<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, 1999
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.
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(Exact name of small business issuer as specified in its charter)
Delaware 94-2691724
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
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: 5,565,704 shares of Common Stock, par
value. $.04 per share, outstanding as of November 12, 1999.
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CONNECTIVITY TECHNOLOGIES INC.
INDEX
Page No.
PART I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Balance Sheets
as of September 30, 1999 and December 31, 1998 ............ 3
Condensed Consolidated Statements of Operations for the
Three and Nine Months Ended September 30, 1999 and 1998 ... 4
Condensed Consolidated Statements of Cash Flows
for the Nine Months Ended September 30, 1999 and 1998 ..... 5
Notes to Condensed Consolidated Financial
Statements ................................................ 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ....................... 11
PART II - OTHER INFORMATION
Item 1. Legal Proceedings ........................................... 15
Item 3. Defaults Upon Senior Securities ............................. 15
Item 6. Exhibits and Reports on Form 8-K ............................ 15
<PAGE> 3
CONNECTIVITY TECHNOLOGIES INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
ASSETS SEPTEMBER 30, 1999 DECEMBER 31, 1998
------------------ -----------------
<S> <C> <C>
CURRENT ASSETS
Cash $ 146,735 $ 598,804
Accounts receivable, net 8,587,884 6,740,133
Inventories, net 5,228,754 5,203,023
Prepaid expenses and other current assets 175,891 129,883
Refundable income taxes 667,775 987,622
------------- -------------
Total current assets 14,807,039 13,659,465
Property, plant and equipment, net 6,201,420 6,949,801
Deposits and other assets 123,917 102,919
Goodwill and intangible assets, net of accumulated
amortization 9,284,655 9,606,045
------------- -------------
Total assets $ 30,417,031 $ 30,318,230
============= =============
LIABILITIES
CURRENT LIABILITIES
Loan payable to bank, in default $ 16,119,231 $ 16,462,168
Subordinated notes payable, in default 882,600 882,600
Trade accounts payable 4,123,377 2,740,040
Accrued liabilities 2,861,861 2,596,005
------------- -------------
Total current liabilities 23,987,069 22,680,813
STOCKHOLDERS' EQUITY
Preferred stock - $.01 par value;
10,000,000 shares authorized, none outstanding
Series B Common Stock - $.04 par value;
750,000 shares authorized, none outstanding
Common Stock - $.04 par value; 20,000,000 shares
authorized, 5,771,857 shares issued, 5,565,704
shares outstanding 230,867 230,874
Additional paid-in capital 109,334,759 109,336,244
Accumulated deficit (103,127,400) (101,921,437)
Less 206,601 shares in treasury, at cost (8,264) (8,264)
------------- -------------
Total stockholders' equity 6,429,962 7,637,417
------------- -------------
Total liabilities and stockholders' equity $ 30,417,031 $ 30,318,230
============= =============
</TABLE>
See accompanying notes to Condensed Consolidated Financial Statements
Page 3
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CONNECTIVITY TECHNOLOGIES INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, 1999 SEPTEMBER 30,1998 SEPTEMBER 30, 1999 SEPTEMBER 30, 1998
------------------ ----------------- ------------------ ------------------
<S> <C> <C> <C> <C>
Net sales $31,459,683 $35,101,110 $10,745,283 $10,491,175
Cost of goods sold 25,929,271 28,265,731 8,873,310 8,812,455
----------- ----------- ----------- -----------
Gross profit 5,530,412 6,835,379 1,871,973 1,678,720
Selling, general and administrative expenses 6,052,838 6,589,907 1,887,354 2,244,735
----------- ----------- ----------- -----------
Operating income (loss) (522,426) 245,472 (15,381) (566,015)
Other income (expense):
Gain on sale of investments 462,786 462,786
Interest expense, net (1,279,034) (1,522,260) (436,976) (549,856)
Other 3,497 61,340 (52,566) 23,268
----------- ----------- ----------- -----------
(1,275,537) (998,134) (489,542) (63,802)
----------- ----------- ----------- -----------
Loss from continuing operations before income taxes (1,797,963) (752,662) (504,923) (629,817)
