
disruptions, quality control and exposure to changes in costs, including wages, and changes in the valuation of the Chinese Yuan
and Mexican Peso; (see “Business – Manufacturing”);
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weather and similar conditions, including the effect of typhoons or hurricanes on our contract
manufacturer’s facilities in China and Mexico, which can disrupt production (see “Business – Manufacturing”
and “Business – Seasonality”);
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the effect of hurricanes in the United States which can affect the demand for our products and
the effect of harsh winter conditions in the United States which can temporarily disrupt the installation of certain of our products
by Telcos; (see “Business – Manufacturing” and “Business – Seasonality”);
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our ability to attract and retain technologically qualified personnel
(see “Business – Product Development”);
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the availability of financing on satisfactory terms (see Item 7, “Management’s Discussion
and Analysis of Financial Condition and Results of Operations”).
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Relating to our Recent Acquisitions:
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our ability to successfully complete the integration of our recently acquired businesses, including
their products, sales forces and employees into our business;
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our ability to penetrate the markets and customers of the acquired products with our products,
and to penetrate our existing markets with the recently acquired products;
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our ability to execute our plans with our contract manufacturer to improve gross margins of the
products of the acquired Copper Products Division;
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the stability of the Pound Sterling and Mexican Peso relative to the U.S. dollar exchange rate
(see “Business – International Markets” and Item 7A, “Quantitative and Qualitative Disclosures About Market
Risks:”).
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We undertake no obligation to update any
forward-looking statement to reflect events after the date of this Report.
Part I
General
Tii Network Technologies, Inc. and subsidiaries
(together, “Tii,” the “Company,” “we,” “us” or “our”) design, manufacture
and sell products to service providers in the communications industry for use in their networks. We sell our products through
a network of sales channels, principally to telephone operating companies (“Telcos”), multi-system operators (“MSOs”)
of communications services, including cable and satellite service providers, and original equipment manufacturers ("OEMs").
Our products are typically found in the Telcos central offices, outdoors in the service providers’ distribution network,
at the interface where the service providers’ network connects to the users’ network, and inside the users’ home
or apartment, and are critical to the successful delivery of voice and broadband communication services.
Our corporate headquarters are located
in a building that we own at 141 Rodeo Drive, Edgewood, New York.
Acquisitions
On May 19, 2010, we acquired all of
the assets, exclusive of cash, and assumed certain operating liabilities, primarily accounts payable and accrued expenses, of the
Copper Products Division of Porta Systems Corp. (the “Porta Copper Products Division”) for cash of $8,150,000, plus
subsequent purchase price adjustments totaling $99,000, for a total purchase price of $8,249,000. The Porta Copper Products Division
was comprised of two wholly owned subsidiaries, one in England and the other in Mexico, as well as domestic assets and liabilities
exclusively related to copper telecommunications products. Concurrent with this acquisition, we sold the acquired Mexican subsidiary,
exclusive of customer contracts and certain machinery and equipment which we retained, to our contract manufacturer, which is now
operating this manufacturing facility, for $1,000,000, subject to a subsequent working capital reduction. As discussed further
in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations Overview –
Impairment of Goodwill,” an impairment charge to write-off all of the goodwill associated with this acquisition was recorded
during the fourth quarter of 2011.
On March 11, 2011, we acquired
100%
of the capital stock of Frederick Fiber Optics (“F2O”) for an initial cash payment made from cash on hand and incentive
payments to be made based on the achievement of certain performance objectives for 2011 and 2012. The performance criteria were
achieved in 2011. F2O was renamed Tii Fiber Optics, Inc. (“Tii
Fiber”), and is headquartered in Frederick, Maryland,
manufacturing a wide variety of high performance fiber optic cable assemblies, wall and rack mounted fiber distribution panels,
and miscellaneous fiber accessories and services.
Our financial statements include the activity
of the Porta Copper Products Division since May 20, 2010 and the activity of Tii Fiber since March 12, 2011.
Products
Network Interface Devices (“NID”),
Building Entrance Terminals (“BET”) and Accessories
Telco NIDs and
BETs house the demarcation point between the public switched telephone network (PSTN) provider and the customer’s network.
They contain
primary protectors that meet or exceed National Electric Code requirements for incoming communications lines,
a
s well as customer demarcation, customer termination ports, and various electronic circuits.
Building
Entrance Terminals (“BETs”) are used in larger line pair environments such as condos, apartments, and office buildings.
Network Interface
Devices:
A NID is typically a thermoplastic box located on the outside of a customer’s
premise, housing primary surge protectors, customer demarcation, customer termination ports and various electronic circuits. It
is ruggedized against the environment and has both Telco and customer access points. Our family of 1, 2, 3, 6 and 12 line NIDs
is designed to comply with rigorous industry environmental and electrical performance standards. Our NIDs usually incorporate
a variety of components including our overvoltage surge protectors, Digital Subscriber Line (“DSL”) service splitters
for broadband delivery, and customer bridge modules which facilitate customer access to the network. Our NIDs are used in single
family and small multi-dwelling unit (“MDU”) applications
.
Building Entrance
Terminals:
A BET is a sheet metal enclosure located either inside or outside of an MDU or commercial building, housing
primary surge protectors in a 5 pin format, as well as connectivity for incoming and outgoing multi-pair bundles of copper communication
wire. BETs come in a variety of connectivity and enclosure options, with typical line counts of 25, 50, and 100 pairs, with the
ability to stack multiple units for larger pair counts.
Accessories
:
Tii designs and manufactures a broad range of products designed to operate in our NIDs, as well as our competitor’s NIDs.
These products include station protectors, customer wiring modules to interconnect service to the home, DSL service splitters,
Electro-Magnetic Interference (EMI) filters and line test modules, which enable remote testing of the integrity of the service
providers’ lines, minimizing costly maintenance dispatches.
Broadband Products
Our broadband products facilitate the successful
deployment of Triple Play services (voice, video and data) and are comprised of both active electronics and passive components.
These products enable service providers to offer the most stable and highest bandwidth services safely to the user at the lowest
deployment cost.
Digital Subscriber
Line Technology:
In many instances Telcos have been utilizing their existing infrastructure of copper access wires to deliver
broadband services with DSL technology. We have developed an extensive line of DSL electronic products for this market, including
a line of xDSL POTS (Plain Old Telephone Service) Splitters. These splitters isolate the voice and data signals on a Telco line
to provide separate outputs for phone and data services which enable DSL services. Modules are available in several NID configurations,
as well as several indoor units. Our products also allow DSL signals to coexist with door entry/intercom systems and monitored
alarm systems.
Intelligent NID:
Our outdoor intelligent residential gateway Outrigger
TM
, sometimes referred to as an “iNID,” facilitates
the delivery of Triple-Play bundled services – digital telephone, television and Internet data by telephone or cable service
providers. Our current configuration accomplishes this by embedding the Home Phone Network Alliance (“HPNA”) technology
for delivering Internet Protocol (“IP”) technologies to customers over a home’s existing cable TV (COAX) or telephone
wiring, eliminating the need to run new dedicated CAT5 Ethernet cabling to provide Triple-Play services. Our expertise in this
area has enabled us to sell key component parts to companies delivering similar products.
HomePlug®:
HomePlug® technology enables networking of voice, data and audio devices through the consumers’ AC power lines. Our HomePlug®-compatible
and HomePlug®-embedded surge protectors incorporate our patented and proprietary AC protection, filtering and HomePlug®
Powerline integrated circuits.
Connectivity Products
Connectivity products include both active
and passive solutions that incorporate superior wire management, technician friendly “tool-less” design, insulation
displacement contact (“IDC”) and gel-sealed options. These products are designed to support broadband-enabled services
and network management.
Connector
Block and Terminal Block Products
:
These products connect large numbers of copper interconnects with or without
protection, typically utilizing tool-less punch down IDC technology or wire wrapping. The products are used by telephone and data
equipment companies to connect copper lines, most commonly in a Telco Central Office or in a field distribution cabinet.
Voice over Internet
Protocol (“VoIP”) Products
:
These solutions provide Telco “NID – like” environmentally robust
enclosures and advanced gel sealed wire termination products for connection of broadband delivered VoIP telephony service. An extensive
range of connectivity solutions is offered for single family, MDU and commercial applications.
Voice Intercom
Systems (“VIS”) Products:
These products are used in MDUs for telephony delivered via cable, fiber or DSL VoIP
to enable the newly installed telephone service to work with Gate Entry and Door Entry Intercom systems which are typically disconnected
when broadband services are deployed.
Wire Terminals
and Other Connectivity:
These
products include
various wire connectivity solutions
for telephony and category 5 wiring. The products include aerial terminals and enclosures that provide world class performance
in extremely harsh outdoor environments and are located throughout the service providers’ network, typically deployed in
aerial locations
.
Fiber Optic Products
Fiber optic products include both active
and passive solutions to aid service providers (Telco, MSO and other providers) in their deployment of Fiber To The Home (“FTTH”)
and Fiber to the Node (“FTTN”) networks. These deployments typically utilize an Optical Network Terminal (“ONT”)
to convert light pulses from a fiber optic line into electrical pulses. Other fiber optic products are sold by us for use in commercial
or business fiber deployments, data centers, and Central Office applications for wireline and wireless service providers. We have
expanded our fiber optic product offerings as a result of our acquisition of F2O completed in March 2011. The following discussion
of our fiber optics products includes these new products.
Wall
Mount Enclosures:
Wall mount fiber enclosures are typically installed inside a building and serve to transition
from outdoor to indoor fiber using a fusion splice. They store slack of both the indoor and outdoor fibers, constrain and protect
the fusion splices, and provide a connectorized demarcation point for indoor patching and testing using a handheld meter to verify
signal integrity. This family of products is designed to accommodate up to 144 fibers, and is available with a wide variety of
adapter
plates, splice trays, and custom fiber cable assemblies.
Rack
Mount Enclosures:
Rack mount fiber enclosures perform essentially the same function as wall mount enclosures for customers
who prefer to use equipment racks.
This family of products is designed to accommodate up to 864 fibers, and is available
with a wide variety of adapter plates, splice trays, and custom fiber cable assemblies.
Outside Plant
(“OSP”) Fiber Enclosures:
These products consist of a thermoplastic box located on the outside of a customer’s
premise or MDU, for use in FTTH and FTTN deployments. These enclosures are used by service providers to protect fiber splices made
in the field, provide a demarcation/fiber test port for verifying signal integrity, and to allow transition from outdoor rated
fiber to indoor rated fiber. They are designed to comply with rigorous industry environmental and electrical performance standards
and several products are available for up to 12 fibers.
Cable Assemblies:
These products consist of custom fiber cable assemblies and standard length fiber patch cords. Custom fiber cables are built using
virtually any fiber type, length, and connector type such as SC, FC, LC, ST, MTP/MPO and more exotic types. These custom assemblies
are typically of high quality and performance, and are built to order with a lead time of 2 days to 2 weeks. Standard length fiber
patch cords of various lengths and connector types are also available.
Miscellaneous
Fiber Accessories:
These products consist of
various custom assemblies containing fiber optic components such as
optical couplers, splitters, attenuators. Fiber cleaning supplies, test equipment, and field services are also offered.
ONT
Installation Accessories:
We provide various connectivity modules that are typically utilized inside ONT’s and active
electronic devices to enable the fiber delivered telephone service to coexist with Gate Entry and Door Entry Intercom systems.
We also provide a grounding and overvoltage protection device used in the deployment of ONTs by service providers
.
Overvoltage Surge Protection
Surge protection products are used by major
telecommunications providers at the Central Office, remote DSL pedestals and subscriber locations, protecting both personnel and
network plant equipment, while increasing field service reliability and reducing maintenance costs.
Gas Tubes:
Our gas tubes represent the foundation upon which most of our overvoltage surge protector products are based. Our proprietary two
and three electrode gas tubes have been designed to withstand multiple high-energy overvoltage surges while continuing to provide
a long service life.
Modular Station
Protectors:
Our broad line of station overvoltage surge protectors are designed to be deployed in a variety of configurations
to accommodate service providers’ requirements. Our most advanced overvoltage surge protector incorporates sealed Insulation
Displacement Connector (“IDC”) “tool-less” connections, which reduce installation time, increase reliability
and are ideally suited for today’s high speed broadband service networks.
Protector
Modules:
Protector Modules are used to protect equipment and personnel from electrical surges in Central Office
applications, BETs, remote distribution cabinets, and FTTN DSL pedestals. The product line consists of industry standard 1 and
5 pin protector modules, with one module used for each copper twisted pair that requires protection. The protector modules utilize
various technologies including Gas Discharge Tube, solid state, and optionally include current limiting devices, such as heat coils
and positive temperature coefficient resistors.
Protector
Packs and Cat 5 Cat 6 Protection:
Products in this category are primarily designed to protect copper wires used
in data and PBX applications. They contain connectivity for multiple wire pairs, and accommodate 1 or 5 pin protector modules.
They are typically used for protecting Cat 5 or 6 Ethernet connections, or any other type of communication system that utilizes
copper wire.
Other Surge Protection
Products:
We design and manufacture a variety of other surge protection devices that include
a patented high-performance 75 ohm coaxial protector for cable networks, a 50-ohm coaxial protector for wireless service providers’
cell sites, a gel-sealed Ethernet data protector and power line/data line protectors for personal computers and home entertainment
systems
.
Product Development
We focus our product development resources on products that
providers of communication services need to more effectively deliver their services. Our customers maintain highly complex networks,
and many of the products we develop are the result of discussions we have with our customers. An important aspect of our product
development is that we also invest our resources to develop products in anticipation of the future network strategies of our customers.
Our research and development (“R&D”) strategy
includes developing products internally, as well as with contract engineers, technology partners and our contract manufacturer.
Our R&D engineers work closely with our contract manufacturer during the design and development phase of all products.
Our R&D department is skilled and experienced in various
technical disciplines, including physics, electrical, mechanical and software design, with specialization in such fields as plastics,
electronics, metallurgy and chemistry. We also use contract engineers skilled in specific design tasks. Our contract manufacturer
is similarly skilled in these R&D fields, with engineering and manufacturing expertise to bring a product of the highest quality
to market on time at a competitive price.
For the years ended December 31, 2011,
2010 and 2009, R&D expense was $2,584,000, $2,239,000 and $1,590,000, respectively. The largest portion of our development
efforts is focused on new products for the growth segments of the telecommunications markets, primarily broadband and fiber deployment.
Marketing and Sales
We market and sell our products to the
providers of communications services through a combination of our own sales employees and manufacturers’ representatives.
Products are distributed either directly or through national and regional distributors. Sales to OEM customers are direct or through
distributors.
The following is certain information concerning
customers that accounted for 10% or more of our consolidated net sales during the periods presented below. With our acquisition
of the Porta Copper Products Division in May 2010, we added significant customers to our customer base. As a result, while we
are dependent upon the customers in the table below in the aggregate, and the loss of or disruption of shipments to any of those
customers could have a material adverse effect on our results of operations and financial condition, we are not substantially
dependent upon any single customer.
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Years ended December 31,
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2011
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2010
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2009
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Customer A
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14
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%
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18
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%
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34
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%
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Customer B
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16
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%
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19
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%
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*
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Customer C
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20
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%
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14
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%
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14
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%
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Customer D
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*
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*
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11
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%
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* Amounts are less than 10%
Telco customers represented approximately 98%, 94% and 89% of
our net sales for the years ended December 31, 2011, 2010 and 2009, respectively.
Sales of our products to certain of our principal customers
are generally through “as-ordered” general supply agreements. General supply agreements do not require Telcos to purchase
specific quantities of products and can be terminated for various reasons, including without cause by either party, or extended
by mutual written agreement. Prices, warranties, benefits, terms and conditions granted to customers under these general supply
agreements are fixed, and generally must be at least as favorable as those granted by Tii to other commercial customers under like
or similar circumstances. Purchases of our products are generally based on individual customer purchase orders for delivery from
inventory or within thirty days. We, therefore, have no material firm backlog of orders but must carry sufficient inventory to
meet anticipated needs of our customers.
We believe that our products offer superior, cost-effective
performance, features and characteristics, including high reliability, long life cycles, ease of installation and optimum protection
against adverse environmental conditions. We believe that this, together with responsive customer service, reduces the risks inherent
in “as-ordered” contracts. We further believe that our superior products and customer care, attributes which have attracted
and maintained our Telco business, will enhance our ability to expand into other target markets. The Porta Copper Products Division
acquisition provided products and sales channels for the Central Office, OSP and Customer Premise markets, markets in which we
historically have had a relatively small presence. These products include building entrance terminals, cable assemblies and surge
protection modules. With the acquisition of Tii Fiber, we significantly expanded our fiber optic product offering while leveraging
our existing and well established sales channels to our customers.
International Markets
Over the past several years, we had been seeking to expand sales
of our products into international markets. Historically, sales into foreign markets have been made primarily to Canada, in addition
to countries in the Caribbean, South and Central America, the Pacific Rim and other parts of Europe. With the acquisition of the
Porta Copper Products Division, we added significant Telcos in both England and Mexico to our customer base. Our international
sales were approximately $19.7 million (35% of sales), $23.2 million (43% of sales) and $5.1 million (19% of sales) for the years
ended December 31, 2011, 2010 and 2009, respectively. Excluding sales to our customer in England, which are denominated in
Pound Sterling, and sales to our customers in Mexico, which are billed in U.S. dollars and paid in Mexican Pesos, we require foreign
sales to be paid for in U.S. currency. International sales are affected by such factors as the North American Free Trade Agreement
(“NAFTA”) and Central American Free Trade Agreement (“CAFTA”) requirements, exchange rates, changes in
protective tariffs and foreign government import controls. We believe international markets continue to offer additional opportunities
for our products and we continue to actively pursue these markets.
Manufacturing
We operate
a quick-response, low volume manufacturing operation from our headquarters in Edgewood, New York. All high volume production
is outsourced to, and produced by, our contract manufacturer from its facilities in China and Mexico. This contract manufacturer
utilizes, in most cases, our equipment and processes. We depend on our contract manufacturer to produce the majority of
our products for sale to our customers. There is a strict non-disclosure agreement in place with our contract manufacturer.
The reliance on our contract manufacturer increases our risk of excess inventory as it may increase our lead times and certain
purchases require minimum orders which may exceed forecasted demand.
All
product manufactured in foreign locations is approved by Tii prior to leaving the country of origin using Acceptable Quality Level
(“AQL”) sampling procedures and on site auditing by Tii quality personnel located in local Quality Assurance laboratories.
These laboratories hold the same TL9000 certificate as Tii headquarters in New York and report directly to Tii’s Vice President
Quality Assurance. Our contract manufacturer is an independent U.S. based corporation with wholly owned subsidiaries located in
China and Mexico and registered to either ISO9000 or TL9000 quality standards.
Concurrent
with the Porta Copper Products Division acquisition in May 2010, we sold the acquired Mexican subsidiary, exclusive of customer
contracts and certain machinery and equipment which we retained, to our contract manufacturer, which is now operating this manufacturing
facility and supplying us product from this facility.
We
terminated our agreement with another contract manufacturer in Malaysia,
which produced most of our proprietary gas tubes,
effective December 20, 2010, with the sourcing of these products being transitioned to our now
sole contract manufacturer’s facility in China
.
Raw Materials
The primary components of our products
are stamped, drawn and formed parts made out of a variety of commonly available metals, ceramics and plastics. The manufacturer
of our overvoltage surge protectors and station electronic products uses commonly available components, printed circuit boards
and standard electrical components, such as resistors, diodes and capacitors. All orders with suppliers of the components utilized
in the manufacture of our products are scheduled for delivery within a year.
Our products contain a
significant amount of plastic that is manufactured out of petroleum, brass and other alloys that contain copper and steel.
