SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
Date of Report (Date of earliest event
reported): March 30, 1998
SYPRIS SOLUTIONS, INC.
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(Exact name of registrant as specified in its charter)
Delaware 0-24020 59-2948116
- ----------------- ----------- ------------------
(State or other (Commission (IRS Employer
jurisdiction of File Number) Identification No.)
incorporation)
455 South Fourth Avenue, Louisville, Kentucky 40202
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(Address of principal executive offices)
(502) 585-5544
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(Registrant's telephone number, including area code)
Formerly Group Technologies Corporation
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(Former name or former address, if changed since last report)
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS.
Effective March 30, 1998, Sypris Solutions, Inc. (formerly Group
Technologies Corporation, a Florida corporation, and herein referred to as the
"Company") completed the acquisition of Group Financial Partners, Inc. ("GFP"),
and GFP's majority-owned subsidiaries Bell Technologies, Inc. ("Bell") and Tube
Turns Technologies, Inc. ("Tube Turns"). The transaction was effected pursuant
to a Fourth Amended and Restated Agreement and Plan of Reorganization (the
"Reorganization Agreement"), dated as of February 5, 1998, by and among the
Company, GFP, Bell and Tube Turns, and was approved by the shareholders of the
Company and Bell on March 16, 1998, and by the shareholders of GFP and Tube
Turns on March 17, 1998. At the closing of the transactions contemplated by the
Reorganization Agreement, the following events occurred in chronological order:
(i) the distribution of all of the outstanding shares of GFP Partners-V, Inc.,
Unison Commercial Group, Inc. and BW Riverport, Inc. to the shareholders of GFP;
(ii) the merger of Tube Turns with and into a newly formed, wholly-owned
subsidiary of the Company ("New Tube Turns") (the "Tube Turns Merger"); (iii)
the merger of Bell with and into a newly formed, wholly-owned subsidiary of the
Company ("New Bell") (the "Bell Merger"); (iv) the merger of GFP with and into
the Company; and (v) the contribution by the Company of all of the assets of the
Company (other than the shares of New Tube Turns and New Bell and the shares of
BT Holdings, Inc. and Metrum-Datatape, Inc. ("Metrum-Datatape"), former wholly-
owned subsidiaries of GFP) into a newly formed, wholly-owned subsidiary of the
Company, and the assumption by this subsidiary of all of the liabilities of the
Company (collectively, the "Reorganization"). Immediately after the
Reorganization, the Company effected a 1-for-4 reverse stock split and
reincorporated in Delaware through the merger of Group Technologies Corporation
into a newly formed wholly-owned Delaware subsidiary.
In the Reorganization, (i) each share of the common stock of Tube Turns was
converted into 5.4276 shares of the common stock of the Company; (ii) each share
of the common stock of Bell was converted into 14.4737 shares of the common
stock of the Company; and (iii) each share of the common stock of GFP was
converted into 106.2013 shares of the common stock of the Company. Fractional
shares were paid in cash based upon $3.04 per share of the common stock of the
Company. The number of shares of the common stock of the Company issued to the
shareholders of GFP included the 15,064,625 shares of the common stock of the
Company owned by GFP immediately prior to the effective time of the
Reorganization and the 19,190,933 shares of the common stock of the Company
received by GFP in the Tube Turns Merger and the Bell Merger attributable to
GFP's ownership of Tube Turns and Bell, respectively.
The aggregate consideration received by the shareholders of GFP, Tube Turns
and Bell was $104,136,896, $22,717,679 and $41,462,080, respectively. The
aggregate consideration received by shareholders of GFP included $45,796,460
attributable to the common stock of the Company owned by GFP immediately prior
to the effective time of the Reorganization and $21,261,900 and $37,078,536
attributable to shares of common stock of the Company received in the Tube Turns
Merger and the Bell Merger, respectively. Under the Reorganization Agreement,
shares of the common stock of the Company were valued at $3.04 per share, the
arithmetic average of the closing price per share of the common stock of the
Company, as reported on the Nasdaq Stock Market, for each of the ten (10)
consecutive trading days ending February 5, 1998. The valuations used in
determining the aggregate consideration were determined by or under the
direction of certain affiliates of the Company described below and were based on
a review of comparable earnings and book value multiples.
Robert E. Gill and Jeffrey T. Gill served in a number of overlapping
positions at the Company, GFP, Tube Turns and Bell. Prior to the Reorganization,
Robert E. Gill served as Chairman of GFP, President, Chief Executive Officer and
a director of GFP and Chairman of Bell and Tube Turns. In addition, as of
February 5, 1998, the Gill Family controlled approximately 99.4% of the common
stock of GFP, and GFP in turn controlled approximately 80.0% of the common stock
of the Company, 100% of the preferred stock of the Company, approximately 98.6%
of the common stock of Tube Turns, and approximately 95.8% of the common stock
of Bell. After the Reorganization was completed, the Gill Family ownership of
the Company increased from approximately 82.3% to approximately 89.2%. After the
Reorganization, Robert E. Gill will continue to act as Chairman of the Company
and Jeffrey T. Gill became the President and Chief Executive Officer of the
Company. Both men will continue to serve as directors of the Company after the
Reorganization. The President of Tube Turns, who also served as a director of
Tube Turns prior to the Reorganization, has rights to a substantial number of
shares of stock under option in the Company as a result of the Reorganization.
R. Scott Gill, who served as a director of GFP, Bell and Tube Turns, is serving
as a director of the Company after the Reorganization. Each of Richard L. Davis,
who served as Vice President and Chief Financial Officer
2
of GFP and as a director of Tube Turns, and Anthony C. Allen, who served as Vice
President of Finance of GFP and as a director of Bell, has rights to a
substantial number of shares of stock under option in the Company. William L.
Healey and Robert Sroka, who served as directors of Bell, are serving as
directors of the Company after the Reorganization.
At December 31, 1997, GFP had consolidated assets of approximately
$120,608,000, Tube Turns had consolidated assets of approximately $16,946,000,
and Bell had consolidated assets of approximately $29,167,000. Prior to the
Reorganization, GFP was a privately-held holding company headquartered in
Louisville, Kentucky whose principal assets were the shares of the Company, Tube
Turns and Bell owned by it and the manufacturing facility of its Metrum-Datatape
subsidiary in Monrovia, California. Prior to the Reorganization, Tube Turns,
headquartered in Louisville, Kentucky, provided a range of manufacturing
services for heavy industry and manufactured a number of proprietary engineered
products, and Bell, headquartered in Orlando, Florida, provided a range of
outsourcing services for the electronics industry and manufactured a series of
specialty electronics products. The principal asset of Tube Turns is an owned
manufacturing facility in Louisville, Kentucky consisting of offices,
manufacturing space and equipment. The principal assets of Bell are its
headquarters, testing, calibration and manufacturing facility in Orlando,
Florida and a leased instrumentation products facility in Littleton, Colorado
consisting of offices, manufacturing space and equipment. New Tube Turns and New
Bell intend to continue such activities after the Reorganization.
ITEM 5. OTHER EVENTS.
On March 30, 1998, Group Technologies Corporation, a Florida corporation,
changed its state of incorporation by merging with and into Sypris Solutions,
Inc., a Delaware corporation and wholly-owned subsidiary of Group Technologies
Corporation ("Sypris"). The reincorporation was approved by the shareholders of
Group Technologies Corporation at the meeting of its shareholders held on March
16, 1998. The Certificate of Incorporation and By-Laws of Sypris are included as
exhibits to this Current Report on Form 8-K. Pursuant to paragraph (a) of Rule
12g-3 promulgated pursuant to the Securities Exchange Act of 1934 (the "Act"),
the common stock of Sypris is deemed registered under Section 12(g) of the Act.
3
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
A. Financial statements.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
Board of Directors and Shareholders
Group Financial Partners Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Group
Financial Partners Inc. and Subsidiaries as of December 31, 1997 and 1996, and
the related consolidated statements of operations, shareholders' 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 financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Group Financial
Partners Inc. and Subsidiaries at December 31, 1997 and 1996, and the
consolidated 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.
Ernst & Young LLP
Louisville, Kentucky
April 3, 1998
4
GROUP FINANCIAL PARTNERS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except for share data)
December 31,
------------------
1996 1997
-------- --------
ASSETS
Current assets:
Cash and cash equivalents........................... $ 6,012 $ 9,836
Accounts receivable, net............................ 37,254 28,560
Inventories, net.................................... 34,288 44,867
Other current assets................................ 2,307 2,062
-------- --------
Total current assets.............................. 79,861 85,325
Property, plant and equipment, net.................... 48,602 26,885
Other assets.......................................... 4,497 8,398
-------- --------
$132,960 $120,608
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................... $ 23,920 $ 14,858
Accrued liabilities................................. 24,595 31,867
Current portion of long-term debt................... 25,009 3,477
-------- --------
Total current liabilities......................... 73,524 50,202
Long-term debt........................................ 21,588 27,863
Other noncurrent liabilities.......................... 10,381 10,325
-------- --------
Total liabilities................................. 105,493 88,390
Minority interests in subsidiaries.................... 3,262 3,569
Redeemable common stock............................... 1,821 921
Shareholders' equity:
Common stock, no par value, 1,000,000 shares
authorized; 314,196 shares issued and outstanding. 7,892 7,892
Retained earnings.................................. 14,492 19,836
-------- --------
Total shareholders' equity........................ 22,384 27,728
-------- --------
$132,960 $120,608
======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
5
GROUP FINANCIAL PARTNERS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except for per share data)
Years ended December 31,
------------------------------
1995 1996 1997
-------- -------- --------
Revenue........................................................................................... $328,977 $308,598 $217,355
Cost and expenses:
Cost of services rendered and products sold..................................................... 312,712 278,678 184,437
Selling, general and administrative expense..................................................... 31,081 29,407 31,133
Interest expense, net........................................................................... 3,397 3,979 1,959
Other expense (income), net..................................................................... 196 (828) (2,205)
-------- -------- --------
Total cost and expenses........................................................................... 347,386 311,236 215,324
-------- -------- --------
(Loss) income before income taxes, minority interests and discontinued operations................. (18,409) (2,638) 2,031
Income taxes...................................................................................... (3,109) 1,614 1,143
-------- -------- --------
(Loss) income before minority interests and discontinued operations............................... (15,300) (4,252) 888
Minority interests in losses of consolidated subsidiaries......................................... 3,535 1,716 639
-------- -------- --------
(Loss) income from continuing operations.......................................................... (11,765) (2,536) 1,527
Loss from discontinued operations (net of applicable taxes of $406, $205 and $186 in 1995, 1996
and 1997, respectively)......................................................................... (905) (609) (375)
Gain on disposal of discontinued operations (net of applicable tax of $2,389, $2,932 and $2,160
in 1995, 1996 and 1997, respectively)........................................................... 4,637 4,066 4,192
-------- -------- --------
Net (loss) income................................................................................. $ (8,033) $ 921 $ 5,344
======== ======== ========
(Loss) income from continuing operations per common share:
Basic........................................................................................... $ (37.20) $ (8.03) $ 4.83
Diluted......................................................................................... $ (36.64) $ (7.92) $ 4.77
Net (loss) income per common share:
Basic........................................................................................... $ (25.40) $ 2.91 $ 16.91
Diluted......................................................................................... $ (25.02) $ 2.88 $ 16.70
The accompanying notes are an integral part of the consolidated financial
statements.
