SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1995
Commission file number 1-4680
EA INDUSTRIES, INC.
(Exact Name of Registrant as Specified in its Charter)
New Jersey 21-0606484
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
185 Monmouth Parkway 07764-9989
West Long Branch, New Jersey (Zip Code)
(Address of Principal Executive Offices)
Registrant's telephone number, including area code: (908) 229-1100
Former Name - Electronic Associates, Inc.
Former name, former address and former fiscal year, if changed since last report
----------------------------------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 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 N
---
----------------------------------------------------------------
As of September 30, 1995, there were 14,976,363 outstanding shares of the
Registrant's common stock.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EA INDUSTRIES, INC. AND SUBSIDIARIES
Consolidated Condensed Balance Sheet
(UNAUDITED)
(thousands of dollars)
Sept. 30, December 31,
1995 1994
---------- -----------
ASSETS
Current Assets: $1,474
Cash and cash equivalents $ 6,157
Restricted cash 7,386 --
Receivables, less allowance of $382 in 1995 and $207
in 1994 for doubtful accounts 12,689 5,958
Inventories 9,622 4,178
Prepaid expenses and other assets 957 676
--------- -------
Total current assets 32,128 16,969
--------- -------
Fixed assets 12,986 7,472
Less accumulated depreciation (6,092) (4,753)
--------- -------
6,894 2,719
--------- -------
Investment in affiliates 1,367 2,745
--------- -------
Intangible assets 14,595 --
Less accumulated amortization (696) --
--------- -------
13,899 --
--------- -------
Other Assets 436 412
Note receivable 1,075 --
--------- -------
$ 55,799 $ 22,845
========= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term liabilities $ 9,791 $ 5,933
Accounts payable 12,269 4,711
Accrued expenses 2,007 1,959
--------- -------
Total current liabilities 24,067 12,603
--------- -------
Long-Term liabilities:
Long-term debt 5,134 690
Other long-term liabilities 2,478 2,308
--------- -------
Total long-term liabilities 7,612 2,998
--------- -------
Total liabilities 31,679 15,601
--------- -------
Minority interest 3,818 --
--------- -------
Shareholders' Equity:
Common Stock 60,213 20,117
Marketable securities adjustment (167)
Accumulated deficit since January 1, 1986 (39,269) (12,398)
--------- -------
20,777 7,719
Less common stock in treasury, at cost (475) (475)
--------- -------
Total Shareholders' Equity 20,302 7,244
--------- -------
$ 55,799 $ 22,845
========= =======
The accompanying notes are an integral part of these consolidated
condensed financial statements.
(2)
EA INDUSTRIES, INC. AND SUBSIDIARIES
Consolidated Condensed Statement of Operations
(UNAUDITED)
(thousands of dollars, except per share data)
Quarter Ended Nine Months Ended
------------- -----------------
Sept. 30, Sept. 30, Sept. 30, Sept.30,
--------- --------- --------- --------
1995 1994 1995 1994
Sales $18,895 $8,801 $56,128 $22,491
----------- ---------- ----------- ------------
Cost of Sales 18,645 7,353 55,715 19,715
Selling, general and
administrative expenses 2,076 1,292 6,262 3,204
Purchased research and
development (Note 3) 13,534 -- 19,546 --
----------- ---------- ----------- ------------
Total 34,255 8,645 81,523 22,919
----------- ---------- ----------- ------------
Loss from operations (15,360) 156 (25,395) (428)
----------- ---------- ----------- ------------
Interest expense 315 178 993 497
Interest income (111) (26) (188) (57)
Other expense 222 -- 671 --
----------- ---------- ----------- ------------
Net loss $(15,786) $4 $(26,871) $(868)
=========== ========== =========== ============
Loss per common share $(1.21) $ -- $(2.35) $(0.20)
=========== ========== =========== ============
Weighted average
- ----------------
common shares and 13,088,865 14,256,043 11,437,851 4,389,685
- -----------------
common share
- ------------
equivalents outstanding
- -----------------------
========== ========== ============ ===========
The accompanying notes are an integral part of these consolidated condensed
financial statements.
(3)
EA INDUSTRIES, INC. AND SUBSIDIARIES
Consolidated Condensed Statement of Shareholders' Equity
For The Nine Months Ended September 30, 1995
(UNAUDITED)
(in thousands of dollars)
Common Stock Treasury Stock
------------ -------------- Accumulated Marketable
Shares Amount Shares Amount Deficit Securities
Since Adjustment
Jan. 1,
1986
-----------------------------------------------------------------------------------
Balance, December 31, 8,326,056 $20,117 (218,476) $(475) $(12,398)
1994
Net loss (26,871)
Issuance of stock:
Tanon acquisition 1,538,462 14,460
BarOn investment 382,775 1,995
Warrants, Options and
Stock issued in
connection with
the IAI investment 140,719 7,400
Exercise of stock
options 686,205 1,546
Exercise of Class C
warrants 383,861 1,734
Exercise of Class A
and B Warrants 1,261,768 1,302
Shares sold in exempt
offerings 2,474,993 11,659
Marketable securities
adjustment (167)
------------------------------------------------------------------------------------
Balance, September 15,194,839 $60,213 (218,476) $(475) $(39,269) (167)
30, 1995
====================================================================================
The accompanying notes are an integral part of these consolidated
condensed financial statements.
(4)
EA INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
(UNAUDITED)
(thousands of dollars)
Nine Months Ended
-----------------------------------------------------------------
September 30, September 30,
1995 1994
--------------------- ----------------------------
Cash Flows from Operating Activities: $(868)
Net loss $(26,871)
Adjustment to reconcile net income (loss) to net cash
provided (used) by operating activities:
669
Depreciation and amortization 2,035
Purchased research and development 19,546 --
Equity in loss of affiliate 558 --
Cash provided (used) by changes in:
Receivables 1,849 (3,171)
Inventories (662) (1,972)
Prepaid expenses & other assets 809 --
Accounts payable and accrued expenses (2,290) 801
Accrued excess leased space costs (319) (203)
Other operating items - net (715) (70)
--------------------- -------------------
Operating cash flow from continuing operations (6,060) (4,814)
Operating cash flow from discontinued operations -- 85
--------------------- -------------------
Net cash used by operating activities (6,060) (4,729)
--------------------- -------------------
Cash flows from Investing Activities:
Capital expenditures, net (3,390) (1,160)
Investment in affiliates (11,500) (130)
Cash acquired in purchase of Tanon 890 --
Proceeds from the sale of discontinued operations 394 200
--------------------- -------------------
Net cash provided/(used) by investing activities (13,606) (1,090)
--------------------- -------------------
Cash flows from financing activities:
Net borrowings/(repayments) under credit facilities (258) 1,542
Proceeds from the exercise of stock options or rights 1,546 42
Issuance of note receivable in connection with acquisition (1,000) --
Net proceeds from sale of common stock (exempt offerings)
and exercise of warrants 14,695 6,859
--------------------- -------------------
Net cash provided by/(used for) financing activities 14,983 8,443
--------------------- -------------------
Net increase/(decrease) in cash and cash equivalents (4,683) 2,624
Cash and cash equivalents at beginning of period 6,157 64
--------------------- -------------------
Cash and cash equivalents at end of period $1,474 $ 2,688
===================== ===================
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $955 $ 422
===================== ===================
Noncash investing and financing activities:
Acquisition of business:
Fair value of assets acquired, excluding cash $28,960
Liabilities assumed (15,390)
Common stock and options issued (14,460)
---------------------
Cash acquired $890
=====================
Additional common stock valued at approximately $2.0 million (Note 3)
was issued in connection with the purchase of a minority interest.
