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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark one)
X Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
- --- Act of 1934. For the fiscal year ended December 31, 1996.
Transition report pursuant to Section 13 or 15(d) of the Securities
- --- Exchange Act of 1934. For the transition period from to .
---- ----
Commission file number 0-24020
GROUP TECHNOLOGIES CORPORATION
(Exact name of registrant as specified in its charter)
Florida 59-2948116
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
10901 Malcolm McKinley Drive
Tampa, Florida 33612
(Address of principal executive offices, including zip code)
(813) 972-6000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K /X/.
The aggregate market value of the Registrant's Common Stock held by non-
affiliates on March 19, 1997 (based upon the average of the high and low prices
of the registrant's Common Stock reported for such date on The Nasdaq Stock
Market, was $4,116,855. Shares of Common Stock held by each executive officer
and director and by each person who owns 10% or more of the outstanding Common
Stock have been excluded in that such persons may be deemed to be affiliates.
The determination of affiliate status is not necessarily a conclusive
determination for other purposes. As of March 19, 1997, the registrant had
outstanding 16,220,629 shares of Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
None.
Table of Contents
Page No.
Part I
Item 1. Business 1
Item 2. Properties 5
Item 3. Legal Proceedings 5
Item 4. Submission of Matters to a Vote of Security Holders 5
Part II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters 6
Item 6. Selected Financial Data 7
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
Item 8. Financial Statements and Supplementary Data 16
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 37
Part III
Item 10. Directors and Executive Officers of the Registrant 37
Item 11. Executive Compensation 39
Item 12. Security Ownership of Certain Beneficial Owners
and Management 44
Item 13. Certain Relationships and Related Transactions 45
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K 46
1
PART I
Item 1. Business
Group Technologies Corporation ("GTC" or the "Company") provides advanced
manufacturing, engineering and testing services to original equipment
manufacturers ("OEMs") of electronic products. GTC's principal operating
facility is located in Tampa, Florida. GTC's operating subsidiaries include
Group Technologies S.A. de C.V. ("GTC Mexico"), a majority-owned subsidiary
located in Mexico City, Mexico where it operates one manufacturing facility and
Group Technologies Suprimentos de Informatica Industria e Comercio Ltda. ("GTC
Brazil"), a majority-owned subsidiary located in the state of Sao Paulo, Brazil
where it operates two separate manufacturing facilities, one in Hortolandia and
one in Campinas. GTC is a majority owned subsidiary of Group Financial Partners,
Inc. ("GFP").
GTC custom manufactures complex circuit card assemblies, subsystems and
end-user products for use in a wide variety of markets, including automotive,
commercial avionics, computer, government systems, industrial electronics,
networking, space, and telecommunications. GTC offers its customers traditional
turnkey manufacturing solutions, including basic design services (such as board
layout, production and testing), materials management (including selection,
sourcing and procurement), automated assembly and quality assurance. GTC also
provides high-level engineering services, such as design services, software
development and product redesign. GTC believes that its ability to offer its
customers a broad range of sophisticated engineering services, which complement
its basic manufacturing services, gives it a competitive advantage.
Substantially all of the assets of Metrum, Inc. ("Metrum"), a wholly owned
subsidiary of GTC, were divested during the first quarter of 1996, and GTC
immediately ceased all operations at its Littleton, Colorado facility. Also
during the first quarter of 1996, GTC sold substantially all of the assets
related to its Badger line of name brand products. The effect of these
dispositions is more fully discussed herein under the caption "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations". In order to meet the needs of its expanding customer base in
Brazil, GTC opened a manufacturing facility located in Campinas, Brazil, during
the third quarter of 1996.
Forward Looking Statements
Certain statements set forth in Item 1 and Item 7 in this Annual Report on
Form 10-K may constitute forward-looking statements that involve numerous risks
and uncertainties. Among the factors that can cause the Company's actual
performance to differ materially are the following: business conditions and
growth in the advanced manufacturing, engineering and testing services industry
and the general economy; competitive factors and price pressures; availability
of third party component parts at reasonable prices; inventory risks due to
shifts in market demand and/or price erosion of purchased components; changes in
product mix; cost and yield issues associated with the Company's manufacturing
facilities; the Company's ability to comply with the terms of its credit
facilities; dependence upon and ability to retain key personnel; ability to
comply with the rules for inclusion in the Nasdaq Stock Market, including
minimum stock bid price and market value requirements as discussed in Item 5 in
this Annual Report on Form 10-K; stock price fluctuations; the effect of
environmental laws; and the risk factors listed from time to time in the
Company's Securities and Exchange Commission (the "Commission") filings. The
impact of certain of these factors experienced during 1996 is more fully
discussed herein under the caption "Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations".
Manufacturing Services
GTC provides its customers with a broad variety of solutions, from low-
volume prototype assembly to high-volume turnkey systems manufacturing. GTC
employs a multi-disciplined engineering team which provides comprehensive
manufacturing and design support to customers. The turnkey systems solutions
offered by GTC include design conversion and enhancement, materials procurement,
system assembly, testing and final system configuration.
2
GTC's manufacturing capabilities are enhanced by up-to-date manufacturing
techniques. Among these techniques are just-in-time procurement and continuous
flow manufacturing (where practical), statistical process control, total quality
management, stringent and real-time engineering change control routines, and
total cycle time reduction techniques. GTC has also invested in integrated
manufacturing support systems to maximize performance. These systems provide a
continuous flow of information from the initial estimating phase of a project
through final shipment.
GTC provides varied levels of testing services, ranging from in-circuit
test, burn-in test and environmental stress screening to functional test.
Increasingly, GTC is asked to provide final systems assembly ("box build")
services. As a result, testing procedures and equipment are required to ensure
that finished products are tested to standards that reflect their required use.
Engineering Services
GTC utilizes its advanced engineering services capabilities to provide its
customers with complete system solutions that exceed the scope of traditional
turnkey services provided by most contract manufacturers. GTC believes that the
ability to provide its customers with these services, including software
development, design services, prototype development, product re-engineering,
feature enhancement, product ruggedization, cost reduction, product
miniaturization, and EMI interference and shielding is instrumental in moving
new products to market quickly and regularly. GTC's engineers perform design
work on a contract basis for a number of customers, including those requiring
high levels of security clearance.
Customers and Marketing
GTC has pursued the diversification of its market segments and customer
base and has sought relationships with leading OEMs in the markets it serves.
GTC's principal sources of new business originate from the expansion of existing
relationships, referrals and direct sales through senior management, direct
sales personnel, and market specialists. Supported by the executive staff,
market specialists identify and attempt to develop relationships with potential
OEM customers who meet a certain profile, which includes financial stability,
industry leadership, need for technology driven turnkey manufacturing,
anticipated unit volume growth and long-term relationship potential.
GTC's sales efforts are further supported by advertising in numerous trade
media and sales literature and by promotions. GTC promotes the concept of
manufacturing relationships with each of its customers. The focus of this
relationship is centered on the belief that GTC and its employees must become an
essential part of every customer's operations. To facilitate this relationship,
GTC employs program managers who are dedicated to one or more customers to
ensure that customer contract requirements are met and that information critical
to the success of each program is communicated and acted upon in an expedient
fashion. This requires that program managers maintain close contact with GTC
employees and with the customers that they support, communicating project status
in addition to resolving specific issues which arise. GTC believes that this
dedicated relationship is critical to meeting the dynamic needs of its
customers.
During the last three years, GTC's largest individual commercial customer
was IBM, which accounted for approximately 14%, 16%, and 16%, of GTC's revenue
in 1994, 1995 and 1996, respectively. Sales to International Game Technology
represented approximately 10% of GTC's revenue in 1996. GTC's sales of products
and services to United States government agencies represented approximately 19%,
20% and 17% of GTC's revenue in 1994, 1995 and 1996, respectively. GTC's sales
of products and services to a variety of prime contractors under contract with
the federal government, in the aggregate, represented approximately 11%, 9% and
12% of GTC's revenue in 1994, 1995 and 1996, respectively.
3
Competition
GTC operates in a highly competitive environment and competes against
numerous domestic and foreign manufacturers. GTC's competitors include AVEX
Electronics, Benchmark Electronics, DII Group, IEC Electronics, Jabil Circuit,
Plexus, SCI Systems, Sanmina, and Solectron. In addition, GTC may encounter
competition in the future from other large electronic manufacturers which are
selling, or may begin to sell, contract manufacturing services. GTC may also
face competition from the manufacturing operations of its current and potential
OEM customers, which GTC believes continue to evaluate the merits of
manufacturing products internally versus the value of contract manufacturing.
GTC believes that the primary basis of competition in its targeted markets
are time to market, capability, price, manufacturing quality, advanced
manufacturing technology and reliable delivery. GTC believes that it generally
competes favorably with respect to each of these factors. To remain competitive,
GTC must continue to provide technologically advanced manufacturing services,
maintain world-class quality levels, offer flexible delivery schedules, deliver
finished products on a reliable basis and compete favorably on the basis of
price.
Backlog
GTC's order backlog at December 31, 1996 was approximately $65 million as
compared to order backlog at December 31, 1995 of approximately $124 million.
Backlog consists of firm purchase orders and commitments, substantially all of
which is expected to be filled within twelve months. However, since orders and
commitments may be rescheduled or canceled, backlog is not a definitive
indicator of future financial performance.
Suppliers
GTC procures components from a broad group of suppliers, determined on an
assembly-by-assembly basis. Some of the products and assemblies manufactured by
GTC require one or more components that may be available from only a single
source. Also, certain components are allocated in response to supply shortages.
GTC attempts to ensure the continuity of supply of these components. In cases
where unanticipated customer demand or supply shortages occur, GTC attempts to
arrange for alternative sources of supply, where available, or defers planned
production to meet the anticipated availability of the critical component. In
some cases, supply shortages will substantially curtail production of all
assemblies using a particular component. In addition, at various times there
have been industry-wide shortages of electronic components, especially memory
and logic devices. While GTC has not experienced significant material shortages
in the recent past, such shortages could produce significant short-term
interruptions of GTC's future operations.
GTC believes it fosters fair and strong relationships with its suppliers.
These relationships are built upon a history of GTC providing suppliers with
accurate and timely information when ordering materials and responding to the
suppliers' requirements. In return, suppliers are expected to provide
competitive material prices with flexible delivery schedules, to honor their
commitments for delivery of materials on time, and to meet or exceed all quality
requirements.
Research and Development
GTC invested $5.2 million, $3.0 million and $0.3 million, in research and
development in 1994, 1995 and 1996, respectively. This investment was made
primarily in support of GTC's name brand products line of business,
substantially all of which was divested by GTC by the end of the first quarter
of 1996. GTC also utilizes its research and development capability to develop
processes and technologies for the benefit of its customers. GTC plans to
perform a limited amount of research and development in the future. The Company
cannot forecast the impact of such expenditures upon the overall success of its
sales.
4
Proprietary Rights, Patents and Trademarks
GTC regards its manufacturing processes and circuit designs as proprietary
trade secrets and confidential information. GTC relies largely upon a
combination of trade secret laws, agreements with its OEM customers, internal
security systems, confidentiality procedures and employee agreements to maintain
the trade secrecy of its circuit designs and manufacturing processes. Although
GTC takes steps to protect its trade secrets, there can be no assurance that
misappropriation will not occur.
GTC licenses some technology from third parties which it uses in providing
manufacturing services to its OEM customers. GTC believes that such licenses are
generally available on commercial terms from a number of licensors. Generally,
the agreements governing such technology grant GTC nonexclusive, worldwide
licenses with respect to the subject technology and terminate upon a material
breach by GTC.
Although GTC does not believe that its circuit designs or manufacturing
processes infringe on the proprietary rights of third parties, there can be no
assurance that third parties will not assert infringement claims against GTC in
the future with respect to current or future designs or processes. Any such
assertion may require GTC to enter into a royalty arrangement or result in
costly litigation.
Certifications
GTC's Tampa facility is certified to ISO 9001, the international standard
for quality assurance in design, development, production, installation and
service. GTC also meets the National Aeronautics and Space Administration's
NHB5300.4 specification for space programs and numerous military specifications
including MIL-Q-9858A (quality program), MIL-STD-2000A (high-reliability
soldering), MIL-STD 45662 (calibration and metrology) and MIL-STD-801D
(environmental testing). GTC also meets certain manufacturing and quality
practices required by the Federal Aviation Administration. GTC will continue to
utilize these certifications to provide service to these and other niche
markets.
GTC's facilities in Mexico City, Mexico and Hortolandia, Brazil are
certified to ISO 9002. ISO 9002 is the international standard for quality
assurance in product installation and service, but does not cover product design
or development.
Government Regulation
GTC's operations are subject to certain federal, state and local regulatory
requirements relating to environmental, waste management, health and safety
matters. Management believes that GTC's business is operated in material
compliance with applicable regulations promulgated by the Occupational Safety
and Health Administration and the Environmental Protection Agency and
corresponding state agencies which, respectively, pertain to health and safety
in the workplace and the use, discharge and storage of chemicals employed in the
manufacturing process. Current costs of compliance are not material to GTC.
However, new or modified requirements, not presently anticipated, could be
adopted creating additional expense for GTC.
GTC's former leased facility located on Waters Avenue in Tampa, Florida is
currently subject to remediation activities related to ground water
contamination by methylene chloride and other volatile organic compounds which
occurred prior to GTC's lease of the facility. Through a series of evaluations,
it was determined that ground water contamination is also present off site. In
December 1986, Honeywell, Inc. ("Honeywell"), a prior operator of the facility,
entered into a consent order (the "Consent Order") with the State of Florida
Department of Environmental Regulation under which Honeywell agreed to take
certain corrective action to remediate the contamination. These remediation
activities include the installation of recovery wells and the treatment of the
contaminated ground water. Under the Consent Order, Honeywell assumed the
responsibility for initiating and conducting these remediation activities,
including the annual cost associated with these remediation activities,
currently estimated to be up to $500,000 per year. At the time GTC purchased the
assets of the business located on this leased site, it obtained an agreement
from the seller, Philips Electronics North America Corporation, to
5
indemnify and hold GTC harmless with respect to such matters. GTC vacated the
property in December 1994, at which time its lease obligation expired.
In the course of Metrum's acquisition of certain assets of a business from
Alliant Techsystems, Inc. ("Alliant"), Metrum and GTC became aware of ground
water contamination that will require remedial action at the facility where the
business was located in Littleton, Colorado. Evaluations indicate that certain
chlorinated solvents were disposed of on the site by a previous owner of the
business and these solvents have contaminated the ground water. There has been
no final determination on the total scope of actions which will be required to
remediate the ground water contamination, although it is estimated that the
clean-up cost could reach as high as $20 million in the aggregate. As part of
the agreement for the purchase and sale of the assets of the business, Alliant
agreed to indemnify and hold Metrum harmless with respect to such matters.
Metrum leased the facility from Alliant and continued operations on the site
until substantially all of the assets of the business were sold on February 9,
1996. Metrum and GTC agreed to indemnify and hold the buyer harmless with
respect to such matters.
Employees
As of December 31, 1996, GTC employed approximately 1,500 employees, of
which approximately 800 are employed in the United States, 400 are employed in
Mexico and 300 are employed in Brazil. GTC employs approximately 110 people in
finance, sales or administration, 1,290 people in manufacturing operations and
100 people in various engineering functions. Approximately 350 of GTC's domestic
employees are represented by the International Brotherhood of Teamsters
collective bargaining unit. In 1993, GTC and the International Brotherhood of
Teamsters signed a five-year contract. GTC believes its relationships with its
employees are good.
Geographic Segments
All of GTC's operations for 1994, 1995 and 1996 were located in the United
States, Mexico and Brazil. See Note 18 to Notes to Consolidated Financial
Statements for financial information about GTC's geographic segments.
Item 2. Properties
GTC's headquarters are in a 308,000 square foot office and manufacturing
facility on Malcolm McKinley Drive in Tampa, Florida which GTC occupies under a
ten-year lease expiring in April 2002 (with two additional five-year options).
Adjacent to its Tampa headquarters, GTC leases a 60,000 square foot warehouse.
