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SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
(Mark One)
X Quarterly report pursuant to Section 13 or 15(d) of the Securities
--- Exchange Act of 1934. For the quarterly period ended March 30, 1997.
Transition report pursuant to Section 13 or 15(d) of the Securities
--- Exchange Act of 1934. For the transition period from to .
----- -----
Commission file number: 0-24020
GROUP TECHNOLOGIES CORPORATION
(Exact name of registrant as specified in its charter)
FLORIDA 59-2948116
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
10901 Malcolm McKinley Drive
Tampa, Florida 33612
(Address of principal executive offices, including zip code)
(813) 972-6000
(Registrant's telephone number, including area code)
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 1, 1997 there were 16,220,629 shares of the Registrant's Common Stock
outstanding.
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INDEX
Part I. Financial Information
Item 1. Financial Statements
Consolidated Statements of Operations for the Three Months
ended March 30, 1997 and March 31, 1996..................................3
Consolidated Balance Sheets at March 30, 1997 and December 31, 1996.......4
Consolidated Statements of Cash Flows for the Three Months
ended March 30, 1997 and March 31, 1996..................................5
Notes to Interim Consolidated Financial Statements........................6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.............................9
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K...............................12
Signatures...............................................................13
Exhibit Index............................................................14
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Part I. Financial Information
Item 1. Financial Statements
GROUP TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except for per share data)
Three Months Ended
March 30, March 31,
1997 1996
------- -------
(Unaudited)
Revenue............................................. $26,438 $68,200
Cost of operations.................................. 27,797 64,000
------- -------
Gross (loss) profit................................. (1,359) 4,200
Selling, general and administrative expense......... 1,499 2,773
Research and development............................ 0 286
------- -------
Operating (loss) income............................. (2,858) 1,141
Interest expense.................................... 513 949
Other (income) expense, net......................... (13) 84
------- -------
(Loss) income before income taxes................... (3,358) 108
Income tax expense.................................. 21 103
------- -------
Net (loss) income................................... $(3,379) $5
======= =======
Net (loss) income per share:
Primary............................................. $(0.21) $0.00
Fully diluted....................................... $(0.21) $0.00
Shares used in computing per share amounts:
Primary............................................. 16,221 16,263
Fully diluted....................................... 16,221 16,263
The accompanying notes are an integral part of the consolidated financial
statements.
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GROUP TECHNOLOGIES CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except for share data)
March 30, December 31,
1997 1996
------- -------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents........................... $312 $661
Accounts receivable, net............................ 16,038 22,754
Inventories, net.................................... 22,961 20,220
Other current assets................................ 1,957 2,102
------- -------
Total current assets................................ 41,268 45,737
Property and equipment, net......................... 20,102 21,206
Other assets........................................ 538 522
------- -------
$61,908 $67,465
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................... $16,968 $17,969
Accrued liabilities................................. 13,813 16,416
Current portion of long-term debt................... 11,055 3,513
------- -------
Total current liabilities........................... 41,836 37,898
Long-term debt...................................... 855 10,119
Other liabilities................................... 222 45
------- -------
Total liabilities................................... 42,913 48,062
Preferred Stock, $.01 par value;
1,000,000 shares authorized;
250,000 shares issued and outstanding in 1997...... 3 0
Additional paid-in capital - Preferred Stock........ 2,497 0
Shareholders' equity:
Common Stock, $.01 par value, 40,000,000 shares
authorized; 16,220,629 shares issued and
outstanding in 1997 and 1996...................... 162 162
Additional paid-in capital......................... 25,146 24,675
Accumulated deficit................................ (8,813) (5,434)
------- -------
Total shareholders' equity.......................... 16,495 19,403
------- -------
$61,908 $67,465
======= =======
The accompanying notes are an integral part of the consolidated financial
statements.