Warrants to acquire common stock valued at approximately $3.0 million
were issued in connection with the purchase of a joint venture (Note 3).
The accompanying notes are an integral part of these consolidated
condensed financial statements.
(5)
EA INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
(1) Basis of Presentation
The condensed financial statements included herein have been prepared by EA
Industries, Inc. ("EAI" or the "Company"), without audit, pursuant to the
rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations, although the Company believes that the disclosures are
adequate to make the information presented not misleading. These condensed
financial statements should be read in conjunction with the financial
statements and the notes thereto included in the Company's latest annual
report on Form 10-K, as amended on Form 10-K/A, for the year ended December
31, 1994. These condensed financial statements reflect, in the opinion of
management, all adjustments (consisting only of normal recurring
adjustments) necessary to present fairly the results for the interim
periods. Results of operations for the interim periods are not necessarily
indicative of results of operations expected for the full year.
The Company operates on a 52 week year, with each fiscal week and quarter
ending on Saturday, except for the fourth quarter which ends on December
31.
Certain amounts and captions in the 1994 financial statements have been
reclassified in a manner consistent with the presentation of the 1995
financial statements.
Loss per share amounts have been computed based on the weighted average
number of common shares outstanding. Shares issuable upon the exercise of
stock options and warrants have not been included in per share
computations, because their impact would have been antidilutive in each
period except the period ended September 30, 1994 which experienced a
profit. In that period the dilutive effect of stock options and warrants
was reflected in the computation.
(2) Operations and Liquidity
At the end of fiscal year 1994, the Company was in the process of redeeming
the outstanding Class C Warrants which were not exercised upon the
Company's call for redemption of such warrants. Total proceeds received by
the Company from the exercise of the Class C Warrants was approximately
$6.6 million, of which $4,864,000 was received in December 1994 and net
proceeds of $1,734,000 representing the exercise of Class C Warrants to
purchase 383,861 shares was received in January 1995.
On April 14, 1995, the Company completed the sale of 525,000 shares of
common stock at $5.85 per share for net proceeds of approximately
$2,906,000 in an offering exempt from the registration provisions under the
Securities Act of 1933, as amended. The number of shares issued in this
sale increased by 15,712 shares on May 22, 1995 without additional proceeds
to the Company pursuant to an adjustment provision set forth in the
purchase agreements for such shares because 80% of the average market price
of the Company's
(6)
EA INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Cont'd)
(UNAUDITED)
common stock for the five day period ending forty days after the closing
was less than $5.85 per share.
On July 21, 1995, the Company completed the sale of an additional 416,667
shares of common stock at $4.80 per share for net proceeds of approximately
$1,900,000 in an offering exempt from the registration provisions under the
Securities Act of 1933, as amended. The adjustment provision set forth in
the purchase agreements for such shares has expired with no further
increase in the number of shares sold.
On August 3, 1995, the Company completed the sale of an additional
1,458,333 shares of common stock at $4.80 per share for net proceeds of
approximately $6,853,000 in an offering exempt from the registration
provisions under the Securities Act of 1933, as amended. The number of
shares issued in this sale shall be increased by 59,281 shares pursuant to
an adjustment provision set forth in the purchase agreement for such
shares, subject to such shares being listed on the New York Stock Exchange.
In addition, the Company has agreed to issue 140,719 additional shares of
Common Stock to A.M.P. Argonauts Ltd., in exchange for additional services
rendered in connection with the formation of the Joint Venture with Israel
Aircraft Industries Ltd. on August 8, 1995 (see note 3), subject to
approval by the Company's Board of Directors and the listing of such shares
on the New York Stock Exchange.
On September 30, 1995, the Company completed the issuance of $3,150,000
principal amount of convertible subordinated debentures which mature on
November 19, 1996 and bear interest at 9% per annum, in an offering exempt
from the registration provisions under the Securities Act of 1933, as
amended. The debentures are convertible into 700,000 shares of common stock
at a conversion price of $4.50 per share, subject to such shares being
listed on the New York Stock Exchange.
The Company has incurred significant losses and had negative cash flows
from operations in each of the last four years and the nine months ended
September 30, 1995. The Company has implemented measures to reduce
expenses, including the closing and sale of its Southwest operations in
Arizona and Mexico, respectively, and reduction of indirect manufacturing
and sales, general and administrative staff in its West Long Branch, New
Jersey and Fremont, California facilities, which the Company substantially
completed by the third quarter of 1995. The Company was successful in
raising approximately $11,800,000 of capital during 1994 and approximately
$19,400,000 since the beginning of 1995 through the exempt offerings of
common stock and convertible subordinated debentures discussed above, and
the exercise of warrants and options. Although the Company's projections
indicate that operating losses and negative cash flow from operations will
continue during 1995, except with respect to its obligation to invest
$2,000,000 in BarOn, management believes that its available cash, together
with funds available under its existing lines of credit, will enable the
Company to meet its obligations in the normal course of business through
December 31, 1995. The Company is currently seeking to raise additional
capital to finance the $2,000,000 investment in BarOn which is currently
due and to finance its general administrative expenses associated with
oversight of its manufacturing operations and its investments in BarOn and
the Joint Venture with IAI which are anticipated to be incurred in 1996.
However, no assurance can be given that such financing will be obtained.
(7)
EA INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Cont'd)
(UNAUDITED)
The Company's business plan includes making certain additional investments
with respect to BarOn Technologies Ltd. ("BarOn") as a result of the
acquisition made in January 1995 and the Joint Venture formed with Israel
Aircraft Industries, Ltd. on August 8, 1995 (see note 3), which may
require, among other things, additional cash resources in excess of those
presently available. The Class A and Class B warrants issued in the
February 1994 Private Placement (hereinafter defined), if exercised, could
provide the Company with additional capital of approximately $3,100,000. To
date, Class A and Class B Warrants to purchase 1,261,768 shares have been
exercised and the Company has received $1,302,000 in proceeds. No assurance
can be given that the remainder of such warrants will be exercised. In
addition, the Company is presently in negotiations with its existing
lenders as well as new lending institutions to increase the amount
available under its revolving credit facilities. There can be no assurance
that such additional borrowings or financing will be available.
At September 30, 1995, the Joint Venture formed with Israel Aircraft
Industries, Ltd. had remaining cash of $7,386,000. Such cash will be used
to fund expenses of the Joint Venture and accordingly has been classified
as Restricted Cash by the Company.
(3) Acquisitions
On January 4, 1995, pursuant to an Agreement and Plan of Reorganization
dated December 12, 1994 (the "Tanon Acquisition Agreement"), the Company
acquired Tanon Manufacturing, Inc. ("Tanon") (the "Tanon Acquisition"). The
Company reflected the transaction as a purchase for accounting purposes
and, accordingly, the results of operations of Tanon have been included in
the consolidated financial statements of the Company since January 4, 1995.