Competition
We face significant competition across all of our markets and
product lines. Our principal competitors within the Telco market are Corning Cable Systems LLC, Bourns Inc., and Tyco
Electronics Corp, which is also our customer. Our principal competition within the MSO market is Tyco Electronics Corp
and Channell Commercial Corporation. This competition subjects our products to significant risk of obsolescence due to changing
market demands and the introduction of new products by our competitors or us.
Principal competitive factors within our markets include price,
technology, product features, service, quality, reliability and bringing new products to market on time. Compared to our business
and operations, most of our competitors have substantially greater financial, sales, manufacturing and product development resources.
Our reputation among our customers is one of providing swift responses to their needs with creative and effective solutions, using
products compliant with, and in most cases superior in performance to, the demanding specifications of customers. This approach,
combined with our history of continually improving technology, improved operations and effective collaborations, allows us to
bring product solutions to our customers quickly and at competitive prices.
We believe that these factors, together with our high quality
products and service, our contract manufacturer’s low cost production capabilities, our engineering resources and our overvoltage
surge protection technology, enable us to maintain our competitive position.
Patent and Trademarks
We
own or have applied for a number of patents relating to certain of our products or product components and own a number of registered
trademarks that are considered to be of value, principally in identifying Tii and our products. TII®, Porta Systems®,
In-Line®, Totel Failsafe®, and Angle Driver® are among our registered trademarks. While we consider our patents
and trademarks to be important, especially in the early stages of product marketing, we believe that, because of technological
advances in our industry, our success depends primarily upon our sales, engineering and manufacturing skills and effective development
collaborations which have accelerated the time-to-market of improved and new products. To maintain our industry position,
we rely primarily on technical leadership, trade secrets, our proprietary technology and our contract manufacturer’s low
cost production capabilities and engineering resources
.
Government Regulation
The Telcos
and MSOs are subject to regulation in the United States and in other countries. In the United States, the FCC and various state
public service or utility commissions regulate most of the Telcos and other communications access providers who use our products.
While those regulations do not typically apply directly to us, the effects of those regulations, which are under continuous review
and subject to change, could adversely affect our customers and, ultimately, Tii.
The National
Electric Code (“NEC”) of the United States requires that an overvoltage surge protector listed by UL or another qualified
electrical testing laboratory be installed on all traditional Telco copper subscriber telephone lines that are exposed to lightning
and accidental contact with electric light or power conductors. We have traditionally obtained and maintained listing by UL where
required.
Compliance
with applicable Federal, state and local environmental regulations has not had, and we do not believe that compliance in the future
will have, a material adverse effect on our earnings, capital expenditures or competitive position.
Employees
As of March 26, 2012, we had approximately
78 full-time employees. We have not experienced any work stoppage as a result of labor difficulties and believe we have satisfactory
employee relations. We are not a party to any collective bargaining agreements.
Seasonality
Our operations are subject to seasonal
variations, primarily due to the fact that our principal products, NIDs, are typically installed on the side of homes.
During the hurricane season, sales may increase based on the severity and location of hurricanes and the number of NIDs that are
damaged and need replacement. Conversely, during winter months when severe weather hinders or delays the Telco’s
installation and maintenance of their outside plant network, NID sales have been adversely affected until replacements
can be installed (at which time sales increase).
An investment
in our common stock involves a number of risks. Our business and future operating results may be affected by many risks, uncertainties
and other factors, including those set forth below. These factors could materially and adversely affect our business, financial
condition, results of operations, cash flows and prospects. As a result, the market price of our common stock could decline and
you could lose all or part of your investment. The risks, uncertainties and other factors described in this Report are not the
only ones we face. There may be additional risks, uncertainties and other factors that we do not currently consider material or
that are not presently known to us.
Risks Relating To Our Business
We have certain contractual limitations
on price increases, which coupled with increased commodities costs and pricing pressures, could adversely affect our gross profit
margins.
Pricing pressures in the markets in which
we operate are intense due in part to the consolidation of various telephone companies and their resulting purchasing power. Our
general supply contracts generally prohibit us from increasing the price of our products to be sold under the contract for stated
periods of time. Accordingly, any significant increase in our costs during those periods, without offsetting price increases, could
adversely affect our gross profit margins.
Economic conditions may continue to
adversely affect consumers and our customers and suppliers, thereby adversely affecting our financial performance, results of operations
and financial condition.
The global economic environment since 2008
has resulted in reduced credit lending by banks, solvency concerns of major financial institutions and others, high unemployment
levels and significant declines and volatility in the global financial markets. The credit crisis caused our customers to reduce
inventories since 2008, which resulted in reduced purchases from suppliers such as us, and certain customers continue to aggressively
seek pricing concessions. These factors have a negative impact on the level of consumer spending. Certain of the products offered
by our customers - service providers in the communications industry - are dependent on consumer spending which, in turn, impacts
the demand of the service providers for our products. These actions have impacted, and a continuance of these factors in the future
could further impact, our sales and profit margins.
Our primary market, the traditional
Telco copper-based transmission network, has been declining over the last several years.
Principally due to the competitive impact
of alternative technologies that compete with the Telco’s traditional copper-based transmission network, such as cellular
service and Fiber-To-The-Premises (“FTTP”), and competition from MSOs, over the past several years there have been
cutbacks in copper-based construction and maintenance budgets by the Telcos and a reduction in the number of their access lines.
As a result, our principal copper-based business has been adversely affected.
In this regard, one of our principal customers
continues its strategy to deploy FTTP. This multi-year program has resulted in a reduction of capital outlays for its traditional
copper network and has, therefore, impacted our traditional protection based products since FTTP networks require less traditional
protection than current copper networks. Also, this customer has taken actions to reduce its footprint by bundling telephone lines
in certain territories and offering them for sale, and there is no guarantee that we will continue to provide products to the service
provider that might buy these lines previously serviced by this customer.
Though landlines, in general, continue
to be dropped by customers as a result of the introduction and acceptance of new technologies, current economic conditions are
accelerating this trend. While we believe that the current embedded copper infrastructure will continue to play a significant role
as a transmission medium for years to come, it is likely to continue to decline year to year. Further, there can be no assurance
that this trend will not accelerate.
New product introductions by us could
be costly and there is no certainty that we will be able to successfully develop or market new products.
In response to the trend by Telco’s
to move away from reliance on their copper-based transmission network, we have been expanding our marketing efforts and incurring
costs in pursuing new markets with new products designed to take advantage of our proprietary overvoltage surge protection, enclosure
technologies and electronic design capabilities, while continuing to meet the needs of our existing customers.
Our success will depend, in large measure,
upon our ability to timely identify, develop and market new products at competitive prices, that address our customers' and the
marketplace’s needs for additional functionality and new technologies. In this regard, we have been developing various fiber
products, VoIP products, new station electronic and other products for Telcos, MSOs and home networking products for consumers.
See Item 1, “Business – Products.” The development of new products is subject to a variety of risks, including:
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·
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Our ability to determine and meet
the changing needs of our customers and the marketplace;
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·
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Our ability to predict market requirements
and develop new products meeting those needs in advance of the development of similar or advanced products by our competitors;
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·
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Our ability to develop and engineer products
on a timely basis, within budget and at a quality and performance level that will enable us to manufacture, or have those
products manufactured for us, and then sell them on a profitable basis;
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·
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The availability or ability to obtain sufficient
financing to fund any capital investments needed to develop, manufacture, market and sell new products;
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·
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Product development cycles that can be lengthy
and are subject to changing requirements and unforeseen factors that can result in delays;
|
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·
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New products or features which may contain
defects that, despite testing, are discovered only after a product has been installed and used by customers; and
|
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·
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Changing technology, evolving industry standards,
changes in customer requirements and competitive product introductions and enhancements.
|
We cannot provide assurance that products
that we have recently developed or acquired, or may develop or acquire in the future, will achieve market acceptance. If our new
products fail to achieve market acceptance, or if we fail to develop new or enhanced products that achieve market acceptance, our
growth prospects and competitive position could be adversely affected. In addition, we cannot assure you that we will be successful
in the development of new, profitable products or that we will not encounter delays, defects or product recalls or that we will
be able to respond timely to changing industry and customer needs.
We are dependent upon a small number
of customers for most of our revenue and a significant decrease in sales to these customers could seriously harm our business.
A relatively small number of customers
collectively account for a significant amount of our revenue. Our three largest customers accounted for approximately 50%, 51%
and 59% of our revenue in 2011, 2010 and 2009, respectively. Other customers have, from time to time, accounted for more than 10%
of our revenues in a year. See Item 1, “Business – Marketing and Sales.” We expect that, at least in the near
term, we will continue to rely on our success in selling our existing and future products to these customers in significant quantities.
There can be no assurance that we will be able to retain our largest customers or that we will be able to obtain additional customers
or replace key customers we may lose or who may reduce their purchases from us. The loss of one or more of these customers, or
a substantial diminution in orders received from these customers, could have a material adverse effect on us.
Our key customers typically have the
ability to cancel or modify their commitments to us.
In most instances, our sales are made under
open purchase orders received from time to time from our customers under general supply contracts which cover one or more of our
products. Some of those contracts permit the customer to terminate the contract due to our inability to deliver a product that
meets the specifications on time or, in certain cases, at any time upon notice.
In addition, although most of our general
supply contracts contain terms such as the purchase price, they do not establish minimum purchase commitments. These contracts
also contain other terms favorable to these customers that could adversely impact our future results of operations.
We are dependent upon our contract manufacturer for high
volume production, obtaining product components and aiding in our product development.
We are dependent on our sole contact manufacturer
for its low cost production facilities in China and Mexico to manufacture those of our products that require high volume production
and to procure the components needed for their production. In addition, our in-house engineers use the engineering resources of
the contract manufacturer to design and develop new products. Our use of a contract manufacturer for those products, coupled with
the requirement of our customers for the delivery of products from inventory or within thirty days, requires us to place orders
with sufficient lead time and often in minimum quantities which may exceed actual demand, which increases our risk of carrying
excess inventories. The loss of this contract manufacturer without a seamless transition to one or more other contract manufacturers
could adversely affect our ability to service our customers and, as a result, our ongoing relationships with our customers.
Offshore manufacturing poses a number
of risks.
Currently we depend on our principal contract
manufacturer, located in China and Mexico, for the timely delivery of high quality product. As a result, we are subject to risks
of doing business outside the United States, including:
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·
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potential delays and added delivery expenses in meeting rapid delivery schedules;
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·
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potential U.S. government sanctions, such as embargoes and restrictions on importation;
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·
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potential currency fluctuations;
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·
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potential labor unrest and political instability;
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·
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potential restrictions on the transfer of funds;
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·
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U.S. customs and tariffs;
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·
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drug cartel violence in Mexico; and
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·
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weather, such as typhoons and hurricanes, that could disrupt the delivery of product from our contract
manufacturer in China and Mexico, respectively.
|
We are dependent upon suppliers of
product components, the loss of whom could result in manufacturing and delivery delays, affect our ability to obtain components
and increase prices to us.
Our contract
manufacturer procures the components necessary to produce products for us. Generally there do not exist any long-term supply contracts.
The reliance on our contract manufacturer increases our risk of excess inventory as it may increase our lead times and certain
purchases require minimum orders which may exceed forecasted demand. Although we believe that substantially all components and
supplies used will continue to be available in adequate quantities at competitive prices, we cannot assure you that we will not
experience the absence of components or supplies, delays in obtaining their delivery or increases in prices in the future.
We are subject to foreign currency
exchange rate fluctuations.
Our acquisition
of the Porta Copper Products Division has increased our exposure to currency exchange rate fluctuations because a larger portion
of our revenues, a portion of our expenses and certain assets and liabilities are translated into U.S. dollars for financial reporting
purposes. In addition, our contract manufacturer operates facilities in China and Mexico. Accordingly, a reduction in the value
of non-U.S. dollar currencies, principally the Pound Sterling, Chinese Yuan and Mexican Peso relative to the U.S. dollar, or changes
in the relative value of currencies that we use for transactions, could have a material adverse effect on our financial condition
and results of operations. We may seek to mitigate our exposure to currency exchange rate fluctuations through currency hedging
and other means, but our efforts may not be successful.
Our credit facility imposes restrictions
on certain aspects of our business and our ability to obtain additional financing which may affect our ability to grow.
We currently have a credit facility in
the amount of $5,000,000. The revolving credit facility is limited by a borrowing base, in general, equal to 80% of eligible accounts
receivable, plus the lesser of 30% of eligible inventory, after certain reserves, or $1,500,000. At December 31, 2011, our borrowing
base was $4,703,000. There was no balance outstanding under this facility as of December 31, 2011, although there were outstanding
borrowings of $3,000,000 under this credit facility from April 2011 until September 2011. The credit agreement contains various
covenants, including financial covenants and covenants that prohibit or limit a variety of actions without the bank's consent.
These include, among other things, covenants that prohibit the payment of dividends and limit our ability to repurchase our stock,
incur or guarantee indebtedness, create liens, purchase all or a substantial part of the assets or stock of another entity, other
than certain permitted acquisitions, create or acquire any subsidiary, or substantially change our business. As a result of the
loss we sustained in the fourth quarter of 2011, we were not in compliance with the interest coverage financial covenant under
the credit facility at December 31, 2011, and received a covenant compliance waiver from the bank.
If we fail to comply with the covenants
in our credit agreement, our bank lender may prohibit us from making future borrowings and may declare any borrowings outstanding
at the time to become due and payable immediately. As of December 31, 2011, we were not in compliance with all our financial covenants
in the credit agreement and received a covenant compliance waiver from the bank.
If the amount we may borrow under the credit
facility is not sufficient for our needs, we may require financing from other sources, which we may not be able to obtain until
the credit facility is terminated. Our inability to obtain financing could have a material adverse effect on our ability to expand
our business.
The costs that we incur and management
time we expend as a result of being a public company could increase significantly in the future.
We incur significant legal, accounting,
administrative and other costs and expenses as a public company. We are required to comply with rules and regulations promulgated
by the SEC and NASDAQ. Compliance with these rules and regulations causes us to incur legal, audit and financial compliance costs,
and diverts management’s attention from operations and strategic opportunities.
In 2007, we incurred significant initial
costs in evaluating and reporting on our internal control over financial reporting as required by Section 404(a) of the Sarbanes-Oxley
Act of 2002 (“SOX”) and related rules and regulations of the SEC and standards of the Public Company Accounting Oversight
Board (PCAOB). The process of assessing and testing our internal controls and complying with Section 404 is ongoing and has
been, and will continue to be, time consuming, and it requires significant management attention.
As a smaller reporting company (defined
as having a market capitalization less than $75 million) we are currently exempt from needing an independent auditor test and report
on the effectiveness of our internal controls over financial reporting. However, if in the future our status as a smaller reporting
company were to change, we will incur additional costs when our independent registered public accounting firm would be required,
under Section 404(b) of SOX, to audit the effectiveness of our internal controls over financial reporting.
See our report on internal control over
financial reporting in Item 9A, “Controls and Procedures.”
A failure by us to maintain an effective
system of internal controls in the future could have an adverse effect on our operating results, stock price and ability to raise
financing.
We cannot be certain that the measures
we have taken with respect to our internal control over financial reporting will ensure that we will maintain adequate controls
over our financial processes and reporting in the future. We have in the past discovered, and may in the future discover, areas
of our internal controls that require improvement. A failure to implement required new or improved controls, or difficulties encountered
in their implementation, could harm our operating results or cause us to fail to meet our reporting obligations. Disclosures of
material weaknesses could reduce the market’s confidence in our financial statements and harm our stock price and our ability
to borrow and raise capital.
Risks Relating To Recent Acquisitions
The success of the acquisitions of the
Porta Copper Products Division and F2O will depend on our solidifying relationships with their pre-existing customers.
The success of the acquisitions of the
Porta Copper Products Division and F2O will be dependent on our ability to maintain and renew relationships with the pre-existing
customers of both the Porta Copper Products Division and Tii Fiber. There can be no assurance that we will be able to maintain
pre-existing customer contracts and other business relationships, or enter into or maintain new customer contracts and other business
relationships, on acceptable terms, if at all. The failure to maintain important customer relationships could have a material adverse
effect on our business, financial condition and results of operations. During 2011, sales to our customers in Mexico decreased
56% compared to 2010. In December 2011 we hired an experienced salesperson to oversee the relationships, although there can be
no assurance that sales will be impacted favorably.
Risks Relating To Our Common Stock
We do not anticipate paying dividends.
We intend to retain any future earnings
for use in our business. As a result, we do not anticipate paying any cash dividends in the foreseeable future. In addition, our
bank credit agreement prohibits us from declaring and paying any dividends.
The anti-takeover provisions in our
certificate of incorporation and under Delaware law may discourage or prevent takeover offers which could increase the price of
our stock if those provisions did not exist.
Generally, attempts to obtain control of
a company results in security holders obtaining a premium above the market price of a company's stock that existed before the attempt
is made. Our certificate of incorporation and the Delaware General Corporation Law contain provisions that, while intended to enable
our Board of Directors to maximize security holder value, could discourage or prevent any attempts by outsiders to obtain control
of us through mergers, tender offers, proxy contests and other means and could prevent or delay changes in our management. These
provisions include the following:
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the ability to issue preferred
stock with terms fixed by our Board of Directors at the time of their issuance without further security holder authorization;
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a supermajority vote to authorize certain
transactions;
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a classified Board of Directors;
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a requirement that directors may be removed
only by stockholders for cause; and
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the benefits of Delaware's "anti-takeover"
statutory provisions.
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Future sales of our common stock in
the public market could adversely affect the trading price of our common stock.
Sales of significant amounts of our common
stock in the public market, including short sale transactions, or the perception that such sales will occur, could adversely affect
prevailing trading prices of our common stock.
The price of our common stock may continue
to be volatile.
The market price of our common stock has
been at times, and may in the future be, subject to wide fluctuations. See Item 5, "Market for Registrant’s Common Equity,
Related Stockholder Matters and Issuer Purchases of Equity Securities." Factors that may adversely affect the market price
of our common stock include, among other things:
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quarter to quarter variations
in operating results;
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the occurrence of events that affect or could
affect our operating results;
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significant write-offs or write-downs of our
goodwill, identifiable intangible assets, receivables, inventories or other assets;
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changes in earnings estimates by analysts;
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announcements regarding technological innovations
or new products by us or others and the degree of success of those innovations and new products;
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announcements of gains or losses of significant
customers or contracts;
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prospects in the telecommunications industry;
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changes in the regulatory environment;
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market conditions; and
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the sale or attempted sale of large amounts
of our common stock into the public markets.
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ITEM 1B.
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UNRESOLVED STAFF COMMENTS
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None.
We own an approximately 25,000 square foot
building located in Edgewood, New York, which houses our principal research and development activities, sales and marketing and
administrative and executive offices. We moved into this facility in June 2007.
We lease an approximately 9,000 square
foot building located in Frederick, Maryland, which houses our sales support staff and warehouse for our Tii Fiber subsidiary.
This lease expires in June 2016.
We lease an approximately 6,000 square
foot building located in Daventry, England, which houses our sales support staff and warehouse for our customers in England. This
lease expires in September 2017.
We lease approximately 3,000 square feet
of space in Brownsville, Texas on a month to month basis. This facility encompasses a warehouse and a receiving and shipping point
for products coming from our contract manufacturer in Mexico.
We lease an approximately 1,100 square
foot quality assurance laboratory in Dongguan, China under a lease that expires in March 2013.
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ITEM 3.
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LEGAL PROCEEDINGS
|
None.
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ITEM 4.
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MINE SAFETY DISCLOSURES
|
Not applicable.
PART II
|
ITEM 5.
