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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, 1999
Commission file number 0-12113
CONNECTIVITY TECHNOLOGIES INC.
(Exact name of registrant as specified in its charter)
Delaware 94-2691724
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
680 Mechanic Street, Suite 1201, Leominster, MA 01453
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (978) 537-9138
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.04 par value per share
(Title of 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 May 1, 2000, was
$1,088,746. On such date, the closing price of registrant's Common Stock was
$.31 per share. Solely for the purposes of this calculation, shares beneficially
owned by directors, executive officers and stockholders of the registrant that
beneficially own more than 10% of the registrant's voting stock have been
excluded, except shares with respect to which such directors and officers
disclaim beneficial ownership. Such exclusion should not be deemed a
determination or admission by the registrant that such individuals are, in fact,
affiliates of the registrant.
The number of shares of Common Stock, $.04 par value per share, outstanding
as of May 1, 2000 was 5,565,253.
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. 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.
In October 1998, the Company announced its plan to sell the CPI subsidiary
or any of its divisions. On November 15, 1999, the Company executed a
non-binding Letter of Intent with Rome Group Inc. ("Rome"). The Letter of Intent
provides for the merger ("Merger") of CPI into a wholly-owned subsidiary of
Rome, pursuant to which the Company is expected to receive in exchange for all
of its CPI stock, a subordinated promissory note from Rome in the principal
amount of approximately $1.75 million and a cash payment of approximately
$250,000 from CPI. To the extent CPI is unable to fund the cash payment, Rome
would be required to fund the balance of the cash payment. In such event, Rome
would be entitled to be reimbursed from one half of any tax refunds received by
CPI for the tax year 1999. The Letter of Intent also provides that
simultaneously with the Merger, Rome would cause CPI's obligations to its
lenders to be satisfied with an approximate $14 million cash payment and an
approximate $1 million note provided by Rome under the terms acceptable to the
lenders. The proceeds realizable by the Company under the Letter of Intent would
thus be substantially less than those anticipated in a prior letter of intent
with Rome that terminated without consummation. The Merger is subject to
conditions, including Rome's completion of its due diligence investigation to
its satisfaction; the negotiation and execution of a mutually acceptable merger
agreement; Rome's obtaining financing terms and conditions satisfactory to Rome;
an extension of the agreement with the remaining CPI minority stockholder to
relinquish his 2.2% of CPI stock to Rome and the consent of CPI's lenders. The
Merger was subject to the notification and waiting period requirements under the
Hart-Scott-Rodino Antitrust Improvement Act of 1976, but this requirement was
satisfied on April 4, 2000. The Company also believes, but cannot assure, that
if the Merger is consummated, CPI will continue as part of Rome's group of
companies with sufficient resources to meet its obligations to its customers and
suppliers. If the Merger is consummated, the outstanding debt obligation of CPI
is expected to be satisfied and the Company is expected to record a loss on
disposal in the range of $15-19 million before the effect of any income taxes.
Such loss is not reflected in the accompanying consolidated financial
statements. Further, the Company would engage in evaluating candidates for
acquisition. However, no assurances can be given that a Merger will be
concluded. If the Merger does not take place, CPI would lack sufficient funds to
continue its operations and the Company would lose its entire investment in CPI,
its only substantial asset, unless the Company were successful in promptly
implementing interim measures such as selling its subsidiary or a part thereof
to another buyer, concluding another interim arrangement with its lenders or
locating another source of financing. Although other potential buyers have
expressed an interest in acquiring CPI, the Company sees no immediate prospect
of promptly implementing any such interim measures.
At December 31, 1999, the Company had negative working capital, was in
default of its loan agreement as a result of not meeting a loan covenant 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. Subsequent to December 31, 1999, the Company
received a waiver from its lenders in regard to the nonperformance on the loan
covenant. Management's plans to resolve these
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matters presently include the divestiture of the Company's CPI subsidiary. 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., 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 portion of the components for its
products from BSCC.
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.
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.
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
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GENERAL DESCRIPTION OF THE INDUSTRY
The wire and cable industry encompasses a wide variety of product
applications requiring electronic and electrical connectivity. The Company
participates in the security, factory automation, signal and sound markets.
Technological advances in commercial building monitoring and a greater
concern for safety features in commercial buildings and residences have
increased demand for wiring products for fire and burglary alarms, motion
detectors, voice activators, climate controls, and electronic card and video
surveillance devices. Increasingly stringent safety requirements imposed by
local and national building codes and insurance providers have also increased
the demand for "safety cable," which refers to certain physical attributes of
cable that improve the safety and performance of such cables under hazardous
conditions, particularly in buildings with advanced fire alarm and safety
systems. Continued growth of the factory automation and robotic machinery market
as well as changes in equipment installation procedures have increased the
demand for wire and cable products servicing this industry. Demand for signal
wire used in traffic control signals and transit wire installed in, among other
things, subways, bridges, tunnels and toll booths, is driven by the need to
rebuild infrastructure and the pace of new construction in this area.
DIVISIONS AND PRODUCTS
Manufacturing. The Company's BSCC division manufactures low voltage copper
wire and cable for the security, factory automation, signal and sound markets.
Low voltage wire and cable includes electronic and electrical wire and cable,
control and signal wire and cable, climate control wire and cable, transit wire
and cable and low smoke and low halogen wire and cable products. BSCC also
manufactures wire and cable for sale to distributors that is specifically
designated by original equipment manufacturers ("OEM's") or installers as
meeting the specification of a particular function ("spec'd product").
Competition for sales of 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, an Electrical Testing Laboratories
("ETL") approved manufacturer, and is ISO 9000 certified. The Company depends
upon UL and ETL for approvals of many of its products. Currently, all of the
Company's products requiring the UL and ETL designation are 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 certain 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
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manufacturing equipment and reconfigures it to achieve desired operating speeds
and tolerances. 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 1999
and 1998, Anicom, Inc. accounted for approximately 34% and 34%, respectively, of
BSCC's net sales. No other customer accounted for more than 10% of BSCC's
revenues during Fiscal 1999 and 1998. BSCC also supplies standard and specialty
products to the Company's EEA division which accounted for 7% and 5% of BSCC's
net sales for Fiscal 1999 and 1998, 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.
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 23% and 27% of
EEA's purchases in 1999 and 1998, 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 and
on-time deliveries, 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.
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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.
The copper futures contract as reported on the COMEX stablized in 1999,
decreasing 4% as compared to a 25% decrease in 1998. The 1999 copper futures
contract as reported on the COMEX reached near the thirteen 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 1999, backlog amounts were $2.4 million and $235,000
at BSCC and EEA respectively. At the end of fiscal 1998, backlog amounts were
$1.1 million and $312,000 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.
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EMPLOYEES
As of May 1, 2000, the Company had 182 full time employees, of whom, 112
were employed at the BSCC manufacturing division, and 70 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.
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 not adequate for its current needs and is seeking additional space
either in its current building or elsewhere for anticipated future needs.
Management believes that negotiations for the additional space will be
successful and anticipate that a lease will be executed in the near future. If
the negotiations are not successful, management believes adequate replacement
space is readily available if the need arises.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings.
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.
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>
1998 1999
High Low High Low
<S> <C> <C> <C> <C>
Fiscal quarter ended March 31 $3.81 $1.94 $1.38 $.75
Fiscal quarter ended June 30 2.31 1.78 0.81 0.38
</TABLE>
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<TABLE>
<CAPTION>
1998 1999
High Low High Low
<S> <C> <C> <C> <C>
Fiscal quarter ended September 30 1.31 0.75 0.88 0.38
Fiscal quarter ended December 31 1.63 0.97 0.56 0.25
</TABLE>
B. Holders.
On May 1, 2000, as reported by the Company's transfer agent, there
were 5,565,253 shares of Common Stock issued and outstanding which were held of
record by 1,793 persons, including several holders who are nominees for an
undetermined number of beneficial owners.
C. Dividends.
The Company has not declared or paid any cash dividends on its Common
Stock since its inception nor does the Company intend to do so in the
foreseeable future. The payment of dividends, if any, is within the discretion
of the Board of Directors and will depend on the Company's earnings, if any, its
capital requirements and financial condition as well as other relevant factors.