Tanon was merged with a newly-formed wholly-owned subsidiary of the Company
and the Company issued 1,538,462 shares of its common stock with an
appraised value of $13,077,000 for the remaining outstanding shares of
common stock of Tanon. In addition, the Company granted to certain option
holders of Tanon in exchange for their options to purchase Tanon capital
stock, options to purchase approximately 201,000 shares of the Company's
common stock at a weighted average exercise price of $1.05 per share with
an appraised value of $1,383,000. As further contemplated by the Tanon
Acquisition Agreement (a) the Company invested $2,000,000 in Tanon and (b)
the Company has agreed to use its best efforts to invest in, or loan to,
Tanon, up to an additional $5,000,000, subject to receipt by the Company of
an acceptable operating plan. Through September 30, 1995 the Company has
invested an additional $1,642,000 in Tanon. In connection with the merger,
the Company loaned Mr. Spalliero, the President of the Company and Chief
Operating Officer of Tanon (formerly the Chairman and President of Tanon
prior to the Tanon Acquisition), $1,000,000 for a 30-month term, with
interest accruing at the applicable Federal rate, and due, together with
principal, at the end of the 30-month term. Such loan is non-recourse and
is secured solely with 192,300 shares of common stock of the Company
acquired by Mr. Spalliero upon consummation of the Tanon Acquisition
Agreement.
In addition, upon closing, Mr. Spalliero and certain other executives of
Tanon received certain compensation, incentives and benefits. Specifically,
the Company granted to Mr. Spalliero
(8)
EA INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Cont'd)
(UNAUDITED)
at closing, incentive and non-incentive stock options to acquire an
aggregate of 350,000 shares of common stock of the Company at an exercise
price equal to fair market value with respect to 305,000 shares and 110% of
fair market value with respect to 45,000 shares, which options will vest
proportionately over three years. Mr. Spalliero also received a cash bonus
of $300,000 at closing and will be eligible to earn a cash bonus of up to
$750,000, such bonus to be paid (to the extent earned based upon Tanon
meeting certain goals) in equal installments during 1996, 1997 and 1998.
Also, upon closing, the company indemnified Mr. Spalliero for certain
outstanding indebtedness of Tanon in the aggregate amount of $9,450,000,
which had been personally guaranteed by Mr. Spalliero.
(9)
EA INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Cont'd)
(UNAUDITED)
A summary of the Purchase Price and the resultant Intangibles follows.
Cash investment in Tanon $ 2,400,000
Appraised value of 1,538,462 shares of common stock of the
Company exchanged for 100% of the outstanding shares of
Tanon common stock 13,077,000
Appraised value of options to acquire 201,000 shares of the Company's
common stock exchanged for options to acquire
shares of Tanon common stock 1,383,000
Estimated fees, expenses and other accruals 1,071,000
------------------
TOTAL $ 17,931,000
==================
Allocated as follows:
Historical Stockholders' Equity of Tanon $ 3,687,000
Adjustments to acquired assets and liabilities to reflect estimated
fair values:
Equipment 66,000
Deferred Income Taxes (417,000)
Intangible Assets:
Customer relationship $ 1,740,000
Excess purchase price
over net assets
acquired 12,855,000
----------------
Total Intangible Assets 14,595,000
------------------
TOTAL $17,931,000
==================
During the quarter and nine months ended September 30, 1995, the
Company charged operations $232,000 and $696,000 respectively
representing the amortization of intangible assets arising from
the Tanon Acquisition. The intangible assets are comprised of
$1,740,000 representing the value of customer relationships and
excess of purchase price over net assets acquired of
$12,855,000, which are being amortized over six years and
(10)
EA INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Cont'd)
(UNAUDITED)
twenty years, respectively. It is the Company's policy to evaluate the
value of goodwill by estimating the business unit's undiscounted net income
over the remaining life of the goodwill. The Company feels that the
goodwill incurred in connection with the Tanon acquisition is fairly
stated.
On January 16, 1995, the Company acquired (i) 25.01% of the ordinary shares
of BarOn for consideration with an estimated value of $6,700,000 comprised
of a $4,000,000 capital contribution to BarOn ($2,500,000 cash and the
cancellation of BarOn's obligation to repay the Company $500,000 pursuant
to a previous business loan arrangement between the Company and BarOn at
closing, and 127,592 shares of common stock of the Company with an
estimated value of $1,000,000), and $2,700,000 paid to various shareholders
of BarOn and (ii) an option to acquire an additional 8.33% of the ordinary
shares of BarOn for $2,000,000 in cash and 255,183 shares of common stock
of the Company (the "BarOn Investment"). On September 30, 1995 the Company
exercised this option and, as a result, recorded a current amount payable
of $2,000,000 and issued 255,183 shares of common stock which on September
30, 1995 had an estimated value of approximately $995,000. In addition, the
Company has certain rights of first refusal to purchase additional equity
in BarOn, but not to exceed 49% of BarOn's issued and outstanding ordinary
stock. The Company has accounted for this transaction as a purchase of a
minority interest using the equity method of accounting and, accordingly,
the Company's investment in BarOn and 25.01% equity interest in the results
of BarOn's third quarter and first nine months of 1995 resulted in charges
of approximately $211,000 and $558,000 respectively for the Company, which
has been included in other expenses in the consolidated results of the
Company for the quarter and nine months ended September 30, 1995.
The following is BarOn's Comparative Condensed Statement of Operations for
the Quarter and Nine Months Ended September 30, 1995 and 1994:
Quarter Ended Nine Months Ended
September 30, September 30,
1995 1994 1995 1994
---- ---- ---- ----
Research and Development
Costs $635,000 $247,000 $1,582,000 $472,000
General and Administrative
Expenses 219,000 84,000 652,000 224,000
Interest (Inc)/Exp (10,000) (2,000) (1,000) (21,000)
--------------------------------- ------------------------------------
Net Loss $(844,000) $(329,000) $(2,233,000) $(675,000)
================================= ====================================
(11)
EA INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Cont'd)
(UNAUDITED)
On August 8, 1995, the Company made an investment of $7,500,000 through a 52.3%
owned subsidiary "Partner" in a newly formed Israeli Corporation ("Joint
Venture") which is 50.1% owned by Partner and 49.9% owned by Israel Aircraft
Industries, Ltd. ("IAI"). The Company's investment in the Joint Venture has been
accounted for as a purchase. The estimated purchase price, the minority interest
in the Joint Venture and the purchased research and development have been
determined as follows:
Purchase:
Cash investment in Joint Venture $ 7,500,000 (1)
Estimated value of options and warrants to acquire
shares of common stock of the Company and common stock
of the Company issued in connection with
this transaction 7,400,000 (2)
Estimated fees, expenses and other accruals 515,000 (3)
--------------
Total estimated purchase price 15,415,000
Minority interest in equity of Joint Venture (3,743,000)
Purchased research and development $11,672,000
===========
The assets of the Joint Venture include the right to review and evaluate certain
technological applications developed by IAI which are in various stages of
development. If a technology is selected for development and exploitation, IAI
will grant a perpetual, royalty free license to exploit the technology. IAI has
advised the Company that the technological applications are in various stages of
development, including certain applications which are fully developed and for
which some products have been sold. To date, the Joint Venture has not completed
its review of the applications and, accordingly, there is no assurance that any
of the applications will be selected for development and exploitation, or if
selected, will be capable of being developed, or if developed, will be
commercially accepted and if commercially accepted, will be profitable. Certain
technologies may be in the initial stages of development and considered to be
in-process research and development with no alternative future use. The Company
will obtain an appraisal of the technological applications which the Joint
Venture has a right to exploit and selects for development and exploitation.
