<PAGE> 1
FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES AND EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
EXCHANGE ACT
For the transition period from
COMMISSION FILE NUMBER: 0-12113
CONNECTIVITY TECHNOLOGIES INC.
(Exact name of small business issuer as specified in its charter)
Delaware 94-2691724
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
667 Madison Avenue, New York, New York 10021
(Address of principal executive offices)
(212) 644-8880
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No _______
State the number of shares outstanding of each of the issuer's classes of common
equity as of the latest practicable date: 5,565,074 shares of Common Stock, par
value. $.04 per share, outstanding as of July 31, 1997.
Transitional small business disclosure Format (check one):
Yes _______ No X
<PAGE> 2
CONNECTIVITY TECHNOLOGIES INC.
INDEX
<TABLE>
<CAPTION>
Page No.
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Restated Condensed Consolidated Balance Sheet (Unaudited)
as of June 30, 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Restated Condensed Consolidated Income Statement
(Unaudited) for the Three and Six Months Ended
June 30, 1997 and 1996 . . . . . . . . . . . . . . . . . . . . . . . . . .4
Restated Condensed Consolidated Statements of Cash Flows
(Unaudited) for the Six Months
Ended June 30, 1997 and 1996 . . . . . . . . . . . . . . . . . . . . . . .5
Notes to Restated Condensed Consolidated Financial
Statements (Unaudited) . . . . . .. . . . .. . . . . . . . . . . . . . . .6
Restated Pro Forma Condensed Consolidated Income
Statement (Unaudited) for the Three and Six
Months Ended June 30, 1997 and 1996 . . . . . . . . . . . . . . .. . . .9
Notes to Restated Pro Forma Condensed Consolidated
Income Statement (Unaudited) . . . . . . . . . . . . . . . . . . . . . . . 10
Pro Forma Condensed Consolidated Balance Sheet
(Unaudited) as of June 30, 1997 . . . . . . . . . . . . . . . . . . . . . .11
Notes to Pro Forma Condensed Consolidated
Balance Sheet . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . 12
Item 2. Management's Discussion and Analysis or Plan
of Operation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . 18
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
</TABLE>
2
<PAGE> 3
CONNECTIVITY TECHNOLOGIES INC.
RESTATED CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
JUNE 30, 1997
<TABLE>
<CAPTION>
ASSETS
<S> <C>
CURRENT ASSETS
Cash and cash equivalents $ 77,631
United States Treasury Bills 592,227
Accounts receivable, less allowance of $71,875 7,475,752
Inventories 6,866,505
Prepaid expenses and other assets 526,173
-----------
Total current assets 15,538,288
Property, plant and equipment 6,426,380
Deferred tax asset 10,897,040
Deposits and other assets 353,128
Goodwill and intangible assets, net of
accumulated amortization 7,599,195
Net assets of discontinued operations 19,942,616
-----------
Total assets $60,756,647
===========
LIABILITIES
CURRENT LIABILITIES
Current portion of long term debt $ 2,790,000
Trade accounts payable 5,597,728
Accrued compensation and commissions 128,361
Accrued liabilities 666,444
------------
Total current liabilities 9,182,533
Long term debt 38,960,000
------------
Total liabilities 48,142,533
============
Minority interest, net of demand notes receivable
of $638,780, 6 percent, from a minority
stockholder of the subsidiary (406,250)
STOCKHOLDERS' EQUITY
Preferred stock - par value $.01 per share;
authorized 10,000,000 shares, none issued
Series B Common Stock - par value $.04 per share;
authorized 750,000 shares, none issued
Common Stock - par value $.04; authorized 20,000,000
shares, outstanding 5,565,074 shares, net of
206,601 shares held in treasury 222,613
Additional paid-in capital 109,336,792
Accumulated deficit (96,539,041)
------------
Total stockholders' equity 12,614,114
------------
Total liabilities' and stockholders' equity $ 60,756,647
</TABLE> ============
See Accompanying Notes to Condensed Consolidated Financial Statements
3
<PAGE> 4
CONNECTIVITY TECHNOLOGIES INC.
RESTATED CONDENSED CONSOLIDATED INCOME STATEMENT
(UNAUDITED)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1997 AND 1996
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30 SIX MONTHS ENDED JUNE 30
1997 1996 1997 1996
------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
Net sales $ 12,627,156 $ 3,354,484 $ 23,735,903 $ 3,354,484
Cost of goods sold 10,155,263 2,440,256 18,832,171 2,440,256
------------ ----------- ------------ -----------
Gross profit 2,471,893 914,228 4,903,732 914,228
Selling, general and administrative expenses 2,093,231 1,119,351 4,039,666 1,364,351
------------ ----------- ------------ -----------
Operating income 378,662 (205,123) 864,066 (450,123)
Other income (expense):
Interest income 6,010 115,026 16,360 277,026
Interest expense (515,557) (128,086) (994,153) (128,086)
Other 1,251 (1,000) (1,249) (1,000)
------------ ----------- ------------ -----------
Loss from continuing operations before
income taxes and minority interest (129,634) (219,183) (114,976) (302,183)
Provision for income taxes 10,451 (73,327) 25,451 (70,559)
------------ ----------- ------------ -----------
Loss from continuing operations before
minority interest (140,085) (145,856) (140,427) (231,624)
Minority interest in subsidiary 9,671 (11,472) (32,931) (11,056)
------------ ----------- ------------ -----------
Loss from continuing operations (130,414) (157,328) (173,358) (242,680)
Income from discontinued operations, net
of income taxes and minority interest 66,135 65,328 174,639 67,680
------------ ----------- ------------ -----------
Net income (loss) $ (64,279) $ (92,000) $ 1,281 $ (175,000)
============ =========== ============ ===========
Earnings (loss) per share (primary and fully diluted)
Continuing operations $ (0.02) $ (0.02) $ (0.03) $ (0.04)
Discontinued operations 0.01 0.01 $ 0.03 $ 0.01
------------ ----------- ------------ -----------
Net earnings (loss) per share $ (.01) (0.01) $ 0.00 $ (0.03)
============ =========== ============ ===========
Weighted Average Number of Common
Shares and Common Share Equivalents:
Primary 5,595,663 6,193,290 5,730,950 6,033,200
Fully Diluted 5,595,663 6,218,754 5,730,950 6,123,298
</TABLE>
See Accompanying Notes to Condensed Consolidated Income Statement
4
<PAGE> 5
CONNECTIVITY TECHNOLOGIES INC.
