<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES AND EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
EXCHANGE ACT
For the transition period from
COMMISSION FILE NUMBER: 0-12113
CONNECTIVITY TECHNOLOGIES INC.
--------------------------------------------------
(Exact name of issuer as specified in its charter)
DELAWARE 94-2691724
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
680 MECHANIC STREET, LEOMINSTER, MA 01453
-----------------------------------------
(Address of principal executive offices)
(978) 537-9138
---------------------------
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
State the number of shares outstanding of each of the issuer's classes of common
equity as of the latest practicable date: 5,565,256 shares of Common Stock, par
value. $.04 per share, outstanding as of November 1, 1998.
<PAGE> 2
CONNECTIVITY TECHNOLOGIES INC.
INDEX
Page No.
PART I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Balance Sheets
as of September 30, 1998 and December 31, 1997 .............. 3
Condensed Consolidated Statement of Operations
for the Three and Nine Months Ended September 30, 1998 ...... 4
Condensed Consolidated Statement of Cash Flows
for the Nine Months Ended September 30, 1998 ................ 5
Notes to Condensed Consolidated Financial Statements ......... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ......................... 10
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K ............................. 14
<PAGE> 3
CONNECTIVITY TECHNOLOGIES INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
ASSETS SEPTEMBER 30,1998 DECEMBER 31, 1997
----------------- -----------------
<S> <C> <C>
CURRENT ASSETS
Cash $ 1,666,768 $ 245,843
Marketable securities 87,750 3,127,012
Accounts receivable:
Trade, net 5,108,085 5,883,728
Other 60,397 119,093
Inventories, net 2,834,518 2,322,720
Prepaid expenses and other current assets 110,478 190,287
Current assets held for sale, net 3,586,173 5,171,851
------------- -------------
Total current assets 13,454,169 17,060,534
Property, plant and equipment, net 6,582,451 6,593,167
Deposits and other noncurrent assets 175,312 95,105
Goodwill and intangible assets, net 6,284,628 6,514,908
Noncurrent assets held for sale 3,982,811 4,022,938
------------- -------------
Total assets $ 30,479,371 $ 34,286,652
============= =============
LIABILITIES
CURRENT LIABILITIES
Long term debt, in default $ 16,556,339 $ 12,300,000
Subordinated notes, in default 882,600 6,000,000
Trade accounts payable 3,138,319 4,492,397
Accrued compensation and commissions 426,967 295,996
Federal and state income taxes payable 1,021,197 3,356,314
Accrued liabilities 851,688 3,300,915
------------- -------------
Total current liabilities 22,877,110 29,745,622
STOCKHOLDERS' EQUITY
Preferred stock - par value $.01 per share;
authorized 10,000,000 shares, none issued
Series B Common Stock - par value $.04 per share;
authorized 750,000 shares, none issued
Common Stock - par value $.04; authorized 20,000,000
shares, outstanding 5,565,256 shares 230,874 230,874
Additional paid-in capital 109,336,244 109,336,244
Accumulated deficit (101,879,840) (105,635,869)
Less 206,601 shares held in treasury, at cost (8,264) (8,264)
Unrealized gain (loss) on investments, net of income tax (76,753) 618,045
------------- -------------
Total stockholders' equity 7,602,261 4,541,030
------------- -------------
Total liabilities and stockholders' equity $ 30,479,371 $ 34,286,652
============= =============
</TABLE>
See Accompanying Notes to Condensed Consolidated Financial Statements
3
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CONNECTIVITY TECHNOLOGIES INC.
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30,1998 SEPTEMBER 30,1998
----------------- ------------------
<S> <C> <C>
Net sales $35,101,110 $10,491,175
Cost of goods sold 28,265,731 8,812,455
----------- -----------
Gross profit 6,835,379 1,678,720
Selling, general and administrative expenses 6,589,907 2,244,735
----------- -----------
Operating income (loss) 245,472 (566,015)
Other income (expense):
Interest income 2,065 756
Gain on sale of investments 462,786 462,786
Interest expense (1,524,325) (550,612)
Other 61,340 23,268
----------- -----------
Loss from continuing operations before income taxes (752,662) (629,817)
Income taxes 400,500 357,200
----------- -----------
Loss from continuing operations (1,153,162) (987,017)
Discontinued operations:
Gain on sale, net of income taxes 38,151
----------- -----------
Income (loss) before extraordinary income (1,115,011) (987,017)
Extraordinary income recognized on settlement of
subordinated debt, less income taxes of $481,800 4,871,040 4,871,040
----------- -----------
Net income $ 3,756,029 $ 3,884,023
=========== ===========
Basic and diluted income (loss) per share
Continuing operations $ (0.21) $ (0.18)
Discontinued operations 0.01 0.00
Extraordinary income 0.88 0.88
----------- -----------
Net income $ 0.68 $ 0.70
=========== ===========
Weighted average shares outstanding 5,565,256 5,565,256
</TABLE>
See Accompanying Notes to Condensed Consolidated Financial Statements
4
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CONNECTIVITY TECHNOLOGIES INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, 1998
<S> <C>
OPERATING ACTIVITIES
Loss from continuing operations $(1,153,162)
Adjustments to reconcile loss from continuing operations to
cash used for operating activities:
Gain on sale of investments (462,786)
Deferred income taxes 383,000
Depreciation and amortization 1,235,334
Changes in assets and liabilities:
Accounts receivable, net 834,339
Inventories, net (511,798)
Prepaid expenses, deposits and other assets (398)
Current assets held for sale, net 1,585,678
Trade accounts payable (1,354,078)
Federal and state income taxes payable (2,816,910)
Accrued liabilities (2,280,111)
-----------
Net cash used for operating activities (4,540,892)
-----------
INVESTING ACTIVITIES
Purchases of property, plant and equipment (795,586)
Proceeds from sale of investments 2,424,249
Purchases of property, plant and equipment, held for sale (158,625)
-----------
Net cash provided by investing activities 1,470,038
-----------
FINANCING ACTIVITIES
Proceeds from long-term borrowings 4,256,339
Repayment of subordinated debt (350,000)
Settlement of subordinated debt 585,440
-----------
Net cash provided by financing activities 4,491,779
-----------
Net increase in cash 1,420,925
Cash at beginning of period 245,843
-----------
Cash at end of period $ 1,666,768
===========
</TABLE>
See Accompanying Notes to Condensed Consolidated Financial Statements
5
<PAGE> 6
CONNECTIVITY TECHNOLOGIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(UNAUDITED)
Note 1 - Condensed Consolidated Financial Statements
The Condensed Consolidated Financial Statements included herein have
been prepared by Connectivity Technologies Inc. ("CTI" or the "Company") without
audit, pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations, although the Company believes the disclosures which are made are
adequate to make the information presented not misleading. Further, the
Condensed Consolidated Financial Statements have been prepared in accordance
with generally accepted accounting principles for interim financial information,
the instructions to Form 10-Q and Regulation S-K and reflect, in the opinion of
management, all adjustments of a normal recurring nature necessary to present
fairly the financial position and results of operations as of and for the
periods indicated.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
These Condensed Consolidated Financial Statements should be read in
conjunction with the Consolidated Financial Statements and the Notes thereto
included in CTI's Annual Report on Form 10-KSB for the year ended December 31,
1997.