Upon completion of the appraisal, a determination will be made as to the portion
of the purchase price which will be capitalized as an identified intangible
asset and the portion which will be charged to expense as in-process research
and development with no alternative future use. The allocation of the purchase
price detailed above assumes that no portion of the purchase price will be
capitalized, thus resulting in a charge to expense of $11,672,000.
(12)
EA INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Cont'd)
(UNAUDITED)
(1) Represents the portion of cash loaned to Partner by the Company and
certain minority shareholders which was invested in the Joint Venture.
(2) Represents the estimated value of the options and warrants to acquire
775,000 and 1,100,000 shares of common stock of the Company,
respectively, at exercise prices of approximately $8.125 and $7.25 per
share, respectively, and the estimated value of 140,719 shares of
common stock of the Company, all granted in connection with the
transaction. The total purchase price may change dependent upon the
appraised value of these securities.
(3) Represents an estimate of expenses related to the Joint Venture
formation and investment including legal fees, accounting fees, due
diligence costs and other accruals.
The excess of the purchase price over the estimated fair value of EAI's original
25.01% equity interest in the net assets of BarOn in the amount of $6,012,000
has been determined to be in-process research and development with no
alternative future use and, accordingly, was charged to expense in the first
quarter of fiscal 1995. As discussed above, on September 30, 1995 the Company
made an additional investment in BarOn of $2,995,000 bringing its equity
interest in BarOn to 33.33%. This resulted in an additional charge to expense in
the third quarter of 1995 of $1,862,000 based on the excess of purchase price
over the estimated fair value of EAI's 33.33% equity interest in the net assets
of BarOn. These charges have not been reflected in the unaudited pro forma
summary detailed below. The pro forma summary also does not reflect the
Company's investment in the IAI Joint Venture or the related $11,672,000 charged
to purchased research and development expense. The purchase price allocation for
both acquisitions is based on preliminary estimates of the fair value of the net
assets acquired and is subject to adjustment as additional information becomes
available during fiscal 1995. The pro forma loss per common share for the
quarter ended and nine months ended September 30, 1994 reflects the issuance of
1,239,130 shares of common stock of the Company to finance the BarOn Investment
as if such shares had been issued on January 1, 1994. These shares are based on
a portion of the Class C Warrants exercised in December, 1994 at $4.60 per
warrant (note 2) to arrive at proceeds of $5,700,000 necessary to finance the
BarOn Investment.
(13)
EA INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Cont'd)
(UNAUDITED)
The following unaudited pro forma summary presents the consolidated results of
operations as if the Tanon Acquisition and BarOn Investment occurred on January
1, 1994 and does not purport to be indicative of what would have occurred had
the acquisitions actually been made as of such date or of results which may
occur in the future. The IAI Joint Venture was formed in August of 1995, and,
accordingly, there is no pro forma impact on the 1994 results.
(thousands of dollars, except per share data)
Quarter Ended Nine Months Ended
------------- -----------------
September 30, September 30,
------------- -----------------
1994 1994
---- ----
Sales $22,114 $
$58,265
Net Loss (475) (1,578)
Loss Per Common Share $ (0.07) $ (.28)
(4) Restructuring
In anticipation of the Tanon Acquisition, the Company determined in the
fourth quarter of 1994 that it would be necessary to restructure its
operations in order to reduce the operating expense from redundant
activities and achieve greater operating efficiency from the combined
operations subsequent to the Tanon Acquisition. As a result, a provision
for restructuring in the amount of $2,400,000 was established in the fourth
quarter of 1994. In connection therewith, the Company determined to close
its Southwest operations in Tucson, Arizona and Nogales, Sonora, Mexico in
order to reduce the operating expenses in place to support its existing
sales base. Additionally, the Company reduced indirect manufacturing and
sales, general and administrative staff in its New Jersey facility during
the first nine months of 1995. The combined termination costs for these
activities through September 30, 1995 was approximately $410,000. The
Company believes that these actions will eliminate duplicate expenses and
improve operating efficiencies for materials procurement and management.
However, no assurance can be given that such effects will be experienced by
the Company as a result thereof.
(5) Lines of Credit
The Company maintains an asset based credit facility which is described in
detail in note 5, "Notes Payable and Line of Credit" of Notes To
Consolidated Financial Statements at Item 8 of the Company's latest Annual
Report on Form 10-K, as amended on Form 10-K/A, for the year ended December
31, 1994. At September 30, 1995, the Company had $3,514,000 outstanding
under this credit facility and had approximately $229,000 of additional
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EA INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Cont'd)
(UNAUDITED)
borrowing capacity. There are two covenants with which the Company must
comply under this facility. Working capital, as defined, must exceed
$750,000 and tangible net worth must exceed negative $500,000. The Company
was in compliance with both covenants as of September 30, 1995.
Tanon maintains a separate revolving line of credit with a commercial bank
that provides for short-term borrowings up to $5.5 million based on
eligible accounts receivable and inventory. At September 30, 1995,
$5,500,000 was committed under this line ($5,195,000 in loans and $305,000
in a letter of credit). This line bears interest at prime plus 1.5% and is
due on demand. The credit agreement pertaining to this line of credit
restricts Tanon from entering into certain transactions and contains
covenants regarding the maintenance of working capital, minimum net worth
and debt-to-equity ratios, together with minimum profitability
requirements. At September 30, 1995 Tanon was in compliance with all of
these covenants.
(6) Long Term Debt
Partner's investment in the IAI Joint Venture was financed by the issuance
of subordinated notes in the principal amounts of $6,300,000 to the Company
and $1,575,000 to certain other of Partner's shareholders, respectively.
The subordinated notes bear interest at 6% per annum and are to be repaid
from the net profits of Partner. The subordinated note in the principal
amount of $1,575,000 issued to Partner's other shareholders is included in
long-term debt.
On September 30, 1995, the Company completed the sale of convertible
subordinated debentures in the principal amount of $3,150,000. The
debentures mature on November 19, 1996 and bear interest at 9% per annum.
(15)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations
On January 4, 1995, the Company acquired Tanon Manufacturing, Inc.
("Tanon"), a privately-owned contract electronic manufacturing firm with
operations located in Fremont, California. The acquisition has been reported as
a purchase for accounting purposes and, accordingly, the results of operations
of Tanon are included with those of the Company from January 4, 1995 forward.
Tanon's manufacturing services consist primarily of the assembly of printed
circuit boards, the manufacturing and assembly of integrated electro-mechanical
systems and related engineering support. For a more thorough discussion of this
transaction, see "Liquidity and Capital Resources" below.