Income taxes (benefit) (592,000) 400,500 (172,000) 357,200
----------- ----------- ----------- -----------
Loss from continuing operations (1,205,963) (1,153,162) (332,923) (987,017)
Gain on sale of discontinued operations, net
of income taxes 0 38,151 0 0
----------- ----------- ----------- -----------
Loss before extraordinary income (1,205,963) (1,115,011) (332,923) (987,017)
Extraordinary income recognized on settlement of
subordinated debt, less income taxes of $481,800 0 4,871,040 0 4,871,040
----------- ----------- ----------- -----------
Net income (loss) $(1,205,963) $ 3,756,029 $ (332,923) $ 3,884,023
=========== =========== =========== ===========
Earnings (loss) per share
Continuing operations $ (0.22) $ (0.21) $ (0.06) $ (0.18)
Discontinued operations 0.00 0.01 0.00 0.00
Extraordinary income 0.00 0.88 0.00 0.88
----------- ----------- ----------- -----------
$ (0.22) $ 0.68 $ (0.06) $ 0.70
=========== =========== =========== ===========
Weighted average shares outstanding 5,565,704 5,565,256 5,565,704 5,565,256
</TABLE>
See accompanying notes to Condensed Consolidated Financial Statements
Page 4
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CONNECTIVITY TECHNOLOGIES INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,1999 SEPTEMBER 30,1998
----------------- -----------------
<S> <C> <C>
OPERATING ACTIVITIES
Loss from continuing operations $ (1,205,963) $(1,153,162)
Adjustments to reconcile loss from operations to
cash provided by (used for) operating activities:
Gain on sale of investments (462,786)
Deferred income taxes 383,000
Depreciation and amortization 1,227,575 1,235,334
Changes in assets and liabilities:
Accounts receivable, net (1,847,751) 2,675,535
Inventories, net (25,731) (198,045)
Prepaid expenses, deposits and other assets (67,006) 2,986
Refundable income taxes 319,847
Trade accounts payable 1,383,337 (1,842,297)
Accrued liabilities and federal and state income taxes payable 264,367 (5,181,457)
------------ -----------
NET CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES 48,675 (4,540,892)
INVESTING ACTIVITIES
Purchases of property, plant and equipment (157,807) (954,211)
Proceeds from sale of investments 2,424,249
------------ -----------
NET CASH PROVIDED BY (USED FOR) INVESTING ACTIVITIES (157,807) 1,470,038
FINANCING ACTIVITIES
Proceeds from long-term borrowings 19,537,554 4,256,339
Repayment of long-term borrowings (19,880,491) (350,000)
Proceeds from settlement of subordinated debt 585,440
------------ -----------
NET CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES (342,937) 4,491,779
------------ -----------
Net increase (decrease) in cash (452,069) 1,420,925
Cash at beginning of period 598,804 245,843
------------ -----------
CASH AT END OF PERIOD $ 146,735 $ 1,666,768
============ ===========
</TABLE>
See accompanying notes to Condensed Consolidated Financial Statements.
Page 5
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CONNECTIVITY TECHNOLOGIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(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-K for the year ended December
31, 1998.
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 1998 and for the three and nine months ended September 30, 1999
and has a working capital deficiency. Also, as further described in Note 3, the
Company has consummated a $16.5 million revolving credit agreement under which,
among other things, all amounts outstanding become due on January 31, 2000. The
Company is in default under its revolving credit facility and all amounts
outstanding thereunder are currently payable. Although the lenders are currently
forbearing from enforcement of their rights under the credit agreement, the
lenders have the right to proceed against the Company's assets at any time and
no assurance can be given that the lenders will continue to forbear. In
addition, the rate at which the Company is required to reduce the principal
amount outstanding under the credit agreement is currently scheduled to double
to $200,000 per month on November 30, 1999. The Company anticipates that this
increase as required by the credit agreement would result in insufficient cash
flows to continue its operations. These conditions raise substantial doubt about
the Company's ability to continue as a going concern.