RESTATED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
------------------- -------------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 1,281 $ (175,000)
Adjustments to reconcile net income (loss) to net
cash from (used in) operating activities:
Depreciation and amortization 884,196 123,000
Minority interest 78,751 23,000
Deferred taxes 178,712 (101,000)
Changes in operating assets and liabilities:
Decrease (increase) in:
Accounts receivable (1,654,846) 1,289,581
Inventories (1,909,322) (322,933)
Prepaid and other current assets 57,862 107,422
Deposits and other assets (114,749) (6,439)
Increase (decrease) in:
Accounts payable 1,310,917 1,443,758
Accrued liabilities (1,303,505) (664,816)
Discontinued operations (1,412,154) (2,876,737)
------------------- -------------------
Net cash used in operations (3,882,857) (1,160,164)
------------------- -------------------
Cash flows from investing activities:
Purchases of property, plant, and equipment, net (841,664) (85,000)
Sales of United States Treasury Bills 397,714 9,407,000
Payments for companies purchased, net of cash acquired (7,234,000)
------------------- -------------------
Net cash from (used in) investing activities (443,950) 2,088,000
------------------- -------------------
Cash flows from financing activities:
Repayment of debt (1,400,000)
Exercise of stock options and warrants 605,000
Proceeds from notes payable-net 4,200,000
------------------- -------------------
Net cash provided by (used for) financing activities 4,200,000 (795,000)
------------------- -------------------
Net increase (decrease) in cash (126,807) 132,836
Cash and cash equivalents, beginning of period 204,438 176,000
------------------- -------------------
Cash and cash equivalents, end of period $ 77,631 $ 308,836
=================== ===================
</TABLE>
See Accompanying Notes to Condensed Consolidated Financial Statements
5
<PAGE> 6
CONNECTIVITY TECHNOLOGIES INC.
NOTES TO RESTATED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1 - Condensed Consolidated Financial Statements:
The Condensed Consolidated Financial Statements have been
restated to reflect Energy Electric Cable ("EEC") as a discontinued operation.
See also Note 3 - Discontinued Operations.
The Restated Condensed Consolidated Financial Statements
included herein have been prepared by Connectivity Technologies Inc. ("CTI" or
"the Company") without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations, although the Company believes the disclosures which are
made are adequate to make the information presented not misleading. Further, the
Condensed Consolidated Financial Statements have been prepared in accordance
with generally accepted accounting principles for interim financial information,
the instructions to Form 10-QSB and Regulation S-B (including Item 310(b)
thereof) and reflect, in the opinion of management, all adjustments necessary to
present fairly the financial position and results of operations as of and for
the periods indicated.
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
It is suggested that these Condensed Consolidated Financial
Statements be read in conjunction with the Consolidated Financial Statements and
the Notes thereto for the year ended December 31, 1996, included in CTI's Annual
Report on Form 10-KSB to the Securities and Exchange Commission.
Note 2 - Nature of Operations and Basis of Presentation:
The Company's restated 1997 financial statements include the
accounts of CTI and operations of its of 85% owned subsidiary, Connectivity
Products Incorporated ("CPI"). The 1996 restated condensed consolidated
statement of operations includes the results of operations of CPI subsequent to
May 31, 1996, when it was acquired by CTI. All significant intercompany accounts
and transactions have been eliminated in consolidation. Certain prior period
amounts have been reclassified to conform to current period presentation.
6
<PAGE> 7
The primary business of the Company is the manufacture of
wire and cable products. The two major markets served by the Company are
industrial (commercial and residential security, factory automation, traffic and
transit signal control and audio systems) and communications (networking, voice
and data).
Note 3 - Discontinued Operations
On July 11, 1997, Anicom, Inc. ("Anicom") acquired for
$27,000,000 in cash and $2,000,000 of its common stock substantially all of the
assets of and assumed certain liabilities of the Company's EEC Division
(representing the Distribution Industry Segment). The purchase price is subject
to adjustment based on the net assets of the EEC division as of June 30, 1997.
The net book value of the assets sold are shown as "net assets of discontinued
operations" on the June 30, 1997 balance sheet, and EEC's 1996 and 1997
operating results are separately reported on the statements of operations. The
Company expects to recognize a gain related to the sale of approximately
$1,900,000 (net of taxes of $6,100,000 and minority interest of $300,000) in the
quarter ended September 30, 1997. See also "Management's Discussion and Analysis
for Plan of Operation" for June 30, 1997.