It is currently the policy of the Company's Board of Directors to retain
earnings, if any, to finance the Company's operations and the expansion of the
Company's business. The Company is precluded from making any dividend payments
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)
1999 1998 1997 1996 1996 1995(3)
UNAUDITED
-------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
SELECTED STATEMENT OF INCOME DATA:
Net sales $ 42,308 $ 45,167 $ 41,708 $ 20,319 $ 35,830 $ --
======== ======== ======== ======== ======== ========
Income (loss) from continuing operations $ (2,022) $ (1,160) $(14,494) $ (274) $ 28 $ (153)
======== ======== ======== ======== ======== ========
Net income (loss) $ (2,022) $ 3,714 $ (9,096) $ 359 $ 768 $ (153)
======== ======== ======== ======== ======== ========
Income (loss) from continuing operations
per common share:
Basic and diluted $ (0.36) $ (0.21) $ (2.60) $ (0.05) $ 0.01 $ (0.03)
======== ======== ======== ======== ======== ========
Weighted average number of shares:
Basic 5,565 5,565 5,565 5,508 5,508 5,322(1)
======== ======== ======== ======== ======== ========
Diluted 5,565 5,565 5,565 5,508 5,988 5,322
======== ======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31
---------------------------------------------------------------------------------
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
SELECTED BALANCE SHEET DATA:
Total assets $28,057 $29,617 $35,086 $63,945 $12,159
======= ======= ======= ======= =======
Long-term obligations $ -- $ -- $ -- $34,295 $ --
======= ======= ======= ======= =======
Debt, in default $16,508 $17,345 $18,300 $ -- $ --
======= ======= ======= ======= =======
</TABLE>
- ----------
(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.
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, 1999, 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
divestiture by the Company of its stock in CPI. On November 15, 1999, the
Company executed a non-binding Letter of Intent with Rome Group Inc. ("Rome")
for a merger ("Merger") of CPI with a subsidiary of Rome. In exchange for all of
its CPI stock, the Company is expected to receive a subordinated promissory note
from Rome in the principal amount of approximately $1.75 million and a cash
payment of approximately $250,000 from CPI. To the extent CPI is unable to fund
the cash payment, Rome would be required to fund the balance of the cash
payment. In such event, Rome would be entitled to be reimbursed from one half of
any tax refunds received by CPI for the tax year 1999. The Letter of Intent also
provides that simultaneously with the Merger, Rome would cause CPI's obligations
to its lenders to be satisfied with an approximate $14 million cash payment and
a $1 million note provided by Rome under the terms acceptable to the lenders.
The proceeds realizable by the Company under the Letter of Intent would thus be
substantially less than those anticipated in a prior Letter of Intent with Rome
that terminated without consummation. The Merger is subject to conditions,
including Rome's completion of its due diligence investigation to its
satisfaction; the negotiation and execution of a mutually acceptable merger
agreement; Rome's obtaining financing terms and conditions satisfactory to Rome;
an extension of the agreement with the remaining CPI minority stockholder to
relinquish his 2.2% of CPI stock; and the consent of CPI's lenders. The Company
also believes, but cannot assure, that if the Merger is consummated, CPI will
continue as part of Rome's group of companies with sufficient resources to meet
its obligations to its customers and suppliers. However, no assurances can be
given that a Merger will be concluded. If the Merger does not take place, CPI
would lack sufficient funds to continue its operations and the Company would
lose its entire investment in CPI, its only substantial asset, unless the
Company were successful in promptly implementing interim measures such as
selling its subsidiary or a part thereof to another buyer, concluding another
interim arrangement with its lenders or locating another source of financing.
Although other potential buyers have expressed an interest in acquiring CPI, the
Company sees no immediate prospect of consummating a sale of CPI with an
alternative buyer. In the event the Merger is consummated, the Company intends
to be principally engaged in evaluating candidates for acquisition.
There can be no assurance that management will be successful in its efforts
to consummate a transaction with Rome. A prior Letter of Intent terminated
without consummation. Similarly, should the Company not succeed in its CPI
divestiture 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
10
<PAGE> 11
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 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. Anicom purchased an aggregate of approximately $11 million and $12 million
from CPI for wire and cable products in accordance with the terms of the Supply
Agreement during 1999 and 1998 respectively. 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 related financing is more fully described
in Note 9 in the Notes to Consolidated Financial Statements included in this
Report.
11
<PAGE> 12
RESULTS OF OPERATIONS (CONTINUED)
Year ended December 31, 1999 compared to year ended December 31, 1998
Net sales for Fiscal 1999 decreased to $42.3 million, a 6.4% decrease over
net sales of $45.2 million for Fiscal 1998. Net sales to external customers at
the BSCC division decreased by 9.6% primarily due to a decrease of 4.0% in the
average copper spot price during 1999 as selling prices are based on the quoted
copper spot price. Net sales to external customers at the EEA division increased
2.1% primarily due to continued development of sales efforts. Management also
believes continued customer apprehension about the Company's future has
negatively impacted Fiscal 1999 sales.
Cost of goods sold as a percentage of net sales for Fiscal 1999 increased
to 83.5% from 81.5% in Fiscal 1998. Consequently, gross profit as a percentage
of net sales decreased to 16.5% in Fiscal 1999 from 18.5% for Fiscal 1998. At
BSCC, gross profit as a percentage of net sales decreased to 11.1% in Fiscal
1999 from 12.3% in Fiscal 1998. The primary reasons for the decrease in gross
margin are downward pressure on sales prices coupled with the decline in sales
resulting in less revenue to absorb fixed costs inherent in cost of goods sold.
At the Company's EEA division, despite the slight increase in sales, gross
profit as a percentage of net sales decreased to 27.9% in Fiscal 1999 compared
to 32.2% in Fiscal 1998 primarily due to price increases from vendors, a
reduction in purchasing discounts offered from vendors, and increased labor
charges due to a shift in EEA's sales mix to more labor intensive orders.
Selling, general and administrative expenses were $8.0 million for Fiscal
1999 compared to $8.9 million for Fiscal 1998, primarily due to a decrease in
professional fees, headcount reductions, and an executive bonus in 1998 which
was not earned in 1999.
Interest expense was $1.7 million for Fiscal 1999 compared to $1.9 million
for Fiscal 1998. The decrease in Fiscal 1999 is primarily due to lower average
debt balances outstanding during Fiscal 1999 offset somewhat by higher interest
rates experienced by the Company during the latter half of the year due to rate
increases by the Federal Reserve Board.
Income tax benefit for continuing operations totaled approximately $770,000
in Fiscal 1999 compared to income tax benefit of approximately $900,000 in
Fiscal 1998.
12
<PAGE> 13
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, which, prior to the sale of EEC,
were eliminated upon consolidation. 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 liquidation 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.
FINANCIAL CONDITION AND LIQUIDITY
During Fiscal 1999, cash flows from continuing operating activities
provided approximately $596,000 as compared to using approximately $5.2 million
in cash in Fiscal 1998. Included in the determination of cash flows
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<PAGE> 14
from operating activities in Fiscal 1998 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. An increase in trade payables provided approximately $1.0 million of
operating cash flows, primarily caused by a decision to get vendors closer to
stated terms whereas in Fiscal 1998 management intentionally decreased vendor
terms. Decreased inventory levels provided approximately $715,000 of operating
cash flows as management focused on decreasing inventory levels in the latter
half of Fiscal 1999. Increased accrued liabilities and income taxes provided
approximately $313,000 in operating cash flows.
Net cash used for investing activities in Fiscal 1999 totaled approximately
$214,000 compared to cash being provided by investing activities of $1.4 million
in Fiscal 1998. The change is primarily attributable to $2.5 million in net
proceeds received in conjunction with the sale of the Anicom stock which
resulted from the sale of the EEC division in Fiscal 1997 and approximately
$871,000 less in capital purchases in Fiscal 1999 as compared to Fiscal 1998.
Net cash used for financing activities in Fiscal 1999 totaled approximately
$837,000 compared to net cash provided of approximately $4.1 million in Fiscal
1998. During Fiscal 1999, the Company was able to repay approximately $837,000
against the credit facility compared to a net borrowing of approximately $3.8
million in Fiscal 1998. These borrowings were offset by $325,000 in proceeds
received from the forgiveness of subordinated debt in Fiscal 1998.
At the end of fiscal 1999, the Company had one month remaining on its
credit facility and was negotiating with its lender regarding possible terms and
conditions of an extension so as to provide additional time for the Company to
potentially consummate its Merger with Rome. Subsequent to December 31, 1999, an
extension of the credit facility was granted through May 31, 2000 under the
existing terms.
Borrowings outstanding at December 31, 1999 accrued interest at 200 basis
points over the bank's rate and were secured by substantially all the assets of
CPI and further secured by the Company's interest in the stock of CPI.
Outstanding borrowings at December 31, 1999 and 1998 were classified as a
current liability because of the lockbox arrangement, the subjective
acceleration clause and loan covenant violations.
The Company has not complied with certain technical requirements pertaining
to its employee benefit plans. Management believes the technical requirements
issues are confined to benefit plan approvals and reporting and that all benefit
plans are fully funded. The Company is implementing remedial actions to come
into full compliance with laws and regulations governing such employee benefit
plans. In connection with bringing the plans into compliance, the Company will
incur professional fees and likely be assessed fines and penalties. The
aggregate of professional fees and fines and penalties is estimated to range
from $40,000 to $350,000. In this connection the Company has accrued the low end
of this range, $40,000, because there is no estimate within the aforementioned
range that is a better estimate.