The accompanying condensed 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 loss from continuing
operations in 1997 and has a working capital deficiency. Also, as further
described in Note 4, the Company has negotiated an amendment to its revolving
credit and term loan facility, under which, among other things, all amounts
outstanding are to become due on November 30, 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 or other assets, although
previously announced discussions with a prospective buyer have terminated (see
note 6). 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. Conversations looking to the possible
extension of the previously reported forbearance agreement with the Company's
lenders are now in progress and the Company believes on the basis of preliminary
discussions that an extension beyond the current November 30, 1998 expiration
date will be granted, but the banks have made no commitment and no assurances of
an extension can be given. In addition, the Company has recently formed a new
management team and is currently making changes in 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 following the sale of EEA, 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.
6
<PAGE> 7
There can be no assurance that management will be successful in its
efforts to sell the EEA division or any other assets at a price acceptable to
the Board of Directors. Further, there can be no assurance that management will
be successful in its efforts to extend its forbearance agreement or 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 condensed
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.
Note 2 - Comparative 1997 Financial Statements
The accompanying condensed consolidated statements of income and cash
flows do not include comparative information for the corresponding periods of
the preceding year. The Company disclosed in its annual report on Form 10-KSB
for the year ended December 31, 1997, that several significant adjustments,
increasing the 1997 loss from continuing operations by approximately $14,447,000
and increasing the gain on sale of discontinued operations by approximately
$3,483,000, were recorded during the fourth quarter of 1997. The Company is in
the process of estimating the effect of these adjustments on previously reported
results of operations for each quarter of 1997. When its analysis is complete,
the Company will file an amended Form 10-Q for the quarter ended September 30,
1998, to present restated financial statements for the comparable 1997 periods.
Note 3 - Nature of Operations and Basis of Presentation
The primary business of the Company is the manufacture and sale of wire
and cable products. The major market served by the Company is industrial
(commercial and residential security, factory automation, traffic and transit
signal control and audio systems).
The Company's third quarter and year to date 1998 condensed
consolidated financial statements include the accounts of CTI and operations of
its subsidiary (see Note 5) Connectivity Products Incorporated ("CPI"). All
significant intercompany accounts and transactions have been eliminated in
consolidation.
7
<PAGE> 8
Certain reclassifications of amounts reported in the accompanying
December 31, 1997, Condensed Consolidated Balance Sheet have been made to permit
comparison with September 30, 1998 classifications.
Note 4 - Revolving Credit and Term Loan Facility
On July 10, 1998, the Company's subsidiary, CPI, failed to make a
required payment of approximately $5,000,000 due on its revolving credit and
term loan facility. The loan balance was reduced by approximately $2,125,000 in
the third quarter 1998 with proceeds received from the sale of marketable
securities. On September 1, 1998, CPI and its lenders finalized a Forbearance
Agreement and Tenth Amendment (the "Agreement") to the existing loan agreement.
Under the terms of the Agreement, the maximum available borrowings were reduced
from $20,000,000 to $17,876,100, reflecting the sale of the marketable
securities discussed above. Proceeds from the sale of one of CPI's operating
divisions, if such a sale is effectuated, also are to be used to repay
outstanding borrowings (see note 6). The terms of the Agreement provide that it
will expire on November 30, 1998, at which time all outstanding borrowings will
become payable. Interest is to accrue at the bank's base rate (8.5% at September
30, 1998) plus 2%. The Agreement contains various financial and operating
covenants including meeting monthly minimum EBITDA requirements, maintaining the
overadvance amount within certain predetermined levels, and limiting capital
expenditures to a specific agreed upon amount. In the event of any default,
interest is to accrue at the bank's base rate plus 6%. The Company is in
compliance with all of the terms and conditions of the forbearance agreement and
is currently in discussions with its lenders. The Company believes, on the basis
of preliminary discussions with its lenders that an extension will be granted,
but no assurances can be given that an extension will result.
Note 5 - Subordinated Debt
On June 30, 1998, four stockholders assigned all of their rights, title
and interest in their subordinated notes ($3,352,800 plus accrued interest of
approximately $166,000), 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. In exchange, the Company
has agreed not to assert any claims concerning any matters against these former
stockholders. The agreement required consents, which were received in July 1998,
from outside third parties.
On August 26, 1998, the Company entered into an agreement with another
stockholder pursuant to which the stockholder transferred to CTI and CPI
subordinated notes of $1,414,600 plus accrued interest of approximately $94,000
along with 33.7941 shares of common stock of CPI (representing 4.41% interest of
the outstanding shares of common stock of CPI), 90,669 stock options of CTI and
cash of $325,000. This agreement required consents from outside third parties,
which were received in September 1998
The aggregate effect of these agreements ($4,871,040 net of provision
for income taxes of $481,800) is reported as extraordinary income for the
quarter ended September 30, 1998.
8
<PAGE> 9
Note 6 - Assets Held for Sale
The Company is actively seeking a purchaser for its Energy Electric
Assembly (EEA) division and, accordingly, has classified the assets of EEA as
Assets Held for Sale in the accompanying condensed consolidated balance sheet.
Previously announced discussions with a prospective buyer have terminated. Net
sales of the division approximated $10.1 million and $2.6 million for the nine
and three month periods ended September 30, 1998, respectively. Net proceeds
after income taxes and expenses received from the sale of the division are to be
used to repay outstanding indebtedness.
Note 7 - Inventories
Inventories consist of the following:
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
------------------ -----------------
<S> <C> <C>
Raw materials $ 923,920 $ 971,596
Work in process 771,561 320,101
Finished goods 1,139,037 1,031,023
---------- ----------
$2,834,518 $2,322,720
========== ==========
</TABLE>
Note 8 - Comprehensive Income (Loss)
As of January 1, 1998, the Company adopted FASB Statement No. 130,
Reporting Comprehensive Income (Statement 130). Statement 130 established new
rules for the reporting and display of comprehensive income and its components.
Statement 130 requires unrealized gains or losses on the Company's
available-for-sale securities which, prior to adoption, were reported separately
in stockholders' equity, to be included in other comprehensive income. During
the nine and three month periods ended September 30, 1998, total comprehensive
income consisted of the following:
<TABLE>
<CAPTION>
Nine Months Three Months
-----------------------------
<S> <C> <C>
Net income $3,756,029 $3,884,023
Change in unrealized gain (loss) on
investments, net (694,798) (499,083)
---------- ----------
$3,061,231 $3,384,940
========== ==========
</TABLE>
Note 9 - Discontinued Operations
Income from discontinued operations of $38,151 recognized during 1998
resulted from the final settlement of the sale price of the Company's Energy
Electric Cable division, which was sold in 1997.
9
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS SEPTEMBER 30, 1998
The primary business of Connectivity Technologies Inc. (the "Company" or "CTI")
is the manufacture and sale of wire and cable products. The major market served
by the Company is industrial (commercial and residential security, factory
automation, traffic and transit signal control and audio systems).
