<PAGE> 1
U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-K
[X] FOR ANNUAL AND TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
Commission file number 0-12113
CONNECTIVITY TECHNOLOGIES INC.
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(Exact name of registrant as specified in its charter)
Delaware 94-2691724
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(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
680 Mechanic Street, Suite 1201, Leominster, MA 01453
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (978) 537-9138
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Securities registered pursuant to Section 12(b) of the Act: None
----
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.04 PAR VALUE PER SHARE
(Title of Class)
Indicate by check mark whether the registrant (1) filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
during the past 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No _ .
Indicate by check mark if disclosure of delinquent filers in response
to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates
of the registrant based on the closing price of such stock on March 26, 1999,
was $2,725,490. On such date, the closing price of registrant's Common Stock was
$.75 per share. Solely for the purposes of this calculation, shares benefi-
cially owned by directors, executive officers and stockholders of the registrant
that beneficially own more than 10% of the registrant's voting stock have been
excluded, except shares with respect to which such directors and officers
disclaim beneficial ownership. Such exclusion should not be deemed a determi-
nation or admission by the registrant that such individuals are, in fact,
affiliates of the registrant.
The number of shares of Common Stock, $.04 par value per share,
outstanding as of March 24, 1999 was 5,565,256.
DOCUMENTS INCORPORATED BY REFERENCE: None
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
(a) General Development of Business
-------------------------------
Connectivity Technologies Inc. (the "Company" or the "Registrant") is
principally engaged in the manufacture and assembly of wire and cable through
its subsidiary, Connectivity Products Incorporated ("CPI"). The Company owns
97.8% of the capital stock of CPI. The Company originally acquired 85% of CPI on
May 31, 1996 from James S. Harrington, Duane A. Gawron, Trustee of the Living
Trust of Duane A. Gawron, Margo Gawron, John E. Pylak, Trustee of the John E.
Pylak Living Trust, Rebecca Pylak and Kurt Cieszkowski (collectively, the
"Sellers"). On June 30, 1998, four of the Sellers assigned all of their rights,
title, and interest in their outstanding common stock (representing 8.4% of the
total outstanding common stock of CPI) to CPI. The four Sellers also assigned
all of their rights, title, and interest in their subordinated notes amounting
to approximately $3.4 million plus accrued interest of approximately $166,000 to
the Company and CPI. On August 26, 1998, another Seller assigned all of his
rights, title, and interest in his outstanding common stock (representing
approximately 4.4% of the total outstanding common stock of CPI) to CPI. This
Seller also assigned all of his rights, title, and interest in his subordinated
note amounting to approximately $1.4 million plus accrued interest of
approximately $94,000 to the Company and CPI. In October 1998, the Company
announced its plan to sell the CPI subsidiary or any of its divisions. The
remaining Seller owns 2.2% of the capital stock of CPI. Prior to its acquisition
of CPI, the Company was principally engaged in evaluating candidates for
acquisition.
At December 31, 1998, the Company had negative working capital, was in
default of its loan agreement and experienced recurring losses from continuing
operations. In addition, amounts under the Company's loan agreement are due and
payable and, although the lender has not so indicated, the lender has the right
to proceed against the Company's assets. These conditions raise substantial
doubt about the Company's ability to continue as a going concern. Management's
plans to resolve these matters presently include the sale by the Company's CPI
subsidiary of some or all of its operating assets or the sale by the Company of
its stock in CPI. If a sale is successfully consummated, the proceeds from the
sale would be utilized first to pay the outstanding loan payable to the bank. In
the event a CPI sale cannot be consummated, management intends to continue
enhancing operations and consider seeking alternative sources of financing, as
necessary. See "Management's Discussion and Analysis of Financial Condition or
Plan of Operation."
CPI was formed by the merger of CPI's three operating divisions in
October 1995. On July 11, 1997 (the "Closing Date"), CPI sold substantially all
of the assets and certain of the liabilities of its distribution division (the
"Sale") which operated under the name, Energy Electric Cable ("EEC") to Reel
Acquisition Corp. (the "Purchaser"), a wholly-owned subsidiary of Anicom, Inc.
("Anicom"). The purchase price for the EEC division consisted of approximately
$27,000,000 in cash after post-closing adjustments and 190,476 shares of
Anicom's common stock, par value $.001 per share (the "Anicom Stock"), which was
valued at $2,000,000, for a total purchase price of approximately $29,000,000.
In connection with the Sale, CPI and Anicom also entered into a Supply Agreement
pursuant to which Anicom is required to purchase a specified amount of wire and
cable products manufactured by CPI during each of the five years following the
Closing Date. See "Narrative Description of Business - Manufacturing";
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
CPI has two remaining operating divisions. The first, located in
Leominster, Massachusetts, operates under the name "BSCC" and manufactures low
voltage wire and cable for the security, factory automation, signal and sound
markets. The second, located in Auburn Hills, Michigan, operates under the name
Energy Electric Assembly ("EEA") and specializes in designing and manufacturing
cable assemblies primarily for robotics and machine tool manufacturers and
end-users (factory automation). EEA obtains a majority of the components for its
products from BSCC.
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Following the Sale of EEC in July 1997, the Company has focused on
positioning itself as a leading manufacturer and assembler of wire and cable
products. By developing long-standing relationships based on quality products,
knowledge of its customers, continuity of supply, customized design and prompt
delivery at competitive prices, the Company endeavors to expand its current
market position in the connectivity industry. With a management team experienced
in manufacturing and the specialized assembly businesses, the Company seeks to
position itself to evaluate and pursue opportunities for advancement and growth
in its industry through expansion into targeted geographical areas and new
internally developed product lines, and the development of strategic
relationships with major suppliers and manufacturers in the industry.
The Company was incorporated under the laws of Delaware on September
29, 1980 as Fortune Systems Corporation. In June 1987, the Company changed its
name to Tigera Group, Inc., and in December 1996, the Company changed its name
from Tigera Group, Inc. to Connectivity Technologies Inc.
In December 1996, the Company effectuated a one-for-four reverse stock
split. Unless otherwise indicated, all share and per share amounts set forth in
this Annual Report reflect such reverse stock split.
On November 8, 1995, Beverly Hills Bancorp sold to Hudson River Capital
LLC, formerly Victory Capital LLC ("Hudson River"), its holdings of shares of
common stock, par value $.04 per share, of the Company ("Common Stock") owned
directly and indirectly (1,185,000 shares) for $3.60 per share. Hudson River
makes investments in entities in which it acquires either controlling or
non-controlling equity interests. Hudson River also purchased, or agreed to
purchase, certain shares of the Company owned by Albert M. Zlotnick (432,750
shares) and Michael S. Berlin (62,062 shares) at $3.60 per share which purchases
were completed on November 15, 1995 and January 4, 1996, respectively. Effective
as of November 8, 1995, all of the prior directors of the Company resigned
(except for Albert M. Zlotnick and A. Clinton Allen whose terms as directors
ended in December 1996 when their successors were elected) and were replaced by
newly designated directors. Hudson River and its affiliates currently hold
approximately 33.3% of the outstanding shares of Common Stock of the Company.
(b) Financial Information About Industry Segments
---------------------------------------------
Financial information about industry segments is more fully described
in Note 18 in the Notes to Consolidated Financial Statements included in this
Report.
(c) Narrative Description of Business
---------------------------------
GENERAL DESCRIPTION OF THE INDUSTRY
The wire and cable industry encompasses a wide variety of product
applications requiring electronic and electrical connectivity. The Company
participates in the security, factory automation, signal and sound markets.
Technological advances in commercial building monitoring and a greater
concern for safety features in commercial buildings and residences have
increased demand for wiring products for fire and burglary alarms, motion
detectors, voice activators, climate controls, and electronic card and video
surveillance devices. Increasingly stringent safety requirements imposed by
local and national building codes and insurance providers have also increased
the demand for "safety cable," which refers to certain physical attributes of
cable that improve the safety and performance of such cables under hazardous
conditions, particularly in buildings with advanced fire alarm and safety
systems. Continued growth of the factory automation and robotic machinery market
as well as changes in equipment installation procedures have increased the
demand for wire and cable products servicing this industry. Demand for signal
wire used in traffic control signals and transit wire installed in, among other
things, subways, bridges, tunnels and toll booths, is driven by the need to
rebuild infrastructure and the pace of new construction in this area.
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DIVISIONS AND PRODUCTS
Manufacturing. The Company's BSCC division manufactures low voltage
copper wire and cable for the security, factory automation, signal and sound
markets. Low voltage wire and cable includes electronic and electrical wire and
cable, control and signal wire and cable, climate control wire and cable,
transit wire and cable and low smoke and low halogen wire and cable products.
BSCC also manufactures wire and cable for sale to distributors that is
specifically designated by original equipment manufacturers ("OEM's") or
installers as meeting the specification of a particular function ("spec'd
product"). Competition for sales of spec'd product is generally limited to
select competitors, if any, who have been designated by the OEM as manufacturers
of the spec'd product.
The manufacturing process for insulated wire consists of extruding
plastic compounds (the insulation) over conductive metal, such as copper (the
conductor). Cables are then formed by combining various insulated wires. BSCC
melts and applies compound to wire using extruders that pump molten compound
through dies to shape it into its final form on the wire. After extrusion,
insulated wires pass through a variety of secondary operations depending on the
finished cable form. Secondary operations are primarily twinning (the twisting
of two insulated wires), cabling (the grouping of a multitude of insulated
wires) and jacketing (the extrusion of a plastic compound jacket over the
finished cable). Additional operations may be performed to stripe insulated wire
for identification and apply tape or braided metal shields for mechanical
protection and reduction of electrical interference. BSCC is an Underwriters
Laboratory(TM) ("UL") approved manufacturer and is ISO 9000 certified. The
Company depends upon UL for approvals of many of its products. Currently, all of
the Company's products requiring the UL designation are UL approved.
BSCC uses copper as the base conductor material for the majority of the
wire and cable it produces. BSCC has not experienced difficulties in obtaining
sufficient supplies of copper in the past and typically purchases copper wire
weekly to minimize its investment in inventory. Although the Company does not
engage in hedging transactions for the purchase of copper, it typically orders
copper 30 days in advance of its projected use. BSCC has generally been able to
pass on increases and decreases in the price of copper to its customers, but
there can be no assurance that it will be able to do so in the future. Given the
volatility in the price and the worldwide plentiful supply of copper, BSCC does
not generally enter into long term agreements to supply its products at a fixed
price. See "Description of Business - Raw Materials."
BSCC also uses a number of plastic compounds as insulators. Supplies of
these materials are generally adequate and are expected to remain so for the
foreseeable future. BSCC has alternative sources of supply for these insulating
materials and may use alternative insulating materials in its products.
The manufacture of wire and cable products requires a wide variety of
manufacturing, electronic control and testing equipment. Due to the high cost
and long delivery times of new equipment, BSCC purchases used manufacturing
equipment and reconfigures it to achieve desired operating speeds and
tolerances. Although BSCC has been successful in acquiring used machinery in the
past, a shortage of such equipment could temporarily restrain the future growth
of BSCC. As the reconfiguration and operation of this equipment requires
experienced operators and a continual maintenance program, BSCC has several
equipment specialists on staff to modify and maintain the equipment.
BSCC's products are sold to distributors and others on a non-exclusive
basis. After the sale of the EEC division in July 1997, BSCC began utilizing
several other key distributors in strategic product areas. During fiscal 1998
and 1997, Anicom, Inc. accounted for approximately 34% and 20%, respectively, of
BSCC's net sales. No other customer accounted for more than 10% of BSCC's
revenues during fiscal 1998 and 1997. BSCC also supplies standard and specialty
products to the Company's EEA division which accounted for 5% and 7% of BSCC's
net sales for Fiscal 1998 and 1997, respectively. BSCC currently sells to many
distributors nationwide, and management believes that BSCC's relationships with
its distributors are excellent. In general, BSCC's distributors are not
obligated to carry BSCC's products exclusively and may carry products that
compete with BSCC's products. Although the loss of one or more distributors
could have an adverse effect on BSCC's results of operations in the short term,
management believes that additional distributors could be added without
significant delay.
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Assembly. EEA provides design application and assembly services to
OEM's, such as machine-tool and robotics manufacturers, and to end-users of such
factory automation equipment, in each case, primarily in the automobile
industry. EEA's strategy is to design, engineer and produce subassemblies which
combine cables with various connectors to strict specifications to create
value-added products. In the assembly process, specialized cables are cut to
length, then undergo many detailed processes in order to prepare the cables for
connection and then are attached to specified connectors. Electrical inspection
is then performed before final shipment.
EEA seeks to capitalize on the development of modular machine tool
design which requires complex cable assemblies to link machinery with the
industrial computers controlling it. In addition, cable subassemblies previously
"hardwired" into machinery by electricians are now being designed in modular
form to promote faster and more economical retooling of equipment and assembly
lines.
Although EEA acquires its products from a variety of vendors and is not
dependent on any single vendor, BSCC accounted for approximately 27% and 28% of
EEA's purchases in 1998 and 1997, respectively.
As the services provided by EEA are often time-intensive and can result
in costly delays if not completed to exact specifications, EEA seeks to
encourage OEM's who currently perform this function "in-house" to "outsource"
these functions to EEA.
Competition
The specialty wire and cable market is highly competitive and
fragmented, but in recent years the industry has been experiencing
consolidations. Many of the Company's competitors are substantially larger and
have greater financial, engineering, distribution, manufacturing and other
resources than the Company. Management believes that it competes successfully in
its markets due to its experienced management team, its established reputation
for quality products, its sales force, and its extensive knowledge of its
current customer base.
Management believes that the principal competitive factors in the
manufacturing division are quality and price. BSCC believes that its ability to
extrude and cable low voltage products at a high rate of speed, while
maintaining product quality, enables it to compete effectively. BSCC faces
substantial competition from several manufacturers that have greater financial
and technical resources including Belden Wire & Cable Corp., General Cable
Industries, and the West Penn Wire Division of Cable Design Technologies
Corporation, as well as several smaller regional companies.
Management believes that the principal competitive factors in the
assembly market are knowledge of end-user requirements, quality production, and
the ability to deliver the finished product to end-users on a timely basis. EEA
competes primarily with numerous regional companies most of which have greater
financial and technical resources than the Company.
Wireless communications technology may represent a threat to
copper-based systems by reducing the need for premise wiring. The Company
believes that the limited signal security, the relatively slow transmission
speeds of current wireless systems and the relatively higher cost restrict the
use of such systems in many data communication markets. However, there can be no
assurance that future advances in wireless technology will not have a material
adverse effect on the Company's business.
RAW MATERIALS
Copper is the principal raw material used in the Company's products.
Significant increases in the price of the Company's products due to increases in
the cost of copper could have a negative effect on demand for the Company's
products. Similarly, significant decreases in the price of copper could result
in the price for the Company's products decreasing which could have an adverse
effect on the Company's sales and gross profit until inventory with a higher
carrying cost is distributed.
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The copper futures contract as reported on the COMEX stabilized
somewhat in 1998, decreasing 6.9% between the first and second half of 1998 as
compared to a 11.3% decrease between the first and second half of 1997. However,
during 1998, the copper futures contract as reported on the COMEX dropped 25.4%
compared to 1997, reaching near the twelve year low for such contracts. The
effects of copper pricing on profit is more fully described in Item 7A of
this Report.
ENVIRONMENTAL MATTERS
The Company is subject to numerous United States federal, state and
local laws and regulations relating to the storage, handling, emission and
discharge of materials into the environment, including the United States
Comprehensive Environmental Response, Compensation and Liability Act (CERCLA),
the Clean Water Act, the Clean Air Act, the Emergency Planning and Community
Right-To-Know Act and the Resource Conservation and Recovery Act. Regulations of
particular significance to the Company are those pertaining to handling and
disposal of solid and hazardous waste, discharge of process wastewater and
stormwater and release of hazardous chemicals. Although the Company believes it
is in compliance with such laws and regulations, there can be no assurance that
the Company will be in compliance with such laws in the future or that it will
not incur fines, penalties or other costs as a result of noncompliance or an
allegation thereof.
The Company does not currently anticipate any material adverse effect
on its results of operations, financial condition or competitive position as a
result of compliance with federal, state or local environmental laws or
regulations. However, some risk of environmental liability and other costs is
inherent in the nature of the Company's business, and there can be no assurance
that material environmental costs will not arise. The Company is currently not
party to any regulatory action due to noncompliance with environmental laws or
regulations. It is possible that future developments, such as promulgation of
implementing regulations for the 1990 amendments to the Clean Air Act or the
imposition of other requirements of environmental laws and enforcement policies
thereunder, could lead to material costs of environmental compliance and cleanup
by the Company.
BACKLOG
At the end of Fiscal 1998, backlog amounts were $1.1 million and
$312,000 at BSCC and EEA respectively. At the end of Fiscal 1997, backlog
amounts were $2.1 million and $540,000 at BSCC and EEA respectively. Backlog
orders are usually subject to cancellation without penalty.
WORKING CAPITAL PRACTICES
The Company provides rights to return product in certain instances.
EMPLOYEES
As of March 1, 1999, the Company had 197 full time employees of whom
132 were employed at the BSCC manufacturing division and 65 were employed at the
EEA assembly division.
RESEARCH AND DEVELOPMENT; GOVERNMENT CONTRACTS; SEASONALITY
During the last three fiscal years, the Company did not materially
engage in research and development or enter into government contracts. The
Company is not subject to seasonal trends.
ITEM 2. DESCRIPTION OF PROPERTIES
The manufacturing facilities for BSCC consist of two leased premises
comprised of 50,000 and 80,000 square feet of space, in Leominster,
Massachusetts. The Company also leases an additional 9,000 square feet of office
space in Leominster, Massachusetts. The office space meets current demands. BSCC
believes that its existing manufacturing facilities are adequate for its present
foreseeable needs.
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EEA subleases, as a tenant at will, 30,000 square feet of
office, assembly and warehouse space in Auburn Hills, Michigan. EEA believes the
existing facility is adequate for its current and future needs; however, EEA
will continue to increase space as the need arises. Management believes that
adequate replacement space is readily available in its locality.
ITEM 3. LEGAL PROCEEDINGS
The Company is a defendant in a lawsuit captioned Wayne MacPherson v.
BSCC, which was commenced in March 1999 in the State of New York Supreme Court
for the County of Chenango. The complaint alleges that the Company wrongfully
terminated the employment of Mr. MacPherson as a result of a medical disability.
Mr. MacPherson is seeking approximately $2 million in damages. The Company
believes that it has meritorious defenses which it intends to assert against Mr.
MacPherson's claims.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
A. Market Information.
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The Company's shares of Common Stock are currently quoted on the OTC
Bulletin Board maintained by the National Association of Securities Dealers
("NASD") under the trading symbol "CVTK". The following table sets forth, for
the periods indicated, the range of high and low bid prices for shares of Common
Stock as reported by the NASD. The high and low bid prices, set forth below,
reflect inter-dealer prices, without retail mark up, mark down or commission and
may not represent actual transactions. The public market for Common Stock is
limited, and the following quotations should not be taken as necessarily
reflective of prices which might be obtained in actual market transactions or in
transactions involving substantial numbers of shares.
<TABLE>
<CAPTION>
1997 1998
--------------- ---------------
High Low High Low
----- ----- ----- -----
<S> <C> <C> <C> <C>
Fiscal quarter ended March 31 $6.94 $4.13 $3.81 $1.94
Fiscal quarter ended June 30 4.88 2.63 2.31 1.78
Fiscal quarter ended September 30 4.44 3.19 1.31 0.75
Fiscal quarter ended December 31 4.69 2.69 1.63 0.97
</TABLE>
B. Holders.
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On March 26, 1999, as reported by the Company's transfer agent, there
were 5,565,256 shares of Common Stock issued and outstanding which were held of
record by 1,832 persons, including several holders who are nominees for an
undetermined number of beneficial owners.
C. Dividends.
----------
The Company has not declared or paid any cash dividends on its Common
Stock since its inception nor does the Company intend to do so in the
foreseeable future. The payment of dividends, if any, is within the discretion
of the Board of Directors and will depend on the Company's earnings, if any, its
capital requirements
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and financial condition as well as other relevant factors. It is currently the
policy of the Company's Board of Directors to retain earnings, if any, to
finance the Company's operations and the expansion of the Company's business.
The Company is precluded from making any dividend payment under its current
agreement with its lenders.
D. Recent Sales of Unregistered Securities.
----------------------------------------
The Company has not sold any unregistered securities during the last
three fiscal years.
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ITEM 6. SELECTED FINANCIAL DATA
The data set forth below is derived from the Consolidated Financial
Statements of the Company, which have been audited by independent auditors,
except as otherwise noted. These historical and pro forma results are not
necessarily indicative of the results to be expected in the future.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------------------------------------------------
Pro Forma (2)
1996
1998 1997 1996 Unaudited 1995(3) 1994(3)
-------- --------- -------- ------------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
SELECTED STATEMENT OF INCOME DATA:
Net sales $45,167 $ 41,708 $20,319 $35,830 $ -- $ 190
======= ======== ======= ======= ======= =======
Income (loss) from continuing
operations $(1,160) $(14,444) $ (274) $ 28 $ (153) $ 432
======= ======== ======= ======= ======= =======
Net income (loss) $ 3,714 $ (9,096) $ 359 $ 768 $ (153) $ 432
======= ======== ======= ======= ======= =======
Income (loss) from continuing
operations per common share:
Basic and diluted $ (0.21) $ (2.60) $ (0.05) $ 0.01 $ (0.03) $ 0.08
======= ======== ======= ======= ======= =======
Weighted average number of shares:
Basic 5,565 5,565 5,508 5,508 5,322(1) 5,322(1)
======= ======== ======= ======= ======= =======
Diluted 5,565 5,565 5,508 5,988 5,322 5,322
======= ======== ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31
-------------------------------------------------------
1998 1997 1996 1995 1994
-------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
SELECTED BALANCE SHEET DATA:
Total assets $ 29,617 $ 35,086 $ 63,945 $ 12,159 $ 12,359
======== ======== ======== ======== ========
Long term obligations $ -- $ -- $ 34,295 $ -- $ --
======== ======== ======== ======== ========
Debt, in default $17,345 $ 18,300 $ -- $ -- $ --
======= ======== ======== ======== ========
</TABLE>
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(1) Reflects the one-for-four reverse stock split occurring in December 1996.
(2) To enable a clearer understanding of the Company's operating results,
selected unaudited pro forma amounts have been included covering the
operations of the Company for the twelve months ended December 31, 1996 as
if the CPI acquisition had occurred at January 1, 1996.
(3) The Company acquired CPI on May 31, 1996 - See Note 3 of the Consolidated
Financial Statements.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Background
The primary business of Connectivity Technologies Inc. (the "Company")
is the manufacture and assembly of wire and cable products through its
subsidiary, Connectivity Products Incorporated ("CPI"). The 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.