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 was 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 1999, the Company had approximately $900,000 of
subordinated notes outstanding. Interest accrues at a rate of 10% per annum;
principal is due to be paid on the earlier of such time as the current credit
facility is paid or May 31, 2002. At the end of Fiscal 1999 and 1998, 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 1999 and 1998 consolidated financial statements. The current credit facility
prohibits the Company from paying subordinated debt principal or interest and
the Company was in violation of loan covenants during 1998, therefore no
interest was paid to subordinated debt holders as prescribed in the loan for
these two years.
Although management believes the Company will generate cash sufficient to
fund its 2000 operations until the Merger or sale of CPI occurs, no assurances
can be provided in this regard. Similarly, although management expects to do so,
no assurances can be provided that the Company will be able to negotiate further
extensions of the current credit facility with its current lender. As discussed
earlier, the Company is planning to divest of its CPI subsidiary. There can be
no assurances that management will be successful in its efforts to consummate
the Merger with Rome, or, if the Merger was not to take place, 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 assurances 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.
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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.
RECOVERABILITY OF LONG-LIVED ASSETS, INCLUDING GOODWILL
The Company currently evaluates the recoverability of its long-lived
assets, including goodwill, for impairment on a "held for use" basis. The
projected undiscounted operating cash flows attributable to these assets are
sufficient to recover the Company's long-lived assets, including goodwill.
Accordingly, no impairment charge has been recorded.
When and if the Company enters into a definitive purchase and sale
agreement to sell CPI, the Company would then evaluate the recoverability of its
long-lived assets, including goodwill, using a "held for disposal" methodology.
Should a definitive purchase and sale agreement be executed that includes the
terms currently included in the non-binding Letter of Intent with Rome (see Note
3), the Company would be required to record a loss on disposal, a component of
which would be an impairment charge approximately equal to the total carrying
value of its long-lived assets, including goodwill.
PUT AND CALL OPTIONS
The remaining stockholder of CPI ("Stockholder") holds an option to require
the Company to purchase (put) his remaining common stock of CPI. Further, the
Company holds an 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 the Company's common stock on May 31, 1996 (the date at which the
Company acquired CPI). These options are exercisable on November 30, 2000, May
31, 2001 and November 30, 2001 in an amount at each option date equal to
one-third of the outstanding stock (on a cumulative basis). There are
limitations on the Stockholder's ability to sell his common stock. At December
31, 1999 and 1998, the value of these options is not material.
IMPACT OF YEAR 2000
In prior years, the Company discussed the nature and progress of its plans
to become Year 2000 ready. In late 1999, the Company completed its remediation
and testing of systems. As a result of those planning and implementation
efforts, the Company experienced no significant disruptions in mission critical
information technology and non-information technology systems and believes those
systems successfully responded to the Year 2000 date change. The Company
expensed approximately $ 500,000 during 1999 in connection with remediating its
systems. The Company is not aware of any material problems resulting from Year
2000 issues, either with its products, its internal systems, or the products and
services of third parties. The Company will continue to monitor its mission
critical computer applications and those of its suppliers and vendors throughout
the year 2000 to ensure that any latent Year 2000 matters that may arise are
addressed promptly.
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.
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INCOME TAX MATTERS
In Fiscal 1997, management was unable to conclude that it is more likely
than not that 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, 1999, the Company has available approximately $66 million
of net operating loss 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 2013.
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, 1999. 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 divestiture of its CPI subsidiary. If this
divestiture were to occur as an asset sale, the "built-in-gain" associated with
BSCC's and EEA's assets is approximately $20.3 million.
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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, 1999. Amounts outstanding
under the credit agreement bore interest at a variable rate, which was 10.50% at
December 31, 1999. An increase in interest rates of ten percent (105.0 basis
points) would increase interest expense and 2000 interest payments by
approximately $136,000.
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 2000 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. 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
consummate the Merger with Rome or to sell its assets or its stock interests in
CPI, reduce its debt and negotiate a longer term extension of the current credit
facility with its lender if necessary.
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
None.
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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 59 President, Chief Executive Officer and September 1997
Director(1)
Ramon D. Ardizzone 62 Director(2) November 1995
Clarke H. Bailey 45 Director(1) November 1995
David R. Flowers 59 Director(1)(2) April 1997
Herbert M. Friedman 68 Director(3) November 1995
Stephen P. Kelbley 57 Director(3) December 1996
Kurt Cieszkowski 33 Executive Vice President September 1997
George H. Buckham 40 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.
Ramon D. Ardizzone has served as a director of the Company since November
1995, and is formerly 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. He is currently Chairman and Chief Executive Officer of ShipXact.com,
Inc., a provider of supply chain logistics and fulfillment services. He is also
Chairman of Glenayre and Co-Chairman of Highgate Capital LLC ("Highgate"). From
February 1995 until its merger with Iron Mountain Incorporated ("Iron Mountain")
in January 1998, Mr. Bailey
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served as Chairman and Chief Executive Officer of Arcus Technology Services,
Inc. ("Arcus"). Mr. Bailey served as Chief Executive Officer and a director of
Glenayre from December 1990 until March 1994 and as its Vice Chairman from
November 1992 to July 1996. He is a director of ShipXact.com, Inc., Glenayre,
Iron Mountain, Swiss Army Brands, Inc. ("Swiss Army") and SWWT, Inc.
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 serves as director of Autosplice Inc.("Autosplice"), a producer of
specialty interconnection equipment and components for the electronics industry,
DR Technologies, Inc., a high technology incubator company and One Stop Systems,
Inc., a supplier of embedded computers and systems. Mr. Flowers serves on the
Compensation and Audit Committees of 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 on behalf of his employer, Brae Capital Corporation, for various
entities including Swiss Army Brands, Inc. and 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
Capital, 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, and Carlyle Industries, Inc., a distributor of
buttons, home sewing, craft and other products. Mr. Friedman is a Trustee of
Noel Liquidating Trust and the Career Blazers Liquidating Trust, each of which
holds units of Noel Group, Inc., a dissolved corporation, for the benefit of the
former stockholders of that corporation; and is on the Board of Victorinox Swiss
Army Knife Foundation, a charitable organization, and the Board of United
Investors Group, Inc., a private investment vehicle.
Stephen P. Kelbley has served as a director of the Company since December
1996. Mr. Kelbley has served as President of the Home Furnishings Operating
Group of Springs Industries, Inc. ("Springs"), a home furnishings company, since
February 1998 and as an Executive Vice President of Springs since 1991. From May
1995 to February 1998, he served as President of the Diversified Group and from
March 1994 to May 1995, he was President of Springs' Specialty Fabrics Group.
Mr. Kelbley joined Springs in September 1991 as Executive Vice President and
Chief Financial Officer. Prior to joining Springs, he served for seven years as
Senior Vice President - Finance of Bausch & Lomb and two years as Senior Vice
President - Finance & Administration of Moog Automotive, Inc. ("Moog"). He held
significant financial management positions with General Electric Company for 19
years before working at Moog. Mr. Kelbley is also a director of Glenayre and
serves as the Chairman of its Audit Committee and as a member of its
Compensation Committee.
Kurt Cieszkowski has been Executive Vice President of the Company and Chief
Executive Officer of the EEA division of CPI since September 1997. Mr.
Cieszkowski served as a director of the Company and CPI from April 1997 to
January 1998. He served as a Senior Vice President of the Company from May 1996
until September 1997. From October 1995 through May 1996, Mr. Cieszkowski served
as Vice President of CPI with primary responsibility for sales in the Energy
Electric Assembly division. From 1986 through October 1995, Mr. Cieszkowski
served as the President of Energy Electric Assembly, Inc., a predecessor of CPI.
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.
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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,
1999, 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, 1999 all filing
requirements applicable to its officers, directors, and greater than ten-percent
beneficial owners were complied with.
20
<PAGE> 21
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 1999 (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 1999 $150,000 $ - 0- $1,407 -0- -0- -0- -0-
President and Chief 1998 $150,000 $50,000 $1,407 -0- 75,000 -0- -0-
Executive Officer 1997 $85,982 $10,000 - 0- -0- 50,000(1) -0- -0-
Kurt Cieszkowski 1999 $175,000 -0- $1,750 -0- -0- -0- -0-
Executive Vice President 1998 $175,000 $175,000 $1,925 -0- -0- -0- -0-
1997 $211,026 - 0- $2,586 -0- 45,643(2) -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 $3.59
per share which were granted in replacement of options to purchase a like
number of shares of Common Stock which had been granted in 1996.
21
<PAGE> 22
AGGREGATED OPTION EXERCISES DURING FISCAL 1999 AND FISCAL YEAR-END OPTION VALUE.
The following table provides information related to options and warrants
exercised by the Named Executive Officers during 1999 and the number and value
of unexercised options and warrants held by each of the Named Executive Officers
at year-end. The Company does not have any outstanding stock appreciation
rights:
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS, WARRANTS AT OPTIONS, WARRANTS
FISCAL YEAR-END (#) AT FISCAL YEAR-END ($)(1)
SHARES ACQUIRED
NAME ON EXERCISE (#) VALUE REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
<S> <C> <C> <C> <C> <C> <C>
James M. Hopkins -0- -0- 57,180(2) 67,820(2) -0- -0-
Kurt Cieszkowski -0- -0- 42,194(3) 3,449(3) -0- -0-
</TABLE>
- ----------
(1) Based on a closing price on December 31, 1999 of $.28 per share.