Before acquiring 85% of the common stock of Connectivity Products Incorporated
("CPI") as of May 31, 1996, the Company's principal activity consisted of
seeking and evaluating candidates for acquisition. The Company's goals are to
grow internally through capacity expansions and product line extensions.
RESULTS OF OPERATIONS
Operating results for the periods ended September 30, 1997 are not available at
the time of this filing (see Note 2 of Notes to Condensed Consolidated Financial
Statements). When the information becomes available upon the Company's
completion of its analysis of significant 1997 fourth quarter adjustments and
the related effect on previously reported results of operations, this discussion
will be amended to include a comparison of the results of operations for the
periods ended September 30, 1998, with those of the corresponding periods of the
preceding year. Because comparative information for 1997 is not available, the
following discussion compares operations for the nine and three month periods
ended September 30, 1998, to the year ended December 31, 1997.
NINE AND THREE MONTH PERIODS ENDED SEPTEMBER 30, 1998 COMPARED TO YEAR ENDED
DECEMBER 31, 1997
Gross profit as a percent of net sales increased to 19.5% year to date and 16.0%
during the quarter from 15.1% for the preceding year. The increase is
attributable principally to changes in product mix, increased manufacturing
efficiencies inherent in new machinery acquired and new manufacturing and
scheduling processes implemented by management. Stabilization of copper prices
over the three and nine month periods also are reflected in improved gross
margin performance; whereas in 1997 decreases in copper commodity prices, which
are directly related to sales prices, lowered gross margins.
Selling, general and administrative expense decreased to 18.8% and 21.4% of net
sales for the nine and three month periods ended September 30, 1998,
respectively, compared to 25.0% for the year ended December 31, 1997. The
decrease is attributable to a number of factors including bonuses and severance
payments made to former management and directors in 1997; write off of deferred
debt issuance costs of approximately $460,000 in 1997; greater professional fees
in
10
<PAGE> 11
1997; increased sales which on a percentage basis reduces the fixed cost
component; and cost-saving measures instituted by current management.
Interest expense increased during the quarter and year to date periods as a
result of higher average borrowings and increased interest rates in accordance
with the Forbearance Agreement and the Company not having the option to use the
preferential LIBOR based interest rates in 1998. The average interest rate
approximated 10.5% and 10.0% for the three and nine month periods ended
September 30, 1998, as compared to 8.6% for the year ended December 31, 1997.
Income tax expense represents deferred taxes related to the realized gain on
sale of investments and provision for state income taxes which can not be offset
with net operating loss carryforwards.
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED JUNE 30,
1998
Gross profit as a percent of net sales decreased to 16.0% during the quarter
from 23.4% for the preceding quarter and 21.0% for the first six months. The
decrease is attributable principally to decreases in sales at the Company's EEA
division which have significantly higher margins than those of the Company's
BSCC division as well as a change in customer mix at the BSCC division.
Selling, general and administrative expense increased to 21.4% of net sales
during the quarter compared to 17.9% for the preceding quarter. The percentage
increase is due principally to increased professional fees offset by a decrease
in financing fees during the quarter as well as a reduction in sales for the
quarter. Spending levels remained approximately the same.
Interest expense increased slightly during the quarter to $550,612 with an
average interest rate of 10.5% from $522,196 with an average interest rate of
9.2% for the preceding quarter. The increase is attributable to increased rates
associated with the Forbearance Agreement (see Note 4 of Notes to Condensed
Consolidated Financial Statements) offset by reduced levels of subordinated debt
interest expense (see Note 5 of Notes to Condensed Consolidated Financial
Statements).
Income tax expense represents deferred income taxes related to the realized gain
on sale of investments and provision for state income taxes which can not be
offset with net operating loss carryforwards.
FINANCIAL CONDITION AND LIQUIDITY
The accompanying statement of cash flows for the nine months ended September 30,
1998 reports net cash used for operating activities of approximately $4,541,000.
Included in the determination of cash flows from operating activities are tax
payments of approximately $2,700,000 related to the taxable gain realized on the
sale of its Energy Electric Cable division in
11
<PAGE> 12
1997. These tax payments were financed with proceeds from long-term borrowings.
Increased inventory levels resulted in approximately $512,000 of cash flows used
in operating activities, primarily caused by an inventory build since December
31, 1997. This is a normal trend as inventories were reduced in anticipation of
a plant shut down during the holidays. A decrease in assets held for sale
resulted in approximately $1,586,000 of cash flows provided by operating
activities, primarily as a result of a decrease in accounts receivable and
inventory at the Company's EEA division. Decreased accrued liabilities used
approximately $2,280,000 in operating cash flows, primarily caused by a change
in terms to essentially cash-on-delivery for a major copper supplier and a
pay-down of accrued professional fees.
As described in Note 4 of the accompanying Notes to Condensed Consolidated
Financial Statements, the Company has negotiated a Forbearance Agreement and
tenth amendment to its revolving credit facility, which to date has been the
Company's principal external source of capital. The terms of the new agreement
extend the existing facility to November 30, 1998. The Company has entered into
discussions with its lenders regarding an extension of its forbearance agreement
beyond this date. However, no assurances can be given that the Company will be
successful in extending the forbearance period or obtaining financing with its
current lender beyond November 30, 1998, or from any other source. If the
Company is not successful in obtaining other financing beyond November 30, 1998
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. The Company is in
compliance with all of the terms and conditions of the forbearance agreement
and is currently in discussions with its lenders. The Company believes, on the
basis of preliminary discussions with its lenders that an extension will be
granted, but no assurances can be given that an extension will result.
The Company issued subordinated debt in connection with the acquisition of CPI
in May 1996. On June 30, 1998 four stockholders of the Company assigned all of
their rights, title, and interest in their subordinated notes ($3,352,800),
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. The assignment was finalized in July 1998 upon receipt
of required consents from outside third parties. On August 26, 1998, the Company
entered into an agreement with another stockholder pursuant to which the
stockholder transferred to CPI and CTI subordinated notes of $1,414,600 along
with 33.7941 shares of common stock of CPI (representing 4.41% of the
outstanding shares of common stock of CPI), 90,669 outstanding stock options of
CTI and cash of $325,000.
YEAR 2000 UPDATE
The Company has made significant progress in its identification of Year 2000
compliancy issues. Its BSCC division recently purchased its primary
manufacturing and accounting software, both of which are Year 2000 compliant.
The EEA division has recently undergone the same accounting implementation and
is awaiting the Year 2000 upgrade to its production software. It is
12
<PAGE> 13
anticipated that this software will be upgraded by the end of 1998. The
Company's hardware compliance issues have been identified and are in the
process of being or have been replaced or upgraded. Most other production
software and database applications which are not Year 2000 ready have been
scheduled to migrate to fully compliant systems by mid 1999. A portion of the
software upgrades has already been purchased by the Company. Altogether, the
total cost to upgrade, test, and implement the Company's hardware and software
to date is approximately $400,000 and has been funded through cash flows and
bank borrowings. However, a new job writing production software design needs to
be completed, at an estimated cost of at least $50,000. This project has not
begun nor has it been scheduled. There is a contingency plan if this project was
not completed by December 31, 1999. All software and hardware is scheduled to be
tested in the first quarter of 1999. No contingency plan exists in the event
that any tested system fails. The Company plans to evaluate such failures on a
case by case basis. Hardware purchases to enable this testing are expected to be
insignificant.