Note 4 - Debt
In connection with the sale of EEC on July 11, 1997, CPI
refinanced its bank borrowings with an amended facility totaling $30,000,000
comprised of a $12,000,000 revolving credit facility, a $12,000,000 term loan
and a $6,000,000 line of credit ("Bank Borrowings"). All outstanding borrowings
were retired on July 11, 1997 with the proceeds from the sale and $12,000,000 of
new borrowings under the amended term loan. Interest on the Bank Borrowings is
payable at various intervals and accrues at the applicable LIBOR rate plus 2.75
percent. CPI may elect to have all or a portion of the Bank Borrowings accrue
interest at the lender's base rate plus 1 percent. Under certain conditions, the
1 percent add on will be reduced to zero and the 2.75 percent add on will be
reduced to 1.75 percent. In addition, CPI must pay a fee equal to .5 percent (to
be reduced to .375 percent in future years under certain conditions) of the
average unused balance under the revolving credit agreement. The Bank Borrowings
are collateralized by essentially all of the assets of CPI and are guaranteed by
CTI to the extent of its holdings of CPI stock.
The revolving credit facility matures on May 31, 2002. Amounts
advanced under this facility are based upon percentages of eligible accounts
receivable and inventory. The line of credit is to be used for qualified capital
expenditures and acquisitions. Advances under the line of credit mature on May
31, 1998, at which time (subject to certain conditions) advances may be
converted to a term loan.
7
<PAGE> 8
The term loan, as amended, matures as follows:
<TABLE>
<CAPTION>
<S> <C>
1997 $ 300,000
1998 900,000
1999 2,400,000
2000 3,000,000
2001 3,000,000
Thereafter 2,400,000
-----------
$12,000,000
===========
</TABLE>
The agreements governing the Bank Borrowings, as amended as of
July 11, 1997, contain various financial covenants related, among other things,
to maintenance of minimum consolidated net worth, maintenance of a maximum ratio
of senior debt (and overall debt) to EBITDA (as defined) and maintenance of
minimum interest and fixed charges (as defined) coverage ratios.
Note 5 - Earnings Per Share
Statement of Financial Accounting Standards No. 128, "Earnings
per Share," was issued in March 1997. The statement is effective for fiscal
years ending after December 15, 1997. This statement addresses the calculation
of earnings per share. Under the new statement, there are two types of earnings
per share--basic and diluted. Basic earnings per share is calculated by dividing
income available to common stockholders by the weighted average number of common
shares outstanding. Diluted earnings per share is calculated by dividing income
available to common stockholders by the weighted average number of common shares
outstanding and common share equivalents.
Earnings per share calculated under the new statement are as follows:
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
----------------------- ------------------------
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Basic earnings (loss) per share
Continuing operations ($ .02) ($ .02) ($ .03) ($ .04)
Discontinued operations .01 .01 .03 .01
-------- -------- -------- --------
Net $ (.01) ($ .01) $ .00 ($ .03)
======== ======== ======== ========
Diluted earnings (loss) per share
Continuing operations ($ .02) ($ .02) ($ .03) ($ .04)
Discontinued operations .01 .01 .03 .01
-------- -------- -------- --------
Net $ (.01) ($ .01) $ .00 ($ .03)
======== ======== ======== ========
</TABLE>
8
<PAGE> 9
CONNECTIVITY TECHNOLOGIES INC.
RESTATED PRO FORMA CONDENSED CONSOLIDATED INCOME STATEMENT
(UNAUDITED)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1997 AND 1996
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30 SIX MONTHS ENDED JUNE 30
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales $ 12,627,156 $ 11,404,336 $ 23,735,903 $ 21,411,460
Cost of goods sold 10,155,263 8,686,257 18,832,171 16,422,767
------------ ------------ ------------ ------------
Gross profit 2,471,893 2,718,079 4,903,732 4,988,693
Selling, general and administrative expenses 2,093,231 2,152,905 4,039,666 4,024,679
------------ ------------ ------------ ------------
Operating income 378,662 565,174 864,066 964,014
Other income (expense):
Interest income 6,010 18,028 16,360 37,028
Interest expense (515,557) (414,413) (994,153) (819,701)
Other 1,251 (1,008) (1,249) (1,003)
------------ ------------ ------------ ------------
Income (loss) from continuing operations before
income taxes and minority interest (129,634) 167,781 (114,976) 180,338
Provision for income taxes 10,451 74,206 25,451 81,152
------------ ------------ ------------ ------------
Income (loss) from continuing operations before
minority interest (140,085) 93,575 (140,427) 99,186
Minority interest in subsidiary 9,671 (67,322) (32,931) (102,550)
------------ ------------ ------------ ------------
Income (loss) from continuing operations (130,414) 26,253 (173,358) (3,364)
Income from discontinued operations, net
of income taxes and minority interest 66,135 99,181 174,639 112,753
------------ ------------ ------------ ------------
Net income (loss) $ (64,279) $ 125,434 $ 1,281 $ 109,389
============ ============ ============ ============
Earnings (loss) per share (primary and fully diluted)
Continuing operations $ (0.02) $ (0.00) $ (0.03) $ 0.00
Discontinued operations 0.01 0.02 0.03 0.02
------------ ------------ ------------ ------------
Net earnings (loss) per share $ (.01) $ 0.02 $ 0.00 $ 0.02
============ ============ ============ ============
Weighted Average Number of Common
Shares and Common Share Equivalents:
Primary 5,595,663 6,193,290 5,730,950 6,033,200
Fully Diluted 5,595,663 6,218,754 5,730,950 6,123,298
</TABLE>
See Notes to Pro Forma Condensed Consolidated Income Statement
9
<PAGE> 10
CONNECTIVITY TECHNOLOGIES INC.