(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:
<TABLE>
<CAPTION>
<S> <C>
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
</TABLE>
The Company also granted 250,000 options to Clarke H. Bailey in July
1998 which are exercisable at $4.00 per share.
22
<PAGE> 23
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 as the parties did not mutually agree on or before six
months prior to such date to extend the term of the agreement.
CPI has entered into an employment agreement with Kurt Cieszkowski which
provides that he will be employed for a period of three years from May 31, 1996
at an annual salary of $163,000 for the first twelve 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. Mr. Cieszkowski's employment agreement expired in 1999 and was not
renewed by the Company.
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. No similar agreement exists under the current Sale terms with Rome.
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, 2000, 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>
23
<PAGE> 24
- ----------
(1) Based on 5,565,253 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, 2000
concerning shares of Common Stock owned of record or beneficially by each
director, and by each of the Named Executive Officers (as defined in the section
entitled "Executive Compensation", 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 10,083(3) *
Clarke H. Bailey 227,225(4) 3.9%
David R. Flowers 5,833(5) *
Herbert M. Friedman 18,416(6) *
James M. Hopkins 57,180(7) 1.0%
Stephen P. Kelbley 5,833(8) *
Kurt Cieszkowski 45,643(9) *
All executive officers and directors 371,213(10) 6.3%
as a group (8 persons)
</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 5,565,253 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 3,833 shares of Common Stock issuable upon exercise of an
option. Does not include 6,667 options, a portion of which first become
exercisable in July 2000. 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 150,500
shares of Common Stock issuable upon exercise of options. Does not include
24
<PAGE> 25
300,000 options, a portion of which first become exercisable in July 2000.
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 5,833 shares of Common Stock issuable upon the exercise of
options. Does not include 6,667 options, a portion of which first become
exercisable in July 2000.
(6) Represents 6,250 shares of Common Stock currently issuable upon exercise of
a warrant and 12,166 shares of Common Stock issuable upon exercise of an
option. Does not include 23,334 options, a portion of which first become
exercisable in July 2000. Mr. Friedman is the owner of 4,762 series B
preferred units (less than 1% of the voting securities) of Hudson River.
(7) Represents 57,180 shares of Common Stock issuable upon the exercise of
options. Does not include 67,820 options, a portion of which first become
exercisable in July 2000.
(8) Represents 5,833 shares of Common Stock issuable upon exercise of an
option. Does not include 6,667 options, a portion of which first become
exercisable in July 2000.
(9) Represents 45,643 shares of Common Stock issuable upon the exercise of
options.
(10) Includes an aggregate of 337,655 shares of Common Stock issuable upon
exercise of currently exercisable options and warrants referred to in Notes
3 through 9 above and 1,000 shares of Common Stock issuable upon exercise
of currently exercisable options held by George Buckham, the Company's
Secretary. Does not include 411,155 shares of Common Stock issuable upon
exercise of options referred to in Notes 3 through 8 above which are not
yet exercisable and certain shares with respect to which beneficial
ownership is disclaimed. The executive officers and directors as a group
beneficially own 16.8971 shares (2.2%) of CPI Common Stock, 110,553 series
B preferred units and 155,000 Plan Units (collectively, 2.8% 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.
Reference is also made to "Item 11. Executive Compensation - Compensation
of Directors."
25
<PAGE> 26
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, 1999 and 1998
* Consolidated Statements of Operations for the years ended December 31,
1999, 1998 and 1997
* Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1999, 1998 and 1997
* Consolidated Statements of Cash Flows for the years ended December 31,
1999, 1998 and 1997
(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
Exhibit
Number Description of Exhibit
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).
26
<PAGE> 27
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).
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") ).
27
<PAGE> 28
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).
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).
28
<PAGE> 29
10.45 Lease by and between Key Plastics, Inc. and CPI, dated March 6, 1997
(incorporated by reference to Exhibit 10.45 of the Company's 1996
Annual Report).
10.46 First Amendment of Certain Security Documents and Subordination
Agreement and Third Amendment to Amended and Restated Revolving
Credit and Term Loan Agreement by and among CTI, CPI and NBD
(incorporated by reference to Exhibit 10.46 of the Company's 1996
Annual Report).
10.47 Net Lease by and between Douglas J. Detweiler and BSCC Corp., dated
June 5, 1995 (incorporated by reference to Exhibit 10.47 of the
Company's 1996 Annual Report).
10.48 Second Amendment to Lease by and between Douglas J. Detweiler and
BSCC Corp., dated August 29, 1995 (incorporated by reference to
Exhibit 10.48 of the Company's 1996 Annual Report).
10.49 First Amendment of Certain Security Documents and Subordination
Agreement and Third Amendment to Amended and Restated Revolving
Credit and Term Loan Agreement, dated as of February 24, 1997, by
and among the Company, CPI and the Agent (incorporated by reference
to Exhibit 10.1 of the Company's Quarterly Report on Form 10-QSB for
the quarterly period ended March 31, 1997 (the "1997 First Quarter
10-QSB")).
10.50 Fourth Amendment to Amended and Restated Revolving Credit and Term
Loan Agreement, dated as of March 31, 1997, by and among CPI, NBD,
as Administrative Agent, and BankBoston N.A., as Documentation Agent
("BankBoston", f/k/a The First National Bank of Boston)
(incorporated by reference to Exhibit 10.2 of the Company's 1997
First Quarter 10-QSB).
10.51 Fifth Amendment to Amended and Restated Revolving Credit and Term
Loan Agreement, dated as of June 27, 1997, by and among CPI, NBD, as
agent, BankBoston and certain other banks (incorporated by reference
to Exhibit 10.2 of the Company's Quarterly Report on Form 10-QSB for
the Quarterly Period ended June 30, 1997).
10.52 Supply Agreement between CPI and Anicom, Inc., dated as of July 11,
1997 (incorporated by reference to Exhibit 10.1 of the Company's
Quarterly Report on Form 10-QSB for the quarterly period ended
September 30, 1997 (the "1997 Third Quarter 10-QSB")).
10.53 Sixth Amendment to Amended and Restated Revolving Credit and Term
Loan Agreement, dated as of July 11, 1997, by and among CPI, NBD and
BankBoston (incorporated by reference to Exhibit 10.2 of the
Company's 1997 Third Quarter 10-QSB).
10.54 Seventh Amendment to Amended and Restated Revolving Credit and Term
Loan Agreement, dated as of July 25, 1997, by and among CPI, NBD and
BankBoston (incorporated by reference to Exhibit 10.3 of the
Company's 1997 Third Quarter 10-QSB).
10.55 Stock Pledge Agreement, dated as of July 11, 1997, between CPI and
NBD (incorporated by reference to Exhibit 10.4 of the Company's 1997
Third Quarter 10-QSB).
10.56 Second Amended and Restated Term Loan A Note, dated as of July 11,
1997, in the principal amount of $6,000,000 payable by CPI to NBD
(incorporated by reference to Exhibit 10.5 of the Company's 1997
Third Quarter 10-QSB).
10.57 Second Amended and Restated Term Loan A Note, dated as of July 11,
1997, in the principal amount of $6,000,000 payable by CPI to
BankBoston (incorporated by reference to Exhibit 10.6 of the
Company's 1997 Third Quarter 10-QSB).
10.58 Second Amended and Restated Line of Credit Note, dated as of July
11, 1997, in the principal amount of $3,000,000 payable by CPI to
NBD (incorporated by reference to Exhibit 10.7 of the Company's 1997
Third Quarter 10-QSB).
10.59 Second Amended and Restated Line of Credit Note, dated as of July
11, 1997, in the principal amount of $3,000,000 payable by CPI to
BankBoston (incorporated by reference to Exhibit 10.8 of the
Company's 1997 Third Quarter 10-QSB).
10.60 Second Amended and Restated Revolving Credit Note, dated as of July
11, 1997, in the principal amount of $6,000,000 payable by CPI to
NBD (incorporated by reference to Exhibit 10.9 of the Company's 1997
Third Quarter 10-QSB).
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).
29
<PAGE> 30
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.
10.69 Second Amended and Restated Revolving Credit Agreement, dated as of
January 1, 1999, by and among Connectivity Products Incorporated,
BankBoston, N.A.(f/k/a The First National Bank of Boston), and NBD
Bank.
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.*
- ----------
* Filed herewith.
(b) Reports on Form 8-K:
None.