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GROUP FINANCIAL PARTNERS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands, except for share data)
Common Stock Total
--------------- Retained Shareholders'
Shares Amount Earnings Equity
------- ------ -------- -------------
Balance at January 1, 1995.... 314,196 $7,892 $21,604 $29,496
Net loss...................... -- -- (8,033) (8,033)
------- ------ ------- -------
Balance at December 31, 1995.. 314,196 7,892 13,571 21,463
Net income.................... -- -- 921 921
------- ------ ------- -------
Balance at December 31, 1996.. 314,196 7,892 14,492 22,384
Net income.................... -- -- 5,344 5,344
------- ------ ------- -------
Balance at December 31, 1997.. 314,196 $7,892 $19,836 $27,728
======= ====== ======= =======
The accompanying notes are an integral part of the consolidated financial
statements.
7
GROUP FINANCIAL PARTNERS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Years ended December 31,
------------------------------
1995 1996 1997
-------- -------- --------
Cash flows from operating activities:
Net (loss) income................................................................ $ (8,033) $ 921 $ 5,344
Adjustments to reconcile net (loss) income to net cash provided
by (used in) operating activities:
Depreciation and amortization................................................... 10,244 9,897 7,399
Deferred income taxes........................................................... (142) 563 (309)
Minority interests in losses of consolidated subsidiaries....................... (3,535) (1,716) (639)
Provision for excess and obsolete inventories................................... 6,990 4,106 2,130
Provision for doubtful accounts................................................. 1,523 1,208 718
Gain on disposal of discontinued operations, net of tax......................... (4,637) (4,066) (4,192)
Other noncash charges (credits)................................................. 1,930 1,011 (1,689)
Changes in operating assets and liabilities, net of acquisitions
and dispositions:
Accounts receivable............................................................. 1,027 2,047 7,490
Inventories..................................................................... 2,950 15,164 (7,657)
Other current and noncurrent assets............................................. (2,144) 3,921 (775)
Accounts payable................................................................ 8,801 (17,774) (7,986)
Accrued and other liabilities................................................... (36) (1,221) 117
-------- -------- --------
Net cash provided by (used in) operating activities............................... 14,938 14,061 (49)
Cash flows from investing activities:
Capital expenditures............................................................. (10,201) (7,366) (5,746)
Proceeds from disposal of assets................................................. 5,928 6,399 39,586
Purchase of the net assets of acquired entities.................................. (2,245) -- (14,400)
Changes in nonoperating assets and liabilities................................... (509) (548) (911)
-------- -------- --------
Net cash (used in) provided by investing activities............................... (7,027) (1,515) 18,529
Cash flows from financing activities:
Net (repayments) proceeds under revolving credit agreements...................... (6,573) 216 (6,934)
Proceeds from long-term debt..................................................... 2,240 10,000 30,650
Principal payments on long-term debt............................................. (4,151) (22,321) (37,157)
Payments for redemption of common stock in subsidiaries, net..................... (112) (125) (1,215)
-------- -------- --------
Net cash used in financing activities............................................. (8,596) (12,230) (14,656)
-------- -------- --------
Net (decrease) increase in cash and cash equivalents.............................. (685) 316 3,824
Cash and cash equivalents at beginning of year.................................... 6,381 5,696 6,012
-------- -------- --------
Cash and cash equivalents at end of year.......................................... $ 5,696 $ 6,012 $ 9,836
======== ======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
8
GROUP FINANCIAL PARTNERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Organization and Significant Accounting Policies
Organization and Consolidation Policy
Group Financial Partners Inc. ("GFP"), located in Louisville, Kentucky, is
a privately-held holding company which owns a majority-interest in the entities
described below. The accompanying consolidated financial statements include the
accounts of GFP and its subsidiaries (collectively, the "Company"). All
significant accounts and transactions between GFP and its subsidiaries have been
eliminated.
GFP is the parent for the following corporations: Tube Turns Technologies,
Inc., Bell Technologies, Inc., Metrum-Datatape, Inc., Group Technologies
Corporation, BT Holdings, Inc. As of December 31, 1997, GFP owned 80% or greater
of the outstanding common stock of each of its subsidiaries.
Tube Turns Technologies, Inc. ("TTT"), located in Louisville, Kentucky,
manufactures forgings, fittings and related subassemblies primarily for the
aerospace, commercial vehicle, petrochemical and defense markets.
Bell Technologies, Inc. ("Bell"), headquartered in Orlando, Florida,
manufactures magnetic sensing components and instruments and digital and analog
recording products, provides qualification and reliability testing and
electronic component screening services and provides maintenance, calibration
and repair services for test and measurement equipment to customers located
primarily in the United States. On February 9, 1996, Bell acquired substantially
all of the assets of Metrum, Inc. ("Metrum") from GTC (see Note 15).
Metrum-Datatape, Inc. ("MDI"), located in Monrovia, California, primarily
designs, develops and produces high performance recorders, storage devices and
systems. MDI produces standard off-the-shelf recorders which may be selected
from a catalog. MDI also customizes products to meet the specific needs of its
customers who are primarily military contractors and the United States
Government (see Note 2).
Group Technologies Corporation ("GTC"), headquartered in Tampa, Florida,
provides advanced manufacturing, engineering and testing services to original
equipment manufacturers ("OEMs") of electronic products. GTC 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. GTC was the parent for Group Technologies, S.A. de C.V.
("GTC Mexico") located in Mexico City, Mexico and Group Technologies Suprimentos
de Informatica Industria e Comercio Ltda. ("GTC Brazil") located in Hortolandia,
Brazil (collectively the "Latin American operations") until June 30, 1997 at
which time GTC sold its interest in its Latin American operations (see Note 3).
Substantially all of the assets of Metrum, which remains a wholly-owned
subsidiary of GTC, were sold during 1995 and 1996 (see Notes 3 and 15).
During 1995, 1996 and the first quarter of 1997, the Company completed a
series of transactions which resulted in the sale or transfer of ownership
interest in substantially all of the assets of its real estate operations (see
Note 17). The real estate assets primarily consisted of land and commercial
office and industrial buildings owned or under capitalized lease. Unison
Commercial Group, Inc. ("Unison"), a subsidiary of GFP, provided management and
other services for these assets as well as other third-party owned properties.
Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
9
GROUP FINANCIAL PARTNERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
Cash Equivalents
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents.
Inventories
Contract inventories are stated at actual production costs, reduced by the
cost of units for which revenue has been recognized. Gross contract inventories
are considered work in process. Progress payments under long-term contracts are
specified in the contracts as a percentage of cost and are liquidated as
contract items are completed and shipped. Other inventories are stated at lower
of cost (first-in, first-out method) or market. Certain inventories of TTT are
stated at lower of cost (last-in, first-out method) or market.
Property, Plant and Equipment
Property, plant and equipment, including property under capitalized leases,
is stated on the basis of cost. Buildings and building improvements are
depreciated over their estimated economic lives principally using the straight-
line method. Machinery, equipment, furniture and fixtures are depreciated over
their estimated economic lives principally using accelerated methods. Leasehold
improvements are amortized over the lease term using the straight-line method.
Expenditures for maintenance, repairs and renewals of minor items are expensed
as incurred. Major renewals and improvements are capitalized.
Amortization
Goodwill, patents, non-compete agreements, product drawings, and similar
intangible assets are amortized over their estimated economic lives of five to
fifteen years, using the straight-line method.
Minority Interests in Subsidiaries
Minority interests in subsidiaries represents minority shareholders'
proportionate share of the equity of GTC.
Contract Revenue Recognition
A portion of the Company's business is conducted under long-term, fixed-
price contracts with OEMs, the United States Government and its prime
contractors. Contract revenue is included in the consolidated statement of
operations as units are completed and shipped using the units of delivery,
percentage of completion method of accounting. The costs attributed to contract
revenue are based upon the estimated average costs of all units to be shipped.
The cumulative average costs of units shipped to date is adjusted through
current operations as estimates of future costs to complete change (see Contract
Accounting below).
Revenue recognized under the percentage of completion method of accounting
totaled $57,945,000, $54,397,000 and $47,887,000 for the years ended December
31, 1995, 1996 and 1997, respectively. Substantially all such amounts were
accounted for under the units of delivery method. All other revenue is
recognized as product is shipped and title passes or when services are rendered.
Contract Accounting
For long-term contracts, the Company capitalizes in inventory direct
material, direct labor and factory overhead as incurred. The Company also
capitalizes certain general and administrative costs for estimating and bidding
on contracts awarded (of which approximately $210,000 remained in inventories at
December 31, 1996 and 1997). Selling costs are
10
GROUP FINANCIAL PARTNERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
expensed as incurred. Costs to complete long-term contracts are estimated on a
monthly basis. Estimated margins at completion are applied to cumulative
contract revenue to arrive at costs charged to operations.
Accounting for long-term contracts under the percentage of completion
method involves substantial estimation processes, including determining the
estimated cost to complete a contract. As contracts may require performance over
several accounting periods, formal detailed cost to complete estimates are
performed which are updated monthly via performance reports. Management's
estimates of costs to complete change due to internal and external factors such
as labor rate and efficiency variances, revised estimates of warranty costs,
estimated future material prices and customer specification and testing
requirement changes. Changes in estimated costs are reflected in gross profit in
the period in which they are known. If increases in projected costs to complete
are sufficient to create a loss contract, the entire estimated loss is charged
to operations in the period the loss first becomes known. Provisions for losses
on firm fixed priced contracts totaled $700,000, $2,327,000 and $1,600,000 in
1995, 1996 and 1997, respectively.
During the second quarter of 1996, the Company successfully settled a
name brand products contract claim and recognized revenue and income before
income taxes of approximately $4,100,000 associated with that settlement.