With the object of resolving these matters, the Company and
its Connectivity Products Incorporated subsidiary ("CPI") executed a non-binding
Letter of Intent with Rome Group, Inc. ("Rome") on November 15, 1999. The Letter
of Intent provides for the acquisition of CPI by Rome through a merger pursuant
to which the Company would receive in exchange for all of its CPI stock, a
subordinated promissory note from Rome in the principal amount of $1.75 million
and a cash payment of $250,000 from CPI. To the extent CPI is unable to fund the
cash payment, Rome would be required to fund the balance of the cash payment. In
such event, Rome would be entitled to be reimbursed from one half of any tax
refunds received by CPI for the period prior to the merger. The Letter of Intent
also provides that simultaneously with the merger, Rome would cause CPI's
obligations to its lenders to be satisfied with a $14 million cash
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payment and a $1 million note provided by Rome under the terms acceptable to the
lenders. The proceeds realizable by the Company under the Letter of Intent would
thus be substantially less than those anticipated in a prior letter of intent
with Rome that terminated without consummation. The merger is subject to
conditions, including Rome's completion of its due diligence investigation to
its satisfaction; the negotiation and execution of a mutually acceptable merger
agreement; Rome's obtaining financing on terms and conditions satisfactory to
Rome; compliance with the notification and waiting period requirements under the
Hart-Scott-Rodino Antitrust Improvement Act of 1976; and the consent of CPI's
lenders. The Company also believes, but cannot assure, that if the merger is
consummated, CPI will continue as part of Rome's group of companies with
sufficient resources to meet its obligations to its customers and suppliers.
However, no assurances can be given that a merger will be concluded, that the
lenders will consent to the proposal embodied in the Letter of Intent or any
modifications thereto, that CPI's lenders will agree to the waivers of CPI's
non-compliance with the financial covenants in its credit agreement or to any
modifications of the terms of that agreement as may be necessary to permit CPI
to meet its ongoing obligations. If the merger does not take place or if the
waivers of the minimum earnings covenants and a reduction in the acceleration of
the principal amount cannot be obtained promptly from the lenders, CPI would
lack sufficient funds to continue its operations and the Company would lose its
entire investment in CPI, its only substantial asset, unless the Company were
successful in promptly implementing interim measures such as selling its
subsidiary or a part thereof to another buyer, concluding another interim
arrangement with its lenders or locating another source of financing. Although
other potential buyers have expressed an interest in acquiring CPI, the Company
sees no immediate prospect of promptly implementing any such interim measures.
Note 2 - 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 97.8% owned subsidiary, CPI.
All significant intercompany accounts and transactions have been eliminated in
consolidation.
Certain reclassifications of amounts reported in the
accompanying December 31, 1998 Condensed Consolidated Balance Sheet have been
made to permit comparison with September 30, 1999 classifications.
Note 3 - Revolving Credit Facility, in Default
On April 27, 1999, CPI consummated a $16.5 million revolving
credit agreement ("the 1999 Revolver") whereunder borrowings under the credit
agreement existing at December 31, 1998 became amounts outstanding under the
1999 Revolver. The 1999 Revolver matures on January 31, 2000. Borrowings under
the 1999 Revolver: 1) accrue interest at the bank's base rate plus 200 basis
points (the bank's base rate was 8.25% at September 30, 1999); 2) are secured by
substantially all assets of CPI and further secured by the Company's interest in
the stock of CPI and; 3) cannot exceed an amount that is calculated by reference
to specified percentages of eligible accounts receivable, inventory, and
equipment. The 1999 Revolver contains a lockbox requirement and a subjective
acceleration clause. The 1999 Revolver also contains covenants restricting the
amount of capital expenditures and requiring, among other things, the attainment
of monthly minimum earnings and cash flow related thresholds and monthly
principal reductions which increase to $200,000 per month on November 30, 1999.
The Company was not in compliance with the minimum earnings covenant as of
August 31 and September 30, 1999 and is currently in default under the 1999
Revolver and all amounts outstanding thereunder are currently payable. Although
the lenders are currently forbearing from enforcement of their rights under the
credit agreement, the lenders have the right to proceed against the Company's
assets at any time and no assurance can be given that the lenders will continue
to forbear. The
7
<PAGE> 8
Company is in negotiations with its lenders to waive the non-compliance default,
revise the monthly covenant requirements, and to reduce the accelerated monthly
principal reductions. No assurances can be given that these negotiations will
be successful or that the Company will be able to comply with the covenants in
the future. If the Company is not successful in its efforts to negotiate more
favorable terms or to have their non-compliance waived, the lenders could
proceed against CPI and its assets and the Company could lose its entire
investment in CPI.