30
<PAGE> 31
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: May 4, 2000 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 May 4, 2000
- ---------------------------------------- Officer and Director
James M. Hopkins
/s/ Ramon D. Ardizzone Director May 4, 2000
- ----------------------------------------
Ramon D. Ardizzone
/s/ Clarke H. Bailey Director May 4, 2000
- ----------------------------------------
Clarke H. Bailey
/s/ David R. Flowers Director May 4, 2000
- ----------------------------------------
David R. Flowers
/s/ Herbert M. Friedman Director May 4, 2000
- ----------------------------------------
Herbert M. Friedman
/s/ Stephen P. Kelbley Director May 4, 2000
- ----------------------------------------
Stephen P. Kelbley
/s/ George H. Buckham Controller (Principal Accounting May 4, 2000
- ---------------------------------------- Officer)
George H. Buckham
</TABLE>
31
<PAGE> 32
INDEX OF EXHIBITS
Exhibit Description of Exhibit
Number
23(a) Consent of Ernst & Young LLP.
27.1 Financial Data Schedule.
<PAGE> 33
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, 1999
Connectivity Technologies Inc.
Leominster, MA
<PAGE> 34
Connectivity Technologies Inc.
Audited Consolidated Financial Statements
Years ended December 31, 1999, 1998 and 1997
CONTENTS
<TABLE>
<CAPTION>
<S> <C>
Report of Independent Auditors........................................................................F-1
Audited Consolidated Financial Statements
Consolidated Balance Sheets...........................................................................F-2
Consolidated Statements of Operations.................................................................F-3
Consolidated Statements of Stockholders' Equity.......................................................F-4
Consolidated Statements of Cash Flows.................................................................F-5
Notes to Consolidated Financial Statements............................................................F-7
</TABLE>
<PAGE> 35
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, 1999 and 1998, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 1999. 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 auditing standards generally accepted
in the United States. 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, 1999, and 1998, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended December 31, 1999 in conformity with accounting
principles generally accepted in the United States.
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, 1999, 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.
/s/ ERNST & YOUNG LLP
Boston, Massachusetts
April 18, 2000, except for the first
paragraph of Note 14, as to which the
date is May 2, 2000
F-1
<PAGE> 36
Connectivity Technologies Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31
1999 1998
-------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 143,801 $ 598,804
Accounts receivable:
Trade, less allowances of $540,829 in 1999 and
$309,536 in 1998 7,998,480 6,672,085
Other 38,840 68,048
Inventories 4,489,338 5,203,023
Prepaid expenses and other current assets 145,052 129,883
Refundable income taxes, net -- 286,733
-------------------------------------
Total current assets 12,815,511 12,958,576
Property, plant and equipment, net 5,966,108 6,949,801
Goodwill and other intangible assets 9,177,525 9,606,045
Other assets 98,009 102,919
-------------------------------------
$ 28,057,153 $ 29,617,341
=====================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Loan payable to bank, in default $ 15,625,659 $ 16,462,168
Subordinated note payable, in default 882,600 882,600
Trade accounts payable 3,724,858 2,740,040
Accrued liabilities 1,987,814 1,895,116
Income taxes payable, net 221,802 --
-------------------------------------
Total current liabilities 22,442,733 21,979,924
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, 5,565,253 shares
outstanding 230,867 230,874
Additional paid-in capital 109,334,759 109,336,244
Accumulated deficit (103,942,942) (101,921,437)
Less 206,601 shares in treasury, at cost (8,264) (8,264)
-------------------------------------
Total stockholders' equity 5,614,420 7,637,417
-------------------------------------
$ 28,057,153 $ 29,617,341
=====================================
</TABLE>
See accompanying notes.
F-2
<PAGE> 37
Connectivity Technologies Inc.
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Year ended December 31
1999 1998 1997
----------------------------------------------------------
<S> <C> <C> <C>
Net sales $ 42,308,497 $ 45,167,299 $ 41,707,988
Cost of goods sold 35,342,245 36,801,437 35,393,009
----------------------------------------------------------
Gross profit 6,966,252 8,365,862 6,314,979
Selling, general and administrative expenses 8,039,149 8,916,283 10,441,178
----------------------------------------------------------
Operating loss (1,072,897) (550,421) (4,126,199)
Other income (expense):
Interest income 2,065 31,220
Interest expense (1,717,936) (1,935,685) (2,395,038)
Gain on sale of investments 420,534
Other 39,247
----------------------------------------------------------
(1,717,936) (1,513,086) (2,324,571)
----------------------------------------------------------
Loss from continuing operations before
income taxes (2,790,833) (2,063,507) (6,450,770)
Income taxes (benefit) provision (769,328) (903,986) 7,993,424
----------------------------------------------------------
Loss from continuing operations (2,021,505) (1,159,521) (14,444,194)
Discontinued operations:
Income from discontinued operations, less
income taxes of $194,269 292,132
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
Extraordinary gain on forgiveness of
subordinated notes, less income taxes of
$517,038 4,835,802
----------------------------------------------------------
Net income (loss) $ (2,021,505) $ 3,714,432 $ (9,095,507)
==========================================================
Weighted average shares outstanding 5,565,253 5,565,256 5,565,272
==========================================================
Basic and diluted income (loss) per share:
Continuing operations $ (.36) $ (.21) $ (2.60)
Discontinued operations .01 .96
Extraordinary income .87
----------------------------------------------------------
$ (.36) $ .67 $ (1.64)
==========================================================
</TABLE>
See accompanying notes.
F-3
<PAGE> 38
Connectivity Technologies Inc.
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TREASURY STOCK
--------------------- PAID-IN ACCUMULATED -----------------
SHARES AMOUNT CAPITAL DEFICIT SHARES AMOUNT
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1997 5,771,926 $230,877 $ 109,336,792 $ (96,540,362) 206,601 $(8,264)
Net loss (9,095,507)
Unrealized gain on marketable securities,
less income taxes of $411,001
Comprehensive income (loss)
Shares repurchased and retired (69) (3) (548)
---------------------------------------------------------------------------------
Balance at December 31, 1997 5,771,857 230,874 109,336,244 (105,635,869) 206,601 (8,264)
Net income 3,714,432
Reclassification adjustment on realized
Gain on sale of marketable securities,
Less income taxes of $411,001
Comprehensive income
---------------------------------------------------------------------------------
Balance at December 31, 1998 5,771,857 230,874 109,336,244 (101,921,437) 206,601 (8,264)
Net loss (2,021,505)
Other (7) (1,485)
---------------------------------------------------------------------------------
Balance at December 31, 1999 5,771,857 $230,867 $ 109,334,759 $(103,942,942) 206,601 $(8,264)
=================================================================================
</TABLE>
<TABLE>
<CAPTION>
UNREALIZED GAIN ACCUMULATED OTHER TOTAL
ON MARKETABLE COMPREHENSIVE STOCKHOLDERS'
SECURITIES INCOME EQUITY
---------------------------------------------------
<S> <C> <C> <C>
Balance at January 1, 1997 $13,019,043
Net loss (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 retired (551)
-----------------------------------------------
Balance at December 31, 1997 618,045 618,045 4,541,030
Net income 3,714,432
Reclassification adjustment on realized
Gain on sale of marketable securities, (618,045) (618,045) (618,045)
Less income taxes of $411,001
-----------
Comprehensive income 3,096,387
-----------------------------------------------
Balance at December 31, 1998 7,637,417
Net loss (2,021,505)
Other (1,492)
-----------------------------------------------
Balance at December 31, 1999 $ -- $ -- $ 5,614,420
===============================================
</TABLE>
See accompanying notes.
F-4
<PAGE> 39
Connectivity Technologies Inc.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year ended December 31
1999 1998 1997
-----------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Loss from continuing operations (excluding $ (2,021,505) $ (1,159,521) $(14,444,194)
extraordinary gain of $4,835,802 in 1998)
Adjustments to reconcile loss from continuing
operations to cash provided by (used for)
operating activities:
Depreciation and amortization 1,626,480 1,644,280 1,703,230
Debt issuance costs 458,311
Gain on sale of investments (420,534)
Deferred income taxes 556,883 9,488,583
Noncash interest expense 260,440
Changes in assets and liabilities:
Accounts receivable (1,297,187) 2,391,578 (3,386,801)
Refundable income taxes, net 286,733 (286,733)
Inventories 713,685 (72,108) (173,865)
Prepaid expenses and other assets (10,259) 101,916 115,611
Trade accounts payable 984,818 (2,364,558) 733,303
Accrued liabilities and income taxes 313,008 (5,869,607) (211,620)
----------------------------------------------------------
Net cash provided by (used for) continuing
operations 595,773 (5,217,964) (5,717,442)
Income from discontinued operations 38,151 292,132
Adjustments to reconcile income from discontinued
operations to cash provided by (used for) operating
activities
Depreciation and amortization 118,496
Changes in assets and liabilities:
Accounts receivable (2,846,593)
Inventories 123,357
Prepaid expenses and other assets (39,689)
Trade accounts payable 1,889,502
Accrued liabilities and income taxes (38,151) 1,361,417
Other (12,280)
----------------------------------------------------------
(38,151) 594,210
----------------------------------------------------------
Net cash provided by (used for) discontinued
operations -- -- 886,342
----------------------------------------------------------
Net cash provided by (used for) operating activities 595,773 (5,217,964) (4,831,100)
INVESTING ACTIVITIES
Proceeds from disposal of discontinued operations,
net of transaction costs 25,460,698
Purchases of property, plant and equipment (214,267) (1,084,743) (2,031,040)
Purchases of property, plant and equipment by
discontinued operations (224,246)
Purchases of marketable securities (1,779,059)
Proceeds from sale of investments 2,518,500 2,671,034
----------------------------------------------------------
Net cash provided by (used for) investing activities (214,267) 1,433,757 24,097,387
</TABLE>
F-5
<PAGE> 40
Connectivity Technologies Inc.