GTC also leases a 118,000 square foot office and manufacturing facility located
on Poniente 152 No. 659 in Mexico City, Mexico under a lease that expires in
July 1997 (with two additional three-year options). GTC occupies approximately
20,000 square feet of a manufacturing facility in Hortolandia, Brazil in
connection with its manufacturing services agreement with its customer. GTC also
leases approximately 30,000 square feet of space at a facility in Campinas,
Brazil, pursuant to a lease that expires in July 1999 (with an option to renew
for an unspecified period).
Item 3. Legal Proceedings
GTC is, from time to time, a party to litigation which arises in the normal
course of its business. Management does not believe that these proceedings,
individually or in the aggregate, are material or that any adverse outcomes of
these matters would have a material adverse effect upon the business or
financial condition of GTC.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of shareholders of GTC during the
fourth quarter of fiscal year 1996.
6
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
The shares of GTC's voting Common Stock are quoted on the Nasdaq Stock
Market under the symbol GRTK. The following table sets forth, for the periods
indicated, the high and low sales prices per share for GTC's Common Stock as
reported by the Nasdaq Stock Market:
[CAPTION]
High Low
Year Ended December 31, 1995
First Quarter $7.000 $4.500
Second Quarter $6.000 $4.500
Third Quarter $8.000 $4.500
Fourth Quarter $6.250 $1.875
Year ended December 31, 1996
First Quarter $3.750 $2.125
Second Quarter $4.250 $2.125
Third Quarter $3.000 $1.750
Fourth Quarter $2.625 $0.750
As of March 19, 1997, there were approximately 636 holders of record of the
Company's Common Stock.
The National Association of Securities Dealers ("NASD") is presently
considering rules which, if adopted, would result in new minimum criteria which
a company must meet for inclusion in either the Nasdaq Stock Market or the Small
Cap Market. Under the recently proposed rules, companies will be required to
meet higher financial standards and maintain a stock market price of at least
$1.00 per share, or else face automatic termination of their designation for
inclusion in either the Nasdaq Stock Market or Small Cap Market. Additionally,
current rules of the Nasdaq Stock Market state that in order to remain eligible
for Nasdaq Stock Market listing, a security must have a bid price of at least
$1.00 per share or in the alternative, the market value of publicly held shares
(those held by persons other than officers, directors and 10% shareholders) must
be at least $3,000,000 and the company's net tangible assets must be at least
$4,000,000. While the Common Stock is currently quoted on the Nasdaq Stock
Market, there can be no assurance that its designation for inclusion thereon
will not be terminated if the NASD adopts the proposed regulations and GTC is
not able to meet the higher financial standards, or its stock market price drops
below $1.00 per share. If the designation for Common Stock is terminated,
trading in the Common Stock would thereafter be conducted in the over-the-
counter market in the so-called "pink sheets" or, if then available, the "OTC
Bulletin Board Service". As a result, a stockholder would likely find it to be
more difficult to dispose of, or to obtain accurate quotations as to the value
of, the Common Stock.
The Company has historically not declared or paid any cash dividend on the
Common Stock. The Company presently intends to retain all of its earnings for
the future operation and growth of its business and does not intend to pay cash
dividends in the foreseeable future. The payment of cash dividends in the future
will be dependent upon the Company's results of operations, earnings, capital
requirements, contractual restrictions and other factors considered relevant by
the Board of Directors. The Company's existing credit facilities prohibit the
Company from declaring or making any dividend or other distributions on the
Common Stock.
7
Item 6. Selected Financial Data
The following selected historical consolidated financial data should be
read in conjunction with the consolidated financial statements and the related
notes thereto in Item 8 and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in Item 7. The Company has historically not
declared or paid any cash dividend on the Common Stock.
[CAPTION]
Years Ended December 31,
1992 1993(1) 1994 1995(2) 1996(3)
-------- -------- -------- -------- --------
(in thousands, except for per share data)
Statement of Operations Data:
Revenue $116,572 $243,856 $274,147 $273,647 $224,661
Cost of operations 103,471 200,408 237,867 269,150 217,890
-------- -------- -------- -------- --------
Gross profit 13,101 43,448 36,280 4,497 6,771
Selling, general and
administrative expense 5,947 21,808 20,561 19,683 11,453
Research and development 1,190 4,138 5,170 3,041 299
-------- -------- -------- -------- --------
Operating income (loss) 5,964 17,502 10,549 (18,227) (4,981)
Interest expense 1,169 1,647 2,048 2,907 2,858
Other expense (income) 0 0 504 521 (59)
-------- -------- -------- -------- --------
Income (loss) before
income taxes 4,795 15,855 7,997 (21,655) (7,780)
Income taxes 1,588 5,882 3,297 (3,982) 799
-------- -------- -------- -------- --------
Net income (loss) $3,207 $9,973 $4,700 $(17,673) $(8,579)
======== ======== ======== ======== ========
Net income (loss) per share:
Primary $0.24 $0.71 $0.30 $(1.13) $(0.53)
Fully diluted $0.24 $0.69 $0.30 $(1.13) $(0.53)
Shares used in computing
per share amounts:
Primary 13,551 14,066 15,644 15,695 16,157
Fully diluted 13,551 14,554 15,789 15,695 16,157
8
[CAPTION]
December 31,
1992(4) 1993(5) 1994 1995(6) 1996(7)
-------- -------- ---------------- --------
(in thousands)
Balance Sheet Data:
Working capital $24,066 $37,305 $56,622 $23,922 $7,839
Total assets 67,030 111,925 122,566 113,106 67,465
Current portion of long-term debt 3,000 4,271 2,080 8,171 3,513
Long-term debt, less
current portion 21,469 30,362 30,392 23,050 10,119
Redeemable Common Stock and related
additional paid-in capital 1,971 2,508 0 0 0
Total shareholders' equity 6,926 17,340 42,799 25,840 19,403
(1) Reflects the results of operations from the date of acquisition of Metrum,
Inc. ("Metrum") and Philips Circuit Assemblies ("PCA") on December 31, 1992
and July 30, 1993, respectively.
(2) Reflects the results of operations through the date of disposition of the
peripheral products and imaging products business units of Metrum on May
31, 1995 and June 6, 1995, respectively.
(3) Reflects the results of operations through the date of disposition of the
instrumentation products business unit of Metrum on February 9, 1996.
(4) Reflects the acquisition of Metrum on December 31, 1992.
(5) Reflects the acquisition of PCA on July 30, 1993.
(6) Reflects the disposition of the peripheral products and imaging products
business units of Metrum on May 31, 1995 and June 6, 1995, respectively.
(7) Reflects the disposition of the instrumentation products business unit of
Metrum on February 9, 1996.
9
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview
GTC provides advanced manufacturing, engineering and testing services to
OEMs of electronic products and also to certain end users such as United States
government agencies. These services include the manufacture of circuit card
assemblies, subsystems and end-user products for use in a wide variety of
markets. In providing these services, GTC is affected by a number of internal
and external factors including, but not limited to, materials management and
availability, working capital needs, variability of customer requirements,
production start-up costs, industry trends and competition.
GTC's operating results are also dependent upon the efforts and abilities
of key managerial and technical employees and upon its ability to attract and
retain qualified employees. During 1996 and during the first quarter of 1997,
GTC experienced turnover of certain key employees, including its President and
Chief Executive Officer and other executive officers of the Company. See Item 10
and Item 11 in this Annual Report on Form 10-K for additional information
regarding the executive officers of the Company.
Results of Operations
The following table sets forth certain data from GTC's Consolidated
Statements of Operations for the years ended December 31, 1994, 1995 and 1996
expressed as a percentage of revenue:
[CAPTION]
Years ended December 31,
1994 1995 1996
------ ------ ------
Revenue 100.0% 100.0% 100.0%
Cost of operations 86.8 98.4 97.0
------ ------ ------
Gross profit 13.2 1.6 3.0
Selling, general and administrative expense 7.5 7.2 5.1
Research and development 1.9 1.1 0.1
------ ------ ------
Operating income (loss) 3.8 (6.7) (2.2)
Interest expense 0.7 1.1 1.3
Other expense 0.2 0.2 0.0
------ ------ ------
Income (loss) before income taxes 2.9 (8.0) (3.5)
Income taxes (benefit) 1.2 (1.5) 0.3
------ ------ ------
Net income (loss) 1.7% (6.5)% (3.8)%
====== ====== ======
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Revenue
Revenue decreased by 17.9% to $224.7 million for 1996, as compared to
$273.6 million for 1995. The net decrease in revenue of $48.9 million is related
to the decrease in GTC's name brand product line revenue of $31.2 million (net
of contract claim revenue recognized in 1996 of $4.1 million) and a decrease in
the Tampa-based manufacturing and engineering services operations of $36.1
million, partially offset by an increase in sales by GTC's international EMS
operations of $18.4 million.
The decrease in name brand product line revenue results from the
disposition of substantially all of the assets of Metrum and GTC's Badger
business. These dispositions, which occurred during 1995 and 1996, are more
fully discussed under the caption "Disposition of Assets" included herein below.
The decrease in the name
10
brand products revenues was partially offset by the successful settlement of a
$4.1 million name brand product contract claim during the second quarter of
1996.
The Tampa manufacturing services business continues to suffer from
underutilized capacity. A large government contract was completed late in 1994
and orders on two commercial contracts were reduced during 1995 due to the
customers' need to reduce their inventory levels. GTC also lost opportunities
with two commercial customers due to a change in outsourcing strategies which
resulted in the loss of a significant level of planned business. During 1996,
GTC's domestic operations also experienced the impact of reduced demand from
certain semiconductor industry customers and also suffered from increased
facility underutilization related to certain contract terminations. The Company
also expects certain contract requirements to decline during 1997, which could
further reduce the utilization of the domestic operations. In an effort to
mitigate the impact of these reduced contract requirements, management is
implementing cost reduction strategies and is increasing its Tampa marketing
efforts on high product mix and advanced packaging services.
GTC's Latin American manufacturing services business grew significantly
during 1995 and 1996. GTC entered into a manufacturing services agreement in
July 1995 to provide contract manufacturing services in Brazil to GTC's largest
commercial customer, IBM. The Brazilian operation began contributing to revenue
and operating profit during the third quarter of 1995. During 1996, GTC's
presence in Brazil expanded as a result of the start-up of a second Brazilian
facility. While the Company also fostered growth at its Mexican facility during
1995, certain Mexican-based contracts were terminated during 1996, creating
underutilized capacity at that facility. In response to this underutilized
capacity, the Company has retained new marketing management and has increased
its high volume manufacturing marketing efforts.
To enhance GTC's prospects for achieving an adequate revenue load in future
periods, management has structured the marketing and sales function to optimize
the Company's capabilities at each of its manufacturing facilities. The
marketing efforts for GTC's domestic, Mexican and Brazilian manufacturing
services operations are focused on high product mix and advanced packaging, high
volume manufacturing, and box build services, respectively.
Gross Profit
Gross profit increased to $6.8 million for 1996, compared to $4.5 million
for 1995. The gross margin increased to 3.0% in 1996 as compared to 1.6% in
1995. The net increase of $2.3 million represents an increase in gross profit in
the Tampa-based manufacturing and engineering services operations of $9.0
million and an increase from increased sales by GTC's Latin American operations
of $1.4 million, partially offset by a decrease associated with GTC's
divestiture of name brand product lines of $8.1 million. The name brand product
line claim referred to above contributed $4.1 million to 1996 gross profit.
Therefore, adjusting for the effect of this claim, the gross margin percentage
in 1996 remained relatively consistent with the 1995 percentage. Included in the
costs of operations in 1996 are costs amounting to $7.4 million which are more
fully discussed below.
GTC's ability to generate the expected level of profitability on contracts
is highly dependent on its ability to effectively manage materials. The Company
recognized inventory adjustments of $3.6 million, including $1.7 million related
to two contract terminations during the year and $1.9 million related to
excessive domestic and foreign scrap and related physical inventory adjustments.
GTC performed its physical inventory counts on a semi-annual basis during 1996
and will continue to evaluate its inventory control and physical inventory count
procedures to minimize the risk of material adjustments in the future.
Management also evaluated the profitability on certain long-term contracts and
recorded costs associated with changes in contract estimates of loss contracts
of $1.0 million during the second quarter of 1996 and $0.8 million in the fourth
quarter. Other estimate changes on long-term contracts were also recognized
during 1996. These estimate changes principally resulted from the Company's
inability to achieve expected labor costs or material costs during the year.
Costs associated with asset disposals and deferred rent payments for capital
equipment amounted to $1.6 million. Severance costs also negatively impacted
gross margin by $0.4 million in 1996.
11
During 1995, the Company also recognized significant charges to its
operations, which are more fully discussed under the caption "Year ended
December 31, 1995 compared to year ended December 31, 1994" included herein
below.
Selling, General and Administrative Expense
Selling, general and administrative expense was $11.5 million or 5.1% of
revenue in 1996, as compared to $19.7 million or 7.2% of revenue for 1995. This
decrease principally represents a $6.2 million reduction of costs associated
with the sale of substantially all of the assets of Metrum. Decreased
administrative expenses also resulted from continued cost reduction initiatives
including work force reductions during 1996. Cost reduction activities
implemented at various times during 1995 contributed to the significant cost
reductions realized in 1996 as compared to the full year ended December 31,
1995. These reductions offset the impact of $1.4 million of costs in 1996,
including severance costs of $0.5 million and costs incurred for the expected
closure of a Tampa warehouse of $0.9 million.
With regard to warehouse costs, in the second quarter of 1996 GTC
implemented a cost saving strategy to integrate the materials warehousing
function into its main Tampa facility. The total cost of the move was originally
estimated to be $0.4 million, but an increased cost of $0.5 million was recorded
in the fourth quarter based on actual costs incurred and the review of
additional information regarding sublease strategies.
Selling, general and administrative expense also includes $1.0 million of
provisions for doubtful accounts receivable, as compared to $1.3 million
recognized in 1995. The provision for doubtful accounts in both 1995 and 1996
represents a change in estimate of collectibility following extensive
communications with the respective customers regarding non-payment of invoices
and conclusions or settlements reached during the year regarding ultimate
collectibility.
Research and Development
Research and development expense was $0.3 million or 0.1% of revenue in
1996, as compared to $3.0 million or 1.1% of revenue for 1995. The decrease
reflects the fact that the Company's research and development efforts have
historically been concentrated on the divested name brand products business
units. GTC's manufacturing and engineering services businesses are expected to
continue to require limited levels of research and development in the future.
Interest Expense
Interest expense was $2.9 million or 1.3% of revenue in 1996, as compared
to $2.9 million or 1.1% of revenue in 1995. Interest expense remained relatively
constant with 1995 levels despite a significant reduction in outstanding debt
during 1996. The increased interest rate is partly attributable to the
amortization of warrants issued in the first quarter of 1996 in connection with
an amended and restated credit facility. The increased interest rate also
results from a higher weighted average interest rate incurred in the second half
of 1995 and throughout 1996 on the Company's principal credit facility.
Income Tax Expense
Income tax expense of $0.8 million in 1996 is primarily attributable to the
Company's international operations and Metrum state taxes payable. While an
income tax benefit of $4.0 million was recognized in 1995, as of December 31,
1995, the Company had substantially exhausted the benefits of any income tax
loss carrybacks. Also as of December 31, 1996, the Company has recorded a
valuation allowance for all temporary differences and income tax loss
carryforwards.
12
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
Revenue
Revenue decreased by 0.2% to $273.6 million for 1995, as compared to $274.1
million for 1994. The net change in revenue was derived from an increase in
sales by GTC's expanding Latin American operations offset by a decrease in sales
related to the divestiture of certain of GTC's name brand product lines during
the second quarter of 1995, a decline in sales from the balance of the name
brand product lines and a decrease in sales to commercial customers of GTC's
domestic manufacturing services business.