Note 4 - Subordinated Debt, in Default
Subordinated notes payable were issued as part of the
Company's acquisition of CPI. The notes bear interest at the rate of 10% per
annum, payable quarterly. The Company has made no interest payments on the
subordinated notes since December 31, 1997. Under the terms of the note,
principal becomes payable on May 31, 2003. The Company entered into agreements
with certain of the noteholders in 1998 pursuant to which the Company's
obligations for principal amounting to $4,767,400 and accrued interest of
$260,440 were canceled.
In connection with consummating the 1999 Revolver, the remaining
holder of the subordinated note agreed not to require any payments of either
principal or interest under the note until the earlier of such time as the 1999
Revolver is repaid, or May 2002.
Note 5 - Anticipated Merger of Subsidiary
On November 15, 1999, the Company signed a non-binding Letter of Intent
to merge CPI with Rome. The Letter of Intent provides for the acquisition of CPI
by Rome through a merger pursuant to which the Company would receive in exchange
for all of its CPI stock a subordinated promissory note from Rome in the
principal amount of $1.75 million and a cash payment of $250,000 from CPI. To
the extent CPI is unable to fund the cash payment, Rome is required to fund the
balance of the cash payment. In such event, Rome will be entitled to be
reimbursed from one half of any tax refunds received by the Company for the
period prior to the merger. The Letter of Intent also provides that
simultaneously with the merger, Rome will cause CPI's obligations to its lenders
to be satisfied with a $14 million cash payment and a $1 million note provided
by Rome under terms acceptable to the lenders. The proceeds realizable by the
Company under the Letter of Intent will thus be substantially less than those
anticipated in a prior letter of intent with Rome that terminated without
consummation. The Company is currently negotiating for the banks to accept
Rome's payment and note as full satisfaction on the outstanding amount to the
banks. The transaction is subject to conditions, including Rome's completion of
its due diligence investigation to its satisfaction; the negotiation and
execution of a mutually acceptable merger agreement; Rome's obtaining financing
on terms and conditions satisfactory to Rome; the consent of CPI's lenders; and
compliance with the notification and waiting period requirement under the
Hart-Scott-Rodino Antitrust Improvement Act of 1976. Should the transaction be
consummated in its current form, the Company would likely record a loss on
impairment of goodwill in the range of $5 million to $8 million. There can be no
assurances that the Company will be successful in its efforts to sell its stock
in its CPI subsidiary or to complete the merger. A sale or merger of the CPI
subsidiary would effectively eliminate the operating activities of the Company.
Note 6 - Inventories
Inventories consist of the following:
September 30, 1999 December 31, 1998
------------------ -----------------
Raw materials $3,436,788 $3,211,631
Work in process 1,176,785 686,124
Finished goods 615,181 1,305,268
---------- ----------
$5,228,754 $5,203,023
========== ==========
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Note 7 - 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. For the
three and nine month periods ended September 30, 1999, the Company had no
material transactions other than net loss that should be reported as
comprehensive loss. Comprehensive income for the three and nine month periods
ended September 30, 1998 consisted of the following:
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
========== ==========
Note 8 - 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.
Note 9 - Contingencies
The Company is subject to various other legal proceedings and claims
that arise in the ordinary course of business. In the opinion of management,
such proceedings will not, individually or in the aggregate, have a material
adverse impact on the Company's financial position. The Company settled a
previously reported $2 million lawsuit on August 19, 1999 for an amount
substantially less than initially sought.
Note 10 - Segment Information
The Company has two reportable business segments: BSCC division and
Energy Electric Assembly (EEA) division. The BSCC division manufactures low
voltage copper electronic and electric wire and cable for security, factory
automation, signal and sound markets. The EEA division provides cable design
application and assembly services for machine tool and robotics products used
primarily within the automotive industry. The divisions maintain separate and
distinct physical operating facilities.
