================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): November 16, 1998
TECHNITROL, INC.
----------------
(Exact Name of registrant as specified in its charter)
Pennsylvania 1-5375 23-1292472
- -------------------------------- ------------------------ -------------------
(State or other jurisdiction of (Commission File Number) (I.R.S. Employer
incorporation) Identification No.)
1210 Northbrook Drive, Suite 385, Trevose, Pennsylvania 19053
-------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (215) 355-2900
--------------
Not Applicable
--------------
(Former name or former address, if changed since last report)
Page 1 of 10
<PAGE>
The undersigned registrant hereby amends the following items, financial
statements and exhibits of its report on Form 8-K dated November 30, 1998, as
set forth in the following pages:
Item 7. Financial Statements and Exhibits
Paragraphs (a) and (b) of Item 7 are amended in their entirety.
Paragraph (c) is amended to add exhibit (23).
Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the
Private Securities Litigation Reform Act of 1995
This Current Report on Form 8-K/A contains certain forward-looking
statements regarding Technitrol, Inc. ("Technitrol" or the "Company") including
statements regarding the acquisition of GTI Corporation ("GTI") and the impact
of the acquisition on Technitrol and its financial condition and operating
results. These statements are based on the Company's expectations, which are
believed to be reasonable, but are subject to a number of risks and
uncertainties, many of which are beyond the Company's control. Such risks
include, but are not limited to, the successful integration of GTI's operations
into Technitrol facilities, the achievement of anticipated cost savings and
synergies, the risks inherent in operating in developing countries, and the
market conditions of those markets the Company sells product
into, particularly the local area network market. These risks and uncertainties
could cause actual results to differ materially from those in the
forward-looking statements.
Page 2 of 10
<PAGE>
Item 7. Financial Statements and Exhibits.
----------------------------------
(a) Financial Statements of the Business Acquired Page(s)
--------------------------------------------- -
Audited financial statements of GTI Corporation
-----------------------------------------------
Independent Auditors' Report F-1
Consolidated Statements of Operations for the years ended F-2
December 31, 1997, 1996 and 1995
Consolidated Balance Sheets as of December 31, 1997 F-3
and 1996
Consolidated Statements of Stockholders' Equity for the F-4
years ended December 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows for the years ended F-5
December 31, 1997, 1996 and 1995
Notes to the Consolidated Financial Statements F-6 -- F17
Unaudited interim financial statements of GTI Corporation
---------------------------------------------------------
Condensed Consolidated Statements of Operations for F-18
the nine months ended September 26, 1998 and
September 27, 1997
Condensed Consolidated Balance Sheet as of F-19
September 26, 1998 and December 31, 1997
Condensed Consolidated Statements of Cash Flows for F-20
the nine months ended September 26, 1998 and
September 27, 1997
Notes to Condensed Consolidated Financial Statements F-21--F22
(b) Unaudited Pro Forma Financial Information
-----------------------------------------
Pro Forma Condensed Combined Balance Sheet
as of September 30, 1998 5
Pro Forma Condensed Combined Statements of Operations
for the year ended December 31, 1997 and for
the nine months ended September 30, 1998 6-7
Notes to Pro Forma Condensed Combined Financial
Statements 8-9
(c) Exhibits
--------
(2) Agreement and Plan of Merger (previously filed).
(23) Consent of Arthur Andersen LLP, dated
January 25, 1999
Page 3 of 10
<PAGE>
Unaudited Pro Forma Condensed Combined Financial Information
- ------------------------------------------------------------
The following unaudited pro forma condensed combined financial information
presents the Pro Forma Condensed Combined Balance Sheet as of September 30, 1998
of Technitrol, Inc. and Subsidiaries ("Technitrol" or the "Company") and of GTI
Corporation ("GTI") giving effect to the acquisition of GTI as if the
acquisition had been consummated on September 30, 1998. The Pro Forma Condensed
Combined Statement of Operations is presented for the year ended December 31,
1997 and for the nine month period ended September 30, 1998 giving effect to the
acquisition of GTI as if the acquisition had been consummated on January 1,
1997.