In connection with the Tanon Acquisition the Company recorded approximately
$14,600,000 of goodwill and other intangibles. It is the Company's policy to
periodically review the recoverability of such goodwill. In such review the
Company evaluates Tanon's ability to achieve predetermined operating profit
levels, industry growth trends, whether or not the subsidiary has lost any
significant customers and any other factors which might result in a diminution
in the value of the investment. Additionally, the Company evaluates the value of
the goodwill by estimating the undiscounted net income of the subsidiary over
the remaining life of the goodwill.
On January 16, 1995, the Company acquired a 25.01% equity interest in BarOn
Technologies Ltd. ( "BarOn" ), a privately-owned Israeli corporation based in
Haifa, Israel. BarOn is a development stage company engaged in the research and
development of a computer input device that can directly digitize handwriting in
a variety of languages, from any surface. The investment in BarOn has been
accounted for as a purchase of a minority interest using the equity method of
accounting, and, accordingly, the Company's investment in BarOn and 25.01%
equity interest in the results of BarOn are included in the consolidated results
of the Company from January 16, 1995 forward. On September 30, 1995 the Company
exercised its option to acquire an additional 8.33% of the ordinary shares of
BarOn and, as a result, recorded a current amount payable of $2,000,000 and
issued 255,183 shares of common stock, which on September 30, 1995 had a value
of approximately $995,000. For a more thorough discussion of this transaction,
see "Liquidity and Capital Resources" below.
The amount of the purchase price in excess of the estimated fair value of
the 25.01% equity interest in BarOn acquired by the Company during the first
quarter of 1995 and the additional 8.33% equity interest acquired on September
30, 1995 represent in-process research and development with no alternative
future use. Accordingly, the estimated value associated with such purchased
research and development of $6,012,000 and $1,862,000, respectively was recorded
as research and development expense.
On August 8, 1995, the Company, through a 52.3% owned subsidiary
("Partner"), entered into a joint venture agreement with Israel Aircraft
Industries, Ltd. ("IAI") to review, develop and exploit non-classified
technological applications developed by IAI. The Company and certain other
shareholders of Partner advanced $6,300,000 and $1,575,000, respectively, to
Partner. Of such funds $7.5 million has been advanced to the joint venture with
IAI ("Joint Venture"). Additionally, warrants to purchase shares of the
Company's common stock were granted to IAI and A.M.P. Argonauts Ltd. For a more
thorough discussion of this transaction, see "Liquidity and Capital Resources"
below.
The Company's investment in the Joint Venture is accounted for using the
purchase method of accounting. No portion of the purchase price has been
capitalized to date, since the Joint Venture has
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not completed its review of the technological applications of IAI and,
accordingly, there is no assurance that any of the applications will be selected
for development and exploitation, or if selected, will be capable of being
developed, or if developed, will be commercially accepted and if commercially
accepted will be profitable. Further, certain technologies may be in the initial
stage of development and considered to be in process research and development
with no alternative future use. Secondly, the Company has recorded a charge to
research and development of $11,672,000 with respect to formation of the IAI
Joint Venture. The Company has initiated the process of obtaining an appraisal
of the initial technological applications which the Joint Venture has selected
for development and exploitation. The Joint Venture's review and evaluation of
other technological applications of IAI is ongoing and may result in the
selection of other applications for development and exploitation, for which the
Company would also obtain appraisals. Upon completion of each such appraisal, a
portion of the purchase price may be capitalized.
During the first nine months of 1995, the Company's sales increased, cost
of sales increased, both in total value and as a percentage of sales, and
selling, general and administrative expenses increased in total but decreased as
a percentage of sales. The Company had a loss from operations of $26,871,000 for
the first nine months of 1995, which included non-recurring charges of
$7,874,000 and $11,672,000, representing the write-off of in-process research
and development resulting from its investments in BarOn and the Joint Venture
with IAI, respectively. This compared with a loss from operations of $428,000 in
the first nine months of 1994. During the third quarter of 1995, the Company's
sales increased, cost of sales increased, both in total and as a
percentage of sales, and selling, general and administrative expenses increased
in total but decreased as a percentage of sales compared with the third
quarter of 1994.
The increase in sales to $56,128,000 in the first nine months of 1995 from
$22,491,000 during the same period in 1994, resulted primarily from the
additional sales generated by Tanon, which had sales of $36,256,000 in that
period. Sales from the Company's prior existing operations during the nine month
period decreased to $19,872,000 from $22,491,000 in the same nine month period
of 1994 which decrease was a direct result of the closing of the Company's
Tucson, AZ and Nogales, Mexico plants. The majority of the services provided to
customers at the Tucson facility was transferred to the Company's manufacturing
facility in New Jersey; a moderate level of manufacturing services was
transferred to the Company's Fremont facility at the customer's request, and the
assembly-related services provided at the Nogales, Mexico facility were sold,
together with the assets of that facility. The sales of $36,256,000 for Tanon in
the first nine months of 1995 increased moderately from sales of $35,774,000
during the same period in 1994, which reflects the loss of revenue from two
customers who terminated their relationship with Tanon during this period,
offset by the growth and sales to Tanon's existing customer base. Sales of
$18,895,000 in the third quarter of 1995 increased moderately from sales of
$18,178,000 in the second quarter of 1995.
Cost of sales in the first nine months of 1995 increased to $55,715,000
from $19,715,000 during the same period in 1994. Cost of sales increased, as a
percentage of revenue, to 99.3% in the first nine months of 1995 compared with
87.7% in the same period of 1994, resulting primarily from the increase in
materials cost for a customer with whom the Company has expanded its material
handling services, combined with a one-time price reduction in sales of material
by Tanon to one of its existing customers, which was negotiated in response to
competitive pricing pressures. Cost of sales, as a percentage of revenue, was
substantially the same in the third quarter of 1995 as it was in the first and
second quarters of 1995.
Sales, general and administrative expenses increased to $6,262,000 in the
first nine months of 1995, from $3,204,000 in the same period of 1994. The
increase in the level of sales, general and administrative expenses was related
to the addition of the Tanon operations, the amortization of approximately
$696,000 of intangible assets resulting from the Tanon acquisition, the payment
of
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consulting fees for several directors and the elimination of salary reductions
for employees of the Company which had been in effect during the first nine
months of 1994. Selling, general and administrative expenses declined as a
percentage of revenue to 11.2% in the first nine months of 1995 from 14.3% in
the same period in 1994 primarily because the increase in sales exceeded the
rate of the increase in selling, general and administrative expenses. Selling,
general and administrative expenses increased slightly to $2,076,000 in the
third quarter of 1995 from $2,037,000 in the second quarter of 1995, due to
normal inflation, and decreased to 11.0% from 11.2% of total revenue primarily
as the result of the Company's actions to reduce the level of operating expenses
discussed below.
In anticipation of the Tanon Acquisition, the Company determined in the
fourth quarter of 1994 that it would be necessary to restructure its operations
in order to reduce the operating expenses associated with redundant activities
and to achieve greater operating efficiency from combined operations subsequent
to the Tanon Acquisition. As a result, a provision for restructuring in the
amount of $2,400,000 was established in the fourth quarter of 1994. Pursuant to
such determination, during the first quarter of 1995 the Company began taking
steps to close and sell its Southwest operations in Tucson, Arizona and Nogales,
Mexico in order to eliminate the operating expenses associated with these
facilities. The closing of the Tucson, Arizona operations and sale of the
Nogales, Mexico operations were completed in the second quarter of 1995. The
majority of the operations which were supporting the Company's sales base out of
the Tucson location were transferred to the New Jersey facility in the second
quarter of 1995. Additionally, the Company reduced indirect manufacturing and
sales, general and administrative staff in its New Jersey facility during the
first quarter in 1995 and in the Fremont, California facility in the second
quarter of 1995. The combined termination expenses for these activities in the
first and second quarters were approximately $250,000 and $160,000 respectively.
