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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition period from ________ to ________
Commission file number 0-12113
CONNECTIVITY TECHNOLOGIES INC.
(Name of small business issuer in its charter)
<TABLE>
<S> <C>
DELAWARE 94--2691724
(State or other jurisdiction of Incorporation (I.R.S. Employer Identification No.)
or organization)
680 MECHANIC STREET, SUITE 1201, LEOMINSTER, MA 01453
(Address of principal executive offices) (Zip Code)
</TABLE>
Issuer's telephone number: (978) 537-9138
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.04 PAR VALUE PER SHARE
(Title of each class)
Check whether the Issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act during the past 12 months (or
for such shorter period that the Registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes ____No X .
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]
Issuer's revenues for its most recent fiscal year: $41,707,988
The aggregate market value of the Registrant's Common Stock, $.04 par value
per share, held by non-affiliates of the Registrant based on the closing price
of such stock on June 26, 1998, was $7,123,623. On such date, the closing price
of Registrant's Common Stock was $1.88 per share. Solely for the purposes of
this calculation, shares beneficially owned by directors, executive officers and
stockholders of the Registrant that beneficially own more than 10% of the
Registrant's voting stock have been excluded, except shares with respect to
which such directors and officers disclaim beneficial ownership. Such exclusion
should not be deemed a determination or admission by the Registrant that such
individuals are, in fact, affiliates of the Registrant.
The number of shares of Common Stock, $.04 par value per share, outstanding
as of June 26, 1998 was 5,690,128.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
(a) Business Development.
Connectivity Technologies Inc. (the "Company" or the "Registrant") is
principally engaged in the manufacture and assembly of wire and cable through
its subsidiary, Connectivity Products Incorporated ("CPI"). The Company owns 85%
of the capital stock of CPI which it acquired on May 31, 1996 from James S.
Harrington, Duane A. Gawron, Trustee of the Living Trust of Duane A. Gawron,
Margo Gawron, John E. Pylak, Trustee of the John E. Pylak Living Trust, Rebecca
Pylak and Kurt Cieszkowski (collectively, the "Sellers"). The Sellers own the
remaining 15% of the capital stock of CPI. See "Item 12. Certain Relationships
and Related Transactions." Prior to its acquisition of CPI, the Company was
principally engaged in evaluating candidates for acquisition.
At December 31, 1997, the Company had negative working capital, had
violated certain covenants included in its loan agreements and experienced
poorer than expected operating results. Although the Company has recently
amended its credit agreement with its lenders, that amendment requires, among
other things, the elimination of the overadvance (approximately $4.4 million as
of May 31, 1998) on or before July 10, 1998. After July 10, 1998, if the Company
is unable to eliminate the overadvance, it would be in default of the amendment.
If the Company is able to effectuate a sale of its Energy Electric Assembly
("EEA") division, the proceeds of that sale would be utilized to meet this
obligation. However, no assurances can be given that such a sale will be
effectuated, and the Company believes it unlikely that such a sale can be closed
on or before July 10, 1998. If the Company is unable to meet this obligation or
to repay the entire indebtedness to its lenders (approximately $17.7 as of June
19, 1998) by July 31, 1998, and is unsuccessful in negotiating with its lenders
for an extension or forbearance to permit funds to be raised through the sale of
EEA or other assets, the lenders would have the right to take legal proceedings
against the Company for the repayment of the entire debt and to proceed against
the Company's assets. These conditions raise substantial doubt about the
Company's ability to continue as a going concern. See "Management's Discussion
and Analysis of Financial Condition or Plan of Operation."
CPI was formed by the merger of CPI's three operating divisions in October
1995. On July 11, 1997 (the "Closing Date"), CPI sold substantially all of the
assets and certain of the liabilities of its distribution division (the "Sale")
which operated under the name, Energy Electric Cable ("EEC") to Reel Acquisition
Corp. (the "Purchaser"), a wholly-owned subsidiary of Anicom, Inc. ("Anicom").
The purchase price for the EEC division consisted of approximately $27,000,000
in cash after post-closing adjustments and 190,476 shares of Anicom's common
stock, par value $.01 per share (the "Anicom Stock"), which was valued at
$2,000,000, for a total purchase price of approximately $29,000,000. In
connection with the Sale, CPI and Anicom also entered into a Supply Agreement
pursuant to which Anicom is required to purchase a specified amount of wire and
cable products manufactured by CPI during each of the five years following the
Closing Date. See "Business of Issuer -- Manufacturing"; and "Management's
Discussion and Analysis or Plan of Operation."
CPI's two remaining divisions operate in one business segment,
manufacturing. The first, located in Leominster, Massachusetts, operates under
the name "BSCC" and manufactures low voltage wire and cable for the security,
factory automation, signal and sound markets. The second, is located in Auburn
Hills, Michigan, operates under the name Energy Electric Assembly ("EEA") and
specializes in designing and manufacturing cable assemblies primarily for
robotics and machine tool manufacturers and end-users (factory automation). EEA
sources a majority of its products from BSCC. In February 1998, the Company
announced it plans to sell the EEA division, the proceeds of which would be
applied toward the reduction of bank debt. The Company is currently in
discussions with prospective buyers. However, no agreements have been reached
and there can be no assurances such a sale will be effectuated.
Following the Sale of EEC, the Company has focused on positioning itself as
a leading manufacturer and assembler of wire and cable products. By developing
long-standing relationships based on quality products, knowledge of its
customers, continuity of supply, customized design and prompt delivery at
competitive prices, the Company endeavors to expand its current market position
in the connectivity industry. With a
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management team experienced in manufacturing and the specialized assembly
businesses, the Company seeks to position itself to evaluate and pursue
opportunities for advancement and growth in its industry through internal
expansion into targeted geographical areas and new product lines, and the
development of strategic relationships with major suppliers and manufacturers in
the industry.
During 1996, the Company purchased an option from James S. Harrington, the
former Chairman of the Board and Chief Executive Officer, to acquire all of the
capital stock of Signal Sales Corp., a distributor of wire and cable to the
municipal traffic signal and communications market. See "Item 12. Certain
Relationships and Related Transactions."
The Company was incorporated under the laws of Delaware on September 29,
1980 as Fortune Systems Corporation. In June 1987, the Company changed its name
to Tigera Group, Inc., and in December 1996, the Company changed its name from
Tigera Group, Inc. to Connectivity Technologies Inc.
In December 1996, the Company effectuated a one-for-four reverse stock
split. Unless otherwise indicated, all share and per share amounts set forth in
this Annual Report reflect such reverse stock split.
On November 8, 1995, Beverly Hills Bancorp sold to Hudson River Capital
LLC, formerly Victory Capital LLC ("Hudson River"), its holdings of shares of
common stock, par value $.04 per share, of the Company ("Common Stock") owned
directly and indirectly (1,185,000 shares) for $3.60 per share. Hudson River
makes investments in entities in which it acquires either controlling or
non-controlling equity interests. Hudson River also purchased, or agreed to
purchase, certain shares of the Company owned by Albert M. Zlotnick (432,750
shares) and Michael S. Berlin (62,062 shares) at $3.60 per share which purchases
were completed on November 15, 1995 and January 4, 1996, respectively. Effective
as of November 8, 1995, all of the prior directors of the Company resigned
(except for Albert M. Zlotnick and A. Clinton Allen whose terms as directors
ended in December 1996 when their successors were elected) and were replaced by
newly designated directors. Hudson River and its affiliates currently hold
approximately 33.3% of the outstanding shares of Common Stock of the Company.
(b) Business of Issuer.
GENERAL DESCRIPTION OF THE INDUSTRY
The wire and cable industry encompasses a wide variety of product
applications requiring electronic and electrical connectivity. The Company
participates in the security, factory automation, signal and sound markets.
Technological advances in commercial building monitoring and a greater
concern for safety features in commercial buildings and residences have
increased demand for wiring products for fire and burglary alarms, motion
detectors, voice activators, climate controls, and electronic card and video
surveillance devices. Increasingly stringent safety requirements imposed by
local and national building codes and insurance providers have also increased
the demand for "safety cable," which refers to certain physical attributes of
cable that improve the safety and performance of such cables under hazardous
conditions, particularly in buildings with advanced fire alarm and safety
systems. Continued growth of the factory automation and robotic machinery market
as well as changes in equipment installation procedures have increased the
demand for wire and cable products servicing this industry. Demand for signal
wire used in traffic control signals and transit wire installed in, among other
things, subways, bridges, tunnels and toll booths, is driven by the need to
rebuild infrastructure and the pace of new construction in this area.
DIVISIONS AND PRODUCTS
Manufacturing. The Company's BSCC division manufactures low voltage copper
wire and cable for the security, factory automation, signal and sound markets.
Low voltage wire and cable includes electronic and electrical wire and cable,
control and signal wire and cable, climate control wire and cable, transit wire
and cable and low smoke and low halogen wire and cable products. BSCC also
manufactures wire and cable for sale to distributors that is specifically
designated by original equipment manufacturers ("OEM's") or installers as
meeting the specification of a particular function ("spec'd product").
Competition for sales of
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spec'd product is generally limited to select competitors, if any, who have been
designated by the OEM as manufacturers of the spec'd product.
The manufacturing process for insulated wire consists of extruding plastic
compounds (the insulation) over conductive metal, such as copper (the
conductor). Cables are then formed by combining various insulated wires. BSCC
melts and applies compound to wire using extruders that pump molten compound
through dies to shape it into its final form on the wire. After extrusion,
insulated wires pass through a variety of secondary operations depending on the
finished cable form. Secondary operations are primarily twinning (the twisting
of two insulated wires), cabling (the grouping of a multitude of insulated
wires) and jacketing (the extrusion of a plastic compound jacket over the
finished cable). Additional operations may be performed to stripe insulated wire
for identification and apply tape or braided metal shields for mechanical
protection and reduction of electrical interference. BSCC is an Underwriters
Laboratory(TM) ("UL") approved manufacturer and is ISO 9000 certified. The
Company depends upon UL for approvals of many of its products. The Company's low
smoke products are currently UL approved. However, due to changes in the UL
approval guidelines for low smoke products, many companies in the wire and cable
industry, including the Company, anticipate future difficulty obtaining UL
approvals for such products. The Company is currently working with
representatives from UL to ensure UL's continued approval for the Company's low
smoke products.
BSCC uses copper as the base conductor material for the majority of the
wire and cable it produces. BSCC has not experienced difficulties in obtaining
sufficient supplies of copper in the past and typically orders copper wire
weekly to minimize its investment in inventory. Although the Company does not
engage in hedging transactions for the purchase of copper, it typically
purchases copper 30 days in advance of its projected use. BSCC has generally
been able to pass on increases in the price of copper to its customers, but
there can be no assurance that it will be able to do so in the future.
Conversely, BSCC also passes on to customers decreases in the price of copper,
as was the case in the latter half of 1997, and gross margins were adversely
impacted. Given the volatility in the price and the worldwide availability of
copper, BSCC does not generally enter into long term agreements to supply its
products at a fixed price.
BSCC also uses a number of plastic compounds as insulators. Supplies of
these materials are generally adequate and are expected to remain so for the
foreseeable future. BSCC has alternative sources of supply for these insulating
materials and may use alternative insulating materials in its products.
The manufacture of wire and cable products requires a wide variety of
manufacturing, electronic control and testing equipment. Due to the high cost
and long delivery times of new equipment, BSCC purchases used manufacturing
equipment and reconfigures it to achieve desired operating speeds and
tolerances. Although BSCC has been successful in acquiring used machinery in the
past, a shortage of such equipment could temporarily restrain the future growth
of BSCC. As the reconfiguration and operation of this equipment requires
experienced operators and a continual maintenance program, BSCC has several
equipment specialists on staff to modify and maintain the equipment.
BSCC's products are sold to distributors on a non-exclusive basis. Sales to
EEC, accounted for 18% of BSCC's net sales for fiscal 1997. After the sale of
the EEC division in July 1997, BSCC began utilizing several other key
distributors in strategic product areas. During fiscal 1997, Anicom and Simplex
Consortium accounted for approximately 20% and 4% of BSCC's net sales,
respectively. BSCC also supplies standard and specialty products to the
Company's EEA division which accounted for 7% of BSCC's net sales for 1997 and
6% for 1996. BSCC currently sells to many distributors nationwide, and
management believes that BSCC's relationships with its distributors are
excellent. In general, BSCC's distributors are not obligated to carry BSCC's
products exclusively and may carry products that compete with BSCC's products.
Although the loss of one or more distributors could have an adverse effect on
BSCC's results of operations in the short term, management believes that
additional distributors could be added without significant delay.
EEA provides design application and assembly services to OEM's, such as
machine-tool and robotics manufacturers, and to end-users of such factory
automation equipment, in each case, primarily in the automobile industry. EEA's
strategy is to design, engineer and produce subassemblies which combine cables
with various connectors to strict specifications to create value-added products.
In the assembly process, specialized cables are cut to length, then undergo many
detailed processes in order to prepare the cables for
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connection and then are attached to specified connectors. Electrical inspection
is then performed before final shipment.
EEA seeks to capitalize on the development of modular machine tool design
which requires complex cable assemblies to link machinery with the industrial
computers controlling it. In addition, cable subassemblies previously
"hardwired" into machinery by electricians are now being designed in modular
form to promote faster and more economical retooling of equipment and assembly
lines.
Although EEA acquires its products from a variety of vendors and is not
dependent on any single vendor, BSCC accounted for approximately 28% and 36% of
EEA's purchases in 1997 and 1996, respectively.
As the services provided by EEA are often time-intensive and can result in
costly delays if not completed to exact specifications, EEA seeks to encourage
OEM's who currently perform this function "in-house" to "outsource" these
functions to EEA. The Company has announced its intention to sell EEA, but no
assurances can be given that such a sale will be effectuated.
Distribution. Prior to the sale of the EEC division of CPI in July 1997,
the Company operated as a full-line distributor of several manufacturers' wire
and cable products, including (i) data communications cable, fiber optic cables,
and a complete range of connectivity devices, and (ii) security, signal, sound
and control products. See "Description of Business -- Business Developments" and
"Managements Discussion and Analysis or Plan of Operation."
COMPETITION
The specialty wire and cable market is highly competitive and fragmented.
Many of the Company's competitors are substantially larger and have greater
financial, engineering, distribution, manufacturing and other resources than the
Company. Management believes that it competes successfully in its markets due to
its experienced management team, its established reputation for quality
products, its sales force, and its extensive knowledge of its current customer
base.
Management believes that the principal competitive factors in the
manufacturing division are quality and price. BSCC believes that its ability to
extrude and cable low voltage products at a high rate of speed, while
maintaining product quality, enables it to compete effectively. BSCC faces
substantial competition from several manufacturers that have greater financial
and technical resources including Belden Wire & Cable Corp., General Cable
Industries, and the West Penn Wire Division of Cable Design Technologies
Corporation, as well as several smaller regional companies.
Management believes that the principal competitive factors in the assembly
market are knowledge of end-user requirements, quality production, and the
ability to deliver the finished product to end-users on a timely basis. EEA
competes primarily with numerous regional companies most of which have greater
financial and technical resources than the Company.
Wireless communications technology may represent a threat to copper-based
systems by reducing the need for premise wiring. The Company believes that the
limited signal security, the relatively slow transmission speeds of current
wireless systems and the relatively higher cost restrict the use of such systems
in many data communication markets. However, there can be no assurance that
future advances in wireless technology will not have a material adverse effect
on the Company's business.
RAW MATERIALS
Copper is the principal raw material used in the Company's products.
Significant increases in the price of the Company's products due to increases in
the cost of copper could have a negative effect on demand for the Company's
products. Similarly, significant decreases in the price of copper could result
in the price for the Company's products decreasing which could have an adverse
effect on the Company's sales and gross profit until inventory with a higher
carrying cost is distributed. See "Business -- Divisions and Products -
Manufacturing."
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Between July 1997 and December 31, 1997, the copper futures contract as
reported on the COMEX dropped significantly, reaching near the ten year low for
such contracts. COMEX prices have remained stable from December 31 through June
29, 1998. In addition, inventories for North American and European wire and
cable companies have increased significantly due to a decrease in demand for
wire and cable products in Asia. However, the industry is currently experiencing
a tightness in the supply of copper rod at the producer level.
ENVIRONMENTAL MATTERS
The Company is subject to numerous United States federal, state and local
laws and regulations relating to the storage, handling, emission and discharge
of materials into the environment, including the United States Comprehensive
Environmental Response, Compensation and Liability Act (CERCLA), the Clean Water
Act, the Clean Air Act, the Emergency Planning and Community Right-To-Know Act
and the Resource Conservation and Recovery Act. Regulations of particular
significance to the Company are those pertaining to handling and disposal of
solid and hazardous waste, discharge of process wastewater and stormwater and
release of hazardous chemicals. Although the Company believes it is in
compliance with such laws and regulations, there can be no assurance that the
Company will be in compliance with such laws in the future or that it will not
incur fines, penalties or other costs as a result of noncompliance or an
allegation thereof.
The Company does not currently anticipate any material adverse effect on
its results of operations, financial condition or competitive position as a
result of compliance with federal, state or local environmental laws or
regulations. However, some risk of environmental liability and other costs is
inherent in the nature of the Company's business, and there can be no assurance
that material environmental costs will not arise. The Company is currently not
party to any regulatory action due to noncompliance with environmental laws or
regulations. It is possible that future developments, such as promulgation of
implementing regulations for the 1990 amendments to the Clean Air Act or the
imposition of other requirements of environmental laws and enforcement policies
thereunder, could lead to material costs of environmental compliance and cleanup
by the Company.
EMPLOYEES
As of June 1, 1998, the Company had 238 full time employees of whom 157
were employed at the BSCC manufacturing division and 81 were employed at the EEA
assembly division.
ITEM 2. DESCRIPTION OF PROPERTIES
The manufacturing facilities for BSCC consist of two leased premises
comprised of 50,000 and 80,000 square feet of space, respectively, in
Leominster, Massachusetts. The Company also leases an additional 9,000 square
feet of office space in Leominster, Massachusetts.
