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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE
SECURITIES EXCHANGE ACT OF 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
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[X] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only
(as permitted by Rule 14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Section 240.14a-11(c) or 240.14a-12
</TABLE>
GTI CORPORATION
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required.
[X] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
Common Stock, par value $.04 per share; $35.00 Cumulative Convertible
Preferred Stock, par value $1.00 per share
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(2) Aggregate number of securities to which transaction applies:
8,973,475 shares of Common Stock; 8,110 shares of Preferred Stock
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
$3.10 per share of Common Stock; $726.37 per share of Preferred Stock;
all in cash. This is the agreed merger consideration per the merger
agreement.
- --------------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
$33,708,632
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(5) Total fee paid:
$6,742
- --------------------------------------------------------------------------------
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
- --------------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
- --------------------------------------------------------------------------------
(3) Filing Party:
- --------------------------------------------------------------------------------
(4) Date Filed:
- --------------------------------------------------------------------------------
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GTI CORPORATION
9715 BUSINESS PARK AVENUE
SAN DIEGO, CA 92131
(619) 537-2500
------------------------
JULY , 1998
Dear Stockholders:
You are cordially invited to attend a Special Meeting of stockholders of
GTI Corporation to be held at on August , 1998 at local
time.
At this meeting, you will be asked to vote on the acquisition, by means of
a merger, of GTI by a subsidiary of Technitrol, Inc. (the "Merger"). In the
Merger, you will be entitled to receive $3.10 in cash for each share of GTI
Common Stock that you own and $726.37 in cash for each share of GTI preferred
stock that you own.
A merger agreement with Technitrol entities has been approved by your Board
of Directors. In deciding to approve the merger agreement, your Board of
Directors received the opinion of Cowen & Company, an investment banker, dated
May 26, 1998, to the effect that, based upon the assumptions made, matters
considered and the limitations on the review undertaken in connection therewith,
the consideration to be received by GTI Common Stockholders in the Merger, as of
such date, was fair to such stockholders (other than Technitrol and its
subsidiaries and affiliates) from a financial point of view. YOUR BOARD OF
DIRECTORS HAS CONCLUDED THAT THE PROPOSED MERGER IS IN THE BEST INTERESTS OF GTI
AND GTI'S STOCKHOLDERS AND, THEREFORE, YOUR BOARD OF DIRECTORS UNANIMOUSLY
RECOMMENDS THAT YOU VOTE FOR ADOPTION OF THE MERGER AGREEMENT.
Telemetrix PLC, a United Kingdom corporation, which directly or indirectly
owns approximately 47.9% of the outstanding shares of GTI common stock and 100%
of the outstanding shares of GTI preferred stock, has entered into an agreement
with Technitrol pursuant to which Telemetrix has called a meeting of its
stockholders for July 17, 1998 to vote upon the disposition of Telemetrix's
shares of GTI capital stock, by means of the Merger. Telemetrix's board of
directors has recommended that Telemetrix stockholders vote in favor of such
disposition. If holders of a majority of the shares of Telemetrix present in
person or by proxy at that meeting vote in favor of such disposition, Telemetrix
has agreed to vote its GTI common and preferred stock for the Merger Agreement.
Trustees of certain trusts beneficially owning in excess of 47% of the
outstanding shares of Telemetrix voting capital stock have agreed with
Technitrol to cause such shares to be voted in favor of such disposition. GTI
will publicly announce the results of the Telemetrix stockholders meeting
promptly after it has taken place.
The attached notice of meeting and proxy statement explain the proposed
Merger and provide specific information concerning the Special Meeting. Please
read these materials carefully.
Whether or not you plan to attend the Special Meeting, we urge you to
complete, sign and promptly return the enclosed proxy card to assure that your
shares will be voted at the meeting. The merger is an important step for GTI and
its stockholders. THE MERGER CANNOT BE COMPLETED UNLESS GTI CORPORATION
STOCKHOLDERS ADOPT THE MERGER AGREEMENT.
Sincerely,
/s/ ALBERT J. HUGO-MARTINEZ
--------------------------------------
Albert J. Hugo-Martinez
President and Chief Executive Officer
<PAGE> 3
GTI CORPORATION
9715 BUSINESS PARK AVENUE
SAN DIEGO, CA 92131
(619) 537-2500
------------------------
NOTICE AND PROXY STATEMENT
------------------------
SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON AUGUST , 1998
To the stockholders of GTI Corporation:
This notice is provided to inform you that a Special Meeting of
Stockholders of GTI Corporation ("GTI") will be held at on August
, 1998 at local time (the "Meeting") for consideration of and action
upon the following matters:
1. To consider and vote on a proposal (the "Proposal") to approve and
adopt an Agreement and Plan of Merger, dated as of May 26, 1998 (the
"Merger Agreement"), by and between GTI, Technitrol International, Inc.
("Parent") and Technitrol Acquisition, Inc. ("Acquisition," a wholly-owned
subsidiary of Parent). Parent is a wholly-owned subsidiary of Technitrol,
Inc., NYSE: TNL. Pursuant to the Merger Agreement, Acquisition will be
merged into GTI (the "Merger"), with GTI continuing as the surviving
corporation. If the Merger Agreement is adopted by the GTI stockholders,
the other conditions to the Merger are satisfied or waived, and the Merger
becomes effective, then each share of common stock of GTI issued and
outstanding immediately prior to the effective time of the Merger (other
than shares as to which statutory appraisal rights have been perfected)
will be converted into the right to receive $3.10 in cash, without
interest, and each share of preferred stock of GTI issued and outstanding
immediately prior to the effective time of the Merger (other than shares as
to which statutory appraisal rights have been perfected) will be converted
into the right to receive $726.37 in cash, without interest. The complete
terms of the Merger are contained in the Merger Agreement, which is
included in the Proxy Statement as Appendix A.
2. To transact such other business as may properly come before the
Meeting and any postponement or adjournment thereof, and matters incident
to the conduct of the Meeting.
The Board of Directors has fixed the close of business on July , 1998 as
the record date for the determination of stockholders of GTI entitled to notice
of, and to vote at, the Meeting and any postponement or adjournment thereof.
Stockholders may vote in person or by proxy. In the event that there are not
sufficient votes to approve the Proposal, GTI expects that the Meeting will be
postponed or adjourned in order to permit further solicitation of proxies by
GTI. The Proxy Statement and the accompanying proxy card was first sent to
stockholders on or about July , 1998.
Whether or not you plan to attend the Meeting in person, please mark, date
and sign your proxy, and mail it in the stamped envelope enclosed for your
convenience. In order to avoid the additional expense to GTI of further
solicitation, we ask your cooperation in mailing your proxy promptly. Returning
the proxy does not affect your right to vote in person on all matters brought
before the Meeting, but will help assure a quorum if you do not attend.
BY ORDER OF THE BOARD OF DIRECTORS,
/s/ BRUCE C. MYERS
--------------------------------------
Bruce C. Myers
Secretary and Chief Financial Officer
San Diego, CA
July , 1998
<PAGE> 4
TABLE OF CONTENTS
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PAGE
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SUMMARY..................................................... 1
THE MERGER.................................................. 12
Purpose, Structure and Effect of the Merger............... 12
Background of the Merger.................................. 12
GTI's Reasons for the Merger; Recommendation of the
Special Committee and the Board of Directors........... 21
Considerations of the Special Committee................... 21
Considerations of the Board............................... 23
Opinion of Cowen & Company................................ 24
Interests of Certain Persons in the Merger................ 30
Merger Agreement.......................................... 30
Terms of the Merger.................................... 30
Conversion of Shares in the Merger..................... 31
Appraisal Rights....................................... 31
Options and Warrants................................... 31
Payment of Shares...................................... 31
Representations and Warranties......................... 32
Conduct of Business Pending the Merger................. 32
Solicitations and Superior Proposals................... 33
Additional Covenants................................... 34
Conditions to the Merger............................... 34
Termination of Merger Agreement and Termination Fees... 35
Expenses............................................... 36
Amendment.............................................. 36
Accounting Treatment...................................... 36
Certain Effects of the Merger............................. 36
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES....... 37
REGULATORY COMPLIANCE....................................... 38
APPRAISAL RIGHTS............................................ 38
INFORMATION REGARDING GTI CORPORATION....................... 39
SELECTED CONSOLIDATED FINANCIAL DATA........................ 45
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................. 46
LIQUIDITY AND CAPITAL RESOURCES............................. 50
INFORMATION REGARDING TECHNITROL, PARENT AND ACQUISITION.... 51
MARKET PRICE FOR GTI COMMON STOCK........................... 51
PRINCIPAL STOCKHOLDERS AND HOLDINGS OF OFFICERS AND
DIRECTORS................................................. 52
Principal Stockholders.................................... 52
Aggregate Stock Ownership of Directors and Officers....... 53
INDEPENDENT ACCOUNTANTS..................................... 53
</TABLE>
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PAGE
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WHERE YOU CAN FIND ADDITIONAL INFORMATION................... 53
OTHER BUSINESS.............................................. 54
CONSOLIDATED FINANCIAL STATEMENTS........................... F-1
Appendix A -- Agreement and Plan of Merger
Appendix B -- Opinion of Cowen & Company
Appendix C -- Appraisal Rights Statute
</TABLE>
ii
<PAGE> 6
GTI CORPORATION
9715 BUSINESS PARK AVENUE
SAN DIEGO, CA 92131
(619) 537-2500
------------------------
PROXY STATEMENT
------------------------
SPECIAL MEETING OF STOCKHOLDERS
OF GTI CORPORATION
AUGUST , 1998
------------------------
SUMMARY
This summary highlights selected information from this document. You are
being asked to consider and vote on a proposal (the "Proposal") to approve and
adopt an Agreement and Plan of Merger, dated as of May 26, 1998 (the "Merger
Agreement"), by and between GTI Corporation, Technitrol International, Inc.
("Parent") and Technitrol Acquisition, Inc. ("Acquisition," a wholly-owned
subsidiary of Parent). Parent is a wholly-owned subsidiary of Technitrol, Inc.,
NYSE: TNL. As used herein, the term "Company" or "GTI" refers to GTI and, unless
specifically identified otherwise, all of its subsidiaries.
Technitrol, Inc. has unconditionally guaranteed to GTI (the "Guaranty") the
prompt and complete payment and performance, when due, of all liabilities and
obligations of Parent to GTI under the Merger Agreement. Technitrol, Inc.,
Parent and Acquisition are herein collectively referred to as "Technitrol."
Pursuant to the Merger Agreement, Acquisition will be merged into GTI (the
"Merger"), with GTI continuing as the surviving corporation. Immediately after
the Merger, GTI will become a wholly-owned subsidiary of Technitrol.
This summary may not contain all of the information that is important to
you. To understand the Merger fully and for a more complete description of the
complete terms of the Merger, you should read carefully this entire document and
the other documents referred to herein. See "Where You Can Find Additional
Information" at page 53 of this Proxy Statement. The complete terms of the
Merger are contained in the Merger Agreement, which is included in this Proxy
Statement as Appendix A.
THE MERGER CONSIDERATION
If the Merger is completed, GTI stockholders who do not perfect their
statutory appraisal rights will receive $3.10 per share in cash for their GTI
Common Stock (the "Common Stock") and $726.37 per share in cash for their GTI
$35.00 Cumulative Convertible Preferred Stock (the "Preferred Stock") (which
amount equals the Preferred Stock to Common Stock conversion ratio of 234.314
multiplied by $3.10). The consideration to be received by holders of Common and
Preferred Stock is hereinafter referred to as the "Merger Consideration." The
total amount to be paid to all holders of Common and Preferred Stock (assuming
no stockholders perfect their statutory appraisal rights) will be approximately
$33.7 million. All outstanding options and warrants to purchase shares of Common
Stock will be cancelled at the effective time of the Merger (the "Effective
Time"). No holder of any such option or warrant will be entitled to receive any
amount on account of such cancellation, because the exercise price of each such
option and warrant is greater than $3.10 per share of Common Stock.
VOTING
At the Meeting, the holders of Common and Preferred Stock will vote on the
Proposal to adopt the Merger Agreement. In order to be approved, a majority of
all the outstanding shares of Common Stock, and at least two-thirds of the
outstanding shares of Preferred Stock, voting as separate classes, must be voted
in favor of adopting the Merger Agreement. On the record date, there were
8,973,475 shares of Common Stock outstanding and entitled to vote which were
held by approximately stockholders of record, and
<PAGE> 7
there were 8,110 shares of Preferred Stock outstanding and entitled to vote, all
of which were held by a wholly-owned subsidiary of Telemetrix, PLC, a United
Kingdom corporation ("Telemetrix").
Telemetrix, which directly or indirectly owns approximately 47.9% of the
outstanding shares of Common Stock and 100% of the outstanding shares of
Preferred Stock, has entered into an agreement with Technitrol pursuant to which
Telemetrix has called a meeting of its stockholders for July 17, 1998 to vote
upon the disposition of Telemetrix's shares of Common Stock and Preferred Stock
by means of the Merger. Telemetrix's board of directors has recommended that
Telemetrix stockholders vote in favor of such disposition. If holders of a
majority of the shares of Telemetrix present in person or by proxy at that
meeting vote in favor of such disposition, Telemetrix has agreed to vote its
Common and Preferred Stock for the Merger Agreement. Trustees of certain trusts
beneficially owning in excess of 47% of the outstanding shares of Telemetrix
voting capital stock have agreed with Technitrol to cause such shares to be
voted in favor of such disposition. GTI will publicly announce the results of
the Telemetrix stockholders meeting promptly after it has taken place.
RECORD DATE
The close of business on July , 1998, is the record date for determining
those stockholders entitled to vote at the Meeting.
RECOMMENDATION OF GTI'S BOARD OF DIRECTORS (PAGE 21)
GTI'S BOARD OF DIRECTORS HAS APPROVED THE MERGER AGREEMENT AND UNANIMOUSLY
RECOMMENDS THAT YOU VOTE TO ADOPT THE MERGER AGREEMENT. GTI'S BOARD OF DIRECTORS
BELIEVES THAT THE MERGER IS FAIR TO, AND IN THE BEST INTERESTS OF, GTI AND ITS
STOCKHOLDERS.
FACTORS CONSIDERED BY THE GTI BOARD OF DIRECTORS (PAGE 21)
The Company's business is heavily dependent on the maturing market for LAN
products, which recently has experienced a downturn in the quantities of
products that the Company manufactures and sells. As a result of this downturn
and quality-control problems experienced by the Company in 1996, the market for
the Company's products contracted and has experienced significant competition
and price declines. As a result of these adverse trends, the Company experienced
significant operating losses in 1996 and 1997 and in the first quarter of 1998.
On November 20, 1997, the GTI Board of Directors (the "Board") appointed a
Special Committee of two independent non-employee directors of GTI (the "Special
Committee") to examine strategic alternatives available to GTI, including a
possible sale of GTI. On January 15, 1998, the Board directed the Special
Committee to manage the process of considering strategic alternatives. On May
26, 1998, the Special Committee unanimously recommended the approval of the
Merger Agreement and the transactions contemplated thereby, including the
Merger.
On May 26, 1998, the Company Board (with Mr. Venter not participating
because he was then in transit from Johannesburg, South Africa to London,
England to attend a meeting of the board of directors of Telemetrix) based upon,
among other things, the unanimous recommendation and approval of the Special
Committee, the fairness opinion received from the Special Committee's financial
advisor, Cowen & Company ("Cowen" or the "Financial Advisor"), and the Board's
independent review of the Merger Agreement and the other factors described
below, approved the Merger Agreement and the transactions contemplated thereby,
including the Merger, and it determined that the Merger is fair to, in the best
interests of, and produces the highest value reasonably obtainable by, the
stockholders of the Company and that it should recommend that the stockholders
of the Company adopt the Merger Agreement.
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Considerations of the Special Committee. In reaching its determination
referred to above, the Special Committee considered the following factors, each
of which, in the view of the Special Committee, supported such determination:
1. The assessment of the Company's management, the Board and the
Special Committee that the Company could not long sustain its continuing
operating losses. It was the determination of the Special Committee that,
in order for GTI to compete more effectively in its market and increase
stockholder value, it would be necessary to become or combine with a
larger, diversified and better capitalized enterprise. Further, it was the
Special Committee's assessment that it would be difficult for the Company
to achieve this substantial increase in size either by acquisition or
through internal growth. Based in part on the advice of the Financial
Advisor, the Special Committee concluded that GTI likely would encounter
difficulties raising the additional capital necessary to produce value to
the Company's stockholders at levels similar to $3.10 per share of Common
Stock in the reasonably foreseeable future. This determination was also due
in part to the fact that many of the Company's competitors are
substantially larger, more diversified and better capitalized than the
Company and, as a result, possess greater ability to effect acquisitions,
to maintain necessary technology programs and to hire and retain employees.
Accordingly, the Special Committee concluded that a sale of GTI at the
current time is in the best interests of GTI and its stockholders and that
the Company, acting independently, would be unlikely to produce value to
its stockholders at a level similar to or greater than $3.10 per share of
Common Stock in the reasonably foreseeable future.
2. The fact that the Special Committee and, at its direction, the
Financial Advisor, had conducted a wide-ranging process to identify and
contact potential acquirers or others interested in a strategic
relationship or transaction with GTI. The Special Committee, working with
management and the Financial Advisor, developed a detailed strategy of
approach, first to potential strategic acquirers who were not competitors,
then to other potential strategic partners, next to potential financial
acquirers and last to competitors. In all, 15 such parties were contacted.
The Special Committee held numerous meetings and carefully monitored the
progress of such discussions and directed management and the Financial
Advisor with respect to such discussions. In addition, in February 1998,
GTI publicly announced that it had retained the Financial Advisor to
explore strategic alternatives, including the possible sale of GTI. Any
potential acquirer or strategic partner who had not yet been contacted was
thereby given notice that GTI was potentially for sale. Accordingly, the
Special Committee believed that a full and fair market test had been done
to establish the arm's-length market value of GTI. Since the May 27, 1998
announcement of the Merger Agreement, neither GTI nor the Financial Advisor
has received any bid or indication of interest of any kind from any party.
3. The history of the negotiations between the Special Committee and
Technitrol, including (i) the Special Committee's belief (and Technitrol's
clearly stated position) that Technitrol would not further increase the
Merger Consideration, and, accordingly, $3.10 per share of Common Stock and
$726.37 per share of Preferred Stock was, in the opinion of the Special
Committee, the highest price that could be obtained from Technitrol and
(ii) the Special Committee's belief that further negotiations concerning
price with Technitrol could cause Technitrol to terminate negotiations with
respect to the Merger.
4. That the Merger Consideration of $3.10 per share of Common Stock
represents: (i) a premium of approximately 34% over the $2.3125 per share
closing price on May 12, 1998, which was seven days prior to the May 19,
1998 public announcement of the fact that the Company had signed a letter
of intent with Technitrol for the merger of the Company at $3.10 per share
of Common Stock in cash; (ii) a premium of approximately 15.3% over the
$2.6875 per share closing price on May 20, 1998, which was seven days prior
to the May 27, 1998 public announcement (the "Announcement") of the fact
that the Company had entered into a definitive agreement for the merger of
the Company at $3.10 per share of Common Stock in cash; (iii) a premium of
approximately 3.3% over the $3.00 per share closing price on April 27,
1998, which was 30 days prior to the Announcement; and (iv) a premium of
approximately 19.4% over the average closing price for the one-month period
preceding the Announcement. In addition, the shares of Common Stock have
not traded in Nasdaq's National Market higher than $3.10 per share of
Common Stock since April 21, 1998. The $3.10 price per share of Common
Stock and the $726.37 price
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per share of Preferred Stock are payable in cash, thus eliminating any
uncertainties in valuing the consideration to be received by the holders of
Common Stock and Preferred Stock.
5. The terms and conditions of the Merger Agreement, including two key
provisions negotiated by the Special Committee. First, Technitrol cannot
refuse to complete the Merger because of a decline in the financial
performance of GTI after May 26, 1998, even if such decline has a Material
Adverse Effect (as defined in the Merger Agreement) on GTI. Second, GTI's
Board of Directors retains the right to consider unsolicited superior
proposals received from third parties, supply non-public information to
such third parties, and terminate the Merger Agreement under certain
circumstances if an unsolicited superior offer is received, subject to
fulfillment of certain financial obligations to Technitrol. See "Merger
Agreement."
6. The opinion of the Financial Advisor, addressed to the Special
Committee and the Board, to the effect that, based upon the assumptions
made, matters considered and the limitations on the review undertaken in
connection therewith, the Merger Consideration of $3.10 per share of Common
Stock, was, as of May 26, 1998, fair to holders of Common Stock (other than
Technitrol and its subsidiaries and affiliates) from a financial point of
view. See "Opinion of Cowen & Company" and the written opinion of the
Financial Advisor attached as Appendix B.
7. The possibility that the consideration the Company's stockholders
might obtain in a future transaction was likely to be less advantageous
than the Merger Consideration because of: the lower than expected Company
earnings for the first fiscal quarter ended March 31, 1998, and the fiscal
year ended December 31, 1997; the substantial uncertainty concerning
whether the Company would be able to improve its performance in the
nine-months ended September 30, 1998 or thereafter; the frequency with
which the Company had, in the past, not met its internally projected
results; and the uncertainty regarding the market for Local Area Network
("LAN") products, which account for in excess of 90% of the Company's
revenues, and its effect on future Company earnings.
8. The fact that Technitrol, Inc. was executing and delivering a
guaranty of payment of the Merger Consideration by its subsidiary pursuant
to the Merger Agreement, which increased the likelihood that the proposed
acquisition would be consummated.
9. While consummation of the Merger would result in the stockholders
of the Company receiving a premium for their shares of Common Stock over
the trading prices of such shares prior to the public announcement that the
Company had signed a letter of intent for the sale of the Company at a
price of $3.10 per share of Common Stock, consummation of the Merger would
eliminate any opportunity for stockholders of the Company to participate in
the potential future growth prospects, if any, of the Company. The Special
Committee determined, however, that (a) the loss of opportunity is
reflected in the price of $3.10 per share of Common Stock, and (b) there
are continued substantial business risks associated with independent
operation that could materially negatively affect the Company's ability to
achieve the future operating results believed by the Special Committee to
be necessary to achieve higher trading prices for the Common Stock.
The foregoing discussion of the factors considered by the Special Committee
is not intended to be all-inclusive. In view of the variety of factors
considered in connection with its evaluation of the Merger, the Special
Committee did not find it practicable to and did not attempt to rank or assign
relative weights to the foregoing factors.
Considerations of the Board. The members of the Board evaluated the factors
listed above in light of their knowledge of the business, financial condition
and prospects of the Company and based upon the advice of independent financial
and legal advisors. In addition, the Board determined that the Merger Agreement
was the result of a process that was fair to the stockholders of the Company
because, among other things, (a) a Special Committee was formed consisting of
members of the Board of Directors who are neither employees of the Company nor
affiliated with any substantial stockholder of the Company nor any of the
bidders, (b) the Special Committee conducted more than 20 meetings during the
period between the formation of the Special Committee and the execution and
delivery of the Merger Agreement, during which meetings the Special
4
<PAGE> 10
Committee evaluated and analyzed the bids, determined the negotiating strategy
and reached informed conclusions based, in part, on the advice of its
independent financial and legal advisors, (c) the Board and the Special
Committee deliberated with respect both to the Merger and the alternative
strategies of remaining independent or seeking a joint venture to which the
Company would contribute substantially all of its assets and personnel, and (d)
the price of $3.10 per share of Common Stock and the other terms and conditions
of the Merger Agreement resulted from active arm's-length bargaining between the
Special Committee and Technitrol.
OPINION OF COWEN & COMPANY (PAGE 24)
At the meetings of the Special Committee and the Board held on May 26,
1998, the Financial Advisor delivered to the Special Committee and the Board of
Directors its oral opinion, which opinion was subsequently confirmed in a
written opinion dated as of such date, to the effect that, based upon the
assumptions made, matters considered and the limitations on the review
undertaken in connection therewith, the Merger Consideration, as of May 26,
1998, was fair to holders of Common Stock (except Technitrol and its
subsidiaries and affiliates) from a financial point of view. The opinion of the
Financial Advisor is included in this Proxy Statement as Appendix B.
Stockholders of GTI are urged to read the opinion of the Financial Advisor in
its entirety.
INTERESTS OF GTI MANAGEMENT AND TELEMETRIX IN THE MERGER (PAGE 30)
All members of the Board and executive officers of GTI own stock options
and/or Common Stock of GTI and, to that extent, their interest in the Merger is
the same as yours. However, some of the officers and directors of GTI have
interests in the Merger that are different from your interests as a stockholder.
Some of these interests are set forth below. The Board and the Special Committee
were aware of these interests and considered them in recommending and approving
the Merger.
- Certain GTI officers, including Mr. Hugo-Martinez, who is also a
director, will be entitled to receive change of control stay bonuses upon
the effectiveness of the Merger. See "The Merger -- Interests of Certain
Persons in the Merger."
- The Merger Agreement provides that all rights to indemnification in favor
of any present or former director or officer of GTI as provided in GTI's
certificate of incorporation and bylaws or certain applicable
indemnification agreements shall survive the Merger with respect to
matters occurring at or prior to the Effective Time. Subject to certain
limitations, the present GTI director and officer liability insurance
policy coverage is to be maintained by the surviving corporation for six
years. Technitrol, Inc. has guaranteed payment of the indemnity.
- Certain of GTI's senior management may continue to be employed by
Technitrol after the Merger. As of the date hereof, neither Mr.
Hugo-Martinez nor any of the Company's other executive officers has, to
the Company's knowledge, entered into any written or oral employment
agreement with Technitrol.
- The Merger Agreement requires that GTI repay its loan from Telemetrix
(which directly or indirectly owns approximately 47.9% of the outstanding
shares of Common Stock and 100% of the outstanding shares of Preferred
Stock) immediately prior to the Effective Time as part of Technitrol's
plan to replace all of the Company's financing facilities. This repayment
will occur earlier than Telemetrix would otherwise have been repaid.
- Consummation of the Merger will provide liquidity to Telemetrix for its
substantial block of Common and Preferred Stock, which liquidity might
not otherwise be available to Telemetrix.
5
<PAGE> 11
APPRAISAL RIGHTS (PAGE 38)
Any stockholder who does not wish to accept the Merger Consideration has
the right under the Delaware General Corporation Law (the "DGCL") to receive the
"fair value" of his or her shares of Common Stock or Preferred Stock as
determined by a Delaware court. This "appraisal right" is subject to a number of
restrictions and technical requirements. Generally, in order to perfect
appraisal rights:
- you must not vote in favor of the Merger; and
- you must make a written demand for appraisal before the vote on the
Merger.
Merely voting against the Merger will not protect your right of appraisal.
Appendix C to this Proxy Statement contains the applicable provisions of the
DGCL relating to appraisal rights. See "Appraisal Rights."
CONDITIONS TO THE MERGER (PAGE 34)
The obligations of GTI and Technitrol to complete the Merger are subject to
a number of conditions. If these conditions are not satisfied or waived, the
Merger will not be completed. The most important of the mutual conditions are:
- adoption of the Merger Agreement by holders of a majority of the
outstanding shares of Common Stock and holders of at least two-thirds of
the outstanding shares of Preferred Stock, voting as separate classes;
- expiration or earlier termination of the waiting period under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976 ("HSR"); early
termination was granted and became effective on June 19, 1998; and
- no statute, rule, regulation, executive order, decree, ruling or
injunction shall have been enacted, entered, promulgated or enforced by
any United States court or United States governmental authority which
prohibits, restrains, enjoins or restricts the consummation of the
Merger.
Several additional conditions exist that must be met to require Technitrol
to complete the Merger. The most important of these conditions are:
- the representations of the Company contained in the Merger Agreement or
in any other document delivered pursuant thereto shall be true and
correct at and as of the Effective Time with the same effect as if made
at and as of the Effective Time (except to the extent the representations
specifically related to an earlier date, in which case such
representations shall be true and correct as of such earlier date),
provided that the representations of the Company and its subsidiaries
which are not qualified by materiality or Material Adverse Effect (as
defined in the Merger Agreement) shall be deemed for all purposes of the
Merger Agreement to be true and correct if, in the aggregate the breach
of all such representations, if any, do not have a Material Adverse
Effect on the Company or the validity of the Merger;
- each of the covenants and obligations of the Company to be performed at
or before the Effective Time pursuant to the terms of the Merger
Agreement shall have been duly performed in all material respects at or
before the Effective Time;
- the Company shall have obtained the consent or approval of each person
whose consent or approval shall be required in connection with the
transactions contemplated by the Merger Agreement under any loan or
credit agreement, license, note, mortgage, indenture, lease or other
agreement or instrument, except those for which failure to obtain such
consents and approvals would not, individually or in the aggregate, have
a Material Adverse Effect on the Company or the validity of the Merger;
- receipt of an opinion of legal counsel to the Company as to certain
matters set forth in Exhibit B to the Merger Agreement; and
6
<PAGE> 12
- GTI stockholders perfecting appraisal rights hold no more than 10% of the
outstanding shares of Common Stock of GTI, assuming for purposes of such
calculation the conversion to shares of Common Stock of all outstanding
shares of Preferred Stock.
Notwithstanding the above, the first three conditions precedent, above, to
Technitrol's obligation to complete the Merger will be deemed satisfied if such
conditions would have been satisfied but for the occurrence, between May 26,
1998 and the closing date of the Merger, of a reduction, compared to the first
quarter of fiscal year 1998, in the earnings before interest, taxes,
depreciation and amortization of the Company and its subsidiaries, on a
consolidated basis ("EBITDA") that has a Material Adverse Effect on the Company,
and the business and financial events resulting in such reduction in EBITDA were
not themselves initiated by one or more independent breaches by the Company of
the representations and warranties of the Company contained in the Merger
Agreement.
Additional conditions exist that must be met to require GTI to complete the
Merger. The most important of these conditions are:
- the representations of Parent and Acquisition contained in the Merger
Agreement or in any other document delivered pursuant thereto shall be
true and correct at and as of the Effective Time with the same effect as
if made at and as of the Effective Time (except to the extent such
representations specifically related to an earlier date, in which case
such representations shall be true and correct as of such earlier date),
provided that the representations of Parent and Acquisition which are not
qualified by materiality or Material Adverse Effect shall be deemed for
all purposes of this Agreement to be true and correct if, in the
aggregate the breaches of all such representations, if any, do not have a
Material Adverse Effect on Parent or Acquisition or the validity of the
Merger;
- each of the covenants and obligations of Parent and Acquisition to be
performed at or before the Effective Time pursuant to the terms of this
Agreement shall have been duly performed in all material respects at or
before the Effective Time;
- Parent shall have obtained the consent or approval of each person whose
consent or approval shall be required in connection with the transactions
contemplated by the Merger Agreement under any loan or credit agreement,
note, mortgage, indenture, lease or other agreement or instrument, except
those for which failure to obtain such consents and approvals would not,
individually or in the aggregate, have a Material Adverse Effect on
Parent or Acquisition or the validity of the Merger; and
- receipt of an opinion of legal counsel to Parent as to the matters set
forth in Exhibit A to the Merger Agreement.
TERMINATION OF THE MERGER AGREEMENT (PAGE 35)
Either GTI or Technitrol may terminate the Merger Agreement if:
- they mutually consent in writing to terminate the Merger Agreement;
- a final order or similar action by a court of competent jurisdiction in
the United States or other United States Governmental Entity (as defined
in the Merger Agreement) restrains, enjoins or otherwise prohibits the
Merger; or
- the Merger has not been consummated by November 30, 1998, unless the
terminating party has caused the failure to meet the closing conditions
by failing to fulfill its obligations under the Merger Agreement.
In addition, Technitrol may terminate the Merger Agreement if:
- GTI breaches any of its representations or warranties in the Merger
Agreement and the first or third condition precedent, above, to
Technitrol's obligation to close the Merger is not capable of being
satisfied by November 30, 1998.
7
<PAGE> 13
- GTI breaches a covenant in the Merger Agreement having a Material Adverse
Effect on GTI or materially adversely affecting (or materially delaying)
the consummation of the Merger, such that the second or third condition
precedent, above, to Technitrol's obligation to close the Merger is not
capable of being satisfied by November 30, 1998 and such breach has not
been cured within twenty business days after notice thereof by
Technitrol;
- the Board has recommended to GTI's stockholders a Superior Proposal (as
defined in the Merger Agreement) and GTI's stockholders have not adopted
the Merger Agreement by November 30, 1998;
- the Board has withheld, withdrawn, modified or changed its approval or
recommendation of the Merger Agreement and GTI's stockholders have not
adopted the Merger Agreement by November 30, 1998; or
- GTI stockholders perfecting appraisal rights hold more than 10% of the
outstanding shares of Common Stock of GTI, assuming for purposes of such
calculation the conversion to shares of Common Stock of all outstanding
shares of Preferred Stock.
- the Board convenes a meeting of GTI stockholders to vote upon the Merger
Agreement and the GTI stockholders fail to adopt the Merger Agreement.
In addition, GTI may terminate the Merger Agreement if:
- Parent or Acquisition breaches any of its representations or warranties
in the Merger Agreement and the first or third condition precedent,
above, to GTI's obligation to close the merger is not capable of being
satisfied by November 30, 1998;
- Parent or Acquisition breaches a covenant in the Merger Agreement
materially adversely affecting (or materially delaying) the consummation
of the Merger, such that the second or third condition precedent, above,
to GTI's obligation to close the Merger is not capable of being satisfied
by November 30, 1998 and such breach has not been cured within twenty
business days after notice thereof by GTI; or
- Section 4.4 of the Merger Agreement, relating to the receipt and
evaluation by GTI of a Superior Proposal (as defined in the Merger
Agreement), is satisfied.
TERMINATION FEES (PAGE 36)
GTI will be required to pay Technitrol a termination fee equal to
Technitrol's actual documented out-of-pocket costs incurred, not to exceed
$750,000, if the Merger Agreement is terminated due to:
- the Board's termination of the Merger Agreement pursuant to Section 4.4
thereof, relating to the receipt and evaluation of a Superior Proposal;
- the Board's recommendation of a Superior Proposal and the failure of the
Company's stockholders to adopt the Merger Agreement, instead, by
November 30, 1998;
- the Board's withholding, withdrawal, modification or change of its
approval or recommendation to GTI's stockholders of a vote for the
adoption of the Merger Agreement, and the failure of the Company's
stockholders to adopt the Merger Agreement, in any event, by November 30,
1998; or
- the Board's convening of a meeting of GTI stockholders to vote upon the
Merger Agreement and the failure of the Company's stockholders to adopt
the Merger Agreement.
In addition, if the Merger is terminated as a result of one of the factors
enumerated in the preceding sentence and GTI consummates a transaction with
respect to a Third Party Acquisition Proposal (as defined in the Merger
Agreement) with a party other than Technitrol or enters into an option,
agreement or letter of intent with respect to a Third Party Acquisition Proposal
or other arrangement intended to transfer control of GTI or the stockholders of
GTI tender or grant an option on shares representing 50% or more of the voting
interest in GTI, within twelve months after termination (and, in the event the
Merger Agreement was terminated due to a failure of the Company's stockholders
to adopt the Merger Agreement at a meeting
8
<PAGE> 14
convened by the Board to vote upon the Merger Agreement, a Third Party
Acquisition Proposal was outstanding at the time of such stockholders' meeting),
then GTI will pay to Technitrol an additional termination fee equal to $2
million less the amount paid pursuant to the immediately preceding sentence. The
termination fee is intended to be the only damages that Technitrol is entitled
to receive if the Merger Agreement is terminated for the first or second
grounds, above, on the basis of which Technitrol can terminate the Merger
Agreement.
FEDERAL INCOME TAX CONSEQUENCES (PAGE 37)
A holder of Common Stock will be taxed for United States federal income tax
purposes on the receipt of the Merger Consideration to the extent that the
amount received exceeds the holder's tax basis in the Common Stock. Because the
tax consequences of the Merger can be complicated, especially in light of recent
changes to the United States federal tax laws governing capital gains, and
because state tax laws may apply as well, you should consult your tax advisor in
order to understand fully how the Merger will affect you. See "The
Merger -- Certain United States Federal Income Tax Consequences."
TIME, PLACE AND PURPOSE OF THE SPECIAL MEETING
This proxy statement and the accompanying proxy card are solicited by the
Board. These proxies will be used at the Special Meeting of Stockholders (the
"Meeting") to be held at local time, on August , 1998 at
, and at any and all adjournments thereof. The purpose of the
Meeting is to consider and vote on a proposal to adopt the Merger Agreement,
pursuant to which Acquisition will be merged into GTI with GTI continuing as the
Surviving Corporation. THE BOARD OF DIRECTORS OF GTI HAS APPROVED, AND
UNANIMOUSLY RECOMMENDS THAT GTI STOCKHOLDERS VOTE FOR ADOPTION OF, THE MERGER
AGREEMENT. See "The Merger -- Background of the Merger."
VOTING SECURITIES OF THE COMPANY
Stockholders of record at the close of business on July , 1998 (the
"Record Date") will be entitled to vote at the Meeting. On the Record Date,
there were outstanding 8,973,475 shares of Common Stock which were held by
approximately stockholders of record, and 8,110 shares of Preferred
Stock, all of which were held by a wholly-owned subsidiary of Telemetrix.
All shares represented by properly executed and unrevoked proxies will be
voted at the Meeting. The proxy accompanying this Proxy Statement may be revoked
at any time prior to voting by providing written notice to the Secretary of the
Company or by appearance at the Meeting and voting in person.
At the Meeting, the holders of Common Stock and Preferred Stock will vote
on the Proposal to adopt the Merger Agreement. In order to be approved, holders
of a majority of the outstanding shares of Common Stock, and holders of at least
two-thirds of the outstanding shares of Preferred Stock, voting as separate
classes, must vote in favor of adopting the Merger Agreement in order for the
Proposal to be adopted. Votes withheld, abstentions and "broker non-votes" will
not be counted as votes cast and will not be voted.
Telemetrix, which directly or indirectly owns approximately 47.9% of the
outstanding shares of Common Stock and 100% of the outstanding shares of
Preferred Stock, has entered into an agreement with Technitrol pursuant to which
Telemetrix has called a meeting of its stockholders for July 17, 1998 to vote
upon the disposition of Telemetrix's shares of Common Stock and Preferred Stock,
by means of the Merger. Telemetrix's board of directors has recommended that
Telemetrix stockholders vote in favor of such disposition. If holders of a
majority of the shares of Telemetrix present in person or by proxy at that
meeting vote in favor of such disposition, Telemetrix has agreed to vote its
Common and Preferred Stock for the Merger Agreement. Trustees of certain trusts
beneficially owning in excess of 47% of the outstanding shares of Telemetrix
voting capital stock have agreed with Technitrol to cause such shares to be
voted in favor of such disposition. GTI will publicly announce the results of
the Telemetrix stockholders meeting promptly after it has taken place.
9
<PAGE> 15
If the enclosed proxy is duly executed and received in time for the
Meeting, and if no contrary instructions are included on the proxy, it is the
intention of the persons named as proxies to vote the shares of Common Stock and
Preferred Stock represented thereby in favor of the Proposal to adopt the Merger
Agreement, and in the discretion of the persons named as proxies in connection
with any other business that may properly come before the Meeting or any
adjournment thereof.
At this time, GTI knows of no other matters that may be presented for
stockholder action at the Meeting. However, if any matters, other than approval
of the Merger Agreement, should properly come before the Meeting, it is the
intention of the persons named in the enclosed proxy to vote such proxy in
accordance with their best judgment.
In the event that there are not sufficient votes to approve the Proposal
raised at the Meeting, it is expected that the Meeting will be postponed or
adjourned in order to permit further solicitation of proxies by GTI.
The delivery of this Proxy Statement shall not, under any circumstances,
create any implication that the information contained herein is correct after
the date hereof, July , 1998.
GTI'S BOARD OF DIRECTORS HAS APPROVED THE MERGER AGREEMENT AND UNANIMOUSLY
RECOMMENDS THAT YOU VOTE TO ADOPT THE MERGER AGREEMENT. GTI'S BOARD OF DIRECTORS
BELIEVES THAT THE MERGER IS FAIR TO, AND IN THE BEST INTERESTS OF, GTI AND ITS
STOCKHOLDERS. THE AFFIRMATIVE VOTE OF HOLDERS OF A MAJORITY OF THE OUTSTANDING
SHARES OF COMMON STOCK AND THE HOLDERS OF AT LEAST TWO-THIRDS OF THE OUTSTANDING
SHARES OF PREFERRED STOCK, VOTING AS SEPARATE CLASSES, IS REQUIRED TO ADOPT THE
MERGER AGREEMENT.
NO PERSONS HAVE BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROXY STATEMENT IN CONNECTION
WITH GTI CORPORATION'S SOLICITATION OF PROXIES AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY GTI CORPORATION OR ANY OTHER PERSON.
SOLICITATION OF PROXIES
GTI will pay all additional expenses of the solicitation of proxies for the
Meeting, including the cost of mailing. Officers and regular employees of GTI
may solicit proxies from stockholders by telephone, telegram, facsimile or in
person. GTI will not pay these individuals any additional compensation for such
services, except for the reimbursement of any reasonable out-of-pocket expenses
that they incur.
FORWARD-LOOKING STATEMENTS MAY PROVE INACCURATE
Some statements contained in this Proxy Statement regarding future
financial performance and results and other statements that are not historical
facts are forward-looking statements. The words "expect," "project," "estimate,"
"predict," "anticipate," "believes" and similar expressions are also intended to
identify forward-looking statements. Such statements and the Company's results
are subject to numerous risks, uncertainties and assumptions, including but not
limited to: possible deficiencies in future liquidity levels, possible declines
in market growth rates, dependence on key customers, possible failure of product
development activities, the development of alternative technologies by
competitors of GTI or its customers, price pressures and other competitive
factors, volatility in the market for GTI's products, and legal proceedings.
These risk factors are more fully described in "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Should one or more of these risks or uncertainties materialize, or should
underlying assumptions prove incorrect, actual results may vary materially from
those indicated.
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<PAGE> 16
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data of the Company have been
derived from the unaudited interim financial statements and the audited annual
financial statements of the Company. This data should be read in conjunction
with Management's Discussion and Analysis of Financial Condition and Results of
Operations, the Interim Unaudited Financial Statements and Notes thereto, and
the Annual Audited Financial Statements and Notes thereto, all included
elsewhere in this document.
SELECTED CONSOLIDATED FINANCIAL DATA
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FIRST QUARTER
(UNAUDITED) YEAR ENDED DECEMBER 31,
----------------- --------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
------- ------- ------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Income Statement Data
Sales............................ $14,002 $22,393 $82,591 $ 92,533 $114,836 $103,239 $88,575
======= ======= ======= ======== ======== ======== =======
Income (loss) from:
Continuing operations.......... $(4,586) $ 188 $(3,133) $ (7,651) $ 6,124 $ 3,299 $10,890
Discontinued operations, net of
income taxes................. -- -- -- (2,998) (2,178) 1,962 2,310
Disposal of discontinued
operations, net of income
taxes........................ -- -- -- (10,822) (2,000) -- --
Cumulative effect of change in
accounting principle, net of
income taxes................. (899) -- -- -- -- -- --
------- ------- ------- -------- -------- -------- -------
Net income (loss)................ $(5,485) $ 188 $(3,133) $(21,471) $ 1,946 $ 5,261 $13,200
======= ======= ======= ======== ======== ======== =======
Diluted earnings (loss) per
share:
Continuing operations.......... $ (0.52) $ 0.01 $ (0.38) $ (0.88) $ 0.56 $ 0.32 $ 1.09
Discontinued operations, net of
income taxes................. -- -- -- (0.33) (0.20) 0.19 0.23
Disposal of discontinued
operations, net of income
taxes........................ -- -- -- (1.21) (0.18) -- --
Cumulative effect of change in
accounting principle, net of
income taxes................. (0.10) -- -- -- -- -- --
------- ------- ------- -------- -------- -------- -------
Net income (loss) per share...... $ (0.62) $ 0.01 $ (0.38) $ (2.42) $ 0.18 $ 0.51 $ 1.32
======= ======= ======= ======== ======== ======== =======
Weighted average number of common
shares and common stock
equivalents.................... 8,973 8,973 8,973 8,973 10,904 10,187 10,023
======= ======= ======= ======== ======== ======== =======
Balance Sheet Data
Total Assets..................... $74,936 $95,672 $82,954 $ 91,524 $117,699 $ 99,948 $89,648
======= ======= ======= ======== ======== ======== =======
Working Capital.................. $31,095 $30,656 $33,813 $ 29,513 $ 53,690 $ 42,108 $38,055
======= ======= ======= ======== ======== ======== =======
Long-term debt, less current
portion........................ $ -- $ 1,250 $ 625 $ -- $ -- $ -- $ --
======= ======= ======= ======== ======== ======== =======
Stockholders' equity............. $58,209 $67,314 $63,765 $ 67,150 $ 88,995 $ 77,563 $71,772
======= ======= ======= ======== ======== ======== =======
</TABLE>
11
<PAGE> 17
THE MERGER
PURPOSE, STRUCTURE AND EFFECT OF THE MERGER
The purpose of the Merger is for Technitrol to acquire all of the
outstanding capital stock of GTI and to provide GTI stockholders (other than
those who perfect their statutory appraisal rights) with $3.10, in cash, for
each share of Common Stock that they hold and $726.37, in cash, for each share
of Preferred Stock that they hold. The Merger is structured as a cash merger of
Acquisition with and into GTI, with the result that GTI will be the surviving
corporation and a wholly-owned subsidiary of Parent. Under the Merger Agreement,
the certificate of incorporation, bylaws, officers and directors of Acquisition
immediately prior to the Effective Time shall be the certificate of
incorporation, bylaws, officers and directors of GTI on and immediately
following the Effective Time.
