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 March 30, 1996 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, former address and former fiscal year, if changed since last report
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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 No
--- ---
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As of March 30, 1996, there were 17,432,027 outstanding
shares of the Registrant's common stock.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EA INDUSTRIES, INC. AND SUBSIDIARIES
Consolidated Condensed Balance Sheets
(UNAUDITED)
(thousands of dollars)
March 30, Dec. 31,
1996 1995
--------- --------
ASSETS
Current Assets:
Cash and cash equivalents $6,140 $9,830
Restricted cash 8,266 8,004
Receivables, less allowance of $275 in 1996 and $385
in 1995 for doubtful accounts 13,815 12,092
Inventories 12,525 12,978
Prepaid expenses and other assets 1,334 1,610
-------- --------
TOTAL CURRENT ASSETS 42,080 44,514
-------- --------
Equipment and leasehold improvements 17,676 15,023
Less accumulated depreciation (7,236) (6,952)
-------- --------
10,440 8,071
-------- --------
Investment in affiliates 804 1,083
-------- --------
Intangible assets 12,331 12,331
Less accumulated amortization (1,024) (813)
-------- --------
11,307 11,518
-------- --------
Other assets 361 454
Note receivable 793 985
-------- --------
$ 65,785 $ 66,625
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of Debt and Capital Lease Obligations $ 10,216 $ 9,704
Accounts payable 11,809 13,522
Accrued expenses 3,298 2,712
-------- --------
TOTAL CURRENT LIABILITIES 25,323 25,938
-------- --------
Long-Term Liabilities:
Long-term Debt and Capital Lease Obligations 3,221 1,731
Convertible Notes and Debentures 9,300 12,200
Other long-term liabilities 3,590 3,672
-------- --------
TOTAL LONG-TERM LIABILITIES 16,111 17,603
-------- --------
TOTAL LIABILITIES 41,434 43,541
-------- --------
Minority interest 3,730 3,694
-------- --------
Shareholders' Equity:
Common Stock 66,302 63,397
Accumulated deficit since January 1, 1986 (45,206) (43,532)
-------- --------
21,096 19,865
Less common stock in treasury, at cost (475) (475)
-------- --------
TOTAL SHAREHOLDERS' EQUITY 20,621 19,390
-------- --------
$ 65,785 $ 66,625
======== ========
The accompanying notes are an integral part of these
consolidated condensed financial statements.
(2)
EA INDUSTRIES, INC. AND SUBSIDIARIES
Consolidated Condensed Statements of Operations
(UNAUDITED)
(thousands of dollars, except per share data)
Quarter Ended
March 30, April 1,
1996 1995
---------- ----------
Sales $24,025 $19,056
---------- ----------
Cost of sales 22,634 18,950
Selling, general and
administrative expenses 2,227 2,158
Purchased research and
development -- 6,012
---------- ----------
Total 24,861 27,120
---------- ----------
Loss from operations (836) (8,064)
---------- ----------
Interest expense 435 328
Interest income (158) (35)
Other expense 561 241
---------- ----------
Net loss $(1,674) $(8,598)
========== ==========
Loss per common share $ (0.10) $ (0.84)
========== ==========
Weighted average
common shares and
common share
equivalents outstanding 16,616,944 10,241,278
========== ==========
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 Three Months Ended March 30, 1996
(UNAUDITED)
(thousands of dollars)
Accumulated
Deficit
Since
Common Stock Treasury Stock Jan. 1,
Shares Amount Shares Amount 1986
---------- ------- -------- ------ ---------
Balance, December 31, 1995 16,045,447 $63,397 (218,476) $(475) $(43,532)
Net loss (1,674)
Exercise of stock
options 1,250 5
Exercise of Class A
and B Warrants 796,084 1,096
Notes receivable from
stock sales -- (1,096)
Debt conversion 807,722 2,900
---------- ------- -------- ----- --------
Balance, March 30, 1996 17,650,503 $66,302 (218,476) $(475) $(45,206)
========= ======= ======== ===== ========
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)
Quarter Ended
-------------------------
March 30, April 1,
1996 1995
--------- --------
Cash Flows from Operating Activities:
Net Loss $(1,674) $(8,598)
Adjustments to reconcile net loss to net
cash provided/(used) by operating
activities:
Depreciation and amortization 763 697
Valuation adjustment -- Note Receivable 192 --
Purchased research and development -- 6,012
Equity in loss of affiliate 225 187
Cash provided/(used) by changes in:
Receivables (1,723) 2,605
Inventories 453 (2,099)
Prepaid expenses & other assets 276 814
Accounts payable and accrued expenses (1,127) 845
Accrued excess leased space costs (109) (107)
Other operating items -- net (52) (414)
------- -------
Net cash used by operations (2,776) (58)
------- -------
Cash flows from Investing Activities:
Capital expenditures (2,921) (758)
Investment in affiliates -- (5,325)
Cash acquired in purchase of Tanon -- 890
Proceeds from the sale of discontinued operations -- 200
------- -------
Net cash provided/(used) by investing activities (2,921) (4,993)
------- -------
Cash flows from Financing Activities:
Net borrowings/(repayments) under credit facilities (32) (2,225)
Net proceeds from capital leases 2,034 --
Principal repayments of long-term debt -- (109)
Proceeds from the exercise of stock options or rights 5 527
Net proceeds from sale of common stock (private
placement) and exercise of warrants -- 1,734
Issuance of note receivable in connection with
acquisition -- (1,000)
------- -------
Net cash provided/(used) by financing activities 2,007 (1,073)
Net Increase (Decrease) in Cash and Cash Equivalents (3,690) (6,124)
Cash and Cash Equivalents at Beginning of Period 9,830 6,157
------- -------
Cash and Cash Equivalents at End of Period $6,140 $ 33
======= =======
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $407 $ 328
======= =======
Non cash financing activities:
Conversion of debt to equity $2,900
=======
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) Description of Business and Basis of Presentation
EA Industries, Inc., a New Jersey corporation formerly known as
"Electronic Associates, Inc." ("EAI" or the "Company"), through
its wholly-owned subsidiary, Tanon Manufacturing, Inc.
