<PAGE> 1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
[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 NO. 1-4289
GTI CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 05-0278990
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
9715 BUSINESS PARK AVENUE
SAN DIEGO, CALIFORNIA 92131
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) (ZIP CODE)
</TABLE>
(619) 537-2500
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SESSION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, PAR VALUE $.04
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 and Exchange Act
of 1934 during the preceding 12 months (or for such shorter periods that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [X]
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 registrants knowledge, in definite proxy or information statements
incorporated by reference in Part III of this form 10-K or any amendment to this
form 10-K.
The aggregate market value of the registrants voting Common Stock, held by
non-affiliates, based upon the closing price for the Registrant's Common Stock
as reported in the NASDAQ National Market System on March 31, 1997 was
$22,765,500. This was calculated by excluding shares of Common Stock and $35.00
Cumulative Convertible Preferred Stock beneficially owned by Telemetrix PLC and
by directors and officers as a group from total outstanding shares solely for
the purposes of this response.
The number of shares of Common Stock of the Registrant issued and
outstanding as of March 31, 1997: 8,973,475
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents are incorporated by reference in the
following parts of this report:
Registrant's Definitive Proxy Statement which will be filed with the
Securities and Exchange Commission on or before April 10, 1997, in connection
with Registrant's Annual Meeting of Stockholders to be held on May 15, 1997 is
incorporated by reference into Part III of this Report. Certain sections of the
Registrant's 1996 Annual Report to Stockholders are incorporated by reference to
Parts I and II of this report.
================================================================================
<PAGE> 2
PART I
This Form 10-K contains certain statements of a forward-looking nature
relating to future events or the future performance of the Company. Prospective
investors are cautioned that such statements are only predictions and that
actual events or results may differ materially. In evaluating such statements,
prospective investors should specifically consider various factors (including
risk factors) identified in this Form 10-K which could cause actual results to
differ materially from those indicated by such forward-looking statements.
ITEM 1. BUSINESS
Reference is made to the information required by Item 1 (General, Products,
Customers, Sales and Marketing, Competition, Manufacturing and Suppliers,
Product Development, Foreign Operations, International Sales, and Backlog) which
are under their corresponding headings on pages 2 through 6 of the Company's
1996 Annual Report to Stockholders (the "Annual Report"), which information is
hereby incorporated by reference.
GENERAL
GTI Corporation was originally incorporated under the laws of Rhode Island
in 1956 as Glass-Tite Industries, Inc. ("GTI-RI"). In March 1987, pursuant to an
Agreement and Plan of Merger, GTI-RI merged with and into GTI Delaware, Inc., a
Delaware corporation. At the effective time of the merger, the name of the
surviving corporation was changed to GTI Corporation. As a result of a series of
subsequent acquisitions and divestitures, GTI's only current continuing
operation is Valor Electronics, Inc., a wholly-owned subsidiary of the Company
("Valor"). As used herein, the term "Company" or "GTI" refers to GTI Corporation
and, unless specifically identified otherwise, all of its subsidiaries.
Since the acquisition of Valor, the Company has evolved into a broad-based
supplier of signal management components to original equipment manufacturers
("OEMs") of local area networks ("LAN") and wide area networks ("WANs") for data
communications. The Company designs, manufactures, markets, and supports a broad
family of standards-based magnetic components with application-specific
interface solutions for signal management in networking and internetworking
products. These signal management products provide signal processing and power
transfer functions such as circuit isolation and impedance matching, signal
shaping and conditioning, noise reduction and filtering, and voltage conversion.
These electrical functions help enable the OEMs hardware and software product
architecture to transmit data over the LAN transmission media.
DISCONTINUED OPERATIONS
The Company's electronic components and equipment segment was sold in
December 1995, and its distribution products segment was sold in February 1996.
In March 1997, Promptus Communications, Inc., a majority-owned subsidiary of the
Company ("Promptus") entered into an agreement to sell the net assets of its
Network Access Card ("NAC") business for approximately $20.0 million of which
approximately $14.5 million will be paid in cash and will be paid in 223,881
shares of VideoServer, Inc.'s common stock, subject to regulatory approval.
Immediately after the sale of its NAC business, Promptus has agreed to purchase
100% of the Promptus common stock held by the Company and repay indebtedness to
the Company for for an aggregate of approximately $11.6 million, net of certain
transaction costs. Management expects these transactions to close during the
quarter ended June 28, 1997.
BUSINESS SEGMENT INFORMATION
As a result of the discontinued operations and related divestitures
described above, the Company now operates only in the networking products
industry segment. During the years presented herein, 100% of the revenues from
continuing operations were derived from Valor.
1
<PAGE> 3
PROPRIETARY RIGHTS
Because its products are subject to rapidly changing design, the Company
believes that, patent and copyright protection are less significant to the
Company's competitive position than factors such as the knowledge, ability, and
experience of the Company's personnel, new product development, product quality,
market recognition, and on-going customer support. To protect its proprietary
rights in these products, the Company primarily relies on trade secrets and
nondisclosure agreements. Despite these precautions, it may be possible for
unauthorized third parties to copy aspects of the Company's products or to
obtain and use information that the Company regards as proprietary. The laws of
some foreign countries do not protect the Company's proprietary rights in the
Company's products to the same extent as do the laws of the United States.
EMPLOYEES
The number of persons employed by the Company, excluding the employees of
Promptus, as of March 1, 1997, was approximately 7,620. Of these employees,
approximately 6,500 were employed by the Company's PRC operations; 960 were
employed by the Company's Philippines operations, and approximately 140 were
employed by the Company's domestic operations. In addition, approximately 1,476
and 410 persons are employed by the Company's PRC and Philippine subcontractors,
respectively, to manufacture certain of the Company's networking products. The
Company considers its relationships with its employees and subcontractors to be
good.
ENVIRONMENTAL COMPLIANCE
The Company is subject to various federal, state, and local environmental
protection laws and regulations and, from time to time, has incurred costs for
environmental compliance, none of which to date has been material. The Company
has been studying and undertaking certain remedial actions with respect to
groundwater pollution and soil contamination conditions at its closed facility
in Leesburg, Indiana. The Company anticipates that additional environmental
expenses will be incurred in future years as the Company continues its
environmental studies and analysis, and upon mutual agreement with a certain
state agency implements a remediation plan. Based on current knowledge, the
Company does not believe that any future expenses associated with environmental
remediation will have a material impact on the financial position of the
Company.
EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth the names, ages, and offices held by the
Company's current executive officers:
<TABLE>
<CAPTION>
NAME AGE OFFICE
- ------------------------ --- --------------------------------------------
<S> <C> <C>
Albert J. Hugo-Martinez 50 President and Chief Executive Officer and
Director
Bruce C. Myers 41 Vice President Finance, Chief Financial
Officer, Treasurer and Secretary
</TABLE>
There are no family relationships among the executive officers and
directors of the Company.
Albert J. Hugo-Martinez became president and chief executive officer of the
Company in March 1996. From 1988 to 1995, Mr. Hugo-Martinez was president and
chief executive officer of Applied Micro Circuits Corp. in San Diego,
California. Prior thereto, he held various management positions with TRW, Burr
Brown Corporation, and Motorola Semiconductor. Mr. Hugo-Martinez is a director
of Microchip Corp. and the UCSD Cancer Center.
Bruce C. Myers became vice president of finance and chief financial officer
of the Company on January 21, 1997. From June 1989 to December 1996, Mr. Myers
was chief operating officer and chief financial officer of Xscribe Corporation
in San Diego, California. Prior thereto, Mr. Myers held various positions with
Arthur Andersen LLP for eleven years.
2
<PAGE> 4
ITEM 2. PROPERTIES
The Company's and Valor's world-wide headquarters as well as the principal
executive, marketing, sales, product development, manufacturing process design,
materials procurement, managerial and manufacturing support, and a warehousing
facility are located in a leased building in San Diego, California. The
manufacturing operations for Valor are located in three leased facilities in the
PRC and the Philippines.
The majority of the Company's operations are conducted in leased
facilities. The following table sets forth the Company's principal leased
facilities by location, square footage, segment and use, lease expiration, and
renewal options:
<TABLE>
<CAPTION>
APPROXIMATE RENEWAL
SQUARE YEAR OF LEASE OPTIONS
LOCATION FOOTAGE SEGMENT PRODUCTS/USES EXPIRATION #/PERIOD
- ------------------ ----------- ------------------------- ------------- ---------
<S> <C> <C> <C> <C>
U.S.A.
San Diego, CA 40,000 Corporate Office 2002 2/2 years
Networking Products/Valor each
administration, product
development
San Diego, CA 7,525 Networking Products/Valor 2002 2/2 years
warehouse, stockroom each
HONG KONG
Kowloon 12,450 Networking Products/Valor 1997 1/3 years
regional sales office
PEOPLE'S REPUBLIC
OF CHINA(1)
Factory 1 133,000 Networking Products/Valor 1997(2) None(2)
signal processing, power
transfer
Factory 2 174,000 Networking Products/Valor 2000 None
signal processing, power
transfer
PHILIPPINES
Cabuyao 34,400 Networking Products/Valor 1997 1/5 years
signal processing, power
transfer
</TABLE>
- ---------------
(1) The PRC facilities are operated directly by the Company under negotiated
contracts between the Company and the provincial government of China. In
addition to the manufacturing space indicated, each facility includes space
for staff quarters and dormitories. Such living quarters in the aggregate
represent 177,200 square feet of space.
(2) The Company intends to extend the existing lease arrangement for this
facility during 1997. There can be no assurance that the terms of the
extended lease arrangement will be acceptable to the Company. In the event
that the lease is not extended, this would have a material adverse effect on
the Company's operations, results of operations, and financial position.
In addition to its manufacturing and distribution facilities, the Company
leases sales offices elsewhere in the United States, United Kingdom, and
Germany. The Company believes that its facilities are well maintained, in good
operating condition and adequate to support anticipated operating needs over the
next twelve months.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in various legal proceedings and claims arising in
the ordinary course of business, none of which, in the opinion of management, is
expected to have a material adverse affect on the Company's consolidated
financial position.
3
<PAGE> 5
In December 1995, a class-action lawsuit was filed in the United States
District Court, Southern District of California, against the Company and certain
of its officers and directors alleging violations of the Securities Exchange Act
of 1934. Specifically, the complaint asserted, among other claims, that the
Company artificially inflated the value of its Common Stock by making false and
misleading statements about expected financial results. In July 1996, the
Company entered into a Stipulation of Settlement which was approved by the Court
with prejudice and all claims were released. The settlement amount was $1
million of which $400,000 was paid by the Company and $600,000 was paid by the
Company's insurance carrier.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 1996.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
Reference is made to the information under the heading "Market of the
Registrant's Common Stock and Related Security Holder Matters" on page 6 of the
Annual Report, which information is hereby incorporated by reference.
ITEM 6. SELECTED FINANCIAL DATA
Reference is made to the information under the heading "Selected Financial
Data" on pages 6 and 7 of the Annual Report, which information is hereby
incorporated by reference.
The selected consolidated financial data should be read in conjunction with
Management's Discussion and Analysis of Financial Condition and Results of
Operations and the Consolidated Financial Statements and Notes thereto included
elsewhere as part of the Annual Report, which information is hereby incorporated
by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Reference is made to the information under the heading "Management's
Discussion and Analysis of Financial Condition and Results of Operations" on
pages 7 through 12 of the Annual Report, which information is hereby
incorporated by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's consolidated financial statements as of December 31, 1996 and
1995 and for the three years in the period ending December 31, 1996, 1995, and
1994 and the related Report of Independent Public Accountants are contained in
the Annual Report for the year ended December 31, 1996, which information is
hereby incorporated by reference. An index to such materials appears on page
F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is set forth in the Company's 1997
Proxy Statement under the headings "Election of Directors -- Nominees for
Election as Directors", and "Compensation and Other Transactions with Officers
and Directors", and "Compliance with Section 16 of the Exchange Act" and is
incorporated herein by reference. See Part I Item 1 "Executive Officers of the
Company" for a discussion of the executive officers of the Company.
4
<PAGE> 6
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is included in the Company's 1997
Proxy Statement under the heading "Compensation and Other Transactions with
Officers and Directors" (excluding the information under the heading subcaption
"Compensation Committee Report") and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information related to security ownership of certain beneficial owners
and security ownership of management is set forth in the Company's 1997 Proxy
Statement under the headings "Principal Stockholders" and "Election of
Directors-Aggregate Stock Ownership of Directors and Officers" and is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is included in the Company's 1997
Proxy Statement under the headings "Election of Directors- Nominees for Election
as Directors" and Note 3 to the table under "Election of Directors-Aggregate
Stock Ownership of Directors and Officers" and "Certain Relationships and
Related Transactions" and is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a) Consolidated Financial Statements and Consolidated Financial Statement
Schedules
The Report of Independent Public Accountants and the related financial
statement schedule appear on pages F-2 and F-3, respectively, hereon.
(b) Exhibits
The documents listed on the Exhibit Index appearing at pages 7 through
12 of this Report are filed herewith. The 1997 Proxy Statement shall be
deemed to have been "filed" only to the extent portions thereof are
expressly incorporated herein by reference. Copies of the exhibits
listed in the Exhibit Index will be furnished, upon request, to holders
or beneficial owners of the Company's Common Stock as of April 15, 1997,
subject to payment in advance of a fee of $.15 per page to reimburse the
Company for reproduction costs.
Each management contract or compensatory plan or arrangement listed in
the Exhibit Index has been marked with the letter "C" to identify it as
such.
(c) Reports on Form 8-K
The following reports on Form 8-K were filed during the fourth quarter
of 1996:
Report dated November 12, 1996, reporting under Item 5 an announcement
of the court's approval of a Stipulation of Settlement of a class-action
lawsuit filed in December 1995 against the Company and certain of its
officers, and directors. Additionally, the Company announced that a
certain officer of the Company resigned.
Report dated December 12, 1996, reporting under Item 5 an announcement
that Mr. Andre Horn (69) retired from the Board of Directors of the
Company.
5
<PAGE> 7
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
REFERENCE PAGE
----------------------------
1996
ANNUAL REPORT TO
STOCKHOLDERS FORM 10-K
---------------- ---------
<S> <C> <C>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS............................ 13
CONSOLIDATED FINANCIAL STATEMENTS...................................
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER
31, 1996, 1995, 1994.............................................. 14
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1996 AND 1995........ 15
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED
DECEMBER 31, 1996, 1995 AND 1994.................................. 16
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER
31, 1996, 1995, AND 1994.......................................... 17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.......................... 18
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULES............... F-2
SCHEDULE II......................................................... F-3
</TABLE>
F-1
<PAGE> 8
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULES
To GTI Corporation:
We have audited in accordance with generally accepted auditing standards the
consolidated financial statements incorporated by reference in this Form 10K,
and have issued our report thereon dated March 25, 1997. Our audits of the
consolidated financial statements were made for the purpose of forming an
opinion on those statements taken as a whole. The supplemental Schedule II is
presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. This
supplemental schedule has been subjected to the auditing procedures applied in
the audits of the basic financial statements and, in our opinion, fairly states
in all material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
San Diego, California,
March 25, 1997
F-2
<PAGE> 9
GTI CORPORATION
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
ADDITIONS
------------------
BALANCE AT CHARGED TO BALANCE AT
BEGINNING OF COSTS AND DEDUCTIONS END OF
DESCRIPTION PERIOD EXPENSES OTHER (A) YEAR
- --------------------------------------------- ------------ ---------- ----- ---------- ----------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts:
Year ended December 31, 1996................. $225 $ 60 $ -- $(84) $201
Year ended December 31, 1995................. $143 $ 90 $ -- $ (8) $225
Year ended December 31, 1994................. $131 $ 12 $ -- $ -- $143
</TABLE>
- ---------------
(A) Amount represents accounts written off.
F-3
<PAGE> 10
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
GTI CORPORATION
April 8, 1997 By: /s/ ALBERT J. HUGO-MARTINEZ
------------------------------------
Albert J. Hugo-Martinez
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.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------------------- -------------------------------- --------------
<S> <C> <C>
/s/ TIMOTHY M. CURTIS Director April 8, 1997
- ---------------------------------------------
Timothy M. Curtis
/s/ EDMUND B. FITZGERALD Director April 8, 1997
- ---------------------------------------------
Edmund B. Fitzgerald
/s/ ALBERT J. HUGO-MARTINEZ President April 8, 1997
- --------------------------------------------- Chief Executive Officer &
Albert J. Hugo-Martinez Director (Principal Executive
Officer)
Chairman of the Board & Director April , 1997
- ---------------------------------------------
Kenneth E. Maud
/s/ BRUCE C. MYERS Vice President -- Finance and April 8, 1997
- --------------------------------------------- Chief Financial Officer
Bruce C. Myers (Principal Financial and
Accounting Officer)
/s/ ROBERT E. VENTER Director April 8, 1997
- ---------------------------------------------
Robert E. Venter
</TABLE>
6
<PAGE> 11
EXHIBIT INDEX
The following Exhibits to this report are filed herewith, or if marked with
an asterisk (*), are incorporated herein by reference. Each management contract
or compensatory plan or arrangement has been marked with the letter "C" to
identify it as such.
<TABLE>
<CAPTION>
MANAGEMENT
CONTRACT OR PRIOR FILING OR
EXHIBIT COMPENSATORY SEQUENTIAL PAGE
NUMBER DESCRIPTION PLAN OR ARRANGEMENT NUMBER HEREIN
- ------ ----------------------------------- ------------------- ---------------------------------
<C> <S> <C> <C>
3.1 *Certificate of Incorporation of Exhibit 3.01 to Form 8-B filed
GTI Corporation with the Commission on July 11,
1987**
3.2 *Certificate of Merger of GTI Exhibit 3.02 to Form 8-B filed
Corporation into GTI Delaware, with the Commission on July 11,
Inc. as filed with Delaware 1987**
Secretary of State
3.3 *Articles of Merger of GTI Exhibit 4.01 to Report on Form 8-
Corporation into GTI Delaware, K dated November 2, 1988**
Inc. as filed with Rhode Island
Secretary of State
3.4 *Certificate of Designation of the Exhibit 4.01 to Report on Form 8-
$35.00 Cumulative Convertible K dated November 2, 1988**
Preferred Stock By-Laws of GTI
Corporation, as amended
3.5 *By-Laws of GTI Corporation, as Exhibit 3.5 to Annual Report on
amended as of February 26, 1992 Form 10-K for year ended December
31, 1991**
4.1 *Credit Agreement and Note dated as Exhibit 4.1 to Annual Report on
of December 1, 1992, between GTI Form 10-K for year ended December
Corporation and Union Bank 31, 1991**
4.2 *First Amendment to Credit Exhibit 99.02 to Amendment No. 1
Agreement and Note between GTI to Registration Statement on Form
Corporation and Union Bank dated S-3 (No. 33-65086) filed on July
May 7, 1993 16, 1993
4.3 *Second Amendment to Credit Exhibit 99.03 to Amendment No. 1
Agreement and Note between the to Registration Statement on Form
Company and Union Bank dated July S-3 (No. 33-65086) filed on July
15, 1993 16, 1993
4.4 *Third Amendment to Credit Exhibit 4.4 to Annual Report on
Agreement and Note dated as of Form 10-K for year ended December
March 24, 1994 31, 1993**
10.1 *GTI Corporation 1980 Employee C Exhibit 4.4 to Annual Report on
Stock Option Plan Form 10-K for year ended December
31, 1993**
10.2 *Amendments to 1980 Employees Stock C Exhibit 10.1 to Post-Effective
Option Plan adopted May 8, 1981 Amendment No. 1 to Form S-8
Registration Statement (No. 2-
68202) filed on May 12, 1981
10.3 *Amendments to 1980 Employees Stock C Exhibit 4.03 to Post-Effective
Option Plan dated June 4, 1987 Amendment No. 2 to Form S-8
Registration Statement (No. 2-
68202) filed on July 1, 1987
10.4 *Amendment to 1980 Employees Stock C Exhibit 4.03 to Post-Effective
Option Plan dated December 13, Amendment No. 3 to Form S-8
1989 Registration Statement (No. 2-
68202) filed on May 7, 1990
</TABLE>
- ---------------
**Commission File No. 1-4289
7
<PAGE> 12
<TABLE>
<CAPTION>
MANAGEMENT
CONTRACT OR PRIOR FILING OR
EXHIBIT COMPENSATORY SEQUENTIAL PAGE
NUMBER DESCRIPTION PLAN OR ARRANGEMENT NUMBER HEREIN
- ------ ----------------------------------- ------------------- ---------------------------------
<C> <S> <C> <C>
10.5 *Amendment to 1980 Employees Stock C Exhibit 10.5 to Annual Report on
Option Plan dated February 9, 1994 Form 10-K for the year ended
December 31, 1993**
10.6 *GTI Corporation 1982 Employees C Exhibit 10.5 to Annual Report on
Stock Option Plan Form 10-K for the year ended
December 31, 1992**
10.7 *Amendments to 1982 Employees Stock C Exhibit 5.01 to Post-Effective
Option Plan adopted June 4, 1987 Amendment No. 1 to Form S-8
Registration Statement (No. 2-
86797) filed on July 1, 1987
10.8 *Amendment to 1982 Employees Stock C Exhibit 4.03 to Post-Effective
Option Plan adopted May 3, 1990 Amendment No. 2 to Form S-8
Registration Statement (No. 2-
86797) filed on May 7, 1990
10.9 *Amendment to 1982 Employees Stock C Exhibit 10.9 to Annual Report
Option Plan dated February 9, 1994 onForm 10-K for the year ended
December 31, 1993**
10.10 *GTI Corporation 1985 Stock Option C Exhibit A to definitive Proxy
Plan for Non-Employee Directors Statement dated March 28, 1986
10.11 *Amendment to GTI Corporation 1985 C Exhibit 10.11 to Annual Report on
Stock Option Plan for Non-Employee Form 10-K for year ended December
Directors 31, 1993**
10.12 *GTI Corporation Stock Incentive C Exhibit 4.01 to Form S-8
Plan (1989) Registration Statement (No. 33-
34667) filed May 7, 1990
10.13 *Amendment to GTI Corporation Stock C Exhibit 10.10 to Annual Report on
Incentive Plan (1986) Form 10-K for year ended December
31, 1991**
10.14 *Amendments to GTI Corporation C Exhibit 10.14 to Annual Report on
Stock Incentive Plan (1989) Form 10-K for year ended December
31, 1993**
10.15 *GTI Corporation 1989 Stock Option C Exhibit 4.01 to Form S-8
Plan for Non-Employee Directors Registration Statement (No. 33-
34668) filed May 7, 1990**
10.16 *Amended and Restated Cash of C Exhibit 10.13 to Annual Report on
Deferred Profit Sharing plan for Form 10-K for year ended December
Employees of GTI Corporation and 31, 1991**
its Affiliates
10.17 *Guarantee of GTI Corporation dated Exhibit 10.13 to Annual Report on
September 24, 1982, for the Form 10-K for year ended December
obligations of GTI-Ireland, Ltd. 31, 1992**
10.18 *Guarantee of GTI Corporation dated Exhibit 10.14 to Annual Report on
July 10, 1982, to Allied Irish Form 10-K for year ended December
Banks Ltd. in relation to leasing 31, 1992**
of machinery and equipment by
GTI-Ireland Ltd.
10.19 *Allied Irish Banks Ltd. and GTI- Exhibit 10.15 to Annual Report on
Ireland Ltd. master agreement Form 10-K for year ended December
dated July 10, 1982, in relation 31, 1992**
to leasing future equipment and
machinery
</TABLE>
- ---------------
**Commission File No. 1-4289
8
<PAGE> 13
<TABLE>
<CAPTION>
MANAGEMENT
CONTRACT OR PRIOR FILING OR
EXHIBIT COMPENSATORY SEQUENTIAL PAGE
NUMBER DESCRIPTION PLAN OR ARRANGEMENT NUMBER HEREIN
- ------ ----------------------------------- ------------------- ---------------------------------
<C> <S> <C> <C>
10.20 *Agreement dated October 12, 1982, Exhibit 10.16 to Annual Report on
among GTI-Ireland Ltd., GTI Form 10-K for year ended December
Corporation, and the industrial 31, 1992**
Development Authority (of Ireland)
10.21 *Employment Agreement dated April C Exhibit 10.15 to Annual Report on
13, 1989, between GTI Corporation Form 10-K for year ended December
and Gary L. Luick 31, 1989**
10.22 *Letter Agreement dated May 12, C Exhibit 10.18 to Annual Report on
1990, between GTI Corporation and Form 10-K for year ended December
Jack VanderKnyff 31, 1992**
10.23 *Employment Agreement dated March C Exhibit 10.19 to Annual Report on
9, 1992, between GTI Corporation Form 10-K for year ended December
and R. Bert McClung 31, 1992**
10.24 *Indemnification Agreement dated Exhibit 10.20 to Form 8-B filed
June 23, 1987, between GTI with the Commission on July 11,
Corporation and John C. Brittain 1987**
10.25 *Indemnification Agreement dated Exhibit 10.24 to Annual Report on
May 5, 1989, between GTI Form 10-K for year ended December
Corporation and Gary L. Luick 31, 1989**
10.26 *Indemnification Agreement dated Exhibit 19.5 to Report on Form
August 27, 1990, between GTI 10-Q for quarter ended September
Corporation and Douglas J. Downs 30, 1990**
10.27 *Indemnification Agreement dated Exhibit 10.24 to Annual Report on
August 27, 1991, between GTI Form 10-K for year ended December
Corporation and Andre R. Horn 31, 1992**
10.28 *Indemnification Agreement dated Exhibit 10.26 to Annual Report on
February 26, 1992, between GTI Form 10-K for year ended December
Corporation and Arthur S. Walsh 31, 1992**
10.29 *Indemnification Agreement dated Exhibit 10.27 to Annual Report on
May 26, 1992, between GTI Form 10-K for year ended December
Corporation and Henry N. Huta 31, 1992**
10.30 *Indemnification Agreement dated Exhibit 10.30 to Annual Report on
May 12, 1993, between GTI Form 10-K for year ended December
Corporation and Jesse Rifkind 31, 1993**
10.31 *Indemnification Agreement dated Exhibit 10.31 to Annual Report on
May 12, 1993, between GTI Form 10-K for year ended December
Corporation and Edmund B. 31, 1993**
Fitzgerald
10.32 *Indemnification Agreement dated Exhibit 10.32 to Annual Report on
May 12, 1993, between GTI Form 10-K for year ended December
Corporation and Robert E. Venter 31, 1993**
10.33 *Indemnification Agreement dated Exhibit 10.33 to Annual Report on
February 9, 1994, between GTI Form 10-K for year ended December
Corporation and Timothy M. Curtis 31, 1993**
10.34 *Indemnification Agreement dated Exhibit 10.34 to Annual Report on
May 3, 1991, between GTI Form 10-K for year ended December
Corporation and Jack VanderKnyff 31, 1993**
10.35 *Indemnification Agreement dated Exhibit 10.35 to Annual Report on
May 15, 1992, between GTI Form 10-K for year ended December
Corporation and R. Bert McClung 31, 1993**
10.36 *Indemnification Agreement dated Exhibit 10.36 to Annual Report on
August 1993 between GTI Form 10-K for year ended December
Corporation and Donald J. Moore 31, 1993**
</TABLE>
- ---------------
**Commission File No. 1-4289
9
<PAGE> 14
<TABLE>
<CAPTION>
MANAGEMENT
CONTRACT OR PRIOR FILING OR
EXHIBIT COMPENSATORY SEQUENTIAL PAGE
NUMBER DESCRIPTION PLAN OR ARRANGEMENT NUMBER HEREIN
- ------ ----------------------------------- ------------------- ---------------------------------
<C> <S> <C> <C>
10.37 *GTI Corporation Stock Option C Exhibit 10.25 to Annual Report on
Agreement (Nonstatutory Stock Form 10-K for year ended December
Options) dated as of May 5, 1989, 31, 1989**
between GTI Corporation and Gary
L. Luick (1980 Plan)
10.38 *GTI Corporation Stock Option C Exhibit 10.25 to Annual Report on
Agreement (Nonstatutory Stock Form 10-K for year ended December
Options) dated as of May 5, 1989, 31, 1989**
between GTI Corporation and Gary
L. Luick (1982 Plan)
10.39 *Management Shares Agreement dated C Exhibit 2.02 to Report on Form
as of June 29, 1990, among GTI 8-K dated September 12, 1990
Corporation, Valor Electronics,
Inc., and the Shareholders named
therein
10.40 *Letter Agreement dated June 22, Exhibit 99.01 to Registration
1993, relating to purchase of Statement on Form S-3 (No.
Valor minority shares 33-65086) filed on June 25, 1993
10.41 *Letter Agreement dated September C Exhibit 10.41 to Annual Report on
2, 1993, between GTI Corporation Form 10-K for year ended December
and John C. Brittain 31, 1993**
10.42 *GTI Corporation Key Executive C Exhibit 10.42 to Annual Report on
Long-Term Incentive Plan and Trust Form 10-K for year ended December
Agreement 31, 1993**
10.43 *Amendment to GTI Corporation 1989 C Exhibit 10.14 to Annual Report on
Stock Incentive Plan Form 10-K for year ended December
31, 1993**
10.44 *Placement Agency Agreement dated Exhibit 1.1 Report on Form 8-K
January 5, 1995, between the dated January 6, 1995
Company and Needham & company,
Inc., as Agent, including
Subscription Form and Escrow
Agreement
10.45 *Consent and Fifth Amendment to Exhibit 99.1 to Report on Form
Credit Agreement and Note between 8-K dated January 6, 1995
the Company and Union Bank dated
as of November 30, 1994
10.46 *Merger Agreement dated as of Exhibit 2.1 to Report on Form 8-K
October 15, 1994, among the dated January 6, 1995
Company, GTI Acquisition Corp.,
Promptus, and certain shareholders
of Promptus
10.47 *Amendment dated as of January 6, Exhibit 2.2 to Report on Form 8-K
1995 to Merger Agreement dated as dated January 6, 1995
of October 15, 1994, among the
Company, GTI Acquisition Corp.,
Promptus, and certain shareholders
of Promptus
10.48 *Management Shares Agreement dated C Exhibit 10.48 to Annual Report on
January 5, 1995, between the Form 10-K for year ended December
Company, Promptus Communications, 31, 1994
Inc., and the Shareholders named
therein
</TABLE>
- ---------------
**Commission File No. 1-4289
10
<PAGE> 15
<TABLE>
<CAPTION>
MANAGEMENT
CONTRACT OR PRIOR FILING OR
EXHIBIT COMPENSATORY SEQUENTIAL PAGE
NUMBER DESCRIPTION PLAN OR ARRANGEMENT NUMBER HEREIN
- ------ ----------------------------------- ------------------- ---------------------------------
<C> <S> <C> <C>
10.49 *Indemnification Agreement dated Exhibit 10.49 to Annual Report on
October 12, 1994, between GTI Form 10-K for year ended December
Corporation and Richard C. Barron 31, 1994**
10.50 *Indemnification Agreement dated Exhibit 10.50 to Annual Report on
February 15, 1995, between GTI Form 10-K for year ended December
Corporation and Kirk D'Orazio 31, 1994**
10.51 *Indemnification Agreement dated Exhibit 10.51 to Annual Report on
February 15, 1995, between GTI Form 10-K for year ended December
Corporation and Aurelio Lucci 31, 1994**
10.52 *Amendment to Employment Agreement C Exhibit 10.52 to Annual Report on
dated March 29, 1995, between GTI Form 10-K for year ended December
Corporation and Gary L. Luick 31, 1994
10.53 *Stock Purchase Agreement dated Exhibit 99.1 to Current Report on
February 15, 1996, by and among Form 8-K, as amended, dated
GTI Corporation and Insulectro December 21, 1995
10.54 *Asset Purchase Agreement dated Exhibit 99.1 to Current Report on
December 16, 1995, by and among Form 8-K, as amended, dated
GTI Corporation and Component December 21, 1995
InterTechnologies, Inc.