If the Merger is consummated, the stockholders of GTI will no longer have
any equity interest in GTI, and therefore will not share in its future earnings
and growth, if any. Instead, each stockholder (other than stockholders who
perfect statutory appraisal rights) will receive, upon surrender of the
certificate or certificates, $3.10 per share of Common Stock, in cash, and
$726.37 per share of Preferred Stock, in cash. At such time, there will cease to
be any public market for the Common Stock and, after the Effective Time, the
Common Stock will be delisted from the Nasdaq National Market. Upon such event,
GTI will apply to the United States Securities and Exchange Commission (the
"Commission") for the deregistration of the Common Stock under the Securities
Exchange Act of 1934, as amended (the "Exchange Act").
BACKGROUND OF THE MERGER
The Company's business is heavily dependent on the maturing market for LAN
products, which recently has experienced a downturn in the quantities of
products that the Company manufactures and sells. As a result of this downturn
and quality-control problems experienced by the Company in 1996, the market for
the Company's products contracted and has experienced significant competition
and price declines. As a result of these adverse trends, the Company experienced
significant operating losses in 1996 and 1997 and in the first quarter of 1998.
At a meeting of the Board on November 20, 1997, the Board discussed at
length the Company's strategic situation and alternatives. It was the view of
the Company's management and the Board that the Company could not long sustain
its continuing operating losses. The Board also was of the view that the Company
would need to become or combine with a larger, diversified and better
capitalized enterprise in order to compete more effectively in its market and
increase stockholder value. Further, it was the Board's view that it would be
difficult for the Company to achieve this substantial increase in size either by
acquisition or through internal growth. This view was due in part to the
difficulty that GTI likely would encounter in trying to raise additional capital
in view of its continuing operating losses. This view was also due to the fact
that many of the Company's competitors are substantially larger, more
diversified and better capitalized than the Company and, as a result, possess
greater ability to effect acquisitions, to maintain necessary technology
programs and to hire and retain employees. In particular, the Board was of the
view that it might be in the best interests of the Company and its stockholders
to consider strategic alternatives, including the possible sale of GTI. GTI's
largest stockholder, Telemetrix, had expressed similar views. Accordingly, the
Board established a Special Committee made up of Messrs. Kenneth E. Maud and
Edmund B. Fitzgerald, who are not otherwise affiliated or associated with the
Company or Telemetrix, and authorized the Special Committee to engage an
investment banker and legal counsel to explore such strategic alternatives,
including the possible sale of GTI. Telemetrix advised the Board that Telemetrix
would be willing to consider disposal of its interest in GTI in connection with
a sale of GTI upon terms determined by the Special Committee to be fair to all
stockholders of the Company.
The Special Committee elected Mr. Maud as its Chairman, considered several
investment banking firms and decided that the Special Committee should retain
its own legal counsel. These decisions were made at several meetings of the
Special Committee in November and December of 1997 and in the first two weeks of
January 1998. The Special Committee decided that the Financial Advisor should be
retained as investment banker and Gibson, Dunn & Crutcher LLP ("Legal Counsel")
should be retained as legal counsel to the
12
<PAGE> 18
Special Committee. The Special Committee negotiated with the Financial Advisor
and Legal Counsel the terms of their respective engagements, especially with
respect to the Financial Advisor's fee structure and the defined circumstances
under which the Financial Advisor would be entitled to receive such fees.
At a meeting of the Special Committee on January 14, 1998, representatives
of Legal Counsel made a lengthy presentation to the Special Committee concerning
the fiduciary duties of members of the Special Committee and of the Board. In
addition, the Financial Advisor discussed at length with the Special Committee
the strategic alternatives potentially available to the Company and a proposed
strategy for identifying and contacting potential strategic partners on a
confidential basis. The Financial Advisor had developed this proposed strategy
in consultation with management of the Company. The Special Committee
extensively discussed with the Financial Advisor this proposed strategy and the
Financial Advisor's view on the strategic alternatives potentially available to
the Company, including a possible sale of the Company. Following a thorough
discussion, the Special Committee decided to recommend to the Board that the
Financial Advisor promptly finalize a list of potential strategic partners,
ranking them in three tiers based on the perceived likelihood of each party in a
particular tier submitting a favorable proposal to the Company.
After excluding representatives of the Company's management, the Special
Committee was advised that it was not uncommon for key managers of a corporation
to be provided with change of control packages when the corporation was
considering strategic alternatives. Following extensive discussion, the Special
Committee determined that it should recommend that the Board approve such a
package, reflecting concepts that the Special Committee had discussed with its
advisors, because the Special Committee believed that it would be in the best
interests of the Company and its stockholders for the Company to offer a change
of control stay bonus and severance package to key managers of the Company in
order to retain their services through the period of examining strategic
alternatives and to provide appropriate incentives to the management in
achieving the Company's strategic goals.
On January 15, 1998, the Board met. Representatives of Legal Counsel made a
lengthy presentation to the Board concerning the fiduciary duties of the members
of the Board and discussing the appropriate steps to be taken by members of the
Board during the process of considering strategic alternatives. In addition,
representatives of the Financial Advisor discussed at length with the Board the
strategic alternatives potentially available to the Company and a proposed
strategy, developed by the Financial Advisor in consultation with management,
for exploring such strategic alternatives. The Board discussed with the
Financial Advisor and management the potential strategic partners that had been
identified thusfar. After the Company's management was excused, the Board
discussed and was advised concerning the advisability of entering into change of
control stay bonus and severance agreements with key managers of the Company
along the lines discussed by the Special Committee. The Board, Legal Counsel and
the Financial Advisor discussed the appropriate process to be followed by the
Board and the Special Committee in order to best serve the interests of the
Company and its stockholders, with Legal Counsel discussing the issue in the
context of the DGCL and applicable securities laws. With the representatives of
Legal Counsel and the Financial Advisor excused, the Board discussed with the
Special Committee the advisability of retaining Legal Counsel and the Financial
Advisor to advise and assist the Special Committee in exploring strategic
alternatives available to GTI, including a possible sale of GTI. After
management of the Company and the representatives of the Financial Advisor and
Legal Counsel had been readmitted to the meeting, the Board adopted resolutions
approving the recommendation of the Special Committee to retain Cowen & Company
as investment bankers and Gibson, Dunn & Crutcher LLP as legal counsel to the
Special Committee. Further, the Board directed the Financial Advisor to refine
the proposed strategy for approaching potential strategic partners, based on the
discussions with respect to the potential strategic partners. In addition, the
Board decided that the Special Committee should manage the process of
considering strategic alternatives, in consultation with management, the
Financial Advisor and Legal Counsel. The Board approved the adoption of a change
of control stay bonus and severance package for key managers, reflecting the
concepts discussed by the Special Committee. The Board, with Mr. Hugo-Martinez
abstaining from such Board vote, directed the Special Committee, in consultation
with Legal Counsel, to negotiate change of control agreements with the key
managers. See "The Merger -- Interests of Certain Persons in the Merger."
13
<PAGE> 19
A meeting of the Special Committee was held on January 20, 1998. The
representatives of the Financial Advisor updated and reviewed the list of
potential strategic partners and their placement within the tiered structure
proposed. The Special Committee discussed in detail with management and
representatives of the Financial Advisor each of the possible strategic partners
in the upper tiers of the strategic partner list. The Special Committee
discussed with management and the Financial Advisor the prospect that each of
these potential strategic partners would make a proposal for a strategic
relationship with the Company, including a possible purchase of the Company, and
discussed the timing and method of the approaches to be used for each. In
addition, the Special Committee discussed the form of confidentiality agreement
that each potential strategic partner would be required to sign, the materials
to be circulated to potential strategic partners, the proposed engagement letter
with the Financial Advisor, a proposed letter agreement with Telemetrix
concerning the expressed willingness of Telemetrix to pay certain of the costs
incurred by the Company in case Telemetrix decided to sell its Common Stock and
Preferred Stock in a transaction that did not involve the sale of GTI as a
whole. Further, the Special Committee discussed with key managers of the Company
the proposed change of control agreements and the preparation of a data room at
the Company for use by potential strategic partners.
Following the January 20, 1998 meeting of the Special Committee, the
Financial Advisor and GTI management began contacting select potential strategic
partners on a confidential basis in accordance with the directions of the
Special Committee. On January 29, 1998 the Special Committee met to discuss with
management and the Financial Advisor the contacts that had occurred with
potential strategic partners since the January 20, 1998 meeting of the Special
Committee. The Special Committee discussed with management and the Financial
Advisor the likelihood that each of the potential strategic partners contacted
would submit a proposal. The Special Committee also discussed with management
and the Financial Advisor the best approach to be used with each such potential
strategic partner. Following the January 29, 1998 meeting of the Special
Committee, the Financial Advisor and management continued the process of
contacting potential strategic partners and discussing strategic alternatives
with them.
A meeting of the Special Committee was held on February 5, 1998. The
Special Committee discussed the appropriateness of making a public disclosure
concerning the fact that the Company had retained the Financial Advisor to
explore strategic alternatives. The Special Committee sought the advice of Legal
Counsel, the Financial Advisor and management concerning the appropriateness and
effect of such a disclosure at that time. The Special Committee also discussed
the best means of informing employees that strategic alternatives were being
considered. The Special Committee directed that a press release be issued after
the close of business on Friday, February 6, 1998, stating that the Company had
retained the Financial Advisor to explore strategic alternatives, including a
possible sale of the Company. In addition, the Special Committee discussed with
management and the Financial Advisor the results of discussions that had
occurred with potential strategic partners as well as plans for future contacts
with potential strategic partners. The Special Committee discussed the process
of encouraging potential strategic partners to give an indication of their
interest and in expediting their due diligence processes.
Between February 5, 1998 and March 2, 1998, the Financial Advisor and
management conducted discussions with numerous potential strategic partners. Of
the parties contacted, six eventually executed confidentiality agreements and
received information from the Company.
The Special Committee met on February 19, 1998 to discuss with management
and representatives of the Financial Advisor the progress to date with each of
the potential strategic partners. The Special Committee discussed the best means
of continuing ongoing discussions with each of the potential strategic partners
and the schedule for such potential strategic partners to give an indication of
interest. The Special Committee also discussed the need to expedite the process
to mitigate disruption to GTI's business. The Special Committee and management
also considered the sensitivity around soliciting interest from competitors.
The Special Committee met on March 2, 1998 to discuss with management and
the Financial Advisor the progress to date with each of the potential strategic
partners. The Special Committee discussed the best means of continuing ongoing
discussions with each of the potential strategic partners and of accelerating
the schedule for obtaining indications of interest from such potential strategic
partners. The Special Committee
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<PAGE> 20
determined to set the last day of March as a deadline for receiving indications
of interests from potential strategic partners. On March 19, 1998, the Special
Committee directed that a letter be dispatched to each potential strategic
partner advising it of such deadline.
The Board also met on March 19, 1998. The Financial Advisor discussed with
the Board the nine potential strategic partners with whom it was engaged in
discussions, of which six eventually executed confidentiality agreements with
the Company. Management discussed with the Board its preliminary view that the
revised projections for the first quarter of 1998 that had been presented to the
Board on January 14, 1998 appeared to be likely to be missed by a substantial
amount. The Board discussed at length with management its new projections, based
on current rates of sales. The Board directed the Financial Advisor to notify
the potential strategic partners that had executed confidentiality agreements of
the expected variance of first quarter results from the projections that had
been discussed by the Financial Advisor or GTI with such potential strategic
partners. The Board also concurred with the Special Committee's decision to
inform all interested parties that non-binding indications of interest were due
no later than March 31, 1998.
The Special Committee met on March 31, 1998. The Financial Advisor reported
that it had received two written indications of interest; a third potential
bidder was still evaluating a possible strategic partnership with the Company
and had sought an extension of the deadline for submitting an indication of
interest to April 10, 1998; a fourth potential strategic partner had stated to
the Financial Advisor that it would need third-party financing before submitting
a written indication of interest and was unable to do so at the present time;
and Technitrol had stated to the Financial Advisor that it would be submitting
an indication of interest within the next several days. The Financial Advisor
and Mr. Hugo-Martinez also reported that one of the parties that had submitted a
written indication of interest had apparently withdrawn its indication of
interest. The Special Committee directed Mr. Hugo-Martinez to contact such party
to determine whether such party was indeed withdrawing from the process. The
Financial Advisor next discussed with the Special Committee the specific
transaction structures that were being considered by the parties expressing an
interest in the Company. Mr. Hugo-Martinez discussed with the Special Committee
the current cash status of the Company and described to the Special Committee
his contacts with certain of the Company's major customers, who were expressing
an unwillingness to issue purchase orders to the Company or to design into their
forthcoming products the Company's components until such customers knew who
would ultimately be the strategic partner of the Company. Following extensive
discussion, the Special Committee directed the Financial Advisor to contact
Technitrol to encourage Technitrol speedily to submit an indication of interest.
In addition, the Special Committee directed the Financial Advisor to contact the
potential strategic partner that had requested an extension through April 10,
1998 to submit a bid and to state that the Special Committee was prepared to
give such party the additional ten days to submit a written indication of
interest. The Special Committee determined that it was prepared to extend the
March 31, 1998 deadline for the submission of written indications of interest
because the Special Committee believed that it would be in the best interests of
the Company and its stockholders to solicit and obtain additional written
indications of interest. The Special Committee discussed in detail with
management, and the representatives of the Financial Advisor and Legal Counsel,
the one written indication of interest that had not been withdrawn. The
Financial Advisor presented information concerning the party that had submitted
such written indication of interest and Technitrol. The Special Committee
directed the Financial Advisor and Legal Counsel to contact such party to obtain
further information concerning the specifics of such party's interest. Because
such party had proposed a stock-for-stock merger, the Financial Advisor was
directed to prepare additional information for the Special Committee concerning
the value and the marketability of the securities to be received in the proposed
stock-for-stock merger with such party.
On March 31, 1998, pursuant to the direction of the Special Committee,
representatives of the Financial Advisor and Legal Counsel conducted a lengthy
discussion with the party that had submitted a written indication of interest in
a stock-for-stock merger with GTI (the "Stock Merger Bidder"). Such party stated
that its proposed stock-for-stock merger would provide only non-voting stock to
GTI stockholders and would not include any cash component. Such party stated
that, although its charter did not presently authorize a class of non-voting
common stock, it proposed to seek an amendment of its charter to so provide.
Such party also stated its unwillingness to modify its proposal to include
voting stock or cash.
15
<PAGE> 21
On April 2, 1998 the Special Committee met. The Financial Advisor reported
to the Special Committee that, although the Financial Advisor had not yet
received a written indication of interest from Technitrol, Technitrol had stated
that it expected to provide such a written indication of interest later that
day. The Financial Advisor next described to the Special Committee the March 31,
1998 discussions that the Financial Advisor and Legal Counsel had conducted with
the Stock Merger Bidder. In addition, the Financial Advisor stated to the
Special Committee that the Financial Advisor had received a subsequent call from
the Stock Merger Bidder stating that it was re-evaluating its proposed merger
consideration value in light of the decline in the Company's anticipated first
quarter financial results, as reported in the Company's Form 10-K. Mr.
Hugo-Martinez advised the Special Committee that the party that had submitted a
written indication of interest but had subsequently indicated that it was
withdrawing from the process, had confirmed to him that it was indeed so
withdrawing. The Financial Advisor reported to the Special Committee that the
party that had requested until April 10, 1998 to submit a written indication of
interest was, as of April 2, 1998, not yet prepared to submit a written
indication of interest. Mr. Hugo-Martinez stated to the Special Committee that
the Company's business was continuing to decline, and that the entire LAN market
was showing no signs of recovery. He again stated that certain of the Company's
major customers were unwilling to commit to orders and design activity until
they know who would be the Company's strategic partner. The Special Committee
directed the Financial Advisor to contact Technitrol and the party that had
requested until April 10, 1998 to submit an indication of interest, to encourage
them to submit their indications of interest as soon as possible.
The Special Committee met on April 6, 1998. The Financial Advisor reported
that it had received an indication of interest from Technitrol, contemplating an
acquisition of GTI by Technitrol at a price of $4.00 in cash per share of Common
Stock. The Financial Advisor further stated that, although Technitrol had
indicated that it would need 45 to 60 days of due diligence before commencing
definitive discussions with the Company, the Financial Advisor had told
Technitrol that a period that long would be unattractive to the Board and the
Special Committee. The Financial Advisor also reported that the Stock Merger
Bidder, which had stated to the Financial Advisor that it was in the process of
revising downwards its indication of interest, expected to send a revised offer
within the next several days. In addition, the Financial Advisor related that
the bidder that had requested until April 10, 1998 to submit a bid had
reiterated that it did not expect to be able to submit any indication of
interest until April 10, 1998, at the earliest. The Special Committee engaged in
an extensive discussion of the timing of possible transactions with the
potential strategic partners, as well as the best approach to deal with each of
them. The Special Committee directed the Financial Advisor to contact Technitrol
and the Stock Merger Bidder and to state to such parties that they were being
given one week to clarify their bids, diligence periods and the other key terms
of their proposals. The Special Committee directed Legal Counsel to dispatch
draft definitive merger agreements to Technitrol and the Stock Merger Bidder.
The Special Committee met on April 8, 1998. The Special Committee discussed
with management, the Financial Advisor and Legal Counsel the bids of Technitrol,
the Stock Merger Bidder, and the status of the party that requested until April
10, 1998 to submit an indication of interest. Management and the Financial
Advisor reported that such bidder had stated that it was unlikely to submit a
bid by April 10, 1998. The Special Committee discussed in detail the requirement
by Technitrol that its $4.00 per share of Common Stock cash proposal be
conditional on Technitrol finding synergies through its due diligence process
before confirming such price and that it be granted exclusivity in the bidding
process for a period of 60 days. The Special Committee extensively discussed the
timing of the several possible transactions and the need to proceed
expeditiously, given the continuing deterioration of the Company's operating
results.
On April 9, 1998, the Board met. The Special Committee summarized its
activities to date, reviewing in detail the meetings of the Special Committee
and the process conducted. In addition, the Special Committee summarized the
indications of interest received to date and recommended waiting no later than
April 13, 1998 to receive an indication of interest from the party that had
requested until April 10, 1998. The Board engaged in an extensive discussion of
the indications of interest received to date. In addition, the Board discussed
at considerable length the other strategic alternatives available to the
Company. The Financial Advisor advised the Board that it believed that the
probability of finding a financial buyer for the Company had always been small,
and none of the potential financial buyers with whom the Financial Advisor had
discussions had submitted an indication of interest to the Financial Advisor.
The Board further discussed the current state of
16
<PAGE> 22
the Company's business and the necessity of proceeding expeditiously. The Board
adopted the recommendation of the Special Committee that Mr. Fitzgerald and a
representative of Legal Counsel meet with representatives of Technitrol and the
Stock Merger Bidder to clarify and make more firm their respective proposals.
On April 16, 1998, Mr. Fitzgerald and a representative of Legal Counsel met
with representatives of Technitrol. Mr. Fitzgerald expressed the Special
Committee's concern that the $4.00 per share of Common Stock cash proposal
received from Technitrol was not firm, that the combined due diligence and
definitive negotiation periods of 60 days were too long and that Technitrol's
requirement for a 60-day exclusivity period was problematic in light of the fact
that its proposal was not firm. Following extensive discussion, Technitrol
agreed that if it were granted exclusivity for 45 days, it would perform all of
its economic, synergistic and other due diligence tasks during this time while
concurrently negotiating the definitive merger agreement. It also committed
that, if at any time prior to the expiration of such 45 day period, it became
apparent to Technitrol that it would be unable to confirm the $4.00 per share of
Common Stock cash price, Technitrol would advise the Company immediately.
Technitrol further agreed that the definitive merger agreement would not
condition Technitrol's obligation to consummate the Merger on there not having
been a material adverse change in the financial condition of the Company between
the date of signing of the definitive merger agreement and the consummation of
the transaction.
On April 16, 1998, Mr. Fitzgerald and a representative of Legal Counsel
also met with representatives of the Stock Merger Bidder. The representatives of
the Stock Merger Bidder stated that its indicated merger consideration value of
$4.75 per share of Common Stock in non-voting common stock of the Stock Merger
Bidder was not firm, and would not be firm until it, too, had completed its
economic, synergistic and other due diligence process, which it expected would
take six weeks to complete. The representatives of the Stock Merger Bidder also
stated that under no circumstances would it be prepared to pay in the aggregate,
in merger consideration and total transaction costs, a price in excess of the
Company's 1998 estimated sales. Based on then current estimates of the Company,
such a limit would have translated, on April 16, 1998, into approximately $4.00
per share of Common Stock in non-voting stock of the Stock Merger Bidder. In
addition, the representative of the Stock Merger Bidder stated that such value
of merger consideration would not be guaranteed if the market price of the
non-voting stock on the closing date of the merger were less than the market
price of the non-voting stock on the date of executing the definitive merger
agreement by more than 10% or 15%. Mr. Fitzgerald noted that a substantial
amount of risk would be created for GTI stockholders by this sort of "collar"
around the price of a security which did not then exist and therefore would have
a very limited trading history on the date of the definitive merger agreement.
The Stock Merger Bidder stated that it would not negotiate a definitive merger
agreement with the Company until after the authorization of the new non-voting
stock at a stockholders meeting tentatively scheduled for mid-June, 1998.
Representatives of the Stock Merger Bidder further stated that the definitive
merger agreement would need to condition its obligation to consummate the merger
on there not having been a material adverse change in the financial condition of
the Company between the signing of the definitive merger agreement and the
consummation of the transaction. In addition, because the transaction would
require the separate approval of the stockholders of the Stock Merger Bidder,
its representatives acknowledged that, even if a contrary provision were
included in the definitive merger agreement, it would not prevent the
stockholders of the Stock Merger Bidder from voting against the transaction in
the event of a material adverse change in the financial conditions of the
Company subsequent to the signing of the definitive merger agreement.
The Special Committee met on April 16, 1998 to discuss Mr. Fitzgerald's
meetings that day with Technitrol and the Stock Merger Bidder. Mr. Fitzgerald
described in detail these discussions, with a particular focus on the merger
consideration offered by each potential strategic partner and the timing and
conditions of closing that had been addressed with the two potential strategic
partners. The Special Committee discussed with the Financial Advisor the issues
that arose in evaluating and comparing the two proposals.
The Board met on April 17, 1998. Mr. Fitzgerald reported to the Board at
considerable length concerning his discussions the previous day with the
representatives of Technitrol and the Stock Merger Bidder. The Board sought the
advice of the Financial Advisor and Legal Counsel concerning these two
proposals. Following lengthy discussions with the Financial Advisor and Legal
Counsel, the Board accepted the
17
<PAGE> 23
recommendation of the Special Committee that the Company agree to grant
Technitrol a 45 day exclusivity period during which Technitrol would complete
its due diligence and a definitive merger agreement would be negotiated. The
Board took special note of the fact that, although the indicated value of the
merger consideration proposed by the Stock Merger Bidder was nominally in excess
of the merger consideration proposed by Technitrol, the Stock Merger Bidder had
stated that the value of its merger consideration, together with all of its
transaction costs, would in no event exceed the estimated 1998 revenues of the
Company, which, in light of the Company's then current estimates, would
translate into an aggregate merger consideration of approximately the same level
as that of Technitrol's proposal. If there were further deterioration in sales
(which has, in fact, occurred), the Stock Merger Bidder's proposed merger
consideration would fall commensurately. In addition, the Board took note of the
fact that the Stock Merger Bidder's proposal contemplated that merger
consideration be paid in a class of securities that did not presently exist and
was of uncertain value and liquidity. In light of this uncertainty, the Board
was troubled that the Stock Merger Bidder had proposed that a rather tight
"collar" would be placed around the target market price of the Stock Merger
Bidder's proposed non-voting common stock, the effect of which would be to
permit the Stock Merger Bidder to condition its obligation to consummate the
merger on there not being a decline, below the collar, in the traded market
price of its then-recently-created non-voting common stock. The trading volume
of the existing voting capital stock of the Stock Merger Bidder was, the
Financial Advisor reported, relatively low compared to the amount of stock
contemplated to be issued in the Stock Merger Bidder's transaction. The Board
noted Technitrol's strong cash position and substantial unused lines of credit
as well as its history of completing acquisitions. The Board further took note
that the Technitrol bid proposed a schedule that would lead to the signing of a
definitive merger agreement substantially sooner than that proposed by the Stock
Merger Bidder; that Technitrol did not require approval of its stockholders in
order to consummate the Merger; and that Technitrol had agreed that the
definitive merger agreement would not permit Technitrol to condition its
obligation to consummate the Merger on there not having been a material adverse
change in the financial condition of the Company after the signing of a
definitive agreement and prior to the consummation of the transaction. By
contrast, the Stock Merger Bidder was unwilling to agree to such a provision. In
any case, the Stock Merger Bidder required a stockholders meeting to approve the
merger prior to the closing date and therefore could not guarantee that a
material adverse change in the financial condition of the Company would not
prevent consummation of the merger. These factors were particularly important to
the Board in light of the continuing decline in the Company's operating results.
The Board concluded that the Technitrol proposal was superior and directed
management to make available on a highly expedited basis all appropriate
information concerning the Company requested by Technitrol. The Board further
directed the Special Committee to oversee Technitrol's due diligence process and
to negotiate the Merger Agreement on behalf of the Company, in consultation with
management, Legal Counsel and the Financial Advisor.
Beginning on April 20, 1998, extensive information was made available to
Technitrol to permit it to conduct its due diligence on an expedited basis. On
April 27, 1998, representatives of Technitrol met, at Technitrol's request, with
Mr. Fitzgerald and a representative of Legal Counsel. At this meeting, the
representatives of Technitrol stated that the business of the Company was in
worse condition than they previously had understood and that, accordingly,
Technitrol was informing the Company, pursuant to Technitrol's statement of
April 16, 1998, that it would be unable to confirm a price of $4.00 per share of
Common Stock in cash. The representatives of Technitrol further stated that they
expected to be able to complete their due diligence within two weeks from April
27, 1998, and to confirm an offer price at that time, which was earlier than
Technitrol originally had thought feasible. From April 27, 1998 through May 10,
1998, Technitrol continued its due diligence process. Management promptly
responded to numerous oral and written requests for information from Technitrol.
On May 11, 1998, representatives of Technitrol met with management, Mr.
Maud and a representative of Legal Counsel to discuss Technitrol's analysis of
possible merger consideration and the basis of such analysis in terms of
synergies and revenue effects anticipated to occur during the three years
following the effectiveness of the Merger. Management and Mr. Maud engaged in
lengthy discussions with the representatives of Technitrol concerning their
assumptions and analysis. Following this meeting, the Special Committee convened
to discuss the meeting with the representatives of Technitrol and to determine
the appropriate strategy for the Company in its negotiations with Technitrol.
18
<PAGE> 24
On May 13, 1998, the Special Committee met. Mr. Fitzgerald reported that a
senior representative of Technitrol had called and stated that, based on its due
diligence and financial analysis, Technitrol was obliged to reduce its offer to
$3.00 per share of Common Stock in cash. The Special Committee discussed with
the Financial Advisor the price now offered by Technitrol, in light of the
proposed terms of the Merger. The Special Committee discussed with the Financial
Advisor and Legal Counsel the alternative of commencing discussions with the
Stock Merger Bidder. The Special Committee decided to continue instead with
negotiations with Technitrol for the following reasons. First, each of the
problems and uncertainties with the Stock Merger Bidder's proposal that the
Board had discussed on April 17, 1998, continued to be true and had been
exacerbated by continuing declines in the Company's sales, which would, as
stated by the Stock Merger Bidder on April 16, 1998, reduce its offer
commensurately. Second, the Special Committee considered that Technitrol had
invested considerable expense and time in its strategic, synergistic and other
due diligence with respect to GTI and would be likely to cease to continue its
interest in GTI if GTI were to attempt to delay further discussions with
Technitrol for the six-week period that the Stock Merger Bidder had stated it
required before providing a firm offer. Third, in light of the decline in the
operating results of the Company, the Special Committee believed it to be
imperative to enter into a definitive merger agreement as soon as practicable,
with as few obstacles to closing as practicable. The Special Committee
determined that Mr. Fitzgerald should commence negotiations with representatives
of Technitrol in order to attempt to increase the merger price offered by
Technitrol and to reach agreement on certain outstanding issues that would need
to be included in the Merger Agreement, including the ability of the Board to
consider and accept an unsolicited superior offer, if one should be forthcoming
from another party.
On May 15, 1998, the Special Committee met. Mr. Fitzgerald reported to the
Special Committee that, as a result of his negotiations with representatives of
Technitrol, Technitrol had agreed to increase the merger price to $3.10 per
share of Common Stock in cash, subject to negotiation of the Merger Agreement.
The Special Committee discussed with the Financial Advisor its views (and, in
particular, the assumptions underlying such views) concerning the $3.10 per
share of Common Stock cash offer, in light of the proposed terms of the Merger
Agreement. The Special Committee also discussed with the Financial Advisor
Technitrol's offer in light of the extensive process that the Special Committee
had conducted, including the contacting of numerous potential strategic buyers.
The Special Committee directed management and Legal Counsel to work with the
Special Committee to negotiate the Merger Agreement on an expedited basis.
Between May 15, 1998 and May 18, 1998, at the request of Technitrol, the
Special Committee negotiated with Technitrol the terms of a non-binding letter
of intent providing for the merger of GTI with a subsidiary of Technitrol at a
price of $3.10 in cash per share of Common Stock and $726.37 in cash per share
of Preferred Stock. At the request of Technitrol, Telemetrix's board of
directors and a committee thereof adopted resolutions providing that, if the
consideration and the terms of the Merger Agreement to be negotiated
substantially reflected the consideration and terms of the proposed bid of
Technitrol set out in the letter of intent (and such other terms as were
acceptable to the Telemetrix board of directors or such committee), then
Telemetrix's board of directors would: duly call, give notice of and convene a
meeting of its stockholders to approve of the disposition, by the Merger, of all
of Telemetrix's shares of Common Stock and Preferred Stock; recommend a vote for
such approval, subject to the directors' fiduciary duties; and cause such shares
of Common Stock and Preferred Stock to be voted to adopt the Merger Agreement,
if the Telemetrix stockholders approved such disposition at such stockholders
meeting. At the request of Technitrol, trustees of certain trusts beneficially
owning in excess of 47% of the outstanding shares of Telemetrix voting capital
stock agreed with Technitrol to cause such shares to be voted in favor of the
disposition of Telemetrix's shares of the Common Stock or Preferred Stock, by
means of the Merger.
On May 18, 1998, the Board met to consider the proposed letter of intent.
Following discussions with Legal Counsel, the Board determined that the draft
letter of intent fairly summarized the views of the parties. The Board further
noted that the letter of intent was, by its own terms, non-binding. The Board
directed that the Special Committee, in consultation with Legal Counsel,
complete the final negotiation of the specific language of the letter of intent
and work with management of the Company and representatives of Technitrol to
produce an appropriate press release concerning the signing of the letter of
intent. In addition, the Board expressed its view that it was in the best
interests of the Company and its stockholders to proceed to the
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<PAGE> 25
signing of a definitive merger agreement as soon as possible. Accordingly, the
Board directed the Special Committee, working in consultation with Legal
Counsel, to press Technitrol to complete negotiation and signing of the Merger
Agreement on an expedited basis. The letter of intent was executed and a press
release announcing such execution was issued prior to the opening of the Nasdaq
National Market on May 19, 1998.
Prior to May 20, 1998, Legal Counsel had provided to the Board the original
draft of the Merger Agreement and a second draft, prepared by counsel to
Technitrol, that incorporated all of Technitrol's proposed changes to the Merger
Agreement. Between May 20, 1998 and May 26, 1998, the Special Committee,
management and Legal Counsel engaged in extensive negotiations with Technitrol
and its counsel concerning the Merger Agreement, the exhibits and disclosure
schedules thereto and the guaranty (the "Guaranty") of payment by Technitrol,
Inc. of the obligation of its subsidiary under the Merger Agreement to pay $3.10
in cash per share of Common Stock and $726.37 in cash per share of Preferred
Stock. Several drafts of the Merger Agreement were provided to the Special
Committee, which were discussed at length with Legal Counsel. Intensive
negotiation of the Merger Agreement ensued from May 20, 1998 through May 26,
1998. In connection with such negotiations, the parties also negotiated the size
of the break-up fee and the circumstances under which it would be paid by the
Company to Technitrol. On May 25, 1998, a draft of the Merger Agreement in form
and substance not materially different from the Merger Agreement ultimately
executed by the parties was sent to each member of the Board.
On May 26, 1998 the Special Committee met to consider the Merger Agreement.
A representative of Legal Counsel presented a summary of the Merger Agreement
and many of the specific terms and conditions contained therein. The Special
Committee discussed with representatives of Legal Counsel the effect of a number
of the specific provisions of the Merger Agreement. The Special Committee
engaged in a discussion with representatives of the Financial Advisor concerning
the Financial Advisor's fairness opinion that would be delivered to the Board.
See Appendix B for the text of the opinion of the Financial Advisor. In the
context of discussing the fairness of the Merger Consideration to the holders of
Common Stock (other than Technitrol and its subsidiaries and affiliates) from a
financial point of view, the representatives of the Financial Advisor discussed
at length the extensive process of search, review and analysis that had been
undertaken by the Financial Advisor and the Special Committee. The Special
Committee discussed at length with the representatives of the Financial Advisor
their financial analysis of the Merger Consideration in light of the terms and
conditions of the Merger Agreement, with particular emphasis on the assumptions
that the Financial Advisor had made concerning growth rates, rates of return,
multiples of earnings and other measures of performance and premiums to market
prices that had been paid in other transactions. The representatives of the
Financial Advisor also expressed their view of other strategic alternatives,
including the continued independence of the Company. The Special Committee also
discussed with the representatives of the Financial Advisor their analysis,
based on a market survey and the Financial Advisor's experience, of the size of
the break-up fee and the circumstances in which it would be paid to Technitrol.
After management and the representatives of the Financial Advisor were excluded,
the Special Committee and representative of Legal Counsel reviewed the process
that had been undertaken by the Special Committee since its inception and the
terms and conditions of the Merger Agreement, in the context of the DGCL and
applicable securities laws. Following further discussion, the Special Committee
concluded that it was in the best interests of the Company and its stockholders
for the Company to be sold before any further deterioration had occurred in its
operating results. The Special Committee further concluded that having conducted
an exhaustive process, the proposal from Technitrol represented the best value
reasonably available for the Company and its stockholders. The Special Committee
unanimously passed a resolution to recommend that the Board adopt resolutions
approving the Merger Agreement, the exhibits and disclosure schedules thereto
and the Guaranty.
Immediately following the adjournment of the meeting of the Special
Committee, a Board meeting convened, joined by the Company's Chief Financial
Officer and representatives of the Financial Advisor and Legal Counsel. A
representative of Legal Counsel discussed at length the terms and conditions in
the Merger Agreement, the exhibits and disclosure schedules thereto and the
Guaranty. The Board sought the advice of the Financial Advisor concerning the
terms of the Merger Agreement, in the context of similar transactions of which
the Financial Advisor had knowledge. The Financial Advisor presented its
fairness analysis and its opinion that, based upon the assumptions made, matters
considered and the limitations on the review
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<PAGE> 26
undertaken in connection therewith, the Merger Consideration, as of such date,
was fair to holders of Common Stock (other than Technitrol and its subsidiaries
and affiliates) from a financial point of view. A copy of the Financial
Advisor's opinion is attached as Appendix B to this Proxy Statement, and
stockholders should read this opinion in its entirety. The Board discussed with
the Financial Advisor the Financial Advisor's assumptions and analytical
methodologies. The Special Committee further reported to the Board that it had
adopted a resolution recommending that the Board adopt resolutions approving the
Merger Agreement, the exhibits and disclosure schedules thereto and the
Guaranty. Following further discussion, the Board adopted resolutions approving
the Merger Agreement, the exhibits and disclosure schedules thereto and the
Guaranty and directing the Company's management to execute and deliver the
Merger Agreement and to take other appropriate actions leading to the
consummation of the Merger. Such resolutions were adopted unanimously by the
four directors participating in the Board meeting. The fifth director, Mr.
Venter, was in transit between Johannesburg, South Africa and London, England at
the time of the Board meeting, and was unable to participate in the meeting, but
he subsequently expressed his approval of the Merger Agreement and the
transactions contemplated thereby.
The Merger Agreement and the Guaranty were executed and delivered on May
26, 1998. A joint press release concerning such execution and delivery was
issued by GTI and Technitrol prior to the opening of the Nasdaq National Market
on May 27, 1998.
Pursuant to its agreement with Technitrol, Telemetrix has called a meeting
of its stockholders to vote on the disposition of Telemetrix's Common Stock and
Preferred Stock through the Merger, and Telemetrix's board of directors has
recommended a vote for such disposition. Also pursuant to such agreement,
Telemetrix will vote its Common Stock and Preferred Stock in favor of the Merger
Agreement if Telemetrix's stockholders vote in favor of such disposition. GTI
will publicly announce the results of the Telemetrix stockholders meeting
promptly after it has taken place.
Since May 27, 1998, neither the Company nor the Financial Advisor has
received any offers or proposals from any third parties.
GTI'S REASONS FOR THE MERGER; RECOMMENDATION OF THE SPECIAL COMMITTEE AND THE
BOARD OF DIRECTORS
On May 26, 1998, the Special Committee unanimously recommended the approval
of the Merger Agreement and the transactions contemplated thereby, including the
Merger.
On May 26, 1998, the Company Board (with Mr. Venter not participating
because he was then in transit from Johannesburg, South Africa to London,
England to attend a meeting of the board of directors of Telemetrix), based
upon, among other things, the unanimous recommendation and approval of the
Special Committee, the fairness opinion received from the Financial Advisor, and
the Board's independent review of the Merger Agreement and the other factors
described below, approved the Merger Agreement and the transactions contemplated
thereby, including the Merger, and it determined that the Merger is fair to, in
the best interests of, and produces the highest value reasonably obtainable to,
the stockholders of the Company and that it should recommend that the
stockholders of the Company adopt the Merger Agreement.
Considerations of the Special Committee. In reaching its determination
referred to above, the Special Committee considered the following factors, each
of which, in the view of the Special Committee, supported such determinations:
1. The assessment of the Company's management, the Board and the
Special Committee that the Company could not long sustain its continuing
operating losses. It was the determination of the Special Committee that,
in order for GTI to compete more effectively in its market and increase
stockholder value, it would be necessary to become or combine with a
larger, diversified and better capitalized enterprise. Further, it was the
Special Committee's assessment that it would be difficult for the Company
to achieve this substantial increase in size either by acquisition or
through internal growth. Based in part on the advice of the Financial
Advisor, the Special Committee concluded that GTI likely would encounter
difficulties raising the additional capital necessary to produce value to
the Company's
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stockholders at levels similar to $3.10 per share of Common Stock in the
reasonably foreseeable future. This determination was also due in part to
the fact that many of the Company's competitors are substantially larger,
more diversified and better capitalized than the Company and, as a result,
possess greater ability to effect acquisitions, to maintain necessary
technology programs and to hire and retain employees. Accordingly, the
Special Committee concluded that a sale of GTI at the current time is in
the best interests of GTI and its stockholders and that the Company, acting
independently, would be unlikely to produce value to its stockholders at a
level similar to or greater than $3.10 per share of Common Stock in the
reasonably foreseeable future.
2. The fact that the Special Committee and, at its direction, the
Financial Advisor, had conducted a wide-ranging process to identify and
contact potential acquirers or others interested in a strategic
relationship or transaction with GTI. The Special Committee, working with
management and the Financial Advisor, developed a detailed strategy of
approach, first to potential strategic acquirers who were not competitors,
then to other potential strategic partners, next to potential financial
acquirers and last to competitors. In all, 15 such parties were contacted.
The Special Committee held numerous meetings and carefully monitored the
progress of such discussions and directed management and the Financial
Advisor with respect to such discussions. In addition, in February 1998,
GTI publicly announced that it had retained the Financial Advisor to
explore strategic alternatives, including the possible sale of GTI. Any
potential acquirer or strategic partner who had not yet been contacted was
thereby given notice that GTI was potentially for sale. Accordingly, the
Special Committee believed that a full and fair market test had been done
to establish the arm's-length market value of GTI. Since the May 27, 1998
announcement of the Merger Agreement, neither GTI nor the Financial Advisor
has received any bid or indication of interest of any kind from any party.
3. The history of the negotiations between the Special Committee and
Technitrol, including (i) the Special Committee's belief (and Technitrol's
clearly stated position) that Technitrol would not further increase the
Merger Consideration, and, accordingly, $3.10 per share of Common Stock and
$726.37 per share of Preferred Stock was, in the opinion of the Special
Committee, the highest price that could be obtained from Technitrol and
(ii) the Special Committee's belief that further negotiations concerning
price with Technitrol could cause Technitrol to terminate negotiations with
respect to the Merger.
4. That the Merger Consideration of $3.10 per share of Common Stock
represents: (i) a premium of approximately 34% over the $2.3125 per share
closing price on May 12, 1998, which was seven days prior to the May 19,
1998 public announcement of the fact that the Company had signed a letter
of intent with Technitrol for the merger of the Company at $3.10 per share
of Common Stock in cash; (ii) a premium of approximately 15.3% over the
$2.6875 per share closing price on May 20, 1998, which was seven days prior
to the May 27, 1998 public announcement (the "Announcement") of the fact
that the Company had entered into a definitive agreement for the merger of
the Company at $3.10 per share of Common Stock in cash; (iii) a premium of
approximately 3.3% over the $3.00 per share closing price on April 27,
1998, which was 30 days prior to the Announcement; and (iv) a premium of
approximately 19.4% over the average closing price for the one-month period
preceding the Announcement. In addition, the shares of Common Stock have
not traded in Nasdaq's National Market higher than $3.10 per share of
Common Stock since April 21, 1998. The $3.10 price per share of Common
Stock and the $726.37 price per share of Preferred Stock are payable in
cash, thus eliminating any uncertainties in valuing the consideration to be
received by the holders of Common Stock and Preferred Stock.
5. The terms and conditions of the Merger Agreement, including two key
provisions negotiated by the Special Committee. First, Technitrol cannot
refuse to complete the Merger because of a decline in the financial
performance of GTI after May 26, 1998, even if such decline has a Material
Adverse Effect (as defined in the Merger Agreement) on GTI. Second, GTI's
Board of Directors retains the right to consider unsolicited superior
proposals received from third parties, supply non-public information to
such third parties, and terminate the Merger Agreement under certain
circumstances if an unsolicited superior offer is received, subject to
fulfillment of certain financial obligations to Technitrol. See "Merger
Agreement."
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6. The opinion of the Financial Advisor, addressed to the Special
Committee and the Board, to the effect that, based upon the assumptions
made, matters considered and the limitations on the review undertaken in
connection therewith, the Merger Consideration of $3.10 per share of Common
Stock, was, as of May 26, 1998, fair to holders of Common Stock (other than
Technitrol and its subsidiaries and affiliates) from a financial point of
view. See "Opinion of Cowen & Company" and the written opinion of the
Financial Advisor attached as Appendix B.
7. The possibility that the consideration the Company's stockholders
might obtain in a future transaction was likely to be less advantageous
than the Merger Consideration because of: the lower than expected Company
earnings for the first fiscal quarter ended March 31, 1998, and the fiscal
year ended December 31, 1997; the substantial uncertainty concerning
whether the Company would be able to improve its performance in the
nine-months ended September 30, 1998 or thereafter; the frequency with
which the Company had, in the past, not met its internally projected
results; and the uncertainty regarding the market for Local Area Network
("LAN") products, which account for in excess of 90% of the Company's
revenues, and its effect on future Company earnings.
8. The fact that Technitrol, Inc. was executing and delivering a
guaranty of payment of the Merger Consideration by its subsidiary pursuant
to the Merger Agreement, which increased the likelihood that the proposed
acquisition would be consummated.