Gross Profit
Gross profit decreased to $4.5 million for 1995, compared to $36.3 million
for 1994. The gross margin decreased to 1.6% in 1995 as compared to 13.2% in
1994. The decline in gross profit is attributable to depressed margins on GTC's
domestic and international manufacturing services and charges during 1995
totaling $11.6 million related to inventories, estimated losses on terminated
contracts, asset disposals, operating lease liabilities and severance costs. The
lower-margin performance on the domestic and international manufacturing service
resulted from the start-up of new contracts in GTC's Tampa and Mexican
operations which replaced certain high-margin contracts completed in the fourth
quarter of 1994. Additionally, a higher percentage of GTC's 1994 revenue was
realized from contracts performed with consigned materials at relatively high
gross margins as compared to 1995. During 1994, GTC also recognized gross profit
of $4.5 million resulting from favorable changes in contract and claim estimates
and $2.7 million from the settlement of a government contract termination claim.
Management exercises careful judgment in its determination of the adequacy
of its reserves for excess and obsolete inventories. Charges recognized by GTC
during the second and fourth quarters of 1995 were the result of thorough
evaluations conducted by management in the respective quarters of these reserve
balances. GTC charged $2.0 million and $3.2 million to cost of operations during
the second and fourth quarters of 1995, respectively, to increase its reserve
for excess and obsolete inventories. Included in the fourth quarter charge for
excess and obsolete inventories was $2.2 million related to Badger inventories.
The Badger product line was divested in March 1996.
Concurrent with its review of inventory levels during the second quarter of
1995, management also evaluated a number of its contracts which were not meeting
GTC's volume or margin targets. The review resulted in improved pricing on
certain contracts; however, it also resulted in decisions, mutually agreed to
with customers, to terminate unprofitable contracts. GTC charged $1.8 million
and $0.5 million to cost of operations during the second and fourth quarters of
1995, respectively, to recognize estimated losses on terminated or unprofitable
contracts.
During the fourth quarter of 1995, management evaluated the probability of
a contribution to future earnings from a certain specialized manufacturing
equipment item currently under lease. The operating lease was entered into in
November 1994 and GTC has since been unsuccessful in attracting customers
requiring this specific technology. During the implementation of the technology
center concept during the fourth quarter of 1995, management determined that
this equipment did not adequately match the strategies of any of the technology
centers. Following its review of the business opportunities for this equipment,
management elected to pursue the disposition of the equipment through a sale or
assignment of lease. Management charged $1.1 million to cost of operations
during the fourth quarter of 1995 to recognize the net present value of future
costs associated with this lease.
GTC conducted its annual physical inventory count for its domestic and
international manufacturing businesses on October 31, 1995 and December 31,
1995, respectively. Management subsequently completed the reconciliation of its
perpetual inventory records to its physical count which resulted in a fourth
quarter charge to cost of operations of approximately $1.7 million and an
additional inventory adjustment for an accounts payable reconciliation performed
contemporaneously with the physical inventory of $0.8 million. The significant
difference
13
between the perpetual and physical amounts was not anticipated by management.
Management believes that improvements in the stability of GTC's material
management system and the implementation of additional inventory control
procedures will reduce the likelihood of significant book to physical
adjustments in the future. GTC has also implemented user training programs to
certify the users on the materials management system. GTC also recognized
certain other charges during the fourth quarter totaling $0.5 million related to
the disposal of idle manufacturing equipment.
Selling, General and Administrative Expense
Selling, general and administrative expense was $19.7 million or 7.2% of
revenue in 1995, as compared to $20.6 million or 7.5% of revenue for 1994.
Selling, general and administrative expense decreased due to company-wide cost
reduction initiatives implemented at various times throughout 1995 and the
divestiture of two of Metrum's lines of name brand products during the second
quarter. These reductions offset the impact of a $1.3 million provision for
uncollectible accounts during 1995 (including $0.8 million recorded in the
second quarter following extensive communications with the respective customers
regarding non-payment of invoices and conclusions or settlements reached
regarding ultimate collectibility) and increased costs associated with GTC's
Latin American operations. GTC also recognized certain other charges during the
second quarter totaling $0.6 million related to employee severance costs and
costs associated with an uncompleted business acquisition. GTC also recognized a
charge during the fourth quarter totaling $0.5 million related to the write-off
of terminated financing agreement costs.
Research and Development
Research and development expense was $3.0 million or 1.1% of revenue in
1995, as compared to $5.2 million or 1.9% of revenue for 1994. Reductions in
research and development expense were implemented in the first quarter of 1995,
and the second quarter Metrum divestitures resulted in further reductions.
Interest Expense
Interest expense was $2.9 million or 1.1% of revenue in 1995, as compared
to $2.0 million or 0.7% of revenue in 1994. Interest expense increased due to a
significant increase in the average debt outstanding and an increase in the
Company's interest rate which occurred during the third quarter of 1995.
Income Tax Expense
Income taxes include current and deferred tax benefits and expense in 1995
and 1994. GTC recorded a $4.4 million valuation allowance against its deferred
tax assets during 1995. GTC also recorded a current tax benefit for the amount
of federal and state income taxes refundable as a result of the 1995 operating
loss.
Dispositions of Assets
Beginning in 1995, management focused its attention toward the actions
necessary to return GTC's core manufacturing services business to profitability.
Management believed that the focus of GTC's human and financial resources should
be directed to its core business and, therefore, made decisions during 1995 to
begin the divestiture of substantially all of GTC's line of name brand products.
Another factor considered by management in reaching its decision to divest these
operations was GTC's need to reduce its outstanding debt under its revolving
credit agreement, which resulted in part from non-compliance with its credit
agreement. These divestitures were completed during the first quarter of 1996.
GTC's product offerings historically included a line of name brand
products. All sales of GTC's Metrum subsidiary were considered name brand
products, namely computer peripheral products, digital color imaging products
and instrumentation recording products. GTC also marketed a line of ruggedized
computers under the
14
Badger tradename. Management successfully completed sale transactions for
substantially all of the assets of the peripherals products and imaging products
businesses during the second quarter of 1995 and the instrumentation products
and Badger products businesses during the first quarter of 1996. The aggregate
sales price of the name brand products businesses was approximately $18.0
million, which was paid with $16.4 million in cash and a note receivable of $1.6
million. GTC retained approximately $2.4 million in liabilities associated with
the Metrum business, which liabilities related primarily to certain employee
benefits, accrued income taxes and commissions. GTC retained certain warranty
obligations of the Badger product in addition to performance obligations under a
contract with a customer who is in competition with the buyer of the assets. GTC
recorded charges of $0.2 million and $0.3 million to cost of operations and
other expense, respectively, during the second quarter of 1995 related to the
Metrum divestitures and a $2.2 million charge to cost of operations during the
fourth quarter of 1995 to write down its Badger inventories to the negotiated
sale price. GTC recorded a $0.6 million increase in capital related to the first
quarter 1996 instrumentation products divestiture.
Revenue from GTC's name brand products line, in the aggregate, typically
generated higher gross profit margins than revenue from GTC's manufacturing and
engineering services. However, the development of name brand products and the
maintenance and growth of the market position of these name brand products
require significantly higher amounts of research and development and selling,
general and administrative expenditures than are required by GTC's manufacturing
and engineering services.
Foreign Currency
In addition to its domestic operations, GTC provides manufacturing services
in Brazil and Mexico. The Company recognized foreign currency exchange losses
due to the devaluation of the Mexican new peso, which, in the aggregate,
amounted to $0.5 million or 0.2% of revenue in 1994. Foreign currency
transaction gains and losses in Latin America have generally not been
significant.
Liquidity and Capital Resources
Net cash provided by operating activities was $7.7 million and $9.4 million
in 1996 and 1995, respectively. The principal contributors to the positive
operating cash flow in 1996 include recognition and collection of a name brand
products claim, collection of income tax refunds, collection of accounts
receivable and reduced inventory levels. Significant cash payments reducing
accounts payable served to partially off-set the positive contributing items. At
the end of 1995, the Company was substantially beyond its payment terms with its
suppliers. While GTC continues to extend its payments beyond normal terms, a
significant effort was made during 1996 to reduce the days accounts payable are
outstanding, contributing to the overall reduction in accounts payable. GTC has
long-term relationships with a majority of its suppliers and as a result, has
been successful in continuing to work on reasonable credit terms with its
supplier base.
Net cash provided by investing activities was $8.2 million as compared to
net cash used in investing activities of $2.8 million in 1995. Capital
expenditures in 1996 and 1995 were $3.4 million and $8.0 million, respectively.
GTC's investments in manufacturing equipment in both 1996 and 1995 were required
to expand its Latin American capacity, maintain its competitive position and
respond to technological changes. The Company expects its capital expenditures
in 1997 to be comparable to or less than 1996 levels. The divestiture of GTC's
name brand product lines during 1996 and 1995 generated net proceeds of
approximately $11.6 million and $5.2 million, respectively.
Net cash used in financing activities was $17.4 million and $5.8 million
during 1996 and 1995, respectively. During both 1996 and 1995, GTC significantly
reduced debt outstanding on its primary credit agreement and other debt. The
1996 reductions were principally provided for by the divestiture of GTC's name
brand products line in the first quarter of 1996, settlement of a name brand
products claim, and by income tax refunds received during the year. GFP also
invested $0.3 million in 1995 to provide funding for the start-up of GTC's
Brazilian operation.
15
The credit agreement between GTC and its bank entered into on March 29,
1996 (the "Credit Agreement") was amended on March 28, 1997. As more fully
discussed below, the March 27, 1997 amendment (the "Amendment") resulted in,
among other matters, reduced credit availability, an investment from GFP, and
more lenient financial covenants. A revolving credit facility issued under the
Credit Agreement provided credit availability up to $27.5 million through
December 1996 and, as amended, provides $13.5 million through March 1998,
subject to a borrowing base consisting of eligible accounts receivable and
inventories. During 1996, GTC fully repaid a $5.0 million note and reduced the
principal outstanding on a $3.3 million term note by $0.6 million. Both of the
notes payable were issued under the Credit Agreement. During the first quarter
of 1997, GTC repaid an additional $0.5 million on the $3.3 million term note.
In connection with execution of the Credit Agreement in 1996, GFP invested
$1.0 million in GTC in exchange for 374,531 shares of GTC Common Stock. GTC also
issued warrants to the bank to purchase 1.2 million shares of GTC Common Stock
for $.01 per share, 0.2 million of which became vested at closing. As amended,
the Credit Agreement provides for the balance of the warrants to become
exercisable as follows; 125,000 on March 31, 1997; 375,000 on June 30, 1997,
250,000 on September 30, 1997; and, 250,000 on December 31, 1997. Vesting of
these warrants is also subject to an acceleration clause included in the Credit
Agreement. The bank will forfeit any unvested warrants in the event GTC repays
all debt outstanding prior to any warrant vesting date.
In connection with the Amendment, during the first quarter of 1997 GFP
invested $2.5 million in GTC in exchange for 250,000 shares of GTC Preferred
Stock (the "Preferred Stock"). The Preferred Stock is redeemable and pays
quarterly dividends of 8.5% per annum. The Preferred Stock is redeemable at the
option of the holder upon repayment by the Company of all of its outstanding
Credit Agreement indebtedness. The Preferred Stock is also convertible and each
share may be exchanged for 8.3 shares of the Company's Common Stock.
Planned Merger
The Company has filed a registration statement with the Securities and
Exchange Commission regarding its intent to merge with GFP and two of GFP's
subsidiaries. The registration statement has not become effective and the
Company can make no assurances regarding the completion of the merger, the
timing of the merger or the effect the merger may have on the Company's results
of operations or liquidity.
16
Item 8. Financial Statements and Supplementary Data
GROUP TECHNOLOGIES CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Certified Public Accountants 17
Consolidated Balance Sheets 18
Consolidated Statements of Operations 19
Consolidated Statements of Shareholders' Equity 20
Consolidated Statements of Cash Flows 21
Notes to Consolidated Financial Statements 22
17
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Shareholders
Group Technologies Corporation
We have audited the accompanying consolidated balance sheets of Group
Technologies Corporation as of December 31, 1995 and 1996, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the three years in the period ended December 31, 1996. Our audits also
included the financial statement schedule listed in the index at Item 14(a).
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Group Technologies Corporation at December 31, 1995 and 1996, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
/s/ Ernst & Young LLP
Tampa, Florida
March 28, 1997
18
GROUP TECHNOLOGIES CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except for share data)
[CAPTION]
December 31,
1995 1996
-------- --------
ASSETS
Current assets:
Cash and cash equivalents $2,143 $661
Accounts receivable, net 31,167 22,754
Inventories, net 46,499 20,220
Other current assets 7,965 2,102
-------- --------
Total current assets 87,774 45,737
Property and equipment, net 24,090 21,206
Other assets 1,242 522
-------- --------
$113,106 $67,465
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $37,789 $17,969
Accrued liabilities 17,892 16,416
Current portion of long-term debt 8,171 3,513
-------- --------
Total current liabilities 63,852 37,898
Long-term debt 23,050 10,119
Other liabilities 364 45
-------- --------
Total liabilities 87,266 48,062
Commitments and contingencies
Shareholders' equity:
Preferred Stock, $.01 par value, 1,000,000 shares
authorized, no shares issued and outstanding 0 0
Common stock, $.01 par value, 40,000,000 shares
authorized; 15,828,707 and 16,220,629 shares
issued and outstanding in 1995 and
1996, respectively 158 162
Additional paid-in capital 22,537 24,675
Retained earnings (deficit) 3,145 (5,434)
-------- --------
Total shareholders' equity 25,840 19,403
-------- --------
$113,106 $67,465
======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
19
GROUP TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except for per share data)
[CAPTION]
Years ended December 31,
1994 1995 1996
-------- -------- --------
Revenue $274,147 $273,647 $224,661
Cost of operations 237,867 269,150 217,890
-------- -------- --------
Gross profit 36,280 4,497 6,771
Selling, general and administrative expense 20,561 19,683 11,453
Research and development 5,170 3,041 299
-------- -------- --------
Operating income (loss) 10,549 (18,227) (4,981)
Interest expense 2,048 2,907 2,858
Other expense (income) 504 521 (59)
-------- -------- --------
Income (loss) before income taxes 7,997 (21,655) (7,780)
Income taxes 3,297 (3,982) 799
-------- -------- --------
Net income (loss) $4,700 $(17,673) $(8,579)
======== ======== ========
Net income (loss) per share:
Primary $0.30 $(1.13) $(0.53)
Fully diluted $0.30 $(1.13) $(0.53)
Shares used in computing per share amounts:
Primary 15,644 15,695 16,157
Fully diluted 15,789 15,695 16,157
The accompanying notes are an integral part of the consolidated financial
statements.
20
GROUP TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands, except for share data)
[CAPTION]
Common Stock Additional Retained Deferred Share-
------------ Paid-In Earnings Compen- holders'
Shares Amount Capital (Deficit) sation Equity
------ ------ ------ -------- ------ -------
Balance at
December 31, 1993 12,508,800 $125 $875 $16,492 $(152) $17,340
Common stock issued 2,050,560 20 17,793 0 0 17,813
Compensation expense
recorded in connection
with issuance of
redeemable common stock 0 0 0 277 0 277
Deferred compensation 0 0 0 0 152 152
Conversion of redeemable
common stock to
shareholders' equity 1,067,187 11 3,157 (651) 0 2,517
Net income 0 0 0 4,700 0 4,700
---------- ---- ------- ------- ---- -------
Balance at
December 31, 1994 15,626,547 156 21,825 20,818 0 42,799
Common stock issued
and issuable 202,160 2 712 0 0 714
Net loss 0 0 0 (17,673) 0 (17,673)
---------- ---- ------- ------- ---- -------
Balance at
December 31, 1995 15,828,707 158 22,537 3,145 0 25,840
Common stock issued 391,922 4 1,045 0 0 1,049
Warrants issued 0 0 480 0 0 480
Capital contribution 0 0 613 0 0 613
Net loss 0 0 0 (8,579) 0 (8,579)
---------- ---- ------- ------- ---- -------
Balance at
December 31, 1996 16,220,629 $162 $24,675 $(5,434) $0 $19,403
========== ==== ======= ======= ==== =======
The accompanying notes are an integral part of the consolidated financial
statements.