10.55 *Consent and Sixth Amendment to Exhibit 10.55 to the Annual
Credit Agreement and Note between Report on Form 10-K for the year
the Company and Union Bank dated ended December 31, 1995
June 29, 1995
10.56 *Consent and Seventh Amendment to Exhibit 10.56 to the Annual
Credit Agreement and Note between Report on Form 10-K for the year
the Company and Union Bank dated ended December 31, 1995
December 19, 1995
10.57 *Consent and Eight Amendment to Exhibit 10.57 to the Annual
Credit Agreement and Note between Report on Form 10-K for the year
the company and Union Bank dated ended December 31, 1995
February 15, 1996
10.58 *Indemnification Agreement dated Exhibit 10.58 to the Annual
May 10, 1995, between GTI Report on Form 10-K for the year
Corporation and Kenneth E. Maud ended December 31, 1995
10.59 Employment Agreement effective C
March 13, 1996, between GTI
Corporation and Albert J. Hugo-
Martinez
10.60 Waiver And Ninth Amendment to
Credit Agreement and Note Between
Union Bank and the Company
10.61 *Note Purchase Agreement dated Exhibit 10.1 to Current Report on
February 11, 1997 between Valor Form 8-K dated February 11, 1997
Electronics, Inc. and Telemetrix
PLC
10.62 *Secured Promissory Note dated Exhibit 10.2 to Current Report on
February 11, 1997 between Valor Form 8-K dated February 11, 1997
Electronics, Inc. and Telemetrix
PLC
10.63 *Subordination Agreement dated Exhibit 10.3 to Current Report on
February 11, 1997 between Valor Form 8-K dated February 11, 1997
Electronics, Inc. and Telemetrix
PLC
</TABLE>
- ---------------
**Commission File No. 1-4289
11
<PAGE> 16
<TABLE>
<CAPTION>
MANAGEMENT
CONTRACT OR PRIOR FILING OR
EXHIBIT COMPENSATORY SEQUENTIAL PAGE
NUMBER DESCRIPTION PLAN OR ARRANGEMENT NUMBER HEREIN
- ------ ----------------------------------- ------------------- ---------------------------------
<C> <S> <C> <C>
10.64 Indemnification Agreement dated
March 13, 1996, between GTI
Corporation and Albert
Hugo-Martinez
10.65 Stock Purchase Agreement dated
March 24, 1997 between GTI
Corporation and Promptus
Communications, Inc.
13 The Company's Annual Report to
Shareholder's for the year ended
December 31, 1996 expressly
incorporated by reference herein
21.1 List of Subsidiaries of the
Registrant
23.1 Consent of Independent Public
Accountants
99.1 *Letter Agreement dated August 25, Exhibit 28.01 to Registration
1992, between GTI Corporation and Statement on Form S-3 (No.
Telemetrix PLC, re: California tax 33-52386) filed September 24,
matter 1992
</TABLE>
- ---------------
**Commission File No. 1-4289
12
<PAGE> 1
EXHIBIT 10.59
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement"), dated as of March
13, 1996 (the "Effective Date") is made by and between GTI Corporation, a
Delaware Corporation having its principal offices at 9171 Towne Centre Drive,
Suite 460, San Diego, California 92122-1229 (the "Company") and Albert J.
Martinez ("Employee").
AGREEMENT
A. Effective Date.
Employee's employment will commence on March 13, 1996. The
terms of this agreement will become effective upon signature of this Agreement.
Employee's employment relationship with the Company is at-will.
B. Employment Duties.
1. Title/Responsibilities. Employee shall hold the
title of President and Chief Executive Officer of the Company, and shall have
the powers and duties consistent with such position. Employee shall also
perform all duties which from time to time are assigned to him by the Board of
Directors ("Board").
2. Full Time Attention. Employee shall devote
substantially all of his business time and attention, energy and skills to the
Company during the time he is employed under this Agreement. The Company
acknowledges that Employee currently sits on the board of directors of the
following companies: (1) MicroChip Corporation, Arizona; and (2) UCSD Cancer
Center, San Diego. The Company and Employee agree that no conflict of interest
arises from Employee's present board of director involvement. Employee agrees
to notify and obtain approval from the Company's Board prior to accepting any
additional board of director positions.
3. Policy Compliance. Employee is required to comply
with the Company policy, practice and procedure in effect during his
employment. The Company or Employee may terminate the employment relationship
for any reason or no reason.
C. Compensation.
1. Base Salary. The Company shall pay to Employee an
initial annual Base Salary of Three Hundred Thousand Dollars ($300,000). Any
increase to the monthly Base Salary is within the sole discretion of the
Company.
1
<PAGE> 2
2. Bonus Compensation. In addition to the compensation
provided above, the Company will pay Employee an incentive bonus for each full
year starting with 1997 during the employment relationship. For 1996, Employee
is eligible for a pro-rata portion of the annual targeted amount. Such bonus
shall be calculated according to the Company Bonus Plan in effect at the time
of the calculation. Generally, Employee will receive fifty percent (50%) of
base salary if the Target is attained and up to a maximum of seventy five
percent (75%) of base salary if the Target is exceeded by twenty percent(20%).
Bonuses are payable on March 1 of each year, provided Employee remains in his
position with the Company on that date. All bonus arrangements are subject to
annual review and establishment by the Board.
3. Hiring Bonus. Within seven (7) days of the
commencement of Employee's employment with the Company, the Company shall pay
to Employee a net hiring bonus of Fifteen Thousand Dollars ($15,000).
4. Stock Options. Employee will be granted options to
purchase 100,000 shares of the Company's common stock under the GTI Stock
Incentive Plan (1989), as amended, at a price which is the fair market value of
the stock at close of business on the date of commencement of employment, March
13, 1996. The option to purchase will remain open for as long as the Employee
is in employment or for 6 years from the grant, whichever is the shorter
period. Twenty percent (20%) of the option shares will vest upon commencement
of employment. Of the remaining eighty percent (80%), twenty percent (20%) of
the option shares will vest on each of the first four anniversaries after the
grant. The details of this grant are formalized in the Stock Plan to be
provided by the Company to Employee. In the event of an acquisition of the
Company, including an offer by Telemetrix to acquire one hundred percent (100%)
of GTI, full vesting will occur.
2
<PAGE> 3
h. Fringe Benefits.
a) Vacation. During the Term of this
Agreement, Employee shall be entitled to three (3) weeks (fifteen (15) working
days) annual paid vacation in addition to customary paid holidays. Vacation
will increase annually by one day per year of service with a maximum of twenty
(20) days of vacation per year. Employee may carry over unused vacation from
the prior year, but will cease to accrue vacation once he has accrued a maximum
of forty (40) days. Employee will not accrue any more vacation until he has
taken enough vacation to bring his accrued vacation below the maximum.
(2) Health Benefits. During his Employment, the
Company agrees to provide Employee with comprehensive health insurance
benefits.
b) 401K Participation. Employee may participate
in any 401K or other employee retirement plan according to the requirements of
those plans.
c) Life Insurance. The Company shall maintain
a term life insurance policy providing for payment of four (4) times base salary
to Employee's designated beneficiaries should Employee die during his
Employment.
(5) Director and Officer Insurance. During his
term as Director of the Company, Employee will be covered according to the
terms of the Company's Director and Officer Insurance.
d) Automobile. During his employment, the
Company agrees to provide Employee with an automobile allowance in the amount
of $800.00 per month towards an automobile to be used in connection with the
Company's business. Reasonable costs associated with the use of this
automobile will be assumed by the Company.
3
<PAGE> 4
5. Reimbursement of Expenses. During his Employment,
with approval by the Chairman of the Board, Employee shall be entitled to
reimbursement of reasonable and actual expenses, incurred on behalf of the
Company, including but not limited to travel and entertainment expenses,
supplies and cellular phone expenses.
D. Confidentiality.
1. Proprietary Information. Employee agrees that he
will not disclose any Proprietary Information (as hereinafter defined) to any
individual or entity at any time while he is employed by the Company or at any
time thereafter, except as is necessary and appropriate in the ordinary course
of performing Employee's duties to the Company during his employment under this
Agreement, or unless such disclosure has been authorized in writing by the
Chairman of the Board, or unless such disclosure is required by law. For
purposes of this Agreement, the term "Proprietary Information" shall mean any
information that was developed by, became known by, or was assigned or
otherwise conveyed to the Company, and which has commercial value in the
Company's business. Proprietary Information includes, but is not limited to,
trade secrets, financial information, customer lists and information, marketing
plans, strategies, business forecasts, computer programs, product plans,
research and development information, testing methods and results, inventions,
improvements, formulas, processes, techniques, designs, know-how and data.
Proprietary Information also includes, without limitation, any information
which is generally regarded as confidential in the Company's industry or which
is generally treated as confidential by the Company.
2. Return Of Property. Employee agrees that all
documents, records, apparatus, equipment and other physical property which is
furnished or obtained by Employee in the course of his employment with the
Company shall be and remain the sole property of the Company. Employee agrees
that, upon the termination of his employment, he shall return all such property
(whether or not it pertains to Proprietary Information), and agrees not to make
or retain copies, reproductions or summaries of any such property.
E. Non Competition. During the term of his employment, Employee
shall not, directly or indirectly, either as an employee, employer, consultant,
corporate officer, director, or in any other individual or representative
capacity, engage or participate in any business that is in competition in with
the business of the Company in any location, unless such participation or
interest is fully disclosed to the Company and approved by the Board.
F. Severance. Employee shall be eligible for severance payments
upon termination of the employment relationship as follows:
4
<PAGE> 5
1. the employment relationship between the parties is at-will,
terminable by either party for any reason or no reason. The Company may,
nonetheless, find that Employee has acted with gross misconduct in the
performance of his duties. Where Employee is discharged for reasons other than
gross misconduct, death or disability, Employee is eligible for severance
payments equivalent to twelve months of base pay paid over a twelve (12) month
period.
2. Resignation. Where Employee voluntarily resigns his
employment at his own initiative with the Company, the Company at its option
may offer for severance payments up to twelve (12) monthly payments of salary,
if and only if he agrees to extend the non-competition requirements set forth
in paragraph 5 above for the severance period. The Company reserves the right
to cease any remaining Severance Payments in the event Employee violates this
Agreement.
3. Discharge after Gross Misconduct. Where Employee is
discharged as a result of gross misconduct, he is not eligible for severance.
G. Dispute Resolution Procedures: Any controversy or claim
arising out of or relating to this Agreement or the breach thereof, or the
interpretation thereof, shall be settled by binding arbitration in accordance
with the Rules of the American Arbitration Association; and judgment upon the
award rendered in such arbitration shall be final and may be entered in any
court having jurisdiction thereof. However, the selection of the arbitrator is
not limited to the AAA roster. Notice of the demand for arbitration shall be
filed in writing with the other party to this Agreement and with the American
Arbitration Association. In no event shall the demand for arbitration be made
after the date when institution of legal or equitable proceedings based on such
claim, dispute or other matter in question would be barred by the applicable
statute of limitations. This agreement to arbitrate shall be specifically
enforceable under the prevailing arbitration law. Any party desiring to
initiate arbitration procedures hereunder shall serve written notice on the
other party. The parties agree that an arbitrator shall be selected pursuant
to these provisions within thirty (30) days of the service of the notice of
arbitration. In the event of any arbitration pursuant to these provisions, the
parties shall retain the rights of all discovery provided pursuant to the
California Code of Civil Procedure, and the Rules thereunder. All rights,
causes of action, remedies and defenses available under California law and
equity are available to the parties and shall be applicable as though in a
court of law.
H. General Provisions.
1. Governing Law. This Agreement will be governed by
and construed in accordance with the laws of the State of California.
2. Assignment. Employee may not assign, pledge or
encumber his interest in this Agreement or any part thereof.
3. No Waiver Of Breach. The failure to enforce any
provision of this Agreement will not be construed as a waiver of any such
provision, nor prevent a party thereafter from enforcing the provision or any
other provision of this Agreement. The rights granted the parties are
cumulative, and the election of one will not constitute a waiver of such
party's right to assert all other legal and equitable remedies available under
the circumstances.
5
<PAGE> 6
4. Severability. The provisions of this Agreement are
severable, and if any provision will be held to be invalid or otherwise
unenforceable, in whole or in part, the remainder of the provisions, or
enforceable parts of this Agreement, will not be affected.
5. Entire Agreement. This Agreement constitutes the
entire agreement of the parties with respect to the subject matter of this
Agreement, and supersedes all prior and contemporaneous negotiations,
agreements and understandings between the parties, oral or written.
6. Modification; Waivers. No modification, termination
or attempted waiver of this Agreement will be valid unless in writing, signed
by the party against whom such modification, termination or waiver is sought to
be enforced.
7. Fees and Expenses. If any proceeding is brought for
the enforcement or interpretation of this Agreement, or because of any alleged
dispute, breach, default or misrepresentation in connection with any provisions
of this Agreement, the successful or prevailing party will be entitled to
recover from the other party reasonable attorneys' fees and other costs
incurred in that proceeding (including, in the case of an arbitration,
arbitration fees and expenses), in addition to any other relief to which such
party may be entitled.
8. Amendment. This Agreement may be amended or
supplemented only by a writing signed by both of the parties hereto.
9. Duplicate Counterparts. This Agreement may be
executed in duplicate counterparts, each of which shall be deemed an original;
provided, however, such counterparts shall together constitute only one
instrument.
10. Interpretation. The headings contained in this
Agreement are for reference purposes only and shall not affect in any way the
meaning or interpretation of this Agreement.
11. Drafting Ambiguities. Each party to this Agreement
and its counsel have reviewed and revised this Agreement. The rule of
construction that any ambiguities are to be resolved against the drafting party
shall not be employed in the interpretation of this Agreement or any of the
amendments to this Agreement.
6
<PAGE> 7
12. English Language. All reports, data, information,
notices, schedules, plans, records and other information required to be
provided hereunder by either party shall be in the English language. If a
translation is made of this Agreement, it shall be made for the convenience of
the parties and the English language of this Agreement shall be controlling.
Dated: March 13, 1996 GTI Corporation
By: \s\ Kenneth E. Maud
--------------------------------------
Kenneth E. Maud, Chairman of the Board
Dated: March 13, 1996 \s\ Albert J. Hugo-Martinez
---------------------------------------
Albert J. Martinez
7
<PAGE> 1
EXHIBIT 10.60
WAIVER AND NINTH AMENDMENT TO CREDIT AGREEMENT AND NOTE
THIS WAIVER AND NINTH AMENDMENT TO CREDIT AGREEMENT AND NOTE ("Ninth
Amendment"), made and entered into as of the 31st day of December, 1996, by and
between GTI CORPORATION, a Delaware corporation ("Company"), and UNION BANK OF
CALIFORNIA, N.A. (successor in interest to Union Bank), a national banking
association ("Bank"),
W I T N E S S E T H
WHEREAS, on December 17, 1992, the Company and the Bank entered into a
Certain Credit Agreement and Note (as amended by those certain First, Second,
Third, Fourth, Fifth, Sixth, Seventh and Eighth Amendments to Credit Agreement
and Note, dated as of May 7, 1993, July 14, 1993, March 24, 1994, June 24,
1994, November 30, 1994, June 29, 1995, December 19, 1995 and February 15,
1996, respectively, the "Credit Agreement") pursuant to which the Bank agreed
to extend to the Company and the Company agreed to accept from the Bank certain
credit facilities more particularly described therein; and
WHEREAS, the Company and the Bank desire (i) to evidence the waiver by
the Bank of the Company's compliance with certain of the financial covenants
set forth in the Credit Agreement for the fiscal quarter of the Company ended
September 30, 1996, and (ii) to amend the Credit Agreement (A) to extend the
Revolver Termination Date through and including March 31, 1997, (B) to decrease
the maximum availability under the Revolving Loan Facility from Ten Million
Dollars ($10,000,000.00) to Seven Million Five Hundred Thousand Dollars
($7,500,000.00), (C) to modify certain of the financial and other covenants
with which the Company is to comply, and (D) to provide for certain ancillary
matters;
NOW, THEREFORE, for and in consideration of the premises hereof, and
other good and valuable consideration the receipt and adequacy of which are
hereby acknowledged, the parties hereto hereby agree as follows:
1. All capitalized terms used in this Ninth Amendment shall, unless
otherwise defined herein or unless the context otherwise requires, have the
meanings given thereto in the Credit Agreement.
2. The Bank hereby waives, for the fiscal quarter of the Company ended
September 30, 1996, and only for such fiscal quarter, compliance by the Company
with the Tangible Net Worth covenant set forth in Subsection 4.02(h) of the
Credit Agreement, the profitability covenant set forth in Subsection 4.02(j) of
the Credit Agreement and the debt service coverage ratio covenant set forth in
Subsection 4.02(1) of the Credit Agreement, and agrees that such noncompliance
shall not constitute an Event of Default under the Credit Agreement or under
the Credit Agreement as amended by this Ninth Amendment. The waiver here given
is specific to the covenants, and for the fiscal quarter of the Company,
referred to above and shall not operate as a waiver of compliance by the
Company with any other covenants set forth in the Credit Agreement, or in the
Credit Agreement as amended by this Ninth Amendment, or with the covenants
referred to above for any other fiscal quarters of the Company.
3. Section I of the Credit Agreement is amended to read as follows:
SECTION I. THE REVOLVING LOAN FACILITY
1.01. Availability. Subject to the terms and conditions of this Agreement,
the Bank shall, from time to time during the period commencing on the Ninth
Amendment Effective Date and ending on March 31, 1997 (the "Revolver
Termination Date"), advance to the Company such revolving loans as the Company
may request under the Revolving Loan Facility (individually a "Revolving Loan"
and collectively the "Revolving Loans"); provided, however, that the
outstanding principal amount of all Revolving Loans shall not exceed in the
aggregate (a) at any given time during the period commencing on the Ninth
Amendment Effective Date and ending on December 31, 1996, the lesser of (I) Ten
Million Dollars ($10,000,000.00), or (ii) eighty percent (80%) of the net
amount owing on Eligible Accounts, or (b) at any other given time, the lesser
of (I) Seven Million Five Hundred Thousand Dollars ($7,500,000.00), or (ii)
eighty percent (80%) of the net amount owing on Eligible Accounts (the
"Revolving Loan Commitment"). Except as otherwise provided herein, the Company
may borrow, repay, and reborrow under the Revolving Loan Facility. Unless
otherwise directed by the Company, the Bank shall make the proceeds of each
Revolving Loan available to the Company by crediting account no. 4000132123
maintained by the Company at the Bank's San Diego Regional Office.
1
<PAGE> 2
1.02. Notice of Revolver Borrowing. The Company shall request the Bank to
make each Revolving Loan by an irrevocable notice to the Bank (a "Notice of
Revolver Borrowing") which specifies:
(a) The amount of the requested Revolving Loan, which shall be
Twenty-five Thousand Dollars ($25,000.00) or an integral multiple thereof; and
(b) The date of the requested Revolving Loan, which shall be a Banking
Day.
The Company shall give each Notice of Revolver Borrowing to the Bank on or
prior to the date of the requested Revolving Loan, and shall do so by
telephone, telex or telecopy to the Bank's San Diego Regional Office, located
at the address shown in Subsection 8.01(a) hereof, during the hours specified
in Subsection 8.01(b) hereof. The Company shall immediately confirm each
Notice of Revolver Borrowing in a writing to the Bank in the form appended
hereto as Exhibit A.
1.03. Interest Rate. The Company shall pay interest on the unpaid
principal amount of each Revolving Loan as follows:
(a) From the date of such loan until the earlier of December 31, 1996 or
the maturity of such loan (whether by acceleration or otherwise) at a rate per
annum equal to the Reference Rate plus one-half of one percent (0.50%), such
rate to change from time to time as the Reference Rate shall change; and
(b) From the later of January 1, 1997 or the date of such loan until the
maturity of such loan (whether by acceleration or Otherwise) at a rate per
annum equal to the Reference Rate Plus one and one-quarter percent (1.25%),
such rate to change from time to time as the Reference Rate shall change.
1.04. Payments.
(a) If not sooner repaid, the Company shall repay the aggregate unpaid
principal amount of all Revolving Loans on the Revolver Termination Date;
provided, however, that on December 31, 1996, the Company shall repay such
portion of the aggregate unpaid principal amount of all Revolving Loans as
shall be necessary to reduce such aggregate unpaid principal amount to an
amount not greater than the amount to which the Revolving Loan Commitment will
be reduced on January 1, 1997. The Company shall pay accrued interest on the
unpaid principal amount of each Revolving Loan in arrears on the last day in
each calendar month (commencing December 31, 1996), and at maturity (whether by
acceleration or otherwise).
(b) The Company may prepay any Revolving Loan, in whole or in part and at
any time, provided that each partial prepayment shall be in a principal amount
Twenty-five Thousand Dollars ($25,000.00) or an integral multiple thereof.
1.05. Extension Fee. Upon the execution of the Ninth Amendment, the
Company shall pay to the Bank an extension fee in the amount of Five Thousand
Dollars ($5,000.00) (the"Extension Fee").
1.06. Commitment Fee. Until the Revolver Termination Date, the Company
shall pay to the Bank a commitment fee of one-quarter of one percent (0.25%)
per annum on the average daily undisbursed amount of the Revolving Loan
Commitment during each calendar quarter or portion thereof; provided, however,
that the commitment fee payable in respect of the calendar quarter ending
December 31, 1996 shall be computed at rate of one-eighth of one percent
(0.125%) per annum (the "Commitment Fees). The Commitment Fee shall be payable
quarterly in arrears on the last day in each March, June, September and
December (commencing December 31, 1996), and at maturity (whether by
acceleration or otherwise). For purposes of computing the Commitment Fee, the
Revolving Loan Commitment shall be deemed to be (a) for the calendar quarter
ending December 31, 1996, Ten Million Dollars ($10,000,000.00), and (b) for all
subsequent calendar quarters, Seven Million Five Hundred Thousand Dollars
($7,500,000.00), irrespective of whether a shortfall in Eligible Accounts
otherwise limits the aggregate principal amount of Revolving Loans available to
the Company at any given time.
1.07. Purpose. Revolving Loans shall be used only for the general working
capital purposes of the Company.
2
<PAGE> 3
1.08. Facility Account. The obligation of the Company to repay the
Revolving Loans and to pay interest thereon as herein provided shall be
evidenced by an account or accounts maintained by the Bank on its books
(collectively, the "Facility Account"). The Company hereby authorizes the Bank
to record in the Facility Account:
(a) The principal amount and the date
of each Revolving Loan
(b) The interest rates applicable to each Revolving Loan and the
effective dates of all changes in such rates;
(c) The date and amount of each payment of principal, interest or other
expenses made by or on behalf of the Company with respect to each Revolving
Loan; and
(d) Such other matters as the Bank shall deem necessary or desirable for
the computation of amounts required to be paid by the Company under this
Agreement or the other Facility Documents.
The Company agrees that all notations made by the Bank in the Facility Account
shall constitute prima facie evidence of the matters noted.
1.09 Other Payment Terms.
(a) Whenever any payment due hereunder shall fall due on a day other than
a Banking Day, such payment shall be made on the next succeeding Banking Day,
and such extension of time shall be included in the computation of interest or
fees, as the case may be.
(b) The Company shall make all payments hereunder to the Bank's San Diego
Regional office, located at the address shown in Subsection 8.01(a) hereof, in
lawful money of the United States of America and in immediately available
funds. The Company hereby authorizes the Bank to charge from time to time
against any or all deposit accounts maintained by the Company with the Bank any
amount payable by the Company hereunder not paid when due.
(c) If any amounts required to be paid by the Company under this
Agreement or the other Facility Documents (including without limitation
principal, accrued interest and fees) remain unpaid after maturity (whether by
acceleration or otherwise), the Company shall pay interest on the aggregate
outstanding balance of such amounts from maturity until those amounts are paid
in full at a rate per annum equal to the Reference Rate plus five percent (5%),
such rate to change from time to time as the Reference Rate shall change.
(d) A11 computations of interest or fees under this Agreement shall be
based on a year of 360 days for actual days elapsed.
1.10. Security. A11 amounts due or to become due hereunder a- Secured
and/or supported, as the case may be, by (a) a Security Agreement, dated
December 19, 1996, executed by the Company, (b) a Continuing Guaranty, dated
December 19, 1996, executed by Valor Electronics, Inc. ("Valor"), which
Continuing Guaranty is in turn secured by a Security Agreement (Chattel
Mortgage), dated October 6, 1992, executed by Valor, (c) a Continuing Guaranty,
dated December 19, 1996, executed by Promptus, which Continuing Guaranty is in
turn secured by a Security Agreement, dated November 16, 1994, executed by
Promptus, and (d) two (2) Security Agreements - Pledge, each dated November 30,
1994, and each executed by the Company. In addition, and as security for all
Obligations of the Company to the Bank, the Company hereby grants to the Bank a
continuing security interest in:
(1) All Deposits in which the Company now or at any time hereafter has
an interest; and
(2) All proceeds and products of, and all accessions to, such Deposits.
1.11. Banking Relationship. In consideration of the interest rates payable
with respect to the Revolving Loans, and to afford the Bank the benefit of the
security interest in Deposits granted by the Company to the Bank in Section
1.10 hereof, the Company hereby agrees that it will maintain all of its major
deposit accounts with the Bank until the termination of this Agreement and the
satisfaction in full of all Obligations of the Company arising hereunder.
3
<PAGE> 4
4. Subsection 2.02(b) of the Credit Agreement is amended to read as
follows:
(b) The Company shall have delivered to the Bank statements in form and
detail satisfactory to the Bank showing the aging and adjustment of the
accounts receivable of the Company, Valor and Promptus (and collections
thereon) as at the end of the semimonthly period most recently ended (or as at
the end of the next preceding semimonthly period if the requested Revolving
Loan is to be made during the first ten (10) days of any such semimonthly
period); provided, however, that the statements of the Company, Valor and
Promptus as at November 30, 1996 shall satisfy the requirement set forth in
this Subsection 2.02(b) in respect of all Revolving Loans requested by the
Company during the period commencing on December 16, 1996 and ending on January
10, 1997; and
5. Subsection 3.01(g) of the Credit Agreement is amended by deleting
therefrom the date "December 31, 1994" where it appears in the second line of
such subsection and by substituting in lieu thereof the date "December 31,
1995".
6. Subsection 3.01(h) of the Credit Agreement is amended by deleting
therefrom the phrase "the Seventh Amendment" where it appears in the third line
of such subsection and by substituting in lieu thereof the phrase "the Ninth
Amendment".
7. Subsection 4.01(a) of the Credit Agreement is amended by the addition
thereto of a new Subsection 4.01(a)(i) to read as follows:
(i) Within thirty (30) days after the end of each calendar month, a
copy of the Financial Statement of the Company for such calendar month
Certified by the chief executive officer, the president, the chief financial
officer or the corporate controller of the Company to have been prepared in
accordance with generally accepted accounting principles consistently applied,
except for any inconsistencies explained in such certificate;
8. Subsection 4.01(a)(vi) of the Credit Agreement is amended by deleting
therefrom the phrase "Subsections 4.01(a)(ii) and (iv) hereof" where it appears
in the second and third lines of such subsection and by substituting in lieu
thereof the phrase "Subsections 4.01(a)(i), (ii) and (iv) hereof".
9. Subsection 4.01(a)(ix) of the Credit Agreement is amended to read as
follows:
(ix) Not later than the tenth (10th) day after each of the fifteenth
(15th) day and the last day of each calendar month, but only if Revolving Loans
are then outstanding under the Revolving Loan Facility, statements in form and
detail satisfactory to the Bank showing the aging and adjustment of the
accounts receivable of the Company, Valor and Promptus (and collections
thereon) as at the end of such semimonthly period;
10. The first sentence of Subsection 4.01(f) of the Credit Agreement is
amended to read as follows:
The Company will use the Facilities and the proceeds of the Revolving Loans
only for the purposes, and in the manner, specifically set forth in Section
1.07 hereof.
11. Subsection 4.01(h) of the Credit Agreement is amended by deleting
therefrom the phrase "Subsection 1.01(a)" where it appears in the sixth line of
such subsection and by substituting in lieu thereof the phrase "Section 1.01".
12. Subsection 4.02(g) of the Credit Agreement is amended to read as
follows:
(g) Capital Expenditures. The Company will not, and will not permit any
Subsidiary to, make any expenditures for fixed or capital assets (including,
without limitation, expenditures under capital leases) which would cause the
aggregate of all expenditures for fixed or capital assets made by the Company
and all Subsidiaries (including, without limitation, expenditures under capital
leases) to exceed Ten Million Dollars ($10,000,000.00) during the fiscal year
of the Company ending December 31, 1996, or Five Hundred Thousand Dollars
($500,000.00) during any fiscal year of the Company ending after December 31,
1996.
4
<PAGE> 5
13. Subsection 4.02(h) of the Credit Agreement is amended to read as
follows:
(h) Tangible Net Worth. The Company will not permit its consolidated
Tangible Net Worth to be less than:
(i) As at the end of the fiscal quarter of the Company ending December
31, 1996, the sum of (A) Thirty-eight Million Dollars ($38,000,000.00), (B)
seventy-five percent (758) of the cumulative consolidated after tax net profits
of the Company for the fiscal quarter of the Company ending December 31, 1996
(without reduction, however, for any consolidated after tax net losses
sustained by the Company for such calendar quarter), and (C) the aggregate
amount of all infusions of equity made on or after October 1, 1996 and on or
prior to December 31, 1996; and
(ii) As at the end of any calendar month ending after December 31, 1996,
the sum of (A) Thirty-eight Million Dollars ($38,000,000.00), (B) seventy-five
percent (75%) of the cumulative consolidated after tax net profits of the
Company for the fiscal quarter of the Company ending December 31, 1996, (C)
seventy-five percent (75%) of the cumulative consolidated after tax net profits
of the Company for all calendar months ending after December 31, 1996 and on or
prior to the date of computation (without reduction, however, for consolidated
after tax net losses sustained by the Company for any of such calendar months),
and (D) the aggregate amount of all infusions of equity made on or after
October 1, 1996.