Consolidated Statements of Cash Flows (continued)
<TABLE>
<CAPTION>
Year ended December 31
1999 1998 1997
----------------------------------------------------------
<S> <C> <C> <C>
FINANCING ACTIVITIES
Proceeds from borrowings $ 30,881,325 $ 8,228,828 $ 13,405,000
Repayment of borrowings (31,717,834) (4,416,660) (32,655,000)
Proceeds from forgiveness of subordinated notes 325,000
Other (551)
----------------------------------------------------------
Net cash provided by (used for) financing activities (836,509) 4,137,168 (19,250,551)
----------------------------------------------------------
Net increase (decrease) in cash (455,003) 352,961 15,736
Cash at beginning of year 598,804 245,843 230,107
----------------------------------------------------------
Cash at end of year $ 143,801 $ 598,804 $ 245,843
==========================================================
SUPPLEMENTAL CASH FLOW INFORMATION DURING THE YEAR FOR:
Income taxes, paid $ 0 $ 2,907,000 $ 225,000
==========================================================
Interest, paid $ 1,626,000 $ 1,563,000 $ 2,935,000
==========================================================
Income tax refunds $ 1,208,000 -0- -0-
==========================================================
</TABLE>
See accompanying notes.
F-6
<PAGE> 41
Connectivity Technologies Inc.
Notes to Consolidated Financial Statements
December 31, 1999
1. BASIS OF PRESENTATION
DESCRIPTION OF BUSINESS
Connectivity Technologies Inc. (CTI, or the Company) owns approximately 97.8 %
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, 1999, the Company had negative working capital, was
in default of its loan agreement (see Note 10) 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 to resolve these matters presently include the divestiture by
the Company of its stock in CPI via a merger with Rome Group, Inc. (Rome) (see
Note 3). If the merger with Rome is successfully consummated, the outstanding
debt obligation of CPI is expected to be satisfied in full and the Company is
expected to record a loss on disposal in the range of $15 million to $19 million
before the effect of any income taxes. Such loss is not reflected in the
accompanying consolidated financial statements. In the event the CPI merger with
Rome cannot be consummated, management intends to continue its efforts to divest
its CPI subsidiary or some or all of its operating assets, continue enhancing
operations and consider seeking alternative sources of financing, as necessary.
F-7
<PAGE> 42
Connectivity Technologies Inc.
Notes to Consolidated Financial Statements (continued)
1. BASIS OF PRESENTATION (CONTINUED)
GOING CONCERN MATTERS (CONTINUED)
There can be no assurance that management will be successful in its efforts to
consummate a merger transaction with Rome. A prior Letter of Intent with Rome
terminated without consummation. Similarly, should the Company not succeed in
its CPI merger 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.
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.
INVENTORIES
Inventories are stated at the lower of cost, determined on the first-in,
first-out basis, or market.
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.
F-8
<PAGE> 43
Connectivity Technologies Inc.
Notes to Consolidated Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
The Company amortizes its intangible assets over their estimated useful lives,
principally 25 years.
RECOVERABILITY OF LONG-LIVED ASSETS, INCLUDING GOODWILL
The Company currently evaluates the recoverability of its long-lived assets,
including goodwill, for impairment on a "held for use" basis. The projected
undiscounted operating cash flows attributable to these assets are sufficient to
recover the Company's long-lived assets, including goodwill. Accordingly, no
impairment charge has been recorded.
When and if the Company enters into a definitive purchase and sale agreement to
sell CPI, the Company would then evaluate the recoverability of its long-lived
assets, including goodwill, using a "held for disposal" methodology. Should a
definitive purchase and sale agreement be executed that includes the terms
currently included in the non-binding Letter of Intent with Rome (see Note 3),
the Company would be required to record a loss on disposal, a component of which
would be an impairment charge approximately equal to the total carrying value of
its long-lived assets, including goodwill.
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.
CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the Company to concentrations of
credit risk consist primarily of trade accounts receivable.
The Company has 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 34%, 34% and
17% of the Company's net sales for the years ended December 31, 1999, 1998 and
1997, respectively, were from sales to Anicom. Approximately 44%, 29% and 28% of
the
F-9
<PAGE> 44
Connectivity Technologies Inc.
Notes to Consolidated Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CONCENTRATIONS OF CREDIT RISK (CONTINUED)
Company's trade accounts receivable at December 31, 1999, 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 consolidated financial statements.
PENDING ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin 101, (SAB 101), "Revenue Recognition in Financial
Statements". SAB 101 summarizes the application of generally accepted accounting
principles to revenue recognition in financial statements. On March 24, 2000,
the SEC issued an amendment to SAB 101 (SAB 101A) delaying the effective date
for certain companies. The Company will adopt SAB 101 in the second quarter of
fiscal 2000 and is presently analyzing what impact, if any, SAB 101 will have on
the financial position or results of operations of the Company.
RECLASSIFICATIONS
Certain amounts reported in prior years have been reclassified to conform to
1999 presentation.
F-10
<PAGE> 45
Connectivity Technologies Inc.
Notes to Consolidated Financial Statements (continued)
3. ANTICIPATED DIVESTITURE OF CPI SUBSIDIARY
In November 1999, the Company signed a non-binding Letter of Intent to divest
its entire interest in CPI to Rome. Under the Letter of Intent, the Company is
expected to receive consideration of approximately $2 million. Coincident with
the divestiture, Rome will discharge CPI's obligations to its lenders for
consideration of approximately $15 million. The lenders have tentatively agreed
that this repayment is satisfactory.
The $2 million consideration to the Company will be comprised of a subordinated
promissory note from Rome in the principal amount of $1.75 million and a cash
payment of $250,000 from CPI. To the extent CPI is unable to fund the cash
payment, Rome would be required to fund the balance of the cash payment. In such
event, Rome would be entitled to be reimbursed from one half of any tax refunds
received by CPI for the tax year 1999.
The proceeds realizable by the Company under the Letter of Intent are
substantially less than proceeds anticipated pursuant to a prior unconsummated
Letter of Intent with Rome.
The transaction is subject to conditions, including Rome's completion of its due
diligence investigation to its satisfaction, the negotiation and execution of a
mutually acceptable agreement with the remaining stockholder to divest his
interest in CPI to Rome, Rome's obtaining financing terms and conditions
satisfactory to Rome and the consent of CPI's lenders.
However, no assurances can be given that a merger will be consummated or that
CPI's lenders will continue to agree to waivers of CPI's non-compliance with the
financial covenants in its credit agreement (see Note 10) or to any
modifications of the terms or the agreement as may be necessary to permit CPI to
meet its ongoing obligations.
Should the transaction be consummated in its current form, the Company is
expected to record a loss on disposal in the range of $15 million to $19 million
before the effect of any income taxes. Such loss is not reflected in the
accompanying consolidated financial statements. There can be no assurances that
the Company will be successful in its efforts to divest its stock in its CPI
subsidiary. A disposition of the CPI subsidiary would eliminate virtually all
operating activities and assets of the Company.
F-11
<PAGE> 46
Connectivity Technologies Inc.
Notes to Consolidated Financial Statements (continued)
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.
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 in determining income from discontinued operations for
the year ended December 31, 1997. 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
-----------
(Unaudited)
<S> <C>
Net sales $34,631,928
Income, net of income taxes 292,132
</TABLE>
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following at December 31, 1999 and
1998:
<TABLE>
<CAPTION>
1999 1998
--------------------------------
<S> <C> <C>
Machinery and equipment $ 8,653,276 $ 8,520,726
Office equipment 638,648 589,366
Leasehold improvements 481,328 462,386
Transportation equipment 22,979 22,979
--------------------------------
9,796,231 9,595,457
Less accumulated depreciation and amortization (3,830,123) (2,645,656)
--------------------------------
$ 5,966,108 $ 6,949,801
================================
</TABLE>
F-12
<PAGE> 47
Connectivity Technologies Inc.
Notes to Consolidated Financial Statements (continued)
5. PROPERTY, PLANT AND EQUIPMENT (CONTINUED)
Depreciation expense approximated $1,158,000, $1,188,000 and $1,175,000
(including approximately $118,000 in 1997 related to discontinued operations)
for the years ended December 31, 1999, 1998 and 1997, respectively.