The Company also maintains a corporate headquarters apart from its
operating divisions. The Company evaluates performance and allocates resources
based on profit or loss from operations before income taxes. Expenses incurred
and revenues received by the corporate headquarters are not allocated to the
divisions.
The divisions use the same accounting policies as those described in
Note 1, "Condensed Consolidated Financial Statements". Interdivision sales
consist principally of product sales from the BSCC division to the EEA division.
Such sales carry the same markup as sales to external customers.
Following is a presentation of selected financial information for each
division and the corporate headquarters for the nine months ended September 30,
1999 and 1998.
BSCC EEA
Division Division Corporate Eliminations Consolidation
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9
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<TABLE>
<S> <C> <C> <C> <C> <C>
Nine months ended September 30, 1999
Sales to external customers $22,298,056 $ 9,161,627 $31,459,683
Interdivision sales 1,431,330 $ (1,431,330)
Income (loss) from continuing
operations before income taxes (618,060) 730,204 $(1,540,718) (369,389) (1,797,963)
Total assets 17,253,187 7,614,228 16,030,709 (10,481,093) 30,417,031
Nine months ended September 30, 1998
Sales to external customers $24,996,997 $10,104,113 $35,101,110
Interdivision sales 1,378,296 $ (1,378,296)
Income (loss) from continuing
operations before income taxes (205,623) 1,238,292 $(1,458,911) (326,420) (752,662)
Total assets 17,669,402 5,898,424 13,949,992 (7,791,834) 29,725,984
</TABLE>
10
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS SEPTEMBER 30, 1999
The primary business of Connectivity Technologies Inc. (the "Company" or "CTI")
is the manufacture and assembly of wire and cable products through its
subsidiary, Connectivity Products Incorporated ("CPI"). The major markets served
by the Company are commercial and residential security, factory automation,
traffic and transit signal control and audio systems. The Company has no
operations other than those carried out by CPI.
RESULTS OF OPERATIONS
Net sales decreased by approximately 10.4% during the nine month period ended
September 30, 1999, and increased by approximately 2.4% during the three month
period ended September 30, 1999, as compared to the corresponding periods of the
preceding year. The BSCC division experienced decreases in sales for both
periods which, for the nine months ended September 30, 1999, is primarily
attributable to a 9.5% decrease in the Comex average price of copper, on which
BSCC bases its selling price. For the three month period ended September 30,
1999, BSCC shipped 7.2% more product pounds and the Comex average price of
copper increased by 3.7%, although these increases were offset by downward
pricing pressures. Net sales at the EEA division decreased by approximately 9.3%
during the nine month period ended September 30, 1999 and increased by
approximately 17.8% during the three month period ended September 30, 1999, as
compared to the corresponding periods of the preceding year. EEA continues to
experience increased competition which adversely impacted sales mix and created
pricing pressures for the nine month period ended September 30, 1999. The
increase for the three month period ended September 30, 1999 is attributable to
a strike at a major customer in the corresponding period of the preceding year.
Further, management believes customer apprehension at both operating divisions
due to a perceived lack of financial stability has also negatively impacted
sales.
Gross profit as a percent of net sales decreased to 17.6% during the nine month
period ended September 30, 1999 as compared to 19.5% for the corresponding
period of the preceding year. During the three month period ended September
30,1999, gross profit increased to 17.4% as compared to 16.0% for the
corresponding period of the preceding year. The decrease for the nine month
period ended September 30, 1999 is attributable principally to the decrease in
sales which results in less revenue to absorb fixed costs inherent in cost of
goods sold. The increase for the three month period ended September 30, 1999 is
primarily attributable to reduced overhead costs at BSCC as a result of
management initiatives to control costs such as overtime dollars. Margins
continue to be affected positively by increased manufacturing efficiencies
inherent in new machinery acquired and new manufacturing and scheduling
processes implemented by management.
Selling, general and administrative expense increased to 19.2% of net sales for
the nine month period ended September 30, 1999 compared to 18.8% for the same
nine month period in 1998. The increase is attributable principally to decreased
sales during the nine months, which on a percentage basis increases the fixed
cost component. On a dollar basis, selling, general and administrative expense
decreased approximately $540,000 from the corresponding period of the preceding
year. The decrease is primarily attributable to a decrease in the amortization
of loan origination fees and a reduction in salaries at both operating divisions
as a result of headcount reductions.