21
GROUP TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
[CAPTION]
Years ended December 31,
1994 1995 1996
-------- -------- --------
Cash flows from operating activities:
Net income (loss) $4,700 $(17,673) $(8,579)
Adjustments to reconcile net income (loss)
to net cash (used in) provided by
operating activities:
Depreciation and amortization 5,402 5,596 5,214
Compensation paid with redeemable common stock 429 0 0
Deferred income taxes 2,499 741 251
Provision for inactive, obsolete
and unsalable inventories 540 6,939 3,567
Provision for doubtful accounts 571 1,293 961
Provision for idle leased equipment 0 1,104 0
Loss on equipment disposals and other 273 778 1,134
Changes in operating assets and liabilities,
net of acquisitions and dispositions:
Accounts receivable (2,856) 1,875 4,195
Inventories (7,172) 3,287 15,497
Other current and non-current assets (4,403) (3,752) 4,737
Accounts payable (3,829) 8,043 (18,872)
Accrued and other liabilities (9,052) 1,183 (389)
-------- -------- --------
Net cash (used in) provided by
operating activities (12,898) 9,414 7,716
Cash flows from investing activities:
Capital expenditures (7,271) (8,042) (3,408)
Proceeds from disposal of assets 0 5,214 11,561
-------- -------- --------
Net cash (used in) provided by
investing activities (7,271) (2,828) 8,153
Cash flows from financing activities:
Net proceeds (repayments) under
line of credit agreement 19,212 (4,667) (10,418)
Repayments of notes payable
and long-term debt (22,573) (1,505) (7,933)
Net proceeds from issuance of common stock 17,801 401 1,000
-------- -------- --------
Net cash provided by (used in)
financing activities 14,440 (5,771) (17,351)
-------- -------- --------
Net (decrease) increase in cash
and cash equivalents (5,729) 815 (1,482)
Cash and cash equivalents at beginning of year 7,057 1,328 2,143
-------- -------- --------
Cash and cash equivalents at end of year $1,328 $2,143 $661
======== ======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
22
GROUP TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Business
Group Technologies Corporation (the "Company") was incorporated on December
27, 1988 as a subsidiary of Group Financial Partners, Inc. (the "Parent"), a
private holding company. The Parent owns approximately 80% of the outstanding
Common Stock of the Company.
The Company provides advanced manufacturing, engineering and testing
services to original equipment manufacturers ("OEMs") of electronic products.
The Company custom manufactures complex circuit card assemblies, subsystems and
end-user products for use in a wide variety of markets, including automotive,
commercial avionics, computer, government systems, industrial electronics,
networking, space, and telecommunications.
(2) Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its majority owned subsidiaries (hereinafter collectively referred to as the
"Company"). The Company's operating subsidiaries are Group Technologies, S.A. de
C.V. ("GTC Mexico") and Group Technologies Suprimentos de Informatica Industria
e Comercio Ltda. ("GTC Brazil"). Substantially all of the assets of Metrum Inc.
("Metrum"), which remains a wholly owned subsidiary of the Company, were sold on
February 9, 1996 (see Note 4). All significant intercompany transactions and
accounts have been eliminated.
Use of Estimates
The preparation of the financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Cash Equivalents
The Company considers all liquid investments with an original maturity of
three months or less when purchased to be cash equivalents.
Inventories
Contract inventories are stated at actual production costs, reduced by the
cost of units for which revenue has been recognized. Gross contract inventories
are considered work in process. Progress payments under long-term contracts are
specified in the contracts as a percentage of cost and are liquidated as
contract items are completed and shipped. Other inventories are stated at lower
of cost (first-in, first-out) or market. Inventories of Metrum are stated at
lower of cost (last-in, first-out) or market.
Property and Equipment
Property and equipment is stated at cost. Leasehold improvements are
amortized over the lease term using the straight-line method. Machinery,
equipment, furniture and fixtures are depreciated over their estimated economic
lives (three to ten years). Expenditures for maintenance, repairs and renewals
of minor items are expensed as incurred. Major renewals and improvements are
capitalized.
Effective January 1, 1995, the Company changed its method of depreciation
for financial reporting purposes for newly acquired machinery, equipment,
furniture and fixtures from principally an
23
accelerated method to the straight-line method. Management believes that the
straight-line method of depreciation provides a preferable matching between
expected productivity and cost allocation since the equipment's operating
capacity and consumption generally remains consistent over time. The change had
no cumulative effect on prior year earnings and was not material to operating
results for the year ended December 31, 1995.
Amortization
Noncompete agreements are amortized over five years and patents and other
intangible assets are amortized over their composite economic life of seven
years, using the straight-line method. The excess of the fair value of the net
assets of an acquired business over the purchase price of such net assets
(negative goodwill) is amortized using the straight-line method over five years.
Negative goodwill included in other non-current liabilities at December 31, 1995
was $261,000. Accumulated amortization of negative goodwill at December 31, 1995
was $396,000. In connection with the disposition of a portion of Metrum's assets
during 1995, negative goodwill with an unamortized basis of $330,000 was
included in the net book value of assets sold for purposes of determining the
loss. As a result of the disposition of substantially all of Metrum's remaining
assets during 1996, there was no negative goodwill remaining at December 31,
1996.
Contract Revenue Recognition
A portion of the Company's business is conducted under long-term fixed-
price contracts with OEMs, the United States government and its prime
contractors. Contract revenue is included in the statement of operations as
units are completed and shipped using the units of delivery, percentage of
completion method of accounting. The costs attributed to contract revenue are
based upon the estimated average costs of all units to be shipped. The
cumulative average costs of units shipped to date is adjusted through current
operations as estimates of future costs to complete change (see Contract
Accounting).
Revenue recognized under the percentage of completion method of accounting
amounted to $60,500,000, $57,945,000 and $54,397,000 in 1994, 1995 and 1996,
respectively. Substantially all such amounts were accounted for under the units
of delivery method. All other revenue is recognized as product is shipped and
title passes.
Contract Accounting
For long-term contracts, the Company capitalizes in inventory direct
material, direct labor and factory overhead as incurred. The Company also
capitalizes certain general and administrative costs for estimating and bidding
on contracts awarded (of which approximately $210,000 remained in inventory at
December 31, 1995 and 1996). Selling costs are expensed as incurred. Costs to
complete long-term contracts are estimated on a monthly basis. Estimated margins
at completion are applied to cumulative contract revenue to arrive at costs
charged to operations.
Accounting for long-term contracts under the percentage of completion
method involves substantial estimation processes, including determining the
estimated cost to complete a contract. As contracts may require performance over
several accounting periods, formal detailed cost to complete estimates are
performed which are updated monthly via performance reports. Management's
estimates of costs to complete change due to internal and external factors such
as labor rate and efficiency variances, revised estimates of warranty costs,
estimated future material prices and customer specification and testing
requirement changes. Changes in estimated costs are reflected in gross profit in
the period in which they are known. If increases in projected costs to complete
are sufficient to create a loss contract, the entire estimated loss is charged
to operations in the period the loss first becomes known. Provisions for losses
on
24
firm fixed-price contracts amounted to $1,226,000, $700,000 and $2,327,000 in
1994, 1995 and 1996, respectively.
The Company recognized income before income taxes in 1994 of approximately
$4,500,000 resulting from favorable changes in contract and contract claim
estimates for which all related costs had been charged to operations in previous
years. Approximately $3,100,000 of such estimate revisions were recognized by
the Company during the fourth quarter of 1994. While contract claim reserves
were initially established in response to customer assertions regarding product
failures, tests regarding the alleged failures ultimately were determined to be
inconclusive, requiring a change in estimate. The Company also successfully
negotiated the settlement of a government contract termination claim and
recognized income before income taxes of approximately $2,700,000 in 1994.
During the second quarter of 1996, the Company successfully settled a name brand
products contract claim and recognized revenue and income before income taxes of
approximately $4,100,000 associated with that settlement.
Research and Development
Company sponsored research and development costs are expensed as incurred.
Income Taxes
The Company and its domestic subsidiaries were included in the consolidated
federal income tax return of the Parent from the Company's inception through
March 22, 1995. Effective March 23, 1995, as a result of a decrease in the
Parent's ownership percentage of the Company, the Company did not meet the 80-
percent-voting power and value requirements defined by the Internal Revenue Code
for affiliated group membership and ceased to be an includable member of the
Parent's affiliated group. The Company and its domestic subsidiaries separately
filed its initial consolidated federal income tax return for the period March
23, 1995 through December 31, 1995. Effective March 29, 1996, as a result of an
increase in the Parent's ownership percentage of the Company, the Company again
met the 80-percent-voting power and value requirements defined by the Internal
Revenue Code for affiliated group membership and expects to be an includable
member of the Parent's affiliated group beginning March 29, 1996.
For financial reporting purposes during the tax periods in which the
Company is or expects to be included in the Parent's consolidated federal income
tax return, income taxes are accounted for on a separate return basis, including
deferred income taxes. For those tax periods, liabilities for, or refunds of,
federal income taxes were calculated on a stand-alone basis and were payable to,
or receivable from, the Parent.
The Company has applied the provisions of Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes," which requires an asset and
liability approach in accounting for income taxes for all years presented.
Concentrations of Credit Risk
Financial instruments which potentially expose the Company to
concentrations of credit risk consist of accounts receivable. The Company's OEM
customer base consists primarily of large computer and electronic manufacturers
and its commercial accounts receivable are concentrated with a few of these
large companies. Although the Company is directly affected by the well being of
the computer and electronics industry, management does not believe significant
credit risk exists at December 31, 1996.
The Company earned revenue from the United States government and its
agencies of approximately $51,200,000 (19% of revenue), $53,643,000 (20% of
revenue) and $38,635,000 (17% of revenue) during 1994, 1995 and 1996,
respectively. The Company also served as a subcontractor to a
25
variety of prime contractors under contract with the federal government, which
in the aggregate, represented approximately 11%, 9% and 12% of the Company's
revenue in 1994, 1995 and 1996, respectively. The Company's largest commercial
customer was IBM which represented approximately 14%, 16% and 16% of the
Company's revenue in 1994, 1995 and 1996, respectively. Sales to International
Game Technology represented approximately 10% of the Company's revenue in 1996.
No other single customer accounted for more than 10% of the Company's revenue in
1994, 1995 or 1996.
Foreign Currency Translation
The United States dollar is the functional currency for the Company's GTC
Mexico and GTC Brazil subsidiaries. Foreign currency transaction gains and
losses, which are insignificant in all years presented, are included in
determining net income.
Stock-Based Compensation
The Company grants stock options under its Stock Option Plans to
employees and independent directors (see Note 13). The Company accounts for
stock option grants in accordance with APB Opinion No. 25, "Accounting for Stock
Issued to Employees," and, accordingly, recognizes no compensation expense for
the stock option grants.
Net Income (Loss) Per Share
Net income per share is computed using the weighted average number of
issued and issuable common shares, redeemable common shares and equivalent
shares outstanding. Net loss per share is computed using the weighted average
number of issued and issuable common shares outstanding. The computation of
fully diluted net loss per share was antidilutive during the years ended
December 31, 1995 and 1996; therefore, the number of shares used for computing
primary and fully diluted loss per share are the same. Stock issued within one
year of the Company's initial public offering at below the estimated initial
public offering price is reflected as outstanding for 1994. All share and per
share data in the accompanying financial statements retroactively reflect a 6-
for-1 stock split effected March 4, 1994.
Impact of Recently Issued Accounting Standards
In March 1995, Statement of Financial Accounting Standard No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of", was issued which requires impairment losses to be recorded on
long-lived assets used in operations when indicators of impairment are present
and the undiscounted cash flows estimated to be generated by those assets are
less than the assets' underlying carrying amount. Statement No. 121 also
addresses the accounting for long-lived assets that are expected to be disposed
of. The effect of the implementation of Statement No. 121 in 1996 was not
significant.
In October 1995, Statement of Financial Accounting Standard No. 123,
"Accounting for Stock-Based Compensation," was issued which provides an
alternative to APB Opinion No. 25, "Accounting for Stock Issued to Employees,"
in accounting for stock-based compensation issued to employees. The Statement
allows for a fair value based method of accounting for employee stock options
and similar equity instruments. However, for companies that continue to account
for stock-based compensation arrangements under Opinion No. 25, Statement No.
123 requires disclosure of the pro forma effect on net income and earnings per
share of its fair value based accounting for those arrangements. These
disclosure requirements are effective for fiscal years beginning after December
15, 1995, or upon initial adoption of the statement, if earlier. The Company
evaluated the effects of applying Statement 123's fair value method to the
Company's stock-based awards and determined that the results in pro forma net
income
26
and earnings per share were not materially different from the actual amounts
reported and therefore no separate pro forma results are being included.
(3) Acquisitions
On July 4, 1994, GTC Mexico, a wholly-owned subsidiary of the Company,
acquired certain assets and assumed certain liabilities of Philips Mexicana,
S.A. de C.V. The transaction was accounted for as a purchase in which a
liability of $1,200,000 to the seller based on sales to customers of GTC Mexico
during the next five years was allocated based on fair values of assets acquired
and liabilities assumed. No goodwill resulted from this transaction. The 1994
consolidated statement of operations includes amounts for GTC Mexico from July
4, 1994.
On July 18, 1995, GTC Brazil acquired certain manufacturing equipment of
IBM Brasil-Industria, Maquinas e Sevicos Ltda. ("IBM Brasil"). The transaction
was accounted for as a purchase in which the purchase price of $4,900,000, in
the form of a note payable to the seller, was allocated based on fair values of
assets acquired. No goodwill resulted from this transaction. The 1995
consolidated statement of operations includes amounts for GTC Brazil from July
18, 1995.
These acquisitions did not have a significant effect on the Company's
results of operations in 1994 and 1995.
(4) Dispositions
The Company completed two transactions during 1995 and one transaction on
February 9, 1996, which, in the aggregate, resulted in the sale of substantially
all of the assets of its Metrum subsidiary. On May 31, 1995, the assets of the
peripherals products business unit of Metrum were sold to MountainGate Data
Systems, Inc., a subsidiary of Lockheed Martin Corporation for $5,247,000,
consisting of cash of $3,655,000 and a note receivable from the buyer of
$1,592,000. On June 6, 1995, the assets of the imaging business unit of Metrum
were sold to Sienna Imaging, Inc. for $1,331,000 cash. On February 9, 1996, the
assets of the instrumentation products business unit of Metrum were sold to Bell
Technologies, Inc. ("Bell"), also a subsidiary of the Parent, for $10,104,000
cash and an earn-out provision which provides for additional payments to the
Company, up to $3,000,000, in the event annual earnings before interest and
taxes exceeds defined amounts through December 31, 2000. The sales price for
each 1995 transaction approximated the net book value of the respective business
units on the date of sale. The sales price for the February 9, 1996 transaction
exceeded the net book value of assets and liabilities transferred by $613,000.
The proceeds from the sale transactions were used to reduce the Company's debt
balance and to fund working capital needs. Revenue, net income and net income
per share for Metrum were $31,268,000, $2,348,000 and $0.15, respectively, for
the year ended December 31, 1995.
Due to the common ownership interest of the Parent in the Company and Bell,
the Company requested and obtained an independent opinion, which indicated that
the consideration received by the Company for the sale of the instrumentation
products business was fair, from a financial point of view, to the unaffiliated
shareholders of the Company. In addition, due to the common ownership, the
amount by which the sales price exceeds the net book value of assets and
liabilities transferred of $613,000 was recorded by the Company as a
contribution to its capital.
On March 22, 1996, the Company sold substantially all of the assets related
to its Badger line of name brand products. The Company recorded a $2,200,000
charge to cost of operations during the fourth quarter of 1995 to reduce Badger
inventory to the sale price.
27
(5) Accounts Receivable
Accounts receivable consist of the following:
[CAPTION]
December 31,
1995 1996
------- -------
(in thousands)
Commercial customers $28,088 $20,237
United States Government 3,862 3,763
------- -------
31,950 24,000
Allowance for doubtful accounts (783) (1,246)
------- -------
$31,167 $22,754
======= =======
Accounts receivable from the United States Government includes amounts due
under long-term contracts, which are all billed, at December 31, 1995 and 1996
of $2,568,000 and $2,463,000, respectively. The provision for doubtful accounts
was $571,000, $1,293,000 and $961,000 for the years ended December 31, 1994,
1995 and 1996, respectively.
