<PAGE> 1
FORM 10-Q/A NO. 1
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 and
1997........................................................... 4
Condensed Consolidated Statement of Cash Flows
for the Nine Months Ended September 30, 1998 and 1997.......... 5
Notes to Condensed Consolidated Financial
Statements..................................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.......................................... 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk....... 15
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K........................... 16
<PAGE> 3
CONNECTIVITY TECHNOLOGIES INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS SEPTEMBER 30,1998 DECEMBER 31, 1997
----------------- -----------------
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 ,O30
------------- -------------
Total liabilities and stockholders'
equity $ 30,479,371 $ 34,286,652
============= =============
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 30,1997 SEPTEMBER 30,1998 SEPTEMBER 30,1997
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Net sales $35,101,110 $29,523,899 $10,491,175 $12,027,826
Cost of goods sold 28,265,731 24,384,527 8,812,455 10,453,778
----------- ----------- ----------- -----------
Gross profit 6,835,379 5,139,372 1,678,720 1,574,048
Selling, general and administrative expenses 6,589,907 6,556,462 2,244,735 2,168,175
----------- ----------- ----------- -----------
Operating income (loss) 245,472 (1,417,090) (566,015) (594,127)
Other income (expense):
Gain on sale of investments 462,786 462,786
Interest expense, net (1,522,260) (1,867,044) (549,856) (349,499)
Other 61,340 (2,479) 23,268 (1,230)
----------- ----------- ----------- -----------
(998,134) (1,869,523) (63,802) (350,729)
----------- ----------- ----------- -----------
Loss from continuing operations before income taxes (752,662) (3,286,613) (629,817) (944,856)
Income taxes 400,500 (972,837) 357,200 (279,677)
----------- ----------- ----------- -----------
Loss from continuing operations (1,153,162) (2,313,776) (987,017) (665,179)
Discontinued operations:
Income from discontinued operations, net of income taxes 292,132
Gain on sale, net of income taxes 38,151 5,056,555 5,056,555
----------- ----------- -----------
38,151 5,348,687 5,056,555
----------- ----------- ----------- -----------
Income (loss) before extraordinary income (1,115,011) 3,034,911 (987,017) 4,391,376
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 $ 3,034,911 $ 3,884,023 $ 4,391,376
=========== =========== =========== ===========
Basic and diluted income (loss) per share
Continuing operations $ (0.21) $ (0.42) $ (0.18) $ (0.12)
Discontinued operations 0.01 0.96 0.00 0.91
Extraordinary income 0.88 0.00 0.88 0.00
----------- ----------- ----------- -----------
Net income $ 0.67 $ 0.55 $ 0.70 $ 0.79
=========== =========== =========== ===========
Weighted average shares outstanding 5,565,256 5,565,074 5,565,256 5,565,074
</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 SEPTEMBER 30,1997
----------------- -----------------
Operating activities
<S> <C> <C>
Loss from continuing operations $ (1,153,162) $ (2,313,776)
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 1,075,121
Changes in assets and liabilities:
Accounts receivable, net 834,339 (3,206,202)
Inventories, net (511,798) (376,776)
Prepaid expenses, deposits and other assets (398) (140,952)
Assets held for sale, net 1,585,678 (1,395,511)
Trade accounts payable (1,354,078) 417,375
Accrued liabilities and federal and state income taxes payable (5,097,021) 338,308
------------ ------------
Net cash used for continuing operations (4,540,892) (5,602,413)
Discontinued operations:
Income 292,132
Depreciation and amortization 118,496
Deferred income taxes 1,633,050
Changes in assets, net (1,157,336)
------------ ------------
Net cash provided by discontinued operations 0 886,342
------------ ------------
NET CASH USED FOR OPERATING ACTIVITIES (4,540,892) (4,716,071)
INVESTING ACTIVITIES
Proceeds from disposal of discontinued operations, net 25,460,698
Purchases of property, plant and equipment (795,586) (1,454,650)
Purchases of property, plant and equipment, discontinued operations (224,246)
Purchases of property, plant and equipment, assets held for sale (158,625) (157,149)
Proceeds from sale of investments 2,424,249 497,864
------------ ------------
NET CASH PROVIDED BY INVESTING ACTIVITIES 1,470,038 24,122,517
FINANCING ACTIVITIES
Proceeds from long-term borrowings 4,256,339 12,150,000
Repayment of long-term borrowings (350,000) (31,550,000)
Proceeds from settlement of subordinated debt 585,440
------------ ------------
NET CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES 4,491,779 (19,400,000)
------------ ------------
Net increase in cash 1,420,925 6,446
Cash at beginning of period 245,843 204,438
------------ ------------
CASH AT END OF PERIOD $ 1,666,768 $ 210,884
============ ============
</TABLE>
See accompanying notes to Condensed Consolidated Financial Statements.