The Company was incorporated under the laws of Delaware on September
29, 1980 as Fortune Systems Corporation. In June 1987, the Company changed its
name to Tigera Group, Inc. In December 1996, the Company changed its name from
Tigera Group, Inc. to Connectivity Technologies Inc. to better fit the Company's
wire and cable business along with its products and markets.
Prior to acquiring 85% of the common stock of CPI on May 31, 1996, the
Company's principal activity consisted of seeking and evaluating candidates for
acquisition.
Going Concern Considerations
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern, which contemplates
the realization of assets and the satisfaction of liabilities in the normal
course of business. At December 31, 1998, the Company had negative working
capital, was in default of its loan agreement and experienced recurring losses
from continuing operations. In addition, amounts under the Company's loan
agreement are due and payable and, although the lender has not so indicated,
the lender has the right to proceed against the Company's assets. These
conditions raise substantial doubt about the Company's ability to continue as a
going concern.
Management's plans to resolve these matters presently include the sale
by the Company's CPI subsidiary of some or all of its operating assets or the
sale by the Company of its stock in CPI. If a sale is successfully consummated,
the proceeds from the sale would be utilized first to pay the outstanding loan
payable to the bank. In the event a CPI sale cannot be consummated, management
intends to continue enhancing operations and seeking alternative sources of
financing, as necessary.
There can be no assurances that management will be successful in its
efforts to sell some or all of the operating assets of CPI or for the Company to
sell the stock of CPI at a price acceptable to the Board of Directors. Further,
no assurance can be provided that proceeds from any sale would be sufficient to
satisfy outstanding obligations. Similarly, should the Company not succeed in
its CPI sale plans there can be no assurance that alternative financing will be
available at commercially feasible rates, or at all. The accompanying
consolidated financial statements do not include any adjustments to reflect the
possible future effects on the recoverability and classification of assets or
the amounts and classification of liabilities that may result from the outcome
of this uncertainty.
Sale of Energy Electric Cable
On July 11, 1997, CPI sold its distribution division which operated
under the name, Energy Electric Cable (EEC) to Reel Acquisition Corp., a
wholly-owned subsidiary of Anicom, Inc. The purchase price for the
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EEC division consisted of approximately $27 million in cash after post-closing
audit adjustments and 190,476 shares of Anicom common stock, par value $.001 per
share, which was valued at $2 million for a total purchase price of $29 million.
In connection with the sale, CPI entered into a Supply Agreement with Anicom,
pursuant to which Anicom agreed to purchase a specified amount of wire and cable
products, subject to adjustment, from CPI for each of the five years following
the closing date. In Fiscal 1998, Anicom purchased an aggregate of approximately
$12 million from CPI for wire and cable products in accordance with the terms of
the Supply Agreement. During the six-month period ended December 31, 1997,
Anicom purchased approximately $7 million from CPI. In addition, in connection
with the sale, CPI refinanced its current debt obligations.
Acquisition of CPI
- ------------------
On May 31, 1996, the Company acquired for $7.99 million in cash, 85% of
the outstanding common stock of CPI from the Sellers. Concurrent with the
acquisition, CPI redeemed shares of its common stock and incurred additional
indebtedness, including refinancing of its existing debt. On June 30, 1998, four
of the Sellers 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 approximately 8.4% of
the total outstanding common stock of CPI) and outstanding stock options of CTI
(114,695 options) to CTI and CPI. 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 Seller 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 4.4% 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 acquisition and related financing are more
fully described in Notes 3 and 10 in the Notes to Consolidated Financial
Statements included in this Report.
11
<PAGE> 12
RESULTS OF OPERATIONS
The consolidated financial statements filed herewith report the
operations of the EEC division of CPI as a discontinued operation. Furthermore,
results from continuing operations included in the Consolidated Statements of
Operations for Fiscals 1998 and 1997 include twelve months of operations of CPI,
whereas results from continuing operations included in the Consolidated
Statements of Operations for the year ended December 31, 1996 include seven
months of operations of CPI ("Fiscal 1996") as a result of the CPI acquisition -
see Note 3 to the Consolidated Financial Statements included in this Report.
Included in the table below are the Consolidated Statements of Operations of the
Company for Fiscal 1998 and Fiscal 1997. To enable a clearer understanding of
the Company's operating results, an unaudited pro forma Consolidated Statement
of Operations ("Pro Forma 1996") has been included covering the operations of
the Company for the twelve months ended December 31, 1996 as if the CPI
acquisition had occurred at January 1, 1996. The pro forma adjustments are based
upon available information and certain assumptions that the Company believes are
reasonable. The Pro Forma 1996 results of operations do not purport to represent
what the Company's results of operations would have been had the CPI acquisition
in fact occurred on January 1, 1996, or to project results of operations for or
at any future period or date.
12
<PAGE> 13
Connectivity Technologies Inc.
Consolidated Statements of Operations
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
PRO FORMA
FISCAL FISCAL FISCAL 1996
1998 1997 1996 (UNAUDITED)
---------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $45,167,299 $ 41,707,988 $20,318,996 $35,830,194
Cost of goods sold 36,801,437 35,393,009 14,499,866 25,658,764
--------------------------------------------------------------
Gross profit 8,365,862 6,314,979 5,819,130 10,171,430
Selling, general and administrative expenses 8,916,283 10,441,178 5,111,292 7,979,676
--------------------------------------------------------------
Operating income (loss) (550,421) (4,126,199) 707,838 2,191,754
Other income (expense):
Interest income 2,065 31,220 335,365 95,365
Interest expense (1,935,685) (2,395,038) (1,368,323) (2,201,022)
Gain on sale of investments 420,534
Other 39,247 65,077 (34,923)
--------------------------------------------------------------
Income (loss) from continuing operations before
income taxes (2,063,507) (6,450,770) (260,043) 51,174
Provision for income taxes (benefit) (903,986) 7,993,424 13,990 22,858
--------------------------------------------------------------
Income (loss) from continuing operations (1,159,521) (14,444,194) (274,033) 28,316
Discontinued operations:
Income from discontinued operations, net of income
taxes of $194,269 in Fiscal 1997, $620,262 in
Fiscal 1996 and $1,016,122 in Pro Forma 1996 292,132 633,193 739,416
Gain on sale of discontinued operations, net of
income taxes of $25,434 in 1998 and $6,398,995 in 1997 38,151 5,056,555
--------------------------------------------------------------
Income from discontinued operations 38,151 5,348,687 633,193 739,416
--------------------------------------------------------------
Extraordinary gain on forgiveness of subordinated notes,
less income taxes of $517,038 4,835,802
--------------------------------------------------------------
Net income (loss) $3,714,432 $ (9,095,507) $359,160 $ 767,732
==============================================================
Weighted average shares outstanding:
Basic 5,565,256 5,565,272 5,508,057 5,508,057
==============================================================
Diluted 5,565,256 5,565,272 5,508,057 5,987,925
==============================================================
Basic earnings (loss) per share:
Continuing operations $ (.21) $ (2.60) $ (.05) $ .01
Discontinued operations .01 .96 .11 .13
Extraordinary income .87
-------------------------------------------------------------
$ .67 $ (1.64) $ .06 $ .14
==============================================================
Diluted earnings (loss) per share: $ .01
Continuing operations .12
==============================================================
Discontinued operations $ .13
==============================================================
</TABLE>
13
<PAGE> 14
RESULTS OF OPERATIONS (CONTINUED)
Year ended December 31, 1998 compared to year ended December 31, 1997
Net sales for Fiscal 1998 increased to $45.2 million, an 8.3% increase
over net sales of $41.7 million for Fiscal 1997. The increase in sales 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 to external customers at the BSCC division increased by
18.4% primarily due to the impact of EEC sales, as described prior. Adjusting
for the impact of sales to EEC, BSCC net sales decreased approximately 3.4% from
1997, primarily due to a decrease in the average copper spot price throughout
1998 as selling prices are based on the quoted copper spot price. Offsetting
this decrease is an increase in the volume of copper pounds shipped in 1998 over
1997 levels. Net sales to external customers at the EEA division decreased
11.1%, primarily due to an overall slowdown in automotive programs in 1998, a
strike at a major customer, and turnover in sales personnel.
Cost of goods sold as a percentage of net sales for Fiscal 1998
decreased to 81.5% from 84.9% in Fiscal 1997. Consequently, gross profit as a
percentage of net sales increased to 18.5% in Fiscal 1998 from 15.1% for Fiscal
1997. At BSCC, gross profit as a percentage of net sales increased to 12.3% in
Fiscal 1998 from 5.4% in Fiscal 1997. The primary reasons for the significant
increase in gross margin are improved inventory controls, the implementation of
a standard costing system, headcount reductions, manufacturing efficiencies
inherent in new machinery acquired throughout Fiscal 1997, and new manufacturing
and scheduling processes implemented by management. Stabilization of copper
prices over the current year 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. At the Company's EEA
division, despite the decrease in sales, gross profit as a percentage of net
sales remained consistent at 32.2% in Fiscal 1998 compared to 32.1% in Fiscal
1997 due to a headcount reduction, thereby reducing the fixed costs of EEA's
manufacturing facility.
Selling, general and administrative expenses were $8.9 million for
Fiscal 1998 compared to $10.4 million for Fiscal 1997 primarily due to a
decrease in professional fees, headcount reductions, and non-recurring
write-downs in 1997, offset somewhat by an increase in executive bonuses.
Interest income was approximately $2,000 for Fiscal 1998 compared to
$31,000 for Fiscal 1997. The decrease is due to the redemption in early Fiscal
1998 of all United States Treasury Bills held by the Company.
Interest expense was $1.9 million for Fiscal 1998 compared to $2.4
million for Fiscal 1997. The decrease in Fiscal 1998 is primarily due to
canceled subordinated debt and lower average debt balances outstanding during
Fiscal 1998 offset somewhat by higher interest rates experienced by the Company
during the latter half of the year and due to the Company not having the option
in Fiscal 1998 to use the preferential LIBOR based interest rate. In Fiscal
1997, approximately $283,000 of interest expense was allocated to discontinued
operations.
In Fiscal 1998, the Company recorded a gain on the sale of investments
of approximately $420,000 due to the sale of the Anicom stock received from the
sale of EEC.
In Fiscal 1998, the Company recorded an extraordinary gain of
approximately $4.8 million, net of income taxes of approximately $517,000
relating to the forgiveness of subordinated notes. The aggregate amount of
extraordinary gain is comprised of approximately $4.8 million in subordinated
debt principal, $260,000 in subordinated debt interest payable, and a cash
payment of $325,000.
Income tax benefit for continuing operations totaled approximately
$900,000 in Fiscal 1998 compared to income tax expense of approximately $8.0
million in Fiscal 1997. The Company's provision differs from the statutory tax
rate in Fiscal 1997 primarily because the Company recorded an adjustment to
increase the valuation allowance for deferred taxes totaling $9.9 million.
14
<PAGE> 15
RESULTS OF OPERATIONS (CONTINUED)
Year ended December 31, 1997 compared to year ended December 31, 1996
The Company's net sales for Fiscal 1997 increased to $41.7 million from
actual $20.3 million for Fiscal 1996 which is primarily due to the effect of the
acquisition of CPI in May 1996 as described above. Net sales for Fiscal 1997
increased 16.4% to $41.7 million from $35.8 million on a pro forma basis. Net
sales at the BSCC division declined by 1.7% despite the fact that the volume of
copper pounds shipped increased by approximately 10% during Fiscal 1997. The
decline of the copper spot price throughout the latter half of 1997 directly
impacted the selling prices quoted by the Company. Consequently, although sales
volume increased, sales prices were reduced to reflect the reduced copper
prices. Net sales at the EEA division increased 43.7%, primarily due to the
increased sales to the automotive industry.
Cost of goods sold as a percentage of net sales for Fiscal 1997
increased to 84.9% from actual 71.4% in Fiscal 1996. The increase in cost of
goods sold as a percentage of net sales is as significant when compared to pro
forma basis of 71.6%. Consequently, gross profit as a percentage of net sales
decreased to 15.1% in Fiscal 1997 from actual 28.6% for Fiscal 1996. Pro forma
gross profit as a percentage of net sales was 28.4%. At BSCC, gross profit as a
percentage of net sales decreased to 5.4% in Fiscal 1997 from 19.6% in Pro Forma
1996. The primary reason for the deterioration in gross margin resulted from the
significant decrease in the price of copper which occurred in the second half of
Fiscal 1997. Copper is the principal raw material used in the Company's
products. Since the Company does not hedge its copper inventories and the price
the Company uses to sell its products is tied to the Comex spot price, the
Company realized a significant loss on copper inventories purchased in the first
half of Fiscal 1997 which were subsequently sold in the second half of Fiscal
1997. At the Company's EEA division, gross profit as a percentage of net sales
remained consistent at 32.1% in Fiscal 1997 compared to 33.7% in Pro Forma 1996.
Selling, general and administrative expenses were $10.4 million for
Fiscal 1997 compared to $5.1 million for Fiscal 1996 which is primarily due to
the effect of the acquisition of CPI in May 1996 as described above, as well as
increased professional fees and a write-off of deferred debt issuance costs.
Selling, general and administrative expenses were $10.4 million for Fiscal 1997
compared to $8.0 million for Pro Forma 1996. The increase is attributable to
increased professional fees as well as a write-off of deferred debt issuance
costs incurred in Fiscal 1997.
Interest income was approximately $31,000 for Fiscal 1997 compared to
$335,000 for Fiscal 1996. The decrease is due to a reduction in the amount of
United States Treasury Bills held by the Company in Fiscal 1997 as compared to
Fiscal 1996.
Interest expense was $2.4 million for Fiscal 1997 compared to $1.4
million for Fiscal 1996. The increase in Fiscal 1997 from Fiscal 1996 is
primarily due to the effect of the acquisition of CPI in May 1996 as described
above, offset by lower average debt balances outstanding in Fiscal 1997 as
compared to Fiscal 1996. Interest expense was $2.4 million for Fiscal 1997
compared to $2.2 million for Pro Forma 1996. In Fiscal 1997, approximately
$283,000 of interest expense was allocated to discontinued operations whereas
approximately $975,000 was allocated in Pro Forma 1996. In total, interest
expense decreased between Fiscal 1997 and Pro Forma 1996. This is a result of
lower average debt balances outstanding in Fiscal 1997 as compared to Pro Forma
1996. The lower average debt balances outstanding in Fiscal 1997 was due to the
pay down of debt from the proceeds received from the sale of EEC.
Income tax expense for continuing operations totaled $8.0 million in
Fiscal 1997 compared to $14,000 in Fiscal 1996 and $23,000 on a pro forma basis.
The Company's provision differs from the statutory tax rate in Fiscal 1997
primarily because the Company recorded an adjustment to increase the valuation
allowance for deferred taxes totaling $9.9 million.
15
<PAGE> 16
Income from discontinued operations, net of income taxes was
approximately $292,000 for Fiscal 1997 compared to $633,000 for Fiscal 1996 and
$739,000 on a pro forma basis. Also in Fiscal 1997, the Company recorded a $5.1
million gain, net of taxes, resulting from the sale of the Company's EEC
division.
FINANCIAL CONDITION AND LIQUIDITY
During Fiscal 1998, cash flows from continuing operating activities
used approximately $5.2 million as compared to using approximately $5.7 million
in cash in Fiscal 1997. Included in the determination of cash flows from
operating activities are tax payments of approximately $2.7 million related to
the taxable gain realized on the sale of the Company's EEC division in 1997.
These tax payments were financed with proceeds from long-term borrowings. A
reduction in trade payables used approximately $2.4 million of operating cash
flows, primarily caused by management intentionally decreasing vendor terms.
Decreased accrued liabilities used approximately $1.9 million 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. These uses
of operating cash flows were somewhat offset by a reduction of accounts
receivables providing approximately $2.4 million of operating cash flows. The
decrease in accounts receivables was caused primarily to slower sales growth in
the last half of Fiscal 1998 and the successful collection efforts of a newly
employed full-time collections person at the BSCC division during Fiscal 1998.
Further; certain outstanding account issues at EEA in 1997 were resolved during
Fiscal 1998.
Net cash provided by investing activities in Fiscal 1998 totaled $1.4
million compared to $24.1 million in Fiscal 1997. The decrease is primarily
attributable to $25.5 million in net proceeds received in conjunction with the
sale of the EEC division in Fiscal 1997. Total capital purchases decreased to
$1.1 million in Fiscal 1998 from $2.3 million in Fiscal 1997 due primarily to
the completion of the installation of new machinery at BSCC.
Net cash provided by financing activities in Fiscal 1998 totaled $4.1
million compared to net cash used of approximately $19.3 million in Fiscal 1997.
During Fiscal 1998, the Company was able to repay approximately $4.4 million
against the credit facility compared to a repayment of approximately $32.7
million in Fiscal 1997, primarily from the proceeds received in conjunction with
the sale of the EEC division. These repayments were offset by other net
borrowings of approximately $8.2 million and $13.4 million in Fiscal 1998 and
1997, respectively.
At the end of fiscal 1998, the Company was negotiating with its lender
regarding possible terms and conditions of a new loan facility or an extension
of the forbearance agreement which expired on November 30, 1998. In 1999, the
Company continues to negotiate for a new loan agreement with its lender. In
addition, amounts under the company's loan agreement are due and payable and,
although the lender has not so indicated, the lender has the right to proceed
against the Company's assets.
Borrowings outstanding at December 31, 1998 accrued interest at 200
basis points over the bank's rate and were secured by substantially all the
tangible assets of the Company. Outstanding borrowings at December 31, 1998 and
1997 were classified as a current liability because the Company was in default
of the agreements in place at those dates.
16
<PAGE> 17
On June 30, 1998, four of the Sellers of CPI assigned all of their
rights, title, and interest in their subordinated notes amounting to
approximately $3.4 million plus accrued interest of approximately $166,000 to
the Company and CPI. On August 26, 1998, the Company entered into an agreement
with one other Seller in which the Seller assigned all of his rights, title, and
interest in his subordinated notes amounting to approximately $1.4 million plus
accrued interest of approximately $94,000 to the Company and CPI. Since the
Company is not currently aware of any matter for which it would assert a claim
against these Sellers, the Company, in exchange for the consideration received,
has agreed to not assert any claims concerning any matters against these
stockholders. These agreements required consents from other third parties that
were received in 1998. As of the end of Fiscal 1998, the Company had
approximately $900,000 of subordinated notes outstanding. The Company originally
had $6 million of subordinated notes payable that resulted from the redemption
of stock in connection with the acquisition of CPI. Interest accrues at a rate
of 10% per annum; principal is due to be paid on May 31, 2003. At the end of
Fiscal 1998 and 1997, the Company was in violation of certain covenants of the
subordinated debt agreement. Accordingly, this debt has been classified as a
current liability in the 1998 and 1997 consolidated financial statements. The
Company was in violation of loan covenants throughout this period, therefore no
interest was paid to subordinated debt holders as prescribed in the loan.
Although management believes the Company will generate cash sufficient
to fund its 1999 operations, no assurances can be provided in this regard.
Similarly, although management expects to do so, no assurances can be provided
the Company will be able to negotiate a new loan facility or an extension of
the forbearance agreement with its current lender or from any other source. As
discussed earlier, the Company is planning to sell its CPI subsidiary or some or
all of its operating assets. If a sale is successfully consummated, the proceeds
from the sale would be utilized first to pay the outstanding loan payable to the
bank. In the event a CPI sale cannot be consummated, management intends to
continue enhancing operations and seeking alternative sources of financing, if
necessary. There can be no assurances that management will be successful in its
efforts to sell some or all of the operating assets of CPI or for the Company to
sell the stock of CPI at a price acceptable to the Board of Directors. Further,
no assurance can be provided that proceeds from any sale would be sufficient to
satisfy outstanding obligations. Similarly, should the Company not succeed in
its CPI sale plans there can be no assurance that alternative financing will be
available at commercially feasible rates, or at all.
17
<PAGE> 18
INTANGIBLE ASSETS
The Company periodically evaluates its intangible assets for
impairment. If facts and circumstances indicate that the Company's intangible
assets might be impaired, the estimated future undiscounted cash flows
associated with the intangible asset would be compared to its carrying amount to
determine if a write-down to fair value is necessary.
As previously described, there is substantial doubt about the Company's
ability to continue as a going concern. The Company has undertaken a number of
initiatives to alleviate the doubt and there can be no assurance that the
Company will be able to successfully carry out those initiatives. Depending on
the ultimate outcome of these initiatives, the Company could be required to
record an impairment charge pertaining to goodwill associated with one or both
of its divisions.
PUT AND CALL OPTIONS
In connection with the acquisition of CPI by CTI, CTI granted the CPI
minority stockholders (Stockholders) the option to require CTI to purchase (put)
their remaining common stock of CPI, and each Stockholder granted CTI the option
to purchase (call) the remaining outstanding stock. The put and call purchase
price is based on a formula which is tied to the market value of CTI's common
stock at the date of sale. These options are exercisable on November 30, 2000,
May 31, 2001 and November 30, 2001 in an amount on each option date equal to
one-third of the outstanding stock (on a cumulative basis). As a result of five
of the original six Sellers of CPI assigning their stock of CPI to CTI during
Fiscal 1998, the put and call provision only applies to the remaining
stockholder. There are limitations on the Stockholders' ability to sell his
common stock. At December 31, 1998, the value of these options is not material.
YEAR 2000
The Company has made significant progress in its identification of Year
2000 compliancy issues. Its BSCC division implemented and upgraded its
accounting and manufacturing software, all of which is Year 2000 compliant. The
EEA division has recently purchased the same software and anticipates
implementation of this software in the second quarter of 1999. 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 has been approximately $425,000 which has been capitalized and has been
funded through cash flows and bank borrowings. An additional $50,000 is
anticipated to be incurred to complete remediation efforts, which will be 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 will be addressed in the second 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. The Company is in the
process of determining whether its customers, service providers, and suppliers
are Year 2000 compliant. Current plans are for this phase of the Company's Year
2000 project to be completed in the second 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.
18
<PAGE> 19
INCOME TAX MATTERS
In Fiscal 1997, management was unable to conclude that it is more
likely than not the Company will realize its net deferred tax assets.
Accordingly, the valuation allowance increased by approximately $9.9 million in
1997, due primarily to changes in judgment about future year's operating
results. This charge has been reflected in income from continuing operations.
At December 31, 1998, the Company has available approximately $76
million of net operating loss carryforwards and $1.4 million of tax credit
carryforwards for federal tax purposes. Except as described below, these
carryforwards may be used to offset future taxes on income, if any, and expire
beginning in 1998 through 2010.
Should an ownership change of the Company occur, as defined under
section 382 of the Internal Revenue Code (the "IRC"), the Company could lose the
ability to utilize some or all of these net operating loss carryforwards and tax
credit carryforwards. The Company has determined that an ownership change has
not occurred through December 31, 1998. The Company has determined that the if
the assets or stock of CPI are sold an ownership change will not be deemed to
have taken place and the Company would retain the ability to utilize some or all
of the net operating loss carryforwards.