EEA subleases, as a tenant at will, 30,000 square feet of office, assembly
and warehouse space in Auburn Hills, Michigan.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
A. Market Information.
The Company's shares of Common Stock are currently quoted on the OTC
Bulletin Board maintained by the National Association of Securities Dealers
("NASD") under the trading symbol "CVTK". Prior to the Company's name change in
December 1996, the Company's Common Stock traded under the symbol "TYGR". The
following table sets forth, for the periods indicated, the range of high and low
bid prices for shares of Common Stock as reported by the NASD. The high and low
bid prices, set forth below, reflect inter-dealer prices, without retail mark
up, mark down or commission and may not represent actual transactions. The
public market for Common Stock is limited, and the following quotations should
not be taken as necessarily reflective of prices which might be obtained in
actual market transactions or in transactions involving substantial numbers of
shares. The following prices have been adjusted to reflect to the Company's
one-for-four reverse stock split which was effected in December 1996.
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1996 1997
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HIGH LOW HIGH LOW
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Fiscal quarter ended March 31............ $10.50 $4.13 $6.94 $4.13
Fiscal quarter ended June 30............. 14.75 9.25 4.88 2.63
Fiscal quarter ended September 30........ 13.00 8.00 4.44 3.19
Fiscal quarter ended December 31......... 10.00 6.38 4.69 2.69
</TABLE>
B. Holders.
On June 26, 1998, as reported by the Company's transfer agent, there were
5,690,128 shares of Common Stock issued and outstanding which were held of
record by 1,878 persons, including several holders who are nominees for an
undetermined number of beneficial owners.
C. Dividends.
The Company has not declared or paid any cash dividends on its Common Stock
since its inception nor does the Company intend to do so in the foreseeable
future. The payment of dividends, if any, is within the discretion of the Board
of Directors and will depend on the Company's earnings, if any, its capital
requirements and financial condition as well as other relevant factors. It is
currently the policy of the Company's Board of Directors to retain earnings, if
any, to finance the Company's operations and the expansion of the Company's
business.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION OR PLAN OF
OPERATION
OVERVIEW
Background
The primary business of Connectivity Technologies Inc. (the "Company") is
the manufacture and assembly of wire and cable products through its subsidiary,
Connectivity Products Incorporated ("CPI"). 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).
The Company was incorporated under the laws of Delaware on September 29,
1980 as Fortune Systems Corporation. In June 1987, the Company changed its name
to Tigera Group, Inc. In December 1996, the Company changed its name from Tigera
Group, Inc. to Connectivity Technologies Inc. to better fit the Company's wire
and cable business along with its products and markets.
Prior to acquiring 85% of the common stock of CPI on May 31, 1996, the
Company's principal activity consisted of seeking and evaluating candidates for
acquisition.
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Going Concern
The consolidated financial statements contained in this Report have been
prepared assuming the Company will continue as a going concern which
contemplates the realization of assets and the satisfaction of liabilities in
the normal course of business. The Company incurred a significant operating loss
in 1997 and had a working capital deficiency. Also, the Company was not in
compliance with the covenants of its revolving credit facility at December 31,
1997 and had received advances in excess of those allowable under the terms of
the revolving credit facility. In addition, the revolving credit facility was
amended in 1998 whereunder, among other items, all amounts are due July 31,
1998. These conditions raise substantial doubt about the Company's ability to
continue as a going concern. As a result, the Company's auditors have included
an explanatory paragraph in their report to the Company's consolidated financial
statements at December 31, 1997 that expresses substantial doubt as to the
Company's ability to continue as a going concern. The consolidated financial
statements do not include any adjustments to reflect the possible future effects
on the recoverability and classification of assets or the amounts and
classification of liabilities that may result from the outcome of this
uncertainty.
Management's plans to address these issues include the sale of its EEA
division. If a sale is successfully consummated, the proceeds from the sale
would be applied against the Company's outstanding balance due under the
revolving credit facility and the Company would seek to refinance or amend its
credit facility in order to extend the repayment terms. In addition, the Company
has formed a new management team and is currently making changes to its
operations in order to improve profitability and to generate sufficient cash
flow to meet its obligations. Operational changes include, but are not limited
to, focusing solely on the BSCC division, the installation of new machinery
which will augment existing product lines and the implementation of an improved
costing system which will enable the Company to better analyze the profitability
of its product lines.
Management can make no assurances that the Company will be able to sell EEA
at a price acceptable to the Board of Directors. Further, there can be no
assurances that management will be successful in its efforts to refinance or
amend its credit facility at commercially available rates with favorable
repayment terms, or that the Company will be able to carry out its operational
plan. If the Company is unable to achieve its operational plan, the lenders
would be in a position to commence legal proceedings against the Company for the
repayment of the entire debt, plus certain amounts, and to proceed against the
Company's assets. See "Management's Discussion and Analysis of Financial
Condition or Plan of Operation -- Financial Condition and Liquidity".
Fourth Quarter Adjustments
In the fourth quarter of 1997, the Company recorded several significant
adjustments as follows:
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Pre-tax adjustments increasing net loss from continuing
operations:
Deferred tax valuation allowance increase................... $(9,905,000)
Inventory adjustments....................................... (2,340,000)
Accrued expenses increases.................................. (1,345,000)
Accounts receivable adjustments............................. (649,000)
Other....................................................... (208,000)
Pre-tax adjustment increasing income from discontinued
operations:
Increase to gain on sale of EEC............................. $ 3,483,000
</TABLE>
The Company is in the process of determining the effects of all significant
fourth quarter adjustments on previously reported 1997 quarterly information.
In addition, certain amounts previously reported in each of the three
quarters ended September 30, 1997 reflected an inappropriate classification of
net sales between continuing operations and discontinued operations. These
amounts represent reclassifications only and have no impact on quarterly net
income as previously reported.
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Upon completion of the aforementioned analysis, the Company likely will
amend prior interim financial information reported in one or more of the three
quarters ended September 30, 1997.
Sale of Energy Electric Cable
On July 11, 1997, CPI sold its distribution division which operated under
the name, Energy Electric Cable to Reel Acquisition Corp., a wholly-owned
subsidiary of Anicom, Inc. The purchase price for the EEC division consisted of
approximately $27 million in cash after post-closing audit adjustments and
190,476 shares of Anicom common stock, par value $.01 per share, which was
valued at $2 million for a total purchase price of $29 million. In connection
with the sale, CPI entered into a Supply Agreement with Anicom, pursuant to
which Anicom agreed to purchase a specified amount of wire and cable products,
subject to adjustment, from CPI for each of the five years following the closing
date. During the six-month period ended December 31, 1997, Anicom purchased an
aggregate of approximately $7 million from CPI for wire and cable products in
accordance with the terms of the Supply Agreement. In addition, in connection
with the sale, CPI refinanced its current debt obligations.
Acquisition of CPI
On May 31, 1996, the Company acquired for $7.99 million in cash, 85% of the
outstanding common stock of CPI. Concurrent with the acquisition, CPI redeemed
shares of its common stock and incurred additional indebtedness, including
refinancing of its existing debt. The acquisition and related financing are more
fully described in Notes 3 and 11 in the Notes to Consolidated Financial
Statements included in this Report.
RESULTS OF OPERATIONS
The consolidated financial statements filed herewith report the operations
of the EEC division of CPI as a discontinued operation. Furthermore, results
from continuing operations included in the Consolidated Statements of Operations
for the year ended December 31, 1997 include twelve months of operations of CPI
("Fiscal 1997"), whereas results from continuing operations included in the
Consolidated Statements of Operations for the year ended December 31, 1996
include seven months of operations of CPI ("Fiscal 1996") as a result of the CPI
acquisition -- see Note 3 to the Consolidated Financial Statements included in
this Report. Included in the table below are the Consolidated Statements of
Operations of the Company for Fiscal 1996 and Fiscal 1997. To enable a clearer
understanding of the Company's operating results, an unaudited pro forma
Consolidated Statement of Operations ("Pro Forma 1996") has been included
covering the operations of the Company for the twelve months ended December 31,
1996 as if the CPI acquisition had occurred at January 1, 1996. The pro forma
adjustments are based upon available information and certain assumptions that
the Company believes are reasonable. The Pro Forma 1996 results of operations do
not purport to represent what the Company's results of operations would have
been had the CPI acquisition in fact occurred on January 1, 1996, or to project
results of operations for or at any future period or date.
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CONNECTIVITY TECHNOLOGIES INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
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PRO FORMA
FISCAL FISCAL 1996
1997 1996 (UNAUDITED)
----------- ----------- -----------
<S> <C> <C> <C>
Net sales........................................... $41,707,988 $20,318,996 $35,830,194
Cost of goods sold.................................. 35,393,009 14,499,866 25,658,764
----------- ----------- -----------
Gross profit.............................. 6,314,979 5,819,130 10,171,430
Selling, general and administrative expenses........ 10,441,178 5,111,292 7,979,676
----------- ----------- -----------
Operating income (loss)........................ (4,126,199) 707,838 2,191,754
Other income (expense):
Interest income................................ 31,220 335,365 95,365
Interest expense............................... (2,395,038) (1,368,323) (2,201,022)
Other.......................................... 39,247 65,077 (34,923)
----------- ----------- -----------
Income (loss) from continuing operations
before income taxes..................... (6,450,770) (260,043) 51,174
Provision for income taxes.......................... 7,993,424 13,990 22,858
----------- ----------- -----------
Income (loss) from continuing
operations.............................. (14,444,194) (274,033) 28,316
Discontinued operations:
Income from discontinued operations, net of
income taxes of $194,269 in Fiscal 1997,
$620,262 in Fiscal 1996 and $1,016,122 in Pro
Forma 1996................................... 292,132 633,193 739,416
Gain on sale of discontinued operations, net of
income taxes of $6,398,995................... 5,056,555
----------- ----------- -----------
Income from discontinued operations............ 5,348,687 633,193 739,416
----------- ----------- -----------
Net income (loss)................................... $(9,095,507) $ 359,160 $ 767,732
=========== =========== ===========
Weighted average shares outstanding:
Basic.......................................... 5,565,272 5,508,057 5,508,057
=========== =========== ===========
Diluted........................................ 5,987,925
===========
Basic earnings (loss) per share:
Continuing operations.......................... $ (2.60) $ (.05) $ .01
Discontinued operations........................ .96 .11 .13
----------- ----------- -----------
$ (1.64) $ .06 $ .14
=========== =========== ===========
Diluted earnings per share:
Continuing operations.......................... $ .01
Discontinued operations........................ .12
-----------
$ .13
===========
</TABLE>
9
<PAGE> 11
The Company's net sales for Fiscal 1997 increased to $41.7 million from
$20.3 million for Fiscal 1996 which is primarily due to the effect of the
acquisition of CPI in May 1996 as described above. Net sales for Fiscal 1997
increased 16.4% to $41.7 million from $35.8 million for Pro Forma 1996. Net
sales at the BSCC division declined by 1.7% despite the fact that the volume of
copper pounds shipped increased by approximately 10% during Fiscal 1997. The
decline of the copper spot price throughout the latter half of 1997 directly
impacted the selling prices quoted by the Company. Consequently, although sales
volume increased, sales prices were reduced to reflect the reduced copper
prices. Net sales at the EEA division increased 43.7%, primarily due to the
increased sales to the automotive industry.
Cost of goods sold as a percentage of net sales for Fiscal 1997 increased
to 84.9% from 71.4% in Fiscal 1996 and from 71.6% in Pro Forma 1996.
Consequently, gross profit as a percentage of net sales decreased to 15.1% in
Fiscal 1997 from 28.6% for Fiscal 1996 and from 28.4% in Pro Forma 1996. At
BSCC, gross profit as a percentage of net sales decreased to 5.4% in Fiscal 1997
from 19.6% in Pro Forma 1996. The primary reason for the deterioration in gross
margin resulted from the significant decrease in the price of copper which
occurred in the second half of Fiscal 1997. Copper is the principal raw material
used in the Company's products. Since the Company does not hedge its copper
inventories and the price the Company uses to sell its products is tied to the
Comex spot price, the Company realized a significant loss on copper inventories
purchased in the first half of Fiscal 1997 which were subsequently sold in the
second half of Fiscal 1997. At the Company's EEA division, gross profit as a
percentage of net sales remained consistent at 32.1% in Fiscal 1997 compared to
33.7% in Pro Forma 1996.
Selling, general and administrative expenses were $10.4 million for Fiscal
1997 compared to $5.1 million for Fiscal 1996 which is primarily due to the
effect of the acquisition of CPI in May 1996 as described above, as well as
increased professional fees and a write-off of deferred debt issuance costs.
Selling, general and administrative expenses were $10.4 million for Fiscal 1997
compared to $8.0 million for Pro Forma 1996. The increase is attributable to
increased professional fees as well as a write-off of deferred debt issuance
costs incurred in Fiscal 1997.
Interest income was approximately $31,000 for Fiscal 1997 compared to
$335,000 for Fiscal 1996. The decrease is due to a reduction in the amount of
United States Treasury Bills held by the Company in Fiscal 1997 as compared to
Fiscal 1996.
Interest expense was $2.4 million for Fiscal 1997 compared to $1.4 million
for Fiscal 1996. The increase from Fiscal 1997 to Fiscal 1996 is primarily due
to the effect of the acquisition of CPI in May 1996 as described above, offset
by lower average debt balances outstanding in Fiscal 1997 as compared to Fiscal
1996. Interest expense was $2.4 million for Fiscal 1997 compared to $2.2 million
for Pro Forma 1996. In Fiscal 1997, approximately $283,000 of interest expense
was allocated to discontinued operations whereas approximately $975,000 was
allocated in Pro Forma 1996. In total, interest expense decreased between Fiscal
1997 and Pro Forma 1996. This is a result of lower average debt balances
outstanding in Fiscal 1997 as compared to Pro Forma 1996. The lower average debt
balances outstanding in Fiscal 1997 was due to the pay down of debt from the
proceeds received from the sale of EEC.
Income tax expense for continuing operations totaled $8.0 million in Fiscal
1997 compared to $14,000 in Fiscal 1996 and $23,000 in Pro Forma 1996. The
Company's provision differs from the statutory tax rate in Fiscal 1997 primarily
because the Company recorded an adjustment to increase the valuation allowance
for deferred taxes totaling $9.9 million.
Income from discontinued operations, net of income taxes was approximately
$292,000 for Fiscal 1997 compared to $633,000 for Fiscal 1996 and $739,000 for
Pro Forma 1996. Also in Fiscal 1997, the Company recorded a $5.1 million gain,
net of taxes, resulting from the sale of the Company's EEC division.
FINANCIAL CONDITION AND LIQUIDITY
During Fiscal 1997, cash flows from continuing operating activities used
approximately $5.7 million as compared to providing approximately $1.1 million
in cash in Fiscal 1996. The increased use of cash primarily relates to incurring
a cash loss from continuing operations totaling $2.8 million (represents loss
from
10
<PAGE> 12
continuing operations plus non-cash items) and an increase in accounts
receivable of approximately $3.4 million. The increases in accounts receivable
were due to higher days sales outstanding on average and to increased sales at
the Company's EEA division.
Net cash provided by investing activities in Fiscal 1997 totaled $24.1
million compared to $259,000 in Fiscal 1996. The increase is primarily
attributable to $25.5 million in net proceeds received in conjunction with the
sale of the EEC division. Total capital purchases increased to $2.3 million in
Fiscal 1997 from $1.7 million in Fiscal 1996 due to additional purchases of
equipment at the Company's BSCC division to expand capacity at its two
manufacturing facilities.
Net cash used in financing activities in Fiscal 1997 totaled $19.3 million
compared to $245,000 in Fiscal 1996. During Fiscal 1997, the Company was able to
repay $23.8 million against the credit facility from the proceeds received in
conjunction with the sale of the EEC division. This was offset by other net
borrowings of approximately $4.5 million.
The Company's bank indebtedness primarily originated in conjunction with
the acquisition of CPI. At the time of the acquisition, the bank facility
consisted of a revolving credit facility, a term loan and a line of credit
(collectively, the "Bank Facility"). Maximum borrowings available under the Bank
Facility were limited to $30 million, but availability under the facility could
be further limited. Borrowings under the Bank Facility were $12.3 million as of
December 31, 1997. CPI pledged essentially all of its assets, including the
Anicom Stock acquired in connection with the sale of EEC, and the Company has
pledged all of its CPI stock to secure the repayment of amounts borrowed. The
Bank Facility contains various covenants related to, among other items,
maintenance of minimum consolidated net worth, maintenance of a maximum ratio of
senior debt (and total debt) to EBITDA (as defined) and maintenance of minimum
interest and fixed charges coverage ratios (as defined), as well as covenants
restricting CPI's ability to make capital expenditures in excess of stated
amounts, incur indebtedness, pay dividend on or purchase, redeem or otherwise
acquire its capital stock, or, in certain cases, merge or purchase assets or
stock of another entity.
On June 2, 1998, the Company amended the Bank Facility. Under the terms of
the amended Bank Facility, all amounts then outstanding under the revolving
credit facility, term notes and the line of credit became an amount outstanding
under an amended revolving credit note. Availability was reduced to $20 million
and could be further limited. The financial covenants consist of minimum EBITDA
requirements and a limit on capital expenditures. At June 5, 1998, approximately
$17.7 million was outstanding under the amended Bank Facility which amounts are
due in July 1998.
The Company is currently negotiating with its lenders looking to a possible
extension of the amended Bank Facility or a forbearance by the lenders to permit
the Company to raise additional funds through the sale of EEA or its other
assets. No assurances can be given that such negotiations will be successful.
If not successful, the lenders would be in a position to commence legal
proceedings against the Company for the repayment of the entire debt, plus
certain other amounts, and to proceed against the Company's assets. These
conditions raise substantial doubt about the Company's ability to continue as a
going concern.
Management's plans to address these issues include the sale of its EEA
division. If a sale is successfully consummated, the proceeds from the sale
would be applied against the Company's outstanding balance due under the
revolving credit facility and the Company would seek to refinance or amend its
credit facility in order to extend the repayment terms. In addition, the Company
has formed a new management team and is currently making changes to its
operations in order to improve profitability and to generate sufficient cash
flow to meet its obligations. Operational changes include, but are not limited
to, focusing solely on the BSCC division, the installation of new machinery
which will augment existing product lines and the implementation of an improved
costing system which will enable the Company to better analyze the profitability
of its product lines.
The Company has $6 million of subordinated notes payable that resulted from
the redemption of stock in connection with the acquisition of CPI. Interest
accrues at a rate of 10% per annum; principal is due to be paid on May 31, 2003.
In order to facilitate the amendment to the revolving credit facility, the
subordinated note holders have waived their rights to receive scheduled interest
or principal until the earlier of (i) the sale of the
11
<PAGE> 13
EEA division resulting in net cash proceeds of at least $10 million or (ii) the
date on which the over advance amount described above is equal to zero. At
December 31, 1997, the Company was in violation of certain covenants of the
subordinated debt agreement. Accordingly, this debt has been classified as a
current liability in the 1997 consolidated financial statements.