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MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
|
Our common stock trades on the NASDAQ Capital Market under the
symbol "TIII." The following table sets forth, for each calendar quarter since January 1, 2010, the high and low
sales prices of our common stock on that market:
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High
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Low
|
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Year ended December 31, 2011
|
|
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First Quarter
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$
|
3.93
|
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$
|
2.83
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Second Quarter
|
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3.07
|
|
|
|
2.21
|
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Third Quarter
|
|
|
2.78
|
|
|
|
1.84
|
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Fourth Quarter
|
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|
1.99
|
|
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|
1.32
|
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Year ended December 31, 2010
|
|
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First Quarter
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$
|
1.45
|
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$
|
1.20
|
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Second Quarter
|
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1.74
|
|
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|
1.29
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Third Quarter
|
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1.67
|
|
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1.23
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Fourth Quarter
|
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3.02
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1.20
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On March 23, 2012, we had approximately
237 holders of record of our common stock.
To date, we have paid no cash dividends.
For the foreseeable future, we intend to retain all earnings generated from operations for use in our business. Additionally, our
bank credit agreement prohibits the payment of cash dividends.
During 2011, we did not sell any securities
that were not registered under the Securities Act of 1933.
Issuer Purchases of Equity Securities
During the fourth quarter of 2011, we cancelled
the following number of shares of our common stock, representing in market value the minimum statutory withholding requirements
that we paid in cash to the appropriate taxing authorities on behalf of certain employees, in lieu of issuing all of the employees’
vested restricted stock:
Period
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Total Number
of Shares
Purchased
|
|
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Average Price
Paid Per Share
|
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Total Number of shares
Purchased as Part of Publicly
Announced Plans
|
|
|
|
|
|
|
|
|
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December 2011
|
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21,663
|
|
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$
|
1.44
|
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-
|
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ITEM 6.
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SELECTED FINANCIAL DATA
|
Not applicable.
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ITEM 7.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
|
The following
discussion and analysis should be read in conjunction with Item 8, “Financial Statements and Supplementary Data” and
the notes thereto included elsewhere in this Report. Historical operating results are not necessarily indicative of results that
may occur in future periods. This discussion and analysis contains forward-looking statements that involve risks, uncertainties
and assumptions. Actual results may differ materially from those anticipated in these forward-looking statements as a result of
certain factors, including, but not limited to, those presented under “Forward-Looking Statements” preceding Item 1,
in Item 1A, “Risk Factors,” and elsewhere in this Report. We undertake no obligation to update any forward-looking
statement to reflect future events.
Overview
Business
We design, manufacture and sell products
to the service providers in the communications industry for use in their networks. We sell our products through a network of sales
channels, principally to telephone operating companies (“Telcos”), multi-system operators (“MSOs”) of communications
services, including cable and satellite service providers, and original equipment manufacturers ("OEMs"). Our products
are typically found in the Telcos’ central offices, outdoors in the service providers’ distribution network, at the
interface where the service providers’ network connects to the users’ network, and inside the users’ home or
apartment, and are critical to the successful delivery of voice and broadband communication services.
Sales to the Company’s customers
are generally through “as ordered” general supply agreements. General supply agreements do not require customers to
purchase specific quantities of product and can be terminated for various reasons at any time. We forecast inventory requirements
based on historical trends and discussions with our customers. As previously reported, a general supply contract under which most
of our sales to a large international customer are ordered was put out to bid. We were awarded that contract in 2012 and it was
renewed with us on terms that are relatively consistent with the prior contract.
Recent Acquisitions
On March 11, 2011, we acquired
100%
of the capital stock of F2O, renamed Tii Fiber, for an initial cash payment of $750,000 from available cash on hand, and two contingent
cash payments of $125,000 each to be made based on the achievement of certain performance criteria in 2011 and 2012. The fair value
of the contingent consideration has been included in the overall purchase price of F2O based on the assessment that the achievement
of these targets is highly probable. The performance criteria were achieved for 2011.
Tii Fiber, headquartered in Frederick,
Maryland, manufactures a wide variety of high performance fiber optic cable assemblies, wall and rack mounted fiber distribution
panels, and miscellaneous fiber accessories and services. This acquisition was made in order to expand our fiber optics product
offerings.
On May 19, 2010, we acquired all of
the assets, exclusive of cash, and assumed certain operating liabilities, primarily accounts payable and accrued expenses, of the
Copper Products Division of Porta Systems Corp. (the “Porta Copper Products Division”) for cash of $8,150,000, subject
to purchase price adjustments. The Porta Copper Products Division was comprised of two wholly owned subsidiaries, one in England
and the other in Mexico, as well as domestic assets and liabilities exclusively related to copper telecommunications products.
Concurrent with this acquisition, we sold for $1,000,000 the acquired Mexican subsidiary, exclusive of customer contracts and certain
machinery and equipment which we retained, to our principal contract manufacturer, which is now operating this manufacturing facility.
We paid the net purchase price of $7,249,000, plus $99,000 of acquisition costs, predominately from the proceeds of the redemption
of our $7,000,000 certificate of deposit.
Impairment of Goodwill
During the fourth quarter of 2011, our
stock price significantly decreased and it became evident that the reduction in operating income of certain portions of the Tii
reporting unit would remain at lower levels due to economic conditions in the industry and buying patterns of certain customers.
These were triggering events which caused us to perform a goodwill impairment test as of December 31, 2011. Upon completion of
our goodwill impairment test, we recorded a goodwill impairment charge of $4,101,000 for the Tii reporting unit, which was all
the goodwill related to the Porta Copper Products Division acquisition. We concluded that there was no impairment of the goodwill
related to the Tii Fiber reporting unit.
Our financial statements include, and the following discussion
and analysis reflects, the activities of the Porta Copper Products Division from its May 19, 2010 date of acquisition and F2O from
its March 11, 2011 date of acquisition.
Results of Operations
The following tables
set forth certain operating information in thousands of dollars and as a percentage of net sales for the periods indicated (except
“Income tax provision,” which is stated as a percentage of “Income before income taxes”), as well as the
dollar increase or decrease between periods and the percentage of the dollar increase or decrease:
|
|
Years ended December 31,
|
|
|
|
|
|
|
2011
|
|
|
2010
|
|
|
Dollar
|
|
|
Percent
|
|
|
|
Amount
|
|
|
% of
Net Sales
|
|
|
Amount
|
|
|
% of
Net Sales
|
|
|
Increase
(Decrease)
|
|
|
Increase
(Decrease)
|
|
Net sales
|
|
$
|
56,258
|
|
|
|
100.0
|
%
|
|
$
|
54,498
|
|
|
|
100.0
|
%
|
|
$
|
1,760
|
|
|
|
3.2
|
%
|
Cost of sales
|
|
|
41,458
|
|
|
|
73.7
|
%
|
|
|
38,458
|
|
|
|
70.6
|
%
|
|
|
3,000
|
|
|
|
7.8
|
%
|
Gross profit
|
|
|
14,800
|
|
|
|
26.3
|
%
|
|
|
16,040
|
|
|
|
29.4
|
%
|
|
|
(1,240
|
)
|
|
|
-7.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
|
11,846
|
|
|
|
21.1
|
%
|
|
|
10,264
|
|
|
|
18.8
|
%
|
|
|
1,582
|
|
|
|
15.4
|
%
|
Research and development
|
|
|
2,584
|
|
|
|
4.6
|
%
|
|
|
2,239
|
|
|
|
4.1
|
%
|
|
|
345
|
|
|
|
15.4
|
%
|
Impairment of goodwill
|
|
|
4,101
|
|
|
|
7.3
|
%
|
|
|
-
|
|
|
|
0.0
|
%
|
|
|
4,101
|
|
|
|
100.0
|
%
|
Total operating expenses
|
|
|
18,531
|
|
|
|
32.9
|
%
|
|
|
12,503
|
|
|
|
22.9
|
%
|
|
|
6,028
|
|
|
|
48.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) income
|
|
|
(3,731
|
)
|
|
|
-6.6
|
%
|
|
|
3,537
|
|
|
|
6.5
|
%
|
|
|
(7,268
|
)
|
|
|
-205.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency transaction (loss) gain
|
|
|
(218
|
)
|
|
|
-0.4
|
%
|
|
|
48
|
|
|
|
0.1
|
%
|
|
|
(266
|
)
|
|
|
-554.2
|
%
|
Interest income
|
|
|
-
|
|
|
|
0.0
|
%
|
|
|
10
|
|
|
|
0.0
|
%
|
|
|
(10
|
)
|
|
|
-100.0
|
%
|
Interest expense
|
|
|
(29
|
)
|
|
|
-0.1
|
%
|
|
|
-
|
|
|
|
0.0
|
%
|
|
|
(29
|
)
|
|
|
-100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before income taxes
|
|
|
(3,978
|
)
|
|
|
-7.1
|
%
|
|
|
3,595
|
|
|
|
6.6
|
%
|
|
|
(7,573
|
)
|
|
|
-210.7
|
%
|
Income tax (benefit) provision
|
|
|
(845
|
)
|
|
|
21.2
|
%
|
|
|
1,365
|
|
|
|
38.0
|
%
|
|
|
(2,210
|
)
|
|
|
-161.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(3,133
|
)
|
|
|
-5.6
|
%
|
|
$
|
2,230
|
|
|
|
4.1
|
%
|
|
$
|
(5,363
|
)
|
|
|
-240.5
|
%
|
|
|
Years ended December 31,
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Dollar
|
|
|
Percent
|
|
|
|
Amount
|
|
|
% of
Net Sales
|
|
|
Amount
|
|
|
% of
Net Sales
|
|
|
Increase
(Decrease)
|
|
|
Increase
(Decrease)
|
|
Net sales
|
|
$
|
54,498
|
|
|
|
100.0
|
%
|
|
$
|
27,437
|
|
|
|
100.0
|
%
|
|
$
|
27,061
|
|
|
|
98.6
|
%
|
Cost of sales
|
|
|
38,458
|
|
|
|
70.6
|
%
|
|
|
18,193
|
|
|
|
66.3
|
%
|
|
|
20,265
|
|
|
|
111.4
|
%
|
Gross profit
|
|
|
16,040
|
|
|
|
29.4
|
%
|
|
|
9,244
|
|
|
|
33.7
|
%
|
|
|
6,796
|
|
|
|
73.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
|
10,264
|
|
|
|
18.8
|
%
|
|
|
7,157
|
|
|
|
26.1
|
%
|
|
|
3,107
|
|
|
|
43.4
|
%
|
Research and development
|
|
|
2,239
|
|
|
|
4.1
|
%
|
|
|
1,590
|
|
|
|
5.8
|
%
|
|
|
649
|
|
|
|
40.8
|
%
|
Total operating expenses
|
|
|
12,503
|
|
|
|
22.9
|
%
|
|
|
8,747
|
|
|
|
31.9
|
%
|
|
|
3,756
|
|
|
|
42.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
3,537
|
|
|
|
6.5
|
%
|
|
|
497
|
|
|
|
1.8
|
%
|
|
|
3,040
|
|
|
|
611.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency transaction gain
|
|
|
48
|
|
|
|
0.1
|
%
|
|
|
-
|
|
|
|
0.0
|
%
|
|
|
48
|
|
|
|
*
|
|
Interest income
|
|
|
10
|
|
|
|
0.0
|
%
|
|
|
15
|
|
|
|
0.1
|
%
|
|
|
(5
|
)
|
|
|
-33.3
|
%
|
Interest expense
|
|
|
-
|
|
|
|
0.0
|
%
|
|
|
(5
|
)
|
|
|
0.0
|
%
|
|
|
(5
|
)
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
3,595
|
|
|
|
6.6
|
%
|
|
|
507
|
|
|
|
1.8
|
%
|
|
|
3,088
|
|
|
|
609.1
|
%
|
Income tax provision
|
|
|
1,365
|
|
|
|
38.0
|
%
|
|
|
434
|
|
|
|
85.6
|
%
|
|
|
931
|
|
|
|
214.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
2,230
|
|
|
|
4.1
|
%
|
|
$
|
73
|
|
|
|
0.3
|
%
|
|
$
|
2,157
|
|
|
|
*
|
|
* Percentage increase was in excess of
1,000% for these items.
Year Ended December 31, 2011 compared
to Year Ended December 31, 2010
Net sales in 2011 were $56,258,000 compared
to $54,498,000 in 2010, an increase of $1,760,000 or 3%.
The sales growth was primarily due to the
inclusion of sales of our F2O acquisition since its March 11, 2011 date of acquisition, and increased sales to existing
customers of $3,472,000, partially offset by a decrease in sales of our
Porta Copper Products Division
of $1,713,000. We do not expect sales in 2012 to Porta Copper Products Division customers to return to the same levels as 2010.
Sales from Tii Fiber and Porta Copper Products Division accounted for 4% and 29% of total sales for the year ended December 31,
2011, as compared to 0% and 33% of total sales for year ended December 31, 2010.
Gross profit was $14,800,000 in
2011 compared to $16,040,000 in 2010, a decrease of $1,240,000 or 8%, while our gross profit margin was 26.3% in 2011
compared to 29.4% in 2010. The decreases are primarily due to inventory write-offs of $2,548,000 recorded in 2011 due to a
number of factors, including (i) increased technological obsolescence, (ii) changes in forecasted demand, (iii) customers
ceasing orders for certain products and (iv) excess inventory related to decreased sales of Porta Copper Products
Division’s products which were manufactured in anticipation of continued demand experienced post acquisition which was
not sustained in the latter part of 2011. In addition, in the fourth quarter of 2011, we incurred accelerated depreciation
charges for manufacturing fixed assets taken out of service of $849,000.
Selling, general and administrative expenses
were $11,846,000 in 2011 compared to $10,264,000 in 2010, an increase of $1,582,000 or 15%. The increase was primarily attributable
to expenses related to the newly acquired Tii Fiber operations of $657,000, accrued severance expense related to the departure
of our former CEO of $527,000, an increase in legal expenses of $144,000, amortization expense related to the intangible assets
related to the F2O acquisition of $53,000 and increased expenses associated with a full year of operations of the Porta Copper
Products Division.
In 2011, impairment of goodwill was $4,101,000
based on our analysis that indicated all of the goodwill relating to the Porta Copper Products Division was impaired. See “Critical
Account Policies, Estimates and Judgments,” below. There was no impairment of goodwill in 2010.
Research and development expenses were
$2,584,000 in 2011 compared to $2,239,000 in 2010, an increase of $345,000 or 15%. The increase was primarily attributable to
salaries and related benefits resulting from the inclusion of these costs of the Porta Copper Products Division for a full year
in 2011 compared to approximately 7-1/2 months in 2010, and product development expenses resulting from redesigning and qualifying
certain new products. The largest portion of our development efforts is focused on new products for the growth segments of the
telecommunication markets, primarily broadband and fiber deployment.
The foreign currency transaction loss
of $218,000 in 2011 was related to our subsidiaries in Mexico and England. The foreign currency transaction gain of $48,000 in
2010 was related to our subsidiary in England acquired as part of the Porta Copper Products Division acquisition.
There was no interest income in 2011 as
compared to $10,000 in 2010. The reduction was due to the redemption of our $7,000,000 certificate of deposit in May 2010 for
use in funding our acquisition of the Porta Copper Products Division.
Interest expense was $29,000 in 2011 as
compared to zero in 2010. We borrowed $3,000,000 under our credit facility in April 2011 that was fully repaid in September 2011.
We recorded a benefit from income taxes
of $845,000 in 2011 compared to a provision of $1,365,000 in 2010. In 2011 our benefit was less than, and in 2010 our rate exceeded,
the 34.0% U.S. Federal statutory rate primarily due to certain share-based compensation expense recorded for financial reporting
purposes that is not deductible for income tax purposes and the effect of state and local income taxes. Additionally, in 2011,
the tax benefit was decreased by $209,000 for the non-deductible portion of the impairment of goodwill. In both 2011 and 2010,
these items were partially offset by income from our U.K. subsidiary which was taxed at a lower rate. Neither the benefit for
taxes in 2011 nor the provision in 2010 represents the actual cash tax receivable or payable by us for the year. Actual U.S. Federal
income taxes owed for 2011 and 2010 were $94,000 and $38,000, respectively, due to our utilization of net operating loss carryforwards.
As of December 31, 2011, we had available
U.S. Federal and U.K. net operating loss carryforwards of approximately $17,766,000 and $1,166,000, respectively. We have U.S.
Federal tax credits of approximately $411,000 to offset taxable income in the future.
Net loss in 2011 was $3,133,000 or ($0.23)
per diluted share, compared to net income of $2,230,000 or $0.16 per diluted share in 2010. Net income amounts include income
tax benefit of $845,000 ($0.06 per diluted share) in 2011 and an income tax provision of $1,365,000 ($0.10 per diluted share)
in 2010.
Year Ended December 31, 2010 compared
to Year Ended December 31, 2009
Net sales in 2010 were $54,498,000 compared
to $27,437,000 in 2009, an increase of $27,061,000 or 99%.
The sales growth was primarily due to the
sales from our acquired Porta Copper Products Division, sales of new products to existing customers and sales to new customers
from
market share gains made in the fourth quarter of 2009
. Sales from the acquired Porta Copper
Products Division, which are included in our financial results since May 20, 2010, were $17,818,000 during 2010, accounting for
66% of the total sales increase. Porta Copper Products Division sales were at a higher run rate in 2010 than we expect going forward
due to increased orders from certain customers to replenish inventory that had been depleted prior to our acquisition.
Gross profit was $16,040,000 in 2010 compared
to $9,244,000 in 2009, an increase of $6,796,000 or 74%, while our gross profit margin was 29.4% in 2010 compared to 33.7% in 2009.
The increase in gross profit is attributable to the increase in sales, while the gross profit margin decrease was primarily attributable
to sales of the Porta Copper Products Division’s products which have historically sold at lower margins than our existing
products.
Selling, general and administrative expenses
were $10,264,000 in 2010 compared to $7,157,000 in 2009, an increase of $3,107,000 or 43%. The increase was primarily attributable
to transaction and integration costs of approximately $840,000 incurred during 2010 in connection with the Porta Copper Products
Division acquisition, additional salaries, benefits and other operating costs resulting from the Porta Copper Products Division
acquisition and an increase in commissions resulting from the increase in sales. However, selling, general and administrative expenses
decreased as a percentage of sales to 18.8% in 2010 (inclusive of the non-recurring transaction and integration costs) from 26.1%
in 2009, as the costs of our existing operations combined with the costs of our acquired operations were absorbed over the significantly
higher sales levels.
Research and development expenses were
$2,239,000 in 2010 compared to $1,590,000 in 2009, an increase of $649,000 or 41%. The increase was primarily attributable to salaries
and related benefits resulting from the Porta Copper Products Division acquisition and product development expenses resulting from
redesigning and qualifying certain of the newly acquired products.
The foreign currency translation adjustment
of $48,000 in 2010 is related to our United Kingdom subsidiary acquired as part of the Porta Copper Products Division acquisition.
Interest income was $10,000 in 2010 compared
to $15,000 in 2009. The reduction was due to both the redemption of our $7,000,000 certificate of deposit in May 2010 for use in
funding our acquisition of the Porta Copper Products Division and declining interest rates.
Interest expense was nominal in 2010 and
$5,000 in 2009 for a lease financing obligation.
We recorded a provision for income taxes
of $1,365,000 in 2010 compared to $434,000 in 2009. The provisions in 2010 and 2009 were 38% and 86%, respectively, of our pre-tax
income for financial reporting purposes. Our rate exceeds the 34.0% U.S. Federal statutory rate primarily due to certain share-based
compensation expense recorded for financial reporting purposes that are not deductible for income tax purposes and the effect of
state and local income taxes, each of which increases our effective tax rate for financial reporting purposes. Additionally, in
2010, these items were partially offset by income from our U.K. subsidiary which was taxed at a rate of only 28%. Neither the provision
for taxes in 2010 nor the provision in 2009 represents the actual cash tax payable by us in the ensuing year. Actual U.S. Federal
income taxes owed in 2010 and 2009 were $38,000 and $26,000, respectively, due to our utilization of net operating loss carryforwards.