The use of the Company's net operating losses is further limited by
section 384 of the IRC. At the time of the acquisition of CPI by the Company,
the fair value of the CPI assets acquired exceeded the associated tax basis.
(This difference is referred to as "built-in-gain"). Net operating loss
carryforwards currently may not be used to offset the portion of any gain that
may be recognized upon the sale of CPI assets that was "built-in" at the date of
acquisition. In this connection, net operating loss carryforwards were not
available to offset the "built-in-gain" portion ($6.2 million) of the gain
recognized on the 1997 sale of its EEC division assets. Additionally, the
Company has decided to pursue the sale of its CPI subsidiary. If this sale were
to occur as an asset sale, the "built-in-gain" associated with BSCC's and EEA's
assets is approximately $20.3 million.
To the extent the Company is able to utilize net operating loss and tax
credit carryforwards subsequent to December 31, 1998, the first $9.9 million of
such amount recognized will be credited to operations and the recognition of any
further amounts will be recorded with an offsetting reduction to goodwill.
19
<PAGE> 20
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company utilizes copper in its production processes and is
therefore subject to risks associated with the movement of the price of copper.
Generally, the Company's sales prices reflect the price of copper on the day
product shipped. Accordingly, if the price of copper drops between the initial
date of the customer's order and the date of shipment, so does the sales price
of product shipped. Alternatively, when the price of copper rises, the Company
is able to upwardly adjust its sales prices. The amount of risk to which the
Company is exposed correlates to the amount of copper in inventory at a point of
time. The Company does not hedge potential movements in the price of copper. The
affect of copper pricing is more fully described in "Description of Business -
Raw Materials". Should the price of copper decrease by 10%, the Company's gross
margins would be adversely impacted by approximately $65,000.
The Company also is subject to interest rate risk with respect to amounts
outstanding under its credit agreement at December 31, 1998. Amounts
outstanding under the credit agreement bore interest at a variable rate, which
was 9.75% at December 31, 1998. An increase in interest rates of ten percent
(97.5 basis points) would increase interest expense and 1999 interest payments
by approximately $160,000.
SAFE HARBOR PROVISION OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The statements contained in Item 1 (Description of Business) and Item 7
(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 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, those
described under "Risk Factors" in such filings. These risks and uncertainties,
include, without limitation, general economic and business conditions affecting
the industries of the Company's customers, competition from other manufacturers
and assemblers that have greater financial, technical, and marketing resources
than the Company, the Company's ability to adequately address its going concern
issues in a timely matter including, without limitation, its ability to sell
assets, including its stock interests in CPI, and reduce its debt, negotiate a
long term credit facility with its lender, and the Company's ability to
adequately address its Year 2000 issues in a timely manner.
ITEM 8. FINANCIAL STATEMENTS
The response to this Item is submitted in a separate section of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On December 18, 1997, PricewaterhouseCoopers, LLP ("Coopers") resigned
as the Company's independent public accountants. Coopers' reports on the
Company's financial statements for the fiscal years ended December 31, 1995 and
1996 did not contain an adverse opinion or disclaimer of opinion and were not
qualified or modified as to uncertainty, audit scope or accounting principle.
The Company's Audit Committee and Board of Directors participated in and
approved the decision to change independent accountants. There were no
disagreements with Coopers for the fiscal years ended December 31, 1995 and 1996
or for the interim periods subsequent to December 31, 1996, on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure, which disagreements, if not resolved to the satisfaction of
Coopers would have caused them to make reference thereto in their reports on the
financial statements for such years.
The Company has engaged Ernst & Young LLP (the "New Auditors") as its
new independent auditors as of December 23, 1997. During the fiscal years ended
December 31, 1995 and 1996 and the interim periods subsequent to December 31,
1996, the Company did not consult with the New Auditors on the application of
accounting principles to a specified transaction, either completed or proposed;
or the type of audit opinion that
20
<PAGE> 21
might be rendered on the Company's financial statements; or receive either
written or oral advice from the New Auditors that was an important factor in
reaching a decision as to an accounting, auditing or financial reporting issue.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT; COMPLIANCE WITH
SECTION 16(A) OF THE EXCHANGE ACT
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
Name Age Position(s) Director and/or Executive
- ---- --- ----------- Officer Since
-------------
<S> <C> <C> <C>
James M. Hopkins 58 President, Chief Executive Officer and September 1997
Director(1)
Ramon D. Ardizzone 61 Director(2) November 1995
Clarke H. Bailey 45 Director(1) November 1995
David R. Flowers 58 Director(1)(2) April 1997
Herbert M. Friedman 67 Director(3) November 1995
Stephen P. Kelbley 56 Director(3) December 1996
Kurt Cieszkowski 32 Executive Vice President September 1997
George H. Buckham 39 Secretary and Controller August 1998
</TABLE>
(1) Member of the Executive Committee.
(2) Member of the Compensation Committee.
(3) Member of the Audit Committee.
Directors hold office until the next annual meeting of stockholders of
the Company and until their successors have been elected and qualified or until
their earlier resignation or removal. Officers serve at the discretion of the
Board of Directors. No family relationship exists among any of the executive
officers and directors of the Company.
The following sets forth the principal occupations of each of the
Company's executive officers and directors during the previous five years, as
well as the names of any other public or affiliated companies or registered
investment companies of which they are directors.
James M. Hopkins has served as President, Chief Executive Officer and a
director of the Company and CPI since September 1997. He has also served as
Chief Operating Officer of the BSCC division of CPI since September 1997. Prior
to joining the Company, Mr. Hopkins was the Vice President of Sales for
Intech/Belden, a wire and cable manufacturing company from September 1995 until
May 1997. From May 1990 until June 1995, Mr. Hopkins held various positions at
Helix Hitemp Cable, a wire and cable company, including Vice President of Sales
and President.
21
<PAGE> 22
Ramon D. Ardizzone has served as a director of the Company since
November 1995, and is currently Chairman of the Board of Glenayre Technologies,
Inc. ("Glenayre"), a paging and messaging infra-structure technology company.
From 1988 to 1998, Mr. Ardizzone was employed by Glenayre in various capacities.
Clarke H. Bailey has served as a director of the Company since November
1995. From February 1995 until its merger with Iron Mountain Incorporated ("Iron
Mountain") in January 1998, Mr. Bailey served as Chairman of the Board and Chief
Executive Officer of Arcus, Inc. ("Arcus"). He also served as Chairman of the
Board and Chief Executive Officer of United Acquisition Company and Arcus
Technology Services, Inc., subsidiaries of Arcus from February 1995 until they
merged with Arcus in January 1998. Mr. Bailey is a director of Iron Mountain, a
national, full-service provider of records management and related services. He
is currently a director and Co-Chairman of the Board of Hudson River. He served
as Chief Executive Officer and a director of Glenayre from December 1990 until
March 1994 and as its Vice Chairman of the Board from November 1992 to July
1996. In March 1994, Mr. Bailey was named Chairman of the Executive Committee of
the Board of Glenayre, and he relinquished the title of Chief Executive Officer.
Mr. Bailey is also a director of Swiss Army Brands, Inc. ("Swiss Army"), the
exclusive United States and Canadian importer and distributor of Victorinox
Original Swiss Army Knives and professional cutlery as well as other products.
Mr. Bailey is a director of SWWT, Inc., a publicly traded company seeking
acquisition opportunities.
George H. Buckham, a CPA, has served as Secretary of the Company since
August 1998. He joined the Company in December 1996 as Senior Financial Analyst.
Previously, he was a Supervisor for five years for the CPA firm of Joseph B.
Cohan & Associates of Worcester, Massachusetts. Prior to that, he held various
managerial, accounting and auditing positions, representing over 15 years of
business experience.
David R. Flowers has served as a director of the Company since April
1997. Mr. Flowers served in various capacities at Pulse Engineering Inc., an
electronics company ("Pulse"), including Chairman of the Board and Chief
Executive Officer from July 1986 until October 1995, President from July 1982
until July 1986 and in various other executive positions from 1977 until 1982.
Mr. Flowers also serves as director of Babcock Inc. ("Babcock"), a supplier of
high reliability components and subsystems to the aerospace and avionics
industry, and of Autosplice Inc.("Autosplice"), a producer of specialty
interconnection equipment and components for the electronics industry. Mr.
Flowers serves on the Compensation and Audit Committees of Babcock and
Autosplice.
Herbert M. Friedman, Esq. has served as a director of the Company since
November 1995. Since April 1998, Mr. Friedman, who is an attorney, has performed
services for various entities including Hudson River. Prior thereto, from 1967
to April 1998, Mr. Friedman was a member of the law firm of Zimet, Haines,
Friedman & Kaplan. Zimet, Haines, Friedman & Kaplan acted as counsel to the
Company until April 1998. Mr. Friedman is also a director of Hudson River, Swiss
Army, Victory Ventures LLP, a company which conducts its operations through
small and medium sized companies in which it holds either controlling or
non-controlling equity interests, Noel Group, Inc., a company which conducts its
operations through small and medium sized companies in which it holds either
controlling or non-controlling equity interests, Equities Enterprises, Inc., a
company with controlling and other interests in various industries, including
the employee leasing industry, and Carlyle Industries, Inc., a distributor of
buttons, home sewing, craft and other products.
Stephen P. Kelbley has served as a director of the Company since
December 1996. Mr. Kelbley has served as President of the Home Furnishings
Operating Group of Springs Industries, Inc. ("Springs"), a home furnishings
company, since February 1998 and as an Executive Vice President of Springs since
1991. From May 1995 to February 1998, he served as President of the Diversified
Group and from March 1994 to May 1995, he was President of Springs' Specialty
Fabrics Group. Mr. Kelbley joined Springs in September 1991 as Executive Vice
President and Chief Financial Officer. Prior to joining Springs, he served for
seven years as Senior Vice President - Finance of Bausch & Lomb and two years as
Senior Vice President - Finance & Administration of Moog Automotive, Inc.
("Moog"). He held significant financial management positions with General
Electric Company for 19 years before working at Moog. Mr. Kelbley is also a
director of Glenayre and serves as the Chairman of its Audit Committee and as a
member of its Compensation Committee.
22
<PAGE> 23
Kurt Cieszkowski has been Executive Vice President of the Company and
Chief Executive Officer of the EEA division of CPI since September 1997. Mr.
Cieszkowski served as a director of the Company and CPI from April 1997 to
January 1998. He served as a Senior Vice President of the Company from May 1996
until September 1997. From October 1995 through May 1996, Mr. Cieszkowski served
as Vice President of CPI with primary responsibility for sales in the Energy
Electric Assembly division. From 1986 through October 1995, Mr. Cieszkowski
served as the President of Energy Electric Assembly, Inc., a predecessor of CPI.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's officers and directors, and persons who own more than ten percent of a
registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission
and to furnish the Company with copies of such reports.
Based solely on its review of the copies of such forms furnished to the
Company by such reporting persons during the fiscal year ended December 31,
1998, or written representations from such reporting persons that no Forms 5
were required for those persons with respect to such period, the Company
believes that during the fiscal year ended December 31, 1998 all filing
requirements applicable to its officers, directors, and greater than ten-percent
beneficial owners were complied with.
23
<PAGE> 24
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth certain information regarding
compensation awarded or earned, whether paid or deferred, by the persons who
served as the Company's Chief Executive Officer and the Company's other highly
compensated executive officer during Fiscal 1998 (the "Named Executive
Officers") and during each of the last three fiscal years.
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
-------------------------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
-------------------------------------- ------------- -----------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
OTHER
ANNUAL RESTRICTED SECURITIES ALL OTHER
COMPEN- STOCK UNDERLYING LTIP COMPEN-
NAME AND PRINCIPAL SATION AWARD(S) OPTIONS/ PAYOUTS SATION
POSITION YEAR SALARY($) BONUS($) ($) ($) SARS(#) ($) ($)
- ------------------------- ---- --------- -------- ----------- ----------- ----------- --------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
James M. Hopkins 1998 150,000 $50,000 1,407 -0- 75,000 -0- -0-
President and Chief 1997 85,982 $10,000 -0- -0- 50,000(1) -0- -0-
Executive Officer
Kurt Cieszkowski 1998 $175,000 $175,000 $1,925 -0- -0- -0- -0-
Executive Vice 1997 $211,026 -0- $2,586 -0- 45,643(2) -0- -0-
President 1996 (3) -0- -0- -0- -0- -0- -0-
</TABLE>
- ----------
(1) Includes 25,000 options to purchase shares of Common Stock which were
granted pursuant to the terms of Mr. Hopkins' employment agreement. See
"Executive Compensation - Employment Contracts and Termination of
Employment and Change in Control Arrangements."
(2) Represents options to acquire shares of Common Stock exercisable at $3.59
per share which were granted in replacement of options to purchase a like
number of shares of Common Stock which had been granted in 1996.
(3) This person was not a Named Executive Officer for the year ended December
31, 1996.
24
<PAGE> 25
OPTION/SAR GRANTS DURING FISCAL 1998
The following table sets forth information regarding individual grants
of options and/or warrants made by the Company during Fiscal 1998 to each of the
Named Executive Officers:
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF STOCK
PRICE APPRECIATION FOR
INDIVIDUAL GRANTS OPTION TERM
- -----------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e) (f) (g)
NUMBER OF PERCENT OF TOTAL
SECURITIES OPTIONS/SARS EXCISE
UNDERLYING GRANTED TO OF BASE
OPTIONS/SARS EMPLOYEES IN PRICE EXPIRATION 5% 10%
NAME GRANTED (#) FISCAL YEAR ($/SH) DATE ($) ($)
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
James M. Hopkins 75,000(1) 60.0% $1.13 7/16/08 $53,250 $135,000
Kurt Cieszkowski -0- -- -0- -- -0- -0-
</TABLE>
- -------------
(1) Consists of options to purchase shares of Common Stock. These options vest
in three equal annual installments commencing on the first anniversary of
the date of grant. In the event a change in control occurs with respect to
the Company, all of the options will become fully vested and exercisable on
such date. If the Named Executive Officer's employment with the Company is
terminated under certain circumstances, all of the options will expire on
such date of termination.
AGGREGATED OPTION EXERCISES DURING FISCAL 1998 AND FISCAL YEAR-END
OPTION VALUE.
The following table provides information related to options and
warrants exercised by the Named Executive Officers during 1998 and the number
and value of unexercised options and warrants held by each of the Named
Executive Officers at year-end. The Company does not have any outstanding stock
appreciation rights:
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS, WARRANTS AT OPTIONS, WARRANTS
FISCAL YEAR-END (#) AT FISCAL YEAR-END ($)(1)
-------------------- -------------------------
SHARES ACQUIRED
NAME ON EXERCISE (#) VALUE REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- --------------- ------------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
James M. Hopkins -0- -0- 5,319(2) 119,681(2) -0- -0-
Kurt Cieszkowski -0- -0- 3,448(3) 42,195(3) -0- -0-
</TABLE>
- -------------
(1) Based on a closing price on December 31, 1998 of $.97 per share.
25
<PAGE> 26
(2) Consists of 75,000 options exercisable at $1.13 per share, 25,000
options exercisable at $3.59 per share and 25,000 options exercisable at
$4.03 per share to acquire a like number of shares of Common Stock.
(3) Consists of an aggregate of 45,643 options exercisable at $3.59 per share
to acquire a like number of shares of Common Stock.
The Company has no long term incentive plans or defined benefit plans.
COMPENSATION OF DIRECTORS
Effective December 1996, non-employee directors are paid a quarterly
retainer of $2,000 and are reimbursed for out-of-pocket expenses incurred in
attending meetings of the Board of Directors and of the Committees to which they
are elected.
Commencing as of December 1996, each person, other than employees of
the Company, elected to the Board of Directors, who was not a director preceding
such person's election, shall receive an option to purchase up to 2,500 shares
of the Company's Common Stock exercisable at the then fair market value.
Thereafter, as of the date of the Company's annual meeting of stockholders, each
non-employee director is presently entitled to receive an option to acquire up
to 500 shares of the Company's Common Stock exercisable at the then fair market
value.
In July 1998, the Company granted stock options exercisable at $1.13
per share to its directors as follows:
Clarke H. Bailey 200,000 shares
James M. Hopkins 75,000 shares
Herbert M. Friedman 35,000 shares
Ramon D. Ardizzone 10,000 shares
David R. Flowers 10,000 shares
Stephen P. Kelbley 10,000 shares
The Company also granted 250,000 options to Clarke H. Bailey in July
1998 which are exercisable at $4.00 per share.
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE IN CONTROL
ARRANGEMENTS
In June 1997, CPI entered into an employment agreement with James M.
Hopkins which provides that he will be employed as an Executive Vice President
of CPI at an annual salary of $150,000 for the first year of employment, and
thereafter Mr. Hopkins' salary will be reviewed and increased at the discretion
of CPI's compensation committee. Mr. Hopkins is entitled to a bonus equal to
three percent of the increase, if any, in the earnings before interest, taxes,
depreciation and amortization ("EBITDA") of CPI's BSCC division over the prior
year's EBITDA up to a maximum of $50,000. The agreement called for a minimum
bonus of $10,000 for the year ended December 31, 1997, with no minimum bonus
under the remainder of the agreement. In addition, Mr. Hopkins was granted
options to purchase up to 25,000 shares of the Company's Common Stock. In the
event Mr. Hopkins' employment is terminated for other than cause or disability,
Mr. Hopkins shall be entitled to his base salary then in effect and any other
amounts to which he is entitled pursuant to any compensation or benefit plan
through the Notice Period (as defined in the agreement) provided that Mr.
Hopkins continues working during the Notice Period. The Company, however, may
elect to stop Mr. Hopkins' employment immediately and pay the amount to which
Mr. Hopkins would otherwise be entitled during the Notice Period in one lump
sum. In the event of a "change in control" of CPI, Mr. Hopkins shall be entitled
to an amount equal to 24 months of his base salary. The employment agreement
also includes provisions regarding non-competition, non-solicitation,
confidentiality and proprietary information. The employment agreement shall
terminate on June 1, 2000 unless the parties mutually agree on or before six
months prior to such date to extend the term of the agreement.
26
<PAGE> 27
CPI has entered into an employment agreement with Kurt Cieszkowski
which provides that he will be employed for a period of three years from May 31,
1996 at an annual salary of $163,000 for the first twelve months and $175,000
per year thereafter plus an annual cash bonus (subject to a maximum of the
annual base salary for such year or partial year) equal to five percent of the
amount by which the "Adjusted Bonus EBITDA" for the prior year or part thereof
exceeds the "Adjusted Bonus EBITDA" for the prior year or part thereof. Mr.
Cieszkowski waived his right to the aforementioned annual cash bonus for 1997.
The employment agreement provides for payment of both salary and bonus for the
full three-year term if Mr. Cieszkowski is discharged other than for cause,
death or disability, and, in the case of his death or disability, for the
payment of salary for the full three-year term and bonus for the year in which
he dies or becomes disabled. If Mr. Cieszkowski is terminated for cause or
resigns in breach of the employment agreement, no further salary is payable and
any bonus for the year of termination is forfeited. The employment agreement
also includes provisions on non-competition, non-solicitation, confidentiality
and proprietary information and is automatically renewable for terms of one year
unless either party gives no less than 60 days prior written notice of its
intention not to renew the agreement.
In April 1998, CPI entered into an agreement with Kurt Cieszkowski
which provides that in the event of the sale of EEA on or before April 1, 1999,
CPI shall pay Mr. Cieszkowski a closing bonus of $100,000 plus an additional
amount in the event the sale proceeds exceed $14,000,000. The Company did not
sell EEA on or before April 1, 1999, thus this agreement has expired and has not
been extended.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(a) Security Ownership of Certain Beneficial Owners.
------------------------------------------------
The following table sets forth, as of March 24, 1999, information
regarding the holdings of all persons known to own beneficially more than 5% of
the Company's Common Stock. Unless otherwise indicated, such ownership is
believed to be direct, with the holder possessing sole voting and investment
powers.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY PERCENT OF
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED CLASS(1)
- ------------------------------------ ------------------------ -----------------------
<S> <C> <C>
Hudson River Capital LLC 1,854,044(2) 33.3%
667 Madison Avenue
New York, NY 10022
- --------------
</TABLE>
(1) Based on 5,565,256 shares of Common Stock outstanding.
(2) The information set forth in the table regarding shares of Common Stock
owned by Hudson River is based on Amendment No. 15 to the Schedule 13D,
filed on May 5, 1998 jointly by Hudson River, Brae Group, Inc. ("Brae") and
Louis Marx, Jr., which schedule indicates that Hudson River holds 1,854,044
shares of the Company's Common Stock and Brae holds 215,962 (3.9%) shares of
the Company's Common Stock. As a significant indirect holder of voting
securities of Hudson River, Brae may be deemed to be beneficial owner,
within the meaning of Rule 13d-3 promulgated under the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), of the shares of the Company's
Common stock held directly by Hudson River, although Brae disclaims
beneficial ownership thereof. As a significant holder of voting securities
of both Hudson River and Brae, Louis Marx, Jr. may be deemed to be the
beneficial owner of the shares of the Company's Common Stock held directly
by Hudson River and by Brae. Mr. Marx disclaims beneficial ownership
thereof.
(b) Security Ownership of Management.
---------------------------------
The following table sets forth certain information, as of March 24,
1999 concerning shares of Common Stock owned of record or beneficially by each
director, and by each of the Named Executive Officers (as defined
27
<PAGE> 28
in the section entitled "Executive Compensation", and by all executive officers
and directors as a group). The footnotes also reflect the ownership by such
persons of each class of equity securities of Hudson River, which may be deemed
to be the parent of the Company within the meaning of the federal securities
laws, and CPI.
<TABLE>
<CAPTION>
PERCENT
SHARES BENEFICIALLY BENEFICIALLY
NAME OWNED(1) OWNED(2)
- ---- ----------------------- ---------------
<S> <C> <C>
Ramon D. Ardizzone 6,750(3) *
Clarke H. Bailey 77,225(4) 1.3%
David R. Flowers 2,500(5) *
Herbert M. Friedman 6,750(6) *
James M. Hopkins 5,319(7) *
Stephen P. Kelbley 2,500(8) *
Kurt Cieszkowski 3,448(9) *
All executive officers and
directors as a group
(8 persons) 104,492(10) 1.9%
</TABLE>
- -------------
* Less than 1%.
(1) Unless otherwise indicated, each of the parties listed has sole voting and
investment power over the shares owned. The number of shares of Common
Stock indicated includes, in each case, the number of shares of Common
Stock currently issuable upon exercise of options granted under the
Company's 1991 Stock Incentive Plan (the "1991 Plan"), the Company's 1996
Stock Incentive Plan (the "1996 Plan") and non-plan warrants and options.
For purposes of this table, shares are deemed to be "currently issuable" if
they may become issuable upon exercise of an option or warrant within 60
days following the date hereof.
(2) Based on 5,565,256 shares of Common Stock currently issued and outstanding.
In addition, treated as outstanding for the purpose of computing the
percentage ownership of each individual or group are shares of Common Stock
currently issuable to such individual or group upon exercise of options or
warrants.