The unaudited pro forma condensed combined financial information is based
on the historical consolidated financial statements of the Company and the
historical consolidated financial statements of GTI after giving effect to the
acquisition transaction under the purchase method of accounting and the
assumptions and adjustments described in the accompanying Notes to Pro Forma
Condensed Combined Financial Statements. A preliminary allocation of purchase
price to the assets acquired and liabilities assumed has been made using
estimated fair values that include values based on independent appraisals and
management estimates. These estimates are subject to adjustment to reflect
actual amounts. Any subsequent adjustments are expected to occur by November 30,
1999 and are not expected to have a material impact on the Company's financial
position.
As the pro forma information is based on historical financial results and
does not reflect any anticipated cost savings as a result of integrating GTI's
operations into existing Technitrol facilities, management of the Company does
not believe that the pro forma condensed combined financial information is
indicative of the results that actually would have occurred if the acquisition
had been consummated on the date indicated or which may be attained in the
future. As reflected in the historical financial statements presented herein,
GTI experienced significant financial difficulty prior to its acquisition by
Technitrol and Technitrol plans to make significant changes in GTI's business
and realize significant cost savings and synergies as a result of such changes.
However, there can be no assurance regarding the extent of such changes, cost
savings or any synergies that will ultimately occur. The pro forma information
is provided for illustrative purposes only.
The unaudited pro forma condensed consolidated financial information should
be read in conjunction with the historical financial statements, and the
accompanying notes thereto, of Technitrol and GTI. The historical financial
statements and the accompanying notes of GTI as of December 31, 1997 and 1996
and for each of the years in the three year period ended December 31, 1997 and
as of and for the nine month period ended September 26, 1998 and September 27,
1997 have been previously filed with the Securities and Exchange Commission and
are included herein. The historical financial statements of Technitrol as of and
for the year ended December 31, 1997 and as of and for the nine month period
ended September 30, 1998 have been previously filed with the Securities and
Exchange Commission.
Page 4 of 10
<PAGE>
<TABLE>
<CAPTION>
Technitrol, Inc. and GTI Corporation
Pro Forma Condensed Combined Balance Sheet
September 30, 1998
(Unaudited)
(In thousands of dollars)
Historical
Historical GTI Pro Forma
Technitrol Note (1) Adjustments Note (2) Pro Forma
---------- -------- ----------- -------- ---------
<S> <C> <C> <C> <C> <C>
Assets
Cash and equivalents $41,754 $7,259 $(13,710) (a) $35,303
Accounts receivable, net 68,755 6,001 74,756
Inventories 62,897 10,868 73,765
Prepaid expenses and other current assets 5,965 5,023 10,988
----- ------- --------
Current assets 179,371 29,151 194,812
Property, plant and equipment, net 74,659 10,609 658 (b) 85,926
Deferred income taxes 9,024 0 8,000 (c) 17,024
Excess of cost over net assets acquired, net
and other assets 36,000 19,490 (18,458) (d)
3,421 (e) 40,453
-------- ------- --------
$299,054 $59,250 $338,215
======== ======= ========
Liabilities and shareholders' equity
Notes payable and current installments of
long-term debt $5,526 $625 $6,151
Accounts payable and accrued expenses 89,693 7,755 5,000 (f) 102,448
