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 June 29, 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
NOT APPLICABLE
________________________________________________________________
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 June 29, 1996, there were 19,080,510 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)
June 29, Dec. 31,
1996 1995
-------- --------
ASSETS
Current Assets:
Cash and cash equivalents $ 729 $ 9,830
Restricted cash 8,197 8,004
Receivables, less allowance of $323 in 1996 and $385
in 1995 for doubtful accounts 14,300 12,092
Inventories 10,910 12,978
Prepaid expenses and other assets 1,393 1,610
-------- --------
TOTAL CURRENT ASSETS 35,529 44,514
-------- --------
Equipment and leasehold improvements 18,546 15,023
Less accumulated depreciation (7,794) (6,952)
-------- --------
10,752 8,071
-------- --------
Investments including those in affiliates 12,536 1,083
-------- --------
Intangible assets 12,331 12,331
Less accumulated amortization (1,221) (813)
-------- --------
11,110 11,518
-------- --------
Other assets 824 454
Note receivable 793 985
-------- --------
$ 71,544 $ 66,625
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Revolving Credit Facility $ 10,184 $ 9,146
Current portion of Capital Lease Obligations 1,337 558
Accounts payable 10,501 13,522
Accrued expenses 2,567 2,712
-------- --------
TOTAL CURRENT LIABILITIES 24,589 25,938
-------- --------
Long-Term Liabilities:
Long-term portion of Capital Lease Obligations 3,437 1,731
Convertible Notes and Debentures 13,005 12,200
Other long-term liabilities 3,317 3,672
-------- --------
TOTAL LONG-TERM LIABILITIES 19,759 17,603
-------- --------
TOTAL LIABILITIES 44,348 43,541
-------- --------
Minority interest 3,682 3,694
-------- --------
Shareholders' Equity:
Common Stock 70,839 63,397
Accumulated deficit since January 1, 1986 (46,833) (43,532)
Cumulative Translation Adjustment (17)
-------- --------
23,989 19,865
Less common stock in treasury, at cost (475) (475)
-------- --------
TOTAL SHAREHOLDERS' EQUITY 23,514 19,390
-------- --------
$ 71,544 $ 66,625
======== ========
The accompanying notes are an integral part of
these consolidated condensed financial statements.
EA INDUSTRIES, INC. AND SUBSIDIARIES
Consolidated Condensed Statements of Operations
(UNAUDITED)
(thousands of dollars, except per share data)
Quarter Ended Six Months Ended
------------- ----------------
June 29, July 1, June 29, July 1,
1996 1995 1996 1995
---- ---- ---- ----
Sales $ 22,388 $ 18,178 $ 46,413 $ 37,233
------------ ------------ ------------ ------------
Cost of sales 20,799 18,111 43,433 37,061
Selling, general and
administrative expenses 2,466 2,037 4,693 4,195
Purchased research and
development -- -- -- 6,012
------------ ------------ ------------ ------------
Total 23,265 20,148 48,126 47,268
------------ ------------ ------------ ------------
Loss from operations (877) (1,970) (1,713) (10,035)
------------ ------------ ------------ ------------
Interest expense 558 350 993 678
Interest income (155) (44) (313) (77)
Other expense 347 208 908 449
------------ ------------ ------------ ------------
Net loss $ (1,627) $ (2,484) $ (3,301) $ (11,085)
============ ============ ============ ============
Loss per common share $ (0.09) $ (0.23) $ (0.19) $ (1.05)
============ ============ ============ ============
Weighted average common shares
outstanding 18,953,234 10,976,000 17,785,089 10,608,804
============ ============ ============ ============
The accompanying notes are an integral part of
these consolidated condensed financial statements.