Research and Development
Company sponsored research and development costs are expensed as
incurred. Research and development expense totaled $3,893,000, $3,049,000 and
$3,487,000 for the years ended December 31, 1995, 1996 and 1997, respectively,
and are included in selling, general and administrative expense in the
consolidated statements of operations.
Income Taxes
GFP files a consolidated federal income tax return which includes all
domestic subsidiaries in which it has at least an 80% ownership interest.
Effective March 23, 1995, as a result of a decrease in GFP's ownership
percentage of GTC, GTC did not meet the 80% voting power and value requirements
defined by the Internal Revenue Code for affiliated group membership and ceased
to be an includable member in GFP's affiliated group. GTC and its domestic
subsidiaries separately filed its initial consolidated federal income tax return
for the period beginning March 23, 1995 through December 31, 1995. Effective
March 29, 1996, as a result of an increase in GFP's ownership percentage of GTC,
GTC again met the 80% voting power and value requirements defined by the
Internal Revenue Code for affiliated group membership, and therefore has filed
an election for reaffiliation and expects to be an includable member of GFP's
affiliated group beginning March 29, 1996.
Concentrations of Credit Risk
Financial instruments which potentially expose the Company to
concentrations of credit risk consist of accounts receivable. The Company's OEM
customer base consists primarily of large computer and electronic manufacturers
and its commercial accounts receivable are concentrated with a few of these
large companies. Although the Company is directly affected by the well being of
the computer and electronics industry, management does not believe significant
credit risk exists at December 31, 1997. The Company performs periodic credit
evaluations of its customers' financial condition and does not require
collateral on its commercial accounts receivable. Credit losses are provided for
in the financial statements and consistently have been within management's
expectations.
The Company recognized revenue from the United States Government and
its agencies of approximately $53,643,000, $38,725,000 and $40,170,000 during
the years ended December 31, 1995, 1996 and 1997, respectively. The Company also
served as a subcontractor to a variety of prime contractors under contract with
the federal government which, in the aggregate, represented 11%, 12% and 7% of
the Company's revenue in 1995, 1996 and 1997,
11
GROUP FINANCIAL PARTNERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
respectively. The Company's largest commercial customer was IBM which
represented approximately 13%, 12% and 10% of the Company's revenue for the
years ended December 31, 1995, 1996 and 1997, respectively. No other single
customer accounted for more than 10% of the Company's revenue for the years
ended December 31, 1995, 1996 or 1997.
Foreign Currency Translation
The United States dollar was the functional currency for GTC's
formerly-owned GTC Mexico and GTC Brazil subsidiaries (see Note 3). Foreign
currency transaction gains and losses, which are insignificant in all years
presented, are included in determining net income.
Stock Based Compensation
Stock options are granted under Stock Option Plans to employees and
independent directors of subsidiaries (see Note 12). The Company accounts for
stock option grants in accordance with APB Opinion No. 25, "Accounting for Stock
Issued to Employees."
Earnings Per Share
In 1997, the Financial Accounting Standards Board issued Statement No.
128, "Earnings per Share" ("Statement 128"). Statement 128 replaced the
calculation of primary and fully diluted earnings per share with basic and
diluted earnings per share. Unlike primary earnings per share, basic earnings
per share excludes any dilutive effects of options, warrants and convertible
securities. Diluted earnings per share is very similar to the previously
reported fully diluted earnings per share. All earnings per share amounts for
all periods have been presented, and where appropriate, restated to conform to
Statement 128 requirements.
Reclassifications
Certain amounts in the Company's 1995 and 1996 consolidated financial
statements have been reclassified to conform with the 1997 presentation.
(2) Acquisitions
On January 31, 1995, Bell acquired certain assets and assumed certain
liabilities of Associated Testing Laboratories, Inc. ("ATL"). The transaction
was accounted for as a purchase in which the purchase price of $2,245,000 was
allocated based on the fair values of assets acquired and liabilities assumed.
Goodwill in the amount of $1,000,000 was recorded as a result of the transaction
and is being amortized over fifteen years utilizing the straight-line method.
The acquisition was financed by a term note with a bank. The 1995 consolidated
statement of operations includes amounts for ATL from January 31, 1995.
On July 18, 1995, GTC Brazil acquired certain manufacturing equipment
of IBM Brasil-Industria, Maquinas e Sevicos Ltda. ("IBM Brasil"). The
transaction was accounted for as a purchase in which the purchase price of
$4,900,000, in the form of a note payable to the seller, was allocated based on
the fair values of assets acquired. No goodwill resulted from this transaction.
The 1995 consolidated statement of operations includes amounts for GTC Brazil
from July 18, 1995. GTC sold its investment in the equity interests of GTC
Brazil in June 1997 (see Note 3).
On November 14, 1997, MDI acquired substantially all of the assets and
assumed certain liabilities of Datatape Incorporated ("Datatape"). The
transaction was accounted for as a purchase, in which the purchase price of
$14,400,000 was allocated based on the fair values of assets acquired and
liabilities assumed, with the excess amount allocated to goodwill which totaled
$5,240,000. Goodwill is being amortized over a period of fifteen years utilizing
the straight line method. The acquisition was financed by the BT Credit
Agreement, as amended (see Note 8).
12
GROUP FINANCIAL PARTNERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
(3) Dispositions
GTC completed a series of transactions which, in the aggregate,
resulted in the sale of substantially all of the assets of its name brand
products business units, including the assets of its Metrum subsidiary. On May
31, 1995, the assets of the peripherals products business unit of Metrum were
sold for $5,247,000, consisting of cash of $3,655,000 and a note receivable from
the buyer of $1,592,000. On June 6, 1995, the assets of the imaging business
unit of Metrum were sold for $1,331,000 cash. On February 9, 1996, the assets of
the instrumentation products business unit of Metrum were sold to Bell (see Note
15). On March 22, 1996, GTC sold substantially all of the assets related to its
Badger line of name brand products for $1,457,000 in cash. The sales price for
each transaction approximated the net book value of the respective business
units on the date of sale. The proceeds from the sale transactions were used to
reduce GTC's debt balance and to fund working capital needs.
On June 30, 1997, GTC 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 Industia E Comercio Ltda., and Group Technologies
Integraoes em Electronica Ltda. These three subsidiaries comprised all of GTC's
Latin American operations. GTC 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 totaled $18,000,000 in cash and
the assumption by SCI of certain liabilities. Pursuant to procedures described
in the purchase and sale agreement, the price is subject to subsequent
adjustment, upward or downward, based upon, among other things, the value of the
net assets of GTC's Latin American operations at June 29, 1997. GTC expects to
repay $2,914,000 of the initial sales price to SCI, subject to a final
determination to be made in accordance with the purchase and sale agreement. GTC
recognized a gain of $3,200,000 after giving consideration to its recorded
liability and expected repayment of $2,914,000, relative to this disposition.
(4) Accounts Receivable
Accounts receivable consist of the following:
December 31,
------------------
1996 1997
------- -------
(in thousands)
Commercial......................................$33,641 $23,899
United States Government........................ 5,624 5,758
------- -------
39,265 29,657
Allowance for doubtful accounts................. (2,011) (1,097)
------- -------
$37,254 $28,560
======= =======
Accounts receivable from the U.S. Government includes amounts due
under long-term contracts, all of which are billed at December 31, 1996 and
1997, of $2,463,000 and $1,144,000, respectively. The provision for doubtful
accounts totaled $1,523,000, $1,208,000 and $718,000 for the years ended
December 31, 1995, 1996 and 1997, respectively.
13
GROUP FINANCIAL PARTNERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
(5) Inventories
Inventories consist of the following:
December 31,
--------------------
1996 1997
------- --------
(in thousands)
Raw materials............................................................................................. $20,360 $ 27,007
Work-in process........................................................................................... 11,993 14,954
Finished goods............................................................................................ 847 6,725
Costs relating to long-term contracts and programs, net of amounts
attributed to revenue recognized to date................................................................. 11,655 17,729
Progress payments related to long-term contracts and programs (3,292) (5,189)
LIFO reserve.............................................................................................. (744) (720)
Reserve for excess and obsolete inventories............................................................... (6,531) (15,639)
------- --------
$34,288 $ 44,867
======= ========
The preceding amounts include inventories valued under the last-in,
first-out ("LIFO") method totaling $6,512,000 and $4,966,000 at December 31,
1996 and 1997, respectively, which approximates replacement cost. Provisions for
obsolete, inactive and unsalable inventories totaled $6,990,000, $4,106,000 and
$2,129,000 for the years ended December 31, 1995, 1996 and 1997, respectively.
(6) Property, Plant and Equipment
Property, plant and equipment consists of the following:
December 31,
-------------------
1996 1997
-------- --------
(in thousands)
Land and land improvements................................................................................ $ 4,656 $ 976
Buildings and building improvements....................................................................... 35,990 11,513
Machinery, equipment, furniture and fixtures.............................................................. 59,356 52,426
Facilities in progress.................................................................................... 943 866
-------- --------
100,945 65,781
Accumulated depreciation.................................................................................. (52,343) (38,896)
-------- --------
$ 48,602 $ 26,885
======== ========
Depreciation expense totaled $9,350,000, $9,218,000 and $6,620,000 for
the years ended December 31, 1995, 1996 and 1997, respectively.
14
GROUP FINANCIAL PARTNERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
(7) Accrued Liabilities
Accrued liabilities consist of the following:
December 31,
-----------------
1996 1997
------- -------
(in thousands)
Payments received from customers in excess of contract costs........ $ 3,657 $ 2,691
Employee benefit plan accruals...................................... 6,241 5,547
Other............................................................... 14,697 23,629
------- -------
$24,595 $31,867
======= =======
Included in other accrued liabilities are employee payroll deductions,
advance payments, accrued operating expenses and accrued interest, none of which
exceed 5% of total current liabilities.