On June 30, 1998, four stockholders of the Company assigned all of their
rights, title and interest in their subordinated notes (approximately $3.4
million), outstanding common stock of CPI (64 shares, representing 8% of the
total outstanding common stock of CPI) and outstanding stock options of CTI
(114,705 options), to CPI and CTI. Since the Company is not currently aware of
any matter for which it would assert a claim against these stockholders, the
Company, in exchange for the consideration received, has agreed to not assert
any claims concerning any matters against these stockholders. The finalization
of this agreement is contingent upon consents from other third parties that are
expected to be received by the Company in July 1998.
INTANGIBLE ASSETS
The Company periodically evaluates its intangible assets for impairment. If
facts and circumstances indicate that the Company's intangible assets might be
impaired, the estimated future undiscounted cash flows associated with the
intangible asset would be compared to its carrying amount to determine if a
write-down to fair value is necessary.
As previously described, there is substantial doubt about the Company's
ability to continue as a going concern. The Company has undertaken a number of
initiatives to alleviate the doubt and there can be no assurance that the
Company will be able to successfully carry out those initiatives. If not
successful, the Company may be required to recognize an impairment loss of
goodwill associated with one or both of its divisions.
PUT AND CALL OPTIONS
In connection with the acquisition of CPI by CTI, CTI granted the CPI
minority stockholders (Stockholders) the option to require CTI to purchase (put)
their remaining common stock of CPI, and each Stockholder granted CTI the option
to purchase (call) the remaining outstanding stock. The put and call purchase
price is based on a formula which is tied to the market value of CTI's common
stock at the date of sale. These options are exercisable on November 30, 2000,
May 31, 2001 and November 30, 2001 in an amount on each option date equal to
one-third of the outstanding stock (on a cumulative basis). There are
limitations on the Stockholders' ability to sell their common stock.
MANAGEMENT INFORMATION SYSTEMS
The BSCC division implemented and upgraded its accounting and manufacturing
software, all of which is year 2000 compliant. The EEA division has recently
undergone the same accounting implementation and is awaiting the year 2000
compliant upgrade to its production software. It is anticipated that this
software will be installed in 1998. The Company is in the process of determining
whether its customers, service providers, and suppliers are year 2000 compliant.
INCOME TAX MATTERS
Management is unable to conclude it is more likely than not the Company
will realize its net deferred tax assets. Accordingly, the valuation allowance
increased by approximately $9.9 million in 1997, due primarily to changes in
judgment about future year operating results. This charge has been reflected in
income from continuing operations.
At December 31, 1997, the Company has available approximately $82 million
of net operating loss carryforwards and $1.4 million of tax credit carryforwards
for federal tax purposes. Except as described below, these carryforwards may be
used to offset future taxes on income, if any, and expire beginning in 1998
through 2010.
Should an ownership change of the Company occur, as defined under section
382 of the Internal Revenue Code (the "IRC"), the Company could lose the ability
to utilize some or all of these net operating loss
12
<PAGE> 14
carryforwards and tax credit carryforwards. The Company has determined that an
ownership change has not occurred through December 31, 1997.
The use of the Company's net operating losses is further limited by section
384 of the IRC. At the time of the acquisition of CPI by the Company, the fair
value of the CPI assets acquired exceeded the associated tax basis. (This
difference is referred to as "built-in-gain"). Net operating loss carryforwards
currently may not be used to offset the portion of any gain that may be
recognized upon the sale of CPI assets that was "built-in" at the date of
acquisition.
In this connection, net operating loss carryforwards were not available to
offset the "built-in-gain" portion ($6.2 million) of the gain recognized on the
1997 sale of its EEC division assets. Additionally, the Company has decided to
pursue the sale of its EEA division assets. The "built-in-gain" associated with
EEA's assets is approximately $7.2 million.
To the extent the Company is able to utilize net operating loss and tax
credit carryforwards subsequent to December 31, 1997, the first $9.9 million of
such amount recognized will be credited to operations and the recognition of any
further amounts will be recorded with an offsetting reduction to goodwill.
SAFE HARBOR PROVISION OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The statements contained in Item 1 (Description of Business) and Item 6
(Management's Discussion and Analysis of Financial Condition and Results of
Operations) that were not historical facts may be forward-looking statements.
Whenever possible, the Company has identified these forward-looking statements
by words such as "believes", "plans", "intends", and similar expressions. The
Company cautions readers that these forward looking statements are subject to a
variety of risks and uncertainties that could cause the Company's actual results
in 1998 and beyond to differ materially from those expressed in any
forward-looking statements made by, or on behalf of, the Company. These risks
and uncertainties are more fully described in the Company's filings with the
Securities and Exchange Commission including, without limitation, those
described under "Risk Factors" in such filings. These risks and uncertainties,
include, without limitation, general economic and business conditions affecting
the industries of the Company's customers, competition from other manufacturers
and assemblers that have greater financial, technical, and marketing resources
than the Company, the Company's ability to adequately address its going concern
issues in a timely matter including, without limitation, its ability to sell
EEA, reduce its debt, and negotiate a longer term
ITEM 7. FINANCIAL STATEMENTS
See the Consolidated Financial Statements of the Company and the notes
related thereto, beginning on page F-1, included elsewhere in this Annual Report
on Form 10-KSB.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On June 10, 1996, as a result of the consummation of the acquisition of the
capital stock of CPI on May 31, 1996, BDO Seidman, LLP ("BDO"), the Company's
independent public accountant for the fiscal year ended December 31, 1995, was
dismissed to allow Coopers & Lybrand LLP ("Coopers"), CPI's independent public
accountant, to be engaged as the Company's independent public accountant. BDO's
report on the financial statements of the Company for each of the last two years
did not contain an adverse opinion or disclaimer of opinion and was not modified
as to uncertainty, audit scope or accounting principles. The decision to change
accountants was recommended by the Executive Committee of the Board of
Directors. There were no disagreements with BDO on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure, which, if not resolved to BDO's satisfaction, would have caused it to
make reference to the subject matter of the disagreement in connection with its
report.
On December 18, 1997, Coopers resigned as the Company's independent public
accountants. Coopers' reports on the Company's financial statements for the
fiscal years ended December 31, 1995 and 1996 did not contain an adverse opinion
or disclaimer of opinion and were not qualified or modified as to uncertainty,
audit scope or accounting principle. The Company's Audit Committee and Board of
Directors participated in and
13
<PAGE> 15
approved the decision to change independent accountants. There were no
disagreements with Coopers for the fiscal years ended December 31, 1995 and 1996
or for the interim periods subsequent to December 31, 1996, on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure, which disagreements, if not resolved to the satisfaction of
Coopers would have caused them to make reference thereto in their reports on the
financial statements for such years.
The Company has engaged Ernst & Young LLP (the "New Auditors") as its new
independent auditors as of December 23, 1997. During the fiscal years ended
December 31, 1995 and 1996 and the interim periods subsequent to December 31,
1996, the Company did not consult with the New Auditors on the application of
accounting principles to a specified transaction, either completed or proposed;
or the type of audit opinion that might be rendered on the Company's financial
statements; or receive either written or oral advice from the New Auditors that
was an important factor in reaching a decision as to an accounting, auditing or
financial reporting issue.
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT; COMPLIANCE WITH
SECTION 16(A) OF THE EXCHANGE ACT
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
DIRECTOR AND/OR EXECUTIVE
NAME AGE POSITION(S) OFFICER SINCE
---- --- ----------- -------------------------
<S> <C> <C> <C>
James M. Hopkins................. 57 President, Chief Executive September 1997
Officer and Director(1)
Ramon D. Ardizzone............... 60 Director(2) November 1995
Clarke H. Bailey................. 44 Director(1) November 1995
David R. Flowers................. 57 Director(1)(2) April 1997
Herbert M. Friedman.............. 66 Director(3) November 1995
Stephen P. Kelbley............... 55 Director(3) December 1996
Kurt Cieszkowski................. 31 Executive Vice President May 1996
</TABLE>
- ---------------
(1) Member of the Executive Committee.
(2) Member of the Compensation Committee.
(3) Member of the Audit Committee.
Directors hold office until the next annual meeting of stockholders of the
Company and until their successors have been elected and qualified or until
their earlier resignation or removal. Officers serve at the discretion of the
Board of Directors. No family relationship exists among any of the executive
officers and directors of the Company.
The following sets forth the principal occupations of each of the Company's
executive officers and directors during the previous five years, as well as the
names of any other public or affiliated companies or registered investment
companies of which they are directors.
James M. Hopkins has served as President, Chief Executive Officer and a
director of the Company and CPI since September 1997. He has also served as
Chief Operating Officer of the BSCC division of CPI since September 1997. Prior
to joining the Company, Mr. Hopkins was the Vice President of Sales for Intech/
Belden, a wire and cable manufacturing company from September 1995 until May
1997. From May 1990 until June 1995, Mr. Hopkins held various positions at Helix
Hitemp Cable, a wire and cable company, including Vice President of Sales and
President.
Ramon D. Ardizzone has served as a director of the Company since November
1995, and is currently Chairman of the Board of Glenayre Technologies, Inc.
("Glenayre"), a paging and messaging infra-structure technology company. From
1988 to 1997, Mr. Ardizzone was employed by Glenayre in various capacities.
14
<PAGE> 16
Clarke H. Bailey has served as a director of the Company since November
1995. From February 1995 until its merger with Iron Mountain Incorporated ("Iron
Mountain") in January 1998, Mr. Bailey served as Chairman of the Board and Chief
Executive Officer of Arcus, Inc. ("Arcus"). He also served as Chairman of the
Board and Chief Executive Officer of United Acquisition Company and Arcus
Technology Services, Inc., subsidiaries of Arcus from February 1995 until they
merged with Arcus in January 1998. Mr. Bailey is director of Iron Mountain, a
national, full-service provider of records management and related services. He
is currently a director and Co-Chairman of the Board of Hudson River. He served
as Chief Executive Officer and a director of Glenayre from December 1990 until
March 1994 and as its Vice Chairman of the Board from November 1992 to July
1996. In March 1994, Mr. Bailey was named Chairman of the Executive Committee of
the Board of Glenayre, and he relinquished the title of Chief Executive Officer.
Mr. Bailey is also a director of Swiss Army Brands, Inc. ("Swiss Army"), the
exclusive United States and Canadian importer and distributor of Victorinox
Original Swiss Army Knives and professional cutlery as well as other products.
Mr. Bailey is a director of SWWT, Inc., a publicly traded company seeking
acquisition opportunities.
David R. Flowers has served as a director of the Company since April 1997.
Mr. Flowers served in various capacities at Pulse Engineering Inc., an
electronics company ("Pulse"), including Chairman of the Board and Chief
Executive Officer from July 1986 until October 1995, President from July 1982
until July 1986 and in various other executive positions from 1977 until 1982.
Mr. Flowers also serves as director of Babcock Inc., a supplier of high
reliability components and subsystems to the aerospace and avionics industry,
and of Autosplice Inc., a producer of specialty interconnection equipment and
components for the electronics industry.
Herbert M. Friedman, Esq. has served as a director of the Company since
November 1995. Since April 1998, Mr. Friedman, who is an attorney, has performed
services for various entities including Hudson River. Prior thereto, from 1967
to April 1998, Mr. Friedman was a member of the law firm of Zimet, Haines,
Friedman & Kaplan. Zimet, Haines, Friedman & Kaplan acted as counsel to the
Company until April 1998. Mr. Friedman is also a director of Noel Group, Inc.
("Noel"), Hudson River, Swiss Army and Victory Ventures LLC ("Victory"), a
company which conducts its operations through small and medium sized companies
in which it holds either controlling or non-controlling equity interests. Mr.
Friedman is a director of Equities Enterprises, Inc., a company operating a
magazine and holding other assets. Mr. Friedman is also a director of Carlyle,
Inc., a company engaged in the distribution of buttons.
Stephen P. Kelbley has served as a director of the Company since December
1996. Mr. Kelbley has served as President of the Home Furnishings Operating
Group of Springs Industries, Inc. ("Springs"), a home furnishings company, since
February 1998 and as an Executive Vice President of Springs since 1991. From May
1995 to February 1998, he served as President of the Diversified Group and from
March 1994 to May 1995, he was President of Springs' Specialty Fabrics Group.
Mr. Kelbley joined Springs in September 1991 as Executive Vice President and
Chief Financial Officer. Prior to joining Springs, he served for seven years as
Senior Vice President -- Finance of Bausch & Lomb and two years as Senior Vice
President -- Finance & Administration of Moog Automotive, Inc. ("Moog"). He held
significant financial management positions with General Electric Company for 19
years before working at Moog. Mr. Kelbley is also a director of Glenayre and
serves as the Chairman of its Audit Committee and as a member of its
Compensation Committee.
Kurt Cieszkowski has been Executive Vice President of the Company and Chief
Executive Officer of the EEA division of CPI since September 1997. Mr.
Cieszkowski served as a director of the Company and CPI from April 1997 to
January 1998. He served as a Senior Vice President of the Company from May 1996
until September 1997. From October 1995 through May 1996, Mr. Cieszkowski served
as Vice President of CPI with primary responsibility for sales in the Energy
Electric Assembly division. From 1986 through October 1995, Mr. Cieszkowski
served as the President of Energy Electric Assembly, Inc., a predecessor of CPI.
Michael J. George served as Chief Financial Officer, Senior Vice President,
and Secretary of the Company from September 1997 until his resignation in April
1998.
15
<PAGE> 17
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
officers and directors, and persons who own more than ten percent of a
registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission
and to furnish the Company with copies of such reports.
Based solely on its review of the copies of such forms furnished to the
Company by such reporting persons during the fiscal year ended December 31,
1997, or written representations from such reporting persons that no Forms 5
were required for those persons with respect to such period, the Company
believes that during the fiscal year ended December 31, 1997 all filing
requirements applicable to its officers, directors, and greater than ten-percent
beneficial owners were complied with.
16
<PAGE> 18
ITEM 10. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth certain information regarding compensation
awarded or earned, whether paid or deferred, by the persons who served as the
Company's Chief Executive Officer and the Company's three other most highly
compensated executive officers during Fiscal 1997 (the "Named Executive
Officers") and during each of the last three fiscal years.
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
---------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
--------------------------------------------- ---------- -------
(A) (B) (C) (D) (E) (F) (G)
OTHER RESTRICTED SECURITIES (H) (I)
ANNUAL STOCK UNDERLYING LTIP ALL OTHER
NAME AND PRINCIPAL COMPENSATION AWARD(S) OPTIONS/ PAYOUTS COMPENSATION
POSITION YEAR SALARY($) BONUS($) ($) ($) SARS(#) ($) ($)
------------------ ---- --------- -------- ------------ ---------- ---------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
James M. Hopkins........... 1997 85,982(1) $ 10,000 -0- -0- 50,000(2) -0- -0-
President and Chief 1996 -0- -0- -0- -0- -0- -0- -0-
Executive Officer 1995 0- -0- -0- -0- -0- -0- -0-
James S. Harrington........ 1997 $215,073 $714,776(4) $15,091 -0- 90,669(5) -0- -0-
Former Chairman 1996 87,498 -0- 12,520 -0- (5) -0- -0-
of the Board, President
and 1995 -0- -0- -0- -0- -0- -0- -0-
Chief Executive
Officer(3)
Kurt Cieszkowski........... 1997 $211,026 -0- $ 2,586 -0- 45,643(5) -0- -0-
Executive Vice President 1996 (6) -0- -0- -0- (5) -0- -0-
1995 (6) -0- -0- -0- -0- -0- -0-
Gregory C. Kowert.......... 1997 $167,896 -0- 5,433 -0- -0- -0- -0-
Former Senior Vice 1996 (6) -0- -0- -0- -0- -0- -0-
President and Chief 1995 (6) -0- -0- -0- -0- -0- -0-
Executive Officer
Duane A. Gawron............ 1997 $371,800 -0- -0- -0- -0- -0- -0-
Former Senior Vice 1996 (6) -0- -0- -0- -0- -0- -0-
President 1995 (6) -0- -0- -0- -0- -0- -0-
</TABLE>
- ---------------
(1) Represents approximately seven months salary as James M. Hopkins began
employment in June 1997.
(2)Includes 25,000 options to purchase shares of Common Stock which were granted
pursuant to the terms of Mr. Hopkins' employment agreement. See "Executive
Compensation - Employment Contracts and Termination of Employment and Change
in Control Arrangements."
(3) Mr. Harrington served as President and Chief Executive Officer of the
Company from May 1996 until September 1997, and as Chairman of the Board
from September 1997 to May 1998.
(4) Represents a bonus awarded to Mr. Harrington in Fiscal 1997. Payment of such
bonus was deferred until 1998 and took the form of cancellation of an
outstanding note made by Mr. Harrington to CPI.
(5) Represents options to acquire shares of Common Stock exercisable at $3.59
per share which were granted in replacement of options to purchase a like
number of shares of Common Stock which had been granted in 1996.
(6) This person was not a Named Executive Officer for the years ended December
31, 1996 or 1995.
17
<PAGE> 19
OPTION GRANTS DURING FISCAL 1997
The following table sets forth information regarding individual grants of
options and/or warrants made by the Company during Fiscal 1997 to each of the
Named Executive Officers:
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
- ---------------------------------------------------------------------------------------------------------
(A) (B) (C) (D) (E)
NUMBER OF % OF TOTAL
SECURITIES OPTIONS
UNDERLYING GRANTED TO EXERCISE OR
OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION
NAME GRANTED (#) FISCAL YEAR ($/SH) DATE
---- ------------ ------------- ------------ -----------
<S> <C> <C> <C> <C>
James M. Hopkins........................... 25,000(1)(2)(3) 7.2% $3.59 7/10/07
25,000(4)(2)(3) 7.2% $4.03 9/15/07
James S. Harrington........................ 55,947(5)(2)(3) 16.2% $3.59 7/10/07
34,722(6)(2)(3) 10.1% $3.59 7/10/07
Kurt Cieszkowski........................... 10,921(5)(2)(3) 3.2% $3.59 7/10/07
34,722(6)(2)(3) 10.1% $3.59 7/10/07
Gregory C. Kowert.......................... -0- -- -0- --
Duane A. Gawron............................ -0- -- -0- --
</TABLE>
- ---------------
(1) Consists of options to purchase shares of Common Stock which are not
exercisable until July 8, 1999. These options vest in four equal annual
installments commencing on the date of grant.