Net income in 2010 was $2,230,000 or $0.16
per diluted share, compared to net income of $73,000 or $0.01 per diluted share in 2009. Net income amounts include income tax
expense of $1,365,000 ($0.10 per diluted share) in 2010 and $434,000 ($0.03 per diluted share) in 2009.
Impact of Inflation
We do not believe our business is affected
by inflation to a greater extent than the general economy.
Our products contain a significant amount
of plastic that is petroleum based. Additionally, we import most of our products from our principal contract manufacturer, located
in China and Mexico, and fuel costs are, therefore, a significant component of transportation costs to obtain delivery of products.
Accordingly, the recent increases in petroleum prices have increased, and are expected to further increase, the cost of our products.
Our products also contain a significant
amount of certain precious metals, in particular copper, gold and steel. The continuing increases in the costs of these precious
metals have, and are expected to further increase the cost of our products.
Increased labor costs in China and Mexico,
the countries in which our contract manufacturer produces products for us, could also increase the cost of our products.
We monitor the impact of inflation and
attempt to adjust prices where market conditions permit, except that we may not increase prices under certain of our general supply
agreements with our principal customers.
Inflation has not had a significant effect
on our operations during any of the reported periods.
Liquidity and Capital Resources
As of December 31, 2011, we had approximately
$21,419,000 of working capital, which included $3,715,000 of cash, and our current ratio was 3.5 to 1. As of December 31,
2010, we had approximately $18,200,000 of working capital, which included $1,635,000 of cash, and our current ratio was 2.8 to
1. The increase in our working capital and current ratio since December 31, 2010 was due to cash provided by operating activities.
In 2011, operating
activities provided cash of $4,173,000, primarily from net loss, before non-cash expenses for depreciation and amortization,
accelerated depreciation charges for equipment taken out of service, goodwill impairment, provision for excess and obsolete
inventory, deferred income taxes and share-based compensation, of $6,167,000 and a decrease in other receivables and
inventory of $577,000. This was partially offset by a $2,044,000 decrease in accounts payable and accrued liabilities related
to the timing of vendor payments and a $662,000 increase in accounts receivable. In 2010, operating activities used cash of
$1,721,000, primarily from an increase in inventory of $7,613,000 and an increase in accounts receivable of $2,945,000. This
was partially offset by net income, before non-cash expenses for depreciation and amortization, deferred income taxes and
share-based compensation, of $5,837,000 and a $3,447,000 increase to accounts payable and accrued liabilities related to
timing of vendor payments.
Investing activities in 2011 used cash
of $1,322,000 for capital expenditures, primarily for tools, molds, dies and equipment used to manufacture new products, and $717,000
for the acquisition of F2O. Investing activities in 2010 used cash of $1,679,000 for capital expenditures and $7,249,000 for the
acquisition of the Porta Copper Products Division, of which $7,000,000 was provided by redeeming a certificate of deposit.
Financing activities provided cash of
$1,000 in 2011, resulting from $68,000 of proceeds from stock option exercises and $2,000 from excess tax benefits from vesting
of restricted stock, offset by $69,000 of restricted shares purchased from employees to enable them to fund their tax withholding
obligation. Borrowings under the credit facility of $3,000,000 were repaid during the year. There were no cash financing activities
in 2010.
In December 2010, we entered into a bank
credit agreement (the “credit agreement”) which replaced a $5,000,000 facility that was expiring. Under the credit
agreement, which is scheduled to expire on December 31, 2013, we are entitled to borrow up to $5,000,000 in the aggregate which
is limited to a borrowing base that, in general, is equal to 80% of eligible accounts receivable (as defined), plus the lesser
of 30% of eligible inventory (as defined, generally to include, with certain exceptions, inventories at the Company’s continental
United States warehouse), after certain reserves, or $1,500,000. As of December 31, 2011, our borrowing base was $4,703,000.
Any loans under the credit agreement would
mature on December 31, 2013. We had no borrowings outstanding under the credit agreement as of December 31, 2011 or 2010.
However, we borrowed $3,000,000 under this facility in April 2011 that was fully repaid in September 2011.
Outstanding loans under the credit agreement
bear interest, at our option, either at (a) the bank's prime rate, provided that the prime rate shall not be less than an adjusted
one-month London Interbank Offered Rate (“LIBOR”) (as defined in the amended agreement), or (b) under a formula based
on LIBOR plus 1.85% per annum. We also pay a commitment fee equal to 0.25% per annum on the average daily unused portion of the
credit facility.
Our obligations under the credit agreement
are collateralized, pursuant to a Continuing Security Agreement, by all of our accounts receivable and inventory, and are also
guaranteed by one of our subsidiaries.
The credit agreement contains various covenants,
including financial covenants and covenants that prohibit or limit a variety of actions without the bank's consent. These include,
among other things, covenants that prohibit our payment of dividends and limit our ability to repurchase stock, incur or guarantee
indebtedness, create liens, purchase all or a substantial part of the assets or stock of another entity, other than certain permitted
acquisitions, create or acquire any subsidiary, or substantially change our business. The amended agreement requires us to maintain,
as of the end of each fiscal quarter, tangible net worth and subordinated debt of at least $28,500,000, a ratio of net income before
interest expense and income taxes for the 12-month period ending with such fiscal quarter to interest expense for the same period
of at least 2.25 to 1.00, and a ratio of total liabilities, excluding accounts payable in the ordinary course of business, accrued
expenses or losses and deferred revenues or gains, to net income before interest expense, income taxes, depreciation and amortization
for the 12-month period ending with the fiscal quarter for which compliance is being determined of not greater than 2.5 to 1.0.
As of December 31, 2011, we were not in compliance with all our financial covenants in the credit agreement and received a covenant
compliance waiver from the bank, upon paying a waiver fee of $1,000 and the bank’s legal fees.
We believe that existing cash, together
with internally generated funds and the available line of credit, will be sufficient for our working capital requirements and
anticipated capital expenditure needs for at least the next twelve months and to meet our long term liquidity needs.
Off-Balance Sheet Arrangements
We have no off-balance
sheet contractual arrangements, as defined in Item 303(a)(4) of Regulation S-K.
Critical Accounting Policies, Estimates
and Judgments
Our consolidated financial statements have
been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires
management to make estimates and judgments. We believe that the determination of the carrying value of our inventories, long-lived
assets and goodwill, the valuation of accounts receivable, the valuation of deferred tax assets and the valuation of share-based
payment compensation are the most critical areas where management’s judgments and estimates most affect our reported results.
While we believe our estimates are reasonable, misinterpretation of the conditions that affect the valuation of these assets could
result in actual results varying from reported results, which are based on our estimates, assumptions and judgments as of the balance
sheet date.
Inventories are required to be stated at
net realizable value at the lower of cost or market. In establishing the appropriate inventory write-downs, management assesses
the ultimate recoverability of the inventory, considering such factors as technological advancements in products as required by
our customers, average selling prices for finished goods inventory, changes within the marketplace, quantities of inventory items
on hand, historical usage or sales of each inventory item, forecasted usage or sales of inventory and general economic conditions.
We review long-lived assets, such as fixed
assets to be held and used or disposed of, for impairment whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. If the sum of the expected cash flows undiscounted and without interest is less than
the carrying amount of the asset, an impairment loss is recognized in the amount by which the carrying amount of the asset exceeds
its fair value.
We measure and test goodwill and intangible
assets not subject to amortization for impairment in accordance with Accounting Standards Codification (“ASC”) 350,
“Intangibles – Goodwill and Other,” at least annually on April 30
th
or more frequently upon the occurrence
of certain events or substantive changes in circumstances, such as a change in business conditions. We test intangible assets that
are not subject to amortization for impairment at the reporting unit level at least annually based upon discounted cash flow and
common market multiple analyses.
Goodwill is reviewed for potential impairment
at the reporting unit level on an annual basis, and in interim periods if events or circumstances indicate a potential impairment.
A reporting unit is an operating segment or one level below. As reporting units are determined after an acquisition or evolve with
changes in business strategy, goodwill is assigned to reporting units and it no longer retains its association with a particular
acquisition. All of the revenue streams and related activities of a reporting unit, whether acquired or organic, are available
to support the value of the goodwill.
Prior to 2011, the Company operated in
one operating segment and reporting unit. During 2011, and principally as a result of the acquisition of F2O, we concluded that
the Company was comprised of two reporting units, one reporting unit was comprised of F2O (“Tii Fiber”) acquired in
March 2011 and the other reporting unit was comprised of the remainder of Tii, including the Porta Copper Products Division acquired
in May 2010. The Company’s stock price experienced a sustained decline during the fourth quarter of 2011 and into the first
quarter of 2012 which caused our market capitalization to remain significantly below our recorded book value. Accordingly, during
the fourth quarter of 2011, we concluded this was a triggering event requiring impairment testing in order to determine whether
the carrying amount of goodwill exceeded its fair value.
Estimating the fair value of reporting
units is a subjective process that involves the use of estimates and judgments, particularly related to cash flows, the appropriate
discount rates and an applicable control premium. We determined the fair values of the reporting units using a combination of valuation
techniques consistent with the market approach and the income approach, and included the use of independent valuation specialists.
As a result of our procedures, we concluded
that all of the goodwill relating to the Porta Copper Products Division, included in our Tii reporting unit, was impaired and,
accordingly, we recorded a non-cash impairment charge of approximately $4,101,000. No impairment charge was deemed necessary relating
to the remaining $460,000 of goodwill attributable to the March 2011 F2O acquisition. In the future there may be additional triggering
events such that we may be required to reassess the recoverability of some or all of the remaining goodwill. The Company has estimated
that the fair value of its Tii Fiber reporting unit exceeds its carrying amount by 10% as of December 31, 2011. In estimating the
fair value of the Tii Fiber reporting unit, the Company considered: (1) indicators of recent market activity and (2) cash
flow projections using assumptions about, among other things, future growth in operating results. Deterioration in general market
conditions, or conditions affecting the industry, or the Company’s inability to execute its operating plan for Tii Fiber
could have a negative effect on these assumptions, and might result in an impairment of goodwill related to the reporting unit
in the future.
Accounts receivable are presented net of
allowances for doubtful accounts and sales returns based upon current facts and circumstances and management’s estimate of
expected trends. The majority of sales generated by our subsidiary in England are factored with a high credit quality financial
institution (the “factor”). The sale of the receivables is accounted for in accordance with the accounting guidance
for transfers and servicing of financial assets and extinguishments of liabilities. In accordance with the ASC 860, “Transfers
and Servicing,” receivables are considered sold when they are transferred beyond the reach of the subsidiary and its creditors,
the purchaser has the right to pledge or exchange the receivables, and the subsidiary has surrendered control over the transferred
receivables.
Consistent with ASC 740, “Income
Taxes,” we regularly estimate our ability to recover deferred tax assets and report these assets at the amount that is determined
to be “more-likely-than-not” recoverable. This evaluation considers several factors, including an estimate of the likelihood
of generating sufficient taxable income in future periods over which temporary differences reverse, the expected reversal of deferred
tax liabilities, past and projected taxable income and available tax planning strategies. Should management be unable to execute
its operating plan in future periods, it is possible that our estimate of the recoverability of deferred taxes may change, resulting
in an associated adjustment to earnings in that period.
In accordance with the requirements of
ASC 718, “Compensation – Stock Compensation”, we record the fair value of share-based compensation awards as
an expense. In order to determine the fair value of stock options on the date of grant, we apply the Black-Scholes-Merton option-pricing
model. Inherent in this model are assumptions related to expected stock-price volatility, option life, risk-free interest rate
and dividend yield. While the risk-free interest rate and dividend yield are less subjective assumptions, typically based on factual
data derived from public sources, the expected stock-price volatility and expected term assumptions require a greater level of
judgment. We estimate expected stock-price volatility based primarily on historical volatility of the underlying stock using daily
price observations over a period equal to the expected term of the option, but also consider whether other factors are present
that indicate that exclusive reliance on historical volatility may not be a reliable indicator of expected volatility. With regard
to our estimate of expected term, we use historical share option exercise experience, along with the vesting term and original
contractual term of options granted.
Recent Accounting Pronouncements
The Financial Accounting Standards Board
issues, from time to time, new financial accounting standards, staff positions and emerging issues task force consensus. See Note
1 to our consolidated financial statements for a discussion of recent accounting pronouncements that may affect our financial statements.
|
ITEM 7A.
|
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISKS
|
We are exposed to market risks, including
changes in interest rates. The interest payable under our credit facility, under which there were no borrowings outstanding as
of December 31, 2011, but as to which we had $3,000,000 of outstanding borrowing from April 2011 until September 2011, is
based on a specified bank’s prime interest rate or LIBOR and, therefore, is affected by changes in market interest rates.
Historically, the effects of movements in the market interest rates have been immaterial to our operating results, as we have not
borrowed to any significant degree.
Our products contain a significant amount
of plastic that is petroleum based, as well as certain precious metals, in particular copper, gold and steel. We import most of
our products from our contract manufacturer, principally in China and Mexico. Therefore, increased costs in either petroleum or
these precious metals can increase the cost of our products.
Other than sales generated by our subsidiaries
in England and Mexico, we require foreign sales to be paid in U.S. currency, and we are billed by our contract manufacturer in
U.S. currency. However, assets, liabilities and revenues generated by our subsidiaries in England and Mexico are denominated in
the Pound Sterling and Mexican Pesos, respectively, and, accordingly, fluctuations in the exchange rate of these currencies could
have a material impact on our financial position and results of operations. Additionally, since our contract manufacturer is based
in China and Mexico, the cost of our products could be affected by changes in the valuation of the Chinese Yuan and Mexican Peso,
respectively, and wage increases in these regions.
Historically, we have not purchased or
entered into interest rate swaps or future, forward, option or other instruments designed to hedge against changes in interest
rates, the price of materials used in the manufacturing of the products we sell, or the value of foreign currencies.
|
ITEM 8.
|
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
|
Report of Independent Registered Public
Accounting Firm
The Board of Directors and Stockholders
Tii Network Technologies, Inc.:
We have audited the accompanying consolidated
balance sheet of Tii Network Technologies, Inc. and subsidiaries (the “Company”) as of December 31, 2011,
and the related consolidated statements of operations and comprehensive (loss) income, stockholders’ equity, and cash flows
for the year then ended. These consolidated financial statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with
the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial
statements referred to above present fairly, in all material respects, the financial position of Tii Network Technologies, Inc.
and subsidiaries as of December 31, 2011, and the results of their operations and their cash flows for the year then
ended, in conformity with U.S. generally accepted accounting principles.
/s/ KPMG LLP
KPMG LLP
Melville, New York
March 30, 2012
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
To the Audit Committee of the
Board of Directors and Stockholders of
Tii Network Technologies, Inc.
We have audited the accompanying consolidated
balance sheet of Tii Network Technologies, Inc. and Subsidiaries (the “Company”) as of December 31, 2010 and
the related consolidated statements of operations and comprehensive (loss) income, stockholders’ equity and cash flows for
each of the years in the two-year period ended December 31, 2010. These consolidated financial statements are the responsibility
of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based
on our audits.
We conducted our audits in accordance
with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.
The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.
Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s
internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion
In our opinion, the consolidated financial
statements referred to above present fairly, in all material respects, the financial position of Tii Network Technologies, Inc.
and Subsidiaries as of December 31, 2010 and the results of its operations and its cash flows for each of the years in the
two-year period ended December 31, 2010, in conformity with United States generally accepted accounting principles.