9. While consummation of the Merger would result in the stockholders
of the Company receiving a premium for their shares of Common Stock over
the trading prices of such shares prior to the public announcement that the
Company had signed a letter of intent for the sale of the Company at a
price of $3.10 per share of Common Stock, consummation of the Merger would
eliminate any opportunity for stockholders of the Company to participate in
the potential future growth prospects, if any, of the Company. The Special
Committee determined, however, that (a) the loss of opportunity is
reflected in the price of $3.10 per share of Common Stock, and (b) there
are continued substantial business risks associated with independent
operation that could materially negatively affect the Company's ability to
achieve the future operating results believed by the Special Committee to
be necessary to achieve higher trading prices for the Common Stock.
The foregoing discussion of the factors considered by the Special Committee
is not intended to be all-inclusive. In view of the variety of factors
considered in connection with its evaluation of the Merger, the Special
Committee did not find it practicable to and did not attempt to rank or assign
relative weights to the foregoing factors.
Considerations of the Board. The members of the Board evaluated the factors
listed above under "Considerations of the Special Committee," in light of their
knowledge of the business, financial condition and prospects of the Company and
based upon the advice of management, the Financial Advisor and Legal Counsel. In
addition, the Board determined that the Merger Agreement was the result of a
process that was fair to the stockholders of the Company because, among other
things, (a) a Special Committee was formed consisting of members of the Board of
Directors who are neither employees of the Company nor affiliated with any
substantial stockholder of the Company nor any of the bidders, (b) the Special
Committee conducted more than 20 meetings during the period between the
formation of the Special Committee and the execution and delivery of the Merger
Agreement, during which meetings the Special Committee evaluated and analyzed
the bids, determined the negotiating strategy and reached informed conclusions
based, in part, on the advice of its independent financial and legal advisors,
(c) the Board and the Special Committee deliberated with respect both to the
Merger and the alternative strategies of remaining independent or seeking a
joint venture to which the Company would contribute substantially all of its
assets and personnel, and (d) the price of $3.10 per share of Common Stock and
the other terms and conditions of the Merger Agreement resulted from active
arm's-length bargaining between the Special Committee and Technitrol.
IN LIGHT OF ALL THE FACTORS SET FORTH ABOVE, GTI'S BOARD OF DIRECTORS HAS
APPROVED THE MERGER AGREEMENT AND UNANIMOUSLY RECOMMENDS THAT
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YOU VOTE TO ADOPT THE MERGER AGREEMENT. GTI'S BOARD OF DIRECTORS BELIEVES THAT
THE MERGER IS FAIR TO, AND IN THE BEST INTERESTS OF, GTI AND ITS STOCKHOLDERS.
OPINION OF COWEN & COMPANY
Pursuant to an engagement letter dated January 22, 1998 (the "Financial
Advisor Engagement Letter"), the Special Committee retained Cowen & Company
("Cowen" or the "Financial Advisor") to serve as its financial advisor with
respect to the Merger. As part of this assignment, the Financial Advisor was
asked to render an opinion to the Special Committee and the Board as to the
fairness, from a financial point of view, of the financial terms of the Merger
to the holders of Common Stock other than Technitrol and its subsidiaries and
affiliates. The amount of consideration was determined through negotiations
between the Company and Technitrol and not pursuant to recommendations of the
Financial Advisor.
On May 26, 1998, the Financial Advisor delivered certain of its written
analyses and its oral opinion to the Special Committee and the Board,
subsequently confirmed in writing as of the same date, to the effect that, as of
May 26, 1998, the financial terms of the Merger were fair, from a financial
point of view, to the holders of Common Stock other than Technitrol and its
subsidiaries and affiliates. The full text of the written opinion of the
Financial Advisor, dated May 26, 1998, is attached hereto as Appendix B and is
incorporated by reference. Holders of Common Stock are urged to read the opinion
in its entirety for the assumptions made, procedures followed, other matters
considered and limits of the review by the Financial Advisor. This summary of
the written opinion of the Financial Advisor set forth herein is qualified in
its entirety by reference to the full text of such opinion. The Financial
Advisor's analyses and opinion were prepared for and addressed to the Special
Committee and the Board and are directed only to the fairness, from a financial
point of view, of the financial terms of the Merger and do not constitute an
opinion as to the merits of the Merger or a recommendation to any stockholder as
to how to vote on the proposed Merger.
The Financial Advisor was selected by the Special Committee as its
financial advisor, and to render an opinion to the Special Committee, because
the Financial Advisor is a nationally recognized investment banking firm and
because certain principals of the Financial Advisor have substantial experience
in transactions similar to the Merger and are familiar with the Company and its
businesses. As part of its investment banking business, the Financial Advisor is
regularly engaged in the valuation of businesses and their securities in
connection with mergers and acquisitions and valuations for corporate and other
purposes.
In arriving at its opinion, the Financial Advisor (i) reviewed the
Company's combined and consolidated financial statements for the fiscal years
ended December 31, 1995 through December 31, 1997, unaudited financial
statements for the fiscal quarter ended March 31, 1998, certain publicly
available filings with the Securities and Exchange Commission and certain other
relevant financial and operating data of the Company; (ii) reviewed the May 25,
1998 draft of the Merger Agreement provided to the Financial Advisor by
management of the Company; (iii) held meetings and discussions with management
and senior personnel of the Company to discuss the business, operations,
historical financial results and future prospects of the Company; (iv) reviewed
financial projections furnished to the Financial Advisor by the management of
the Company, including, among other things, the capital structure, sales,
operating income, net income, cash flow, capital requirements and other data of
the Company the Financial Advisor deemed relevant; (v) reviewed the operating
and financial results of the Company over the last three fiscal years and
compared its results with the operating and financial results of certain other
publicly traded companies which the Financial Advisor deemed relevant; (vi)
reviewed the public market valuation and trading multiples of the Company, and
compared the Company's trading multiples to the trading multiples of certain
other publicly traded companies which the Financial Advisor deemed relevant;
(vii) reviewed the historical prices and trading activity of the Common Stock
from May 22, 1997 to May 22, 1998 and from May 22, 1995 to May 22, 1998 and
compared the price performance of the Common Stock to the stock price
performance of certain other publicly traded companies which the Financial
Advisor deemed relevant over the period from May 22, 1997 to May 22, 1998;
(viii) compared the financial terms of the Merger with the financial terms of
the acquisitions of certain other companies which the Financial Advisor deemed
relevant, including a comparison of the premiums paid in the Merger with the
premiums paid in those other acquisitions; and (ix) conducted such other
studies, analysis,
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<PAGE> 30
inquiries and investigations as the Financial Advisor deemed appropriate. At the
request of the Company, the Financial Advisor solicited third-party indications
of interest in acquiring all or substantially all of the stock or assets of the
Company.
In rendering its opinion, the Financial Advisor, with the consent of the
Special Committee and the Board, relied upon the Company's management with
respect to the accuracy and completeness of the financial and other information
furnished to it as described above or that was otherwise reviewed by it. With
respect to the financial projections furnished to the Financial Advisor by
management of the Company, the Financial Advisor assumed, with the consent of
the Special Committee and the Board, the attainability of the financial results
therein and that they were reasonably prepared on bases reflecting the best
currently available estimates and judgments of the Company's management as to
the future financial performance of the Company, and that such projections
provided a reasonable basis for the Financial Advisor's opinion. Because such
projections are inherently subject to uncertainty, none of the Financial
Advisor, the Board, the Special Committee, GTI or any other person assumes
responsibility for their accuracy. The Financial Advisor did not assume any
responsibility for independent verification of such information, including
financial information, nor did the Financial Advisor make or receive an
independent evaluation or appraisal of any of the properties or assets of the
Company. With respect to all legal matters relating to the Company, Technitrol
and the Merger, the Financial Advisor relied on the advice of legal counsel of
the Company. The Financial Advisor rendered no opinion with respect to such
matters.
The Financial Advisor's opinion is necessarily based on general economic,
market, financial and other conditions as they exist on, and can be evaluated as
of, May 26, 1998, as well as the information then available to it. It should be
understood that, although subsequent developments may affect its opinion, the
Financial Advisor does not have any obligation to update, revise or reaffirm its
opinion. The Financial Advisor's opinion is limited to the fairness, from a
financial point of view, of the financial terms of the Merger to the holders of
Common Stock (other than Technitrol and its subsidiaries and affiliates). The
Financial Advisor expresses no opinion with respect to any other reasons, legal,
business or otherwise, that may support the decision of the Special Committee to
recommend to the Board the approval of, the decision of the Board to approve, or
the Company's decision to enter into, the Agreement.
For purposes of rendering its opinion the Financial Advisor assumed, in all
respects material to its analysis, that the representations and warranties of
each party contained in the Merger Agreement are true and correct, that each
party will perform all of the covenants and agreements required to be performed
by it under the Merger Agreement and that all conditions to the consummation of
the Merger will be satisfied without waiver thereof. The Financial Advisor also
assumed that all governmental, regulatory or other consents and approvals
contemplated by the Merger Agreement will be obtained and that in the course of
obtaining those consents no restrictions will be imposed or waivers made that
would have a material adverse effect on the contemplated benefits of the Merger.
The Financial Advisor also assumed, with the consent of the Special
Committee and the Board, that, prior to the effectiveness of the Merger, each
issued and outstanding share of Preferred Stock will be converted into 234.314
shares of Common Stock. The Financial Advisor did not express any opinion, and
did not conduct any analysis, with respect to a transaction that does not
contemplate the aforementioned conversion of all outstanding Preferred Stock
shares into shares of Common Stock. The Financial Advisor also expressed no
opinion as to the consideration that could have been received by the holders of
the Preferred Stock absent the conversion.
The following is a summary of the principal financial analyses performed by
the Financial Advisor to arrive at its opinion. The Financial Advisor performed
certain procedures, including each of the financial analyses described below,
and reviewed with the Special Committee and the Board, the assumptions on which
such analyses were based and other factors, including the historical and
projected financial results of the Company. No limitations were imposed by the
Special Committee or the Board with respect to the investigations made or
procedures followed by the Financial Advisor in rendering its opinion.
Stock Trading History. The Financial Advisor reviewed the historical market
prices and trading volumes of the Common Stock from May 22, 1997 to May 22, 1998
(the second to last trading day prior to
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<PAGE> 31
announcement of the Merger) and from May 22, 1995 to May 22, 1998. The Financial
Advisor also compared the closing price of the Common Stock with indices made up
of the average closing prices of each of the Core Comparable Companies, the
Small Cap Companies and the Large Cap Companies, respectively (the "Indices").
The companies included two companies in the magnetic-based electronic component
industry (Bel Fuse, Inc. and Technitrol, Inc.) (the "Core Comparable
Companies"); five small cap general electronic component companies (ACME
Electric Corp., Corcom, Inc., C.P. Clare Corporation, Methode Electronics, Inc.
and Spectrum Control, Inc.) (the "Small Cap Companies"); and five large cap
general electronic component companies (Artesyn Technologies, Inc., AVX
Corporation, Burr-Brown Corporation, Kemet Corporation and Vishay
Intertechnology, Inc.) (the "Large Cap Companies" and all of the companies
together, the "Selected Companies"). This information was presented solely to
provide the Special Committee and the Board with background information
regarding the stock price of GTI over the period indicated. The Financial
Advisor noted that over the last twelve months the high and low trading prices
for shares of Common Stock were $7.75 and $1.94, respectively, and that the
average closing price during this period was $5.28; and over the last three
years the high and low trading prices were $23.63 and $1.94, respectively. The
Financial Advisor also noted that the price of the Common Stock has fallen
during the twelve months ended May 22, 1998, while each of the three Indices has
increased during the twelve months ended May 22, 1998.
The Financial Advisor noted that the consideration being offered in the
Merger represented premiums of 12.7%, 15.3% and 7.8% over the closing trading
prices of the Common Stock on May 22, 1998 ($2.75), May 15, 1998 ($2.69) and
April 24, 1998 ($2.88), respectively, and was 20.0% below the closing trading
price of the Common Stock on February 6, 1998 ($3.88) (the date immediately
prior to the announcement that GTI would explore strategic alternatives). The
Financial Advisor also noted that, after reducing the consideration being
offered in the Merger and the applicable closing trading price of the Common
Stock by the amount per share of cash on the balance sheet of GTI as of March
31, 1998, the corresponding premiums for such dates were 16.5%, 20.0%, 10.0% and
- -23.9%, respectively.
Comparable Growth and Margin Analysis. To provide further contextual
information regarding the Company, the Financial Advisor analyzed the historical
median compound annual growth rates, over the last three fiscal years and for
the latest reported twelve months ("LTM") over the prior fiscal year, for
revenue, earnings before interest expense, income taxes, depreciation and
amortization ("EBITDA"), earnings before interest expense and income taxes
("EBIT") and net income and the projected median growth rates for net income for
each of the Core Comparable Companies, the Small Cap Companies and the Large Cap
Companies. The Financial Advisor also analyzed the median gross margin, EBIT and
net (net income) margins for each of the same groups of Selected Companies. The
Financial Advisor did not include Technitrol, Inc. and Vishay Intertechnology,
Inc. in this analysis as both companies have not restated their financials for
the last three fiscal years to reflect significant purchase acquisitions.
Such analysis indicated that, for the Core Comparable Companies, the median
compound annual growth rates for revenue, EBITDA, EBIT and net income over the
last three fiscal years were 2.0%, 8.6%, 9.0% and 4.5%, respectively. The median
projected growth rate for net income from 1998 calendar year end to 1999
calendar year end (based on projected net income data calculated by First Call)
was 16.0%; and the average gross, EBIT and net margins were 29.5%, 11.4% and
11.8%, respectively. For the Small Cap Companies, the median compound annual
growth rates for revenue, EBITDA, EBIT and net income over the last three fiscal
years were 9.5%, 8.5%, 7.1% and 9.6%, respectively. The median projected growth
rate for net income from 1998 calendar year end to 1999 calendar year end was
not meaningful as 1999 calendar year end projected earnings were not available
for any of the Small Cap Companies; and the average gross, EBIT and net margins
were 31.7%, 10.0% and 6.4%, respectively. For the Large Cap Companies, the
median compound annual growth rates for revenue, EBITDA, EBIT and net income
over the last three fiscal years were 2.5%, 2.6%, -0.4% and 2.3%, respectively.
The median projected growth rate for net income from 1998 calendar year end to
1999 calendar year end (based on projected net income data calculated by First
Call) was 18.4%; and the average gross, EBIT and net margins were 28.7%, 15.5%
and 10.0%, respectively.
The corresponding growth rate in revenue for GTI was -15.2%. The
corresponding growth rates for EBITDA, EBIT, net income, and projected net
income for GTI were each not meaningful given GTI's
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historical and projected net and operating losses. The corresponding gross, EBIT
and net margins for GTI were 23.4%, -2.1% and -2.0%, respectively.
Such analysis for the LTM over the prior fiscal year indicated that, for
the Core Comparable Companies, the median growth rates for revenue, EBITDA,
EBIT, and net income were 17.8%, 33.2%, 40.5% and 34.6%, respectively. The
corresponding gross, EBIT and net margins were 31.9%, 13.5% and 13.6%,
respectively. For the Small Cap Companies, the median growth rates for revenue,
EBITDA, EBIT, and net income were 12.1%, 28.9%, 32.3% and 20.1%, respectively.
The corresponding gross, EBIT and net margins were 31.0%, 10.7% and 7.5%,
respectively. For the Large Cap Companies, the median growth rates for revenue,
EBITDA, EBIT, and net income were 20.6%, 30.9%, 31.8% and 26.2%, respectively.
The corresponding gross, EBIT and net margins were 28.3%, 14.3% and 9.5%,
respectively.
The corresponding growth rate in revenue for GTI was -19.8%. The
corresponding growth rates for EBITDA, EBIT and net income for GTI were each not
meaningful given GTI's historical net and operating losses. The corresponding
gross, EBIT and net margins for GTI were 18.7%, -9.7% and -10.0%, respectively.
Discounted Cash Flow Analysis. The Financial Advisor estimated the range of
values for the Common Stock based upon the discounted present value of the
projected after-tax free cash flows of GTI for the fiscal years ended December
31, 1998 through December 31, 2001, and of the terminal value of the Company at
December 31, 2002. After tax free cash flow was calculated by taking projected
EBIT and subtracting from such amount projected taxes, capital expenditures,
changes in working capital and changes in other assets and liabilities and
adding back projected depreciation and amortization (the "Free Cash Flows").
This analysis was based upon operating (EBIT) cash flow projections provided by
GTI management. In performing this analysis, the Financial Advisor utilized
discount rates ranging from 15.0% to 20.0% based on GTI's weighted average cost
of capital of 17.2% as of May 22, 1998. In calculating the terminal value of the
Company, the Financial Advisor utilized perpetual growth rates ranging from 3.0%
to 5.0% applied to 2001 Free Cash Flow for GTI. Utilizing this methodology,
GTI's fully-diluted equity value ranged from $1.60 to $2.60 per share.
Discounted Prospective Future Earnings Analysis. The Financial Advisor also
analyzed potential Common Stock prices one year from May 26, 1998 and two years
from May 26, 1998, based on management's projected earnings in 1999 and in 2000
and prospective price to earnings ("P/E") multiples ranging from 12.5x to 22.5x.
The Financial Advisor noted that as of May 22, 1998, the 1998 P/E multiples for
the Core Comparable Companies ranged from 15.4x to 16.8x with a median and mean
of 16.1x. The Financial Advisor observed that, on the basis of the Company's
earnings per share projections in 1999, GTI would have to achieve a 1999 P/E
multiple of greater than 22.5x in order to achieve, by May 26, 1999, a price
greater than $3.00 per share of Common Stock.
The Financial Advisor also observed that in 2000, on the basis of the
Company's earnings projections (which the Financial Advisor noted represents a
161% increase over the 1999 earnings projections), GTI must achieve a P/E
multiple greater than 16.0x in order to achieve a price per share of Common
Stock that has a present value greater than $3.10 per share. The Financial
Advisor assumed a discount rate of approximately 17% in calculating the present
value of the Company's prospective share price. The Financial Advisor observed
that this discount rate approximated the Company's cost of equity of 17.5% as of
May 22, 1998.
Analysis of Certain Transactions. The Financial Advisor reviewed the
financial terms, to the extent publicly available, of nine transactions
involving the acquisition of companies in the electronics industry (the "EI
Transactions") and 3 transactions involving the acquisition of companies in the
magnetic-based components industry (the "MBC Transactions" and, collectively
with the EI Transactions, the "Selected Transactions"), in each case which were
announced or completed since January 1, 1992. The EI Transactions consisted of
(listed as acquiror/target): Computer Products Inc./Zytec Corporation; Cooper
Industries, Inc./ Coiltronics, Inc.; Computer Products, Inc./Elba Group; Thomas
& Betts Corporation/Augat Inc.; AMP, Inc./ M/A-Com, Inc.; Vishay
Intertechnology, Inc./Vitramon, Inc.; Avnet, Inc./Hall-Mark Electronics Corp.;
Hicks, Muse & Co./DuPont Co. -- Connector Systems; and Vishay Intertechnology,
Inc./Sprague Technologies Inc. -- Component Operations. The MBC Transactions
consisted of (listed as acquiror/target): Technitrol, Inc./Northern Telecom
Ltd. -- Magnetic Components; Technitrol, Inc./Pulse Engineering Inc.; and
Technitrol, Inc./The Fil-Mag Group (the "MBC Transactions").
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The Financial Advisor reviewed the market capitalization of common stock
plus total debt less cash and equivalents ("Enterprise Value") paid in the
Selected Transactions as a multiple of LTM revenues and also examined the
multiples of equity value paid in the Selected Transactions to book value and
tangible assets. In addition, the Financial Advisor reviewed the premium of the
offer price over the trading prices one trading day, five trading days, twenty
trading days and thirty trading days prior to the announcement date of the
Selected Transactions.
Such analysis indicated that the Enterprise Value paid, as a multiple of
LTM revenues, ranged, for the Selected Transactions, from 0.43x to 1.68x, with a
median of 0.96x and a mean of 0.92x (excluding one of the Selected Transactions
for which information was not available); for the MBC transactions, from 0.43x
to 0.55x, with a median of 0.46x and a mean of 0.48x; and for the EI
Transactions, from 0.55x to 1.68x, with a median of 1.05x and a mean of 1.08x.
The Financial Advisor noted that the corresponding multiple of LTM revenues
implied by Technitrol's offer is 0.38x.
Such analysis also indicated that the equity value paid, as a multiple of
book value, ranged, for the Selected Transactions, from 0.97x to 8.16x book
value, with a median of 2.75x and a mean of 3.37x (excluding five of the
Selected Transactions for which information was not available); for the MBC
Transactions, was 1.09x (information was available for only one of the MBC
Transactions); and for the EI Transactions, from 0.97x to 8.16x, with a median
of 3.12x and a mean of 3.75x. Such analysis also indicated that the equity value
paid as a multiple of tangible assets, ranged, for the Selected Transactions,
from 0.80x to 3.52x, with a median of 1.36x and a mean of 1.61x (excluding five
of the Selected Transactions for which information was not available); for the
MBC Transactions, was 0.86x (information available for only one of the MBC
Transactions); and for the EI Transactions, from 0.80x to 3.52x, with a median
of 1.51x and a mean of 1.73x. The corresponding multiples of book value and
tangible assets implied by Technitrol's offer are 0.58x and 0.60x, respectively.
Such analysis also indicated that, for the Selected Transactions, the
premium of the offer price, at announcement, one trading day, five trading days,
twenty trading days, and thirty trading days prior to the announcement date
ranged from 8.9% to 50.0%, 8.0% to 55.6%, 5.4% to 74.2% and 25.9% to 74.7%,
respectively, with medians and means of 33.5% and 31.6%, 43.7% and 35.6%, 36.3%
and 39.3%, and 38.4% and 43.4%, respectively. The corresponding premiums implied
by Technitrol's offer are 12.7%, 15.3%, 7.8% and -17.3%.
Although the Selected Transactions were used for comparison purposes, none
of such transactions is directly comparable to the Merger, and none of the
companies in such transactions is directly comparable to GTI or Technitrol (with
the exception of the MBC Transactions in which Technitrol was the acquiring
company). Accordingly, an analysis of the results of such a comparison is not
purely mathematical but instead involves complex considerations and judgments
concerning differences in historical and projected financial and operating
characteristics of the companies involved and other factors that could affect
the acquisition value of such companies or GTI to which they are being compared.
Analysis of Certain Publicly Traded Companies. To provide contextual data
and comparative market information, the Financial Advisor compared selected
historical operating and financial data and ratios for GTI to the corresponding
data and ratios of each of the Selected Companies. Such data and ratios included
the Enterprise Value of such companies as a multiple of LTM revenues, and the
market capitalization of common stock of such companies as a multiple of the
book value of common shareholders' equity. The Financial Advisor also examined
the ratios of the current prices of such companies to the estimated 1999
calendar year earnings per share ("EPS") (as estimated by Institutional Brokers
Estimating System ("IBES") and First Call).
Such analysis indicated that, for the Core Comparable Companies, the
Enterprise Value as a multiple of LTM revenues ranged from 1.54x to 1.67x with a
median of 1.60x and a mean of 1.60x, and that, for all the Selected Companies,
the Enterprise Value as a multiple of LTM revenues ranged from 0.50x to 3.43x,
with a median of 1.23x and a mean of 1.34x. The Financial Advisor noted that the
corresponding multiple of LTM revenues implied by Technitrol's offer is 0.38x.
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Such analysis also indicated that, for the Core Comparable Companies, the
equity value as a multiple of book value ranged from 2.13x to 4.37x, with a
median of 3.25x and a mean of 3.25x, and the multiple of current prices of the
Core Comparable Companies to their estimated 1999 calendar year EPS was 14.5x
(estimated 1999 calendar year earnings were available for only one of the Core
Comparable Companies). Such analysis also indicated that, for the Selected
Companies, the equity value as a multiple of book value ranged from 1.34x to
4.37x, with a median of 2.15x and a mean of 2.49x; the price per share ranged
from 10.6x to 18.8x estimated 1999 calendar year EPS, with a median of 13.3x and
a mean of 14.0x (excluding eight of the Selected Companies for which there were
no estimated 1999 calendar year earnings available). The Financial Advisor noted
that the corresponding multiples implied by Technitrol's offer are 0.58x book
value and 30.6x estimated 1999 calendar year EPS.
Although the Selected Companies were used for comparison purposes, none of
such companies are directly comparable to GTI. Accordingly, an analysis of the
results of such a comparison is not purely mathematical but instead involves
complex considerations and judgments concerning differences in historical and
projected financial and operating characteristics of the Selected Companies and
other factors that could affect the public trading value of the Selected
Companies or GTI to which they are being compared.
The summary set forth above does not purport to be a complete description
of all the analyses performed by the Financial Advisor. The preparation of a
fairness opinion involves various determinations as to the most appropriate and
relevant methods of financial analyses and the application of these methods to
the particular circumstances and, therefore, such an opinion is not readily
susceptible to partial analysis or summary description. The Financial Advisor
did not attribute any particular weight to any analysis or factor considered by
it, but rather made qualitative judgments as to the significance and relevance
of each analysis and factor. Accordingly, notwithstanding the separate factors
summarized above, the Financial Advisor believes, and has advised the Special
Committee and the Board, that its analyses must be considered as a whole and
that selecting portions of its analyses and the factors considered by it,
without considering all analyses and factors, could create an incomplete view of
the process underlying its opinion. In performing its analyses, the Financial
Advisor made numerous assumptions with respect to industry performance, business
and economic conditions and other matters, many of which are beyond the control
of GTI and Technitrol. These analyses performed by the Financial Advisor are not
necessarily indicative of actual values or future results, which may be
significantly more or less favorable than suggested by such analyses. In
addition, analyses relating to the value of businesses do not purport to be
appraisals or to reflect the prices at which businesses or securities may
actually be sold. Accordingly, such analyses and estimates are inherently
uncertain and, they are subject to significant business, economic, competitive,
regulatory and other uncertainties and contingencies, all of which are difficult
or impossible to predict and are beyond the control of the Financial Advisor and
GTI. As mentioned above, the analyses supplied by the Financial Advisor and its
opinion were among several factors taken into consideration by the Special
Committee and the Board in making their respective decisions to recommend the
approval of, and to approve, the Merger Agreement and should not be considered
as determinative of such decisions.
Pursuant to the Financial Advisor Engagement Letter, GTI has agreed to pay
certain fees to the Financial Advisor for its financial advisory services
provided in connection with the Merger, a significant portion of which is
contingent upon the consummation thereof. If the Merger is consummated, the
Financial Advisor will be entitled to receive an aggregate transaction fee in an
amount equal to approximately $600,000, less a retainer fee of $50,000 paid upon
execution of the Financial Advisor Engagement Letter. Additionally, GTI has
agreed to reimburse the Financial Advisor for its out-of-pocket expenses
(including the reasonable fees and expenses of its counsel) incurred or accrued
during the period of, and in connection with, the Financial Advisor's
engagement. GTI has also agreed to indemnify the Financial Advisor against
certain liabilities, including liabilities under the federal securities laws,
relating to or arising out of services performed by the Financial Advisor as
financial advisor to the Special Committee in connection with the Merger, unless
it is finally judicially determined that such liabilities arose out of the
Financial Advisor's gross negligence or willful misconduct. The terms of the fee
arrangement with the Financial Advisor, which are customary in transactions of
this nature, were negotiated at arm's length between the Special Committee and
the Financial
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Advisor, and the Board was aware of such arrangement, including the fact that a
significant portion of the aggregate fee payable to the Financial Advisor is
contingent upon consummation of the Merger.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the Merger, stockholders should be aware that certain
current and prior directors and officers of GTI have interests in the Merger, as
described below.
Change of Control Stay Bonuses. Upon closing of the Merger, Albert J.
Hugo-Martinez (the Company's Chief Executive Officer and a director) will
receive a lump sum payment equal to eighteen months of his base salary, and five
other officers of the Company will receive a lump sum cash payment equal to nine
months of their respective base salaries, assuming that they are still employed
by the Company at that time. These payments supersede and replace any other
severance payment to which these employees might otherwise be entitled. Bruce C.
Myers (the Company's Chief Financial Officer) will receive at closing a lump sum
cash payment of approximately $75,000 in addition to the nine month amount
described above.
Options. Certain of the GTI officers and directors hold options to acquire
Common Stock, all of which options are at an exercise price which is greater
than $3.10 per share. As a result, no officer or director will profit from such
options.
Indemnification. The Merger Agreement provides that all rights to
indemnification and advancement of expenses existing in favor of any present or
former director or officer of GTI, as provided in (i) GTI's certificate of
incorporation or bylaws, or (ii) certain indemnification agreements identified
in the Merger Agreement as in effect on the date thereof, shall survive the
Merger with respect to matters occurring at or prior to the Effective Time.
Pursuant to the Merger Agreement, Technitrol has agreed that it will indemnify
and hold harmless the present and former officers and directors of GTI in
respect of acts or omissions occurring prior to the Effective Time, subject to
limitations imposed under applicable law. Technitrol has agreed to maintain the
existing GTI policy of directors' and officers' liability insurance for a period
of six years after the Effective Time. Technitrol, Inc. has guaranteed payment
of the indemnity.
Repayment of Telemetrix Loan. The Merger Agreement requires that the
Company repay its outstanding loan from Telemetrix immediately prior to the
Effective Time, as part of Technitrol's plan to replace the Company's existing
financing facilities. The outstanding principal balance on the Telemetrix loan
was $1.25 million as of May 27, 1998. Absent this requirement, $625,000
principal amount of the loan is due in August 1998 and $625,000 principal amount
of the loan is due in February 1999. Accordingly, the Merger Agreement will have
the effect of Telemetrix receiving its payments earlier than might otherwise
have occurred.
Liquidity for Telemetrix. Consummation of the Merger will provide liquidity
to Telemetrix for its substantial block of Common Stock and Preferred Stock,
which liquidity might not otherwise be available to Telemetrix.
MERGER AGREEMENT
The following summary of the Merger Agreement is subject to, and qualified
in its entirety by, the complete text of the Merger Agreement, which is attached
to this Proxy Statement as Appendix A. The terms of the Merger Agreement are the
result of arm's-length negotiations between GTI and Technitrol.
Terms of the Merger. At the Effective Time, and subject to and upon the
terms and conditions of the Merger Agreement and the DGCL, Acquisition will be
merged with and into GTI, the separate corporate existence of Acquisition will
cease, and GTI will continue as the surviving corporation.
Subject to and immediately following the receipt of the vote of
stockholders of GTI and the satisfaction or waiver of the conditions to the
consummation of the Merger set forth in the Merger Agreement, the parties shall
cause the Merger to be consummated by filing a certificate of merger as
contemplated by the DGCL. The Merger shall be effective at the time the
certificate of merger is filed with the Delaware Secretary of State or such
other time as specified in the certificate of merger.
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The Merger Agreement provides that the certificate of incorporation of
Acquisition, as in effect immediately prior to the Effective Time, shall be the
certificate of incorporation of GTI immediately after the Effective Time. The
Merger Agreement provides that the bylaws of Acquisition, as in effect
immediately prior to the Effective Time, shall be the bylaws of GTI immediately
after the Effective Time.
The directors and officers of Acquisition immediately prior to the
Effective Time shall be the directors and officers of GTI immediately after the
Effective Time.
Conversion of Shares in the Merger. At the Effective Time, each share of
Preferred Stock which is issued and outstanding immediately prior to the
Effective Time (other than shares of Preferred Stock as to which appraisal
rights are exercised) shall, by virtue of the Merger and without any action on
the part of the holder thereof, be converted into and represent the right to
receive, in cash, $726.37 per share of Preferred Stock. At the Effective Time,
each share of Common Stock which is issued and outstanding immediately prior to
the Effective Time (other than shares of Common Stock as to which appraisal
rights are exercised) shall, by virtue of the Merger and without any action on
the part of the holder thereof, be converted into and represent the right to
receive, in cash, $3.10 per share of Common Stock.
At the Effective Time, each share of Common Stock held in the treasury of
GTI immediately prior to the Effective Time shall be canceled and cease to
exist, and no payment shall be made with respect thereto.
Appraisal Rights. Notwithstanding any provision of the Merger Agreement to
the contrary, any shares of Common Stock outstanding immediately prior to the
Effective Time held by a holder who has demanded and perfected the right of
appraisal of those shares in accordance with the provisions of Section 262 of
the DGCL and as of the Effective Time has not withdrawn or lost such right to
such appraisal ("Dissenting Shares") shall not be converted into or represent a
right to receive a cash payment pursuant to the Merger Agreement, but the holder
shall only be entitled to such rights as are granted by the DGCL. See "Appraisal
Rights." If a holder of shares of Common Stock who demands appraisal of those
shares under the DGCL effectively withdraws or loses (through failure to perfect
or otherwise) the right of appraisal, then, as of the Effective Time or the
occurrence of such event, whichever last occurs, those shares shall be converted
into and represent only the right to receive $3.10 per share, without interest,
upon compliance with the provisions, and subject to the limitations, of the
Merger Agreement. The Merger Agreement requires that GTI shall give Technitrol
(a) prompt notice of any written demands for appraisal of any shares of Common
Stock, attempted withdrawals of such demands, and any other instrument served
pursuant to the DGCL and received by GTI relating to stockholders' rights of
appraisal, and (b) the opportunity to participate in all negotiations and
proceedings with respect to demands for appraisal under the DGCL. GTI shall not,
except with the prior written consent of Technitrol, voluntarily make any
payment with respect to any demands for appraisal of Common Stock or offer to
settle or settle any such demands.
Options and Warrants. At or immediately prior to the Effective Time, all
options and warrants (the "Stock Rights") to purchase shares of Common Stock
that were granted under any employee stock option or compensation plan, or other
arrangement shall be canceled. No holder of Stock Rights shall be entitled to
receive any amount on account of such cancellation because each Stock Right is
exercisable at a price in excess of $3.10 per share of Common Stock.
Payment of Shares. At the Effective Time, Technitrol shall deposit, in
immediately available funds, with Registrar and Transfer Company (the "Payment
Agent"), an amount sufficient to allow the Merger Consideration to be paid to
the holders of each share of Common and Preferred Stock (such sum being
hereinafter referred to as the "Merger Fund"). Out of the Merger Fund, the
Payment Agent shall, pursuant to instructions from the holders of Common and
Preferred Stock, make the payments of the Merger Consideration referred to in
the Merger Agreement. Any amount remaining in the Fund one year after the
Effective Time shall be refunded to Parent, upon demand, and Parent shall remain
liable for payment of the Merger Consideration.
In the event any certificate or certificates representing Common or
Preferred Stock are lost, stolen or destroyed, then the person claiming such
fact must provide (i) an affidavit to that effect and (ii) a suitable
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indemnity or bond, if required by Parent or the Payment Agent. Upon receipt and
processing of such documents, the amount owing to such person shall be paid to
such person.
At and after the Effective Time, all shares of Common and Preferred Stock
issued and outstanding immediately prior to the Effective Time shall be canceled
and cease to exist, and each holder of a certificate or certificates that
represented shares of Common or Preferred Stock issued and outstanding
immediately prior to the Effective Time shall cease to have any rights as a
stockholder of GTI with respect to the shares of Common or Preferred Stock
represented by such certificate or certificates, except for the right to
surrender such holder's certificate or certificates in exchange for the payment
provided pursuant to the Merger Agreement or to perfect such holder's right to
receive payment for such holder's shares pursuant to the DGCL if such holder has
validly exercised and not withdrawn or lost such holder's right to receive
payment for such holder's shares pursuant to the DGCL.
DETAILED INSTRUCTIONS, INCLUDING A TRANSMITTAL LETTER, WILL BE MAILED TO
STOCKHOLDERS PROMPTLY FOLLOWING THE EFFECTIVE TIME AS TO THE METHOD OF
EXCHANGING CERTIFICATES FORMERLY REPRESENTING SHARES OF COMMON STOCK OR
PREFERRED STOCK FOR THE MERGER CONSIDERATION. STOCKHOLDERS SHOULD NOT SEND
CERTIFICATES REPRESENTING THEIR SHARES OF COMMON STOCK OR PREFERRED STOCK TO THE
PAYMENT AGENT OR GTI PRIOR TO RECEIPT OF THE TRANSMITTAL LETTER.
Representations and Warranties. The Merger Agreement contains
representations and warranties of GTI, in respect of GTI and its subsidiaries,
relating to the following matters (which representations and warranties are
subject, in certain cases, to specified exceptions): (i) corporate organization
and qualification; (ii) capitalization; (iii) authority; (iv) Securities and
Exchange Commission reports and financial statements; (v) information provided
in this Proxy Statement; (vi) consents, approvals and absence of violations;
(vii) absence of defaults; (viii) absence of undisclosed liabilities and certain
changes; (ix) litigation; (x) compliance with applicable law; (xi) employee
benefit plan and labor matters; (xii) environmental laws and regulations; (xiii)
taxes; (xiv) vote required (xv) opinion of the Financial Advisor; (xvi) absence
of brokers; (xvii) absence of restrictions on business activities; (xvii)
absence of liens and encumbrances; (xix) intellectual property; (xx) agreements,
contracts and commitments; and (xxi) non-public information provided to
Technitrol.
The Merger Agreement contains representations and warranties of Parent and
Acquisition relating to the following matters (which representations and
warranties are subject, in certain cases, to specific exceptions): (i)
organization; (ii) authority; (iii) absence of defaults; (iv) litigation; (v)
consents, approvals and absence of violations; and (vi) availability of funds.
None of the representations or warranties of any of GTI, Parent or
Acquisition survive the consummation of the Merger.
Conduct of Business Pending the Merger. The Merger Agreement provides that,
from the date of the Merger Agreement through the Effective Time, GTI will
conduct its operations only in the ordinary course of business consistent with
past practices, and to the extent consistent therewith, with no less diligence
and effort than would have been applied in the absence of the Merger Agreement.
Without limiting the generality of the foregoing, the Merger Agreement provides
that, from the date of the Merger Agreement through the Effective Time, GTI will
not do any of the following without the prior written consent of Parent (except
as otherwise permitted or required by the Merger Agreement): (i) amend its
certificate of incorporation or bylaws; (ii) grant, amend or modify any Stock
Rights or issue, sell or otherwise dispose of any of its capital stock (except
upon the exercise of Stock Rights or conversion of Preferred Shares outstanding
as of the date of the Merger Agreement); (iii) split, combine, reclassify,
repurchase, declare or pay any dividends on its capital stock; (iv) adopt a plan
of complete or partial liquidation, dissolution, merger, consolidation,
restructuring, recapitalization or other reorganization of the Company or any of
its subsidiaries (other than the Merger); (v) alter through merger, liquidation,
reorganization, restructuring or any other fashion the corporate structure of
ownership of any subsidiary; (vi) incur or assume any long-term or short-term
debt or issue any debt securities; (vii) except as required by law, enter into,
adopt or amend or terminate any employment agreement
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or any bonus, profit sharing, compensation, severance, termination, stock option
or other arrangement for the benefit or welfare of any director, officer or
employee; (viii) enter into or amend any agreement or take any action which
reasonable would be expected to have a Material Adverse Effect on the Company or
enter into any agreement, order, consent or commitment relating to the Company
property in Leesburg, Indiana; (ix) transfer or license to any person or entity
or otherwise materially extend, amend or modify any rights to the Company's
Intellectual Property Rights or enter into grants to future patent rights; (x)
grant any severance or termination to any executive officer or other employee
except payments made in amounts consistent with the Company's policies and past
practices and written agreements outstanding; (xi) commence any litigation other
than for the routine collection of bills, or where the Company in good faith
determines that failure to commence suit would result in the material impairment
of a valuable asset of the Company's business; (xii) acquire or agree to acquire
by any manner, any business organization, or otherwise acquire any assets that
are material to the business of the Company; (xiii) sell, lease or otherwise
dispose of properties or assets, other than in the ordinary course of business;
(xiv) materially revalue any of the Company's tangible assets other than in the
ordinary course of business; (xv) pay, discharge or satisfy any claim, liability
or obligation in excess of One Hundred Thousand Dollars ($100,000.00) (in any
one case) or Three Hundred and Fifty Thousand Dollars ($350,000.00) (in the
aggregate), other than in the ordinary course of business; (xvi) make or change
any material election in respect of Taxes; or (xvii) take, or agree to take, any
of the actions described above.
Solicitations and Superior Proposals. The Company has covenanted that
neither the Company nor any of its subsidiaries shall, nor shall the Company
authorize or permit any of its or their respective officers, directors,
employees, representatives, agents, investment bankers, subsidiaries and
affiliates to, directly or indirectly, solicit, initiate, engage or participate
in discussions or negotiations with, or disclose or afford access to non-public
information concerning the Company and its subsidiaries to or otherwise assist,
encourage or cooperate with or enter into any agreement or understanding with
any person or group (other than Parent and Acquisition or any designees of
Parent and Acquisition) concerning any Third Party Acquisition Proposal;
provided, however, that such covenant shall not prevent the Board from taking
and disclosing to the Company's stockholders a position contemplated by Rules
14d-9 and 14e-2 promulgated under the Exchange Act with regard to any tender
offer. The Board shall not withdraw or amend its recommendation of the Merger
Agreement or approve or recommend, or cause the Company to enter into any
agreement with respect to, any Third Party Acquisition Proposal, and the Company
shall and shall cause its respective officers, directors, employees,
representatives, agents, investment bankers, subsidiaries and affiliates not to
make or authorize any statement, recommendation or solicitation in support of
any Third Party Acquisition Proposal. Notwithstanding anything to the contrary
provided in the Merger Agreement, the Board may participate in negotiations with
a Third Party, furnish information to a Third Party or amend or withdraw its
recommendation of the adoption of the Merger Agreement or approve or recommend a
Superior Proposal, but only after a Third Party shall have delivered to the
Company in writing an unsolicited, bona fide Third Party Acquisition Proposal
that the Board by a majority vote determines in its good faith judgment (after
consultation with its principal advisors, including a financial advisor of
nationally recognized reputation, which shall be deemed to include the Financial
Advisor) to be more favorable to the Company's stockholders than the Merger (a
"Superior Proposal") and for which financing, to the extent required, is then
committed or which, in the good faith reasonable judgment of the Board (based on
the advice of a financial advisor of nationally recognized reputation) is
reasonably capable of being financed by such Third Party and which is probable
to be consummated in accordance with its terms. In the event the Company
receives a Superior Proposal, the Company will (i) immediately give written
notice to Parent (a "Notice of Superior Proposal") advising Parent that the
Board has received an unsolicited bona fide Superior Proposal, specifying the
material terms and conditions of such Superior Proposal and identifying the
person making such Superior Proposal and (ii) give Parent five business days
from its receipt of the Notice of Superior Proposal to make an offer which the
Board by a majority vote determines in its good faith judgment (after
consultation with its principal advisors, including a financial advisor of
nationally recognized reputation) to be at least as favorable to the Company's
stockholders as such Superior Proposal, in which event the Board shall accept
such offer from Parent unless, within five business days of the Company's
receipt of such offer from Parent, the Company receives a Third Party
Acquisition Proposal that the Board, by a majority vote, determines in its good
faith judgment (after
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consultation with its principal advisors, including a financial advisor of
nationally recognized reputation) to be more favorable to the Company's
stockholders than such offer from Parent. "Third Party" means any person, entity
or group (which includes a "person" as such term is defined in Section 13(d)(3)
of the Exchange Act), other than Parent, Acquisition or any affiliate thereof.
"Third Party Acquisition Proposal" means a proposal to the Company by a Third
Party for a transaction that would include any of the following events: (i) the
acquisition of the Company by merger or otherwise by any Third Party; (ii) the
acquisition by a Third Party of more than 50% of the total assets of the Company
and its subsidiaries taken as a whole; or (iii) the acquisition by a Third Party
of 50% or more of the outstanding Common Stock or Preferred Stock.
Additional Covenants. Pursuant to the Merger Agreement, GTI has covenanted
to: (i) prepare and file with the Securities and Exchange Commission this Proxy
Statement and all other filings with the Securities and Exchange Commission
required to be filed by the Company; (ii) convene a special meeting of GTI
stockholders as soon as practicable to vote upon adoption of the Merger
Agreement; (iii) permit Technitrol to have access to GTI's officers, employees,
agents, independent auditors, representatives, properties, books and records;
and (iv) use all reasonable efforts to obtain any third party consents required
to effectuate the Merger Agreement.