-------- ------- --------
Current liabilities 95,219 8,380 108,599
Long-term debt, excluding current installments 28,884 0 20,000 (a) 48,884
Other long-term liabilities 6,992 5,781 12,773
-------- ------- --------
131,095 14,161 170,256
Shareholders' equity 167,959 45,089 (45,089) (g) 167,959
-------- ------- --------
$299,054 $59,250 $338,215
======== ======= ========
<FN>
See accompanying Notes to Pro Forma Condensed Combined Financial Statements
</FN>
</TABLE>
Page 5 of 10
<PAGE>
<TABLE>
<CAPTION>
Technitrol, Inc. and GTI Corporation
Pro Forma Condensed Combined Statement of Operations
Year Ended December 31, 1997
(Unaudited)
(In thousands, except earnings per share)
Historical
Historical GTI Pro Forma Pro
Technitrol Note (1) Adjustments Note Forma
---------- -------- ----------- ---- -----
<S> <C> <C> <C> <C> <C>
Net sales $397,067 $82,591 479,658
Cost of sales 269,050 63,164 94 3 332,308
------- ------ -------
Gross profit 128,017 19,427 147,350
Selling, general and administrative 82,264 21,742 (696) 4
expenses (277) 5
______ ______ 230 6 103,263
-------
Operating profit (loss) 45,753 (2,315) 44,087
Other income(expense):
Interest, net 82 (229) (700) 7
(1,200) 8 (2,047)
Other, net 929 (589) 340
--- ----- -------
Earnings (loss) from continuing
operations before income taxes
46,764 (3,133) 42,380
Income taxes 17,678 0 (3,950) 9
(698) 10 13,030
-------- ------- -------
Net earnings (loss) from continuing
operations 29,086 (3,133) 29,350
======== ======= =======
Earnings per share from continuing
operations:
Basic $1.81 $(0.38) $1.82
======== ======= =======
Diluted $1.80 $(0.38) $1.82
======== ======= =======
Shares used in computing earnings
per share:
Basic 16,093 8,973 16,093
Diluted 16,137 8,973 16,137
<FN>
See accompanying Notes to Pro Forma Condensed Combined Financial Statements
</FN>
</TABLE>
Page 6 of 10
<PAGE>
<TABLE>
<CAPTION>
Technitrol, Inc. and GTI Corporation
Pro Forma Condensed Combined Statement of Operations
Nine Months Ended September 30, 1998
(Unaudited)
(In thousands, except earnings per share)
Historical
Historical GTI Pro Forma Pro
Technitrol Note (1) Adjustments Note Forma
---------- -------- ----------- ---- -----
<S> <C> <C> <C> <C> <C>
Net sales $328,985 $34,466 $363,451
Costs of sales 224,738 37,707 71 3 262,516
-------- ------ --------
Gross Profit 104,247 (3,241) 100,935
Selling, general and administrative 63,244 13,142 (522) 4
expenses 170 6 76,034
-------- --------
Operating Profit 41,003 (16,383) 24,901
Other income(expense):
Interest, net (696) 0 (525) 7
(900) 8 (2,121)
Other, net (106) (1,103) 1,116 11 (93)
----- ------- --------
Earnings (loss) from continuing
operations before income taxes
40,201 (17,486) 22,687
Income taxes 14,968 78 (3,110) 9
(133) 10 11,803
-------- ------- --------
Net earnings (loss) from continuing
operations $25,233 ($17,564) $10,884
======== ======= ========
Earnings per share from continuing
operations:
Basic $1.58 $(1.98) $.68
===== ======= ========
Diluted $1.56 $(1.98) $.67
===== ======= ========
Shares used in computing earnings per
share:
Basic 15,979 8,973 15,979
Diluted 16,201 8,973 16,201
<FN>
See accompanying Notes to Pro Forma Condensed Combined Financial Statements
</FN>
</TABLE>
Page 7 of 10
<PAGE>
Notes to Pro Forma Condensed Combined Financial Statements
(1) The historical financial information of GTI was derived from the audited
financial statements of GTI for the year ended December 31, 1997 and the
unaudited financial statements as of and for the nine months ended September
26, 1998.
Pro Forma Condensed Combined Balance Sheet
- ------------------------------------------
(2) The acquisition has been accounted for as a purchase business combination.