/s/ Marcum LLP
Marcum LLP
Melville, New York
March 31, 2011
Tii NETWORK TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share
data)
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
3,715
|
|
|
$
|
1,635
|
|
Accounts receivable, net of allowance of $172 and $149 at December 31, 2011and 2010, respectively
|
|
|
9,069
|
|
|
|
8,269
|
|
Other receivable
|
|
|
16
|
|
|
|
396
|
|
Inventories
|
|
|
13,157
|
|
|
|
15,737
|
|
Deferred tax assets, net
|
|
|
3,659
|
|
|
|
2,091
|
|
Other current assets
|
|
|
401
|
|
|
|
463
|
|
Total current assets
|
|
|
30,017
|
|
|
|
28,591
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
|
8,186
|
|
|
|
9,350
|
|
Deferred tax assets, net
|
|
|
5,741
|
|
|
|
6,460
|
|
Intangible assets, net
|
|
|
2,920
|
|
|
|
2,822
|
|
Goodwill
|
|
|
460
|
|
|
|
4,102
|
|
Other assets
|
|
|
-
|
|
|
|
49
|
|
Total assets
|
|
$
|
47,324
|
|
|
$
|
51,374
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
5,742
|
|
|
$
|
8,697
|
|
Accrued liabilities
|
|
|
2,856
|
|
|
|
1,690
|
|
Total current liabilities and total liabilities
|
|
|
8,598
|
|
|
|
10,387
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders' equity:
|
|
|
|
|
|
|
|
|
Preferred stock, par value $1.00 per share; 1,000,000 shares authorized; no shares outstanding
|
|
|
-
|
|
|
|
-
|
|
Common stock, par value $.01 per share; 30,000,000 shares authorized; 14,682,252
shares issued and 14,664,615
shares outstanding as of December 31, 2011, and 14,601,322
shares issued and 14,583,685 shares outstanding as of December 31, 2010
|
|
|
147
|
|
|
|
146
|
|
Additional paid-in capital
|
|
|
44,718
|
|
|
|
43,812
|
|
Accumulated deficit
|
|
|
(5,970
|
)
|
|
|
(2,837
|
)
|
Accumulated other comprehensive income - foreign currency translation
|
|
|
112
|
|
|
|
147
|
|
|
|
|
39,007
|
|
|
|
41,268
|
|
Less: Treasury shares, at cost, 17,637 common shares at December 31, 2011 and 2010
|
|
|
(281
|
)
|
|
|
(281
|
)
|
Total stockholders' equity
|
|
|
38,726
|
|
|
|
40,987
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders' equity
|
|
$
|
47,324
|
|
|
$
|
51,374
|
|
See notes to consolidated financial statements
Tii NETWORK TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE (LOSS) INCOME
(in thousands, except per share data)
|
|
|
Year Ended December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
56,258
|
|
|
$
|
54,498
|
|
|
$
|
27,437
|
|
Cost of sales
|
|
|
41,458
|
|
|
|
38,458
|
|
|
|
18,193
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
14,800
|
|
|
|
16,040
|
|
|
|
9,244
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
|
11,846
|
|
|
|
10,264
|
|
|
|
7,157
|
|
Research and development
|
|
|
2,584
|
|
|
|
2,239
|
|
|
|
1,590
|
|
Impairment of goodwill
|
|
|
4,101
|
|
|
|
-
|
|
|
|
-
|
|
Total operating expenses
|
|
|
18,531
|
|
|
|
12,503
|
|
|
|
8,747
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) income
|
|
|
(3,731
|
)
|
|
|
3,537
|
|
|
|
497
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency transaction (loss) gain
|
|
|
(218
|
)
|
|
|
48
|
|
|
|
-
|
|
Interest income
|
|
|
-
|
|
|
|
10
|
|
|
|
15
|
|
Interest expense
|
|
|
(29
|
)
|
|
|
-
|
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before income taxes
|
|
|
(3,978
|
)
|
|
|
3,595
|
|
|
|
507
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax (benefit) provision
|
|
|
(845
|
)
|
|
|
1,365
|
|
|
|
434
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(3,133
|
)
|
|
$
|
2,230
|
|
|
$
|
73
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
(35
|
)
|
|
|
147
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive (loss) income
|
|
$
|
(3,168
|
)
|
|
$
|
2,377
|
|
|
$
|
73
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
(0.23
|
)
|
|
$
|
0.16
|
|
|
$
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
13,878
|
|
|
|
13,677
|
|
|
|
13,582
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
13,878
|
|
|
|
14,267
|
|
|
|
13,777
|
|
See notes to consolidated financial
statements
Tii NETWORK TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, except share data)
|
|
Common
Stock
Shares
|
|
|
Common
Stock
Amount
|
|
|
Additional
Paid-In
Capital
|
|
|
Accumulated
Deficit
|
|
|
Accumulated
Other
Comprehensive
Income
|
|
|
Treasury
Stock
|
|
|
Total
Stockholders'
Equity
|
|
Balance January 1, 2009
|
|
|
13,769,792
|
|
|
$
|
138
|
|
|
$
|
42,262
|
|
|
$
|
(5,140
|
)
|
|
$
|
-
|
|
|
$
|
(281
|
)
|
|
$
|
36,979
|
|
Share-based compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
802
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
802
|
|
Restricted shares issued
|
|
|
453,424
|
|
|
|
5
|
|
|
|
(5
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Excess tax deficiencies
from vested restricted stock
|
|
|
-
|
|
|
|
-
|
|
|
|
(9
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(9
|
)
|
Net
income for the year
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
73
|
|
|
|
-
|
|
|
|
-
|
|
|
|
73
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2009
|
|
|
14,223,216
|
|
|
$
|
143
|
|
|
$
|
43,050
|
|
|
$
|
(5,067
|
)
|
|
$
|
-
|
|
|
$
|
(281
|
)
|
|
$
|
37,845
|
|
Share-based compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
801
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
801
|
|
Restricted shares issued
|
|
|
390,000
|
|
|
|
4
|
|
|
|
(4
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Restricted shares forfeited
|
|
|
(12,369
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Restricted shares purchased
from employees and retired
|
|
|
(17,162
|
)
|
|
|
(1
|
)
|
|
|
(35
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(36
|
)
|
Foreign currency translation
adjustment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
147
|
|
|
|
-
|
|
|
|
147
|
|
Net
income for the year
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,230
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,230
|
|
Balance December 31, 2010
|
|
|
14,583,685
|
|
|
$
|
146
|
|
|
$
|
43,812
|
|
|
$
|
(2,837
|
)
|
|
$
|
147
|
|
|
$
|
(281
|
)
|
|
$
|
40,987
|
|
Share-based compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
906
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
906
|
|
Restricted shares issued
|
|
|
172,500
|
|
|
|
1
|
|
|
|
(1
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Restricted shares forfeited
|
|
|
(126,668
|
)
|
|
|
(1
|
)
|
|
|
1
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Stock option exercises
|
|
|
69,350
|
|
|
|
1
|
|
|
|
67
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
68
|
|
Excess income tax benefit
from stock award exercises
|
|
|
-
|
|
|
|
-
|
|
|
|
2
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2
|
|
Restricted shares purchased
from employees and retired
|
|
|
(34,252
|
)
|
|
|
-
|
|
|
|
(69
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(69
|
)
|
Foreign currency translation
adjustment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(35
|
)
|
|
|
-
|
|
|
|
(35
|
)
|
Net
loss for the year
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,133
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,133
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31,
2011
|
|
|
14,664,615
|
|
|
$
|
147
|
|
|
$
|
44,718
|
|
|
$
|
(5,970
|
)
|
|
$
|
112
|
|
|
$
|
(281
|
)
|
|
$
|
38,726
|
|
See notes to consolidated financial statements
Tii NETWORK TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
|
|
Years ended December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
Cash Flows from Operating Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(3,133
|
)
|
|
$
|
2,230
|
|
|
$
|
73
|
|
Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
2,784
|
|
|
|
1,604
|
|
|
|
1,627
|
|
Share-based compensation
|
|
|
906
|
|
|
|
801
|
|
|
|
802
|
|
Provision for excess and obsolete inventory
|
|
|
2,548
|
|
|
|
184
|
|
|
|
-
|
|
Deferred income taxes
|
|
|
(1,039
|
)
|
|
|
1,202
|
|
|
|
414
|
|
Impairment of goodwill
|
|
|
4,101
|
|
|
|
|
|
|
|
|
|
Loss on disposal of equipment
|
|
|
-
|
|
|
|
-
|
|
|
|
19
|
|
Excess tax benefit (deficiencies) from vesting of restricted stock
|
|
|
(2
|
)
|
|
|
-
|
|
|
|
(9
|
)
|
Changes in operating assets and liabilities, net of effects from acquisitions of businesses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(662
|
)
|
|
|
(2,945
|
)
|
|
|
438
|
|
Other receivables
|
|
|
380
|
|
|
|
(396
|
)
|
|
|
-
|
|
Inventories
|
|
|
197
|
|
|
|
(7,797
|
)
|
|
|
987
|
|
Other assets
|
|
|
137
|
|
|
|
(51
|
)
|
|
|
110
|
|
Accounts payable and accrued liabilities
|
|
|
(2,044
|
)
|
|
|
3,447
|
|
|
|
375
|
|
Net cash provided by (used in) operating activities
|
|
|
4,173
|
|
|
|
(1,721
|
)
|
|
|
4,836
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(1,322
|
)
|
|
|
(1,679
|
)
|
|
|
(738
|
)
|
Redemption of (investment in) certificate of deposit
|
|
|
-
|
|
|
|
7,000
|
|
|
|
(7,000
|
)
|
Net cash paid for the acquisition of the Copper Products
|
|
|
|
|
|
|
|
|
|
|
|
|
Division of Porta Systems Corp.
|
|
|
-
|
|
|
|
(7,249
|
)
|
|
|
-
|
|
Net cash paid for the acquisition of F2O
|
|
|
(717
|
)
|
|
|
-
|
|
|
|
-
|
|
Net cash used in investing activities
|
|
|
(2,039
|
)
|
|
|
(1,928
|
)
|
|
|
(7,738
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from exercise of stock options
|
|
|
68
|
|
|
|
-
|
|
|
|
-
|
|
Restricted shares purchased from employees
|
|
|
(69
|
)
|
|
|
-
|
|
|
|
-
|
|
Borrowings under credit facility
|
|
|
3,000
|
|
|
|
-
|
|
|
|
-
|
|
Repayment of credit facility borrowings
|
|
|
(3,000
|
)
|
|
|
-
|
|
|
|
(242
|
)
|
Excess tax benefit (deficiency) from vesting of restricted stock
|
|
|
2
|
|
|
|
-
|
|
|
|
(9
|
)
|
Net cash provided by (used in) financing activities
|
|
|
1
|
|
|
|
-
|
|
|
|
(251
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net effect of exchange rate changes on cash
|
|
|
(55
|
)
|
|
|
155
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
2,080
|
|
|
|
(3,494
|
)
|
|
|
(3,153
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, at beginning of year
|
|
|
1,635
|
|
|
|
5,129
|
|
|
|
8,282
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, at end of year
|
|
$
|
3,715
|
|
|
$
|
1,635
|
|
|
$
|
5,129
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash Investing and Financing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance premiums financed with short term debt
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
242
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock
|
|
$
|
-
|
|
|
$
|
4
|
|
|
$
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Cash Flow Information
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the year for interest
|
|
$
|
29
|
|
|
$
|
-
|
|
|
$
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the year for income taxes
|
|
$
|
122
|
|
|
$
|
92
|
|
|
$
|
10
|
|
See notes to consolidated financial statements
TII NETWORK
TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – Description of Business
and Summary of Significant Accounting Policies
Business
Tii Network Technologies, Inc. and subsidiaries
(together, “Tii,” the “Company,” “we,” “us” or “our”) design, manufacture
and sell equipment to service providers in the communications industry for use in their networks. We sell our products through
a network of sales channels, principally to telephone operating companies (“Telcos”), multi-system operators (“MSOs”)
of communications services, including cable and satellite service providers, and original equipment manufacturers ("OEMs").
Our products are typically found in the Telcos’ central offices, outdoors in the service providers’ distribution network,
at the interface where the service providers’ network connects to the users’ network, and inside the users’ home
or apartment, and are critical to the successful delivery of voice and broadband communication services.
Principles of Consolidation
The consolidated financial statements include
the accounts of Tii Network Technologies, Inc. and its wholly owned subsidiaries. All significant intercompany balances and transactions
have been eliminated in consolidation.
Reclassifications
Approximately $166,000 has been reclassified
from other assets to amortizable intangible assets as of December 31, 2010 in order to conform to the 2011 presentation.
Use of Estimates
The preparation of financial statements
in conformity with U.S. 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 the financial
statements and the reported amounts of revenues and expenses during the reporting period. Our more significant estimates include
the valuation of accounts receivable, inventory and deferred income taxes, the valuation of goodwill and other long-lived assets
and establishing the fair value of share-based compensation. Actual results could differ from such estimates.
Revenue Recognition
Our sales are derived from the sale of
our products. We do not provide any services to our customers. Product sales are recorded when there is persuasive evidence of
the arrangement, usually a customer purchase order, the products are shipped, title passes to the customer, and the price is fixed
and determinable and probable of collection. Once a product is shipped, we have no acceptance or other post-shipment obligations
precluding revenue recognition. Accounts receivable as of December 31, 2011 and 2010 are presented net of allowances for doubtful
accounts and sales returns of $172,000 and $149,000, respectively, based upon known facts and circumstances and management’s
estimate of expected trends.
In the normal
course of business, we collect non-income related taxes, including sales, use and foreign value added tax, from our customers and
we remit those taxes to governmental authorities. We present sales net of these taxes.
Concentration of Credit Risk
At December 31, 2011, our cash deposits
were maintained at three high credit quality financial institutions. At times, our cash and cash equivalents may be uninsured or
in deposit accounts that exceed the Federal Deposit Insurance Corporation insurance limit.
Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents,
receivables, other current assets, accounts payable and accrued liabilities approximate fair value due to the short-term nature
of these instruments.
Foreign Currency Translation
Our subsidiary in England maintains its
accounting records in Pound Sterling, which is its functional currency. Our Mexican subsidiary maintains its accounting records
in Mexican Pesos, which is its functional currency. We translate the foreign subsidiaries’ assets and liabilities into U.S.
dollars based on exchange rates at the end of the respective reporting periods and reflect the effect of foreign currency translation
as a component of stockholders’ equity. Income and expense items are translated at an average exchange rate during the period.
Transaction gains and losses are included in the determination of the results from operations.
Factored Receivables
The majority of sales generated by our
subsidiary in England are factored with a high credit quality financial institution (the “factor”). The sale of the
receivables is accounted for in accordance with the accounting guidance contained in Accounting Standards Codification (“ASC”)
No. 860 (“ASC 860”), “Transfers and Servicing.” In accordance with ASC 860, receivables are considered
sold when they are transferred beyond the reach of the subsidiary and its creditors, the purchaser has the right to pledge or exchange
the receivables, and the subsidiary has surrendered control over the transferred receivables. Included in accounts receivables
are factored receivables net of advances from the factor of $1,629,000 and $790,000 as of December 31, 2011 and December 31,
2010, respectively.
Inventories
Inventories are stated at the lower of
cost or market, on a first-in, first-out basis.
Property, Plant and Equipment
Property, plant and equipment are recorded
at cost and depreciated using the straight-line method over the estimated useful life of the related asset. The estimated useful
lives for each category of property, plant and equipment is as follows:
|
Estimated useful life
(in years)
|
Building and building improvements
|
30
|
Machinery and equipment
|
5 - 10
|
Computer hardware and software
|
3 - 5
|
Office furniture, fixtures, equipment and other
|
3 - 5
|
Goodwill and Other Intangible Assets
The assets and liabilities of our acquired
businesses are recorded at their estimated fair values at the date of acquisition. The excess of the purchase price over the estimated
fair value of the net assets acquired is recorded as goodwill. All acquisition costs are expensed as incurred. We measure and test
goodwill and intangible assets not subject to amortization for impairment in accordance with ASC 350, “Intangible –
Goodwill and Other,” at least annually on April 30
th
or more frequently upon the occurrence of certain events
or substantive changes in circumstances, such as a change in business conditions.
Other intangible assets, which include
customer relationships, are amortized using the straight-line method over the estimated useful lives of the related assets. Intangible
assets that are subject to amortization are tested for impairment whenever events or changes in circumstances indicate that the
carrying value may not be recoverable. We determined that, as of December 31, 2011, there was no impairment of our intangible assets
other than goodwill.
Goodwill impairment is determined using
a two-step process. The first step of the goodwill impairment test is used to identify potential impairment by comparing the fair
value of a reporting unit with its carrying amount, including goodwill utilizing an enterprise-value based premise approach. If
the carrying amount of a reporting unit exceeds its fair value, the second step of the goodwill impairment test is performed to
measure the amount of goodwill impairment loss, if any. The second step of the goodwill impairment test compares the implied fair
value of the reporting unit’s goodwill with the carrying amount of the goodwill. If the carrying amount of the reporting
unit’s goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to the
excess. The implied fair value of goodwill is determined in the same manner as the amount of goodwill that would be recognized
in a business combination. For the purpose of evaluating goodwill impairment we had two reporting units, which recognized goodwill.
These reporting units are Tii reporting unit, which includes the goodwill from the Porta Copper Products Division acquisition (see
Note 2), and, Tii Fiber Optics Inc. (“Tii Fiber”) (see Note 2).
In assessing the recoverability of our
goodwill and other long-lived assets, we must make assumptions regarding estimated future cash flows and other factors to determine
the fair value of the respective assets. These estimates and assumptions could have a significant impact on whether an impairment
charge is recognized and also the magnitude of any such charge. Fair value estimates are made at a specific point in time, based
on relevant information. These estimates are subjective in nature and involve uncertainties and matters of significant judgments
and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Estimates of
fair value are primarily determined using discounted cash flows and comparable market transactions. These valuations are based
on estimates and assumptions including projected future cash flows, discount rate, and determination of appropriate market comparables
and determination of whether a premium or discount should be applied to comparables.
During the fourth quarter of 2011, our
stock price significantly decreased, and it became evident that the reduction in operating income of certain portions of the Tii
reporting unit would remain at lower levels due to economic conditions in the industry and buying patterns of certain customers.
These were triggering events which caused us to perform a goodwill impairment test as of December 31, 2011. Upon completion of
our goodwill impairment test, we recorded a goodwill impairment charge of $4,101,000 for the Tii reporting unit, which was all
the goodwill related to the Porta Copper Products Division acquisition.
In the first step of the goodwill impairment
test, the fair value of the Tii reporting unit was less than its carrying amount under both the income and market approaches. Under
the income approach, the weighted average cost of capital used to discount future cash flows was 14% and the terminal value was
calculated utilizing a 3% perpetuity growth rate.
At December 31, 2011 the Tii Fiber reporting
unit’s fair value exceeded its carrying amount. The fair value was determined using an income approach, with a weighted average
cost of capital of 14% and a 4% perpetuity growth rate. In order to evaluate the sensitivity of the fair value calculations of
our Tii Fiber reporting unit on the impairment calculation for goodwill, we applied a hypothetical decrease to the estimated fair
value of the reporting unit. A hypothetical decrease of 10% would cause the Tii Fiber reporting unit to fail step one of the goodwill
impairment analysis.
Prior to 2011, there were no accumulated
impairment losses related to goodwill.
Segment Information
We have evaluated the provisions of ASC
280, “Segment Reporting” (“ASC 280”), and have determined that we have two reportable segments. We have
provided the required geographic, major supplier and major customer information in Note 11.
Long-Lived
Assets
We
review long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. If the sum of the expected cash flows, undiscounted and without interest, is less than the carrying amount
of the asset, an impairment loss is recognized in the amount by which the carrying amount of the asset exceeds its fair value.
Income Taxes
Deferred tax assets
and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax bases and net operating loss and tax credit carryforwards.
Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change
in tax rates is recognized in income in the period that includes the enactment date. We use the with-and-without approach to determine
the recognition and measurement of excess tax benefits resulting from tax deductions in excess of the cumulative compensation cost
recognized from stock options exercised and restricted stock vesting or tax deficiencies resulting from cumulative compensation
cost recognized from stock options exercised and restricted stock vesting in excess of tax deductions. For financial statement
purposes, certain of our net operating loss carryforwards contain deductions for share-based compensation in excess of the related
compensation expense recognized. In determining the period in which related tax benefits are recognized for financial reporting
purposes, such excess share-based compensation deductions included in net operating losses are realized after regular net operating
losses are exhausted.
Tax benefits related to uncertain tax positions
taken or expected to be taken on a tax return are recorded when such benefits meet a “more likely than not” threshold.
Otherwise, these tax benefits are recorded when a tax position has been effectively settled, which means that the statute of limitation
has expired or the appropriate taxing authority has completed its examination even though the statute of limitations remains open.
Interest and penalties related to uncertain tax positions are recognized as part of the provision for income taxes and are accrued
beginning in the period that such interest and penalties would be applicable under relevant tax law until such time that the related
tax benefits are recognized.
Net Income Per Common Share
Basic earnings per share (“EPS”)
is computed by dividing income available to common stockholders (which equals our net income) by the weighted average number of
common shares outstanding, and dilutive EPS adds the dilutive effect of stock options and other common stock equivalents. The following
table sets forth the amounts used in the computation of basic and diluted earnings per share:
|
|
Years ended December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
Numerator for diluted EPS calculation:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(3,133,000
|
)
|
|
$
|
2,230,000
|
|
|
$
|
73,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic EPS calculation:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding - Basic
|
|
|
13,878,000
|
|
|
|
13,677,000
|
|
|
|
13,582,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted EPS calculation:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding - Basic
|
|
|
13,878,000
|
|
|
|
13,677,000
|
|
|
|
13,582,000
|
|
Effect of dilutive stock options
|
|
|
-
|
|
|
|
214,000
|
|
|
|
122,000
|
|
Effect of unvested restricted stock awards
|
|
|
-
|
|
|
|
376,000
|
|
|
|
73,000
|
|
Balance December 31
|
|
|
13,878,000
|
|
|
|
14,267,000
|
|
|
|
13,777,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and Diluted EPS
|
|
$
|
(0.23
|
)
|
|
$
|
0.16
|
|
|
$
|
0.01
|
|
The following table sets forth restricted
stock awards and outstanding options to purchase shares of common stock which were excluded from the computation of diluted earnings
per share because their inclusion would have been anti-dilutive:
|
|
Years ended December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
Restricted stock awards
|
|
|
538,509
|
|
|
|
73,000
|
|
|
|
260,000
|
|
Outstanding stock options
|
|
|
1,937,200
|
|
|
|
1,731,000
|
|
|
|
2,199,000
|
|
|
|
|
2,475,709
|
|
|
|
1,804,000
|
|
|
|
2,459,000
|
|
Advertising Costs
We incur advertising costs for sales and
marketing initiatives, including advertisements in magazines, brochures and mailings, promotions and public relations. Advertising
costs were $128,000, $85,000 and $46,000 for the years ended December 31, 2011, 2010 and 2009, respectively.
Share-Based Payment
We follow the provisions
of ASC 718, “Compensation – Stock Compensation” (ASC 718”), which requires that all share-based compensation
be recognized as an expense in the financial statements and that this cost be measured at the fair value of the award. ASC 718
also requires that excess tax benefits and deficiencies related to stock option exercises and restricted stock vesting be reflected
in the consolidated statements of cash flows as financing cash inflows and operating cash outflows. See Note 9 for additional information
on shared-based compensation.
Comprehensive Income
Comprehensive income includes, in addition
to net income (loss), foreign currency translation gains and losses, the accumulated effect of which is included in the stockholders’
equity section of the balance sheet. We reported comprehensive loss of $3,168,000 for the year ended December 31, 2011 and comprehensive
income of $2,377,000 and $73,000 for the years ended December 31, 2010 and 2009, respectively.