Parent has covenanted to cause: (i) at the Effective Time, the payment of
funds sufficient to pay the Merger Consideration; and (ii) after the Effective
Time, GTI to honor all GTI employment, severance, consulting and other
compensation contracts with any current or former GTI director, officer or
employee, and all provisions for vested benefits under employee benefit plans,
and, for one year after the Effective Time, to extend benefit plans that, in the
aggregate, are substantially similar to the GTI benefit plans in effect
immediately prior to the Effective Time. The covenant contained in the preceding
clause (ii) does not obligate GTI or Parent to continue to employ any person who
is not a party to an employment agreement. Technitrol, Inc. has guaranteed
Parent's covenant to pay the Merger Consideration.
GTI, Parent and Acquisition each have covenanted to: (i) make any filings
required by the HSR Act; (ii) give any required notices concerning breaches of
its own representations and warranties in the Merger Agreement; (iii) make a
joint press release concerning the Merger; and (iv) use all commercially
reasonable efforts to take all actions and to do all things necessary in order
to consummate and make effective the transactions contemplated by the Merger
Agreement.
Conditions to the Merger. The obligations of GTI and Technitrol to complete
the Merger are subject to a number of conditions. If these conditions are not
satisfied or waived, the Merger will not be completed: (i) approval of the
Merger Agreement by holders of a majority of the outstanding shares of Common
Stock and holders of at least two-thirds of the outstanding shares of Preferred
Stock, voting as separate classes; (ii) expiration or earlier termination of the
waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976
("HSR") (early termination was granted and became effective on June 19, 1998);
and (iii) no statute, rule, regulation, executive, order, decree, ruling or
injunction shall have been enacted, entered, promulgated or enforced by any
United States court or United States governmental authority which prohibits,
restrains, enjoins or restricts the consummation of the Merger.
Several additional conditions exist that must be met to require Technitrol
to complete the Merger: (i) the representations of the Company contained in the
Merger Agreement or in any other document delivered pursuant thereto shall be
true and correct at and as of the Effective Time with the same effect as if made
at and as of the Effective Time (except to the extent the representations
specifically related to an earlier date, in which case such representations
shall be true and correct as of such earlier date), provided that the
representations of the Company and its subsidiaries which are not qualified by
materiality or Material Adverse Effect (as defined in the Merger Agreement)
shall be deemed for all purposes of the Merger Agreement to be true and correct
if, in the aggregate the breach of all such representations, if any, do not have
a Material Adverse Effect on the Company or the validity of the Merger; (ii)
each of the covenants and obligations of the Company to be performed at or
before the Effective Time pursuant to the terms of the Merger Agreement shall
have been duly performed in all material respects at or before the Effective
Time; (iii) the Company shall have obtained the consent or approval of each
person whose consent or approval shall be required in connection with the
transactions contemplated by the Merger Agreement under any loan or credit
agreement,
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license, note, mortgage, indenture, lease or other agreement or instrument,
except those for which failure to obtain such consents and approvals would not,
individually or in the aggregate, have a Material Adverse Effect on the Company
or the validity of the Merger; (iv) receipt of an opinion of legal counsel to
the Company as to certain matters set forth in Exhibit B to the Merger
Agreement, and (v) GTI stockholders perfecting appraisal rights hold no more
than 10% of the outstanding shares of Common Stock of GTI, assuming for purposes
of such calculation the conversion to shares of Common Stock of all outstanding
shares of Preferred Stock.
Notwithstanding the above, the first three conditions, in the immediately
preceding paragraph, to Technitrol's obligation to complete the Merger will be
deemed satisfied if such conditions would have been satisfied but for the
occurrence, between May 26, 1998 and the closing date of the Merger, of a
reduction, compared to the first quarter of fiscal year 1998, in the earnings
before interest, taxes, depreciation and amortization of the Company and its
subsidiaries, on a consolidated basis ("EBITDA") that has a Material Adverse
Effect on the Company, and the business and financial events resulting in such
reduction in EBITDA were not themselves initiated by one or more independent
breaches by the Company of the representations and warranties of the Company
contained in the Merger Agreement.
Additional conditions exist that must be met to obligate GTI to complete
the Merger: (i) the representations of Parent and Acquisition contained in the
Merger Agreement or in any other document delivered pursuant thereto shall be
true and correct at and as of the Effective Time with the same effect as if made
at and as of the Effective Time (except to the extent such representations
specifically related to an earlier date, in which case such representations
shall be true and correct as of such earlier date), provided that the
representations of Parent and Acquisition which are not qualified by materiality
or Material Adverse Effect shall be deemed for all purposes of this Agreement to
be true and correct if, in the aggregate the breaches of all such
representations, if any, do not have a Material Adverse Effect on Parent or
Acquisition or the validity of the Merger; (ii) each of the covenants and
obligations of Parent and Acquisition to be performed at or before the Effective
Time pursuant to the terms of this Agreement shall have been duly performed in
all material respects at or before the Effective Time; (iii) Parent shall have
obtained the consent or approval of each person whose consent or approval shall
be required in connection with the transactions contemplated by the Merger
Agreement under any loan or credit agreement, note, mortgage, indenture, lease
or other agreement or instrument, except those for which failure to obtain such
consents and approvals would not, individually or in the aggregate, have a
Material Adverse Effect on Parent or Acquisition or the validity of the Merger;
and (iv) receipt of an opinion of legal counsel to Parent as to the matters set
forth in Exhibit A to the Merger Agreement.
Termination of Merger Agreement and Termination Fees. Either GTI or
Technitrol may terminate the Merger Agreement if: (i) they mutually consent in
writing to terminate the Merger Agreement; (ii) a final order or similar action
by a court of competent jurisdiction in the United States or other United States
Governmental Entity (as defined in the Merger Agreement) restrains, enjoins or
otherwise prohibits the Merger; or (iii) the Merger has not been consummated by
November 30, 1998, unless the terminating party has caused the failure to meet
the closing conditions by failing to fulfill its obligations under the Merger
Agreement.
In addition, Technitrol may terminate the Merger Agreement if: (i) GTI
breaches any of its representations or warranties in the Merger Agreement and
the first or third condition precedent, above, to Technitrol's obligation to
close the Merger is not capable of being satisfied by November 30, 1998; (ii)
GTI breaches a covenant in the Merger Agreement having a Material Adverse Effect
or materially adversely affecting (or materially delaying) the consummation of
the Merger, such that the second or third condition precedent, above, to
Technitrol's obligation to close the Merger is not capable of being satisfied by
November 30, 1998 and such breach has not been cured within twenty business days
after notice thereof by Technitrol; (iii) the Board has recommended to GTI's
stockholders a Superior Proposal (as defined in the Merger Agreement) and GTI's
stockholders have not adopted the Merger Agreement by November 30, 1998; (iv)
the Board has withheld, withdrawn, modified or changed its approval or
recommendation of the Merger Agreement or the Merger and GTI's stockholders have
not adopted the Merger Agreement by November 30, 1998; (v) GTI stockholders
perfecting appraisal rights hold more than 10% of the outstanding shares of
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Common Stock of GTI, assuming for purposes of such calculation the conversion to
shares of Common Stock of all outstanding shares of Preferred Stock; or (vi) the
Board convenes a meeting of GTI stockholders to vote upon the Merger Agreement
and the GTI stockholders fail to adopt the Merger Agreement.
In addition, GTI may terminate the Merger Agreement if: (i) Parent or
Acquisition breaches any of its representations or warranties in the Merger
Agreement and the first or third condition precedent, above, to GTI's obligation
to close the merger is not capable of being satisfied by November 30, 1998; (ii)
Parent or Acquisition breaches a covenant in the Merger Agreement materially
adversely affecting the consummation of the Merger, such that the second or
third condition precedent, above, to GTI's obligation to close the merger is not
capable of being satisfied by November 30, 1998 and such breach has not been
cured within twenty business days after notice thereof by GTI; or (iii) Section
4.4 of the Merger Agreement, relating to the receipt and evaluation by GTI of a
Superior Proposal, is satisfied.
GTI will be required to pay Technitrol a termination fee equal to
Technitrol's actual documented out-of-pocket costs incurred, not to exceed
$750,000, if the Merger is terminated due to: (i) the Board's termination of the
Merger Agreement pursuant to Section 4.4 thereof, relating to the receipt and
evaluation of a Superior Proposal; (ii) the Board's recommendation of a Superior
Proposal and the failure of the Company's stockholders to adopt the Merger
Agreement, instead, by November 30, 1998; (iii) the Board's withholding,
withdrawal, modification or change of its approval or recommendation to GTI's
stockholders of a vote for the adoption of the Merger Agreement, and the failure
of the Company's stockholders to adopt the Merger Agreement, in any event, by
November 30, 1998; or (iv) the Board's convening of a meeting of GTI
stockholders to vote upon the Merger Agreement and the failure of the Company's
stockholders to adopt the Merger Agreement.
In addition, if the Merger Agreement is terminated as a result of one of
the factors enumerated in the preceding paragraph and GTI consummates a
transaction with respect to a Third Party Acquisition Proposal with a party
other than Technitrol or enters into an option, agreement or letter of intent
with respect to a Third Party Acquisition Proposal or other arrangement intended
to transfer control of GTI or the stockholders of GTI tender or grant an option
on shares representing 50% or more of the voting interest in GTI, within twelve
months after termination (and, in the event the Merger was terminated due to a
failure of the Company's stockholders to adopt the Merger Agreement at a meeting
convened by the Board to vote upon the Merger Agreement, a Third Party
Acquisition Proposal was outstanding at the time of such stockholders' meeting),
then GTI will pay to Technitrol an additional termination fee equal to $2
million less the amount paid pursuant to the immediately preceding paragraph.
The termination fee is intended to be the only damages that Technitrol is
entitled to receive if the Merger Agreement is terminated for the first or
second grounds, above, on the basis of which Technitrol can terminate the Merger
Agreement.
Expenses. All expenses incurred in connection with the Merger Agreement and
the transactions contemplated in the Merger Agreement will be paid by the party
incurring such expenses.
Amendment. The parties to the Merger Agreement may modify or amend any
provision of the Merger Agreement at any time prior to the Effective Time,
whether before or after adoption of the Merger Agreement by the GTI
stockholders, by written agreement executed and delivered by duly authorized
officers of the respective parties, but, after such adoption, no amendment shall
be made which requires the approval of GTI stockholders under applicable law
without such approval.
ACCOUNTING TREATMENT
The Merger will be accounted for under the purchase method of accounting. A
final determination of required purchase accounting adjustments of the fair
value of the assets and liabilities of GTI has not yet been made.
CERTAIN EFFECTS OF THE MERGER
Upon consummation of the Merger, Acquisition will be merged into GTI, the
separate corporate existence of Acquisition will cease, and GTI will continue as
the surviving corporation. Thereafter Technitrol
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will own directly or indirectly all of the outstanding shares of Common Stock
and will be entitled to all of the benefits and detriments resulting from that
interest, including all income or losses generated by GTI's operations and any
future increase or decrease in GTI's value. After the Effective Time, the
present holders of Common and Preferred Stock will no longer have any equity
interest in GTI, will not share in the future earnings or growth of GTI and will
no longer have rights to vote on corporate matters. GTI is currently subject to
the information filing requirements of the Exchange Act, and in accordance
therewith, is required to file reports and other information with the Commission
relating to its business, financial statements and other matters. As a result of
the Merger, GTI will become a wholly-owned subsidiary of Parent, there will
cease to be any public market for the Common Stock, and, after the Effective
Time, the Common Stock will be delisted from the Nasdaq National Market. Upon
such event, GTI will apply to the Commission for the deregistration of the
Common Stock under the Exchange Act. The termination of the registration of the
Common Stock under the Exchange Act would make certain provisions of the
Exchange Act (including the proxy solicitation provisions of Section 14(a), and
the short-swing trading provisions of Section 16(b)), no longer applicable to
GTI.
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
Upon consummation of the Merger each outstanding share of the Common Stock
(except for those with respect to which statutory appraisal rights are perfected
or those owned by Parent or any of its subsidiaries) will be converted into the
right to receive the Merger Consideration.
THE UNITED STATES FEDERAL INCOME TAX CONSEQUENCES SET FORTH BELOW ARE
INCLUDED FOR GENERAL INFORMATIONAL PURPOSES ONLY AND ARE BASED UPON PRESENT LAW.
BECAUSE INDIVIDUAL CIRCUMSTANCES MAY DIFFER, EACH STOCKHOLDER IS URGED TO
CONSULT SUCH STOCKHOLDER'S OWN TAX ADVISOR TO DETERMINE THE APPLICABILITY OF THE
RULES DISCUSSED BELOW TO SUCH STOCKHOLDER AND THE PARTICULAR TAX EFFECTS OF THE
MERGER, INCLUDING THE APPLICATION AND EFFECT OF UNITED STATES ALTERNATIVE
MINIMUM TAX, STATE, LOCAL AND OTHER TAX LAWS.
THE FOLLOWING DISCUSSION DOES NOT ADDRESS TAX CONSEQUENCES TO THE HOLDER OF
THE PREFERRED STOCK, AND MAY NOT BE APPLICABLE TO CERTAIN TYPES OF SHAREHOLDERS,
SUCH AS FINANCIAL INSTITUTIONS, BROKER-DEALERS, SHAREHOLDERS WHO ACQUIRED SHARES
PURSUANT TO THE EXERCISE OF OPTIONS OR OTHERWISE AS COMPENSATION, INDIVIDUALS
WHO ARE NOT CITIZENS OR RESIDENTS OF THE UNITED STATES, FOREIGN ENTITIES AND
PERSONS WHO RECEIVED PAYMENTS IN RESPECT OF OPTIONS OR WARRANTS TO ACQUIRE
COMMON STOCK.
The receipt of cash pursuant to the Merger will be a taxable transaction
for United States federal income tax purposes. In general, for United States
federal income tax purposes, a stockholder will recognize gain or loss equal to
the difference between the cash received by the stockholder pursuant to the
Merger Agreement and the stockholder's adjusted tax basis in the shares of
Common Stock converted into the right to receive the Merger Consideration
pursuant to the Merger Agreement. Such gain or loss will be a capital gain or
loss if the shares of Common Stock constitute capital assets in the hands of the
stockholder. Pursuant to recently enacted legislation, in the case of an
individual holder of Common Stock, any such capital gain generally will be
subject to a maximum United States federal income tax rate of (a) 20% if the
holder's holding period in such shares was more than 18 months at the Effective
Time and (b) 28% if the holder's holding period was more than one year but not
more than 18 months at the Effective Time. Certain limitations apply with
respect to the deductibility of capital losses.
Payments in connection with the Merger may be subject to "backup
withholding" at a 31% rate. Backup withholding generally applies if the
stockholder fails to furnish such stockholder's social security number or other
taxpayer identification number ("TIN"), or furnishes an incorrect TIN. Backup
withholding is not an additional tax but merely a creditable advance payment,
which may be refunded to the extent it results in an overpayment of tax. Certain
persons generally are exempt from backup withholding, including corporations
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and financial institutions. Certain penalties apply for failure to furnish
correct information and for failure to include reportable payments in income.
Stockholders should consult with their own tax advisors as to the qualifications
and procedures for exemption from backup withholding.
REGULATORY COMPLIANCE
The Merger is subject to review by the Federal Trade Commission and the
Antitrust Division of the Department of Justice under the HSR Act. The Company,
Telemetrix and Technitrol were granted early termination of the HSR waiting
period, effective on June 19, 1998.
A certificate of merger must be filed on behalf of GTI and Acquisition with
the Secretary of State of Delaware in order to effect the Merger.
Except as described above, GTI is not aware of any licenses or regulatory
permits that are material to its business that might be adversely affected by
the Merger, or of any approval or other action by any governmental,
administrative or regulatory agency or authority which would be required prior
to the Effective Time.
APPRAISAL RIGHTS
If the Merger is consummated, a holder of record of shares of Common Stock
who objects to the terms of the Merger may seek an appraisal under Section 262
of the DGCL of the "fair value" of such holder's shares. The following is a
summary of the principal provisions of Section 262 and does not purport to be a
complete description. A copy of Section 262 is attached to this Proxy Statement
as Appendix C. Failure to take any action required by Section 262 will result in
a termination or waiver of a stockholder's rights under Section 262.
1. A stockholder electing to exercise Appraisal Rights must (a) deliver to
GTI, before GTI stockholders vote on the Merger Agreement, a written demand for
appraisal that is made by or on behalf of the person who is the holder of record
of GTI stock for which appraisal is demanded and (b) not vote in favor of
adopting the Merger Agreement. The demand must be delivered to GTI Corporation
at 9715 Business Park Avenue, San Diego, California 92131, Attention: Bruce C.
Myers, Chief Financial Officer. A proxy or vote against adopting the Merger
Agreement does not constitute a demand. A stockholder electing to take such
action must do so by a separate written demand that reasonably informs GTI of
the identity of the holder of record and of such stockholder's intention to
demand appraisal of such holder's GTI stock. Because a proxy left blank will,
unless revoked, be voted FOR adoption of the Merger Agreement, a stockholder
electing to exercise Appraisal Rights who votes by proxy must not leave the
proxy blank but must vote AGAINST adoption of the Merger Agreement or ABSTAIN
from voting for or against adoption of the Merger Agreement.
2. Only the holder of record of GTI stock is entitled to demand Appraisal
Rights for GTI stock registered in that holder's name. The demand must be
executed by or for the holder of record, fully and correctly, as the holder's
name appears on the holder's stock certificates. If GTI stock is owned of record
in a fiduciary capacity, such as by a trustee, guardian, or custodian, the
demand should be executed in that capacity. If GTI stock is owned of record by
more than one person, as in a joint tenancy or tenancy in common, the demand
should be executed by or for all owners. An authorized agent, including one of
two or more joint owners, may execute the demand for appraisal for a holder of
record; however, the agent must identify the owner or owners of record and
expressly disclose the fact that, in executing the demand, the agent is acting
as agent for the owner or owners of record.
A holder of record, such as a broker, who holds GTI stock as nominee for
beneficial owners may exercise a holder's right of appraisal with respect to GTI
stock held for all or less than all of such beneficial owners. In such case, the
written demand should set forth the number of GTI stock covered by the demand.
Where no number of shares of GTI stock is expressly mentioned, the demand will
be presumed to cover all GTI stock standing in the name of the holder of record.
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3. Within 10 days after the Effective Time, GTI will send notice of the
effectiveness of the Merger to each person who prior to the Effective Time
satisfied the foregoing conditions.
4. Within 120 days after the Effective Time, GTI or any stockholder who has
satisfied the foregoing conditions may file a petition in the Delaware Court of
Chancery demanding a determination of the fair value of the GTI stock.
Stockholders seeking to exercise Appraisal Rights should not assume that GTI
will file a petition to appraise the value of their GTI stock or that GTI will
initiate any negotiations with respect to the "fair value" of such GTI stock.
Accordingly, GTI stockholders should initiate all necessary action to perfect
their Appraisal Rights within the time periods prescribed in Section 262.
5. Within 120 days after the Effective Time, any stockholder who has
complied with the requirements for exercise of Appraisal Rights, as discussed
above, is entitled, upon written request, to receive from GTI a statement
setting forth the aggregate number of shares of GTI stock not voted in favor of
the Merger and with respect to which demands for appraisal have been made and
the aggregate number of holders of such GTI stock. GTI is required to mail such
statement within 10 days after it receives a written request to do so.
6. If a petition for an appraisal is timely filed, after a hearing on the
petition, the Delaware Court of Chancery will determine the stockholders
entitled to Appraisal Rights and will appraise the GTI stock owned by such
stockholders, determining its "fair value" exclusive of any element of value
arising from the accomplishment or expectation of the Merger and will determine
the amount of interest, if any, to be paid upon the value of the GTI stock of
the stockholders entitled to appraisal. Any such judicial determination of the
"fair value" of GTI stock could be based upon considerations other than or in
addition to the price paid in the Merger and the market value of GTI stock,
including asset values, the investment value of the GTI stock and any other
valuation considerations generally accepted in the investment community. The
value so determined for GTI stock could be more, less than, or the same as the
consideration paid pursuant to the Merger Agreement. The Court may also order
that all or a portion of any stockholder's expenses incurred in connection with
an appraisal proceeding, including, without limitation, reasonable attorneys'
fees and fees and expenses of experts utilized in the appraisal proceeding, be
charged pro rata against the value of all GTI stock entitled to appraisal.
7. Any stockholder who has duly demanded an appraisal in compliance with
Section 262 will not, after the Effective Time, be entitled to vote the shares
subject to such demand for any purpose or be entitled to dividends or other
distributions on that GTI stock (other than those payable or deemed to be
payable to stockholders of record as of a date prior to the Effective Time).
8. Holders of GTI stock lose the right to appraisal if no petition for
appraisal is filed within 120 days after the Effective Time, or if a stockholder
delivers to GTI a written withdrawal of such stockholder's demand for an
appraisal and an acceptance of the Merger, except that any such attempt to
withdraw made more than 60 days after the Effective Time requires GTI's written
approval. If Appraisal Rights are not perfected or a demand for Appraisal Rights
is withdrawn, a stockholder will be entitled to receive the consideration
otherwise payable pursuant to the Merger Agreement.
9. If an appraisal proceeding is timely instituted, such proceeding may not
be dismissed as to any stockholder who has perfected a right of appraisal
without the approval of the Delaware Court of Chancery.
INFORMATION REGARDING GTI CORPORATION
GENERAL
GTI Corporation, primarily through its wholly owned subsidiary Valor
Electronics, Inc. (collectively "the Company"), is an international supplier of
magnetics-based, signal management components to original equipment
manufacturers ("OEMs") of local area networks ("LAN"), wide area networks
("WANs"), telecommunications and broadband systems (collectively "networks") for
data and voice communications. In general, the Company's products isolate and
filter the communication signal at the point where two or more network
components are connected to assure that the signal is clean and that the network
and its components are protected.
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PRODUCTS
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 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 transmission media.
Magnetics-based components are marketed under the Valor name and consist of
two categories, signal processing and power transfer, as more fully described
below. The Company's products comply 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 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. The Company's products are located at most interface points of the
system where signal conversion is required. For example, on the desktop in a LAN
application, these products are found inside the computer on the network
interface adapter card. 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 Products. The majority of the Company's revenues are
derived from signal-processing products which 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, close to the connector, to isolate the network wiring from the adapter
card itself. This isolation prevents the network wire from transferring voltage
spikes into the system which would severely damage the circuits. 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
common mode noise (noise present equally on pairs of wires where the signals are
supposed to exist at opposite levels to each other) emission on the transmit and
receive line. The Company's transformers and chokes support Ethernet over
coaxial cable; 10Base-T and Token Ring LAN topologies; 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,
T1/E1/CEPT and xDSL interface applications. Filter products reduce or eliminate
conducted noise frequencies outside of the normal network frequencies 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 functions. Filters are located at the
transmit and receive connection ports in such hardware as adapter cards,
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
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functions of signal isolation, impedance matching, signal conditioning,
filtering, noise suppression and overvoltage protection. The Company's filter
products support applications for Ethernet over coaxial cable, 10Base-T, Token
Ring, PCMCIA credit card-sized standard, FDDI over copper, 100Base-VG,
100Base-T4, 155 Mbps ATM, ADSL and Cable Modem.
Beginning in 1998, the Company offers a line of single, one-by-four and
two-by-six integrated connectors which integrate the Company's signal processing
products with RJ45 connectors in a strategic arrangement with AMP (a connector
manufacturer). These integrated connectors offer size and performance benefits
as compared to the current approach of a separate signal processing component
and a separate RJ45 connector.
GTI has been conducting research and development on a technology that, if
successful, might, in some fashion, permit the automation of the production
process of magnetic components of the sort made by the Company and its
competitors while producing components of markedly higher quality at lower cost
than current methods. First (and thus far the only) prototypes were completed in
April 1998, which prototypes do not satisfy the required LAN specifications of
the product. The Company continues to evaluate the design and performance of
these prototypes as well as alternative designs and methodologies. If this
research and development project is ultimately successful and results in a
product that can be manufactured at competitive prices and is acceptable to
customers, this project could have a material positive effect on the business,
financial condition and prospects of the Company. The project is not yet near to
completion, however, and there can be no assurance that the several scientific
and engineering hurdles in the way of successful completion will be overcome. In
addition, there can be no assurance that, even if the technical problems can be
solved, the resulting technology could or would be commercially exploited or
have a material positive effect on the business, financial condition or
prospects of the Company.
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 different voltage level than the integrated circuit, and
converts the voltage to a 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
combination adapter cards and hubs and support Ethernet (10Base2/5) over coaxial
cable applications. 10Base-T topologies do not require a DC/DC converter.
CUSTOMERS
The Company's products are sold directly or indirectly to more than 1,000
customers, including primarily OEMs and distributors. Two of these customers
accounted for 18% and 13% of the Company's total sales in 1997. Two customers
accounted for 20% and 10% of the Company's total sales in 1996, and two
customers accounted for 16% and 14% of the Company's total sales in 1995. No
other customer accounted for 10% or more of total sales in these years, but
several other customers contributed more than 5% of the Company's total sales in
these years. The sales percentage from the Company's OEM and distribution
customers has historically fluctuated and may continue to vary in future
periods. Management believes that future sales concentration to these OEM and
distribution customers is likely to continue. The importance of these customers
to the Company, combined with competitive pressures, could result in the
negotiation of lower sales prices for these customers which could adversely
affect the Company's results of operations and financial condition. The loss of
one of these customers would have a material adverse effect on the Company's
results of operations and financial condition.
SALES AND MARKETING
The Company's products are sold in North America 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 two
national and one regional electronics distributors with branches throughout the
United States and Canada. The efforts of the representative organizations are
directed by three regional manager employees, and the efforts of the
distribution organizations are directed by a national distribution manager
employee, all of whom report to a vice president of sales.
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The international sales structure comprises representative and distributor
networks in Europe and the Pacific Rim. There are directors of sales and
marketing in London, England, and Hong Kong who oversee sales in Europe and
Asia, respectively. The Company employs customer service representatives to
process purchase orders and respond to customer inquiries.
COMPETITION
The market for magnetics-based components for network applications is
highly competitive. The Company's LAN products have two principal competitors,
Pulse Engineering, Inc., (a subsidiary of Technitrol) and Bel Fuse, Inc. Each of
these competitors offers a broad product line, and each competes with levels of
manufacturing and engineering capabilities at least similar to the Company's. In
addition, numerous foreign-based firms with strong, low cost manufacturing
capabilities offer specific products with capabilities similar to the Company's
product lines. There is no dominant competitor in the telecommunications market
for magnetic components, and competition varies according to location and type
of interface. Among at least 30 competitors in the telecommunications market,
the Company competes most often with Pulse Engineering, Midcom, Vacuumschmelze
and UMEC.
The number of competitors and the characteristics of competition for the
Company'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 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 has competed 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 the Company'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. The Company conducts its manufacturing in two operations in the
People's Republic of China ("PRC") and one operation in the Philippines. The
activities of these manufacturing operations are coordinated and supported by
the Company's San Diego-based headquarters and, in times of peak production, may
be supplemented by third-party subcontractors in the PRC and in the Philippines.
All of the Company's manufacturing operations in the PRC and the Philippines are
certified pursuant to ISO 9002. The Company has direct product supervision over
the subcontractor operations. The related subcontractor 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 the Company'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 several existing sources.
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.
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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.
The Company is developing its magnetics-based products for use in emerging
communications markets, such as Fast Ethernet, GigaBit, FDDI/CDDI, ATM, xDSL,
ISDN and T1/E1 standards. The Company works closely with networking customers
and integrated circuits manufacturers with which the Company's products must
interface and participates as a member in the IEEE and ANSI Standards Committees
and the ADSL Forum. These efforts give the Company early access to new
technologies and new product plans, which the Company believes provide it with
timely information regarding the development of its products. Concurrent
engineering projects with key customers are also becoming an important factor in
developing new products and product enhancements. In 1997, 1996, and 1995, the
Company incurred design engineering and product development costs of $3,166,000,
$3,245,000 and $4,705,000, respectively.
FOREIGN OPERATIONS
Substantially all of the Company's manufacturing operations and
approximately 52% of its identifiable assets (excluding goodwill) are located in
the PRC and the Philippines. See also "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, fluctuating currency exchange rates, changes in
tariffs, taxes, duties and imposts, market forces, and changes in 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. For example, 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.
INTERNATIONAL SALES
Sales to customers outside of the United States comprised approximately 46%
of the Company's total sales in 1997, of which approximately 21%, 22%, and 1%
were made to customers in Asia, Europe, and North America (outside the United
States), respectively. Sales to customers outside the United States as a
percentage of total sales were approximately 48% in 1996, and 42% in 1995.
Additional geographic segment financial information is set forth in the Notes to
the Consolidated Financial Statements included elsewhere herein.
The Company has established sales offices in Hong Kong and London, England
to administer its international sales activities. The Company believes that LAN,
telecommunication and broadband systems, 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.
PROPERTIES
The Company's world-wide headquarters as well as the principal executive,
marketing, sales, product development, manufacturing process design, materials
procurement, managerial and manufacturing support are located in two leased
buildings in San Diego, California. The manufacturing operations for the Company
are located in two leased facilities in the PRC and one leased facility in the
Philippines.
43
<PAGE> 49
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 SEGMENT YEAR OF LEASE OPTIONS
LOCATION FOOTAGE PRODUCTS/USES EXPIRATION #/PERIOD
-------- ----------- ------------- ------------- --------
<S> <C> <C> <C> <C>
U.S.A.
San Diego, CA............... 40,000 Corporate Office 2002 2/2 years each
Valor administration, product
development
San Diego, CA............... 7,500 Valor warehouse, stockroom 2002 2/2 years each
Hong Kong
Kowloon..................... 2,000 Valor regional sales office 1999 None
People's Republic of China(1)
Factory 1................... 50,000 Valor signal processing, 1998 None
power transfer
Factory 2................... 95,000 Valor signal processing, 2000 None
power transfer
Philippines
Cabuyao..................... 39,000 Valor signal processing, 1999 1/5 years
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 278,500 square feet of space.
In addition to its manufacturing and distribution facilities, the Company
leases small sales offices elsewhere in the United States and the United
Kingdom. 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.
LEGAL PROCEEDINGS
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. In November 1996, the court approved a Stipulation of Settlement with
prejudice resulting in a release of all claims. The settlement amount, paid by
the Company in 1996, was $400,000.
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 the relevant
state agency, as the Company 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
or results of operations of the Company.
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 effect on the Company's consolidated financial
position or results of operations.
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<PAGE> 50
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data of the Company have been
derived from the unaudited interim financial statements and the audited annual
financial statements of the Company. This data should be read in conjunction
with Management's Discussion and Analysis of Financial Condition and Results of
Operations, the Interim Unaudited Financial Statements and Notes thereto, and
the Annual Audited Financial Statements and Notes thereto all included elsewhere
in this document.
SELECTED CONSOLIDATED FINANCIAL DATA
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FIRST QUARTER
(UNAUDITED) YEAR ENDED DECEMBER 31,
----------------- --------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
------- ------- ------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Income Statement Data Sales......................... $14,002 $22,393 $82,591 $ 92,533 $114,836 $103,239 $88,575
======= ======= ======= ======== ======== ======== =======
Income (loss) from:
Continuing operations............................. $(4,586) $ 188 $(3,133) $ (7,651) $ 6,124 $ 3,299 $10,890
Discontinued operations, net of income taxes...... -- -- -- (2,998) (2,178) 1,962 2,310
Disposal of discontinued operations, net of income
taxes........................................... -- -- -- (10,822) (2,000) -- --
Cumulative effect of change in accounting
principle, net of income taxes.................. (899) -- -- -- -- -- --
------- ------- ------- -------- -------- -------- -------
Net income (loss)........................... $(5,485) $ 188 $(3,133) $(21,471) $ 1,946 $ 5,261 $13,200
======= ======= ======= ======== ======== ======== =======
Diluted earnings (loss) per share:
Continuing operations............................. $ (0.52) $ 0.01 $ (0.38) $ (0.88) $ 0.56 $ 0.32 $ 1.09
Discontinued operations, net of income taxes...... -- -- -- (0.33) (0.20) 0.19 0.23
Disposal of discontinued operations, net of income
taxes........................................... -- -- -- (1.21) (0.18) -- --
Cumulative effect of change in accounting
principle, net of income taxes.................. (0.10) -- -- -- -- -- --
------- ------- ------- -------- -------- -------- -------
Net income (loss) per share................. $ (0.62) $ 0.01 $ (0.38) $ (2.42) $ 0.18 $ 0.51 $ 1.32
======= ======= ======= ======== ======== ======== =======
Weighted average number of common shares and common
stock equivalents................................. 8,973 8,973 8,973 8,973 10,904 10,187 10,023
======= ======= ======= ======== ======== ======== =======
Balance Sheet Data
Total Assets........................................ $74,936 $95,672 $82,954 $ 91,524 $117,699 $ 99,948 $89,648
======= ======= ======= ======== ======== ======== =======
Working Capital..................................... $31,095 $30,656 $33,813 $ 29,513 $ 53,690 $ 42,108 $38,055
======= ======= ======= ======== ======== ======== =======
Long-term debt, less current portion................ $ -- $ 1,250 $ 625 $ -- $ -- $ -- $ --
======= ======= ======= ======== ======== ======== =======
Stockholders' equity................................ $58,209 $67,314 $63,765 $ 67,150 $ 88,995 $ 77,563 $71,772
======= ======= ======= ======== ======== ======== =======
</TABLE>
45
<PAGE> 51
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following discussion should be read in conjunction with the Interim
Unaudited Financial Statements and Notes thereto and the Annual Audited
Financial Statements and Notes thereto included elsewhere in this document.
Amounts are expressed in thousands (except per share data).
RESULTS OF OPERATIONS
Three months ended March 28, 1998 compared to the three months ended March 29,
1997
Revenues declined by $8,391 or 37.5% to $14,002 in the first quarter ended
March 28, 1998 from $22,393 in the comparable quarter in 1997. This decrease
resulted from an approximate 31.9% decrease in average selling prices (including
the effects of changes in mix), coupled with an approximate 8.2% 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
average selling prices also resulted from a greater current-quarter mix of
lower-priced components for telecommunications markets. The 8.2% decrease in
unit volume generally resulted from softness in the overall market for local
area networking products coupled with the negative effects of customer
uncertainty related to the Company's previously announced consideration of
strategic alternatives (see also Trends, Uncertainties and Prospective
Information included elsewhere herein). The Company expects the declining trend
in revenues to continue through at least the second quarter of 1998.
In the quarter ended March 28, 1998, two of the Company's customers
individually accounted for more than 10% of the Company's sales, and
collectively these two customers accounted for 41.4% of total 1998 first quarter
sales. In the comparable quarter of the prior year, two of the Company's
customers, each individually accounting for more than 10% of the Company's
sales, collectively accounted for 28.7% of total sales. The sales percentage
from the Company's OEM customers has historically fluctuated and will likely
continue to fluctuate in future periods. The importance of these customers to
the Company, combined with competitive pressures, could result in the
negotiation of lower sales prices for these customers which could adversely
effect the Company's results of operations and financial condition. The loss of
one of these customers would have a material adverse affect on the Company's
results of operations and financial condition.
The Company's backlog at March 28, 1998, was approximately $8,600 compared
to approximately $17,500 at March 29, 1997. 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 quarter are
dependent upon obtaining "turns business" (i.e., orders received in a quarter
for shipment within the same quarter). Further, current trends are towards a
greater dependence on turns business as the Company's customers demand shorter
lead times and provide fewer long-term orders. Management expects this trend to
continue. If turns orders do not materialize, the Company's operating results
will be adversely affected. The Company's future performance on a
quarter-to-quarter and year-to-year basis will be materially affected by the
volume, mix and timing of orders received.
Cost of sales decreased $2,845 or 17.2% from $16,509 (73.7% of revenue) in
the first quarter of 1997 to $13,664 (97.6% of revenue) in the first quarter of
1998. The current quarter cost of sales include a $1,500 charge related to the
consolidation of the Company's two PRC factories into one factory. The decrease
in cost of sales of $2,845 results from decreased variable costs related to
decreased sales, and from a 26.5% reduction in overhead spending, offset
somewhat by the factory consolidation costs and by the negative effects of sales
price erosion. The increase in cost of sales as a percent of revenue results
from the factory consolidation costs, from the sales price erosion, and from the
effects of fixed costs spread over the lower volume, offset somewhat by the
decreased overhead spending.
Gross profit decreased $5,546 or 94.3% from $5,884 in the first quarter of
1997 to $338 in the first quarter in 1998. Gross profit as a percent of sales
decreased from 26.3% to 2.4%. The decrease in gross profit as a percent of sales
results from the factory consolidation costs, from the sales price erosion, and
from the effects of fixed costs spread over the lower volume, offset somewhat by
the decreased overhead spending.
46
<PAGE> 52
Operating expenses for the first quarter of 1998 decreased by $635 or by
11.6% from $5,476 (24.5% of sales) in the first quarter of 1997 to $4,841 (34.6%
of sales) in the first quarter of 1998. The decrease in operating expenses of
$635 relates primarily to decreased commissions resulting from the decreased
sales. The increase in operating expenses as a percent of revenues is a function
of sales, marketing, administration and product development costs that did not
decline in proportion to the decline in sales.
Other expenses for the first quarter of 1998 decreased $37 from $120 in the
comparable quarter of the prior year to $83 in the current quarter. This
decrease is primarily due to decreased interest expense associated with
decreased borrowings.
The Company's tax provision was zero for the first quarter of 1998 compared
to $100 for the comparable quarter of the prior year. The current quarter
provision is disproportionate to the related loss from operations because of
potential uncertainties related to the realization of the Company's net
operating loss and capital-loss carryforwards.
The significant decrease in gross profit offset slightly by the decreases
in operating expenses and other expenses resulted in a loss from operations for
the first quarter of 1998 of $4,586 or $0.52 per share. This compares to income
from operations of $188 or $0.01 per share in the comparable quarter of the
prior year. Including the cumulative effect of change in accounting principle in
the first quarter of 1998 of $899, the first quarter of 1998 net loss was $5,485
or $0.62 per share. This compares to net income of $188 or $0.01 per share in
the comparable quarter of the prior year.
1997 compared to 1996
Revenues declined by 10.7% from $92,533 in 1996 to $82,591 in 1997. This
decrease resulted from an approximate 17.0% decrease in average selling prices
(including the effects of changes in mix), offset somewhat by an approximate
4.7% increase 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 average selling prices also resulted from a greater
current year mix of lower-priced components for telecommunications markets. The
4.7% increase in unit volume resulted primarily from initial successes in the
telecommunications markets as a result of the Company's strategy to build on its
LAN magnetics expertise and to penetrate new telecommunications and broadband
markets.
Two of the Company's OEM customers collectively accounted for 31% and 30%
of the Company's sales in the current and prior year, respectively. The sales
percentage from the Company's OEM 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. The importance of these
customers to the Company, combined with competitive pressures, could result in
the negotiation of lower sales prices for these customers which could adversely
effect the Company's results of operations and financial condition. The loss of
one of these customers would have a material adverse affect on the Company's
results of operations and financial condition.
Cost of sales decreased $12,186 or 16.2% from $75,350 (81.4% of revenue) in
1996 to $63,164 (76.5% of revenue) in 1997. Gross profit increased $2,244 or
13.1% from $17,183 in 1996 to $19,427 in 1997. Gross profit as a percent of
sales increased from 18.6% to 23.5% in 1996 and 1997, respectively. These
improved margins resulted primarily from decreased labor and overhead costs
resulting from the 1996 replacement of China subcontract labor with direct
employees and facilities which more than offset the decreased sales prices.
Nevertheless, based on the Company's current overhead structure, if future
volumes decline, the actual cost per unit and gross profit could be materially
and adversely affected.
Operating expenses for 1997 decreased by $3,980 or 15.5% from $25,722
(27.8% of sales) in 1996 to $21,742 (26.3% of sales) in 1997. The prior year
included a $1,900 charge related to the restructuring of the Company's Asia
operations, a $650 charge related to the settlement and legal costs of a class
action lawsuit, and an $871 charge related to employee severance. Absent these
prior-year costs, operating expenses
47
<PAGE> 53
decreased $559 or 2.5% primarily as a result of decreased professional fees and
decreased administrative personnel, offset somewhat by increased sales and
marketing expenditures.
Other expenses increased $656 from $162 in 1996 to $818 in 1997 primarily
because of a $499 net loss on the liquidation of the VideoServer shares received
in connection with the Promptus divestiture.
The Company's tax provision (benefit) related to continuing operations was
$0 in 1997 compared to a $1,050 benefit in 1996. These tax amounts are
disproportionate to the related loss from continuing operations because the
Company's net operating loss carryforwards have been used to decrease the amount
of the permanently reinvested off-shore earnings that had not been taxed in
prior years.
The increase in gross profit and the decreases in operating expenses,
offset somewhat by the increase in other expenses and the decrease in tax
benefits, resulted in a loss from continuing operations in 1997 of $3,133 or
$0.38 per share. This compares to a loss from continuing operations of $7,651 or
$0.88 per share in 1996. Including the effects of discontinued operations in
1996, the net loss decreased $18,338 from $21,471 or $2.42 per share in the
prior year to $3,133 or $0.38 per share in 1997.
1996 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 attributed to certain
product quality issues that management believes have since been addressed.
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 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. This decrease was off set slightly by decreased labor
and 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
restructuring of the Company's Hong Kong management team.
Operating expenses increased by 1.3%, from $25,382 in 1995 to $25,722 in
1996. The 1996 operating expenses included 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 employee severance. 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.
The Company's tax provision (benefit) 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 resulted primarily from the 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 (at that time) to not repatriate
off-shore 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 on a diluted basis) in 1995.
48
<PAGE> 54
The Company discontinued three operations during the years 1995 and 1996.
Losses from discontinued operations were $2,998 ($.33 per share) in 1996
compared to $2,178 ($.20 per share on a diluted basis) in 1995. Estimated loss
on disposal of discontinued operations was $10,822 ($1.21 per share) in 1996 and
$2,000 ($.18 per share on a diluted basis) 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 on a diluted basis) in 1995.
TRENDS, UNCERTAINTIES AND PROSPECTIVE INFORMATION
The Company expects that revenues in its second quarter of 1998 will again
decline significantly, both on a sequential quarter and on a comparable-quarter
basis. Management believes that this continuing revenue decline results first
from an overall softening in demand for computer and networking products, from
adverse economic conditions in Asia, and from intensified competition and
resultant price declines in the LAN market. These adverse factors have been
further exacerbated by the uncertainty caused by the Company's previously
announced consideration of strategic alternatives, which announcement has caused
reluctance on the part of certain customers to place orders and to engage in new
design activities with the Company, at least until such time as the
consideration of strategic alternatives is finalized. Also in response to these
adverse trends and for other reasons, the Company continues to initiate ongoing
revenue enhancement and cost reduction programs. However, there can be no
assurance that revenues will increase, nor can there be any assurance that the
Company will be able to reduce costs in an amount sufficient to offset the
negative effects of the revenue decline.
Management believes that its future operating results will be influenced by
a number of factors including, but not limited to: general economic conditions;
the growth of the LAN and internetworking markets; the growth of broadband,
global services and high-speed, digital, network and telecommunications
applications; timely new product introductions; dependence on key OEM customers;
market acceptance of new networking, telecommunications and broadband
technologies; market acceptance of the Company'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 the Company to
identify, develop, manufacture, and market new products or to enhance existing
product offerings
The majority of the Company's sales continue to be derived from products
that support Ethernet applications. The Company's operating results could be
affected if there is an unexpected change in such technologies or if the Company
does not respond appropriately to expected changes. The Company supplies OEM's
with 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 the Company'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 period. 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. If anticipated orders do not develop, or changes in delivery
schedules or cancellation of orders occur, the Company's per-unit manufacturing
costs, expenditures, and inventory levels could be disproportionately high in
relation to sales. This could have an adverse effect on the Company's operating
results and liquidity for that quarterly period.
The Company's results and stock price have been, and may continue to be,
subject to significant volatility, particularly on a quarterly basis. A further
reduction in sales or increase in operating losses could have an immediate and
significant adverse affect on the trading price of the Company's Common Stock in
any given quarterly period.
Throughout the world, many existing computer programs use only two digits
to identify a year in the date field. These programs were designed and developed
without considering the impact of the upcoming change in
49
<PAGE> 55
the century. If not corrected, many computer applications could fail or create
erroneous results by or at the Year 2000. The Year 2000 issue affects virtually
all companies and organizations. During 1997, the Company completed a migration
of its information systems (for all functions of the Company) to new Enterprise
Resource Planning software (database and applications software) which fully
addresses the Year 2000 issue. Also, the Company's management has reviewed and
evaluated the potential impact of the Year 2000 issue on other application
software, firmware and hardware utilized by the Company and have concluded that
the Company has no additional or significant exposure (from an operational or a
financial perspective) related to this matter.