Under purchase accounting, the total purchase price is allocated to the
assets and liabilities of GTI based upon their respective fair values as of
November 16, 1998. The purchase price was as follows:
Cash paid for the outstanding stock of GTI ($3.10 per share
for 8,973,475 common shares outstanding and $726.37 per
share for 8,110 preferred shares outstanding) $33,710,000
Estimated transaction and related acquisition costs 2,000,000
-----------
$35,710,000
===========
Pro forma balance sheet adjustments consist of:
(a) cash paid for the GTI's shares outstanding ($13,710,000 in cash and
$20,000,000 from available credit facilities),
(b) increase in the carrying value of property, plant and equipment to reflect
fair market values based on independent appraisals,
(c) increase in deferred tax assets as a result of tax planning strategies
available to Technitrol that were previously unavailable to GTI,
(d) elimination of GTI's pre-acquisition goodwill,
(e) goodwill as a result of the purchase of GTI by Technitrol assuming the
transaction was consummated on September 30, 1998,
(f) accrual for estimated transaction costs, related acquisition costs and
qualifying restructuring activities (accounted for in accordance with EITF
No. 95-3, "Recognition of Liabilities in Connection with a Purchase Business
Combination"),
(g) elimination of the historical equity accounts of GTI.
The pro forma adjustments to the Condensed Combined Balance Sheet assume that
the acquisition occurred on September 30, 1998. The purchase price includes
estimated professional fees and other expenses associated with the transaction.
The total purchase price will be adjusted as the actual expenses are determined;
however, any such adjustments are not expected to be material to the financial
position of the Company.
Page 8 of 10
<PAGE>
Notes to Pro Forma Condensed Combined Financial Statements - (Continued)
Pro Forma Condensed Combined Statements of Operations
- -----------------------------------------------------
(3) Increase in depreciation expense as the result of valuing property, plant
and equipment at fair value based on independent appraisals.
(4) Elimination of the amortization of GTI's pre-acquisition goodwill.
(5) Elimination of the amortization of organization costs previously
capitalized by GTI. GTI wrote-off the remaining balance of approximately
$899,000 in the first quarter of 1998 as a cumulative effect of a change in
accounting principle.
(6) Amortization of goodwill of $3,421,000 over a 15-year amortization period,
or approximately $230,000 annually.
(7) Reduction of interest income as a result of using $13,710,000 of cash
on-hand to fund the acquisition.
(8) Interest expense on $20,000,000 of long-term debt incurred to fund the
acquisition.
(9) Income tax benefits on GTI losses that the combined entity would have
realized.
(10) Income tax benefits related to the pro forma adjustments at the effective
rate.
(11) Elimination of merger costs recorded by GTI during the nine-months ended
September 30, 1998.
Page 9 of 10
<PAGE>
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 hereunto duly authorized.
TECHNITROL, INC.
-----------------
(Registrant)
/s/Albert Thorp, III
--------------------
Albert Thorp, III
Vice President - Finance, and Chief Financial Officer
/s/Drew A. Moyer
----------------
Drew A. Moyer
Corporate Controller, Secretary and Chief Accounting Officer
Date: January 28, 1999
Page 10 of 10
<PAGE>
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-1
<PAGE>
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-2
<PAGE>
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-3
<PAGE>
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-4
<PAGE>
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 (162) 7,827 2,869
continuing operations
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 -- --
Isssuance 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-5
<PAGE>
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
F-6
<PAGE>
deductible amounts in future years based on the reporting of certain costs in
different periods for financial statement and income tax purposes.
Foreign Currency Translation - Assets and liabilities of the Company's foreign
operations are translated into U.S. dollars at the exchange rate in effect at
the balance sheet date, and revenue and expenses are translated at the average
exchange rate for the period. Translation gains or losses of the Company's
foreign subsidiaries are not included in 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 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
F-7
<PAGE>
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-8
<PAGE>
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>
F-9
<PAGE>
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>
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 150,000 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.