14. Subsection 4.02(j) of the Credit Agreement is amended to read as
follows:
(j) Net Income. The Company (I) will not permit its consolidated net
income after taxes for the fiscal quarter of the Company ending December 31,
1996 to be less than One Hundred Thousand Dollars ($100,000.00), (ii) will not
permit its consolidated net income after taxes for any calendar month ending
after December 31, 1996 to be less than One Dollar ($1.00), and (iii) will not
permit its consolidated net income after taxes for the fiscal quarter of the
Company ending March 31, 1997 to be less than Five Hundred Thousand Dollars
($500,000.00).
15. Section 4.02 of the Credit Agreement is amended by the addition
thereto of a new Subsection 4.02(m) to read as follows:
Section V.
(m) Promptus Net Income. The Company will not permit the net income
after taxes of Promptus for the fiscal quarter of Promptus ending March 31,
1997 to be less than One Dollar ($1.00).
16. The Credit Agreement is amended by deleting therefrom
17. The definition of "Bank" set forth in Section 7.01 of the Credit
Agreement is amended to read as follows:
"Bank" shall mean Union Bank of California, N.A. (successor in interest to
Union Bank), a national banking association.
18. The definition of "Banking Day" set forth in Section 7.01 of the
Credit Agreement is amended to read as follows:
"Banking Day" shall mean a day (other than a Saturday or Sunday) on which
commercial banks are open for business in San Diego, California, and "Banking
Days" shall mean two (2) or more such days.
19. The definition of "Commitment Fee" set forth in Section 7.01 of the
Credit Agreement is amended to read as follows:
"Commitment Fee" shall have the meaning given to that term in Section 1.06.
5
<PAGE> 6
20. The definition of "Facility Account" set forth in Section 7.01 of the
Credit Agreement is amended to read as follows:
"Facility Account" shall have the meaning given to that term in Section 1.08.
21. The definition of "Guaranty" set forth in Section 7.01 of the Credit
Agreement is amended by deleting therefrom the phrase "Subsections 1.03(c)(ii)
and (iii)" where it appears in the second line of such definition and by
substituting in lieu thereof the phrase "Subsections 1.10(b) and (c)".
22. The definition of "Notice of Revolver Borrowing" set forth in Section
7.01 of the Credit Agreement is amended to read as follows:
"Notice of Revolver Borrowings" shall have the meaning given to that term in
Section 1.02.
23. The definition of "Revolver Termination Date" set forth in Section
7.01 of the Credit Agreement is amended to read as follows:
"Revolver Termination Date" shall have the meaning given to that term in
Section 1.01.
24. The definition of "Revolving Loan" and "Revolving Loans" set forth in
Section 7.01 of the Credit Agreement is amended to read as follows:
"Revolving Loan" and "Revolving Loans" shall have the meanings given to those
terms in Section 1.01.
25. The definition of "Revolving Loan Commitment" set forth in Section
7.01 of the Credit Agreement is amended to read as follows:
"Revolving Loan Commitment" shall have the meaning given to that term in
Section
26. The definition of "Valor" set forth in Section 7.01 of the Credit
Agreement is amended to read as follows:
"Valor" shall have the meaning given to that term in Subsection 1.10(b).
27. Section 7.01 of the Credit Agreement is amended by deleting therefrom
the definitions of "Change of Law", "Interest Period", "LIBO Rate" "LIBOR
Revolving Loan" and "LIBOR Revolving Loans", "Notice of Revolver Conversion",
"Notice of Revolver Interest Period Selection", "Reference Rate Revolving Loan"
and "Reference Rate Revolving Loans" and "Yield Rate".
28. Section 7.01 of the Credit Agreement is further amended by the
addition thereto of the following definitions in proper alphabetic order:
"Extension Fee" shall have the meaning given to that term in Section 1.05.
"Ninth Amendment" shall mean that certain Ninth Amendment to Credit Agreement
and Note, dated as of______________, 1996, by and between the Company and the
Bank.
"Ninth Amendment Effective Date" shall mean the date on which the Ninth
Amendment becomes effective as provided in Paragraph 33 thereof.
6
<PAGE> 7
29. The address of the Bank for purpose of notice set forth in Subsection
8.01(a) of the Credit Agreement is amended to read as follows:
Union Bank of California, N.A.
San Diego Regional Office
530 "B" Street, 4th Floor
San Diego, California 92101
Attention; Mr. Richard A. Petrie
The amendment to the Credit Agreement set forth in this Paragraph 29 shall be,
and shall be deemed to be, notice to the Company of the change in the address
of the Bank herein set forth.
30. The first sentence of Subsection 8.01(b) of the Credit Agreement is
amended to read as follows:
Each Notice of Revolver Borrowing shall be given by the Company to the Bank's
San Diego Regional Office, located at the address referred to in Subsection
8.01(a) hereof, between 8:30 a.m. and 3:00 p.m., California time, on a Banking
Day.
31. Section 8.08 of the Credit Agreement is amended to read as follows:
8.08. Dispute Resolution. The Alternative Dispute Resolution Agreement
appended to the Ninth Amendment is incorporated herein and made a part hereof.
32. The Credit Agreement is amended by deleting therefrom Exhibits A, C
and D and by substituting in lieu thereof new Exhibits A, C and D in the forms
appended to this Ninth Amendment as Exhibits I, II and III, respectively.
33. This Ninth Amendment shall become effective on the date on which the
Bank shall have received the following:
(a) This Ninth Amendment, duly executed by the Company;
(b) A certificate of the Company's secretary or an assistant secretary,
dated not later than the date of this Ninth Amendment, certifying the following
documents, copies of which shall be attached to or incorporated in such
certificate: (I) resolutions, adopted by the Company's Board of Directors and
continuing in effect, which authorize the execution, delivery and performance
by the Company of this Ninth Amendment and all other documents and instruments
to be executed, delivered and performed by the Company in connection herewith;
and (ii) all other documents evidencing additional corporate action and
governmental or other approvals, if any, necessary for the execution, delivery
and performance by the Company of this Ninth Amendment and all other documents
and instruments to be executed, delivered and performed by the Company in
connection herewith;
(c) A certificate of the Company's secretary or an assistant secretary,
dated not later than the date of this Ninth Amendment, certifying the
incumbency and signatures of the officers of the Company authorized to execute,
deliver and perform on behalf of the Company this Ninth Amendment and all other
documents and instruments to be executed, delivered and performed by the
Company in connection herewith;
(d) A Security Agreement on the Bank's standard form, dated December 19,
1996 and duly executed by the Company, granting to the Bank a security interest
in the therein described assets of the Company as security for the Obligations
of the Company arising under the Credit Agreement as amended by this Ninth
Amendment and the other Facility Documents;
(e) Two (2) Continuing Guaranties, each on the Bank's standard form, each
dated December 19, 1996, one (1) duly executed by each of Valor and Promptus;
7
<PAGE> 8
(f) Three (3) Alternative Dispute Resolution Agreements in the form
appended to this Ninth Amendment as Exhibit IV, each dated not later than the
date of this Ninth Amendment, one duly executed by each of the Company, Valor
and Promptus;
(g) A certificate of the secretary or an assistant secretary of each of
Valor and Promptus, each dated not later than the date of this Ninth Amendment,
certifying the following documents, copies of which shall be attached to or
incorporated in such certificate: (I) resolutions, adopted by the Board of
Directors of Valor or Promptus, as the case may be, and continuing in effect,
which authorize the execution, delivery and performance by Valor or Promptus,
as the case may be, of such corporation's Continuing Guaranty and Alternative
Dispute Resolution Agreement; and (ii) all other documents evidencing
additional corporate action and governmental or other approvals, if any,
necessary for the execution, delivery and performance by Valor or Promptus, as
the case may be, of such corporation's Continuing Guaranty and Alternative
Dispute Resolution Agreement; together with a certificate of the secretary or
an assistant secretary of each of Valor and Promptus, each dated not later than
the date of this Ninth Amendment, certifying the incumbency and signatures of
the officers of Valor or Promptus, as the case may be, authorized to execute,
deliver and perform on behalf of Valor or Promptus, as the case may be, such
corporation's Continuing Guaranty and Alternative Dispute Resolution Agreement;
(h) Evidence that all steps necessary in the opinion of the Bank to
perfect the security interest granted to the Bank by the Security Agreement
referred to in Subparagraph 33(d) of this Ninth Amendment as a first priority
security interest in the assets described therein have been duly taken
(including the filing of all appropriate UCC-2 Financing Statement Change
Forms);
(i) The Extension Fee in the amount of Five Thousand Dollars ($5,000.00); and
(j) Such other documents and agreements as the Bank may reasonably
request to effectuate the purposes of this Ninth Amendment.
34. Except as expressly provided herein, the Credit Agreement is unchanged
and remains in full force and effect.
35. This Ninth Amendment shall be governed by and construed in accordance
with the laws of the State of California.
36. This Ninth Amendment may be executed in any number of counterparts,
any set of which signed by both parties hereto shall be deemed to constitute a
complete, executed original for all purposes.
IN WITNESS WHEREOF, the Company and the Bank have caused this Ninth
Amendment to be executed as of the day and year first above written.
<TABLE>
<S> <C>
UNION BANK OF CALIFORNIA, GTI CORPORATION
N.A.
By: \s\ Richard Petrie By: \s\ Albert J. Hugo-Martinez
-------------------------- -----------------------------
Title: Vice President Title: President and CEO
------------------------- -------------------------
By:____________________________ By:___________________________
Title:__________________________ Title:__________________________
</TABLE>
8
<PAGE> 9
EXHIBIT I
(EXHIBIT A)
NOTICE OF REVOLVER BORROWING CONFIRMATION
[Date]
Union Bank of California, N.A.
San Diego Regional Office
530 "B" Street, 4th Floor
San Diego, California 92101
Attention: Mr. Richard A. Petrie
Gentlemen:
This letter will confirm the Notice of Revolver Borrowing given by GTI
CORPORATION ("Company") to UNION BANK OF CALIFORNIA, N.A. ("Bank") on ,
199_, pursuant to Section 1.02 of the Credit Agreement and Note, dated as of
December 17, 1992, between the Company and the Bank, as amended (the
"Agreement"). In such notice, the Company requested the Bank to make a
Revolving Loan pursuant to the Agreement and specified as follows:
(a) The amount of the requested loan is to be $__________________; and
(b) The date of the requested loan is to be _____________________,
199___.
The Company further confirms to the Bank that, as of the date of this
confirmation, the representations and warranties set forth in Section 3.01 of
the Agreement are true and correct, no Event of Default or Unmatured Event of
Default has occurred and is continuing, and each of the Facility Documents
remains in full force and effect.
Very truly yours,
GTI CORPORATION
By_______________________________
Title:___________________________
9
<PAGE> 1
EXHIBIT 10.64
INDEMNIFICATION AGREEMENT
THIS AGREEMENT made the 13 day of March 1996 by and between
GTI Corporation, a Delaware corporation (hereinafter the "Corporation"), and
Albert J. Hugo-Martinez (hereinafter "Indemnitee").
WHEREAS, Indemnitee is a member of the Board of Directors and
an executive officer of the Corporation; and
WHEREAS, the Certificate of Incorporation and the By-laws of
the Corporation provide for indemnification of and advancement of expenses to
certain persons acting on behalf of the Corporation; and
WHEREAS, such Certificate of Incorporation and By-laws and the
indemnification provision of Section 145 of Title 8 of the Delaware Code
(hereinafter the "State Statute") provide that they are not exclusive of any
other rights under any agreement, and thus, contemplate that agreements may be
entered into between the Corporation and the members of its Board of Directors
or officers with respect to indemnification and advancement of expenses to such
directors and officer; and
WHEREAS, such By-laws and State Statute permit the Corporation
to purchase and maintain insurance on behalf of certain persons acting on
behalf of the Corporation against any liability asserted against and incurred
by such persons in any capacity as such; and
WHEREAS, recent developments with respect to the availability
of such insurance and the terms on which it may be procured have raised
uncertainties concerning the adequacy and reliability of the protection
afforded thereby; and
WHEREAS, in order to ameliorate such uncertainties and to
induce Indemnitee to continue to serve the Corporation, the Corporation has
determined it to be in its interest to enter into this Agreement with
Indemnitee;
NOW, THEREFORE, in consideration of Indemnitee's continued
service to the Corporation after the date hereof, the parties hereto, intending
to be legally bound hereby, agree as follows:
1. Authorized Representative. For the purposes of this
Agreement, the term "authorized representative" shall mean a director, officer,
employee or agent of the Corporation or of any subsidiary of the Corporation,
or a trustee, custodian, administrator, committeeman or fiduciary of any
employee benefit plan established and maintained by the Corporation or by any
other corporation, partnership, joint venture, trust or other enterprise in any
of the foregoing capacities at the request of the Corporation.
1
<PAGE> 2
2. Indemnity. The Corporation hereby agrees to hold
harmless and indemnify Indemnitee, to the fullest extent now or hereafter
permitted by law, in the event that Indemnitee was or is made is threatened to
be made a party to or a witness in any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative, by
reason of the fact that Indemnitee was or is an authorized representative of the
Corporation, against all expenses (including attorneys' fees and disbursements)
judgments, fines (including excise taxes and penalties) and amounts paid in
settlement actually and reasonably incurred by Indemnitee in connection with
such action, suite or proceeding.
3. Advancement of Expenses. Subject to the obligations
of Indemnitee set forth in paragraph 11 (b) hereof, upon request by Indemnitee,
the Corporation shall, within 45 days of such request, pay all expenses
(including attorneys' fees and disbursements) incurred by Indemnitee by reason
of his participation in such action, suit or proceeding referred to in
paragraph 2 in advance of the final disposition of such action, suit or
proceeding.
4. Maintenance of Insurance.
(a) The Corporation may purchase and maintain
insurance on behalf of Indemnitee against certain liabilities asserted against
and incurred by Indemnitee.
(b) The Corporation shall not be required to
maintain the insurance referred to in subparagraph 4(a) hereof if such
insurance is not available on terms satisfactory to the then existing Board of
Directors of the Corporation (hereinafter the "Board") or if, in the business
judgment of the then existing Board, either (i) the premium cost for such
insurance is substantially disproportionate to the amount of coverage, or (ii)
the coverage provided by such insurance is so limited by exclusions that there
is insufficient benefit from such insurance.
5. Liability to the Corporation or the Stockholders.
(a) Subject only to subparagraph (b) hereof, the
Corporation agrees that Indemnitee shall not be personally liable to the
Corporation or its stockholders for monetary damages for breach of any
fiduciary duty owing to the Corporation by reason of Indemnitee's position with
the Corporation.
(b) Subparagraph (a) hereof shall not operate to
eliminate the liability of Indemnitee to the extent that such elimination of
liability is expressly prohibited under the State Statute.
6. Changes in the Law; Partial Indemnity.
(a) In the event of any changes, after the date of
this Agreement, in any applicable law, statute, or rule which expend the right
of the Corporation to indemnify a person serving in a capacity referred to in
paragraph 2 hereof, such change shall be within the purview of Indemnitee's
rights and the Corporation's obligations, under this Agreement. In the event
of any changes in any applicable law, statute, or rule which narrow the right
of the Corporation to indemnify a person serving in a capacity referred to in
paragraph 2 hereof, such changes, to the extent not otherwise required by such
law, statute or rule to be applied to this Agreement shall have no effect on
this Agreement or the parties' rights and obligations hereunder.
2
<PAGE> 3
(b) The indemnification provided by this
Agreement shall not be deemed exclusive of any rights to which Indemnitee may
be entitled under the Corporation's Certificate of Incorporation, its By-laws,
any agreement, any vote of stockholders or disinterested directors, the State
Statute, or otherwise, both as to action in Indemnitee's official capacity and
as to action in another capacity while holding such office.
(c) If Indemnitee is entitled under any provision
of this Agreement to indemnification by the Corporation for some or a portion
of the expenses, judgments, fines or penalties actually or reasonably incurred
by Indemnitee in the preparation, investigation, defense, appeal or settlement
of any civil or criminal action, suit or proceeding, but not, however, for the
total amount thereof, the Corporation shall nevertheless indemnify Indemnitee
for the portion of such expenses, judgments, fines or penalties to which
Indemnitee is entitled.
7. Contribution. If the indemnification provided in
paragraph 2 is unavailable and may not be paid to Indemnitee because such
indemnification is not permitted by law, then in respect to any threatened,
pending or completed action, suit or proceeding in which the Corporation is
jointly liable with Indemnitee (or would be if joined in such action, suit or
proceeding), the Corporation shall contribute to the amount of expenses
(including attorneys' fees and disbursements), judgments, fines (including
excise taxes and penalties) and amounts paid in settlement actually and
reasonably incurred and paid or payable by Indemnitee in such proportion as is
appropriate to reflect (i) the relative benefits received by the Corporation on
the one hand and Indemnitee on the other hand from the transaction from which
such action, suit or proceeding arose, and (ii) the relative fault of the
Corporation on the one hand and of Indemnitee on the other in connection with
the events which resulted in such expenses, judgments, fines or settlement
amounts, as well as any other relevant equitable considerations. The relative
fault of the Corporation on the one hand and of Indemnitee on the other shall
be determined by reference to, among other things, the parties' relative
intent, knowledge, access to information and opportunity to correct or prevent
the circumstances resulting in such expenses, judgments, fines or settlement
amounts. The Corporation agrees that it would not be just and equitable if
contribution pursuant to this paragraph 7 were determined by pro rata
allocation or any other method of allocation which does not take account of the
foregoing equitable consideration.
8. Exclusions.
(a) The Corporation shall not be liable to make any
payment hereunder (whether in the nature of indemnification or contribution) to
the extent payment is actually made to Indemnitee under a valid, enforceable
and collectible insurance policy (the "Insurance Policy") or by a fund, or
under the Certificate of Incorporation or By-laws of the Corporation or
otherwise. If Indemnity is required to pay any amount that the Corporation is
obligated to pay hereunder except for the exclusion in this subsection, before
payment is reasonably expected to be made under the Insurance Policy or by the
Fund or otherwise, the Corporation shall promptly advance the amount Indemnitee
is required to pay for which the Corporation is liable hereunder. Any advance
by the Corporation shall be made with the undertaking of Indemnitee, which
hereby is given, that he shall immediately pay over to the Corporation, from
the funds Indemnitee later receives under the Insurance Policy or from the Fund
or otherwise, an amount equal to the amount which the Corporation advanced
pursuant to this subsection.
3
<PAGE> 4
(b) The Corporation shall not be liable hereunder for
amounts paid in settlement of a proceeding effected without its written
consent, which consent may not be unreasonably withheld.
9. Continuation of Indemnity. All obligations of the
Corporation contained herein shall continue during the period Indemnitee is an
authorized representative of the Corporation and shall continue thereafter so
long as Indemnitee shall be subject to any possible claim or threatened or
pending or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative, by reason of the fact that Indemnitee was an
authorized representative of the Corporation.
10. Enforcement. In the event Indemnitee is required to
bring any action to enforce rights or to collect moneys due under this
Agreement and is successful in such action, the Corporation shall reimburse
Indemnitee for all of Indemnitee's reasonable expenses (including attorneys'
fees and disbursements) in bringing and pursuing such action. The burden of
proving that indemnification or advances are not appropriate shall be on the
Corporation.
11. Obligations of Indemnitee.
(a) Promptly after receipt by Indemnitee of notice of the
commencement of any action, suit or proceeding in which Indemnitee is made or
is threatened to be made a party or a witness, Indemnitee shall notify the
Corporation of the commencement of such action, suit or proceeding; but the
omission so to notify the Corporation shall not relieve the Corporation from
any obligation it may have to indemnify or advance expenses to Indemnitee
otherwise than under this Agreement.
(b) Indemnitee agrees that Indemnitee shall reimburse the
Corporation for all or an appropriate portion of the expenses advanced to
Indemnitee pursuant to paragraph 3 hereof if it shall be finally adjudicated
that Indemnitee is not entitled to be indemnified, or not entitled to be fully
indemnified because indemnification in the particular circumstances is not
permitted under the applicable law.
(c) Indemnitee shall not settle any claim or action in
any manner which would impose on the Corporation any penalty, constraint, or
obligation to hold harmless or indemnify Indemnitee pursuant to this Agreement
without the Corporation's prior written consent, which consent shall not be
unreasonably withheld.
12. Defense of Claim. If any action, suit or proceeding,
or any claim thereof, commenced against Indemnitee is also commenced against
the Corporation, the Corporation shall be entitled to participate therein at
its own expense and, except as otherwise provided herein below, to the extent
that it may wish, the Corporation shall be entitled to assume the defense
thereof. After notice from the Corporation to Indemnitee of its election to
assume the defense of any action, suit or proceeding, the Corporation shall not
be obligated to Indemnitee under this Agreement for any legal or other expenses
subsequently incurred by Indemnitee in connection with the defense thereof
other than reasonable costs of investigation, travel and lodging expenses
arising out of Indemnitee's participation in such action, suit or proceeding.
Indemnitee shall have the right to employ Indemnitee's own counsel in such
action, suit or proceeding, but the fees and expenses of such counsel incurred
after notice from the Corporation to Indemnitee of its assumption of the
defense thereof shall be at the
4
<PAGE> 5
expense of Indemnitee unless (i) otherwise authorized by the Corporation, (ii)
Indemnitee shall have reasonably concluded, and so notified the Corporation,
that there may be a conflict of interest between the Corporation and Indemnitee
in the conduct of the defense of such action, suit or proceeding, or (iii) the
Corporation shall not in fact have employed counsel to assume the defense of
such action, suit or proceeding, in which cases the fees and expenses of
Indemnitee's counsel shall be at the expense of the Corporation. The
Corporation shall not be entitled to assume the defense of any action, suit or
proceeding brought by or on behalf of the Corporation or its stockholders or as
to which Indemnitee shall have made the conclusion set forth in (ii) of this
paragraph 12.
13. Severability. Wherever possible, each provision of
this Agreement shall be interpreted in such manner as to be effective and valid
under applicable law, but if any provision of this Agreement shall be
prohibited by or invalid under applicable law, such provision shall be
ineffective only to the extent of such prohibition or invalidity without
invalidating the remainder of such provision or the remaining provisions of
this Agreement.
14. Miscellaneous.
(a) This Agreement shall be deemed to be a contract made
under and governed by the laws of the State of Delaware.
(b) This Agreement shall be binding upon Indemnitee, his
heirs, personal representatives and permitted assigns, and upon the
Corporation, its successors and assigns. This Agreement shall inure only to
the benefit of Indemnitee, his heirs, personal representatives and permitted
assigns and to the benefit of the Corporation, its successors and assigns and
shall not inure to the benefit of any other party. No assignment of this
Agreement or of any duty, obligation, money due or to become due hereunder
shall be made in whole or in part by Indemnitee without the prior written
consent of the Corporation, which consent shall not be unreasonably withheld.
Any assignment by Indemnitee or the Corporation shall not relieve the assignor
of any duty or obligation of such assignor under this Agreement.
(c) No amendment, modification, termination or claimed waiver
of any of the provisions hereof shall be valid unless in writing and signed by
the party or an authorized representative of the party against whom such
modification is sought to be enforced.
5
<PAGE> 6
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement on and as of the day and year first above written.
GTI CORPORATION
By: \s\ Kenneth E. Maud
------------------------------------
Kenneth E. Maud
Title: Chairman of the Board
INDEMNITEE
By: \s\ Albert J. Hugo-Martinez
-----------------------------------
Albert J. Hugo-Martinez
Title: President and CEO
6
<PAGE> 1
EXHIBIT 10.65
PROMPTUS COMMUNICATIONS, INC.
STOCK PURCHASE AGREEMENT
This Stock Purchase Agreement dated as of March 24, 1997 is by and
among GTI Corporation, a Delaware corporation with a principal place of
business at 9715 Business Park Avenue, San Diego, California ("GTI"), Promptus
Communications, Inc., a Rhode Island corporation with a principal place of
business at 207 High Point Avenue, Portsmouth, Rhode Island ("Promptus"), and
Aurelio Lucci, as Agent (the "Agent") for the individuals listed on Schedule I
attached hereto (the "Management Shareholders"), each with an address as set
forth on said Schedule I.
RECITALS
WHEREAS, GTI is the owner of 4,024,598 shares of Promptus Common Stock
(the "GTI Shares") and the Management Shareholders are the owners of 1,555,300
shares of Promptus Common Stock (the "Management Shares"); and
WHEREAS, GTI, Promptus and the Management Shareholders are parties to
a Management Shares Agreement dated as of January 6, 1995 (the "Management
Shares Agreement") pursuant to which GTI has certain rights and obligations to
acquire the Management Shares; and
WHEREAS, the Management Shareholders have executed an Indemnification
and Agency Agreement dated as of January 6, 1995 (the "Agency Agreement")
appointing Aurelio Lucci as Agent to act on their behalf in connection with
matters arising under the Management Shares Agreement; and
WHEREAS, pursuant to an Asset Purchase Agreement dated as of the date
hereof by and between VideoServer, Inc. ("VideoServer") and Promptus, Promptus
intends to sell to VideoServer its Network Access Card business (the "NAC
Sale"); and
WHEREAS, in connection with the consummation of the NAC Sale, GTI
desires to transfer the GTI Shares to Promptus and to terminate its obligations
under the Management Shares Agreement; and
WHEREAS, Promptus has agreed to repurchase the GTI Shares and the
Agent, on behalf of the Management Shareholders, has agreed to amend the
Management Shares Agreement to terminate GTI's obligations thereunder on the
terms and conditions set forth herein; NOW, THEREFORE, in consideration
of the mutual promises and agreements set forth herein, and intending to be
legally bound hereby, the parties hereby agree as follows:
<PAGE> 2
ARTICLE I
DEFINITIONS
1.01 Certain Terms Defined. In addition to other words and terms
defined elsewhere in this Agreement, as used herein the following words and
terms shall have the following meanings, unless the context expressly or by
necessary implication otherwise requires:
"Actual Liabilities Adjustment" shall have the meaning assigned to
that term in Section 2.02(b)(ii) hereof.
"Additional Payment" shall mean an amount equal to the lesser of (i)
72.1267% of the amount, if any, by which the Market Value of the VideoServer
Common Stock delivered as the Stock Portion (as such term is defined in the NAC
Purchase Agreement) of the NAC Purchase Price exceeds $6,428,370.00 and (ii)
$288,506.80; provided, however, that in the event that the amount determined
pursuant to subpart (i) above is less than $0.00, then the amount of the
Additional Payment shall be $0.00.
"Additional SERP Contribution" shall mean the amount required to be
contributed to the Promptus Communications, Inc. Supplemental Employee
Retirement Plan and Trust (the "Promptus SERP") to fund in full Promptus'
benefit obligations thereunder accrued through the Closing Date, assuming a
monthly benefit of $9,652.43 payable over 10 years based upon an annual net
investment return rate of 7% (compounded monthly).
"Affiliate" shall mean any Person which directly or indirectly
controls, is controlled by or is under common control with another Person. The
term "control" means the possession, directly or indirectly, of the power to
direct or cause the direction of the management or policies of a Person,
whether through the ownership of voting securities, by contract or otherwise.
"Agency Agreement" shall have the meaning set forth in the Recitals.
"Agreement" or "this Agreement" shall mean this Stock Purchase
Agreement as originally executed and delivered, or, if amended or supplemented,
as so amended or supplemented.
"Business Day" shall mean any day other than a Saturday, Sunday,
public holiday under the laws of the State of Rhode Island or other day on
which banking institutions are authorized or obligated to close in Providence,
Rhode Island.
"Cash Portion" shall have the meaning set forth in the NAC Purchase
Agreement.
"Claim" shall have the meaning assigned to that term in Section
7.03(a) hereof.
"Closing" shall have the meaning assigned to that term in Section
2.06 hereof.
"Closing Date" shall have the meaning assigned to that term in Section
2.06 hereof.
"Closing Date Liabilities Adjustment" shall have the meaning assigned
to that term in Section 2.02(a)(i) hereof.
"Closing Date Payment" shall have the meaning assigned to that term
in Section 2.02(a)(i) hereof.
"Code" shall mean the Internal Revenue Code of 1986, as amended.
"Collar Adjustment" shall mean 16.724% of the product of (i) the
Market Value of the VideoServer Common Stock and (ii) the difference between
(x) the number of shares of VideoServer Common Stock that would have been
issued as part of the NAC Purchase Price if the lower amount set forth in
Section 2.1(b) of the NAC Purchase Agreement were $30.50 rather than $33.50 and
(y) the number of shares of VideoServer Common Stock actually issued as part of
the NAC Purchase Price.
2
<PAGE> 3
"Escrow Distributions" shall mean any amounts distributed to Promptus
pursuant to the NAC Escrow Agreement, net of any legal fees, Indemnity Claims
or Appraisal Claims incurred by Promptus in connection with disputing any
claims asserted by VideoServer or VSVR Acquisition under the NAC Escrow
Agreement which are in excess of such amounts as reflected in the calculation
of the Actual Liabilities Adjustment pursuant to Section 2.02(b)(ii) hereof.
"Final Returns" shall have the meaning assigned to such term in
Section 2.02(b)(ii) hereof.
"Final Statement" shall have the meaning assigned to such term in
Section 2.02(b)(ii).
"Full Payment" shall mean the sum of (a) 72.1267% of the sum of (i)
the Net Cash Proceeds and the Net Stock Proceeds, minus (ii) the amount (if
any) by which the Actual Liabilities Adjustment exceeds the Closing Date
Liabilities Adjustment, plus (iii) the amount (if any) by which the Closing
Date Liabilities Adjustment exceeds the Actual Liabilities Adjustment, plus (b)
the Taxes Adjustment and the Additional Payment minus, (c) the Collar
Adjustment.
"GTI Loan" shall mean the aggregate amount of indebtedness owed by
Promptus to GTI, which amount has been agreed to by the parties as being
$7,686,593.87 as of February 7, 1997 and shall be adjusted to reflect advances
and payments together with interest accrued on such indebtedness at 9.5% per
annum.
"GTI Profit-Sharing Plan" shall have the meaning assigned to such term
in Section 3.06 hereof.
"GTI Shares" shall have the meaning set forth in the Recitals.