A survey of significant third party preparedness has been initiated. Current
plans are for this phase of the Company's Year 2000 project to be completed in
the first quarter of 1999.
The failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of, certain normal business activities or
operations. Such failures could materially and adversely affect the Company's
results of operations, liquidity and financial condition. Due to the general
uncertainty inherent in the Year 2000 problem, resulting in part from the
uncertainty of the Year 2000 readiness of third party suppliers and customers,
the Company is unable to determine at this time whether the consequences of Year
2000 failures will have a material impact on the Company's results of
operations, liquidity or financial condition.
SAFE HARBOR PROVISION OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The statements contained in Item 2 (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 the remainder of 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, 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 credit facility.
13
<PAGE> 14
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No. Description of Document
- ----------- -----------------------
10.1 Forbearance Agreement and Tenth Amendment to Amended and
Restated Revolving Credit and Term Loan Agreement, dated as of
July 31, 1998, by and among Connectivity Products
Incorporated, NBD Bank and BankBoston.
27 Financial Data Schedule
(b) Reports on Form 8-K
On July 8, 1998, the Registrant filed a Current Report on Form 8-K in
connection with its inability to comply with the scheduled paydown of the
overadvance position of approximately $5 million and the repayment of the
outstanding balance of its entire credit facility amounting to approximately
$17.7 million by the required dates. The Registrant stated that discussions were
continuing regarding the entering into a forbearance agreement with the lenders.
On July 13, 1998, the Registrant filed a Current Report on Form 8-K in
connection with an agreement concluded between the Registrant and members of the
group from whom the Registrant acquired its interest in CPI whereby this group
transferred back to the Registrant subordinated notes of CPI in the total
principal amount of $3,519,062, including interest, plus 64.2088 shares of CPI
Common Stock and options covering 114,724 shares of the Registrant's common
stock in exchange for releases and indemnifications.
On August 3, 1998, the Registrant filed a Current Report on Form 8-K in
connection with an agreement in principal between the Registrant and the lenders
whereby the lenders agreed to grant the Registrant until the end of November
1998, to meet its repayment obligations to the lenders or to arrive at a longer
term credit agreement. The Registrant also reported that it was evaluating
offers for the purchase of its EEA division.
On August 26, 1998, the Registrant filed a Current Report on Form 8-K
in connection with an agreement concluded between the Registrant and a member of
the group from whom the Registrant acquired its interest in CPI whereby this
member transferred back to the Registrant subordinated notes of CPI in the total
principal amount of $1,496,763, including interest, plus 33.7941 shares of CPI
Common Stock, options covering 90,669 shares of the Registrant's common stock,
and $325,000 cash in exchange for general releases and indemnifications.
14
<PAGE> 15
On September 3, 1998, the Registrant filed a Current Report on Form 8-K
in connection with the conclusion of a formal Forbearance Agreement and amended
its Revolving Credit and Term Loan Agreement with its lending banks. The lenders
agreed not to enforce their rights to proceed against CPI and its assets prior
to November 30, 1998. The provisions conditioning the lenders to forbear include
covenants pertaining to financial performance as well as the absence of steps
contrary to CPI by its creditors.
On September 16, 1998, the Registrant filed a Current Report on Form
8-K in connection with the signing of a non-binding Letter of Intent to sell all
of the business and assets of its EEA division to a subsidiary of Orion Capital
Partners, LP. The net proceeds from this sale will be used to reduce its bank
debt.
On October 30, 1998, the Company filed a Current Report on Form 8-K in
connection with the entering into discussions with its lenders regarding an
extension of the Forbearance Agreement which would otherwise terminate on
November 30, 1998. The Registrant also reported that its previously announced
discussions with a prospective buyer for its EEA division had been terminated
and that the Company had been approached by potential buyers for all of the
assets of the company, including its EEA and BSCC divisions. Connectivity
reported that it is in full compliance with all of the terms and conditions of
the Forbearance Agreement.
15
<PAGE> 16
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, the Registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CONNECTIVITY TECHNOLOGIES INC.
Date: November 16, 1998 By: /s/ James M. Hopkins
----------------------------------------
James M. Hopkins
President and Chief Executive Officer
(as a duly authorized officer of the
Registrant)
By: /s/ George H. Buckham
----------------------------------------
George H. Buckham
Corporate Controller and Secretary
(as the principal accounting officer
of the Registrant)
16
<PAGE> 1
BANKBOSTON, N.A.
NBD BANK
dated of July 31, 1998
Connectivity Products Incorporated
680 Mechanic Street
Leominster, Massachusetts 01453
Re: Forbearance Agreement and Tenth Amendment
-----------------------------------------
Ladies and Gentlemen:
Reference is hereby made to the Amended and Restated Revolving Credit
and Term Loan Agreement, dated as of May 31, 1996 by and among (a) Connectivity
Products Incorporated, a Delaware corporation (the "COMPANY"), (b) the financial
institutions listed on SCHEDULE I thereto (the "BANKS"), and (c) BankBoston,
N.A., a national banking association in its capacity as Administrative Agent and
Documentation Agent for the Banks (as amended and in effect from time to time,
the "CREDIT AGREEMENT"), and the various notes, guaranties and security
documents delivered in connection therewith (collectively, the "LOAN
DOCUMENTS").
The Company acknowledges that prior to July 31, 1998 the Company was in
default of the requirement set forth in the Credit Agreement that the
Overadvance Amount, as such term is used in the definition of BORROWING BASE, be
reduced to $0.00 effective as of July 10, 1998. In addition, as of May 22, 1998,
the Company is also in default of its obligation to deliver its financial
statements for the first fiscal quarter of 1998 and the fiscal year 1998
projections pursuant to ss.9.4(j) and (k) of the Credit Agreement, respectively
and the representation and warranty made pursuant to ss.8.4 of the Credit
Agreement with respect to the financial statements delivered to the Banks prior
to the delivery of the audited financial statements for fiscal year 1997
prepared by Ernst & Young. These Events of Default are hereinafter referred to
as the "SPECIFIED DEFAULTS", and the Company acknowledges and agrees that the
Co-Agents and the Banks have not waived any of the Specified Defaults. The
Company also acknowledges and agrees that all of the Company's obligations,
liabilities and indebtedness to the Banks and the Co-Agents under the Credit
Agreement may at any time be declared due and payable in full by reason of the
Specified Defaults, that the Banks have no further commitment to extend credit
to the Company and the Banks and the Co-Agents are entitled to accelerate the
Bank Obligations and to proceed to enforce any and all of their respective
rights and remedies under the terms of the Loan Documents. The Company has now
requested that the Banks and the Co-Agents extend the Revolving Credit Loan
Maturity Date and forbear from exercising their rights and remedies under the
Loan Documents until the Forbearance Termination Date (as hereinafter defined)
under the following terms and conditions:
<PAGE> 2
-2-
SS.1. DEFINITIONS. All capitalized terms used herein without
definition that are defined in the Credit Agreement, as amended and in effect on
the date hereof, shall have the same meanings herein as therein. All accounting
terms used herein and not otherwise defined shall be used in accordance with
generally accepted accounting principles. For the purposes of this Agreement,
"BANK OBLIGATIONS" shall mean all indebtedness, obligations and liabilities of
the Company and its Subsidiaries to any of the Banks and the Co-Agents existing
on the date of this Agreement or arising thereafter, direct or indirect, joint
or several, absolute or contingent, matured or unmatured, liquidated or
unliquidated, secured or unsecured, arising by contract, operation of law or
otherwise, including without limitation, those arising or incurred under any of
the Loan Documents or under any other instruments, documents or agreements at
any time evidencing such indebtedness, obligations or liabilities.