("Tanon"), is engaged principally in the business of providing
contract electronic manufacturing services ranging from the
assembly of printed circuit boards to the complete procurement,
production, assembly, test and delivery of entire electronic
products and systems. Tanon was acquired by the Company on
January 4, 1995. References to the Company with respect to any
time period after January 3, 1995 shall be deemed to include
Tanon unless the context otherwise requires.
In addition, the Company, through its one-third investment in
BarOn Technologies, Ltd. ("BarOn") a privately owned Israeli
corporation based in Haifa, Israel and its indirect interest in
a joint venture with Israel Aircraft Industries, Ltd., an
Israeli government corporation ("IAI"), seeks to develop and
market new, high technology products. Baron has developed and is
in the process of commercializing an electronic computer input
pen that captures handwriting independent of surface or
language. The joint venture with IAI which was formed in August
1995, was organized to review, evaluate and exploit the
commercial potential of products based on technologies developed
by IAI.
The condensed financial statements included herein have been
prepared by 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 for the year ended December
31, 1995. 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 period. Results of operations for the
interim period ended March 30, 1996 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.
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, warrants and convertible
notes and debentures have not been included in per share
computations, because their impact would have been antidilutive
in each period.
(2) Operations and Liquidity
The Company has incurred significant losses and had negative
cash flows from operations in each of the last four years and in
the quarter ended March 30, 1996. In order to continue
(6)
EA INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Cont'd)
(UNAUDITED)
operations, the Company has had to raise additional capital to
offset cash utilized in operating and investing activities. The
Company was successful in raising approximately $33,200,000
during 1995 from the issuance of common stock, the exercise of
stock options and warrants and the sale of convertible notes and
debentures. In November 1995, the Company completed the sale of
10% convertible debentures in the aggregate principal amount of
$2,200,000 to four purchasers. As of the date of this report all
of these debentures have been converted into 646,756 shares of
the Company's common stock in accordance with their terms. In
December 1995, the Company completed the sale of 7% convertible
notes of the Company in the aggregate principal amount of
$10,000,000 to GFL Advantage Fund Limited and GFL Performance
Fund Limited. As of this date $5,095,000 of such notes have
been converted into 1,424,190 shares of the Company's stock in
accordance with their terms. On May 3, 1996, the Company raised
an additional $7,000,000 from the sale of 9% convertible
debentures which was used in purchasing approximately 11.64% of
the outstanding shares of common stock of Aydin (hereinafter
defined). See Note 5 below. Although the Company's financial
projections indicate that operating losses and negative cash
flows from operations will continue at a declining rate during
most of 1996, management believes that available cash, together
with funds available under Tanon's line of credit with Schroder
(hereinafter defined), will enable the Company to meet its
obligations in the normal course of business during 1996. See
Note 3 below.
The Company acquired, during 1995, an approximate 33.34% equity
interest in BarOn, including an additional equity interest of
8.33% acquired in September, 1995. The cash consideration for
the additional equity interest was $2,000,000, of which
$1,500,000 was paid in 1995 and the remaining $500,000 was paid
on April 1, 1996. According to BarOn's business and operating
plan for 1996, BarOn will need additional capital by early in
the third quarter of 1996. Consistent with such plan, BarOn is
seeking investors to raise additional funds. Although no formal
determination has been made, currently, the Company does not
plan to increase its interest in BarOn, pursuant to its existing
right of first refusal or otherwise.