(8) Long-Term Debt
Long-term debt consists of the following:
December 31,
-----------------
1996 1997
------- -------
(in thousands)
BT Term Loan........................................................ $ -- $14,500
BT Revolver......................................................... -- 16,150
Bell Mortgage Note.................................................. 1,993 --
Bell Reducing Revolver Note......................................... 11,850 --
GTC Revolver........................................................ 6,934 --
GTC Term Note....................................................... 2,690 --
P-IV Mortgage Note.................................................. 17,398 --
P-IV Second Mortgage Note........................................... 1,300 --
Other............................................................... 4,552 690
-------- -------
46,717 31,340
Less unamortized original issue discount............................ (120) --
Less current portion................................................ (25,009) (3,477)
-------- -------
$ 21,588 $27,863
======== =======
On March 21, 1997, Bell and TTT entered into a financing agreement (the "BT
Credit Agreement"). On November 14, 1997, the BT Credit Agreement was amended
to, among other things, include GTC and MDI as additional borrowers. Under the
BT Credit Agreement's terms, a bank committed a maximum of $45,000,000 for cash
borrowings and letters of credit. The BT Credit Agreement provides for a term
loan (the "BT Term Loan") which permits borrowings of up to $15,000,000 and a
revolving credit loan (the "BT Revolver") which permits borrowings and letters
of credit up to a maximum of $30,000,000, subject to a $5,000,000 limit for
letters of credit. Under the terms of the BT Credit Agreement, interest rates
are determined at the time of borrowing and are based on the prime rate, the
London Interbank Offered Rates plus a spread, or certain alternative rates, and
approximated 7.4% at December 31, 1997. The BT Credit Agreement also requires
compliance with a number of financial and non-financial covenants and prohibits
the Company from paying dividends. The commitment fee on the unused portion of
the revolving credit loan is 0.15% to 0.35% per annum. All borrowings under the
BT Credit Agreement are secured by substantially all of the assets of Bell, TTT,
GTC, MDI and a pledge of all shares of common stock of Bell, TTT, GTC and MDI
owned by GFP. The proceeds from the BT Credit Agreement were used to repay all
debt outstanding under the credit agreements of Bell and
15
GROUP FINANCIAL PARTNERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
TTT. In connection with the November 14, 1997 amendment, the Company borrowed
$14,400,000 to finance the acquisition of substantially all of the assets of
Datatape by MDI. Under the terms of the BT Credit Agreement, principal payments
of $750,000 per quarter are due beginning March 1998, through September 30,
2002, which is also the maturity date for the BT Term Loan and the BT Revolver.
GTC's financing agreement with its bank (the "GTC Credit Agreement") was
entered into on March 29, 1996 and amended on March 28, 1997. The GTC Credit
Agreement provided GTC with a revolving line of credit facility (the "GTC
Revolver"), a $3,300,000 two-year facility (the "GTC Term Note") and an
additional $5,000,000 facility (the "1996 Note"). The 1996 Note was repaid in
full during 1996. The GTC Revolver and the GTC Term Note were repaid in full on
June 30, 1997 with proceeds from the sale of GTC's Latin American operations
(see Note 3). The GTC Credit Agreement was terminated on June 30, 1997.
GTC, in conjunction with the GTC Credit Agreement, paid a $250,000 fee and
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. The exercise period for the 325,000 warrants expires on
March 29, 2001. As a result of the early repayment and termination of the GTC
Credit Agreement, the remaining 875,000 unvested warrants were forfeited by the
lender.
The P-IV mortgage notes were repaid on February 28, 1997 in connection with
the sale of assets by P-IV (see Note 17).
The annual maturities of long-term debt are presented below. Maturities of
debt under the BT Revolver have been reported on the basis that the commitment
to lend under this agreement will be terminated at the end of its current term.
(in thousands)
1998................................................. $ 3,477
1999................................................. 3,213
2000................................................. 3,000
2001................................................. 3,000
2002................................................. 3,000
2003 and thereafter.................................. 15,650
-------
$31,340
=======
Interest paid during the years ended December 31, 1995, 1996 and 1997
totaled $7,381,000, $6,082,000 and $2,238,000, respectively.
(9) Fair Value of Financial Instruments
Cash, accounts receivable, accounts payable and accrued liabilities are
reflected in the financial statements at their carrying amount which
approximates fair value because of the short-term maturity of those instruments.
The carrying amount of debt outstanding under the Company's revolving credit
agreement approximates fair value, due to the short-term nature of the
instrument. The carrying amount of other long-term debt is assumed to
approximate fair value because there have not been any significant changes in
market conditions or specific circumstances since the instruments were recorded.
(10) Employee Benefit Plans
TTT has a number of noncontributory defined benefit pension plans (the
"TTT Pension Plans") covering substantially all employees. TTT Pension Plans
covering salaried and management employees provide pension benefits that are
based on the employees' highest 5-year average compensation within 10 years
before retirement. TTT Pension Plans covering hourly employees and union members
generally provide benefits at stated amounts for each year of
16
GROUP FINANCIAL PARTNERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
service. TTT's funding policy is to make the minimum annual contributions
required by the applicable regulations. Pension expense for the years ended
December 31, 1995, 1996 and 1997 totaled $708,000, $825,000 and $766,000,
respectively. The net pension cost of the TTT Pension Plans included the
following components:
Years ended December 31,
-------------------------
1995 1996 1997
------- ------ ------
(in thousands)
Service cost benefits earned during the period............................................. $ 147 $ 183 $ 157
Interest cost of projected benefit obligation.............................................. 1,175 1,266 1,312
Net amortizations and deferrals............................................................ 1,323 32 889
Actual return on plan assets............................................................... (1,937) (656) (1,592)
------- ------ ------
$ 708 $ 825 $ 766
======= ====== ======
The significant assumptions used in accounting for the TTT Pension
Plans are as follows:
1996 1997
------ -------
Discount rate used in determining present values........................................... 8.75% 8.00%
Annual increase in future compensation levels.............................................. 4.75% 4.75%
Expected long-term rate of return on assets................................................ 8.50% 8.50%
The funded status of the TTT Pension Plans and amounts recognized in
the Company's consolidated balance sheets are as follows:
December 31,
-----------------
1996 1997
------- -------
(in thousands)
Accumulated benefit obligation, including vested benefits of 1996 - $14,576,000; 1997 - $16,555,000. $15,337 $16,933
======= =======
Projected benefit obligation for service rendered to date....................................... $15,637 $17,195
Plan assets at fair value (primarily debentures, stocks and cash)............................... 10,303 11,924
------- -------
Projected benefit obligation in excess of plan assets........................................... 5,334 5,271
Unrecognized prior service cost................................................................. (1,075) (920)
Unrecognized net gain........................................................................... 837 (775)
Additional pension liability.................................................................... 790 1,076
------- -------
Accrued pension cost............................................................................ $ 5,886 $ 4,652
======= =======
Included in:
Current liabilities........................................................................... $ 1,263 $ 1,428
Noncurrent liabilities........................................................................ $ 4,623 $ 3,224
The Company sponsors defined contribution plans (the "Defined
Contribution Plans") for substantially all employees of the Company. The Defined
Contribution Plans are intended to meet the requirements of Section 401(k) of
the Internal Revenue Code. The Defined Contribution Plans allow the Company to
match participant contributions as approved by the respective Board of Directors
of GFP and of each its subsidiaries, and certain of the Defined Contribution
Plans include required base contributions and discretionary contributions.
Contributions to the Defined Contribution Plans for 1995, 1996 and 1997 totaled
$3,079,000, $2,676,000 and $1,863,000, respectively.
The Company has partially self-insured medical plans (the "Medical
Plans") for the employees of GTC. The Medical Plans limit the Company's annual
obligations to fund claims to specified amounts per participant and in the
aggregate. The Company is adequately insured for amounts in excess of these
limits. Employees are responsible, in some instances, for payment of a portion
of the premiums. During 1995, 1996 and 1997, the Company charged $4,526,000,
17
GROUP FINANCIAL PARTNERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
$3,732,000 and $2,265,000, respectively, to operations related to reinsurance
premiums, medical claims incurred and estimated, and administrative costs for
the Medical Plans. Claims paid during 1995, 1996 and 1997 did not exceed the
aggregate limits.
(11) Commitments And Contingencies
The Company leases certain of its real property and certain computer,
manufacturing and office equipment under operating leases with terms ranging
from month-to-month to 10 years and which contain various renewal and rent
escalation clauses. Future minimum noncancelable lease payments for each year
ending December 31, are as follows:
(in thousands)
1998................................................ $ 4,442
1999................................................ 3,384
2000................................................ 2,250
2001................................................ 2,122
2002................................................ 1,479
2003 and thereafter................................. 585
-------
$14,262
=======
Rent expense for the years ended December 31, 1995, 1996 and 1997 totaled
$6,104,000, $4,892,000 and $3,406,000, respectively.
TTT is a co-defendant in two lawsuits in Louisiana arising out of an
explosion in a coker plant owned by Exxon Corporation located in Baton Rouge,
Louisiana. According to the complaints, TTT is the alleged manufacturer of a
carbon steel pipe elbow which failed causing the explosion which destroyed the
coker plant and caused unspecified damages to surrounding property owners. The
suits are being defended for TTT by its insurance carrier. One of the actions
was brought by Exxon and claims damages for destruction of the plant which Exxon
estimates exceed $100,000,000. In this action TTT is a co-defendant with the
fabricator who built the pipe line in which the elbow was incorporated and with
the general contractor for the plant. The second action is a class action filed
on behalf of the residents living around the plant and claims damages in an
amount as yet undetermined. Exxon is a co-defendant with TTT, the contractor and
the fabricator in this action. TTT intends to vigorously defend its case and
believes that a settlement or related judgement would not result in a material
loss to TTT or the Company. No amounts are recorded on the books of the Company
in anticipation of a loss on this contingency.
The Company is involved in certain litigation and contract issues arising
in the normal course of business. While the outcome of these matters cannot, at
this time, be predicted in light of the uncertainties inherent therein,
management does not expect that these matters will have a material adverse
effect on the consolidated financial position or results of operations of the
Company.
(12) Stock Plans
The Company has various stock option plans, stock purchase plans and
incentive plans which provide for the issuance of common stock to the employees
of each company. The Company has also adopted a formula price (the "Formula
Price") valuation as a basis for establishing a value for a share of common
stock for all stock which is not publicly traded. Effective March 31, 1996,
Unison terminated its existing stock plans and repurchased all outstanding
shares from its employees.
The Formula Prices for GFP, Bell and TTT are determined by the Board of
Directors of the respective companies (the "Boards"). In determining the Formula
Prices, the Boards consider a number of factors generally used in the evaluation
of securities of closely held and of publicly held companies; however, the
decisions by the Boards have
18
GROUP FINANCIAL PARTNERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
been based primarily on the judgment of the Boards in the application of these
factors to arrive at Formula Prices which the Boards believe approximate market
value. The judgment of the Boards is based on the long-range prospects of the
respective companies as opposed to short-range trends of the companies or to the
values of securities generally.
The principal shareholders of GFP consist of five members of the Gill
family, who, in the aggregate, own approximately 99% of the issued and
outstanding stock of GFP as of December 31, 1997. The remaining shares of common
stock of GFP are held by four employees not related to the Gill family.