(3) Represents 6,250 shares of Common Stock currently issuable upon exercise of
a warrant and 500 shares of Common Stock issuable upon exercise of an
option. Does not include 10,000 options, a portion of which first become
exercisable in July 1999. Mr. Ardizzone is the owner of 7,552 Series B
preferred units (less than 1% of the voting securities) of Hudson River.
(4) Consists of 26,725 shares of Common Stock held directly, 50,000 shares of
Common Stock currently issuable upon exercise of a warrant and 500 shares
of Common Stock issuable upon exercise of an option. Does not include
450,000 options, a portion of which first become exercisable in July 1999.
Mr. Bailey is the owner of 98,239 series B preferred units of Hudson River
and holds 155,000 plan units issued by Hudson River which entitle Mr.
Bailey to voting rights and to receive a portion of the appreciation of
Hudson River's assets since the date of grant of such units, under certain
circumstances ("Plan Units"). Of Mr. Bailey's Plan Units, 75,000 are
beneficially owned by a charitable foundation of which Mr. Bailey is a
trustee. The series B preferred units and the Plan Units beneficially owned
by Mr. Bailey collectively represent approximately 2.6% of the voting
securities of Hudson River.
(5) Represents 2,500 shares of Common Stock issuable upon the exercise of
options. Does not include 10,000 options, a portion of which first
become exercisable in July 1999.
(6) Represents 6,250 shares of Common Stock currently issuable upon exercise of
a warrant and 500 shares of Common Stock issuable upon exercise of an
option. Does not include 35,000 options, a portion of which first become
exercisable in July 1999. Mr. Friedman is the owner of 4,762 series B
preferred units (less than 1% of the voting securities) of Hudson River.
(7) Represents 5,319 shares of Common Stock issuable upon the exercise of
options. Does not include 119,681 options, a portion of which first become
exercisable in July 1999.
(8) Represents 2,500 shares of Common Stock issuable upon exercise of an
option. Does not include 10,000 options, a portion of which first become
exercisable in July 1999.
(9) Represents 3,448 shares of Common Stock issuable upon the exercise of
options. Does not include 42,195 options, a portion of which first become
exercisable in July 1999.
(10) Does not include 679,376 shares of Common Stock issuable upon exercise of
options and warrants which are not yet exercisable and certain shares with
respect to which beneficial ownership is disclaimed. The executive officers
28
<PAGE> 29
and directors as a group beneficially own 16.8971 shares (2.2%) of CPI
Common Stock, 110,553 series B preferred units and 155,000 Plan Units
(collectively, 2.8% of the voting securities) of Hudson River.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Pursuant to the Stockholders' Agreement executed in connection with the
acquisition of CPI, the Company granted to the Sellers a put option to sell
their shares of CPI Common Stock to the Company, and the Sellers granted the
Company a call option to purchase Sellers' shares of CPI Common Stock
(collectively, the "Put/Call Options") at a price to be determined based on the
then market value of the shares of the Company's Common Stock now outstanding
subject to specified adjustments. The Put/Call Options are exercisable in
increments of one-third of Sellers' shares of CPI Common Stock on each of the
54th, 60th and 66th month anniversary dates of the closing of the CPI
transaction and become immediately exercisable in the event of a merger,
liquidation, sale of substantially all of the assets or change of control of the
Company. The Stockholders Agreement contains additional provisions including,
among others, provisions relating to the inclusion of certain of the Sellers in
management's slate of nominees for election as directors of the Company,
provided that they remain as employees of the Company or CPI (only one Seller,
Mr. Cieszkowski, remains employed), the Company's commitment to a maximum
investment of $3,500,000 in CPI Preferred Stock, restrictions on the
transferability of shares of CPI stock held by the Company and by the Sellers,
"tag along" rights which entitle the Sellers to sell, and "drag along" rights
which require the Sellers to sell, their shares of CPI Common Stock in the event
of a proposed transfer by the Company of all of its shares of CPI Common Stock,
participation rights in favor of the Sellers in any future issuances of capital
stock or options or warrants convertible into capital stock of CPI (other than
employee stock options) for cash or in any additional entity organized by the
Company to make acquisitions in the wire and cable industry, and restrictions on
the Company's ability to acquire any business not engaged in the wire and cable
industry without the consent of the holders of a majority of the shares of CPI
Common Stock held by the Sellers.
In July 1997, the Company approved the prepayment of $350,000 of
principal due under a note in the principal amount of $1,764,000 payable to
James Harrington, a former Director and Officer of the Company. This amount was
paid in 1998. Under the terms of the note, such principal was scheduled to be
paid in May 2003.
The law firm of Zimet, Haines, Friedman & Kaplan, of which Herbert M.
Friedman, a director of the Company, was a partner, provided legal services to
the Company and CPI during Fiscal 1998.
Reference is also made to "Item 11. Executive Compensation -
Compensation of Directors."
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
The following consolidated financial statements are included in Item 8:
* Consolidated Balance Sheets as of December 31, 1998 and 1997
* Consolidated Statements of Operations for the years ended December 31,
1998, 1997 and 1996
* Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1998, 1997 and 1996
* Consolidated Statements of Cash Flows for the years ended December 31,
1998, 1997 and 1996
(a) 2. Financial Statement Schedules
All schedules have been omitted since the required information is not present
or not present in amounts sufficient to require submission of the schedule, or
because the information required is included in the consolidated financial
statements or the notes thereto.
(a) 3. Listing of Exhibits
29
<PAGE> 30
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
- ------ -----------------------
<S> <C>
2.1 Stock Redemption and Purchase Agreement, dated as of May 17, 1996 (the
"Purchase Agreement") by and among James S. Harrington, Duane A.
Gawron, Trustee of the Living Trust of Duane A. Gawron, Margo Gawron,
John E. Pylak, Trustee of the John E. Pylak Living Trust, Rebecca Pylak
and Kurt Cieszkowski (collectively, the "Sellers"), Connectivity
Products Incorporated, a Delaware corporation ("CPI"), and the Company
(incorporated by reference to Exhibit of the same number to the
Company's Current Report on Form 8-K dated May 31, 1996).
2.2 Amendment No. 1 to the Purchase Agreement, dated as of May 31, 1996
(incorporated by reference to Exhibit of the same number to the
Company's Current Report on Form 8-K dated May 31, 1996).
3.1 Certificate of Amendment of the Restated Certificate of Incorporation
of the Company, dated July 21, 1987 (incorporated by reference to
Exhibit
3.1 to the Company's Annual Report on Form 10-K for the year ended December
31, 1987). 3.2 Amended and Restated By-Laws of the Company
(incorporated by reference to Exhibit
3.2 to the Company's Annual Report on form 10-K for the year ended December
31, 1988).
3.3 Certificate of Amendment to Certificate of Incorporation of Tigera
Group, Inc., dated December 5, 1996 (incorporated by reference to
Exhibit 3.3 to the Company's Annual Report on Form 10-KSB for the year
ended December 31, 1996 (the "1996 Annual Report")).
3.4 Certificate of Amendment to the Certificate of Incorporation of the
Company, dated December 13, 1996 (incorporated by reference to Exhibit
3.4 to the Company's 1996 Annual Report).
4.1 Reference is made to Exhibits 3.1, 3.2 and 3.4.
10.1 Letter Agreement, dated April 11, 1991, among Joseph M. Girard and
James S. Campbell and the Company (incorporated by reference to Exhibit
of the same number to the Company's Annual Report on Form 10-K for the
year ended December 31, 1991 (the "1991 Annual Report")).
10.2 The Company's 1991 Stock Option Plan (incorporated by reference to
Exhibit of the same number to the Company's 1991 Annual Report).
10.3 Form of Non-Employee Stock Option Agreement used in connection with the
1991 Stock Option Plan (incorporated by reference to Exhibit of the
same number to the Company's 1991 Annual Report).
10.4 Form of Incentive Stock Option Agreement used in connection with the
1991 Stock Option Plan (incorporated by reference to Exhibit of the
same number to the Company's 1991 Annual Report).
10.5 Form of Incentive Stock Option Agreement used in connection with the
1991 Stock Option Plan (incorporated by reference to Exhibit of the
same number to the Company's Annual Report on Form 10-KSB for the year
ended December 31, 1995 (the "1995 Annual Report")).
10.6 Form of Employee Non-Qualified Stock Option Agreement used in
connection with the 1991 Stock Option Plan (incorporated by reference
to Exhibit of the same number to the Company's 1995 Annual Report).
10.7 Form of Non-Employee Non-Qualified Stock Option Agreement used in
connection with the 1991 Stock Option Plan (incorporated by reference
to Exhibit of the same number to the Company's 1995 Annual Report).
10.8 Form of Warrant Agreement, dated as of April 11, 1991, by and between
the Company and each of James S. Campbell and Joseph M. Gerard
(incorporated by reference to Exhibit of the same number to the
Company's 1995 Annual Report).
10.9 Form of Warrant Agreement, dated as of November 15, 1995, by and
between the Company and each of Donald T. Pascal and Deborah A.
Farrington (incorporated by reference to Exhibit of the same number to
the Company's 1995 Annual Report).
10.10 Form of Warrant Agreement, dated as of November 15, 1995, by and
between the Company and each of Messrs. Julien H. Meyer III and Francis
G. Hayes (incorporated by reference to Exhibit of the same number to
the Company's 1995 Annual Report).
10.11 Form of Warrant Agreement, dated as of November 15, 1995, by and
between the Company and each of A. Clinton Allen and Clarke H. Bailey
(incorporated by reference to Exhibit of the same number to the
Company's 1995 Annual Report).
10.12 Form of Warrant Agreement, dated as of November 15, 1995, by and
between the Company and each of Ramon D. Ardizzone, Albert M. Zlotnick
and Herbert M. Friedman (incorporated by reference to Exhibit of the
same number to the Company's 1995 Annual Report).
</TABLE>
30
<PAGE> 31
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
- ------ -----------------------
<S> <C>
10.13 Form of Warrant Agreement, dated as of December 26, 1995, by and
between the Company and each of Michael S. Berlin, Philip R. Hankin,
Irving I. Lassoff, James A. Martin III and Daniel A. Rivetti
(incorporated by reference to Exhibit of the same number to the
Company's 1995 Annual Report).
10.14 Employment Agreement, dated as of November 15, 1995, by and between the
Company and Donald T. Pascal (incorporated by reference to Exhibit of
the same number to the Company's 1995 Annual Report).
10.15 Employment Agreement, dated as of November 15, 1995, by and between the
Company and Deborah A. Farrington (incorporated by reference to Exhibit
of the same number to the Company's 1995 Annual Report).
10.16 Form of Consulting Agreement, dated as of November 15, 1995, by and
between the Company and each of Messrs. Julien H. Meyer III and Francis
G. Hayes (incorporated by reference to Exhibit of the same number to
the Company's 1995 Annual Report).
10.17 Stockholders' Agreement relating to CPI, dated as of May 17, 1996,
among the Sellers, CPI and the Company (incorporated by reference to
Exhibit 10.1 of the Company's Current Report on Form 8-K dated May 31,
1996).
10.18 Form of Employment Agreement, dated as of May 17, 1996, by and between
CPI and each of Messrs. Harrington, Gawron, Pylak and Cieszkowski
(incorporated by reference to Exhibit 10.2 of the Company's Current
Report on Form 8-K dated May 31, 1996).
10.19 Form of Redemption Note, dated as of May 31, 1996, by CPI in favor of
each of the Sellers (incorporated by reference to Exhibit 10.3 of the
Company's Current Report on Form 8-K dated May 31, 1996).
10.20 Form of Contingent Note, dated as of May 31, 1996, by CPI in favor of
each of the Sellers (incorporated by reference to Exhibit 10.4 of the
Company's Current Report on Form 8-K dated May 31, 1996).
10.21 Credit Agreement (the "Credit Agreement"), dated as of May 31, 1996, by
and among NBD Bank ("NBD") and The First National Bank of Boston
("FNBB" and, together with NBD and the other lending institutions
listed on Schedule 1 thereto, the "Banks"), each individually and as
Co-Agents, and CPI (incorporated by reference to Exhibit 10.1 of the
Company's Quarterly Report on Form 10-QSB for the quarter ended June
30, 1996 (the "1996 Second Quarter 10-QSB") ).
10.22 $10,000,000 Revolving Credit Note, dated as of May 31, 1996, executed
by CPI in favor of NBD (incorporated by reference to Exhibit 10.2 of
the Company's 1996 Second Quarter 10-QSB). 10.23 $10,000,000 Revolving
Credit Note, dated as of May 31, 1996, executed by CPI in favor of FNBB
(incorporated by reference to Exhibit 10.3 of the Company's 1996 Second
Quarter 10-QSB).
10.24 $3,500,000 Line of Credit Note, dated as of May 31, 1996, executed by
CPI in favor of NBD (incorporated by reference to Exhibit 10.4 of the
Company's 1996 Second Quarter 10-QSB).
10.25 $3,500,000 Line of Credit Note, dated as of May 31, 1996, executed by
CPI in favor of FNBB (incorporated by reference to Exhibit 10.5 of the
Company's 1996 Second Quarter 10-QSB).
10.26 $9,300,000 Term Loan A Note, dated as of May 31, 1996, executed by CPI
in favor of NBD (incorporated by reference to Exhibit 10.6 of the
Company's 1996 Second Quarter 10-QSB).
10.27 $9,300,000 Term Loan A Note, dated as of May 31, 1996, executed by CPI
in favor of FNBB (incorporated by reference to Exhibit 10.7 of the
Company's 1996 Second Quarter 10-QSB).
10.28 Subordination Agreement, dated as of May 31, 1996, executed by the
Sellers, the Company and CPI in favor of NBD, as administrative agent
for the Banks (the "Agent") (incorporated by reference to Exhibit 10.8
of the Company's 1996 Second Quarter 10-QSB).
10.29 Security Agreement, dated as of October 5, 1995, by and between CPI and
the Agent (incorporated by reference to Exhibit 10.9 of the Company's
1996 Second Quarter 10-QSB).
10.30 First Amendment to the Security Agreement, dated as of May 31, 1996, by
and between CPI and the Agent (incorporated by reference to Exhibit
10.9(a) of the Company's 1996 Second Quarter 10-QSB).
10.31 Guaranty, dated as of May 31, 1996, executed by the Company in favor of
the Agent (incorporated by reference to Exhibit 10.10 of the Company's
1996 Second Quarter 10-QSB).
10.32 Stock Pledge Agreement, dated as of May 31, 1996, by and between the
Company and the Agent (incorporated by reference to Exhibit 10.11 of
the Company's 1996 Second Quarter 10-QSB).
</TABLE>
31
<PAGE> 32
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
- ------ -----------------------
<S> <C>
10.33 Note Pledge Agreement, dated as of May 31, 1996, by and among the
Sellers and the Agent (incorporated by reference to Exhibit 10.12 of
the Company's 1996 Second Quarter 10-QSB).
10.34 Form of Stock Option Agreement, dated as of March 8, 1996, by and
between the Company and each of James S. Harrington, Duane A. Gawron,
John E. Pylak and Kurt Cieszkowski (incorporated by reference to
Exhibit 10.13 of the Company's 1996 Second Quarter 10-QSB).
10.35 Employment Agreement, dated as of July 9, 1996, between Gregory C.
Kowert and CPI (incorporated by reference to Exhibit 10.14 of the
Company's 1996 Second Quarter 10-QSB).
10.36 First Amendment to Credit Agreement, dated as of August 26, 1996, by
and among NBD and FNBB, each individually and as Co-Agents, and CPI
(incorporated by reference to Exhibit 10.1 of the Company's Quarterly
Report on Form 10-QSB for the quarter ended September 30, 1996 (the
"1996 Third Quarter 10-QSB")).
10.37 Second Amendment to the Credit Agreement, dated as of September 30,
1996, by and among NBD, FNBB, each individually and as Co-Agents, Fleet
Bank, N.A. and CPI (incorporated by reference to Exhibit 10.2 of the
Company's 1996 Third Quarter 10-QSB).
10.38 Agreement, dated as of September 27, 1996, by and among James S.
Harrington, Duane A. Gawron, John E. Pylak, Kurt Cieszkowski and CPI
(incorporated by reference to Exhibit 10.3 of the Company's 1996 Third
Quarter 10-QSB).
10.39 Form of Employee Stock Option Agreement pursuant to the Company's 1996
Stock Incentive Plan (incorporated by reference to Exhibit 10.4 of the
Company's 1996 Third Quarter 10-QSB).
10.40 Company's 1996 Stock Incentive Plan (incorporated by reference to
Exhibit D to the Company's Proxy Statement relating to the Company's
Annual Meeting of Shareholders held on December 4, 1996).
10.41 Stock Option Purchase Agreement by and among James S. Harrington, CPI,
Wayne MacPherson and Signal Sales Corp., dated as of December 17, 1996
(incorporated by reference to Exhibit 10.41 of the Company's Annual
Report on Form 10-KSB for the year ended December 31, 1996 (the "1996
Annual Report")).
10.42 Building Lease between Anthony Bennet Properties and Energy Electric
Cable, Inc., dated December 22, 1988 (incorporated by reference to
Exhibit 10.42 of the Company's 1996 Annual Report).
10.43 First Amendment to Building Lease between Anthony Bennet Properties and
Energy Electric Cable, Inc., dated February 9, 1994 (incorporated by
reference to Exhibit 10.43 of the Company's 1996 Annual Report).
10.44 Lease of Real Property at Crossroad Office Park by Peter F. Zichelle to
CPI, dated December 19, 1996 (incorporated by reference to Exhibit
10.44 of the Company's 1996 Annual Report).
10.45 Lease by and between Key Plastics, Inc. and CPI, dated March 6, 1997
(incorporated by reference to Exhibit 10.45 of the Company's 1996
Annual Report).
10.46 First Amendment of Certain Security Documents and Subordination
Agreement and Third Amendment to Amended and Restated Revolving Credit
and Term Loan Agreement by and among CTI, CPI and NBD (incorporated by
reference to Exhibit 10.46 of the Company's 1996 Annual Report).
10.47 Net Lease by and between Douglas J. Detweiler and BSCC Corp., dated
June 5, 1995 (incorporated by reference to Exhibit 10.47 of the
Company's 1996 Annual Report).
10.48 Second Amendment to Lease by and between Douglas J. Detweiler and BSCC
Corp., dated August 29, 1995 (incorporated by reference to Exhibit
10.48 of the Company's 1996 Annual Report).
10.49 First Amendment of Certain Security Documents and Subordination
Agreement and Third Amendment to Amended and Restated Revolving Credit
and Term Loan Agreement, dated as of February 24, 1997, by and among
the Company, CPI and the Agent (incorporated by reference to Exhibit
10.1 of the Company's Quarterly Report on Form 10-QSB for the quarterly
period ended March 31, 1997 (the "1997 First Quarter 10-QSB")).
10.50 Fourth Amendment to Amended and Restated Revolving Credit and Term Loan
Agreement, dated as of March 31, 1997, by and among CPI, NBD, as
Administrative Agent, and BankBoston N.A., as Documentation Agent
("BankBoston", f/k/a The First National Bank of Boston) (incorporated
by reference to Exhibit 10.2 of the Company's 1997 First Quarter
10-QSB).
</TABLE>
32
<PAGE> 33
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
- ------ -----------------------
<S> <C>
10.51 Fifth Amendment to Amended and Restated Revolving Credit and Term Loan
Agreement, dated as of June 27, 1997, by and among CPI, NBD, as agent,
BankBoston and certain other banks (incorporated by reference to
Exhibit 10.2 of the Company's Quarterly Report on Form 10-QSB for the
Quarterly Period ended June 30, 1997).
10.52 Supply Agreement between CPI and Anicom, Inc., dated as of July 11,
1997 (incorporated by reference to Exhibit 10.1 of the Company's
Quarterly Report on Form 10-QSB for the quarterly period ended
September 30, 1997 (the "1997 Third Quarter 10-QSB")).
10.53 Sixth Amendment to Amended and Restated Revolving Credit and Term Loan
Agreement, dated as of July 11, 1997, by and among CPI, NBD and
BankBoston (incorporated by reference to Exhibit 10.2 of the Company's
1997 Third Quarter 10-QSB).
10.54 Seventh Amendment to Amended and Restated Revolving Credit and Term
Loan Agreement, dated as of July 25, 1997, by and among CPI, NBD and
BankBoston (incorporated by reference to Exhibit 10.3 of the Company's
1997 Third Quarter 10-QSB).
10.55 Stock Pledge Agreement, dated as of July 11, 1997, between CPI and NBD
(incorporated by reference to Exhibit 10.4 of the Company's 1997 Third
Quarter 10-QSB).
10.56 Second Amended and Restated Term Loan A Note, dated as of July 11,
1997, in the principal amount of $6,000,000 payable by CPI to NBD
(incorporated by reference to Exhibit 10.5 of the Company's 1997 Third
Quarter 10-QSB).
10.57 Second Amended and Restated Term Loan A Note, dated as of July 11,
1997, in the principal amount of $6,000,000 payable by CPI to
BankBoston (incorporated by reference to Exhibit 10.6 of the Company's
1997 Third Quarter 10-QSB).
10.58 Second Amended and Restated Line of Credit Note, dated as of July 11,
1997, in the principal amount of $3,000,000 payable by CPI to NBD
(incorporated by reference to Exhibit 10.7 of the Company's 1997 Third
Quarter 10-QSB).
10.59 Second Amended and Restated Line of Credit Note, dated as of July 11,
1997, in the principal amount of $3,000,000 payable by CPI to
BankBoston (incorporated by reference to Exhibit 10.8 of the Company's
1997 Third Quarter 10-QSB).
10.60 Second Amended and Restated Revolving Credit Note, dated as of July 11,
1997, in the principal amount of $6,000,000 payable by CPI to NBD
(incorporated by reference to Exhibit 10.9 of the Company's 1997 Third
Quarter 10-QSB).
10.61 Second Amended and Restated Revolving Credit Note, dated as of July 11,
1997, in the principal amount of $6,000,000 payable by CPI to
BankBoston (incorporated by reference to Exhibit 10.10 of the Company's
1997 Third Quarter 10-QSB).
10.62 Assignment and Acceptance, dated as of July 11, 1997, by and among NBD,
BankBoston and CPI concerning NBD (incorporated by reference to Exhibit
10.11 of the Company's 1997 Third Quarter 10-QSB).
10.63 Assignment and Acceptance, dated as of July 11, 1997, by and among NBD,
BankBoston and CPI concerning BankBoston (incorporated by reference to
Exhibit 10.12 of the Company's 1997 Third Quarter 10-QSB).
10.64 Eighth Amendment to Amended and Restated Revolving Credit and Term Loan
Agreement, dated as of June 30, 1997, by and among CPI, NBD and
BankBoston (incorporated by reference to Exhibit 10.13 of the Company's
1997 Third Quarter 10-QSB).
10.65 Severance Agreement by and among CPI, the Company and Duane A. Gawron,
dated as of August 29, 1997 (incorporated by reference to Exhibit 10.14
of the Company's 1997 Third Quarter 10-QSB).