(6) Inventories
Inventories consist of the following:
[CAPTION]
December 31,
1995 1996
------- -------
(in thousands)
Raw materials $34,469 $12,538
Work in process 6,840 4,100
Finished goods 330 107
Costs relating to long-term contracts and programs, net
of amounts attributed to revenue recognized to date 25,766 11,655
Progress payments related to long-term contracts
and programs (12,300) (3,292)
Reserve for inactive, obsolete and unsalable (8,606) (4,888)
------- -------
$46,499 $20,220
======= =======
The above amounts include inventory valued under the last-in, first-out
("LIFO") method totaling $5,318,000 at December 31, 1995, which approximates
replacement cost at that date. Provisions for inactive, obsolete and unsalable
inventories were $540,000, $6,939,000 and $3,567,000 for the years ended
December 31, 1994, 1995 and 1996, respectively.
(7) Other Current Assets
Other current assets consist of the following:
[CAPTION]
December 31,
1995 1996
------- -------
(in thousands)
Net deferred tax assets $589 $0
Refundable income taxes 5,000 744
Other 2,376 1,358
------- -------
$7,965 $2,102
======= =======
28
(8) Property and Equipment
Property and equipment consists of the following:
[CAPTION]
December 31,
1995 1996
------- -------
(in thousands)
Leasehold improvements $6,954 $6,426
Machinery, equipment, furniture and fixtures 39,780 38,594
------- -------
46,734 45,020
Less accumulated depreciation (22,644) (23,814)
------- -------
$24,090 $21,206
======= =======
Depreciation expense was $5,350,000, $5,073,000 and $4,848,000 for the
years ended December 31, 1994, 1995 and 1996, respectively.
(9) Accrued Liabilities
Accrued liabilities consist of the following:
[CAPTION]
December 31,
1995 1996
------- -------
(in thousands)
Payments received from customers in
excess of contract costs $5,340 $3,657
Employee benefit plan accruals 4,045 2,423
Other 8,507 10,336
------- -------
$17,892 $16,416
======= =======
Included in other current liabilities are employee payroll deductions,
advance payments, accrued operating expenses and accrued interest, none of which
exceed 5% of total current liabilities.
(10) Long-Term Debt
Long-term debt consists of the following:
[CAPTION]
December 31,
1995 1996
------- -------
(in thousands)
Revolving credit (a) $25,583 $6,934
Term note (a) 0 2,690
Other (b) 5,638 4,128
------- -------
Total long-term debt 31,221 13,752
Less unamortized original issue discount (a) 0 (120)
Less current portion of long-term debt (8,171) (3,513)
------- -------
$23,050 $10,119
======= =======
(a) On March 29, 1996, the Company entered into a financing agreement (the
"Credit Agreement") with its bank to replace a prior debt instrument. The Credit
Agreement provided the Company with a revolving line of credit facility (the
"Revolver"), a $3,300,000 two-year facility (the "Term Note") and an additional
$5,000,000 facility (the "1996 Note"). Borrowings under the Credit Agreement are
secured by substantially all of the assets of the Company. Under the terms of
the Credit Agreement, the Company pays interest monthly on outstanding
borrowings at the prime rate (8.25% at December 31, 1996) plus 1.25%. The
Company was provided credit availability on the Revolver equal to the lesser of
$27,500,000 or the applicable amount of its eligible accounts receivable and
inventories through December 31, 1996. Available borrowings on the Revolver at
December 31, 1996 were approximately $6,800,000. As amended, the Credit
Agreement provides credit availability on the
29
Revolver equal to the lesser of $13,500,000 or the applicable amount of its
eligible accounts receivable and inventories through March 1998. Principal
payments are due monthly on the Term Note. The 1996 Note was repaid in full
during 1996.
The Company, in connection with the execution of the Credit Agreement, paid
a $250,000 fee and issued warrants to purchase 1,200,000 shares of Common Stock
at $0.01 per share to the lender. Upon execution of the Credit Agreement,
200,000 of the warrants became exercisable. As amended, the Credit Agreement
provides for the balance of the warrants to become exercisable as follows;
125,000 on March 31, 1997; 375,000 on June 30, 1997, 250,000 on September 30,
1997; and, 250,000 on December 31, 1997.
The warrants will expire five years following the issue date. The lender
will forfeit any unvested warrants in the event the Company repays all debt
outstanding under the Credit Agreement prior to any vesting date. On March 29,
1996, the Company believed that it was probable that the Credit Agreement would
be refinanced prior to the remaining warrants becoming exercisable. Therefore,
only the 200,000 warrants were considered in determining the fair value of the
transaction. Unamortized original issue discount related to the issuance of the
vested warrants is $120,000 at December 31, 1996.
In connection with an amendment to the Credit Agreement on March 28, 1997, the
Parent invested $2,500,000 in GTC in exchange for 250,000 shares of GTC
Preferred Stock (the "Preferred Stock"). The Preferred Stock is redeemable and
pays quarterly dividends of 8.5% per annum. The Company agreed to utilize
$500,000 of the proceeds of the Preferred Stock to partially repay the Term
Note. The Preferred Stock is redeemable at the option of the holder upon
repayment by the Company of all of its outstanding Credit Agreement
indebtedness. The Preferred Stock is also convertible and each share may be
exchanged for 8.3 shares of the Company's Common Stock.
(b) In connection with two business acquisitions, the Company agreed to make
additional payments to the sellers over a five-year period from the respective
dates of acquisition based upon sales to certain customers. The Company believed
the maximum future payments were probable and recorded debt equal to the net
present value of the maximum future payments on the date of acquisition. At
December 31, 1996, $587,000 was payable to the sellers.
In connection with the acquisition of GTC Brazil, the Company is obligated
on a note payable to IBM Brasil. The note is for a term of three years and is
secured by GTC Brazil's equipment. The Company recorded the note at its net
present value discounted at current market interest rates for comparable
financing. The principal balance of the note is subject to annual adjustment
under an economic price adjustment clause in the debt agreement. The adjustment
calculated in 1996 was not significant. At December 31, 1996, $2,928,000 was
payable to the seller.
During 1996, the Company purchased approximately $1,100,000 of equipment
which was financed by the manufacturer. At December 31, 1996, $613,000 was
payable to the manufacturer.
30
The annual maturities of long-term debt for each year ended December 31 are
presented below. Maturities of debt incurred under the Credit Agreement have
been reported on the basis that the commitment to lend under this agreement will
be terminated at the end of its current term.
1997 $3,513
1998 10,119
Interest paid during 1994, 1995 and 1996 was $2,161,000, $3,427,000 and
$2,974,000, respectively.
(11) Fair Value of Financial Instruments
Cash, accounts receivable, accounts payable and accrued liabilities are
reflected in the financial statements at their carrying amount which
approximates fair value because of the short-term maturity of those instruments.
The carrying amount of debt outstanding under the Company's revolving credit
agreement approximates fair value, due to the short-term nature of the
instrument. The carrying amount of other long-term debt is assumed to
approximate fair value because there have not been any significant changes in
market conditions or specific circumstances since the instruments were recorded
at fair value.
(12) Employee Benefit Plans
The Company sponsors defined contribution plans (the "Plans") for
substantially all domestic employees of the Company. The Plans are intended to
meet the requirements of Section 401(k) of the Internal Revenue Code. The Plans
allow the Company to match participant contributions as approved by the Board of
Directors. Contributions to the Plans during 1994, 1995 and 1996 were
$2,271,000, $1,783,000 and $902,000, respectively.
The Company has partially self-insured employee medical plans. The plans
limit the Company's annual obligations to fund claims to specified amounts per
participant and in the aggregate. The Company is insured for amounts in excess
of these limits. Employees are responsible, in some instances, for payment of a
portion of the premiums. During 1994, 1995 and 1996, the Company charged
$5,287,000, $4,526,000 and $3,732,000, respectively, to operations related to
reinsurance premiums, medical claims incurred and estimated, and administrative
costs for its employee medical plans. Claims paid during 1994, 1995 and 1996 did
not exceed the aggregate limits.
(13) Stock Plans
In January 1990, the Company's Board of Directors adopted a stock option
plan, a stock purchase plan and various incentive plans and adopted a formula
price (the "Formula Price") valuation as a basis for establishing a value for a
share of Common Stock. All shares of Common Stock issued to employees were
subject to a restriction agreement, under which the Company was required to
redeem all shares offered for redemption at the option of the employee or upon
the termination, retirement, disability or death of the employee. On May 18,
1994, the effective date of the Offering, the 1990 Stock Option Plan and the
Stock Purchase Plan were terminated and all restrictions on outstanding shares
lapsed.
Stock Purchase Plan
The Company maintained a stock purchase plan (the "Stock Purchase Plan")
from 1990 through May 1994. Eligible employees were permitted to purchase Common
Stock annually for cash or semi-annually through payroll deductions and were
awarded one bonus share of Common Stock (a "Bonus Share") for every three shares
purchased. The Company amortized compensation expense related to Bonus Shares on
a straight-line method over an eighteen-month vesting period. When the Stock
Purchase
31
Plan was terminated in 1994 all Bonus Shares became fully vested and the Company
recognized the unamortized compensation related to the Bonus Shares as an
expense.
In addition, compensation expense of $247,000 was recorded in 1994 on
shares purchased between December 31, 1993 and April 3, 1994 for the excess of
the fair market value over the purchase price.
During 1994, 20,520 shares valued at $295,000 were issued under the Stock
Purchase Plan.
Stock Option Plans
In October 1994, the Board of Directors adopted the 1994 Stock Option Plan
for Key Employees (the "1994 Plan") and the Independent Directors' Stock Option
Plan (the "Directors Plan"). The 1994 Plan replaced the Stock Option Plan
adopted in January 1990 (the "1990 Plan"). Options remain outstanding and
exercisable under the terminated 1990 Plan; however, no further grants will be
made under the 1990 Plan. During 1994, no options were granted under the 1990
Plan prior to its termination on May 18, 1994.
Under the 1994 Plan, as amended, options may be granted to employees to
purchase a maximum of 800,000 shares of Common Stock. Options to purchase
179,000 and 553,066 shares were granted under the 1994 Plan during 1995 and
1996, respectively.
Under the Directors Plan, as amended, options may be granted to members of
the Board of Directors who are not employees of the Parent, the Company or its
subsidiaries to purchase a maximum of 300,000 shares of Common Stock. Options to
purchase 10,000, 25,951 and 78,371 shares were granted under the Directors Plan
during 1994, 1995 and 1996, respectively.
On February 2, 1996, the Board of Directors approved, subject to further
approval by the shareholders, the Group Technologies Corporation Employee Stock
Purchase Plan (the Purchase Plan) and reserved 1,000,000 shares of Common Stock
for issuance under the Purchase Plan. No shares have been issued under this
plan.
Options granted under the 1990 Plan have a maximum term of 13 years.
Options granted under the 1994 Plan and the Directors' Plan have a maximum term
of 10 years. The exercise price of all options granted under such plans must be
at least 100% of the fair market value of such shares on the date of grant. The
Option Plan Committee of the Board of Directors was formed in 1994 to administer
the 1994 Plan and the Directors Plan. Until October 1996, the Option Plan
Committee had the sole authority to select the individuals who were granted
options and determine the number of shares subject to each option, fix the
period during which each option may be exercised and fix the price at which
shares subject to options may be purchased. Beginning in October 1996, both the
full Board of Directors and the Option Plan Committee have authority to
administer the stock option plans.
32
The following table summarizes option activity for the three years ended
December 31, 1996:
[CAPTION]
Options Outstanding
Option
price
Shares per share
--------- ----------
Balance at December 31, 1993 1,080,000 $1.67-2.35
Granted 10,000 7.75
Terminated/forfeited (60,000) 2.12
--------- ----------
Balance at December 31, 1994 1,030,000 1.67-7.75
Granted 204,951 4.50-6.38
Exercised (90,000) 1.67
Terminated/forfeited (125,000) 6.00-6.25
--------- ----------
Balance at December 31, 1995 1,019,951 1.67-7.75
Granted 631,437 0.84-3.00
Terminated/forfeited (401,700) 2.35-6.00
--------- ----------
Balance at December 31, 1996 1,249,688 $0.84-7.75
========= ==========
At December 31, 1996, options to purchase 594,322 shares were exercisable
under the Company's stock option plans with a weighted-average share price of
$2.07.
At December 31, 1995 and 1996 the weighted-average share price for options
outstanding was $2.33 and $2.30, respectively. The weighted-average share price
for options granted during 1996 was $2.46. During 1996, 251,700 and 150,000
options were forfeited and expired, respectively. Forfeited and expired options
in 1996 had weighted-average share prices of $2.79 and $2.35, respectively. The
weighted-average remaining contractual life of options outstanding at December
31, 1996, was approximately five years.
(14) Shareholders' Equity
On February 18, 1994, the Company increased the number of shares of
authorized Common Stock from 8,000,000 to 40,000,000 and authorized a new class
of 1,000,000 shares of no par value Preferred Stock, none of which have been
issued. On March 4, 1994, a 6-for-1 stock split was approved and ratified by the
Board of Directors.
On April 20, 1994, the Company's Articles of Incorporation were amended to
change the no par value Common Stock and Preferred Stock to $.01 par value. The
stock split and the change to $.01 par value Common Stock have been
retroactively reflected in the accompanying consolidated financial statements.
On May 18, 1994, the Company completed an initial public offering of
2,000,000 shares of Common Stock at $10.00 per share (the "Offering"). The net
proceeds of the Offering, after deducting applicable issuance costs and expenses
were $17,348,000, of which $13,393,000 was used to reduce the Company's
outstanding debt. On June 23, 1994, the Company issued an additional 50,000
shares of Common Stock at $10.00 per share and applied the net proceeds of
approximately $465,000 to reduce the Company's outstanding debt. The effect on
unaudited pro forma earnings per share giving effect to the Offering as if the
Offering were consummated as of the beginning of 1994 is not significant.
Also during 1995 and 1996, certain transactions were executed with related
parties (see Note 17).
33
(15) Commitments and Contingencies
The Company leases all of its real property and certain computer,
manufacturing and office equipment. The real property operating leases have
terms up to ten years and contain various renewal and rent escalation clauses.
The equipment operating leases have terms of up to five years. Future minimum
noncancelable lease payments for each year ending December 31, are as follows:
[CAPTION]
(in thousands)
1997 $3,638
1998 3,553
1999 2,449
2000 1,151
2001 1,187
Thereafter 593
Rent expense for the years ended December 31, 1994, 1995 and 1996, was
$3,354,000, $5,194,000 and $3,660,000, respectively.
The Company is involved in certain litigation and contract issues arising
in the normal course of business. While the outcome of these matters cannot, at
this time, be predicted in light of the uncertainties inherent therein,
management does not expect that these matters will have a material adverse
effect on the consolidated financial position or results of operations of the
Company.
(16) Income Taxes
The components of income tax expense (benefit) are:
[CAPTION]
Years ended December 31,
1994 1995 1996
------ ------ ------
(in thousands)
Income taxes currently payable (refundable):
Federal $528 $(5,263) $(333)
State 270 112 62
Foreign 0 428 481
------ ------- ----
798 (4,723) 210
Deferred income taxes:
Federal 2,301 668 589
State 198 73 0
------ ------- ----
2,499 741 589
------ ------- ----
$3,297 $(3,982) $799
====== ======= ====
Income taxes paid during 1994 and 1996 were $6,421,000 and $762,000,
respectively, including federal income taxes paid to the Parent of $5,628,000 in
1994. Income tax refunds received during 1995 and 1996 were $2,350,000 and
$4,928,000, respectively, all of which was received from the Parent. At December
31, 1995 and 1996, federal income taxes receivable from the Parent of $5,073,000
and $330,000, respectively, were included in other current assets.