(2) In the event a change in control occurs with respect to the Company, all of
the options will become fully vested and exercisable on such date.
(3) If the Named Executive Officer's employment with the Company is terminated
under certain circumstances, all of the options will become fully vested and
will become exercisable in the amounts and on the dates set forth in the
option agreement relating to such grant.
(4) Consists of options to purchase shares of Common Stock which are not
exercisable in full until September 16, 2000. These options vest in four
equal annual installments commencing on the date of grant.
(5) Consists of options to purchase shares of Common Stock which became vested
in full on March 8, 1998 but are not exercisable until July 8, 1999. These
options were granted in replacement of canceled options to purchase a like
amount of shares of Common Stock.
(6) Consists of options to purchase shares of Common Stock which become vested
in full and exercisable in part on July 8, 1998. These options were granted
in replacement of canceled options to purchase a like number of shares of
Common Stock.
AGGREGATED OPTION EXERCISES DURING FISCAL 1997 AND FISCAL YEAR-END OPTION VALUE.
The following table provides information related to options and warrants
exercised by the Named Executive Officers during 1997 and the number and value
of unexercised options and warrants held by each of the Named Executive Officers
at year-end. The Company does not have any outstanding stock appreciation
rights:
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS, WARRANTS AT OPTIONS, WARRANTS
FISCAL YEAR-END (#) AT FISCAL YEAR-ENDED($)(1)
SHARES ACQUIRED --------------------------- ---------------------------
NAME ON EXERCISE (#) VALUE REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ---------------- ------------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
James M. Hopkins..... -0- -0- -0- 50,000(2) -0- -0-
Kurt Cieszkowski..... -0- -0- -0- 45,643(3) -0- -0-
James S. Harrington.. -0- -0- -0- 90,669(4) -0- -0-
Gregory C. Kowert.... -0- -0- -0- 25,000 -0- -0-
Duane A. Gawron...... -0- -0- -0- 86,043 -0- -0-
</TABLE>
- ---------------
(1) Based on a closing price on December 31, 1997 of $2.94 per share.
18
<PAGE> 20
(2) Consists of 25,000 options exercisable at $3.59 per share and 25,000 options
exercisable at $4.03 per share to acquire a like number of shares of Common
Stock.
(3) Consists of an aggregate of 45,643 options exercisable at $3.59 per share to
acquire a like number of shares of Common Stock.
(4) Consists of an aggregate of 90,669 options exercisable at $3.59 per share to
acquire a like number of shares of Common Stock.
COMPENSATION OF DIRECTORS
Effective December 1996, non-employee directors are paid a quarterly
retainer of $2,000 and are reimbursed for out-of-pocket expenses incurred in
attending meetings of the Board of Directors and of the Committees to which they
are elected.
Commencing as of December 1996, each person, other than employees of the
Company, elected to the Board of Directors, who was not a director preceding
such person's election, shall receive an option to purchase up to 2,500 shares
of the Company's Common Stock exercisable at the then fair market value.
Thereafter, as of the date of the Company's annual meeting of stockholders, each
non-employee director is presently entitled to receive an option to acquire up
to 500 shares of the Company's Common Stock exercisable at the then fair market
value.
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE IN CONTROL
ARRANGEMENTS
CPI entered into an employment agreement with James S. Harrington, former
Chairman of the Board, Chief Executive Officer, and President, which provided
that he would be employed on a full-time basis for a period of three years from
May 31, 1996 at an annual salary of $163,000 for the first twelve months and
$175,000 per year thereafter plus an annual cash bonus (subject to a maximum of
the annual base salary for such year or partial year) equal to five percent of
the amount by which the "Adjusted Bonus EBITDA" for the prior year or part
thereof exceeded the "Adjusted Bonus EBITDA" for the prior year or part thereof.
Commencing in 1997, Mr. Harrington ceased devoting his full time to the affairs
of CPI and he received a base annual salary of $95,000. On May 31, 1998, Mr.
Harrington resigned as Chairman of the Board and as an employee, therefore
precluding any further salary payments. Additionally, Mr. Harrington waived his
right to the aforementioned annual cash bonus for 1997. The employment agreement
also includes provisions on non-competition, non-solicitation, confidentiality
and proprietary information which remain in effect.
In June 1997, CPI entered into an employment agreement with James M.
Hopkins which provides that he will be employed as an Executive Vice President
of CPI at an annual salary of $150,000 for the first year of employment, and
thereafter Mr. Hopkins' salary will be reviewed and increased at the discretion
of CPI's compensation committee. Mr. Hopkins is entitled to a bonus equal to
three percent of the increase, if any, in the earnings before interest, taxes,
depreciation and amortization ("EBITDA") of CPI's BSCC division over the prior
year's EBITDA up to a maximum of $50,000. The agreement called for a minimum
bonus of $10,000 for the year ended December 31, 1997, with no minimum bonus
under the remainder of the agreement. In addition, Mr. Hopkins was granted
options to purchase up to 25,000 shares of the Company's Common Stock. In the
event Mr. Hopkins' employment is terminated for other than cause or disability,
Mr. Hopkins shall be entitled to his base salary then in effect and any other
amounts to which he is entitled pursuant to any compensation or benefit plan
through the Notice Period (as defined in the agreement) provided that Mr.
Hopkins continues working during the Notice Period. The Company, however, may
elect to stop Mr. Hopkins' employment immediately and pay the amount to which
Mr. Hopkins would otherwise be entitled during the Notice Period in one lump
sum. In the event of a "change in control" of CPI, Mr. Hopkins shall be entitled
to an amount equal to 24 months of his base salary. The employment agreement
also includes provisions regarding non-competition, non-solicitation,
confidentiality and proprietary information. The employment agreement shall
terminate on June 1, 2000 unless the parties mutually agree on or before six
months prior to such date to extend the term of the agreement.
CPI has entered into an employment agreement with Kurt Cieszkowski which
provides that he will be employed for a period of three years from May 31, 1996
at an annual salary of $163,000 for the first twelve
19
<PAGE> 21
months and $175,000 per year thereafter plus an annual cash bonus (subject to a
maximum of the annual base salary for such year or partial year) equal to five
percent of the amount by which the "Adjusted Bonus EBITDA" for the prior year or
part thereof exceeds the "Adjusted Bonus EBITDA" for the prior year or part
thereof. Mr. Cieszkowski waived his right to the aforementioned annual cash
bonus for 1997. The employment agreement provides for payment of both salary and
bonus for the full three-year term if Mr. Cieszkowski is discharged other than
for cause, death or disability, and, in the case of his death or disability, for
the payment of salary for the full three-year term and bonus for the year in
which he dies or becomes disabled. If Mr. Cieszkowski is terminated for cause or
resigns in breach of the employment agreement, no further salary is payable and
any bonus for the year of termination is forfeited. The employment agreement
also includes provisions on non-competition, non-solicitation, confidentiality
and proprietary information and is automatically renewable for terms of one year
unless either party gives no less than 60 days prior written notice of its
intention not to renew the agreement.
In April 1998, CPI entered into an agreement with Kurt Cieszkowski which
provides that in the event of the sale of EEA on or before April 1, 1999, CPI
shall pay Mr. Cieszkowski a closing bonus of $100,000 plus an additional amount
in the event the sale proceeds exceed $14,000,000.
In August 1997, the Company and CPI entered into a Severance Agreement with
Duane Gawron, who resigned as Senior Vice President and a director of the
Company and CPI upon execution of the agreement. In accordance with the
severance agreement, Mr. Gawron's employment agreement was terminated, and the
Company and CPI were released from all obligations thereunder in consideration
for payment to Mr. Gawron of $350,000. No further amounts are due to Mr. Gawron.
In July 1996, CPI entered into an employment agreement with Gregory C.
Kowert, who served as Chief Financial Officer, Senior Vice President and
Secretary of the Company. Mr. Kowert resigned those positions in August 1997.
The Agreement, which provided for an annual base salary of $160,000 and a term
of 18 months, was not renewed. No further amounts are due to Mr. Kowert.
For a description of a change of control provision in the Stockholder's
Agreement, see "Item 12. Certain Relationships and Related Transactions" below.
REPORT OF THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS ON REPRICING OF
OUTSTANDING OPTIONS
In view of the Company's efforts to contain costs, the Company's
Compensation Committee (the "Compensation Committee") has sought to balance the
objectives of providing competitive compensation to the Company's executives
with the goal of conserving its cash resources by emphasizing stock-based
compensation arrangements which the Compensation Committee believes should
provide an incentive for executives to remain with the Company and to increase
share value over the long term. Accordingly, in July 1997, the Compensation
Committee lowered the exercise price for certain outstanding stock options with
exercise prices of $8.12 or $8.64 per share held by executive officers and
employees to an exercise price of $3.59 per share, the fair market value per
share on the date of repricing. The Compensation Committee believes that the
grant of new options will serve the dual purposes of providing an incentive to
management to increase share value over the long term and conserving the
Company's cash resources. An aggregate of 65,750 outstanding options were
repriced. In July 1997, the Board approved the cancellation of 136,312 options
with exercise prices ranging from $8.12 -- $8.64 per common share and the
issuance of 136,312 new options at $3.59 per common share.
Submitted by the following members of the Compensation Committee who served
on the Compensation Committee at the time of the repricing:
Ramon D. Ardizzone
David R. Flowers
20
<PAGE> 22
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(a) Security Ownership of Certain Beneficial Owners.
The following table sets forth, as of June 23, 1998, information regarding
the holdings of all persons known to own beneficially more than 5% of the
Company's Common Stock. Unless otherwise indicated, such ownership is believed
to be direct, with the holder possessing sole voting and investment powers.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY PERCENT OF
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED CLASS(1)
------------------------------------ -------------------- -----------
<S> <C> <C>
Hudson River Capital LLC....................... 1,854,044(2) 33.3%
667 Madison Avenue
New York, NY 10022
</TABLE>
- ---------------
(1) Based on 5,565,256 shares of Common Stock outstanding.
(2) The information set forth in the table regarding shares of Common Stock
owned by Hudson River is based on Amendment No. 15 to the Schedule 13D,
filed on May 5, 1998 jointly by Hudson River, Brae Group, Inc. ("Brae") and
Louis Marx, Jr., which schedule indicates that Hudson River holds 1,854,044
shares of the Company's Common Stock and Brae holds 215,962 (3.9%) shares of
the Company's Common Stock. As a significant indirect holder of voting
securities of Hudson River, Brae may be deemed to be beneficial owner,
within the meaning of Rule 13d-3 promulgated under the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), of the shares of the Company's
Common stock held directly by Hudson River, although Brae disclaims
beneficial ownership thereof. As a significant holder of voting securities
of both Hudson River and Brae, Louis Marx, Jr. may be deemed to be the
beneficial owner of the shares of the Company's Common Stock held directly
by Hudson River and by Brae. Mr. Marx disclaims beneficial ownership
thereof.
(b) Security Ownership of Management
The following table sets forth certain information, as of June 23, 1998
concerning shares of Common Stock owned of record or beneficially by each
director, and by each of the Named Executive Officers (as defined in the section
entitled "Executive Compensation", excluding Messrs. Kowert, Gawron and
Harrington, who are no longer executive officers of the Company, and by all
executive officers and directors as a group). The footnotes also reflect the
ownership by such persons of each class of equity securities of Hudson River,
which may be deemed to be the parent of the Company within the meaning of the
federal securities laws, and CPI.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY PERCENT OF
NAME OWNED(1) CLASS(2)
---- -------------------- -------------
<S> <C> <C>
Ramon D. Ardizzone............................ -0-(3) *
Clarke H. Bailey.............................. 26,725(4) *
David R. Flowers.............................. -0-(5) *
Herbert M. Friedman........................... -0-(6) *
James M. Hopkins.............................. -0-(7) *
Stephen P. Kelbley............................ -0-(8) *
All executive officers and directors as a
group (7 persons)........................... 30,173(9) 5%
</TABLE>
- ---------------
* Less than 1%.
(1) Unless otherwise indicated, each of the parties listed has sole voting and
investment power over the shares owned. The number of shares of Common Stock
indicated includes, in each case, the number of shares of Common Stock
currently issuable upon exercise of options granted under the Company's 1991
Stock Incentive Plan (the "1991 Plan"), the Company's 1996 Stock Incentive
Plan (the "1996 Plan") and non-plan warrants and options. For purposes of
this table, shares are deemed to be "currently issuable' if they may become
issuable upon exercise of an option or warrant within 60 days following the
date hereof.
21
<PAGE> 23
(2) Based on 5,690,128 shares of Common Stock currently issued and outstanding.
In addition, treated as outstanding for the purpose of computing the
percentage ownership of each individual or group are shares of Common Stock
currently issuable to such individual or group upon exercise of options or
warrants.
(3) Does not reflect 6,250 shares of Common Stock currently issuable upon
exercise of a warrant which Mr. Ardizzone has agreed not to exercise until
1999 or 500 shares of Common Stock issuable upon exercise of an option which
becomes exercisable in 1999. Mr. Ardizzone is the owner of 7,552 series B
preferred units (less than 1% of the voting securities) of Hudson River.
(4) Consists of 17,225 shares of Common Stock held directly. Does not reflect
50,000 shares of Common Stock currently issuable upon exercise of a warrant
which Mr. Bailey has agreed not to exercise until 1999 or 500 shares of
Common Stock issuable upon exercise of an option which becomes exercisable
in 1999. Mr. Bailey is the owner of 98,239 series B preferred units of
Hudson River and holds 155,000 plan units issued by Hudson River which
entitle Mr. Bailey to voting rights and to receive a portion of the
appreciation of Hudson River's assets since the date of grant of such units,
under certain circumstances ("Plan Units"). Of Mr. Bailey's Plan Units,
75,000 are beneficially owned by a charitable foundation of which Mr. Bailey
is a trustee. The series B preferred units and the Plan Units beneficially
owned by Mr. Bailey collectively represent approximately 2.6% of the voting
securities of Hudson River.
(5) Does not reflect 2,500 shares of Common Stock issuable upon the exercise of
options which first become exercisable in 1999.
(6) Does not reflect 6,250 shares of Common Stock currently issuable upon
exercise of a warrant which Mr. Friedman has agreed not to exercise until
1999 or 500 shares of Common Stock issuable upon exercise of an option which
becomes exercisable in 1999. Mr. Friedman is the owner of 4,762 series B
preferred units (less than 1% of the voting securities) of Hudson River.
(7) Does not reflect an aggregate of 50,000 shares of Common Stock issuable upon
the exercise of options, a portion of which first become exercisable in
September 1998.
(8) Does not reflect 2,500 shares of Common Stock issuable upon exercise of an
option which becomes exercisable in 1999.
(9) Does not include 108,802 shares of Common Stock issuable upon exercise of
options and warrants which are not exercisable and certain shares with
respect to which beneficial ownership is disclaimed. Does not reflect an
aggregate of 42,195 shares of Common Stock issuable upon the exercise of
stock options held by Kurt Cieszkowski, the Company's Executive Vice
President, which are not currently exercisable. The executive officers and
directors as a group beneficially own 16.8971 shares (2.2%) of CPI Common
Stock, 110,553 series B preferred units and 155,000 Plan Units
(collectively, 2.7% of the voting securities) of Hudson River.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On May 31, 1996, the Company acquired 85% of the outstanding capital stock
of CPI, a privately held company engaged in the business of distribution,
manufacturing and assembly of wire and cable from James S. Harrington, a former
officer and director of the Company, Duane A. Gawron, a former officer and
director of the Company and the Trustee of the Living Trust of Duane A. Gawron,
Margo Gawron (Duane Gawron's wife), John E. Pylak, a former officer and director
of the Company and the Trustee of the John E. Pylak Living Trust, Rebecca Pylak
(John Pylak's wife) and Kurt Cieszkowski (the "Sellers"). As a result of the
transaction, Mr. Harrington became the President, Chief Executive Officer and a
director of the Company; Mr. Harrington resigned as President and Chief
Executive Officer in September 1997, and as a director in May 1998. Mr.
Cieszkowski became a Senior Vice President of the Company, and in September
1997, he was appointed as Executive Vice President of the Company. The remaining
15% of the outstanding common stock of CPI continues to be held by the Sellers.
In consideration for such sale, the Sellers received: (i) from CPI, in
consideration for shares of CPI Common Stock held by them and redeemed by CPI,
(A) an aggregate of $7,622,919 (the "Redemption Amount"), $250,000 of which was
placed in escrow, (B) promissory notes due May 31, 2003 in the aggregate
principal amount of $6,000,000, (C) additional promissory notes due May 31, 2003
in the aggregate principal amount of $3,000,000, payment of which is contingent
upon the achievement by CPI of certain financial
22
<PAGE> 24
targets, all of which were waived by the Sellers in 1998 and are now void, and
(D) forgiveness of an aggregate of $2,000,000 in indebtedness of the Sellers to
CPI; and (ii) from the Company, an aggregate of $7,990,000, $1,000,000 of which
was placed in escrow. In addition, the Company committed to invest an additional
$3,500,000 in preferred stock of CPI ("CPI Preferred Stock") to fund future
expansion, $1,350,000 of which was invested on the closing date and $1,250,000
of which was invested in December 1996. The CPI Preferred Stock has a preference
on liquidation equal to its purchase price, is non-voting, is not entitled to
dividends, and is subject to mandatory redemption at its purchase price per
share (i) after the payment of the promissory notes issued to the Sellers in
partial consideration for the shares of CPI Common Stock redeemed by CPI, and
(ii) subject to the consent of CPI's lenders. The Company has also invested
$400,000 for a subordinated note payable by CPI for working capital purposes.