Shares of common stock issued to employees of GFP, Bell and TTT are
subject to restriction agreements (the "Stock Restriction Agreements"), under
which the Company is required to redeem all shares offered for redemption at the
option of the employee. The Stock Restriction Agreements also require the
redemption of all shares held by an employee upon the termination, retirement,
disability or death of the employee. Such redeemable common stock is shown in
the accompanying consolidated balance sheets separately from shareholders'
equity and is carried at its redemption value at December 31, 1996 and 1997.
Common stock held by the principal shareholders of GFP is not subject to the
redemption obligation and is shown in the accompanying consolidated balance
sheets in shareholders' equity.
Stock Purchase Plan
The stock purchase plans (the "Stock Purchase Plans") permit eligible
employees to purchase common stock of their respective companies for cash or
through payroll deductions for the Formula Price at the purchase date. An
employee is awarded one bonus share of common stock (a "Bonus Share") for every
three shares purchased. Bonus Shares vest over periods ranging from 18 to 24
months following the award date. Deferred compensation is recorded for Bonus
Shares and is amortized on a straight-line basis over the vesting period.
Incentive Plans
The incentive plans (the "Incentive Plans") provide for incentive awards to
be made to certain employees for individual performance and to all employees or
certain key employees based upon the achievement of selected financial measures
of the respective companies for each calendar year as compared on a year-to-year
basis. Compensation expense is recognized for the Incentive Plans in the year in
which the individual performance and financial measures are achieved.
Stock Option Plan
Under the stock option plans (the "Stock Option Plans"), options to
purchase common stock may be granted to certain key employees and independent
directors of subsidiaries. Options granted under the Stock Option Plans have
maximum terms ranging from 8 to 13 years. The exercise price of all options
issued under the Stock Option Plans must be at least 100% of the Formula Price
or, in the case of GTC, the fair market value of such shares on the date of
grant. Stock options issued by companies which do not have publicly traded
common stock are subject to agreements which require the respective companies to
redeem the options for the amount by which the Formula Price on the exercise
date exceeds the exercise price. Each company's Board of Directors or its
designated committee selects the individuals who will be granted options and
determines the number of shares subject to each option, fixes the period during
which each option may be exercised and fixes the price at which shares subject
to options may be purchased.
19
GROUP FINANCIAL PARTNERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
The following table summarizes option activity for the years ended December 31,
1995, 1996 and 1997:
GFP TTT Bell GTC
---------------------- --------------------- ----------------------- -----------------------
Exercise Exercise Exercise Exercise
Price Price Price Price
Shares Range Shares Range Shares Range Shares Range
------ -------------- ------ ------------- ------- -------------- --------- ------------
Balance at
January 1, 1995.................. 6,880 $45.99 - 73.40 55,000 $ 9.05 62,150 $ 9.92 - 13.56 1,030,000 $1.67 - 7.75
Granted........................... -- -- -- -- 24,500 15.49 204,951 4.50 - 6.38
Exercised......................... -- -- -- -- -- -- (90,000) 1.67
Forfeited......................... -- -- -- -- (2,000) 15.49 (125,000) 6.00 - 6.25
Expired........................... -- -- -- -- (10,000) 10.38 -- --
------ -------------- ------ ------------- ------- -------------- --------- ------------
Balance at December 31, 1995...... 6,880 45.99 - 73.40 55,000 9.05 74,650 9.92 - 15.49 1,019,951 1.67 - 7.75
Granted........................... -- -- 20,000 10.75 35,000 13.47 - 16.56 631,437 0.84 - 3.00
Exercised......................... (280) 73.40 -- -- -- -- -- --
Forfeited......................... -- -- -- -- -- -- (251,700) 2.35 - 6.00
Expired........................... -- -- -- -- -- -- (150,000) 2.35
------ -------------- ------ ------------- ------- -------------- --------- ------------
Balance at December 31, 1996...... 6,600 45.99 - 73.40 75,000 9.05 - 10.75 109,650 9.92 - 16.56 1,249,688 0.84 - 7.75
Granted........................... -- -- -- -- -- -- 806,879 0.88 - 4.03
Exercised......................... -- -- (5,000) 9.05 (36,350) 9.92 - 15.49 (600) 2.75
Forfeited......................... -- -- -- -- -- -- (411,600) 1.06 - 5.25
------ -------------- ------ ------------- ------- -------------- --------- ------------
Balance at December 31, 1997...... 6,600 $45.99 - 73.40 70,000 $9.05 - 10.75 73,300 $ 9.92 - 16.56 1,644,367 $0.84 - 7.75
====== ============== ====== ============= ======= ============== ========= ============
Exercisable at December 31, 1997.. 6,600 $45.99 - 73.40 50,000 $ 9.05 50,550 $ 9.92 - 16.56 594,322 $0.84 - 7.75
====== ============== ====== ============= ======= ============== ========= ============
Accounting for Stock Based Compensation
The Company applies Accounting Principles Board ("APB") Opinion No.
25, "Accounting for Stock Issued to Employees," and related interpretations in
accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under SFAS No. 123, "Accounting
for Stock-Based Compensation," requires use of option valuation models that were
not developed for use in valuing employee stock options. Under APB Opinion No.
25, when the exercise price of the Company's employee stock options is equal to
the market price of the underlying stock on the date of grant, no compensation
expense is recognized.
The Company recognized compensation expense of $535,000 in its 1996
consolidated statement of operations for the excess of the fair market value of
the GFP common stock on the date of extension over the stated exercise price
related to the change in terms of the GFP options. Fair market value on the date
of extension was determined by reference to the applicable Formula Price for the
GFP common stock at such date. In the case of certain employee stock options
granted by Bell during the year ended December 31, 1996, the Company recognized
compensation expense of approximately $30,000 for stock options granted with an
exercise price below the applicable Formula Price for the Bell common stock on
the date of grant.
20
GROUP FINANCIAL PARTNERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
Pro forma information regarding net income and net income per share is
required by SFAS No. 123, and has been determined as if the Company had
accounted for its employee stock options under the fair value method of that
Statement. The fair value for the options issued by the Company, excluding those
issued by GTC which is a public company, were estimated at the date of grant
using the minimum value method. The fair value for the options issued by GTC
were estimated at the date of grant using a Black-Scholes option pricing model.
The following weighted-average assumptions were used for options granted during
the years ended December 31, 1995, 1996 and 1997:
GFP, TTT and
Bell Options GTC Options
------------------ ------------------
Years ended Years ended
December 31, December 31,
------------------ ------------------
1995 1996 1997 1995 1996 1997
---- ---- ---- ---- ---- ----
Risk-free interest rate...... 5.00% 5.00% -- 5.88% 5.88% 5.75%
Expected life in years....... 9.2 8.2 -- 2.7 2.6 3.3
Expected dividend yield...... 0.00% 0.00% -- 0.00% 0.00% 0.00%
Expected volatility.......... -- -- -- 0.71 0.71 1.12
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information for the years ended December 31, 1995, 1996 and 1997 is as
follows:
Years ended December 31,
-------------------------------------
1995 1996 1997
-------- ------- ------
(in thousands, except per share data)
Pro forma (loss) income from continuing operations... $(11,889) $(2,805) $1,185
======== ======= ======
Pro forma net (loss) income.......................... $ (8,157) $ 652 $5,002
======== ======= ======
Pro forma basic (loss) earnings per common share:
Loss from continuing operations.................... $ (37.60) $ (8.88) $ 3.75
Net (loss) income.................................. $ (25.79) $ 2.06 $15.83
Pro forma diluted (loss) earnings per common share:
(Loss) income from continuing operations........... $ (37.03) $ (8.76) $ 3.70
Net (loss) income.................................. $ (25.40) $ 2.04 $15.63
21
GROUP FINANCIAL PARTNERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
The per share weighted average fair value of options granted during the
years ended December 31, 1995, 1996 and 1997 is as follows:
Years ended December 31,
-------------------------------------
1995 1996 1997
----- ----- -----
(in thousands, except per share data)
TTT....................................................... $ -- $3.88 $ --
Bell
Exercise price equal to market price on date of grant... $6.52 $6.64 $ --
Exercise price less than market price on date of grant.. $ -- $5.44 $ --
GTC....................................................... $2.76 $1.10 $1.30
The following table summarizes the weighted average exercise prices for
option activity for the years ended December 31, 1996 and 1997:
GFP TTT Bell GTC
-------------- ------------- -------------- ------------
1996 1997 1996 1997 1996 1997 1996 1997
------ ------ ------ ----- ------ ------ ----- -----
Balance at January 1.... $49.89 $48.90 $ 9.05 $9.50 $12.57 $13.24 $2.33 $2.30
Granted................. -- -- 10.75 -- 16.41 -- 2.46 1.29
Exercised............... 73.40 -- -- 9.05 13.47 13.85 -- 2.75
Forfeited............... -- -- -- -- -- -- 2.79 2.23
Expired................. -- -- -- -- -- -- 2.35 --
Balance at December 31.. $48.90 $48.90 $ 9.50 $9.54 $13.24 $12.94 $2.30 $1.82
22
GROUP FINANCIAL PARTNERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
The following table summarizes certain weighted average data for
options outstanding and currently exercisable at December 31, 1997:
Outstanding Exercisable
---------------------------------- ------------------------
Weighted Average
-------------------- Weighted
Remaining Average
Exercise Contractual Exercise
Exercise Price Range Shares Price Life Shares Price
- --------------------- ------------ -------- ----------- ------------- --------
GFP:
$45.99......................................................... 5,900 $45.99 7.7 5,900 $45.99
$73.40......................................................... 700 $73.40 8.2 700 $73.40
--------- -------------
Total......................................................... 6,600 $48.90 7.8 6,600 $48.90
========= =============
TTT:
$9.05 - $10.75................................................. 70,000 $ 9.54 4.3 50,000 $ 9.05
Bell:
$9.92 - $13.56................................................. 46,300 $10.96 1.9 45,550 $10.95
$15.49 - $16.56................................................ 27,000 $16.34 7.6 7,000 $16.15
--------- -------------
Total......................................................... 73,300 $12.94 4.0 52,550 $11.64
========= =============
GTC:
$0.84 - $1.28.................................................. 702,638 $ 1.15 8.2 88,030 $ 1.16
$1.38 - $1.88.................................................. 415,872 $ 1.64 2.8 340,967 $ 1.64
$2.25 - $3.13.................................................. 440,201 $ 2.46 6.1 58,400 $ 2.78
$3.75 - $4.50.................................................. 63,705 $ 4.14 6.9 34,472 $ 4.35
$5.75 - $7.75.................................................. 21,951 $ 6.84 7.3 21,951 $ 6.84
--------- -------------
Total......................................................... 1,644,367 $ 1.82 6.2 543,820 $ 2.07
========= =============
(13) Income Taxes
The components of income tax (benefit) expense are as follows:
Years Ended December 31,
----------------------------------
1995 1996 1997
------- ------------ --------
(in thousands)
Current:
Federal......................................................... $(4,123) $ (189) $1,171
State........................................................... 507 407 138
Foreign and other............................................... 449 495 169
------- ------------- --------
(3,167) 713 1,478
Deferred:
Federal........................................................ 22 931 (251)
State.......................................................... 36 (30) (84)
------- ------------- --------
58 901 (335)
------- ------------- --------
$(3,109) $ 1,614 $1,143
======= ============= ========
Income taxes paid during 1995, 1996 and 1997 totaled $954,000,
$3,708,000 and $3,760,000, respectively. Income tax refunds received during 1996
and 1997 totaled $4,518,000 and $1,373,000, respectively.