Also during 1995, the Company's 52.3% owned subsidiary
Electronic Associates Technologies Israel, Ltd. ("EATI"),
entered into a joint venture agreement ("JVA" or "Joint Venture
Agreement") with IAI to form a joint venture called "ITI" (the
"Joint Venture") to review, develop, and exploit non-military,
non-classified technological applications developed by IAI. The
JVA provides that an Investment Committee (the "Investment
Committee") will review and evaluate applications developed by
IAI. If an application is selected for development and
exploitation, an entity will be formed ("Licensee") in which
EATI 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.
(7)
EA INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Cont'd)
(UNAUDITED)
As of the date of this report, the Investment Committee has
selected one application for development and exploitation, the
Vista Application ("Vista"). Vista is a system for the automatic
inspection of manufactured parts, capable of detecting defects
as small as 20 microns. The preliminary business plan for Vista
requires funding of $1,000,000. Consistent with the terms of the
JVA, the Company is considering raising funds for Vista through
a variety of methods including a combination of sales of Vista
equity interests and borrowings by Vista. There can be no
assurance that the Company will be successful in its efforts to
raise such funds, in which case the Company will be confronted
with the choice of possibly foregoing its investment in the
Joint Venture or funding the $1,000,000 through its own
resources.
At March 30, 1996, the Joint Venture formed with IAI had
remaining cash of $7,246,000. Such cash will be used to fund
expenses of the Joint Venture and accordingly has been
classified as Restricted Cash by the Company.
On May 6, 1996 the Company purchased 11.64% of the outstanding
shares of Aydin. The Company has initiated discussions with
Aydin's Board of Directors regarding a possible merger. A merger
may require, among other things, additional cash resources in
excess of those presently available. See Note 5 below.
The remaining unexercised Class A and Class B warrants issued in
February 1994, if exercised, could provide the Company with
additional capital of approximately $2,000,000. To date, Class A
and Class B warrants to purchase 2,037,084 shares have been
exercised and the Company received $1,302,000 in proceeds. In
addition, in February 1996, the Company received unsecured
promissory notes in the aggregate principal amount of $1,096,000
as payment for the exercise of Class A and Class B warrants to
purchase 796,084 shares of common stock. These promissory notes
bear interest at the rate of 7% per annum and are due on or
before February 14, 1997. No assurance can be given that the
remaining unexercised warrants will be exercised or that such
promissory notes will be paid in full.
(3) Lines of Credit
On May 3, 1996, Tanon replaced the Company's existing asset
based credit facility and the Tanon separate revolving line of
credit with a new asset based credit facility provided by IBJ
Schroder Bank & Trust Company ("Schroder") to Tanon. Under the
terms of this new facility, Schroder will advance up to
$13,000,000 in the form of a revolving loan with availability
subject to the amount of a borrowing base comprised generally of
the sum of (1) up to between 80% and 85% of eligible accounts
receivable, (2) up to 18% of eligible inventory subject to an
availability sublimit of $3,000,000 and (3) up to 75% (reduced
by one percentage point on the first day of each month following
May 3, 1996) of the liquidation value of certain of the
Company's machinery and equipment, subject to an availability
sublimit of $1,250,000 (the "Schroder Loan Facility"). The
Schroder Loan Facility has a three-year term and bears interest
at an annual rate equal to the sum of the base commercial rate
determined by Schroder and publicly announced to be in effect
from
(8)
EA INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Cont'd)
(UNAUDITED)
time to time plus 1-1/2%. Each fiscal quarter, Tanon will also
be obligated to pay a fee at a rate equal to one-half of one
percent (1/2%) per annum of the average unused portion of the
Schroder Loan Facility. The Company paid a commitment issuance
fee of $75,000 to Schroder on March 25, 1996 and an additional
$50,000 fee at the closing of the Schroder Loan Facility.
Advances under the Schroder Loan Facility can only be used to
fund the Company's electronic contract manufacturing operations
which are now being conducted solely by Tanon. The agreement
with Schroder requires Tanon to maintain certain financial
ratios, including current assets to current liabilities and
earnings to certain fixed charges, and to maintain a minimum net
worth. As a result of the new facility Tanon's available
borrowing capacity increased by approximately $3,000,000 as
compared to the sum of the two prior facilities.
Concurrent with, and as a condition to, the closing of the
Schroder Loan Facility, the Company consolidated all of its
contract electronic manufacturing business into its wholly-owned
subsidiary, Tanon, by assigning to Tanon all of the assets and
liabilities related to the contract electronic manufacturing
business conducted directly by the Company. As a result, EAI is
now principally a holding company with all operations being
conducted by various subsidiaries with EAI providing strategic,
financial and other support to such subsidiaries.
The Company maintained 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, for the year
ended December 31, 1995. At March 30, 1996, the Company had
$3,942,000 outstanding under this credit facility and had
approximately $734,000 of additional borrowing capacity. There
were two financial covenants with which the Company had to
comply under this facility, which the Company was in
compliance with as of March 30, 1996. On May 3, 1996 Tanon
replaced this facility with the Schroder Loan Facility.
