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
June 29, 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 August 6, 1997 there were 16,220,629 shares of the Registrant's
Common Stock outstanding.
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Statements of Operations for the Three
Months and Six Months ended June 29, 1997 and June 30, 1996
Consolidated Balance Sheets at June 29, 1997 and
December 31, 1996
Consolidated Statements of Cash Flows for the Six
Months ended June 29, 1997 and June 30, 1996
Notes to Interim Consolidated Financial Statements
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
SIGNATURES
EXHIBIT INDEX
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 Six Months Ended
------------------ ------------------
June 29, June 30, June 29, June 30,
1997 1996 1997 1996
------- ------- ------- --------
(Unaudited) (Unaudited)
Revenue $36,459 $63,990 $62,897 $132,190
Cost of operations 35,278 59,173 63,075 123,173
------- ------- ------- --------
Gross profit (loss) 1,181 4,817 (178) 9,017
Selling, general and
administrative expense 1,750 3,431 3,249 6,204
Research and development 99 8 99 294
------- ------- ------- --------
Operating (loss) income (668) 1,378 (3,526) 2,519
Interest expense 680 977 1,193 1,926
Other (income) expense, net (242) (11) (255) 73
------- ------- ------- --------
(Loss) income before
income taxes (1,106) 412 (4,464) 520
Income tax expense 131 354 152 457
------- ------- ------- --------
Net (loss) income $(1,237) $58 $(4,616) $63
======= ======= ======= =======
Net (loss) income per share:
Primary $(0.08) $0.00 $(0.28) $0.00
Fully diluted $(0.08) $0.00 $(0.28) $0.00
Shares used in computing per share amounts:
Primary 16,221 17,760 16,221 17,012
Fully diluted 16,221 17,760 16,221 17,012
The accompanying notes are an integral part of the consolidated financial
statements.
GROUP TECHNOLOGIES CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except for share data)
June 29, December 31,
1997 1996
------- -------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $41 $661
Accounts receivable, net 18,095 22,754
Inventories, net 22,120 20,220
Other current assets 2,115 2,102
------- -------
Total current assets 42,371 45,737
Property and equipment, net 18,992 21,206
Other assets 481 522
------- -------
$61,844 $67,465
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $17,616 $17,969
Accrued liabilities 13,939 16,416
Current portion of long-term debt 12,259 3,513
------- -------
Total current liabilities 43,814 37,898
Long-term debt 226 10,119
Other liabilities 46 45
------- -------
Total liabilities 44,086 48,062
Redeemable 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 (10,050) (5,434)
------- -------
Total shareholders' equity 15,258 19,403
------- -------
$61,844 $67,465
======= =======
The accompanying notes are an integral part of the consolidated financial
statements.
GROUP TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Six Months Ended
------------------
June 29, June 30,
1997 1996
------- -------
(Unaudited)
Cash flows from operating activities:
Net (loss) income $(4,616) $63
Adjustments to reconcile net (loss) income
to net cash used in operating activities:
Depreciation and amortization 2,756 2,609
Other 354 230
Changes in operating assets and
liabilities, net of dispositions:
Accounts receivable 4,659 1,388
Inventories (1,900) 4,065
Other current and non-current assets (85) (1,996)
Accounts payable (353) (10,323)
Accrued and other liabilities (2,477) (2,162)
------- -------
Net cash used in operating activities (1,662) (6,126)
Cash flows from investing activities:
Capital expenditures (428) (1,525)
Proceeds from disposal of assets 0 11,561
------- -------
Net cash (used in) provided by
investing activities (428) 10,036
Cash flows from financing activities:
Net proceeds (repayments) under
revolving credit agreement 949 (3,214)
Repayments of notes payable and long-term debt (1,979) (2,702)
Net proceeds from issuance of Common Stock 0 1,000
Proceeds from issuance of
Redeemable Preferred Stock 2,500 0
------- -------
Net cash provided by (used in)
financing activities 1,470 (4,916)
Net decrease in cash and cash equivalents (620) (1,006)
Cash and cash equivalents at beginning of period 661 2,143
------- -------
Cash and cash equivalents at end of period $41 $1,137
======= =======
The accompanying notes are an integral part of the consolidated financial
statements.
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 and six month periods ended June 29, 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.