"Governmental Authority" shall mean any government or political
subdivision or any agency, authority, bureau, commission department or
instrumentality of either, or any court, tribunal, grand jury or arbitrator, in
every case whether foreign or domestic.
"HSR Act" shall mean the Hart-Scott-Rodino Antitrust Improvements Act
of 1976, as amended.
"Initial Stock Payment" shall mean an amount equal to (i) 72.1267% of
the Net Stock Proceeds, minus (ii) the sum of the Reserve Amount and the Collar
Adjustment.
"Liabilities Adjustment" shall mean the sum of the following amounts:
(i) All Taxes imposed on Promptus (A) arising by result
of the transactions contemplated by the NAC Purchase Agreement or this
Agreement (including any gain or loss realized on the sale of the VideoServer
Common Stock, calculated as if such gain or loss had been realized on the
Closing Date, and, in the event that less than all of the VideoServer Common
Stock is sold pursuant to an order to sell less than all of such stock,
assuming, when calculating such gain or loss, that all of the VideoServer
Common Stock had been sold at the average price per share realized on the sale
of at least 72.1267% of the VideoServer Common Stock); (B) with respect to or
relating to any period ending on or before the Closing Date, or, in the case of
any taxable period that includes, but does not end on the Closing Date, the
portion of such period ending on the Closing Date; or (C) resulting from
Promptus ceasing to be affiliated with GTI.
(ii) The amount of the GTI Loan;
(iii) The Additional SERP Contribution;
(iv) The aggregate amount of all severance payments due to
Promptus employees whose employment with Promptus is terminated in connection
with the NAC Sale (the "Severance Obligations") plus the aggregate amount
payable by Promptus as lessee under outstanding leases which are not assumed by
VideoServer in connection with the NAC Sale minus the aggregate rentals due on
equipment and office space required by Promptus for its operations following
the Closing Date (the "Lease Obligations"), the total of which Severance
Obligations and Lease Obligations has been agreed to by the parties as being
$300,000.00;
3
<PAGE> 4
(v) All Transaction Expenses; and
(vi) Any amounts paid or reserved for payment to Promptus
shareholders seeking appraisal or dissenters' rights ("Appraisal Claims") and
any amounts paid or reserved to indemnify VideoServer for any losses related to
any such Appraisal Claims or any claims challenging Promptus' authority to
enter into the NAC Purchase Agreement or the fairness of the NAC Sale or any
claims for rescission of the NAC Sale or to indemnify the Agent for any losses
related to any claims challenging the Agent's authority to enter into this
Agreement or the Management Shares Amendment ("Indemnity Claims").
"License Fees" means all costs, expenses, license fees and other
payments incurred by Promptus (i) in connection with Promptus' obligation to
obtain any consent to the assignment and transfer of the Acquired Assets (as
defined in the NAC Purchase Agreement) to VideoServer under the NAC Purchase
Agreement, or (ii) in connection with obtaining any consents or licenses
necessary to implement the provisions of the NAC Technology Agreement.
"Management Shares Amendment" shall have the meaning assigned to that
term in Section 2.04 hereof.
"Management Shares Agreement" shall have the meaning set forth in the
Recitals.
"Management Shareholders" shall have the meaning set forth in the
Recitals.
"Management Shareholder Notes" shall mean those certain Note and
Security Agreements executed by the Management Shareholders evidencing
principal indebtedness to GTI totaling $1,496,600.00 and granting GTI a
security interest in certain shares of Promptus Common Stock.
"Market Value of the VideoServer Common Stock" shall mean the price of
the VideoServer Common Stock as determined pursuant to Section 2.1(b) of the
NAC Purchase Agreement, without regard to the collar on such price described
therein.
"NAC Escrow Agreement" shall mean the Escrow Agreement dated as of the
Closing Date by and among VideoServer, Promptus and an escrow agent to be
determined as provided therein.
"NAC Purchase Agreement" shall mean the Asset Purchase Agreement of
even date herewith by and between VideoServer and Promptus.
"NAC Purchase Price" shall mean the Purchase Price paid to Promptus by
VideoServer under the NAC Purchase Agreement.
"NAC Registration Rights Agreement" shall mean the Registration Rights
and Lock-up Agreement dated as of the Closing Date by and between VideoServer
and Promptus, which shall be in the form of Exhibit D to the NAC Purchase
Agreement.
"NAC Sale" shall have the meaning set forth in the Recitals.
"NAC Technology Agreement" shall mean the Technology and Software
License Agreement dated as of the Closing Date by and between VideoServer and
Promptus, which shall be in the form attached as Exhibit F to the NAC Purchase
Agreement.
"NAC Transaction Documents" shall mean the NAC Purchase Agreement and
Schedules thereto, the NAC Escrow Agreement, the NAC Registration Rights
Agreement and the NAC Technology Agreement.
"Net Cash Proceeds" shall mean the Cash Portion (excluding any portion
thereof which is subject to the NAC Escrow Agreement whether contributed by
VideoServer or Promptus) of the NAC Purchase Price (giving effect to the
Working Capital Adjustment) paid to Promptus under the NAC Purchase Agreement
minus the Closing Date Liabilities Adjustment, determined in accordance with
the provisions of Section 2.02(a) hereof.
4
<PAGE> 5
"Net Stock Proceeds" shall mean the net proceeds from the sale of
VideoServer Common Stock (excluding any portion thereof which is subject to the
NAC Escrow Agreement) delivered as the Stock Portion of the NAC Purchase Price,
after deduction of all fees and expenses incurred or borne by Promptus in
connection with such sale (including legal and accounting fees and expenses in
connection with the registration of such stock under federal and state
securities laws and any selling expenses or commissions) and, in the event that
less than all of the VideoServer Common Stock is sold pursuant to an order to
sell less than all of such stock, assuming that all of the VideoServer Common
Stock had been sold at the average price per share realized on the sale of at
least 72% of the VideoServer Common Stock.
"Person" shall mean an individual, corporation, partnership,
unincorporated organization, voluntary association, joint stock company,
business trust joint venture, Governmental Authority or any other entity.
"Pledged Management Shares" shall mean those shares of Promptus common
sock which are pledged to GTI to secure obligations under the Management
Shareholder Notes.
"Preliminary Returns" shall have the meaning assigned to such term in
Section 2.02 (a)(i) hereof. "Preliminary Statement" shall have the meaning
assigned to such term in Section 2.02 (a)(i) hereof.
"Promptus Defined Contribution Plan" shall have the meaning assigned
to such term in Section 5.02(A) hereof.
"Related Documents" shall mean and include, collectively, this
Agreement, the Transfer Documents, the Management Share Amendment and all other
agreements and instruments related thereto.
"Remaining Payment" shall mean an amount equal to the difference
between (i) the Full Payment minus (ii) the Closing Date Payment.
"Reserve Amount" shall mean the greater of (i) $40,000.00 and (ii) the
amount, if any, by which the Actual Liabilities Adjustment as determined on the
Business Day immediately preceding the date of the Initial Stock Payment
exceeds the Closing Date Liabilities Adjustment.
"Taxes" shall mean all taxes, however denominated, including any
interest, penalties or additions to tax that may become payable in respect
thereof, imposed by any federal, state, local or foreign government or any
agency or political subdivision of any such government, relating to the income
of the applicable Person, whether arising before, on or after the date hereof.
"Taxes Adjustment" means an amount equal to the product of (i) the
amount of the Taxes portion of the Liabilities Adjustment (as determined under
subpart (i) of the definition of the term "Liabilities Adjustment") as of the
determination of the Actual Liabilities Adjustment multiplied by (ii) 5.00% for
the period commencing on the day after the Closing Date and continuing through
the date or dates on which such Taxes become due and payable (which dates will
be detemined at the Closing) multipled by (iii) 60% multiplied by (iv)
72.1267%.
"Tax Return" shall mean any return, report, filing, estimate,
declaration, or information statement related to, or required to be filed in
connection with, any Tax pursuant to statutes, rules and regulations of any
federal, state, local or foreign government taxing authority.
"Telemetrix Confirmation" shall have the meaning assigned to such term
in Section 6.03(d) hereof.
"Total Profit-Sharing Plan Transfer Amount" shall have the meaning
assigned to such term in Section 5.02(b) hereof.
5
<PAGE> 6
"Transfer Date" shall have the meaning assigned to such term in
Section 5.02(c) hereof.
"Transfer Documents" shall have the meaning set forth in Section 2.03
hereof.
"Transaction Expenses" means all fees and expenses incurred by
Promptus and GTI in connection with the preparation, execution and consummation
of the NAC Purchase Agreement and this Agreement and the transactions
contemplated thereby, including, without limitation, filing fees under the HSR
Act, License Fees, attorneys' fees and expenses (including legal fees and
expenses of the Agent for the Management Shareholders), accountants' and
outsider adviser's fees and disbursements (including the fees and expenses of
Arthur Andersen for preparation of the Preliminary Returns and Final Returns
required hereunder net of any reimbursements from VideoServer), but excluding
any fees or expenses expressly assumed by GTI hereunder, including, without
limitation, the fees and expenses of Montgomery Securities, Inc. and the fees
incurred in connection with obtaining the Telemetrix Confirmation.
"VideoServer" means VideoServer, Inc., a Delaware corporation.
"VideoServer Common Stock" means the common stock of VideoServer
delivered as the Stock Portion (as such term is defined NAC Purchase Agreement)
of the NAC Purchase Price.
ARTICLE II
PURCHASE OF GTI SHARES
2.01 Agreement to Sell; Agreement to Purchase. Subject to the
terms and conditions set forth in this Agreement, on the Closing Date, GTI
shall sell and transfer to Promptus the GTI Shares and Promptus will purchase
the GTI shares from GTI.
2.02 Purchase Price. As payment for the GTI Shares, Promptus
agrees to pay GTI the following:
(a) Net Cash Proceeds. Promptus shall pay to GTI
72.1267% of the Net Cash Proceeds, which amount shall be determined and
payable as follows:
(i) Attached hereto as Schedule 2.02 is a
Settlement Statement setting forth a preliminary calculation of the Liabilities
Adjustment and Net Cash Proceeds based upon the parties' good faith estimates
of the components thereof. At the Closing, Promptus shall deliver to GTI (A)
draft federal and state income Tax Returns (the "Preliminary Returns") for
Promptus prepared by Arthur Andersen LLP ("Arthur Andersen") as if the tax year
of Promptus ended on the Closing Date, which Preliminary Returns shall contain
a calculation based on Promptus' best estimate of the taxable income or loss
and other tax attributes for Promptus for the period from January 1, 1997 to
the Closing Date (the "STUB Period") after giving effect to the NAC Sale, and
(B) a revised Settlement Statement (the "Closing Date Statement") setting forth
any known adjustments to the estimate of the Liabilities Adjustment as of the
Closing Date (the "Closing Date Liabilities Adjustment") and the calculation of
the Net Cash Proceeds based upon such estimate and the Cash Portion of the NAC
Purchase Price paid to Promptus at the closing of the NAC Sale. At the
Closing, immediately following the receipt of the Cash Portion of the NAC
Purchase Price, Promptus shall deliver to GTI, by wire transfer to a bank
account designated by GTI at least two (2) Business Days prior to the Closing
Date, an amount equal to 72.1267% of the Net Cash Proceeds as reflected on the
Closing Date Statement (the "Closing Date Payment").
(b) Remaining Payment. Promptus shall pay GTI the
Remaining Payment, which amount shall be determined and payable as follows:
(i) within two (2) Business Days of Promptus'
receipt of the Net Stock Proceeds from the sale of not less than 72% of the
VideoServer Common Stock, Promptus shall deliver to GTI, by wire transfer to
GTI's bank account designated in accordance with Section 2.02(a)(i) hereof, an
amount equal to the sum of (A) the Initial Stock Payment and (B) the Additional
Payment;
6
<PAGE> 7
(ii) within thirty (30) days of the payment of the
Initial Stock Payment, Promptus shall prepare a final Settlement Statement (the
"Final Statement") setting forth the actual Cash Portion (excluding any portion
thereof which is subject to the NAC Escrow Agreement) of the NAC Purchase Price
(after any Working Capital Adjustment), the actual Liabilities Adjustment (the
"Actual Liabilities Adjustment"), the amount of the Net Cash Proceeds, the
amount of the Net Stock Proceeds, the amount of the Taxes Adjustment, the
amount of the Additional Payment and the amount of the Collar Adjustment, which
it shall deliver to GTI, together with final draft federal and state income Tax
Returns for the STUB Period (the "Final Returns") prepared by Arthur Andersen,
which shall reflect the estimated tax liability of Promptus for the STUB Period
(including any gain or loss realized on the sale of the VideoServer Common
Stock, calculated as if such gain or loss had been realized on the Closing
Date). If GTI disputes the correctness of either the Final Returns or the
Final Statement, GTI shall notify Promptus of its objections within the (10)
Business Days after delivery of the Final Statement and shall set forth in
reasonable detail in such notice the reason for its objections. If GTI fails
to deliver such notice within such time period, GTI shall be deemed to have
accepted Promptus' calculation of the Actual Liabilities Adjustment, the Net
Cash Proceeds, the Net Stock Proceeds, the Taxes Adjustment, the Additional
Payment and the Collar Adjustment. If GTI delivers such notice, GTI and
Promptus shall endeavor in good faith to resolve their dispute over the
determination of the Actual Liabilities Adjustment, the Net Cash Proceeds, the
Net Stock Proceeds, the Taxes Adjustment, the Additional Payment and the Collar
Adjustment within 15 days after Promptus' receipt of such notice. If they are
unable to do so within such 15-day period, the dispute shall be submitted to a
tax partner with experience in the computer technology industry of the Boston
office of Arthur Andersen who shall resolve the dispute within 15 days. The
decision of Arthur Andersen as to the Actual Liabilities Adjustment, the Net
Cash Proceeds, the Net Stock Proceeds, the Taxes Adjustment, the Additional
Payment and the Collar Adjustment shall be final and binding upon the parties.
The expense of Arthur Andersen shall be treated as a Liabilities Adjustment in
calculating the amount of the Full Payment.
(iii) Within two (2) Business Days following final
determination of the Actual Liabilities Adjustment, the Net Cash Proceeds, the
Net Stock Proceeds, the Taxes Adjustment, the Additional Payment and the Collar
Adjustment, Promptus shall pay to GTI an amount equal to the Full Payment less
the sum of the Closing Date Payment and the Initial Stock Payment. Such
payment shall be made by wire transfer to GTI's bank account designated in
accordance with Section 2.02(a)(i) hereof. In the event that the sum of the
Closing Date Payment plus the Initial Stock Payment plus the Additional Payment
exceeds the amount of the Full Payment, then GTI shall pay to Promptus an
amount equal to such difference within two Business Days following final
determination of the Actual Liabilities Adjustment, the Net Cash Proceeds, the
Net Stock Proceeds, the Taxes Adjustment, the Additional Payment and the Collar
Adjustment by wire transfer to a bank account designated by Promptus.
(c) Escrow Distributions. Promptus shall pay GTI 72.1267
% of the Escrow Distributions within two (2) Business Days of Promptus' receipt
thereof, in cash by wire transfer to a bank account designated by GTI.
2.03 Assignment of Management Shareholder Notes. On the Closing
Date, GTI shall deliver to Promptus the original Management Shareholder Notes
endorsed without recourse to the order of Promptus and all certificates
evidencing Pledged Management Shares, together with blank stock powers executed
by the pledgors (the "Pledged Certificates") so as to vest in Promptus all of
GTI's right, title and interest in and to the Management Shareholder Notes and
the Pledged Management Shares.
2.04 Amendment to Management Shares Agreement. On the Closing
Date, Promptus, GTI and the Agent shall each execute and deliver the Amendment
to Management Shares Agreement (the "Management Shares Amendment") in the form
attached hereto as Exhibit A.
2.05 Release of Guarantees and Discharge of Liens. At the Closing,
GTI shall deliver to Promptus pay-off letters and lien discharges (or
agreements therefor) from any Person with an encumbrance on any assets of
Promptus or who holds a guaranty from Promptus, each of which to be in form and
substance satisfactory to Promptus.
2.06 The Closing. The purchase and sale of the GTI Shares as
contemplated by this Agreement (the "Closing") will take place concurrently
with the closing of the NAC Sale pursuant to the NAC Purchase Agreement or as
soon thereafter as all conditions to Closing set forth herein have been
satisfied or waived. The date on which the Closing is actually held hereunder
is sometimes referred to herein as the "Closing Date".
7
<PAGE> 8
2.07 Pledge of VideoServer Common Stock and Escrow Distributions.
As security for the payment of the Net Stock Proceeds and the Escrow
Distributions, Promptus shall pledge to GTI its interest in 72.1267% of (i)
the shares of VideoServer Common Stock held by it (excluding shares of
VideoServer Common Stock subject to the NAC Escrow Agreement) pursuant to the
terms of a stock pledge agreement in the form of Exhibit B attached hereto and
(ii) Promptus' interest in the Escrow Distributions pursuant to the terms of a
pledge agreement in the form of Exhibit C attached hereto.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF GTI
GTI hereby represents and warrants to Promptus as follows:
3.01 Organization, Standing, and Authority. GTI is a corporation
duly organized, validly existing, and in good standing under the laws of the
State of Delaware, and is duly qualified to do business and in good standing in
the States of the United States and foreign jurisdictions where its ownership
or leasing of property or the conduct of its business requires it to be so
qualified and in which the failure to be duly qualified would, either
individually or in the aggregate, have a material adverse effect on the
business, operations, assets, condition (financial or otherwise), or results of
operations of GTI, or GTI's ability to consummate the transactions contemplated
by this Agreement (a "GTI Material Adverse Effect"). GTI has all necessary
corporate power and authority to carry on its business as now conducted, to
own, lease, and operate its assets, properties, and business, and to execute
and deliver, and to perform its obligations under, this Agreement.
3.02. Authority.
(a) The execution and delivery of this Agreement by GTI
and the consummation by GTI of the transactions contemplated herein, have been
duly and validly authorized by the Board of Directors of GTI and by all other
necessary corporate action on the part of GTI. This Agreement represents the
valid and legally binding obligation of GTI, enforceable against GTI in
accordance with its terms, except as may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws affecting generally the
enforcement of creditors' rights and by general principles of equity.
(b) Neither the execution and deliver of this Agreement
by GTI, nor the consummation by GTI of the transactions contemplated herein,
nor compliance by GTI with any of the provisions hereof, will (i) conflict with
or result in a breach of any provision of the Certificate of Incorporation or
By-Laws of GTI, or (ii) constitute or result in the breach of any term,
condition, or provision of, or constitute a default or give rise to any
additional liability of GTI under, or give rise to any right of termination,
cancellation, or acceleration with respect to, or result in the creation of any
lien, charge, or encumbrance upon any property or assets of GTI pursuant to,
any note, bond, mortgage, indenture, license, agreement, lease, or other
instrument or obligation to which GTI is a party or by which GTI or any of its
properties or assets may be subject, and that would, either individually or in
the aggregate, have a GTI Material Adverse Effect. The GTI Disclosure Letter
lists the approvals, authorizations, filings, registrations, notifications and
consents required in connection with the consummation of the transactions
contemplated hereby. Consummation of the transactions contemplated hereby will
not violate any order, writ, injunction, decree, statute, rule or regulation
applicable to GTI or any of its properties or assets.
3.03 Ownership of GTI Shares. GTI represents and warrants that (i)
it owns the GTI Shares free and clear of all assignments, collateral
assignments, liens, encumbrances, security interests, claims and restrictions
of any kind whatsoever, including without limitation claims of any third
parties (other than a lien created by the pledge of the GTI Shares to Union
Bank to secure obligations of GTI to Union Bank, which lien will be released
prior to or at the Closing), and GTI has the full power and authority to
transfer the GTI Shares to Promptus; (ii) Promptus will acquire title to the
GTI Shares free and clear of any restrictions, liens, encumbrances or any other
claims of third parties whatsoever; (iii) there are no rights, subscriptions,
warrants, options, conversion rights or other arrangements of any kind
outstanding to purchase or otherwise acquire all or any portion of the GTI
Shares, and (iv) GTI has not granted any option to purchase, right of first
refusal or right to restrain the GTI Shares or any portion thereof.
8
<PAGE> 9
3.04 Ownership of Management Shareholder Notes. GTI represents and
warrants that (i) it owns the Management Shareholder Notes, free and clear of
all assignments, collateral assignments, liens and encumbrances, security
interests, claims and restrictions of any kind whatsoever, including without
limitation claims of any third parties (other than a lien created by the pledge
of some or all of the Management Shareholder Notes to Union Bank to secure
obligations of GTI to Union Bank, which lien will be released prior to or at
the Closing), and GTI has the full power and authority to transfer the
Management Shareholder Notes to Promptus; (ii) Promptus will acquire title to
the Management Shareholder Notes free and clear of any restrictions, liens,
encumbrances or any other claims of third parties whatsoever; (iii) there are
no rights, subscriptions, warrants, options, conversion rights or other
arrangements of any kind outstanding to purchase or otherwise acquire all or
any portion of the Management Shareholder Notes; and (iv) GTI has not granted
any option to purchase, right of first refusal or right to restrain the
Management Shareholder Notes or any portion thereof.
3.05 Reports. Since January 1, 1995, GTI has filed all reports and
statements, together with any amendments required to be made with respect
thereto, that it was required to file with (a) the Securities and Exchange
Commission ("SEC") and (b) any other applicable federal or state regulatory
authorities (except state filings which are not material or filings with
regulatory authorities other than federal or state securities authorities which
are not material). As of their respective dates and without giving effect to
any amendments or modifications filed after the date of this Agreement with
respect to reports and documents filed before the date of this Agreement), each
of such reports and documents, including the financial statements, exhibits,
and schedules thereto, complied in all material respects with all of the
statutes, rules, and regulations enforced or promulgated by the authority with
which they were filed and did not contain any untrue statement of a material
fact or omit to state any material fact necessary in order to make the
statements made therein, in light of the circumstances under which they were
made, not misleading.
3.06 GTI Profit Sharing Plan. The Amended and Restated Cash or
Deferred Profit Sharing Plan for Employees of GTI Corporation and its
Affiliates (the "GTI Profit-Sharing Plan") has been determined to be qualified
by the Internal Revenue Service under Section 401(k) of the Code, nothing has
occurred since the date of the last such determination which has resulted or is
likely to result in the revocation of such determination, and such GTI
Profit-Sharing Plan is and has heretofore been maintained and operated in
compliance in all material respects with the terms of such Plan and with the
requirements prescribed (whether as a matter of substantive law or as necessary
to secure favorable tax treatment) by any and all statutes, governmental or
court orders, or governmental rules or regulations in effect from time to time,
including but not limited to the Employee Retirement Income Security Act of
1974 ("ERISA") and the Code.
3.07 Broker. Neither GTI nor, to GTI's knowledge, Promptus has
retained, utilized or been represented by any broker, agent, finder or
intermediary in connection with the negotiation or consummation of the
transactions contemplated by the NAC Purchase Agreement, this Agreement, except
for Montgomery Securities, Inc. ("Montgomery"). GTI shall be solely
responsible for any payments to Montgomery, and shall indemnify Promptus from
and against any and all liability to or claims by Montgomery or any other
broker, agent, finder or intermediary claiming to act for or on behalf of GTI
or Promptus.
3.08 Disclosure. To GTI's knowledge, the NAC Transaction Documents
(including the Schedules and Exhibits thereto) contain all of the terms and
conditions of, and constitutes the entire agreement among VideoServer, Promptus
and GTI with respect to the NAC Sale.
3.09 No Consents. Except for the Telemetrix Confirmation, no
authorization, consent, approval, license, exemption of or filing or
registration with any court or governmental department, commission, board,
bureau, agency or instrumentality, domestic or foreign, (except those which
have been obtained) is or will be necessary to the valid execution, delivery to
Promptus and the Agent or performance by GTI of this Agreement.
9
<PAGE> 10
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF PROMPTUS
Promptus hereby represents and warrants to GTI as follows:
4.01 Organization, Standing, and Authority. Promptus is a
corporation duly organized, validly existing, and in good standing under the
laws of the State of Rhode Island, and, with the exception of The Commonwealth
of Massachusetts, is duly qualified to do business and in good standing in the
States of the United States and foreign jurisdictions where its ownership or
leasing of property or the conduct of its business requires it to be so
qualified and in which the failure to be duly qualified would, either
individually or in the aggregate, have a material adverse effect on the
business, operations, assets, condition (financial or otherwise), or results of
operations of Promptus, or Promptus's ability to consummate the transactions
contemplated by this Agreement (a "Promptus Material Adverse Effect").
Promptus has all necessary corporate power and authority to carry on its
business as now conducted, to own, lease, and operate its assets, properties,
and business, and to execute and deliver, and to perform its obligations under,
this Agreement.
4.02. Authority.
(a) The execution and delivery of this Agreement by
Promptus and the consummation by Promptus of the transactions contemplated
herein, have been duly and validly authorized by the Board of Directors of
Promptus and by all other necessary corporate action on the part of Promptus,
other than shareholder authorization for the repurchase of the GTI Shares,
which shall have been duly and validly authorized by all necessary corporate
action on the part of Promptus shareholders prior to the Closing Date. This
Agreement represents the valid and legally binding obligation of Promptus,
enforceable against Promptus in accordance with its terms, except as may be
limited by bankruptcy, insolvency, reorganization, moratorium or other similar
laws affecting generally the enforcement of creditors' rights and by general
principles of equity.
(b) Neither the execution and deliver of this Agreement
by Promptus, nor the consummation by Promptus of the transactions contemplated
herein, nor compliance by Promptus with any of the provisions hereof, will (i)
conflict with or result in a breach of any provision of the Articles of
Incorporation or By-Laws of Promptus or (ii) constitute or result in the breach
of any term, condition, or provision of, or constitute a default or give rise
to any additional liability of Promptus under, or give rise to any right of
termination, cancellation, or acceleration with respect to, or result in the
creation of any lien, charge, or encumbrance upon any property or assets of
Promptus pursuant to, any note, bond, mortgage, indenture, license, agreement,
lease, or other instrument or obligation to which Promptus is a party or by
which Promptus or any of its properties or assets may be subject, and that
would, either individually or in the aggregate, have a Promptus Material
Adverse Effect. Consummation of the transactions contemplated hereby will not
violate any order, writ, injunction, decree, statute, rule or regulation
applicable to Promptus or any of its properties or assets.
ARTICLE IVA
REPRESENTATIONS AND WARRANTIES OF THE AGENT
The Agent hereby represents and warrants to GTI as follows:
4A.01 Broker. The Agent has not retained, utilized or been
represented by any broker, agent, finder or intermediary in connection with the
negotiation or consummation of the transactions contemplated by the NAC
Purchase Agreement or this Agreement.
10
<PAGE> 11
4A.02 Disclosure. To the Agent's knowledge, the NAC Transaction
Documents (including the Schedules and Exhibits thereto) contain all of the
terms and conditions of, and constitutes the entire agreement among
VideoServer, Promptus and GTI with respect to the NAC Sale.
ARTICLE V
COVENANTS
5.01 Amendment to NAC Transaction Documents. Neither Promptus nor
GTI may execute or agree to any supplement, modification or amendment of any of
the NAC Transaction Documents or waive any provisions thereof without the prior
written consent of the Agent and, to the extent that such supplement,
modification or amendment may have an effect on GTI, the prior written consent
of GTI. The Agent may not execute or agree to any supplement, modification or
amendment of any of the NAC Transaction Documents or waive any provisions
thereof to the extent that such supplement, modification or amendment would
have an effect on GTI without the prior written consent of the GTI.
5.02 Transfer of 401(k) Plan Assets.
(a) Promptus agrees to establish a defined contribution
employee pension benefit plan that is qualified under Section 401(a) of the
Code (the "Promptus Defined Contribution Plan"), effective no later than the
Transfer Date. In accordance with the provisions of this Section 5.02, GTI
agrees to cause the trustee of the GTI Profit-Sharing Plan to transfer the
Total Profit-Sharing Plan Transfer Amount to the trustee of the Promptus
Defined Contribution Plan.
(b) The "Total Profit-Sharing Plan Transfer Amount" shall
be the amount equal to the account balances in the GTI Profit- Sharing Plan
attributable to the participants and beneficiaries in such plan who are
Promptus employees as shown on the valuation report for the monthly valuation
date occurring on, or immediately before, the Closing Date (including any
amounts accrued as of such date but not yet contributed to the GTI
Profit-Sharing Plan or not yet allocated to the account of a Promptus employee
under the GTI Profit-Sharing Plan). The Total Profit-Sharing Plan Transfer
Amount shall take into account any distributions, in-service withdrawals or
participant loans received by Promptus employees from the GTI Profit-Sharing
Plan, including any such distributions, withdrawals or loans received after the
Closing Date. The Total Profit-Sharing Plan Transfer Amount shall be
transferred to the Promptus Trustee entirely in (i) cash or other assets
acceptable to the Promptus Trustee, and (ii) notes which represent the
participant loans of Promptus employees.
(c) GTI shall cause the GTI Trustee to make a transfer to
the Promptus Defined Contribution Plan in an amount equal to the Total
Profit-Sharing Plan Transfer Amount as soon as practicable after the creation
of the Promptus Defined Contribution Plan, but in no event later than 60 days
after the establishment thereof (the "Transfer Date"). The obligations of GTI
to cause the trustee of the GTI Profit- Sharing Plan to so transfer the Total
Profit-Sharing Plan Transfer Amount by the Transfer Date is conditioned upon
Promptus' having first established the Promptus Defined Contribution Plan and
having provided GTI with a determination letter to that effect.
(d) GTI agrees to prepare and provide to Promptus, as
soon as practicable following the Closing Date, a list of the Promptus
employees who were participants in or otherwise entitled to benefits under the
GTI Profit-Sharing Plan, as of the Closing Date, together with a listing of
each such Promptus employee's term of service for eligibility and vesting
purposes under the GTI Profit-Sharing Plan and a listing of each such Promptus
employee's account balance thereunder, and Promptus and GTI agree to provide
one another with such additional information in the possession of one company
and not already in the possession of the other as may be reasonably requested
by either of them and necessary in order for Promptus to establish and
administer the transferred account balances of Promptus employees. In
addition, with respect to any amounts payable prior to the Transfer Date by
Promptus employees on participant loans received from the GTI Profit-Sharing
Plan, Promptus shall take whatever actions and make whatever arrangements may
be necessary to permit the periodic repayment of such amounts through payroll
deduction and the remittance of the payments to the GTI Profit-Sharing Plan.
11
<PAGE> 12
(e) Before the expiration of the remedial amendment
period that applies under Code Section 401(b) to the Promptus Defined
Contribution Plan for determination of its initial qualification under Code
Section 401(a), Promptus shall apply for a determination by the Internal
Revenue Service to the effect that the Promptus Defined Contribution Plan
satisfies the requirements for qualification under Section 401(a) of the Code,
and Promptus shall take all reasonable actions to ensure continued
qualification of the Defined Contribution Plan under Section 401(a) of the
Code.