34
The following is a reconciliation of income tax expense recognized to that
computed by applying the federal statutory rate of 34% in 1994 , 1995 and 1996
to income before income taxes:
[CAPTION]
Years ended December 31,
1994 1995 1996
------ ------ ------
(in thousands)
Federal tax at the statutory rate $2,719 $(7,363) $(2,645)
State income taxes net of federal tax benefit 305 (76) 46
State tax net operating loss carry forward 0 (1,080) (617)
Change in valuation allowance for
deferred tax asset 0 4,367 3,175
Other 273 170 840
------ ------- -------
$3,297 $(3,982) $ 799
====== ======= =======
Deferred income taxes reflect the net tax effect of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Deferred tax assets are
reduced by a valuation allowance when, in the opinion of management, it is more
likely than not that some portion or all of the deferred tax assets will not be
realized. Due to the uncertain nature of the ultimate realization of deferred
tax assets based upon the Company's financial performance during 1995 and 1996
and the potential expiration of the net operating loss carryforward, the Company
has established a valuation allowance against its deferred tax assets. The
Company will recognize the benefits associated with the deferred tax assets only
as reassessment demonstrates they are realizable. Realization is entirely
dependent upon future earnings in specific tax jurisdictions. While the need for
this valuation allowance is subject to periodic review, if the allowance is
reduced, the tax benefits will be recorded in future operations as a reduction
of the Company's income tax expense.
Significant components of the Company's deferred tax assets and liabilities
are as follows:
[CAPTION]
December 31,
1995 1996
------- -------
(in thousands)
Deferred tax assets:
Compensation and benefit accruals $ 920 $ 773
Inventory valuation 2,279 1,550
Net operating loss carryforward 1,080 4,442
Other 1,037 1,409
------ ------
5,316 8,174
Valuation allowance (4,367) (7,542)
Deferred tax liabilities:
Depreciation 0 (458)
Contract provisions (360) (130)
Other 0 (44)
------ ------
Net deferred tax asset $ 589 $ 0
====== ======
During the years ended December 31, 1995 and 1996, the Company recorded a
valuation allowance of $4,367,000 and $3,175,000, respectively, on its deferred
tax assets to reduce the total to an amount that management believes will more
likely than not be realized. Realization of deferred tax assets is dependent
upon sufficient taxable income during the period that temporary differences and
carryforwards are expected to be available to reduce taxable income.
At December 31, 1996, for federal income tax purposes, the Company had a
net operating loss carryforward of approximately $7,920,000, which will expire
in 2011. At December 31, 1996, for state
35
income tax purposes, the Company had a net operating loss carryforward of
approximately $31,830,000, which will expire beginning in 2010.
(17) Related Party Transactions
The Company paid a corporate allocation (0.2% of revenue) to the Parent of
$548,000 during 1994. The Company's corporate allocation for 1995, charged to
operations, consisted of $274,000 in cash and 69,813 shares of Common Stock
valued at $300,000, based on the fair market value of the shares during the
related period. All shares issuable as of December 31, 1995 were issued during
1996. During 1996, the corporate allocation consisted of the issuance of 17,391
shares of Common Stock valued at approximately $50,000. The Company is also a
party to a consolidated federal income tax sharing agreement with the Parent
applicable to the tax periods during which the Company is includable in the
Parent's consolidated federal income tax return.
The Company issued 374,531 shares of its Common Stock to the Parent in a
private placement transaction in March 1996. The shares were sold to the Parent
in exchange for $1,000,000 in cash. The per share price of the transaction was
equal to an average of the prices for the last sale transactions of the Common
Stock on each of the last three business days immediately preceding the date of
sale.
On February 9, 1996, the Company sold substantially all of the assets of
its Metrum subsidiary to a related party, which resulted in the recognition of
additional paid-in capital of $613,000 (see Note 4).
(18) Geographic Segments
The Company is a multinational corporation with operations in the United
States, Mexico and Brazil. For the year ended December 31, 1994, revenue,
operating profit and identifiable assets of the Company's foreign operations
were not significant. Information about the Company's operations in geographic
areas for the years ended December 31, 1996 and 1995 is as follows:
[CAPTION]
December 31,
1995 1996
-------- --------
(in thousands)
Revenue:
United States $233,515 $166,204
Latin America 40,132 58,457
-------- --------
$273,647 $224,661
======== ========
Operating Loss:
United States $(16,172) $ (3,665)
Latin America (2,055) (1,316)
-------- --------
$(18,227) $ (4,981)
======== ========
Identifiable Assets:
United States $ 87,049 $ 47,311
Latin America 26,057 20,154
-------- --------
$113,106 $ 67,465
======== ========
Identifiable assets of foreign subsidiaries are those assets related to the
operations of those subsidiaries. The Company's domestic assets consist of all
other operating assets of the Company.
(19) Fourth Quarter Adjustments
The Company recognized charges during the fourth quarter of 1995 totaling
approximately $8,300,000, which increased cost of operations by $7,300,000,
selling, general and administrative expense by $800,000 and other expense by
$200,000. The charges to cost of operations were primarily related to
36
an inventory adjustment for the discontinued Badger line of name brand products
of $2,200,000, inventory adjustments required based upon the October physical
inventory count of $1,700,000, inventory adjustments for an accounts payable
reconciliation performed contemporaneously with the physical inventory of
$800,000, the idle status of specialized manufacturing equipment under lease
amounting to $1,100,000, an increase to the excess and obsolete inventory
reserve of $1,000,000 and the recognition of estimated losses on terminated or
unprofitable contracts of $500,000. The Company believes the inventory
adjustments, including the effect of account reconciliations, arose principally
from excessive scrap and shrinkage rates and were not determinable prior to a
physical count of the inventory. The Company believes that the implementation of
system software contributed to this inventory adjustment. The fourth quarter
charges to selling, general and administrative expense related primarily to the
acceleration of loan fee amortization due to the Company's refinancing agreement
described in Note 10 and the increase in the reserve for uncollectible accounts
receivable. The fourth quarter charges to other expense related primarily to
losses on the sale of equipment.
The Company recognized charges during the fourth quarter of 1996 totaling
approximately $5,100,000, which increased cost of operations by $3,800,000 and
selling, general and administrative expense by $1,300,000. The charges to cost
of operations were primarily related to a December domestic operations physical
inventory adjustment of $300,000, a December foreign operations physical
inventory adjustment of $700,000, estimate revisions for costs of sales related
to long-term contracts of $800,000, increased reserves for excess inventories of
$600,000, and costs associated with asset disposals and deferred rent payments
of $1,400,000. The fourth quarter charges to selling, general and administrative
expense include severance costs of $500,000, warehouse move costs of $500,000
and an increase in the reserve for uncollectible accounts receivable of
$300,000. With regard to the warehouse costs, in the second quarter of 1996 GTC
implemented a cost saving strategy to integrate the materials warehousing
function into its main Tampa facility. The total cost of the move was originally
estimated to be $400,000, but an increased cost of $500,000 was recorded in the
fourth quarter based on actual costs incurred and the review of additional
information regarding sublease strategies.
37
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
PART III
Item 10. Directors and Executive Officers of the Registrant
The following table contains certain information concerning the directors
and executive officers of GTC.
[CAPTION]
Name Age Position with GTC and Principal Occupation
- ------------------ --- -------------------------------------------
Jeffrey T. Gill 41 Director and Chairman of the Board; President
and Chief Executive Officer of GFP
Robert E. Gill 71 Director; Chairman of the Board of GFP
Sidney R. Petersen 66 Director; Retired; formerly Chairman and
Chief Executive Officer of Getty Oil, Inc.
Henry F. Frigon 62 Director; Retired; formerly President and
Chief Executive Officer of BATUS, Inc.
Roger W. Johnson 62 Director; Former Administrator of U.S.
General Services Administration
Thomas W. Lovelock 54 Director, President and Chief Executive
Officer
Aviram Margalith 47 Vice President and General Manager of
International EMS Operations and Engineering
Services
David D. Johnson 41 Vice President and Chief Financial Officer
James G. Cocke 49 Vice President and Manager of Federal Systems
Division
All directors hold office until the next annual meeting of shareholders or
until their successors are elected and qualified. Officers are appointed by the
GTC Board and serve at the discretion of the GTC Board.
Jeffrey T. Gill has served as a director of GTC since 1989 and as Chairman
of the Board of GTC since 1992. Mr. Gill co-founded GFP and has served as a
director of GFP since its inception in 1983 and as its President and Chief
Executive Officer since 1992. Mr. Gill also serves as a director and officer of
several other privately-held companies which are either direct or indirect
subsidiaries of GFP. Jeffrey T. Gill is the son of Robert E. Gill.
Robert E. Gill has served as a director of GTC since 1989. He also served
as Chairman of the Board of GTC from 1989 to 1992 and as President and Chief
Executive Officer of GTC from October 1996 until February 1997. Mr. Gill
co-founded GFP and has served as Chairman of the Board of GFP since its
inception in 1983 and as its President and Chief Executive Officer from 1983
through 1992. Mr. Gill also serves as a director and officer of several other
privately-held companies which are either direct or indirect subsidiaries of
GFP. Robert E. Gill is the father of Jeffrey T. Gill.
Sidney R. Petersen has served as a director of GTC since 1994. In 1984, Mr.
Petersen retired as Chairman of the Board and Chief Executive Officer of Getty
Oil, Inc. where he served in a variety of increasingly responsible management
positions since 1955. Mr. Petersen currently serves as director of
38
Avery Dennison Corporation, Union Bank of California, Seagull Energy
Corporation, and NICOR, Inc. and its subsidiary, Northern Illinois Gas Company.
Henry F. Frigon has served as a director of GTC since 1994. Mr. Frigon is
currently a private investor and business consultant. He most recently served as
Executive Vice President-Corporate Development and Strategy and Chief Financial
Officer of Hallmark Cards, Inc. from 1990 through 1994. He retired as President
and Chief Executive Officer of BATUS, Inc. in March 1990, after serving with
that company for over 10 years. Mr. Frigon currently serves as a director of H &
R Block, Inc., CompuServe, Inc., Buckeye Cellulose Corporation and Dimon, Inc.
Roger W. Johnson has served as a director of GTC since 1996. Mr. Johnson
most recently served as Administrator of the United States General Services
Administration from 1993 through 1996. He served as Chairman and Chief Executive
Officer of Western Digital Corporation, a manufacturer of computer hard drives,
from 1982 through 1993. Mr. Johnson currently serves as a director of Array
Microsystems, Elexys International, Inc., Needham Funds, Inc., JTS Corporation,
Insulectro and AST Computer.
Thomas W. Lovelock has served as a director of GTC since March 1997 and as
President and Chief Executive Officer of GTC since February 1997. He was also
Vice President of Operations of GTC from 1989 until 1993. From 1995 to 1997, Mr.
Lovelock served as President and Chief Executive Officer of Bell Technologies,
Inc. ("Bell"), a subsidiary of GFP which provides electronic products and
services to the high technology segment of the electronics industry. From 1993
to 1995, Mr. Lovelock served as Executive Vice President and Chief Operating
Officer of Bell.
Aviram Margalith has served as Vice President and General Manager of
International EMS Operations and Engineering Services of GTC since January 1996.
He has submitted a notice of his intent to resign from this position effective
April 4, 1997. Dr. Margalith also served as Vice President of Engineering for
GTC from 1989 to 1994 and as Vice President and General Manager of Federal
Systems and Engineering during 1995.
David D. Johnson has served as Vice President and Chief Financial Officer
of GTC since March 1996. From 1993 to 1996, Mr. Johnson served as Financial
Director, Far East South for Molex Incorporated, which manufactures electronic
components and tooling used by OEMs. He served Molex in various other management
positions since 1984. Prior to 1984, Mr. Johnson was a senior manager for KPMG
Peat Marwick in San Francisco, California.
James G. Cocke has served as Vice President and Manager of the Federal
Systems Division of GTC since March 1997. From 1995 to 1997, Mr. Cocke was
Division Manager of the Services Division of Bell. Prior to 1995, he was
employed as Vice President of Finance for Science Applications International
Corporation, which designs and produces ruggedized computer equipment, CAE Link
Corporation, which designs and produces military flight simulators, and for
Smiths Industries which designs and manufactures a wide range of electronic
equipment.
Section 16(a) Beneficial Ownership Reporting Compliance
Based solely on GTC's review of the copies of reports of ownership on Form
3 and changes in ownership on Forms 4 and 5 filed with the Securities and
Exchange Commission (the "Commission") by GTC's officers, directors and certain
beneficial shareholders, or written representations furnished to GTC by these
reporting persons, GTC believes that, during 1996, its officers, directors, and
greater than 10% beneficial owners were in compliance with all applicable filing
requirements.
39
Item 11. Executive Compensation
Summary Compensation Table
The following table sets forth the annual and long-term compensation paid
or accrued by GTC during the years indicated to each of GTC's Chief Executive
Officers and its other highest paid executive officers whose total salary and
bonus exceeded $100,000 for the year ended December 31, 1996 (collectively, the
"Named Officers").
[CAPTION]
Long-Term
Compensation Awards
Annual Restricted Options All
Name and Compensation(1) Stock /SARs Other
Principal Position Year Salary Bonus Awards (#) Compensation
- -------------------- ---- -------- ------- ------ ------- ------------
Carl P. McCormick(2) 1996 $199,529(3) $0 $0 124,066(3) $365,916(4)
President & Chief 1995 280,299 0 0 0 13,868
Executive Officer 1994 269,135 0 0 0 11,216
Robert E. Gill(5) 1996 0 0 0 0 0
President & Chief
Executive Officer
Aviram Margalith(6) 1996 152,885 10,000(7) 0 10,000(7) 8,389(8)
Vice President & 1995 149,151 0 0 0 7,187
General Manager of 1994 129,206 0 0 0 6,689
International EMS
Operations
J. Hardie Harris(9) 1996 136,154 0 0 80,000 6,286(10)
Vice President & 1995 99,380 20,000 0 30,000 4,987
General Manager of
U.S. EMS Operations
David D. Johnson 1996 119,849 50,000(11) 0 120,000 2,319(12)
Vice President of
Finance & Chief
Financial Officer
(1) Includes amounts deferred, at the election of the Named Officers, pursuant
to GTC's 401(k) Plan. The Named Officers received certain perquisites and
benefits; however, GTC has concluded that the aggregate amount of such
personal benefits and other compensation is the lesser of $50,000 or 10% of
the total annual salary and bonus paid to each of the Named Officers.
(2) Carl P. McCormick resigned from his positions as President and Chief
Executive Officer of GTC on October 31, 1996. However, he assumed other
duties and, therefore, remained on active status on GTC's payroll through
December 31, 1996.
(3) From March 11, 1996 through December 31, 1996, Mr. McCormick received a
portion of his salary in the form of nonstatutory stock options in lieu of
cash. The dollar amount shown in the Salary column is the cash portion of
his salary. The total number shares represented by stock options received
by Mr. McCormick in lieu of his salary is shown in the Options/SARs column.
Each of the options for the purchase of these shares has an exercise price
that is equal to the fair market value of GTC's Common Stock on the date
the option was granted and, accordingly, Mr. McCormick did not realize any
additional compensation at the time the options were granted. The
expiration date of each option is seven years after the date of grant.
(4) The amount shown includes $355,000 payable to Mr. McCormick pursuant to the
terms of a separation agreement signed in December 1996, plus $9,716 for
Matching and Profit Sharing
40
Contributions made by GTC pursuant to GTC's 401(k) Plan and $1,200 of
premiums paid by GTC for term life insurance for the benefit of Mr.
McCormick during 1996.
(5) Robert E. Gill replaced Mr. McCormick as President and Chief Executive
Officer of GTC on October 31, 1996. Mr. Gill served GTC in these positions,
without compensation of any kind from GTC or any third party, until he
resigned and was replaced by Thomas W. Lovelock on February 28, 1997.
(6) Dr. Margalith has submitted a notice of his intent to resign as Vice
President and General Manager of International EMS Operations and
Engineering Services on April 4, 1997.
(7) The amount shown is the cash portion of a bonus paid to Dr. Margalith in
February 1996. The balance of the bonus was paid to him in the form of a
nonstatutory stock option to purchase 10,000 shares of GTC's Common Stock.
The total number of shares for the stock option portion of the bonus is
shown in the Options/SARs column. The option for the purchase of these
shares has an exercise price that is equal to the fair market value of
GTC's Common Stock on the date the option was granted and, accordingly, Dr.