Recently Adopted Accounting Pronouncements
In October 2009, the FASB issued Accounting
Standards Update (“ASU”) No. 2009-13, “Revenue Recognition (Topic 605) - Multiple-Deliverable Revenue Arrangements”
(“ASU 2009-13”), which amends the revenue recognition guidance for multiple-element arrangements and expands the disclosure
requirements related to such arrangements. The new guidance amends the criteria for separating consideration in multiple-deliverable
arrangements, establishes a selling price hierarchy for determining the selling price of a deliverable, eliminates the residual
method of arrangement consideration allocation, and requires the application of the relative selling price method in allocating
the arrangement consideration to all deliverables. We adopted ASU 2009-13 on a prospective basis to revenue arrangements entered
into or materially modified on or after January 1, 2011 which did not have any impact on our financial statements.
In December 2010, the FASB issued
ASU 2010-28, “Intangibles - Goodwill and Other (Topic 350): When to Perform Step 2 of the Goodwill Impairment Test for Reporting
Units with Zero or Negative Carrying Amounts” (“ASU 2010-28”). ASU 2010-28 modifies Step 1 of the goodwill impairment
test for reporting units with zero or negative carrying amounts by requiring an entity to perform Step 2 of the goodwill impairment
test if it is more likely than not that a goodwill impairment exists. We adopted ASU 2010-28 on January 1, 2011. The adoption of
this authoritative guidance did not have any impact on our consolidated financial statements.
In December 2010, the FASB issued ASU 2010-29,
“Business Combinations (Topic 805): Disclosure of Supplementary Pro Forma Information for Business Combinations” (“ASU
2010-29”). This amendment affects any public entity (as defined by Topic 805, “Business Combinations”) that enters
into business combinations consummated after January 1, 2011 and that are material on an individual or aggregate basis. ASU 2010-29
provides that comparative financial statements should present and disclose pro forma revenue and earnings of the combined entity
as though the business combination that occurred during the current year had occurred as of the beginning of the comparable prior
annual reporting period only. The amendment also expands the supplemental pro forma disclosures to require a description of the
nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in
the reported pro forma revenue and earnings. We adopted ASU 2010-29 on January 1, 2011. The adoption of this authoritative guidance
did not have a material impact on our consolidated financial statements.
Recently Issued But Not Yet Adopted
Accounting Pronouncements
In September 2011, the FASB issued ASU
2011-08, “Intangibles—Goodwill and Other (Topic 350), Testing Goodwill for Impairment”, to simplify how entities
test goodwill for impairment. ASU 2011-08 allows entities to first assess qualitative factors to determine whether it is more likely
than not that the fair value of a reporting unit is less than its carrying amount. If a greater than 50 percent likelihood exists
that the fair value is less than the carrying amount then a two-step goodwill impairment test as described in Topic 350 must be
performed. The guidance provided by this update becomes effective for annual and interim goodwill impairment tests performed for
fiscal years beginning after December 15, 2011, with early adoption permitted. We have not elected to early adopt this ASU.
We will adopt this ASU in the first quarter of 2012. The adoption of this ASU is not expected to have an impact on our financial
statements.
In June 2011, the FASB issued ASU 2011-05,
“Comprehensive Income (Topic 220), Presentation of Comprehensive Income” (“ASU 2011-05”). ASU 2011-05 requires
that all non-owner changes in stockholder’s equity be presented either in a single continuous statement of comprehensive
income or in two separate but consecutive statements. In both cases, an entity is required to present each component of net income
along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and
a total amount for comprehensive income. Since ASU 2011-05 does not change the items that must be reported in other comprehensive
income or when an item of other comprehensive income must be reclassified to net income, it will have no impact on our financial
position or results of operations. ASU 2011-05 is effective for us in the first quarter of 2012.
NOTE 2 – Acquisitions
On March 11, 2011, we acquired
100%
of the capital stock of Frederick Fiber Optics (“F2O”), which was renamed Tii Fiber Optics Inc. (“Tii Fiber”)
for an initial cash payment of $750,000, and two contingent cash payments of $125,000 each to be made based on the achievement
of certain performance criteria in 2011 and 2012, which are included at their fair value in accrued liabilities in the accompanying
consolidated balance sheet at December 31, 2011 based on the assessment that the achievement of these targets is highly probable.
The performance criteria were achieved for 2011.
Tii Fiber, headquartered in Frederick, Maryland, manufactures a wide variety
of high performance fiber optic cable assemblies, wall and rack mounted fiber distribution panels, and miscellaneous fiber accessories
and services. This acquisition was made in order to expand our fiber optic product offerings.
The following is a summary of the fair
value of the net assets acquired, exclusive of $33,000 of acquired cash, as a result of the acquisition of F2O:
Assets
|
|
|
|
|
Accounts receivable
|
|
$
|
251,000
|
|
Inventories
|
|
|
175,000
|
|
Prepaid expenses and other assets
|
|
|
4,000
|
|
Property and equipment
|
|
|
31,000
|
|
Goodwill
|
|
|
460,000
|
|
Customer relationships
|
|
|
332,000
|
|
Liabilities
|
|
|
|
|
Accounts payable
|
|
|
(101,000
|
)
|
Accrued expenses
|
|
|
(54,000
|
)
|
Deferred tax liability
|
|
|
(131,000
|
)
|
|
|
|
|
|
Total net purchase price, including $250,000 in accrued contingent consideration
|
|
$
|
967,000
|
|
We recorded this transaction in our interim reporting periods
in 2011 based on a preliminary estimate of the fair value of the net assets acquired. We completed our assessment of fair values
during the fourth quarter of 2011 and reallocated fair values based on this assessment. The only change was to reclassify $181,000
from goodwill to identifiable intangible assets subject to amortization. The customer relationships intangible asset is being amortized
over its estimated useful life of five years and, since the amortization is not deductible for income tax purposes, we recorded
a related deferred tax liability.
On a pro forma basis, had the F2O acquisition taken place as
of January 1, 2010, our results of operations since then would not have been materially affected.
On May 19, 2010, we acquired all of
the assets, exclusive of cash, and assumed certain operating liabilities, primarily accounts payable and accrued expenses, of the
Porta Copper Products Division for cash of $8,150,000, subject to price adjustments. This acquisition was made in order to increase
our sales levels, expand into key markets and acquire new products and technology.
The Porta Copper Products Division is comprised
of two wholly owned subsidiaries, one in England and the other in Mexico, as well as domestic assets, liabilities, sales and expenses
exclusively related to copper telecommunications products.
Concurrent with this acquisition, we sold
the acquired Mexican subsidiary, exclusive of customer contracts and certain machinery and equipment which we retained, to our
principal contract manufacturer, which now operates this manufacturing facility. In consideration for this sale, we received $1,000,000
from the contract manufacturer, subject to purchase price adjustments, as well as an option to reacquire up to approximately 9%
of a newly formed entity that now owns the Mexican subsidiary, for a total exercise price of $100,000. We believed that the value
of this option, which expired on May 18, 2011, was not material and we therefore did not allocate any of the net Porta Copper
Products Division purchase price to this option. Additionally, we sold to the contract manufacturer certain raw material and component
inventories, which were acquired as part of the Porta Copper Products Division transaction,
for approximately
$1,175,000.
The following is a summary of the fair
value of the net assets acquired as a result of the acquisition of the Porta Copper Products Division, net of the concurrent sale
of the Mexican manufacturing operations to our principal contract manufacturer:
Assets
|
|
|
|
|
Accounts receivable
|
|
$
|
1,479,000
|
|
Net balance due from contract manufacturer
|
|
|
221,000
|
|
Inventories
|
|
|
228,000
|
|
Prepaid expenses and other assets
|
|
|
274,000
|
|
Deferred tax assets
|
|
|
876,000
|
|
Property and equipment
|
|
|
1,145,000
|
|
Intangible assets subject to amortization
|
|
|
2,710,000
|
|
Goodwill
|
|
|
4,101,000
|
|
Liabilities
|
|
|
|
|
Accounts payable
|
|
|
(3,314,000
|
)
|
Accrued expenses
|
|
|
(471,000
|
)
|
Total net purchase price
|
|
$
|
7,249,000
|
|
We recorded this transaction in our interim
reporting periods in 2010 subsequent to the acquisition based on a preliminary estimate of the fair value of the net assets acquired.
We completed our assessment of fair values during the fourth quarter of 2010 and reallocated fair values based on this assessment.
The most significant change was to reclassify $1,670,000 from goodwill to identifiable intangible assets subject to amortization.
We also reassessed the useful lives of these intangible assets and adjusted the amortization periods, the result of which did not
have a material effect on the interim periods.
The net balance due from our contract manufacturer
of $221,000 is comprised of raw materials and components inventories sold to the contract manufacturer for $1,175,000, partially
offset by a purchase price adjustment payable resulting from the sale of the Mexican subsidiary and
additional Mexican subsidiary liabilities
which were assumed by the contract manufacturer. The receivable balance as of
December 31, 2010, which totaled $396,000 due to subsequent transactions with the contract manufacturer, is included in other
receivables in the accompanying consolidated balance sheet.
Unaudited pro forma sales, net income and
earnings per share data, calculated under the premise that the acquisition of the Porta Copper Products Division had occurred on
January 1, 2009 were $63,405,000, $2,009,000, $0.15 basic earnings per share and $0.14 diluted earnings per share for the
year ended December 31, 2010 and $48,835,000, $29,000 and $0.00 basic and diluted earnings per share for the year ended December 31,
2009.
Acquisition related expenses included in
selling, general and administrative expenses in the statement of operations were $17,000 and $840,000 in 2011 and 2010, respectively.
As discussed in Note 1, all of the goodwill
associated with this acquisition was written off in the fourth quarter of 2011.
NOTE 3 – Inventories
The following table represents the cost basis of each major
class of inventory as of December 31, 2011 and 2010:
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
|
Raw material and subassemblies
|
|
$
|
1,710,000
|
|
|
$
|
1,594,000
|
|
Finished goods
|
|
|
11,447,000
|
|
|
|
14,143,000
|
|
|
|
$
|
13,157,000
|
|
|
$
|
15,737,000
|
|
The Company recorded a provision for excess
and obsolete inventory of $2,548,000 and $184,000 in 2011 and 2010, respectively. The increase to the provision recorded in 2011
was due to a number of factors, including (i) increased technological obsolescence, (ii) changes in forecasted demand, (iii) customers
ceasing orders for certain products and (iv) excess inventory related to decreased sales of Porta Copper Products Division’s
products.
NOTE 4 – Property, Plant and Equipment
Property, plant and equipment are recorded
at cost and depreciated using the straight-line method over the estimated useful life of the related asset. The following table
presents the amounts of each major class of property, plant and equipment as of December 31, 2011 and 2010:
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
|
Land
|
|
$
|
1,244,000
|
|
|
$
|
1,244,000
|
|
Building and building improvements
|
|
|
4,314,000
|
|
|
|
4,307,000
|
|
Construction in progress
|
|
|
18,000
|
|
|
|
34,000
|
|
Machinery and equipment
|
|
|
7,136,000
|
|
|
|
9,925,000
|
|
Computer hardware and software
|
|
|
873,000
|
|
|
|
905,000
|
|
Furniture, fixtures, equipment and other
|
|
|
925,000
|
|
|
|
905,000
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
14,510,000
|
|
|
$
|
17,320,000
|
|
Less: accumulated depreciation and amortization
|
|
|
(6,324,000
|
)
|
|
|
(7,970,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
8,186,000
|
|
|
$
|
9,350,000
|
|
Depreciation and amortization of plant
and equipment was $1,669,000, $1,494,000 and $1,576,000 for the years ended December 31, 2011, 2010 and 2009, respectively.
We recorded an accelerated
depreciation charge for equipment taken out of service of $849,000 for the year ended December 31, 2011, which is
included in cost of sales in the accompanying statement of operations. We recorded a loss on disposal of equipment of $19,000
for the year ended December 31, 2009 that was recorded in selling, general and administrative expense.
NOTE 5 – Amortizable Intangible
Assets
Intangible assets other than goodwill are
amortized using the straight-line method over the estimated useful life of the related asset. The following table sets forth the
amounts of each major class of intangible assets subject to amortization as of December 31, 2011 and 2010:
|
|
2011
|
|
|
Weighted
average
amortization
period in years
|
|
|
2010
|
|
Customer relationships
|
|
$
|
2,372,000
|
|
|
|
9.3
|
|
|
$
|
2,040,000
|
|
Patents
|
|
|
1,674,000
|
|
|
|
10.7
|
|
|
|
1,642,000
|
|
Distributor relationships
|
|
|
540,000
|
|
|
|
10.0
|
|
|
|
540,000
|
|
Trade name
|
|
|
130,000
|
|
|
|
3.0
|
|
|
|
130,000
|
|
|
|
|
4,716,000
|
|
|
|
|
|
|
|
4,352,000
|
|
Less: accumulated amortization
|
|
|
(1,796,000
|
)
|
|
|
|
|
|
|
(1,530,000
|
)
|
|
|
$
|
2,920,000
|
|
|
|
|
|
|
$
|
2,822,000
|
|
Amortization of intangible assets subject
to amortization was $266,000 and $54,000 for the years ended December 31, 2011, and 2010 respectively. The estimated amortization
expense for the fiscal years ending December 31, 2012, 2013, 2014, 2015 and 2016 is $367,000, $359,000, $324,000, $324,000 and
$271,000, respectively.
NOTE 6 - Accrued Liabilities
Accrued liabilities consist of the following as of December 31,
2011 and 2010:
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
Accrued payroll and vacation
|
|
$
|
1,024,000
|
|
|
$
|
1,077,000
|
|
Accrued legal and other professional fees
|
|
|
648,000
|
|
|
|
122,000
|
|
Accrued severance
|
|
|
527,000
|
|
|
|
-
|
|
Other accrued expenses
|
|
|
657,000
|
|
|
|
491,000
|
|
|
|
$
|
2,856,000
|
|
|
$
|
1,690,000
|
|
NOTE 7 - Revolving Credit Facility
In December 2010, we entered into a bank
credit agreement (the “credit agreement”) which replaced a $5,000,000 facility that was expiring. Under the credit
agreement, which is scheduled to expire on December 31, 2013, we are entitled to borrow up to $5,000,000 in the aggregate which
is limited to a borrowing base which, in general, is equal to 80% of eligible accounts receivable (as defined), plus the lesser
of 30% of eligible inventory (as defined, generally to include, with certain exceptions, inventories at the Company’s continental
United States warehouse), after certain reserves, or $1,500,000. As of December 31, 2011, our borrowing base was $4,703,000.
Any loans under the credit agreement would
mature on December 31, 2013. We had no borrowings outstanding under the credit agreement as of December 31, 2011 or 2010.
However, we borrowed $3,000,000 under this facility in April 2011 that was fully repaid in September 2011.
Outstanding loans under the credit agreement
bear interest, at our option, either at (a) the bank's prime rate, provided that the prime rate shall not be less than an adjusted
one-month London Interbank Offered Rate (“LIBOR”) (as defined in the credit agreement), or (b) under a formula based
on LIBOR plus 1.85% per annum. We also pay a commitment fee equal to 0.25% per annum on the average daily unused portion of the
credit facility.
Our obligations under the credit agreement
are collateralized, pursuant to a Continuing Security Agreement, by all of our accounts receivable and inventory, and are also
guaranteed by one of our subsidiaries.
The credit agreement contains various covenants,
including financial covenants and covenants that prohibit or limit a variety of actions without the bank's consent. These include,
among other things, covenants that prohibit our payment of dividends and limit our ability to repurchase stock, incur or guarantee
indebtedness, create liens, purchase all or a substantial part of the assets or stock of another entity other than certain permitted
acquisitions, create or acquire any subsidiary, or substantially change our business. The credit agreement requires us to maintain,
as of the end of each fiscal quarter, tangible net worth and subordinated debt of at least $28,500,000, a ratio of net income before
interest expense and income taxes for the 12-month period ending with such fiscal quarter to interest expense for the same period
of at least 2.25 to 1.00, and a ratio of total liabilities, excluding accounts payable in the ordinary course of business, accrued
expenses and losses and deferred revenues or gains, to net income before interest expense, income taxes, depreciation and amortization
for the 12-month period ending with the fiscal quarter for which compliance is being determined of not greater than 2.5 to 1.0.
As of December 31, 2011 we were not in compliance with the interest coverage financial covenant in the credit agreement and received
a covenant compliance waiver from the bank.
NOTE 8 - Income Taxes
The components of the income (loss) before
income taxes for the years ended December 31, 2011, 2010 and 2009 are as follows:
|
|
Years ended December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
United States
|
|
$
|
(4,868,000
|
)
|
|
$
|
2,400,000
|
|
|
$
|
507,000
|
|
Foreign
|
|
|
890,000
|
|
|
|
1,195,000
|
|
|
|
-
|
|
Total income (loss) before income taxes
|
|
$
|
(3,978,000
|
)
|
|
$
|
3,595,000
|
|
|
$
|
507,000
|
|
The components of the income tax (benefit) expense for the years
ended December 31, 2011, 2010 and 2009 were as follows:
|
|
Years ended December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
Current
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
94,000
|
|
|
$
|
38,000
|
|
|
$
|
27,000
|
|
State
|
|
|
100,000
|
|
|
|
35,000
|
|
|
|
11,000
|
|
Total current
|
|
|
194,000
|
|
|
|
73,000
|
|
|
|
38,000
|
|
Deferred
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(1,252,000
|
)
|
|
|
916,000
|
|
|
|
288,000
|
|
State
|
|
|
(53,000
|
)
|
|
|
19,000
|
|
|
|
108,000
|
|
Foreign
|
|
|
266,000
|
|
|
|
357,000
|
|
|
|
-
|
|
Total deferred
|
|
|
(1,039,000
|
)
|
|
|
1,292,000
|
|
|
|
396,000
|
|
Total income tax (benefit) expense
|
|
$
|
(845,000
|
)
|
|
$
|
1,365,000
|
|
|
$
|
434,000
|
|
The following table is a reconciliation
of our income tax provision based on the U.S. Federal statutory income tax rate to the income tax expense reported for financial
reporting purposes:
|
|
Years ended December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
Tax at statutory rate
|
|
$
|
(1,352,000
|
)
|
|
|
(34.0
|
)%
|
|
$
|
1,223,000
|
|
|
|
34.0
|
%
|
|
$
|
172,000
|
|
|
|
34.0
|
%
|
Increase (reduction) in income taxes from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State and local income taxes, net of federal income tax effect
|
|
|
(12,000
|
)
|
|
|
(0.3
|
)%
|
|
|
29,000
|
|
|
|
0.8
|
%
|
|
|
56,000
|
|
|
|
11.1
|
%
|
Change in state tax rate and apportionments used to measure deferred taxes
|
|
|
(2,000
|
)
|
|
|
0.0
|
%
|
|
|
21,000
|
|
|
|
0.6
|
%
|
|
|
94,000
|
|
|
|
18.6
|
%
|
Non-deductible share-based compensation
|
|
|
75,000
|
|
|
|
1.9
|
%
|
|
|
123,000
|
|
|
|
3.4
|
%
|
|
|
128,000
|
|
|
|
25.3
|
%
|
Non-deductible meals and entertainment
|
|
|
29,000
|
|
|
|
0.7
|
%
|
|
|
26,000
|
|
|
|
0.7
|
%
|
|
|
22,000
|
|
|
|
4.4
|
%
|
Change in valuation allowance
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(31,000
|
)
|
|
|
(6.1
|
)%
|
Foreign rate differential
|
|
|
(36,000
|
)
|
|
|
(0.9
|
)%
|
|
|
(49,000
|
)
|
|
|
(1.3
|
)%
|
|
|
-
|
|
|
|
-
|
|
Non-deductible goodwill impairment
|
|
|
209,000
|
|
|
|
5.3
|
%
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Reduction of deferred tax assets for forfeitures and expirations of restricted stock and stock options
|
|
|
187,000
|
|
|
|
4.7
|
%
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Other, net
|
|
|
57,000
|
|
|
|
1.4
|
%
|
|
|
(8,000
|
)
|
|
|
(0.2
|
)%
|
|
|
(7,000
|
)
|
|
|
(1.4
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(845,000
|
)
|
|
|
(21.2
|
)%
|
|
$
|
1,365,000
|
|
|
|
38.0
|
%
|
|
$
|
434,000
|
|
|
|
85.9
|
%
|
The tax effects of temporary differences
and net operating loss and tax credit carryforwards that give rise to deferred tax assets and liabilities are as follows:
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
|
Inventory
|
|
$
|
1,267,000
|
|
|
$
|
386,000
|
|
Accounts receivable
|
|
|
40,000
|
|
|
|
30,000
|
|
Property, plant and equipment - U.K.
|
|
|
294,000
|
|
|
|
318,000
|
|
Accrued expenses
|
|
|
361,000
|
|
|
|
322,000
|
|
Share-based compensation
|
|
|
765,000
|
|
|
|
792,000
|
|
Net operating loss carryforwards - U.S.
|
|
|
5,598,000
|
|
|
|
6,568,000
|
|
Net operating loss carryforwards - U.K.
|
|
|
291,000
|
|
|
|
566,000
|
|
Intangible assets
|
|
|
1,086,000
|
|
|
|
-
|
|
Business and AMT credit carryforwards
|
|
|
411,000
|
|
|
|
469,000
|
|
|
|
|
10,113,000
|
|
|
|
9,451,000
|
|
Less: valuation allowance
|
|
|
-
|
|
|
|
(108,000
|
)
|
Net deferred tax assets
|
|
|
10,113,000
|
|
|
|
9,343,000
|
|
Property, plant and equipment - U.S.
|
|
|
(449,000
|
)
|
|
|
(437,000
|
)
|
Intangible assets
|
|
|
(264,000
|
)
|
|
|
(355,000
|
)
|
Net deferred tax assets
|
|
$
|
9,400,000
|
|
|
$
|
8,551,000
|
|
The total amount of deductible goodwill
that is being amortized over fifteen years for tax reporting purposes is approximately $3,500,000, which is unaffected by the goodwill
impairment charge during 2011.