10.66 Form of director's stock options under stock option plans.
10.67 Form of non-plan director's stock option.
10.68 Form of employee/director stock option.
21.1 Subsidiaries of the Registrant (incorporated by reference to the
Company's 1996 Annual Report).
23(a) Consent of Ernst & Young LLP.*
27.1 Financial Data Schedule.*
</TABLE>
- ----------------
* Filed herewith.
33
<PAGE> 34
(b) Reports on Form 8-K:
--------------------
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 Company also reported that its previously announced
discussions with a prospective buyer for its EEA division had been terminated
and 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.
On December 1, 1998, the Company filed a Current Report on Form 8-K in
connection with the continuation of active discussions with its lenders
regarding the possible restructuring of the bank debt to replace the expired
Forbearance Agreement. As reported the new arrangement may include an
asset-based loan and would include the repayment to the Banks of more than $1
million in cash generated from operations in recent months. The Company believes
that a restructuring will be achieved and that the Banks would not demand
immediate payment while the discussions continue in a manner acceptable to the
Banks.
<PAGE> 35
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
Dated: April 13, 1999 CONNECTIVITY TECHNOLOGIES INC.
By: /s/ James M. Hopkins
--------------------------
James M. Hopkins
Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the Registrant and in the capacities and
on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ James M. Hopkins President, Chief Executive April 13, 1999
- ---------------------- Officer and Director
James M. Hopkins
/s/ Ramon D. Ardizzone Director April 13, 1999
- ----------------------
Ramon D. Ardizzone
/s/ Clarke H. Bailey Director April 13, 1999
- ----------------------
Clarke H. Bailey
/s/ David R. Flowers Director April 13, 1999
- ----------------------
David R. Flowers
/s/ Herbert M. Friedman Director April 13, 1999
- ----------------------
Herbert M. Friedman
/s/ Stephen P. Kelbley Director April 13, 1999
- ----------------------
Stephen P. Kelbley
/s/ George H. Buckham Controller (Principal April 13, 1999
- ---------------------- Accounting Officer)
George H. Buckham
</TABLE>
35
<PAGE> 36
Annual Report on Form 10-K
Item 8, Item 14(a)(1) and (2), (c) and (d)
List of Financial Statements
Certain Exhibits
Year ended December 31, 1998
Connectivity Technologies Inc.
Leominster, MA
<PAGE> 37
Connectivity Technologies Inc.
Audited Consolidated Financial Statements
Years ended December 31, 1998, 1997 and 1996
CONTENTS
<TABLE>
<S> <C>
Report of Independent Auditors (by Ernst & Young LLP)......................F-1
Report of Independent Accountants (by PricewaterhouseCoopers LLP)..........F-2
Audited Consolidated Financial Statements
Consolidated Balance Sheets................................................F-3
Consolidated Statements of Operations......................................F-4
Consolidated Statements of Stockholders' Equity............................F-5
Consolidated Statements of Cash Flows......................................F-6
Notes to Consolidated Financial Statements.................................F-8
</TABLE>
<PAGE> 38
Report of Independent Auditors
The Board of Directors and Stockholders
Connectivity Technologies Inc.
We have audited the accompanying consolidated balance sheets of Connectivity
Technologies Inc. as of December 31, 1998 and 1997, and the related consolidated
statements of operations, stockholders' equity and cash flows for the years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Connectivity Technologies Inc. at December 31, 1998 and 1997, and the
consolidated results of its operations and its cash flows for the years then
ended in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As more fully described in
Note 1, at December 31, 1998, the Company had negative working capital, was in
default of its loan agreement and experienced recurring losses from continuing
operations. These conditions raise substantial doubt about the Company's ability
to continue as a going concern. Management's plans in regard to these matters
also are described in Note 1. The financial statements do not include any
adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities that
may result from the outcome of this uncertainty.
ERNST & YOUNG LLP
Boston, Massachusetts
March 12, 1999
F-1
<PAGE> 39
Report of Independent Accountants
The Board of Directors and Stockholders
Connectivity Technologies Inc.
We have audited the accompanying consolidated statements of operations,
stockholders' equity, and cash flows of Connectivity Technologies Inc. for the
year ended December 31, 1996. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated results of operations and cash flows and
changes in stockholders' equity of Connectivity Technologies Inc. for the year
ended December 31, 1996, in conformity with generally accepted accounting
principles.
Other than for the reclassification for the discontinued operations as discussed
in Note 4, our audit report is based on the facts and conditions that existed at
February 24, 1997.
PricewaterhouseCoopers LLP
Detroit, Michigan
February 24, 1997, except Note 4,
for which the date is June 4, 1997
F-2
<PAGE> 40
Connectivity Technologies Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 598,804 $ 245,843
Marketable securities 3,127,012
Accounts receivable:
Trade, less allowances of $309,536 in 1998 and 6,672,085 9,012,618
$321,000 in 1997
Other 68,048 119,093
Inventories 5,203,023 5,130,915
Prepaid expenses and other current assets 129,883 223,983
Refundable income taxes, net 286,733
----------- -----------
Total current assets 12,958,576 17,859,464
Property, plant and equipment, net 6,949,801 7,053,318
Goodwill and other intangible assets 9,606,045 10,062,065
Other assets 102,919 110,735
----------- -----------
$29,617,341 $35,085,582
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities:
Loan payable to bank, in default $16,462,168 $12,300,000
Subordinated notes payable 882,600 6,000,000
Trade accounts payable 2,740,040 5,104,598
Accrued liabilities 1,895,116 3,783,640
Income taxes payable 3,356,314
----------- -----------
Total current liabilities 21,979,924 30,544,552
Stockholders' equity:
Preferred stock, $.01 par value, 10,000,000 shares
authorized, none outstanding
Series B common stock, $.04 par value, 750,000 shares
authorized, none outstanding
Common Stock, $.04 par value, 20,000,000 shares
authorized, 5,771,857 shares issued, 5,565,256 shares
outstanding 230,874 230,874
Additional paid-in capital 109,336,244 109,336,244
Accumulated deficit (101,921,437) (105,635,869)
Less 206,601 shares in treasury, at cost (8,264) (8,264)
Unrealized gain on marketable securities, less income
taxes of $411,001 618,045
----------- -----------
Total stockholders' equity 7,637,417 4,541,030
----------- -----------
$29,617,341 $35,085,582
=========== ===========
</TABLE>
See accompanying notes.
F-3
<PAGE> 41
Connectivity Technologies Inc.
Consolidated Statements of Operations
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Net sales $ 45,167,299 $ 41,707,988 $ 20,318,996
Cost of goods sold 36,801,437 35,393,009 14,499,866
------------ ------------ ------------
Gross profit 8,365,862 6,314,979 5,819,130
Selling, general and administrative expenses 8,916,283 10,441,178 5,111,292
------------ ------------ ------------
Operating income (loss) (550,421) (4,126,199) 707,838
Other income (expense):
Interest income 2,065 31,220 335,365
Interest expense (1,935,685) (2,395,038) (1,368,323)
Gain on sale of investments 420,534 -- --
Other -- 39,247 65,077
------------ ------------ ------------
(1,513,086) (2,324,571) (967,881)
------------ ------------ ------------
Loss from continuing operations before
income taxes (2,063,507) (6,450,770) (260,043)
Income taxes (benefit) provision (903,986) 7,993,424 13,990
------------ ------------ ------------
Loss from continuing operations (1,159,521) (14,444,194) (274,033)
Discontinued operations:
Income from discontinued operations, less income
taxes of $194,269 in 1997 and $620,262 in 1996
292,132 633,193
Gain on sale of discontinued operations, less
income taxes of $25,434 in 1998 and $6,398,995
in 1997 38,151 5,056,555
------------ ------------ ------------
Income from discontinued operations 38,151 5,348,687 633,193
Extraordinary gain on forgiveness of subordinated
notes, less income taxes of $517,038 4,835,802
------------ ------------ ------------
Net income (loss) $ 3,714,432 $ (9,095,507) $ 359,160
============ =========== ============
Weighted average shares outstanding 5,565,256 5,565,272 5,508,057
============ =========== ============
Basic and diluted income (loss) per share:
Continuing operations $ (.21) $ (2.60) $ (.05)
Discontinued operations .01 .96 .11
Extraordinary income .87
------------ ------------ ------------
$ .67 $ (1.64) $ .06
============ =========== ============
</TABLE>
See accompanying notes.
F-4
<PAGE> 42
Connectivity Technologies Inc.
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
ACCUMULATED
UNREALIZED OTHER
COMMON STOCK ADDITIONAL TREASURY STOCK GAIN ON COMPRE- TOTAL
-------------------- PAID-IN ACCUMULATED ---------------- MARKETABLE HENSIVE STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT SHARES AMOUNT SECURITIES INCOME EQUITY
---------- -------- ------------ ------------- ------- ------- ---------- --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1996 21,492,902 $221,127 $108,741,543 $ (96,899,522) 206,601 $(8,264) $12,054,884
Net income 359,160 359,160
Stock options and 975,000 9,750 595,249 604,999
warrants exercised
Reverse stock split (16,695,976) --
---------- -------- ------------ ------------- ------- ------- -------- -------- -----------
Balance at December 31, 1996 5,771,926 230,877 109,336,792 (96,540,362) 206,601 (8,264) -- -- 13,019,043
Net loss (9,095,507) (9,095,507)
Unrealized gain on
marketable securities
less income taxes
of $411,001 $618,045 $618,045 618,045
-----------
Comprehensive income (loss) (8,477,462)
Shares repurchased and (69) (3) (548) (551)
retired
---------- -------- ------------ ------------- ------- ------- -------- -------- -----------
Balance at December 31, 1997 5,771,857 230,874 109,336,244 (105,635,869) 206,601 (8,264) 618,045 618,045 4,541,030
Net income 3,714,432 3,714,432
Reclassification adjustment
on realized gain on sale
of marketable securities
less income taxes of
$411,001 (618,045) (618,045) (618,045)
-----------
Comprehensive income 3,096,387
---------- -------- ------------ ------------- ------- ------- -------- -------- -----------
Balance at December 31, 1998 5,771,857 $230,874 $109,336,244 $(101,921,437) 206,601 $(8,264) $ -- $ -- $ 7,637,417
========== ======== ============ ============= ======= ======= ======== ======== ===========
</TABLE>
See accompanying notes.
F-5
<PAGE> 43
Connectivity Technologies Inc.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Loss from continuing operations (excluding extra-
ordinary gain of $4,835,802) $ (1,159,521) $(14,444,194) $ (274,033)
Adjustments to reconcile loss from continuing
operations to cash provided by (used for)
operating activities:
Depreciation and amortization 1,644,280 1,703,230 931,537
Debt issuance costs 458,311
Gain on sale of investments (420,534)
Deferred income taxes 556,883 9,488,583 459,252
Noncash interest expense 260,440
Changes in assets and liabilities:
Accounts receivable 2,391,578 (3,386,801) 527,483
Inventories (72,108) (173,865) (707,198)
Prepaid expenses and other assets 101,916 115,611 1,006,881
Trade accounts payable (2,364,558) 733,303 (515,858)
Accrued liabilities and income taxes (6,156,340) (211,620) (332,957)
------------ ------------ ------------
Net cash provided by (used for) continuing operations (5,217,964) (5,717,442) 1,095,107
Income from discontinued operations 38,151 292,132 633,193
Adjustments to reconcile income from discontinued
operations to cash provided by (used for)
operating activities
Depreciation and amortization 118,496 126,906
Changes in assets and liabilities:
Accounts receivable (2,846,593) (867,778)
Inventories 123,357 (233,495)
Prepaid expenses and other assets (39,689) (19,127)
Trade accounts payable 1,889,502 (833,875)
Accrued liabilities and income taxes (38,151) 1,361,417 146,134
Other (12,280) (7,123)
------------ ------------ ------------
(38,151) 475,714 (1,815,264)
------------ ------------ ------------
Net cash provided by (used for) discontinued
operations -- 886,342 (1,055,165)
------------ ------------ ------------
Net cash provided by (used for) operating activities (5,217,964) (4,831,100) 39,942
INVESTING ACTIVITIES
Proceeds from disposal of discontinued operations,
net of transaction costs 25,460,698
Purchases of property, plant and equipment (1,084,743) (2,031,040) (1,490,507)
Purchases of property, plant and equipment by
discontinued operations (224,246) (230,330)
Purchases of marketable securities (1,779,059)
Proceeds from sale of investments 2,518,500 2,671,034 9,869,666
Acquisition of Connectivity Products, Inc., net of
cash acquired of $756,170 (7,233,830)
Acquisition of option of Signal ($629,182) and other
intangible assets (655,815)
------------ ------------ ------------
Net cash provided by investing activities 1,433,757 24,097,387 259,184
</TABLE>
F-6
<PAGE> 44
Connectivity Technologies Inc.
Consolidated Statements of Cash Flows (continued)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996
---------- ----------- ----------
<S> <C> <C> <C>
FINANCING ACTIVITIES
Proceeds from long-term borrowings $8,228,828 $13,405,000
Repayment of long-term borrowings (4,416,660) (32,655,000) $ (850,000)
Proceeds from forgiveness of
subordinated notes 325,000 (551)
Other
Stock options exercised 604,999
---------- ----------- ----------
Net cash provided by (used for)
financing activities 4,137,168 (19,250,551) (245,001)
---------- ----------- ----------
Net increase in cash 352,961 15,736 54,125
Cash at beginning of year 245,843 230,107 175,982
---------- ----------- ----------
Cash at end of year $ 598,804 $ 245,843 $ 230,107
========== =========== ==========
SUPPLEMENTAL INFORMATION:
Cash paid during the year for:
Income taxes $2,907,000 $ 225,000 $ 63,000
========== =========== ==========
Interest $1,563,000 $ 2,935,000 $1,650,000
========== =========== ==========
</TABLE>
See accompanying notes.
F-7
<PAGE> 45
Connectivity Technologies Inc.
Notes to Consolidated Financial Statements (continued)
December 31, 1998
1. BASIS OF PRESENTATION
DESCRIPTION OF BUSINESS
Connectivity Technologies Inc. (CTI, or the Company) owns approximately 97.8 %
(85% at December 31, 1997) of the outstanding common stock of Connectivity
Products Incorporated (CPI). The primary business of CPI is the manufacture and
assembly of wire and cable products. Principal manufacturing markets include
security, factory automation, signal and sound. CTI has no operations other than
those carried out by CPI.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of CTI and its
subsidiary, CPI. All significant intercompany accounts have been eliminated in
consolidation.
GOING CONCERN MATTERS
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern, which contemplates the
realization of assets and the satisfaction of liabilities in the normal course
of business. At December 31, 1998, the Company had negative working capital, was
in default of its loan agreement and experienced recurring losses from
continuing operations. In addition, amounts under the Company's loan agreement
are due and payable and, although the lender has not so indicated, the lender
has the right to proceed against the Company's assets. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans to resolve these matters presently include the sale by the
Company's CPI subsidiary of some or all of its operating assets or the sale by
the Company of its stock in CPI. If a sale is successfully consummated, the
proceeds from the sale would be utilized first to pay the outstanding loan
payable to the bank. In the event a CPI sale cannot be consummated, management
intends to continue enhancing operations and consider seeking alternative
sources of financing, as necessary.
F-8
<PAGE> 46
Connectivity Technologies Inc.
Notes to Consolidated Financial Statements
1. BASIS OF PRESENTATION (CONTINUED)
GOING CONCERN MATTERS (CONTINUED)
There can be no assurance that management will be successful in its efforts to
sell some or all of the operating assets of CPI or for the Company to sell the
stock of CPI at a price acceptable to the Board of Directors. Further, no
assurance can be provided that proceeds from any sale would be sufficient to
satisfy outstanding obligations. Similarly, should the Company not succeed in
its CPI sale plans there can be no assurance that alternative financing will be
available at commercially feasible rates, or at all. The accompanying
consolidated financial statements do not include any adjustments to reflect the
possible future effects on the recoverability and classification of assets or
the amounts and classification of liabilities that may result from the outcome
of this uncertainty.
RECLASSIFICATIONS
Certain amounts reported in prior years have been reclassified to conform to the
1998 presentation.
The most significant reclassification in the 1997 balance sheet pertains to the
assets and liabilities of the Company's EEA division that were classified as
held for sale in 1997. At December 31, 1998, because the entire operations of
CPI are available for sale, the assets and liabilities of EEA as of December 31,
1997 have been reclassified for comparative purposes to their respective line
items.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts in the financial statements and accompanying notes.
Actual results could differ from those estimates.
MARKETABLE SECURITIES
Under the provisions of FASB Statement No. 115, Accounting for Certain
Investments in Debt and Equity Securities (FAS 115), the Company classified its
investments in Anicom, Inc. and United States treasury bills at December 31,
1997 as available-for-sale securities. Available-for-sale securities are carried
at fair value, with the unrealized gains and losses, net of tax, reported in a
separate component of stockholders' equity. Realized gains and losses and
declines in value judged to be other-than-temporary on available-for-sale
securities are included in investment income. The cost of securities sold is
based on the specific identification method. To the extent earned, interest and
dividends on investments classified as available-for-sale are included in
investment income. The carrying value of the United States treasury bills
approximates fair value.
INVENTORIES
Inventories are stated at the lower of cost, determined on the first-in,
first-out basis, or market.
F-9
<PAGE> 47
Connectivity Technologies Inc.
Notes to Consolidated Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is recorded at cost less accumulated depreciation
and amortization. Depreciation is calculated using the straight-line method over
the estimated useful lives of the individual assets (5 to 12 years for equipment
and 3 to 10 years for leasehold improvements). Cost of major renewals and
additions are capitalized, while expenditures for repairs and maintenance costs
are expensed as incurred. Upon retirement or disposal of property, plant and
equipment, the cost and accumulated depreciation or amortization are removed
from the accounts, and any gain or loss is included in the determination of net
income.
GOODWILL AND OTHER INTANGIBLE ASSETS
Intangible assets consist primarily of goodwill. Periodically, management
assesses whether there has been an impairment in the carrying value of the
intangible assets. If facts and circumstances indicate that the Company's
intangible assets might be impaired, the estimated future undiscounted cash
flows associated with the intangible asset would be compared to its carrying
amount to determine if an adjustment to fair value is necessary.
As described in Note 1, there is substantial doubt about the Company's ability
to continue as a going concern. The Company has undertaken a number of
initiatives to alleviate the doubt and there can be no assurance that the
Company will be able to successfully carry out these initiatives. Depending on
the ultimate outcome of these initiatives, the Company could be required to
record an impairment charge pertaining to goodwill associated with one or both
of its divisions.
The Company amortizes its intangible assets over their estimated useful lives,
principally 25 years.
INCOME TAXES
In accordance with FASB Statement No. 109, Accounting for Income Taxes, the
Company accounts for income taxes using the liability method. Deferred tax
assets and liabilities are determined based on differences between financial
reporting and income tax bases of assets and liabilities and are measured using
the enacted tax rates and laws that will be in effect when the differences are
expected to reverse. When appropriate, deferred tax assets are reduced by a
valuation allowance to reflect the uncertainty associated with their ultimate
realization.
F-10
<PAGE> 48
Connectivity Technologies Inc.
Notes to Consolidated Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the Company to concentrations of
credit risk consist primarily of trade accounts receivable.
Concurrent with the sale of substantially all of the assets and liabilities of
the Company's Electric Energy Cable (EEC) division to Anicom, Inc. (Anicom) (see
Note 4), the Company entered into a supply agreement with Anicom. Pursuant to
this agreement, Anicom agreed to purchase a specified amount of wire and cable
products manufactured by the Company through July 11, 2002. Approximately 26%
and 17% of the Company's net sales for the years ended December 31, 1998 and
1997, respectively, were from sales to Anicom. Approximately 29% and 28% of the
Company's trade accounts receivable at December 31, 1998 and 1997, respectively,
represented amounts due from Anicom.
The Company performs credit evaluations on all new customers and generally does
not require collateral.
STOCK-BASED COMPENSATION
The Company grants stock options and warrants of shares to employees with an
exercise price equal to the fair market value of the shares at the grant date.
The Company accounts for stock option grants in accordance with APB Opinion No.
25, Accounting for Stock Issued to Employees, and accordingly, recognizes no
compensation expense for the stock option grants.
REVENUE RECOGNITION
Revenue from sale of product is recognized at the time of shipment.
EARNINGS PER SHARE
The Company reports earnings per share (EPS) in accordance with the provisions
of FASB Statement No. 128, Earnings per Share (FAS 128). In accordance with FAS
128, the Company has excluded the dilutive effects of options and warrants from
its EPS calculations because it has incurred a loss from continuing operations
for all periods presented in the accompanying financial statements.
F-11
<PAGE> 49
Connectivity Technologies Inc.
Notes to Consolidated Financial Statements (continued)
3. ACQUISITION OF CONNECTIVITY PRODUCTS INCORPORATED
On May 31, 1996, CTI acquired for cash of $7.99 million, 85% of the outstanding
common stock of CPI. The consolidated financial statements of the Company
include the operating results of CPI since the date of acquisition. At the time
of the acquisition, the primary business of CPI included the distribution of a
full line of wire and cable products for the computer networking market and the
security, signal and sound markets. The stock acquisition has been accounted for
as a purchase and the purchase price was allocated as follows:
<TABLE>
<S> <C>
Current assets (including deferred taxes of $1,945,766) $ 30,167,738
Property, plant and equipment 6,100,694
Deferred taxes ($10,046,119) and other assets 10,382,754
Goodwill and intangible assets 14,547,320
------------
61,198,506
Liabilities assumed (53,828,816)
Notes receivable from minority stockholder 620,310
------------
$ 7,990,000
============
</TABLE>
F-12
<PAGE> 50
Connectivity Technologies Inc.
Notes to Consolidated Financial Statements (continued)
3. ACQUISITION OF CONNECTIVITY PRODUCTS INCORPORATED (CONTINUED)
Goodwill attributable to the acquisition is amortized over 25 years. Unaudited
pro forma results of operations for the year ended December 31, 1996, including
the pro forma effects of discontinued operations, as if the acquisition had
occurred at January 1, 1996 are as follows:
<TABLE>
<CAPTION>
CONTINUING DISCONTINUED
OPERATIONS OPERATIONS TOTAL
----------- ------------ -----------
(Unaudited)
<S> <C> <C> <C>
Net sales $35,830,194 $61,434,304 $97,264,498
Income before income taxes 51,174 1,755,538 1,806,712
Net income 28,316 739,416 767,732
Basic earnings per share $ .01 $ .13 $ .14
Diluted earnings per share .01 .12 .13
</TABLE>
The above pro forma information does not purport to represent the Company's
results of operations that would have been attained had the above acquisition in
fact occurred at the beginning of the period indicated or to project the
Company's results for any future period.