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GROUP TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Three Months Ended
March 30, March 31,
1997 1996
------- -------
(Unaudited)
Cash flows from operating activities:
Net (loss) income................................... $(3,379) $5
Adjustments to reconcile net (loss) income
to net cash used in operating activities:
Depreciation and amortization..................... 1,305 1,294
Other............................................. 120 200
Changes in operating assets and
liabilities, net of dispositions:
Accounts receivable............................. 6,716 (12,579)
Inventories..................................... (2,741) (2,981)
Other current and non-current assets............ 306 (446)
Accounts payable................................ (1,001) 4,828
Accrued and other liabilities................... (2,603) (1,902)
------- -------
Net cash used in operating activities............... (1,277) (11,581)
Cash flows from investing activities:
Capital expenditures................................ (201) (472)
Proceeds from disposal of assets.................... 0 11,457
------- -------
Net cash (used in) provided by investing activities. (201) 10,985
Cash flows from financing activities:
Net repayments under revolving credit agreement..... (453) (1,730)
Repayments of notes payable and long-term debt...... (918) (136)
Proceeds from issuance of preferred stock........... 2,500 0
Net proceeds from issuance of common stock.......... 0 1,000
------- -------
Net cash provided by (used in) financing activities. 1,129 (866)
------- -------
Net decrease in cash and cash equivalents........... (349) (1,462)
Cash and cash equivalents at beginning of period.... 661 2,143
------- -------
Cash and cash equivalents at end of period.......... $312 $681
======= =======
The accompanying notes are an integral part of the consolidated financial
statements.
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GROUP TECHNOLOGIES CORPORATION
Notes to Interim Consolidated Financial Statements
(1) Organizational Structure
Group Technologies Corporation (the "Company") was incorporated on December
27, 1988 as a subsidiary of Group Financial Partners, Inc. (the "Parent"), a
private holding company. The Parent owns approximately 80% of the outstanding
Common Stock of the Company.
The Company provides advanced manufacturing, engineering and testing
services to original equipment manufacturers ("OEMs") of electronic products.
The Company custom manufactures complex circuit card assemblies, subsystems and
end-user products for use in a wide variety of markets, including automotive,
commercial avionics, computer, government systems, industrial electronics,
networking, space, and telecommunications.
(2) Basis of Presentation
The unaudited consolidated financial statements and related notes have been
prepared in accordance with the rules and regulations of the Securities and
Exchange Commission and on substantially the same basis as the annual
consolidated financial statements. The consolidated financial statements include
the accounts of the Company and its subsidiaries. All significant intercompany
transactions and accounts have been eliminated.
In the opinion of management, the consolidated financial statements reflect
all adjustments, consisting only of normal recurring adjustments, necessary for
a fair presentation of the financial position, operating results, and cash flows
for those periods presented. . Operating results for the three-month period
ended March 30, 1997 are not necessarily indicative of the results that may be
expected for the year ending December 31, 1997. These consolidated financial
statements should be read in conjunction with the consolidated financial
statements, and notes thereto, for the year ended December 31, 1996 as presented
in the Company's annual report on Form 10-K.
During the first quarter of 1997, Statement of Financial Accounting
Standard No. 128, "Earnings per Share," was issued which revises the manner in
which earnings per share are calculated. In accordance with the effective date
of Statement No. 128, the Company will implement the new standard during the
fourth quarter of 1997. The Company does not expect that the provisions of
Statement No. 128 will have a material impact upon the Company's reported
earnings per share for the year ending December 31, 1997.
(3) Net (Loss) Income Per Share
Net (loss) income per share is computed using the weighted average number
of common shares and dilutive common equivalent shares outstanding during the
applicable period. Common equivalent shares consist of stock options and
warrants (vested and unvested) and are computed using the treasury stock method.
The computation includes those common shares and common equivalent shares as
prescribed by the Securities and Exchange Commission Staff Accounting Bulletins.