5.03 Non-Competition; Non-Disclosure.
(a) GTI agrees with each of Promptus and the Agent that GTI
will not at any time within the three (3) year period immediately following the
Closing, directly or indirectly, divulge, communicate, use to the detriment of
Promptus and the Management Shareholders or for the benefit of any other
Person, or misuse in any way, any confidential information or trade secrets of
Promptus, including personnel information, secret processes, know-how, customer
lists, formulas, or other technical data except as may be required to be
disclosed by GTI pursuant to a requirement of law; provided, however, that GTI
provides Promptus with prior written notice of such disclosure and takes
reasonable and lawful actions to avoid and/or minimize the extent of such
disclosure. GTI acknowledges that any information or data GTI has acquired on
any of these matters or items was received in confidence and as a fiduciary of
Promptus.
(b) GTI acknowledges that the injury that would be
suffered by Promptus and the Management Shareholders as a result of the breach
of this section will be irreparable and that an award of monetary damages will
be an adequate remedy. Consequently, Promptus and the Agent and either of
them, will have the right to obtain injunctive relief against any breach or
threatened breach of this section and to specifically enforce its provisions.
Neither Promptus nor the Agent will be obligated to post bond or other security
in seeking such relief. GTI will pay the reasonable costs and expenses
incurred by Promptus or the Agent in enforcing this section if Promptus or the
Agent is the prevailing party.
5.04 Cooperation in Administrative Matters. Promptus and GTI will
cooperate fully with each other in connection with the preparation of all Tax
Returns and all audit examinations of, or claims or assertions against,
Promptus, or with respect to the NAC Sale or the purchase of GTI Shares, by any
governmental taxing authority with respect to any taxable period ending on or
before the Closing Date to the extent that the audit, claim or assertion
relates to property, income or operations of Promptus, in each case including
but not limited to the furnishing or making available of records, books of
account or other materials and appropriate personnel necessary or helpful for
the defense against the assertions of any taxing authority. Promptus and GTI
will further cooperate fully with each other in connection with the preparation
of other mutual administrative matters such as the preparation of financial
statements for both Promptus and GTI.
5.05 Repayment of GTI Loan. Promptus shall use a portion of the
cash portion of the Purchase Price paid under the NAC Purchase Agreement to
repay the GTI Loan by wire transfer on the Closing Date or, if the cash portion
of the Purchase Price is received by Promptus too late in the day on the
Closing Date to effect a wire transfer, then on the Business Day immediately
following the Closing Date.
5.06 Sale of VideoServer Common Stock. Promptus agrees to exercise
its right to sell not less than 72.1267% of the VideoServer Common Stock held
by it as soon as it is so permitted pursuant to the terms and conditions of NAC
Registration Rights Agreement and, in connection therewith, to cooperate fully
with VideoServer in the preparation of the registration statement covering the
resale of such securities. Promptus hereby agrees that Montgomery shall serve
as its agent for such sale so long as the fees charged to Promptus by
Montgomery in connection therewith are commercially competitive.
5.07 VideoServer Disbursements and Adjustments. Promptus agrees
not to consent to any disbursements from the NAC Escrow Agreement or to any
settlements related thereto, or to any adjustments to Working Capital (as such
term is defined in the NAC Purchase Agreement) without the prior consent of
GTI, which consent shall not be unreasonably withheld.
5.08 Telemetrix Confirmation. GTI agrees to use its best efforts
to obtain the Telemetrix Confirmation.
12
<PAGE> 13
ARTICLE VI
CONDITIONS TO AND DELIVERIES AT CLOSING
6.01 Mutual Conditions. The obligations of GTI, Promptus and the
Agent to consummate this Agreement and the transactions contemplated hereby are
subject to the fulfillment, at the Closing (or prior to the Closing, if
specified), of the following conditions precedent (subject to the rights of the
parties to waive any such condition in writing):
(a) No Legal Bar. No Governmental Authority shall have
instituted or notified any of the parties of its intention to institute any
suit or proceeding to restrain or enjoin the consummation of this Agreement or
the transactions contemplated hereby or to nullify or render ineffective this
Agreement or such transactions if consummated, and no order or decree so
restraining or enjoining such consummation shall be in effect.
(b) Consents and Approvals. Any and all material
consents, orders, permits, licenses, qualifications, authorizations or
approvals from Governmental Authorities required for the consummation of the
transactions contemplated by the NAC Purchase Agreement and this Agreement
shall have been obtained, and all applicable waiting periods shall have
expired.
(c) Absence of Litigation. No order or decree will have
been issued against GTI, Promptus or the Agent restraining or enjoining the
consummation of the transactions contemplated by the NAC Purchase Agreement or
this Agreement.
(d) NAC Sale. The NAC Sale shall have been consummated.
6.02 Conditions to the Obligations of Promptus and the Agent. The
obligations of Promptus and the Agent to consummate this Agreement and the
transactions contemplated hereby are subject to the fulfillment, prior to or at
the Closing, of the following conditions precedent (subject to the right of
Promptus and the Agent to waive any such condition in writing):
(a) Accuracy of Representations and Warranties. The
representations and warranties of GTI herein contained shall have been true
when made and, in addition, shall be true in all material respects on and as of
the Closing Date with the same force and effect as though made on and as of the
Closing Date, except: (i) as affected by transactions contemplated hereby; and
(ii) to the extent that any such representations and warranties are made as of
a specified date, in which case such representations and warranties shall have
been true as of the specified date.
(b) Compliance with Covenants and Agreements. The
covenants and agreements required by this Agreement to be performed or complied
with by GTI in all material respects prior to or at the Closing shall have been
performed and complied with by GTI.
(c) Shareholder Authorization. The execution of this
Agreement and the consummation of the transactions contemplated hereby,
including the repurchase of the GTI Shares, shall have been duly authorized by
holders of a majority of the outstanding shares of Promptus Common Stock at a
meeting called for such purpose.
13
<PAGE> 14
(d) Management Shareholder Approval. The execution of
the Management Shares Amendment in the form attached hereto as Exhibit A shall
have been approved by (i) holders of a majority of the outstanding Management
Shares, and (ii) holders of a majority of the outstanding Management Shares,
excluding for purposes of such vote, Management Shares owned by Aurelio Lucci
or Francine Lucci.
(e) Termination of Promptus' Guaranties. The termination
of any and all guaranties entered into by Promptus guarantying any obligations
of GTI.
6.03 Conditions to the Obligations of GTI. The obligation of GTI
to consummate this Agreement and the transactions contemplated hereby are
subject to the fulfillment, prior to or at the Closing, of the following
conditions precedent (subject to the right of GTI to waive any such condition
in writing):
(a) Accuracy of Representations and Warranties. The
representations and warranties of Promptus herein contained shall have been
true when made and, in addition, shall be true in all material respects on and
as of the Closing Date with the same force and effect as though made on and as
of the Closing Date, except: (i) as affected by transactions contemplated
hereby; and (ii) to the extent that any such representations and warranties are
made as of a specified date, in which case such representations and warranties
shall have been true as of the specified date.
(b) Compliance with Covenants and Agreements. The
covenants and agreements required by this Agreement to be performed or complied
with by Promptus and the Agent in all material respects prior to or at the
Closing shall have been performed and complied with by Promptus and the Agent.
(c) Termination of GTI's Guaranties. The termination of
any and all guaranties entered into by GTI guarantying any obligations of
Promptus.
(d) Stock Exchange Confirmation. GTI's parent
corporation, Telemetrix plc, shall have received the written confirmation
contemplated by Section 11.8(b) of the Listing Rules of the London Stock
Exchange with respect to the transactions contemplated hereby (the "Telemetrix
Confirmation"). It is hereby understood by the parties that any and all costs
and expenses incurred in connection with obtaining the Telemetrix Confirmation
shall be borne solely by GTI.
6.04 Deliveries by GTI to Promptus. At the Closing, GTI will
deliver to Promptus the following, all documents to be in form and substance
satisfactory to Promptus, the Agent and their counsel:
(a) CEO Certificate. GTI shall deliver to Promptus a
certificate (dated the Closing Date) executed by GTI's chief executive officer
to the effect that (i) he is familiar with the provisions of this Agreement and
(ii) the conditions specified in subsections (a) and (b) of Section 6.02 have
been satisfied.
(b) Stock Certificates. GTI shall deliver a certificate
or certificates representing the GTI Shares, registered in the name of GTI,
duly endorsed for transfer to Promptus or accompanied by an assignment of the
GTI Shares to Promptus duly executed by GTI consistent with the representations
and warranties made by GTI herein.
14
<PAGE> 15
(c) Transfer Documents. GTI shall deliver the Management
Shareholder Notes, Pledged Certificates and the Transfer Documents duly
executed by GTI, assigning and transferring to Promptus, GTI's right, title,
and interest in and to the Management Shareholder Notes and the Pledged
Management Shares consistent with the representations and warranties made by
GTI herein.
(d) Director and Officer Resignations . GTI shall
deliver to Promptus the written resignations of all directors of Promptus
(other than Aurelio Lucci) and of Kirk D'Orazio.
(e) Management Shares Amendment . GTI shall deliver to
Promptus the Management Shares Amendment executed by GTI.
(f) All Proceedings to be Satisfactory. Promptus shall
have received certified or other copies of all resolutions, incumbency
certificates and other documents relating to GTI and the GTI Shares and the
Management Shareholder Notes incident to the transactions contemplated hereby
as Promptus may reasonably request and such documents shall be reasonably
satisfactory in form and substance to Promptus.
6.05 Deliveries by Promptus and the Agent to GTI. At the Closing,
Promptus will deliver to GTI the following:
(a) CEO Certificate. Promptus shall deliver to GTI a
certificate (dated the Closing Date) executed by the Chief Executive Officer of
Promptus to the effect that (i) he is familiar with the provisions of this
Agreement and (ii) the conditions specified in subsections (a) and (b) of
Section 6.03 have been satisfied.
(b) Management Shares Amendment. Promptus shall deliver
to GTI the Management Shares Amendment executed by Promptus and the Agent.
(c) Closing Date Payment. Promptus shall deliver to GTI
the Closing Date Payment in accordance with the provisions of Section 2.02(a)
hereof.
(d) All Proceedings to be Satisfactory. GTI shall have
received certified or other copies of all resolutions, incumbency certificates
and other documents relating to Promptus incident to the transactions
contemplated hereby as GTI may reasonably request and such documents shall be
reasonably satisfactory in form and substance to GTI.
ARTICLE VII
INDEMNIFICATION
7.01 Indemnity Obligations.
(a) From GTI. GTI agrees to defend, indemnify and hold
Promptus and the Agent harmless from any and all liabilities, obligations,
losses, damages, claims, costs and expenses whatsoever, including but not
limited to reasonable attorneys' fees and accounting fees and disbursements
("Damages"), incurred in connection with:
15
<PAGE> 16
(i) any breach of the representations and
warranties made by GTI herein or in any Related Document or otherwise
made to Promptus or the Agent in connection with the transactions
contemplated hereby;
(ii) the failure of GTI to perform any of the
covenants or obligations to be performed by it hereunder or under any
Related Document;
(iii) any liability of GTI or any member (other
than Promptus) of any Consolidated Group of which GTI has ever been a
member for the payment of all taxes, however denominated, including
any interest, penalties or additions to tax that may become payable in
respect thereof, imposed by any federal, state, local or foreign
government or any agency or political subdivision of any such
government, which taxes shall include, without limited the generality
of the foregoing, all income taxes, estimated taxes, payroll and
employee withholding taxes, backup withholding taxes, unemployment
insurance taxes, social security taxes, sale and use taxes, excise
taxes franchise taxes, gross receipts taxes, occupation taxes, capital
stock taxes, taxes on services, and other obligations of the same or
of a similar nature, whether arising before, on or after the date
hereof;
(iv) any operational defects in the administration
the GTI Profit-Sharing Plan;
(v) any liability arising under any guaranty or
security agreement entered into by Promptus guarantying or securing
any obligations of GTI; and
(vi) any fraudulent behavior by GTI of any kind or
nature in connection with the transactions under or pursuant to this
Agreement, the NAC Transaction Documents or any of the provisions of
this Section 7.01(a).
(b) From Promptus to GTI. Promptus agrees to defend,
indemnify and hold GTI harmless from any and all Damages incurred in connection
with (i) any breach of the representations and warranties made by Promptus
herein or in any Related Document, (ii) the failure of Promptus to perform any
of the covenants or obligations to be performed by it hereunder or under any
Related Document or (iii) any fraudulent behavior by Promptus of any kind or
nature in connection with the transactions under or pursuant to this Agreement,
the NAC Transaction Documents or any of the provisions of this Section 7.01(b).
(c) From Promptus to Agent. Promptus agrees to defend,
indemnify and hold the Agent harmless from any and all Damages incurred in
connection with any claim challenging the Agent's authority to enter into this
Agreement or the Management Shares Amendment.
16
<PAGE> 17
(d) Set-Off. If, at the time that any payment becomes
due from Promptus to GTI hereunder, Promptus has in good faith asserted a
Claim, then Promptus may withhold from such payment the amount of such Claim
pending resolution thereof, so long as Promptus segregates the amount of such
Claim from its general assets. Should the resolution of said Claim include a
determination that the Damages suffered by Promptus in respect thereof were
less than the amount of the withheld payment, then, within 15 Business Days
after the making of such determination, Promptus shall pay to GTI the amount by
which such withheld payment exceeded the Damages determined to have been
suffered by Purchaser in respect of such Claim, together with interest on said
amount at the per annum rate of Fleet National Bank's prime rate in effect
during the relevant time, from and including the date such payment was withheld
to but not including the date of payment of such amount; and, additionally, if
GTI shall obtain a final unappealable judicial order to the effect that
Promptus did not have a good faith basis to assert said Claim, then Promptus
shall also pay to GTI the reasonable out-of-pocket expenses, including
attorneys' fees, costs and expenses, of GTI in defending such Claim and seeking
such order. With respect to a Direct Claim, GTI may seek to recover such
withheld amounts in accordance with the arbitration provisions of Section
7.01(e) hereof. Third Party Claims shall not be subject to any arbitration
procedure but shall be subject to the procedures set forth in Section 7.03(a)
and (b) hereof.
(e) Arbitration of Direct Claims. If, in any case in which Promptus
intends to assert its set-off rights in connection with a Direct Claim,
Promptus shall furnish notice to GTI of such assertion (which notice shall
include the nature of the Direct Claim and the amount which Promptus proposes
to set-off), GTI shall have the right to contest either Promptus' right to
assert such set-off rights or the amount which Promptus proposes to set off by
furnishing notice thereof (the "Dispute Notice") to Promptus within 15 days of
its receipt of such notice from Promptus of its assertion of the set-off
rights, and the dispute shall be resolved as follows. Such dispute shall be
submitted to arbitration pursuant and subject to the provisions of the
Arbitration Act, R.I.G.L. Section 10-3-1 et seq. (the "Act"), in Providence,
Rhode Island. The disputants shall promptly endeavor by mutual agreement to
designate one person to serve as the arbitrator within 10 days after Promptus'
receipt of the Dispute Notice. If they are unable to agree within that period
upon such person, then the arbitrator shall be promptly selected through the
facilities of the Boston Regional Office of the American Arbitration
Association and in accordance with the rules thereof. The award of the
arbitrator shall be final and binding upon the disputants, subject only to such
rights of appeal as are provided by the Act; provided however, that any such
award shall be accompanied by a written opinion of the arbitrator giving the
reasons for the award. The costs of the arbitration proceeding, including the
fees of the arbitrator, shall be borne pro rata by the disputants based upon
the award of the arbitrator (i.e., if the party making the claim is awarded
100% of its claim, then the other party shall bear 100% of the cost of the
arbitration). If any disputant appeals the award of an arbitrator and such
award is not changed, vacated, modified or corrected by the court to which such
appeal is taken, the appellant shall pay all costs and attorneys' fees of all
parties incurred in connection with such appeal and all proceedings (other than
the arbitration) related thereto. This provision for arbitration shall be
specifically enforceable.
7.02 Limitations.
(a) As to GTI. The liability of GTI for its
indemnification obligations hereunder shall be limited as follows:
17
<PAGE> 18
(i) No claim for indemnity under this Agreement
may be asserted by Promptus after the first anniversary of the Closing
Date (the "First Anniversary Date") except for (i) claims for breach
of Seller's representation and warranty set forth in Section 3.06,
claims for breach of the obligations under Section 5.02 and indemnity
claims under Sections 7.01(a)(iii) and 7.01(a)(iv), which claims may
be asserted, if at all, until the expiration of the statutory period
of limitations for assessments of tax deficiencies and/or the
disqualification of tax-qualified employee pension benefit plans, as
applicable, including any extensions thereof, for the applicable
taxable period, (ii) claims for breach of GTI's obligations under
Section 5.03 which claims may be asserted, if at all, until the
expiration of the third anniversary of the Closing Date, (iii)
indemnity claims under Sections 7.01(a)(v) and 7.01(a)(vi), which
claims may be asserted, if at all, until the expiration of the
statutory period of limitations for such claims.
(ii) except for claims for breach of GTI's
representation and warranty set forth in Section 3.06 and claims for
breach of the obligations under Sections 5.02 and 5.03 and indemnity
claims under Sections 7.01(a)(iii), 7.01(a)(iv), 7.01(a)(v) and
7.01(a)(vi) (for which there will be no "cap"), GTI shall have no
liability to pay in respect of the indemnification obligations
pursuant to this Agreement more than the aggregate amount actually
paid by Promptus under this Agreement, provided, however, that if a
Claim that is subject to indemnification hereunder arises prior to the
First Anniversary Date, then if GTI is otherwise entitled to receive
additional cash and/or shares of VideoServer Common Stock pursuant to
Section 2.02 hereof or otherwise, the amount of such prior claims
shall be subject to indemnification under this Section 7.02(a) to the
extent of such cash and shares of VideoServer Common Stock.
(b) As to Promptus. The liability of Promptus for its
indemnification obligation hereunder shall be limited as follows:
(i) No claim for indemnity under this Agreement
may be asserted by GTI after the First Anniversary Date, except for
indemnity claims under Sections 7.01(b)(iii), which claims may be
asserted, if at all, until the expiration of the statutory period of
limitations for such claims;
(ii) Except for indemnity claims under Sections
7.01(b)(iii) (for which there will be no "cap"), Promptus shall have
no liability to pay in respect of the indemnification obligations
pursuant to this Agreement more than the aggregate amount actually
paid by Promptus to GTI under this Agreement.
7.03 Procedure for Indemnification.
(a) If a party to this Agreement entitled to assert a
claim under this Agreement (a "Claim") shall receive notice of the assertion by
a Person who is not a party to this Agreement (or an Affiliate of a Party to
this Agreement) of any claim or of the commencement by any such Person of any
action or proceeding (a "Third Party Claim") with respect to which GTI or
Promptus is obligated to provide indemnification, the indemnified party (the
"Indemnitee") shall give the indemnifying party (the "Indemnitor") prompt
notice thereof. Such notice shall describe the Third Party Claim in reasonable
detail.
18
<PAGE> 19
(b) The Indemnitor may elect to compromise or defend, at
such Indemnitor's own expense and by such Indemnitor's own counsel, any Third
Party Claim. If an Indemnitor elects to defend a Third Party Claim it shall,
within 30 days of receipt of the notice referred to in Section 7.03(a) above
(or sooner, if the nature of such Third Party Claim so requires), notify the
Indemnitee of its intent to do so, and such Indemnitee shall reasonably
cooperate in the compromise of, or defense against, such Third Party Claim.
Such Indemnitor shall pay such Indemnitee actual out-of-pocket expenses
incurred in connection with such cooperation. After notice from an Indemnitor
to an Indemnitee of its election to assume the defense of a Third Party Claim,
such Indemnitor shall not be liable to such Indemnitee under this Article VIII
for any legal expenses subsequently incurred by such Indemnitee in connection
with the defense thereof; provided that such Indemnitee shall have the right to
employ one counsel for each Third Party Claim to represent such Indemnitee if
the Indemnitee is advised by its counsel that (i) a conflict of interest
between such Indemnitee and such Indemnitor exists in respect of such Third
Party Claim or (ii) where the Indemnitor is also a party to such Third Party
Claim, different or conflicting claims or defenses may reasonably exist, in
which events such portion of the fees and expenses of such separate counsel
that are reasonably related to matters covered by the indemnity provided in
this Article VIII shall be paid by such Indemnitor. If an Indemnitor elects
not to defend against a Third Party Claim, or fails to notify an Indemnitee of
its election as provided in Section 7.03(a) above, such Indemnitee may without
advance written notice to the Indemnitor, pay, compromise or defend such Third
Party Claim reasonably and in good faith on behalf of and for the account and
risk of the Indemnitor to the extent that the Indemnitee is entitled to receive
indemnification from the Indemnitor hereunder. No Indemnitor shall consent to
entry of any judgment or entry into any settlement against or with respect to
any Indemnitee without the written consent of such Indemnitee (not to be
unreasonably withheld), unless such judgment or settlement (A) provides solely
for money damages or other payments for which such Indemnitee is entitled to
indemnification hereunder and (B) includes as an unconditional term thereof the
giving by the claimant or plaintiff to such Indemnitee of a release for all
liability in respect of such Third Party Claim.
(c) With respect to any Claim hereunder which does not
result from a Third Party Claim (a "Direct Claim"), the Indemnitor shall have a
period of 30 days from receipt of notice from the Indemnitee within which to
respond thereto. If such Indemnitor does not respond within such 30-day period
or rejects such Direct Claim in whole or in part, such Indemnitee shall be free
to pursue such remedies as may be available to such Indemnitee under applicable
law.
(d) This Article VIII shall not impair the ability of any
party to exercise any of its other rights and remedies under applicable law.
ARTICLE VIII
TERMINATION
8.01 Termination. Anything herein or elsewhere to the contrary
notwithstanding, this Agreement may be terminated and the transactions
contemplated hereby abandoned at any time prior to the Closing:
(a) by mutual written consent of GTI, Promptus and the
Agent;
(b) by any of GTI, Promptus or the Agent, if the NAC
Purchase Agreement is terminated;
19
<PAGE> 20
(c) by any of GTI, Promptus or the Agent on ten (10)
days' written notice in the event any of the conditions set forth in Sections
6.01, 6.02 or 6.03 are not satisfied by June 30, 1997 (other than as a result
of a breach of this Agreement by the party seeking termination); provided that,
the parties obligations under this Agreement shall continue during such ten-day
period, and this Agreement shall not terminate if all such conditions are
satisfied within such ten-day period;
(d) by a party not in breach in the event of a material
breach by another party which is not cured within thirty (30) days after
written notice thereof;
(e) by Promptus or the Agent in the event that the
Telemetrix Confirmation has not been received by the Closing Date and GTI
elects not to proceed with the Closing without the Telemetrix Confirmation.
8.02 Effect of Termination. If this Agreement is terminated and
the transactions contemplated hereby are not consummated as provided above,
this Agreement shall become void and of no further force and effect, except for
(i) any liability for any breach causing or permitting such termination, (ii)
the provisions of Article VIII relating to indemnification, (iii) the
provisions of Article IX relating to the Management Shares Agreement and (iv)
the provisions of this Section 8.02. GTI agrees that, if this Agreement is
terminated for the reason set forth in Section 8.01(e) above and the
transactions contemplated hereby are not consummated as provided above, it will
not cause any portion of the GTI Loan to be repaid by Promptus (other than from
operating revenues of Promptus in the ordinary course of business consistent
with past practices), nor will it cause any dividends or distributions to be
made in connection with the capital stock of Promptus, until the closing of the
sale of Management Shares subject to the purchase rights and obligations of the
Management Shareholders and GTI during the First Exercise Period (as such terms
are defined in the Management Shares Agreement). GTI further agrees that, in
the event that the NAC Sale is consummated but this Agreement is terminated and
the transactions contemplated hereby are not consummated as provided above,
Promptus will make the Additional SERP Contribution promptly after the closing
of the NAC Sale, and in no event later than two (2) Business Days thereafter.
ARTICLE IX
AGREEMENTS RELATED TO MANAGEMENT SHARES AGREEMENT
9.01 The parties agree that, if the Closing does not occur within
60 days of the date hereof, the period during which GTI and the Agent shall
attempt to agree on a forecast of the financial results to be generated by
Promptus as required under Section 3(a) of the Management Shares Agreement (the
"Forecast") for the First Exercise Period (as such term is defined in the
Management Shares Agreement) shall commence on the earlier to occur of (i) the
termination of the NAC Purchase Agreement or (ii) sixty days from the date
hereof (the "Start Date").
20
<PAGE> 21
9.02 The parties further agree that, in the event that GTI and the
Agent fail to reach an agreement as to the Forecast within 15 days after the
Start Date, then the matter shall immediately be presented to an arbitrator as
set forth in Section 3 of the Management Shares Agreement.
9.03 The parties also agree that, in the event that this Agreement
is terminated pursuant to the provisions of Section 8.01(e) hereof, each
Forecast to be determined by GTI and the Agent pursuant to Section 3(a) of the
Management Shares Agreement shall, for all purposes, be made as if the NAC Sale
had neither been contemplated nor had occurred and the Forecast of the NAC
Business (as such term is defined in the NAC Purchase Agreement) as determined
(by agreement of GTI and the Agent or by arbitration) for the First Exercise
Period shall be fixed for purposes of establishing the NAC Business component
of the Forecast for all subsequent Exercise Periods under the Management Shares
Agreement, and shall be deemed to be the actual results of the NAC Business
component of Promptus' business for subsequent Exercise Periods and that
appropriate adjustments shall be made to account for the receipt by Promptus of
the NAC Purchase Price and the use by Promptus thereof.
ARTICLE X
MISCELLANEOUS
10.01 Survival of Representations and Warranties. The
representations and warranties of each party hereto which are contained herein
or in any certificate or other document delivered pursuant hereto shall survive
the date hereof, but, except for the representation and warranty set forth in
Section 3.06 herein, the representations and warranties shall expire on the
First Anniversary Date, and no claim for breach thereof may be made by any
party after such date. Claims for breach of the representation and warranty set
forth in Section 3.06 herein may be asserted, if at all, until the expiration
of the statutory period of limitations for assessments of tax deficiencies,
including any extensions thereof, for the applicable taxable period.
10.02 Notices. All notices, demands and other communications which
may or are required to be given hereunder or with respect hereto shall be in
writing (including telexed and telecopied communication), shall be sent by
first-class mail, or by courier, or by telex or telecopier, or by personal
delivery and shall be deemed to have been given or made when personally
delivered and otherwise when received, addressed to the respective parties as
follows:
21
<PAGE> 22
(a) If to GTI:
GTI Corporation
9715 Business Park Avenue
San Diego, California 92131
Attention: President
with a copy to:
Kirkpatrick & Lockhart LLP
1500 Oliver Building
Pittsburgh, PA 15222-2312
Attention: John C. Rodney, Esq.
(b) If to Promptus or the Agent:
Promptus Communications, Inc.
207 High Point Ave.
Portsmouth, RI
Attention: Aurelio Lucci
in each case with a copy to:
Hinckley, Allen & Snyder
1500 Fleet Center
Providence, Rhode Island 02903
Attention: Margaret D. Farrell, Esq.
or to such other address as any party may from time to time designate by notice
to each other party with respect to future notices, demands and other
communications to such party.
10.03 Postponement and Waiver. Any postponement or waiver pursuant
to this Agreement shall be in writing and shall be effective only in the
specific instance and for the purpose for which given. No failure or delay on
the part of any party in exercising any right, power or privilege under this
Agreement shall operate as a waiver thereof nor shall any single or partial
exercise of any right, power or privilege hereunder preclude any other or
further exercise thereof or the exercise of any other right, power or
privilege. The rights and remedies expressly specified in this Agreement are
cumulative and are not exclusive of any rights or remedies which any party
would otherwise have.
10.04 Assignment. Neither party may assign its rights or delegate
its duties hereunder or under any of the Related Documents to any Person
without the prior written consent of the other parties. The rights and
obligations of the parties hereto shall be binding on and inure to the benefit
of their respective successors and permitted assigns.
22
<PAGE> 23
10.05 Entire Agreement. This Agreement, together with the exhibits
and schedules hereto and the Related Documents, constitutes the entire
agreement among the parties pertaining to the subject matter hereof, and
supersedes any and all prior agreements among the parties pertaining to the
subject matter.
10.06 Invalidity. In the event that any one or more of the
provisions contained in this Agreement, the Related Documents or in any other
instrument referred to herein, shall for any reason be held to be invalid,
illegal or unenforceable in any respect, such invalidity, illegality or
unenforceability shall not affect any other provision of this Agreement, any
Related Document or any such other instrument.
10.07 Captions. The captions of Articles and Sections in this
Agreement are for convenience of reference only and shall not alter, control or
affect the meaning or construction of any provision hereof.
10.08 Counterparts. This Agreement may be executed in as many
counterparts as may be deemed necessary and convenient, and by the different
parties hereto on separate counterparts, each of which, when so executed, shall
be deemed an original, but all such counterparts shall constitute but one and
the same instrument.
10.09 Governing Law. This Agreement shall be governed by, and
construed and enforced in accordance with, the laws of the State of Rhode
Island.
10.10 Amendment. This Agreement may not be amended without the
written consent of all parties.
10.11 No Third Party Beneficiary Rights. This Agreement is made
solely and specifically between and for the benefit of the parties hereto and
the Management Shareholders, and their respective successors and assigns,
subject to the express provisions hereof relating to successors and assigns,
and no other Person (other than the Management Shareholders) shall have any
rights, interests or claims hereunder or be entitled to any benefits under or
on account of this Agreement as a third party beneficiary or otherwise.
23
<PAGE> 24
WITNESS the due execution of this Stock Purchase Agreement as of the
day and year first above written.
GTI CORPORATION
By:
-----------------------------------------
Title:
--------------------------------------
PROMPTUS COMMUNICATIONS, INC.
By:
-----------------------------------------
Title:
--------------------------------------
__________________________________
Aurelio Lucci, as Agent for the
Management Shareholders
24
<PAGE> 25
EXHIBIT A
Form of Amendment to Management Shares Agreement
AMENDMENT TO MANAGEMENT SHARES AGREEMENT
Made this ____ day of March, 1997 among GTI Corporation, a Delaware
corporation ("GTI"), Promptus Communications, Inc., a Rhode Island corporation
("Promptus") and Aurelio Lucci, an individual resident of Rhode Island, as
agent for the Shareholders (the "Agent").