NOTES TO RESTATED PRO FORMA CONDENSED CONSOLIDATED INCOME STATEMENTS (UNAUDITED)
1. PRO FORMA FINANCIAL STATEMENTS
The unaudited pro forma consolidated statements of operations for the
three-month and six-month periods ended June 30, 1997 and 1996 give effect to
the acquisition ("Acquisition") of 85% of the capital stock of Connectivity
Products Incorporated ("CPI") by Connectivity Technologies Inc. ("CTI") as if
the acquisition occurred January 1, 1996, and the concurrent redemption by CPI
of 1,274 shares of its common stock. The Acquisition has been accounted for as a
purchase.
The pro forma financial statements have been restated to reflect Energy Electric
Cable ("EEC") as a discontinued operation. See also "Note 3 - Discontinued
Operations" included with the Notes to the Restated Condensed Consolidated
Financial Statements.
The pro forma information is based on unaudited financial statements after
giving effect to adjustments related to the allocation of the purchase price.
The unaudited pro forma consolidated income statements include all adjustments,
consisting of normal recurring accruals, which CTI considers necessary for a
fair presentation of the results of operations.
The unaudited pro forma consolidated income statements may not be indicative of
the results that actually would have been achieved if the acquisition had
occurred on the date assumed and do not project CTI's results of operations at
any future period then ended.
2. EMPLOYMENT AGREEMENTS
Selling, general and administrative expense for the three months ended March 31,
1996 reflects actual compensation paid to two stockholders of CPI involved with
continuing operations which exceeds their current base salaries by $87,500 for
the three months ended March 31, 1996 and by $145,833 for the six months ended
June 30, 1996. These amounts have not been reflected as a decrease in expense on
the pro forma statements of income.
10
<PAGE> 11
CONNECTIVITY TECHNOLOGIES INC. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
AS OF JUNE 30, 1997
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS:
SALE OF
CTI ENERGY ELECTRIC
HISTORICAL CABLE PRO FORMA
ASSETS
<S> <C> <C> <C>
Current Assets
Cash and cash equivalents $ 362,535 65,096 (a) $ 427,631
United States Treasury Bills 592,227 592,227
Accounts receivable, less allowance 20,634,098 (12,476,787)(a) 8,157,311
Inventories 13,911,499 (7,081,174)(a) 6,830,325
Prepaid expenses and other assets 609,211 (83,038)(a) 526,173
------------- ------------- ------------
Total current assets 36,109,570 (19,575,903) 16,533,667
Property, plant and equipment 7,630,351 (1,203,971)(a) 6,426,380
Deferred tax asset 11,019,069 (2,844,000) 8,175,069
Deposits and other assets 460,221 1,892,907 (a) 2,353,128
Goodwill and intangible assets, net of accumulated
amortization 14,399,195 (6,810,763)(a) 7,588,432
------------ ------------- ------------
$ 69,618,406 $ (28,541,730) $ 41,076,676
============= ============= ============
LIABILITIES
Current portion of long term debt $ 2,790,000 (2,190,000)(a) $ 600,000
Trade accounts payable 13,372,766 (9,040,062)(a) 4,332,704
Income taxes payable 3,256,000 (b) 3,256,000
Accrued compensation and commissions 627,678 (499,317)(a) 128,361
Accrued liabilities 1,253,848 2,406,649 (a) 3,660,497
------------- ------------- ------------
Total current liabilities 18,044,292 (6,066,730) 11,977,562
Long term debt 38,960,000 (24,460,000)(a) 14,500,000
------------- ------------- ------------
Total liabilities 57,004,292 (30,526,730) 26,477,562
------------- ------------- ------------
Minority interest, net of demand notes receivable
$620,310, 6%, from a minority stockholder
of the subsidiary (406,250) (300,000) (706,250)
STOCKHOLDERS' EQUITY
Preferred stock - par value $.01 per share;
authorized 10,000,000 shares, none issued
Series B Common Stock - par value $.04 per share;
authorized 750,000 shares, none issued
Common Stock - par value $.04; authorized 20,000,000
shares, outstanding 5,565,074 shares, net of 206,601
shares held in treasury 222,613 222,613
Additional paid-in capital 109,336,792 109,336,792
(6,100,000)(b)
Accumulated deficit (96,539,041) 8,385,000 (a) (94,254,041)
------------- ------------- ------------
12,614,114 1,985,000 14,579,114
------------- ------------- ------------
$ 69,618,406 $ (28,541,730) $ 41,076,676
============= ============= ============
</TABLE>
See notes to Pro Forma Condensed Consolidated Balance Sheet
11
<PAGE> 12
NOTES TO PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
This Pro Forma Condensed Consolidated Balance Sheet includes the accounts
of CTI and the effects of the sale of EEC on financial position. This Pro
Forma Condensed Consolidated Balance sheet is prepared on the assumption
that the sale of Energy Electric Cable was made on June 30, 1997.
(a) To eliminate Energy Electric Cable's assets and liabilities and
record net proceeds from and pretax gain on sale of Energy
Electric Cable.
(b) To provide estimated taxes on the gain.
12
<PAGE> 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
JUNE 30, 1997
The primary business of Connectivity Technologies Inc. (the "Company", "CTI", or
the "Registrant") is the manufacture of wire and cable products. The two major
markets served by the Company are industrial (commercial and residential
security, factory automation, traffic and transit signal control and audio
systems) and communications (networking, voice and data). Prior to selling the
Company's Energy Electric Cable distribution division ("EEC"), the Company was
also engaged in distribution. See "Sale of Energy Electric Cable".