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(4) Inventories
Inventories consist of the following:
March 30, December 31,
1997 1996
------- -------
(Unaudited)
Raw materials....................................... $11,707 $12,538
Work in process..................................... 6,061 4,100
Finished goods...................................... 26 107
Costs relating to long-term contracts and
programs, net of amounts attributed to
revenue recognized to date......................... 13,176 11,655
Progress payments related to long-term
contracts and programs............................. (3,077) (3,292)
Reserve for inactive, obsolete and
unsalable inventories.............................. (4,932) (4,888)
------- -------
$22,961 $20,220
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(5) Note Payable and Long-Term Debt
The Company has a financing agreement (the "Credit Agreement") with its
bank which provides the Company with a revolving line of credit facility (the
"Revolver"), and a term note (the "Term Note"). As amended on March 28, 1997,
the Credit Agreement provides credit availability on the Revolver equal to the
lesser of $13,500,000 or the applicable amount of its eligible accounts
receivable and inventories through March 29, 1998.
The Company, in connection with the initial execution of the Credit
Agreement during 1996, issued warrants to purchase 1,200,000 shares of Common
Stock at $0.01 per share to the lender. Upon execution of the Credit Agreement,
200,000 of the warrants became exercisable and, on March 31, 1997, an additional
125,000 of the warrants became exercisable. As amended, the Credit Agreement
provides for the balance of the warrants to become exercisable as follows:
375,000 on June 30, 1997; 250,000 on September 30, 1997; and 250,000 on December
31, 1997. The warrants will expire five years following the issue date. The
lender will forfeit any unvested warrants in the event the Company repays all
debt outstanding under the Credit Agreement prior to any vesting date. During
the first quarter of 1997, the Company recognized a change in estimate for
additional paid-in capital and related long-term debt discount amounting to
$471,000 relative to the value of warrants which are expected to vest through
September 29, 1997. The Company has estimated that 500,000 warrants will be
forfeited by the lender and has, therefore, not recognized any additional paid-
in capital for warrants with vesting dates subsequent to September 29, 1997.
In connection with the March 28, 1997 amendment to the Credit Agreement,
the Parent invested $2,500,000 in the Company in exchange for 250,000 shares of
the Company's Preferred Stock (the "Preferred Stock"). The Company agreed to
utilize $500,000 of the proceeds it received from the sale of the Preferred
Stock to partially repay the Term Note.
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Long-term debt consists of the following:
March 30, December 31,
1997 1996
------- -------
(Unaudited)
Revolver............................................ $6,481 $6,934
Term note........................................... 2,025 2,690
Other............................................... 3,875 4,128
------- -------
Total long-term debt........................... 12,381 13,752
Unamortized discount related to warrants............ (471) (120)
Current portion of long-term debt................... (11,055) (3,513)
------- -------
$855 $10,119
======= =======
Available borrowings on the Revolver at March 30, 1997 were approximately
$3,850,000. The Revolver and Term Note are payable upon the expiration of the
Credit Agreement on March 29, 1998 and are, therefore, classified as current
liabilities. The interest rate on all debt outstanding under the Credit
Agreement at March 30, 1997 was 9.75%.
(6) Preferred Stock
Each share of Preferred Stock outstanding may be exchanged for 8.1 shares
of the Company's Common Stock. The Preferred Stock outstanding is also
redeemable at the option of the holder (the Parent), subject to certain
restrictions, and pays quarterly dividends of 8.5% per annum. The shares of
Preferred Stock outstanding have voting rights equal to the voting rights of the
Company's Common Stock, except that the holder of each share of Preferred Stock
is entitled to the number of votes equal to the number of shares of Common Stock
that would be receivable upon conversion. The rates and preferences of Preferred
Stock authorized but not issued have not been determined.
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Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
The following table sets forth certain data, expressed as a percentage of
revenue, from the Company's Consolidated Statement of Operations for the three-
month periods ended March 30, 1997 and March 31, 1996.