23
GROUP FINANCIAL PARTNERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
The following is a reconciliation of income tax (benefit) expense to that
computed by applying the federal statutory rate of 34% to income before income
taxes, minority interest and discontinued operations:
Years ended December 31,
---------------------------
1995 1996 1997
------- ------- -------
(in thousands)
Federal tax at the statutory rate............................. $(6,259) $ (897) $ 691
State income taxes, net of federal tax benefit................ 215 372 47
Foreign income taxes.......................................... 428 481 152
State tax net operating loss carryforward..................... (1,080) (671) (29)
Change in valuation allowance for deferred tax asset.......... 4,367 1,144 247
Other......................................................... (780) 1,185 35
------- ------- -------
$(3,109) $ 1,614 $ 1,143
======= ======= =======
Deferred income tax assets and liabilities are as follows:
December 31,
-----------------
1996 1997
------- -------
(in thousands)
Deferred tax assets:
Compensation and benefit accruals............................ $ 1,356 $ 1,381
Inventory valuation.......................................... 1,168 1,251
Net operating loss carryforward.............................. 1,908 975
Accounts receivable allowance................................ 603 194
Depreciation................................................. 27 --
Defined benefit pension plan................................. 1,476 1,361
Other........................................................ 1,075 2,514
------- -------
7,613 7,676
Valuation allowance.......................................... (6,511) (6,758)
------- -------
1,102 918
Deferred tax liabilities:
Stock issuance by subsidiary................................. (5,051) (5,051)
Depreciation................................................. -- (685)
Contract provisions.......................................... (130) (194)
Other........................................................ (54) --
------- -------
(5,235) (5,930)
------- -------
Net deferred tax liability.................................... $(4,133) $(5,012)
======= =======
During the years ended December 31, 1995, 1996 and 1997, the Company
recorded valuation allowances totaling $4,367,000, $1,144,000 and $247,000,
respectively, on its deferred tax assets to reduce the total to an amount that
management believes will more likely than not be realized. Realization of
deferred tax assets is dependent upon sufficient taxable income during the
period that temporary differences and carryforwards are expected to be available
to reduce taxable income.
At December 31, 1997, for state income tax purposes, GTC and Bell had net
operating loss carryforwards of approximately $17,740,000 and $718,000,
respectively. The GTC and Bell state tax net operating loss carryforwards will
expire beginning in 2010 and 2001, respectively.
24
GROUP FINANCIAL PARTNERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
(14) Earnings Per Common Share
The calculation of basic and diluted earnings per common share is as
follows for the years ended December 31, 1995, 1996 and 1997:
Years Ended December 31,
----------------------------------------------------------------------
1995 1996 1997
-------------------- -------------------- --------------------
Basic Diluted Basic Diluted Basic Diluted
--------- --------- --------- --------- --------- ---------
(Loss) earnings per common share:
(Loss) income from continuing operations....... $ (37.20) $ (36.64) $ (8.03) $ (7.92) $ 4.83 $ 4.77
Loss from discontinued operations.............. (2.86) (2.82) (1.93) (1.90) (1.19) (1.17)
Gain on disposal of discontinued operations.... 14.66 14.44 12.87 12.70 13.27 13.10
-------- -------- -------- -------- -------- --------
Net (loss) income per common share............. $ (25.40) $ (25.02) $ 2.91 $ 2.88 $ 16.91 $ 16.70
======== ======== ======== ======== ======== ========
The calculation of weighted average equivalent shares outstanding is as
follows:
Years Ended December 31,
---------------------------------------------------------------------
1995 1996 1997
------------------- ------------------- -------------------
Basic Diluted Basic Diluted Basic Diluted
-------- -------- -------- -------- -------- --------
Shares of GFP common stock outstanding...... 316,232 316,232 313,006 313,006 315,962 315,962
Employee compensation-related shares,
including stock options................... -- 4,852 -- 4,122 -- 4,118
-------- -------- -------- -------- -------- --------
316,232 321,084 313,006 320,128 315,962 320,080
======== ======== ======== ======== ======== ========
(15) Related Party Transaction
On February 9, 1996, Bell purchased the assets of the instrumentation
products business unit of Metrum from GTC for $10,000,000 cash and an earn-out
provision which provides for additional payments to GTC, up to $3,000,000 in the
event annual earnings before interest and taxes exceeds defined amounts through
December 31, 2000. Due to the common ownership of GFP in GTC and Bell, an
independent opinion was obtained which indicated that the consideration received
by GTC for the sale of the instrumentation products business was fair, from a
financial point of view, to the unaffiliated shareholders of GTC.
25
GROUP FINANCIAL PARTNERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
(16) Segment Information
Industry Segments
The Company operates in two industry segments: Electronics Services and
Forging and Fabrication Services. The Company's real estate operations were
formerly included in a third industry segment; however, these operations were
terminated effective with the divestiture of the Company's sole remaining
property in the first quarter of 1997, and accordingly, the results of
operations for the real estate segment are presented as discontinued operations
in the Company's consolidated statements of operations for the years ended
December 31, 1995, 1996 and 1997 (see Note 17). All of the real estate
operations were located in the United States.
Revenue by industry segment consists of sales to customers, as reported in
the Company's consolidated statements of operations. There were no intersegment
sales during the three years ended December 31, 1997.
Operating profit by industry segment is total revenue less operating
expenses. In computing operating profit by industry segment, the effects of
general corporate expenses, interest income and expense, gains and losses on
asset disposals, minority interests, other income and expense items and income
taxes are not included.
Identifiable assets by industry segment are those assets used in the
Company's operations in each segment. General corporate assets are principally
cash and cash equivalents. Capital expenditures are reported exclusive of
acquisitions.
Information about the Company's industry segments for the three years ended
December 31, 1997 are as follows:
Years ended December 31,
------------------------------
1995 1996 1997
-------- -------- --------
(in thousands)
Revenue:
Electronics Services................................................................ $305,119 $283,915 $185,854
Forging and Fabrication Services.................................................... 23,858 24,683 31,501
-------- -------- --------
$328,977 $308,598 $217,355
======== ======== ========
(Loss) income before income taxes, minority interests and discontinued operations:
Electronics Services................................................................ $(15,975) $ (501) $ 60
Forging and Fabrication Services.................................................... 1,280 1,225 2,042
-------- -------- --------
Operating (loss) profit............................................................. (14,695) 724 2,102
General corporate................................................................... (121) (211) (317)
Interest expense.................................................................... (3,397) (3,979) (1,959)
Other income (expense), net......................................................... (196) 828 2,205
-------- -------- --------
$(18,409) $ (2,638) $ 2,031
======== ======== ========
26
GROUP FINANCIAL PARTNERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
Years ended December 31,
----------------------------------
1995 1996 1997
-------- -------- --------
(in thousands)
Identifiable Assets:
Electronics Services.................... $129,330 $ 97,160 $ 97,978
Forging and Fabrication Services........ 13,174 16,221 16,946
General Corporate....................... 4,021 4,084 5,684
-------- -------- --------
146,525 117,465 120,608
Discontinued Operations (Real Estate).. 26,503 15,495 --
-------- -------- --------
$173,028 $132,960 $120,608
======== ======== ========
Depreciation and Amortization:
Electronics Services.................... $ 6,713 $ 7,033 $ 6,111
Forging and Fabrication Services........ 581 629 816
General Corporate....................... 59 56 93
-------- -------- --------
7,353 7,718 7,020
Discontinued Operations (Real Estate).. 2,891 2,179 379
-------- -------- --------
$ 10,244 $ 9,897 $ 7,399
======== ======== ========
Capital Expenditures:
Electronics Services.................... $ 8,844 $ 5,266 $ 3,329
Forging and Fabrication Services........ 369 1,614 2,294
General Corporate....................... 78 29 108
-------- -------- --------
9,291 6,909 5,731
Discontinued Operations (Real Estate)... 910 457 15
-------- -------- --------
$ 10,201 $ 7,366 $ 5,746
======== ======== ========
27
GROUP FINANCIAL PARTNERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
Geographic Segments:
Through June 30, 1997, the Company was a multinational corporation with
operations in the United States, Mexico and Brazil. Revenue and operating profit
information presented below for the Company's geographic segments relates to the
Company's continuing operations. Information about the Company's operations in
geographic areas for the years ended December 31, 1995, 1996 and 1997 is as
follows:
Years ended December 31,
------------------------------
1995 1996 1997
-------- -------- --------
(in thousands)
Revenue:
United States............. $288,845 $250,141 $200,424
Latin America............. 40,132 58,457 16,931
-------- -------- --------
$328,977 $308,598 $217,355
======== ======== ========
Operating (Loss) Profit:
United States............. $(12,640) $ 2,040 $ 4,274
Latin America............. (2,055) (1,316) (2,172)
-------- -------- --------
$(14,695) $ 724 $ 2,102
======== ======== ========
Identifiable Assets:
United States............. $146,971 $112,806 $120,608
Latin America............. 26,057 20,154 --
-------- -------- --------
$173,028 $132,960 $120,608
======== ======== ========
Identifiable assets of foreign subsidiaries are those assets related to the
operations of those subsidiaries. United States assets consist of all other
operating assets of the Company.
(17) Discontinued Operations
The Company's real estate operations were divested at various times
beginning in October 1995 and ending in February 1997. The real estate segment
is accounted for as discontinued operations and, accordingly, the results of
operations and related gain on the disposal of the properties are segregated in
the accompanying consolidated statements of operations.
On October 1, 1995, GFP Partners-II, Ltd. ("P-II") and its lender, which
held a promissory note secured by a mortgage on a commercial office building and
land located at 515 West Market Street in Louisville, Kentucky (the "515
Building"), executed an agreement which transferred title for the 515 Building
to the lender in exchange for a release of P-II's liability for payment of the
unpaid balance of the principal and accrued and unpaid interest due on the
mortgage. As a result of the exchange, the Company recognized a gain on the
extinguishment of debt of $4,637,000, net of applicable income taxes of
$2,389,000, in its 1995 consolidated statement of operations.