In connection with the acquisition, CTI granted the CPI minority stockholders
(Stockholders) the option to require CTI to purchase (put) their remaining
common stock of CPI, and each Stockholder granted CTI the option to purchase
(call) the remaining outstanding stock. The put and call purchase price is based
on a formula which is tied to the market value of CTI's common stock at the
transaction date. These options are exercisable on November 30, 2000, May 31,
2001 and November 30, 2001 in an amount on each option date equal to one-third
of the outstanding stock (on a cumulative basis). There are limitations on the
Stockholders' ability to sell their common stock. As a result of five of the
original six stockholders assigning their options to CTI during the year ended
December 31, 1998, as discussed below, the put and call provision only applies
to the remaining stockholder. At December 31, 1998, the value of these options
is not material.
Immediately prior to the acquisition, CPI redeemed, on a pro rata basis, 1,274
shares of its common stock for cash of $7.6 million, subordinated notes of $6
million, subordinated contingent notes of $3 million and forgiveness of $2
million of stockholder notes. The subordinated notes were included in
liabilities assumed upon acquisition.
Payment of the subordinated contingent notes was based on the Company achieving
an earnings related threshold for the two years ended December 31, 1997. The
agreed-upon threshold was not attained and the contingent notes expired.
F-13
<PAGE> 51
Connectivity Technologies Inc.
Notes to Consolidated Financial Statements (continued)
3. ACQUISITION OF CONNECTIVITY PRODUCTS INCORPORATED (CONTINUED)
During the year ended December 31, 1998, the Company entered into agreements
with certain of the Stockholders pursuant to which the Stockholders transferred
to CTI and CPI subordinated notes of $4,767,400 plus accrued interest of
approximately $260,000, common stock of CPI aggregating approximately 12.8% of
the total outstanding shares of CPI, options to purchase 205,364 common shares
of CTI, and cash of $325,000. The effect of these agreements, $4,835,802 net of
provision for income taxes of $517,038, is reported as extraordinary gain.
4. DISCONTINUED OPERATIONS
Effective June 30, 1997, CPI sold substantially all of the assets and
liabilities of EEC to Anicom for consideration consisting of cash of $27 million
and 190,476 shares of Anicom common stock, valued at $2 million. Under the terms
of the sale agreement, the Anicom stock was held in escrow until July 11, 1998.
As discussed in Note 2, concurrent with the sale of the EEC division, the
Company entered into a five year supply agreement with Anicom.
EEC represented a separate line of business and, accordingly, its results of
operations have been reported, net of applicable income taxes, as discontinued
operations for all periods presented. The Company allocated interest expense of
approximately $283,000 and $600,000 in determining income from discontinued
operations for the years ended December 31, 1997 and 1996, respectively.
Interest expense was allocated based on the proportionate share of EEC's net
assets to the total net assets and consolidated debt of the Company.
Summarized financial information for EEC is as follows:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
(Unaudited)
<S> <C> <C>
Net sales $34,631,928 $36,378,959
Income, net of income taxes 292,132 633,193
</TABLE>
F-14
<PAGE> 52
Connectivity Technologies Inc.
Notes to Consolidated Financial Statements (continued)
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following at December 31, 1998 and
1997:
<TABLE>
<CAPTION>
1998 1997
------------ -----------
<S> <C> <C>
Machinery and equipment $ 8,520,726 $ 7,734,755
Transportation equipment 22,979 94,821
Office equipment 589,366 368,155
Leasehold improvements 462,386 429,040
------------ -----------
9,595,457 8,626,771
Less accumulated depreciation and amortization (2,645,656) (1,573,453)
------------ -----------
$ 6,949,801 $ 7,053,318
============ ===========
</TABLE>
Depreciation expense approximated $1,188,000 for the year ended December 31,
1998 and $1,175,000 (including approximately $118,000 related to discontinued
operations) and $645,000 (including approximately $126,000 related to
discontinued operations) for the years ended December 31, 1997 and 1996,
respectively.
6. MARKETABLE SECURITIES
The following is a summary of marketable securities, classified as
available-for-sale at December 31, 1997. The Company had no investments in
marketable securities at December 31, 1998.
<TABLE>
<CAPTION>
GROSS
UNREALIZED ESTIMATED
COST GAINS FAIR VALUE
---------- ---------- ----------
<S> <C> <C> <C>
Investment in Anicom, Inc. $2,000,000 $1,029,046 $3,029,046
U.S. Treasury Bills--due in April 1998 97,966 - 97,966
---------- ---------- ----------
$2,097,966 $1,029,046 $3,127,012
========== ========== ==========
</TABLE>
F-15
<PAGE> 53
Connectivity Technologies Inc.
Notes to Consolidated Financial Statements (continued)
7. INVENTORIES
Inventory consists of the following at December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Raw materials $3,211,631 $3,763,267
Work-in-process 686,124 336,625
Finished goods 1,305,268 1,031,023
---------- ----------
$5,203,023 $5,130,915
========== ==========
</TABLE>
8. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and other intangible assets consist of the following at December 31,
1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Goodwill $10,713,000 $10,713,000
Non compete covenant 150,000 150,000
----------- -----------
10,863,000 10,863,000
Less accumulated amortization (1,256,955) (800,935)
----------- -----------
$ 9,606,045 $10,062,065
=========== ===========
</TABLE>
F-16
<PAGE> 54
Connectivity Technologies Inc.
Notes to Consolidated Financial Statements (continued)
9. LEASES
CTI leases its facilities and certain manufacturing equipment, vehicles and
office equipment under various operating leases which expire on various dates
through 2004. Management expects that in the normal course of business, leases
that expire will be renewed or replaced by other leases.
Future minimum commitments under operating leases with non-cancelable terms of
one or more years are as follows at December 31, 1998:
<TABLE>
<CAPTION>
<S> <C>
1999 $ 678,532
2000 437,509
2001 287,495
2002 178,228
2003 113,259
Thereafter 116,538
-----------
$ 1,811,561
===========
</TABLE>
Rent expense approximated $883,000 and $1,200,000 (including approximately
$403,000 related to discontinued operations) and $1,181,000 (including
approximately $496,000 related to discontinued operations) for the years ended
December 31, 1998, 1997 and 1996, respectively.
F-17
<PAGE> 55
Connectivity Technologies Inc.
Notes to Consolidated Financial Statements (continued)
10. DEBT
LOAN PAYABLE TO BANK, IN DEFAULT
At the end of fiscal 1998, the Company was negotiating with its lender regarding
possible terms and conditions of a new loan facility or an extension of the
forbearance agreement which expired on November 30, 1998. In addition, amounts
under the Company's loan agreement are due and payable and, although the lender
has not so indicated, the lender has the right to proceed against the Company's
assets.
Borrowings outstanding at December 31, 1998 accrued interest at 200 basis points
over the bank's base rate and were secured by substantially all the tangible
assets of the Company. Outstanding borrowings at December 31, 1998 and 1997 were
classified as a current liability because the Company was in default of the
agreements in place at those dates.
SUBORDINATED NOTES PAYABLE
Subordinated notes payable were issued as part of the Company's acquisition of
CPI (see Note 3). 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 agreement, principal
becomes payable on May 31, 2003. As described in Note 3, 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. At December 31, 1998 and 1997, the Company was not
in compliance with certain of the conditions specified in the note agreement
and, accordingly, the outstanding balances have been classified as a current
liability.
DEFERRED DEBT ISSUANCE COSTS
During 1997, the Company expensed the unamortized value of the deferred debt
issuance costs (approximately $460,000) associated with the then existing
revolving credit and term loan facility.
F-18
<PAGE> 56
Connectivity Technologies Inc.
Notes to Consolidated Financial Statements (continued)
11. INCOME TAXES
The income taxes provisions (benefit) consist of the following:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- --------
<S> <C> <C> <C>
CONTINUING OPERATIONS
Current:
Federal $(1,168,742) $(1,210,916) $ --
State (292,127) (284,243) (39,725)
----------- ----------- --------
(1,460,869) (1,495,159) (39,725)
Deferred:
Federal 474,062 9,488,583 53,715
State 82,821 -- --
----------- ----------- --------
556,883 9,488,583 53,715
----------- ----------- --------
Total income taxes--continuing operations $ (903,986) $ 7,993,424 $ 13,990
=========== =========== ========
DISCONTINUED OPERATIONS
Current:
Federal $ 19,711 3,574,116 $ --
State 5,723 1,386,098 214,725
----------- ----------- --------
25,434 4,960,214 214,725
Deferred:
Federal -- 1,633,050 405,537
State -- -- --
----------- ----------- --------
-- 1,633,050 405,537
----------- ----------- --------
Total income taxes--discontinued operations $ 25,434 $ 6,593,264 $620,262
============ =========== ========
EXTRAORDINARY GAIN
Current:
Federal $ 181,120
State 481,800
-----------
662,920
Deferred:
Federal (145,882)
State --
-----------
(145,882)
-----------
Total income taxes--extraordinary gain $ 517,038
===========
</TABLE>
F-19
<PAGE> 57
Connectivity Technologies Inc.
Notes to Consolidated Financial Statements (continued)
11. INCOME TAXES (CONTINUED)
Deferred tax liabilities and assets represent the tax effect of temporary
differences attributable to the following at December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Deferred tax liabilities:
Depreciation $ (969,965) $ (832,842)
Unrealized gains on marketable securities (411,001)
---------- ----------
Total deferred tax liabilities (969,965) (1,243,843)
Deferred tax assets:
Accounts receivable valuation allowance 123,628 111,033
Inventory valuation 140,523 176,700
Accrued expenses 269,058 875,653
State income taxes 101,314
Net operating loss carryforwards 25,756,343 28,039,336
Tax credit carryforwards 1,410,747 1,410,747
----------
----------
Total deferred tax assets 27,801,613 30,613,469
Valuation allowance (26,831,648) (29,369,626)
----------
----------
Net deferred tax assets 969,965 1,243,843
---------- ----------
Net deferred tax balance $ -- $ --
========== ==========
</TABLE>
Management is unable to conclude it is more likely than not the Company will
realize its net deferred tax assets. The valuation allowance was increased by
approximately $9.9 million in 1997, due primarily to changes in judgment about
future years operating results. The related expense is included in loss from
continuing operations for the year ended December 31, 1997.
F-20
<PAGE> 58
Connectivity Technologies Inc.
Notes to Consolidated Financial Statements (continued)
11. INCOME TAXES (CONTINUED)
A reconciliation of the income tax provision (benefit) for continuing operations
to the amount computed using the federal statutory tax rate consists of the
following:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- ----------
<S> <C> <C> <C>
Loss from continuing operations before
income taxes $(2,063,507) $(6,450,770) $(260,043)
Tax benefit at statutory rate of 34% $ (701,592) $(2,193,262) $ (88,414)
State income tax benefit, net of federal benefit (77,267) (316,436) (26,219)
Effect of permanent differences (principally
goodwill) 121,469 148,257 128,623
Change in valuation allowance (255,004) 9,904,554 --
Expiration of tax credits 589,253 --
Other 8,408 (138,942) --
----------- ----------- ---------
Income tax provision (benefit) $ (903,986) $ 7,993,424 $ 13,990
=========== =========== =========
</TABLE>
At December 31, 1998, the Company has available approximately $76 million of net
operating loss carryforwards and $1.4 million of tax credit carryforwards for
federal tax purposes. Except as described below, these carryforwards may be used
to offset future taxes on income, if any, and expire through 2010 as follows:
1999--$9.8 million; 2000--$14.1 million; 2001--$16.6 million; 2002--$19.1
million; 2002--$8.6 million; thereafter--$9.2 million.
Should an ownership change of the Company occur, as defined under section 382 of
the Internal Revenue Code (IRC), the Company could lose the ability to utilize
some or all of these net operating loss carryforwards and tax credit
carryforwards. The Company has determined that an ownership change has not
occurred through December 31, 1998.
The use of the Company's net operating losses is further limited by section 384
of the IRC. At the time of the acquisition of CPI by the Company, the fair value
of the CPI assets acquired exceeded the associated tax basis. (This difference
is referred to as "built-in-gain"). Net operating loss carryforwards may not be
used to offset the portion of any gain that may be recognized upon the sale of
CPI assets that was "built-in" at the date of acquisition.
In this connection, net operating loss carryforwards were not available to
offset the "built-in-gain" portion ($6.2 million) of the gain recognized on the
1997 sale of EEC division.
F-21
<PAGE> 59
Connectivity Technologies Inc.
Notes to Consolidated Financial Statements (continued)
11. INCOME TAXES (CONTINUED)
To the extent the Company is able to utilize net operating loss and tax credit
carryforwards subsequent to December 31, 1998, the first $9.9 million of such
amount will be credited to operations. The realization of any additional amounts
will be recorded as a reduction of goodwill.
12. STOCKHOLDERS' EQUITY
OPTIONS
The Company's stock incentive plans allow for the issuance of options to
officers, directors, employees and consultants of CTI for the purchase of up to
1,275,000 shares of common stock. All options granted have an exercise price
equal to or more than 100 percent of the fair market value of the Company's
common stock at the date of grant and vest over 2 to 5 years. Options for 8,767
shares are exercisable at December 31, 1998. The weighted average exercise price
of the options is $3.86. No options were exercisable at December 31, 1997 and
1996. Options granted expire 10 years after the date of the grant and the
weighted average life of options outstanding at December 31, 1998 is 8.74 years.
The Board of Directors may also issue nonqualified stock options with the
exercise price and terms determined at the date of the grant.
The following is a summary of stock option activity:
<TABLE>
<CAPTION>
1998 1997 1996
------------------- ------------------- -------------------
WEIGHTED WEIGHTED WEIGHTED
NUMBER OF AVERAGE NUMBER OF AVERAGE NUMBER OF AVERAGE
OPTIONS EXERCISE OPTIONS EXERCISE OPTIONS EXERCISE
PRICE PRICE PRICE
--------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding--beginning
of year 861,007 $5.05 787,898 $6.79 406,250 $2.87
Granted 644,500 2.46 345,062 3.67 544,148 8.25
Exercised -- -- -- -- (162,500) 1.89
Forfeited or canceled (365,025) 5.15 (271,953) 8.32 -- --
--------- ----- ------- ----- ------- -----
Outstanding--end of year 1,140,482 $3.54 861,007 $5.05 787,898 $6.79
========= ===== ======= ===== ======= =====
</TABLE>
F-22
<PAGE> 60
Connectivity Technologies Inc.
Notes to Consolidated Financial Statements (continued)
12. STOCKHOLDERS' EQUITY (CONTINUED)
OPTIONS (CONTINUED)
<TABLE>
<CAPTION>
RANGE OF EXERCISE PRICES
-----------------------------
$1.13 - $4.25 $7.75 - $8.64
------------- -------------
<S> <C> <C>
OPTIONS OUTSTANDING:
Number outstanding at December 31, 1998 987,482 153,000
Weighted average remaining contractual life (years)
8.9 7.4
Weighted average exercise price $ 2.86 $ 8.07
</TABLE>
At December 31, 1998, 97,783 options were available for issuance under the
Company's stock incentive plans.
In July 1997, the Board approved the cancellation of 136,312 options with
exercise prices ranging from $8.12--$8.64 per common share and the issuance of
136,312 new options at $3.59 per common share (which represented the then fair
market value of the Company's common stock at the date of re-issuance). In
addition, in July 1997, the Board approved the repricing of 65,750 options with
exercise prices ranging from $8.12--$8.64 per common share to $3.59 per common
share (which represented the then fair market value of the Company's common
stock at the date of repricing).
WARRANTS
The Company has issued to certain current and former members of its Board of
Directors, officers and consultants to the Company, warrants to purchase shares
of its common stock. The exercise price of the warrants is equal to the fair
value of Company's common stock at the date of the grant. No warrants are
exercisable at December 31, 1997 and 1998. Warrants granted expire 10 years
after the date of grant and the weighted average contractual life of the
warrants outstanding at December 31, 1998 is 8.9 years. A summary of activities
related to the warrants follows:
F-23
<PAGE> 61
Connectivity Technologies Inc.
Notes to Consolidated Financial Statements (continued)
12. STOCKHOLDERS' EQUITY (CONTINUED)
WARRANTS (CONTINUED)
<TABLE>
<CAPTION>
1998 1997 1996
------------------------ ------------------------- -----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE NUMBER AVERAGE NUMBER AVERAGE
NUMBER OF EXERCISE OF EXERCISE OF EXERCISE
WARRANTS PRICE WARRANTS PRICE WARRANTS PRICE
--------- ------------- -------- ------------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding--beginning of year 451,250 $4.17 451,250 $4.17 470,000 $3.54
Granted -- -- -- -- 62,500 8.12
Exercised -- -- -- -- (81,250) 3.57
Canceled (50,000) 3.54
------- ------------- ------- ------------- ------- -------------
Outstanding--end of year 401,250 $4.25 451,250 $4.17 451,250 $4.17
======= ============= ======= ============= ======= =============
Price range per share of
outstanding warrants $3.54 - $8.12 $3.54 - $8.12 $3.54 - $8.12
============= ============= =============
</TABLE>
FAS 123 DISCLOSURES
As required by FASB Statement No. 123, Accounting for Stock-Based Compensation
(FAS 123), the Company has estimated the weighted average fair values per share
of options and warrants granted, during the years ended December 31, 1998, 1997
and 1996 to be $0.94, $2.25 and $3.75, respectively. During the year ended
December 31, 1998, the weighted average fair value per share of options whose
exercise price equals the market price of the stock on the grant date was $1.12.
The weighted average fair value per share of options whose exercise price
exceeded the market price of the stock on the grant date was $0.67. The fair
values of options and warrants granted were estimated using the Black-Scholes
model with the following assumptions:
<TABLE>
<CAPTION>
1998 1997 1996
------ ----- ------
<S> <C> <C> <C>
Expected life (years) 8 8 8
Expected stock price volatility 73% 50% 50%
Risk-free interest rate 6.89% 6.06% 6.52%
</TABLE>
The Company has never declared nor paid dividends on any of its capital stock
and does not expect to do so in the foreseeable future.
F-24
<PAGE> 62
Connectivity Technologies Inc.
Notes to Consolidated Financial Statements (continued)
12. STOCKHOLDERS' EQUITY (CONTINUED)
FAS 123 DISCLOSURES (CONTINUED)
Had compensation expense for the Company's stock-based plans been accounted for
using the fair value method prescribed by FAS 123, net loss and net loss per
share would have been as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ------------ ---------
<S> <C> <C> <C>
Pro forma net income (loss) $3,480,861 $(10,021,911) $(481,153)
Pro forma net income (loss)
per share $ 0.63 $ (1.80) $ (0.08)
</TABLE>
The effects of applying FAS 123 in the above pro forma disclosures are not
indicative of future pro forma disclosures.
COMMON STOCK RESERVED
At December 31, 1998, the Company has reserved 1,062,500 shares of common stock
for issuance upon the exercise of all outstanding options authorized but
unexercised under the Company's stock option plans.
13. EMPLOYMENT AGREEMENT
In connection with the acquisition of CPI by CTI, the Company has an employment
agreement with one of the stockholders of CPI. Under the terms of the agreement,
the stockholder is to be paid a base salary of $175,000 per year plus an annual
bonus (subject to a maximum amount equal to the base salary) based on earnings
criteria specified in the agreement. A bonus of $175,000 was accrued for the
year ended December 31, 1998. No bonuses were earned in prior years. All pay and
benefits under the agreements shall cease upon voluntary termination or
termination for cause. The employment agreement calls for salary and benefit
continuation in the event that the individual is unable to perform his duties by
reason of illness or incapacity.
F-25
<PAGE> 63
Connectivity Technologies Inc.
Notes to Consolidated Financial Statements (continued)
14. RELATED-PARTY TRANSACTIONS
The Company incurred approximately $20,000, $503,000 and $500,000 for legal
services rendered in 1998, 1997 and 1996, respectively, by a law firm from which
one of its partners was a director of CTI.
Through 1997, the Company rented office space from and made certain support
personnel payments to Hudson River, a stockholder of CTI, on a month-to-month
basis. Total payments were $144,732 and $325,614 in 1997 and 1996, respectively.
During 1997, the Company purchased equipment for $105,000 from two of its
employees.
In July 1997, as a bonus for assisting the Company dispose of its EEC division,
the Board of Directors voted to forgive the debt of two employees. Total
forgiveness of debt, including imputed interest, amounted to approximately
$760,000 and was expensed against the gain from the sale of EEC (see Note 4).
During 1996, CPI acquired for $629,182 an option to acquire 100 percent of the
capital stock of Signal Sales Corp. (a company owned by a minority stockholder
of CPI). The amount paid for the option was capitalized by the Company as
goodwill. This goodwill pertained to the Company's EEC division (see Note 4).
Albert M. Zlotnick, a former shareholder of the Company, was retained as a
consultant for a period of two years beginning December 1, 1995, at a rate of
$15,000 per month.
F-26
<PAGE> 64
Connectivity Technologies Inc.
Notes to Consolidated Financial Statements (continued)
15. CONTINGENCIES
In March 1999, the Company was named a defendant in a $2 million lawsuit
alleging wrongful termination of employment. The Company believes it has not
engaged in any wrongdoing in connection with this matter. However, as this
litigation is in a very early stage, the Company is unable to conclude on the
likely outcome of this matter.
The Company is also 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.
16. EMPLOYEE BENEFIT PLAN
The Company has a defined contribution plan which covers substantially all
employees of the Company. The Company may make discretionary contributions to
the plan. Employees may voluntarily contribute up to 15% of their compensation
as allowable under section 401(k) of the Internal Revenue Code of 1974. The
Company made discretionary contributions of approximately $30,000, $35,000 and
$33,000 to the plan for the years ended December 31, 1998, 1997 and 1996,
respectively.
17. FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in estimating its
fair value disclosures for financial instruments:
Cash, Marketable Securities, Accounts Receivable, Accounts Payable and Loan
Payable to Bank. The carrying amounts reported in the balance sheet approximate
fair value.
Subordinated Note: It is not practicable to estimate the fair value of the
subordinated note because comparable market information is not available.
F-27
<PAGE> 65
Connectivity Technologies Inc.
Notes to Consolidated Financial Statements (continued)
18. SEGMENT INFORMATION
The Company has two reportable business segments: BSCC division and EEA
division. The BSCC division manufactures low voltage copper electronic and
electric wire and cable for the 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 (e.g., gain on sale of investments) by the corporate
headquarters are not allocated to the divisions.
The divisions use the same accounting policies as those described in Note 2,
"Summary of Significant Accounting Policies". 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. Interdivision sales
include sales of approximately $6,442,000 and $6,022,000 to discontinued
operations for the years ended December 31, 1997 and 1996, respectively.
The BSCC division's sales to Anicom in 1998 were $11,583,000 or 34% of the
division's sales and $7,215,000 or 20% in 1997. The Company did not have any
significant customers in 1996.
Following is a presentation of selected financial information for each division
and the corporate headquarters for the years ended December 31, 1998, 1997 and
1996.
F-28
<PAGE> 66
Connectivity Technologies Inc.