Margalith did not realize any additional compensation at the time the
option was granted. The option is exercisable in annual increments of 5,000
shares each, beginning one year from the date of grant and it expires five
years after the date of grant. However, all unexercised options held by Dr.
Margalith will be subject to cancelation as of April 4, 1997, in accordance
with the terms and conditions of the underlying stock option plans.
(8) The amount shown is for Matching and Profit Sharing Contributions made by
GTC pursuant to GTC's 401(k) Plan.
(9) J. Hardie Harris was hired as Vice President and General Manager of U.S.
EMS Operations on April 3, 1995. He resigned from this position on January
31, 1997.
(10) The amount shown is for Matching and Profit Sharing Contributions made by
GTC pursuant to GTC's 401(k) Plan.
(11) Mr. Johnson received a hiring bonus from GTC in the amount of $50,000 on
March 22,1996.
(12) The amount shown is for Matching and Profit Sharing Contributions made by
GTC pursuant to GTC's 401(k) Plan.
Option Grants in Last Fiscal Year
Set forth below is information on stock options granted during the fiscal
year ended December 31, 1996 to the Named Officers.
[CAPTION]
Potential
Individual Grants(1) Realizable
------------------------------------------- Value at
No. of % of Total Assumed Rates
Securities Options of Stock Price
Underlying Granted to Exercise Appreciation for
Options Employees in Price Expiration Option Term(2)
Granted Fiscal Year ($/Share) Date 5% 10%
-------- ----------- --------- -------- ------- -------
Carl P. McCormick(3) 8,417 1.5% $3.00 04/10/03 $10,280 $23,956
9,182 1.7% 2.75 05/10/03 10,280 23,956
6,733 1.2% 3.75 06/10/03 10,280 23,956
9,619 1.7% 2.625 07/10/03 10,280 23,956
11,222 2.0% 2.25 08/10/03 10,280 23,956
14,429 2.6% 1.75 09/10/03 10,280 23,956
10,632 1.9% 2.375 10/10/03 10,280 23,956
16,160 2.9% 1.5625 11/10/03 10,280 23,956
18,364 3.3% 1.375 12/10/03 10,280 23,956
19,308 3.5% 0.84375 12/30/03 6,632 15,457
Robert E. Gill(4) 0 0.0% N/A N/A 0 0
Aviram Margalith(5) 5,000 0.9% 2.75 02/19/01 3,799 8,395
5,000 0.9% 2.75 02/19/01 3,799 8,395
41
J. Hardie Harris(6) 10,000 1.8% 2.75 02/01/06 17,295 43,828
10,000 1.8% 2.75 02/01/06 17,295 43,828
10,000 1.8% 2.75 02/01/06 17,295 43,828
10,000 1.8% 2.75 02/01/06 17,295 43,828
10,000 1.8% 2.75 02/01/06 17,295 43,828
10,000 1.8% 2.75 02/01/06 17,295 43,828
10,000 1.8% 2.75 02/01/06 17,295 43,828
10,000 1.8% 2.75 02/01/06 17,295 43,828
David D. Johnson(7) 15,000 2.7% 2.25 03/21/06 21,225 53,789
15,000 2.7% 2.25 03/21/06 21,225 53,789
15,000 2.7% 2.25 03/21/06 21,225 53,789
15,000 2.7% 2.25 03/21/06 21,225 53,789
15,000 2.7% 2.25 03/21/06 21,225 53,789
15,000 2.7% 2.25 03/21/06 21,225 53,789
15,000 2.7% 2.25 03/21/06 21,225 53,789
15,000 2.7% 2.25 03/21/06 21,225 53,789
- ----------
(1) Each grant was made pursuant to the GTC 1994 Stock Option Plan for Key
Employees.
(2) The 5% and 10% assumed rates of appreciation are required by rules of the
Commission and do not represent GTC's estimate or projection of the future
GTC Common Stock price.
(3) GTC granted stock options to Mr. McCormick on a monthly basis from April
11, 1996 through December 11, 1996. Mr. McCormick also received a stock
option from GTC on December 31, 1996. These options each have an exercise
price that is equal to the fair market value of GTC's Common Stock on the
date the option was granted. Each of the options becomes exercisable two
years from the date of grant.
(4) Mr. Gill served as President and Chief Executive Officer from October 31,
1996 until February 28, 1997 and did not receive any options or other
compensation for his services.
(5) GTC granted Dr. Margalith a stock option for the purchase of 10,000 shares
of the GTC's Common Stock as part of a bonus paid to him on February 20,
1996. The option has an exercise price that is equal to the fair market
value of GTC's Common Stock on the date the option was granted. The option
is exercisable in annual increments of 5,000 shares each, beginning one
year from the date of grant. Dr. Margalith submitted a notice of his intent
to resign from his position as Vice President and General Manager of
International EMS Operations and Engineering Services on April 4, 1997. All
unexercised options held by Dr. Margalith will be subject to cancelation as
of April 4, 1997, in accordance with the terms and conditions of the
underlying stock option plans.
(6) The Company granted Mr. Harris a stock option for the purchase of 80,000
shares of the GTC's Common Stock on February 2, 1996. The option was to
become exercisable in annual increments of 10,000 shares each, beginning
one year from the date of grant. Mr. Harris resigned from his position as
Vice President and General Manager of U.S. EMS Operations on January 31,
1997. All options held by Mr. Harris were canceled as of that date.
(7) The Company granted Mr. Johnson a stock option for the purchase of 120,000
shares of the GTC's Common Stock on March 22, 1996. The option becomes
exercisable in annual increments of 15,000 shares each, beginning one year
from the date of grant.
42
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option
Values
Set forth below is information on each exercise of stock options during the
fiscal year ended December 31, 1996, and the value as of December 31, 1996, of
unexercised stock options held by the Named Officers.
[CAPTION]
Number of Securities Value of
Underlying Unexercised In-the-
Number Unexercised Options Money Options at
of Shares at Fiscal Year End Fiscal Year End(1)
Acquired ------------------ ------------------
on Value Exer- Unexer- Exer- Unexer-
Name Exercise Realized cisable cisable cisable cisable
- ------------------- -------- -------- -------- -------- -------- --------
Carl P. McCormick(2) 0 $0 300,000 150,000 $0 $0
Robert E. Gill(3) 0 0 0 0 0 0
Aviram Margalith(4) 0 0 180,000 10,000 0 0
J. Hardie Harris(5) 0 0 0 110,000 0 0
David D. Johnson 0 0 0 120,000 0 0
- ---------------
(1) Based on a market value of the underlying securities of $0.84375 at
December 31, 1996, none of the options were in-the-money as of that date.
(2) Carl P. McCormick resigned from his positions as President and Chief
Executive Officer of GTC on October 31, 1996. All options held by Mr.
McCormick which are or will become exercisable on or before December 31,
1998 will remain valid and effective per the terms and conditions of each
such option, as amended. All other options held by Mr. McCormick became
null and void as of December 31, 1996.
(3) Robert E. Gill replaced Mr. McCormick as President and Chief Executive
Officer of GTC on October 31, 1996. Mr. Gill served GTC in these positions,
without compensation of any kind from GTC or any third party, until he
resigned and was replaced by Thomas W. Lovelock on February 28, 1997.
(4) Aviram Margalith submitted a notice of his intent to resign from his
position as Vice President and General Manager of International EMS
Operations and Engineering Services on April 4, 1997. All unexercised
options held by Dr. Margalith will be subject to cancelation as of April 4,
1997, in accordance with the terms and conditions of the underlying stock
option plans.
(5) J. Hardie Harris resigned from his position as Vice President and General
Manager of U.S. EMS Operations on January 31, 1997. All options held by Mr.
Harris were canceled as of that date.
Compensation of Directors
Directors who are employees of GTC or any affiliate of GTC are not eligible
to receive any compensation for services rendered as a director, but they are
reimbursed for travel and related expenses they incur in order to attend Board
meetings. Directors of GTC who are not employees of GTC or any affiliate of GTC
("Independent Directors") are compensated pursuant to the terms and conditions
of GTC's Independent Directors' Compensation Program. More specifically, each
Independent Director is granted a stock option for the purchase of 7,000 shares
of GTC's Common Stock each time he or she is elected to serve on GTC's Board of
Directors. In addition, each of the Independent Directors is paid an annual
retainer of $15,000 and an attendance fee of $1,000 for each Board meeting the
director attends. Each of the Independent Directors is also reimbursed for
travel and related expenses he or she incurs in order to attend Board meetings.
An Independent Director may elect to receive his or her annual retainer and
attendance fees either in cash or in the form of stock options granted to him or
her by GTC pursuant to the GTC Independent Directors' Stock Option Plan. Those
Independent Directors who elect to receive cash compensation may elect to defer
any of their compensation by participating in GTC's Management Deferred
Compensation Plan. During 1996, Roger W. Johnson elected to receive his annual
retainer and
43
attendance fees in cash without any deferral. Messrs. Frigon and Petersen
elected to receive their annual retainers and meeting fees in the form of stock
options. None of the Independent Directors exercised stock options in 1996.
Employment Contracts
GTC entered into a separation agreement in December 1996, with Carl P.
McCormick who resigned as a director and as President and Chief Executive
Officer of GTC on October 31, 1996, but who remained employed by GTC through
December 31, 1996. Mr. McCormick assisted in the transition of his duties and
provided certain other services to GTC during November and December 1996. He
continued to receive salary and benefits at his then-current level of pay and he
received a car allowance and previously-approved club memberships and similar
benefits through December 31, 1996.
In the separation agreement, Mr. McCormick agreed to be bound by certain
nonsolicitation, noncompetition and confidentiality provisions and he executed a
general release in favor of GTC regarding any employment-based claims. In
consideration for these promises and other conditions stated in the separation
agreement, GTC agreed to place Mr. McCormick on lay-off status from January 1,
1997 through December 31, 1998 and to pay Mr. McCormick salary continuance
during this time period based upon an annual pay rate of $175,000, less
applicable federal and state taxes. Mr. McCormick will also continue to receive
customary medical and dental benefits, at employee rates, through GTC's plans
until December 31, 1998. GTC also agreed to reimburse Mr. McCormick for the
costs of professional executive outplacement services, up to a maximum of
$5,000. GTC amended certain stock option plans and the applicable stock option
agreements with Mr. McCormick in order to provide that those stock options which
GTC had granted to Mr. McCormick with a exercisability date on or before
December 31, 1998, will remain valid and effective for the stated term of the
options, unless Mr. McCormick breaches any terms of the separation agreement.
All other options held by Mr. McCormick became null and void as of December 31,
1996.
Compensation Committee Interlocks and Insider Participation
The Committee was formed in August 1994 and is composed of Jeffrey T. Gill,
Robert E. Gill, Henry F. Frigon and Sidney R. Petersen. Two members of the
Compensation Committee were also executive officers of GTC during 1996: Jeffrey
T. Gill served as Chairman of the Board of GTC for the entire year and Robert E.
Gill served as the President and Chief Executive Officer of GTC from October 31,
1996 until February 28, 1997. Neither Jeffrey T. Gill nor Robert. E. Gill
received any compensation from GTC for their services as executive officers of
GTC.
Jeffrey T. Gill and Robert E. Gill each serve as a director and officer of
several other entities which are also subsidiaries of GFP and they beneficially
own 32.3% and 39.3%, respectively, of the GFP Common Stock. As described more
fully in Item 13 below, GTC has engaged or has proposed to engage in certain
transactions with some of these entities.
44
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information with respect to
beneficial ownership of GTC Common Stock, including beneficial ownership (i) of
each person (or group of affiliated persons) who is known by GTC to own
beneficially more than 5% of the shares of GTC Common Stock, (ii) by each of
GTC's directors who owns shares, (iii) by each of the Named Officers reflected
in the Summary Compensation Table and (iv) by all directors and executive
officers as a group. Except as otherwise indicated, the persons named in the
table have sole voting and investment power with respect to all shares of GTC
Common Stock shown as beneficially owned by them.
[CAPTION]
Shares Beneficially Owned
As of March 24, 1997
Name Number Percent(1)
- --------------------------------- ----------- ----------
Group Financial Partners, Inc.(2) 13,039,625 80.4%
455 South Fourth Avenue
Louisville, Kentucky 40202
Carl P. McCormick(3) 432,486 2.6%
David D. Johnson(4) 16,525 *
Aviram Margalith(5) 216,516 1.3%
J. Hardie Harris(6) 0 *
Henry F. Frigon(7) 75,146 *
Sidney R. Petersen(8) 73,466 *
Roger W. Johnson(9) 7,000 *
Robert E. Gill(10) 4,000 *
Jeffrey T. Gill(11) 675 *
All directors and executive officers as a group 13,865,439 82.2%
- ------------------
* less than 1%
(1) The percentages shown were calculated based upon 16,220,629 shares of GTC
Common Stock which were outstanding as of March 24, 1997, plus the
respective number of additional shares for each person which are deemed
outstanding pursuant to Rule 13d-3(d)(1) under the Exchange Act.
(2) GFP directly owns shares of GTC Common Stock. Robert E. Gill, Jeffrey T.
Gill, R. Scott Gill, Virginia G. Gill and Patricia G. Gill own 19.4%,
32.2%, 27.9%, 19.8% and 0.1%, respectively (99.4% in the aggregate), of the
GFP Common Stock and, therefore, may be deemed to have an indirect
beneficial interest in the shares of GTC Common Stock owned by GFP. Robert
E. Gill is also a director of GTC and Jeffrey T. Gill is a director and an
executive officer of GTC.
(3) Includes 300,000 shares issuable under currently exercisable options.
(4) Includes 15,000 shares issuable under currently exercisable options.
(5) Includes 185,000 shares issuable under currently exercisable options.
However, Dr. Margalith has submitted a notice of his intent to resign from
his position as Vice President and General Manager of International EMS
Operations and Engineering Services on April 4, 1997. All unexercised
options held by Dr. Margalith will be subject to cancelation as of April 4,
1997, in accordance with the terms and conditions of the underlying stock
option plans.
45
(6) Mr. Harris resigned from his position as Vice President and General Manager
of U.S. EMS Operations on January 31, 1997. All options held by Mr. Harris
were canceled as of that date.
(7) Includes 70,146 shares issuable under currently exercisable options.
(8) Includes 70,966 shares issuable under currently exercisable options.
(9) Includes 7,000 shares issuable under currently exercisable options.
(10) Includes shares owned by Robert E. Gill and his spouse, but none of the
shares attributed to them because of their ownership interest in GFP.
(11) Includes shares owned by Jeffrey T. Gill, but none of the shares attributed
to him or his spouse because of their ownership interest in GFP.
Item 13. Certain Relationships and Related Transactions
Robert E. Gill served as President and Chief Executive Officer of GTC from
October 31, 1996 until February 28, 1997. He currently is a director of GTC and
he also serves as Chairman of the Board of GFP, a private holding company which
holds controlling interests in GTC, Tube Turns Technologies, Inc. ("TTT") and
Bell and as a Director and executive officer of TTT and Bell. Robert E. Gill is
the father of Jeffrey T. Gill and R. Scott Gill. Jeffrey T. Gill, a director and
Chairman of the Board of GTC, also serves as a director and President and Chief
Executive Officer of GFP, as Chairman of the Board of TTT and as Chairman of the
Board of Bell. R. Scott Gill serves as Vice President and a director of GFP, and
as a director of TTT and Bell. Robert E. Gill (including those shares owned by
his wife Virginia G. Gill) and Jeffrey T. Gill (including those shares owned by
his wife Patricia G. Gill) and R. Scott Gill own 39.3%, 32.3%, and 27.9%
respectively, of the outstanding shares of GFP Common Stock.
Historically, GTC paid a monthly management fee to GFP in exchange for
financial advisory and management consulting services. The management fee to GFP
was suspended as of January 31, 1996, and accordingly, the only payment made by
GTC for these in 1996 consisted of the issuance of 17,391 shares of GTC Common
Stock to GFP on February 21, 1996. The number of shares issued was computed
based upon a monthly management fee of $50,000 and a per share price equal to
the average closing price of the GTC Common Stock on the last three trading days
of January 1996.