Before acquiring 85% of the common stock of Connectivity Products Incorporated
("CPI") as of May 31, 1996, the Company's principal activity consisted of
seeking and evaluating candidates for acquisition. The Company now focuses its
acquisition activity on companies in the wire and cable business according to
established strategic and financial criteria. The Company's goals are to grow
(i) internally through capacity expansions and product line extensions and (ii)
externally through complementary acquisitions.
SALE OF ENERGY ELECTRIC CABLE
On July 11, 1997, the Company's subsidiary, Connectivity Products Incorporated,
("CPI") entered into an Asset Purchase Agreement ("Asset Purchase Agreement")
with Anicom, Inc. ("Anicom") and Reel Acquisition Corp., a wholly-owned
subsidiary of Anicom (the "Purchaser"), pursuant to which Purchaser acquired the
business and substantially all of the assets of EEC. In connection with the
sale, the Purchaser assumed most of EEC's liabilities other than borrowings,
taxes, and certain other liabilities.
Pursuant to the Agreement, CPI received $29,000,000 subject to adjustment,
including $27,000,000 in cash and $2,000,000 consisting of 190,476 shares of
Anicom's stock, plus the liabilities assumed by the Purchaser. The gain on the
sale will be reported as a gain on disposal of a discontinued operation.
RESTATEMENT OF FINANCIAL STATEMENTS
CTI's financial statements have been restated to classify EEC as a discontinued
operation. The regular financial statements separately report on continuing
operations comprised of the manufacture of wire and cable products.
COMPARISON OF RESTATED HISTORICAL RESULTS
The Company's financial statements include the continuing operations of CPI,
excluding EEC, since June 1, 1996. Most significant changes in CTI's results of
operations are a result of the CPI acquisition. To enable a clearer
understanding of the combined operations, restated pro forma consolidated
financial statements covering continuing operations of CTI are included with
this Quarterly Report on Form 10-QSB for the three months and six months ended
June 30,
13
<PAGE> 14
1997, compared to the like periods of 1996. These statements are prepared as if
CTI had acquired CPI as of January 1, 1996, the beginning of the periods
reported on. A discussion of the restated pro forma results is also included in
a separate section in this Management's Discussion and Analysis or Plan of
Operation.
Sales were $12,627,000 for the second quarter of 1997 and $23,736,000 for the
six months ended June 30, 1997 compared to $3,354,000 for the three-month and
six-month comparable periods of 1996. Sales were due to CPI continuing
operations from date of acquisition.
Cost of goods sold were $10,155,000 for the second quarter of 1997 and
$18,832,000 for the six months ended June 30, 1997 compared to $2,440,000 for
the three-month and six-month comparable periods of 1996. Cost of goods sold
were due to CPI continuing operations from date of acquisition.
Selling, general and administrative expenses were $2,093,000 for the second
quarter of 1997 and $4,040,000 for the six months ended June 30, 1997, compared
to $1,119,000 for the second quarter of 1996 and $1,364,000 for the six months
ended June 30, 1996. The increases are primarily due to CPI operations from date
of acquisition. In the second quarter of 1996, the Company expensed $255,000 of
one-time consulting fees related to acquisition reviews. In the second quarter
of 1997, the Company expensed approximately $80,000 of professional fees due to
suspension of an initial public offering planned for CPI.
Interest income was $6,000 for the second quarter of 1997 and $16,000 for the
six months ended June 30, 1997. This compares to $115,000 for the second quarter
of 1996 and $277,000 for the six months ended June 30, 1996. The comparative
decreases were primarily due to a decrease in the amount of Treasury Bills held
by the Company.
Interest expense was $516,000 for the second quarter of 1997 and $994,000 for
the six months ended June 30, 1997. This compares to $128,000 for the second
quarter of 1996 and $128,000 for the six months ended June 30, 1996. The
increases relate to CPI interest expense from date of acquisition.
Income tax expense is provided on taxable operating results at statutory tax
rates, approximately 45%. Non-deductible good will amortization, which does not
reduce cash flow from operations caused the difference between statutory rates
and the Company's effective tax rate for the periods presented.
COMPARISON OF RESTATED PRO FORMA RESULTS
Restated pro forma income statements included with this Form 10-QSB are prepared
as if the continuing operations of the companies (excluding EEC) had been
combined since January 1, 1996.
Sales for the three months ended June 30, 1997, increased 10.7% to $12,627,000
from $11,404,000 for the comparable year earlier period. For the six months
ended June 30, 1997,
14
<PAGE> 15
sales increased 10.9% to $23,736,000 versus $21,411,000 for the six months ended
June 30, 1996. In 1997 periods compared to 1996, sales of both wire and cable
products increased. Cable product sales increases accounted for most of the
sales increase. Although wire manufacturing dollar volumes increased, unit
volumes were up more than sales due to lower copper prices during the first half
of 1997 compared to the first half of 1996.
Cost of goods sold for the three months ended June 30, 1997, was 80.4% of sales
or $10,155,000 versus 76.2% or $8,686,000 for the comparable prior year period.
Cost of goods sold was 79.3% or $18,832,000 for the six months ended June 30,
1997 versus 76.7% or $16,423,000 for the six months ended June 30, 1996. The
higher cost of sales in the second quarter 1997 and six months ended June 30,
1997, was primarily due to slower demand in some products, product mix and
transition to new products, along with a negative adjustment related to a
physical inventory at June 30, 1997. Lower copper prices in 1997 also had a
negative effect on gross margins.