Management believes that by these actions it has eliminated duplicate expenses
and improved operating efficiencies for materials procurement and management.
However, no assurance can be given that such effects will be experienced by the
Company as a result thereof.
The Company's consolidated backlog at September 30, 1995 was $44,719,000.
Liquidity and Capital Resources
Liquidity, as discussed below, is measured in reference to the consolidated
financial position of the Company at September 30, 1995, as compared with the
financial position of the Company at December 31, 1994, adjusted to reflect the
balance sheet of Tanon at December 31, 1994. Net cash used by operations of
$6,060,000 in the first nine months of 1995 increased by $1,331,000 from cash
used in operations of $4,729,000 in the same period of 1994, resulting primarily
from a greater net loss somewhat offset by non operating expenditures (primarily
Purchased Research and Development). Liquidity, as measured by cash and cash
equivalents, decreased to $1,474,000 at September 30, 1995 from $6,157,000 at
December 31, 1994. Liquidity as measured by working capital (excluding
Restricted Cash of $7,386,000) decreased to $675,000 at September 30, 1995
compared with $4,366,000 at December 31, 1994. The decrease in working capital
resulted primarily from the amounts paid by the Company in connection with the
consummation of the Tanon Acquisition and the BarOn Investment consummated in
January 1995, and the Joint Venture with IAI consummated in August 1995,
compounded by negative operating cash flows, and partially offset by financings.
The Company's ability to generate internal cash flows result primarily from the
sale of material and labor elements of its contract electronic manufacturing
services. In the first nine months of 1995, revenue from such services increased
by $33,637,000 from $22,491,000 in the same period of 1994, primarily resulting
from the acquisition of Tanon. Consolidated accounts receivable declined by
$1,849,000 in the first nine months of 1995 reflecting the collection of
receivables at a rate greater than sales were generated during the period. A
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marginally profitable enterprise which had over $2,100,000 payable to the
Company at year end is currently paying its account in accordance with
established terms and the balance has been reduced to $911,000 at November 10,
1995. Consolidated inventory increased by $622,000 during the first nine months.
Management of the Company constantly evaluates inventory levels on hand with
respect to orders placed by customers and, if necessary, inventory amounts which
may become excess could be reduced by the sale or return of inventories to
suppliers, uses of inventories on alternative customers' assemblies or the
cancellation of purchase commitments with or without the payment of cancellation
penalties.
At September 30, 1995, the Company had consolidated accounts payable of
approximately $12,269,000 of which approximately $2,039,000 had been outstanding
for over 90 days. This compares with $10,928,000 of consolidated accounts
payable at December 31, 1994, of which $426,000 had been outstanding for over 90
days. The balance over 90 days includes approximately $1,690,000 payable to
equipment manufacturers for machinery delivered to the West Long Branch
manufacturing facility during the second quarter of 1995 and for which the
Company negotiated a capital lease on November 10, 1995.
Net cash flows from financing activities during the nine months ended
September 30, 1995 amounted to a source of $14,983,000, which resulted primarily
from the issuance of an aggregate of 2,474,993 shares of common stock in
separate offerings conducted in April, July, and August 1995, as discussed
below, the exercise of Class C Warrants to purchase 383,861 shares of common
stock, the exercise of Class A and B Warrants to purchase 1,261,768 shares of
common stock, the exercise of employee stock options to purchase 686,205 shares
of common stock, and the sale of $3,150,000 principal amount of convertible
subordinated debentures in September 1995, after the repayment of balances under
the Company's and Tanon's lines of credit and the loan to Joseph Spalliero,
President of the Company, in connection with the Tanon Acquisition also
discussed below.
Net cash in the amount of $13,606,000 was used for investing activities
during the nine months ended September 30, 1995. Funds in the amount of
$3,390,000 were used in making capital expenditures and $11,500,000 was used in
making investments in affiliates pursuant to the terms of the Tanon Acquisition,
BarOn Investment and the Joint Venture with IAI discussed below. These uses were
partially offset by cash acquired in the acquisition of Tanon of $890,000 and
the proceeds from the sale of discontinued operations of $394,000. The cash
required to consummate the Tanon Acquisition and BarOn Investment was financed,
in large part, from the cash flows from financing activities during 1994 which
amounted to $13,192,000, resulting primarily from the issuance of 1,200,000
units (each unit consisting of one share of Common Stock, a Class A Warrant and
a Class B Warrant (the "February Units") in the private placement completed in
February 1994 (the "February 1994 Private Placement"), the issuance of 2,500,000
units (each unit consisting of one share of Common Stock and one Class C
Warrant) (the "June Units") in the private placement commenced in June 1994 (the
"June 1994 Private Placement") and exercise of related Class C Warrants issued
in the June 1994 Private Placement, net of reductions in outstanding debt. The
proceeds from these activities which were not used to consummate the Tanon
Acquisition and BarOn Investment were used to maintain cash balances for working
capital. As previously disclosed, a Registration Statement was filed with the
Securities & Exchange Commission covering an aggregate of 9,800,523 issued and
outstanding shares of common stock for resale by selling shareholders, which
included, among other shares, the shares sold in the February 1994 Private
Placement and June 1994 Private Placement. Such Registration Statement was
declared effective on August 14, 1995. The Registration Statement will permit
existing shareholders to resell shares of common stock of the Company which they
had purchased directly from the Company. The Company will not receive any
proceeds directly from the offering.
The Company maintains an asset based credit facility with its lender,
Congress Financial Corporation, which is described in detail in Note 5, "Notes
Payable and Line of Credit" of Notes to
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Consolidated Financial Statements at Item 8 of the Company's latest Annual
Report on Form 10-K, as amended on Form 10-K/A, for its fiscal year ended
December 31, 1994 ("Form 10-K"). At September 30, 1995, the Company had
$3,514,000 principal amount of borrowings outstanding under this credit facility
and had approximately $229,000 of additional borrowing availability. There are
two financial covenants with which the Company must comply under this facility.
Working capital, as defined, must exceed $750,000 and tangible net worth must
exceed a negative $500,000. The Company was in compliance with both covenants as
of September 30, 1995.
Tanon maintains a separate revolving line of credit with a commercial bank
that provides for short-term borrowings up to $5.5 million based on eligible
accounts receivable and inventory. At September 30, 1995, $5,500,000 was
committed under this line ($5,195,000 in loans and $305,000 in a letter of
credit). This line bears interest at prime plus 1.5% and is due on demand. The
credit agreement pertaining to this line of credit restricts Tanon from entering
into certain transactions and contains covenants regarding the maintenance of
working capital, minimum net worth and debt-to-equity ratios, together with
minimum profitability requirements. At September 30, 1995 Tanon was in
compliance with all of these covenants.