WHEREAS, GTI, Promptus, the Agent and others are parties to that
certain Management Shares Agreement dated as of January 6, 1995 (the
"Agreement") pursuant to which the shareholders of Promptus other than GTI
(collectively, the "Shareholders") agreed to sell their remaining shares in
Promptus to GTI, and GTI agreed to purchase such shares, all on the terms and
conditions set forth therein; and
WHEREAS, on December 30, 1996 GTI and the Agent entered into an
agreement entitled "Summary of Extension Terms" pursuant to which certain time
periods set forth in the Agreement were extended; and
WHEREAS, GTI, Promptus and the Agent have entered into a Stock
Purchase Agreement dated March ___, 1997 (the "Redemption Agreement") pursuant
to which Promptus agreed to redeem all of the shares in Promptus held by GTI
and the parties agreed to take certain related actions; and
WHEREAS, one of the conditions to the transactions contemplated by the
Redemption Agreement is the execution of this Agreement.
NOW, THEREFORE, BE IT AGREED, as follows:
1. Definitions. Capitalized terms used herein and not otherwise
defined are defined in the Agreement.
2. Amendment to Agreement.
(a) The preamble to the Agreement is hereby revised to delete
the first two Whereas clauses.
(b) Section 1(a) of the Agreement is hereby revised to delete
the phrase "or with the prior written consent of GTI".
(c) Section 1(b) of the Agreement is hereby revised to delete
the phrase "GTI and".
(d) Sections 2, 3, 4, 5, 6, 7 and 8 of the Agreement are
hereby deleted.
(e) Section 9(a) of the Agreement is hereby revised to
eliminate all references to GTI, which shall have no further rights thereunder.
(f) Section 9(d) of the Agreement is hereby revised to
indicate that GTI's address is now 9715 Business Park Avenue, San Diego, CA
92131.
3. Miscellaneous. The provisions of Subsections (b), (c), (d) (as
amended), (e), (f) and (g) of Section 9 of the Agreement are hereby
incorporated hereby reference.
25
<PAGE> 26
Executed as of the date first set forth above.
GTI Corporation
By:
--------------------------
Title: President
Promptus Communications, Inc.
By:
--------------------------
Title: Chairman
Shareholders' Agent
-----------------------------
Aurelio Lucci
26
<PAGE> 27
EXHIBIT B
Form of Stock Pledge Agreement
STOCK PLEDGE AGREEMENT
To secure the payment of all obligations of Promptus Communications,
Inc., a Rhode Island corporation with a principal place of business at 207 High
Point Avenue, Portsmouth, Rhode Island (the "Debtor") to GTI Corporation, a
Delaware corporation with a principal place of business at 9715 Business Park
Avenue, San Diego, California (the "Secured Party") arising in connection with
that certain Stock Purchase Agreement of even date herewith between, inter
alia, the Debtor and the Secured Party (the "Obligations"), and in
consideration thereof, the Debtor does hereby grant a security interest in, and
pledge, assign, transfer and deliver to the Secured Party, and to its
successors and assigns, as general collateral security for the payment and
performance of the Obligations, the shares of capital stock of VideoServer,
Inc. ("VideoServer") which are represented by the stock certificates attached
hereto as Exhibit A and incorporated herein by reference, which Exhibit A has
attached to it a stock power for each such stock certificate, duly signed by
the Debtor as transferor (all of the aforesaid stock certificates and powers
being hereinafter collectively referred to as the "Collateral").
To effectuate the provisions hereof, the Debtor hereby irrevocably
appoints and constitutes the Secured Party as its true and lawful attorney with
full power of substitution to complete and fill in any blank endorsements, to
file the same and to take such further action as the Secured Party may deem
necessary to exercise, as a stockholder, all of its right, title and position
in VideoServer. The aforesaid power of attorney shall be deemed irrevocable
and coupled with an interest. The Debtor further agrees that any transfer of
the Collateral under the provisions of this paragraph shall not be deemed a
sale or disposition under the provisions of Article 9 of the Rhode Island
Uniform Commercial Code, nor an acceptance of such Collateral in satisfaction
of the Obligations or any portion thereof.
Upon any such default, the Secured Party shall further have all the
rights and remedies of a secured party afforded by the Uniform Commercial Code
as from time to time in effect in the State of Rhode Island or afforded by
other applicable law. Requirement of reasonable notice with respect to any
sale or disposition shall be met if such notice is mailed, postage prepaid, to
the Debtor at the address set forth above at least five (5) days before the
time of the sale or other disposition. Expenses of retaking, holding,
preparing for sale, selling, or the like shall include the Secured Party's
reasonable attorneys' fees and other costs and legal expenses.
Until such time as the Obligations have been paid or performed in
full, the Debtor shall not encumber the Collateral, or any part thereof, with
any lien, security interest, or encumbrance junior to the interest granted to
the Secured Party hereby other than such liens, security interests or other
encumbrances which may exist as of the date hereof.
In no event shall the Secured Party be liable with respect to the
Collateral, except for the safekeeping thereof.
All of the agreements, obligations, undertakings, representations and
warranties herein made by the Debtor shall inure to the benefit of the Secured
Party, its successors and assigns. The Debtor further agrees to execute such
other instruments as the Secured Party may deem necessary or desirable to
effectuate the purposes of this Agreement.
This Agreement has been executed and delivered as a Rhode Island
agreement and shall be governed by and construed in accordance with the laws of
the State of Rhode Island.
Each party irrevocably
(i) agrees that any suit, action, or other legal proceeding arising
out of this Agreement may be brought in the courts of record of the State of
Rhode Island or the courts of the United States located in the State of Rhode
Island;
(ii) consents to the jurisdiction of such court in any such suit,
action or proceeding; and
(iii) waives any objection which it may have to the laying of venue
of such suit, action or proceeding in any of such courts and waives any right
to a trial by jury in any of such courts.
27
<PAGE> 28
In case any one or more of the provisions contained herein should be
invalid, illegal or unenforceable in any respect, the validity, legality or
enforceability of the remaining provisions contained herein shall not in any
way be affected or impaired thereby.
Executed as a sealed instrument as of the 24th day of March, 1997.
WITNESS: PROMPTUS COMMUNICATIONS, INC.
- ---------------------------------- By: \s\ Aurelio Lucci
-----------------------------------
Name: Aurelio Lucci
---------------------------------
Title: President and CEO
--------------------------------
WITNESS: GTI CORPORATION
- ---------------------------------- By: \s\ Albert J. Hugo-Martinez
-----------------------------------
Name: Albert J. Hugo-Martinez
---------------------------------
Title: President and CEO
--------------------------------
28
<PAGE> 29
Exhibit A
List of Pledged Stock
29
<PAGE> 30
EXHIBIT C
Form of Pledge of Escrow Distributions
[TO BE PREPARED BY KIRKPATRICK & LOCKHART]
30
<PAGE> 31
SCHEDULE I
Management Shareholders
31
<PAGE> 32
SCHEDULE 2.02
Settlement Statement
1. Calculation of Net Cash Proceeds:
2. Calculation of Liabilities Adjustment:
a. Taxes $2,800,000.00*
b. The amount of the GTI Loan $7,686,593.87
c. The Additional SERP Contribution $ 550,200.00
d. The Severance Obligations plus
the Lease Obligations $ 300,000.00
e. All Transaction Expenses $ [252,500.00]
f. Appraisal Claims plus Indemnity
Claims $____________
TOTAL $____________
* This figure is based upon an aggregate Purchase Price (as such term is
defined in the NAC Purchase Agreement) of $22,000,000.00 The amount will be
adjusted based upon the actual Purchase Price.
30
<PAGE> 1
Exhibit 13
GTI CORPORATION
1996 ANNUAL REPORT
<PAGE> 2
PRESIDENT'S LETTER
Dear Shareholder:
The year 1996 was a time of transition and re-focus for GTI Corporation. When I
joined GTI in early 1996, GTI owned two very different businesses: Promptus
Communications and Valor Electronics. At that time, Promptus was posting
operating losses and was struggling to successfully launch the Systems portion
of its business. Also at that time, Valor revenues were declining and as a
result, the Valor cost structure had become overly burdensome.
To address these issues and to begin re-building our foundation, decisive and
difficult actions were necessary. Many of these corrections were expensive and
painful, but were deemed to be the right steps at the right time. It would seem
that the most difficult corrections are now behind us, and that GTI's future is
brighter as a result.
Recognizing that Valor offers our best prospects for the future, we decided to
focus primarily on the restructuring of this operation. To provide the impetus
for the necessary changes, a new Senior Valor Management of skilled and
motivated leaders was recruited. To reduce costs and increase management
efficiency, the new Valor management team was consolidated with the GTI
Corporate Team, resulting in the elimination of exclusively holding company
management positions.
To further address our burdensome cost structure, a new wholly-owned
manufacturing operation was created in China. This permitted the elimination of
most third-party processing relationships in China, significantly reducing
manufacturing costs. Also as a result of this consolidation in China,
significant reductions in the overhead costs of our Hong Kong management
infrastructure was achieved. The cost of this restructuring was substantial, but
the savings should also be substantial. We believe that the resultant product
cost decreases will create more globally-competitive Valor products.
As a part of the restructuring in China, global material procurement, production
planning, and shipping logistics were streamlined and consolidated. These
changes, although initially painful, have resulted in significant reductions in
inventory levels as well as measurable increases in product quality and delivery
intervals, quality and order processing times.
Primarily as a result of the above actions in pursuit of customer satisfaction,
the Valor revenue decline of the previous five quarters was arrested in the
fourth quarter of 1996 and Valor's lower cost structure contributed to
encouraging improvements in fourth quarter financial results.
To facilitate continued focus on improved Valor operations, in January 1997, GTI
decided to divest its 72% ownership in Promptus Communications. In April 1997,
GTI agreed to this divestiture in exchange for cash and common shares of
VideoServer, Inc. totaling approximately $11.6 million. Although this
transaction resulted in a substantial non-recurring loss chargeable to 1996
operations, the loss was entirely related to goodwill associated with the
earlier Promptus purchase. The proceeds from this divestiture will provide
additional liquidity for GTI to pursue further strategic investments in Valor.
To enhance the growth of Valor, corporate focus is now on a strategic plan to
leverage Valor's core competence in magnetics through the development of new
subsystems specifically designed for high-growth markets. For example, Valor
recently introduced our FlexPHY line of Integrated LAN modules for the
telecommunications market. Also in conjunction with this strategic market focus,
product development and marketing groups have been realigned around three
primary opportunities: magnetic components, power solutions, and integrated
products. This new structure will allow Valor to focus on the customer needs in
specific markets and to expand revenues from magnetic component products.
Achieving total customer satisfaction in global growth markets shall continue to
be the company's mission. As we aggressively pursue this mission, we are
sincerely grateful for the support of our valued customers and suppliers, for
the dedication and hard work of our outstanding employees, and for the trust and
encouragement of our shareholders.
Sincerely,
Albert J. Hugo-Martinez
President and
Chief Executive Officer
<PAGE> 3
GTI CORPORATION
GTI Corporation ("the Company") is a broad-based supplier of signal
management components to original equipment manufacturers ("OEMs") of local area
networks ("LAN") and wide area networks ("WANs") for data communications.
Through its Valor Electronics, Inc. ("Valor") subsidiary, the Company designs,
manufactures, markets, and supports a broad family of standards-based magnetic
components with application-specific interface solutions for signal management
in networking and internetworking products. These signal management products
provide signal processing and power transfer functions such as circuit isolation
and impedance matching, signal shaping and conditioning, noise reduction and
filtering, and voltage conversion. These electrical functions help enable the
OEM's hardware and software product architecture to transmit data over the LAN
transmission media.
The Company's principal products are magnetics-based components.
Magnetics-based components are marketed under the Valor name and consist of two
categories, signal processing and power transfer, as more fully described below.
Valor's products are compliant with the industry standards adopted by the
Institute of Electrical and Electronic Engineers ("IEEE") for the conversion and
transmission of data over copper wire and support the major networking
architectures ("LAN topologies"), which have evolved based on these standards.
The Company's magnetic-based components include a broad family of
standards-compliant, miniature, wire-wound transformers; integrated modules; and
subsystem products. The Company works closely with networking customers and
integrated circuit companies to design products that complement the
manufacturers' integrated circuit or chip set configuration with magnetics
applications required to enable the integrated circuit to perform its desired
function, which is the conversion of the digital signal from inside the
computing device into an analog signal for transmission on the LAN medium or
cabling system. Valor's products are located at all interface points of the LAN
cabling system where signal conversion is required. For example, on the desktop,
these products are found inside the computer on the network interface adapter
card. In addition, these products are located within external connection devices
such as transceivers. At the file server, these products are found near the
connection port of hubs or concentrators, routers, and switches, as well as
inside multiple-access units.
Magnetics-based components are an integral part of electronic circuitry. In
LAN applications, circuits need to be isolated from each other, impedances
matched (signal levels stepped up or down), unwanted signals suppressed or noise
emissions filtered, and voltage converted. The LAN topologies that these
networking products support differ in their requirements for transmission speed,
wiring specifications, and signaling-access methods of the LAN; and, as a
result, the component mix, quantity, placement, and degree of component
integration for these products will vary depending upon the LAN topology used.
Signal Processing Product -- The Company's signal-processing products
consist of pulse transformers, chokes, filters, and integrated filter modules.
Pulse transformers provide electrical isolation of circuits and match impedances
between different parts of circuits, thus allowing for different circuits placed
within close proximity on the same board to handle voltage signals without
causing data distortion or circuit damage. In a LAN using copper wire as the
transmission medium, isolation transformers are used on network adapter cards,
generally located inside the computer, to isolate the wire from the network
adapter card itself. This isolation prevents the wire from transferring voltage
spikes into the system which would severely damage the circuits and destroy the
signal. Chokes are used for filtering and smoothing electrical signals, and are
often used in connection with transformers. In a LAN, the required magnetics
application for chokes is signal conditioning and shaping at the network
interface point to suppress noise emission on the transmit and receive line. The
Company's transformers and chokes support Ethernet over coax; 10Base-T and Token
Ring LAN topologies; and other high-speed LAN applications, such as 100Base-TX
Fast Ethernet, 155 Mbps Asynchronous Transfer Mode ("ATM"), and fibre-channel
applications. Transformers and chokes are also used in telecommunication
products with ISDN, T-1/CEPT, and S and U interface applications. Filter
products reduce or eliminate conducted noise from traveling along transmission
media as well as minimize large current or voltage spikes that would be deemed
excessive on the transmission cable. Filter products are designed to work with
the most commonly used integrated circuits and generally support both transmit
or receive
2
<PAGE> 4
functions. Filters are located at the transmit and receive connection ports in
such hardware as adapter cards, transceivers, intelligent hubs, routers, and
switches and may be placed discretely on printed-circuit boards or into an
integrated filter module.
Integrated filter modules consist of a filter and a transformer and often a
choke in one single module and may also include resistors, compactors and
opto-isolators. Integrated filter modules perform the combined functions of
signal isolation, impedance matching, signal conditioning, filtering, noise
suppression and overvoltage protection. The Company's filter products support
applications for Ethernet over coax, 10Base-T, Token Ring, and the PCMCIA credit
card-sized standard as well as 100Base-TX Fast Ethernet, FDDI over copper, and
155 Mbps ATM.
Power-Transfer Products -- The Company's principal power-transfer products
are DC/DC converters. DC/DC converters take the bus or supply voltage, which
generally operates at a higher voltage level than the integrated circuit, and
converts the voltage to a different voltage level to enable the integrated
circuit to function optimally. DC/DC converters are also suitable for flash
memory and distributed power applications. In a LAN, DC/DC two watt converters
are located in adapter cards and hubs and support Ethernet over coax
applications. 10Base-T topologies do not require a DC/DC converter. Higher power
levels (up to 40 watts) are used to support new sub-5v levels for faster
Pentium-type micro processors.
CUSTOMERS
Valor's products are sold directly or indirectly to more than 1,000
customers, including the following 10 customers which individually represented,
at a minimum, 2% of the Company's 1996 sales and collectively represented
approximately 71% of the Company's 1996 sales:
<TABLE>
<S> <C>
Accton Hyo Sung Computers
Avnet Engineering Jabil Circuits
Bay Networks, Inc. Motorola, Inc.
Cabletron Systems, Inc. SCI
Hewlett-Packard Company 3Com Corporation
</TABLE>
Two customers, 3Com Corporation and SCI Manufacturing, Inc., accounted for
approximately 20% and 10%, respectively, of the Company's total sales in 1996.
Two customers, 3Com Corporation and Bay Networks, Inc., accounted for 16% and
14%, respectively, of the Company's total sales in 1995. One customer, 3Com
Corporation, accounted for 22% of the Company's total sales in 1994. The sales
percentage from Valor's OEM customers has historically fluctuated and may
continue to vary in future periods. Management believes that future sales
concentration to these OEM customers is likely to continue; consequently, such
concentration may adversely affect both average selling prices, future sales
growth, gross margins, and the Company's financial condition.
SALES AND MARKETING
Valor's products are sold domestically (including Canada) through 16
manufacturers' representative organizations employing over 150 sales engineers
trained to sell the Company's products. These products are also offered for sale
through three national and two regional electronics distributors with branches
throughout the United States and Canada. The largest distributor is
Hamilton/Hallmark (a subsidiary of Avnet Engineering). In January 1997, one of
the regional distributors became a national distributor of Valor's products. The
efforts of the representative and distribution organizations are directed by
three regional manager employees who report to a vice president of sales and
marketing. Additionally, during 1997, Valor added a national distribution
manager who reports to the vice president of sales and marketing.
The international sales structure comprises representative and distributor
networks in Europe and the Pacific Rim. There are directors of sales and
marketing in Munich, Germany, and Hong Kong who oversee sales in Europe and the
Pacific Rim, respectively. The Company employs customer service representatives
to process purchase orders and respond to customer inquiries.
3
<PAGE> 5
COMPETITION
The market for magnetics-based components for LAN applications is highly
competitive. Valor's products have two principal competitors, Pulse Engineering,
Inc., (a subsidiary of Technitrol) and Bel Fuse, Inc. with each offering a broad
product line and competing with similar levels of manufacturing and engineering
capabilities. In addition, numerous foreign-based firms, mainly Taiwanese with
strong manufacturing capabilities, offer specific products with capabilities
similar to the Company's standard and mature product lines. These firms tend to
compete on a product-specific basis or a protocol-specific basis but do not
compete across all products and LAN applications offered by the Company.
The number of competitors and the characteristics of competition for
Valor's products varies based on the degree of engineering and design related to
each product. Currently, competition is primarily based on engineering design,
quality, availability, and price. Products with very little engineering
requirements or changes in design have more competitors, and typically compete
on price. Products with a high degree of engineering design and component
integration have fewer competitors, and typically compete on the ability to
provide solutions. The Company believes that its engineering program and
relationship with customers give it a competitive advantage over companies with
fewer engineering resources with respect to products requiring a high degree of
engineering and component integration.
The market for 10Base-T Ethernet and 10Base-2/5 products is becoming
increasingly mature and, as a result, manufacturing companies are entering the
marketplace with standard products and have sought to compete on the basis of
price. The Company believes that it has been able to compete effectively in this
environment by focusing on higher degrees of engineering and functionality,
product quality, and availability, as well as the ability to cost re-engineer
mature products. See "Product Development" for a discussion of new product
development and emerging communications markets.
MANUFACTURING AND SUPPLIERS
The manufacturing operations for Valor's products are labor intensive, and
primarily involve the winding of magnetic cores; the assembly and placement of
discrete, and integrated circuit components onto printed circuit boards; product
encapsulation; testing; quality assurance; and marking of the final component.
Valor conducts its manufacturing in the Asia Pacific Region via five operations
in the People's Republic of China ("PRC") and two operations in the Philippines.
The activities of these manufacturing operations are coordinated and supported
by Valor's San Diego-based headquarters. All of the manufacturing operations in
the PRC and the Philippines are certified pursuant to ISO 9002. Of the five
operations in the PRC, two are owned by Valor and three are operated through
subcontracting arrangements over which the Company has direct product
supervision. Of the two operations in the Philippines, one is owned by Valor and
the other is operated through subcontracting arrangements over which the Company
has direct product supervision. The subcontract arrangements are negotiated on a
price-per-piece basis, renewable annually, and generally provide to the Company
flexibility to adapt its production schedule in response to fluctuations in
market demand.
The principal materials and fabricated components used in Valor's products
include ferrite cores, coilforms, leadframes, printed circuit boards, epoxies,
discrete, and integrated circuit electronic components. The Company generally
uses standard parts and components for its products and, historically, has been
able to obtain adequate supplies from existing sources. During 1996, the Company
has sought to establish close supplier relationships for its principal materials
and components for its principal materials and fabricated components, through a
supplier quality program, and believes that, in the case of non-critical
components, there are a number of alternative qualified vendors to supply parts
in a timely manner. Currently, pin coilforms, which are used in approximately
30% of filter products, are manufactured by a sole-sourced supplier. An
interruption in the supply of pin coilforms or the inability of the Company to
procure this component from alternative sources at acceptable prices within a
reasonable time would materially and adversely affect the Company's business,
manufacturing operations, operating results, and financial condition.
4
<PAGE> 6
PRODUCT DEVELOPMENT
The market for the Company's products is characterized by rapidly changing
technology, frequent new product introduction, and the requirement to conform to
evolving standards for networking data communications architectures. The
Company's ability to develop and introduce new products to the market in a
timely manner or enhancements to existing products is crucial to its future
success.
Valor is developing its magnetics-based products for use in emerging
communications markets, such as Fast Ethernet, FDDI/CDDI, ATM, xDSL, and PCMCIA
standards. Valor works closely with networking customers and integrated circuits
manufacturers with which Valor's products must interface and participates as a
member in the IEEE and ANSI Standards Committees. These efforts give Valor early
access to new technologies and new product plans, which Valor believes provide
it with advantages in the timely development of its products. Concurrent
engineering projects with key customers are also becoming an important factor in
developing new products and product enhancements. Valor is also developing
products for sale in broader telecommunication markets (including ISDN) and
products for flash memories, in addition to developing subsystems with higher
degrees of component integration and value-added for its major customers. In
1996, 1995, and 1994, Valor incurred design engineering and product development
costs of $3,245,000, $4,705,000, and $5,464,000, respectively.
FOREIGN OPERATIONS
Substantially all of Valor's manufacturing operations and approximately 54%
of its identifiable assets (excluding goodwill) are located in the PRC and
Philippines. See the discussion "Manufacturing and Suppliers" and "Properties."
There are risks inherent to these foreign operations, many of which are beyond
the control of the Company. These risks include exposure to the effects of
political and economic instability and significant changes to existing
international treaties, market forces, and foreign laws as well as difficulties
in staffing and managing foreign subsidiaries and oversight of subcontracting
arrangements. Such risks could result in interruptions of manufacturing
operations, capability, or substantial increases in operating costs, which if
prolonged would have a material, adverse effect on the Company's profitability
and financial condition. If the United States Government were to eliminate
current favorable trade legislation with China or increase customs duties, it
could have a material adverse effect on a significant portion of the Company's
foreign operations. In 1996, the Company obtained formal approval and began to
operate in China as a Wholly Foreign-Owned Enterprise ("WFOE"), and believes
that conducting its operations in China under the WFOE structure will
potentially mitigate certain risks and uncertainties associated with the
previous contractual arrangements in China.
INTERNATIONAL SALES
Sales to customers outside of the United States comprised approximately
48.6% of the Company's total net sales in 1996, of which approximately 19.3%,
27.7%, and 1.6% were made to customers in the Pacific Rim, Europe, and North
America, respectively. Sales to customers outside the United States as a
percentage of total sales were approximately 42.6% in 1995, and 36.5% in 1994.
The Company also exports products to international markets from its Valor
domestic operations. Valor's export sales as a percentage of total domestic
sales were 1.9%, 4.6%, and 9.7% for 1996, 1995, and 1994, respectively.
Additional geographic segment financial information is set forth in Footnote 13
to the Financial Statements under the caption "Geographic Segments," included
herein.
The Company has established sales offices in Hong Kong and Munich, Germany,
to administer its international sales activities for Valor. The Company believes
that LANs, which require magnetics-based components such as those manufactured
by the Company, will make further penetration into international markets, as has
been the case in the United States. Accordingly, the Company expects that
international sales will continue to represent a significant percentage of total
future sales. International sales are, however, subject to inherent risks,
including changes in regulatory requirements, fluctuating currency exchange
rates, increases in tariff and other barriers, difficulties in obtaining export
licenses, and potentially adverse tax consequences.
5
<PAGE> 7
BACKLOG
The backlog of unfilled orders as of December 31, 1996, was approximately
$15,736,000, compared to approximately $25,800,000 as of December 31, 1995. The
Company generally manufactures its products against firm orders and forecasted
demand. The Company's backlog at the beginning of each quarterly period is not
sufficient to achieve anticipated revenues for the quarter. As a result, the
Company's sales for any future quarterly period are dependent upon obtaining
orders in a quarter for shipment within the same quarter. Therefore, the
Company's backlog may not be indicative of actual revenues for the future
quarterly period. While the Company believes that the orders included in the
backlog are firm, typical customer terms generally include the ability to cancel
or reschedule orders within 30 days of the initial order placement date without
significant penalty. In addition, the Company commits its manufacturing and
expense levels according to monthly and quarterly sales and production
forecasts. If anticipated sales do not meet these forecasts, the Company's
operating results would be adversely effected.
MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SECURITY MATTERS
The Company's Common Stock is traded on the NASDAQ/NMS -- Symbol: GGTI. The
prices quoted below have been furnished by the NASDAQ/NMS. As of December 31,
1996, there were approximately 1,470 holders of the Company's Common Stock. The
Company has not paid dividends on its Common Stock since 1982.
<TABLE>
<CAPTION>
1996 1995
-------------- --------------
QUARTER HIGH LOW HIGH LOW
------------------------------------------- ---- --- ---- ---
<S> <C> <C> <C> <C>
1st...................................... 18 1/4 8 1/4 17 1/4 9 1/2
2nd...................................... 9 1/2 7 1/4 19 1/2 9 1/2
3rd...................................... 7 3/4 5 1/4 23 5/8 15 1/2
4th...................................... 7 1/4 4 3/8 19 7/8 10 1/2
</TABLE>
SELECTED CONSOLIDATED FINANCIAL DATA
The income statement data of the Company presented below for each of the
five fiscal years ended December 31, 1996, and the balance sheet data as of
December 31, 1996, 1995, 1994, 1993, and 1992 have been derived from the audited
Consolidated Financial Statements of the Company that are included as part of
this Annual Report and the Company's Annual Reports for the prior three fiscal
years.
The selected consolidated financial data set forth below should be read in
conjunction with Management's Discussion and Analysis of Financial Condition and
Results of Operations and the Consolidated Financial Statements and Notes
thereto included elsewhere as part of this Annual Report.
6
<PAGE> 8
SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- ------- -------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Sales $ 92,533 $114,836 $103,239 $88,575 $63,985
======== ======== ======== ======= =======
Income (loss) from continuing operations $ (7,651) $ 6,124 $ 3,699 $10,890 $ 7,032
Income (loss) from discontinued
operations, net (2,998) (2,178) 1,962 2,310 1,998
Loss on disposal of discontinued
operations, net (10,822) (2,000) -- -- --
-------- -------- -------- ------- -------
Net income (loss) $(21,471) $ 1,946 $ 5,261 $13,200 $ 9,030
======== ======== ======== ======= =======
Net income (loss) per share of Common
Stock -- primary and fully diluted
Income (loss) from continuing operations $ (0.88) $ 0.56 $ 0.32 $ 1.09 $ 0.72
Income (loss) from discontinued operations (0.34) (0.20) 0.20 0.23 0.21
Loss on disposal of discontinued
operations (1.20) (0.18) -- -- --
-------- -------- -------- ------- -------
Net income (loss) $ (2.42) $ 0.18 $ 0.52 $ 1.32 $ 0.93
======== ======== ======== ======= =======
Weighted average shares outstanding 8,973 10,873 10,187 10,023 9,713
======== ======== ======== ======= =======
BALANCE SHEET DATA
Total assets $ 91,524 $117,699 $ 99,948 $89,648 $66,721
======== ======== ======== ======= =======
Working capital $ 29,513 $ 53,690 $ 42,108 $38,055 $25,157
======== ======== ======== ======= =======
Long-term debt $ -- $ -- $ -- $ -- $ 2,625
======== ======== ======== ======= =======
Stockholders' equity $ 67,150 $ 88,995 $ 77,563 $71,772 $48,480
======== ======== ======== ======= =======
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
This Annual Report contains certain statements of a forward-looking nature
relating to future events or the future performance of the Company. Prospective
investors are cautioned that such statements are only predictions and that
actual events or results may differ materially. In evaluating such statements,
prospective investors should specifically consider various factors (including
risk factors) identified in this Annual Report which could cause actual results
to differ materially from those indicated by such forward-looking statements.
The following discussion should be read in conjunction with the
consolidated financial statements and related notes included elsewhere in this
Annual Report. Dollar amounts below are expressed in thousands.
In March 1997, Promptus entered into an agreement (the "NAC Transaction")
to sell the net assets of its Network Access Card business (the "NAC's") for
approximately $20.0 million, subject to regulatory approval. These sale proceeds
will consist of $14.5 million in cash and 223,881 shares of common stock of
VideoServer Inc Subject to the closing of the NAC Transaction, Promptus will
purchase 100% of the Promptus shares held by the Company and repay certain
indebtedness to the Company for an aggregate of approximately $11.6 million, net
of certain transaction costs. The net proceeds to the Company are estimated to
consist of $8.2 million in cash and approximately 158,000 shares of common stock
of VideoServer Inc., resulting in a loss on disposal of approximately $10.8
million. Management expects these transactions to close in the quarter ended
June 28, 1997, and has based its estimated loss on the disposal of Promptus
based on the terms of these pending transactions. Accordingly, these businesses
have been accounted as discontinued operations in accordance with Accounting
Principles Board Opinion No. 30.
7
<PAGE> 9
RESULTS OF OPERATIONS
1996 as compared to 1995
Revenues declined by 19.4%, from $114,836 in 1995 to $92,533 in 1996. This
decrease consisted of an approximate 5.3% decrease in average selling prices and
an approximate 14.9% decrease in unit volume. Management attributes the decrease
in average selling prices to the competitive pressures caused by downward
pressures on prices in the market for networking products for which the Company
provides components. The decrease in unit volume is also attributed to these
market conditions as well as to certain manufacturing and product issues that
resulted from the 1996 restructuring of the Company's off-shore manufacturing
operations. Management believes that these issues have been and continue to be
addressed, and that measurable improvements have been made. Management further
believes that these improvements contributed directly to the improved fourth
quarter 1996 results where revenues increased by 8.6% as compared to the
immediately preceding quarter. This was the first increase in sequential
quarterly revenue levels after six quarters of sequential quarterly revenue
decline. However, there can be no assurance that revenues will continue to
increase or that revenue will return to 1995 levels.