Interest expense decreased during the nine and three month periods ended
September 30, 1999, as compared to 1998, due principally to lower average
borrowings and less subordinated debt offset by higher interest rates. Interest
rates have increased in accordance with the terms of the Second Amended
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<PAGE> 12
and Restated Revolving Credit Agreement and because the Company does not have
the option in 1999 to use the preferential LIBOR based interest rate.
Income tax benefit from continuing operations totaled $592,000 for the nine
month period and $172,000 for the three month period ended September 30, 1999,
as compared to income tax expense of $400,500 and $357,200 for the corresponding
periods of the preceding year. The effective tax rate for the year was 34%
during the nine and three months ended September 30, 1999. At September 30,
1999, the Company is projecting a pre-tax loss and the Company will be able to
carryback such loss to years in which the Company paid income taxes and obtain
an income tax refund.
FINANCIAL CONDITION AND LIQUIDITY
The accompanying statement of cash flows for the nine months ended September 30,
1999 reports net cash provided by operating activities of approximately $49,000
as compared to cash used for operating activities of approximately $4,541,000
during the corresponding nine months of the previous year. Increased accounts
receivable of approximately $1,848,000 resulted in cash used for operating
activities, primarily as a result of slightly higher sales and slower
collections in the quarter ended September 30, 1999 over the previous quarter.
Offsetting the increase in receivables is an increase in payables of
approximately $1,383,000 which resulted in cash flows provided by operating
activities during the nine months ended September 30, 1999, primarily caused by
increased purchases as compared to the end of the previous year when purchases
tend to decrease as sales decrease. Included in the determination of cash flows
from operating activities for the nine months ended September 30, 1998 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. The Company used
approximately $1,843,000 of operating cash flows to reduce accounts payable in a
concerted effort to make payments within or better than accepted trade terms.
The Company used approximately $158,000 for the purchase of property, plant and
equipment for the nine months ended September 30, 1999 as compared to an
approximate use of $904,000 for the corresponding nine months of the previous
year. The change is attributable to the upgrading of machinery at the BSCC
division during the nine months ended September 30, 1998. The Company sold
investments during the nine months ended September 30, 1998, and realized a
source of funds of approximately $2,424,000.
Approximately $343,000 in bank repayments resulted in cash used by financing
activities during the nine months ended September 30, 1999 as compared to
$4,492,000 provided by financing activities for the corresponding nine months
ended September 30, 1998. The borrowings in the nine months ended September 30,
1998 were used for the payment of $2,884,000 in taxes, the purchase of
equipment, and the financing of working capital.
As described in Note 3 of the accompanying Notes to Condensed Consolidated
Financial Statements, the 1999 Revolver to date has been the Company's principal
external source of capital. The terms of the 1999 Revolver extend to January 31,
2000. The Company is in default under the 1999 Revolver and all amounts
outstanding thereunder are currently payable. Although the lenders are currently
forbearing from enforcement of their rights under the 1999 Revolver, the lenders
have the right to proceed against the Company's assets at any time and no
assurance can be given that the lenders will continue to forbear. In addition,
the rate at which the Company is required to reduce the principal amount
outstanding under the 1999 Revolver is currently scheduled to double to $200,000
per month on November 30, 1999. The Company is in negotiations with its lenders
to revise the current covenant and principal reduction requirements. If the
merger as described in Note 5 of the Notes to Condensed Consolidated Financial
Statements does not take place or if waivers of the minimum earnings covenants
and relief from the doubling to $200,000 of the principal on November 30, 1999
cannot be obtained promptly from the lenders, CPI would
12
<PAGE> 13
lack sufficient funds to continue its operations and that the Company could
lose its entire investment in CPI, its only substantial asset, unless the
Company were successful in promptly implementing interim measures such as
selling its subsidiary or a part thereof to another buyer, concluding another
interim financing arrangement with its lenders or locating another source of
financing. Although other potential buyers have expressed interest in acquiring
CPI, the Company sees no immediate prospect of promptly implementing any of such
interim measures. No assurances can be given that the negotiations with the
lenders will be successful or that the Company will be able to comply with the
covenants in the future.