SS.2. RATIFICATION OF EXISTING AGREEMENTS. The Company hereby
ratifies and confirms in all respects all of the Bank Obligations, except as
otherwise expressly modified in this Agreement upon the terms set forth herein.
In addition, by execution of this Agreement, the Company represents and warrants
that, to the best of its knowledge, as of the date hereof, no claim or
counterclaim, right of set-off or defense of any kind exists or is outstanding
with respect to the Bank Obligations. The Company further agrees that, to the
extent any such claim, counterclaim, right of setoff or defense of any kind to
its knowledge exists, the Company hereby waives and releases each and all of
them in consideration for the Co-Agents and the Banks entering into this
Agreement. The Company acknowledges that, in entering into this Agreement, the
Banks have relied on the representations, warranties and waivers contained in
this ss.2. As of July 31, 1998, the Company agrees that the outstanding
aggregate principal amount of the Revolving Credit Loans plus the aggregate
Maximum Drawing Amount of the Letters of Credit outstanding under the Credit
Agreement is equal to $18,225,372.92.
SS.3. REPRESENTATIONS AND WARRANTIES. The Company has adequate
corporate power and authority to execute and deliver this Agreement and to
perform its obligations hereunder. This Agreement has been duly authorized,
executed and delivered by the Company and does not contravene any law, rule or
regulation applicable to the Company or any of the terms of the Company's
charter documents, by-laws or other governing document or any indenture,
agreement or undertaking to which the Company is a party. The obligations of the
Company under this Agreement and the Loan Documents constitute its legal, valid
and binding obligations enforceable against it in accordance with their
respective terms. All of the representations and warranties made by or on behalf
of the Company in the Loan Documents are true and correct on the date hereof as
if made on and as of the date hereof, except for those matters previously
disclosed in writing to the Banks or disclosed herein.
SS.4. FORBEARANCE OBLIGATIONS. Subject to the conditions set forth
in ss.5 hereof, the Banks agree to forbear from enforcing any of their rights
and remedies under the Loan Documents (except with respect to the Anicom, Inc.
stock, which the Company agrees is to be sold and the proceeds applied as
provided in ss.6(j) hereof) for the purpose of seeking payment of any of the
Bank Obligations (including, without limitation, any act with respect to any
collateral now or hereafter securing payment any Bank Obligations or any setoff
or any other application of funds of the Company now or hereafter on deposit
with or otherwise controlled by any of the Banks until that date (the
"FORBEARANCE TERMINATION DATE") which is the earliest to occur of (a) the
Company's failure to comply with any of the terms and conditions of this
Agreement, including any of the undertakings set forth in ss.ss.5 and 6, (b) an
Event of Default (other than the Specified Defaults) under any of the Loan
Documents, (c) if the Company or any person or entity claiming by or through the
Company ever commences, joins in, assists, cooperates or participates as an
adverse party or adverse witness in any suit or other proceeding against the
Banks relating to the indebtedness referred to as the Bank Obligations or any
amounts owing hereunder, (d) any of the claims of the Banks under this Agreement
or with respect to the Bank Obligations shall be
<PAGE> 3
-3-
subordinated to the claims of any other creditor of the Company, (e) the Company
shall make a general assignment for the benefit of creditors, or admit in
writing its inability to pay or generally fail to pay its debts as they mature
or become due, or shall petition or apply for the appointment of a trustee or
other custodian, liquidator or receiver of the Company or of any substantial
part of the assets of such Company or shall commence any case or other
proceeding relating to the Company under any bankruptcy, reorganization,
arrangement, insolvency, readjustment of debt, dissolution or liquidation or
similar law of any jurisdiction, now or hereafter in effect, or shall take any
action to authorize or in furtherance of any of the foregoing, or if any such
petition or application shall be filed or any such case or other proceeding
shall be commenced against the Company and the Company shall indicate its
approval thereof, consent thereto or acquiescence therein, (f) a decree or order
is entered appointing any such trustee, custodian, liquidator or receiver or
adjudicating the Company bankrupt or insolvent, or approving a petition in any
such case or other proceeding, or thirty days after a decree or order for relief
is entered in respect of the Company in an involuntary case under federal
bankruptcy laws as now or hereafter constituted, (g) more than ten percent (10%)
by Dollar amount of the Company's trade creditors reduce to less than thirty
(30) days the number of days which the Company has to pay its accounts payable,
and (h) November 30, 1998. The period from the effective date of this Agreement
through the Forbearance Termination Date is referred to herein as the "Limited
Forbearance Period". Except as expressly provided above in this ss.4, the Banks
reserve the right to exercise all of their rights and remedies under the Loan
Documents. The Company agrees to refrain from making payments on their
Subordinated Debt prior to the Forbearance Termination Date and in any event, to
the extent the relevant Subordination Agreements so provide, during the
continuance of any Event of Default (including any Specified Defaults) under the
Credit Agreement. Upon the Forbearance Termination Date, the Banks and the Agent
shall be free in their sole and absolute discretion to proceed to enforce any or
all of their rights and remedies under or in respect of the Loan Documents and
applicable law, including without limitation, those credit termination,
acceleration, enforcement and other rights and remedies arising by virtue of the
occurrence of the Specified Defaults. All of the Company's payment and
performance obligations to the Banks hereunder, including without limitation,
the obligations set forth in ss.ss.5 and 6 below, shall survive the Forbearance
Termination Date, and all of such obligations shall be secured by the collateral
security granted under the Loan Documents.
SS.5. CONDITIONS TO EFFECTIVENESS. This Agreement shall become
effective upon satisfaction of the following conditions on or prior to September
1, 1998:
(a) The Banks, the Co-Agents and the Company shall have
executed and delivered counterparts of this Agreement to the
Administrative Agent;
(b) The Companies shall have paid, in cash, (i) a
forbearance fee (the "Forbearance Fee") to the Administrative Agent for
the benefit of the Banks in an amount equal to $50,000 and (ii) the
remaining installment of the restructuring fee in the amount of $30,000
which was due and payable as of July 10, 1998;
(c) The Administrative Agent shall have received a
certificate executed by the Company certifying that no Defaults or
Events of Default currently exist under the Credit Agreement, other
than the Specified Defaults;
(d) The Company and Anicom, Inc. and the Administrative
Agent shall have entered into a letter agreement with Harris Trust and
Savings Bank as Trustee under the Escrow Agreement, in form and
substance satisfactory to the Banks, pursuant to which not less than
171,202 of the Shares (as defined in the Escrow Agreement) shall have
been transferred to or at
<PAGE> 4
-4-
the direction of the Administrative Agent and satisfactory provisions
shall have been made with respect to the remaining 19,274 Shares; and
(e) The Company shall have paid all fees and expenses
incurred by the Banks and the Agent, including but not limited to, all
legal fees and disbursements, and commercial finance examination fees,
and billed for all periods through August 24, 1998.