5
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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 for the nine months ended September 30, 1998 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 became 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 and term loan 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
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Company's lenders are now in progress and the Company believes on the basis of
preliminary discussions that an extension will be granted, but the banks have
made no commitment and no assurances 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.
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 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 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 - Restatement of 1997 Financial Statements
The accompanying financial statements for the three and nine
month periods ended September 30, 1997 have been restated to give effect to
adjustments recorded in the fourth quarter of 1997. The Company has determined
that certain of these fourth quarter adjustments should have been recorded in
previously issued financial statements and has accordingly restated the
operating results for each quarter of 1997. The effect of the adjustments
increased loss from continuing operations from amounts previously reported by
$642,706 and $2,117,945 for the three and nine month periods ended September 30,
1997, respectively. Income from and gain on sale of discontinued operations is
also increased by $3,859,232 and $3,976,725 (principally relating to adjustments
of goodwill pertaining to the business sold) for the three and nine months,
respectively. The adjustments to continuing operations consisted of the
following:
THREE MONTHS NINE MONTHS
----------------------------
Inventory valuation $ 800,456 $ 2,073,422
Accrued expenses 126,620 1,002,595
Accounts receivable valuation 89,998 167,838
Other (12,888) (45,819)
Income taxes (361,480) (1,080,091)
--------- -----------
$ 642,706 $ 2,117,945
========= ===========
Adjustments to income taxes for the nine months represent the
tax effects of reported losses from continuing operations which are offset for
tax purposes against taxable income generated from discontinued operations.
7
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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 markets served by the Company are
industrial, commercial and residential security, factory automation, traffic and
transit signal control and audio systems.
The Company's 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.
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. 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 principal balance was
reduced from $20,000,000 to $17,946,680, reflecting a repayment made with
proceeds received from the sale of marketable securities. Proceeds from the sale
of one of CPI's operating divisions, if such sale is effectuated, also are to be
used to repay outstanding borrowings (see note 6). The terms of the Agreement
provide that it expired on November 30, 1998, at which time all outstanding
borrowings became payable. Interest accrues 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 currently in discussion with its lenders about extending the Agreement and
believes, based on preliminary discussions that an extension will be granted,
but the lenders have to date made no commitment and there are no assurances 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
8
<PAGE> 9
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 common shares 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.
Note 6 - Assets Held for Sale
The Company is actively seeking the sale of 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. Net sales of the division approximated $10.1 million and$10.7 million for
the nine month periods ended September 30,1998 and 1997, respectively, and $2.6
million and $3.6 million for the three month periods ended September 30, 1998
and 1997, respectively. Net proceeds after income taxes received from the sale
of the division are to be used to repay outstanding indebtedness.
Note 7 - Inventories
Inventories consist of the following:
SEPTEMBER 30, 1998 DECEMBER 31, 1997
------------------ -----------------
Raw materials $ 926,590 $ 971,596
Work in process 771,561 320,101
Finished goods 1,136,367 1,031,023
---------- ----------
$2,834,518 $2,322,720
========== ==========
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.
Comprehensive income for the three and nine month periods ended September
30,1998 and 1997 consisted of the following:
9
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SEPTEMBER 30, 1998
NINE MONTHS THREE MONTHS
----------- ------------
Net income $3,756,029 $3,884,023
Unrealized loss on investments (694,798) (499,083)
---------- ----------
$3,061,231 $3,384,940
========== ==========
SEPTEMBER 30, 1997
NINE MONTHS THREE MONTHS
----------- ------------
Net income $3,034,911 $4,391,376
Unrealized gain on investments 788,696 788,696
---------- ----------
$3,823,607 $5,180,072
========== ==========
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.
10
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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 markets served
by the Company are 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.