On April 1, 1996, GFP Partners-III, Ltd. ("P-III") and its lender, which
held a promissory note secured by a mortgage on a commercial office building and
land located at 500 New Circle Road in Lexington, Kentucky (the "North Park
Building"), executed an agreement which transferred title for the North Park
Building to the lender in exchange for a release of P-III's liability for
payment of the unpaid balance of the principal and accrued and unpaid interest
due on the mortgage. As a result of the exchange, the Company recognized a gain
on the extinguishment of debt of $2,182,000, net of applicable income taxes of
$915,000, in its 1996 consolidated statement of operations.
28
GROUP FINANCIAL PARTNERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
On November 19, 1996, GFP Partners-VI, Ltd. ("P-VI") completed a
transaction in which it sold to BSRT Riverport Corp. substantially all of the
assets associated with the industrial warehouse and land located at 6310 Cane
Run Road in Louisville, Kentucky. Assets sold included the leasehold interest in
the real property and improvements thereon, related personal property and
leases. The proceeds from the sale, net of related disposition expenses was
approximately $3,900,000. The Company recognized a gain on the sale of
$4,816,000, net of applicable income taxes of $2,017,000, in its 1996
consolidated statement of operations.
On February 28, 1997, GFP Partners-IV, Ltd. ("P-IV") completed a
transaction in which it sold to Empire State Collateral Corporation
substantially all of the assets associated with the commercial office building
and land located at 455 Fourth Avenue in Louisville, Kentucky and the parking
garage and land located at 430 South Third Street in Louisville, Kentucky.
Assets sold included the real property and improvements thereon, related
personal property and leases. The proceeds from the sale, net of related
disposition expenses totaled approximately $21,200,000, a portion of which was
used to repay the mortgage note and second mortgage note secured by the real
property. The Company recognized a gain on the sale of $6,352,000, net of
applicable income taxes of $2,160,000, in its 1997 consolidated statement of
operations.
The components of net assets related to discontinued operations included in
the consolidated balance sheet as of December 31, 1996 are as follows:
(in thousands)
Current assets............................. $ 156
Property, plant and equipment, net......... 15,248
Accounts payable and accrued liabilities... 232
Long-term debt, including current portion.. 18,698
Total assets............................... 15,495
(18) Subsequent Event
On February 5, 1998, GFP entered into the Fourth Amended and Restated
Agreement and Plan of Reorganization with TTT, Bell and GTC (the
"Reorganization"), which will result in, among other things, the merger of GFP
with and into GTC and the conversion of all outstanding shares of common stock
of GFP, TTT and Bell into shares of common stock of GTC.
29
B. Pro forma financial information.
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
The unaudited pro forma combined financial statements were derived from,
should be read in conjunction with, and are qualified in their entirety by
reference to, the consolidated financial statements of GFP and the notes
thereto. GTC, Tube Turns and Bell are subsidiaries of GFP and are included in
the consolidated financial statements of GFP. After the Reorganization, GFP will
be the reporting entity from an accounting point of view and therefore, the
following unaudited pro forma condensed combined financial statements are
prepared to show the potential impact of the sale of GTC's Latin American
operations, the Reorganization and the acquisition of Metrum-Datatape on the
historical consolidated financial statements of GFP as if the transactions had
been consummated as of January 1,1997 for the results of operations or as of
December 31, 1997 for the balance sheet.
The pro forma consolidated financial data are based upon certain
assumptions and estimates and are not necessarily indicative of the results
which would actually have been attained if the transactions had been consummated
at the beginning of the indicated periods or as of the date specific, or which
may be attained in the future.
The sale of GTC's Latin American operations to SCI Systems, Inc. occurred
on June 30, 1997. GTC utilized a portion of the sale proceeds to fully
extinguish its debt payable to its primary lender and has terminated its credit
agreement with that lender effective June 30, 1997. GFP completed the
divestiture of all operations related to its real estate segment in the first
quarter of 1997. The results of operations for the real estate segment are
presented as discontinued operations in the historical consolidated financial
statements of GFP and, therefore, are not included in the pro forma statements
of operations.
The acquisition of Metrum-Datatape occurred on November 14, 1997. Metrum-
Datatape was acquired by a wholly owned subsidiary of GFP and was accounted for
under the purchase method of accounting and, therefore, these pro forma
financial statements are prepared on such a basis. The purchase price for
Metrum-Datatape has been allocated to the assets and liabilities based upon
preliminary estimates of their respective fair values and the pro forma
adjustments do not give effect to any synergies.
In the opinion of management, all adjustments necessary to present fairly
such pro forma condensed combined financial statements, as set forth in the
accompanying explanatory notes, have been made. The unaudited pro forma
condensed combined statement of operations, which include results of operations
as if the Reorganization had been consummated on January 1, 1997, do not reflect
the effects of potential cost savings and operating synergies anticipated to
result from the Reorganization.
30
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
(in thousands, except per share data)
Pro Forma Adjustments
------------------------------ Pro Forma
For the Adjustments Pro Forma
sale of GTC's for the Combined
GFP Latin American For the Pro Forma Metrum-Datatape and
Historical operations (1) Reorganization Combined Acquisition (8) Acquisition
---------- -------------- -------------- --------- --------------- -----------
Revenue.............................. $ 217,355 $ (16,931) $ -- $ 200,424 $ 31,215 $ 231,639
Cost of operations................... 184,437 (17,776) -- 166,661 18,576 185,237
---------- -------------- ------------ ---------- --------------- -----------
Gross profit......................... 32,918 845 -- 33,763 12,639 46,402
Selling, general and administrative
expense............................. 31,133 (880) (22)(6) 30,231 10,167 40,398
---------- -------------- ------------ ---------- --------------- -----------
Operating income..................... 1,785 1,725 22 3,532 2,472 6,004
Interest expense, net................ 1,959 (915)(2) -- 1,044 1,035 2,079
Other (income) expense, net.......... (2,205) 3,205 (3) -- 1,000 102 1,102
---------- -------------- ------------ ---------- --------------- -----------
Income before income taxes, minority
interests and discontinued operations 2,031 (565) 22 1,488 1,335 2,823
Income taxes......................... 1,143 (152)(4) 8 (7) 999 494 1,493
---------- -------------- ------------ ---------- ---------------- -----------
Income before minority interests and
discontinued operations............. 888 (413) 14 489 841 1,330
Minority interests................... 639 83 (5) (722)(5) -- -- --
---------- --------- ------------ ---------- --------------- -----------
Income from continuing operations.... $ 1,527 $ (330) $ (708) $ 489 $ 841 $ 1,330
========== ========= ============ ========== =============== ===========
Income per share from continuing
operations.......................... $ 4.77 $ 0.05 $ 0.14
Weighted average shares outstanding.. 320 9,685(15) 9,685
31
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
DECEMBER 31, 1997
(in thousands)
Pro Forma
Adjustments
GFP for the Pro Forma
Historical Reorganization Combined
---------- -------------- ---------
ASSETS
Cash and cash equivalents........... $ 9,836 $ -- $ 9,836
Accounts receivable................. 28,560 -- 28,560
Inventories......................... 44,867 -- 44,867
Other current assets................ 2,062 -- 2,062
-------- ------ --------
Total current assets................ 85,325 -- 85,325
Property, plant and equipment, net.. 26,885 -- 26,885
Other assets........................ 8,398 9,618 (9) 18,016
-------- ------ --------
$120,608 $9,618 $130,226
======== ====== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable.................... $ 14,858 $ -- $ 14,858
Accrued liabilities................. 31,867 254 (10) 32,121
Current portion of long-term debt... 3,477 -- 3,477
-------- ------- --------
Total current liabilities........... 50,202 254 50,456
Long-term debt...................... 27,863 -- 27,863
Other noncurrent liabilities........ 10,325 (1,491) (11) 8,834
-------- ------- --------
Total liabilities................... 88,390 (1,237) 87,153
Minority interests in subsidiaries.. 3,569 (3,569) (12) --
Redeemable common stock............. 921 (921) (10) --
Common stock........................ 7,892 (7,795) (13) 97
Additional paid-in capital.......... -- 7,795 (13) 23,040
567 (10)
11,109 (14)
3,569 (12)
Retained earnings................... 19,836 100 (10) 19,936
-------- ------- --------
Total shareholders' equity.......... 27,728 15,345 43,073
-------- ------- --------
$120,608 $ 9,618 $130,226
======== ======= ========
32
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
(1) Reflects the results of operations for GTC's Latin American operations for
the year ended December 31, 1997 assuming the disposition of the operations
occurred on January 1, 1997.
(2) Reflects the reduction in interest expense of $239,000 incurred by GTC's
Latin American operations and a reduction of $676,000 resulting from the
repayment of indebtedness with the proceeds of the disposition.
(3) Reflects the elimination of the $3,200,000 gain recognized by GTC on the
June 30, 1997 sale of its Latin American operations, after giving
consideration to an expected repayment to the buyer of $2,900,000, which is
subject to final determination to be made in accordance with the purchase
and sale agreement. GTC's deferred income tax assets are fully reserved,
including those relative to tax operating loss carryforwards. Since such
tax operating loss carryforwards exceed the potential taxable gain on the
sale of the Latin American Operations, no net tax expense was recognized
for the disposition.
(4) Reflects a reduction in income tax expense for foreign income tax recorded
by GTC's Latin American operations.
(5) Reflects a reduction in minority shareholders' 20% proportionate share of
the loss from continuing operations of GTC's Latin American operations, and
the elimination of the remaining balance of minority shareholders' 20%
proportionate share of the loss of GTC.
(6) Reflects a net increase in selling, general and administrative expense for
the following:
Increase in amortization expense of estimated intangible assets
recorded for the step-up in basis on the acquisition of minority
interests of GTC, Tube Turns and Bell by GFP in the
Reorganization (a)............................................. $ 641,000
Decrease for accretion recognized for the change in redemption
value on redeemable common stock............................... (663,000)
---------
Decrease in selling, general and administrative expense......... $ (22,000)
=========
------------
(a) The intangible asset is being amortized using the straight-line method
over an estimated useful life of 15 years.
(7) Reflects income taxes on pro forma adjustments to selling, general and
administrative expense for the Reorganization at an assumed effective
income tax rate of 37%.
33
(8) Reflects the results of operations of Metrum-Datatape for the period ended
November 14, 1997 assuming the acquisition occurred on January 1, 1997.