6. INVENTORIES
Inventory consists of the following at December 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
------------------------------
<S> <C> <C>
Raw materials $2,878,577 $3,211,631
Work-in-process 669,588 686,124
Finished goods 941,173 1,305,268
------------------------------
$4,489,338 $5,203,023
==============================
</TABLE>
7. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and other intangible assets consist of the following at December 31,
1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
------------------------------
<S> <C> <C>
Goodwill $10,713,000 $10,713,000
Non compete covenant 150,000
------------------------------
10,713,000 10,863,000
Less accumulated amortization (1,535,475) (1,256,955)
------------------------------
$ 9,177,525 $ 9,606,045
==============================
</TABLE>
8. 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.
F-13
<PAGE> 48
Connectivity Technologies Inc.
Notes to Consolidated Financial Statements (continued)
8. LEASES (CONTINUED)
Future minimum commitments under operating leases with non-cancelable terms of
one or more years are as follows at December 31, 1999:
<TABLE>
<CAPTION>
<S> <C>
2000 $ 704,036
2001 683,554
2002 572,443
2003 278,810
2004 116,542
----------
$2,355,385
==========
</TABLE>
Rent expense approximated $704,000, $883,000 and $1,200,000 (including
approximately $403,000 in 1997 related to discontinued operations) for the years
ended December 31, 1999, 1998 and 1997, respectively.
9. DEBT, IN DEFAULT
LOAN PAYABLE TO BANK, in DEFAULT
At December 31, 1998, the Company was negotiating with its lenders regarding
possible terms and conditions of a new loan facility or an extension of the
Forbearance Agreement which expired on November 30, 1998. On April 27, 1999, CPI
consummated a $16.5 million revolving credit agreement ("the 1999 Revolver")
whereunder borrowings under the credit agreement existing at December 31, 1998
became amounts outstanding under the 1999 Revolver. The 1999 Revolver matured on
January 31, 2000. Borrowings under the 1999 Revolver: 1) accrue interest at the
bank's base rate plus 200 basis points (the bank's base rate was 8.5% at
December 31, 1999); 2) are secured by substantially all assets of CPI and
further secured by the Company's interest in the stock of CPI and; 3) cannot
exceed an amount that is calculated by reference to specified percentages of
eligible accounts receivable, inventory, and equipment. During 1999, the maximum
amount of borrowings under the 1999 Revolver amounted to $16.5 million. The 1999
Revolver contains a lockbox arrangement and a subjective acceleration clause.
Under the lockbox arrangement, a lockbox controlled by the bank is used to
process all of the Company's cash receipts. From the lockbox account, the bank
applies the amounts against the outstanding debt.
The 1999 Revolver also contains covenants restricting the amount of capital
expenditures and requiring, among other things, the attainment of monthly
minimum earnings and cash flow related thresholds and monthly reductions of
principal outstanding under the 1999 Revolver.
During the period April, 1999 to September, 1999, the Company was required to
make minimum principal reductions on the amount outstanding under the credit
agreement amounting to $500,000. Subsequent to September, 1999, the Company is
not required to make any additional principal reductions on the amount
outstanding under the credit agreement.
F-14
<PAGE> 49
Connectivity Technologies Inc.
Notes to Consolidated Financial Statements (continued)
9. DEBT, IN DEFAULT (CONTINUED)
LOAN PAYABLE TO BANK, in DEFAULT (CONTINUED)
The Company was not in compliance with the minimum earnings covenant as of
December 31, 1999. Outstanding amounts at December 31, 1999 and 1998 were
classified as a current liability since the revolver contained the lockbox
arrangement and the subjective acceleration clause and the Company was in
violation of certain loan covenant violations.
Subsequent to December 31, 1999, the Company successfully negotiated an
extension of the 1999 Revolver through May 31, 2000 under the existing terms.
Further, the lenders waived the non-compliance with the monthly earnings
covenant at December 31, 1999.
Although the lenders are currently forbearing from enforcing their rights under
the credit agreement, the lenders have the right to proceed against the
Company's assets at any time and no assurance can be given that the lenders will
continue to forbear.
SUBORDINATED NOTES PAYABLE, in DEFAULT
Subordinated notes payable were issued as part of the Company's acquisition of
CPI. The notes bear interest at the rate of 10% per annum, payable quarterly.
The Company has made no interest payments on the subordinated notes since
December 31, 1997. Under the terms of the notes, principal becomes payable on
May 31, 2003. The Company entered into agreements with certain of the
noteholders in 1998 pursuant to which the Company's obligations for principal
amounting to $4,767,400 and accrued interest of $260,440 were canceled. This
cancellation resulted in an extraordinary gain of $4,835,802, net of provision
for income taxes of $517,038 at December 31, 1998. In connection with
consummating the 1999 Revolver, the remaining subordinated noteholder agreed not
to require any payments of either principal or interest under the note until the
earlier of such time as the 1999 Revolver is repaid, or May 2002.
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-15
<PAGE> 50
Connectivity Technologies Inc.
Notes to Consolidated Financial Statements (continued)
10. INCOME TAXES
The income taxes provisions (benefit) consist of the following:
<TABLE>
<CAPTION>
CONTINUING OPERATIONS 1999 1998 1997
-------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $ (769,328) $(1,168,742) $(1,210,916)
State (292,127) (284,243)
-------------------------------------------------------
(769,328) (1,460,869) (1,495,159)
Deferred:
Federal 474,062 9,488,583
State 82,821
-------------------------------------------------------
556,883 9,488,583
-------------------------------------------------------
Total income taxes--continuing operations $ (769,328) $ (903,986) $ 7,993,424
=======================================================
DISCONTINUED OPERATIONS
Current:
Federal $ 19,711 $ 3,574,116
State 5,723 1,386,098
---------------------------------
25,434 4,960,214
Deferred:
Federal -- 1,633,050
State -- --
---------------------------------
-- 1,633,050
---------------------------------
Total income taxes--discontinued operations $ 25,434 $ 6,593,264
=================================
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-16
<PAGE> 51
Connectivity Technologies Inc.
Notes to Consolidated Financial Statements (continued)
10. INCOME TAXES (CONTINUED)
Deferred tax liabilities and assets represent the tax effect of temporary
differences attributable to the following at December 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
-----------------------------------
<S> <C> <C>
Deferred tax liabilities:
Depreciation $ (1,049,026) $ (969,965)
Unrealized gains on marketable securities
-----------------------------------
Total deferred tax liabilities (1,049,026) (969,965)
Deferred tax assets:
Accounts receivable valuation allowance 216,007 123,628
Inventory valuation 179,146 140,523
Accrued expenses 203,065 269,058
State income taxes 101,314 101,314
Net operating loss carryforwards 22,416,671 25,756,343
Tax credit carryforwards 20,844 1,410,747
-----------------------------------
Total deferred tax assets 23,137,047 27,801,613
Valuation allowance (22,088,021) (26,831,648)
-----------------------------------
Net deferred tax assets 1,049,026 969,965
-----------------------------------
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 decreased by
approximately $4.7 million in 1999, due primarily to the expiration of net
operating losses and tax credit carryforwards which reduced the gross deferred
tax assets.
F-17
<PAGE> 52
Connectivity Technologies Inc.
Notes to Consolidated Financial Statements (continued)
10. 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>
1999 1998 1997
-------------------------------------------------------
<S> <C> <C> <C>
Loss from continuing operations before
income taxes $(2,790,833) $(2,063,507) $(6,450,770)
Tax benefit at statutory rate of 34% $ (948,883) $ (701,592) $(2,193,262)
State income tax, net of federal benefit 2,058 (77,267) (316,436)
Effect of permanent differences
(principally goodwill) 132,968 121,469 148,257
Change in valuation allowance (13,871) (255,004) 10,493,807
Other 58,400 8,408 (138,942)
-------------------------------------------------------
Income tax provision (benefit) $ (769,328) $ (903,986) $ 7,993,424
=======================================================
</TABLE>
At December 31, 1999, the Company has available approximately $66 million of net
operating loss 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 2018 as follows: 2000--$14.1 million; 2001--$16.6 million;
2002--$19.1 million; 2003--$8.5 million; 2004--none; thereafter--$8.1 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, 1999.
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-18
<PAGE> 53
Connectivity Technologies Inc.
Notes to Consolidated Financial Statements (continued)
11. 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
525,411 shares are exercisable at December 31, 1999. The weighted average
exercise price of the options is $2.71. Options for 8,767 shares were
exercisable at December 31, 1998, and no options were exercisable at the end of
1997. Options granted expire 10 years after the date of the grant and the
weighted average life of options outstanding at December 31, 1999 is 8.29 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>
1999 1998 1997
---------------------------- ---------------------------- -------------------------
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 1,140,482 $ 3.54 861,007 $ 5.05 787,898 $ 6.79
Granted -- -- 644,500 2.46 345,062 3.67
Exercised -- -- -- -- -- --
Forfeited or canceled (324,375) 5.61 (365,025) 5.15 (271,953) 8.32
---------------------------- ---------------------------- ------------------------
Outstanding--end of
year 816,107 $ 2.74 1,140,482 $ 3.54 861,007 $ 5.05
============================ ============================ ========================
</TABLE>
F-19
<PAGE> 54
Connectivity Technologies Inc.