Selling and administrative expenses were 16.6% of sales or $2,093,000 for the
three months ended June 30, 1997, compared to 18.9% of sales or $2,153,000 for
the year earlier period. For the six months ended June 30, 1997, selling and
administrative expenses were 17.0% of sales or $4,040,000 versus 18.8% or
$4,025,000 for the six months ended June 30, 1996. Costs in 1997 benefited from
economies realized due to higher sales volume but were partially offset by
additional salaries and expenses for added infrastructure. Also, base salaries
of stockholders operating the business were lower in 1997 compared to 1996 as
described in Note 2 of "Notes to Restated Pro Forma Condensed Consolidated
Income Statement". In the second quarter of 1997, the Company expensed
approximately $80,000 of professional fees due to suspension of an initial
public offering planned for CPI. In the second quarter of 1996, the Company
expensed $255,000 of one-time consulting fees related to acquisition reviews.
Interest income for the three months ended June 30, 1997 was $6,000 compared to
$18,000 for the second quarter of 1996. For the six months ended June 30, 1997,
interest income amounted to $16,000 versus $37,000 for the comparable 1996
period. Differences in earnings were primarily due to average investment
balances.
Interest expense for the second quarter of 1997 was $516,000 versus $414,000 for
the second quarter of 1996. For the six months ended June 30, 1997, interest
expense was $994,000 versus $820,000 the same 1996 period.
Differences were primarily due to working capital requirements.
Income tax expense is provided on taxable operating results at statutory tax
rates, approximately 45%. Non-deductible good will amortization, which does not
reduce cash flow from operations, caused the difference between statutory rates
and the Company's effective tax rate for the periods presented.
FINANCIAL CONDITION AND LIQUIDITY
15
<PAGE> 16
The Company's principal sources of cash are results of operations and existing
credit arrangements. On July 11, 1997, CPI received cash proceeds from the sale
of EEC. See "Sale of Energy Electric Cable".
Simultaneously with the closing of the sale under the Asset Purchase Agreement
(the "Closing"), CPI refinanced its senior credit facility with BankBoston and
NBD Bank to decrease the amount available for borrowing thereunder from
$43,740,000 to $30,000,000. Immediately prior to the Closing, CPI had
approximately $36,000,000 outstanding under the credit facility, which amount
was reduced by $24,000,000 of the cash proceeds. Substantially all of the
remaining cash proceeds were temporarily invested in commercial paper.
The credit facility, as amended July 11, 1997, consists of a revolver, a line
of credit and a term loan ("Senior Debt Agreement"). CPI's Senior Debt
Agreement provides for borrowings up to $30,000,000 subject to a borrowing base
limitation. After completion of the sale on July 11, 1997, $12,000,000 was
outstanding against these facilities which is secured by CPI's assets as well
as CPI stock owned by CTI. On August 13, 1997, effective June 30, 1997,
amendments were made to CPI's Senior Debt Agreement relating to covenants
involving ratios for senior debt and interest coverage to EBITDA. Without these
amendments, the Company would not have been in compliance with the Senior Debt
Agreement at the end of the second quarter 1997. Effective July 11, 1997, the
term loan was further amended as described in this section of the Management's
Discussion.
The Company believes that funds generated from operations along with existing
credit arrangements will be sufficient to support the short-term and long-term
liquidity requirements for operations. Acquisitions are intended to be financed
from operating cash flows, existing credit arrangements and possibly by
additional equity which may be raised for acquisitions.
INCOME TAX MATTERS
The Company has approximately $85,000,000 of U.S. net operating loss
carryforwards ("NOLs") as of December 31, 1996 available to offset future U.S.
taxable income generated by the Company and its subsidiaries with which it files
a federal consolidated return (the "Consolidated Group"). If the NOLs are
available, it is expected that the actual cash outlay by the Consolidated Group
for the next several years will be limited to U.S. alternative minimum tax along
with state income taxes and foreign taxes, if any.
The future benefits of the NOL and tax credit carryforwards are dependent on
their continued availability as well as the availability of future taxable
income. The Deferred Tax Asset (net of a valuation allowance) included in the
Company's Consolidated Financial Statements has been computed on the assumption
that CTI will continue to file a consolidated tax return that includes CPI.
Management previously announced plans for an initial public offering ("IPO") of
CPI's common stock which has now been canceled. If an IPO is accomplished for
CPI in the future, it could result in CTI no longer being able to include CPI in
its consolidated tax return and CPI's earnings would not be sheltered by the
NOL.
16
<PAGE> 17
Section 382 of the Internal Revenue Code (the "Code") contains certain
limitations on the ability of a corporation to utilize its net operating losses
in any one year if there has been a change of ownership of more than 50% within
a three-year period (an "ownership change"), counting for purposes of measuring
the ownership change generally only the value of stock owned by a shareholder or
certain groups of shareholders holding 5% or more of the Company's stock. The
Company does not believe that there has been an ownership change in the past
three years. However, future events, including events beyond the control of the
Company such as the acquisition in the open market of shares of the Company's
Common Stock by a current or new 5% shareholder who was unaware of the possible
negative consequences of such acquisition, could result in an ownership change.
If an ownership change were to occur, the Company's ability to use its NOLs to
reduce the future taxable income of the Company (and the corporations with which
it files a consolidated federal income tax return) could be severely curtailed
and it is possible that a federal income tax liability may be incurred that
would otherwise have been avoidable had the NOLs been fully available.
17
<PAGE> 18
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit No. Description of Document
- ----------- -----------------------
<S> <C>
10.1 Fifth Amendment to Amended and Restated Revolving Credit and
Term Loan Agreement, dated as of June 27, 1997, by and among
Connectivity Products Incorporated, NBD Bank ("NBD Bank"), as
Administrative Agent, BankBoston N.A. (f/k/a The First
National Bank of Boston and hereinafter referred to as
"BankBoston"), and certain other banks.