LIQUIDITY AND CAPITAL RESOURCES
For the quarter ended March 28, 1998, the Company satisfied its working
capital and capital expenditure requirements primarily through reductions to
inventory and accounts receivable levels. The Company's primary uses of these
available funds was to fund operating losses, to add equipment, and to reduce
current liabilities. For the year ended December 31, 1997, the Company satisfied
its working capital and capital expenditure requirements through net borrowings
from a related party, the proceeds from the disposal of Promptus, income tax
refunds and internally generated cash from operations (net income before
depreciation and amortization). The Company's primary uses of these available
funds was to add equipment, to increase inventories and to reduce current
liabilities. These sources and uses of cash are detailed in the Consolidated
Statements of Cash Flows included elsewhere in this document.
In September 1997, the Company received a $3.5 million Federal tax refund
resulting from the carryback of the 1996 U.S. operating loss and 1995 U.S.
capital loss to prior profitable periods. The Company is now in a Federal tax
loss carryforward position, and no further Federal tax refunds are available. As
of March 28, 1998, the Company has foreign tax refunds receivable totaling
$2,878 which the Company expects to collect in 1998. The Company's 1994 Federal
tax return is currently under audit, and the 1997 and prior years' Federal,
state and foreign tax returns are subject to audit. Such audits could result in
adjustments to the Company's tax position.
In February 1997, the Company obtained a $2,500 two-year term note from its
majority shareholder as more fully described in the Notes to Consolidated
Financial Statements included elsewhere in this document. The first payment on
this note of $625 plus interest was paid in August 1997, and the second payment
of $625 plus interest was paid in February 1998.
In April 1997, the Company completed the divestiture of its interest in
Promptus Communications, Inc. The Company received approximately $8.2 million in
cash, net of transaction costs, and 157,795 shares of VideoServer (Nasdaq: VSVR)
common stock. As of December 31, 1997 the Company had sold all of these shares
of VideoServer for total proceeds of approximately $1.8 million.
In the first quarter of 1998, the Company purchased capital equipment
totaling $509. These expenditures were primarily for production equipment. In
1997, the Company purchased capital equipment approximating $3.7 million. These
expenditures were primarily for production equipment and information systems.
The Company anticipates that capital expenditures will total about $3 to $5
million per year for the foreseeable future, depending on revenue growth rates,
if any. These capital expenditures are anticipated to be primarily for
automation equipment to further improve quality, increase capacity and increase
manufacturing labor efficiency. The Company's capital expenditure estimates
assume that future additional capacity needs, if any, are realized through
expansion in subcontractor relationships, requiring a relatively low level of
facility expenditures. The Company anticipates that most of its capital
expenditures for the foreseeable future will be funded through cash on hand or
cash generated from operations.
Management believes that funds on hand will be sufficient to finance
working capital needs, projected capital-expenditure requirements and debt
maturities at least through the next twelve months assuming that revenues and
costs achieve anticipated levels. However, if revenue levels are lower than
anticipated (see also Trends, Uncertainties and Prospective Information included
elsewhere herein), and if the Company's cost
50
<PAGE> 56
reduction efforts are not successful, then the Company may be forced to seek
additional financing. There can be no assurance that additional financing will
be available in amounts or at terms acceptable to the Company.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
There were no changes in or disagreements with accountants on accounting
and financial disclosure in the periods for which financial statements are
presented in this document.
INFORMATION REGARDING TECHNITROL, PARENT AND ACQUISITION
Technitrol, Inc. (NYSE:TNL) is a worldwide producer of electronic
components, electrical contacts and assemblies and other precision-engineered
parts and materials for manufacturers of networking, telecommunications and
computer equipment, electrical switching devices, and other products.
Acquisition is a corporation recently organized by Technitrol for the purpose of
effecting the Merger. It has no material assets and is not engaged in any
material activities, except in connection with the Merger and the transactions
contemplated thereby. Parent is a corporation organized by Technitrol for the
purpose of owning a number of legal entities through which Technitrol conducts
business, primarily in foreign countries. It has no material assets and is not
engaged in any material activities, except in connection with the Merger and the
transactions contemplated thereby.
The executive offices of Technitrol and Acquisition are located at 1210
Northbrook Drive, Suite 385, Trevose, PA 19053, and their telephone number is
(215) 355-2900. The executive offices of Parent are 3411 Silverside Road,
Wilmington, Delaware 19810 and its telephone number is (302) 478-8271.
Technitrol will finance the payment of the Merger Consideration from its
existing cash reserves and the proceeds of bank borrowings.
GTI had no material transactions, arrangements or contracts with Technitrol
prior to the execution of the Merger Agreement.
MARKET PRICE FOR GTI COMMON STOCK
The Common Stock is traded on the Nasdaq National Market under the symbol
"GGTI." On May 26, 1998, the last trading day preceding the public announcement
of the Merger Agreement, the high and low sales prices for the Common Stock as
reported by the Nasdaq National Market were $2.75 and $2.6875, respectively. Set
forth below is the range of the high and the low sales prices for the Common
Stock as reported by the Nasdaq National Market during each indicated fiscal
quarter. There is no trading market for the Preferred Stock.
<TABLE>
<CAPTION>
QUARTER ENDED HIGH LOW
------------- ------- ------
<S> <C> <C>
June 1998................................................. 4.5625 1.9375
March 1998................................................ 5.4375 3.5625
December 1997............................................. 6.625 4.5
September 1997............................................ 7.75 5.25
June 1997................................................. 6.75 4.75
March 1997................................................ 6.875 4.25
December 1996............................................. 7.25 4.375
September 1996............................................ 7.75 5.25
June 1996................................................. 9.5 7.25
March 1996................................................ 18.25 8.25
</TABLE>
GTI has not paid dividends on its Common Stock since 1982. GTI currently
intends to retain future earnings, if any, for use in its business and,
therefore, does not anticipate paying any cash dividends in the foreseeable
future.
51
<PAGE> 57
PRINCIPAL STOCKHOLDERS AND HOLDINGS OF
OFFICERS AND DIRECTORS
PRINCIPAL STOCKHOLDERS
To the knowledge of the Company, only the following persons owned of record
or beneficially more than five percent of the outstanding shares of Common Stock
and Preferred Stock as of June 1, 1998:
<TABLE>
<CAPTION>
AMOUNT AND NATURE PERCENT OF
NAME AND ADDRESS OF BENEFICIAL OF BENEFICIAL CLASS AS OF PERCENT OF
OWNER OR IDENTITY OF GROUP TITLE OF CLASS OWNERSHIP MARCH 1, 1998 TOTAL VOTE
------------------------------ -------------- ----------------- ------------- -----------
<S> <C> <C> <C> <C>
Telemetrix PLC(1)(2) Common Stock 4,544,300 49.3% 40.9%
Knaves Beech Estate, Loudwater, Preferred Stock 8,110 100.0% 17.1%
High Wycombe, Bucks, HP10 9QZ,
United Kingdom Total 57.9%
====
Dimensional Fund Common Stock 562,400 6.3% 5.2%
Advisors Inc.(3)
1299 Ocean Avenue, 11th Floor
Santa Monica, CA 90401
The TCW Group, Inc.(4) Common Stock 547,400 6.1% 5.0%
865 South Figueroa Street
Los Angeles, CA 90017
</TABLE>
- ---------------
(1) The Company has been advised that 47.1% of the capital stock of Telemetrix
PLC is owned by Dr. William P. Venter (a citizen of South Africa), related
family trusts and corporations and Allied Electronics Corporation Limited
("Allied"), a publicly held South African corporation of which Dr. Venter
owns more than a majority of the outstanding shares of capital stock. Dr.
Venter is also a director of Telemetrix PLC as are Messrs. Curtis and Robert
E. Venter. Dr. Venter is the father of Robert E. Venter. Trustees of such
trusts have agreed to cause the Telemetrix shares they beneficially own to
be voted in favor of the disposition by Telemetrix of its GTI capital stock
through the Merger, at a meeting of Telemetrix stockholders held to vote on
such matter. Allied and Dr. Venter disclaim beneficial ownership of any
outstanding securities of the Company.
(2) Of the shares of Common Stock owned by Telemetrix, 3,844,300 shares of
Common Stock are held by Telemetrix Investments Limited, a wholly owned
subsidiary of Telemetrix PLC, and 450,000 shares of Common Stock are held by
Telemetrix Overseas Investments BV, another wholly owned subsidiary of
Telemetrix PLC. The shares of Common Stock reflected herein also include
250,000 shares of Common Stock issuable upon the exercise of a warrant held
by Telemetrix to purchase shares of Common Stock at $6.00 per share. The
shares of Common Stock do not include 1,900,287 shares of Common Stock
issuable upon conversion of the Preferred Stock, which is presently
convertible. All of the Preferred Stock owned by Telemetrix is held by
Telemetrix Investments Limited, a wholly owned subsidiary of Telemetrix PLC.
Pursuant to an agreement with Technitrol, Telemetrix has called a meeting of
its stockholders for July 17, 1998 to vote upon the disposition of
Telemetrix's directly or indirectly owned shares of Common Stock and
Preferred Stock, by means of the Merger. Telemetrix's board of directors has
recommended that Telemetrix stockholders vote in favor of such disposition.
If holders of a majority of the shares of Telemetrix present in person or by
proxy at such meeting vote in favor of such disposition, Telemetrix has
agreed to vote its shares of Common and Preferred Stock for the Merger
Agreement.
(3) Dimensional Fund Advisors Inc. ("Dimensional"), a registered investment
advisor, is deemed to have beneficial ownership of these shares, all of
which shares are held in portfolios of DFA Investment Dimensions Group Inc.,
a registered open end investment company, or in a series of the DFA
Investment Trust Company, a Delaware business trust, or the DFA Group Trust
and DFA Participation Trust, investment vehicles for qualified employee
benefit plans, all of which Dimensional Fund Advisors Inc. serves as
investment manager. Dimensional disclaims beneficial ownership of all such
shares. This information is contained in a Schedule 13G filed by Dimensional
on February 10, 1998, and is the most recent information possessed by the
Company concerning Dimensional's interest in the Common Stock.
52
<PAGE> 58
(4) The TCW Group, Inc. may be deemed for the purposes of reporting under
Section 13(d) or 13(g) of the Securities Exchange Act to the beneficial
owner of the reported securities. The TCW Group, Inc. expressly disclaims
beneficial ownership of the securities, which are held by an investment
manager subsidiary of The TCW Group, Inc. for the benefit of such
subsidiary's clients. Robert A. Day may be deemed to control The TCW Group,
Inc. for the benefit of such subsidiary's clients. Mr. Day expressly
disclaims beneficial ownership of the securities. This information is
contained in a Schedule 13G filed by The TCW Group, Inc. on February 12,
1998, and is the most recent information possessed by the Company concerning
The TCW Group, Inc.'s interest in the Common Stock.
AGGREGATE STOCK OWNERSHIP OF DIRECTORS AND OFFICERS
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock as of March 1, 1998, by (i) each Director of the
Company and each of the Executive Officers of the Company and its subsidiaries,
and (ii) all Directors and Executive Officers of the Company as a group. The
table is based upon information supplied by the Directors and Executive
Officers. Unless otherwise indicated, each of the listed persons has sole voting
and sole investment power with respect to the shares beneficially owned, subject
to community property laws where applicable.
<TABLE>
<CAPTION>
AMOUNT AND NATURE PERCENT OF
NAME OF BENEFICIAL OWNER OR OF BENEFICIAL CLASS AS OF PERCENT OF
IDENTITY OF GROUP OWNERSHIP(1) JUNE 1, 1998 TOTAL VOTING POWER
--------------------------- ----------------- ------------ ------------------
<S> <C> <C> <C>
Timothy M. Curtis(2).............................. 10,000 * *
Edmund B. Fitzgerald.............................. 15,000 * *
Michael Hollabaugh................................ 12,500 * *
Albert J. Hugo-Martinez(3)........................ 88,500 * *
William Kopenhaver................................ 10,000 * *
Kenneth E. Maud................................... 60,000 * *
Bruce C. Myers(4)................................. 15,000 * *
William Staunton.................................. 10,000 * *
Robert E. Venter(2)............................... 12,000 * *
All directors and Executive Officers as a group (9
persons)........................................ 233,000 2.6% 2.2%
</TABLE>
- ---------------
* Less than one percent
(1) Includes only shares of Common Stock that such person has the right to
acquire under option plans which are exercisable within 60 days of June 1,
1998 unless otherwise indicated by footnote.
(2) Messrs. Curtis and Venter are members of the six member Board of Directors
of Telemetrix. Telemetrix beneficially owns 4,544,300 shares of Common Stock
and 8,110 shares of Preferred Stock. See also Note 1 to Principal
Stockholders.
(3) Includes 3,500 shares of Common Stock beneficially owned by Martinez Family
Trust.
(4) Includes 5,000 shares of Common Stock beneficially owned.
INDEPENDENT ACCOUNTANTS
Representatives of Arthur Andersen LLP, GTI's independent accountants, are
expected to be present at the Meeting, where they will be available to respond
to appropriate questions and have the opportunity to make a statement if they so
desire.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
As required by law, GTI files reports, proxy statements and other
information with the Commission. These reports, proxy statements and other
information contain additional information about GTI. You can inspect and copy
these materials at the public reference facilities maintained by the Commission
at
53
<PAGE> 59
Room 1024, 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549, and
at the following Regional Offices of the Commission: 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661; and 7 World Trade Center, Suite 1300, New
York, New York 10048. For further information concerning the Commission's public
reference rooms, you may call the Commission at 1-800-SEC-0330. Some of this
information may also be accessed on the World Wide Web through the Commission's
Internet address at "http://www.sec.gov."
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROXY STATEMENT.
GTI HAS NOT AUTHORIZED ANYONE TO GIVE ANY INFORMATION DIFFERENT FROM THE
INFORMATION CONTAINED IN THIS PROXY STATEMENT. THIS PROXY STATEMENT IS DATED
JULY , 1998. YOU SHOULD NOT ASSUME THAT THE INFORMATION CONTAINED IN THIS
PROXY STATEMENT IS ACCURATE AS OF ANY LATER DATE, AND THE MAILING OF THIS PROXY
STATEMENT TO STOCKHOLDERS SHALL NOT CREATE ANY IMPLICATION TO THE CONTRARY.
OTHER BUSINESS
GTI knows of no other matter to be presented at the Meeting. However, if
other matters should properly come before the Meeting, it is the intention of
the persons named in the enclosed proxy to vote the proxy with respect to such
matters in accordance with their best judgment.
BY ORDER OF THE BOARD OF DIRECTORS,
/s/ BRUCE C. MYERS
--------------------------------------
Bruce C. Myers
Secretary and Chief Financial Officer
San Diego, CA
July , 1998
54
<PAGE> 60
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
REFERENCE
PAGE
---------
<S> <C>
Condensed Consolidated Statement of Operations (unaudited)
for the three months ended March 28, 1998 and March 29,
1997...................................................... F-2
Condensed Consolidated Balance Sheets as of March 28, 1998
(unaudited) and December 31, 1997......................... F-3
Condensed Consolidated Statements of Cash Flows (unaudited)
for the three months ended March 28, 1998 and March 29,
1997...................................................... F-4
Notes to Condensed Consolidated Financial Statements........ F-5
Consent of Independent Public Accountants................... F-7
Report of Independent Public Accountants.................... F-8
Consolidated Financial Statements:
Consolidated Statements of Operations for the Years Ended
December 31, 1997, 1996
and 1995............................................... F-9
Consolidated Balance Sheets as of December 31, 1997 and
1996................................................... F-10
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 1997, 1996 and 1995........... F-11
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997, 1996
and 1995............................................... F-12
Notes to Consolidated Financial Statements................ F-13
Report of Independent Public Accountants on Schedule........ F-25
Schedule II: Valuation and Qualifying Accounts.............. F-26
</TABLE>
F-1
<PAGE> 61
GTI CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
-------------------------------
MARCH 28, 1998 MARCH 29, 1997
-------------- --------------
<S> <C> <C>
Sales....................................................... $14,002 $22,393
Cost of sales............................................... 13,664 16,509
------- -------
Gross profit................................................ 338 5,884
Operating expenses.......................................... 4,841 5,476
------- -------
Operating profit (loss)..................................... (4,503) 408
Other expenses.............................................. 83 120
------- -------
Income (loss) before income taxes and cumulative effect of
change in accounting principle............................ (4,586) 288
Provision (benefit) for income taxes........................ -- 100
------- -------
Income (loss) before cumulative effect of change in
accounting principle...................................... (4,586) 188
Cumulative effect of change in accounting principle, net of
income taxes.............................................. (899) --
------- -------
Net income (loss)........................................... $(5,485) $ 188
======= =======
Net earnings (loss) per share of common stock and common
stock equivalents:
Basic and diluted earnings (loss) per share before
cumulative effect of change in accounting principle....... $ (0.52) $ 0.01
Cumulative effect of change in accounting principle......... (0.10) --
------- -------
Basic and diluted earnings (loss) per share................. $ (0.62) $ 0.01
======= =======
Weighted average number of common shares and common stock
equivalents -- Basic and diluted EPS...................... 8,973 8,973
======= =======
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-2
<PAGE> 62
GTI CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
MARCH 28, 1998 DECEMBER 31, 1997
-------------- -----------------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 6,851 $ 6,967
Accounts receivable, net.................................. 9,541 12,061
Inventories, net.......................................... 19,537 21,794
Prepaid expenses and other................................ 6,108 6,002
------- -------
Total current assets.............................. 42,037 46,824
Property, plant and equipment, net.......................... 12,802 14,800
Goodwill and other assets................................... 20,097 21,330
------- -------
$74,936 $82,954
======= =======
Current liabilities:
Accounts payable, accrued and other liabilities........... $ 9,692 $11,761
Current portion of long-term debt due to affiliate........ 1,250 1,250
------- -------
Total current liabilities......................... 10,942 13,011
Long-term debt due to affiliate, net of current portion..... -- 625
Deferred income taxes and other liabilities................. 5,785 5,553
Stockholders' equity:
Preferred stock, $35.00 cumulative convertible, 8,110
shares issued and outstanding.......................... 8,110 8,110
Common stock, 8,973,475 shares issued and outstanding..... 359 359
Additional paid in capital................................ 44,082 44,082
Retained earnings......................................... 5,671 11,227
Cumulative translation adjustment......................... (13) (13)
------- -------
Total stockholders' equity........................ 58,209 63,765
------- -------
$74,936 $82,954
======= =======
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-3
<PAGE> 63
GTI CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
-------------------------------
MARCH 28, 1998 MARCH 29, 1997
-------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)......................................... $(5,485) $ 188
Adjustments:
Depreciation and amortization.......................... 1,284 1,311
Impairment of fixed assets due to plant closure........ 1,500 --
Cumulative change in accounting
principle -- organization costs....................... 899 --
Change in assets and liabilities:
Accounts receivable............................... 2,520 (359)
Inventories....................................... 2,257 (3,485)
Prepaid expenses and other........................ 51 (270)
Accounts payable, accrued and other liabilities... (2,169) (24)
Other............................................. 232 --
------- -------
Net cash flow provided (used) by continuing operations.... 1,089 (2,639)
Net operating cash flow provided by discontinued
operations............................................. -- 91
------- -------
Net cash provided (used) by operating activities............ 1,089 (2,548)
------- -------
Cash flows from investing activities:
Purchases of property, plant and equipment................ (509) (1,648)
------- -------
Net cash provided (used) by investing activities............ (509) (1,648)
------- -------
Cash flows from financing activities:
Proceeds from line of credit, net......................... -- 2,295
Proceeds (repayment) from long-term debt due to
affiliate.............................................. (625) 2,500
Preferred stock cash dividend............................. (71) --
------- -------
Net cash provided (used) by financing activities............ (696) 4,795
------- -------
Net change in cumulative translation adjustment............. -- 47
------- -------
Net increase (decrease) in cash and cash equivalents........ (116) 646
Cash and cash equivalents -- beginning of period............ 6,967 3,219
------- -------
Cash and cash equivalents -- end of period.................. $ 6,851 $ 3,865
======= =======
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-4
<PAGE> 64
GTI CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 1: BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
reflect the accounts of GTI Corporation (the "Company"), together with its
majority-owned subsidiaries. All significant intercompany transactions and
balances have been eliminated.
These unaudited condensed consolidated financial statements have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and disclosures normally included in annual
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to those rules and
regulations, although the Company believes that the disclosures made are
adequate to prevent the information from being misleading. These unaudited
condensed consolidated financial statements reflect, in the opinion of
management, all adjustments (which include only normal recurring adjustments)
necessary to fairly present the results of operations and financial position as
of the dates and for the periods presented. These unaudited condensed
consolidated financial statements should be read in conjunction with the audited
financial statements and related notes included in the Company's Form 10-K/A
filed with the Securities and Exchange Commission for the year ended December
31, 1997 and attached hereto as pages F-8 through F-26. The results for the
interim periods presented are not necessarily indicative of results to be
expected for a full year.
Certain prior-year amounts have been reclassified to conform to
current-year presentation.
NOTE 2: SUPPLEMENTAL STATEMENTS OF CASH FLOWS DISCLOSURE
Supplemental cash flow information (unaudited) for the three months ended
March 28, 1998 and March 29, 1997 are summarized as follows:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
-------------------------------
MARCH 28, 1998 MARCH 29, 1997
-------------- --------------
<S> <C> <C>
Interest paid..................................... $92 $ 92
=== ====
Income taxes paid................................. $43 $369
=== ====
</TABLE>
NOTE 3: INVENTORIES
Inventories, stated at the lower of cost (first in, first out) or market,
are summarized as follows:
<TABLE>
<CAPTION>
MARCH 28, 1998 DECEMBER 31, 1997
-------------- -----------------
(UNAUDITED)
<S> <C> <C>
Raw materials................................. $ 7,940 $ 9,881
Work in process............................... 2,027 2,871
Finished goods................................ 9,570 9,042
------- -------
Total inventories............................. $19,537 $21,794
======= =======
</TABLE>
NOTE 4: PLANT CLOSURE
In the quarter ended March 28, 1998, the Company decided to combine its two
factories in the People's Republic of China ("PRC") into one factory in the PRC.
Costs associated with the plant closure of $1,500 consist primarily of the
impairment of fixed assets which are now surplus to the operations of the
remaining PRC factory. These costs are included in cost of sales in the current
quarter.
F-5
<PAGE> 65
NOTE 5: CUMULATIVE EFFECT FROM CHANGE IN ACCOUNTING PRINCIPLE
In the quarter ended March 28, 1998, the Company implemented Statement of
Position 98-5, "Reporting on the Costs of Start-Up Activities" ("SOP 98-5"),
which requires organization costs to be expensed as incurred. Accordingly, in
the current quarter, the Company recorded a charge of $899 as a cumulative
effect from change in accounting principle for costs originally related to the
organization of the Company's operations in the PRC.
NOTE 6: NEW ACCOUNTING STANDARD
On January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130 "Reporting Comprehensive Income," which requires companies to
report all changes in equity during a period, except those resulting from
investment by owners and distribution to owners. The components for
comprehensive income are as follows:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
--------------------------------
MARCH 28, 1998 MARCH 29, 1997
-------------- --------------
<S> <C> <C>
Net income (loss)............................... $(5,485) $188
Translation adjustment.......................... -- 47
------- ----
Comprehensive income............................ $(5,485) $235
======= ====
</TABLE>
F-6
<PAGE> 66
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
of our reports included in this Proxy Statement into GTI Corporation's
previously filed Registration Statements File 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
June 29, 1998
F-7
<PAGE> 67
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, 1997
and 1996, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of GTI
Corporation and subsidiaries as of December 31, 1997 and 1996, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1997 in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
San Diego, California
February 25, 1998
F-8
<PAGE> 68
GTI CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
------- -------- --------
<S> <C> <C> <C>
Sales....................................................... $82,591 $ 92,533 $114,836
Cost of sales............................................... 63,164 75,350 82,729
------- -------- --------
Gross profit................................................ 19,427 17,183 32,107
Operating expenses.......................................... 21,742 25,722 25,382
------- -------- --------
Operating profit (loss)..................................... (2,315) (8,539) 6,725
Other (income) expense, net loss on sale of securities...... 499 -- --
Interest (income)......................................... (308) (91) (93)
Interest expense.......................................... 537 319 342
Other (income) expenses................................... 90 (66) (220)
------- -------- --------
Income (loss) from continuing operations before income taxes
and minority interest..................................... (3,133) (8,701) 6,696
Provision (benefit) for income taxes........................ -- (1,050) 506
Minority interest in earnings of subsidiaries............... -- -- 66
------- -------- --------
Income (loss) from continuing operations.................... (3,133) (7,651) 6,124
Loss from discontinued operations, net of income taxes of $0
and $515 for 1996 and 1995, respectively.................. -- 2,998 2,178
Loss on disposal of discontinued operations, net of income
taxes..................................................... -- 10,822 2,000
------- -------- --------
Net income (loss)........................................... $(3,133) $(21,471) $ 1,946
======= ======== ========
NET INCOME (LOSS) PER SHARE OF COMMON STOCK AND COMMON STOCK
EQUIVALENTS:
Basic EPS
Income (loss) from continuing operations.................. $ (0.38) $ (0.88) $ 0.65
Loss from discontinued operations......................... -- (0.33) (0.24)
Loss on disposal of discontinued operations............... -- (1.21) (0.22)
------- -------- --------
Net loss.......................................... $ (0.38) $ (2.42) $ 0.19
======= ======== ========
Weighted average number of common shares.................... 8,973 8,973 8,973
======= ======== ========
Diluted EPS
Income (loss) from continuing operations.................. $ (0.38) $ (0.88) $ 0.56
Loss from discontinued operations......................... -- (0.33) (0.20)
Loss on disposal of discontinued operations............... -- (1.21) (0.18)
------- -------- --------
Net loss.......................................... $ (0.38) $ (2.42) $ 0.18
======= ======== ========
Weighted average number of common shares and common stock
equivalents............................................... 8,973 8,973 10,904
======= ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-9
<PAGE> 69
GTI CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
------------------
1997 1996
------- -------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 6,967 $ 3,219
Accounts receivable, net of allowances of $339 and $201,
respectively........................................... 12,061 11,502
Inventories............................................... 21,794 18,551
Income tax receivable..................................... 2,926 3,435
Prepaid expenses and other................................ 2,786 3,367
Net assets of discontinued operations..................... 290 11,637
------- -------
Total current assets.............................. 46,824 51,711
Property, plant and equipment, net.......................... 14,800 15,974
Goodwill, less accumulated amortization of $4,907 and
$4,211, respectively, and other assets.................... 21,330 23,839
------- -------
TOTAL ASSETS................................................ $82,954 $91,524
======= =======
Current liabilities:
Accounts payable, accrued and other liabilities........... $11,761 $17,298
Short-term borrowings..................................... -- 4,900
Current portion of long-term debt due to affiliate........ 1,250 --
------- -------
Total current liabilities......................... 13,011 22,198
Long-term debt due to affiliate, net of current portion..... 625 --
Deferred income taxes and other liabilities................. 5,553 2,176
Stockholders' equity:
Preferred stock, 1,000,000 shares authorized, first
series, $35.00 cumulative convertible, 8,110 shares
issued and outstanding................................. 8,110 8,110
Common stock, par value $.04 per share, 12,000,000 shares
authorized, 8,973,475 shares issued and outstanding.... 359 359
Additional paid in capital................................ 44,082 44,082
Retained earnings......................................... 11,227 14,644
Cumulative translation adjustment......................... (13) (45)
------- -------
Total stockholders' equity........................ 63,765 67,150
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................. $82,954 $91,524
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-10
<PAGE> 70
GTI CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
THREE YEARS ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
FIRST SERIES ADDITIONAL CUMULATIVE TOTAL
PREFERRED COMMON PAID-IN RETAINED TREASURY TRANSLATION STOCKHOLDERS'
STOCK STOCK CAPITAL EARNINGS STOCK ADJUSTMENT EQUITY
------------ ------ ---------- -------- -------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994............ $8,110 $339 $34,567 $34,737 $(1,040) $850 $77,563
Net income............................ 1,946 1,946
Sale of 650,000 shares of Common
Stock, of which 250,000 shares were
issued from Treasury Stock, in
connection with the 72% acquisition
of Promptus Communications, Inc..... 16 8,655 1,040 9,711
Issuance of 114,125 shares of Common
Stock under stock option plans...... 4 860 864
Preferred Stock dividend.............. (284) (284)
Cumulative translation gain on sale of
assets of the E-Group............... (835) (835)
Translation adjustment................ 30 30
------ ---- ------- ------- ------- ---- -------
Balance, December 31, 1995............ 8,110 359 44,082 36,399 -- 45 88,995
Net loss.............................. (21,471) (21,471)
Preferred Stock dividend.............. (284) (284)
Translation adjustment................ (90) (90)
------ ---- ------- ------- ------- ---- -------
Balance, December 31, 1996............ 8,110 359 44,082 14,644 -- (45) 67,150
Net loss.............................. (3,133) (3,133)
Preferred Stock dividend.............. (284) (284)
Translation adjustment................ 32 32
------ ---- ------- ------- ------- ---- -------
Balance, December 31, 1997............ $8,110 $359 $44,082 $11,227 $ - $(13) $63,765
====== ==== ======= ======= ======= ==== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-11
<PAGE> 71
GTI CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)......................................... $(3,133) $(21,471) $ 1,946
Adjustments to reconcile net income (loss) to net cash
provided (used) by continuing operations:
Loss from discontinued operations...................... -- 2,998 2,178
Loss on disposal of discontinued operations............ -- 10,822 2,000
Depreciation and amortization.......................... 5,608 5,319 4,757
Loss on sale of securities............................. 499 -- --
Minority interest in earnings of subsidiary............ -- -- 66
Loss on disposal of equipment.......................... 202 -- 201
Deferred income taxes.................................. 719 1,289 (1,945)
Change in assets and liabilities:
Accounts receivable.................................. (559) 7,954 (680)
Inventories.......................................... (3,243) 10,694 (8,958)
Income taxes receivable.............................. 509 (3,435) --
Prepaid expenses and other........................... 2,115 (1,231) (326)
Accounts payable, accrued and other liabilities...... (5,537) (5,335) 3,246
Other non-current liabilities........................ 2,658 223 384
------- -------- --------
Net cash provided (used) by continuing operations......... (162) 7,827 2,869
Net operating cash used by discontinued operations........ (701) (2,898) (3,697)
------- -------- --------
Net cash provided (used) by operating activities............ (863) 4,929 (828)
------- -------- --------
Cash flows from investing activities:
Purchases of property, plant and equipment................ (3,661) (6,060) (4,509)
Capital expenditures of discontinued operations........... -- (978) (1,897)
Purchase of Promptus, net of cash acquired................ -- -- (19,089)
Proceeds from disposal of discontinued operations......... 11,549 2,412 11,750
------- -------- --------
Net cash provided (used) by investing activities............ 7,888 (4,626) (13,745)
------- -------- --------
Cash flows from financing activities:
Proceeds from (repayment of) credit facility, net......... (4,900) 666 2,579
Proceeds from long-term debt due to affiliate, net of
repayments............................................. 1,875 -- --
Issuance of common stock.................................. -- -- 10,575
Preferred stock cash dividend paid........................ (284) (213) (284)
------- -------- --------
Net cash provided (used) by financing activities............ (3,309) 453 12,870
------- -------- --------
Net change in cumulative translation adjustment............. 32 (90) 30
------- -------- --------
Net increase (decrease) in cash and cash equivalents........ 3,748 666 (1,673)
Cash and cash equivalents -- beginning of period............ 3,219 2,553 4,226
------- -------- --------
Cash and cash equivalents -- end of period.................. $ 6,967 $ 3,219 $ 2,553
======= ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-12
<PAGE> 72
GTI CORPORATION
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 and its majority-owned subsidiaries
(collectively the Company). All significant intercompany transactions and
balances 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 excess cash in debt instruments of financial
institutions with strong credit ratings and has established guidelines relative
to diversification and maturities that maintain safety and liquidity. The
Company has not experienced any significant 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. As of December 31, 1997, two large
customers represented approximately 46% of the Company's net accounts receivable
balance. A significant portion of the Company's manufacturing operations and its
inventories are concentrated in the People's Republic of China (the "PRC") and,
to a lesser extent, the Philippines.
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 of Cost over Net Assets of Acquired Companies -- The excess of
acquisition cost over the fair value of net assets (goodwill) of Valor
Electronics, Inc. ("Valor," the Company's primary operating subsidiary) 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 goodwill as reflected in the
Company's consolidated financial statements as of December 31, 1997. 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 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 $19,149 and $19,845 as of December 31,
1997 and 1996, respectively.
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.
F-13
<PAGE> 73
GTI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
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 net income 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.
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. Most of the Company's worldwide sales and
inventory and equipment purchases are denominated in U.S. dollars, and most of
the Company's cash is invested in U.S. dollars. As a result, the Company
typically does not enter into foreign exchange transactions to hedge balance
sheet and intercompany balances against movements in foreign exchange rates.
Net Income (Loss) Per Share of Common Stock -- In 1997 the Company adopted
Statement of Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings Per
Share," which sets forth the basis for the computation of "basic" earnings per
share and "dilutive" earnings per share. Basic EPS excludes dilution and is
computed by dividing income (loss) available to common stockholders by the
weighted-average number of common shares outstanding for the period. Diluted EPS
reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock or
resulted in the issuance of common stock that would then share in the earnings
of the entity. Diluted EPS is computed on the basis of the weighted average
shares of Common Stock outstanding plus 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. All EPS
amounts for prior years and quarters have been restated to conform to these new
standards, and the effect of the restatement was not significant.
Recent Accounting Pronouncements -- In 1997, the Financial Accounting
Standards Board issued Statements No. 130 ("SFAS 130"), "Reporting Comprehensive
Income" and No. 131 ("SFAS 131"), "Disclosures about Segments of an Enterprise
and Related Information." SFAS 130 requires that all items that are required to
be recognized under accounting standards as components of comprehensive income
be reported in a financial statement that is displayed with the same prominence
as other financial statements. The statement requires that an enterprise
classify items of other comprehensive income by their nature in a financial
statement and to display the accumulated balance of other comprehensive income
separately from retained earnings and additional paid-in capital in the equity
section of a statement of financial position. SFAS 131 establishes standards for
the way public business enterprises report information about operating segments
in annual financial statements and requires that those enterprises report
selected information about operating segments in interim financial statements.
Both SFAS 130 and 131 are effective for fiscal years beginning after December
15, 1997.
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
accounted for as a purchase and, accordingly, the purchase price was allocated
to the assets acquired and liabilities assumed based on their estimated
fair-market value. This allocation resulted in approximately $17.2 million of
costs in excess of the net assets acquired, which was being amortized over 20
years.
In March 1997, Promptus entered into an agreement (the "NAC Transaction")
to sell the net assets of its Network Access Card business ("NAC") for
approximately $20,000, consisting of $14,500 in cash and 223,881 shares of
VideoServer, Inc. Immediately after the closing of the NAC transaction, Promptus
purchased 100% of the Promptus shares held by the Company and repaid certain
indebtedness to the
F-14
<PAGE> 74
GTI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
Company for an aggregate of approximately $11,600, net of certain transaction
costs. The net proceeds to the Company at closing were $8,200 in cash and
approximately 158,000 shares of common stock of VideoServer, Inc. resulting in a
loss on disposal of approximately $10,800. As a result of this divestiture, the
operations prior to closing and the loss on disposal of Promptus are included
within discontinued operations. In 1997, the Company incurred an additional $499
loss resulting from the decline in value of VideoServer from the date of closing
to the date the Company was able to liquidate the VideoServer shares. This $499
loss was recorded in 1997 in continuing operations.
E-Group -- In December 1995, the Company completed the divestiture of
certain assets and liabilities of the E-Group for approximately $12,500,
resulting in a gain of approximately $3,000, net of income taxes of $2,500. The
Company received $11,750 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 $4,100, consisting of $2,200 in cash and a $1,900
promissory note due in equal installments over six years, resulting in a loss on
disposal of approximately $5,000, net of income tax benefits of approximately
$1,300. This loss was accrued in 1995.
The sales of the E-Group, Esco and Promptus were made pursuant to formal
divestiture plans 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 during the period of
the Company's ownership are summarized as follows:
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Sales....................................................... $17,735 $54,771
------- -------
Loss before tax provision and minority interest income...... (3,530) (2,209)
Income tax provision........................................ -- 515
Minority interest income.................................... 532 546
------- -------
Net loss.................................................... $(2,998) $(2,178)
======= =======
Basic earnings (loss) per share............................. $ (0.33) $ (0.24)
======= =======
</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.
F-15
<PAGE> 75
GTI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
NOTE 3: SUPPLEMENTAL STATEMENTS OF CASH FLOW DISCLOSURE
Supplemental cash flow information are summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ -------
<S> <C> <C> <C>
Interest paid including interest related to discontinued
operations............................................ $ 440 $ 376 $ 1,207
====== ====== =======
Income taxes paid....................................... $1,085 $2,636 $ 1,559
====== ====== =======
Business acquisition, net of cash acquired:
Working capital, other than cash acquired............. $ -- $ -- $ 644
Plant and capital..................................... 1,314
Purchase price in excess of the net assets acquired... 17,230
Other assets.......................................... 1,183
Non-current 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 $11,750 to repay the outstanding
principal and interest on a bank term loan of $4,100 and repaid the remaining
$7,650 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:
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Raw materials............................................ $ 9,881 $ 7,441
Work in process.......................................... 2,871 3,748
Finished goods........................................... 9,042 7,362
------- -------
Total inventories........................................ $21,794 $18,551
======= =======
</TABLE>
Property, plant and equipment consisted of the following:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Land................................................... $ 12 $ 12
Buildings and improvements............................. 5,647 4,683
Machinery and equipment................................ 22,177 20,549
Furniture and fixtures................................. 4,055 3,429
-------- --------
Property, plant and equipment, gross................... 31,891 28,673
Less: accumulated depreciation......................... (17,091) (12,699)
-------- --------
Property, plant and equipment, net..................... $ 14,800 $ 15,974
======== ========
</TABLE>
F-16
<PAGE> 76
GTI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
Accounts payable and accrued liabilities consisted of the following:
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Accounts Payable......................................... $ 5,032 $ 6,700
Employee compensation.................................... 3,045 3,810
Federal, local, foreign and other taxes.................. -- 2,759
Other accrued liabilities................................ 3,684 3,782
Accrued severance costs.................................. -- 247
------- -------
$11,761 $17,298
======= =======
</TABLE>
NOTE 5: CREDIT AGREEMENTS AND RELATED-PARTY NOTE
Through December 1997 the Company had a line of credit agreement with a
bank. Interest on outstanding borrowings accrued at prime plus one and one
quarter percent, and the line was secured by substantially all the Company's
domestic assets. The line of credit agreement expired in December 1997, and as
of December 31, 1997 and 1996, there were zero and $4.9 million, respectively,
outstanding under this arrangement.
In February 1998, the Company negotiated a new line of credit, subject to
activation. However, based on recent financial performance (see Note 13), it is
unlikely that this line will be activated.
In February 1997, the Company entered into a Note Purchase Agreement (the
"Note") with Telemetrix PLC ("Telemetrix," the Company's majority shareholder).
By the terms of the Note, Telemetrix loaned $2,500 to the Company with principal
to be repaid 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% (12.5% as of December 31, 1997). The loan is secured by a
subordinated security interest in all of the Company's assets. As of December
31, 1997, the outstanding balance on this Note was $1,875. Also, by the terms of
the Note and related agreements, the Company granted Telemetrix a warrant to
acquire 250,000 shares of GTI common stock at an exercise price of $6 per share.
The warrant expires 30 days after the Note is repaid in full.
NOTE 6: INCOME TAXES
The components of the provision (benefit) for income taxes for the years
ended December 31 are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- ------
<S> <C> <C> <C>
Federal
current.............................................. $ -- $(2,988) $ (358)
deferred............................................. 1,998 1,264 (762)
Foreign
current.............................................. (1,998) 2,031 1,714
deferred............................................. -- (1,156) 71
State and local........................................ -- (201) (159)
------- ------- ------
$ -- $(1,050) $ 506
======= ======= ======
</TABLE>
F-17
<PAGE> 77
GTI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
The components of the income tax provision (benefit) were based on the
following sources of pre-tax income (loss):
<TABLE>
<CAPTION>
1997 1996 1995
------- -------- -------
<S> <C> <C> <C>
Total United States.................................. $(9,129) $(13,341) $(2,289)
Total Foreign........................................ 5,996 4,640 8,985
------- -------- -------
$(3,133) $ (8,701) $ 6,696
======= ======== =======
</TABLE>
The components of the net deferred income tax asset were as follows:
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
Accelerated depreciation.................................... $ 30 $ 51
Compensation................................................ 99 532
Reserves.................................................... 745 674
NOL, capital loss, AMT credit carryovers.................... 5,261 866
Miscellaneous accrued expenses.............................. 121 --
Other....................................................... 423 90
Valuation reserve -- capital loss........................... (643) (651)
------ ------
$6,036 $1,562
====== ======
</TABLE>
The components of the net deferred income tax liabilities were as follows:
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
Accelerated depreciation of foreign assets.................. $ -- $ --
Earnings not permanently reinvested......................... 6,472 --
------ ------
$6,472 $ --
====== ======
</TABLE>
A reconciliation from the Federal income tax provision at the statutory
rate to the effective rate is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Statutory Federal tax on income before income taxes... $(1,065) $(2,958) $ 1,719
Effect of foreign losses with no tax benefit.......... -- -- --
State income taxes, net of federal benefit............ -- (201) (191)
Differences between US and foreign tax rates.......... -- 986 (1,050)
Foreign tax refund.................................... (1,998) -- --
Earnings not permanently reinvested................... 4,675 -- --
Non-deductible expenses............................... 258 748 28
Benefit of NOL carryforward........................... (1,870) -- --
Other................................................. -- 375 --
------- ------- -------
$ -- $(1,050) $ 506
======= ======= =======
</TABLE>
Income tax provision is not recorded for US Federal income taxes on a
portion of 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 US taxes have not been provided are approximately
$37,300, which would result in a related tax liability of $9,300, net of
estimated foreign tax credits of $6,700, if such earnings were repatriated.
F-18
<PAGE> 78
GTI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
NOTE 7: COMMITMENTS AND CONTINGENCIES
Lease Commitments: The Company leases machinery and equipment, computer
equipment, office furniture and leased facilities under various operating
leases. These leases 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 these
operating lease agreements are as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
- ------------
<S> <C>
1998........................................................ $2,366
1999........................................................ 2,191
2000........................................................ 1,290
2001........................................................ 824
2002........................................................ 640
Thereafter.................................................. --
------
$7,311
======
</TABLE>
Rental expense amounted to $3,468, $2,879 and $3,280 in the years ended
December 31, 1997, 1996 and 1995, 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. In November 1996, the court approved a
Stipulation of Settlement with prejudice resulting in a release of all claims.
The settlement amount, paid by the Company in 1996, was $400.
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 effect on the Company's consolidated financial
position or results of operations.
Change of Control Contingencies: In February 1998, the Company retained
investment bankers to assist the Company regarding the identification and
investigation of strategic alternatives that might be available to the Company,
including a possible sale of the Company. No such strategic transaction has been
negotiated to date, and there can be no assurance that any such strategic
transactions will be consummated. If a sale of the Company occurs, there can be
no assurance regarding the price per share to be received by the Company's
shareholders. Also, if a change of control of GTI occurs, the Company will owe
stay-on bonuses to certain employees aggregating approximately $1,200 and a
success fee to the investment bankers, depending on the price of the strategic
transaction, if any.
NOTE 8: 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 on this
preferred stock at a rate of $35.00 per share per year and are payable
quarterly. The preferred shares have a liquidation preference of $1,000 per
share and have a par value of $1.00 per share.
F-19
<PAGE> 79
GTI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
NOTE 9: EARNINGS PER SHARE
The following represents a reconciliation of the numerator and the
denominator of the Basic EPS computation to the numerator and denominator of the
Diluted EPS computation:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE YEAR ENDED FOR THE YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996 DECEMBER 31, 1995
--------------------------------- ---------------------------------- --------------------------
INCOME PER SHARE INCOME PER SHARE INCOME PER SHARE
(LOSS) SHARES AMOUNT (LOSS) SHARES AMOUNT (LOSS) SHARES AMOUNT
------- ------------ --------- -------- ------------ --------- ------ ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BASIC EARNINGS (LOSS) PER
SHARE:
Net loss.................... $(3,133) $(21,471) $1,946
Less: preferred stock
dividend.................. (284) (284) (284)
------- -------- ------
Loss available for common
stockholders.............. (3,417) 8,973 (21,755) 8,973 1,662 8,973
Basic income (loss) per
share..................... $(0.38) $(2.42) $0.19
====== ====== =====
DILUTIVE EARNINGS (LOSS) PER
SHARE:
Assumed exercise of stock
options................... -- antidilutive -- antidilutive 31
Convertible preferred
stock..................... -- antidilutive -- antidilutive 284 1,900
------- ------------ -------- ------------ ------ ------
Loss available for common
stockholders.............. $(3,417) 8,973 $(21,755) 8,973 $1,946 10,904
======= ============ ======== ============ ====== ======
Dilutive income (loss) per
share..................... $(0.38) $(2.42) $0.18
====== ====== =====
</TABLE>
Implementation of SFAS 128 had no significant impact to the Company's
computation of Dilutive EPS relative to its historical calculation of EPS under
APB Opinion No. 15.