EA INDUSTRIES, INC. AND SUBSIDIARIES
Consolidated Condensed Statement of Shareholders' Equity
For The Six Months Ended June 29, 1996
(UNAUDITED)
(thousands of dollars)
Common Stock Treasury Stock
------------ -------------- Accumulated
Shares Amount Shares Amount Deficit Cumulative
Since Translation
Jan. 1, Adjustment
1986
--------------------------------- -----------------------------------------
Balance, December 31,
1995 16,045,447 $63,397 (218,476) $(475) $(43,532)
Net loss (3,301)
Exercise of stock
options 3,979 8
Exercise of Class A
and B Warrants 961,798 1,415
Notes receivable from stock
sales -- (1,096)
Debt conversion 2,270,946 7,074
Other 16,816 41
-- --
Translation Adjustment $(17)
----------------------------------------------------------------------------
Balance, June 29, 1996 19,298,986 $70,839 (218,476) $(475) $(46,833) $(17)
============================================================================
The accompanying notes are an integral part of
these consolidated condensed financial statements.
EA INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
(UNAUDITED)
(thousands of dollars)
Six Months Ended
-----------------------
June 29, July 1,
1996 1995
--------- ---------
Cash Flows from Operating Activities:
Net Loss $ (3,301) $(11,085)
Adjustments to reconcile net loss to net
cash provided/(used) by operating activities:
Depreciation and amortization 1,546 1,123
Valuation adjustment - Note Receivable 192 --
Purchased research and development -- 6,012
Equity in loss of affiliate 577 337
Cash provided/(used) by changes in:
Restricted Cash (193) --
Receivables (2,208) 1,385
Inventories 2,068 (807)
Prepaid expenses & other assets 217 667
Accounts payable and accrued expenses (3,091) 1,270
Accrued excess leased space costs (216) (213)
Other operating items - net (382) 29
-------- --------
Net cash used by operations (4,791) (1,282)
-------- --------
Cash flows from Investing Activities:
Capital expenditures (3,859) (3,199)
Purchase of proprietary software (371) --
Investment in affiliates (12,030) (5,431)
Cash acquired in purchase of Tanon -- 890
Proceeds from the sale of discontinued operations -- 200
-------- --------
Net cash provided/(used) by investing activities (16,260) (7,540)
-------- --------
Cash flows from Financing Activities:
Net borrowings/(repayments) under credit facilities 1,038 (1,271)
Net proceeds from capital leases 2,485 --
Net proceeds from issuance (repayments) of long-term debt 8,100 (407)
Proceeds from the exercise of stock options or rights 8 790
Net proceeds from sale of common stock (private
placement) and exercise of warrants 319 4,640
Issuance of note receivable in connection with
acquisition -- (1,000)
-------- --------
Net cash provided/(used) by financing activities 11,950 2,752
Net Increase (Decrease) in Cash and Cash Equivalents (9,101) (6,070)
Cash and Cash Equivalents at Beginning of Period 9,830 6,157
-------- --------
Cash and Cash Equivalents at End of Period $ 729 $ 87
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 844 $ 438
======== ========
Non cash financing activities:
Conversion of debt to equity $ 7,074
Common shares issued in payment of interest 75
--------
TOTAL $ 7,149
========
The accompanying notes are an integral part of
these consolidated condensed financial statements.
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 June 29,
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 six months ended
June 29, 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 raised approximately $33,200,000 and $8,100,000
during 1995 and the first six months of 1996, respectively, 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 $6,905,000 of such notes
have been converted into 2,211,986 shares of the Company's stock in
accordance with their terms. In May and June, 1996, the Company raised an
additional $8,100,000 from the sale of 9% convertible debentures which was
used in part, in purchasing approximately 11.64% of the outstanding shares
of common stock of Aydin Corporation ("Aydin"). See Note 5 below.