Notes to Consolidated Financial Statements (continued)
18. SEGMENT INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
BSCC
Division EEA Division Corporate Eliminations Consolidation
----------- ------------ ----------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1998
Sales to external customer $32,487,494 $12,679,805 $45,167,299
Interdivision sales 1,753,596 $(1,753,596)
Interest income $ 2,065 $2,065
Interest expense 1,121,316 2,671 811,698 1,935,685
Depreciation and amortization 1,061,152 114,608 468,520 1,644,280
Income (loss) from
continuing (772,240) 1,331,938 (2,689,093) 65,888(1) (2,063,507)
operations before income taxes
Total assets 16,582,440 6,984,362 10,194,945 (4,144,406)(2) 29,617,341
Acquisition of property, plant
and equipment 923,150 161,593 1,084,743
Year ended December 31, 1997
Sales to external customer 27,447,486 14,260,502 41,707,988
Interdivision sales 8,444,120 172,440 (8,616,560)
Interest income 31,220 31,220
Interest expense 799,143 58,918 1,536,977 2,395,038
Depreciation and amortization 970,275 73,272 659,683 1,703,230
Income (loss) from continuing
operations before income taxes (2,832,775) 1,633,962 (4,975,732) (276,225)(1) (6,450,770)
Total assets 16,711,160 6,718,189 13,534,648 (1,878,415)(2) 35,085,582
Acquisition of property, plant
and equipment 1,818,272 212,768 2,031,040
Year ended December 31, 1996
Sales to external customer 14,374,763 5,944,233 20,318,996
Interdivision sales 7,017,884 14,988 (7,032,872)
Interest income 335,365 335,365
Interest expense 373,021 17,186 978,116 1,368,323
Depreciation and amortization 480,121 32,625 418,791 931,537
Income (loss) from continuing
operations before income taxes 1,715,275 866,843 (2,683,377) (158,784)(1) (260,043)
Total assets 13,611,277 4,810,451 47,550,351(3) (2,027,129)(2) 63,944,950
Acquisition of property, plant
and equipment 1,408,356 82,151 1,490,507
</TABLE>
- -------------------------------
1. Effect of change in intercompany profit in inventory
2. Elimination of intercompany receivables and profit in inventory
3. Includes $22,256,477 pertaining to discontinued operations
F-29
<PAGE> 67
Connectivity Technologies Inc.
Notes to Consolidated Financial Statements (continued)
19. VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Additions
Balance at Charged to Deductions
Beginning of Income (principally Balance at
DESCRIPTION Year Statement write-offs) Other End of Year
- ----------- ------------ ---------------- ------------ --------- -----------
<S> <C> <C> <C> <C> <C>
Accounts Receivable Reserves and Allowances - Continuing Operations:
Year ended December 31, 1996 $ 0 $ 9,834 $ (12,750) $ 59,583(1) $ 56,667
Year ended December 31, 1997 $ 56,667 $361,962 $ (97,629) $321,000
Year ended December 31, 1998 $321,000 $123,891 $(135,355) $309,536
Accounts Receivable Reserves and Allowances - Discontinued Operations:
Year ended December 31, 1996 $ 0 $ 59,602 $ (64,350) $ 682,504(1) $677,756
Year ended December 31, 1997 $677,756 $ 1,164 $ (29,465) $(649,455)(2) $ 0
</TABLE>
- --------
(1). Represents the acquisition of CPI on May 31, 1996
(2). Reflects the sale of EEC effective June 30, 1997
F-30
<PAGE> 68
INDEX OF EXHIBITS
-----------------
Exhibit
Number Description of Exhibit
- ------- ----------------------
10.66 Form of director's stock options under stock option plans.
10.67 Form of non-plan director's stock option.
10.68 Form of employee/director stock option.
23(a) Consent of Ernst & Young LLP.
27.1 Financial Data Schedule.
E-1
<PAGE> 1
EXHIBIT 10.66
CONNECTIVITY TECHNOLOGIES INC.
Agreement Relating to Nonqualified Stock Options
Pursuant to the _____ Stock Incentive Plan
--------------------------
Option granted ____________, 199__ (hereinafter referred to as the "Date of
Grant"), by CONNECTIVITY TECHNOLOGIES INC. (the "Corporation") to _________ (the
"Grantee"):
1. DEFINITIONS. The following terms, as used herein, shall have the
meanings set forth below:
(a) "Code" shall mean the Internal Revenue Code of 1986, as amended.
(b) "Committee" shall mean the committee established by the Board of
Directors of the Corporation pursuant to the Plan to administer the Plan.
(c) "Fair Market Value" shall have the meaning set forth in the Plan.
(d) "Incentive Stock Option" shall mean an option that is intended to
qualify for special federal income tax treatment under Section 421 and 422
of the Code.
(e) "Nonqualified Stock Option" shall mean an option that is not an
Incentive Stock Option.
(f) "Notice" shall have the meaning set forth in Section 4(c) hereof.
(g) "Option" shall have the meaning set forth in Section 2 hereof.
(h) "Option Period" shall have the meaning set forth in Section 4(a)
hereof.
(i) "Option Price" shall have the meaning set forth in Section 3
hereof.
(j) "Plan" shall mean the Corporation's ____ Stock Incentive Plan.
(k) "Securities Act" shall mean the Securities Act of 1933, as
amended.
(l) "Shares" shall mean shares of the Common Stock, par value $0.04
per share, of the Corporation.
(m) "Subsidiary" shall mean any direct or indirect majority-owned
subsidiary of the Corporation.
<PAGE> 2
2. THE OPTION.
(a) The Corporation hereby grants to the Grantee, effective on the
Date of Grant, a stock option (the "Option") to purchase, on the terms and
conditions herein set forth, up to ______ of the Corporation's fully paid,
non-assessable Shares at the option exercise price set forth in Section 3
below.
(b) The Option is granted pursuant to the Plan and is subject in all
respects to the Plan. A copy of the Plan is delivered herewith by the
Corporation and receipt thereof is acknowledged by the Grantee. The Option
and this Option Agreement are subject in all respects to the terms and
conditions of the Plan, which terms and conditions are incorporated herein
by reference and which the Grantee is by acceptance of the Option deemed to
accept.
(c) The Option is a Nonqualified Stock Option.
3. THE PURCHASE PRICE. The purchase price of the Shares shall be $____ per
share, the Fair Market Value on the Date of Grant (the "Option Price").
4. EXERCISE OF OPTION.
(a) Except as otherwise provided in the Plan and this Option
Agreement, the Option is exercisable over a period of ten years from the
Date of Grant (the "Option Period") in accordance with the following
schedule: from the first anniversary of the Date of Grant to the end of the
Option Period, one-third of the Shares covered by the Option shall be
exercisable; from the second anniversary of the Date of Grant to the end of
the Option Period, an additional third of the Shares covered by the Option
shall be exercisable (for an aggregate of two-thirds of the Shares covered
by the Option); and from the third anniversary of the Date of Grant to the
end of the Option Period, the final third of the Shares covered by the
Option shall be exercisable (for an aggregate of all the Shares covered by
the Option). Each portion of the Option that is exercisable pursuant to the
foregoing schedule is hereinafter referred to as a "Vested Portion".
Except as otherwise provided herein, the Option may be exercised from
time to time during the Option Period as to the Vested Portion of this
Option, or any lesser amount thereof, as long as the Grantee performs
services as an officer, director, employee or consultant for the
Corporation or any of its Subsidiaries or, in the discretion of the
Corporation's Board of Directors, after the Grantee ceases to be an
officer, director, employee or consultant for the Corporation or any of its
Subsidiaries, if the Grantee continues to provide services which may be
beneficial to the Corporation. If the Grantee's services to the Corporation
or any Subsidiary are terminated for any reason other than (i) the
Grantee's death or disability, (ii) the Grantee's termination for Cause or
(iii) Grantee's resignation from his positions with the Corporation, then
the Vested Portion of the Option as of the date of such termination may be
exercised during the period of ninety (90) days commencing on the date of
such termination, so long as the Option Period has not expired. If the
Grantee shall die or become disabled within the meaning of Section 22(e)(3)
of the Code while still performing such services for the Corporation or any
of its Subsidiaries, the Vested Portion of the Option as of the date of the
Grantee's death or disability may be exercised during the period commencing
on the date of the Grantee's death or the date he or she first becomes
disabled, as the case may be, and ending on the earlier of the first
anniversary of such date and the expiration of the Option Period, after
which period this Option shall expire and shall cease to be exercisable. In
the event of the death of the Grantee, this Option may be exercised by the
person or persons entitled to do so under the Grantee's will (a "legatee"),
or, if the Grantee shall fail to make testamentary disposition of this
Option, or shall die intestate, by the Grantee's legal representative (a
"legal representative"). In the event that (i) the Grantee's services to
the Corporation or any Subsidiary are terminated for Cause or (ii) the
Grantee resigns from his positions with the Corporation (each, a "Cessation
Date"), then this Option shall expire on the Cessation Date and shall not
be exercisable thereafter.
-2-
<PAGE> 3
(b) If this Option shall extend to 100 or more Shares, then this
Option may not be exercised for less than 100 Shares at any one time, and
if this Option shall extend to less than 100 Shares, then this Option must
be exercised for all such Shares at one time.
(c) Not less than five days nor more than thirty days prior to the
date upon which all or any portion of the Option is to be exercised, the
person entitled to exercise the Option shall deliver to the Corporation
written notice in substantially the form attached as an Exhibit hereto (the
"Notice") of his election to exercise all or a part of the Option, which
Notice shall specify the date for the exercise of the Option and the number
of Shares in respect of which the Option is to be exercised. The date
specified in the Notice shall be a business day of the Corporation.
(d) On the date specified in the Notice, the person entitled to
exercise the Option shall pay to the Corporation the Option Price of the
Shares in respect of which the Option is exercised and the amount of any
applicable Federal and/or state withholding tax or employment tax. The
Option Price shall be paid in full at the time of purchase, (i) in cash or
by certified check or (ii) with shares of the Common Stock of the
Corporation which have been owned by the Grantee for at least six months
prior to the exercise of the Option. The value of any shares of Common
Stock delivered by the Grantee in payment of the Option Price shall be the
Fair Market Value of such shares. If the Option is exercised in accordance
with the provisions of the Plan and this Option Agreement, the Corporation
shall deliver to such person certificates representing the number of Shares
in respect of which the Option is being exercised which Shares or other
securities shall be registered in his or her name.
(e) This Option is not exercisable after the expiration of ten years
from the Date of Grant.
(f) Notwithstanding the provisions of subsection 4(a), in the event
that at any time during the term hereof: (i) the Corporation's subsidiary,
Connectivity Products Incorporated, sells or otherwise disposes of all or
substantially all of its assets, or (ii) there is a change in control of
the Corporation such that a majority of the outstanding voting capital
stock of the Corporation is owned by a person or entity or "group" (as
defined in Section 13(d) of the Securities Exchange Act of 1934, as amended
(the "Exchange Act")) that is not on the date hereof a holder of 5% or more
of the outstanding shares of the Corporation's common stock, or (iii) the
Corporation is merged into or consolidated with any other person (other
than a direct or indirect subsidiary of or corporation or other entity
controlled by the Corporation) or any other person (other than a direct or
indirect subsidiary of or corporation or other entity controlled by the
Corporation) is merged into or consolidated with the Corporation, or (iv)
the Corporation sells or otherwise disposes of all or substantially all of
its assets, provided that a sale of the Corporation's stock of Connectivity
Products Incorporated shall not be deemed a sale of substantially all of
the Corporation's assets or (v) the Corporation is liquidated or dissolved,
then in any such event, the Option shall become immediately exercisable at
the election of the
-3-
<PAGE> 4
Grantee as to all or any part of the Shares not theretofore issued and sold
hereunder. The Corporation shall provide the Grantee with at least 30 days'
notice prior to the consummation of any of the events referred to in the
preceding sentence, during which period the Grantee may so exercise the
Option. If not so exercised, this Option shall expire and terminate at the
end of such 30-day period.
5. REPRESENTATIONS, WARRANTIES AND COVENANTS OF GRANTEE.
(a) The Grantee represents and warrants that he or she is acquiring
this Option and, in the event this Option is exercised, the Shares (unless
the Shares are subject to a then effective registration statement under the
Securities Act), for investment, for his or her own account and not with a
view to the distribution thereof, and that he or she has no present
intention of disposing of this Option or the Shares (unless the Shares are
subject to a then effective registration statement under the Securities
Act) or any interest therein or sharing ownership thereof with any other
person or entity.
(b) The Grantee agrees that he or she will not offer, sell,
hypothecate, transfer or otherwise dispose of any of the Shares unless
either:
(i) A registration statement covering the Shares which are to be
so offered has been filed with the Securities and Exchange Commission
(the "Commission") pursuant to the Securities Act and such sale,
transfer or other disposition is accompanied by a prospectus relating
to a registration statement which is in effect under the Securities
Act covering the Shares which are to be sold, transferred or otherwise
disposed of and meeting the requirements of Section 10 of the
Securities Act; or
(ii) Counsel satisfactory to the Corporation renders a reasoned
opinion in writing and addressed to the Corporation, satisfactory in
form and substance to the Corporation and its counsel, that in the
opinion of such counsel such proposed sale, offer, transfer or other
disposition of the Shares is exempt from the provisions of Section 5
of the Securities Act in view of the circumstances of such proposed
offer, sale, transfer or other disposition.
(c) The Grantee acknowledges that (i) the Shares and this Option
constitute "securities" under the Securities Act and/or the Exchange Act,
and/or the Rules and Regulations promulgated under said acts; (ii) the
Shares may not be transferred until such Shares are subsequently registered
under the Securities Act or an exemption from such registration is
available; and (iii) the Corporation is not under any obligation with
respect to the registration of the Shares.
(d) The Grantee acknowledges and agrees that the certificate or
certificates representing the Shares shall have an appropriate legend
referring to the terms of this Option.
(e) The Grantee acknowledges and agrees that he or she, or his or her
legatee or legal representative, as the case may be and as defined above,
may be required to make an appropriate representation at the time of any
exercise of this Option in form and substance similar to the
representations contained herein, relating to the Shares then being
purchased.
-4-
<PAGE> 5
(f) The Grantee acknowledges that, in the event he or she ceases to
perform services for the Corporation or its Subsidiaries, his or her rights
to exercise this Option are restricted as set forth in Section 4(a) above.
6. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE CORPORATION.
(a) The Corporation represents and warrants that the Option has been
duly granted by the Committee.
(b) The Corporation represents and warrants that the Shares will be
reserved for issuance upon the exercise of the Option.
7. SUCCESSORS AND ASSIGNS. This Option Agreement shall be binding upon and
shall inure to the benefit of any successor or assign of the Corporation and, to
the extent herein provided, shall be binding upon and inure to the benefit of
the Grantee's legatee or legal representative, as defined above.
8. ADJUSTMENT OF OPTIONS.
(a) The number of Shares issuable upon exercise of this Option, or the
amount and kind of other securities issuable in addition thereto or in lieu
thereof upon the occurrence of the events specified in Section 1.5 of the
Plan, shall be determined and subject to adjustment, as the case may be, in
accordance with the procedures therein specified.
(b) Fractional shares resulting from any adjustment in options
pursuant to this Section may be settled in cash or otherwise as the
Committee shall determine. Notice of any adjustment in this Option shall be
given by the Corporation to the holder of this Option and such adjustment
(whether or not such notice is given) shall be effective and binding for
all purposes of the Plan.
9. EXERCISE AND TRANSFERABILITY OF OPTION. During the lifetime of the
Grantee, this Option is exercisable only by him or her and shall not be
assignable or transferable by him or her and no other person shall acquire any
rights therein. If the Grantee, while still employed by the Corporation or any
of its Subsidiaries, shall die within the Option Period, his or her legatee or
legal representative shall have the rights provided in Section 4(a) above.
10. GENERAL PROVISIONS. Nothing contained in this Option Agreement shall
confer upon the Grantee any right to continue in the employ of the Corporation
or shall in any way affect the right and power of the Corporation to dismiss or
otherwise terminate the employment of the Grantee at any time for any reason
with or without cause. This Option Agreement shall be governed and construed in
accordance with the laws of the State of New York applicable to contracts
entered into and to be performed wholly within such state.
If the foregoing is in accordance with the Grantee's understanding and
accepted and agreed by the Grantee, the Grantee may so confirm by signing and
returning the duplicate of this Option Agreement provided for that purpose.
-5-
<PAGE> 6
CONNECTIVITY TECHNOLOGIES INC.
By
--------------------------------------
Name:
Title:
The foregoing is in accordance with my understanding and is hereby confirmed and
agreed to as of the Date of Grant.
-----------------------------------------
Name:
-6-
<PAGE> 7
EXHIBIT
NOTICE OF EXERCISE
The undersigned hereby gives notice to Connectivity Technologies Inc., a
Delaware corporation (the "Corporation"), of his or her intention to exercise
his or her right to purchase the number of Shares set forth below of the Common
Stock of the Corporation, at the exercise price and on the date set forth below,
pursuant to the Nonqualified Stock Option (the "Option") granted to the
undersigned on _______, 199_, and to pay the purchase price thereof, plus any
applicable federal or state withholding or employment taxes, by means of [the
undersigned's check] [other method of payment] which the undersigned is
delivering to the Corporation herewith pursuant to the terms of the Option.
Print Name: __________________________________
Date of Exercise: ____________________________
Number of Shares
to be Purchased: __________________________
Exercise Price Per Share: ____________________
Aggregate Exercise Price: ____________________
_________________________________________
(Signature)
<PAGE> 1
EXHIBIT 10.67
CONNECTIVITY TECHNOLOGIES INC.
Agreement Relating to Nonqualified Stock Options
--------------------------
Option granted ________, 199__ (hereinafter referred to as the "Date of
Grant"), by CONNECTIVITY TECHNOLOGIES INC. (the "Corporation") to ____________
(the "Grantee"):
1. DEFINITIONS. The following terms, as used herein, shall have the
meanings set forth below:
(a) "Code" shall mean the Internal Revenue Code of 1986, as amended.
(b) "Committee" shall mean the committee established by the Board of
Directors of the Corporation to administer this Agreement, or in the absence of
such committee, the Board of Directors of the Corporation.
(c) "Fair Market Value" shall mean (i) if the principal market for the
Common Stock (the "Market") is a national securities exchange or the National
Association of Securities Dealers Automated Quotation System ("NASDAQ") National
Market, the last sale price or, if no reported sales take place on the
applicable date, the average of the high bid and low asked price of Common Stock
as reported for such Market on such date or, if no such quotation is made on
such date, on the next preceding day on which there were quotations, provided
that such quotations shall have been made within the ten (10) business days
preceding the applicable date; or, (ii) if the Market is the Nasdaq SmallCap
Market or another market, the average of the high bid and low asked price for
Common Stock on the applicable date, or, if no such quotations shall have been
made on such date, on the next preceding day on which there were quotations,
provided that such quotations shall have been made within the ten (10) business
days preceding the applicable date; or, (iii) in the event that neither
subparagraph (i) nor (ii) shall apply, the Fair Market Value of a share of
Common Stock on any day shall be determined by the Committee.
(d) "Incentive Stock Option" shall mean an option that is intended to
qualify for special federal income tax treatment under Section 421 and 422 of
the Code.
(e) "Nonqualified Stock Option" shall mean an option that is not an
Incentive Stock Option.
(f) "Notice" shall have the meaning set forth in Section 4(c) hereof.
(g) "Option" shall have the meaning set forth in Section 2 hereof.
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(h) "Option Period" shall have the meaning set forth in Section 4(a)
hereof.
(i) "Option Price" shall have the meaning set forth in Section 3
hereof.
(j) "Securities Act" shall mean the Securities Act of 1933, as amended.
(k) "Shares" shall mean shares of the Common Stock, par value $0.04 per
share, of the Corporation.
(l) "Subsidiary" shall mean any direct or indirect majority-owned
subsidiary of the Corporation.
2. THE OPTION.
(a) The Corporation hereby grants to the Grantee, effective on the Date
of Grant, a stock option (the "Option") to purchase, on the terms and conditions
herein set forth, up to _________ of the Corporation's fully paid,
non-assessable Shares at the option exercise price set forth in Section 3 below.
(b) The Option is a Nonqualified Stock Option.
3. THE PURCHASE PRICE. The purchase price of the Shares shall be $____ per
share, which exceeds the Fair Market Value on the Date of Grant (the "Option
Price").
4. EXERCISE OF OPTION.
(a) Except as otherwise provided in this Option Agreement, the Option
is exercisable over a period of ten years from the Date of Grant (the "Option
Period") in accordance with the following schedule: from the first anniversary
of the Date of Grant to the end of the Option Period, one-third of the Shares
covered by the Option shall be exercisable; from the second anniversary of the
Date of Grant to the end of the Option Period, an additional third of the Shares
covered by the Option shall be exercisable (for an aggregate of two-thirds of
the Shares covered by the Option); and from the third anniversary of the Date of
Grant to the end of the Option Period, the final third of the Shares covered by
the Option shall be exercisable (for an aggregate of all the Shares covered by
the Option). Each portion of the Option that is exercisable pursuant to the
foregoing schedule is hereinafter referred to as a "Vested Portion".
Except as otherwise provided herein, the Option may be exercised from time
to time during the Option Period as to the Vested Portion of this Option, or any
lesser amount thereof, as long as the Grantee performs services as an officer,
director, employee or consultant for the Corporation or any of its Subsidiaries
or, in the discretion of the Corporation's Board of Directors, after the Grantee
ceases to be an officer, director, employee or consultant for the Corporation or
any of its Subsidiaries, if the Grantee continues to provide services which may
be beneficial to the Corporation. If the Grantee's services to the Corporation
or any Subsidiary are terminated for any reason other than the Grantee's death
or disability, then the Vested Portion of the Option as of the date of such
termination may be exercised during the period of ninety (90) days commencing on
the date of such termination, so long as the Option Period has not expired. If
the Grantee shall die or become disabled within the meaning of Section 22(e)(3)
of the Code
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while still performing such services for the Corporation or any of its
Subsidiaries, the Vested Portion of the Option as of the date of the Grantee's
death or disability may be exercised during the period commencing on the date of
the Grantee's death or the date he or she first becomes disabled, as the case
may be, and ending on the earlier of the first anniversary of such date and the
expiration of the Option Period, after which period this Option shall expire and
shall cease to be exercisable. In the event of the death of the Grantee, this
Option may be exercised by the person or persons entitled to do so under the
Grantee's will (a "legatee"), or, if the Grantee shall fail to make testamentary
disposition of this Option, or shall die intestate, by the Grantee's legal
representative (a "legal representative").
(b) If this Option shall extend to 100 or more Shares, then this Option
may not be exercised for less than 100 Shares at any one time, and if this
Option shall extend to less than 100 Shares, then this Option must be exercised
for all such Shares at one time.