Pursuant to the Stockholders' Agreement executed in connection with the
acquisition of CPI, the Company granted to the Sellers a put option to sell
their shares of CPI Common Stock to the Company, and the Sellers granted the
Company a call option to purchase Sellers' shares of CPI Common Stock
(collectively, the "Put/Call Options") at a price to be determined based on the
then market value of the shares of the Company's Common Stock now outstanding
subject to specified adjustments. The Put/Call Options are exercisable in
increments of one-third of Sellers' shares of CPI Common Stock on each of the
54th, 60th and 66th month anniversary dates of the closing of the CPI
transaction and become immediately exercisable in the event of a merger,
liquidation, sale of substantially all of the assets or change of control of the
Company. The Stockholders Agreement contains additional provisions including,
among others, provisions relating to the inclusion of certain of the Sellers in
management's slate of nominees for election as directors of the Company,
provided that they remain as employees of the Company or CPI (no Sellers remain
employed), the Company's investment of $3,500,000 in CPI Preferred Stock,
restrictions on the transferability of shares of CPI stock held by the Company
and by the Sellers, "tag along" rights which entitle the Sellers to sell, and
"drag along" rights which require the Sellers to sell, their shares of CPI
Common Stock in the event of a proposed transfer by the Company of all of its
shares of CPI Common Stock, participation rights in favor of the Sellers in any
future issuances of capital stock or options or warrants convertible into
capital stock of CPI (other than employee stock options) for cash or in any
additional entity organized by the Company to make acquisitions in the wire and
cable industry, and restrictions on the Company's ability to acquire any
business not engaged in the wire and cable industry without the consent of the
holders of a majority of the shares of CPI Common Stock held by the Sellers.
Pursuant to a Stock Option Purchase Agreement dated as of December 17,
1996, CPI purchased an option to acquire 100% of the capital stock of Signal
Sales Corp. ("Signal"), a distributor of wire and cable to the municipal traffic
signal and communication market, from James S. Harrington, then Chief Executive
Officer and a director of the Company, in consideration for payment to Mr.
Harrington of $600,000. Signal ceased operations in 1997; therefore, sales to
Signal by the Company in Fiscal 1997 were minimal.
At December 31, 1997, James Harrington was indebted to CPI in the aggregate
amount of $715,000, including accrued interest, which indebtedness was payable
on demand. In July 1997, the Company forgave such indebtedness, by the payment
of a bonus awarded to Mr. Harrington in January 1998. See "Item 10. Executive
Compensation -- Summary Compensation Table."
In July 1997, the Company approved the prepayment of $350,000 of principal
due under a note in the principal amount of $1,764,000 payable to Mr.
Harrington. This amount was paid in 1998. Under the terms of the note, such
principal was scheduled to be paid in May 2003.
From January 1, 1997 to June 30, 1997, the Company paid to Noel an
aggregate of $79,491 in consideration of the rental of office space and support
staff payments as well as reimbursement for salary payments made by Noel to
employees of the Company.
In Fiscal 1997, the Company paid an aggregate of $65,241 to Hudson River in
consideration of the rental of office space and reimbursement for salary
payments made by Hudson River to employees of the Company, including Deborah
Farrington, a former director.
The law firm of Zimet, Haines, Friedman & Kaplan, of which Herbert M.
Friedman, a director of the Company, was a partner, provided legal services to
the Company and CPI during Fiscal 1997.
23
<PAGE> 25
The Company retained Albert M. Zlotnick, a former Chairman and Chief
Executive Officer, as a consultant for the two year period ending December 1,
1997, at a rate of $15,000 per month. This consulting arrangement has not been
renewed.
Reference is also made to "Item 10. Executive Compensation -- Compensation
of Directors."
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
(1) The financial statements of the Company and the report thereon
listed on the Index to Financial Statements on page F-1 hereof are being
filed as part of this Annual Report on Form 10-KSB.
(2) The following exhibits are being filed as exhibits to this Annual
Report on Form 10-KSB or, where indicated, are incorporated by reference:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
<S> <C>
2.1 Stock Redemption and Purchase Agreement, dated as of May 17, 1996 (the
"Purchase Agreement") by and among James S. Harrington, Duane A.
Gawron, Trustee of the Living Trust of Duane A. Gawron, Margo Gawron,
John E. Pylak, Trustee of the John E. Pylak Living Trust, Rebecca
Pylak and Kurt Cieszkowski (collectively, the "Sellers"), Connectivity
Products Incorporated, a Delaware corporation ("CPI"), and the Company
(incorporated by reference to Exhibit of the same number to the
Company's Current Report on Form 8-K dated May 31, 1996).
2.2 Amendment No. 1 to the Purchase Agreement, dated as of May 31, 1996
(incorporated by reference to Exhibit of the same number to the
Company's Current Report on Form 8-K dated May 31, 1996).
3.1 Certificate of Amendment of the Restated Certificate of Incorporation
of the Company, dated July 21, 1987 (incorporated by reference to
Exhibit 3.1 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1987).
3.2 Amended and Restated By-Laws of the Company (incorporated by reference
to Exhibit 3.2 to the Company's Annual Report on form 10-K for the
year ended December 31, 1988).
3.3 Certificate of Amendment to Certificate of Incorporation of Tigera
Group, Inc., dated December 5, 1996 (incorporated by reference to
Exhibit 3.3 to the Company's Annual Report on Form 10-KSB for the year
ended December 31, 1996 (the "1996 Annual Report")).
3.4 Certificate of Amendment to the Certificate of Incorporation of the
Company, dated December 13, 1996 (incorporated by reference to
Exhibit 3.4 to the Company's 1996 Annual Report).
4.1 Reference is made to Exhibits 3.1, 3.2 and 3.4.
10.1 Letter Agreement, dated April 11, 1991, among Joseph M. Girard and
James S. Campbell and the Company (incorporated by reference to
Exhibit of the same number to the Company's Annual Report on Form 10-K
for the year ended December 31, 1991 (the "1991 Annual Report")).
10.2 The Company's 1991 Stock Option Plan (incorporated by reference to
Exhibit of the same number to the Company's 1991 Annual Report).
10.3 Form of Non-Employee Stock Option Agreement used in connection with
the 1991 Stock Option Plan (incorporated by reference to Exhibit of
the same number to the Company's 1991 Annual Report).
10.4 Form of Incentive Stock Option Agreement used in connection with the
1991 Stock Option Plan (incorporated by reference to Exhibit of the
same number to the Company's 1991 Annual Report).
10.5 Form of Incentive Stock Option Agreement used in connection with the
1991 Stock Option Plan (incorporated by reference to Exhibit of the
same number to the Company's Annual Report on Form 10-KSB for the year
ended December 31, 1995 (the "1995 Annual Report")).
10.6 Form of Employee Non-Qualified Stock Option Agreement used in
connection with the 1991 Stock Option Plan (incorporated by reference
to Exhibit of the same number to the Company's 1995 Annual Report).
</TABLE>
24
<PAGE> 26
<TABLE>
<S> <C>
10.7 Form of Non-Employee Non-Qualified Stock Option Agreement used in
connection with the 1991 Stock Option Plan (incorporated by reference
to Exhibit of the same number to the Company's 1995 Annual Report).
10.8 Form of Warrant Agreement, dated as of April 11, 1991, by and between
the Company and each of James S. Campbell and Joseph M. Gerard
(incorporated by reference to Exhibit of the same number to the
Company's 1995 Annual Report).
10.9 Form of Warrant Agreement, dated as of November 15, 1995, by and
between the Company and each of Donald T. Pascal and Deborah A.
Farrington (incorporated by reference to Exhibit of the same number to
the Company's 1995 Annual Report).
10.10 Form of Warrant Agreement, dated as of November 15, 1995, by and
between the Company and each of Messrs. Julien H. Meyer III and
Francis G. Hayes (incorporated by reference to Exhibit of the same
number to the Company's 1995 Annual Report).
10.11 Form of Warrant Agreement, dated as of November 15, 1995, by and
between the Company and each of A. Clinton Allen and Clarke H. Bailey
(incorporated by reference to Exhibit of the same number to the
Company's 1995 Annual Report).
10.12 Form of Warrant Agreement, dated as of November 15, 1995, by and
between the Company and each of Ramon D. Ardizzone, Albert M. Zlotnick
and Herbert M. Friedman (incorporated by reference to Exhibit of the
same number to the Company's 1995 Annual Report).
10.13 Form of Warrant Agreement, dated as of December 26, 1995, by and
between the Company and each of Michael S. Berlin, Philip R. Hankin,
Irving I. Lassoff, James A. Martin III and Daniel A. Rivetti
(incorporated by reference to Exhibit of the same number to the
Company's 1995 Annual Report).
10.14 Employment Agreement, dated as of November 15, 1995, by and between
the Company and Donald T. Pascal (incorporated by reference to Exhibit
of the same number to the Company's 1995 Annual Report).
10.15 Employment Agreement, dated as of November 15, 1995, by and between
the Company and Deborah A. Farrington (incorporated by reference to
Exhibit of the same number to the Company's 1995 Annual Report).
10.16 Form of Consulting Agreement, dated as of November 15, 1995, by and
between the Company and each of Messrs. Julien H. Meyer III and
Francis G. Hayes (incorporated by reference to Exhibit of the same
number to the Company's 1995 Annual Report).
10.17 Stockholders' Agreement relating to CPI, dated as of May 17, 1996,
among the Sellers, CPI and the Company (incorporated by reference to
Exhibit 10.1 of the Company's Current Report on Form 8-K dated May 31,
1996).
10.18 Form of Employment Agreement, dated as of May 17, 1996, by and between
CPI and each of Messrs. Harrington, Gawron, Pylak and Cieszkowski
(incorporated by reference to Exhibit 10.2 of the Company's Current
Report on Form 8-K dated May 31, 1996).
10.19 Form of Redemption Note, dated as of May 31, 1996, by CPI in favor of
each of the Sellers (incorporated by reference to Exhibit 10.3 of the
Company's Current Report on Form 8-K dated May 31, 1996).
10.20 Form of Contingent Note, dated as of May 31, 1996, by CPI in favor of
each of the Sellers (incorporated by reference to Exhibit 10.4 of the
Company's Current Report on Form 8-K dated May 31, 1996).
10.21 Credit Agreement (the "Credit Agreement"), dated as of May 31, 1996,
by and among NBD Bank ("NBD") and The First National Bank of Boston
("FNBB" and, together with NBD and the other lending institutions
listed on Schedule 1 thereto, the "Banks"), each individually and as
Co-Agents, and CPI (incorporated by reference to Exhibit 10.1 of the
Company's Quarterly Report on Form 10-QSB for the quarter ended
June 30, 1996 (the "1996 Second Quarter 10-QSB")).
10.22 $10,000,000 Revolving Credit Note, dated as of May 31, 1996, executed
by CPI in favor of NBD (incorporated by reference to Exhibit 10.2 of
the Company's 1996 Second Quarter 10-QSB).
10.23 $10,000,000 Revolving Credit Note, dated as of May 31, 1996, executed
by CPI in favor of FNBB (incorporated by reference to Exhibit 10.3 of
the Company's 1996 Second Quarter 10-QSB).
</TABLE>
25
<PAGE> 27
<TABLE>
<S> <C>
10.24 $3,500,000 Line of Credit Note, dated as of May 31, 1996, executed by
CPI in favor of NBD (incorporated by reference to Exhibit 10.4 of the
Company's 1996 Second Quarter 10-QSB).
10.25 $3,500,000 Line of Credit Note, dated as of May 31, 1996, executed by
CPI in favor of FNBB (incorporated by reference to Exhibit 10.5 of the
Company's 1996 Second Quarter 10-QSB).
10.26 $9,300,000 Term Loan A Note, dated as of May 31, 1996, executed by CPI
in favor of NBD (incorporated by reference to Exhibit 10.6 of the
Company's 1996 Second Quarter 10-QSB).
10.27 $9,300,000 Term Loan A Note, dated as of May 31, 1996, executed by CPI
in favor of FNBB (incorporated by reference to Exhibit 10.7 of the
Company's 1996 Second Quarter 10-QSB).
10.28 Subordination Agreement, dated as of May 31, 1996, executed by the
Sellers, the Company and CPI in favor of NBD, as administrative agent
for the Banks (the "Agent") (incorporated by reference to Exhibit 10.8
of the Company's 1996 Second Quarter 10-QSB).
10.29 Security Agreement, dated as of October 5, 1995, by and between CPI
and the Agent (incorporated by reference to Exhibit 10.9 of the
Company's 1996 Second Quarter 10-QSB).
10.30 First Amendment to the Security Agreement, dated as of May 31, 1996,
by and between CPI and the Agent (incorporated by reference to Exhibit
10.9(a) of the Company's 1996 Second Quarter 10-QSB).
10.31 Guaranty, dated as of May 31, 1996, executed by the Company in favor
of the Agent (incorporated by reference to Exhibit 10.10 of the
Company's 1996 Second Quarter 10-QSB).
10.32 Stock Pledge Agreement, dated as of May 31, 1996, by and between the
Company and the Agent (incorporated by reference to Exhibit 10.11 of
the Company's 1996 Second Quarter 10-QSB). 10.33 Note Pledge
Agreement, dated as of May 31, 1996, by and among the Sellers and the
Agent (incorporated by reference to Exhibit 10.12 of the Company's
1996 Second Quarter 10-QSB).
10.34 Form of Stock Option Agreement, dated as of March 8, 1996, by and
between the Company and each of James S. Harrington, Duane A. Gawron,
John E. Pylak and Kurt Cieszkowski (incorporated by reference to
Exhibit 10.13 of the Company's 1996 Second Quarter 10-QSB).
10.35 Employment Agreement, dated as of July 9, 1996, between Gregory C.
Kowert and CPI (incorporated by reference to Exhibit 10.14 of the
Company's 1996 Second Quarter 10-QSB).
10.36 First Amendment to Credit Agreement, dated as of August 26, 1996, by
and among NBD and FNBB, each individually and as Co-Agents, and CPI
(incorporated by reference to Exhibit 10.1 of the Company's Quarterly
Report on Form 10-QSB for the quarter ended September 30, 1996 (the
"1996 Third Quarter 10-QSB")).
10.37 Second Amendment to the Credit Agreement, dated as of September 30,
1996, by and among NBD, FNBB, each individually and as Co-Agents,
Fleet Bank, N.A. and CPI (incorporated by reference to Exhibit 10.2 of
the Company's 1996 Third Quarter 10-QSB).
10.38 Agreement, dated as of September 27, 1996, by and among James S.
Harrington, Duane A. Gawron, John E. Pylak, Kurt Cieszkowski and CPI
(incorporated by reference to Exhibit 10.3 of the Company's 1996 Third
Quarter 10-QSB).
10.39 Form of Employee Stock Option Agreement pursuant to the Company's 1996
Stock Incentive Plan (incorporated by reference to Exhibit 10.4 of the
Company's 1996 Third Quarter 10-QSB).
10.40 Company's 1996 Stock Incentive Plan (incorporated by reference to
Exhibit D to the Company's Proxy Statement relating to the Company's
Annual Meeting of Shareholders held on December 4, 1996).
10.41 Stock Option Purchase Agreement by and among James S. Harrington, CPI,
Wayne MacPherson and Signal Sales Corp., dated as of December 17, 1996
(incorporated by reference to Exhibit 10.41 of the Company's Annual
Report on Form 10-KSB for the year ended December 31, 1996 (the "1996
Annual Report")).
10.42 Building Lease between Anthony Bennet Properties and Energy Electric
Cable, Inc., dated December 22, 1988 (incorporated by reference to
Exhibit 10.42 of the Company's 1996 Annual Report).
10.43 First Amendment to Building Lease between Anthony Bennet Properties
and Energy Electric Cable, Inc., dated February 9, 1994 (incorporated
by reference to Exhibit 10.43 of the Company's 1996 Annual Report).
</TABLE>
26
<PAGE> 28
<TABLE>
<S> <C>
10.44 Lease of Real Property at Crossroad Office Park by Peter F. Zichelle
to CPI, dated December 19, 1996 (incorporated by reference to
Exhibit 10.44 of the Company's 1996 Annual Report).
10.45 Lease by and between Key Plastics, Inc. and CPI, dated March 6, 1997
(incorporated by reference to Exhibit 10.45 of the Company's 1996
Annual Report).
10.46 First Amendment of Certain Security Documents and Subordination
Agreement and Third Amendment to Amended and Restated Revolving Credit
and Term Loan Agreement by and among CTI, CPI and NBD (incorporated by
reference to Exhibit 10.46 of the Company's 1996 Annual Report).
10.47 Net Lease by and between Douglas J. Detweiler and BSCC Corp., dated
June 5, 1995 (incorporated by reference to Exhibit 10.47 of the
Company's 1996 Annual Report).
10.48 Second Amendment to Lease by and between Douglas J. Detweiler and BSCC
Corp., dated August 29, 1995 (incorporated by reference to
Exhibit 10.48 of the Company's 1996 Annual Report).
10.49 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, by and among
the Company, CPI and the Agent (incorporated by reference to
Exhibit 10.1 of the Company's Quarterly Report on Form 10-QSB for the
quarterly period ended March 31, 1997 (the "1997 First Quarter
10-QSB")).
10.50 Fourth Amendment to Amended and Restated Revolving Credit and Term
Loan Agreement, dated as of March 31, 1997, by and among CPI, NBD, as
Administrative Agent, and BankBoston N.A., as Documentation Agent
("BankBoston", f/k/a The First National Bank of Boston) (incorporated
by reference to Exhibit 10.2 of the Company's 1997 First Quarter
10-QSB).
10.51 Fifth Amendment to Amended and Restated Revolving Credit and Term Loan
Agreement, dated as of June 27, 1997, by and among CPI, NBD, as agent,
BankBoston and certain other banks (incorporated by reference to
Exhibit 10.2 of the Company's Quarterly Report on Form 10-QSB for the
Quarterly Period ended June 30, 1997).
10.52 Supply Agreement between CPI and Anicom, Inc., dated as of July 11,
1997 (incorporated by reference to Exhibit 10.1 of the Company's
Quarterly Report on Form 10-QSB for the quarterly period ended
September 30, 1997 (the "1997 Third Quarter 10-QSB")).
10.53 Sixth Amendment to Amended and Restated Revolving Credit and Term Loan
Agreement, dated as of July 11, 1997, by and among CPI, NBD and
BankBoston (incorporated by reference to Exhibit 10.2 of the Company's
1997 Third Quarter 10-QSB).
10.54 Seventh Amendment to Amended and Restated Revolving Credit and Term
Loan Agreement, dated as of July 25, 1997, by and among CPI, NBD and
BankBoston (incorporated by reference to Exhibit 10.3 of the Company's
1997 Third Quarter 10-QSB).
10.55 Stock Pledge Agreement, dated as of July 11, 1997, between CPI and NBD
(incorporated by reference to Exhibit 10.4 of the Company's 1997 Third
Quarter 10-QSB).
10.56 Second Amended and Restated Term Loan A Note, dated as of July 11,
1997, in the principal amount of $6,000,000 payable by CPI to NBD
(incorporated by reference to Exhibit 10.5 of the Company's 1997 Third
Quarter 10-QSB).