Notes to Consolidated Financial Statements (continued)
11. STOCKHOLDERS' EQUITY (CONTINUED)
OPTIONS (CONTINUED)
<TABLE>
<CAPTION>
RANGE OF EXERCISE PRICES
----------------------------------
$1.13 - $4.25 $8.38
----------------------------------
<S> <C> <C>
OPTIONS OUTSTANDING:
Number outstanding at December 31, 1999 812,107 4,000
Weighted average remaining contractual
life (years) 8.3 6.9
Weighted average exercise price $ 2.71 $ 8.38
</TABLE>
At December 31, 1999, 422,158 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, 1998 and 1999. Warrants granted expire 10 years
after the date of grant and the weighted average contractual life of the
warrants outstanding at December 31, 1999 is 5.9 years. A summary of activities
related to the warrants follows:
F-20
<PAGE> 55
Connectivity Technologies Inc.
Notes to Consolidated Financial Statements (continued)
11. STOCKHOLDERS' EQUITY (CONTINUED)
WARRANTS (CONTINUED)
<TABLE>
<CAPTION>
1999 1998 1997
---------------------- ---------------------- ------------------------
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 401,250 $ 4.25 451,250 $ 4.17 451,250 $ 4.17
Granted -- -- -- -- -- --
Exercised -- -- -- -- -- --
Canceled (50,000) 3.54
--------------------- --------------------- ----------------------
Outstanding--end of year 401,250 $ 4.25 401,250 $ 4.25 451,250 $ 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 and
1997 to be $0.94 and $2.25, respectively. There were no options or warrants
granted during the year ended December 31, 1999. The fair values of options and
warrants granted were estimated using the Black-Scholes model with the following
assumptions:
<TABLE>
<CAPTION>
1998 1997
----------------------------------
<S> <C> <C>
Expected life (years) 8 8
Expected stock price volatility 73% 50%
Risk-free interest rate 6.89% 6.06%
</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-21
<PAGE> 56
Connectivity Technologies Inc.
Notes to Consolidated Financial Statements (continued)
11. 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>
1999 1998 1997
-----------------------------------------------------------
<S> <C> <C> <C>
Pro forma net income (loss) $(2,116,905) $3,480,861 $(10,021,911)
Pro forma net income (loss) per share $ (0.38) $ 0.63 $ (1.80)
</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, 1999, 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.
PUT AND CALL OPTIONS
The remaining stockholder of CPI (Stockholder) holds an option to require the
Company to purchase (put) his remaining common stock of CPI. Further, the
Company holds an 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 the Company's common stock on May 31, 1996 (the date at which the
Company acquired CPI). These options are exercisable on November 30, 2000, May
31, 2001 and November 30, 2001 in an amount at each option date equal to
one-third of the outstanding stock (on a cumulative basis). There are
limitations on the Stockholder's ability to sell his common stock. At December
31, 1999 and 1998, the value of these options is not material.
F-22
<PAGE> 57
Connectivity Technologies Inc.
Notes to Consolidated Financial Statements (continued)
12. EMPLOYMENT AGREEMENT
The Company had an employment agreement with one of the stockholders of CPI
which expired in 1999 and has not been renewed. Under the terms of the
agreement, the stockholder was 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 1999 or in prior
years. All pay and benefits under the agreements shall cease upon voluntary
termination or termination for cause. The employment agreement called for salary
and benefit continuation in the event that the individual is unable to perform
his duties by reason of illness or incapacity.
13. RELATED-PARTY TRANSACTIONS
The Company incurred approximately $20,000 and $503,000 for legal services
rendered in 1998 and 1997, 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 in 1997.
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).
Albert M. Zlotnick, a former shareholder of the Company, was retained as a
consultant for a period of two years ending December 1, 1997, at a rate of
$15,000 per month.
14. CONTINGENCIES
The Company has not complied with certain technical requirements pertaining to
its employee benefit plans. The Company is implementing remedial actions to
come into full compliance with laws and regulations governing such employee
benefit plans. In connection with bringing the plans into compliance, the
Company will incur professional fees and likely be assessed fines and
penalties. The aggregate of professional fees and fines and penalties is
estimated to range from $40,000 to $350,000. In this connection the Company has
accrued the low end of this range, $40,000, because there is no estimate within
the aforementioned range that is a better estimate.
The Company is also subject to various legal proceedings and claims that arise
in the ordinary course of business. In the opinion of management, such
proceedings will not, individually or in the aggregate, have a material adverse
impact on the Company's financial position.
F-23
<PAGE> 58
Connectivity Technologies Inc.
Notes to Consolidated Financial Statements (continued)
15. 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 $37,000, $30,000 and
$35,000 to the plan for the years ended December 31, 1999, 1998 and 1997,
respectively.
16. FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in estimating its
fair value disclosures for financial instruments:
Cash, Accounts Receivable, Accounts Payable: The carrying amounts reported in
the balance sheet approximate fair value.
Loan Payable to Bank: The carrying amount reported in the balance sheet
approximates fair value. However, as discussed in Note 3, the lenders have
tentatively agreed to discharge CPI's obligations for repayment of $15 million
in the event the Company consummates the divestiture of CPI to Rome.
Subordinated Note: It is not practicable to estimate the fair value of the
subordinated note because comparable market information is not available.
F-24
<PAGE> 59
Connectivity Technologies Inc.
Notes to Consolidated Financial Statements (continued)
17. 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 to discontinued operations for the
year ended December 31, 1997.
The BSCC division's sales to Anicom in 1999 were $10,698,000 or 34% of the
division's sales, $11,583,000 or 34% in 1998, and $7,215,000 or 20% in 1997.
Following is a presentation of selected financial information for each division
and the corporate headquarters for the years ended December 31, 1999, 1998 and
1997.
F-25
<PAGE> 60
Connectivity Technologies Inc.
Notes to Consolidated Financial Statements (continued)
17. SEGMENT INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
BSCC
Division EEA Division Corporate Eliminations Consolidation
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1999
Sales to external customer $ 29,359,468 $ 12,949,029 $ 42,308,497
Interdivision sales 2,152,654 $ (2,152,654)
Interest expense 1,153,011 1,272 $ 563,653 1,717,936
Depreciation and amortization 1,044,570 113,390 468,520 1,626,480
Income (loss) from continuing
operations before income taxes (1,266,145) 966,978 (2,457,666) (34,000)(1) (2,790,833)
Total assets 15,910,572 7,876,672 11,103,992 (6,834,083)(2) 28,057,153
Acquisition of property, plant and
equipment 178,917 35,350 214,267
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
operations before income taxes (772,240) 1,331,938 (2,689,093) 65,888(1) (2,063,507)
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
</TABLE>
- --------
(1) Effect of change in intercompany profit in inventory
(2) Elimination of intercompany receivables and profit in inventory
F-26
<PAGE> 61
Connectivity Technologies Inc.
Notes to Consolidated Financial Statements (continued)
18. 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, 1997 $ 56,667 $361,962 $ (97,629) $321,000
Year ended December 31, 1998 $321,000 $123,891 $(135,355) $309,536
Year ended December 31, 1999 $309,536 $275,779 $ (44,486) $540,829
Accounts Receivable Reserves and Allowances - Discontinued Operations:
Year ended December 31, 1997 $677,756 $ 1,164 $ (29,465) $(649,455)(1) $ 0
</TABLE>
- --------------------------------------
(1) Reflects the sale of EEC effective June 30, 1997
F-27
<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 April 18, 2000 (except for the first paragraph of Note 14, as to
which the date is May 2, 2000), 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, 1999.
ERNST & YOUNG LLP
Boston, Massachusetts
May 2, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<EXCHANGE-RATE> 1
<CASH> 143,801
<SECURITIES> 0
<RECEIVABLES> 7,998,480
<ALLOWANCES> 0
<INVENTORY> 4,489,338
<CURRENT-ASSETS> 12,815,511
<PP&E> 5,966,108
<DEPRECIATION> 0
<TOTAL-ASSETS> 28,057,153
<CURRENT-LIABILITIES> 22,442,733
<BONDS> 0
0
0
<COMMON> 230,867
<OTHER-SE> 5,383,553
<TOTAL-LIABILITY-AND-EQUITY> 28,057,153
<SALES> 42,308,497
<TOTAL-REVENUES> 42,308,497
<CGS> 35,342,245
<TOTAL-COSTS> 35,342,245
<OTHER-EXPENSES> 8,039,149
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,717,936
<INCOME-PRETAX> (2,790,833)
<INCOME-TAX> (769,328)
<INCOME-CONTINUING> (2,021,505)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,021,505)
<EPS-BASIC> (.36)
<EPS-DILUTED> (.36)
</TABLE>