Three Months Ended
March 30, March 31,
1997 1996
------- -------
(Unaudited)
Revenue............................................. 100.0% 100.0%
Cost of operations ................................ 105.1 93.8
------- -------
Gross (loss) profit................................. (5.1) 6.2
Selling, general and administrative expense......... 5.7 4.1
Research and development............................ 0.0 0.4
------- -------
Operating (loss) income............................. (10.8) 1.7
Interest expense.................................... 1.9 1.4
Other (income) expense, net......................... (0.0) 0.1
------- -------
(Loss) income before income taxes................... (12.7) 0.2
Income tax expense.................................. 0.1 0.2
------- -------
Net (loss) income................................... (12.8)% 0.0%
======= =======
Revenue for the first quarter of 1997 was $26.4 million, a decrease of
$41.8 million or 61.2% from $68.2 million for the first quarter of 1996.
Revenue for the Company's domestic manufacturing and engineering services
businesses decreased by $29.6 million from the first three months of the prior
year. The majority of the domestic manufacturing services revenue decrease was
related to a reduction in customer demand and to contract completions during
1996. Revenue from the Company's Latin American operations in the first three
months of 1997 decreased $10.7 million compared to the first quarter of 1996,
principally as the result of the completion or curtailment of certain contracts
during 1996 and the first quarter of 1997. The disposition of the Company's name
brand products business units during the first quarter of 1996 also contributed
$1.5 million to the decrease in revenue.
The Company reported a gross margin loss of $1.4 million in the first
quarter of 1997 compared to a gross profit of $4.2 million or 6.2% of revenue in
the first quarter of 1996. The decrease in gross profit in the first quarter of
1997 is primarily attributable to the under-utilized capacity of the Company's
Tampa and Mexican-based operations.
The decreased revenue and profitability of the Company has been negatively
impacted by the aforementioned contract completions and curtailments. These
reductions are the result of a number of events including, but not limited to,
changes in customer outsourcing strategies and decreased demand for certain
products, especially in the semiconductor industry. In an effort to mitigate the
impact of these reduced production requirements, the Company retained new
marketing management during 1996 and 1997 and
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continues to focus on its
objective of optimizing the utilization of the Company's manufacturing and
engineering capabilities. Additionally, management, including a newly appointed
President and Chief Executive Officer, has taken actions to realign Company
resources and reduce costs, including a workforce reduction in April 1997.
Selling, general and administrative expense for the first quarter of 1997
decreased to $1.5 million or 5.7% of revenue from $2.8 million or 4.1% of
revenue in the first quarter of 1996. The $1.3 million decrease in the first
quarter of 1997 reflects cost savings resulting from workforce reductions and
other initiatives implemented by the Company during 1996 in response to its
reduced level of operations. The relatively higher percentage of selling,
general and administrative expense as a percent of revenue is attributable to
the fixed nature of certain costs compounded by the decline in revenue
experienced by the Company in the first quarter of 1997.
Research and development expense for the first quarter of 1997 decreased
$0.3 million from the comparable prior year period. The Company's research and
development efforts have historically been concentrated on the name brand
products business units which were substantially divested during the first
quarter of 1996. The Company's manufacturing and engineering services
businesses are expected to require low levels of research and development in the
future.
Interest expense for the first quarter of 1997 decreased $0.4 million from
the comparable prior year period. The Company maintained substantially lower
levels of debt during the first quarter of 1997 as compared to the same period
in 1996. The lower level of debt in 1997 reflects the lower level of operations
and relatively lower level of working capital funded by credit facilities. The
lower debt level also reflects the use of proceeds from the sale of the name
brand products businesses in the first quarter of 1996 to reduce the Company's
debt.
Income tax expense for the first quarter of 1997 and 1996 consists
primarily of income taxes on earnings in foreign countries.