SS.6. COVENANTS AND AGREEMENTS. Without any prejudice or impairment
whatsoever to any of the rights and remedies of any of the Banks and the
Co-Agents contained in any of the Loan Documents or in any agreement, document
or instrument executed in connection therewith, the Company covenants and agrees
with the Co-Agents and the Banks as follows:
(a) DISCRETIONARY LENDING. During the Limited Forbearance
Period, the Banks shall continue to be under no obligation to lend to
the Company or to issue, extend or renew Letters of Credit, and as
such, the Banks shall continue to suspend the commitment fee
contemplated by ss.2.2 of the Credit Agreement, and any advances made
by the Banks to the Company and any Letters of Credit issued, extended
or renewed during the Limited Forbearance Period shall be at the sole
and absolute discretion of the Banks and any discretionary advances
made by the Banks and any obligation incurred by the Banks as a result
of the issuance, extension or renewal of any Letters of Credit shall
constitute Bank Obligations.
(b) INTEREST. The Company acknowledges and agrees that
interest shall continue to accrue at the rate specified in ss.2.5 of
the Credit Agreement (as amended by ss.7 set forth beloW); PROVided
that if an Event of Default other than a Specified Default occurs, then
interest shall accrue on all Bank Obligations outstanding under the
Loan Documents at the default rate of interest set forth in ss.6.11 of
the Credit Agreement (as amended by ss.7 set forth below), whether or
not such amount amount overdue, and shall be payable monthly in arrears
on the last day of each calendar month.
(c) COMPLIANCE WITH LOAN DOCUMENTS. The Company shall
comply and continue to comply will all of the terms, covenants and
provisions contained in the Loan Documents to and any other instruments
evidencing or creating any of the Bank Obligations except as such
terms, covenants and provisions are expressly modified in this ss.6
or ss.7.
(d) COLLATERAL. The Companies shall provide to the
Administrative Agent such additional security agreements and other
security documents as the Administrative Agent may request in order to
obtain, perfect and preserve a prior perfected security interest
(subject only to Permitted Liens) in all existing and after-acquired
personal property and fixtures of the Company for the benefit of the
Banks and the Co-Agents.
(e) CASH FLOW PROJECTIONS. The Company shall deliver to
the Administrative Agent no later than September 1, 1998 updated weekly
cash flow projections for the period commencing on October 1, 1998 and
ending on November 30, 1998 based upon and in the form of EXHIBIT A
attached hereto. All such projections shall include, among other
things, detailed weekly collections and disbursements, calculation of
availability under the Credit Agreement, anticipated borrowings and a
rolling Overadvance calculation.
(f) SALE OF COMPANY OR ANY PORTION THEREOF. The Company
shall deliver to the Agent (i) by not later than Monday of each
calendar week, satisfactory in form and substance to
<PAGE> 5
-5-
the Administrative Agent, a written status report as of the end of the
prior calendar week as to any offers to purchase all or a part of the
Company or its businesses and (ii) promptly upon receipt of the same,
copies of all letters of intent, purchase and sale agreements or other
material documentation evidencing an intention or offer to purchase all
or a part of the Company or its businesses.
(g) CHARTER DOCUMENTS. The Administrative Agent shall
have received by not later than September 1, 1998 an officers
certificate from the Company certifying that there have been no changes
to the charter documents of the Company and certified copies of
corporate resolutions and other evidence of corporate authority
requested by the Administrative Agent from the Company authorizing the
execution of this Agreement and all transactions contemplated herein;
(h) LEGAL OPINION. The Agent shall have received by not
later than September 1, 1998 a favorable written opinion, addressed to
the Banks and the Co-Agents, dated the date hereof, from Craig and
Macauley, PC, counsel to the Company in form and substance satisfactory
to the Administrative Agent;
(i) CONSULTANT. The Company will on or prior to October
1, 1998 engage a business consultant pursuant to an engagement letter
containing a scope of assignment and work plan, all of which shall be
satisfactory to each of the Banks which consultant shall commence
performance under such engagement letter on October 15, 1998; PROVIDED,
HOWEVER, the Company shall not be required to commence performance
under such engagement if (i) no Event of Default (other than a
Specified Default) exists at any time and (ii) on or prior to the
October 15, 1998 the Company shall have entered into a purchase and
sale agreement for the sale of, or a binding commitment to purchase,
the assets and business, and the assumption of selected liabilities, of
its Energy Electric Assembly division ("EEA") on substantiality the
terms outlined in the letter of intent dated July 31, 1998, a copy of
which letter has been provided to each of the Banks (the "Proposed
Sale");
(j) ANICOM STOCK PROCEEDS. All proceeds from the sale of the
shares of the common stock of Anicom, Inc., delivered to the
Administrative Agent pursuant to the Escrow Agreement (as amended or
modified and in effect) shall be applied to the outstanding amount of
interest on and principal of the Revolving Credit Loans or, at the
option of the Banks, up to $202,381.16 of which may be paid to Anicom,
Inc. solely to obtain the release to the Administrative Agent of the
remaining stock of Anicom, Inc. held by the Escrow Agent pursuant to
the Escrow Agreement. To the extent that (i) the Overadvance Amount is
repaid from such proceeds the Overadvance Amount shall be permanently
reduced Dollar for Dollar and (ii) the principal amount of such
Revolving Credit Loans are repaid from such proceeds the Revolving
Credit Commitment shall be permanently reduced Dollar for Dollar;
(k) YEAR 2000. Upon the request of the Agent or any Bank,
the Company will provide a description of its program to address Year
2000 Issues, including updates and progress reports. The Company will
advise the Banks of any reasonable anticipated material adverse effect
on its business, operations or financial condition as a result of Year
2000 Issues. "Year 2000 Issues" means anticipated costs, problems and
uncertainties associated with the inability of certain computer
applications to effectively handle data including dates on or after
January 1, 2000, as such inability affects the business, operations,
and financial condition of the Company and of the Company's material
customers, suppliers and vendors; and
<PAGE> 6
-6-
(l) ASSIGNMENTS. The Company agrees that the conditions
to assignment contained in clauses (i), (ii) and (iii) of Section 20.1
are hereby waived and that clause (v) of the definition of "Eligible
Assignee" is amended by deleting the words "if, but only if, any Event
of Default has occurred and is continuing,."
(m) FURTHER ASSURANCES. The Company shall at any time or
from time to time execute and deliver such further instruments, and
take such further action as the Administrative Agent or any Bank may
reasonably request, in each case further to effect the purposes of this
Agreement, the Loan Documents and all documents, agreements and
instruments executed in connection therewith.