Tanon maintained 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 March 30, 1996, $5,500,000 was committed under
this line ($5,195,000 in loans and $305,000 in a letter of
credit). The credit agreement pertaining to this line of credit
restricted Tanon from entering into certain transactions and
contained covenants regarding the maintenance of working
capital, minimum net worth and debt-to-equity ratios, together
with minimum profitability requirements. At March 30, 1996 Tanon
was in compliance with all of these covenants. On May 3, 1996,
Tanon replaced this facility with the Schroder Loan Facility.
(4) Other Long-Term Liabilities
Other long-term liabilities include $1,575,000 of subordinated
debentures issued by EATI to its shareholders other than the
Company. The Company has no liability on or with respect to any
of such debentures. Moreover, the debentures are payable by EATI
only if, as, when, and out of any profits earned by EATI.
(9)
EA INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Cont'd)
(UNAUDITED)
(5) Acquisition of Aydin Corporation equity interest and issuance
of convertible debentures
On May 6, 1996, the Company purchased 596,927 shares of the
common stock of Aydin Corporation ("Aydin"), a New York Stock
Exchange listed company, in a private purchase from the then
Chairman and Chief Executive Officer of Aydin. The purchase
price for such shares was $18 per share or an aggregate of
$10,744,686 and the purchase represented approximately 11.64% of
the outstanding shares of common stock of Aydin. On May 6, 1996,
the closing price of the common stock of Aydin as reported
by the New York Stock Exchange was $15.50. Aydin designs,
manufactures and sells wireless, digital LOS radios and various
other telecommunications equipment and systems, computer
monitors and workstations, mostly for utilities, network access
equipment, airborne and ground data acquisition, radar
simulation, modernization and air-defense C3 equipment and
systems.
To fund a portion of the purchase price of the Aydin common
stock, the Company, on May 3, 1996, completed the sale of 9%
convertible debentures in the aggregate principal amount of
$7,000,000. The balance of the purchase price was funded with
existing cash of the Company. The Company has agreed to pay a
placement fee equal to 5% of the proceeds raised in the sale of
the debentures, payable on August 1, 1996. These debentures will
mature on May 3, 1998 and are convertible into shares of the
Company's common stock at a conversion price equal to the lesser
of (i) four dollars ($4) per share, or (ii) 82% of the average
closing price of the Company's common stock as traded on the New
York Stock Exchange for the five (5) days preceding the date of
the notice to the Company that the holder wishes to exercise its
conversion right. Such conversion is conditioned on, among other
things, the Company causing the shares underlying the debentures
to be listed on the New York Stock Exchange. The Company has
also agreed to file a registration statement with the Securities
and Exchange Commission covering the shares of the Company's
common stock underlying the debentures within six (6) months
after the closing date and to cause the shares to be registered
within eight (8) months after the closing date. In the event the
registration statement is not declared effective or the New York
Stock Exchange has not approved the listing of the underlying
shares within eight (8) months from the closing date, then the
Company will be obligated to pay certain penalties and the
holders of the debentures may then declare the entire unpaid
principal and interest due and payable.
EAI has initiated discussions with the Board of Directors of
Aydin concerning a possible merger or other combination with
Aydin. EAI and Aydin have not had any formal discussions
concerning the possible terms or structure of such a transaction
and no current proposal has been submitted by EAI to Aydin for
such transaction.
(10)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overview
On January 4, 1995, the Company acquired 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.
On January 16, 1995, the Company acquired a 25.01% equity
interest in BarOn, a privately-owned Israeli corporation based in Haifa, Israel.
On September 30, 1995, the Company exercised its option to acquire an additional
8.33% equity interest in BarOn. BarOn is a development stage company which has
developed and is in the process of commercializing an electric 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 equity interest in the results of BarOn are included in the
consolidated results of the Company from January 16, 1995 forward.
On August 8, 1995, the Company, through a 52.3% owned
subsidiary, EATI, entered into a Joint Venture Agreement with IAI to review,
develop and exploit non-classified technological applications developed by IAI.
The Company 's investment in the Joint Venture, ITI, is accounted for using the
purchase method of accounting.
Results of Operations
During the first quarter of 1996, the Company's sales increased,
its cost of sales increased in total value but decreased 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
$836,000 for the first quarter of 1996. This compared with a loss from
operations of $8,064,000, for the first quarter of 1995 which included a
non-recurring charge of $6,012,000 representing the charge to expense for
purchased in-process research and development resulting from the Company's
investment in BarOn.
The increase in sales to $24,025,000 in the first quarter of
1996 resulted primarily from an increase in sales to its existing customer base
and sales to several new customers partially offset by the loss of two
customers.