F-10
<PAGE>
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>
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>
F-11
<PAGE>
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.
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.
F-12
<PAGE>
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.
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.
F-13
<PAGE>
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.
Additionally, as of December 31, 1997, a warrant was outstanding for 150,000
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>
F-14
<PAGE>
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.
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).
F-15
<PAGE>
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 EVENT
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, 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-16
<PAGE>
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-17
<PAGE>
GTI CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
For the three months ended For the nine months ended
------------------------------ ------------------------------
September 26, September 27, September 26, September 27,
1998 1997 1998 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Sales $ 10,235 $ 19,130 $ 34,466 $ 64,534
Cost of sales 10,039 15,285 37,707 48,302
-------- -------- -------- --------
Gross profit (loss) 196 3,845 (3,241) 16,232
Operating expenses 3,590 5,450 13,142 16,817
-------- -------- -------- --------
Operating profit (loss) (3,394) (1,605) (16,383) (585)
Merger costs 707 -- 1,116 --
Loss on sale of securities -- -- -- 672
Other expenses (income) (53) 167 (13) 339
-------- -------- -------- --------
Income (loss) before income taxes and cumulative
effect of change in accounting principle (4,048) (1,772) (17,486) (1,596)
Provision (benefit) for income taxes -- (277) 78 --
-------- -------- -------- --------
Loss before cumulative effect of
change in accounting principle (4,048) (1,495) (17,564) (1,596)
Cumulative effect of change in accounting
principle, net of income taxes -- -- (899) --
-------- -------- -------- --------
Net loss $ (4,048) $ (1,495) $(18,463) $ (1,596)
======== ======== ======== ========
Net loss per share of common stock
and common stock equivalents:
Basic and diluted loss per share before
cumulative effect of change in accounting principle $ (0.46) $ (0.17) $ (1.98) $ (0.20)
Cumulative effect of change in accounting principle -- -- (0.10) --
-------- -------- -------- --------
Basic and diluted loss per share $ (0.46) $ (0.17) $ (2.08) $ (0.20)
======== ======== ======== ========
Weighted average number of common shares
and common stock equivalents - basic and diluted EPS 8,973 8,973 8,973 8,973
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
F-18
<PAGE>
GTI CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
September 26,
1998 December 31,
(Unaudited) 1997
------------- ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 7,259 $ 6,967
Accounts receivable, net 6,001 12,061
Inventories, net 10,868 21,794
Prepaid expenses and other 5,023 6,002
-------- --------
Total current assets 29,151 46,824
Property, plant and equipment, net 10,609 14,800
Goodwill and other assets 19,490 21,330
-------- --------
$ 59,250 $ 82,954
======== ========
Current liabilities:
Accounts payable, accrued and other liabilities $ 7,755 $ 11,761
Current portion of long-term debt due to affiliate 625 1,250
-------- --------
Total current liabilities 8,380 13,011
Long-term debt due to affiliate, net of current portion -- 625
Deferred income taxes and other liabilities 5,781 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 (deficit) (7,449) 11,227
Cumulative translation adjustment (13) (13)
-------- --------
Total stockholders' equity 45,089 63,765
-------- --------
$ 59,250 $ 82,954
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
F-19
<PAGE>
GTI CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
For the nine months ended
------------------------------
September 26, September 27,
1998 1997
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $(18,463) $ (1,596)
Adjustments:
Depreciation and amortization 3,907 4,021
Impairment of fixed assets due to plant closure 1,500 --
Cumulative change in accounting principle - organization costs 899 --
Loss on sale of securities -- 672
Change in assets and liabilities:
Accounts receivable 6,060 (517)
Inventories 10,926 (7,364)