SS.7. AMENDMENT TO CREDIT AGREEMENT. The Credit Agreement is hereby
amended as follows:
(a) Section 1.1 of the Credit Agreement is amended as
follows:
(i) the definition of APPLICABLE MARGIN set forth in
such ss.1.1 is amended by deleting such definition and
restating it in its entirety as follows:
APPLICABLE MARGIN. The Applicable Margin for all
Revolving Credit Loans or with respect to the
commitment fees are as set forth in the table below:
-----------------------------------------------------
Revolving
Credit Loans Commitment Fee
-----------------------------------------------------
2.00% .50%
-----------------------------------------------------
(ii) The following definitions as set forth in such
ss.1.1 are amended by deleting such definitions and restating
them in their entirety as follows:
INTEREST PAYMENT DATE. The last day of each calendar
month including the calendar month which includes the
Drawdown Date.
INTEREST PERIOD. Initially, the period commencing on
the Drawdown Date of each Revolving Credit Loan and
ending on the last day of the calendar month in which
the Drawdown Date occurs and thereafter, each
calendar month.
OVERADVANCE AMOUNT. As defined in ss.11.8.
(iii) The definition of "Revolving Credit Loan
Maturity Date" as set forth in such ss.1.1 is hereby amended
to be "November 30, 1998" and the Company agrees that
notwithstanding any other provision of the Loan Documents, all
Bank Obligations shall become due and payable on such date if
they have not previously become due and payable.
<PAGE> 7
-7-
(iv) The definition of "Administrative Agent's Head
Office" as set forth in ss.1.1 is hereby changed to be 100
Federal Street, Boston, MA 02110, and clauses (c) and (d) of
Section 21 are changed to have notices go to 100 Federal
Street, Boston, MA 02110, Attention: W. Douglass Vannah, Vice
President, Mail Stop 01-06-01.
(v) The definition of "Obligations" as set forth in
such ss.1.1 is hereby amended by adding the following clause
to the end thereof "and any other indebtedness, obligations or
liabilities of the Borrower or any of its Subsidiaries to any
of the Banks"
(b) Section 6.11 of the Credit Agreement is amended by
deleting such ss.6.11 and restating it in its entirety as follows:
INTEREST AFTER DEFAULT. During the continuance of a Default or
Event of Default (other than a Specified Default as defined in
the Forbearance Agreement, dated as of July 31, 1998) the
principal of the Loans (whether or not overdue) and interest
on the Loans (to the extent permitted by applicable law)
shall, until such Default or Event of Default has been cured
or remedied or such Default or Event of Default has been
waived by the Banks, bear interest at a rate per annum equal
to four percent (4%) above the rate of interest otherwise
applicable to such Loans set forth in this Agreement.
(c) Clause (c) of ss.9.4 of the Credit Agreement is
amended by inserting the following text immediately after the text
"subsections (a) and (b) above,": and on Tuesday of each calendar week
as of the end of the immediately preceding calendar week.
(d) Clause (e) of ss.9.4 of the Credit Agreement is
amended by (i) deleting the text "fifteen (15) days after the end of
each calendar month" and substituting the text "on Tuesday of each
calendar week" therefor and (ii) deleting the text "as at the end of
such calendar month" and substituting the text "as at the end of the
immediately preceding calendar week" therefor.
(e) Section 9.4 of the Credit Agreement is further
amended by (i) deleting the word "and" at the end of clause (j) of
such ss.9.4, (ii) deleting the period at the end of clause (k) of
such ss.9.4 and substituting a semicolon therefor, and (iii) adding the
following new clause (l):
(l) on Tuesday of each calendar week weekly cash flow
variance reports (actual, by line item, as compared to budget, by line
item) as at the end of the immediately preceding calendar week
(f) Section 9.9.2 of the Credit Agreement is amended by
deleting such ss.9.9.2 and restating it in its entirety as follows:
COMMERCIAL FINANCE EXAMS. As frequently as the Administrative
Agent shall determine, either Co-Agent may conduct a
commercial finance exam which exam shall INTER alia, indicate
whether or not the information set forth in the Borrowing Base
Report most recently delivered is accurate and complete in all
material respect based upon a review of the Accounts
Receivable (including verification with respect to the amount,
aging,
<PAGE> 8
-8-
identity and credit of the respective account debtors and the
billing practices of the Borrower or its applicable
Subsidiary) and inventory (including verification as to the
value, location and respective types). In addition to the
foregoing, prior to inclusion in the Borrowing Base of any
assets acquired by the Borrower or any of its Subsidiaries
after the Closing Date, the Banks shall be permitted to
conduct a commercial finance exam with respect to such assets
to determine their eligibility. All such exams and reports
shall be conducted and made at the expense of the Borrower and
may include examination of all books, records and financial
information determined to be relevant by either of the Banks.
(g) Section 10.3 of the Credit Agreement is amended by
deleting paragraphs (a), (c), (d), (e), (f), (g), (h) and (i) thereof
and the provision at the end of Section 10.3 and amending paragraph (b)
to read as follows:
(b) demand deposits and time deposits at one of the
Banks and the investment in Anicom, Inc. stock made
prior to July 31, 1998.
(h) Section 10.4 of the Credit Agreement is amended by
deleting such ss.10.4 and restated in its entirety as follows:
10.4 RESTRICTED PAYMENTS. The Borrower will not make any
Restricted Payments.
(i) Section 11.6 of the Credit Agreement is amended by
deleting such ss.11.6 and restating it in its entirety as follows:
11.6 CAPITAL EXPENDITURES. The Borrower will not make, or
permit any Subsidiary of the Borrower to make, Capital
Expenditures which exceed $35,000 in the aggregate during any
calendar month; PROVIDED, HOWEVER, that if during any calendar
month the amount of Capital Expenditures permitted for that
calendar month is not so utilized, such unutilized amount may
be utilized in the next succeeding calendar month, but in no
event shall the aggregate amount of all Capital Expenditures
made during the months of August through November, 1998 exceed
$140,000.
(j) Section 11.7 of the Credit Agreement is amended by
deleting such ss.11.7 and restating it in its entirety as follows:
11.7 MINIMUM EBITDA. The Borrower will not permit Consolidated
EBITDA at the end of any calendar month to be less than
$225,000, which amount may be revised by the Banks upon the
sale of the EEA Division of the Borrower.
(k) Section 11 of the Credit Agreement is further amended
by adding the following new ss.11.8:
11.8 MAXIMUM OVERADVANCE. The Borrower will not permit the
Overadvance Amount as at the end of any calendar week set
forth in the table below to exceed the amount set forth
opposite such week (such specified amount being deemed to be
the "Overadvance Amount" during such period):
<PAGE> 9
-9-
---------------------------------------------------------------------
Overadvance
Calendar Week Ended Amount
---------------------------------------------------------------------
08/07/98 $7,483,000
---------------------------------------------------------------------
08/14/98 $7,668,000
---------------------------------------------------------------------
08/21/98 $7,868,000
---------------------------------------------------------------------
08/28/98 $7,603,000
---------------------------------------------------------------------
09/04/98 $7,723,000
---------------------------------------------------------------------
09/11/98 $7,723,000
---------------------------------------------------------------------
09/18/98 $7,723,000
---------------------------------------------------------------------
09/25/98 $7,723,000
---------------------------------------------------------------------
10/02/98 and to be based on cash flow
thereafter flow projections to be
delivered to the Administrative
Agent no later than 09/01/98
pursuant to ss.6(e) in
form substance satisfactory
to the Administrative Agent, but in
any event no more than $6,900,000
---------------------------------------------------------------------
To the extent that the Overadvance Amount is repaid from the proceeds
from the sale of the shares of the common stock of Anicom, Inc., delivered to
the Administrative Agent pursuant to the Escrow Agreement (as amended or
modified and in effect), the Overadvance Amount set forth opposite each date in
the table above shall be permanently reduced Dollar for Dollar.