10.57 Second Amended and Restated Term Loan A Note, dated as of July 11,
1997, in the principal amount of $6,000,000 payable by CPI to
BankBoston (incorporated by reference to Exhibit 10.6 of the Company's
1997 Third Quarter 10-QSB).
10.58 Second Amended and Restated Line of Credit Note, dated as of July 11,
1997, in the principal amount of $3,000,000 payable by CPI to NBD
(incorporated by reference to Exhibit 10.7 of the Company's 1997 Third
Quarter 10-QSB).
10.59 Second Amended and Restated Line of Credit Note, dated as of July 11,
1997, in the principal amount of $3,000,000 payable by CPI to
BankBoston (incorporated by reference to Exhibit 10.8 of the Company's
1997 Third Quarter 10-QSB).
10.60 Second Amended and Restated Revolving Credit Note, dated as of
July 11, 1997, in the principal amount of $6,000,000 payable by CPI to
NBD (incorporated by reference to Exhibit 10.9 of the Company's 1997
Third Quarter 10-QSB).
</TABLE>
27
<PAGE> 29
<TABLE>
<S> <C>
10.61 Second Amended and Restated Revolving Credit Note, dated as of July 11, 1997, in the principal amount of
$6,000,000 payable by CPI to BankBoston (incorporated by reference to Exhibit 10.10 of the Company's 1997
Third Quarter 10-QSB).
10.62 Assignment and Acceptance, dated as of July 11, 1997, by and among NBD, BankBoston and CPI concerning NBD
(incorporated by reference to Exhibit 10.11 of the Company's 1997 Third Quarter 10-QSB).
10.63 Assignment and Acceptance, dated as of July 11, 1997, by and among NBD, BankBoston and CPI concerning
BankBoston (incorporated by reference to Exhibit 10.12 of the Company's 1997 Third Quarter 10-QSB).
10.64 Eighth Amendment to Amended and Restated Revolving Credit and Term Loan Agreement, dated as of June 30,
1997, by and among CPI, NBD and BankBoston (incorporated by reference to Exhibit 10.13 of the Company's
1997 Third Quarter 10-QSB).
10.65 Severance Agreement by and among CPI, the Company and Duane A. Gawron, dated as of August 29, 1997
(incorporated by reference to Exhibit 10.14 of the Company's 1997 Third Quarter 10-QSB).
21.1 Subsidiaries of the Registrant (incorporated by reference to the Company's 1996 Annual Report).
23(a) Consent of Ernst & Young LLP.*
27.1 Financial Data Schedule.*
</TABLE>
- ---------------
* Filed herewith.
(a) Reports on Form 8-K:
On December 17, 1997, the Company filed a Current Report on Form 8-K in
which the Company announced an estimated charge to earnings as a result of
accounts receivable adjustments and a potential inventory write-down as a result
of a decline in world-wide prices for copper, the Company's principal raw
material.
On December 18, 1997, the Company filed a Current Report on Form 8-K in
connection with the change of independent accountants from Coopers & Lybrand LLP
to Ernst & Young LLP.
28
<PAGE> 30
AUDITED CONSOLIDATED
FINANCIAL STATEMENTS
CONNECTIVITY TECHNOLOGIES INC.
YEARS ENDED DECEMBER 31, 1997 AND 1996
<PAGE> 31
CONNECTIVITY TECHNOLOGIES INC.
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
CONTENTS
<TABLE>
<S> <C>
Report of Independent Auditors (by Ernst & Young LLP)....... F-1
Report of Independent Accountants
(by Coopers & Lybrand LLP)................................ F-2
Audited Consolidated Financial Statements
Consolidated Balance Sheet.................................. F-3
Consolidated Statements of Operations....................... F-4
Consolidated Statements of Stockholders' Equity............. F-5
Consolidated Statements of Cash Flows....................... F-6
Notes to Consolidated Financial Statements.................. F-8
</TABLE>
<PAGE> 32
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Connectivity Technologies Inc.
We have audited the accompanying consolidated balance sheet of Connectivity
Technologies Inc. as of December 31, 1997, and the related consolidated
statements of operations, stockholders' equity and cash flows for the year then
ended. 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 audit.
We conducted our audit 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 audit provides 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 Connectivity
Technologies Inc. at December 31, 1997, and the consolidated results of its
operations and its cash flows for the year then ended in conformity with
generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As more fully
described in Note 1, the Company has incurred a significant operating loss in
1997 and has a working capital deficiency. In addition, the Company has not
complied with certain covenants of loan agreements with banks. These conditions
raise substantial doubt about the Company's ability to continue as a going
concern. Management's plans in regard to these matters also are described in
Note 1. These financial statements do not include any adjustments to reflect the
possible future effects on the recoverability and classification of assets or
the amounts and classification of liabilities that may result from the outcome
of this uncertainty.
/S/ ERNST & YOUNG LLP
Boston, Massachusetts
June 5, 1998, except for Note 19,
as to which the date is June 30, 1998
F-1
<PAGE> 33
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Stockholders
Connectivity Technologies Inc.
We have audited the accompanying consolidated statements of operations,
stockholders' equity and cash flows of Connectivity Technologies Inc. for the
year ended December 31, 1996. 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 audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated results of its operations and its
cash flows of Connectivity Technologies Inc. for the year ended December 31,
1996 in conformity with generally accepted accounting principles.
Other than for the reclassification for the discontinued operations as
discussed in Note 4, our audit report is based on the facts and conditions that
existed at February 24, 1997.
/S/ COOPERS & LYBRAND LLP
Detroit, Michigan
February 24, 1997, except Note 4,
for which the date is June 4, 1997
F-2
<PAGE> 34
CONNECTIVITY TECHNOLOGIES INC.
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1997
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash................................................... $ 160,104
Marketable securities.................................. 3,127,012
Accounts receivable:
Trade, less allowances of $168,000................ 5,883,728
Other............................................. 119,093
Inventories, net....................................... 2,322,720
Prepaid expenses and other current assets.............. 190,287
Current assets held for sale........................... 6,056,520
-------------
Total current assets......................... 17,859,464
Property, plant and equipment, net..................... 6,593,167
Deposits and other noncurrent assets................... 95,105
Goodwill and intangible assets......................... 6,514,908
Noncurrent assets held for sale........................ 4,022,938
-------------
Total assets................................. $ 35,085,582
=============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Long-term debt, in default............................. $ 18,300,000
Trade accounts payable................................. 5,104,598
Accrued compensation and commissions................... 447,651
Taxes payable.......................................... 3,356,314
Accrued liabilities.................................... 3,335,989
-------------
Total current liabilities.................... 30,544,552
Stockholders' equity:
Preferred stock, $.01 par value, 10,000,000 shares
authorized, none outstanding Series B common stock,
$.04 par value, 750,000 shares authorized, none
outstanding
Common Stock, $.04 par value, 20,000,000 shares
authorized, 5,771,857 shares issued, 5,565,256 shares
outstanding........................................... 230,874
Additional paid in capital............................. 109,336,244
Accumulated deficit.................................... (105,635,869)
Less 206,601 shares in treasury, at cost............... (8,264)
Unrealized gain on marketable securities, net of income
taxes of $411,001..................................... 618,045
-------------
Total stockholders' equity................... 4,541,030
-------------
Total liabilities and stockholders' equity... $ 35,085,582
=============
</TABLE>
See accompanying notes.
F-3
<PAGE> 35
CONNECTIVITY TECHNOLOGIES INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------
1997 1996
----------- ------------
<S> <C> <C>
Net sales................................................... $41,707,988 $ 20,318,996
Cost of goods sold.......................................... 35,393,009 14,499,866
----------- ------------
Gross profit...................................... 6,314,979 5,819,130
Selling, general and administrative expenses................ 10,441,178 5,111,292
----------- ------------
Operating income (loss)........................... (4,126,199) 707,838
Other income (expense):
Interest income........................................ 31,220 335,365
Interest expense....................................... (2,395,038) (1,368,323)
Other.................................................. 39,247 65,077
----------- ------------
Loss from continuing operations before income
taxes........................................... (6,450,770) (260,043)
Provision for income taxes.................................. 7,993,424 13,990
----------- ------------
Loss from continuing operations................... (14,444,194) (274,033)
Discontinued operations:
Income from discontinued operations, net of income
taxes of $194,269 in 1997 and $620,262 in 1996........ 292,132 633,193
Gain on sale of discontinued operations, net of income
taxes of $6,398,995................................... 5,056,555
----------- ------------
Income from discontinued operations............... 5,348,687 633,193
----------- ------------
Net income (loss)........................................... $(9,095,507) $ 359,160
=========== ============
Weighted average shares outstanding......................... 5,565,272 5,508,057
=========== ============
Earnings (loss) per share:
Continuing operations.................................. $ (2.60) $ (.05)
Discontinued operations................................ .96 .11
----------- ------------
$ (1.64) $ .06
=========== ============
</TABLE>
See accompanying notes.
F-4
<PAGE> 36
CONNECTIVITY TECHNOLOGIES INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
UNREALIZED
COMMON STOCK ADDITIONAL TREASURY STOCK GAIN ON
---------------------- PAID-IN ACCUMULATED --------------------- MARKETABLE
SHARES AMOUNT CAPITAL DEFICIT SHARES AMOUNT SECURITIES
----------- -------- ------------ ------------- ----------- ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1996...... 21,492,902 $221,127 $108,741,543 $ (96,899,522) 206,601 $(8,264) $ --
Net income.................. 359,160
Stock options and warrants
exercised................. 975,000 9,750 595,249
Reverse stock split......... (16,695,976)
----------- -------- ------------ ------------- ----------- ------- --------
Balance at December 31, 1996.... 5,771,926 230,877 109,336,792 (96,540,362) 206,601 (8,264) --
Net loss........................ (9,095,507)
Unrealized gain on
marketable securities, net
of income taxes........... 618,045
Shares repurchased and
retired................... (69) (3) (548)
----------- -------- ------------ ------------- ----------- ------- --------
Balance at December 31, 1997.... 5,771,857 $230,874 $109,336,244 $(105,635,869) 206,601 $(8,264) $618,045
=========== ======== ============ ============= =========== ======= ========
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY
-------------
<S> <C>
Balance at January 1, 1996...... $12,054,884
Net income.................. 359,160
Stock options and warrants
exercised................. 604,999
Reverse stock split......... --
-----------
Balance at December 31, 1996.... 13,019,043
Net loss........................ (9,095,507)
Unrealized gain on
marketable securities, net
of income taxes........... 618,045
Shares repurchased and
retired................... (551)
-----------
Balance at December 31, 1997.... $ 4,541,030
===========
</TABLE>
See accompanying notes.
F-5
<PAGE> 37
CONNECTIVITY TECHNOLOGIES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------
1997 1996
------------ -----------
<S> <C> <C>
Cash flows from operating activities:
Loss from continuing operations............................. $(14,444,194) $ (274,033)
Continuing Operations:
Adjustments to reconcile net loss to cash provided by (used
in) operating activities:
Debt issuance costs.................................... 458,311
Depreciation and amortization.......................... 1,703,230 931,537
Deferred income taxes.................................. 9,488,583 459,252
Changes in assets and liabilities:
Accounts receivable, net.......................... (3,386,801) 527,483
Inventory, net.................................... (173,865) (707,198)
Prepaid expenses and other current assets......... 25,200 996,315
Trade accounts payable............................ 733,303 (515,858)
Taxes payable and accrued liabilities............. (211,620) (332,957)
Other............................................. 90,411 10,566
------------ -----------
Net cash provided by (used in) continuing
operations.................................. (5,717,442) 1,095,107
Discontinued Operations:
Income, net of income taxes................................. 292,132 633,193
Adjustment to reconcile net loss to cash provided by (used
in) discontinued operations:
Depreciation and amortization.......................... 118,496 126,906
Deferred income taxes.................................. 1,633,050
Changes in assets and liabilities:
Accounts receivable, net.......................... (2,846,593) (867,778)
Inventory, net.................................... 123,357 (233,495)
Prepaid expenses and other current assets......... (39,689) (19,127)
Trade accounts payable............................ 1,889,502 (833,875)
Accrued liabilities............................... (271,633) 146,134
Other............................................. (12,280) (7,123)
------------ -----------
(1,157,336) (1,815,264)
------------ -----------
Net cash provided by (used in) discontinued
operations.................................. 886,342 (1,055,165)
------------ -----------
Net cash provided by (used in) operating activities......... (4,831,100) 39,942
Cash flows from investing activities:
Proceeds from disposal of discontinued operations, net
of transaction costs.................................. 25,460,698
Purchases of property, plant and equipment............. (2,031,040) (1,490,507)
Purchases of property, plant and equipment by
discontinued operations............................... (224,246) (230,330)
Purchases of marketable securities..................... (1,779,059)
Maturities of marketable securities.................... 2,671,034 9,869,666
Acquisition of Connectivity Products, Inc., net of cash
acquired of $756,170.................................. (7,233,830)
Acquisition of option of Signal ($629,182) and other
intangible assets..................................... (655,815)
------------ -----------
Net cash provided by investing activities.... 24,097,387 259,184
Cash flows from financing activities:
Proceeds from long-term borrowings..................... 13,405,000
Repayment of long-term borrowings...................... (32,655,000) (850,000)
Other.................................................. (551)
Stock options exercised................................ 604,999
------------ -----------
Net cash used in financing activities........ (19,250,551) (245,001)
------------ -----------
Net increase in cash and cash equivalents................... 15,736 54,125
Cash and cash equivalents at beginning of year.............. 230,107 175,982
------------ -----------
</TABLE>
F-6
<PAGE> 38
CONNECTIVITY TECHNOLOGIES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------
1997 1996
------------ -----------
<S> <C> <C>
Cash and cash equivalents at end of year:
Held for sale.......................................... $ 85,739
Other.................................................. 160,104 $ 230,107
------------ -----------
Cash and cash equivalents at end of year.................... $ 245,843 $ 230,107
============ ===========
SUPPLEMENTAL INFORMATION:
Cash paid during the year for:
Income taxes........................................... $ 225,000 $ 63,000
============ ===========
Interest............................................... $ 2,935,000 $ 1,650,000
============ ===========
</TABLE>
See accompanying notes.
F-7
<PAGE> 39
CONNECTIVITY TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
DESCRIPTION OF BUSINESS
Connectivity Technologies Inc. (CTI, or the Company) owns 85 percent of the
outstanding common stock of Connectivity Products Incorporated (CPI). The
primary business of CPI is the manufacture and assembly of wire and cable
products. Principal manufacturing markets include security, factory automation,
signal and sound.
DESCRIPTION OF ENERGY ELECTRIC CABLE DIVISION
Energy Electric Cable (EEC), a division of CPI, distributed a full line of
wire and cable products for the computer networking market and the security,
signal and sound markets. Effective June 30, 1997, CPI sold substantially all of
the assets and liabilities of EEC to Anicom, Inc. (Anicom). EEC represented a
separate line of business and, accordingly, the results of its operations have
been reported as discontinued operations for all periods presented. Refer to
Note 4 for additional information regarding these discontinued operations.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of CTI and its
85 percent owned subsidiary, CPI. All significant intercompany accounts have
been eliminated in consolidation.
GOING CONCERN MATTERS
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern, which contemplates
the realization of assets and the satisfaction of liabilities in the normal
course of business. The Company incurred a significant operating loss in 1997
and has a working capital deficiency. Also as further described in Note 11, the
Company was not in compliance with the covenants of its revolving credit
facility at December 31, 1997 and to date had received advances in excess of
those allowable under the terms of the revolving credit facility. In addition,
the revolving credit facility was amended in 1998 whereunder, among other items,
all amounts outstanding are due in July 1998. These conditions raise substantial
doubt about the Company's ability to continue as a going concern.
Management's plans to resolve these matters presently include the sale of
the Company's Energy Electric Assembly (EEA) division (see Note 5). If a sale is
successfully consummated, the proceeds from the sale would be applied against
the outstanding balance due under the revolving credit facility and the Company
would seek to refinance or amend its credit facility in order to extend the
repayment terms. In addition, the Company has recently formed a new management
team and is currently making changes to its operations in order to improve
profitability and to generate sufficient cash flow to meet its obligations.
Operational changes include, but are not limited to, focusing solely on the BSCC
division, the installation of new machinery which will augment existing product
lines and the implementation of a new costing system which should enable the
Company to better analyze the profitability of its product lines.
There can be no assurance that management will be successful in its efforts
to sell the EEA division at a price acceptable to the Board of Directors.
Further, there can be no assurance that management will be successful in its
efforts to refinance or amend its credit facility at commercially available
rates and with favorable repayment terms, or carry out its operational plan. If
the Company's efforts are not successful, the lenders would be in a position to
commence legal proceedings against the Company for the repayment of the entire
debt, plus certain amounts, and to proceed against the Company's assets. The
accompanying consolidated financial statements do not include any adjustments to
reflect the possible future effects on the recoverability and classification of
assets or the amounts and classification of liabilities that may result from the
outcome of these uncertainties.
F-8
<PAGE> 40
CONNECTIVITY TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
REVERSE STOCK SPLIT
On December 4, 1996, the Company's Board of Directors approved a 1-for-4
reverse stock split of common shares. Other than information included in the
Statement of Stockholders' Equity, all common share and per common share amounts
included in the accompanying consolidated financial statements and notes thereto
have been retroactively restated to give effect to this 1-for-4 reverse stock
split.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts in the financial statements and
accompanying notes. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
All bank time deposits, commercial paper and certificates of deposit with
an original maturity of three months or less are considered to be cash
equivalents.
MARKETABLE SECURITIES
Under the provisions of FASB Statement No. 115, Accounting for Certain
Investments in Debt and Equity Securities (FAS 115), the Company has classified
its investments in Anicom, Inc. and United States treasury bills as
available-for-sale securities. Available-for-sale securities are carried at fair
value, with the unrealized gains and losses, net of tax, reported in a separate
component of stockholders' equity. Realized gains and losses and declines in
value judged to be other-than-temporary on available-for-sale securities are
included in investment income. The cost of securities sold is based on the
specific identification method. To the extent earned, interest and dividends on
investments classified as available-for-sale are included in investment income.
The carrying value of the United States treasury bills approximates fair value.
At December 31, 1997, the Company had a gross unrealized gain of
approximately $1,029,000 relating to the investment in Anicom stock. At June 5,
1998, the gross unrealized gain declined to approximately $550,000.