NOTE 10: 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%, and they generally fully vest upon a change of control of GTI. Non-employee
director options are exercisable in full at the date of grant. The options have
terms of five to ten years.
The following summarizes stock options activity for 1997:
<TABLE>
<CAPTION>
EXERCISE
SHARES PRICE RANGE
---------- --------------
<S> <C> <C>
Outstanding as of December 31, 1996...................... 826,250 $5.25 - $35.00
Granted.................................................. 461,750 $5.50 - $ 6.38
Exercised................................................ -- --
Forfeited................................................ (261,625) $5.25 - $35.00
---------- --------------
Outstanding as of December 31, 1997...................... 1,026,375 $5.25 - $28.75
========== --------------
Number of shares exercisable as of December 31, 1997..... 246,561 $5.25 - $28.75
========== ==============
Weighted average fair value of options granted........... $ 5.69
==========
</TABLE>
The outstanding options expire at various dates through December 2007. As
of December 31, 1997, 147,925 shares were available for future grant under all
plans.
F-20
<PAGE> 80
GTI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
Additionally, as of December 31, 1997, a warrant was outstanding for
250,000 shares of common stock at an exercise price of $6 per share. This
warrant, issued to an affiliated party, expires 30 days after the note payable
to said affiliated party is paid in full. The anticipated retirement of said
note is February 1999.
As permissible under Statement of Financial Accounting Standards No. 123,
the Company accounts for stock options granted as per the methodology prescribed
under Accounting Principles Board Opinion No. 25, which recognizes compensation
cost based upon the intrinsic value of the equity award. Accordingly, no
compensation expense was recognized in the consolidated statement of operations
for any equity awards granted during 1997, 1996 and 1995.
The following table represents pro forma net income (loss) and pro forma
earnings (loss) per share had the Company elected to account for equity awards
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 the years ended December 31, 1997, 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 option 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>
1997 1996 1995
------- -------- ------
<S> <C> <C> <C>
Net income (loss) as reported......................... $(3,133) $(21,471) $1,946
======= ======== ======
Pro forma net income (loss)........................... $(3,470) $(21,777) $1,838
======= ======== ======
Basic EPS as reported................................. $ (0.38) $ (2.42) $ 0.19
======= ======== ======
Pro forma Basic EPS................................... $ (0.42) $ (2.46) $ 0.17
======= ======== ======
Diluted EPS as reported............................... $ (0.38) $ (2.42) $ 0.18
======= ======== ======
Proforma Diluted EPS.................................. $ (0.42) $ (2.46) $ 0.17
======= ======== ======
</TABLE>
NOTE 11: EMPLOYEE BENEFIT PLANS
The Company has a 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. The plan is available to substantially all domestic employees.
Under the plan, participating employees may defer between 1% and 15% of their
pre-tax compensation. The Company contributes 50% for each dollar contributed
per employee up to a maximum 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 which are governed by the laws in the
country in which they are established. Company contributions under all plans
were $81, $120 and $145 in 1997, 1996 and 1995, respectively. There were no
amounts paid relating to the discretionary employer profit sharing contribution
in any of these years.
The Company had no other programs that required payment of post-retirement
benefits to current or retired employees.
NOTE 12: SEGMENT INFORMATION AND MAJOR CUSTOMERS
In the year ended December 31, 1997, two customers represented 18% and 13%,
respectively, of the Company's consolidated sales. In the year ended December
31, 1996, two customers represented 20% and 10%, respectively, of the Company's
consolidated sales. In the year ended December 31, 1995, two customers
represented 16% and 14%, respectively, of the Company's consolidated sales.
F-21
<PAGE> 81
GTI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
Through its Valor subsidiary, the Company operates in one industry segment.
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 OEMs for local area networks and wide area
networks.
The Company operates predominately in the Unites States, the Peoples'
Republic of China, the Philippines, Hong Kong and the United Kingdom. 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 assets in North America consist
of operating assets and goodwill (net of amortization).
GEOGRAPHIC SEGMENTS
<TABLE>
<CAPTION>
ADJUSTMENTS
NORTH AND
AMERICA ASIA EUROPE ELIMINATIONS CONSOLIDATED
-------- -------- ------- ------------ ------------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1997
Sales to unaffiliated customers............ $ 46,044 $ 18,584 $17,963 $ -- $ 82,591
Transfers between geographic segments...... -- 57,611 -- (57,611) --
-------- -------- ------- -------- --------
Total Sales...................... $ 46,044 $ 76,195 $17,963 $(57,611) $ 82,591
======== ======== ======= ======== ========
Income (loss) before income taxes and
minority interest........................ $(12,180) $ 8,638 $ 409 $ -- $ (3,133)
======== ======== ======= ======== ========
Identifiable Assets........................ $ 32,705 $ 42,854 $ 7,395 $ -- $ 82,954
======== ======== ======= ======== ========
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
======== ======== ======= ======== ========
</TABLE>
Export sales, principally to customers in Canada and Latin America, were
$1,109, $908 and $3,048 in the years ended December 31, 1997, 1996 and 1995,
respectively. These export sales are included in the North America amounts
above.
NOTE 13: SUBSEQUENT EVENTS
The Company's revenues in the first quarter of 1998 were $14,002
(unaudited) compared to $22,393 (unaudited) in the comparable quarter of 1997,
and the first quarter 1998 loss was about $5,700 (unaudited,
F-22
<PAGE> 82
GTI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
including a restructuring charge of about $1,500, subject to finalization, and
the cumulative effect of an accounting change of $899). In response to this
adverse trend and for other reasons, the Company has initiated ongoing revenue
enhancement and cost reduction programs. However, there can be no assurance that
revenues will increase, nor can there be any assurance that the Company will be
able to reduce costs in an amount sufficient to offset the negative effects of
the revenue decline. While management believes the Company has sufficient
financial resources, if revenue levels continue to decline, then the Company may
be forced to seek additional financing. There can be no assurance that
additional financing will be available in amounts or at terms acceptable to the
Company.
In January 1998, the Company retained investment bankers to assist the
Company regarding the identification and investigation of strategic alternatives
that might be available to the Company, including a possible sale of the
Company. No such strategic transaction has been negotiated to date, and there
can be no assurance that any such strategic transaction will be consummated. If
a sale of the Company occurs in the short term, it is likely that the sales
price to be received by the Company's shareholders will be less than the
historical book value reflected in the accompanying December 31, 1997 balance
sheet.
F-23
<PAGE> 83
GTI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
NOTE 14: QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The Company's condensed quarterly results of operations for the years ended
December 31, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL
------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1997
Sales...................................... $22,393 $23,011 $19,130 $ 18,057 $ 82,591
------- ------- ------- -------- --------
Gross Profit............................... 5,884 6,503 3,845 3,195 19,427
------- ------- ------- -------- --------
Income (loss) from continuing operations
before taxes............................. 288 (112) (1,772) (1,537) (3,133)
Provision (benefit) from income taxes...... 100 177 (277) -- --
------- ------- ------- -------- --------
Income (loss) from continuing operations... 188 (289) (1,495) (1,537) (3,133)
Income (loss) from discontinued operations,
net of income taxes...................... -- -- -- -- --
Loss on disposal of discontinued
operations, net of income taxes.......... -- -- -- -- --
------- ------- ------- -------- --------
Net income (loss).......................... $ 188 $ (289) $(1,495) $ (1,537) $ (3,133)
======= ======= ======= ======== ========
BASIC AND DILUTED EARNINGS (LOSS) PER
SHARE:
Income (loss) from continuing operations... $ 0.01 $ (0.04) $ (0.17) $ (0.18) $ (0.38)
Income (loss) from discontinued
operations............................... -- -- -- -- --
Loss on disposal of discontinued
operations............................... -- -- -- -- --
------- ------- ------- -------- --------
Net income (loss) per share................ $ 0.01 $ (0.04) $ (0.17) $ (0.18) $ (0.38)
======= ======= ======= ======== ========
YEAR ENDED DECEMBER 31, 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 taxes............................. (855) (2,935) (4,291) (620) (8,701)
Provision (benefit) from 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 income (loss).......................... $(1,638) $(2,765) $(5,127) $(11,941) $(21,471)
======= ======= ======= ======== ========
BASIC AND DILUTED EARNINGS (LOSS) PER
SHARE:
Income (loss) from continuing operations... $ (0.07) (0.26) (0.47) (0.08) $ (0.88)
Income (loss) from discontinued
operations............................... (0.12) (0.05) (0.10) (0.06) (0.33)
Loss on disposal of discontinued
operations............................... -- -- -- (1.21) (1.21)
------- ------- ------- -------- --------
Net income (loss) per share................ $ (0.19) $ (0.31) $ (0.57) $ (1.35) $ (2.42)
======= ======= ======= ======== ========
</TABLE>
F-24
<PAGE> 84
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULES
To GTI Corporation:
We have audited in accordance with generally accepted auditing standards
the consolidated financial statements included in this Form 10K, and have issued
our report thereon dated February 25, 1998. 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
February 25, 1998
F-25
<PAGE> 85
GTI CORPORATION
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO
BEGINNING OF COSTS AND ACCOUNTS BALANCE AT
DESCRIPTION PERIOD EXPENSES WRITTEN OFF END OF YEAR
----------- ------------ ---------- ----------- -----------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts:
Year ended December 31, 1997....................... $201 $168 $(30) $339
Year ended December 31, 1996....................... $225 $ 60 $(84) $201
Year ended December 31, 1995....................... $143 $ 90 $ (8) $225
</TABLE>
F-26
<PAGE> 86
APPENDIX A
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (this "Agreement") dated as of May 26,
1998 is by and among GTI CORPORATION, a Delaware corporation ("Company"),
TECHNITROL INTERNATIONAL, INC., a Delaware corporation ("Parent"), and
TECHNITROL ACQUISITION, INC., a Delaware corporation and a wholly owned
subsidiary of Parent ("Acquisition").
WHEREAS the Boards of Directors of the Company, Parent and Acquisition have
each (i) determined that the Merger (as defined in Section 1.1) is fair and in
the best interests of their respective stockholders and (ii) approved the Merger
in accordance with this Agreement.
NOW THEREFORE in consideration of the premises and the representations,
warranties, covenants and agreements herein contained and intending to be
legally bound hereby the Company, Parent and Acquisition hereby agree as
follows:
ARTICLE 1
THE MERGER
SECTION 1.1. The Merger. At the Effective Time (as defined in Section 1.2)
and upon the terms and subject to the conditions of this Agreement and in
accordance with the Delaware General Corporation Law (the "DGCL"), Acquisition
shall be merged with and into the Company (the "Merger"). Following the Merger,
the Company shall continue as the surviving corporation (the "Surviving
Corporation") and the separate corporate existence of Acquisition shall cease.
SECTION 1.2. Effective Time. Subject to the terms and conditions set forth
in this Agreement, a Certificate of Merger (the "Merger Certificate") shall be
duly executed and acknowledged by Acquisition and the Company and thereafter
delivered to the Secretary of State of the State of Delaware for filing pursuant
to the DGCL on the Closing Date (as defined in Section 1.3). The Merger shall
become effective at such time as a properly executed and certified copy of the
Merger Certificate is duly filed with the Secretary of State of the State of
Delaware in accordance with the DGCL or such later time as Parent and the
Company may agree upon and set forth in the Merger Certificate (the time the
Merger becomes effective being referred to herein as the "Effective Time").
SECTION 1.3. Closing of the Merger. The closing of the Merger (the
"Closing") will take place at a time and on a date (the "Closing Date") to be
specified by the parties, which shall be no later than the second business day
after satisfaction or waiver of the latest to occur of the conditions set forth
in Section 5.1, 5.2 and 5.3 at the offices of Stradley, Ronon, Stevens & Young,
LLP, 2005 Market Street, Philadelphia, Pennsylvania 19103 unless another time,
date or place is agreed to in writing by the parties hereto.
SECTION 1.4. Effects of the Merger. The Merger shall have the effects set
forth in this Agreement and in the applicable provisions of in the DGCL. Without
limiting the generality of the foregoing and subject thereto, at the Effective
Time all the properties, rights, privileges, powers and franchises of the
Company and Acquisition shall vest in the Surviving Corporation and all debts,
liabilities and duties of the Company and Acquisition shall become the debts,
liabilities and duties of the Surviving Corporation.
SECTION 1.5. Certificate of Incorporation and Bylaws. The Certificate of
Incorporation of Acquisition in effect at the Effective Time shall be the
Certificate of Incorporation of the Surviving Corporation until amended in
accordance with applicable law. The Bylaws of Acquisition in effect at the
Effective Time shall be the Bylaws of the Surviving Corporation until amended in
accordance with applicable law.
SECTION 1.6. Directors. The directors of Acquisition at the Effective Time
shall be the initial directors of the Surviving Corporation, each to hold office
in accordance with the Certificate of Incorporation and Bylaws of the Surviving
Corporation until such director's successor is duly elected or appointed and
qualified.
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<PAGE> 87
SECTION 1.7. Officers. The officers of Acquisition at the Effective Time
shall be the initial officers of the Surviving Corporation, each to hold office
in accordance with the Certificate of Incorporation and Bylaws of the Surviving
Corporation until such officer's successor is duly elected or appointed and
qualified.
SECTION 1.8. Conversion of Shares.
(a) At the Effective Time, each share of the Company's First Series
Cumulative Convertible Preferred Stock, par value $1.00 per share (individually
a "Preferred Share" and collectively the "Preferred Shares"), issued and
outstanding immediately prior to the Effective Time (other than (i) Preferred
Shares held in the Company's treasury or by any of the Company's subsidiaries
and (ii) Preferred Shares held by Parent, Acquisition or any other subsidiary of
Parent) shall, by virtue of the Merger and without any action on the part of
Parent, Acquisition, the Company, or the holder thereof, be converted into and
shall become the right to receive the product of (i) 234.314 multiplied by (ii)
$3.10 in cash, without interest (the "Preferred Merger Consideration").
Notwithstanding the foregoing, if between the date of this Agreement and the
Effective Time, the Preferred Shares shall have been changed into a different
number of shares or a different class by reason of any stock dividend,
subdivision, reclassification, recapitalization, split, combination or exchange
of shares then the Merger Consideration contemplated by the Merger shall be
correspondingly adjusted to reflect such stock dividend, subdivision,
reclassification, recapitalization, split, combination or exchange of shares.
(b) At the Effective Time, each share of the Company's common stock, par
value $0.04 per share (individually a "Common Share" and collectively the
"Common Shares"; together with the Preferred Shares, the "Shares"), issued and
outstanding at the Effective Time, (other than (i) Common Shares held in the
Company's treasury or by any of the Company's subsidiaries and (ii) Common
Shares held by Parent, Acquisition or any other subsidiary of Parent) shall, by
virtue of the Merger and without any action on the part of Parent, Acquisition,
the Company or the holder thereof, be converted into and shall become the right
to receive $3.10 in cash, without interest (the "Common Merger Consideration,"
which together with the Preferred Merger Consideration, the "Merger
Consideration"). Notwithstanding the foregoing, if between the date of this
Agreement and the Effective Time, the Common Shares shall have been changed into
a different number of shares or a different class by reason of any stock
dividend, subdivision, reclassification, recapitalization, split, combination or
exchange of shares then the Merger Consideration contemplated by the Merger
shall be correspondingly adjusted to reflect such stock dividend, subdivision,
reclassification, recapitalization, split, combination or exchange of shares.
(c) At the Effective Time, each outstanding share of the common stock, par
value $0.01 per share, of Acquisition shall be converted into one share of
common stock, par value $0.04 per share, of the Surviving Corporation.
(d) At the Effective Time, each Common Share held in the treasury of the
Company and each Common Share held by Parent, Acquisition or any subsidiary of
Parent, Acquisition or the Company immediately prior to the Effective Time
shall, by virtue of the Merger and without any action on the part of
Acquisition, the Company or the holder thereof, be canceled, retired and cease
to exist and no payment shall be made with respect thereto.
SECTION 1.9. Shares of Dissenting Holders.
(a) Notwithstanding anything to the contrary contained in this Agreement,
any holder of Shares with respect to which dissenters' rights, if any, are
granted by reason of the Merger under the DGCL and who does not vote in favor of
or consent in writing to the Merger and who otherwise complies with the DGCL
("Company Dissenting Shares") shall not be entitled to receive any Merger
Consideration pursuant to Section 1.8 (a) or (b), but shall be entitled to
receive payment of the appraised value of such shares held by such holder in
accordance with the provisions of Section 262 of the DGCL, unless such holder
fails to perfect, effectively withdraws or loses his or her right to dissent
from the Merger under the DGCL. If any such holder so fails to perfect,
effectively withdraws or loses his or her dissenters' rights under the DGCL,
each Company Dissenting Share of such holder shall thereupon be deemed to have
been converted, as of the Effective Time, into the right to receive the Merger
Consideration pursuant to Section 1.8(a) and/or (b).
A-2
<PAGE> 88
(b) Any payments relating to Company Dissenting Shares shall be made solely
by the Surviving Corporation and no funds or other property have been or will be
provided by Acquisition, Parent or any of Parent's other direct or indirect
subsidiaries for such payment, nor shall the Company make any payment with
respect to, or settle or offer to settle, any such demands.
(c) The Company shall give Acquisition (i) prompt notice of any demands
received by the Company for the payment of fair value for shares, withdrawals of
such demands and any other instruments served pursuant to the DGCL and received
by the Company which relate to such demand for appraisal, and (ii) the right to
participate in all negotiations and proceedings with respect to such demands.
The Company shall not, except with the prior written consent of the Acquisition,
voluntarily make any payment with respect to any demands for appraisal of the
Shares or offer to settle or settle any such demands.
SECTION 1.10. Payment of Merger Consideration.
(a) No later than the Effective Time, as required by subsection (b) below,
Parent shall deposit with Registrar and Transfer Company or such other agent or
agents as may be appointed by Parent and Acquisition (the "Payment Agent") for
the benefit of the holders of Shares in cash the aggregate amount necessary to
pay the Merger Consideration (such cash is hereinafter referred to as the
"Merger Fund") payable pursuant to Section 1.8 in exchange for outstanding
Shares.
(b) As soon as reasonably practicable after the Effective Time, the Payment
Agent shall mail to each holder of record of a certificate or certificates which
immediately prior to the Effective Time represented outstanding Shares (the
"Certificates") whose shares were converted into the right to receive the Merger
Consideration pursuant to Section 1.8: (i) a letter of transmittal (which shall
specify that delivery shall be effected and risk of loss and title to the
Certificates shall pass only upon delivery of the Certificates to the Payment
Agent and shall be in such form and have such other provisions as Parent and the
Company may reasonably specify) and (ii) instructions for use in effecting the
surrender of the Certificates in exchange for the Merger Consideration. Upon
surrender of a Certificate for cancellation to the Payment Agent, together with
such letter of transmittal duly executed, the holder of such Certificate shall
be entitled to receive in exchange therefor a check representing the Merger
Consideration which such holder has the right to receive pursuant to the
provisions of this Article 1 and the Certificate so surrendered shall forthwith
be canceled. In the event of a transfer of ownership of Shares which is not
registered in the transfer records of the Company, payment of the Merger
Consideration may be made to a transferee if the Certificate representing such
Shares is presented to the Payment Agent accompanied by all documents required
to evidence and effect such transfer and by evidence that any applicable stock
transfer taxes have been paid. Until surrendered as contemplated by this Section
1.10, each Certificate shall be deemed at any time after the Effective Time to
represent only the right to receive upon such surrender the Merger Consideration
as contemplated by this Section 1.10. No interest shall be paid on the Merger
Consideration.
(c) In the event that any Certificate for Shares shall have been lost,
stolen or destroyed, the Payment Agent shall issue in exchange therefor, upon
the making of an affidavit of that fact by the holder thereof, such Merger
Consideration as may be required pursuant to this Agreement; provided, however,
that Parent or its Payment Agent may, in its discretion, require as a condition
precedent thereto the delivery of a suitable bond or indemnity.
(d) All Merger Consideration paid upon the surrender for exchange of Shares
in accordance with the terms hereof shall be deemed to have been paid in full
satisfaction of all rights pertaining to such Shares; subject, however, to the
Surviving Corporation's obligation to pay any dividends or make any other
distributions with a record date prior to the Effective Time which may have been
declared or made by the Company on such Shares in accordance with the terms of
this Agreement, or prior to the date hereof and which remain unpaid at the
Effective Time, and at the Effective Time there shall be no further registration
of transfers on the stock transfer books of the Surviving Corporation of the
Shares which were outstanding immediately prior to the Effective Time. If after
the Effective Time, Certificates are presented to the Surviving Corporation for
any reason they shall be canceled and exchanged as provided in this Article 1.
A-3
<PAGE> 89
(e) Neither Parent nor the Company shall be liable to any holder of Shares
for cash delivered to a public official pursuant to any applicable abandoned
property, escheat or similar law.
(f) Any portion of the Merger Fund which remains undistributed to the
holders of Shares for one (1) year after the Effective Time shall be delivered
to Parent, upon demand, and any holders of Shares who have not theretofore
complied with this Article 1 shall thereafter look only to Parent for the Merger
Consideration to which they are entitled.
(g) Parent shall be entitled to deduct and withhold from the consideration
otherwise payable pursuant to this Agreement to any holder of Shares such
amounts as Parent is required to deduct and withhold with respect to the making
of such payment under the Internal Revenue Code of 1986, as amended (the
"Code"), or any provision of state, local or foreign tax law. To the extent that
amounts are so withheld by Parent and paid by Parent to the appropriate
Governmental Entity (as described below), such withheld amounts shall be treated
for all purposes of this Agreement as having been paid to the holder of the
Shares in respect of which such deduction and withholding was made by Parent.
(h) If, at any time after the Effective Time, any further action is
necessary or desirable to carry out the purposes of this Agreement and to vest
the Surviving Corporation with full right, title and possession to all assets,
property, rights, privileges, powers and franchises of the Company and
Acquisition, the officers and directors of the Company and Acquisition are fully
authorized in the name of their respective corporations or otherwise to take,
and will take, all such lawful and necessary action, so long as such action is
consistent with this Agreement.
SECTION 1.11. Stock Options. At the Effective Time, each outstanding option
to purchase Shares (a "Company Stock Option" or collectively "Company Stock
Options"), whether vested or unvested, issued pursuant to any of the Company's
stock option plans (the "Company Plans") (including by reason of the
transactions contemplated by this Agreement), and each outstanding Warrant to
purchase shares of the Company's capital stock, shall be canceled, and each
holder of a Company Stock Option shall be entitled to receive in exchange
therefor cash in an amount equal to the product of (x) the amount, if any, by
which $3.10 exceeds the exercise price of such Company Stock Option, multiplied
by (y) the number of Shares subject to such Company Stock Option, less
applicable tax withholding. At or before the Effective Time, the Company shall
cause to be effected any necessary amendments to the Company Plans to give
effect to the provisions of this Section 1.11.
SECTION 1.12. Payment of Note. Immediately prior to the Effective Time, the
Company shall repay in full to Telemetrix PLC, a corporation organized under the
laws of England and Wales ("Telemetrix") or its designee, that certain Note,
made by Valor Electronics, Inc. to Telemetrix in the original principal amount
of $2.5 million, dated February 10, 1997, together with all accrued but unpaid
interest through the date of payment.
ARTICLE 2
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
Except as set forth on the Disclosure Schedule attached hereto (the
"Company Disclosure Schedule") or in the Company SEC Reports (as defined in
Section 2.4(a)), the Company hereby represents and warrants to each of Parent
and Acquisition as follows:
SECTION 2.1. Organization and Qualification; Subsidiaries.
(a) Schedule 2.1 identifies each subsidiary of the Company as of the date
hereof and its respective jurisdiction of incorporation or organization, as the
case may be. Except as set forth in Schedule 2.1, the Company does not directly
or indirectly own any equity or similar interest in, or any interest convertible
into or exchangeable or exercisable for any interest in, any corporation,
partnership, joint venture or other business association or entity other than
the securities of any publicly-traded entity held for investment only and
constituting less than 5% of the outstanding capital stock of any such entity.
Each of the Company and its subsidiaries is duly organized, validly existing and
in good standing under the laws of the jurisdiction of its
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<PAGE> 90
incorporation or organization and has all requisite power and authority to own,
lease and operate its properties and to carry on its businesses as now being
conducted. The Company has heretofore delivered to Acquisition or Parent
accurate and complete copies of the Certificate of Incorporation and Bylaws (or
similar governing documents), as currently in effect, of the Company and its
subsidiaries.
(b) Each of the Company and its subsidiaries is duly qualified or licensed
and in good standing to do business in each jurisdiction in which the property
owned, leased or operated by it or the nature of the business conducted by it
makes such qualification or licensing necessary, except in jurisdictions where
the failure to be so duly qualified or licensed and in good standing would not
have a Material Adverse Effect (as defined below) on the Company. When used in
connection with the Company or its subsidiaries, the term "Material Adverse
Effect" means any material adverse change or effect (i) on the business, results
of operations or condition (financial or otherwise) of the Company and its
subsidiaries, taken as whole, other than any change or effect arising out of
general economic conditions (including, without limitation, levels of aggregate
demand, interest rates, currency exchange rates and applicable tax laws), or
(ii) that would impair the ability of the Company to consummate the transactions
contemplated hereby.
SECTION 2.2. Capitalization of the Company and its Subsidiaries.
(a) The authorized capital stock of the Company consists of 12,000,000
Common Shares, of which, as of May 25, 1998, 8,973,475 Shares were issued and
outstanding and 1,000,000 Preferred Shares of which, as of May 25, 1998, 8,110
Preferred Shares were issued and outstanding. All of the outstanding Common
Shares and Preferred Shares have been duly authorized, validly issued and are
fully paid, nonassessable and free of preemptive rights. As of May 25, 1998,
approximately 984,250 Common Shares were reserved for issuance and issuable upon
or otherwise deliverable in connection with the exercise of outstanding Company
Stock Options issued pursuant to the Company Plans. Schedule 2.2(a) sets forth a
list of each outstanding option as of May 25, 1998, the name of the holder, the
vesting date, and if exercisability or vesting will be accelerated in any way in
connection with the consummation of the transactions contemplated in this
Agreement. Between January 1, 1998 and the date hereof, no shares of the
Company's capital stock have been issued other than pursuant to Company Stock
Options already in existence on such date, and between January 1, 1998 and the
date hereof no stock options have been granted. Except as set forth above, as of
the date hereof, there are outstanding (i) no shares of capital stock or other
voting securities of the Company, (ii) no securities of the Company or its
subsidiaries convertible into or exchangeable for shares of capital stock or
voting securities of the Company except for the Preferred Shares, (iii) no
options, warrants (other than warrants issued to Telemetrix and described in the
Company's annual report on Form 10-K/A for the fiscal year ended December 31,
1997) or other rights to acquire from the Company or its subsidiaries and,
except as described in Schedule 2.2(a), no obligations of the Company or its
subsidiaries to issue any capital stock, voting securities or securities
convertible into or exchangeable for capital stock or voting securities of the
Company or to grant, extend, accelerate the vesting of, change the price of, or
otherwise amend any such options, warrants (other than warrants issued to
Telemetrix and described in the Company's annual report on Form 10-K/A for the
fiscal year ended December 31, 1997), calls, rights, commitments or agreements
and (iv) no equity equivalent interests in the ownership or earnings of the
Company or its subsidiaries or other similar rights (collectively "Company
Securities"). As of the date hereof, there are no outstanding obligations of the
Company or its subsidiaries to repurchase, redeem or otherwise acquire any
Company Securities. Except as set forth on Schedule 2.2(a), there are no
stockholder agreements, voting trusts or other agreements or understandings to
which the Company is a party or by which it is bound relating to the voting or
registration of any shares of capital stock of the Company. Since March 31, 1998
there have been no changes in the capital structure of the Company other than
issuances of Common Shares upon exercise of outstanding options granted under
the Company Plans.
(b) Except as set forth on Schedule 2.2(b), all of the outstanding capital
stock of the Company's subsidiaries (other than director's qualifying shares in
the case of foreign subsidiaries) is owned by the Company, directly or
indirectly, free and clear of any Lien (as defined below) or any other
limitation or restriction (including any restriction on the right to vote or
sell the same except as may be provided as a matter of law). Except as set forth
on Schedule 2.2(b), there are no securities of the Company or its subsidiaries
convertible into or exchangeable for, no options, warrants or other rights to
acquire from the
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Company or its subsidiaries and no other contract, understanding, arrangement or
obligation (whether or not contingent) providing for, the issuance or sale,
directly or indirectly, of any capital stock or other ownership interests in or
any other securities of any subsidiary of the Company. Except as set forth on
Schedule 2.2(b), there are no outstanding contractual obligations of the Company
or its subsidiaries to repurchase, redeem or otherwise acquire any outstanding
shares of capital stock or other ownership interests in any subsidiary of the
Company. For purposes of this Agreement, "Lien" means, with respect to any asset
(including without limitation any security), any mortgage, lien, pledge, charge,
security interest or encumbrance of any kind in respect of such asset.
(c) The Common Shares constitute the only class of equity securities of the
Company or its subsidiaries registered or required to be registered under the
Securities Exchange Act of 1934, as amended (the "Exchange Act").
SECTION 2.3. Authority Relative to this Agreement, Recommendation.
(a) The Company has all necessary corporate power and authority to execute
and deliver this Agreement and to consummate the transactions contemplated
hereby. The execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby have been duly and validly authorized by the
Board of Directors of the Company (the "Company Board") and no other corporate
proceedings on the part of the Company are necessary to authorize this Agreement
or to consummate the transactions contemplated hereby except the approval and
adoption of this Agreement by the holders of a majority of the outstanding
Common Shares and two-thirds of the outstanding Preferred Shares, voting as a
separate class. This Agreement has been duly and validly executed and delivered
by the Company and constitutes a valid, legal and binding agreement of the
Company enforceable against the Company in accordance with its terms.
(b) The Company Board has voted to recommend that the stockholders of the
Company approve and adopt this Agreement.
SECTION 2.4. SEC Reports, Financial Statements.
(a) The Company has filed all required forms, reports and documents and all
amendments and supplements thereto with the Securities and Exchange Commission
(the "SEC") since December 31, 1995 and will file with the SEC after the date of
this Agreement through the Effective Time all required forms, reports and
documents and amendments and supplements thereto, (collectively, "Company SEC
Reports"), each of which has complied or when filed, will comply, in all
material respects with all applicable requirements of the Securities Act of
1933, as amended (the "Securities Act") and the Exchange Act and the rules and
regulations promulgated thereunder, each as in effect on the dates such forms,
reports and documents were filed. None of such Company SEC Reports, including,
without limitation, any financial statements (and the related notes thereto) or
schedules included or incorporated by reference therein, contained or will
contain when filed any untrue statement of a material fact or omitted to state a
material fact required to be stated or incorporated by reference therein or
necessary in order to make the statements therein in light of the circumstances
under which they were made not misleading. The audited consolidated financial
statements of the Company included in the Company SEC Reports fairly present in
conformity with generally accepted accounting principles applied on a consistent
basis (except as may be indicated in the notes thereto), the consolidated
financial position of the Company and its consolidated subsidiaries as of the
dates thereof and their consolidated results of operations and cash flows for
the periods then ended. None of the Company's subsidiaries is required to file
any reports or other documents with the SEC.
(b) The Company has heretofore furnished to Acquisition or Parent a
complete and correct copy of any amendments or modifications which are required
to be filed with the SEC but have not yet been filed with the SEC to agreements,
documents or other instruments which previously had been filed by the Company
with the SEC pursuant to the Securities Act or Exchange Act.
SECTION 2.5. Information Supplied. None of the information supplied or to
be supplied by the Company for inclusion or incorporation by reference in the
proxy statement relating to the meeting of the Company's stockholders to be held
in connection with the Merger (the "Proxy Statement") will, at the date mailed
to stockholders of the Company and at the time of the meeting of stockholders of
the Company to be
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held in connection with the Merger, contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary in order to make the statements therein in light of the circumstances
under which they are made not misleading.
SECTION 2.6. Consents and Approvals, No Violations. Except for filings,
permits, authorizations, consents and approvals as may be required under and
other applicable requirements of the Exchange Act, state securities or blue sky
laws, the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the
"HSR Act") and the filing and recordation of the Merger Certificate as required
by the DGCL, no filing with or notice to and no permit, authorization, consent
or approval of any court or tribunal, or administrative governmental or
regulatory body, agency or authority, domestic or, to the Company's knowledge,
foreign, (a "Governmental Entity") is necessary for the execution and delivery
by the Company of this Agreement or the consummation by the Company of the
transactions contemplated hereby, except where the failure to obtain such
permits, authorizations, consents or approvals or to make such filings or give
such notice would not have a Material Adverse Effect on the Company. Neither the
execution, delivery and performance of this Agreement by the Company nor the
consummation by the Company of the transactions contemplated hereby will (i)
conflict with or result in any breach of any provision of the respective
Certificate of Incorporation or Bylaws (or similar governing documents) of the
Company or any of its subsidiaries, (ii) except as set forth in Schedule 2.6,
result in a violation or breach of or constitute (with or without due notice or
lapse of time or both) a default (or give rise to any right of termination,
amendment, cancellation or acceleration of any obligation or loss of any
benefits or creation of any Lien) under any of the terms, conditions or
provisions of any note, bond, mortgage, indenture, lease, license, contract,
agreement or other instrument or obligation to which the Company or any of its
subsidiaries is a party or by which any of them or any of their respective
properties or assets may be bound or (iii) violate any order, writ, injunction,
decree, law, statute, rule or regulation applicable to the Company or any of its
subsidiaries or any of their respective properties or assets except, in the case
of (ii) or (iii), for violations, breaches or defaults which would not have a
Material Adverse Effect on the Company.
SECTION 2.7. No Default. Except as set forth in Schedule 2.7, none of the
Company or its subsidiaries is in breach, default or violation (and no event has
occurred which with notice or the lapse of time or both would constitute a
breach, default or violation) of any term, condition or provision of (i) its
Certificate of Incorporation or Bylaws (or similar governing documents), (ii)
any note, bond, mortgage, indenture, lease, license, contract, agreement or
other instrument or obligation to which the Company or any of its subsidiaries
is now a party or by which any of them or any of their respective properties or
assets may be bound or (iii) any order, writ, injunction, decree, law, statute,
rule or regulation applicable to the Company or any of its subsidiaries or any
of their respective properties or assets except, in the case of (ii) or (iii),
for violations, breaches or defaults that would not have a Material Adverse
Effect on the Company.
SECTION 2.8. No Undisclosed Liabilities, Absence of Changes. Except as and
to the extent publicly disclosed by the Company in the Company SEC Reports, as
of December 31, 1997, none of the Company or its subsidiaries had any
liabilities or obligations of any nature, whether or not accrued, contingent or
otherwise, that would be required by generally accepted accounting principles to
be reflected on a consolidated balance sheet of the Company (including the notes
thereto) or that would have a Material Adverse Effect on the Company. Except as
publicly disclosed by the Company in the Company SEC Reports or in the
disclosure schedules hereto, since March 28, 1998, the Company and its
subsidiaries have conducted their business only in the ordinary course and in a
manner consistent with past practices and none of the Company or its
subsidiaries has incurred any liabilities of any nature, whether or not accrued,
contingent or otherwise, and there have been no events, changes or effects with
respect to the Company or its subsidiaries, having a Material Adverse Effect on
the Company.
SECTION 2.9. Litigation. Except as publicly disclosed by the Company in the
Company SEC Reports, there is no suit, claim, action, proceeding, arbitration or
investigation pending or, to the knowledge of the Company, threatened against
the Company or any of its subsidiaries or any of their respective properties or
assets before any Governmental Entity or arbitrator which individually or in the
aggregate would have a Material Adverse Effect on the Company or seeks to
prevent or delay the consummation of the transactions contemplated by this
Agreement. Except as publicly disclosed by the Company in the Company SEC
Reports,
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none of the Company or its subsidiaries is subject to any outstanding order,
writ, injunction or decree which has a Material Adverse Effect on the Company or
would prevent or delay the consummation of the transactions contemplated hereby.
SECTION 2.10. Compliance with Applicable Law. Except as set forth in
Schedule 2.10, the Company and its subsidiaries hold all permits, licenses,
variances, exemptions, orders and approvals of all Governmental Entities
necessary for the lawful conduct of their respective businesses (the "Company
Permits") except for failures to hold such permits, licenses, variances,
exemptions, orders and approvals which would not have a Material Adverse Effect
on the Company. The Company and its subsidiaries are in compliance with the
terms of the Company Permits except where the failure so to comply would not
have a Material Adverse Effect on the Company. The businesses of the Company and
its subsidiaries are not being conducted in violation of any law, ordinance or
regulation of any Governmental Entity, except that no representation or warranty
is made in this Section 2.10 with respect to Environmental Laws (as defined in
Section 2.12 below) and except for violations or possible violations which do
not and, insofar as reasonably can be foreseen will not, have a Material Adverse
Effect on the Company. There are no products now being manufactured, assembled
or sold by the Company or any of its subsidiaries which at the date hereof would
require any approval of any governmental body, whether federal, state, local or
foreign for the purpose for which they are being manufactured, assembled or sold
by the Company or any of its subsidiaries, for which such approval has not been
obtained, except where the failure to obtain such approval does not,
collectively, have a Material Adverse Effect on the Company. All products now
being commercially distributed by the Company or any of its subsidiaries in any
jurisdiction meet the applicable legal requirements of such jurisdiction and all
requisite governmental approvals have been duly obtained and are in full force
and effect, and there is no basis known to the Company or any of its
subsidiaries for any governmental body to deny or rescind any approval for any
of their commercially distributed products for the purpose for which they are
being manufactured, assembled or sold or for any products that the Company or
any of its subsidiaries proposes to commercially distribute in the future,
except where the failure to meet such requirements, the failure to obtain such
approvals or the failure of such approvals to be in full force and effect, does
not, collectively, have, and such denial or rescission, insofar as reasonably
can be foreseen would not, collectively, have a Material Adverse Effect on the
Company.
No investigation or review by any Governmental Entity with respect to the
Company or its subsidiaries is pending or, to the knowledge of the Company,
threatened nor, to the knowledge of the Company, has any Governmental Entity
indicated an intention to conduct the same, other than such investigations or
reviews as would not, individually or in the aggregate, have a Material Adverse
Effect on the Company.
SECTION 2.11. Employee Benefit Plans, Labor Matters.
(a) Schedule 2.11(a) lists all employee benefit plans (as defined in
Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended
("ERISA")) and all bonus, stock option, stock purchase, incentive, deferred
compensation, supplemental retirement, severance and other similar fringe or
employee benefit plans, programs or arrangements and any current or former
employment, executive compensation or severance agreements, written or
otherwise, maintained or contributed to, for the benefit of or relating to any
employee of the Company, any trade or business (whether or not incorporated)
which is a member of a controlled group including the Company or which is under
common control with the Company within the meaning of Section 414 of the Code
(an "ERISA Affiliate") as well as each plan with respect to which the Company or
an ERISA Affiliate could incur liability under Section 4069 (if such plan has
been or were terminated) or Section 4212(c) of ERISA (together the "Employee
Plans"), excluding former agreements under which the Company has no remaining
material obligations and any of the foregoing that are required to be maintained
by the Company under the laws of any foreign jurisdiction. The Company has made
available to Parent a copy of (i) the most recent annual report on Form 5500
filed with the Internal Revenue Service (the "IRS") for each disclosed Employee
Plan where such report is required, (ii) the documents and instruments governing
each such Employee Plan (other than those referred to in Section 4(b)(4) of
ERISA) and (iii) the summary plan description for each Employee Plan which is
subject to ERISA. Except as set forth in Schedule 2.11(a), no event has occurred
and, to the knowledge of the Company, there currently exists no condition or set
of circumstances in connection with which the Company or any of its subsidiaries
could be subject to any liability under the terms of any Employee Plans, ERISA,
the Code or any other applicable law,
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including, without limitation, any liability under Title IV of ERISA, which
would have a Material Adverse Effect on the Company.
(b) Schedule 2.11(b) sets forth a list of (i) all employment agreements
with officers of the Company and its subsidiaries; (ii) all agreements with
consultants who are individuals obligating the Company or any of its
subsidiaries to make annual cash payments in an amount exceeding $50,000; (iii)
all severance agreements, programs and policies of the Company and its
subsidiaries with or relating to its employees except programs and policies
required to be maintained by law; and (vi) plans, programs agreements and other
arrangements of the Company and its subsidiaries with or relating to its
employees which contain change in control provisions. The Company has made
available to Parent copies (or descriptions in detail reasonably satisfactory to
Parent) of all such agreements, plans, programs and other arrangements.
(c) Except as disclosed in Schedule 2.11(c) of the Company Disclosure
Schedule, there will be no payment, accrual of additional benefits, acceleration
of payments or vesting in any benefit under any Employee Plan or any agreement
or arrangement disclosed under this Section 2.11 solely by reason of entering
into or in connection with the transactions contemplated by this Agreement. No
such payment will constitute an "excess parachute payment" within the meaning of
Section 280G of the Code.
(d) No Employee Plan provides post-retirement medical or welfare benefits
to former employees of the Company or its ERISA Affiliates other than pursuant
to Section 4980B of the Code.
(e) There are no controversies pending or, to the knowledge of the Company,
threatened between the Company or any of its subsidiaries and any of their
respective employees, or involving any Employee Plan, which controversies have a
Material Adverse Effect on the Company. Neither the Company nor any of its
subsidiaries is a party to any collective bargaining agreement or other labor
union contract applicable to persons employed by the Company or its subsidiaries
except as disclosed in Schedule 2.11(e) nor does the Company know of any
activities or proceedings of any labor union to organize any such employees. The
Company has no knowledge of any strikes, slowdowns, work stoppages, lockouts or
threats thereof by or with respect to any employees of the Company or any of its
subsidiaries.
(f) Each Employee Plan has been maintained in material compliance with all
applicable laws, including, without limitation, ERISA and the Code. Each
Employee Plan has been maintained in material conformance with the terms and
provisions of such Plan.
(g) Each Employee Plan which is intended to be qualified under Section
401(a) of the Code, and exempt from tax under Section 501(a) of the ode, is the
subject of an unrevoked favorable determination letter from the Internal Revenue
Service. To the best knowledge of Company, nothing has occurred since the date
of any such letter which may adversely affect such qualification or exemption
(other than changes in applicable law that have occurred since the date of such
letter and for which the remedial amendment period of Section 401(b) of the Code
has not expired as of the date hereof).
(h) The Company and its ERISA Affiliates have made all payments and
contributions to the Employee Plans on a timely basis as required by the terms
of each such Employee Plan and any applicable law.
(i) The Company and its ERISA Affiliates have filed or caused to be filed
with the Internal Revenue Service annual reports on the applicable Form 5500
series for each Employee Plan for all years and periods for which such reports
were required and within the time period required by ERISA and the Code.
(j) No "prohibited transaction", as defined in Section 406 of ERISA and
Section 4975 of the Code, has occurred with respect to any Employee Plan, and,
to the best knowledge of the Company, no civil or criminal action brought
pursuant to Part V, Title I of ERISA is pending or threatened in writing or
orally against any fiduciary of any such Employee Plan.
(k) Neither the Company nor any ERISA Affiliate currently maintains any
Employee Plan that is subject to Title IV of ERISA (other than a multi-employer
plan, within the meaning of Section 3(37) or 4001(a)3 of ERISA) nor has
previously maintained any such Plan that has resulted in any liability or
potential liability for the Company or its ERISA Affiliates under said Title IV.
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(l) Neither the Company nor any ERISA Affiliate maintains, or has
contributed to within the past five years, any multi-employer plan, within the
meaning of Section 3(37) or 4001(a)3 of ERISA. Neither the Company nor any ERISA
Affiliate has any liability to make withdrawal liability payments to any multi-
employer plan.
(m) Each Employee Plan that is a group health plan sponsored or maintained
by the Company or any ERISA Affiliate has been operated in material compliance
with the applicable requirements of Parts 6 and 7 of Subtitle B of Title I of
ERISA and Sections 4980(B)(f), 9801 and 9802 of the Code. The Company has not
contributed to a non-conforming group health plan, as that term is defined in
Section 5000(c) of the Code or incurred any tax liability under Section 5000(a)
of the Code that would have a Material Adverse Affect.