Consistent with the provisions of ASC 740,
“Income Taxes,” we regularly estimate our ability to recover deferred tax assets, and establish a valuation allowance
against deferred tax assets that are determined to be “more likely than not” unrecoverable. This evaluation considers
several factors, including an estimate of the likelihood of generating sufficient taxable income in future periods over which temporary
differences reverse, the expected reversal of deferred tax liabilities, past and projected taxable income and available tax planning
strategies. During 2011, our valuation allowance decreased by $108,000 due to the expiration of the related business credit carryforwards.
During 2010, our valuation allowance was reduced by $36,000 due to general business tax credit carryforwards that expired unutilized.
As of December 31, 2011, management believes that it is “more-likely-than-not” that the results of future operations
will generate sufficient taxable income to realize the net amount of our deferred tax assets over the periods during which deductible
temporary differences reverse and net operating loss and credit carryforwards may be utilized before they expire.
As of December 31, 2010, our deferred
tax asset valuation allowance of $108,000 related to general business tax credit carryforwards that expired unutilized in 2011.
As of December 31, 2011,
we had U.S. Federal and U.K. net operating loss (“NOL”) carryforwards of approximately $17,766,000 and $1,166,000,
respectively. The U.S. Federal NOL carryforwards will expire from 2021 to 2023. The ultimate realization of deferred tax assets
is dependent upon the generation of future taxable income during the periods in which temporary differences become deductible.
We estimate that it is “more likely than not” that these NOL carryforwards will be utilized prior to their respective
expiration periods and, as such, have not provided a valuation allowance against them. It is at least reasonably possible that
the actual period that the NOL carryforwards are utilized may differ from our estimate. Our NOL carryforwards include approximately
$1,300,000 of excess share based compensation net operating losses that have not been recorded as deferred tax assets in accordance
with ASC 718. If all of our net operating losses are realized in the future, approximately $416,000 of the benefit (related to
excess share-based compensation net operating losses) would increase our additional paid-in capital, after regular net operating
losses are exhausted. As of December 31, 2011, we have Alternative Minimum Tax credit carryforwards of $411,000, which have
no expiration date.
As of December 31, 2011 and 2010 we had
no liabilities for uncertain tax positions.
NOTE 9 –
Share-Based Compensation
We account for share-based compensation
in accordance with ASC 718. The fair value of restricted stock awards is based on the closing market price of our common stock
on the measurement date of the award. In order to determine the fair value of stock options on the date of grant, we apply the
Black-Scholes-Merton option-pricing model. Inherent in this model are assumptions related to expected stock-price volatility, option
life, risk-free interest rate and dividend yield. While the risk-free interest rate and dividend yield are less subjective assumptions,
typically based on factual data derived from public sources, the expected stock-price volatility and expected term assumptions
require a greater level of judgment. We estimate expected stock-price volatility based primarily on historical volatility of the
underlying stock using daily price observations over a period equal to the expected term of the option, and also consider whether
other factors are present that indicate that exclusive reliance on historical volatility may not be a reliable indicator of expected
volatility. With regard to the estimate of expected term, we have concluded that our stock option exercise experience provides
a reasonable basis upon which to estimate the expected term.
Share-based compensation is attributable
to the granting of, and vesting over the requisite service period of, stock options and restricted stock awards that are ultimately
expected to vest. Share-based compensation for the years ended December 31, 2011, 2010 and 2009 was $906,000, $801,000 and
$802,000, respectively. As of December 31, 2011, the total unrecognized compensation cost related to all non-vested stock
awards was approximately $869,000 and the related weighted average period over which this remaining expense is expected to be recognized
was approximately 2.8 years. It is our policy to issue previously authorized shares to satisfy stock option exercises in the period
of exercise. During 2008, our Board of Directors adopted, and our stockholders approved, our 2008 Equity Compensation Plan (the
“2008 Plan”), which replaced our 1998 Stock Option Plan, under which our ability to grant options expired on October 7,
2008. The 1998 Plan permitted us to grant only stock options, while the 2008 Plan permits us to grant stock appreciation rights,
restricted stock and restricted stock units, as well as stock options, to our employees, directors and consultants. During 2011,
our Board of Directors adopted, and our stockholders approved, an amendment to the 2008 Plan to increase the number of shares available
for issuance thereunder by 1,000,000 shares. Thus, the 2008 Plan authorizes the grant of awards not to exceed 2,000,000 shares
of our common stock in the aggregate until April 2, 2018. There are 1,016,168 available for grant at December 31, 2011. The
Compensation Committee of our Board of Directors determines, among other things, award recipients, the type of award, the number
of shares to be subject to each share grant or award, exercise prices for options and the base value for stock appreciation rights,
vesting periods and conditions to vesting, and the term of the award, which may not exceed 10 years.
Stock Options
As of December 31, 2011, we had stock
options outstanding under our 1994 Non-Employee Director Stock Option Plan, our 1995 Employee Stock Option Plan and our 1998 Stock
Option Plan, all of which plans have expired as to the grant of future options, as well as our 2003 Non-Employee Director Stock
Option Plan, as amended (the “2003 Plan”), which expires in September 2013. The exercise period for all stock options
may not exceed ten years from the date of grant. Stock option grants to individuals generally become exercisable in substantively
equal tranches over a service period of up to five years.
The 2003 Plan provides for the grant of
options to purchase up to 1,000,000 shares of common stock to our non-employee directors. On the date a person initially becomes
an outside director, that individual is to be granted an option to purchase 24,000 shares under the 2003 Plan and, at each annual
stockholders meeting thereafter at which directors are elected, each outside director in office after the meeting is to be automatically
granted an option to purchase 10,000 shares plus additional specified shares for serving on Board committees or as chairperson
of a committee. Options granted under the 2003 Plan have an exercise price equal to the market value of our common stock on the
date of grant and generally vest in equal installments over periods ranging from one to four years. All options granted under the
2003 Plan have a term of ten years. In 2010, non-employee directors were awarded restricted stock under the 2008 Plan, and waived
the grant of stock options under the 2003 Plan. As of December 31, 2011, 320,000 shares are available for future grant under
the 2003 Plan.
The following table summarizes stock option activity for the
years ended December 31, 2011, 2010 and 2009:
|
|
Common
Shares
Subject to
Options
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Aggregate
Intrinsic
Value
|
|
|
Weighted
Average
Contractual Life
Remaining
in Years
|
|
Outstanding at January 1, 2009
|
|
|
2,424,050
|
|
|
$
|
2.06
|
|
|
$
|
52,000
|
|
|
|
6.2
|
|
Granted
|
|
|
130,000
|
|
|
|
0.95
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(71,500
|
)
|
|
|
1.58
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(8,000
|
)
|
|
|
2.39
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2009
|
|
|
2,474,550
|
|
|
$
|
2.02
|
|
|
$
|
240,288
|
|
|
|
5.5
|
|
Expired
|
|
|
(374,000
|
)
|
|
|
1.61
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(16,250
|
)
|
|
|
1.95
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2010
|
|
|
2,084,300
|
|
|
$
|
2.09
|
|
|
$
|
1,610,185
|
|
|
|
5.2
|
|
Granted
|
|
|
100,000
|
|
|
|
2.55
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(69,350
|
)
|
|
|
0.98
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(156,750
|
)
|
|
|
2.17
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(21,000
|
)
|
|
|
2.16
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2011
|
|
|
1,937,200
|
|
|
$
|
2.15
|
|
|
$
|
243,373
|
|
|
|
4.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Information as of December 31, 2011
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options expected to vest
|
|
|
94,387
|
|
|
$
|
2.12
|
|
|
$
|
0
|
|
|
|
6.8
|
|
Options exercisable at end of year
|
|
|
1,840,300
|
|
|
$
|
2.15
|
|
|
$
|
243,373
|
|
|
|
4.3
|
|
Compensation expense
attributable to stock options for the years ended December 31, 2011, 2010 and 2009 was $444,000, $465,000 and $631,000, respectively.
The total fair value of stock options vested during the years ended December 31, 2011, 2010 and 2009 was $481,000, $512,000,
and $636,000, respectively. The intrinsic value of stock options exercised during the years ended December 31, 2011, 2010
and 2009 was $81,000, $0 and $0, respectively. Fair values of options granted were determined based on the following assumptions:
|
|
Years ended December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
Expected term
|
|
|
7.6 years
|
|
|
|
(a)
|
|
|
|
7.0 years
|
|
Interest rate
|
|
|
2.53
|
%
|
|
|
(a)
|
|
|
|
2.65
|
%
|
Volatility
|
|
|
62.5
|
%
|
|
|
(a)
|
|
|
|
107.9
|
%
|
Dividends
|
|
|
-
|
|
|
|
(a)
|
|
|
|
-
|
|
Weighted average fair value of options granted
|
|
$
|
1.65
|
|
|
|
(a)
|
|
|
$
|
0.82
|
|
|
(a)
|
There were no stock options granted during 2010; therefore the assumptions are not applicable.
|
Board of Director Remuneration
In 2009, our non-employee directors were
entitled to elect to receive, in lieu of their $10,000 annual cash retainer ($25,000 in the case of the non-executive Chairman
of the Board of Directors), shares of our common stock equal in market value to $11,750 ($29,400 in the case of the non-executive
Chairman of the Board of Directors). Market value was determined at the date of the annual meeting of stockholders at which directors
were elected for the year. In 2009, four directors elected to receive an aggregate of 49,476 shares having a market value of $47,000,
and the non-executive Chairman of the Board of Directors elected to receive 30,948 shares having a market value of $29,400. We
recognized expense of $16,000, and $73,000 for these awards during the years ended December 31, 2010 and 2009, respectively.
The 2010 expense was net of $7,000 in income relating to the forfeiture of 12,369 shares during January 2010.
In May 2010, the Company’s Board
of Directors revised the annual cash retainer paid to non-employee directors to $15,000 ($20,000 for the non-executive Chairman
of the Board) and eliminated the provision which permitted non-employee directors (including the non-executive Chairman of the
Board) to elect to receive their annual retainer in shares of our common stock in lieu of cash.
In lieu of the receipt of annual stock
options under the Company’s 2003 Non-Employee Directors Stock Option Plan that would otherwise have been granted in May
2010 as described above, the Board awarded each of our five non-employee directors a restricted stock award of 20,000 shares of
Common Stock under the 2008 Plan.
In May 2011, the Company’s Board
of Directors revised the annual cash retainer paid to non-employee directors to $20,000 from $15,000 ($25,000 for the non-executive
Chairman of the Board). In addition, each non-employee director receives a fee of $1,000 for each meeting of the Board attended,
$500 ($1,000 in the case of the Chairperson) for each meeting of the Board’s Audit, Compensation and Nominating/Governance
Committees attended and $1,000 ($2,000 in the case of the Chairperson) for each meeting of the Board’s Executive Committee
attended.
Restricted Stock
The following table summarizes total activity
of our restricted stock awards during the year ended December 31, 2011:
|
|
2011
|
|
|
Weighted- Average
Grant Date
Fair Value
|
|
Non-vested awards at beginning of year
|
|
|
813,659
|
|
|
$
|
1.51
|
|
Awarded
|
|
|
172,500
|
|
|
$
|
2.76
|
|
Vested
|
|
|
(320,982
|
)
|
|
$
|
1.51
|
|
Forfeited
|
|
|
(126,668
|
)
|
|
$
|
1.66
|
|
Non-vested awards at end of year
|
|
|
538,509
|
|
|
$
|
1.88
|
|
As of December 31, 2011, there were 1,016,168 shares available
for grant under the 2008 Plan. Forfeited shares are returned to authorized but unissued shares on the dates of forfeiture.
Restricted stock grants have full voting
rights prior to vesting. These shares are included as outstanding shares and are subject to forfeiture prior to applicable vesting
dates. In connection with employees satisfaction of the statutory minimum tax withholding obligations for the applicable income
and other employment taxes associated with previously issued restricted shares that vested in 2011 and 2010, we purchased from
certain employees 34,252 and 17,162 shares for $69,000 and $36,000, respectively, and retired the repurchased shares.
As of December 31, 2011, the future expected expense for non-vested
restricted stock awards was $786,000.
NOTE 10 - Preferred Stock
We are 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 our Board of Directors. No shares of preferred stock were outstanding at December 31, 2011 or 2010.
NOTE 11 - Segment Information, Significant
Customers, Export Sales and Geographical Information
Reportable Segments
The following information relates to our reportable segments
as of and for the year ended December 31, 2011(in thousands):
|
|
Tii & Porta
Copper
Products
Division
|
|
|
Tii Fiber
|
|
|
Total
|
|
Net sales
|
|
$
|
54,113
|
|
|
$
|
2,145
|
|
|
$
|
56,258
|
|
Operating (loss) income
|
|
|
(3,857
|
)
|
|
|
126
|
|
|
|
(3,731
|
)
|
Interest expense
|
|
|
29
|
|
|
|
-
|
|
|
|
29
|
|
Depreciation and amortization
|
|
|
2,722
|
|
|
|
62
|
|
|
|
2,784
|
|
Capital expenditures
|
|
|
1,315
|
|
|
|
7
|
|
|
|
1,322
|
|
Total assets at December 31, 2011
|
|
$
|
46,904
|
|
|
$
|
420
|
|
|
$
|
47,324
|
|
Prior to the F2O acquisition in March 2011,
there was only one reportable segment.
Significant Customers
The following customers accounted for 10%
or more of our consolidated net sales during one or more of the periods presented below:
|
|
Years ended December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
Customer A
|
|
|
14
|
%
|
|
|
18
|
%
|
|
|
34
|
%
|
Customer B
|
|
|
16
|
%
|
|
|
19
|
%
|
|
|
*
|
|
Customer C
|
|
|
20
|
%
|
|
|
14
|
%
|
|
|
14
|
%
|
Customer D
|
|
|
*
|
|
|
|
*
|
|
|
|
11
|
%
|
* Amounts are less than 10%
As of December 31, 2011, each of two
customers accounted for approximately 21% of accounts receivable. As of December 31, 2010, four customers accounted for approximately
15%, 14%, 14% and 13% of accounts receivable.
Export Sales
Export sales accounted for 35%, 43% and
19% of consolidated sales during the years ended December 31, 2011, 2010 and 2009, respectively. In 2011 and 2010, 16% and
19% of our consolidated sales, respectively, were to one customer in England.
Geographical Information
Our subsidiary in England maintains a sales
office and warehouse in Daventry, England, which had net inventory and net fixed assets of approximately $596,000 and $2,000, respectively,
at December 31, 2011. At December 31, 2010, this subsidiary had net inventory and net fixed assets of approximately $1,750,000
and $3,000, respectively.
Certain equipment owned by us is utilized
by our contract manufacturer located in China and Mexico. The net book value of our equipment held by our contract manufacturer
at December 31, 2011 and 2010 was approximately $2,696,000 and $3,460,000, respectively.
Significant Contract Manufacturers
On
May 1, 2009, we renewed our agreement with our principal contract manufacturer,
an independent U.S. based corporation with
a wholly owned subsidiary located in China
, to continue the manufacture and supply of applicable
products to us through May 2015.
As discussed in Note 2, concurrent with
our acquisition of the Porta Copper Products Division in May 2010, we sold the acquired Mexican subsidiary, exclusive of customer
contracts and certain machinery and equipment which we retained, to our principal contract manufacturer, which is now operating
the manufacturing facility. In connection with this sale, we entered into an agreement with our contract manufacturer to manufacture
and supply product to us from this Mexico subsidiary through May 2016, after which this agreement will automatically renew for
additional terms of one year, unless at least one year written notice of intent not to renew is given by either party.
In May
2000, we entered into a ten year agreement with a contract manufacturer in Malaysia to outsource the manufacturing of certain of
our gas tubes used in our products, which expired in December 2010. Effective December 2010, we transitioned the sourcing of these
products to our principal contract manufacturer in China.
Our principal contract manufacturer produces the majority of
the products that we sell.
NOTE 12 - Commitments, Contingencies
and Related Party Transactions
We lease real property under operating
leases with terms expiring through March 2016. Rent expense under operating leases was $124,000, $43,000 and $13,000 for the years
ended December 31, 2011, 2010 and 2009, respectively. Minimum lease rental commitments as of December 31, 2011 are not
material.
We are a party to agreements with eleven
executives providing that, in the event we terminate the executive’s employment (other than for cause) or if the executive
voluntarily terminates his or her employment for good reason (as defined), the executive will be entitled to at least six months
severance pay, the continuation of benefits during the ensuing six month period and the acceleration of vesting of stock options.
We do not provide our other employees any post-retirement or post-employment benefits, except discretionary severance payments
upon termination of employment and their COBRA entitlement.
In October 2011, we replaced our then President
and Chief Executive Officer and on March 16, 2012 entered into a settlement and mutual release agreement with him, effective March
23, 2012. In connection with his termination, we recorded $527,000 of severance expense in the fourth quarter of 2011.
From time to time, we are subject to legal
proceedings or claims which arise in the ordinary course of business. While the outcome of such matters cannot be predicted with
certainty, we believe that such matters will not have a material adverse effect on our financial condition or liquidity.
In January 2012, we settled a lawsuit that
was filed in Puerto Rico in 2009 by a former sales representative against us for an insignificant amount. The settlement was recorded
as an expense in the fourth quarter of 2011 and is included in selling, general and administrative expense.
NOTE 13 – Employee Benefits
We have one defined contribution plan,
which qualifies as a deferred salary arrangement under Section 401(k) of the Internal Revenue Code. This plan covers substantially
all U.S. employees who meet eligibility requirements and requires us to match up to 40% of employees' contributions subject to
specified limitations and certain vesting schedules. Our expense for employer matching contributions was $133,000, $112,000 and
$100,000 for the years ended December 31, 2011, 2010 and 2009, respectively.