On July 1, 1996, the Company entered into a Loan Agreement (the "BarOn Loan
Agreement"), with BarOn. Pursuant to the BarOn Loan Agreement, the Company
has agreed to maintain a revolving line of credit of $2 million until July
1, 1998. The amount available under the line will be reduced by any
additional equity obtained by, or borrowings of, BarOn. Advances under the
line will be made in the Company's sole discretion. Such advances bear
interest at an annual rate equal to the sum of the base commercial rate
(the "Base Rate") as determined by IBJ Schroder Bank & Trust Company from
time to time plus one and one half percent (1 1/2%). Interest is due each
calendar quarter and, at the option of BarOn, any payment for such interest
may be deferred until the succeeding July 1. Deferred interest bears
additional interest at the rate of two and one half percent (2 1/2%) plus
the Base Rate. The Company, at its option, may require that interest be
paid in cash or
by issuance of ordinary shares of BarOn at an agreed value of $4.00 per
share (the "Agreed Value"). BarOn, at its option, may make any interest
payments due on or before July 1, 1997 in ordinary shares of BarOn at the
Agreed Value. As of July 30, 1996, there was $430,000 of outstanding
principal on the line of credit. The entire amount outstanding under the
line of credit is due on the earliest of (i) an initial public offering by
BarOn, (ii) sale of equity or borrowings by BarOn exceeding the amount
outstanding by at least $500,000 (unless prohibited by such lender or
investor), (iii) availability of sufficient cash flow, or (iv) June 1,
2000.
In consideration of the Company's agreement to open the line of credit,
BarOn has granted the Company antidilution protection for all shares
currently owned by the Company. This protection provides that the Company
will be issued additional shares if BarOn issues shares of its capital
stock, instruments convertible into such stock, or options or warrants to
purchase such shares, at any price below the Agreed Value. In addition,
BarOn issued the Company a warrant (the "Warrant") to purchase 1 million
shares of BarOn's ordinary shares at any time before July 1, 2001 at an
exercise price equal to the agreed Value. The Warrant has antidilution
provisions substantially similar to those described above and the Company
has piggyback and demand registration rights for shares purchased pursuant
to the Warrant.
The Company and BarOn have also revised their agreement, effective on July
1, 1996, regarding the manufacture of the products of BarOn. The revised
agreement has a five year term and provides that the Company or its
subsidiary will manufacture all of BarOn's products at a price established
based on actual component costs plus labor charges, overhead and an agreed
upon profit margin. This price is consistent with prices charged to
unrelated customers of the Company for comparable manufacturing services.
The Company is not yet manufacturing products for BarOn.
The Company's joint venture with IAI has selected one application for
development and exploitation, the Vista Application ("Vista") and a
Licensee, Vista Computer Vision, Ltd. ("VCV") has been formed. Vista is a
system for the automatic inspection of manufactured parts, capable of
detecting defects as small as 20 microns. The funding for the initial
operations of VCV was made by the Company's subsidiary, Electronic
Associates Technologies Israel, Ltd. ("EATI") in June 1996 as a capital
contribution of $250,000 to VCV and a $750,000 Subordinated Capital Note.
The note matures five years after its issuance and bears interest at 8% per
annum. Payments on the note may be made only out of remaining profits of
VCV after distribution of at least 50% of all accumulated profits. Upon
liquidation of VCV, the note would be subordinate to all other debts of VCV
but would have a preference over payments to equity holders of VCV.
The Company, on June 28, 1996, loaned $1 million to EATI to enable EATI to
make the above capital contribution and loan to VCV. The Loan bears
interest at 10% per annum, payable annually. The principal is repayable in
five equal annual installments beginning on June 1, 2002 and continuing on
June 1 of each year thereafter. The Company may at its option, accelerate
the loan and demand repayment 18 months after the date of issuance of the
loan. This loan is subordinated to all other debts of EATI but would have a
preference over payments to equity holders of EATI.
At June 29, 1996, the Joint Venture formed with IAI had remaining cash of
$7,597,000. Such cash can only be used to fund expenses of the Joint
Venture and accordingly has been classified as Restricted Cash by the
Company.
During May 1996, the Company purchased 11.64% of the outstanding shares of
Aydin and initiated discussions with the management of Aydin concerning the
possibility of a merger or other business combination. Since that time,
both companies have been conducting due diligence on the business and
prospects of each other and have had a number of discussions about the
structure and terms of possible combinations. As of the date of this
report, the due diligence and negotiation process is continuing. A merger
may require, among other things, additional cash resources in excess of
those presently available. See Note 5 below.