Cost of sales increased to $22,634,000 in the first quarter of
1996 from $18,950,000 in the same quarter of 1995 and decreased, as a percentage
of revenue to 94.2% in the first quarter of 1996 compared with 99.4% in the same
quarter of 1995. This decrease resulted from the Company's action in the fourth
quarter of 1995 to reduce its material cost as a percentage of revenues. In
addition, there was a decrease in materials cost resulting from a market driven
decline in prices on certain components. In addition, pricing for services to a
major customer were renegotiated in January 1996. This renegotiation, combined
with the increased sales volume in the first quarter of 1996, has returned the
Company's New Jersey facility to a positive gross margin. Gross profit increased
from $106,000 in the first quarter of 1995 to $1,391,000 in the first quarter of
1996 reflecting improved margins at both the New Jersey facility and the
California facility.
Selling, general and administrative expenses increased to
$2,227,000 in the first quarter of 1996, from $2,158,000 in the same quarter of
1995. This moderate increase has resulted from the
(11)
additional sales, general and administrative staff hired in the fourth quarter
of 1995 to support the increased level of sales. Selling, general and
administrative expenses declined as a percentage of revenue to 9.3% in 1996 from
11.3% in 1995 primarily because the increase in sales exceeded the rate of the
increase in selling, general and administrative expenses.
During the first quarter of 1995, the Company determined that
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 represented 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 was recorded as research and development expense in the first quarter
of 1995.
Interest expense was $435,000 in the first quarter of 1996 as
compared to $328,000 in the first quarter of 1995. The increase is attributable
to interest on convertible notes in the amount of $10,000,000 issued in
December, 1995, interest on capitalized leases related to equipment additions in
1995 and an increase in the interest rate on the Tanon revolving line of credit,
partially offset by reductions in amounts borrowed under the Company's asset
based credit facility.
Interest income increased by $123,000 in the first quarter of
1996 as compared to the same period in 1995 as a result of the investment of
funds received from the sale of convertible notes in December, 1995 in the
amount of $10,000,000.
The increase in other expense is primarily attributable to a
decline in the market value of securities securing a note receivable and an
increase in the Company's equity interest in BarOn's results of operations.
The Company's consolidated backlog at March 30, 1996 was
$42,088,000.
Liquidity and Capital Resources
Liquidity, as discussed below, is measured in reference to the
consolidated financial position of the Company at March 30, 1996, as compared to
December 31, 1995. Net cash used by operations of $2,776,000 in the first
quarter of 1996 increased by $2,718,000 from cash used in operations of $58,000
in the same period in 1995. Net Cash used by operations was primarily a result
of an increase in accounts receivable resulting from increased sales volume and
a decrease in accounts payable and accrued expenses resulting from the payment
of trade payables incurred in connection with the build up of inventories at the
end of 1995 to support higher sales volumes and, to a lesser extent, the net
loss for the quarter.
Liquidity, as measured by cash and cash equivalents, decreased
to $6,140,000 at March 30, 1996 from $9,830,000 at December 31, 1995. Liquidity
as measured by working capital (excluding Restricted Cash of $8,266,000)
decreased to $8,491,000 at March 30, 1996 compared with $10,572,000 at December
31, 1995. The decrease in working capital was a result of capital expenditures
less the proceeds from capital leasing activity during the quarter and the net
loss for the quarter. 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 quarter of 1996, revenue from
such services increased by $4,969,000 from $19,056,000 in the same period of
1995, primarily from an increase in sales to its existing customer base as well
as increased sales volume to new customers. Accounts receivable increased by
$1,723,000 in the first quarter of 1996 reflecting an increase in sales of
$3,069,000 to $24,025,000 from $20,956,000 in the fourth quarter of 1995.
Inventory decreased by $453,000 during the quarter.
(12)
At March 30, 1996, the Company had accounts payable of
approximately $11,809,000 of which approximately $329,000 had been outstanding
for over 90 days. This compares with $13,522,000 of accounts payable at December
31, 1995, of which $167,000 had been outstanding for over 90 days.
Cash flows from financing activities during the first quarter of
1996 amounted to $2,007,000 resulting primarily from the net proceeds from
capital leases. Approximately $1,800,000 of such financing was applicable to
equipment acquired at the end of 1995. During April, 1996 the Company obtained
additional financing in the amount of $750,000 on equipment acquired during the
first quarter of 1996.
Net cash in the amount of $2,921,000 was used to purchase
capital equipment, consisting primarily of two high speed surface mount lines
for the Company's California facility.