(n) Neither the Company nor any ERISA Affiliate has incurred any excise tax
liability with respect to any Employee Plan which has not been satisfied.
SECTION 2.12. Environmental Laws and Regulations.
(a)(i) Except as publicly disclosed by the Company in the Company SEC
Reports or in Schedule 2.12 to this Agreement, (i) each of the Company and its
subsidiaries is in material compliance with all U.S. Environmental Laws (as
defined below) and, to the actual knowledge of the Company, all Foreign
Environmental Laws (as defined below), except for non-compliance that would not
have a Material Adverse Effect on the Company, which compliance includes but is
not limited to, the possession by the Company and its subsidiaries of all
material permits and other governmental authorizations required under applicable
U.S. Environmental Laws and, to the actual knowledge of the Company, Foreign
Environmental Laws and compliance with the terms and conditions thereof, (ii)
none of the Company or its subsidiaries have knowledge of an existing or
potential Environmental Claim (as defined below) against the Company or its
subsidiaries or, to the knowledge of the Company, against any person or entity
whose liability for any Environmental Claim the Company or any of its
subsidiaries has or may have retained or assumed either contractually or by
operation of law, that have or would reasonably be expected to have a Material
Adverse Effect on the Company; and (iii) to the best knowledge of the Company,
there are no circumstances that are reasonably likely to prevent or interfere
with such material compliance in the future.
(b) Except as disclosed in the Company SEC Reports, or except as would not
have a Material Adverse Effect on the Company, (i) there have been no releases
(i.e., any past or present releasing, spilling, leaking, pumping, pouring,
emitting, emptying, discharging, injecting, escaping, leaching, disposing or
dumping) of Hazardous Substances (as defined below) by the Company or its
current or former subsidiaries on, under, upon or into any real properties owned
or leased currently or in the past by the Company or its current or former
subsidiaries, (ii) no underground tank for Hazardous Substances or relating
piping has leaked and (iii) to the best knowledge of the Company, there have
been no such releases of Hazardous Substances on, under, upon or into any real
property in the vicinity of real property of the Company or its current or
former subsidiaries which has flowed, seeped or migrated on or under the real
property of the Company or its subsidiaries.
(c) Except as disclosed on Schedule 2.12, there are no PCBs or asbestos
located in any premises currently owned, operated or leased by the Company or
its subsidiaries in the United States, or to the actual knowledge of the
Company, elsewhere.
(d) No environmental lien has attached to any real property owned or leased
by the Company or its subsidiaries in the United States, or to the actual
knowledge of the Company, elsewhere.
(e) Definitions.
(i) For purposes of this Agreement, "U.S. Environmental Laws" shall
mean all federal, state, district and local laws, all rules or regulations
promulgated thereunder, and all orders, consent orders, judgments, written
notices, permits or demand letters issued, promulgated or entered pursuant
thereto, relating to pollution or protection of the environments
(including, without limitation, ambient air, surface water, groundwater,
land surface or subsurface strata), all as in effect as of the Effective
Date, including, without limitation, (i) laws relating to emissions,
discharges, releases, or threatened releases of
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Hazardous Substances into the environment and (ii) laws relating to the
identification, generation, manufacture, processing, distribution, use,
treatment, storage, disposal, recovery, transport or other handling of
Hazardous Substances. U.S. Environmental Laws shall include, without
limitation, the Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as amended ("CERCLA"), the Toxic Substances Control
Act, as amended, the Hazardous Materials Transportation Act, as amended,
the Resource Conservation and Recovery Act, as amended, the Clean Water
Act, as amended, the Atomic Energy Act of 1954, as amended, the
Occupational Safety and Health Act, as amended, the New Jersey Industrial
Site Recovery Act ("ISRA") and all analogous laws promulgated or issued by
any governmental authority, all as in effect as of the Closing Date.
(ii) For purposes of this Agreement, "Foreign Environmental Laws"
shall mean all foreign laws, all rules or regulations promulgated
thereunder, and all orders, consent orders, judgments, written notices,
permits or demand letters issued, promulgated or entered pursuant thereto,
relating to pollution or protection of the environments (including, without
limitation, ambient air, surface water, groundwater, land surface or
subsurface strata), all as in effect as of the Effective Date, including,
without limitation, (i) laws relating to emissions, discharges, releases,
or threatened releases of Hazardous Substances into the environment and
(ii) laws relating to the identification, generation, manufacture,
processing, distribution, use, treatment, storage, disposal, recovery,
transport or other handling of Hazardous Substances.
(iii) For purposes of this Agreement, "Environmental Claims" shall
mean all notice of violations, liens, written claims, written demands,
investigations, written notices, or suits, of any damage, including,
without limitation, personal injury, property damage (including any
depreciation of property values), lost use of property or consequential
damages, arising out of Environmental Conditions or U.S. Environmental Laws
or Foreign Environmental Laws. (By way of example only, Environmental
Claims include (i) actual or threatened damages to natural resources, (ii)
claims for nuisance or its statutory equivalent, (iii) claims for the
recovery of response costs or administrative or judicial orders directing
the performance of investigations, response or remedial actions under any
U.S. Environmental Laws or Foreign Environmental Laws, (iv) a requirement
to implement "corrective action" pursuant to any order or permit issued
pursuant to the Resource Conservation and Recovery Act, as amended or
similar provisions of applicable state law or Foreign Environmental Laws,
(v) claims for restitution, contribution or indemnity, (vi) fines,
penalties or liens of any kind arising under U.S. Environmental Law or
Foreign Environmental Laws, (vii) claims for injunctive relief or other
orders of notices of violation from federal, state or local agencies or
courts arising under U.S. Environmental Law or Foreign Environmental Laws,
and (viii) with regard to any present or former employees, claims relating
to exposure to or injury from Environmental Conditions.)
(iv) For purposes of this Agreement, "Environmental Conditions" shall
mean the state of the environment, including natural resources (e.g., flora
and fauna), soil, surface water, groundwater, any present or potential
drinking water supply, subsurface strata, ambient air, relating to or
arising out of the use, handling, storage, treatment, recycling,
generation, transportation, release, spilling, leaking, pumping, pouring,
emptying, discharge, injecting, escaping, leaching, disposing or dumping or
threatened release of Hazardous Substances by the Company and its
subsidiaries. With respect to Environmental Claims by third parties,
Environmental Claims also include the exposure of persons to Hazardous
Substances at the work place or the exposure of persons or property to
Hazardous Substances migrating from or otherwise emanating from or located
on property owned by the Company or its subsidiaries.
(v) For purposes of this Agreement, "Hazardous Substances" shall mean
all pollutants, contaminants, chemicals, wastes and any other carcinogenic,
ignitable, corrosive, reactive, toxic or otherwise hazardous substances or
materials (whether solids, liquids or gases), including, but not limited
to, any substances, materials or wastes subject to regulation, control or
remediation under U.S. Environmental Laws or Foreign Environmental Laws. By
way of example only, the term "Hazardous Substances" includes petroleum,
urea formaldehyde, flammable, explosive and radioactive materials, PCBs,
pesticides, herbicides, asbestos or waste waters.
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SECTION 2.13. Taxes.
(a) Definition of Taxes. For the purposes of this Agreement, "Tax" or
"Taxes" refers to any and all federal, state local and foreign taxes,
assessments and other governmental charges, customs, duties, impositions, and
liabilities relating to taxes, including taxes based upon or measured by gross
receipts, income, profits, sales, use and occupation, and value added, ad
valorem, transfer, franchise, withholding, payroll, recapture, employment,
excise and property taxes, together with all interest, penalties and additions
imposed with respect to such amounts and any obligations under any agreements or
arrangements with any other person with respect to such amounts and including
any liability for taxes of a predecessor entity or of a consolidated or unitary
group for which there is joint and several liability.
(b) Tax Returns and Audits. Except as set forth on Schedule 2.13:
(i) Company and each of its subsidiaries has timely filed all federal,
state, local and foreign returns, estimates, information statements and
reports ("Returns") relating to Taxes, required to be filed by Company and
each of its subsidiaries and has paid all Taxes shown to be due on such
Returns or is contesting them in good faith.
(ii) Company and each of its subsidiaries has established (and until
the Effective Time will establish) on its books and records reserves
(taking into account the potential future use of the Company's net
operating losses) that are adequate for the payment of all Taxes incurred,
but not yet due and payable.
(iii) Company and each of its subsidiaries as of the Effective Time
will have withheld with respect to its employees all federal, state, local
and foreign income Taxes, FICA, FUTA and other Taxes required to be
withheld, and paid over to the proper governmental authorities all amounts
required to be so withheld and paid over under all applicable laws.
(iv) Neither Company nor any of its subsidiaries has been delinquent
in the payment of any Tax (for the period during which any statute of
limitations is still open) nor is there any Tax deficiency outstanding,
proposed or assessed against Company or any of its subsidiaries, nor has
Company or any of its subsidiaries executed any waiver of any statute of
limitations on or extending the period for the assessment or collection of
any Tax.
(v) No audit or other examination of any return of Company or any of
its subsidiaries is presently in progress, nor has Company or any of its
subsidiaries been notified of any request for such an audit or other
examination.
(vi) Neither Company nor any of its subsidiaries has any liability for
unpaid federal, state, local or foreign Taxes which have not been accrued
for or reserved (taking into account the potential future use of the
Company's net operating losses) on the Company's books and records, whether
asserted or unasserted, contingent or otherwise.
(vii) There is no contract, agreement, plan or arrangement, including,
but not limited to, the provisions of this Agreement, covering any employee
or former employee of Company or any of its subsidiaries that,
individually, could give rise to the payment of any amount that would not
be deductible pursuant to Sections 280G, 404 or 162(m) of the Internal
Revenue Code of 1987, as amended (the "Code").
(viii) Company is not, and has not been at any time, a "United States
real property holding corporation", within the meaning of Section 897(c)(2)
of the Code.
(ix) Company and its subsidiaries have not participated (and will not
participate prior to the Effective Time) in or cooperated with an
international boycott within the meaning of Section 999 of the Code.
(x) There are no rulings, requests for rulings or closing agreements
with any taxing authority which could affect the Taxes of Company or any of
its subsidiaries for any period after the Effective Time.
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(xi) There are no liens for Taxes upon any property or assets of
Company or its subsidiaries except liens for Taxes not yet due.
(xii) An "ownership change" within the meaning of Section 382 of the
Code and the regulations thereunder has not occurred since December 31,
1993 (and will not occur prior to the Effective Time) such that the Tax
attributes of the Company and its subsidiaries has been (or would be)
limited under Section 382 of the Code.
(xiii) The Company and each subsidiary has complied with all
information reporting requirements of, and has maintained all required
records and supporting information with respect to, Section 6038A of the
Code and the regulations thereunder pertaining to information with respect
to certain foreign-owned corporations.
SECTION 2.14. Vote Required. The affirmative vote of the holders of a
majority of the outstanding Shares and two-thirds of the outstanding Preferred
Shares, voting as a separate class, are the only votes of the holders of any
class or series of the Company's capital stock necessary to approve and adopt
this Agreement.
SECTION 2.15. Opinion of Financial Adviser. Cowen & Co. (the "Company
Financial Adviser") has delivered to the Company Board its written opinion dated
the date of this Agreement to the effect that as of such date the Merger
Consideration is fair to the holders of Common Shares from a financial point of
view.
SECTION 2.16. Brokers. No broker, finder or investment banker (other than
the Company Financial Adviser, a true and correct copy of whose engagement
agreement has been provided to Acquisition or Parent) is entitled to any
brokerage finder's or other fee or commission in connection with the
transactions contemplated by this Agreement based upon arrangements made by or
on behalf of the Company.
SECTION 2.17. Absence of Restrictions on Business Activities. There is no
agreement, judgment, injunction, order or decree binding upon the Company or its
subsidiaries which has or could reasonably be expected to have the effect of
prohibiting or materially impairing any material current business practice of
the Company or its subsidiaries, any acquisition of material property by the
Company or its subsidiaries or the conduct of business by the Company or its
subsidiaries as currently conducted or as proposed to be conducted by the
Company or its subsidiaries.
SECTION 2.18. Absence of Liens and Encumbrances. The Company and each of
its subsidiaries has good and valid title to, or, in the case of leased
properties and assets, valid leasehold interests in, all of its material
tangible properties and assets, real, personal and mixed, used in its business,
free and clear of any liens or encumbrances except as reflected in the Company
Financial Statements included in the Company's SEC Reports and except for liens
for taxes not yet due and payable and such imperfections of title and
encumbrances, if any, which are not material in character, amount or extent, and
which do not materially detract from the value, or materially interfere with the
present use, of the property subject thereto or affected thereby.
SECTION 2.19. Intellectual Property. The Company and each of its
subsidiaries, directly or indirectly, owns, or is licensed or otherwise
possesses legal enforceable rights to use, all patents, trademarks, trade names,
service marks, copyrights, and any applications therefor, maskworks, net lists,
schematics, technology, know-how, computer software programs or applications (in
both source code and object code form), and tangible or intangible proprietary
information or material that are material to its business as currently conducted
or as proposed to be conducted by the Company and its subsidiaries (the "Company
Intellectual Property Rights"). Schedule 2.19 hereto sets forth a complete list
of all patents, trademarks, registered copyrights, trade names and service
marks, and any applications therefor, included in the Company Intellectual
Property Rights, and specifies, where applicable, the jurisdictions in which
each such the Company Intellectual Property Right has been issued or registered
or in which an application for such issuance and registration has been filed,
including the respective registration or application numbers and the names of
all registered owners. Schedule 2.19 also sets forth a complete list of all
material licenses, sublicenses and other agreements as to which the Company or
its subsidiaries is a party and pursuant to which the Company or its
subsidiaries or any other person is authorized to use any Company Intellectual
Property Rights or other trade secret that is material to the Company or its
subsidiaries, and includes the identity of all parties thereto and a description
of the nature and
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subject matter thereof; the copies of such licenses, sublicenses and other
agreements provided to Parent contain a description of the applicable royalty
and the term thereof. The Company is not in violation of any license, sublicense
or agreement described on such list except such violations as do not materially
impair the Company's rights under such license, sublicense or agreement or do
not, collectively, constitute a Material Adverse Effect on the Company. The
execution and delivery of this Agreement by the Company, and the consummation of
the transactions contemplated hereby, will neither cause the Company nor any of
its subsidiaries to be in violation or default under any such license,
sublicense or agreement, nor entitle any other party to any such license,
sublicense or agreement to terminate or modify such license, sublicense or
agreement, except as set forth in Schedule 2.19 or except for such violations,
defaults, terminations and modifications that do not, collectively, constitute a
Material Adverse Effect on the Company. No claims have been asserted or, to the
knowledge of the Company, are threatened by any person nor are there any valid
grounds, to the knowledge of the Company, for any bona fide claims (i) to the
effect that the manufacture, sale, licensing or use of any of the products of
the Company or any of its subsidiaries as now manufactured, sold or licensed or
used or proposed for manufacture, use, sale or licensing by the Company or any
of its subsidiaries infringes on any copyright, patent, trade mark, service mark
or trade secret, (ii) against the use by the Company or any of its subsidiaries
of any trademarks, service marks, trade names, trade secrets, copyrights,
patents, technology, know-how or computer software programs and applications
used in the Company's or any of its subsidiaries' business as currently
conducted or as proposed to be conducted, or (iii) challenging the ownership by
the Company or any of its subsidiaries, validity or effectiveness of any Company
Intellectual Property Rights, except in each of clauses (i), (ii) and (iii) as
disclosed in Schedule 2.19. All material registered trademarks, service marks
and copyrights held by the Company or any of its subsidiaries are valid and
subsisting. To the knowledge of the Company, there is no material unauthorized
use, infringemen t or misappropriation of any Company Intellectual Property
Rights by any third party, including any employee or former employee of the
Company or any of its subsidiaries. No Company Intellectual Property Right or
product of the Company or any of its subsidiaries is subject to any outstanding
decree, order, judgment, or stipulation restricting in any manner the licensing
thereof by the Company or any of its subsidiaries. Neither the Company nor any
of its subsidiaries has entered into any agreement under which the Company or
its subsidiaries is restricted from selling, licensing or otherwise distributing
any of its products to any class of customers, in any geographic area, during
any period of time or in any segment of the market. The Company and each
subsidiary has a policy requiring each key employee to execute a proprietary
information and confidentiality agreement (the "Confidentiality Agreement")
substantially in the Company's standard form, a copy of which is attached to
Schedule 2.19. All current employees of the Company in San Diego, California and
all current employees of the Company and its subsidiaries at the director level
at facilities in the Peoples' Republic of China and the managing director at the
Company's facility in the Phillipines have signed a Confidentiality Agreement.
SECTION 2.20. Agreements, Contracts and Commitments. Except as set forth in
Schedule 2.20, neither the Company nor any of its subsidiaries has, nor is it a
party to nor is it bound by, any of the following:
(a) any material product distribution agreement,
(b) any material joint marketing agreement or product development
agreement,
(c) any material agreement relating to the performance of product
evaluation or testing or regulatory compliance by other parties with
respect to products of the Company or its subsidiaries,
(d) any material agreement with or order by any Government Entity
relating to the testing, manufacture, registration, labeling, marketing or
sale of products manufactured, marketed or sold by the Company or its
subsidiaries,
(e) any material agreement with or order by any Government Entity
relating to the providing by such government of employees related to the
manufacture of products,
(f) any bonus, deferred compensation, incentive compensation, pension,
profit-sharing or retirement plans, or any other employee benefit plans or
arrangements,
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(g) any employment or consulting agreement, or any other similar type
of contract or commitment for an amount in excess of Fifty Thousand Dollars
($50,000.00) in any one year, which in any of such cases is not terminable
by the Company on thirty (30) days notice without liability,
(h) any agreement or plan, including, without limitation, any stock
option plan, stock appreciation right plan or stock purchase plan, any of
the benefits of which will be increased, or the vesting of benefits of
which will be accelerated, by the occurrence of any of the transactions
contemplated by this Agreement or the value of any of the benefits of which
will be calculated on the basis of any of the transactions contemplated by
this Agreement,
(i) any agreement of indemnification or guaranty not entered into in
the ordinary course of business other than such agreements or guarantees
between the Company and any of its subsidiaries,
(j) any agreement, contract or commitment relating to capital
expenditures and involving future obligations in excess of One Hundred
Thousand Dollars ($100,000.00) singularly or Five Hundred Thousand Dollars
($500,000.00) in the aggregate,
(k) any agreement, contract or commitment relating to the disposition
or acquisition of assets not in the ordinary course of business or any
ownership interest in any corporation, partnership, joint venture or other
business enterprise,
(l) any mortgage, indenture, loan or credit agreement, grant
agreement, security agreement or other agreement or instrument relating to
the borrowing of money, extension of credit, or receipt of money,
(m) any collective bargaining agreement,
(n) any real property or personal property lease requiring aggregate
future payments by the Company or its subsidiaries in excess of One Hundred
Thousand Dollars ($100,000.00),
(o) any material joint venture or partnership agreement or
arrangement,
(p) any material consignment or similar agreement relating to
inventory or equipment, or
(q) any other agreement, contract or commitment which involves payment
by the Company of One Hundred Thousand ($100,000.00) or more and is not
cancelable without penalty within thirty (30) days.
Each of the agreements, contracts and commitments referred to in clauses
above that has not expired or been terminated in accordance with its terms is in
full force and effect, except where the failure to be in full force and effect
does not, collectively, have a Material Adverse Effect on the Company, and,
except as otherwise disclosed, is not subject to any material default thereunder
of which the Company is aware by any party obligated to the Company pursuant
thereto.
SECTION 2.21. Non-Public Information Provided to Parent. The non-public
written information contained in the data room in San Diego, California
regarding the business of the Company and its subsidiaries, including product
and historical financial information, did not, to the actual knowledge (without
any obligation to conduct an inquiry) of the Company's executive officers,
contain any material misstatement of a material fact. The written projections of
the Company's future financial performance provided by the Company to Parent
were prepared in good faith based on assumptions believed by the Company to be
reasonable as of the date such projections were provided to Parent and as of the
date of this Agreement; however no other representation is made or to be implied
concerning such projections, and Parent and Acquisition acknowledge the
inherently uncertain, risky and speculative nature of such projections.
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ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF PARENT AND ACQUISITION
Parent and Acquisition hereby represent and warrant to the Company as
follows:
SECTION 3.1. Organization.
(a) Each of Parent and Acquisition is duly organized, validly existing and
in good standing under the laws of the Commonwealth of Pennsylvania and the
State of [Delaware], respectively, and has all requisite power and authority to
own, lease and operate its properties and to carry on its businesses as now
being conducted. Parent has heretofore delivered to the Company accurate and
complete copies of the Certificate of Incorporation and Bylaws as currently in
effect of Parent and Acquisition.
(b) Each of Parent and Acquisition is duly qualified or licensed and in
good standing to do business in each jurisdiction in which the property owned,
leased or operated by it or the nature of the business conducted by it makes
such qualification or licensing necessary, except in such jurisdictions where
the failure to be so duly qualified or licensed and in good standing would not
have a Material Adverse Effect on Parent. When used in connection with Parent or
Acquisition the term "Material Adverse Effect" means any material adverse change
or effect (i) on the business, results of operations or condition (financial or
otherwise) of Parent and its subsidiaries, taken as a whole, other than any
change or effect arising out of general economic conditions (including, without
limitation, levels of aggregate demand, interest rates, currency exchange rates
and applicable tax laws), or (ii) that may impair the ability of Parent and/or
Acquisition to consummate the transactions contemplated hereby.
SECTION 3.2. Authority Relative to this Agreement. Each of Parent and
Acquisition has all necessary corporate power and authority to execute and
deliver this Agreement and to consummate the transactions contemplated hereby.
The execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby have been duly and validly authorized by the
boards of directors of Parent and Acquisition and by Parent as the sole
stockholder of Acquisition and no other corporate proceedings on the part of
Parent or Acquisition are necessary to authorize this Agreement or to consummate
the transactions contemplated hereby. This Agreement has been duly and validly
executed and delivered by each of Parent and Acquisition and constitutes a
valid, legal and binding agreement of each of Parent and Acquisition enforceable
against each of Parent and Acquisition in accordance with its terms.
SECTION 3.3. No Default. None of Parent or its subsidiaries is in breach,
default or violation (and no event has occurred which with notice or the lapse
of time or both would constitute a breach, default or violation) of any term,
condition or provision of (i) its Certificate of Incorporation or Bylaws (or
similar governing documents), (ii) any note, bond, mortgage, indenture, lease,
license, contract, agreement or other instrument or obligation to which Parent
or any of its subsidiaries is now a party or by which any of injunction, decree,
law, statute, rule or regulation applicable to Parent or any of its subsidiaries
or any of their respective properties or assets except, in the case of (ii) or
(iii), for violations, breaches or defaults that would not have a Material
Adverse Effect on Parent.
SECTION 3.4. Litigation. Except as disclosed in Schedule 3.4, there is no
suit, claim, action, proceeding or investigation pending or, to the knowledge of
Parent, threatened against Parent or any of its subsidiaries which seeks to
prevent or delay the consummation of the transactions contemplated by this
Agreement. Except as disclosed in Schedule 3.4, none of Parent or its
subsidiaries is subject to any outstanding order, writ, injunction or decree
that would prevent or delay the consummation of the transactions contemplated
hereby.
SECTION 3.5. Consents and Approvals; No Violations. Except for filings,
permits, authorizations, consents and approvals as may be required under and
other applicable requirements of the Exchange Act, the HSR Act and the filing
and recordation of the Merger Certificate as required by the DGCL, no filing
with or notice to, and no permit authorization, consent or approval of, any
Governmental Entity is necessary for the execution and delivery by Parent or
Acquisition of this Agreement or the consummation by Parent or Acquisition of
the transactions contemplated hereby, except where the failure to obtain such
permits,
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authorizations, consents or approvals or to make such filings or give such
notice would not materially impair the likelihood of the consummation of the
transactions contemplated hereby and the likelihood that such transactions would
not be rescinded or undone. Neither the execution, delivery and performance of
this Agreement by Parent or Acquisition nor the consummation by Parent or
Acquisition of the transactions contemplated hereby will (i) conflict with or
result in any breach of any provision of the respective Certificate of
Incorporation or Bylaws (or similar governing documents) of Parent or
Acquisition or any of Parent's other subsidiaries, (ii) result in a violation or
breach of or constitute (with or without due notice or lapse of time or both) a
default (or give rise to any right of termination, amendment, cancellation or
acceleration or Lien) under any of the terms conditions or provisions of any
note, bond, mortgage, indenture, lease, license, contract, agreement or other
instrument or obligation to which Parent or Acquisition or any of Parent's other
subsidiaries is a party or by which any of them or any of their respective
properties or assets may be bound or (iii) violate any order, writ, injunction,
decree, law, statute, rule or regulation applicable to Parent or Acquisition or
any of Parent's other subsidiaries or any of their respective properties or
assets except, in the case of (ii) or (iii), for violations breaches or defaults
which would not materially impair the likelihood of the consummation of the
transactions contemplated hereby and the likelihood that such transactions would
not be rescinded or undone.
SECTION 3.6. Availability of Funds. Parent has or will have available to it
as of the Closing, not less than $35.15 million for completion of the Merger.
ARTICLE 4
COVENANTS
SECTION 4.1. Conduct of Business of the Company. Except as contemplated by
this Agreement or as described in Schedule 4.1, during the period from the date
hereof to the Effective Time, the Company will and will cause each of its
subsidiaries to conduct its operations in the ordinary course of business
consistent with past practice and, to the extent consistent therewith, with no
less diligence and effort than would be applied in the absence of this
Agreement. Without limiting the generality of the foregoing, except as otherwise
expressly provided in this Agreement or as described in Schedule 4.1, prior to
the Effective Time, neither the Company nor any of its subsidiaries will,
without the prior written consent of Parent and Acquisition (which consent shall
not unreasonably be withheld):
(a) amend its Certificate of Incorporation or Bylaws (or other similar
governing instrument);
(b) authorize for issuance, issue, sell, deliver or agree or commit to
issue sell or deliver (whether through the issuance or granting of options,
warrants, commitments, subscriptions, rights to purchase or otherwise) any
stock of any class or any other securities (except bank loans) or equity
equivalents (including, without limitation, any stock options or stock
appreciation rights) except for the issuance and sale of Shares pursuant to
options previously granted under the Company Plans and the issuance of
Shares pursuant to the conversion of any Preferred Shares;
(c) split, combine or reclassify or repurchase any shares of its
capital stock, declare, set aside or pay any dividend or other distribution
(whether in cash, stock or property or any combination thereof) in respect
of its capital stock, make any other actual, constructive or deemed
distribution in respect of its capital stock or otherwise make any payments
to stockholders in their capacity as such, or redeem or otherwise acquire
any of its securities or any securities of any of subsidiaries;
(d) adopt a plan of complete or partial liquidation, dissolution,
merger, consolidation, restructuring, recapitalization or other
reorganization of the Company or any of its subsidiaries (other than the
Merger);
(e) alter through merger, liquidation, reorganization, restructuring
or any other fashion the corporate structure of ownership of any
subsidiary;
(f) (i) incur or assume any long-term or short-term debt or issue any
debt securities, except for borrowings under existing lines of credit in
the ordinary course of business; (ii) assume, guarantee,
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endorse or otherwise become liable or responsible (whether directly,
contingently or otherwise) for the obligations of any other person except
in the ordinary course of business consistent with past practices and
except for obligations of subsidiaries of the Company incurred in the
ordinary course of business consistent with past practices; (iii) make any
loans or advances (other than in the ordinary course of business consistent
with past practices) or capital contributions to or investments in any
other person (other than to subsidiaries of the Company or customary loans
or advances to employees, in each case in the ordinary course of business
consistent with past practice); (iv) pledge or otherwise encumber shares of
capital stock of the Company or its subsidiaries; or (v) mortgage or pledge
any of its material assets, tangible or intangible, or create or suffer to
exist any material Lien thereupon (other than Tax Liens for Taxes not yet
due);
(g) except as may be required by law, enter into, adopt or amend or
terminate any employment agreement or any bonus, profit sharing,
compensation, severance, termination, stock option, stock appreciation
right, restricted stock, performance unit, stock equivalent, stock purchase
agreement, pension, retirement, deferred compensation, employment,
severance or other employee benefit agreement, trust, plan, fund or other
arrangement for the benefit or welfare of any director, officer or employee
in any manner or increase in any manner the compensation or fringe benefits
of any director, officer or employee or pay any benefit not required by any
plan and arrangement as in effect as of the date hereof (including, without
limitation, the granting of stock appreciation rights or performance
units); provided, however, that this paragraph (g) shall not prevent the
Company or its subsidiaries from (i) entering into employment agreements
with new employees in the ordinary course of business and consistent with
past practice which are terminable without liability upon thirty (30) days
notice or (ii) increasing annual compensation and/or providing for or
amending bonus arrangements for employees for fiscal 1998 in the ordinary
course of year-end compensation reviews consistent with past practice (to
the extent that such compensation increases and new or amended bonus
arrangements do not result in a material increase in benefits or
compensation expense to the Company);
(h) enter into or amend any agreement or take any action which
reasonably would be expected to have a Material Adverse Effect on the
Company or enter into any agreement, order, consent or commitment relating
to the Company's property in Leesburg, Indiana;
(i) transfer or license to any person or entity or otherwise
materially extend, amend or modify any rights to the Company's Intellectual
Property Rights or enter into grants to future patent rights, other than
licenses in connection with the sale or purchase of goods or services
entered into in the ordinary course of business consistent with past
practices (except that past practices shall not control with respect to
arrangements made necessary or economical by the closure of certain
facilities operated by or on behalf of the Company or its subsidiaries);
(j) grant any severance or termination (i) to any executive officer or
(ii) to any other employee except payments made in connection with the
termination of employees in amounts consistent with the Company's policies
and past practices or pursuant to written agreements outstanding and
disclosed in the Schedules hereto, or policies existing on the date hereof
and as disclosed in the Schedules hereto;
(k) commence any litigation other than (i) for the routine collection
of bills, or (ii) where the Company in good faith determines that failure
to commence suit would result in the material impairment of a valuable
asset of the Company's business, provided that the Company consults with
Parent prior to the filing of such a suit;
(l) acquire or agree to acquire by merging or consolidating with, or
by purchasing any equity interest in or a material portion of the assets
of, or by any other manner, any business or any corporation, partnership
interest, association or other business organization or division thereof,
or otherwise acquire or agree to acquire any assets that are material,
individually or in the aggregate, to the business of the Company, except
for equipment, inventory and supplies acquired in the ordinary course of
business consistent with past practice;
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(m) sell, lease, license, encumber or otherwise dispose of any
properties or assets which are material, individually or in the aggregate,
to its business, except in the ordinary course of business consistent with
past practice;
(n) materially revalue any of the Company's or its subsidiaries'
tangible assets, including without limitation, writing down the value of
inventory or writing off notes or accounts receivable other than in the
ordinary course of business consistent with past practice;
(o) pay, discharge or satisfy in an amount in excess of One Hundred
Thousand Dollars ($100,000.00) (in any one case) or Three Hundred and Fifty
Thousand Dollars ($350,000.00) (in the aggregate), any claim, liability or
obligation (absolute, accrued, asserted or unasserted, contingent or
otherwise), other than the payment, discharge or satisfaction in the
ordinary course of business of a liability of the type reflected or
reserved in the Company's financial statements in the Company SEC Reports
(including the notes thereto);
(p) make or change any material election in respect of Taxes, adopt or
change any accounting method in respect of Taxes, enter into any closing
agreement, settle any claim or assessment in respect of Taxes (except
settlements effected solely through payment of immaterial sums of money),
or consent to any extension or waiver of the limitation period applicable
to any claim or assessment in respect of Taxes; or
(q) take, or agree (in writing or otherwise) to take, any of the
actions described in clauses (a) through (p) of this Section 4.1.
SECTION 4.2. Preparation of the Proxy Statement. The Company shall, as
promptly as practicable prepare and file with the SEC the Proxy Statement. The
Proxy Statement shall also include the recommendation of the Board of Directors
of the Company in favor of the Merger, which shall not be withdrawn, modified or
withheld except in compliance with the fiduciary duties of the Company's Board
under applicable law or in compliance with Section 4.4 hereof. To Company's best
knowledge, at the time the Proxy Statement is mailed to the stockholders of the
Company, the Proxy Statement will comply as to form in all material respects
with the provisions of the Exchange Act and the rules and regulations
thereunder. If at any time prior to the Effective Time any information relating
to the Company or any of its affiliates, officers or directors should be
disclosed by the Company in an amendment or a supplement to the Proxy Statement,
the Company shall promptly inform Parent.
SECTION 4.3. SEC Filings. At all times prior to the Closing, the Company
shall:
(a) Make all filings with the SEC required to be made by it, in a
timely manner and in accordance with the applicable rules and regulations
of the SEC;
(b) Promptly notify Parent of any communications received from the SEC
with respect to any such filings, or with respect to any similar filings
made prior to the date of this Agreement, or with respect to the Proxy
Statement; and
(c) Promptly provide to Parent copies of all such SEC filings, and SEC
written communications, as well as copies of all written communications
with stockholders generally.
SECTION 4.4. Other Potential Acquirers.
(a) Neither the Company nor any of its subsidiaries shall, nor shall the
Company authorize or permit any of its or their respective officers, directors,
employees representatives, agents, investment bankers, subsidiaries and
affiliates to, directly or indirectly, solicit, initiate, engage or participate
in discussions or negotiations with, or disclose or afford access to non-public
information concerning the Company and its subsidiaries to or otherwise assist,
encourage or cooperate with or enter into any agreement or understanding with
any person or group (other than Parent and Acquisition or any designees of
Parent and Acquisition) concerning any Third Party Acquisition Proposal;
provided, however, that nothing herein shall prevent the Company Board from
taking and disclosing to the Company's stockholders a position contemplated by
Rules 14d-9 and 14e-2 promulgated under the Exchange Act with regard to any
tender offer. The Company
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Board shall not withdraw or amend its recommendation of the transactions
contemplated hereby or approve or recommend, or cause the Company to enter into
any agreement with respect to, any Third Party Acquisition Proposal and the
Company shall and shall cause its respective officers, directors, employees,
representatives, agents, investment bankers, subsidiaries and affiliates not to
make or authorize any statement, recommendation or solicitation in support of
any Third Party Acquisition Proposal.
(b) Not withstanding anything to the contrary provided in this Agreement,
the Company Board may participate in negotiations with a Third Party (as defined
below), furnish information (other than documents or reports filed with the
Securities and Exchange Commission) to a Third Party or amend or withdraw its
recommendation of the transactions contemplated hereby or approve or recommend a
Superior Proposal (as defined below), but only after a Third Party shall have
delivered to the Company in writing an unsolicited, bona fide Third Party
Acquisition Proposal that the Company Board by a majority vote determines in its
good faith judgment (after consultation with its principal advisers, including a
financial adviser of nationally recognized reputation), which shall be deemed to
include Cowen & Co.) to be more favorable to the Company's stockholders than the
Merger (a "Superior Proposal") and for which financing, to the extent required,
is then committed or which, in the good faith reasonable judgment of the Company
Board (based on the advice of a financial adviser of nationally recognized
reputation) is reasonably capable of being financed by such Third Party and
which is probable to be consummated in accordance with its terms.
(c) In the event the Company receives a Superior Proposal, the Company will
(i) immediately give written notice to Parent (a "Notice of Superior Proposal")
advising Parent that the Company Board has received an unsolicited bona fide
Superior Proposal, specifying the material terms and conditions of such Superior
Proposal and identifying the person making such Superior Proposal and (ii) give
Parent five business days from its receipt of the Notice of Superior Proposal to
make an offer which the Company Board by a majority vote determines in its good
faith judgment (after consultation with its principal advisers, including a
financial adviser of nationally recognized reputation) to be at least as
favorable to the Company's stockholders as such Superior Proposal, in which
event the Company Board shall accept such offer from Parent unless, within five
business days of the Company's receipt of such offer from Parent, the Company
receives a Third Party Acquisition Proposal that the Company Board, by a
majority vote, determines in its good faith judgment (after consultation with
its principal advisers, including a financial adviser of nationally recognized
reputation, which shall be deemed to include Cowen & Co.) to be more favorable
to the Company's stockholders than such offer from Parent. For the purposes of
this Agreement, "Third Party" means any person, entity or group (which includes
a "person" as such term is defined in Section 13(d)(3) of the Securities
Exchange Act of 1934, as amended) other than Parent, Acquisition or any
affiliate thereof. For the purposes of this Agreement, "Third Party Acquisition
Proposal" means a proposal to the Company by a Third Party for a transaction
that would include any of the following events: (i) the acquisition of the
Company by merger or otherwise by any Third Party; (ii) the acquisition by a
Third Party of more than 50% of the total assets of the Company and its
subsidiaries taken as a whole; or (iii) the acquisition by a Third Party of 50%
or more of the outstanding Common Shares or Preferred Shares.
SECTION 4.5. Comfort Letter. The Company shall use all reasonable efforts
to cause Arthur Andersen LLP to deliver a letter dated not more than five days
prior to the date on which the Proxy Statement shall be mailed to the
stockholders of the Company and addressed to the Company and Parent and their
respective Boards of Directors customary in scope for agreed-upon procedures
letters delivered by independent public accountants in connection with proxy
statements similar to the Proxy Statement. The language in such letter shall in
no event constitute a separate or independent basis on which Parent or
Acquisition can terminate this Agreement or refuse to consummate the
transactions contemplated hereby.
SECTION 4.6. Meeting of Stockholders. The Company shall take all action
necessary in accordance with the DGCL and its Certificate of Incorporation and
bylaws to duly call, give notice of, convene and hold a meeting of its
stockholders as promptly as practicable to consider and vote upon the adoption
and approval of this Agreement and the transactions contemplated hereby. The
stockholder votes required for the adoption and approval of the transactions
contemplated by this Agreement shall be the vote required by the DGCL and the
Company's Certificate of Incorporation and bylaws. The Company will, through its
Board of Directors,
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recommend to its stockholders approval of such matters, provided, however, the
Company Board may amend or withdraw its recommendation if permitted by Section
4.4 hereof.
SECTION 4.7. Access to Information.
(a) Subject to the provisions of applicable law, between the date hereof
and the Effective Time, the Company will give Parent and its authorized
representatives reasonable access to all employees, plants, offices, warehouses
and other facilities and to all books and records of itself and its
subsidiaries, will permit Parent to make such inspections as Parent may
reasonably require and will cause its officers and those of its subsidiaries to
furnish Parent with such financial and operating data and other information with
respect to the business and properties of the Company and its subsidiaries as
Parent may from time to time reasonably request.
(b) Between the date hereof and the Effective Time, the Company shall
furnish to Parent within 25 business days after the end of each calendar month
(commencing with the month of May) an unaudited balance sheet of the Company as
of the end of the such month and the related statements of earnings,
stockholders' equity (deficit) and within 25 business days after the end of each
calendar quarter cash flows for the quarter then ended, each prepared in
accordance with generally accepted accounting principles in conformity with the
practices consistently applied by such party with respect to its monthly
financial statements. All the foregoing shall be in accordance with the books
and records of the Company and shall fairly present its financial position
(taking into account the differences between the monthly and quarterly
statements prepared by the Company in conformity with its past practices) as of
the last day of the period then ended.
(c) Each of the parties hereto will hold and will cause its consultants and
advisers to hold in confidence all documents and information furnished to it in
connection with the transactions contemplated by this Agreement pursuant to the
terms of that certain Confidentiality Agreement entered into between the Company
and Parent dated March 18, 1998.
SECTION 4.8. Additional Agreements, Reasonable Efforts. Subject to the
terms and conditions herein provided, each of the parties hereto agrees to use
all reasonable efforts to take or cause to be taken all action and to do or
cause to be done all things reasonably necessary, proper or advisable under
applicable laws and regulations to fulfill the conditions to closing under this
Agreement and to consummate and make effective the transactions contemplated by
this Agreement, including, without limitation, (i) cooperating in the
preparation and filing of the Proxy Statement, any filings that may be required
under the HSR Act and any amendments to any thereof, (ii) obtaining consents of
all third parties and Governmental Entities necessary proper or advisable for
the consummation of the transactions contemplated by this Agreement; (iii)
contesting any legal proceeding relating to the Merger and (iv) executing any
additional instruments necessary to consummate the transactions contemplated
hereby. Subject to the terms and conditions of this Agreement, Parent and
Acquisition agree to use all reasonable efforts to cause the Effective Time to
occur as soon as practicable after the meeting of the Company's stockholders
with respect to the Merger. If at any time after the Effective Time any further
action is necessary to carry out the purposes of this Agreement, the proper
officers and directors of each party hereto shall take all such necessary
action.
SECTION 4.9. Employee Benefits.
(a) After the Closing, Parent shall cause the Surviving Corporation to,
honor in accordance with their terms, all employment, severance, consulting and
other compensation contracts between the Company or any of its subsidiaries and
any current or former director, officer or employee thereof, and all provisions
for vested benefits or other vested amounts earned or accrued through the
Closing under any plans described in Section 2.11 of this Agreement (other than
stock option or other plans involving the potential issuance or purchase on the
open market of securities of the Company or of Parent). Parent agrees and will
cause the Surviving Corporation to honor any "change of control" or similar
provisions relating to employees contained in any existing contracts, and all
termination or severance agreements with executive officers identified in
Schedule 2.11 (c) (subject to Section 1.11 hereof) will be honored in accordance
with their terms as of the date hereof.
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(b) Parent covenants that for a period of one year after the Closing, it
will cause Surviving Corporation to extend to employees of Surviving Corporation
and its subsidiaries benefit plans which, when viewed in the aggregate, shall be
substantially similar to the Employee Plans in effect with respect to employees
of the Company and its subsidiaries immediately before the Closing.
Notwithstanding the foregoing, nothing in this Agreement, express or implied,
shall (i) obligate the Surviving Corporation or any of its subsidiaries or
Parent to continue to employ any of the employees of the Surviving Corporation
or any of its subsidiaries after the Closing Date (except for those employees
who are parties to employment agreements as disclosed in Schedule 2.11(b) and
then only in accordance with the terms of such employment agreements) or (ii)
operate so as to make any employees of the Company or any of its subsidiaries
third party beneficiaries of any of the provisions of this Agreement (except for
the indemnification obligations under Section 4.11).
SECTION 4.10. Public Announcements. Parent, Acquisition and the Company, as
the case may be, will consult with one another before issuing any press release
or otherwise making any public statements with respect to the transactions
contemplated by this Agreement, including, without limitation, the Merger, and
shall not issue any such press release or make any such public statement prior
to such consultation except as may be required by applicable law or by
obligations pursuant to any listing agreement with the New York Stock Exchange
or NASDAQ National Market System as determined by Parent, Acquisition or the
Company, as the case may be.
SECTION 4.11. Indemnification, Directors' and Officers' Insurance.
(a) After the Effective Time, Parent and the Surviving Corporation jointly
and severally shall indemnify and hold harmless (and shall also advance expenses
as incurred to the fullest extent permitted under applicable law, upon receipt
from such indemnified party of the undertaking to repay such advances
contemplated by Section 145 of the DGCL, to) each person who is now or has been
prior to the date hereof or who becomes prior to the Effective Time an officer
or director of the Company or any of the Company's subsidiaries (the
"Indemnified Persons") against (i) all losses, claims, damages, costs, expenses
(including, without limitation, counsel fees and expenses), settlement payments
(provided Parent and the Surviving Corporation have approved such settlement,
which approval shall not be unreasonably withheld) or liabilities arising out of
or in connection with any claim, demand, action, suit, proceeding or
investigation (a "Claim") based in whole or in part on or arising in whole or in
part out of the fact that such person is or was an officer or director of the
Company or any of its subsidiaries whether or not pertaining to any matter
existing or occurring at or prior to the Effective Time and whether or not
asserted or claimed prior to or at or after the Effective Time ("Indemnified
Liabilities") to the fullest extent permitted by applicable law and (ii) all
Indemnified Liabilities based in whole or in part on or arising in whole or in
part out of or pertaining to this Agreement or the transactions contemplated
hereby, in each case to the fullest extent required or permitted under
applicable law or under the Surviving Corporation's Certificate of Incorporation
or bylaws. The parties hereto intend, to the extent not prohibited by applicable
law, that the indemnification provided for in this Section 4.11 shall apply
without limitation to negligent acts or omissions by an Indemnified Person.
Parent hereby guarantees the payment and performance of the Surviving
Corporation's obligations in this Section 4.11. Each Indemnified Person is
intended to be a third party beneficiary of this Section 4.11 and may
specifically enforce its terms. This Section 4.11 shall not limit or otherwise
adversely affect any rights any Indemnified Person may have under any agreement
with the Company or under the Company's Certificate of Incorporation or Bylaws.