The Company has incurred significant losses and had negative cash flows
from operations in each of the last four years and in the nine months ended
September 30, 1995. As reflected in the accompanying financial statements, the
continued negative cash flow from operating loss experienced by the Company
through September 30, 1995, gave rise to the need for additional working
capital. In order to provide additional capital, on April 14, 1995, the Company
completed the sale of 525,000 shares of common stock at $5.85 per share for net
proceeds of approximately $2,906,000 and, separately, on July 21, 1995, the
Company completed the sale of 416,667 shares of Common Stock at $4.80 per share
for net proceeds of approximately $1,900,000, and on September 30, 1995, the
Company completed the sale of $3,150,000 aggregate principal amount of
convertible subordinated debentures, in each case in an offering exempt from the
registration provisions under the Securities Act. The proceeds from these
offerings are being used for working capital purposes. In addition, in
contemplation of the Tanon Acquisition, the Company has implemented measures to
reduce costs, including the closing and sale of its Southwest operations in
Arizona and Mexico, which the Company completed in the second quarter of 1995,
and reduction of indirect maufacturing and sales, general and administrative
staff in its West Long Branch, New Jersey and Femont, California facilities
which the Company substantially completed by the third quarterof 1995. Although
the Company's projections indicate that operating losses and negative cash flows
from operations will continue during 1995, except with respect to its obligation
to invest $2,000,000 in BarOn as discussed below, management believes that its
available cash, together with funds available under its existing lines of
credit, will enable the Company to meet its obligations in the normal course of
business through December 31, 1995. The Company is currently seeking to raise
additional capital to finance the $2,000,000 investment in BarOn which is
currently due and finance its general adminstrative expenses associated with
oversight of its manufacturing operations and its investments in BarOn and the
Joint Venture with IAI which are anticipated to be incurred in 1996. However, no
assurance can be given that such financing will be obtained.
Further, the Company's business plan includes making certain additional
investments with respect to Tanon, BarOn, and IAI as a result of the
acquisitions made in 1995, including the Company's obligation to invest $2.0
million in cash in BarOn to acquire the additional 8.33% equity interest in
BarOn which the Company elected to acquire upon exercise of its option (which
will give the Company an aggregate 33-1/3% equity interest in BarOn) as
contemplated by the Investment Agreement with BarOn. Such additional investments
require, among other things, additional cash resources in excess of those
presently available. The Class A and Class B warrants issued in the February
1994 Private Placement, if exercised, could provide the company with additional
capital of approximately $4.4 million. During the third quarter, approximately
$1.3 million was raised through exercise of these warrants, but no assurance can
be given that any more of such warrants will be exercised. In addition, the
Company is presently in negotiations with its existing lenders as well as new
lending institutions to increase the amount available
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under its revolving credit facilities, and is attempting to raise additional
capital. There can be no assurance that such additional borrowings or financing
will be available.
On January 4, 1995, the Company acquired Tanon by merger pursuant to the
Tanon Acquisition Agreement. At closing, the Company issued 1,538,462 shares of
its common stock and granted options to purchase its common stock with a
combined appraised value of $14,460,000 in exchange for all the outstanding
common stock of Tanon and outstanding options to purchase common stock of Tanon.
In addition, (a) the Company invested $2,000,000 in Tanon, and (b) the Company
has agreed to use its best efforts to invest in (or, at the Company's option,
loan to) Tanon (in form and on terms acceptable to the Company and its lenders)
up to an additional $5,000,000, subject to receipt by the Company of an
acceptable operating plan, of which, through September 30, 1995 the Company had
provided approximately $1,642,000 in additional capital. In connection with the
merger, Joseph R. Spalliero, President of the Company and Chief Operating
Officer of Tanon (formerly the Chairman and President of Tanon prior to the
Tanon Acquisition), entered into an Employment Agreement with Tanon and received
a cash bonus of $300,000 at closing, and will be eligible to earn a cash bonus
of up to $750,000, payable to the extent earned, in equal installments, during
1996, 1997 and 1998. Also, in connection with the Tanon Acquisition, the Company
loaned to Mr. Spalliero $1,000,000 for a 30-month term, with interest accruing
at the applicable Federal rate, and due, together with principal, at the end of
the 30-month term. Such loan is non-recourse and is secured solely with 192,300
shares of common stock of the Company acquired by Mr. Spalliero upon
consummation of the Tanon Acquisition Agreement. In addition, upon closing, the
Company indemnified Mr. Spalliero for certain outstanding indebtedness of Tanon
in the aggregate amount of $9,450,000 which had been personally guaranteed by
Mr. Spalliero.
On January 16, 1995, the Company acquired 25.01% of the ordinary shares of
BarOn for a consideration of cash and shares of common stock in the Company and
a right to acquire an additional 8.33% of the ordinary shares of BarOn. The
Company acquired 8.33% of the 25.01% equity interest in BarOn from certain
shareholders of BarOn in exchange for $2,700,000 which was paid in cash at
closing on January 16, 1995. The balance of 16.68% was acquired from BarOn in
exchange for $3,000,000 in cash and 127,592 shares of common stock of the
Company with an estimated value of $1,000,000 payable as follows: (i) of such
$3,000,000 cash payment, $2,000,000 was paid at closing on January 16, 1995 in
the form of $1,500,000 in cash and the cancellation of BarOn's obligation to
repay the Company $500,000 pursuant to the terms of a business loan to BarOn,
and (ii) the $1,000,000 balance due BarOn and the issuance and delivery of the
127,592 shares of common stock of the Company were due and payable to BarOn on
the four month anniversary of the closing, May 16, 1995. Such payment was
postponed by mutual agreement and paid during the third quarter of 1995.
Pursuant to the terms of the Investment Agreement with BarOn, the Company
elected to exercise its option to increase its equity interest by 8.33%, giving
it an aggregate equity interest of 33-1/3% of the outstanding ordinary shares of
BarOn. Accordingly, the Company recorded a payable in the amount of $2,000,000
and issued 255,183 shares of common stock of the Company with an estimated value
of $995,000 on September 30, 1995. As of November 14, 1995, the $2,000,000
investment due BarOn had not been made.
The Company, through a 52.3% owned subsidiary, has entered into a Joint
Venture Agreement ("JVA") with Israel Aircraft Industries, Ltd., an Israel
government corporation ("IAI"), for the purpose of forming a Joint Venture with
IAI to review, develop, and exploit certain non-military, non-classified
technological applications ("Applications") developed by IAI. The transaction
was consummated on August 8, 1995. To implement the JVA, in early August, 1995,
the Company entered into a Preincorporation Agreement to form an Israeli
corporation ("Partner") which is the joint venture partner and owns 50.1% of the
Joint Venture. IAI owns 49.9% of the Joint Venture. Under the Preincorporation
Agreement, Partner is owned as follows: (a) the Company owns a 52.3% interest,
(b) certain Israeli persons own an aggregate of 25.2%, (c) Mark Hauser owns a
15% interest, (d) Irwin L. Gross, Chairman of the Company, owns a 5% interest,
and (e) Broad Capital Associates owns a 2.5% interest. The equity
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interests in Partner were issued for an aggregate consideration of $10,000 to
each of the shareholders. In addition, the Company and the Israeli citizens have
advanced $6.3 million and $1.575 million, respectively, to Partner. Of such
funds, $7.5 million has been advanced to the Joint Venture to be used solely for
working capital purposes. The remaining $375,000 was used by Partner to pay
expenses relating to consummation of the Joint Venture and for working capital.