This Amendment to the Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1998 is being filed to include 1997 financial statements,
which were omitted from the original filing of this Report, and which have been
restated to give effect to certain required adjustments as more fully described
in Note 2 of the condensed consolidated financial statements. Management's
Discussion and Analysis of Financial Condition and Results of Operations has
also been amended to reflect the inclusion of the 1997 financial statements and
the information required by Item 305 of Regulation S-K. This Amendment to the
Company's Quarterly Report on Form 10-Q speaks as of the original date of filing
of this Report.
RESULTS OF OPERATIONS
Net sales for the nine months ended September 30, 1998 increased by
approximately 18.9%, as compared to the corresponding period of the preceding
year. The increase relates principally to sales made to EEC, a former division
of the Company sold in the third quarter of 1997. In 1997 sales to EEC, to the
date of disposal, were considered intercompany sales and, accordingly, were
eliminated in consolidation. Net sales for the quarter decreased by
approximately 12.8%, as compared to the same period in 1997. The decrease is
attributable to a slowdown in orders, principally at the Company's EEA division,
caused in part by labor problems at a major customer.
Gross profit as a percent of net sales increased to 19.5% year to date and 16.0%
during the quarter from 17.4% and 13.1% for the corresponding periods of 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. Increases in net sales at the Company's BSCC division also
increased gross margins by spreading the fixed costs of that division's
manufacturing facilities over a broader base.
11
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Selling, general and administrative expense decreased to 18.8% of net sales for
the nine month period ended September 30, 1998 compared to 22.2% for the same
nine month period in 1997. The decrease is attributable principally to increased
sales during the nine months, which on a percentage basis reduces the fixed cost
component, and cost-control measures instituted by current management. Selling,
general and administrative expense increased as a percentage of net sales for
the quarter to 21.4% from 18.0% in 1997 while spending levels remained
approximately the same. The percentage increase is due principally to a decrease
in sales at the Company's EEA division.
Interest expense decreased during the nine month period ended September 30,
1998, as compared to 1997, due principally to lower average borrowings offset by
higher interest rates. Interest expense increased during the quarter, compared
to the corresponding quarter of the preceding year, due to higher rates and
increased average borrowings. Average interest rates approximated 10.5% and
10.0% for the three and nine month periods ended September 30, 1998, compared to
approximately 8.6% in 1997. Interest rates have increased in accordance with the
terms of the Forbearance Agreement and because the Company does not have the
option in 1998 to use the preferential LIBOR based interest rate.
Income tax expense in 1998 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. Income taxes in 1997 represent
the tax effect of losses from continuing operations which are offset for tax
purposes against taxable income from discontinued operations.
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 the Company's Energy Electric Cable division in 1997. These tax payments
were financed with proceeds from long-term borrowings. Increased inventory
levels resulted in approximately $512,000 of cash flows used for operating
activities, primarily caused by an inventory build since December 31, 1997. This
is a normal trend as inventories were reduced in anticipation of the plant shut
down during the holidays. A decrease in assets held for sale, primarily as a
result of a decrease in accounts receivable and inventory at the Company's EEA
division, resulted in approximately $1,586,000 of cash flows provided by
operating activities. Decreased accrued liabilities used approximately
$2,446,000 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
extended the existing facility to November 30, 1998. The Company has entered
into discussions with its lender regarding an extension of its forbearance
agreement beyond this date. However, no assurances can be given that the Company
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will be successful in 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 terms and
conditions of the forbearance agreement and is currently in discussion 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 its 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 common shares 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 anticipated
that this software will be upgraded by the end of 1998. The Company's hardware
compliance issues have been identified and non-compliant hardware is in the
process of being or has 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. The Company requires a new job writing production software
design 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 is 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.
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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.
14
<PAGE> 15
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
SEPTEMBER 30, 1998
Inventories include the cost of copper which has been purchased over various
periods of time. Profitability is affected by changes in copper prices as sales
prices are usually adjusted to current copper prices at the time of shipment.
Products with longer than normal inventory cycles may affect profitability
following periods of significant movement in the cost of copper as copper costs
are relieved from these products at costs different than current copper costs.
The Company does not engage in copper hedging activities.
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 or any other assets, reduce its debt, and
negotiate a longer term credit facility.
15
<PAGE> 16
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.
16
<PAGE> 17
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.
17
<PAGE> 18
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: March 10, 1999 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)
18
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