INVENTORIES
Inventories are stated at the lower of cost, determined on the first-in,
first-out basis, or market. Inventory costs include materials, direct labor and
manufacturing overhead.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is recorded at cost less accumulated
depreciation and amortization. Depreciation is calculated using the
straight-line method over the estimated useful lives of the individual assets (5
to 12 years for equipment and 3 to 10 years for leasehold improvements). Cost of
major renewals and additions are capitalized, while expenditures for repairs and
maintenance costs are expensed as incurred. Upon retirement or disposal of
property, plant and equipment, the cost and accumulated depreciation or
amortization are removed from the accounts, and any gain or loss is included in
the determination of net income.
INTANGIBLE ASSETS
Intangible assets consist primarily of goodwill. Periodically, management
assesses whether there has been an impairment in the carrying value of the
intangible assets. If facts and circumstances indicate that the Company's
intangible assets might be impaired, the estimated future undiscounted cash
flows associated with the intangible asset would be compared to its carrying
amount to determine if an adjustment to fair value is necessary.
F-9
<PAGE> 41
CONNECTIVITY TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As described in Note 1, there is substantial doubt about the Company's
ability to continue as a going concern. The Company has undertaken a number of
initiatives to alleviate the doubt and there can be no assurance that the
Company will be able to successfully carry out these initiatives. If not
successful, the Company may be required to recognize an impairment loss on the
goodwill associated with one or both of its divisions.
The Company amortizes its intangible assets over their estimated useful
lives, which range from 5 to 25 years, principally 25 years.
INCOME TAXES
In accordance with FASB Statement No. 109, Accounting for Income Taxes, the
liability method is used to account for income taxes. Deferred tax assets and
liabilities are determined based on differences between financial reporting and
income tax bases of assets and liabilities and are measured using the enacted
tax rates and laws that will be in effect when the differences are expected to
reverse. When appropriate, deferred tax assets are reduced by a valuation
allowance to reflect the uncertainty associated with their ultimate realization.
CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of trade receivables.
Concurrent with the sale of substantially all of the assets and liabilities
of EEC to Anicom (see Note 4), the Company entered into a supply agreement with
Anicom. Pursuant to this agreement, Anicom agreed to purchase a specified amount
of wire and cable products manufactured by the Company through July 11, 2002.
Approximately 15% of the Company's revenues for the year ended December 31, 1997
and 28% of the Company's accounts receivable, including receivable amounts
classified as current assets held for sale, at December 31, 1997 arose from this
one customer, Anicom.
The Company performs credit evaluations on all new customers and generally
does not require collateral.
STOCK BASED COMPENSATION
The Company grants stock options and warrants of shares to employees with
an exercise price equal to the fair market value of the shares at the grant
date. The Company accounts for stock option grants in accordance with APB
Opinion No. 25, Accounting for Stock Issued to Employees, and accordingly,
recognizes no compensation expense for the stock option grants.
REVENUE RECOGNITION
Revenue from sale of product is recognized at the time of shipment.
EARNINGS PER SHARE
In 1997, the Company adopted FASB Statement No. 128, Earnings per Share
(FAS 128). FAS 128 replaces the calculation of primary and fully diluted
earnings per share (EPS), with basic and diluted EPS. Unlike primary EPS, basic
EPS excludes any dilutive effects of options and warrants. Dilutive EPS is very
similar to the previously reported fully diluted EPS. EPS amounts for all
periods have been restated to conform to the FAS 128 requirements. In accordance
with FAS 128, the Company has excluded from its EPS calculations the dilutive
effects of options and warrants because the Company has incurred a loss from
continuing operations for 1997 and 1996.
F-10
<PAGE> 42
CONNECTIVITY TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued Statement No. 130, Reporting Comprehensive
Income (FAS 130). FAS 130 establishes standards for reporting comprehensive
income and its components in a full set of general purpose financial statements.
FAS 130 requires that items to be recorded in comprehensive income, which
include unrealized gains/losses on marketable securities classified as
available-for-sale, be displayed with the same prominence as other financial
statement items. FAS 130 is required to be adopted in the Company's financial
statements beginning in the first quarter of 1998.
In June 1997, the FASB issued Statement No. 131, Disclosures about Segments
of an Enterprise and Related Information (FAS 131). FAS 131 establishes
standards for the way public business enterprises report information about
operating segments in annual financial statements and requires those enterprises
to report selected information about operating segments in interim financial
reports issued to shareholders. FAS 131 also establishes standards for related
disclosures about products and services, geographic areas, and major customers.
FAS 131 is required to be adopted in the Company's financial statements for the
year ending December 31, 1998. The adoption of FAS 131 will have no impact on
the Company's financial results or financial condition, but may result in
certain additional disclosures of segment information.
RECLASSIFICATIONS
Certain amounts reported in the previous year have been reclassified to
conform to the 1997 presentation.
3. ACQUISITION OF CONNECTIVITY PRODUCTS INCORPORATED
On May 31, 1996, CTI acquired for $7.99 million in cash, 85% of the
outstanding common stock of CPI. The consolidated financial statements of the
Company include the operating results of CPI since the date of acquisition. At
the time of the acquisition, the primary business of CPI included the
distribution of a full line of wire and cable products for the computer
networking market and the security, signal and sound markets. The stock
acquisition has been accounted for as a purchase and the purchase price was
allocated as follows:
<TABLE>
<S> <C>
Current assets (including deferred taxes of $1,945,766)..... $30,167,738
Property, plant and equipment............................... 6,100,694
Deferred taxes ($10,046,119) and other assets............... 10,382,754
Goodwill and intangible assets.............................. 14,547,320
-----------
61,198,506
Liabilities assumed......................................... (53,828,816)
Notes receivable from minority stockholder.................. 620,310
-----------
$ 7,990,000
===========
</TABLE>
The goodwill resulting from the above acquisition is being amortized over
25 years. Unaudited pro forma results of operations for the year ended December
31, 1996, including the pro forma effects of discontinued operations, as if the
acquisition had occurred at January 1, 1996 are as follows:
<TABLE>
<CAPTION>
CONTINUING DISCONTINUED
OPERATIONS OPERATIONS TOTAL
----------- ------------ -----------
(Unaudited)
<S> <C> <C> <C>
Net sales.......................... $35,830,194 $61,434,304 $97,264,498
Income before income taxes......... 51,174 1,755,538 1,806,712
Net income......................... 28,316 739,416 767,732
Basic earnings per share........... $ .01 $ .13 $ .14
Diluted earnings per share......... .01 .12 .13
</TABLE>
F-11
<PAGE> 43
CONNECTIVITY TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The above pro forma information does not purport to represent the Company's
results of operations that would have been attained had the above acquisition in
fact occurred at the beginning of the period indicated or to project the
Company's results for any future period.
In connection with the acquisition, CTI granted the CPI minority
stockholders (Stockholders) the option to require CTI to purchase (put) their
remaining common stock of CPI, and each Stockholder granted CTI the option to
purchase (call) the remaining outstanding stock. The put and call purchase price
is based on a formula which is tied to the market value of CTI's common stock at
the date of sale. These options are exercisable on November 30, 2000, May 31,
2001 and November 30, 2001 in an amount on each option date equal to one-third
of the outstanding stock (on a cumulative basis). There are limitations on the
Stockholders' ability to sell their common stock.
Immediately prior to CTI's stock acquisition, CPI redeemed, on a pro rata
basis, 1,274 shares of its common stock for $7.6 million in cash, a $6 million
subordinated note, $3 million subordinated contingent notes and forgiveness of
$2 million of stockholder notes.
Payment under the subordinated contingent note was payable in the event the
Company met an earnings related threshold for the two years ended December 31,
1997. The agreed-upon threshold has not been attained. Accordingly, no payments
are required to be made by the Company pursuant to these subordinated contingent
note agreements.
4. DISCONTINUED OPERATIONS
On June 4, 1997, the Board of Directors authorized the Company to pursue
the potential sale of its Energy Electric Cable division. Effective June 30,
1997, CPI sold substantially all of the assets and liabilities of EEC to Anicom
for consideration consisting of $27 million in cash and 190,476 shares of Anicom
stock, valued at $2 million. Under the terms of the sale, the Anicom stock is to
be held in escrow until July 11, 1998. As discussed in Note 2, concurrent with
the EEC disposition, the Company entered into a five year supply agreement with
Anicom.
EEC represented a separate line of business and, accordingly, the net
operating results of its operations have been reported, net of applicable income
taxes, as discontinued operations for all periods presented. The Company
allocated approximately $283,000 and $600,000 of interest expense in determining
income from discontinued operations for the years ended December 31, 1997 and
1996, respectively. Interest expense was allocated based on the proportionate
share of EEC's net assets to the total net assets and consolidated debt of the
Company. The Company recorded a gain in 1997, net of applicable income taxes, of
$5.1 million on the sale of EEC.
Summarized financial information for EEC is as follows:
<TABLE>
<CAPTION>
1997(1) 1996(2)
----------- -----------
(Unaudited)
<S> <C> <C>
Net sales....................................... $34,631,928 $36,378,959
Income, net of income taxes..................... 292,132 633,193
</TABLE>
- ---------------
(1) Includes activity from January 1, 1997 through June 30, 1997 (date of
disposition).
(2) Includes activity from May 31, 1996 (date of acquisition) through
December 31, 1996.
F-12
<PAGE> 44
CONNECTIVITY TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. ASSETS HELD FOR SALE
In February 1998, the Board of Directors authorized the Company to pursue
the potential sale of its Energy Electric Assembly division. Accordingly, the
Company has presented the net assets of this division as "assets held for sale"
which have been classified as current and noncurrent. The components of assets
held for sale as of December 31, 1997 are as follows:
<TABLE>
<S> <C>
Current assets:
Cash................................................... $ 85,739
Accounts receivable, less allowances of $153,000....... 3,128,890
Inventories:
Raw material...................................... 2,791,671
Work-in-process................................... 16,524
-----------
2,808,195
Prepaid expenses and other assets...................... 33,696
-----------
Total current assets held for sale........... 6,056,520
Noncurrent assets:
Property, plant and equipment:
Machinery and equipment........................... 293,635
Office equipment.................................. 255,036
Leasehold improvements............................ 17,376
-----------
566,047
Less accumulated depreciation and amortization.............. 105,896
-----------
Net property, plant and equipment........................... 460,151
Deposits and other assets................................... 15,630
Goodwill.......................................... 3,547,157
-----------
Total noncurrent assets held for sale........ 4,022,938
-----------
Total assets held for sale................... $10,079,458
===========
</TABLE>
6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following components at
December 31, 1997:
<TABLE>
<S> <C>
Machinery and equipment..................................... $7,394,463
Transportation equipment.................................... 94,821
Office equipment............................................ 113,119
Leasehold improvements...................................... 411,664
Capital lease............................................... 46,657
----------
8,060,724
Less accumulated depreciation and amortization.... 1,467,557
----------
$6,593,167
==========
</TABLE>
Depreciation expense approximated $1,175,000 (including approximately
$118,000 related to discontinued operations) and $645,000 (including
approximately $126,000 related to discontinued operations), respectively, for
the years ended December 31, 1997 and 1996.
F-13
<PAGE> 45
CONNECTIVITY TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. MARKETABLE SECURITIES
The following is a summary of available-for-sale marketable securities at
December 31, 1997:
<TABLE>
<CAPTION>
AVAILABLE-FOR-SALE MARKETABLE SECURITIES
----------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Investment in Anicom, Inc................. $2,000,000 $1,029,046 $ -- $3,029,046
U.S. Treasury Bills -- due in April
1998.................................... 97,966 -- -- 97,966
---------- ---------- ---------- ----------
$2,097,966 $1,029,046 $ -- $3,127,012
========== ========== ========== ==========
</TABLE>
There were no realized gains or losses on available-for-sale securities in
1997 or 1996.
8. INVENTORIES
Inventory consists of the following components at December 31, 1997:
<TABLE>
<S> <C>
Raw materials............................................... $ 971,596
Work-in-process............................................. 320,101
Finished goods.............................................. 1,031,023
----------
$2,322,720
==========
</TABLE>
9. INTANGIBLE ASSETS
Intangible assets consist of the following components at December 31, 1997:
<TABLE>
<S> <C>
Goodwill.................................................... $6,926,849
Non compete covenant........................................ 150,000
----------
7,076,849
Less accumulated amortization................ 561,941
----------
Net intangible assets....................................... $6,514,908
==========
</TABLE>
10. LEASES
CTI leases its facilities and certain shop equipment, vehicles and office
equipment under various operating leases which expire on various dates through
2004. Management expects that in the normal course of business, leases that
expire will be renewed or replaced by other leases.
Future minimum commitments under operating leases with non-cancelable terms
of one or more years are as follows at December 31, 1997:
<TABLE>
<S> <C>
1998........................................................ $ 804,381
1999........................................................ 808,924
2000........................................................ 577,634
2001........................................................ 430,086
2002........................................................ 330,798
Thereafter.................................................. 387,611
----------
$3,339,434
==========
</TABLE>
Rent expense amounted to approximately $1,200,000 (including approximately
$403,000 related to discontinued operations) and $1,181,000 (including
approximately $496,000 related to discontinued operations) for the years ended
December 31, 1997 and 1996, respectively.
F-14
<PAGE> 46
CONNECTIVITY TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. DEBT, IN DEFAULT
Debt consists of the following components:
<TABLE>
<S> <C>
Revolving credit and term loan facility, in default......... $12,300,000
Subordinated notes, in default.............................. 6,000,000
-----------
$18,300,000
===========
</TABLE>
REVOLVING CREDIT FACILITY AND TERM LOAN AGREEMENT
1998 Transactions
On June 2, 1998, the Company amended its revolving credit and term loan
facility (the Amended Revolver). Under the terms of the Amended Revolver, all
amounts then outstanding under the Revolver (as described below) became an
amount outstanding under the Amended Revolver and the maximum available
borrowings were reduced from $30 million to $20 million, but availability could
be further limited. Availability under the Amended Revolver is based on a
percentage of eligible accounts receivable, inventory, the value of the Anicom
stock and equipment. The Amended Revolver matures in July 1998. Interest charged
by the Amended Revolver is payable quarterly at the base rate (defined as the
higher of (a) the bank's prime rate or (b) 1/2 percent above the Federal Funds
Rate) plus 1.00%. Accordingly, the base rate approximated 8.5% at December 31,
1997. Under the Amended Revolver, financial covenants consist of minimum EBITDA
and a limit on capital expenditures.
Description of Revolver at December 31, 1997
Through December 31, 1997, the Company had a $30 million revolving credit
and term loan facility (the Revolver) which consisted of a $12 million revolving
credit facility, a $12 million term loan and a $6 million line of credit and was
scheduled to mature on May 31, 2002. Maximum borrowings available under the
Revolver were limited to $30 million, but availability under the facility could
be further limited. The amount of availability is determined via reference to
specified percentages of eligible inventory, accounts receivable and EBITDA. At
December 31, 1997, the Company had received approximately $8 million of advances
that exceeded the advances allowable per the formula provided for in the
Revolver.
Amounts advanced under the revolving portion of the Revolver totaled
$600,000 at December 31, 1997 and were based on a percentage of eligible
inventory and accounts receivable (subject to the overall limitation as
described above).
Amounts advanced under the term loan totaled $11,700,000 at December 31,
1997. The term loan was due in quarterly installments of $150,000 to $1,800,000
through May 31, 2002 (see terms of the Amended Revolver above).
The line of credit was to be used for qualified capital expenditures and
acquisitions. Advances under the line of credit were due to mature on May 31,
1998. No amounts were outstanding under the line of credit at December 31, 1997.
Interest under the credit facility is payable at various dates and accrues
interest based on various LIBOR rates (5.94% at December 31, 1997) plus 2.25%.
In addition, the Company is subject to commitment fees ranging from .375% to
.5%. Borrowings under the Revolver are collateralized by substantially all the
assets of the Company.
The Revolver contains various covenants related to, among other items,
maintenance of minimum consolidated net worth, maintenance of a maximum ratio of
senior debt (and total debt) to EBITDA (as defined) and maintenance of minimum
interest and fixed charges coverage ratios (as defined), as well as covenants
restricting CPI's ability to make capital expenditures in excess of stated
amounts, incur indebted-
F-15
<PAGE> 47
CONNECTIVITY TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ness, pay dividends on or purchase, redeem or otherwise acquire its capital
stock, or, in certain cases, merge or purchase assets or stock of another entity
(see terms of the Amended Revolver above).
SUBORDINATED NOTES
The subordinated notes payable resulted from the redemption of stock in
connection with the acquisition of CPI (see Note 3). Interest accrues at a rate
of 10 percent per annum and is payable quarterly; principal is due on May 31,
2003. In order to facilitate the amendment to the Revolver, the subordinated
note holders have waived their rights to receive scheduled interest or principal
payments until the earlier of (i) the sale of the EEA division resulting in net
cash proceeds of at least $10 million or (ii) the date on which the overadvance
amount described above is equal to zero. The subordinated notes contain
covenants similar to those contained in the revolving credit facility.
Accordingly, the Company has violated these covenants as well.
CLASSIFICATION
At December 31, 1997, the Company had violated covenants included in all of
its debt arrangements and in June 1998 the Revolver was amended whereby amounts
outstanding under the Amended Revolver are due in July 1998. Accordingly, the
Company has classified all of its debt as current.
DEFERRED DEBT ISSUANCE COSTS
The Company has deemed the unamortized value of the deferred debt issuance
costs at December 31, 1997 (approximately $460,000) to be impaired as a result
of the accelerated maturity date provided for in the amended Revolver and has
reduced the carrying amount of such costs to zero.