In 1996, two of Valor's customers individually accounted for approximately
20% and 10% of sales. This compares to 16% and less than 10% of sales in 1995.
Additionally, there was a third customer who accounted for 14% of sales in 1995.
The sales percentage from these and other customers has historically fluctuated
and may continue to vary in future periods. Management believes that future
sales concentration to these customers is likely to continue; consequently, such
concentration may adversely affect both average selling prices and future sales
growth.
Cost of sales decreased by 8.9%, from $82,729 in 1995 to $75,350 in 1996.
This decrease was due primarily to the decline in unit sales volume and the
factors discussed below related to gross margin.
Gross margin decreased by 46.5%, from $32,107 in 1995 to $17,183 in 1996.
Gross margin as a percent of revenue decreased by 33.6%, from 28% in 1995 to
18.6% in 1996. The decline in gross margin dollars resulted primarily from the
decline in unit volume and from increased excess and obsolete inventory
provisions in 1996. The decrease in gross margin as a percent of revenues
resulted primarily from the effects of fixed costs spread over lesser volume and
from the price decline described above.
The decline in gross margin in 1996 was off-set slightly by decreased
overhead costs resulting from the May 1996 formation of the Company's
wholly-owned manufacturing operation in China, from the resultant termination of
subcontract processing arrangements in China, and from the resultant restructure
of the Company's Hong Kong management team. These reductions in overhead costs
began to turn through inventory and to positively impact margins in the fourth
quarter of 1996, during which margins as a percent of revenue increased to
22.1%. Assuming the Company maintains fourth quarter 1996 unit volume and
average sales price levels, management expects future margins as a percent of
sales to approximate at least 25%. However, there can be no assurance that
future quarter volume and average selling prices will continue, and there can be
no assurance that competitive pricing pressures will not decrease future
margins.
Operating expenses increased by 1.3%, from $25,382 in 1995 to $25,722 in
1996. The 1996 operating expenses include a $1,900 charge related to the
restructuring of the Company's off-shore operations, particularly in Hong Kong,
a $650 charge related to the settlement and legal costs of a class action
lawsuit, and a $871 charge related to the severance of certain corporate
employees. The 1995 operating expenses included a $1,376 charge related to
severance. Absent these charges in 1996 and 1995, operating expenses decreased
by 5.6% resulting primarily from reductions in commissions expense and
personnel.
Other expenses increased from $29 in 1995 to $162 in 1996 primarily as a
result of gains on the sale of certain fixed assets in 1995.
8
<PAGE> 10
The Company's tax provision related to continuing operations changed from
an expense of $506 in 1995 to a net benefit of $1,050 in 1996. The net tax
benefit in 1996 results primarily from the planned carryback of the U.S. portion
of the 1996 consolidated loss. The 1995 expense is significantly less than a
provision based on the U.S. Federal tax rate due to off-shore tax holidays and
due to the Company's intentions to not repatriate off-shore earnings. Management
believes that the Company's future effective tax rate could fluctuate based on
the geographic origin of Valor's earnings, future financial performance, and
future decisions on the repatriation of foreign earnings.
The decreased revenue levels, decreased gross margin and increased
operating expenses, off-set somewhat by income tax consequences, resulted in a
loss from continuing operations after taxes of $7,651 ($0.88 per share) in 1996.
This compares to income from continuing operations after taxes of $6,124 ($0.56
per share) in 1995.
The Company discontinued three operations during the years 1995 and 1996 as
more fully described in the accompanying notes to financial statements. Losses
from discontinued operations were $2,998 ($.34 per share) in 1996 compared to
$2,178 ($.20 per share) in 1995. Estimated loss on disposal of discontinued
operations was $10,822 ($1.20 per share) in 1996 and $2,000 ($.18 per share) in
1995. Including the effect of discontinued operations, the net loss was $21,471
($2.42 per share) in 1996 compared to net income of $1,946 ($.18 per share) in
1995.
1995 compared to 1994
The increase in sales of $11,597 or 11.2% in 1995 from 1994 was primarily
due to increased unit demand (13%) over the prior year for the Company's LAN
magnetics-based components. The growth in sales reflects increased unit volume
across substantially all product families supplied to OEMs for LAN and
internetworking products. International sales continued to remain strong during
1995 increasing 69%, representing 41% of the Company's sales in 1995 compared to
30% in 1994. Substantially all of the increase was a result of increased sales
to existing international OEM customers.
The year-over-year 18% increase in gross profit from $27.1 million in 1994
to $32.1 million in 1995 is a result of increased unit volumes. The increase in
gross profit as a percentage of sales of 1.7% from 1994 is a result of
stabilized product average selling prices, particularly filter products; reduced
raw material costs per unit; reduced manufacturing costs; and, to a lesser
extent, economies of scale associated with increased manufacturing volumes.
The 7.1% increase in selling, general and administrative expenses from
$23.7 million to $25.4 million is due to increased selling costs associated with
Valor's higher sales volume and a charge of approximately $1,376 relating to
certain severance costs. The decrease in selling, general and administrative
expenses, as a percentage of sales, is a result of administrative efficiencies
in relation to sales growth and a decrease in selling costs as a percentage of
sales offset by the severance costs. Management believes that selling, general
and administrative expenses may vary as a percentage of future sales.
Non-operating income (expense), net, consists primarily of interest income
and expense and net foreign currency translation costs. The decrease in interest
income, net, in 1995 from 1994 is primarily a result of increased interest
expense related to increased borrowings on the credit facility to facilitate
Valor's growth.
A significant portion of Valor's operations resides in foreign countries
with lower tax rates than the United States. These foreign operations generated
a significant portion of the Company's total earnings in 1995 and 1994, and
account for the significantly lower, effective income tax rate than the
statutory United States corporate income tax rate.
The increase in income from continuing operations during 1995 is primarily
due to an increase in Valor's sales, gross profit as a percentage of sales and a
decrease in selling, general, and administrative spending as a percentage of
sales offset by increased interest expense during 1995.
9
<PAGE> 11
PROSPECTIVE INFORMATION
The Company believes that its future operating results will be influenced
by a number of factors including, but not limited to, general economic
conditions; the continued growth of the LAN and internetworking markets; the
growth of broad-band, global services and high-speed, digital, network
applications; timely new product introductions; dependence on key OEM customers;
market acceptance of the networking technologies; the future operating and
financial performance of Valor's products ; and numerous competitive forces. It
is anticipated that the Company's operating results in the foreseeable future
will remain dependent on the success of Valor in identifying, developing,
manufacturing, and marketing new products or enhancing existing product
offerings. The Company is subject to technological changes, which could cause
management to reassess its estimate of the realizability of goodwill and/or its
amortization period.
The majority of Valor's sales continue to be derived from products that
support Ethernet and 10Base-T applications. Valor's operating results could be
affected if there is an unexpected change in such technologies or if Valor does
not respond appropriately to expected changes. Valor supplies OEM's product
compliant with all relevant IEEE, ANSI, and ATM forum standards for 100Base-TX
Fast Ethernet, TP/PMD (FDDI over copper), xDSL, and 155 Mbps ATM applications.
The success of these advanced products is dependent on many factors, such as the
Company's ability to manufacture these products in sufficient quantities to meet
anticipated demand and the overall market acceptance of these new technologies.
The inability of these advanced networking products to gain market acceptance or
potential delays of the widespread installation of such products could subject
Valor's existing products to increased competition and pricing pressures, which
would adversely affect the Company's operating results.
The Company's future performance will also be affected by the volume, mix,
and timing of orders received during a particular quarterly period. The
Company's backlog at the beginning of any particular quarter is not sufficient
to achieve expected sales or profitability for that quarter. To achieve its
sales and profitability objectives in a quarter, the Company is dependent upon
obtaining substantial orders in that quarter for shipment during that quarter.
There can be no assurance that orders from existing customers will continue at
the levels of previous years or that the Company will be able to obtain orders
from new customers. Additionally, there can be no assurance that orders received
and requested for shipment in a specific quarter will not be canceled or the
requested date of shipment changed to a subsequent quarter. If anticipated
orders do not develop or changes in delivery schedules or cancellation of orders
occur, the per-unit manufacturing costs, expenditures, and inventory levels
could be disproportionately high in relation to sales. This could have an
adverse affect on the Company's operating results for that quarterly period.
There is one key component (pin coil forms -- see "Manufacturing and
Suppliers") that Valor uses in its manufacturing and assembly process that is
currently available only from a single source. There can be no assurance that
this supplier will be able to meet future demand for components in a timely and
cost-effective manner. The Company's operating results and customer
relationships could be adversely affected by either price increases or an
interruption or reduction in products shipped due to an interruption or
reduction in supply of any key components.
The Company's results and stock price have been, and may continue to be,
subject to significant volatility, particularly on a quarterly basis. Any
shortfall in sales or earnings could have an immediate and significant adverse
affect on the trading price of the Company's Common Stock in any given quarterly
period.
LIQUIDITY AND CAPITAL RESOURCES
In 1996, the Company's liquidity was adversely effected by ongoing
operating losses at Promptus, by increased operating losses at Valor, and by the
costs of restructuring Valor, among other things. These liquidity requirements
were funded primarily through proceeds from the sale of operations discontinued
in 1995 and by reductions in Valor inventory and receivable levels. To help
compensate for the 1996 net reduction in available liquidity, in February 1997
the Company obtained a two year term note from its majority shareholder as more
full described below. Also in March 1997, the Company signed an agreement to
sell its majority interest in Promptus as more fully described below. Assuming
the Promptus transaction closes, the Company's liquidity should be adequate for
the coming year also as more fully described below.
10
<PAGE> 12
The Company's current principal sources of liquidity are cash, cash
equivalents, available borrowings on its credit facility (see below), and the
expected proceeds from the divestiture of Promptus (see also below). On December
31, 1996, 1995, and 1994, cash and cash equivalents totaled $3.2 million, $2.6
million and $4.2 million, respectively. On December 31, 1996, 1995, and 1994,
line of credit borrowings totaled $4.9 million, $4.2 million and $4.9 million,
respectively. Net cash provided (used) by continuing operations was $7.8
million, $2.9 million and $(3.8) million, respectively. Cash provided by
continuing operations increased by approximately $4.9 million in 1996, as
compared to 1995, primarily as a result of reductions in inventory and accounts
receivable balances, offset somewhat by the increased losses from continuing
operations. Net cash provided from the sale of discontinued operations was
$2,412, $11,750 and $0, and net cash provided (used) by discontinued operations
was ($2,898), ($3,697) and $4,447 in 1996, 1995, and 1994, respectively.
The Company has a line of credit agreement with a bank that expires on June
30, 1997. The total amount available under the line is $7.5 million, subject to
the balance of eligible accounts receivable. The entire $7.5 million was
available as of December 31, 1996 and as of March 31, 1997. Interest accrues at
prime plus one and one-quarter percent, and outstanding borrowings are
collaterized by substantially all the Company's domestic assets. As of December
31, 1996, the Company was in default of a financial covenant contained in the
agreement, which default has been waived by the bank.
In February 1997, Valor obtained a $2.5 million two year term note from
Telemetrix PLC, the Company's majority shareholder. This note is to be repaid by
Valor in four equal semi-annual installments of $625,000 plus applicable
interest beginning August 1997 and ending February 1999. Interest accrues at
prime plus 4% per annum (subject to a possible upward adjustment) and the loan
is secured by a subordinated security interest in all of Valor's domestic fixed
assets.
In March 1997, the Company's 72% owned subsidiary Promptus Communications,
Inc. ("Promptus") agreed to sell the assets and associated liabilities of its
Network Access Card business to VideoServer, Inc. for about $20 million, subject
to regulatory approval. This total consideration will include $14.5 million cash
and 223,881 shares of VideoServer common stock. Upon closing of the asset sale,
Promptus has agreed to repay loans from the Company and to redeem all the
Promptus common stock held by the Company in exchange for an aggregate of about
158,000 shares of the VideoServer common stock plus a total of about $8.2
million cash, net of transaction costs. As a result of this redemption of the
Company's interest in Promptus, the Promptus minority shareholders will own 100%
of Promptus which will consist primarily of the Systems business. Management
anticipates that these transactions will close during the second quarter ended
June 28, 1997, and that the VideoServer stock to be received by the Company will
be sold in 1997.
Management anticipates that its line of credit agreement described above
will be extended or replaced during 1997 assuming that the Promptus divestiture
is completed and assuming break-even or better results at Valor beginning in the
first quarter 1997. Management further anticipates that an extended line of
credit, coupled with the proceeds from the Telemetrix note and the anticipated
proceeds from the planned divestiture of Promptus, should give to the Company
the liquidity it needs to pursue its strategic plan for Valor, at least for the
coming year. However, there can be no assurance that the Company's interest in
Promptus will be sold for the amount or within the time frame anticipated by
management, that Valor will maintain break-even or better results, or that
Valor's strategic plan will be successful.
If the Company's interest in Promptus is not sold within the next few
months, and/or if the Company does not maintain break-even or better revenue
levels, then the Company may be forced to curtail its strategic plan and/or to
seek further capital infusions. Also, the current line of credit agreement
expires on June 30, 1997 and there can be no assurance that the bank will renew
the facility. Although management believes it will be able to identify an
asset-based lender to replace the line of credit, if necessary, there can be no
assurance that such will be located. Neither can these be any assurance that
additional capital infusions will be available to the Company in sufficient
amounts, if at all, and, if available, there can be no assurance that the
related terms and conditions will be acceptable to the Company. Failure of the
Company to obtain such credit facility and/or capital infusion, if needed, would
have a material and adverse effect on the Company.
11
<PAGE> 13
The Company made capital expenditures of approximately $6.1 million and
$4.5 million in 1996 and 1995, respectively, a significant portion of which was
expended by Valor for additional equipment to automate its manufacturing
operations and/or to support increased manufacturing volume. The Company
currently estimates its 1997 capital expenditures will range between $4 million
and $8 million, depending on the need for further increases in automation and
capacity at Valor. The Company anticipates that most such capital expenditures
will be funded through cash generated from operations.
Dividends on the Company's 8,110 shares of outstanding, cumulative
convertible Preferred Stock accrue at a rate of $35.00 per share, per year,
payable quarterly. In 1996, dividends totaling $213 were paid and $71 were in
arrears as of December 31, 1996.
In connection with the acquisition of Promptus, the Company entered into an
agreement for the contingent purchase of the remaining 1.6 million shares or
approximately 29% of Promptus's capital stock. The first mutual put/call right
occurred January 1997 for 30% of the remaining Promptus shares, which put/call
has been postponed pending the resolution of the divestiture transactions
described above. If the Promptus divestiture does not occur, the Company may be
obligated to purchase 30% of the remaining Promptus shares held by the minority
shareholders. The price to be paid will be based upon a predetermined formula
using forecast and actual results of Promptus in 1997, 1998, and 1999. Because
of the determinants, it is not presently possible to assess whether the
condition for this contingent purchase will be satisfied nor is it possible to
estimate the price at which such shares might be purchased. In the event the
mutual put/call right is exercised, the Company will be obligated to pay up to
$4.80 per share in cash and may pay the amount in excess of $4.80 in cash,
Common Stock, or a combination thereof. If the Promptus divestiture does not
occur, the put/call obligation could have a material and adverse effect on the
Company.
12
<PAGE> 14
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors, GTI Corporation:
We have audited the accompanying consolidated balance sheets of GTI
Corporation (a Delaware corporation) and subsidiaries as of December 31, 1996
and 1995, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of GTI
Corporation and subsidiaries as of December 31, 1996 and 1995, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1996 in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
San Diego, California
March 25, 1997
13
<PAGE> 15
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1996 1995 1994
-------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER
SHARE DATA)
<S> <C> <C> <C>
Sales.................................................... $ 92,533 $114,836 $103,239
Cost of goods sold....................................... 75,350 82,729 76,122
-------- -------- --------
Gross profit............................................. 17,183 32,107 27,117
Selling, general and administrative expense.............. 25,722 25,382 23,695
-------- -------- --------
Operating profit (loss).................................. (8,539) 6,725 3,422
Other income (expense), net
Interest income........................................ 91 93 173
Interest expense....................................... (319) (342) (122)
Other.................................................. 66 220 226
-------- -------- --------
Income (loss) from continuing operations before income
taxes and minority interest............................ (8,701) 6,696 3,699
Provision (benefit) for income taxes..................... (1,050) 506 264
Minority interest in earnings of subsidiaries............ -- 66 136
-------- -------- --------
Income (loss) from continuing operations................. (7,651) 6,124 3,299
Income (loss) from discontinued operations, net of income
taxes of $0, $515, and $1,085 for 1996, 1995, and 1994,
respectively........................................... (2,998) (2,178) 1,962
Loss on disposal of discontinued operations, including
income taxes of $1,298 and $1,186, respectively........ (10,822) (2,000) --
-------- -------- --------
Net income (loss)........................................ $(21,471) $ 1,946 $ 5,261
======== ======== ========
Net income (loss) per share of Common Stock:
Income (loss) from continuing operations............... $(0.88) $ 0.56 $0.32
Income (loss) from discontinued operations............. (0.34) (0.20) 0.20
Loss on disposal of discontinued operations............ (1.20) (0.18) --
------ ------ ------
Net income (loss) per share.............................. $(2.42) $ 0.18 $0.52
====== ====== ======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
14
<PAGE> 16
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
--------------------
1996 1995
------- --------
(DOLLARS IN
THOUSANDS,
EXCEPT PER SHARE
DATA)
<S> <C> <C>
Current Assets
Cash and cash equivalents............................................. $ 3,219 $ 2,553
Receivables, net of allowances of $201 and $225, respectively......... 11,502 19,456
Inventories........................................................... 18,551 29,245
Prepaid expenses and other............................................ 6,802 3,761
Net assets of discontinued operations................................. 11,637 25,551
------- --------
Total current assets.......................................... 51,711 80,566
Property, plant, and equipment, net..................................... 15,974 14,963
Goodwill, less accumulated amortization of $4,211 and $3,515, and
other................................................................. 23,839 22,170
------- --------
Total Assets.................................................. $91,524 $117,699
======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Short-term borrowings................................................. $ 4,900 $ 4,234
Accounts payable, accrued and other liabilities....................... 17,298 22,642
------- --------
Total current liabilities..................................... 22,198 26,876
------- --------
Deferred income taxes and other non-current liabilities................. 2,176 1,828
------- --------
Commitments and contingencies
Stockholders' Equity
Preferred Stock, authorized 1,000,000 shares, first series, $35.00
cumulative convertible, issued and outstanding 8,110 shares........ 8,110 8,110
Common Stock, par value $0.04 per share, authorized 12,000,000 shares,
issued 8,973,475 in 1996 and 1995.................................. 359 359
Additional paid-in capital............................................ 44,082 44,082
Retained earnings..................................................... 14,644 36,399
Cumulative translation adjustments.................................... (45) 45
------- --------
Total stockholders' equity.................................... 67,150 88,995
------- --------
Total Liabilities and Stockholders' Equity.............................. $91,524 $117,699
======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
15
<PAGE> 17
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
FIRST SERIES ADDITIONAL CUMULATIVE
PREFERRED COMMON PAID-IN RETAINED TREASURY TRANSLATION
THREE YEARS ENDED DECEMBER 31, 1996 STOCK STOCK CAPITAL EARNINGS STOCK ADJUSTMENTS
- ------------------------------------ ------------ ------ ---------- -------- -------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1993.......... $8,110 $337 $ 34,269 $ 29,760 $ (1,040) $ 336
Net Income........................ -- -- -- 5,261 -- --
Issuance of 56,825 shares of
Common Stock under stock option
plans.......................... -- 2 298 -- -- --
Preferred Stock dividend.......... -- -- -- (284) -- --
Translation adjustment............ -- -- -- -- -- 514
------ ---- ------- -------- ------- -----
Balance, December 31, 1994.......... 8,110 339 34,567 34,737 (1,040) 850
Net income........................ -- -- -- 1,946 -- --
Sale of 650,000 shares of Common
Stock, of which 250,000 shares
were issued from Treasury
Stock, in connection with the
71% acquisition of Promptus
Communications, Inc............ -- 16 8,655 -- 1,040 --
Issuance of 114,125 shares of
Common Stock under stock option
plans.......................... -- 4 860 -- -- --
Preferred Stock dividend.......... -- -- -- (284) -- --
Cumulative translation gain on
sale of assets of the
E-Group........................ -- -- -- -- -- (835)
Translation adjustment............ -- -- -- -- -- 30
------ ---- ------- -------- ------- -----
Balance, December 31, 1995.......... 8,110 359 44,082 36,399 -- 45
Net loss.......................... -- -- -- (21,471) -- --
Preferred Stock dividend.......... -- -- -- (284) -- --
Translation adjustment............ -- -- -- -- -- (90)
------ ---- ------- -------- ------- -----
Balance, December 31, 1996.......... $8,110 $359 $ 44,082 $ 14,644 $ -- $ (45)
====== ==== ======= ======== ======= =====
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
16
<PAGE> 18
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1996 1995 1994
-------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income (loss)......................................... $(21,471) $ 1,946 $ 5,261
Adjustments to reconcile net income (loss) to net cash
provided (used) by continuing operations:
Loss (income) from discontinued operations............. 2,998 2,178 (1,962)
Loss on disposal of discontinued operations............ 10,822 2,000 --
Depreciation and amortization.......................... 5,319 4,757 3,124
Minority interest expense in earnings of subsidiary.... -- 66 136
Loss on disposal of equipment.......................... -- 201 --
Deferred income taxes..................................... 1,289 (1,945) 291
Changes in assets and liabilities:
Receivables............................................ 7,954 (680) (8,520)
Inventories............................................ 10,694 (8,958) (8,904)
Prepaid expenses and other assets...................... (4,666) (326) (163)
Accounts payable and accrued liabilities............... (5,335) 3,246 6,085
Other non-current liabilities.......................... 223 384 883
-------- -------- -------
Net cash provided (used) by continuing operations.... 7,827 2,869 (3,769)
Net cash provided (used) by discontinued operations....... (2,898) (3,697) 4,447
-------- -------- -------
Net cash provided (used) by operating activities..... 4,929 (828) 678
-------- -------- -------
Cash Flows from Investing Activities:
Purchases of plant and equipment.......................... (6,060) (4,509) (7,687)
Capital expenditures of discontinued operations........... (978) (1,897) (971)
Purchase of Promptus, net of cash acquired................ -- (19,089) --
Proceeds from disposal of discontinued operations......... 2,412 11,750 --
-------- -------- -------
Net cash used by investing activities................ (4,626) (13,745) (8,658)
-------- -------- -------
Cash Flows from Financing Activities:
Short-term borrowings, net................................ 666 2,579 1,655
Issuance of Common Stock.................................. -- 10,575 300
Preferred Stock dividend paid............................. (213) (284) (284)
-------- -------- -------
Net cash provided by financing activities............ 453 12,870 1,671
Net change in cumulative translation adjustments............ (90) 30 498
-------- -------- -------
Net increase (decrease) in cash and cash equivalents........ 666 (1,673) (5,811)
Cash and cash equivalents at beginning of period............ 2,553 4,226 10,037
-------- -------- -------
Cash and cash equivalents at end of period.................. $ 3,219 $ 2,553 $ 4,226
======== ======== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
17
<PAGE> 19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation -- The consolidated financial statements
include the accounts of GTI Corporation (the "Company"); its wholly-owned
subsidiaries, Valor Electronics, Inc., ("Valor") and Esco Sales, Inc., ("Esco")
(see Note 2); and its majority-owned subsidiary, Promptus Communications, Inc.,
("Promptus") (see Note 2 ). All significant intercompany balances and
transactions have been eliminated.
Financial Statement Preparation -- The preparation of financial statements
in conformity with generally accepted accounting principles requires management
to make estimates and assumptions. These estimates and assumptions affect the
reported amounts of assets, liabilities, revenues and expenses, and disclosure
of contingent assets and liabilities. Actual results could differ from
management's estimates.
Cash Equivalents -- Cash equivalents consist of short-term, highly liquid
investments purchased with a maturity date of three months or less. Cash
equivalents are stated at cost, which approximates market value.
Concentration of Credit Risk and Geographic Operations -- The Company
invests a portion of its cash in debt instruments of financial institutions
throughout the world with strong credit ratings and has established guidelines
relative to diversification and maturities that maintain safety and liquidity.
The Company has not experienced any losses on its cash equivalents. The Company
sells its products to customers in diversified industries worldwide. The Company
performs ongoing credit evaluations of its customers' financial condition and
maintains allowances for potential credit losses. Actual losses have been within
management's expectations and estimates. At December 31, 1996, three large
customers represented approximately 14.7%, 14.4% and 10.7%, respectively, of the
Company's net accounts receivable balance. A significant portion of the
Company's manufacturing operations are concentrated in the People's Republic of
China (the "PRC") and the Philippines. At December 31, 1996, a significant
amount of the Company's physical inventories and equipment were concentrated in
two facilities located in the PRC and one facility in the Philippines. There is
one key component that the Company uses in its manufacturing and assembly
process that is currently available only from a single source. There can be no
assurance that this supplier will be able to meet future demand for components
in a timely and cost-effective manner. The Company's operating results and
customer relationships could be adversely affected by either price increases or
an interruption or reduction in products shipped due to an interruption or
reduction in supply of any key components.
Inventories -- Inventories are stated at the lower of cost (first-in,
first-out) or market and include direct labor, materials, and manufacturing
overhead.
Property Plant and Equipment -- Property, plant, and equipment are stated
at cost less accumulated depreciation. Depreciation is computed using the
straight-line method over estimated useful lives of 7 to 25 years for buildings
and improvements and 3 to 7 years for machinery, equipment, furniture, and
fixtures. Expenditures for property additions together with major renewals and
improvements are capitalized. Maintenance, repairs, and minor renewals and
betterments are charged to expense.
Excess Cost over Net Assets of Acquired Company -- The excess of
acquisition cost over the fair value of net assets (goodwill) of Valor is being
amortized using the straight-line method over 35 years. The Company periodically
re-evaluates the original assumptions and rationale utilized in the
establishment of the carrying value and estimated life of this asset. Management
believes that there has been no impairment of the Valor goodwill as of December
31, 1996. The Company is subject to technological changes, which could cause
management to reassess its estimate of the realizability of goodwill and/or its
amortization period in the future. The determinants used for this evaluation
include management's estimate of the asset's continuing ability to generate
positive income from operations and positive cash flow in future periods as well
as the strategic significance of the intangible asset to the Company's business
objectives. Cost in excess of net assets of Valor, net of amortization, was
$19,845 and $20,542 at December 31, 1996, and 1995, respectively.
18
<PAGE> 20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
Income Taxes -- The Company accounts for income taxes under Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes." This
statement requires an asset and liability approach to account for income taxes.
The Company provides deferred income taxes for temporary differences that will
result in taxable or deductible amounts in future years based on the reporting
of certain costs in different periods for financial statement and income tax
purposes.
Foreign Currency Translation -- Assets and liabilities of the Company's
foreign operations are translated into U.S. dollars at the exchange rate in
effect at the balance sheet date, and revenue and expenses are translated at the
average exchange rate for the period. Translation gains or losses of the
Company's foreign subsidiaries are not included in operations but are reported
as a separate component of stockholders' equity. The functional currency of
those subsidiaries is the primary currency in which the subsidiary operates.
Substantially all of the Company's worldwide sales are conducted in U.S.
dollars. Gains and losses on transactions in denominations other than the
functional currency of the Company's foreign operations, while not material in
amount, are included in the results of operations. The Company does not enter
into foreign exchange transactions to hedge certain balance sheet exposures and
intercompany balances against movements in foreign exchange rates.
Net Income (Loss) Per Share of Common Stock -- Net income (loss) per share
("EPS") of Common Stock for 1996, 1995, and 1994 is computed on the basis of the
weighted average shares of Common Stock outstanding plus dilutive common
equivalent shares arising from the effect of cumulative convertible Preferred
Stock, using the if-converted method, and dilutive stock options, using the
treasury-stock method. In loss years such as 1996, the preferred stock is
assumed not converted, and the related annual preferred stock dividends of $284
are added to the loss to calculate EPS from continuing operations. The number of
shares used for the calculation are 8,973,475, 10,873,000, and 10,187,000 in
1996, 1995, and 1994, respectively. Fully diluted earnings per share are
approximately the same as primary earnings per share for all years presented.
Stock Based Compensation -- During 1996, the Company elected to adopt the
disclosure only provisions of Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" ("SFAS 123"). Under the
provisions of SFAS 123, companies can elect to account for stock-based
compensation plans using a fair-value-based method or continue measuring
compensation expense for those plans using the intrinsic value method prescribed
in APB 25. SFAS 123 requires that companies electing to continue using the
intrinsic value method must make pro forma disclosures of net income and
earnings per share as if the fair-value-based method of accounting has been
applied. (See Note 9)
Reclassifications -- The consolidated financial statements for all periods
presented have been restated to reflect Promptus, the E-Group, and Esco as
discontinued operations in accordance with APB 30 (see Note 2).
NOTE 2 BUSINESS COMBINATION AND DISCONTINUED OPERATIONS
Promptus In January 1995, the Company completed the acquisition of
approximately 72% of the issued and outstanding capital stock of Promptus for
approximately $19.1 million in cash, net of cash acquired. The acquisition was
financed through a combination of secured bank borrowings of approximately $9.9
million; proceeds, net of issuance costs, from the issuance of 650,000 shares of
Common Stock (of which 250,000 were from Treasury Shares) of approximately $9.7
million; and $500 of cash on hand. In addition to the purchase price, the
Company provided approximately $1.0 million to Promptus employees in the form of
secured promissory notes for use in the exercise of stock options, which
occurred at the transaction's closing. The acquisition was accounted for as a
purchase. Accordingly, the purchase price was allocated to the assets acquired
and liabilities assumed based on their estimated fair-market value. The
resulting goodwill of approximately $17.2 million was being amortized over 20
years. Promptus's results of operations have been included in the Company's
results effective January 1, 1995.
In March 1997, Promptus entered into an agreement (the "NAC Transaction")
to sell the net assets of its Network Access Card business (the "NAC's") for
approximately $20.0 million, subject to regulatory approval. These sale proceeds
will consist of $14.5 million in cash and 223,881 shares of common stock of
19
<PAGE> 21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
VideoServer, Inc. Subject to the closing of the NAC Transaction, Promptus will
purchase 100% of the Promptus shares held by the Company and repay certain
indebtedness to the Company for an aggregate of approximately $11.6 million, net
of certain transaction costs. The net proceeds to the Company are estimated to
consist of $8.2 million in cash and approximately 158,000 shares of common stock
of VideoServer Inc., resulting in a loss on disposal of approximately $10.8
million. The estimated loss on disposal of Promptus includes an assumption
regarding the value of the VideoServer, Inc. shares. The ultimate proceeds to
the Company for the VideoServer, Inc. shares is subject to market volatility and
fluctuation. Management expects these transactions to close in the quarter ended
June 28, 1997, and has estimated the loss on the disposal of Promptus based on
the terms of these pending transactions.