11 Computation of Earnings per Share
27 Financial Data Schedule
(b) Reports on Form 8-K:
None.
</TABLE>
18
<PAGE> 19
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, the Registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CONNECTIVITY TECHNOLOGIES INC.
Date: August 14, 1997 By: /s/ James S. Harrington
------------------------
James S. Harrington
President and Chief Executive Officer (as a
duly authorized officer of the Registrant)
By: /s/ Gregory C. Kowert
----------------------
Gregory C. Kowert
Senior Vice President, Chief Financial
Officer and Secretary (as the principal
financial officer of the Registrant)
19
<PAGE> 20
INDEX OF EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Exhibit Description
- ----------- -------------------
<S> <C>
10.1 Fifth Amendment to Amended and Restated Revolving Credit and
Term Loan Agreement, dated as of June 27, 1997, by and among
Connectivity Products Incorporated, NBD Bank ("NBD Bank"), as
Administrative Agent, BankBoston N.A. (f/k/a The First
National Bank of Boston and hereinafter referred to as
"BankBoston"), and certain other banks.
11 Computation of Earnings per Share
27 Financial Data Schedule
</TABLE>
<PAGE> 1
CONNECTIVITY PRODUCTS INCORPORATED
FIFTH AMENDMENT
TO
AMENDED AND RESTATED
REVOLVING CREDIT AND TERM LOAN AGREEMENT
This FIFTH AMENDMENT (this "Amendment"), dated as of June 27, 1997, is
among CONNECTIVITY PRODUCTS INCORPORATED, a Delaware corporation (the
"Borrower"), NBD BANK as Administrative Agent (the "Administrative Agent"),
BANKBOSTON, N.A., F/K/A THE FIRST NATIONAL BANK OF BOSTON as Documentation Agent
(the "Documentation Agent", and together with the Administrative Agent, the
"Co-Agents") for the lending institutions (the "Banks") listed on Schedule 1 to
the Credit Agreement (as hereinafter defined) and the Banks.
WHEREAS, the Borrower, the Banks and the Co-Agents are parties to that
certain Amended and Restated Revolving Credit and Term Loan Agreement, dated as
of May 31, 1996 (as amended by the First Amendment to Amended and Restated
Revolving Credit and Term Loan Agreement, dated as of August 26, 1996, the
Second Amendment to Amended and Restated Revolving Credit and Term Loan
Agreement, dated as of September 30, 1996, the [First Amendment of Certain
Security Documents and Subordination Agreement and] Third Amendment to Amended
and Restated Revolving Credit and Term Loan Agreement, dated as of February 24,
1997, and the Fourth Amendment to Amended and Restated Revolving Credit and Term
Loan Agreement, dated as of March 31, 1997, the "Credit Agreement"), pursuant to
which the Banks, upon certain terms and conditions, have made loans to and may
issue letters of credit for the benefit of the Borrower; and
WHEREAS, the Borrower had requested that the Banks agree, and the Banks
have agreed, on the terms and subject to the conditions set forth herein, to
make certain changes to the Credit Agreement;
NOW, THEREFORE, the parties hereto hereby agree as follows:
SECTION 1. DEFINED TERMS. Capitalized terms which are used herein
without definition and which are defined in the Credit Agreement shall have the
same meanings herein as in the Credit Agreement.
SECTION 2. AMENDMENT OF CREDIT AGREEMENT. The Credit Agreement is hereby
amended as follows:
(a) Section 10.5.2 of the Credit Agreement is amended by adding the
following phrase at the end of such Section 10.5.2:
and the sale of the EEC division of the Borrower, the net proceeds of
which sale shall be applied to the repayment of the Obligations in such
order as the Banks and the Borrower shall mutually agree upon
(b) Section 11.1 of the Credit Agreement is amended by deleting such
Section 11.1 and restating it in its entirety as follows:
<PAGE> 2
- 2 -
11.1. CONSOLIDATED NET WORTH.
The Borrower will not permit Consolidated Net Worth commencing with
the fiscal quarter ended December 31, 1996 to be less than the sum
of negative $14,500,000, plus 75% of Consolidated Net Income on a
cumulative basis as at each fiscal quarter end as set forth in the
Compliance Certificate delivered pursuant to Section 9.4(c).
SECTION 3. CONDITIONS TO EFFECTIVENESS. The effectiveness of this
Amendment shall be subject to receipt by the Administrative Agent of this
Amendment executed by each of the Borrower, the Banks and the Co-Agents.
SECTION 4. AFFIRMATION AND ACKNOWLEDGMENT OF THE BORROWER. The Borrower
hereby ratifies and confirms all of its Obligations to the Banks and the
Co-Agents, including, without limitation the Loans, and the Borrower hereby
affirms its absolute and unconditional promise to pay to the Banks the Loans and
all other amounts due under the Credit Agreement as amended hereby.
Section 5. REPRESENTATIONS AND WARRANTIES. The Borrower hereby represents
and warrants to the Co-Agents and the Banks as follows:
(a) Representation and Warranties in the Credit Agreement. The
representations and warranties of the Borrower contained in the Credit
Agreement were true and correct in all material respects as of the date
when made and continue to be true and correct in all material respects on
the date hereof, except to the extent of changes resulting from
transactions or events contemplated by the Credit Agreement and the other
Loan Documents and changes occurring in the ordinary course of business
that singly or in the aggregate are not materially adverse to the
Borrower, or to the extent that such representations and warranties relate
expressly to an earlier date.