(c) Not less than five days nor more than thirty days prior to the date
upon which all or any portion of the Option is to be exercised, the person
entitled to exercise the Option shall deliver to the Corporation written notice
in substantially the form attached as an Exhibit hereto (the "Notice") of his
election to exercise all or a part of the Option, which Notice shall specify the
date for the exercise of the Option and the number of Shares in respect of which
the Option is to be exercised. The date specified in the Notice shall be a
business day of the Corporation.
(d) On the date specified in the Notice, the person entitled to
exercise the Option shall pay to the Corporation the Option Price of the Shares
in respect of which the Option is exercised and the amount of any applicable
Federal and/or state withholding tax or employment tax. The Option Price shall
be paid in full at the time of purchase, (i) in cash or by certified check or
(ii) with shares of the Common Stock of the Corporation which have been owned by
the Grantee for at least six months prior to the exercise of the Option. The
value of any shares of Common Stock delivered by the Grantee in payment of the
Option Price shall be the Fair Market Value of such shares. If the Option is
exercised in accordance with the provisions of this Option Agreement, the
Corporation shall deliver to such person certificates representing the number of
Shares in respect of which the Option is being exercised which Shares or other
securities shall be registered in his or her name.
(e) This Option is not exercisable after the expiration of ten years
from the Date of Grant.
(f) Notwithstanding the provisions of subsection 4(a), in the event
that at any time during the term hereof: (i) the Corporation's subsidiary,
Connectivity Products Incorporated, sells or otherwise disposes of all or
substantially all of its assets, or (ii) there is a change in control of the
Corporation such that a majority of the outstanding voting capital stock of the
Corporation is owned by a person or entity or "group" (as defined in Section
13(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"))
that is not on the date hereof a holder of 5% or more of the outstanding shares
of the Corporation's common stock, or (iii) the Corporation is merged into or
consolidated with any other person (other than a direct or indirect subsidiary
of or corporation or other entity controlled by the Corporation) or any other
person (other than a direct or indirect subsidiary of or corporation or other
entity controlled by
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the Corporation) is merged into or consolidated with the Corporation, or (iv)
the Corporation sells or otherwise disposes of all or substantially all of its
assets, provided that a sale of the Corporation's stock of Connectivity Products
Incorporated shall not be deemed a sale of substantially all of the
Corporation's assets or (v) the Corporation is liquidated or dissolved, then in
any such event, the Option shall become immediately exercisable at the election
of the Grantee as to all or any part of the Shares not theretofore issued and
sold hereunder. The Corporation shall provide the Grantee with at least 30 days'
notice prior to the consummation of any of the events referred to in the
preceding sentence, during which period the Grantee may so exercise the Option.
If not so exercised, this Option shall expire and terminate at the end of such
30-day period.
5. REPRESENTATIONS, WARRANTIES AND COVENANTS OF GRANTEE.
(a) The Grantee represents and warrants that he or she is acquiring
this Option and, in the event this Option is exercised, the Shares (unless the
Shares are subject to a then effective registration statement under the
Securities Act), for investment, for his or her own account and not with a view
to the distribution thereof, and that he or she has no present intention of
disposing of this Option or the Shares (unless the Shares are subject to a then
effective registration statement under the Securities Act) or any interest
therein or sharing ownership thereof with any other person or entity.
(b) The Grantee agrees that he or she will not offer, sell,
hypothecate, transfer or otherwise dispose of any of the Shares unless either:
(i) A registration statement covering the Shares which are to
be so offered has been filed with the Securities and Exchange
Commission (the "Commission") pursuant to the Securities Act and such
sale, transfer or other disposition is accompanied by a prospectus
relating to a registration statement which is in effect under the
Securities Act covering the Shares which are to be sold, transferred or
otherwise disposed of and meeting the requirements of Section 10 of the
Securities Act; or
(ii) Counsel satisfactory to the Corporation renders a
reasoned opinion in writing and addressed to the Corporation,
satisfactory in form and substance to the Corporation and its counsel,
that in the opinion of such counsel such proposed sale, offer, transfer
or other disposition of the Shares is exempt from the provisions of
Section 5 of the Securities Act in view of the circumstances of such
proposed offer, sale, transfer or other disposition.
(c) The Grantee acknowledges that (i) the Shares and this Option
constitute "securities" under the Securities Act and/or the Exchange Act, and/or
the Rules and Regulations promulgated under said acts; (ii) the Shares may not
be transferred until such Shares are subsequently registered under the
Securities Act or an exemption from such registration is available; and (iii)
the Corporation is not under any obligation with respect to the registration of
the Shares.
(d) The Grantee acknowledges and agrees that the certificate or
certificates representing the Shares shall have an appropriate legend referring
to the terms of this Option.
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(e) The Grantee acknowledges and agrees that he or she, or his or her
legatee or legal representative, as the case may be and as defined above, may be
required to make an appropriate representation at the time of any exercise of
this Option in form and substance similar to the representations contained
herein, relating to the Shares then being purchased.
(f) The Grantee acknowledges that, in the event he or she ceases to
perform services for the Corporation or its Subsidiaries, his or her rights to
exercise this Option are restricted as set forth in Section 4(a) above.
6. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE CORPORATION.
(a) The Corporation represents and warrants that the Option has been
duly granted by the Committee.
(b) The Corporation represents and warrants that the Shares will be
reserved for issuance upon the exercise of the Option.
7. SUCCESSORS AND ASSIGNS. This Option Agreement shall be binding upon and
shall inure to the benefit of any successor or assign of the Corporation and, to
the extent herein provided, shall be binding upon and inure to the benefit of
the Grantee's legatee or legal representative, as defined above.
8. ADJUSTMENT OF OPTIONS.
(a) If there is any change in the outstanding Shares by reason of a
stock dividend or distribution, stock split-up, or any merger, consolidation,
spin-off or other corporate reorganization in which the Corporation is the
surviving entity, the number of Shares issuable upon exercise of this Option and
the Option Price shall be equitably adjusted by the Committee, whose
determination shall be final, binding and conclusive.
(b) Fractional shares resulting from any adjustment in options pursuant
to this Section may be settled in cash or otherwise as the Committee shall
determine. Notice of any adjustment in this Option shall be given by the
Corporation to the holder of this Option and such adjustment (whether or not
such notice is given) shall be effective and binding for all purposes of this
Option Agreement.
9. EXERCISE AND TRANSFERABILITY OF OPTION. During the lifetime of the
Grantee, this Option is exercisable only by him or her and shall not be
assignable or transferable by him or her and no other person shall acquire any
rights therein. If the Grantee, while still employed by the Corporation or any
of its Subsidiaries, shall die within the Option Period, his or her legatee or
legal representative shall have the rights provided in Section 4(a) above.
10. GENERAL PROVISIONS. Nothing contained in this Option Agreement shall
confer upon the Grantee any right to continue in the employ of the Corporation
or shall in any way affect the right and power of the Corporation to dismiss or
otherwise terminate the employment of the Grantee at any time for any reason
with or without cause. This Option Agreement shall be governed and construed in
accordance with the laws of the State of New York applicable to contracts
entered into and to be performed wholly within such state.
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If the foregoing is in accordance with the Grantee's understanding and
accepted and agreed by the Grantee, the Grantee may so confirm by signing and
returning the duplicate of this Option Agreement provided for that purpose.
CONNECTIVITY TECHNOLOGIES INC.
By
------------------------------------
Name:
Title:
The foregoing is in accordance with my understanding and is hereby confirmed and
agreed to as of the Date of Grant.
---------------------------------------
Name:
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EXHIBIT
NOTICE OF EXERCISE
The undersigned hereby gives notice to Connectivity Technologies Inc.,
a Delaware corporation (the "Corporation"), of his or her intention to exercise
his or her right to purchase the number of Shares set forth below of the Common
Stock of the Corporation, at the exercise price and on the date set forth below,
pursuant to the Nonqualified Stock Option (the "Option") granted to the
undersigned on ______, 199__, and to pay the purchase price thereof, plus any
applicable federal or state withholding or employment taxes, by means of [the
undersigned's check] [other method of payment] which the undersigned is
delivering to the Corporation herewith pursuant to the terms of the Option.
Print Name: _____________________
Date of Exercise: _______________
Number of Shares
to be Purchased: _____________
Exercise Price Per Share: _______
Aggregate Exercise Price: _______
-------------------------------------
(Signature)
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EXHIBIT 10.68
CONNECTIVITY TECHNOLOGIES INC.
Agreement Relating to Nonqualified Stock Options
Pursuant to the _____ Stock Incentive Plan
--------------------------
Option granted _______, 199_ (hereinafter referred to as the "Date of
Grant"), by CONNECTIVITY TECHNOLOGIES INC. (the "Corporation") to
__________________ (the "Grantee"):
1. DEFINITIONS. The following terms, as used herein, shall have the
meanings set forth below:
(a) "Cause" shall mean by reason of any of the following: (1) proven or
admitted: (i) embezzlement, or (ii) material dishonest misuse of Corporation
funds or assets; (2) an admitted or proven act constituting a felony or
misdemeanor (other than minor offenses such as traffic violations) or conviction
for such act; (3) deliberate and unwarranted disclosure of Corporation
confidential information; (4) violation of any non-competition or
confidentiality covenants contained in any agreement between the Grantee and the
Corporation or any of its Subsidiaries; (5) continued conduct materially adverse
to the interests of the Corporation which does not cease within thirty (30) days
of written notice from an officer of the Corporation; (6) repeated material
failure by the Grantee, after written warning by an officer of the Corporation,
to perform the duties of his employment (including without limitation material
failure to follow or comply with the reasonable and lawful directives of an
officer of the Corporation); or (7) breach of any statutory of common law
fiduciary duty of loyalty to the Corporation which is not cured without thirty
(30) days of written notice from an officer of the Corporation.
(b) "Code" shall mean the Internal Revenue Code of 1986, as amended.
(c) "Committee" shall mean the committee established by the Board of
Directors of the Corporation pursuant to the Plan to administer the Plan.
(d) "Fair Market Value" shall have the meaning set forth in the Plan.
(e) "Incentive Stock Option" shall mean an option that is intended to
qualify for special federal income tax treatment under Section 421 and 422 of
the Code.
(f) "Nonqualified Stock Option" shall mean an option that is not an
Incentive Stock Option.
(g) "Notice" shall have the meaning set forth in Section 4(c) hereof.
(h) "Option" shall have the meaning set forth in Section 2 hereof.
(i) "Option Period" shall have the meaning set forth in Section 4(a)
hereof.
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(j) "Option Price" shall have the meaning set forth in Section 3
hereof.
(k) "Plan" shall mean the Corporation's ____ Stock Incentive Plan.
(l) "Securities Act" shall mean the Securities Act of 1933, as amended.
(m) "Shares" shall mean shares of the Common Stock, par value $0.04 per
share, of the Corporation.
(n) "Subsidiary" shall mean any direct or indirect majority-owned
subsidiary of the Corporation.
2. THE OPTION.
(a) The Corporation hereby grants to the Grantee, effective on the Date
of Grant, a stock option (the "Option") to purchase, on the terms and conditions
herein set forth, up to ______ of the Corporation's fully paid, non-assessable
Shares at the option exercise price set forth in Section 3 below.
(b) The Option is granted pursuant to the Plan and is subject in all
respects to the Plan. A copy of the Plan is delivered herewith by the
Corporation and receipt thereof is acknowledged by the Grantee. The Option and
this Option Agreement are subject in all respects to the terms and conditions of
the Plan, which terms and conditions are incorporated herein by reference and
which the Grantee is by acceptance of the Option deemed to accept.
(c) The Option is a Nonqualified Stock Option.
3. THE PURCHASE PRICE. The purchase price of the Shares shall be $____ per
share, the Fair Market Value on the Date of Grant (the "Option Price").
4. EXERCISE OF OPTION.
(a) Except as otherwise provided in the Plan and this Option Agreement,
the Option is exercisable over a period of ten years from the Date of Grant (the
"Option Period") in accordance with the following schedule: from the first
anniversary of the Date of Grant to the end of the Option Period, one-third of
the Shares covered by the Option shall be exercisable; from the second
anniversary of the Date of Grant to the end of the Option Period, an additional
third of the Shares covered by the Option shall be exercisable (for an aggregate
of two-thirds of the Shares covered by the Option); and from the third
anniversary of the Date of Grant to the end of the Option Period, the final
third of the Shares covered by the Option shall be exercisable (for an aggregate
of all the Shares covered by the Option). Each portion of the Option that is
exercisable pursuant to the foregoing schedule is hereinafter referred to as a
"Vested Portion".
Except as otherwise provided herein, the Option may be exercised from
time to time during the Option Period as to the Vested Portion of this Option,
or any lesser amount thereof, as long as the Grantee performs services as an
officer, director, employee or consultant for the Corporation or any of its
Subsidiaries or, in the discretion of the Corporation's Board of Directors,
after the Grantee ceases to be an officer, director, employee or consultant for
the
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Corporation or any of its Subsidiaries, if the Grantee continues to provide
services which may be beneficial to the Corporation. If the Grantee's services
to the Corporation or any Subsidiary are terminated for any reason other than
(i) the Grantee's death or disability, (ii) the Grantee's termination for Cause
or (iii) Grantee's resignation from his positions with the Corporation, then the
Vested Portion of the Option as of the date of such termination may be exercised
during the period of ninety (90) days commencing on the date of such
termination, so long as the Option Period has not expired. If the Grantee shall
die or become disabled within the meaning of Section 22(e)(3) of the Code while
still performing such services for the Corporation or any of its Subsidiaries,
the Vested Portion of the Option as of the date of the Grantee's death or
disability may be exercised during the period commencing on the date of the
Grantee's death or the date he or she first becomes disabled, as the case may
be, and ending on the earlier of the first anniversary of such date and the
expiration of the Option Period, after which period this Option shall expire and
shall cease to be exercisable. In the event of the death of the Grantee, this
Option may be exercised by the person or persons entitled to do so under the
Grantee's will (a "legatee"), or, if the Grantee shall fail to make testamentary
disposition of this Option, or shall die intestate, by the Grantee's legal
representative (a "legal representative"). In the event that (i) the Grantee's
services to the Corporation or any Subsidiary are terminated for Cause or (ii)
the Grantee resigns from his positions with the Corporation (each, a "Cessation
Date"), then this Option shall expire on the Cessation Date and shall not be
exercisable thereafter.
(b) If this Option shall extend to 100 or more Shares, then this Option
may not be exercised for less than 100 Shares at any one time, and if this
Option shall extend to less than 100 Shares, then this Option must be exercised
for all such Shares at one time.
(c) Not less than five days nor more than thirty days prior to the date
upon which all or any portion of the Option is to be exercised, the person
entitled to exercise the Option shall deliver to the Corporation written notice
in substantially the form attached as an Exhibit hereto (the "Notice") of his
election to exercise all or a part of the Option, which Notice shall specify the
date for the exercise of the Option and the number of Shares in respect of which
the Option is to be exercised. The date specified in the Notice shall be a
business day of the Corporation.
(d) On the date specified in the Notice, the person entitled to
exercise the Option shall pay to the Corporation the Option Price of the Shares
in respect of which the Option is exercised and the amount of any applicable
Federal and/or state withholding tax or employment tax. The Option Price shall
be paid in full at the time of purchase, (i) in cash or by certified check or
(ii) with shares of the Common Stock of the Corporation which have been owned by
the Grantee for at least six months prior to the exercise of the Option. The
value of any shares of Common Stock delivered by the Grantee in payment of the
Option Price shall be the Fair Market Value of such shares. If the Option is
exercised in accordance with the provisions of the Plan and this Option
Agreement, the Corporation shall deliver to such person certificates
representing the number of Shares in respect of which the Option is being
exercised which Shares or other securities shall be registered in his or her
name.
(e) This Option is not exercisable after the expiration of ten years
from the Date of Grant.
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(f) Notwithstanding the provisions of subsection 4(a), in the event
that at any time during the term hereof: (i) the Corporation's subsidiary,
Connectivity Products Incorporated, sells or otherwise disposes of all or
substantially all of its assets, or (ii) there is a change in control of the
Corporation such that a majority of the outstanding voting capital stock of the
Corporation is owned by a person or entity or "group" (as defined in Section
13(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"))
that is not on the date hereof a holder of 5% or more of the outstanding shares
of the Corporation's common stock, or (iii) the Corporation is merged into or
consolidated with any other person (other than a direct or indirect subsidiary
of or corporation or other entity controlled by the Corporation) or any other
person (other than a direct or indirect subsidiary of or corporation or other
entity controlled by the Corporation) is merged into or consolidated with the
Corporation, or (iv) the Corporation sells or otherwise disposes of all or
substantially all of its assets, provided that a sale of the Corporation's stock
of Connectivity Products Incorporated shall not be deemed a sale of
substantially all of the Corporation's assets or (v) the Corporation is
liquidated or dissolved, then in any such event, the Option shall become
immediately exercisable at the election of the Grantee as to all or any part of
the Shares not theretofore issued and sold hereunder. The Corporation shall
provide the Grantee with at least 30 days' notice prior to the consummation of
any of the events referred to in the preceding sentence, during which period the
Grantee may so exercise the Option. If not so exercised, this Option shall
expire and terminate at the end of such 30-day period.
5. REPRESENTATIONS, WARRANTIES AND COVENANTS OF GRANTEE.
(a) The Grantee represents and warrants that he or she is acquiring
this Option and, in the event this Option is exercised, the Shares (unless the
Shares are subject to a then effective registration statement under the
Securities Act), for investment, for his or her own account and not with a view
to the distribution thereof, and that he or she has no present intention of
disposing of this Option or the Shares (unless the Shares are subject to a then
effective registration statement under the Securities Act) or any interest
therein or sharing ownership thereof with any other person or entity.
(b) The Grantee agrees that he or she will not offer, sell,
hypothecate, transfer or otherwise dispose of any of the Shares unless either:
(i) A registration statement covering the Shares which are to
be so offered has been filed with the Securities and Exchange
Commission (the "Commission") pursuant to the Securities Act and such
sale, transfer or other disposition is accompanied by a prospectus
relating to a registration statement which is in effect under the
Securities Act covering the Shares which are to be sold, transferred or
otherwise disposed of and meeting the requirements of Section 10 of the
Securities Act; or
(ii) Counsel satisfactory to the Corporation renders a
reasoned opinion in writing and addressed to the Corporation,
satisfactory in form and substance to the Corporation and its counsel,
that in the opinion of such counsel such proposed sale, offer, transfer
or other disposition of the Shares is exempt from the provisions of
Section 5 of the Securities Act in view of the circumstances of such
proposed offer, sale, transfer or other disposition.
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(c) The Grantee acknowledges that (i) the Shares and this Option
constitute "securities" under the Securities Act and/or the Exchange Act, and/or
the Rules and Regulations promulgated under said acts; (ii) the Shares may not
be transferred until such Shares are subsequently registered under the
Securities Act or an exemption from such registration is available; and (iii)
the Corporation is not under any obligation with respect to the registration of
the Shares.
(d) The Grantee acknowledges and agrees that the certificate or
certificates representing the Shares shall have an appropriate legend referring
to the terms of this Option.
(e) The Grantee acknowledges and agrees that he or she, or his or her
legatee or legal representative, as the case may be and as defined above, may be
required to make an appropriate representation at the time of any exercise of
this Option in form and substance similar to the representations contained
herein, relating to the Shares then being purchased.
(f) The Grantee acknowledges that, in the event he or she ceases to
perform services for the Corporation or its Subsidiaries, his or her rights to
exercise this Option are restricted as set forth in Section 4(a) above.
6. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE CORPORATION.
(a) The Corporation represents and warrants that the Option has been
duly granted by the Committee.
(b) The Corporation represents and warrants that the Shares will be
reserved for issuance upon the exercise of the Option.
7. SUCCESSORS AND ASSIGNS. This Option Agreement shall be binding upon and
shall inure to the benefit of any successor or assign of the Corporation and, to
the extent herein provided, shall be binding upon and inure to the benefit of
the Grantee's legatee or legal representative, as defined above.
8. ADJUSTMENT OF OPTIONS.
(a) The number of Shares issuable upon exercise of this Option, or the
amount and kind of other securities issuable in addition thereto or in lieu
thereof upon the occurrence of the events specified in Section 1.5 of the Plan,
shall be determined and subject to adjustment, as the case may be, in accordance
with the procedures therein specified.
(b) Fractional shares resulting from any adjustment in options pursuant
to this Section may be settled in cash or otherwise as the Committee shall
determine. Notice of any adjustment in this Option shall be given by the
Corporation to the holder of this Option and such adjustment (whether or not
such notice is given) shall be effective and binding for all purposes of the
Plan.
9. EXERCISE AND TRANSFERABILITY OF OPTION. During the lifetime of the
Grantee, this Option is exercisable only by him or her and shall not be
assignable or transferable by him or her and no other person shall acquire any
rights therein. If the Grantee, while still employed by the
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Corporation or any of its Subsidiaries, shall die within the Option Period, his
or her legatee or legal representative shall have the rights provided in Section
4(a) above.
10. GENERAL PROVISIONS. Nothing contained in this Option Agreement shall
confer upon the Grantee any right to continue in the employ of the Corporation
or shall in any way affect the right and power of the Corporation to dismiss or
otherwise terminate the employment of the Grantee at any time for any reason
with or without cause. This Option Agreement shall be governed and construed in
accordance with the laws of the State of New York applicable to contracts
entered into and to be performed wholly within such state.
If the foregoing is in accordance with the Grantee's understanding and
accepted and agreed by the Grantee, the Grantee may so confirm by signing and
returning the duplicate of this Option Agreement provided for that purpose.
CONNECTIVITY TECHNOLOGIES INC.
By
------------------------------------
Name:
Title:
The foregoing is in accordance with my understanding and is hereby confirmed and
agreed to as of the Date of Grant.
--------------------------------------
Name:
-6-
<PAGE> 7
EXHIBIT
NOTICE OF EXERCISE
The undersigned hereby gives notice to Connectivity Technologies Inc.,
a Delaware corporation (the "Corporation"), of his or her intention to exercise
his or her right to purchase the number of Shares set forth below of the Common
Stock of the Corporation, at the exercise price and on the date set forth below,
pursuant to the Nonqualified Stock Option (the "Option") granted to the
undersigned on _______, 199_, and to pay the purchase price thereof, plus any
applicable federal or state withholding or employment taxes, by means of [the
undersigned's check] [other method of payment] which the undersigned is
delivering to the Corporation herewith pursuant to the terms of the Option.
Print Name: ____________________
Date of Exercise: ______________
Number of Shares
to be Purchased: ____________
Exercise Price Per Share: ______
Aggregate Exercise Price:_______
-----------------------------------
(Signature)
<PAGE> 1
EXHIBIT 23(a)
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-8 Nos. 333-02655 and 33-65384) of Connectivity Technologies Inc. of our
report dated March 12, 1999, with respect to the consolidated financial
statements of Connectivity Technologies Inc. included in this Annual Report
(Form 10-K) for the year ended December 31, 1998.
ERNST & YOUNG LLP
Boston, Massachusetts
April 9, 1999
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