Below is a table which sets out the adjustments between the unaudited
financial statements of Metrum-Datatape and the pro forma financial
statements:
Metrum-Datatape Pro Forma
Historical Adjustments Pro Forma
--------------- ----------- ---------
(in thousands)
Revenue........................................................ $33,658 $(2,443)(a) $31,215
Cost of operations............................................. 21,697 (2,801)(b) 18,576
(1,017)(c)
697 (d)
------- ------- -------
Gross profit................................................... 11,961 678 12,639
Selling, general and administrative expense.................... 15,381 (691)(c) 10,167
384 (d)
324 (e)
(627)(f)
(494)(g)
(3,265)(h)
(845)(i)
------- ------- -------
Operating income............................................... (3,420) 5,892 2,472
Interest expense, net.......................................... 1,093 (1,093)(j) 1,035
1,035 (k)
Other expense, net............................................. 102 -- 102
------- ------- -------
(Loss) income before income taxes and discontinued operations.. (4,615) 5,950 1,335
Income taxes................................................... -- 494 (l) 494
------- ------- -------
(Loss) income from continuing operations....................... $(4,615) $ 5,456 $ 841
======= ======= =======
- --------------
(a) Elimination of revenue from a component of Metrum-Datatape not acquired
by GFP. The acquisition of Metrum-Datatape excludes certain operating
assets and liabilities associated with a strategically unrelated
product line.
(b) Elimination of cost of operations associated with the product line not
acquired.
(c) Elimination of historical depreciation of the fixed assets of Metrum-
Datatape.
(d) To reflect pro forma depreciation of fixed assets based upon
adjustments to record the assets at the estimated fair value,
depreciated over an estimated weighted average remaining useful life of
4.3 years.
(e) To reflect amortization of the estimated goodwill that results from the
acquisition using the straight-line method over an estimated useful
life of 15 years.
(f) Elimination of direct selling, general and administrative expense
associated with the product line not acquired.
(g) Elimination of direct research and development expense associated with
the product line not acquired.
(h) Elimination of research and development expense incurred by the seller
since the seller retained the assets related thereto and the Company
will not incur these expenses after the acquisition.
(i) Elimination of expenses allocated by the seller which will not be
incurred subsequent to the acquisition. Such expenses will not be
incurred by the Company after the acquisition and would not have been
incurred on a stand-alone basis.
(j) Elimination of interest expense on debt of the seller not assumed.
34
(k) To reflect interest resulting from borrowings for the acquisition based
upon an average outstanding debt of $14.4 million assuming an annual
interest rate of 7.5%.
(l) Reflects an assumed effective tax rate of 37%.
(9) Reflects the estimated intangible asset recorded as a result of the step-up
in basis to occur for the acquisition of minority interests by GFP in the
Reorganization. The step-up in basis is anticipated to be allocated to the
assets and liabilities of GTC, Tube Turns and Bell in accordance with the
rules of purchase accounting. The final allocation of the step-up in basis
is dependent on certain valuations that have not progressed sufficiently to
enable Sypris to make a final allocation in the accompanying pro forma
financial statements. Accordingly, the cost allocation adjustments have not
been made and the entire amount is preliminarily classified as other assets
in the combined pro forma balance sheet. The computation of the estimated
intangible asset and the related deferred tax liability is as follows:
GTC Tube Turns Bell Total
------- ---------- ------- -------
(in thousands)
Fair value of common stock issued
in exchange for common stock held
by minority interests (a)......... $10,018 $ 305 $1,636 $11,959
Fair value of stock options issued
in exchange for stock options
held by minority interests (b).... 1,384 436 1,470 3,290
Minority interests' proportionate
share of the net assets of the
acquired entity................... (3,569) (139) (432) (3,757)
------- ----- ------ -------
Excess of fair value of common
stock and stock options issued
over proportionate share of net
assets acquired................... 7,833 602 2,674 11,109
Reduction in allocable cost for
reversal of deferred tax
liability attributable to
GFP's tax basis in GTC common
stock (c)......................... (5,051) -- -- (5,051)
------- ----- ------ -------
Pre-tax step-up in basis
attributable to acquisition of
minority interests................ 2,782 602 2,674 6,058
Deferred tax liability attributable
to increase in basis of
proportionate share of net assets
acquired (using 37% effective
income tax rate).................. 1,635 354 1,571 3,560
------- ----- ------ -------
Step-up in basis allocable to
identifiable assets and to
goodwill, if any, attributable to
acquisition of minority interests. $ 4,417 $ 956 $4,245 $ 9,618
======= ===== ====== =======
---------------
(a) The computation of the fair value of common stock issued in exchange
for common stock held by minority interests is as follows:
GTC Tube Turns Bell
---------- ---------- -----------
Outstanding shares held by
minority shareholders......... 3,252,596 18,229 36,694
Conversion ratios applicable
to the outstanding shares..... -- 5.4276 14.4737
Shares of GTC common stock
issuable...................... -- 98,940 531,097
Fair value of GTC common
stock issuable to minority
interests based on $3.08
per share..................... $10,018,000 $305,000 $1,636,000
35
The per share amount of $3.08 assigned to the GTC Common Stock
issuable to minority interests represents the estimated average
closing price of the GTC Common Stock for the two trading days before
and after the most recent announcement of the terms of the
Reorganization on February 4, 1998. The transaction will be recorded
based upon the actual average closing price of the GTC Common Stock
for this period.
The Conversion Ratios of Tube Turns and Bell are described in "The
Reorganization--The Tube Turns Merger" and "The Reorganization--The
Bell Merger," respectively. See also "The Reorganization--The Merger."
(b) The fair value assigned to the vested and unvested options issuable by
GTC to the option holders of GFP, Tube Turns and Bell were determined
using the Black-Scholes option pricing model.
(c) The reversal of the deferred tax liability attributable to GFP's basis
in GTC common stock and the corresponding reduction in allocable basis
results from the determination that the taxable temporary difference
which gave rise to the recognition of the deferred tax liability is
not expected to occur as a result of the Reorganization. The deferred
tax liability was originally recorded in connection with recognition
of a gain by GFP on the issuance of shares by GTC in its initial
public offering in 1994. Effective with the Reorganization, deferred
taxes on GFP's investment in GTC will be determined by reference to
the tax basis of GTC's net assets rather than the tax basis of GTC
common stock owned by GFP.
(10) Reflects the reclassification of redeemable common stock to shareholders'
equity, since the redemption obligation associated therewith will terminate
upon completion of the Reorganization, and the elimination of deferred
taxes on the cumulative accretion recognized for the change in redemption
value on redeemable common stock. The adjustments related to redeemable
common stock are as follows:
Redeemable common stock........................................ $ 921,000
Additional paid-in capital for redeemable common stock......... (567,000)
---------
Cumulative accretion on redeemable shares outstanding.......... 354,000
Deferred income taxes attributable to redeemable common stock.. (254,000)
---------
Increase to retained earnings.................................. $ 100,000
=========
(11) Reflects the net effect of a $3,560,000 deferred tax liability recorded on
the step-up in basis for acquisition of minority interests by GFP in the
Reorganization and the reversal of a $5,051,000 deferred tax liability in
the consolidated financial statements of GFP associated with the gain on
sale of unissued shares in the initial public offering of GTC Common Stock
(see Note 9). Since the shares of GTC Common Stock held by GFP prior to
the Reorganization will be converted to shares of GTC Common Stock which
will be issued to the individual shareholders of GFP in the Reorganization,
the difference between GFP's tax basis and its financial reporting basis
which gave rise to the $5,051,000 deferred tax liability is not expected to
result in a taxable temporary difference to GFP.
(12) Reflects the reclassification of minority interests to shareholders' equity
for the GTC minority shareholders' proportionate share of GTC's
shareholders' equity.
(13) Reflects the reclassification of paid-in capital for the conversion of GFP
Common Stock, no par value, to GTC Common Stock, $.01 par value, based upon
the total shares assumed to be outstanding after the Reorganization and the
Reverse Stock Split.
(14) Reflects the estimated excess of fair value of common stock and stock
options issued over proportionate share of net assets acquired in
connection with the acquisition of the minority interests of GTC, Bell and
Tube Turns (see Note 9).
36
(15) Pro forma weighted average shares outstanding were computed as follows:
Year ended
December 31,
1997
--------------
(in thousands)
Weighted average shares of GTC Common Stock
outstanding................................. 16,224
Weighted average of the estimated shares of
GTC Common Stock to be issued in
conjunction with the Reorganization (a)..... 21,145
Net effect of dilutive stock options to be
issued by GTC to the option holders of GFP,
Tube Turns and Bell in conjunction with
the Reorganization.......................... 1,369
------
Total......................................... 38,738
======
To reflect the 1 for 4 Reverse Stock Split.... 9,685
======
---------------
(a) The estimated shares of GTC Common Stock to be issued in conjunction
with the Reorganization represents the 34,185,130 shares of GTC Common
Stock issuable to the shareholders of GFP, Tube Turns and Bell in the
Reorganization, net of the 13,039,625 shares of GTC Common Stock owned
by GFP prior to the Reorganization.
37
C. Exhibits
2 Fourth Amended and Restated Agreement and Plan of Reorganization
dated as of February 5, 1998 by and among Group Financial
Partners, Inc., Group Technologies Corporation, Bell
Technologies, Inc., and Tube Turns Technologies, Inc. is
incorporated by reference to Exhibit 2 to Group Technologies
Corporation's Registration Statement on Form S-4/A filed February
12, 1998 (Registration No. 333-20299).
4(a) Agreement and Plan of Merger dated September 22, 1997 by and
between Group Technologies Corporation and Sypris Solutions, Inc.
is incorporated by reference to Appendix G to the Prospectus
included in Group Technologies Corporation's Registration
Statement on Form S-4/A filed February 12, 1998 (Registration No.
333-20299).
4(b) Certificate of Incorporation of Sypris Solutions, Inc. is
incorporated by reference to Appendix H to the Prospectus
included in Group Technologies Corporation's Registration
Statement on Form S-4/A filed February 12, 1998 (Registration No.
333-20299).
4(c) Bylaws of Sypris Solutions, Inc. is incorporated by reference to
Appendix I to the Prospectus included in Group Technologies
Corporation's Registration Statement on Form S-4/A filed February
12, 1998 (Registration No. 333-20299).
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.
SYPRIS SOLUTIONS, INC.
(Registrant)
By: /S/ JEFFREY T. GILL
-----------------------------------------
Jeffrey T. Gill
President and Chief Executive Officer
Date: April 14, 1998
38