On May 3, 1996, Tanon replaced the Company's existing asset
based credit facility and the Tanon separate revolving line of credit with a new
asset based credit facility provided by Schroder to Tanon. Under the terms of
this new facility, Schroder will advance up to $13,000,000 in the form of a
revolving loan with availability subject to the amount of a borrowing base
comprised generally of the sum of (1) up to between 80% and 85% of eligible
accounts receivable, (2) up to 18% of eligible inventory subject to an
availability sublimit of $3,000,000 and (3) up to 75% (reduced by one percentage
point on the first day of each month following May 3, 1996) of the liquidation
value of certain of the Company's machinery and equipment, subject to an
availability sublimit of $1,250,000. The Schroder Loan Facility has a three-year
term and bears interest at an annual rate equal to the sum of the base
commercial rate determined by Schroder and publicly announced to be in effect
from time to time plus 1-1/2%. Each fiscal quarter, Tanon will also be obligated
to pay a fee at a rate equal to one-half of one percent (1/2%) per annum of the
average unused portion of the Schroder Loan Facility. The Company paid a
commitment issuance fee of $75,000 to Schroder on March 25, 1996 and an
additional $50,000 fee at the closing of the Schroder Loan Facility. Advances
under the Schroder Loan Facility can only be used to fund the Company's
electronic contract manufacturing operations which are now being conducted
solely by Tanon. The agreement with Schroder requires Tanon to maintain certain
financial ratios, including current assets to current liabilities and earnings
to certain fixed charges, and to maintain a minimum net worth. As a result of
the new facility Tanon's available borrowing capacity increased by approximately
$3,000,000 as compared to the sum of the two prior facilities.
Concurrent with, and as a condition to, the closing of the
Schroder Loan Facility, the Company consolidated all of its contract electronic
manufacturing business into its wholly-owned subsidiary, Tanon, by assigning to
Tanon all of the assets and liabilities related to the contract electronic
manufacturing business conducted directly by the Company. As a result, EAI is
now principally a holding company with all operations being conducted by various
subsidiaries with EAI providing strategic, financial and other support to such
subsidiaries.
The Company maintained 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, for the year ended December 31, 1995. At March 30, 1996,
the Company had $3,942,000 outstanding under this credit facility and had
approximately $734,000 of additional borrowing capacity. There were two
financial covenants with which the Company had to comply under this
facility, which the Company was in compliance with as of March 30, 1996. On May
3, 1996 Tanon replaced this facility with the Schroder Loan Facility.
Tanon maintained 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 March 30, 1996, $5,500,000 was
committed under this line ($5,195,000 in loans and $305,000 in a letter of
(13)
credit). The credit agreement pertaining to this line of credit restricted Tanon
from entering into certain transactions and contained covenants regarding the
maintenance of working capital, minimum net worth and debt-to-equity ratios,
together with minimum profitability requirements. At March 30, 1996 Tanon was in
compliance with all of these covenants. On May 3, 1996, Tanon replaced this
facility with the Schroder Loan Facility.
The Company has incurred significant losses and had negative
cash flows from operations in each of the last four years and in the quarter
ended March 30, 1996. In order to continue operations, the Company has had to
raise additional capital to offset cash utilized in operating and investing
activities. The Company was successful in raising approximately $33,200,000
during 1995 from the issuance of common stock, the exercise of stock options and
warrants and the sale of convertible notes and debentures. In November 1995, the
Company completed the sale of 10% convertible debentures in the aggregate
principal amount of $2,200,000 to four purchasers. As of the date of this report
all of these debentures have been converted into 646,756 shares of the Company's
common stock in accordance with their terms. In December 1995, the Company
completed the sale of 7% convertible notes of the Company in the aggregate
principal amount of $10,000,000 to GFL Advantage Fund Limited and GFL
Performance Fund Limited, which mature in December 1997. As of this date
$5,095,000 of such notes have been converted into 1,424,190 shares of the
Company's common stock in accordance with their terms. On May 3, 1996, the
Company raised an additional $7,000,000 from the sale of 9% convertible
debentures which was used in purchasing approximately 11.64% of the outstanding
shares of common stock of Aydin. These debentures will mature on May 3, 1998 and
are convertible into shares of the Company's common stock at a conversion price
equal to the lesser of (i) four dollars ($4.00) per share, or (ii) 82% of the
average closing price of the Company's common stock as traded on the New York
Stock Exchange for the five (5) days preceding the date of the notice to the
Company that the holder wishes to exercise its conversion right. Such conversion
is conditioned on, among other things, the Company causing the shares underlying
the debentures to be listed on the New York Stock Exchange. The Company has also
agreed to file a registration statement with the Securities and Exchange
Commission covering the shares of the Company's common stock underlying the
debentures within six (6) months after the closing date and to cause the shares
to be registered within eight (8) months after the closing date. In the event
the registration statement is not declared effetive or the New York Stock
Exchange has not approved the listing of the underlying shares within eight (8)
months from the closing date, then the Company will be obligated to pay certain
penalties and the holders of the debentures may then declare the entire unpaid
principal and interest due and payable. Although the Company's financial
projections indicate that operating losses and negative cash flows from
operations will continue at a declining rate during most of 1996, management
believes that available cash, together with funds available under Tanon's line
of credit with Schroder, will enable the Company to meet its obligations in the
normal course of business during 1996.