On February 9, 1996, the assets of the instrumentation products business
unit of Metrum were sold by GTC to Bell for $10,104,000 cash and an earn-out
provision which provides for additional payments to GTC of up to $3,000,000 in
the event annual earnings before interest and taxes exceeds defined amounts
through December 31, 2000. The proceeds from the sale transaction was used to
reduce GTC's debt balance and to fund working capital needs. Due to the common
ownership interest of GFP in GTC and Bell, GTC requested and obtained an
independent opinion, which indicated that the consideration received by GTC for
the sale of the instrumentation products business was fair, from a financial
point of view, to the unaffiliated shareholders of GTC. In addition, due to the
common ownership, the amount by which the sales price exceeded the net book
value of assets and liabilities transferred has been recorded by GTC as a
contribution to its capital of $613,000. GTC reported this transaction on a Form
8-K filed with the Commission on February 23, 1996, and amended on March 28,
1996.
GTC and its domestic subsidiaries are parties to a tax sharing agreement
with GFP and were included in the consolidated federal income tax return of GFP
from GTC's inception through March 22, 1995. Effective March 23, 1995, as a
result of a decrease in GFP's ownership percentage of GTC, GTC did not meet the
80-percent-voting power and value requirements defined by the Internal Revenue
Code for affiliated group membership and ceased to be an includable member of
GFP's affiliated group. Effective March 29, 1996, as a result of an investment
by GFP of $1,000,000 in GTC as described below,
46
GFP's ownership percentage in GTC exceeded 80% and, therefore, GTC expects to be
included as a member of GFP's affiliated group as of that date.
In connection with the restructuring of GTC's credit agreement on March 29,
1996, GFP invested $1,000,000 in GTC in exchange for 374,531 shares of GTC
Common Stock. The per share price of the transaction was equal to the average
closing price of the GTC Common Stock on the three trading days preceding the
date of sale.
On January 24, 1997, GTC filed a registration statement on Form S-4 with
the Commission regarding its proposal to merge with GFP, Bell, and TTT. In
connection with this proposed merger, the Board of GTC formed a special
committee of Independent Directors to evaluate the fairness of the transaction
to the unaffiliated shareholders of GTC and to make a recommendation to the
Board regarding the transaction. The registration statement has not yet become
effective.
In connection with an amendment to GTC's credit agreement effective on
December 1, 1996, GFP, on March 28, 1997, invested $2,500,000 in GTC in exchange
for 250,000 shares of 8.5% cumulative convertible preferred stock of GTC (the
"Preferred Shares"). GFP, or any subsequent holders of record of each of the
Preferred Shares, is entitled to the rights and preferences stated in the
Statement of Designation of Relative Rights and Preferences filed by GTC with
the Florida Department of State on March 28, 1997 as part of the Third Amendment
to GTC's Articles of Incorporation. Such rights and preferences include the
right of the holder to, among other things: (i) exchange each of the Preferred
Shares for 8.3 shares of GTC Common Stock, which number was determined on March
28, 1997 by dividing the fair market value of GTC Common Stock into the value of
the Liquidation Preference of the Preferred Shares, and (ii) at any time after
GTC repays the amount it owes its lender under the credit agreement, the right
to put the Preferred Shares to GTC for repurchase at a price of $10.00 per
share, plus any accrued dividends and any interest thereon. Additionally, in
connection with the issuance of the Preferred Shares to GFP, GTC and GFP
executed a Stock Purchase and Registration Rights Agreement dated March 28,
1997, wherein GTC, among other things, granted GFP demand and incidental
registration rights for any shares of GTC Common Stock which are acquired by GFP
upon the conversion of the Preferred Shares.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) The following documents are filed as part of this Report:
1. Financial Statements
The financial statements filed as part of this report are listed on
the Index to Consolidated Financial Statements on Page 16.
2. Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts is on page 47.
All other consolidated financial statement schedules have been omitted
because the required information is shown in the consolidated financial
statements or notes therto or they are not applicable.
47
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
GROUP TECHNOLOGIES CORPORATION
[CAPTION]
Balance at Charged to Balance at
Beginning Costs and End of
of Period Expenses Deductions Period
---------- ---------- ---------- ----------
Allowance for
doubtful accounts:
Year ended
December 31, 1996 $783,000 $961,000 $498,000(1) $1,246,000
========== ========== ========== ==========
Year ended
December 31, 1995 $538,000 $1,293,000 $1,048,000(1) $783,000
========== ========== ========== ==========
Year ended
December 31, 1994 $1,144,000 $571,000 $1,177,000(1) $538,000
========== ========== ========== ==========
Reserve for inactive,
obsolete and unsalable
inventories:
Year ended
December 31, 1996 $8,606,000 $3,567,000 $7,285,000(2) $4,888,000
========== ========== ========== ==========
Year ended
December 31, 1995 $2,230,000 $6,939,000 $563,000(2) $8,606,000
========== ========== ========== ==========
Year ended
December 31, 1994 $2,139,000 $540,000 $449,000(2) $2,230,000
========== ========== ========== ==========
- ---------------
(1) Uncollectible accounts written off, net of reserves.
(2) Inactive, obsolete and unsalable inventories written off.
48
3. Exhibits
Exhibit
Number Note Description
- ------- ---- -----------
2.1 (1) Purchase and Sale Agreement among Honeywell Inc., Defense
Communications Products Corporation (prior name of Registrant),
and Group Financial Partners, Inc. dated May 21, 1989.
2.2 (1) Purchase and Sale Agreement among Alliant Techsystems Inc., MAC
Acquisition I, Inc. and the Registrant dated December 31, 1992.
2.3 (1) Purchase and Sale Agreement among Philips Electronic North
America Corporation and the Registrant dated June 25, 1993.
2.4 (4) Purchase Agreement among IBM-Brasil-Industria, Maquinas e
Servicos, Ltda. and Group Technologies Suporte de Informatica
Industria e Comercio Ltda. dated April 28, 1995.
2.4.1 (5) Amendment dated July 18, 1995 to the Purchase Agreement among IBM
Brasil-Industria, Maquinas e Servicos, Ltda. and Group
Technologies Suporte de Informatica Industria e Comercio Ltda.
dated April 28, 1995.
2.5 (4) Purchase and Sale Agreement among Metrum, Inc. and MountainGate
Data Systems, Inc. dated May 3, 1995.
2.6 (4) Purchase and Sale Agreement among Metrum, Inc. and Sienna
Imaging, Inc. dated June 6, 1995.
2.7 (6) Asset Purchase Agreement among Metrum, Inc., Registrant and F.W.
Bell, Inc. dated February 9, 1996.
2.8 (7) Asset Purchase Agreement among Registrant, Teklogix Enterprises,
Inc. and Teklogix International, Inc. dated March 22, 1996.
2.9 (11) Agreement and Plan of Reorganization among Registrant, Group
Financial Partners, Inc., Tube Turns Technologies, Inc. and Bell
Technologies, Inc. dated January 15, 1997.
3.1 (1) Amended and Restated Articles of Incorporation of the Registrant.
3.2 (1) Amended and Restated Bylaws of the Registrant.
3.3 (1) Articles of Amendment to the Amended and Restated Articles of
Incorporation of the Registrant.
3.4 (1) Second Amendment to the Amended and Restated Articles of
Incorporation of the Registrant.
3.5 Third Amendment to the Amended and Restated Articles of
Incorporation of the Registrant.
10.1 (2) Revolving Credit and Security Agreement between the Registrant
and First Union Credit Corporation dated November 22, 1994.
10.2 (3) First Amendment to Revolving Credit and Security Agreement
between Registrant and First Union Commercial Corporation dated
March 29, 1995.
10.3 (5) Forbearance Agreement between the Registrant and First Union
Commercial Corporation dated November 7, 1995.
49
Exhibit
Number Note Description
- ------- ---- -----------
10.4 (7) Amended and Restated Credit and Security Agreement between the
Registrant and First Union Commercial Corporation dated March 29,
1996.
10.4.1 (9) First Amendment to Amended and Restated Credit and Security
Agreement, dated May 13, 1996.
10.4.2 (9) Second Amendment to Amended and Restated Credit and Security
Agreement, dated September 5, 1996.
10.4.3 (9) Letter Agreement dated November 7, 1996 Pertaining to Amended and
Restated Credit and Security Agreement.
10.4.4 Third Amendment to Amended and Restated Credit and Security
Agreement, dated March 28, 1997.
10.5 (1) Form of U.S. Government Award/Contract.
10.6 (1) Preferred Supplier Purchase Agreement for Circuit Card Assembly
between the Registrant and Honeywell, Inc. dated July 1, 1990.
10.7 (1) Purchase Order between the Registrant and Martin Marietta.
10.8 (1) Standard OEM Purchase Agreement between Kulicke and Soffa
Industries, Inc. and Registrant dated March 16, 1993.
10.9 (1) Purchase/Supply Agreement between Philips Circuit Assemblies and
International Game Technology dated July 31, 1992.
10.10 (5) Purchase Order between the Registrant and Lockheed Martin
Corporation dated September 21, 1995.
10.11 OEM Purchase Agreement between Instruments SA, Inc. and
Registrant dated December 11, 1996.
10.12 (1) Cooperation and Licensing Agreement between Dauphin Technology
Incorporated and the Registrant dated August 11, 1993.
10.13 (1) Master Lease Agreement between General Electric Capital
Corporation and the Registrant dated April 1, 1993.
10.14 (1) Lease between Copelco Leasing Corporation and the Registrant
dated April 20, 1993.
10.15 (1) Master Rental Agreement and related documents between Hewlett-
Packard Company and the Registrant.
10.16 (1) Master Equipment Lease Agreement between Ellco Leasing
Corporation and the Registrant dated November 9, 1990.
10.17 (1) Master Lease Agreement between General Electric Capital
Corporation and the Registrant dated March 9, 1993.
10.18 (1) Lease between John Hancock Mutual Life Insurance Company and
Honeywell, Inc. dated April 27, 1979; related Notice of
Assignment from John Hancock Mutual Life Insurance Company to
Sweetwell Industrial Associates, L.P., dated July 10, 1986;
related Assignment and Assumption of Lease between Honeywell,
Inc. and Defense Communications Products Corporation (prior name
of Registrant) dated May 21, 1989; and related Amendment I to
Lease Agreement between
50
Exhibit
Number Note Description
- ------- ---- -----------
Sweetwell Industries Associates, L.P. and the Registrant dated
October 25, 1991, regarding Tampa Industrial park property.
10.19 (1) Lease between the Registrant and TMC Properties, Inc. dated
August 24, 1994, regarding North 46th Street Property.
10.19.1 (4) Amendment No.1 to Lease between Registrant and TMC Properties,
Inc. dated August 24, 1994 regarding North 46th Street Property.
10.20 (1) Agreements between the Registrant and International Brotherhood
of Teamsters, Chauffeurs, Warehousemen, and Helpers of America
Local Union No. 930 dated September 25, 1993.
10.21 (1) Agreements between the Registrant and International Brotherhood
of Teamsters, Chauffeurs, Warehousemen, and Helpers of America
Local Union No. 930 dated November 22, 1994.
10.22 (1) Group Technologies Corporation Stock Option Plan, as amended.
10.22.1 (10) Group Technologies Corporation Stock Option Plan, Restated
effective June 28, 1996, dated January 22, 1990.
10.22.2 Group Technologies Corporation Stock Option Plan, Restated
effective December 17, 1996.
10.23 (1) Group Technologies Corporation Executive Staff Incentive
Compensation Plan, as amended.
10.24 (4) Group Technologies Corporate Management Deferred Compensation
Plan Restated effective January 1, 1994 dated May 5, 1995.
10.25 (5) Group Technologies Corporate Management Deferred Compensation
Plan Restated effective October 1, 1995 dated August 29, 1995.
10.26 (4) Group Technologies Corporation Independent Directors' Stock
Option Plan dated October 27, 1994, as approved and ratified at
Annual Shareholder Meeting dated April 21, 1995.
10.26.1 (8) Group Technologies Corporation Independent Directors' Stock
Option Plan Restated effective February 21, 1996, dated October
27, 1994.
10.26.2 (9) Group Technologies Corporation Independent Directors' Stock
Option Plan Restated effective October 29, 1996, dated October
27, 1994.
10.27 (4) Group Technologies Corporation 1994 Stock Option Plan for Key
Employees dated October 27, 1994, as approved and ratified at
annual shareholder meeting dated April 21, 1995.
10.27.1 (8) Group Technologies Corporation 1994 Stock Option Plan for Key
Employees Restated effective on February 21, 1996, dated October
27, 1994.
10.27.2 (9) Group Technologies Corporation 1994 Stock Option Plan for Key
Employees Restated effective on October 29, 1996, dated October
27, 1994.
10.27.3 Group Technologies Corporation 1994 Stock Option Plan for Key
Employees Restated effective December 17, 1996, dated October 27,
1994.
51
Exhibit
Number Note Description
- ------- ---- -----------
10.28 (8) Group Technologies Corporation Independent Directors'
Compensation Program Restated effective on February 21, 1996,
dated September 1, 1995.
10.29 (8) Group Technologies Corporation 1996 Special Recovery Bonus Plan
for Vice Presidents effective as of January 2, 1996.
10.30 (8) Sublease between Group Technologies Supr. Informatica Ind. e Com.
Ltda. and Ceccato S/A Comercio de Utilidades Domesticas dated
March 20, 1996 regarding the Campinas, Brazil property.
10.31 (11) Separation letter agreement dated December 10, 1996 between the
Registrant and Carl P. McCormick.
10.32 Stock Purchase Agreement and Registration Rights Agreement
between Registrant and Group Financial Partners, Inc. dated March
28, 1997.
11 Statement re: Computation of per share earnings.
18 (3) Letter from Ernst & Young LLP, regarding change in accounting
principles.
21 Subsidiaries of the Registrant.
23 Consent of Ernst & Young, LLP, independent auditors for the
Registrant.
27 Financial Data Schedule (for SEC use only).
- ------------------------
(1) Incorporated by reference to the Registrant's Registration Statement on
Form S-1 filed May 18, 1994 (Registration No. 33-76326).
(2) Incorporated by reference to the Registrant's Form 10-K for fiscal year
ended December 31, 1994 filed on March 31, 1995.
(3) Incorporated by reference to the Registrant's Form 10-Q for the Quarterly
Period ended April 2, 1995 filed on May 17, 1995.
(4) Incorporated by reference to the Registrant's Form 10-Q for the Quarterly
Period ended July 2, 1995 filed on August 16, 1995.
(5) Incorporated by reference to the Registrant's Form 10-Q for the Quarterly
Period ended October 2, 1995 filed on November 15, 1995.
(6) Incorporated by reference to the Registrant's Form 8-K filed on February
23, 1996.
(7) Incorporated by reference to the Registrant's Form 10-K for the fiscal year
ended December 31, 1995 filed on April 1, 1996.
(8) Incorporated by reference to the Registrant's Form 10-Q for the Quarterly
Period ended March 31, 1996 filed on May 14, 1996.
(9) Incorporated by reference to the Registrant's Form 10-Q for the Quarterly
Period ended September 29, 1996 filed on November 13, 1996.
(10) Incorporated by reference to the Registrant's Registration Statement on
Form S-8 filed on June 28, 1996 (Registration No. 333-07111).
(11) Incorporated by reference to the Registrant's Registration Statement on
Form S-4 filed January 22, 1997 (Registration No. 333-20299).
(b) Reports on Form 8-K:
No reports were filed by the Company during the fiscal quarter ended
December 31, 1996.
52
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this Annual Report to be
signed on its behalf by the undersigned, thereunto duly authorized, on March 31,
1997.
GROUP TECHNOLOGIES CORPORATION
(Registrant)
/s/ Thomas W. Lovelock
President and Chief 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 date indicated:
Principal Executive Officer:
/s/ Thomas W. Lovelock March 31, 1997
Principal Financial and Accounting Officer:
/s/ David D. Johnson March 31, 1997
Directors:
/s/ Henry F. Frigon March 31, 1997
/s/ Jeffrey T. Gill March 31, 1997
/s/ Robert E. Gill March 31, 1997
/s/ Thomas W. Lovelock March 31, 1997
Sidney R. Petersen
/s/ Roger W. Johnson March 31, 1997