(4) Inventories
Inventories consist of the following:
June 29, December 31,
1997 1996
------- -------
(Unaudited)
Raw materials $13,290 $12,538
Work in process 5,018 4,100
Finished goods 0 107
Costs relating to long-term contracts and
programs, net of amounts attributed to
revenue recognized to date 12,831 11,655
Progress payments related to long-term
contracts and programs (4,233) (3,292)
Reserve for inactive, obsolete and
unsalable inventories (4,786) (4,888)
------- -------
$22,120 $20,220
======= =======
The Company recognized revenue and income before income taxes during
the second quarter of 1996 of $4,083,000 upon the favorable settlement of a
contractual claim.
(5) Note Payable and Long-Term Debt
As of June 29, 1997, the Company had a financing agreement (the
"Credit Agreement") with its bank which provided 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 provided
credit availability on the Revolver equal to the lesser of $13,500,000 or
the applicable amount of its eligible accounts receivable and inventories.
On June 30, 1997, the Company utilized the proceeds from the sale of its
Latin American operations (see Note 7) to repay all of its outstanding
borrowings under the Credit Agreement and terminated the Credit Agreement.
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 a
result of the early repayment and termination of the Credit Agreement, the
remaining 875,000 unvested warrants were forfeited by the lender.
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").
Long-term debt consists of the following:
June 29, December 31,
1997 1996
------- -------
(Unaudited)
Revolver $7,883 $6,934
Term Note 1,860 2,690
Other 2,979 4,128
------- -------
Total long-term debt 12,722 13,752
Unamortized original issue discount
related to issuance of warrants
exercisable on date of issuance (237) (120)
Current portion of long-term debt (12,259) (3,513)
------- -------
$226 $10,119
======= =======
Available borrowings on the Revolver at June 29, 1997 were
approximately $2,860,000. The interest rate on all debt outstanding under
the Credit Agreement at June 29, 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.
(7) Subsequent Event
On June 30, 1997, the Company sold to SCI Systems, Inc., SCI Systems
De Mexico S.A de C.V. and SCI Holdings, Inc. (collectively, "SCI"), all of
the Company's investment in the capital stock and/or equity interests of
three of its wholly-owned subsidiaries, Group Technologies S.A. de C.V.,
Group Technologies Suprimentos de Informatica Industria E Comercio Ltda.,
and Group Technologies Integracoes em Electronica Ltda. These three
subsidiaries comprised all of the Company's Latin American operations. The
Company also sold or assigned to SCI certain assets principally used in or
useful to the operations being sold, including accounts receivable,
inventory, equipment, accounts payable and equipment leases.
The initial sales price of the aforementioned assets amounted to
$18,000,000 in cash and the assumption by SCI of certain liabilities. The
price is subject to subsequent adjustment, upward or downward, based upon,
among other things, the value of the net assets of the Company's Latin
American operations at June 29, 1997.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
The following tables set forth certain data, expressed as a percentage
of revenue, from the Company's Consolidated Statement of Operations for the
three and six-month periods ended June 29, 1997 and June 30, 1996.
Three Months Ended Six Months Ended
------------------ ------------------
June 29, June 30, June 29, June 30,
1997 1996 1997 1996
------- ------- ------- --------
Revenue 100.0% 100.0% 100.0% 100.0%
Cost of operations 96.8 92.5 100.3 93.2
------- ------- ------- --------
Gross profit (loss 3.2 7.5 (0.3) 6.8
Selling, general and
administrative expense 4.8 5.4 5.2 4.7
Research and development 0.2 0.0 0.1 0.2
------- ------- ------- --------
Operating (loss) income (1.8) 2.1 (5.6) 1.9
Interest expense 1.9 1.5 1.9 1.5
Other (income) expense, net (0.7) 0.0 (0.4) 0.1
------- ------- ------- --------
(Loss) income before income taxes (3.0) 0.6 (7.1) 0.3
Income tax expense 0.4 0.5 0.2 0.3
------- ------- ------- --------
Net (loss) income (3.4)% 0.1% (7.3)% 0.0%
======= ======= ======= ========
Revenue for the three months ended June 29, 1997 was $36.5 million, a
decrease of $27.5 million or 43.0% from $64.0 million for the three months
ended June 30, 1996. Revenue for the first six months of 1997 was $62.9
million, a decrease of $69.3 million or 52.4% from $132.2 million for the
first six months of 1996. During the first six months of 1997 as compared
to the comparable period in 1996, the Company's domestic manufacturing and
engineering operations decreased by $52.4 million. This decline in revenue
is associated with decreased customer demand and the termination or
completion of certain contracts. This change in demand and termination of
contracts is principally reflective of the change in out-sourcing
strategies of three customers which resulted in a $38.8 million reduction
of revenue during the first six months of 1997 as compared to the first six
months of 1996. The fact that the Company completed the disposition of its
name brand products business units during the first quarter of 1996 and the
recognition of $4.1 million of revenue for a favorable claim settlement
during the second quarter of 1996 accounted for an additional $5.7 million
of the $52.4 million decline in domestic revenue during 1997. Changes in
customer demand on other less significant contracts collectively accounted
for the remaining $7.9 million of the decreased revenue in 1997 as compared
to 1996.