The Company acquired, during 1995, an approximate 33.34% equity
interest in BarOn, including an additional equity interest of 8.33% acquired in
September, 1995. The cash consideration for the additional equity interest was
$2,000,000, of which $1,500,000 was paid in 1995 and the remaining $500,000 was
paid on April 1, 1996. According to BarOn's business and operating plan for
1996, BarOn will need additional capital by early in the third quarter of 1996.
Consistent with such plan, BarOn is seeking investors to raise additional funds.
Although no formal determination has been made, currently, the Company does not
plan to increase its interest in BarOn, pursuant to its existing right of first
refusal or otherwise.
Also during 1995, the Company's 52.3% owned subsidiary, EATI,
entered into a joint venture agreement with IAI to review, develop, and exploit
non-military, non-classified technological applications developed by IAI. The
JVA provides that the Investment Committee will review and evaluate applications
developed by IAI. If an application is selected for development and
exploitation, a Licensee will be formed in which EATI 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.
(14)
As of the date of this report, the Investment Committee has
selected one application for development and exploitation, Vista. Consistent
with the terms of the JVA, the Company is considering raising funds for Vista
through a variety of methods including a combination of sales of Vista equity
interests and borrowings by Vista. There can be no assurance that the Company
will be successful in its efforts to raise such funds, in which case the Company
will be confronted with the choice of possibly foregoing its investment in the
Joint Venture or funding the $1,000,000 through its own resources.
On May 6, 1996 the Company purchased 11.64% of the outstanding
shares of Aydin. The Company has initiated discussions with Aydin's Board of
Directors regarding a possible merger or other combination. The Company and
Aydin have not had any formal discussions concerning the possible terms or
structure of such a transaction and no current proposal has been submitted by
the Company to Aydin for such transaction. A merger may require, among other
things, additional cash resources in excess of those presently available.
The remaining unexercised Class A and Class B warrants issued in
February 1994, if exercised, could provide the Company with additional capital
of approximately $2,000,000. To date, Class A and Class B warrants to purchase
2,037,084 shares have been exercised and the Company received $1,302,000 in
proceeds. In addition, in February 1996, the Company received unsecured
promissory notes in the aggregate principal amount of $1,096,000 as payment for
the exercise of Class A and Class B warrants to purchase 796,084 shares of
common stock. These promissory notes bear interest at the rate of 7% per annum
and are due on or before February 14, 1997. No assurance can be given that the
remaining unexercised warrants will be exercised or that such promissory notes
will be paid in full.
Reference is made to "Legal Proceedings" in Item 3, Part I of
the Company's Annual Report on Form 10-K for the fiscal year ended December 31,
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.
(15)
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
asserted a counterclaim against Lemco and cross claims against co-defendants and
others for indemnification and contribution. 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 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 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. Lemco purchased the property in question in 1979
for approximately $400,000. The Company's experts have estimated that, based
upon hydrogeologic data gathered to date by Lemco's experts, the major source of
continuing contamination of groundwater was released into the water table about
late 1984 or, using more conservative extrapolations, about mid-1979. Further
hydrogeologic data to be collected will allow a more precise evaluation. Based
on the foregoing, management believes that the range of possible loss in this
matter ranges from zero to approximately $7.8 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. The Company and its
consultants recently completed the investigation and evaluation of additional
information received from Lemco and have determined that Lemco's remediation
cost estimates are premature and conceptual in nature. In addition, an
independent analysis of the site to determine the appropriateness of Lemco's
claims and of the estimated cost of remediation has not been completed;
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.
The Company is vigorously defending this matter. On May 3, 1996,
the Superior Court of New Jersey referred this case to mediation in an effort
to explore opportunities for settlement. Mediation proceedings are expected to
take place in or after September, 1996. In the event the matter cannot be
resolved through mediation, the case will be referred back to the Court for
trial.
Reference is made to "Legal Proceedings" in Item 3, Part I of
the Company's Annual Report on Form 10-K for the fiscal year ended December 31,
1995 for information concerning this pending claim and a separate pending claim
involving the Bridgeport Rental and Oil Services Superfund Site.
(16)
ITEM 5. OTHER INFORMATION
On May 3, 1996, Tanon replaced the Company's existing asset
based credit facility and the Tanon separate revolving line of credit with a new
asset based credit facility provided by Schroder pursuant to the terms of a
Revolving Credit and Security Agreement ("Schroder Loan Agreement") between
Schroder and Tanon.
In connection with, and as a condition to, the consummation of
the Schroder Loan Agreement and Schroder Loan Facility, the Company transferred
and assigned to Tanon all of its assets related to the Company's electronic
contract manufacturing operations, subject to certain liabilities, in
consideration for Tanon's repayment of the Company's existing asset based credit
facility with Congress Financial Corporation and the balance, if any, as a
capital contribution to Tanon. As a result, all of the Company's electronic
contract manufacturing operations are now being conducted by and through Tanon,
and the Company is now principally a holding company.