Prepaid expenses and other 904 4,184
Accounts payable, accrued and other liabilities (4,006) (1,738)
Other 553 880
-------- --------
Net cash flow provided (used) by continuing operations 2,280 (1,458)
Net operating cash flow provided by discontinued operations 75 (701)
-------- --------
Net cash provided (used) by operating activities 2,355 (2,159)
-------- --------
Cash flows from investing activities:
Purchases of property, plant and equipment (600) (3,172)
Proceeds from sale of discontinued operations -- 11,466
-------- --------
Net cash provided (used) by investing activities (600) 8,294
-------- --------
Cash flows from financing activities:
Repayment of line of credit, net -- (2,400)
Net proceeds (repayment) from long-term debt due to affiliate (1,250) 1,875
Preferred stock cash dividend (213) (213)
-------- --------
Net cash provided (used) by financing activities (1,463) (738)
-------- --------
Net change in cumulative translation adjustment -- 34
-------- --------
Net increase (decrease) in cash and cash equivalents 292 5,431
Cash and cash equivalents - beginning of period 6,967 3,219
-------- --------
Cash and cash equivalents - end of period $ 7,259 $ 8,650
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
F-20
<PAGE>
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 nine months ended
September 26, 1998 and September 27, 1997 are summarized as follows:
<TABLE>
<CAPTION>
For the nine months ended
------------------------------------------
September 26, 1998 September 27, 1997
------------------ ------------------
<S> <C> <C>
Interest paid $ 205 $ 208
====== ======
Income taxes paid $ 78 $1,085
====== ======
</TABLE>
NOTE 3: INVENTORIES
Inventories, stated at the lower of cost (first in, first out) or market, are
summarized as follows:
<TABLE>
<CAPTION>
September 26, 1998
(Unaudited) December 31, 1997
------------------ -----------------
<S> <C> <C>
Raw materials $ 5,367 $ 9,881
Work in process 1,029 2,871
Finished goods 4,472 9,042
------- -------
Total inventories $10,868 $21,794
======= =======
</TABLE>
F-21
<PAGE>
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 quarter
ended March 28, 1998 and in the nine months ended September 26, 1998.
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 first quarter, the Company recorded a charge of $899 as a cumulative effect
of 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 For the nine months ended
-------------------------------- --------------------------------
September 26, September 27, September 26, September 27,
1998 1997 1998 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net income (loss) $ (4,048) $ (1,495) $(18,463) $ (1,596)
Translation adjustment -- -- -- 34
-------- -------- -------- --------
Comprehensive income (loss) $ (4,048) $ (1,495) $(18,463) $ (1,562)
======== ======== ======== ========
</TABLE>
NOTE 7: MERGER AGREEMENT
On May 26, 1998, the Company executed an Agreement and Plan of Merger (the
"Agreement") whereby all of the outstanding GTI common and preferred stock will
be transferred to a subsidiary of Technitrol, Inc. in exchange for $3.10 cash
per GTI common share and $726.37 cash per GTI preferred share. The closing of
this transaction is subject to certain conditions, all of which the Company
believes it has met. However, until recently, Technitrol had refused to close
the merger transaction, citing certain alleged material breaches of
representations and warranties made by the Company in the Agreement, which the
Company has denied. On September 10, 1998, the Company filed suit in the
Delaware Chancery Court seeking a court order, among other things, requiring
Technitrol to close the merger transaction.
On November 3, 1998, Technitrol and the Company announced publicly that the
disagreements discussed above had been resolved and that the closing of the
merger is expected to occur on or about November 16, 1998.
F-22
<PAGE>
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
dated February 25, 1998 includeded in GTI Corporation's Form 10-K File No.
98-578623 (and to all references to our Firm) included in or made a part of this
Form 8-K/A. It should be noted that we have not audited any financial statements
of the Company subsequent to December 31, 1997 or performed any audit procedures
subsquent to the date of our report.
/s/Arthur Andersen LLP
----------------------
ARTHUR ANDERSEN LLP
San Diego, California
January 25, 1999