SS.8. EXPENSES. The Company agrees to pay to the Banks and the
Co-Agents (a) on demand by the Banks or the Co-Agents, an amount equal to any
and all reasonable out-of-pocket costs or expenses (including reasonable legal
fees and disbursements of counsel to the Banks and the Co-Agents, including fees
and expenses of in-house counsel to the Banks and the Co-Agents, consulting,
accounting, appraisal, investment banking and similar professional fees and
charges) incurred or sustained by any of the Banks or the Co-Agents in
connection with the negotiation and preparation of this Agreement and all
related matters and (b) from time to time any and all reasonable out-of-pocket
costs, expenses (including reasonable legal fees and disbursements (including
fees and disbursements of in-house counsel), consulting, accounting, appraisal,
investment banking and similar professional fees and charges) hereafter incurred
or sustained by any of the Banks or the Co-Agents in connection with the
administration of credit extended by the Banks to the Company or the
preservation of or enforcement of their rights under the Loan Documents or in
respect of the Company's other obligations to them.
SS.9. AMENDMENTS. This Agreement shall not be amended without the
written consent of the Banks.
<PAGE> 10
-10-
SS.10. NO WAIVER. Except as otherwise expressly provided for in this
Agreement, nothing in this Agreement shall extend to or affect in any way the
Company's obligations or any of the rights and remedies of the Banks and the
Co-Agents in respect of the Credit Agreement arising on account of the
occurrence of any Event of Default other than the Specified Defaults, all of
which are expressly preserved.
SS.11. NO CLAIMS WITH RESPECT TO THIS AGREEMENT. The Company
acknowledges and agrees that: (a) to the best of their knowledge, the Company
has no claim or cause of action against any of the Banks or the Co-Agents (or
any of their directors, officers, employees or agents); (b) to the best of their
knowledge, the Company has no offset right, counterclaim or defense of any kind
against any of their obligations, indebtedness or liabilities to the Banks or
the Co-Agents; and (c) the Banks and the Co-Agents have heretofore properly
performed and satisfied in a timely manner all of their respective obligations
to the Company. The Banks and the Co-Agents wish (and the Company agrees) to
eliminate any possibility that any past conditions, acts, omissions, events,
circumstances or matters would impair or otherwise adversely affect any of the
rights, interests, contracts, collateral security or remedies of the Banks.
Therefore, the Company unconditionally releases, waives and forever discharges
(i) any and all liabilities, obligations, duties, promises or indebtedness of
any kind of any of the Banks and the Co-Agents to the Company, except the
obligations to be performed by the Banks and the Co-Agents for the Company as
set forth in this Agreement and as expressly stated in the Loan Documents and
(ii) all claims, offsets, causes of action, suits or defenses of any kind
whatsoever (if any), whether against any Bank or the Co-Agents or any of its
directors, officers, employees or agents with respect to the obligations to be
performed by the Banks and the Co-Agents for the Company as set forth in the
Loan Documents, in either case (i) or (ii), on account of any condition, act,
omission, event, contract, liability, obligation, indebtedness, claim, cause of
action, defense, circumstance or matter of any kind whatsoever which existed,
arose or occurred at any time prior to the date hereof or which could thereafter
arise as the result of the execution of (or the satisfaction of any condition
precedent or subsequent to) this Agreement; PROVIDED, HOWEVER, that the Company
shall not be deemed to have waived any rights or claims arising from the gross
negligence or willful misconduct of the Banks and the Co-Agents.
SS.12. REPRESENTATIONS AND WARRANTIES. The Company hereby repeats, on
and as of the date hereof, each of the representations and warranties made by it
in ss.8 of the Credit Agreement (other than ss.ss.8.4 (but only for the period
prior to the delivery of the audited financial statements for fiscal year 1997
prepared by Ernst & Young), 8.5 and 8.11 (but solely with respect to the
Specified Defaults)), PROVIDED, that all references therein to the Credit
Agreement shall refer to such Credit Agreement amended hereby.
SS.13. WAIVER OF JURY TRIAL. THE COMPANY HEREBY WAIVES ANY RIGHTS
THAT IT MAY HAVE TO A JURY TRIAL WITH RESPECT TO ANY ACTION OR CLAIM ARISING OUT
OF ANY DISPUTE IN CONNECTION WITH THIS AGREEMENT OR ANY OF THE LOAN DOCUMENTS,
ANY RIGHTS OR OBLIGATIONS HEREUNDER OR THEREUNDER OR THE PERFORMANCE OF SUCH
RIGHTS AND OBLIGATIONS. Except as prohibited by law, the Company hereby waives
any right that it may have to claim or recover in any litigation referred to in
the preceding sentence any special, exemplary, punitive or consequential damages
or any damages other than, or in addition to, actual damages; PROVIDED, HOWEVER,
that the Company shall not be deemed to have waived any claim the Company may
have to recover such damages for claims which arise from the gross negligence or
willful misconduct of the Banks and the Co-Agents, or the willful breach by the
Banks of the Co-Agents of any of the Loan Documents. The Company hereby (a)
certifies that no representative, agent or attorney of any Bank or the Co-Agents
has represented, expressly or otherwise, that such Bank or the Co-Agents would
not, in the event of litigation, seek to enforce the foregoing
<PAGE> 11
-11-
waivers and (b) acknowledges that it has been induced to enter into this
Agreement by, among other things, the waivers and certifications herein.
SS.14. MISCELLANEOUS. This Agreement shall be governed by and
construed in accordance with the laws of The Commonwealth of Massachusetts and
shall take effect as a sealed instrument under such laws. Any and all notices or
other communications required hereunder shall be in writing and shall be
delivered as required by the Credit Agreement.
SS.15. COUNTERPARTs. This letter agreement may be executed in any
number of counterparts, but all such counterparts shall together constitute but
one instrument. In making proof of this letter agreement it shall not be
necessary to produce or account for more than one counterpart signed by each
party hereto by and against which enforcement hereof is sought.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
<PAGE> 12
-12-
If you are in agreement with the foregoing, please sign and return the
enclosed copy of this letter agreement to the Administrative Agent.
CONNECTIVITY PRODUCTS INCORPORATED
By:
----------------------------------------
Title:
BANKBOSTON, N.A., individually and as
Administrative Agent and Documentation Agent
By:
----------------------------------------
Title:
NBD BANK
By:
----------------------------------------
Title:
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