In connection with the consummation of the Joint Venture with IAI, warrants for
500,000 shares of the Company's common stock and 600,000 shares of the Company's
common stock were granted to Israel Aircraft Industries Ltd. and A.M.P.
Argonauts Ltd., respectively, at an exercise price of $7.25 per share. In
addition, (i) Mark S. Hauser was granted options to purchase 100,000 shares of
the Company's Common Stock at an exercise price of $8.1875, of which 33,333
shares are currently exercisable, (ii) Broad Capital Associates was granted
options to purchase 425,000 shares of the Company's common stock at an exercise
price of $8.125 per share, of which 141,667 shares are currently exercisable,
and (iii) Dedi Graucher was granted options to purchase 250,000 shares of the
Company's common stock at an exercise price of $8.125 per share, of which 83,333
shares are currently exercisable.
The JVA provides that the Joint Venture will review and evaluate
Applications developed by IAI, which are in various stages of development. To
review and evaluate the Applications, an investment committee ("Investment
Committee") comprised of seven persons will be formed. Partner will be entitled
to select four of the seven members of the Investment Committee. If an
Application is selected for development and exploitation, an entity will be
formed ("Licensee") in which Partner will own a 50% interest and IAI will own a
50% interest, and IAI will grant such Licensee a perpetual, royalty free license
for such Application. The Investment Committee will prepare a business plan to
exploit each application selected, including a funding plan. The Company will be
primarily responsible to raise the funds necessary to exploit the Application
selected. However, the Company will not be under any obligation to raise any
funds for such purpose unless and until the Investment Committee selects an
Application for exploitation. In the event the Company is unable to raise the
funds necessary to exploit any Application which the Investment Committee
selects, IAI can terminate the JVA. The JVA can also be terminated under certain
other circumstances.
To fund its obligations under the Preincorporation Agreement to form
Partner, on August 3, 1995 the Company sold 1,458,333 shares of its Common Stock
at a price of $4.80 per share for an aggregate of $7.0 million to five Israeli
persons and entities, three of whom are shareholders in Partner. The offering
was made pursuant to an exemption under the Securities Act of 1933, as amended.
The purchase agreements pursuant to which the shares were sold contain an
adjustment provision, which will require the issuance of 59,281 additional
shares of Common Stock, subject to listing such shares on the New York Stock
Exchange. In addition, the Company has agreed to issue 140,719 additional shares
of Common Stock to A.M.P. Argonauts, Ltd., in exchange for additional services
rendered in connection with the formation of the Joint Venture, subject to
approval by the Company's Board of Directors and the listing of such shares on
the New York Stock Exchange. The proceeds from the offering were placed in
escrow and were released upon the execution of the JVA.
With the exception of the initial investment of $6.3 million in Partner,
the Company is unable to determine at this time the effect, if any, of this
transaction on the results of operation of the Company or on its liquidity and
capital resources.
Reference is made to "Legal Proceedings" in Item 3, Part I of the Company's
Form 10-K for fiscal year ended December 31, 1994, and in Item 1, Part II of the
Company's report on Form 10-Q for the quarterly period ended July 1, 1995 and in
Item 1, Part II of this Report, for information concerning certain pending
claims which could have an adverse impact on the Company's income and cash
flows. Reference is also made to Note 14 of the Notes to Consolidated Financial
Statements at Item 8, Part II of the Form 10-K for information concerning
services provided by contract electronic manufacturing to certain
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customers which are development stage or marginally profitable enterprises or
have highly leveraged capital structures.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As previously disclosed by the Company, in October, 1992, Lemco Associates
L.P., a limited partnership ("Lemco"), the owner of property previously owned by
EAI, initiated an action against EAI and others alleging, among other things,
that the defendants created environmental contamination at the property and is
seeking damages in unspecified amounts. EAI has denied Lemco's allegations,
asserted numerous defenses to the claims asserted and made cross claims for
indemnification and contribution against co-defendants and others. In addition,
the Company has made a demand upon its insurance carriers for coverage for the
claims made by Lemco and cross claims and third party claims may be filed
against these insurance companies seeking indemnification against these claims.
To date, the Company's insurance carriers have agreed to pay 71% of its defense
costs under a reservation of rights. Discovery in this matter is ongoing. By
letter dated March 30, 1995, Lemco has provided the Company with a statement of
its remediation costs to date, as well as an estimate of future remediation
costs associated with the contamination for which it seeks recovery in this
action. Specifically, Lemco claims that it has expended approximately $424,000
in remediation costs, including fees for legal oversight and consultation. It
further estimates that its future remediation costs will amount to approximately
$4,900,000. Such amount is included in a report made by Lemco's environmental
consultants based on their current assessment of the extent of contamination and
the method and period required to complete the remediation. Further, by letter
dated June 7, 1995, Lemco has provided the Company with an appraisal report made
by a real estate appraisal company engaged by Lemco in support of Lemco's claim
for diminution in the value of the property. Such report states that it is the
appraisal company's opinion that the market value of the property as of May 23,
1988 was $3.6 million and as of April 14, 1995 was $750,000. Lemco's appraisal
expert subsequently determined in October 1995 that the value of the property as
of April 14, 1995 was $960,000. Based on the foregoing, management believes that
the range of possible loss in this matter ranges from zero to approximately $8
million, not including costs and expenses, such as legal and expert fees, which
will be incurred in connection with this matter, and not taking into account the
amount of any loss which may be offset by insurance coverage as discussed above.
At this time, the Company and its consultants have not completed the
investigation and evaluation of additional information recently received from
Lemco nor has an independent analysis of the site been completed to determine
the appropriateness of Lemco's claims and of the estimated cost of remediation
and diminution in value of the property. Such investigation, evaluation and
analysis of this matter is expected to be completed by January 1996; therefore,
it is not possible to predict its outcome at this time. Moreover, there is no
assurance that the outcome of this matter will come within the above-mentioned
range of possible loss.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
Exhibit No. Description
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2.1 Form of Pre-Incorporation Agreement in connection with the IAI Joint
Venture was filed as Exhibit 2.1 to the Company's Current Report on
Form 8-K (Date of Report: August 3, 1995), as amended and is hereby
incorporated by reference.
2.2 Form of Joint Venture Agreement in
connection with the IAI Joint Venture was
filed as Exhibit 2.2 to the Company's
Current Report on Form 8-K (Date of
Report: August 3, 1995), as amended and
is hereby incorporated by reference.
27 Financial Data Schedule
(b) The registrant filed the following Form 8-K during the quarter for which this report is
filed:
Date of Report, as amended Item(s) Required
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August 3, 1995 The formation of the Joint Venture with Israel Aircraft Industries Ltd.
("IAI") and proforma financial data relating to the Joint Venture with IAI.
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SIGNATURES
Pursuant to the requirements 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.
EA INDUSTRIES, INC.
(Registrant)
Date: November 14, 1995 By: /s/ Stanley O. Jester
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Stanley O. Jester,
Treasurer and Vice President - Finance
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