(b) Any Indemnified Party wishing to claim indemnification under this
Section 4.11, upon learning of any such Claim, shall notify Parent and the
Surviving Corporation (although the failure so to notify Parent and the
Surviving Corporation shall not relieve Parent and the Surviving Corporation
from any liability which Parent and the Surviving Corporation may have under
this Section 4.11 except to the extent such failure prejudices Parent and the
Surviving Corporation), and shall deliver to Parent and the Surviving
Corporation the undertaking as contemplated by Section 145 of the DGCL. The
Indemnified Parties as a group shall retain one law firm (in addition to local
counsel) to represent them with respect to each such matter unless (i) there is,
under applicable standards of professional conduct (as determined by counsel to
the Indemnified Parties), a conflict or potential conflict between the positions
of any two or more Indemnified Parties, or (ii) an Indemnified Party reasonably
concludes (based upon advice of counsel) that there may be legal defenses
available to the Indemnified Party that are different from or in addition to
those available to the other
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Indemnified Parties, in which events, such additional counsel as may be required
may be retained by the Indemnified Parties.
(c) Parent shall cause the Surviving Corporation to maintain in effect for
not less than six (6) years from the Effective Time the policies of the
directors' and officers' liability and fiduciary insurance most recently
maintained by the Company with aggregate liability coverage not less than the
coverage provided by the insurance most recently maintained by the Company
(provided that the Surviving Corporation may substitute therefor policies of at
least the same coverage containing terms and conditions which are no less
advantageous to the beneficiaries thereof so long as such substitution does not
result in gaps or lapses in coverage) with respect to matters occurring prior to
the Effective Time; provided, however, that in satisfying its obligation under
this Section, the Surviving Corporation shall not be obligated to pay premiums
in excess of 150% of the amount per annum incurred by the Company in the twelve
months ended December 31, 1997 with respect to such insurance, which amount has
been disclosed to Parent.
(d) In the event the Surviving Corporation or its successor (i) is
consolidated with or merges into another person and is not the continuing or
surviving corporation or entity of such consolidation or merger or (ii)
transfers all or substantially all of its properties and assets to any other
person in a single transaction or a series of related transactions, then in each
such case Parent shall make or cause to be made proper provision so that the
successor or transferee of the Surviving Corporation shall comply in all
material respect with the terms of this Section 4.11.
SECTION 4.12. Notification of Certain Matters. The Company shall give
prompt notice to Parent and Acquisition, and Parent and Acquisition shall give
prompt notice to the Company, of (i) the occurrence or nonoccurrence of any
event the occurrence or nonoccurrence of which would be likely to cause any
representation or warranty contained in this Agreement to be untrue or
inaccurate in any material respect at or prior to the Effective Time, and (ii)
any material failure of the Company, Parent or Acquisition, as the case may be
to comply with or satisfy any covenant condition or agreement to be complied
with or satisfied by it hereunder; provided, however, that the delivery of any
notice pursuant to this Section 4.12 shall not cure such breach or
non-compliance or limit or otherwise affect the remedies available hereunder to
the party receiving such notice.
SECTION 4.13. Information Supplied. None of the information supplied or to
be supplied by Parent or Acquisition specifically for inclusion or incorporation
by reference to the Proxy Statement will, at the date mailed to stockholders and
at the times of the meeting or meetings of stockholders of the Company to be
held in connection with the Merger, contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary in order to make the statements therein in light of the circumstances
under which they are made not misleading.
SECTION 4.14. GTI Tax Matters. With respect to any income tax Return
required to be filed by Company and its subsidiaries from the date of this
Agreement through the Effective Time, Company shall provide to Parent and its
authorized representatives with copies of such completed Return at least fifteen
(15) business days prior to the due date (or extended due date if an extension
has been obtained) for the filing of such Return. Parent and its authorized
representatives shall have the right to review such Return prior to the filing
of such Return. Company and Parent agree to consult and resolve in good faith
any issues arising as a result of the review of such Return by Parent and its
authorized representatives.
ARTICLE 5
CONDITIONS TO CONSUMMATION OF THE MERGER
SECTION 5.1. Conditions to Each Party's Obligations to Effect the
Merger. The respective obligations of each party hereto to effect the Merger are
subject to the satisfaction at or prior to the Effective Time of the following
conditions:
(a) this Agreement shall have been approved and adopted by the
requisite vote of the stockholders of the Company;
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(b) no statute, rule, regulation, executive, order, decree, ruling or
injunction shall have been enacted, entered, promulgated or enforced by any
United States court or United States governmental authority which
prohibits, restrains, enjoins or restricts the consummation of the Merger;
and
(c) any waiting period applicable to the Merger under the HSR Act
shall have terminated or expired and any other governmental or regulatory
notices or approvals required with respect to the transactions contemplated
hereby shall have been either filed or received.
SECTION 5.2. Conditions to the Obligations of the Company. The obligation
of the Company to effect the Merger is subject to the satisfaction at or prior
to the Effective Time of the following conditions:
(a) the representations of Parent and Acquisition contained in this
Agreement or in any other document delivered pursuant hereto shall be true
and correct at and as of the Effective Time with the same effect as if made
at and as of the Effective Time (except to the extent such representations
specifically related to an earlier date, in which case such representations
shall be true and correct as of such earlier date), provided that the
representations of Parent and Acquisition which are not qualified by
materiality or Material Adverse Effect shall be deemed for all purposes of
this Agreement to be true and correct if, in the aggregate the breaches of
all such representations, if any, do not have a Material Adverse Effect on
Parent or Acquisition or the validity of the Merger, and, at the Closing,
Parent and Acquisition shall have delivered to the Company a certificate to
that effect;
(b) each of the covenants and obligations of Parent and Acquisition to
be performed at or before the Effective Time pursuant to the terms of this
Agreement shall have been duly performed in all material respects at or
before the Effective Time and, at the Closing, Parent and Acquisition shall
have delivered to the Company a certificate to that effect;
(c) Parent shall have obtained the consent or approval of each person
whose consent or approval shall be required in connection with the
transactions contemplated hereby under any loan or credit agreement, note,
mortgage, indenture, lease or other agreement or instrument, except those
for which failure to obtain such consents and approvals would not,
individually or in the aggregate, have a Material Adverse Effect on Parent
or Acquisition or the validity of the Merger; and
(d) the Directors of the Company and the Company shall have received
the opinion of legal counsel to Parent as to the matters set forth in
Exhibit A.
SECTION 5.3. Conditions to the Obligations of Parent and Acquisition. The
respective obligations of Parent and Acquisition to effect the Merger are
subject to the satisfaction at or prior to the Effective Time of the following
conditions:
(a) the representations of the Company contained in this Agreement or
in any other document delivered pursuant hereto shall be true and correct
at and as of the Effective Time with the same effect as if made at and as
of the Effective Time (except to the extent the representations
specifically related to an earlier date, in which case such representations
shall be true and correct as of such earlier date), provided that the
representations of the Company and its subsidiaries which are not qualified
by materiality or Material Adverse Effect shall be deemed for all purposes
of this Agreement to be true and correct if, in the aggregate the breach of
all such representations, if any, do not have a Material Adverse Effect on
the Company or the validity of the Merger, and, at the Closing, the Company
shall have delivered to Parent and Acquisition a certificate to that
effect;
(b) each of the covenants and obligations of the Company to be
performed at or before the Effective Time pursuant to the terms of this
Agreement shall have been duly performed in all material respects at or
before the Effective Time and, at the Closing, the Company shall have
delivered to Parent and Acquisition a certificate to that effect;
(c) the Company shall have obtained the consent or approval of each
person whose consent or approval shall be required in connection with the
transactions contemplated hereby under any loan or credit agreement,
license, note, mortgage, indenture, lease, or other agreement or
instrument, except
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those for which failure to obtain such consents and approvals would not
individually or in the aggregate, have a Material Adverse Effect on the
Company or the validity of the Merger;
(d) Parent shall have received the opinion of legal counsel to the
Company as to the matters set forth in Exhibit B; and
(e) The Company Dissenting Shares, if any, shall not exceed ten
percent (10%) of the issued and outstanding Shares at the Effective Time.
Section 5.4. Business MAC. Notwithstanding anything to the contrary
contained in this Agreement, conditions (a), (b) and (c) of Section 5.3 shall be
deemed to be satisfied if, between the date of this Agreement and the Closing
Date: (i) a reduction occurs, compared to the first quarter of fiscal year 1998,
in the earnings before interest, taxes, depreciation and amortization of the
Company and its subsidiaries, on a consolidated basis ("EBITDA"), that has a
Material Adverse Effect on the Company, and the business and financial events
resulting in such reduction in EBITDA were not themselves initiated by one or
more independent breaches by the Company of the representations and covenants of
the Company contained herein (such a reduction in EBITDA is a "Business MAC"),
and (ii) one or more of conditions (a), (b) or (c) of Section 5.3 is not
satisfied because of such Business MAC, in the sense that, absent such Business
MAC, such conditions would have been satisfied.
ARTICLE 6
TERMINATION; AMENDMENT; WAIVER
SECTION 6.1. Termination. This Agreement may be terminated and the Merger
may be abandoned at any time prior to the Effective Time whether before or after
approval and adoption of this Agreement by the Company's stockholders:
(a) by mutual written consent of Parent, Acquisition and the Company;
(b) by Parent, Acquisition or the Company if (i) any court of
competent jurisdiction in the United States or other United States
Governmental Entity shall have issued a final order, decree or ruling or
taken any other final action restraining, enjoining or otherwise
prohibiting the Merger and such order, decree, ruling or other action is or
shall have become nonappealable; (ii) the Merger has not been consummated
by November 30, 1998; provided that no party may terminate this Agreement
pursuant to this clause (ii) if such party's failure to fulfill any of its
obligations under this Agreement shall have been the reason that the
Effective Time shall not have occurred on or before said date;
(c) by the Company if (i) there shall have been a breach of any
representation or warranty on the part of Parent or Acquisition set forth
in this Agreement or if any representation or warranty of Parent or
Acquisition shall have become untrue, in either case such that the
conditions set forth in Section 5.2(a) or Section 5.2(c) would be incapable
of being satisfied by November 30, 1998 (or as otherwise extended); (ii)
there shall have been a breach by Parent or Acquisition of any of their
respective covenants or agreements hereunder materially adversely affecting
(or materially delaying) the consummation of the Merger, such that the
conditions set forth in Section 5.2(b) or 5.2(c) would be incapable of
being satisfied by November 30, 1998, and Parent or Acquisition, as the
case may be, has not cured such breach within twenty business days after
notice by the Company thereof, provided, with respect to clauses (i) and
(ii) of this Section 6.1(c), that the Company is not then in material
breach of any of its covenants or agreements hereunder having a Material
Adverse Effect on the Company or materially adversely affecting (or
materially delaying) the consummation of the Merger, such that the
conditions set forth in Sections 5.3(a), 5.3(b) or 5.3(c) would be
incapable of being satisfied by November 30, 1998 and the Company has not
cured such breach within twenty business days after notice by Parent or
Acquisition thereof; or (iii) the Company Board does so in accordance with
Section 4.4; or
(d) by Parent and Acquisition if (i) there shall have been a breach of
any representation or warranty on the part of the Company set forth in this
Agreement or if any representation or warranty of the Company shall have
become untrue in either case such that the conditions set forth in Section
5.3 (a)
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or 5.3(c) would be incapable of being satisfied by November 30, 1998 (or as
otherwise extended); (ii) there shall have been a breach by the Company of
its covenants or agreements hereunder having a Material Adverse Effect on
the Company or materially adversely affecting (or materially delaying) the
consummation of the Merger, such that the conditions set forth in Section
5.3(b) or 5.3(c) would be incapable of being satisfied by November 30, 1998
and the Company has not cured such breach within twenty business days after
notice by Parent or Acquisition thereof provided, with respect to clauses
(i) and (ii) of this Section 6.1(d), that Parent and Acquisition are not
then in material breach of any of their covenants or agreements hereunder
materially adversely affecting (or materially delaying) the consummation of
the Merger, and Parent and Acquisition have not cured such breach within
twenty business days after notice by the Company thereof; (iii) the Company
Board shall have recommended to the Company's stockholders a Superior
Proposal and the Company's stockholders shall not have approved and adopted
the Merger instead by vote or action by written consent by November 30,
1998; (iv) the Company Board shall have withheld, withdrawn, modified or
changed its approval or recommendation of this Agreement or the Merger and
the Company's stockholders shall not have approved or adopted the Merger
instead by vote or action by written consent by November 30, 1998; or (v)
the Company Dissenting Shares exceed ten percent (10%) of the outstanding
Shares, or (vi) the Company shall have convened a meeting of its
stockholders to vote upon the Merger and shall have failed to obtain the
requisite vote or written consents of its stockholders.
SECTION 6.2. Effect of Termination. In the event of the termination and
abandonment of this Agreement pursuant to Sections 6.1(a) or (b), this Agreement
shall forthwith become void and of no effect, without any liability on the part
of any party hereto or its affiliates, directors, officers or stockholders.
Nothing contained in this Section 6.2 shall relieve any party from liability for
any breach of this Agreement.
SECTION 6.3. Fees and Expenses.
(a) In the event that this Agreement shall be terminated pursuant to:
(i) Sections 6.1(c)(iii) or 6.1(d)(iii) or (iv) and within twelve
months thereafter the Company consummates a transaction with respect to a
Third Party Acquisition Proposal or the Company enters into an option,
agreement or letter of intent with respect to any Third Party Acquisition
Proposal or other arrangement intended to transfer the Company or control
of the Company to a Third Party, or the stockholders of the Company, in
response to a tender offer or exchange offer by any person, tender Shares
representing a 50% or greater voting interest in the Company or give
options or rights to any person to acquire such Shares; or
(ii) Section 6.1(d)(vi) and within twelve months thereafter the
Company consummates a transaction with respect to a Third Party Acquisition
Proposal, and at the time of the Company stockholders' meeting at which the
Company failed to obtain the requisite vote, there shall be outstanding an
offer by a Third Party to consummate, or there shall have been under
consideration by the Company, or there shall have been publicly announced a
plan or proposal with respect, to a Third Party Acquisition Proposal;
the Company shall pay to Parent a break-up fee in the amount of $1.25 million
plus an amount equal to $750,000 minus the Transaction Expenses (as defined
below) immediately upon consummation of the Third Party Acquisition Proposal as
provided under 6.3(a)(i) or (ii) above.
(b) At the earlier to occur of the consummation of a transaction with
respect to a Third Party Acquisition Proposal or thirty (30) days after the
termination of this Agreement pursuant to Sections 6.1(c)(iii) or 6.1(d)(iii),
(iv) or (vi), the Company shall reimburse Parent, Acquisition and their
affiliates for $750,000 of the documented out-of-pocket fees and expenses
actually incurred by any of them or on their behalf in connection with the
Merger and the consummation of all transactions contemplated by this Agreement
(including, without limitation, fees and expenses payable to investment bankers,
counsel and accountants to any of the foregoing (the "Transaction Expenses").
(c) Upon the termination of this Agreement pursuant to Sections 6.1(c)(i)
or (ii), the Company shall have full legal rights and remedies under applicable
law to recover all damages resulting from such
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termination. Notwithstanding the foregoing, but not in lieu thereof, Parent
shall reimburse the Company and its affiliates (not later than ten business days
after submission of statements therefor) for $750,000 of the documented
out-of-pocket fees and expenses actually incurred by any of them or on their
behalf in connection with the Merger and the consummation of all transactions
contemplated by this Agreement (including, without limitation, fees and expenses
payable to investment bankers, counsel and accountants to any of the foregoing).
(d) Upon the termination of this Agreement pursuant to Sections 6.1(d)(i)
or (ii), Parent and Acquisition shall have full legal rights and remedies under
applicable law to recover all damages resulting from such termination.
Notwithstanding the foregoing, but not in lieu thereof, the Company shall
reimburse Parent, Acquisition and their affiliates (not later than ten business
days after submission of statements therefor) for $750,000 of the documented
out-of-pocket fees and expenses actually incurred by any of them or on their
behalf in connection with the Merger and the consummation of all transactions
contemplated by this Agreement (including, without limitation, fees and expenses
payable to investment bankers, counsel and accountants to any of the foregoing).
(e) Except as specifically provided in this Section 6.3, each party shall
bear its own expenses in connection with this Agreement and the transactions
contemplated hereby.
SECTION 6.4. Amendment. This Agreement may be amended by action taken by
the Company, Parent and Acquisition at any time before or after approval of the
Merger by the stockholders of the Company but, after any such approval, no
amendment shall be made which requires the approval of such stockholders under
applicable law without such approval. This Agreement (including the Company
Disclosure Schedule) may be amended only by an instrument in writing signed on
behalf of the parties hereto.
SECTION 6.5. Extension, Waiver. At any time prior to the Effective Time,
each party hereto may (i) extend the time for the performance of any of the
obligations or other acts of the other party, (ii) waive any inaccuracies in the
representations and warranties of the other party contained herein or in any
document certificate or writing delivered pursuant hereto or (iii) waive
compliance by the other party with any of the agreements or conditions contained
herein. Any agreement on the part of any party hereto to any such extension or
waiver shall be valid only if set forth in an instrument, in writing, signed on
behalf of such party. The failure of any party hereto to assert any of its
rights hereunder shall not constitute a waiver of such rights.
ARTICLE 7
MISCELLANEOUS
SECTION 7.1. Non-survival of Representations and Warranties. The
representations and warranties made herein shall not survive beyond the
Effective Time or a termination of this Agreement. This Section 7.1 shall not
limit any covenant or agreement of the parties hereto which by its terms
requires performance after the Effective Time.
SECTION 7.2. [Reserved.]
SECTION 7.3. Entire Agreement, Assignment. This Agreement (including the
Company Disclosure Schedules) (a) constitutes the entire agreement between the
parties hereto with respect to the subject matter hereof and supersedes all
other prior or contemporaneous agreements and understandings both written and
oral between the parties with respect to the subject matter hereof and (b) shall
not be assigned by operation of law or otherwise; provided, however, that
Acquisition may assign any or all of its rights and obligations under this
Agreement to any subsidiary of Parent, but no such assignment shall relieve
Acquisition of its obligations hereunder if such assignee does not perform such
obligations.
SECTION 7.4. Validity. If any provision of this Agreement or the
application thereof to any person or circumstance is held invalid or
unenforceable the remainder of this Agreement and the application of such
provision to other persons or circumstances shall not be affected thereby and to
such end the provisions of this Agreement are agreed to be severable.
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SECTION 7.5. Notices. All notices, requests, claims, demands and other
communications hereunder shall be in writing and shall be given (and shall be
deemed to have been duly given upon receipt) by delivery in person, by facsimile
or by registered or certified mail (postage prepaid, return receipt requested)
to each other party as follows:
if to Parent or Acquisition:
c/o Technitrol Inc.
1210 Northbrook Drive, Suite 385
Trevose, PA 19053
Telecopier: (215) 355-7397
Attention: Thomas J. Flakoll
with a copy to:
Stradley, Ronon, Stevens & Young, LLP
2600 One Commerce Square
Philadelphia, Pa 19103-7098
Telecopier: (215) 564-8120
Attention: James M. Papada, III, Esquire
if to the Company to:
GTI Corporation
9715 Business Park
San Diego, CA 92131
Telecopier: (619) 537-2740
Attention: Albert Hugo Martinez
with a copy to:
Gibson Dunn & Crutcher LLP
333 South Grand Avenue
Los Angeles, CA 90071
Telecopier: (213) 229-7520
Attention: Bruce D. Meyer, Esquire
or to such other address as the person to whom notice is given may have
previously furnished to the others in writing in the manner set forth above.
SECTION 7.6. Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Delaware without regard to
the principles of conflicts of law thereof.
SECTION 7.7. Descriptive Headings. The descriptive headings herein are
inserted for convenience of reference only and are not intended to be part of or
to affect the meaning or interpretation of this Agreement.
SECTION 7.8. Parties in Interest. This Agreement shall be binding upon and
inure solely to the benefit of each party hereto and its successors and
permitted assigns and, except as provided in Sections 4.11 and 7.3, nothing in
this Agreement express or implied is intended to or shall confer upon any other
person any rights, benefits or remedies of any nature whatsoever under or by
reason of this Agreement.
SECTION 7.9. Certain Definitions. For the purposes of this Agreement the
term:
(a) "affiliate" means a person that, directly or indirectly, through
one or more intermediaries controls, is controlled by or is under common
control with the first-mentioned person;
(b) "business day" means any day other than a day on which the New
York Stock Exchange is closed;
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(c) "capital stock" means common stock, preferred stock, partnership
interests, limited liability company interests or other ownership interests
entitling the holder thereof to vote with respect to matters involving the
issuer thereof;
(d) "Code" means the Internal Revenue Code of 1986, as amended;
(e) "knowledge" or "known" means, with respect to any matter in
question, the actual knowledge of an officer of the Company and its
subsidiaries or Parent, as the case may be;
(f) "person" means an individual, corporation, partnership, limited
liability company, association, trust, unincorporated organization or other
legal entity; and
(g) "subsidiary" or "subsidiaries" of the Company, Parent, the
Surviving Corporation or any other person means any corporation,
partnership, limited liability company, association, trust, unincorporated
association or other legal entity of which the Company, Parent, the
Surviving Corporation or any such other person, as the case may be, (either
alone or through or together with any other subsidiary) owns, directly or
indirectly, 50% or more of the capital stock the holders of which are
generally entitled to vote for the election of the board of directors or
other governing body of such corporation or other legal entity.
SECTION 7.10. Personal Liability. This Agreement shall not create or be
deemed to create or permit any personal liability or obligation on the part of
any direct or indirect stockholder of the Company or Parent or any officer,
director, employee, agent, representative or investor of any party hereto.
SECTION 7.11. Specific Performance. The parties hereby acknowledge and
agree that the failure of any party to perform its agreements and covenants
hereunder, including its failure to take all actions as are necessary on its
part to the consummation of the Merger, will cause irreparable injury to the
other parties, for which damages, even if available, will not be an adequate
remedy. Accordingly, each party hereby consents to the issuance of injunctive
relief by any court of competent jurisdiction to compel performance of such
party's obligations and to the granting by any court of the remedy of specific
performance of its obligations hereunder; provided, however, that if a party
hereto is entitled to receive payment or reimbursement of expenses pursuant to
Sections 6.3(a), or 6.3(b), (c) or (d) it shall not be entitled to specific
performance to compel the consummation of the Merger.
SECTION 7.12. Consent to Jurisdiction. The parties hereto submit to and
consent to the jurisdiction of the state and Federal courts located in the State
of Delaware and agree that the venue shall be proper and the forum shall be
proper.
SECTION 7.13. Limitation on Damages. Under no circumstances shall any party
be liable to any other party, either for indirect, special, consequential or
punitive damages arising out of or in connection with this Agreement. This
Section 7.13 shall have no application to indemnification pursuant to Section
4.11 arising out of any third-party claim.
SECTION 7.14. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original but all of which
shall constitute one and the same agreement.
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IN WITNESS WHEREOF, each of the parties has caused this Agreement to be
duly executed on its behalf as of the day and year first above written.
TECHNITROL INTERNATIONAL, INC.
By: /s/ ALBERT THORP III
--------------------------------------
Name: Albert Thorp III
Title: President
GTI CORPORATION
By: /s/ ALBERT J. HUGO-MARTINEZ
--------------------------------------
Name: Albert J. Hugo-Martinez
Title: President CEO
TECHNITROL ACQUISITION, INC.
By: /s/ ALBERT THORP III
--------------------------------------
Name: Albert Thorp III
Title: President
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EXHIBIT A
OPINION OF COUNSEL TO THE COMPANY
1. Existence/subsistence of GTI.
2. GTI's outstanding capital stock is duly authorized, validly issued, fully
paid and non-assessible. Telemetrix warrants are canceled.
3. GTI has requisite corporate power and authority to execute/deliver the
Agreement and to perform its obligations under the Agreement and consummate
the transactions contemplated by the Agreement. Execution/delivery and
consummation of the transactions by GTI of the transaction contemplated by
the Agreement have been duly and validly authorized and no other corporate
actions on the part of GTI are necessary to authorize the Agreement or to
consummate the transactions contemplated by the Agreement.
4. The number of shares of common stock perfecting appraisal rights does not
exceed 10% of the issued and outstanding shares of GTI's capital stock.
5. Assuming that all necessary corporate action in respect to the Merger has
been duly and validly taken by Parent and Acquisition, upon consummation of
the transactions contemplated by the Agreement and the filing of GTI and
Acquisition with the Secretary of the State of Delaware of a Certificate of
Merger in accordance with Delaware law, the Merger will have been validly
effected in accordance with the Delaware General Corporation Law.
6. Merger Agreement is valid and binding (normal exceptions).
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EXHIBIT B
OPINION OF COUNSEL TO PARENT
1. Existence/subsistence/organization of Parent and existence/subsistence of
Technitrol, Inc.
2. Existence/subsistence/organization of Acquisition.
3. Power/authority to execute and deliver Agreement and perform obligations and
consummate transactions as set forth in Agreement.
4. Due and valid authorization by all necessary corporate action to execute and
deliver the Agreement by Parent and Acquisition. Execution, delivery and
performance of obligations under the Agreement will not result in a default
or event of default under any material agreement to which Parent or
Technitrol, Inc. is a party.
5. Power/authority of Technitrol, Inc. to guarantee the obligations of Parent
and Acquisition under the Agreement and to execute and deliver the Guaranty
to GTI.
6. Assuming all necessary corporate action in respect of the Merger has been
duly and validly taken by GTI, upon consummation of the transactions
contemplated by the Agreement and necessary filings by GTI and Acquisition in
Delaware, the Merger will have been validly effected in accordance with the
Delaware General Corporation Law.
7. Execution of Guaranty does not result in default under any material agreement
to which Technitrol, Inc. is a party.
8. Merger Agreement and Guaranty are valid and binding (normal exceptions).
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APPENDIX B
(LOGO)
May 26, 1998
Special Committee of the Board of Directors
and the Board of Directors
GTI Corporation
9715 Business Park Drive
San Diego, CA 92131
Gentlemen:
You have requested our opinion as investment bankers as to the fairness, from a
financial point of view, to the holders of the outstanding shares of Common
Stock, par value $0.04 per share ("GTI Common Stock"), of GTI Corporation, a
Delaware corporation (the "Company"), of the financial terms of the Transaction.
For the purposes of this opinion, the "Transaction" means the merger described
below pursuant to the Agreement and Plan of Merger among the Company, Technitrol
International, Inc., a Delaware corporation ("Parent"), and Technitrol
Acquisition, Inc., a Delaware corporation and a wholly owned subsidiary of
Parent ("Acquisition"), to be dated as of May 26, 1998 (the "Agreement").
The Agreement provides for the merger of Acquisition with and into the Company,
subject to the terms and conditions thereof and as more specifically set forth
therein. Upon effectiveness of the Transaction, among other things, (i) each
issued and outstanding share of GTI Common Stock (other than Company Dissenting
Shares, as defined in the Agreement, shares held in the Company's treasury or by
any of the Company's subsidiaries and shares then owned by Parent or Acquisition
or any other subsidiary of Parent) will be converted into the right to receive
$3.10 in cash, without interest and (ii) each issued and outstanding share of
the Company's First Series Cumulative Convertible Preferred Stock, par value
$1.00 per share ("Preferred Stock"), will be converted into the right to receive
the product of 234.314 multiplied by $3.10.
In the ordinary course of its services, Cowen & Company ("Cowen") is regularly
engaged in the valuation and pricing of business and their securities and in
advising corporate securities issuers on related matters.
In arriving at our opinion, Cowen has, among other things:
(1) reviewed the Company's combined and consolidated financial
statements for the fiscal years ended December 31, 1995 through December
31, 1997, unaudited financial statements for the fiscal quarter ended March
31, 1998, certain publicly available filings with the Securities and
Exchange Commission and certain other relevant financial and operating data
of the Company;
(2) reviewed the May 25, 1998 draft of the Agreement provided to us
by management of the Company;
(3) held meetings and discussions with management and senior personnel
of the Company to discuss the business, operations, historical financial
results and future prospects of the Company;
(4) reviewed financial projections furnished to us by the management
of the Company, including, among other things, the capital structure,
sales, operating income, net income, cash flow, capital requirements and
other data of the Company we deemed relevant;
(5) reviewed the operating and financial results of the Company over
the last three fiscal years and compared its results with the operating and
financial results of certain other publicly traded companies which we
deemed relevant;
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(6) reviewed the public market valuation and trading multiples of the
Company, and compared the Company's trading multiples to the trading
multiples of certain other publicly traded companies which we deemed
relevant;
(7) reviewed the historical prices and trading activity of GTI Common
Stock from May 22, 1997 to May 22, 1998 and from May 22, 1995 to May 22,
1998 and compared the price performance of GTI Common Stock to the stock
price performance of certain other publicly traded companies which we
deemed relevant over the period from May 22, 1997 to May 22, 1998;
(8) compared the financial terms of the Transaction with the financial
terms of the acquisitions of certain other companies which we deemed
relevant, including a comparison of the premiums paid in the Transaction
with the premiums paid in those other acquisitions; and
(9) conducted such other studies, analysis, inquiries and
investigations as we deemed appropriate.
At the request of the Company, Cowen solicited third party indications of
interest in acquiring all or substantially all of the stock or assets of
the Company.
On May 22, 1998, the closing price of GTI Common Stock in the last transaction
reported by the National Association of Securities Dealers, Inc. Automated
Quotation/National Market System ("Nasdaq/NMS") was $2.75.
In rendering our opinion, we relied upon the Company's management with respect
to the accuracy and completeness of the financial and other information
furnished to us as described above. With respect to the financial projections
furnished to us by management of the Company, we have assumed, with your
consent, the attainability of the financial results therein and that they have
been reasonably prepared on bases reflecting the best currently available
estimates and judgments of the Company's management as to the future financial
performance of the Company. We have not assumed any responsibility for
independent verification of such information, including financial information,
nor have we made an independent evaluation or appraisal of any of the properties
or assets of the Company. With respect to all legal matters relating to the
Company, Parent and the Transaction, we have relied on the advice of legal
counsel of the Company. We render no opinion with respect to such matters.
Our opinion is necessarily based on general economic, market, financial and
other conditions as they exist on, and can be evaluated as of, the date hereof,
as well as the information currently available to us. It should be understood
that, although subsequent developments may affect our opinion, we do not have
any obligation to update, revise or reaffirm our opinion. Our opinion does not
constitute a recommendation to any stockholder as to how such stockholder should
vote on the proposed Transaction. Our opinion is limited to the fairness, from a
financial point of view, of the financial terms of the Transaction to the
holders of GTI Common Stock (other than Parent and its subsidiaries and
affiliates). We express no opinion with respect to any other reasons, legal,
business or otherwise, that may support the decision of the Special Committee of
the Board of Directors to recommend to the Board of Directors the approval of,
the decision of the Board of Directors to approve, or the Company's decision to
enter into, the Agreement.
For purposes of rendering our opinion we have assumed, in all respects material
to our analysis, that the representations and warranties of each party contained
in the Agreement are true and correct, that each party will perform all of the
covenants and agreements required to be performed by it under the Agreement and
that all conditions to the consummation of the Transaction will be satisfied
without waiver thereof. We have also assumed that all governmental, regulatory
or other consents and approvals contemplated by the Agreement will be obtained
and that in the course of obtaining any of those consents no restrictions will
be imposed or waivers made that would have a material adverse effect on the
contemplated benefits of the Transaction.
We have also assumed, with your consent, that prior to the effectiveness of the
Transaction, each issued and outstanding share of Preferred Stock will be
converted into 234.314 shares of GTI Common Stock. We express no opinion, nor
have we conducted any analysis, with respect to a transaction that does not
contemplate the aforementioned conversion of all outstanding Preferred Stock
shares into GTI Common
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Stock shares. We also express no opinion as to the consideration that could have
been received by the holders of the Preferred Stock absent the conversion.
We have acted as financial advisor to the Special Committee of the Board of
Directors of the Company in connection with the Transaction and will receive a
fee for our services, including the rendering of this opinion, a significant
portion of which is contingent upon the consummation of the Transaction.
On the basis of our review and analysis, as described above, and subject to the
limitations and assumptions set forth herein, it is our opinion as investment
bankers that, as of the date hereof, the financial terms of the Transaction are
fair, from a financial point of view, to the holders of GTI Common Stock other
than Parent and its subsidiaries and affiliates.
Very truly yours,
/s/ COWEN & COMPANY
- ------------------------------------
Cowen & Company
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APPENDIX C
APPRAISAL RIGHTS STATUTE
DELAWARE GENERAL CORPORATION LAW
SECTION 262 APPRAISAL RIGHTS -- (a) Any stockholder of a corporation of
this State who holds shares of stock on the date of the making of a demand
pursuant to subsection (d) of this section with respect to such shares, who
continuously holds such shares through the effective date of the merger or
consolidation, who has otherwise complied with subsection (d) of this section
and who has neither voted in favor of the merger or consolidation nor consented
thereto in writing pursuant to Section 228 of this title shall be entitled to an
appraisal by the Court of Chancery of the fair value of the stockholder's shares
of stock under the circumstances described in subsections (b) and (c) of this
section. As used in this section, the word "stockholder" means a holder of
record of stock in a stock corporation and also a member of record of a nonstock
corporation; the words "stock" and "share" mean and include what is ordinarily
meant by those words and also membership or membership interest of a member of a
nonstock corporation; and the words "depository receipt" mean a receipt or other
instrument issued by a depository representing an interest in one or more
shares, or fractions thereof, solely of stock of a corporation, which stock is
deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to Section 251 (other than a merger effected pursuant to
Section 251(g) of this title), Section 252, Section 254, Section 257, Section
258, Section 263 or Section 264 of this title:
(1) Provided, however, that no appraisal rights under this section
shall be available for the shares of any class or series of stock, which
stock, or depository receipts in respect thereof, at the record date fixed
to determine the stockholders entitled to receive notice of and to vote at
the meeting of stockholders to act upon the agreement of merger or
consolidation, were either (i) listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or (ii) held
of record by more than 2,000 holders; and further provided that no
appraisal rights shall be available for any shares of stock of the
constituent corporation surviving a merger if the merger did not require
for its approval the vote of the stockholders of the surviving corporation
as provided in subsection (f) of Section 251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series
of stock of a constituent corporation if the holders thereof are required
by the terms of an agreement of merger or consolidation pursuant to
Sections 251, 252, 254, 257, 258, 263 and 264 of this title to accept for
such stock anything except:
a. Shares of stock of the corporation surviving or resulting from
such merger or consolidation, or depository receipts in respect thereof;
b. Shares of stock of any other corporation, or depository receipts
in respect thereof, which shares of stock (or depository receipts in
respect thereof) or depository receipts at the effective date of the
merger or consolidation will be either listed on a national securities
exchange or designated as a national market system security on an
interdealer quotation system by the National Association of Securities
Dealers, Inc. or held of record by more than 2,000 holders;
c. Cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a. and b. of this
paragraph; or
d. Any combination of the shares of stock, depository receipts and
cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a., b. and c. of this
paragraph.
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under Section 253 of this title is not owned by
the parent corporation immediately prior to the merger, appraisal rights
shall be available for the shares of the subsidiary Delaware corporation.
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(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
the procedures of this section, including those set forth in subsections (d) and
(e) of this section, shall apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights
are provided under this section is to be submitted for approval at a
meeting of stockholders, the corporation, not less than 20 days prior to
the meeting, shall notify each of its stockholders who was such on the
record date for such meeting with respect to shares for which appraisal
rights are available pursuant to subsections (b) or (c) hereof that
appraisal rights are available for any or all of the shares of the
constituent corporations, and shall include in such notice a copy of this
section. Each stockholder electing to demand the appraisal of his shares
shall deliver to the corporation, before the taking of the vote on the
merger or consolidation, a written demand for appraisal of his shares. Such
demand will be sufficient if it reasonably informs the corporation of the
identity of the stockholder and that the stockholder intends thereby to
demand the appraisal of his shares. A proxy or vote against the merger or
consolidation shall not constitute such a demand. A stockholder electing to
take such action must do so by a separate written demand as herein
provided. Within 10 days after the effective date of such merger or
consolidation, the surviving or resulting corporation shall notify each
stockholder of each constituent corporation who has complied with this
subsection and has not voted in favor of or consented to the merger or
consolidation of the date that the merger or consolidation has become
effective; or
(2) If the merger or consolidation was approved pursuant to Section
228 or Section 253 of this title, each constituent corporation, either
before the effective date of the merger or consolidation or within ten days
thereafter, shall notify each of the holders of any class or series of
stock of such constituent corporation who are entitled to appraisal rights
of the approval of the merger or consolidation and that appraisal rights
are available for any or all shares of such class or series of stock of
such constituent corporation, and shall include in such notice a copy of
this section; provided that, if the notice is given on or after the
effective date of the merger or consolidation, such notice shall be given
by the surviving or resulting corporation to all such holders of any class
or series of stock of a constituent corporation that are entitled to
appraisal rights. Such notice may, and, if given on or after the effective
date of the merger or consolidation, shall, also notify such stockholders
of the effective date of the merger or consolidation. Any stockholder
entitled to appraisal rights may, within 20 days after the date of mailing
of such notice, demand in writing from the surviving or resulting
corporation the appraisal of such holder's shares. Such demand will be
sufficient if it reasonably informs the corporation of the identity of the
stockholder and that the stockholder intends thereby to demand the
appraisal of such holder's shares. If such notice did not notify
stockholders of the effective date of the merger or consolidation, either
(i) each such constituent corporation shall send a second notice before the
effective date of the merger or consolidation notifying each of the holders
of any class or series of stock of such constituent corporation that are
entitled to appraisal rights of the effective date of the merger or
consolidation or (ii) the surviving or resulting corporation shall send
such a second notice to all such holders on or within 10 days after such
effective date; provided, however, that if such second notice is sent more
than 20 days following the sending of the first notice, such second notice
need only be sent to each stockholder who is entitled to appraisal rights
and who has demanded appraisal of such holder's shares in accordance with
this subsection. An affidavit of the secretary or assistant secretary or of
the transfer agent of the corporation that is required to give either
notice that such notice has been given shall, in the absence of fraud, be
prima facie evidence of the facts stated therein. For purposes of
determining the stockholders entitled to receive either notice, each
constituent corporation may fix, in advance, a record date that shall be
not more than 10 days prior to the date the notice is given, provided, that
if the notice is given on or after the effective date of the merger or
consolidation, the record date shall be such effective date. If no record
date is fixed and the notice is given prior to the effective date, the
record date shall be the close of business on the day next preceding the
day on which the notice is given.
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(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder who has
complied with subsections (a) and (d) hereof and who is otherwise entitled to
appraisal rights, may file a petition in the Court of Chancery demanding a
determination of the value of the stock of all such stockholders.
Notwithstanding the foregoing, at any time within 60 days after the effective
date of the merger or consolidation, any stockholder shall have the right to
withdraw his demand for appraisal and to accept the terms offered upon the
merger or consolidation. Within 120 days after the effective date of the merger
or consolidation, any stockholder who has complied with the requirements of
subsections (a) and (d) hereof, upon written request, shall be entitled to
receive from the corporation surviving the merger or resulting from the
consolidation a statement setting forth the aggregate number of shares not voted
in favor of the merger or consolidation and with respect to which demands for
appraisal have been received and the aggregate number of holders of such shares.
Such written statement shall be mailed to the stockholder within 10 days after
his written request for such a statement is received by the surviving or
resulting corporation or within 10 days after expiration of the period for
delivery of demands for appraisal under section (d) hereof, whichever is later.
(f) Upon the filing of any such petition by a stockholder, service of a
copy thereof shall be made upon the surviving or resulting corporation, which
shall within 20 days after such service file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the surviving or resulting corporation. If the petition shall be
filed by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if so
ordered by the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the surviving or
resulting corporation and to the stockholders shown on the list at the addresses
therein stated. Such notice shall also be given by 1 or more publications at
least 1 week before the day of the hearing, in a newspaper of general
circulation published in the City of Wilmington, Delaware or such publication as
the Court deems advisable. The forms of the notices by mail and by publication
shall be approved by the Court, and the costs thereof shall be borne by the
surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled to
appraisal rights. The Court may require the stockholders who have demanded an
appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as to
such stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any element
of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair rate
of interest, the Court may consider all relevant factors, including the rate of
interest which the surviving or resulting corporation would have had to pay to
borrow money during the pendency of the proceeding. Upon application by the
surviving or resulting corporation or by any stockholder entitled to participate
in the appraisal proceeding, the Court may, in its discretion, permit discovery
or other pretrial proceedings and may proceed to trial upon the appraisal prior
to the final determination of the stockholder entitled to an appraisal. Any
stockholder whose name appears on the list filed by the surviving or resulting
corporation pursuant to subsection (f) of this section and who has submitted his
certificates of stock to the Register in Chancery, if such is required, may
participate fully in all proceedings until it is finally determined that he is
not entitled to appraisal rights under this section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so made to each such stockholder, in the case of
holders of uncertificated stock forthwith, and the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
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other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded his appraisal rights as provided in subsection (d)
of this section shall be entitled to vote such stock for any purpose or to
receive payment of dividends or other distributions on the stock (except
dividends or other distributions payable to stockholders of record at a date
which is prior to the effective date of the merger or consolidation); provided,
however, that if no petition for an appraisal shall be filed within the time
provided in subsection (e) of this section, or if such stockholder shall deliver
to the surviving or resulting corporation a written withdrawal of his demand for
an appraisal and an acceptance of the merger or consolidation, either within 60
days after the effective date of the merger or consolidation as provided in
subsection (e) of this section or thereafter with the written approval of the
corporation, then the right of such stockholder to an appraisal shall cease.
Notwithstanding the foregoing, no appraisal proceeding in the Court of Chancery
shall be dismissed as to any stockholder without the approval of the Court, and
such approval may be conditioned upon such terms as the Court deems just.
(i) The shares of the surviving or resulting corporation to which the
shares of such objecting stockholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized and
unissued shares of the surviving or resulting corporation. (Last amended by Ch.
120, L.'97, eff. 7-1-97.)
C-4
<PAGE> 125
PROXY
GTI CORPORATION
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned, revoking all previous proxies, hereby appoints Albert J.
Hugo-Martinez and Bruce C. Myers (the "Proxies"), or any of them acting
individually, as the proxy of the undersigned, with full power of substitution,
to vote, as indicated below and in their discretion upon such other matters as
may properly come before the meeting, all shares which the undersigned would be
entitled to vote at the Special Meeting of the Company to be held at __________
_____________________ and at any postponement or adjournment thereof.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS. UNLESS OTHERWISE
SPECIFIED, THE SHARES WILL BE VOTED "FOR" THE APPROVAL OF THE MERGER AND THE
MERGER AGREEMENT DESCRIBED ON THE REVERSE SIDE HEREOF. THIS PROXY ALSO DELEGATES
DISCRETIONARY AUTHORITY WITH RESPECT TO ANY OTHER BUSINESS WHICH MAY PROPERLY
COME BEFORE THE MEETING OR ANY ADJOURNMENT OR POSTPONEMENT THEREOF.
PLEASE DATE AND SIGN YOUR PROXY ON THE REVERSE SIDE AND RETURN IT PROMPTLY.
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<PAGE> 126
Please mark
your votes as
indicated in [X]
this example
1. To approve and adopt an Agreement and Plan of FOR AGAINST ABSTAIN
Merger, dated as of May 26, 1998 (the "Merger
Agreement"), by and between GTI, Technitrol [ ] [ ] [ ]
International, Inc. ("Parent," a wholly-owned
subsidiary of Technitrol, Inc., NYSE:TNL) and
Technitrol Acquisition, Inc. ("Acquisition," a
wholly-owned subsidiary of Parent), and the
merger of Acquisition into GTI as provided for
therein.
2. In accordance with their best judgment, the
Proxies are authorized to transact and vote upon
such other business as may properly come before the
Special Meeting and any postponement or adjournment
thereof.
THE UNDERSIGNED HEREBY ACKNOWLEDGES RECEIPT OF THE
NOTICE OF SPECIAL MEETING AND PROXY STATEMENT.
Signature(s)_________________________________________________ Date:_____________
NOTE: PLEASE SIGN THIS PROXY EXACTLY AS NAME(S) APPEARS ON YOUR STOCK
CERTIFICATE. WHEN SIGNING AS ATTORNEY-IN-FACT, EXECUTOR, ADMINISTRATOR, TRUSTEE
OR GUARDIAN, PLEASE ADD YOUR TITLE AS SUCH, AND IF SIGNER IS A CORPORATION,
PLEASE SIGN WITH FULL CORPORATE NAME BY A DULY AUTHORIZED OFFICER OR OFFICERS
AND AFFIX THE CORPORATE SEAL. WHERE STOCK IS ISSUED IN THE NAME OF TWO (2) OR
MORE PERSONS, ALL SUCH PERSONS SHOULD SIGN.
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