Liquidity and Capital Resources
Net cash used in operating activities was $1.3 million for the first
quarter of 1997. Accounts receivable decreased by $6.7 million during this
period primarily due to the completion or curtailment of certain contracts
during 1996 and 1997. This positive cash flow was partially offset by an
increase in inventory of $2.7 million which principally resulted from a delay in
orders received from a certain customer. The Company also utilized cash from
operations to reduce its accounts payable and accrued liabilities by $3.6
million. While the Company has maintained extended payment terms with its
suppliers, the Company has long-term relationships with a majority of its
suppliers and has been successful in maintaining reasonable credit terms with
its supplier base.
Net cash provided by financing activities was $1.1 million for the first
quarter of 1997. The financing activities were comprised of proceeds from the
issuance of the Company's Preferred Stock (the "Preferred Stock") of $2.5
million partially off-set by repayments of long term debt of $1.4 million. The
credit agreement between the Company and its bank (the "Credit Agreement") was
amended on March 28, 1997 to be effective as of December 31, 1996. As more fully
discussed below, the March 28, 1997 amendment (the "Amendment") resulted in,
among other things, reduced credit availability, an investment from Group
Financial Partners, Inc. (the "Parent") and more lenient financial covenants. A
revolving credit facility issued under the Credit Agreement, as amended,
provides $13.5 million of availability through March 29, 1998, subject to a
borrowing base consisting of eligible accounts receivable and inventories.
During the
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first quarter of 1997, the Company repaid $0.7 million on a term
note, which is also governed by the Credit Agreement.
In connection with execution of the Credit Agreement in the first quarter
of 1996, the Parent invested $1.0 million in the Company in exchange for 374,531
shares of the Company's Common Stock. The Company also issued warrants to the
bank for purchase of 1.2 million shares of the Company's Common Stock for $.01
per share. Of the 1.2 million warrants, 200,000 became exercisable at closing
and 125,000 became exercisable on March 31, 1997. As amended, the Credit
Agreement provides for the balance of the warrants to become exercisable as
follows: 375,000 on June 30, 1997; 250,000 on September 30, 1997; and, 250,000
on December 31, 1997. Vesting of these warrants is also subject to an
acceleration clause included in the Credit Agreement. The bank will forfeit any
unvested warrants in the event the Company repays all debt outstanding prior to
any warrant vesting date.
In connection with the Amendment, the Parent invested $2.5 million in the
Company in exchange for 250,000 shares of Preferred Stock. The Preferred Stock
pays quarterly dividends of 8.5% per annum and is redeemable at the option of
the holder upon repayment by the Company of all of its outstanding Credit
Agreement indebtedness. The Preferred Stock is also convertible and each share
may be exchanged for 8.1 shares of the Company's Common Stock.
The Company's ability to manage its working capital position during the
remainder of 1997 will affect the available borrowings under its revolving
credit facility. If the Company is not able to maximize its credit availability
or if such availability otherwise proves insufficient to provide the Company
with adequate funding for its working capital, management will undertake actions
to mitigate the effect of such deficiencies. Such actions could consist of
refinancing initiatives, potential asset sales, and other actions relative to
maximizing the liquidity of the Company's financial resources.
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Part II Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The exhibits listed on the Exhibit Index on page 14 of this Form 10-Q are
filed as a part of this report.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed for the three months ended March
30, 1997.
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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.
GROUP TECHNOLOGIES CORPORATION
(Registrant)
Date: May 13, 1997 By:/s/ Thomas W. Lovelock
(Thomas W. Lovelock)
President & Chief Executive Officer
Date: May 13, 1997 By:/s/ David D. Johnson
(David D. Johnson)
Vice President & Chief Financial Officer
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Exhibit Index
Exhibit
Number Description
- ------- -----------
10.33 Stock purchase right agreement dated April 7, 1997 between
the Registrant and Thomas W. Lovelock.
11 Statement re: computation of per share earnings.
27 Financial data schedule (for SEC use only).