12. INCOME TAXES
The components of the provision for income taxes from continuing and
discontinued operations are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------
CONTINUING OPERATIONS: 1997 1996
---------------------- ----------- -----------
<S> <C> <C>
Current:
Federal.............................................. $(1,210,916) $ --
State................................................ (284,243) (39,725)
----------- -----------
(1,495,159) (39,725)
Deferred:
Federal.............................................. 9,488,583 53,715
State................................................ -- --
----------- -----------
9,488,583 53,715
----------- -----------
Total income taxes - continuing operations................ 7,993,424 13,990
DISCONTINUED OPERATIONS:
Current:
Federal.............................................. 3,574,116 -
State................................................ 1,386,098 214,725
----------- -----------
4,960,214 214,725
</TABLE>
F-16
<PAGE> 48
CONNECTIVITY TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------
1997 1996
----------- -----------
<S> <C> <C>
Deferred:
Federal.............................................. 1,633,050 405,537
State................................................ -- --
----------- -----------
1,633,050 405,537
----------- -----------
Total income taxes -- discontinued operations............. 6,593,264 620,262
----------- -----------
Total Income Taxes........................................ $14,586,688 $ 634,252
=========== ===========
</TABLE>
Significant components of the Company's deferred tax liabilities and assets
as of December 31, 1997 are as follows:
<TABLE>
<S> <C>
Deferred tax liabilities:
Depreciation........................................... $ (832,842)
Unrealized gains on marketable securities.............. (411,001)
-----------
Total deferred tax liabilities.............................. (1,243,843)
Deferred tax assets:
Accounts receivable reserves........................... 111,033
Inventory reserves..................................... 176,700
Accrued expenses....................................... 875,653
Net operating loss carryforwards....................... 28,039,336
Tax credit carryforwards............................... 1,410,747
-----------
Total deferred tax assets................................... 30,613,469
Valuation allowance......................................... (29,369,626)
-----------
Net deferred tax assets..................................... 1,243,843
-----------
Net deferred tax balance.................................... $ --
===========
</TABLE>
Management is unable to conclude it is more likely than not the Company
will realize its net deferred tax assets. Accordingly, the valuation allowance
increased by approximately $9.9 million in 1997, due primarily to changes in
judgment about future years operating results. This charge has been reflected in
income from continuing operations.
A reconciliation of the provision for income taxes for continuing
operations to the amount computed using the federal statutory tax rate consists
of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------
1997 1996
----------- ---------
<S> <C> <C>
Loss from continuing operations before income taxes........ $(6,450,770) $(260,043)
Tax benefit at statutory rate of 34%....................... $(2,193,262) $ (88,414)
State income tax benefit, net of federal benefit........... (316,436) (26,219)
Effect of permanent differences............................ 148,257 128,623
Increase in valuation allowance............................ 9,904,554 --
Expiration of tax credits.................................. 589,253 --
Other...................................................... (138,942) --
----------- ---------
Provision for income taxes................................. $ 7,993,424 $ 13,990
=========== =========
</TABLE>
At December 31, 1997, the Company has available approximately $82 million
of net operating loss carryforwards and $1.4 million of tax credit carryforwards
for federal tax purposes. Except as described below, these carryforwards may be
used to offset future taxes on income, if any, and expire beginning in 1998
through 2010.
F-17
<PAGE> 49
CONNECTIVITY TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Should an ownership change of the Company occur, as defined under
section 382 of the Internal Revenue Code (IRC), the Company could lose the
ability to utilize some or all of these net operating loss carryforwards and tax
credit carryforwards. The Company has determined that an ownership change has
not occurred through December 31, 1997.
The use of the Company's net operating losses is further limited by
section 384 of the IRC. At the time of the acquisition of CPI by the Company,
the fair value of the CPI assets acquired exceeded the associated tax basis.
(This difference is referred to as "built-in-gain"). Net operating loss
carryforwards currently may not be used to offset the portion of any gain that
may be recognized upon the sale of CPI assets that was "built-in" at the date of
acquisition.
In this connection, net operating loss carryforwards were not available to
offset the "built-in-gain" portion ($6.2 million) of the gain recognized on the
1997 sale of its EEC division assets (see Note 4). Additionally, the Company has
decided to pursue the sale of its EEA division assets (see Note 5). The
"built-in-gain" associated with EEA's assets is approximately $7.2 million.
To the extent the Company is able to utilize net operating loss and tax
credit carryforwards subsequent to December 31, 1997, the first $9.9 million of
such amount recognized will be credited to operations and the recognition of any
further amounts will be recorded with an offsetting reduction to goodwill.
13. STOCKHOLDERS' EQUITY
OPTIONS
The Company's stock incentive plans allow for the issuance of options to
officers, directors, employees and consultants of CTI for the purchase of up to
1,275,000 shares of common stock. All options granted have an exercise price
equal to 100 percent of the fair market value of the Company's common stock at
the date of grant and vest over 2 to 5 years. No options are exercisable at
December 31, 1997. Options granted expire 10 years after the date of the grant
and the weighted average life of options outstanding at December 31, 1997 is 8.7
years. The Board of Directors may also issue nonqualified stock options with the
exercise price and terms determined at the date of the grant.
The following is a summary of stock option activity (restated for the
1-for-4 reverse stock split):
<TABLE>
<CAPTION>
1997 1996
--------------------- ---------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
NUMBER OF EXERCISE NUMBER OF EXERCISE
OPTIONS PRICE OPTIONS PRICE
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Outstanding -- beginning of year.................. 787,898 $6.79 406,250 $2.87
Granted...................................... 345,062 3.67 544,148 8.25
Exercised.................................... -- -- (162,500) 1.89
Forfeited or canceled........................ (271,953) 8.32 -- --
-------- ----- -------- -----
Outstanding -- end of year........................ 861,007 $5.05 787,898 $6.79
======== ===== ======== =====
</TABLE>
<TABLE>
<CAPTION>
RANGE OF EXERCISE PRICES
------------------------------
$2.88 - $4.25 $7.75 - $8.64
------------- -------------
<S> <C> <C>
OPTIONS OUTSTANDING:
Number outstanding at December 31, 1997..................... 588,812 272,195
Weighted-average remaining contractual life (years)......... 8.9 8.4
Weighted-average exercise price............................. $3.61 $8.18
</TABLE>
At December 31, 1997, 201,493 options were available for issuance under the
Company's stock incentive plans.
F-18
<PAGE> 50
CONNECTIVITY TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In July 1997, the Board approved the cancellation of 136,312 options with
exercise prices ranging from $8.12 - $8.64 per common share and the issuance of
136,312 new options at $3.59 per common share (which represented the then fair
market value of the Company's common stock at the date of re-issuance). In
addition, in July 1997, the Board approved the repricing of 65,750 options with
exercise prices ranging from $8.12 - $8.64 per common share to $3.59 per common
share (which represented the then fair market value of the Company's common
stock at the date of repricing).
WARRANTS
The Company has issued to certain current and former members of its Board
of Directors, officers and consultants to the Company, warrants to purchase
shares of its common stock. The exercise price of the warrants is equal to the
fair value of Company's common stock at the date of the grant. No warrants are
exercisable at December 31, 1997. Warrants granted expire 10 years after the
date of grant and the weighted average contractual life of the warrants
outstanding at December 31, 1997 is 7.9 years. A summary of activities related
to the warrants follows (restated for the 1-for-4 reverse stock split):
<TABLE>
<CAPTION>
1997 1996
-------------------------- -------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
NUMBER OF EXERCISE NUMBER OF EXERCISE
WARRANTS PRICE WARRANTS PRICE
--------- -------------- --------- -------------
<S> <C> <C> <C> <C>
Outstanding--beginning of year............... 451,250 $4.17 470,000 $3.54
Granted................................. - - 62,500 8.12
Exercised............................... - - (81,250) 3.57
------- -------------- ------- -------------
Outstanding--end of year..................... 451,250 $4.17 451,250 $4.17
======= ============== ======= =============
Price range per share of outstanding
warrants................................... $3.54 - $8.12 $3.54 - $8.12
------- -------------- -------------
</TABLE>
FAS 123 DISCLOSURES
As required by FASB Statement No. 123, Accounting for Stock-Based
Compensation (FAS 123), the Company has estimated the weighted average fair
values per share of options and warrants granted, during the years ended
December 31, 1997 and 1996 to be $2.25 and $3.75, respectively. The fair values
of options and warrants granted were estimated using the Black-Scholes model
with the following assumptions:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Expected life (years)....................................... 8 8
Expected stock price volatility............................. 50% 50%
Risk-free interest rate..................................... 6.06% 6.52%
</TABLE>
The Company has never declared nor paid dividends on any of its capital
stock and does not expect to do so in the foreseeable future.
Had compensation expense for the Company's stock-based plans been accounted
for using the fair value method prescribed by FAS 123, net loss and net loss per
share would have been as follows:
<TABLE>
<CAPTION>
1997 1996
------------ ---------
<S> <C> <C>
Pro forma net loss................................ $(10,021,911) $(481,153)
Pro forma net loss per share...................... $ (1.80) $ (0.08)
</TABLE>
The effects of applying FAS 123 in the above pro forma disclosures are not
indicative of future pro forma disclosures.
F-19
<PAGE> 51
CONNECTIVITY TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
COMMON STOCK RESERVED
At December 31, 1997, the Company has reserved 1,513,750 shares of common
stock for issuance upon the exercise of all outstanding warrants and options
authorized but unexercised under the Company's stock option plans.
14. EMPLOYMENT AND NONCOMPETE AGREEMENTS
In connection with the stock acquisition of CPI by CTI, the Company entered
into three-year employment agreements with four of the stockholders which are
automatically renewed on an annual basis thereafter unless the stockholder's
employment has been terminated. Under the terms of the agreements, each
stockholder is to be paid a base salary of $175,000 per year plus an annual
bonus (subject to a maximum amount equal to the base salary) equal to 5 percent
of the amount by which adjusted bonus EBITDA (as defined in the employment
agreements) exceeds adjusted bonus EBITDA for the prior year. All pay and
benefits under the agreements shall cease upon voluntary termination or
termination for cause.
The adjusted bonus EBITDA threshold has not been attained. Accordingly, no
payments are required to be made by the Company pursuant to the annual bonus
provision of the employment agreements.
During 1997, one of the stockholders agreed to reduce his base salary to
$95,000 per year and two other of the stockholders terminated their employment.
The employment agreements call for salary and benefit continuation in the
event that the individual is unable to perform his duties by reason of illness
or incapacity. In connection with the employment agreements, the stockholders
have agreed not to compete with the Company through the later of May 31, 2001,
or the second anniversary date that the employee ceases to be an employee of the
Company.
15. RELATED PARTY TRANSACTIONS
On November 8, 1995, Beverly Hills Bancorp sold to Hudson River Capital LLC
("Hudson River," formerly Victory Capital LLC), its holdings of CTI shares owned
directly and indirectly (1,185,000 shares) for $3.60 per share. Hudson River
also purchased, or agreed to purchase, certain shares of CTI owned by Albert M.
Zlotnick (432,750 shares) and Michael S. Berlin (62,062 shares) at $3.60 per
share. CTI retained Albert M. Zlotnick as a consultant for a period of two years
beginning December 1, 1995, at a rate of $15,000 per month. As of December 31,
1996, the Company has expensed and accrued for all 1997 consulting fees for
Albert M. Zlotnick.
As a result of this and other transactions, Hudson River and its affiliates
hold approximately 33 percent of the outstanding common stock of the Company
The Company rented office space from and made certain support personnel
payments to a related company on a month-to-month basis. Total payments were
$144,732 and $248,112 in 1997 and 1996, respectively. In addition, from January
1, 1996 to June 30, 1996, the Company rented additional space and made certain
support personnel payments to Hudson River on a month-to-month basis at a
monthly cost of $12,917.
The Company incurred approximately $503,000 and $500,000 for legal services
rendered in 1997 and 1996, respectively, by a law firm from which one of its
partners is a director of CTI. At December 31, 1997, approximately $290,000 was
payable to this law firm and is included in accrued liabilities.
During 1996, CPI acquired for $629,182 an option to acquire 100 percent of
the capital stock of Signal Sales Corp. (a company owned by a minority
stockholder of CPI). The amount paid for the option was capitalized by the
Company as goodwill. This goodwill pertained to the Company's EEC division (see
Note 4).
F-20
<PAGE> 52
CONNECTIVITY TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
During 1997, the Company purchased equipment for $105,000 from two of its
employees.
In July 1997, as a bonus for assisting the Company to dispose of its EEC
division, the Board of Directors voted to forgive the debt of two employees.
Total forgiveness of debt, including imputed interest, amounted to approximately
$760,000 and was netted against the gain from the sale of EEC (see Note 4).
16. CONTINGENCIES
The Company is subject to various legal proceedings and claims that arise
in the ordinary course of business. In the opinion of management, such
proceedings will not, individually or in the aggregate, have a material adverse
impact on the Company's financial position.
17. EMPLOYEE BENEFIT PLAN
The Company has a defined contribution plan which covers substantially all
employees of the Company. The Company may make discretionary contributions to
the plan. Employees may voluntarily contribute up to 15% of their compensation
as allowable under section 401(k) of the Internal Revenue Code of 1974. The
Company made discretionary contributions of approximately $35,000 and $33,000,
respectively, to the plan for the years ended December 31, 1997 and 1996.
18. FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments:
Cash, Marketable Securities, Accounts Receivable, Accounts Payable,
Revolving Credit and Term Loan: The carrying amounts reported in the balance
sheet approximate fair value.
Subordinated Note: It is not practicable to estimate the fair value of the
subordinated note because comparable market information is not available.
Interest Rate Swap: The fair value of the interest rate swap was obtained
from dealer quotes. The fair value represents the amount the Company would
receive or pay to terminate the agreement taking into consideration current
interest rates.
INTEREST RATE SWAP
In December 1996, CPI entered into an interest rate swap agreement with the
lending banks to eliminate the impact of changes in interest rates on a portion
of its bank borrowings. Under the terms of the agreement (which expires in
December 1999), CPI will receive (or remit) on a quarterly basis the difference
between interest computed at a fixed rate of 5.98% on a notional principal
amount of $7.5 million (reduced to $5 million in December 1998) and interest
computed at various LIBOR rates, as established under the bank borrowing
agreement. The net cash amounts paid or received on the agreements are accrued
and recognized as an adjustment to interest expense.
While the Company is exposed to credit loss for the periodic settlement of
amounts due under the agreement in the event of nonperformance by the
counter-party, the Company does not anticipate nonperformance by this party.
The fair value of this agreement representing the estimated amount that the
Company would pay a third party assuming the Company's obligations under the
interest rate agreement ceased at December 31, 1997, is approximately $12,500.
F-21
<PAGE> 53
CONNECTIVITY TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
19. SUBSEQUENT EVENT
On June 30, 1998, four stockholders of the Company assigned all of their
rights, title and interest in their subordinated notes (approximately $3.4
million), outstanding common stock of CPI (64 shares, representing 8% of the
total outstanding common stock of CPI) and outstanding stock options of CTI
(114,705 options), to CPI and CTI.
Since the Company is not currently aware of any matter for which it would
assert a claim against these stockholders, the Company, in exchange for the
consideration received, has agreed to not assert any claims concerning any
matters against these stockholders.
The finalization of this agreement is contingent upon consents from other
third parties that are expected to be received by the Company in July 1998.
20. FOURTH QUARTER ADJUSTMENTS (UNAUDITED)
In the fourth quarter of 1997, the Company recorded several significant
adjustments as follows:
Pre-tax adjustments increasing net loss from continuing operations:
<TABLE>
<S> <C>
Deferred tax valuation allowance increase................... $(9,905,000)
Inventory adjustments....................................... (2,340,000)
Accrued expenses increases.................................. (1,345,000)
Accounts receivable adjustments............................. (649,000)
Other....................................................... (208,000)
Pre-tax adjustment increasing income from discontinued
operations:
Increase to gain on sale of EEC............................. $ 3,483,000
</TABLE>
The Company is in the process of determining the effects of all significant
fourth quarter adjustments on previously reported 1997 quarterly information.
In addition, certain amounts previously reported in each of the three
quarters ended September 30, 1997 reflected an inappropriate classification of
net sales between continuing operations and discontinued operations. These
amounts represent reclassifications only and have no impact on quarterly net
income as previously reported.
Upon the completion of the aforementioned analysis, the Company likely will
amend prior interim financial information reported in one or more of the three
quarters ended September 30, 1997.
F-22
<PAGE> 54
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
Date: July 9, 1998 CONNECTIVITY TECHNOLOGIES INC.
By: /s/ JAMES M. HOPKINS
------------------------------------
JAMES M. HOPKINS
Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the Registrant and in the capacities and on
the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ JAMES M. HOPKINS President, Chief Executive Officer and July 9, 1998
- ------------------------------------------ Director
JAMES M. HOPKINS
/s/ RAMON D. ARDIZZONE Director July 9, 1998
- ------------------------------------------
RAMON D. ARDIZZONE
/s/ CLARKE H. BAILEY Director July 9, 1998
- ------------------------------------------
CLARKE H. BAILEY
/s/ DAVID R. FLOWERS Director July 9, 1998
- ------------------------------------------
DAVID R. FLOWERS
/s/ HERBERT M. FRIEDMAN Director July 9, 1998
- ------------------------------------------
HERBERT M. FRIEDMAN
/s/ STEPHEN P. KELBLEY Director July 9, 1998
- ------------------------------------------
STEPHEN P. KELBLEY
/s/ GEORGE H. BUCKHAM Controller (Principal Accounting Officer) July 9, 1998
- ------------------------------------------
GEORGE H. BUCKHAM
</TABLE>
S-1
<PAGE> 55
INDEX OF EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<S> <C>
23(a) Consent of Ernst & Young LLP.
27.1 Financial Data Schedule.
</TABLE>
<PAGE> 1
Exhibit 23(a)
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-8 Nos. 333-02655 and 33-65384) of Connectivity Technologies Inc. of our
report dated June 5, 1998 (except Note 19 as to which the date is June 30,
1998), with respect to the consolidated financial statements of Connectivity
Technologies Inc. included in this Annual Report (Form 10-KSB) for the year
ended December 31, 1997.
ERNST & YOUNG LLP
Boston, Massachusetts
July 6, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<CASH> 160,104
<SECURITIES> 3,127,012
<RECEIVABLES> 6,002,821
<ALLOWANCES> 0
<INVENTORY> 2,322,720
<CURRENT-ASSETS> 17,859,464
<PP&E> 6,593,167
<DEPRECIATION> 0
<TOTAL-ASSETS> 35,085,582
<CURRENT-LIABILITIES> 30,544,552
<BONDS> 0
0
0
<COMMON> 230,874
<OTHER-SE> 4,310,156
<TOTAL-LIABILITY-AND-EQUITY> 35,085,582
<SALES> 41,707,988
<TOTAL-REVENUES> 41,707,988
<CGS> 35,393,009
<TOTAL-COSTS> 35,393,009
<OTHER-EXPENSES> 10,441,178
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,395,038
<INCOME-PRETAX> (6,450,770)
<INCOME-TAX> 7,993,424
<INCOME-CONTINUING> (14,444,194)
<DISCONTINUED> 5,348,687
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,095,507)
<EPS-PRIMARY> (1.64)
<EPS-DILUTED> (1.64)
</TABLE>