NOTE 14 - Quarterly Financial Data (Unaudited)
The following table summarizes our unaudited
quarterly results for the years ended December 31, 2011 and 2010 (in thousands, except per share data):
Quarter Ended
|
|
Net
Sales
|
|
|
Gross
Profit
|
|
|
Operating
Income
(Loss)
|
|
|
Net
Income
(Loss)
|
|
|
Diluted Net
Income (Loss)
per Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2011 (a,b)
|
|
$
|
14,976
|
|
|
$
|
4,583
|
|
|
$
|
1,271
|
|
|
$
|
790
|
|
|
$
|
0.05
|
|
June 30, 2011 (a,b)
|
|
|
13,576
|
|
|
|
4,796
|
|
|
|
1,366
|
|
|
|
828
|
|
|
|
0.06
|
|
September 30, 2011 (a,b)
|
|
|
14,583
|
|
|
|
4,618
|
|
|
|
1,351
|
|
|
|
844
|
|
|
|
0.06
|
|
December 31, 2011(a,b)
|
|
|
13,123
|
|
|
|
803
|
|
|
|
(7,719
|
)
|
|
|
(5,595
|
)
|
|
|
(0.40
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2010
|
|
$
|
7,743
|
|
|
$
|
3,191
|
|
|
$
|
757
|
|
|
$
|
463
|
|
|
$
|
0.03
|
|
June 30, 2010 (a)
|
|
|
10,345
|
|
|
|
3,663
|
|
|
|
323
|
|
|
|
192
|
|
|
|
0.01
|
|
September 30, 2010 (a)
|
|
|
18,625
|
|
|
|
4,720
|
|
|
|
1,308
|
|
|
|
815
|
|
|
|
0.06
|
|
December 31, 2010 (a)
|
|
|
17,785
|
|
|
|
4,466
|
|
|
|
1,149
|
|
|
|
760
|
|
|
|
0.05
|
|
The sum of the above reported
unaudited quarterly amounts do not always equal the annual amounts reported due to rounding.
|
(a)
|
Includes the results of operations of the Porta Copper Products Division since its acquisition on
May 19, 2010. See Note 2.
|
|
|
|
|
(b)
|
Includes the results of operations of F2O since its acquisition on March 11, 2011. See Note 2.
|
NOTE 15 – Subsequent Event
On March 16, 2012, the Company entered
into an Employment Agreement with the Company’s President and Chief Executive Officer, effective January 30, 2012, until
January 29, 2015.
ITEM 9.
Changes
in and Disagreements with Accountants on Accounting and Financial Disclosures
Not applicable.
ITEM
9A.
Controls and Procedures
Disclosure
Controls and Procedures
As of the end of the period covered by
this Report, our management, with the participation of our President and Principal Executive Officer and our Vice President-Finance
and Principal Financial Officer, evaluated the effectiveness of our “disclosure controls and procedures,” as defined
in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934. Based on that evaluation, these officers concluded that,
as of December 31, 2011, our disclosure controls and procedures were effective to provide reasonable assurance that information
required to be disclosed in our periodic filings under the Securities Exchange Act of 1934 is accumulated and communicated to our
management, including those officers, to allow timely decisions regarding required disclosure. It should be noted that a control
system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that it will detect or uncover
failures to disclose material information otherwise required to be set forth in our periodic reports.
Report of Management on Internal Control
over Financial Reporting
Management is responsible for establishing
and maintaining adequate internal control over financial reporting. Our internal control over financial reporting includes
policies and procedures pertaining to our ability to record, process and report reliable information. Our internal control
system is designed to provide reasonable assurance to our management and Board of Directors regarding the preparation and fair
presentation of our published financial statements.
Management assessed the effectiveness of
our internal control over financial reporting as of December 31, 2011. In making this assessment, management used the
criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in
Internal Control –
Integrated Framework
. Based on this assessment, management concluded that, as of December 31, 2011, our internal
control over financial reporting is effective based on those criteria.
This Report does not include an attestation
report of our independent registered public accounting firm regarding internal control over financial reporting. This
Report is not subject to attestation by our independent registered public accounting firm pursuant to rules of the Securities and
Exchange Commission that permit us to provide only management’s report in this annual report.
Changes in Internal Control over Financial
Reporting
During the quarter ended December 31,
2011, there were no changes in the Company’s internal control over financial reporting that have materially affected, or
are reasonably likely to materially affect, the Company’s internal control over financial reporting.
ITEM
9B.
OTHER INFORMATION
None.
PART III
The information required by Part III (Items
10, 11, 12, 13 and 14) of Form 10-K is incorporated herein by reference to the information called for by those items which will
be contained our Proxy Statement to be filed pursuant to Regulation 14A of the Securities Exchange Act of 1934 with respect to
our 2012 Annual Meeting of Stockholders. Notwithstanding the foregoing, information appearing in the section “Audit Committee
Report” shall not be deemed to be incorporated by reference in this Report.
PART IV
ITEM 15.
Exhibits
and Financial Statement Schedules
(1)
Financial Statements
Reports of Independent Registered Public Accounting Firms
|
28
|
Consolidated Balance Sheets at December 31, 2011 and December 31, 2010
|
30
|
Consolidated Statements of Operations and Comprehensive (Loss) Income for the years ended December 31, 2011, December 31, 2010 and December 31, 2009
|
31
|
Consolidated Statements of Stockholders' Equity for the years ended December 31, 2011, December 31, 2010 and December 31, 2009
|
32
|
Consolidated Statements of Cash Flows for the years ended December 31, 2011, December 31, 2010 and December 31, 2009
|
33
|
Notes to Consolidated Financial Statements
|
34
|
(2)
Financial Statement Schedules
None
(3)
Exhibits
Exhibit
|
|
|
Number
|
|
Description
|
|
|
|
2(a)
|
|
Asset Purchase Agreement, dated May 19, 2010, between us and Porta Systems Corp. Incorporated by reference to Exhibit 2.1 to our Current Report on Form 8-K dated (date of earliest event reported) May 19, 2010 (File No. 001-8048).
|
|
|
|
3(a)(1)
|
|
Restated Certificate of Incorporation, as filed with the Secretary of State of the State of Delaware on December 10, 1996. Incorporated by reference to Exhibit 3 to our Quarterly Report on Form 10-Q for the fiscal quarter ended December 27, 1996 (File No. 001-8048).
|
|
|
|
3(a)(2)
|
|
Certificate of Designation, as filed with the Secretary of State of the State of Delaware on May 15, 1998. Incorporated by reference to Exhibit 4.1 to our Current Report on Form 8-K dated (date of earliest event reported) May 7, 1998 (File No. 001-8048).
|
|
|
|
3(a)(3)
|
|
Certificate of Amendment to Certificate of Incorporation, as filed with the Secretary of State of the State of Delaware on December 5, 2001. Incorporated by reference to Exhibit 4.1 to our Current Report on Form 8-K dated (date of earliest event reported) December 5, 2001 (File No. 001-8048).
|
|
|
|
3(a)(4)
|
|
Certificate of Amendment to Certificate of Incorporation, as filed with the Secretary of State of the State of Delaware on May 18, 2009. Incorporated by reference to Exhibit 4.1 to our Current Report on Form 8-K dated (date of earliest event reported) May 18, 2009 (File No. 001-8048).
|
3(b)
|
|
By-laws, as amended. Incorporated by reference to Exhibit 3(b) to our Annual Report on Form 10-K for the fiscal year ended December 31, 2009 (File No. 001-8048).
|
|
|
|
4(a)(1)
|
|
Credit Agreement, dated as of December 15, 2006, between JPMorgan Chase Bank, N.A. and us. Incorporated by reference to Exhibit 4.1(a) to our Current Report on Form 8-K dated (date of earliest event reported) December 15, 2006 (File No. 001-8048).
|
|
|
|
4(a)(2)
|
|
Line of Credit Note, dated December 15, 2006, from us to JPMorgan Chase Bank, N.A. Incorporated by reference to Exhibit 4.1(b) to our Current Report on Form 8-K dated (date of earliest event reported) December 15, 2006 (File No. 001-8048).
|
|
|
|
4(a)(3)
|
|
Amendment, dated as of December 30, 2008, to Line of Credit Note and Credit Agreement, between JPMorgan Chase Bank, N.A. and us. Incorporated by reference to Exhibit 4.1 to our Current Report on Form 8-K dated (date of earliest event reported) December 30, 2008 (File No. 001-8048).
|
|
|
|
4(a)(4)
|
|
Amendment, dated as of December 28, 2010, to Line of Credit Note and Credit Agreement between JPMorgan Chase Bank, N.A. and us. Incorporated by reference to Exhibit 4.1 to our Current Report on Form 8-K dated (date of earliest event reported) May 19, 2010 (File No. 001-8048).
|
|
|
|
4(a)(5)*
|
|
Waiver letter dated March 20, 2012, from JPMorgan Chase Bank, N.A. to us.
|
|
|
|
4(a)(6)
|
|
Continuing Security Agreement, dated as of December 15, 2006, between JPMorgan Chase Bank, N.A. and us. Incorporated by reference to Exhibit 4.1(c) to our Current Report on Form 8-K dated (date of earliest event reported) December 15, 2006 (File No. 001-8048).
|
|
|
|
4(a)(7)
|
|
Continuing Guaranty, dated as of December 15, 2006, by TII Systems, Inc. in favor of JPMorgan Chase Bank, N.A. Incorporated by reference to Exhibit 4.1(d) to our Current Report on Form 8-K dated (date of earliest event reported) December 15, 2006 (File No. 001-8048).
|
|
|
|
10(a)(1)(A)+
|
|
1994 Non-Employee Director Stock Option Plan, as amended. Incorporated by reference to Exhibit 10(a)(2) to our Annual Report on Form 10-K for the fiscal year ended June 29, 2001 (File No. 001-8048).
|
|
|
|
10(a)(1)(B)+
|
|
Form of Option Contract under 1994 Non-Employee Director Stock Option Plan. Incorporated by reference to Exhibit 10(a)(1)(B) to our Annual Report on Form 10-K for the fiscal year ended June 24, 2005 (File No. 001-8048).
|
|
|
|
10(a)(2)(A)+
|
|
1995 Stock Option Plan, as amended. Incorporated by reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q for the fiscal quarter ended December 26, 1997 (File No. 001-8048).
|
|
|
|
10(a)(2)(B)+
|
|
Form of Incentive Stock Option Contract, dated June 7, 2005, between us and separately with each of Kenneth A. Paladino and Nisar Chaudhry. Incorporated by reference to Exhibit 99.2 to our Current Report on Form 8-K dated (date of earliest event reported) June 7, 2005 (File No. 001-8048).
|
|
|
|
10(a)(2)(C)+
|
|
Forms of Option Contracts under our 1995 Stock Option Plan. Incorporated by reference to Exhibit 10(a)(2)(E) to our Annual Report on Form 10-K for the fiscal year ended June 24, 2005 (File No 001-8048).
|
|
|
|
10(a)(3)(A)+
|
|
1998 Stock Option Plan, as amended. Incorporated by reference to Exhibit 99.3 to our Current Report on Form 8-K dated (date of earliest event reported) December 1, 2005 (File No. 001-8048).
|
|
|
|
10(a)(3)(B)+
|
|
Incentive Stock Option Contract, dated September 13, 2005 between us and Kenneth A. Paladino. Incorporated by reference to Exhibit 99.3 to our Current Report on Form 8-K dated (date of earliest event reported) September 13, 2005 (File No. 001-8048).
|
10(a)(3)(C)+
|
|
Forms of Option Contracts under our 1998 Stock Option Plan. Incorporated by reference to Exhibit 10(a)(3)(B) to our Annual Report on Form 10-K for the fiscal year ended June 24, 2005 (File No. 001-8048).
|
|
|
|
10(a)(4)(A)+
|
|
2003 Non-Employee Director Stock Option Plan, as amended. Incorporated by reference to Exhibit 99.4 to our Current Report on Form 8-K dated (date of earliest event reported) December 1, 2005 (File No. 001-8048).
|
|
|
|
10(a)(4)(B)+
|
|
Forms of Option Contracts under our 2003 Non-Employee Director Stock Option Plan. Incorporated by reference to Exhibit 10(a)(4)(C) to our Annual Report on Form 10-K for the fiscal year ended June 24, 2005 (File No. 001-8048).
|
|
|
|
10(a)(5)(A)+
|
|
The Company’s 2008 Equity Compensation Plan. Incorporated by reference to Exhibit 9.2 to our Current Report on Form 8-K dated (date of earliest event reported) April 3, 2008 (File No. 001-8048).
|
|
|
|
10(a)(5)(B)+
|
|
Restricted Stock Contract, dated April 3, 2008, between the Company and Kenneth A. Paladino. Incorporated by reference to Exhibit 99.4 to our Current Report on Form 8-K dated (date of earliest event reported) April 3, 2008 (File No. 001-8048).
|
|
|
|
10(a)(5)(C)+
|
|
Forms of Non-Qualified Stock Option, Incentive Stock Option, Stock Appreciation Rights, Restricted Stock and Restricted Stock Unit Contracts under our 2008 Equity Compensation Plan. Incorporated by reference to Exhibit 10(a)(5)(B) to our Annual Report on Form 10-K for the fiscal year ended December 31, 2009 (File No. 001-8048).
|
|
|
|
10(a)(5)(D)+
|
|
Form of Restricted Stock Contract for our non-employee director awards. Incorporated by reference to Exhibit 99.2 to our Current Report on Form 8-K dated (date of earliest event reported) May 19, 2010 (File No. 001-8048).
|
|
|
|
10(b)(1)+
|
|
Employment Agreement, dated March 16, 2012, between Brian Kelley and the Company. Incorporated by reference to Exhibit 99.1 to our Current Report on Form 8-K dated (date of earliest event reported) March 16, 2012 (File No. 001-8048).
|
|
|
|
10(c)(1)+
|
|
Employment Agreement, dated April 3, 2008, between the Company and Kenneth A. Paladino. Incorporated by reference to Exhibit 99.3 to our Current Report on Form 8-K dated (date of earliest event reported) April 3, 2008 (File No. 001-8048).
|
|
|
|
10(c)(2)+
|
|
Amendment, effective January 1, 2009, to Employment Agreement dated as of April 3, 2008, between the Company and Kenneth A. Paladino. Incorporated by reference to Exhibit 99.1 to our Current Report on Form 8-K dated (date of earliest event reported) December 30, 2008 (File No. 001-8048).
|
|
|
|
10(c)(3)+
|
|
Agreement and Mutual Release, dated as of March 16, 2012, between Kenneth A. Paladino and the Company. Incorporated by reference to Exhibit 99.1 to our Current Report on Form 8-K dated (date of earliest event reported) March 23, 2012 (File No. 001-8048)
|
|
|
|
10(d)(1)+
|
|
Letter Agreement, dated September 8, 2011, between us and Stacey L. Moran. Incorporated by reference to Exhibit
10(a)(1)
to our Quarterly Report on Form 10-Q for the quarter ended September 30, 2011 (File No. 001-8048).
|
|
|
|
10(d)(2)+
|
|
Termination Severance Agreement, dated September 16, 2011, between us and Stacey L Moran. Incorporated by reference to Exhibit 10(a)(2) to our Quarterly Report on Form 10-Q for the quarter ended September 30, 2011 (File No. 001-8048).
|
|
|
|
10(d)(1)+
|
|
Termination Severance Agreement, dated February 7, 2007, between the Company and David E. Foley. Incorporated by reference to Exhibit 99.3(a) to our Current Report on Form 8-K dated (date of earliest event reported) December 30, 2008 (File No. 001-8048).
|
10(e)(2)+
|
|
Amendment, effective January 1, 2009, to Termination Severance Agreement, dated February 7, 2007, between the Company and David E. Foley. Incorporated by reference to Exhibit 99.3(b) to our Current Report on Form 8-K dated (date of earliest event reported) December 30, 2008 (File No. 001-8048).
|
|
|
|
10(f)(1)(A)+
|
|
Description of Non-Employee Directors’ Annual Cash Fee Policy as in effect until May 19, 2010. Incorporated by reference to Exhibit 10(a) to our Quarterly Report on Form 10-Q for the quarter ended June 30, 2009 (File No 001-8048).
|
|
|
|
10(f)(1)(B)+
|
|
Non-Employee Directors’ Annual Cash Compensation Policy as in effect from May 20, 2010 until May 17, 2011. Incorporated by reference to Exhibit 99.1 to our Current Report on Form 8-K dated (date of earliest event reported) May 19, 2010 (File No. 001-8048).
|
|
|
|
10(f)(i)(c)+
|
|
Description of Non-Employee Directors’ Annual Cash Fee Policy in effect beginning May 18, 2011. Incorporated by reference to Exhibit 10(a) to our Quarterly Report on Form 10-Q for the quarter ended June 30, 2011 (File No. 001-8048).
|
|
|
|
10(f)(1)(D)+
|
|
Reimbursement Policy for Non-Employee Directors dated December 31, 2008. Incorporated by reference to Exhibit 99.4 to our Current Report on Form 8-K dated (date of earliest event reported) December 30, 2008 (File No. 001-8048).
|
|
|
|
14
|
|
Code of Ethics for Senior Financial Officers. Incorporated by reference to Exhibit 14.1 to our Current Report on Form 8-K dated (date earliest event reported) January 11, 2008 (File No. 001-8048).
|
|
|
|
21*
|
|
List of Subsidiaries.
|
|
|
|
23(a)*
|
|
Consent of KPMG LLP
|
|
|
|
23 (b)*
|
|
Consent of Marcum LLP
|
|
|
|
31(a)*
|
|
Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
31(b)*
|
|
Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
32(a)*
|
|
Certification of Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
32(b)*
|
|
Certification of Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
101.INS*
°
|
|
XBRL Instance Document
|
|
|
|
101.SCH*
°
|
|
XBRL Taxonomy Extension Schema Document
|
|
|
|
101.CAL*
°
|
|
XBRL Taxanomy Extension Calculation Linkbase Document
|
|
|
|
101.DEF*
°
|
|
XBRL Taxanomy Extension Definition Linkbase Document
|
|
|
|
101.LAB*
°
|
|
XBRL Taxanomy Extension Label Linkbase Document
|
|
|
|
101.PRE*
°
|
|
XBRL Taxanomy Extension Presentation Linkbase Document
|
|
+
|
Management contract or compensatory plan or arrangement.
|
|
o
|
Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement
or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities Exchange Act of 1934,
and otherwise are not subject to liability under those sections.
|
SIGNATURES
Pursuant to the requirements of Section 13
or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
|
|
TII NETWORK TECHNOLOGIES, INC.
|
|
|
|
|
|
March 30, 2012
|
By:
|
/s/ Brian J. Kelley
|
|
|
|
Brian J. Kelley, President and
|
|
|
|
Chief Executive Officer
|
|
|
|
(Principal Executive Officer)
|
|
Pursuant to the requirements of the Securities
Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities
and on the dates indicated.
March 30, 2012
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/s/ Brian J. Kelley
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Brian Kelley, President and
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Chief Executive Officer (Principal
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Executive Officer) and Director
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March 30, 2012
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/s/ Stacey L. Moran
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Stacey L. Moran, Vice President-Finance (Principal Financial Officer), Chief Financial Officer and Principal Accounting Officer
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March 30, 2012
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/s/ Mark T. Bradshaw
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Mark T. Bradshaw, Director
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March 30, 2012
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/s/ Lawrence M. Fodrowski
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Lawrence M. Fodrowski, Director
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March 30, 2012
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/s/ Charles H. House
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Charles H. House, Director
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Tii Network (NASDAQ:TIII)
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Tii Network (NASDAQ:TIII)
過去 株価チャート
から 6 2023 まで 6 2024