Under the terms of the Schroder Loan Facility, Schroder will
advance up to $13,000,000 in the form of a revolving loan with availability
subject to the amount of a borrowing base comprised generally of the sum of (1)
up to between 80% and 85% of eligible accounts receivable, (2) up to 18% of
eligible inventory subject to an availability sublimit of $3,000,000 and (3) up
to 75% (reduced by one percentage point on the first day of each month following
May 3, 1996) of the liquidation value of certain of the Company's machinery and
equipment, subject to an availability sublimit of $1,250,000.
The Schroder Loan Facility has a three-year term and bears
interest at an annual rate equal to the sum of the base commercial rate as
determined by Schroder and publicly announced to be in effect from time to time
plus one and one-half percent (1 1/2%). Each fiscal quarter Tanon will also be
obligated to pay a fee at a rate equal to one-half of one percent (1/2%) per
annum of the average unused portion of the Schroder Loan Facility. Also, the
Company paid a commitment issuance fee of $75,000 to Schroder on March 25, 1996
and an additional $50,000 fee at the closing of the Schroder Loan Facility.
Advances under the Schroder Loan Facility can only be used to fund the Company's
electronic contract manufacturing operations which are now being conducted
solely by Tanon. The available borrowing capacity by Tanon has increased by
approximately $3,000,000 as a result of the Schroder Loan Facility, as compared
to the sum of the two prior loan facilities.
The Schroder Loan Facility is secured by all of the assets of
Tanon, including without limitation, all receivables, inventory and equipment,
together with the proceeds and products thereof. As additional security for the
obligations of Tanon to Schroder, Schroder required the Company to execute a
"Guaranty" and "Guarantor Pledge Agreement", both dated May 3, 1996, in favor of
Schroder, pursuant to which the Company guaranteed the payment and performance
by Tanon of, and became a surety for, Tanon's obligations under the Schroder
Loan Agreement and the Company pledged to Schroder all of the issued and
outstanding capital stock of Tanon as security for the Company's obligations to
Schroder under the Guaranty.
The Schroder Loan Agreement includes certain "Negative
Covenants" pursuant to which Tanon agrees, among other things, not to: (i)
engage in certain transactions, including any merger, consolidation or other
reorganization with or into any other person or entity, any acquisition of all
or substantially all of the assets or stock of another person or entity, or any
sale or transfer of any of its assets except in the ordinary course of business;
(ii) incur any liens on its property; (iii) pay any dividends; (iv) make loans
to or investments in third parties with certain exceptions; (v) guaranty or
become liable for the indebtedness of any other person; (vi) make any capital
expenditures during a fiscal year in excess of certain limitations; (vii) incur
certain other indebtedness; (viii) engage in transactions with affiliates except
in the ordinary course of business and on terms no less favorable than would be
obtainable from an
(17)
unaffiliated person in an arm's-length transaction; or (ix) pay or prepay
certain inter-company indebtedness in the amount of $6,256,000 owed to the
Company, except as permitted in accordance with a "Subordination Agreement"
dated May 3, 1996 among Schroder, the Company and Tanon.
In addition, the Schroder Loan Agreement requires Tanon to
maintain certain financial ratios, including current assets to current
liabilities and earnings to certain fixed charges, and to maintain a certain
minimum net worth. The failure to pay any principal or interest on the Schroder
Loan Facility when due or the breach of a covenant in the Schroder Loan
Agreement (subject to any applicable cure period), or breach of certain other
agreements related to the Schroder Loan Facility including the Company's
Guaranty, Guaranty Pledge Agreement and the Subordination Agreement, and certain
other conditions, constitute an event of default ("Default") under the Schroder
Loan Agreement. Upon such a Default, Schroder may accelerate and make due all
obligations of Tanon under the Schroder Loan Agreement and terminate the
Schroder Loan Facility.
(18)
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
Exhibit No. Description
----------- ------------
10.1 Revolving Credit and Security Agreement
dated May 3, 1996, between IBJ Schroder
Bank & Trust Company and Tanon
Manufacturing, Inc.
10.2 Stock Purchase Agreement dated May 3, 1996, between
the Company and Ayhan Hakimoglu.
10.3 Form of Subscription Agreement and Form of 9%
Convertible Subordinated Debenture issued in
connection with raising $7 million in May, 1996 to
fund a portion of the purchase price for
approximately 11.64% of the issued and outstanding
Aydin Common Stock purchased from Mr. Hakimoglu.
27 Financial Data Schedule
(b) The registrant filed the following Form 8-K during the
quarter for which this report is filed:
NONE
(19)
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: May 14, 1996 By: /s/ Stanley O. Jester
----------------------------
Stanley O. Jester,
Treasurer and
Vice President - Finance
Chief Financial Officer
(Principal Financial and
Chief Accounting Officer)
(20)