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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 28, 1998
Commission File Number 1-4289
GTI CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 05-0278990
- ------------------------------- ----------------------------------
(State or other jurisdiction of I.R.S. Employer Identification No.
incorporation or organization)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
As of May 8, 1998, the Registrant had one class of Common Stock, at a par value
of $.04 per share, with 8,973,475 shares outstanding.
This Report on Form 10-Q contains 12 pages.
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INDEX
GTI CORPORATION
<TABLE>
<CAPTION>
Page
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<S> <C>
PART I - FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS (UNAUDITED)
Condensed consolidated statements of operations for the three months ended
March 28, 1998 and March 29, 1997 3
Condensed consolidated balance sheets as of March 28, 1998 and
December 31, 1997 4
Condensed consolidated statements of cash flows for the three months ended
March 28, 1998 and March 29, 1997 5
Notes to condensed consolidated financial statements 6
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS 8
PART II - OTHER INFORMATION
ITEM 4: SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS 11
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K 11
SIGNATURES 12
</TABLE>
2
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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
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<S> <C> <C>
Sales $ 14,002 $ 22,393
Cost of sales 13,664 16,509
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Gross profit 338 5,884
Operating expenses 4,841 5,476
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Operating profit (loss) (4,503) 408
Other expenses 83 120
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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.
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GTI CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
March 28, 1998
(Unaudited) December 31, 1997
-------------- ------------------
<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.
4
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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
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Net cash provided (used) by operating activities 1,089 (2,548)
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Cash flows from investing activities:
Purchases of property, plant and equipment (509) (1,648)
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Net cash provided (used) by investing activities (509) (1,648)
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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
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Net change in cumulative translation adjustment -- 47
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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.
5
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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. 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
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March 28, 1998 March 29, 1997
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<S> <C> <C>
Interest paid $ 92 $ 92
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Income taxes paid $ 43 $ 369
================== ==================
</TABLE>
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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
(Unaudited) December 31, 1997
------------------ ------------------
<S> <C> <C>
Raw materials $ 7,940 $ 9,881
Work in process 2,027 2,871
Finished goods 9,570 9,042
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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.
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>
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Form 10-Q contains certain statements of a forward-looking nature relating
to future events or the future performance of the Company. Existing and
prospective investors are cautioned that such statements are only predictions
and that actual events or results may differ materially. In evaluating such
statements, such investors should specifically consider various factors,
including risks and uncertainties, identified in the Company's Annual Report on
Form 10-K/A for the year ended December 31, 1997 and other filings with the
Securities and Exchange Commission which could cause actual results to differ
materially from those indicated by such forward-looking statements. Risks and
uncertainties include, but are 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 the Company or its customers,
price pressures and other competitive factors, and volatility in the market for
the Company's products.
Management's discussion and analysis of financial condition and results of
operations should be read in conjunction with the condensed consolidated
financial statements and notes to condensed consolidated financial statements
included elsewhere herein.
Figures are expressed in thousands, except per share amounts.
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 Valor's customers individually
accounted for more than 10% of Valor'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 Valor's customers, each
individually accounting for more than 10% of Valor's sales, collectively
accounted for 28.7% of total sales. The sales percentage from Valor'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.
Valor'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
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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.
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.
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
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assurance that the Company will be able to reduce costs in an amount sufficient
to offset the negative effects of the revenue decline.
See also Management's Discussion and Analysis of Financial Condition and Results
of Operations included in the Company's Annual Report on Form 10-K/A for the
year ended December 31, 1997 for a further discussion of trends and
uncertainties.
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. These sources and uses of cash are detailed in the Consolidated
Statements of Cash Flows included elsewhere in this Form 10-Q.
As of March 28, 1998, the Company has foreign tax refunds receivable totaling
$2,878 which the Company expects to collect in 1998.
In the first quarter of 1998, the Company purchased capital equipment totaling
$509. These expenditures were primarily for production equipment. 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 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.
10
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PART II - OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
Exhibit 27 - Financial Data Schedule (electronic filing only)
b) Reports on Form 8-K
None.
11
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GTI CORPORATION
---------------
(Registrant)
Date: May 15, 1998 By: /s/ ALBERT J. HUGO-MARTINEZ
-------------------------------------
Albert J. Hugo-Martinez
President and Chief Executive Officer
Date: May 15, 1998 By: /s/ BRUCE C. MYERS
-------------------------------------
Bruce C. Myers
Vice President Finance and Treasurer
(Principal Financial and
Accounting Officer)
Date: May 15, 1998 By: /s/ PETER B. HARKER
-------------------------------------
Peter B. Harker
Corporate Controller
12
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-28-1998
<CASH> 6,851
<SECURITIES> 0
<RECEIVABLES> 9,541
<ALLOWANCES> 0
<INVENTORY> 19,537
<CURRENT-ASSETS> 42,037
<PP&E> 12,802
<DEPRECIATION> 0
<TOTAL-ASSETS> 74,936
<CURRENT-LIABILITIES> 10,942
<BONDS> 0
0
8,110
<COMMON> 359
<OTHER-SE> 49,740
<TOTAL-LIABILITY-AND-EQUITY> 74,936
<SALES> 14,002
<TOTAL-REVENUES> 14,002
<CGS> 13,664
<TOTAL-COSTS> 4,841
<OTHER-EXPENSES> 83
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (4,586)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,586)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (899)
<NET-INCOME> (5,485)
<EPS-PRIMARY> (0.62)
<EPS-DILUTED> (0.62)
</TABLE>