YEAR 2000 UPDATE
The Company has made significant progress in its plan to ensure Year 2000
compliancy. Its BSCC division implemented and upgraded its business critical
systems in 1998. The EEA division completed the same implementation and upgrade
of business critical systems in the second quarter of 1999. The Company's
hardware compliance issues have been identified and non-compliant hardware has
been replaced or upgraded. Most other production software and database
applications that are not Year 2000 ready have been scheduled to migrate to
fully compliant systems by the fourth quarter 1999. The Company has purchased
all of the software upgrades. Altogether, the total cost to upgrade, test, and
implement the Company's hardware and software to date is approximately $490,000
and has been funded through cash flows and bank borrowings. The Company requires
a new job writing production software design. The programming required to make
the job writing software compliant, which is being performed internally, has
begun and it is anticipated that this software will be fully programmed and
tested during the fourth quarter of 1999. There is a contingency plan if this
project is not completed by December 31, 1999. All software and hardware has
been tested and non-compliant issues were addressed in the second quarter of
1999. No contingency plan exists at this time in the event that any tested
system fails. The Company plans to evaluate such failures on a case by case
basis. The Company has surveyed its current customers, service providers, and
suppliers regarding Year 2000 compliancy. No issues have been identified with
outside parties to date.
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, customers, and
service providers, 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 1999 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 its CPI subsidiary or any
13
<PAGE> 14
other assets or to consummate the merger with Rome, the lenders' willingness to
continue to forbear under the credit agreement and accept less than full value
as full satisfaction of CPI's bank debt, its ability to comply with its credit
agreement, including the accelerated reduction of the principal amount, its
ability to continue to negotiate long term credit facilities, the Company's
ability to generate sufficient cash to continue funding its operations, and the
Company's ability to adequately address its Year 2000 issues in a timely manner.
14
<PAGE> 15
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company settled a previously reported $2 million wrongful termination
lawsuit, Wayne MacPherson v. BSCC, on August 19, 1999. In exchange for a general
release of claims, the Company paid the defendant an amount substantially less
than initially sought.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
The Company's indebtedness to the lenders is approximately $15.5 million on
November 17, 1999. On April 27, 1999, CPI, consummated a $16.5 million revolving
credit agreement ("the 1999 Revolver") whereunder borrowings under the credit
agreement existing at December 31, 1998 became amounts outstanding under the
1999 Revolver. The 1999 Revolver matures on January 31, 2000. Borrowings under
the 1999 Revolver: 1) accrue interest at the bank's base rate plus 200 basis
points (the bank's base rate was 8.25% at September 30, 1999); 2) are secured by
substantially all assets of CPI and further secured by the Company's interest in
the stock of CPI and; 3) cannot exceed an amount that is calculated by reference
to specified percentages of eligible accounts receivable, inventory, and
equipment. The 1999 Revolver contains a lockbox requirement and a subjective
acceleration clause. The 1999 Revolver also contains covenants restricting the
amount of capital expenditures and requiring, among other things, the attainment
of monthly minimum earnings and cash flow related thresholds and monthly
principal reductions which increase to $200,000 per month on November 30, 1999.
The Company was not in compliance with the minimum earnings covenant as of
August 31 and September 30, 1999 and is currently in default under the 1999
Revolver and all amounts outstanding thereunder are currently payable. Although
the lenders are currently forbearing from enforcement of their rights under the
1999 Revolver, the lenders have the right to proceed against the Company's
assets at any time and no assurance can be given that the lenders will continue
to forbear. The Company is in negotiations with its lenders to waive the non-
compliance default, revise the monthly covenant requirements, and to reduce
the accelerated monthly principal reductions. No assurances can be given that
these negotiations will be successful or that the Company will be able to
comply with the covenants in the future. If the Company is not successful in
its efforts to negotiate more favorable terms or to have their non-compliance
waived, the lenders could proceed against CPI and its assets and the Company
could lose its entire investment in CPI.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No. Description of Document
- ----------- -----------------------
27 Financial Data Schedule
(b) Reports on Form 8-K
None.
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 22, 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)
16
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