E-Group In December 1995, the Company completed the divestiture of certain
assets and liabilities of the E-Group for approximately $12.5 million, resulting
in a gain of approximately $3.0 million, net of income taxes of $2.5 million.
The Company received $11.75 million in cash paid at the closing, $250 in escrow
funds, and a $500 promissory note due in three years. The escrow funds will
remain in escrow until June 1997, at which time, if no purchase price adjustment
occurs, all escrow funds will be remitted to the Company.
Esco In February 1996, the Company sold 100% of Esco's common stock in
exchange for approximately $4.1 million, consisting of $2.2 million in cash and
a $1.9 million promissory note due in equal installments over six years,
resulting in a loss on disposal of approximately $5.0 million, net of income tax
benefits of approximately $1.3 million. This loss was accrued in 1995.
The sales of the E-Group and Esco and the pending sale of Promptus were
made pursuant to formal divestiture plan adopted by the Company's Board of
Directors which required the plans to be carried out within one year.
Accordingly, these businesses have been accounted as discontinued operations in
accordance with Accounting Principles Board Opinion No. 30.
The operating results of the discontinued operations are summarized as
follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Sales......................................... $17,735 $54,771 $38,668
------- ------- -------
Income (loss) before tax provision and
minority interest income.................... $(3,530) $(2,209) $ 3,047
Income tax provision.......................... -- 515 1,085
Minority interest income...................... 532 546 --
------- ------- -------
Net income (loss)............................. $(2,998) $(2,178) $ 1,962
======= ======= =======
Net income (loss) per common share............ $ (0.34) $ (0.20) $ 0.20
======= ======= =======
</TABLE>
Interest expense has been allocated to loss on discontinued operations for
the year ended December 31, 1995 based upon specifically identified debt
incurred in connection with the acquisition of Promptus. The amount of interest
expense allocated was approximately $865.
20
<PAGE> 22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
The net assets of discontinued operations are summarized as follows:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
--------------------
1996 1995
-------- -------
<S> <C> <C>
Current assets.......................................... $ 6,115 $11,159
Plant and equipment, net................................ 2,266 2,285
Goodwill, net of amortization and other assets.......... 16,530 24,014
Current liabilities..................................... (1,801) (3,410)
Other long-term liabilities............................. (651) (975)
Deferral of E-Group gain................................ -- (5,522)
Provision for estimated loss on disposal of discontinued
operations............................................ (10,822) (2,000)
-------- -------
Net assets of discontinued operations......... $ 11,637 $25,551
======== =======
</TABLE>
NOTE 3 SUPPLEMENTAL STATEMENTS OF CASH FLOWS DISCLOSURE
Supplemental cash flow information for the years ended December 31, 1996,
1995, and 1994, are summarized as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER
31,
------------------------------
1996 1995 1994
------ -------- ------
<S> <C> <C> <C>
Interest paid (including interest related to
discontinued operations)................... $ 376 $ 1,207 $ 342
====== ======= ======
Income taxes paid............................ $2,636 $ 1,559 $1,727
====== ======= ======
Business acquisition, net of cash acquired:
Working capital, other than cash
acquired................................ $ -- $ (644) $ --
Plant and equipment........................ -- (1,314) --
Purchase price in excess of the net assets
acquired................................ -- (17,230) --
Other assets............................... -- (1,183) --
Noncurrent liabilities..................... -- 1,282 --
------ ------- ------
Net cash used to acquire
Promptus......................... $ -- $ 19,089 $ --
====== ======= ======
</TABLE>
In connection with the disposal of the E-Group in December 1995, the
Company used the cash proceeds of approximately $11.75 million to repay the
outstanding principal and interest on a bank term loan of $4.1 million and
repaid the remaining $7.65 million against the outstanding principal amount on a
bank credit facility. The term loan and credit facility were both used in
connection with the acquisition of Promptus.
NOTE 4 SUPPLEMENTARY FINANCIAL INFORMATION
Inventory consisted of the following at December 31, 1996, and 1995:
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Raw materials and supplies............................... $ 5,891 $10,306
Work in process.......................................... 3,748 10,454
Finished goods........................................... 8,912 8,485
------- -------
$18,551 $29,245
======= =======
</TABLE>
21
<PAGE> 23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
Property, plant, and equipment consisted of the following at December 31,
1996, and 1995:
<TABLE>
<CAPTION>
1996 1995
-------- -------
<S> <C> <C>
Land.................................................... $ 12 $ 12
Buildings and improvements.............................. 4,683 4,828
Machinery and equipment................................. 20,549 16,597
Furniture and fixtures.................................. 3,429 2,689
-------- -------
28,673 24,128
Less accumulated depreciation........................... (12,699) (9,165)
-------- -------
$ 15,974 $14,963
======== =======
</TABLE>
Accounts payable and accrued liabilities consisted of the following at
December 31, 1996, and 1995:
<TABLE>
<CAPTION>
1996 1995
-------- -------
<S> <C> <C>
Accounts payable........................................ $ 6,700 $ 9,204
Employee compensation................................... 3,810 4,576
Federal, local, foreign, and other taxes................ 2,759 4,279
Other accrued liabilities............................... 3,782 2,875
Accrued severance costs................................. 247 1,708
------- -------
$ 17,298 $22,642
======= =======
</TABLE>
In July 1996, management assessed Valor's Hong Kong operations and cost
structure. Based on its assessment, management initiated a fixed cost reduction
program. This cost reduction program eliminated a significant portion of Valor
Hong Kong's fixed costs without decreasing production capacity. Due to the cost
reduction program, the Company recorded a charge of approximately $1.9 million
during 1996. The cost reduction charge represents employee severance costs,
property lease costs, and the write off of certain assets.
NOTE 5 CREDIT AGREEMENTS
The Company has a $7.5 million line of credit agreement with a bank.
Interest on outstanding borrowings currently accrues at the bank's prime rate of
interest plus one and one-quarter percent (9.50% at December 31, 1996). The
facility is secured by the Company's domestic accounts receivable, inventory,
and equipment; and borrowings are limited to the balance of eligible accounts
receivable. Based on eligible accounts receivable at December 31, 1996, the
entire $7.5 million of the facility was available for borrowing. At December 31,
1996 and 1995, there were approximately $4.9 and $3.2 million, respectively, of
outstanding borrowings under this agreement. The credit agreement expires on
June 30, 1997. In the event that the Promptus transactions are not closed by
June 30, 1997, and/or the Company's future financial results are not
satisfactory to the bank, the bank may not renew or extend the current line of
credit agreement beyond June 30,1997 and the Company may be required to seek
alternative bank financing. There can be no assurance that the Promptus
transactions will be closed or that the Company's financial results for the
first quarter of 1997 will be satisfactory to the bank. Although management
believes it will be able to identify an asset-based lender to replace the line
of credit, if necessary, there can be no assurance that alternative financing
will be available to the Company in sufficient amounts, if at all, and, if
available, there can be no assurance that the related terms and conditions will
be acceptable to the Company. Failure of the Company to obtain such alternative
financing, if needed, would have a material and adverse effect on the Company.
The credit agreement contains certain minimum quarterly profitability,
minimum net-worth, and various financial-ratio requirements. As of December 31,
1996, the Company was in violation of a certain financial covenant which has
been waived by the bank.
The Company had a foreign credit facility with a foreign bank for
approximately $2.2 million. Outstanding borrowings at December 31, 1995 were
approximately $1.0 million. This credit facility was repaid during 1996 and the
agreement was not renewed.
22
<PAGE> 24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
NOTE 6 INCOME TAXES
The components of the provision (benefit) for income taxes from continuing
operations for the years ended December 31 are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------- ------ -----
<S> <C> <C> <C>
Federal -- current............................... $(2,988) $ (358) $(963)
Deferred......................................... 1,264 (762) 120
Foreign -- current............................... 2,031 1,714 884
Deferred......................................... (1,156) 71 393
State and Local.................................. (201) (159) (170)
------- ------ -----
$(1,050) $ 506 $ 264
======= ====== =====
</TABLE>
The components of the income-tax provision were based on the sources of
income (loss) from continuing operations before taxes and minority interest for
the years ended December 31 as follows:
<TABLE>
<CAPTION>
1996 1995 1994
-------- ------- -------
<S> <C> <C> <C>
United States................................ $(10,310) $(2,289) $(2,433)
Foreign...................................... 1,609 8,985 6,132
-------- ------- -------
$ (8,701) $ 6,696 $ 3,699
======== ======= =======
</TABLE>
The components of the current, net deferred, tax asset at December 31 were
as follows:
<TABLE>
<CAPTION>
1996 1995
------ ------
<S> <C> <C>
Accelerated depreciation................................... $ 51 $ 34
Vacation pay and accrued compensation...................... 532 736
Reserves................................................... 674 575
NOL, capital loss, R and D credit carryovers............... 866 1,908
Other...................................................... 90 255
------ ------
2,213 3,508
Valuation reserve, primarily related to capital loss
carryforwards............................................ (651) (682)
------ ------
$1,562 $2,826
====== ======
</TABLE>
The component of the non-current, deferred, income tax liability at
December 31, 1996, and 1995, is as follows:
<TABLE>
<CAPTION>
1996 1995
---- ------
<S> <C> <C>
Accelerated depreciation on foreign assets.................. $ -- $1,156
==== ======
</TABLE>
A reconciliation of the federal income tax provision at the statutory rate
to the effective rate for continuing operations for the years ended December 31
is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- ------
<S> <C> <C> <C>
Statutory federal tax on income before income
taxes and minority interest.................. $(2,958) $ 1,719 $1,211
Effect of foreign losses with no tax benefit... -- -- (82)
State income taxes, net of federal benefit..... (201) (191) (154)
Differences between U.S. and foreign tax
rates........................................ 986 (1,050) (771)
Nondeductible expenses......................... 748 28 141
Other.......................................... 375 -- (81)
------- ------- ------
$(1,050) $ 506 $ 264
======= ======= ======
</TABLE>
23
<PAGE> 25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
Income tax provision is not recorded for U.S. Federal income taxes on the
undistributed earnings of foreign subsidiaries as such earnings are intended to
be permanently reinvested in those operations. Such earnings would become
taxable upon the sale or liquidation of these foreign subsidiaries or upon the
remittance of dividends. Accumulated, undistributed earnings of foreign
subsidiaries on which U.S. taxes have not been provided are approximately
$47,185, which would result in a related tax liability of approximately $10,310,
if such earnings were repatriated.
NOTE 7 COMMITMENTS AND CONTINGENCIES
The Company leases machinery and equipment, computer equipment, and office
furniture and conducts certain operations in leased facilities, which expire on
various dates through 2002. Under the terms of most of the leases, the Company
is required to pay all taxes, insurance, and maintenance. The total future,
minimum, annual lease payments under the operating lease agreements are as
follows:
<TABLE>
<S> <C>
YEAR ENDED DECEMBER 31,
1997................................................ $ 2,346
1998................................................ 1,615
1999................................................ 1,360
2000................................................ 1,049
2001................................................ 856
Thereafter.......................................... 306
------
$ 7,532
======
</TABLE>
Rental expense amounted to $2,879, $3,280, and $3,852 in 1996, 1995, and
1994, respectively.
Litigation -- In December 1995, a class-action lawsuit was filed in the
United States District Court, Southern District of California, against the
Company and certain of its officers and directors alleging violations of the
Securities Exchange Act of 1934. On November 12, 1996, the court approved a
Stipulation of Settlement with prejudice and all claims were released. The
settlement amount paid by the Company was $400 in 1996.
The Company is involved in various legal proceedings and claims arising in
the ordinary course of business, none of which, in the opinion of management, is
expected to have a material affect on the Company's consolidated financial
position or results of operations.
Contingent Purchase of the Promptus Minority Interest -- Concurrent with
the Promptus acquisition, the Company and the minority shareholders of Promptus
entered into an agreement to govern the contingent purchase of the remaining 28%
of the outstanding capital stock of Promptus. Under the agreement, beginning in
January 1997 and each year thereafter through January 1999, the minority
shareholders of Promptus have the right, but not the obligation, to require the
Company to acquire the remaining shares in predefined percentage increments; and
the Company has the right, but not the obligation, to purchase the remaining
shares. The price to be paid is based upon a predetermined formula using a
combination of forecasted and actual results of Promptus for the period January
1, 1997, through December 31, 1999. The percentage increment established for the
first mutual put/call option in January 1997 may not exceed 30% of the minority
shares. In December 1996, the Company and the minority shareholders agreed to
amend the existing agreement to postpone the first mutual put/call option until
the resolution of the Promptus divestiture. In connection with Promptus's
purchase of 100% of the Promptus shares held by the Company (see Note 2), the
agreement governing the contingent purchase will be terminated, and the Company
will have no future obligation with respect to the contingent purchase of any
outstanding capital stock of Promptus. However, if the Promptus transactions are
not consummated, then the above agreement is still in effect and the Company and
minority shareholders will be required to agree upon a Promptus forecast from
January 1997 through
24
<PAGE> 26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
December 1999. In the event the two parties can not agree upon a forecast for
this three year period, the terms of the agreement require the matter to be
decided upon by an arbitrator. Due to the pending close of the Promptus
transactions, no accounting recognition has been provided for this contingency
in the accompanying consolidated financial statements. If the Promptus
divestiture does not occur, the put/call obligation could have a material and
adverse effect on the Company.
NOTE 8 STOCKHOLDERS' EQUITY
Preferred Stock -- The Preferred Stock is convertible at the discretion of
the holder, at a rate of 234.314 shares of Common Stock per share of Preferred
Stock, into 1,900,287 shares of the Company's Common Stock. Dividends accrue at
the rate of $35.00 per share, per year and are payable quarterly. The dividend
payment for the fourth quarter of 1996 was not paid as of December 31, 1996;
however, such dividend was accrued and included in the consolidated balance
sheet as of December 31, 1996 under the caption "Accounts payable, accrued and
other liabilities". The preferred shares have a liquidation preference of $1,000
per share and a par value of $1.00 per share.
NOTE 9 STOCK-BASED COMPENSATION PLANS
Stock Option Plans -- The Company has five stock option plans that provide
for the granting of either incentive stock options or non-qualified stock
options to key employees and non-employee members of the Company's Board of
Directors. All current outstanding options are non-qualified stock options. The
options granted under these plans are to purchase Common Stock at not less than
fair-market value at the date of grant. Employee options are generally
exercisable one year from date of grant in cumulative annual installments of 25
percent, while non-employee director options are exercisable in full at the date
of grant. The options have terms of six to ten years. In May 1996, the Company's
Board of Directors offered the right to all existing employee stock option
holders (at the holders sole option) to cancel the holder's then outstanding
stock option grant in exchange for a replacement grant for one-half of the
number of shares underlying the original stock option grant at the then fair
market value of $7.983 per share. All of the terms of the replacement grant
remain unchanged from the original stock option grants, including the vesting
provisions, except the employee must remain in the employ of the Company on May
14, 1997 and the replacement grant may not be exercised before such date. If the
repriced stock option grant is exercised within the first year, the number of
shares issuable and price per share revert back to the original stock option
grant. These repriced options are included in the stock option activity table
below as forfeitures and grants during the year ended December 31, 1996.
The following table summarizes stock option activity for the year ended
December 31:
<TABLE>
<CAPTION>
1996
---------------------------
SHARES WTD AVE. PRICE
-------- --------------
<S> <C> <C>
Outstanding at beginning of year.................... 810,250 $18.74
Granted............................................. 786,500 $ 6.86
Exercised........................................... -- $ --
Forfeited........................................... (770,500) $17.40
-------- ------
Outstanding at the end of the year.................. 826,250 $ 8.69
======== ======
Number of shares exercisable at the end of the
year.............................................. 231,250 $13.66
======== ======
Weighted average fair value of options granted...... $5.27
========
</TABLE>
The outstanding options expire at various dates through December 2006. At
December 31, 1996, there were 308,050 shares available for future grant under
all plans.
25
<PAGE> 27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
The Company has adopted Statement of Financial Accounting Standards 123
"Accounting For Stock-Based Compensation" ("SFAS 123") and has elected to
continue to account for stock options granted under Accounting Principles Board
Opinion No. 25, which recognizes compensation cost based upon the intrinsic
value of the equity award. No compensation expense has been recognized in the
consolidated statement of operations for any equity awards granted during 1994
through 1996.
The following pro forma net income (loss) and pro forma earnings (loss) per
share had the Company elected to account for equity awards under using the fair
value based method beginning with all equity award grants commencing on January
1, 1995. In estimating the pro forma compensation expense for each equity award
granted during 1996 and 1995, the Company used the Black Scholes option pricing
model, a risk-free interest rate of 6.5%, expected dividend yield of zero,
expected lives of 6.5 years, and expected volatility of 83.2%. The estimated pro
forma compensation cost resulting in the pro forma net income (loss) and
earnings (loss) per share may not be representative of actual results had the
Company accounted for equity awards using the fair value based method.
<TABLE>
<CAPTION>
1996 1995
-------- -------
<S> <C> <C>
Net Income (loss)
As Reported.......................................... $(21,471) $ 1,946
======== ======
Pro Forma............................................ $(21,777) $ 1,838
======== ======
Primary EPS
As Reported.......................................... $(2.42) $ 0.18
====== =====
Pro Forma............................................ $(2.46) $ 0.17
====== =====
</TABLE>
NOTE 10 EMPLOYEE BENEFIT PLANS
The Company has a domestic, defined contribution plan that qualifies as a
cash or deferred profit sharing plan under Sections 401(a) and 401(k) of the
internal Revenue Code available to substantially all domestic employees. Under
the plan, participating employees may defer between 1% to 15% of their pre-tax
compensation. The Company contributes fifty cents for each dollar contributed by
the employee, with a maximum Company contribution of 3% of the employee's
defined compensation. In addition, the plan provides for an employer,
profit-sharing contribution in such amounts as the Board of Directors may
annually determine. The Company also has similar plans for foreign employees,
governed by the laws of the country in which they are established. These foreign
plans generally include a salary deferral element and Company matching
contribution. Company contributions under all plans in the aggregate were $389,
$324, and $363 in 1996, 1995, and 1994, respectively. There were no amounts paid
relating to the employer, profit-sharing provision during 1996, 1995, and 1994.
The Company had no other programs that required payment by the Company of
post-retirement benefits to current or retired employees.
NOTE 11 SEGMENT INFORMATION AND MAJOR CUSTOMERS
In 1996, two customers, when combined, represented approximately 30% of the
Company's sales or approximately 20% and 10%, individually. In 1995, two
customers, when combined, represented approximately 30% of the Company's sales
or approximately 16% and 14%, individually. In 1994, one customer represented
approximately 22% of the Company's sales.
Export sales amounted to $908, $3,048, and $6,751 in 1996, 1995, and 1994,
respectively, principally to customers in North America.
26
<PAGE> 28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
The Company operates in one industry segment through its Valor operations.
Valor is a manufacturer and distributor of magnetic-based components, integrated
modules, and subsystems for signal processing and power-management functions in
networking and internetworking products. Valor products are used principally in
the data communications industry by OEM's for local area networks and wide area
networks.
Valor operates predominately in the United States, the PRC, the
Philippines, Hong Kong, and Germany. Transfers between geographic areas
primarily represent intercompany export sales between the related companies. In
computing income from continuing operations before income taxes and minority
interest, no allocations of general corporate expenses have been made.
Identifiable assets include those assets directly identified to those operations
in each geographical area. The United States' assets consist of operating assets
and goodwill, net of amortization.
GEOGRAPHIC SEGMENTS
<TABLE>
<CAPTION>
ADJUSTMENTS
PACIFIC AND
UNITED STATES RIM EUROPE ELIMINATIONS CONSOLIDATED
------------- --------- -------- ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1996
Sales to unaffiliated
customers...................... $ 48,316 $ 36,454 $ 7,763 $ -- $ 92,533
Transfers between geographic
segments....................... -- 54,192 459 (54,651) --
-------- -------- ------- -------- --------
Total sales................. $ 48,316 $ 90,646 $ 8,222 $(54,651) $ 92,533
-------- -------- ------- -------- --------
Income (loss) before income taxes
and minority interest.......... $ (10,310) $ 727 $ 882 $ -- $ (8,701)
-------- -------- ------- -------- --------
Identifiable assets.... $ 49,775 $ 37,215 $ 4,534 $ -- $ 91,524
======== ======== ======= ======== ========
YEAR ENDED DECEMBER 31, 1995
Sales to unaffiliated
customers...................... $ 66,671 $ 33,373 $ 14,792 $ -- $114,836
Transfers between geographic
segments....................... (2) 67,846 -- (67,844) --
-------- -------- ------- -------- --------
Total sales................. $ 66,669 $ 101,219 $ 14,792 $(67,844) $114,836
-------- -------- ------- -------- --------
Income (loss) before income taxes
and minority interest.......... $ (2,289) $ 7,951 $ 1,034 $ -- $ 6,696
-------- -------- ------- -------- --------
Identifiable assets.... $ 66,364 $ 48,522 $ 2,813 $ -- $117,699
======== ======== ======= ======== ========
YEAR ENDED DECEMBER 31, 1994
Sales to unaffiliated
customers...................... $ 72,262 $ 16,051 $ 14,926 $ -- $103,239
Transfers between geographic
segments....................... 11,654 75,473 -- (87,127) --
-------- -------- ------- -------- --------
Total sales................. $ 83,916 $ 91,524 $ 14,926 $(87,127) $103,239
-------- -------- ------- -------- --------
Income before income taxes and
minority interest.............. $ (2,433) $ 4,728 $ 1,404 $ -- $ 3,699
-------- -------- ------- -------- --------
Identifiable assets.... $ 60,218 $ 35,956 $ 3,774 $ -- $ 99,948
======== ======== ======= ======== ========
</TABLE>
NOTE 12 SUBSEQUENT EVENT
Subordinated Promissory Note -- In February 1997, the Company entered into
a Note Purchase Agreement (the "Note") with Telemetrix PLC ("TMX", the Company's
majority shareholder) and a Common Stock Purchase Warrant Agreement (the
"Warrant") whereby the Company received a $2.5 million loan which is
subordinated to a bank and secured by Valor's U.S. based fixed assets. The loan
accrues
27
<PAGE> 29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
interest at the prime rate plus 4% per annum and is payable in four equal
semi-annual installments of $650,000 plus accrued interest commencing in August
1997 and ending February 1999. If the Company's interest in Promptus is not sold
before February 1998, the interest rate on the Note will increase to Prime plus
6%. In connection with the Note, the Company issued to TMX a Warrant for 250,000
shares of the Company's common stock at an exercise price of $6.00 per share.
The Warrant is exercisable as of the date of required shareholder approval to
amend the Company's Certificate of Incorporation to increase the number of
authorized Common Stock and terminates 30 days after the Note is paid in full.
NOTE 13 QUARTERLY FINANCIAL DATA (UNAUDITED)
The Company's condensed quarterly results from operations for the years
ended December 31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL
------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
1996
Sales.................................................... $26,618 $23,017 $20,560 $ 22,338 $ 92,533
------- ------- ------- ------- --------
Gross profit............................................. 5,929 3,689 2,628 4,937 17,183
------- ------- ------- ------- --------
Income (loss) from continuing operations before income
taxes and minority interest............................ (855) (2,935) (4,291) (620) (8,701)
Provision (benefit) for income taxes..................... (300) (650) (100) -- (1,050)
------- ------- ------- ------- --------
Income (loss) from continuing operations................. (555) (2,285) (4,191) (620) (7,651)
Income (loss) from discontinued operations, net of income
taxes.................................................. (1,083) (480) (936) (499) (2,998)
Loss on disposal of discontinued operations, net of
income taxes........................................... -- -- -- (10,822) (10,822)
------- ------- ------- ------- --------
Net (loss)........................................... $(1,638) $(2,765) $(5,127) $(11,941) $(21,471)
======= ======= ======= ======= ========
Net income (loss) per share -- primary and fully diluted:
Income (loss) from continuing operations................. $ (0.07) $ (0.26) $ (0.47) $ (0.08) $ (0.88)
Income (loss) from discontinued operations............... (0.12) (0.06) (0.10) (0.06) (0.34)
Loss on disposal of discontinued operations.............. -- -- -- (1.20) (1.20)
------- ------- ------- ------- --------
Net (loss) per common share.......................... $ (0.19) $ (0.32) $ (0.57) $ (1.34) $ (2.42)
======= ======= ======= ======= ========
1995
Sales.................................................... $24,094 $29,356 $31,370 $ 30,016 $114,836
------- ------- ------- ------- --------
Gross profit............................................. 6,478 8,723 9,564 7,342 32,107
------- ------- ------- ------- --------
Income (loss) from continuing operations before income
taxes and minority interest............................ 276 2,554 3,695 170 6,696
Provision (benefit) for income taxes..................... (81) 367 591 (371) 506
Minority interest in subsidiary.......................... 12 38 16 -- 66
------- ------- ------- ------- --------
Income (loss) from continuing operations................. 346 2,149 3,088 541 6,124
------- ------- ------- ------- --------
Income (loss) from discontinued operations, net of income
taxes.................................................. (154) (172) (241) (1,610) (2,178)
Loss on disposal of discontinued operations, net of
income taxes........................................... -- -- -- (2,000) (2,000)
------- ------- ------- ------- --------
Net income (loss).................................... 191 1,977 2,847 (3,069) 1,946
======= ======= ======= ======= ========
Net income (loss) per share -- primary and fully diluted:
Income (loss) from continuing operations................. $ 0.03 $ 0.20 $ 0.28 $ 0.06 $ 0.56
Income (loss) from discontinued operations............... (0.01) (0.02) (0.02) (0.19) (0.20)
Loss on disposal of discontinued operations, net of
income taxes........................................... -- -- -- (0.22) (0.18)
------- ------- ------- ------- --------
Net income (loss) per common share................... $ 0.02 $ 0.18 $ 0.26 $ (0.35) $ 0.18
======= ======= ======= ======= ========
</TABLE>
28
<PAGE> 30
CORPORATE INFORMATION
OFFICERS
ALBERT J. HUGO-MARTINEZ
President and Chief Executive Officer
BRUCE C. MYERS
Vice President -- Finance
Chief Financial Officer, Secretary
and Treasurer
DIRECTORS
KEN E. MAUD
Chairman of the Board -- GTI Corporation
Chairman -- Peek plc
TIMOTHY M. CURTIS*
Chief Executive -- Telemetrix plc
EDMUND B. FITZGERALD*
Professor, Managing Director --
Woodmont Associates
ALBERT J. HUGO-MARTINEZ
President and Chief Executive
Officer -- GTI Corporation
ROBERT E. VENTER*
Chief Executive --
Power Technologies Limited
Director -- Telemetrix plc
CORPORATE OFFICES
9715 Business Park Avenue
San Diego, California 92131-1642
(619) 537-2500
INDEPENDENT PUBLIC
ACCOUNTANTS
ARTHUR ANDERSEN LLP
TRANSFER AGENT
CHEMICAL MELLON
SHAREHOLDER
SERVICES, L.L.C.
GENERAL COUNSEL
BAKER & McKENZIE
PRODUCT
DEVELOPMENT &
MANUFACTURING
LOCATIONS
San Diego, California
Kowloon, Hong Kong
Cobuyao, Laguna
Philippines
PRIMARY SALES AND
DISTRIBUTION LOCATIONS
San Diego, California
Kowloon, Hong Kong
Munich, Germany
- ---------------
* Member of the Audit Committee of the Board of Directors
29
<PAGE> 1
EXHIBIT 21.1
GTI CORPORATION
SUBSIDIARIES OF THE REGISTRANT
Valor Electronics, Inc., a California corporation
Valor East Electronics, Ltd., a Hong Kong corporation and wholly-owned
subsidiary of Valor Electronics, Inc.
Barnfinch, Ltd., a Hong Kong corporation and wholly-owned subsidiary of Valor
Electronics, Inc.
Valor Electronics GmbH, a German corporation and wholly-owned subsidiary of
Valor Electronics, Inc.
Valor Electronics Philippines, Inc., a Philippines corporation and wholly-owned
subsidiary of Valor Electronics, Inc.
Val Pan Am, S.A., a Mexican corporation and wholly-owned subsidiary of Valor
Electronics, Inc.
Sierracin, S.A., a Mexican corporation and wholly-owned subsidiary of Valor
Electronics, Inc.
Valor Electronics Investments BV, a Netherlands corporation and wholly-owned
subsidiary of Valor Electronics, Inc.
Valor Electronics Cayman, Inc., a Cayman Islands corporation and wholly-owned
subsidiary of Valor Electronics, Inc.
Promptus Communications, Inc., a Rhode Island corporation (1)
Promptus Communications (UK) Ad., a United Kingdom corporation and wholly-owned
subsidiary of Promptus Communications, Inc. (1)
Promptus Communications Pty. Ltd., an Australian corporation and wholly-owned
subsidiary of Promptus Communications, Inc. (1)
- --------------
(1) Promptus entered into an agreement to sell the net assets of its NAC
business for approximately $20.0 million of which approximately $14.5 million
will be paid in cash and the remaining amount will be paid in 223,881 shares of
common stock of VideoServer, Inc., subject to regulatory approval. Management
anticipates this transaction to close during the quarterly period ended June 28,
1997.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
reports included or incorporated by reference in this Form 10-K into GTI
Corporation's previously filed Registration Statements Files No. 2-68202, No.
2-86797, No. 33-13711, No. 33-34667, No. 33-78930 and No. 33-48101.
ARTHUR ANDERSEN LLP
San Diego, California
March 25, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 3,219
<SECURITIES> 0
<RECEIVABLES> 11,703
<ALLOWANCES> (201)
<INVENTORY> 18,551
<CURRENT-ASSETS> 51,711
<PP&E> 28,673
<DEPRECIATION> (12,699)
<TOTAL-ASSETS> 91,524
<CURRENT-LIABILITIES> 22,198
<BONDS> 0
0
8,110
<COMMON> 359
<OTHER-SE> 58,681
<TOTAL-LIABILITY-AND-EQUITY> 91,524
<SALES> 92,533
<TOTAL-REVENUES> 92,533
<CGS> 75,350
<TOTAL-COSTS> 25,722
<OTHER-EXPENSES> (157)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 319
<INCOME-PRETAX> (8,701)
<INCOME-TAX> (1,050)
<INCOME-CONTINUING> (7,651)
<DISCONTINUED> (13,820)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (21,471)
<EPS-PRIMARY> (2.42)
<EPS-DILUTED> (2.42)
</TABLE>