The Company's Latin American operations contributed $16.9 million and
$33.8 million to revenue in the first six months of 1997 and 1996
respectively. Revenue from the Company's Latin American operations in the
first six months of 1997 as compared to the comparable period in 1996
decreased $16.9 million, principally associated with the completion or
curtailment of certain contracts during the first quarter of 1997 and the
second half of 1996. The Company divested all of its Latin American
operations effective June 30, 1997, as more fully described in Note 7 to
the Company's Interim Consolidated Financial Statements as of and for the
period ended June 29, 1997.
Gross profit for the three months ended June 29, 1997 decreased to
$1.2 million or 3.2% of revenue from $4.8 million or 7.5% of revenue during
the three months ended June 30, 1996. Gross loss for the first six months
of 1997 was $0.2 million or 0.3% of revenue compared to gross profit of
$9.0 million or 6.8% of revenue in the first six months of 1996. The net
decrease in gross profit during the first six months of 1997 was
principally related to a $1.1 million decrease in gross profit from the
Company's domestic manufacturing and engineering services (excluding the
name brand products business), a $3.3 million decrease in gross profit from
the Company's Latin American operations and a $4.8 million decrease from
the name brand products business. The primary cause for the decline in
gross profit (excluding the name brand products business decline) was the
fact that decreased revenue levels experienced by the Company, as discussed
above, caused the Company to underutilize its manufacturing capacity.
Additionally, included in the second quarter gross margin in 1996 was a
favorable name brand products business claim settlement of $4.1 million.
Finally, the reduced gross profits in 1997 are also caused by low margin
contracts and cost overruns on certain contracts. The Company has modified
its marketing strategies to focus on obtaining more profitable contractual
agreements to mitigate the effects of the low margin contracts.
Selling, general and administrative expense for the three months ended
June 29, 1997 decreased to $1.8 million or 4.8% of revenue from $3.4
million or 5.4% of revenue for the three months ended June 30, 1996.
Selling, general and administrative expenses for the six months ended June
29, 1997 decreased to $3.2 million or 5.2% of revenue from $6.2 million or
4.7% of revenue for the six months ended June 30, 1996. Included in
selling, general and administrative expense in the second quarter of 1996
are approximately $1.4 million of charges principally related to increases
in accounts receivable reserves and estimated costs associated with the
relocation of warehouse facilities. With regard to warehouse relocation
costs, in the second quarter of 1996, the Company implemented a cost saving
strategy to integrate the materials warehousing function into its main
Tampa facility. The provision for doubtful accounts in 1996 represents a
change in estimate of collectibility following extensive communications
with the respective customers regarding non-payment of invoices and
conclusions or settlements reached during the period regarding ultimate
collectibility. Additional reductions in selling, general and
administrative costs are associated with the decreased business volume and
cost saving initiatives implemented in 1996 and 1997, including workforce
reductions.
Research and development expense for the three and six month periods
ended June 29, 1997 was $0.1 million. The Company's manufacturing and
engineering services businesses currently require low levels of research
and development.
Interest expense for the three and six month periods ended June 29,
1997 decreased $0.3 million and $0.7 million, respectively, from the
comparable prior year periods. The Company's reduced level of operations
has required a lower level of working capital and, therefore, reduced debt
requirements.
Income tax expense for the three and six month periods ended June 29,
1997 and June 30, 1996, consists primarily of income taxes on earnings in
foreign countries.
Liquidity and Capital Resources
Net cash used in operating activities was $1.7 million for the first
six months of 1997. The Company's accounts receivable decreased by $4.7
million during the first six months of 1997 principally attributable to the
lower level of revenue. While revenue declined during the first six months
of 1997, the Company's inventory increased $1.7 million in anticipation of
fulfilling certain contractual requirements. The Company utilized the
proceeds of the accounts receivable collections, in part, to reduce its
accounts payable and accrued liabilities by $2.8 million. While the Company
continues to maintain 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 used in investing activities was $0.4 million for the first
six months of 1997, comprised of capital expenditures. Current commitments
for capital expenditures for the remainder of 1997 are approximately $0.5
million.