(b) Authority, Etc. The execution and delivery by the Borrower of
this Amendment and the performance by the Borrower of all of its
agreements and obligations under the Credit Agreement as amended hereby
are within the corporate authority of the Borrower and have been duly
authorized by all necessary corporate action on the part of the Borrower.
(c) Enforceability of Obligations. This Amendment and the Credit
Agreement as amended hereby constitute the legal, valid and binding
obligations of the Borrower, enforceable against the Borrower in
accordance with their terms, except as enforceability is limited by
bankruptcy, insolvency, reorganization, moratorium or other laws relating
to or affecting generally the enforcement of, creditors' rights and except
to the extent that availability of the remedy of specific performance or
injunctive relief is subject to the discretion of the court before which
any proceeding therefor may be brought.
(d) No Default. No Default or Event of Default has occurred and is
continuing, and no Default or Event of Default will exist after execution
and delivery of this Amendment.
<PAGE> 3
- 3 -
SECTION 6. NO OTHER AMENDMENTS OR WAIVERS. Except as expressly provided in
this Amendment, all of the terms and conditions of the Credit Agreement and the
other Loan Documents remain in full force and effect.
SECTION 7. EXPENSES. Pursuant to Section 17 of the Credit Agreement, all
costs and expenses incurred or sustained by the Co-Agents in connection with
this Amendment, including the fees and disbursements of legal counsel for the
Co-Agents in producing, reproducing and negotiating the Amendment, will be for
the account of the Borrower whether or not the transactions contemplated by this
Amendment are consummated.
SECTION 8. EXECUTION IN COUNTERPARTS. This Amendment may be executed in
any number of counterparts, each of which shall be deemed an original, but which
together shall constitute one instrument.
SECTION 9. MISCELLANEOUS. THIS AMENDMENT SHALL BE DEEMED TO BE A CONTRACT
UNDER THE LAWS OF THE COMMONWEALTH OF MASSACHUSETTS AND SHALL FOR ALL PURPOSES
BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE COMMONWEALTH OF
MASSACHUSETTS (EXCLUDING THE LAWS APPLICABLE TO CONFLICTS OR CHOICE OF LAW). The
captions in this Amendment are for convenience of reference only and shall not
define or limit the provisions hereof.
[REMAINDER OF PAGE IS LEFT INTENTIONALLY BLANK]
<PAGE> 4
- 4 -
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as a
document under seal as of the date first above written.
CONNECTIVITY PRODUCTS
INCORPORATED
By: /s/ Gregory C. Kowert
--------------------------------------
Gregory C. Kowert, Senior Vice President
NBD BANK, individually and as
Administrative Agent
By: /s/ Erik W. Bakker
--------------------------------------
Erik W. Bakker, Vice President
BANKBOSTON, N.A.
f/k/a THE FIRST NATIONAL BANK
OF BOSTON, individually
and as Documentation Agent
By: /s/ G. Christopher Miller
--------------------------------------
G. Christopher Miller, Vice President
FLEET BANK, N.A.
By: /s/ Mark A. Siegel
--------------------------------------
Name: Mark A. Siegel
Title: Assistant Vice President
<PAGE> 1
EXHIBIT 11 - COMPUTATION OF EARNINGS PER SHARE
Earnings per common share were computed as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED THREE MONTHS ENDED
------------------------------- --------------------------------
JUNE 30, 1997 JUNE 30, 1996 JUNE 30, 1997 JUNE 30, 1996
---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Net income (loss) applicable to common
shares: $ 1,281 ($ 175,000) $ (64,279) ($ 92,000)
========== =========== ========== ===========
Weighted average number of common
shares and of common share equivalents:
Weighted average common shares 5,565,074 5,479,805 5,565,074 5,539,075
Common share equivalents pursuant
to APB 15 165,876 553,395 30,589 654,215
---------- ----------- ---------- -----------
Total primary weighted average number
of common shares and common share
equivalents 5,730,950 6,033,200 5,595,663 6,193,290
Additional shares for full dilution
pursuant to APB 15 -- 90,098 -- 25,464
---------- ----------- ---------- -----------
Total fully diluted average number of
common shares and common share
equivalents 5,730,950 6,123,298 5,595,663 6,218,754
========== =========== ========== ===========
Net income (loss) per share:
Primary $ .00 ($ .03) $ (.01) ($ .01)
========== =========== ========== ===========
Fully diluted $ .00 ($ .03) $ (.01) ($ .01)
========== =========== ========== ===========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 77,631
<SECURITIES> 592,227
<RECEIVABLES> 7,475,752
<ALLOWANCES> 0
<INVENTORY> 6,866,505
<CURRENT-ASSETS> 15,538,288
<PP&E> 6,426,380
<DEPRECIATION> 0
<TOTAL-ASSETS> 60,756,647
<CURRENT-LIABILITIES> 9,182,533
<BONDS> 0
0
0
<COMMON> 222,613
<OTHER-SE> 12,391,501
<TOTAL-LIABILITY-AND-EQUITY> 60,756,647
<SALES> 23,735,903
<TOTAL-REVENUES> 23,735,903
<CGS> 18,832,171
<TOTAL-COSTS> 22,871,837
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 994,153
<INCOME-PRETAX> (114,976)
<INCOME-TAX> 25,451
<INCOME-CONTINUING> (140,427)
<DISCONTINUED> 174,639
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,281
<EPS-PRIMARY> $.00
<EPS-DILUTED> $.00
</TABLE>