Net cash provided by financing activities was $1.5 million for the
first six months of 1997. The financing activities were comprised of
proceeds from the issuance of the Company's Preferred Stock of $2.5 million
partially off-set by repayments of debt of $1.0 million. On June 30, 1997,
the Company utilized the proceeds from the sale of its Latin American
operations to repay all amounts outstanding under the Credit Agreement with
its primary lender and terminated 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 a result of the Company repaying all amounts payable
under the Credit Agreement on June 30, 1997, the bank forfeited the
remaining 875,000 warrants.
In connection with a March 28, 1997 amendment to the Credit Agreement,
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 believes that sufficient resources, including resources
provided by the sale of its Latin American operations, will be available to
meet its cash requirements through the next twelve months. If such
resources otherwise prove 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
financing initiatives, potential asset sales, and other actions relative to
maximizing the liquidity of the Company's financial resources. Cash
requirements for periods beyond the next twelve months depend on the
Company's profitability, its ability to manage working capital requirements
and its growth rate.
Part II Other Information
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Registrant's 1997 Annual Meeting of Shareholders was held on June
25, 1997. Proxies were solicited by the Registrant's board of directors
pursuant to Regulation 14 under the Securities Exchange Act of 1934. There
was no solicitation in opposition to the board's nominees as listed in the
proxy statement, and all of the nominees were elected by a vote of the
majority of the Registrant's shareholders. Voting results for each nominee
were as follows:
Director Nominee Votes For Votes Withheld
- ---------------- ---------- -------
Henry F. Frigon 17,032,020 731,713
Jeffrey T. Gill 17,030,178 733,555
Robert E. Gill 17,033,846 729,887
Roger W. Johnson 17,032,846 730,887
Thomas W. Lovelock 17,034,178 729,555
Sidney R. Petersen 17,033,080 730,653
A proposal to approve an amendment to the Group Technologies
Corporation Independent Directors' Stock Option Plan was approved by a vote
of the majority of the Registrant's shareholders. 15,538,805 shares were
voted in favor of the proposal; 795,189 shares were voted against the
proposal; and the holders of 14,274 shares abstained from voting on the
proposal.
A proposal to approve an amendment to the Group Technologies
Corporation 1994 Stock Option Plan for Key Employees was approved by a vote
of the majority of the Registrant's shareholders. 15,414,470 shares were
voted in favor of the proposal; 838,733 shares were voted against the
proposal; and the holders of 12,974 shares abstained from voting on the
proposal.
The Registrant's shareholders also ratified the appointment of Ernst &
Young LLP as the independent auditors of the Registrant for the fiscal year
ending December 31, 1997. 17,750,836 shares were voted in favor of the
proposal; 9,647 shares were voted against the proposal; and the holders of
2,750 shares abstained from voting on the proposal.
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 during the three months
ended June 29, 1997. However, the Company filed one report on Form
8-K dated July 15, 1997 which reported the sale of the Company's
Latin American operations and which reported certain pro forma
financial information relative to the sale.
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: August 13, 1997 By:/s/ Thomas W. Lovelock
(Thomas W. Lovelock)
President & Chief Executive Officer
Date: August 13, 1997 By:/s/ David D. Johnson
(David D. Johnson)
Vice President & Chief Financial Officer
Exhibit Index
Exhibit
Number Description
10.26.3 Group Technologies Corporation Independent Directors' Stock
Option Plan restated effective June 25, 1997, dated October 27,
1994
10.27.4 Group Technologies Corporation 1994 Stock Option plan for key
employees restated effective June 25, 1997, dated October 27,
1994
10.28.1 Group Technologies Corporation Independent Directors Compensation
Program restated effective June 25, 1997 dated September 1, 1995
10.34 Employment Agreement by and between Thomas W. Lovelock and Group
Technologies Corporation dated June 23, 1997
10.35 Employment Agreement by and between James G. Cocke and Group
Technologies Corporation dated June 23, 1997
10.36 Special Bonus Agreement by and between David D. Johnson and Group
Technologies Corporation dated June 25, 1997
11 Statement re: computation of per share earnings
27 Financial data schedule (for SEC use only)