The purchase of the Aydin common stock, the Loan Agreement with BarOn
(hereinafter discussed) and the Loan to EATI in the amount of $1,000,000 to
enable EATI to fund VISTA (hereinafter discussed) have resulted in the need
to raise additional capital. The Company is presently seeking to borrow up
to $3,000,000 for up to six months to fund its holding company expenses,
make advances to BarOn under the Loan Agreement and pay costs incurred and
to be incurred in conducting the Aydin due diligence reviews (hereinafter
discussed). Such loan will be secured by the Aydin common stock owned by
the Company. The Company's financial projections indicate that operating
losses and negative cash flows will continue, although at a declining rate,
during most of 1996. Although the Company's credit facility with Schroder
(hereinafter defined) is sufficient to fund the Company's contract
manufacturing operations conducted through Tanon, the Company will need to
raise additional capital during the second half of 1996 or the first half
of 1997 through the sale of common stock or the issuance of debt securities
to repay the $3,000,000 short term loan, to fund future holding company
expenses and anticipated expansion of contract manufacturing operations
conducted through Tanon. There can, however, be no assurance that the
Company will be successful in obtaining the $3,000,000 short term loan or
the subsequent raising of additional capital.
The remaining unexercised Class A and Class B warrants issued in February
1994, if exercised, could provide the Company with additional capital of
approximately $1,700,000. To date, Class A and Class B warrants to purchase
2,202,977 shares have been exercised and the Company received $1,584,121 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 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. At June 29, 1996, Tanon was in compliance
with all of these requirements. 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.
(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.
(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 $10,752,186 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, sold 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 sold additional 9%
convertible debentures in the aggregate principal amount of $1,100,000
during the remainder of May and June, 1996. The Company has agreed to pay a
placement fee equal to 5% of the proceeds raised in the sale of the
debentures, payable in installments during August and September 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, provided that in no event shall holder convert
less than $100,000 unpaid principal balance of Debentures at one time, or
(ii) 80% 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 holders of such debentures have agreed not
to sell any shares received on conversion until October 31, 1996 and the
Company has agreed to promptly file a registration statement with the
Securities and Exchange Commission covering the shares of the Company's
common stock underlying the debentures. 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 by November 30, 1996, 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.
The Company has initiated discussions with the Board of Directors of Aydin
concerning a possible merger or other combination with Aydin. The Company
is presently conducting due diligence reviews in concert with Aydin, and
any merger or other combination with Aydin would be subject to the outcome
of these due diligence reviews, the execution of a definitive acquisition
agreement and the approval of such transaction by both Boards of Directors.
There can be no assurance that these conditions will be satisfied and that
a transaction will be consummated.
At June 29, 1996, the Market Value of the common stock of Aydin was $13.50.
The Company is discussing a possible merger or other combination with Aydin
and accordingly, no adjustment to current market value has been made for
the difference between the purchase price of $18 per share and the closing
price as reported by the New York Stock Exchange at June 29, 1996 of $13.50
per share.
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.
The Company's 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. As of
July 30, 1996, the Company has loaned additional funds to BarOn of
$430,000. For a more thorough discussion of these transactions, see "Liquidity
and Capital Resources" below.
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, was accounted for using the purchase
method of accounting. On June 28,1996, the Company, through its subsidiary,
EATI, provided the initial funding in the amount of $1,000,000 for the
establishment of VCV, the first licensee formed under the Joint Venture
Agreement. For a more thorough discussion of this transaction, see "Liquidity
and Capital Resources" below.
Results of Operations
During the first six months of 1996, the Company's sales increased and cost
of sales increased in total value but decreased as a percentage of sales.
Selling, general and administrative expenses increased in total but also
decreased as a percentage of sales. The Company had a loss from operations of
$1,713,000 for the first six months of 1996. This compared with a loss from
operations of $10,035,000 in the first six months 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. During the second quarter of 1996, the Company's sales
increased, and cost of sales increased in total value but decreased as a
percentage of sales in comparison to the same period in 1995. Selling, general
and administrative expenses increased in total value but also decreased as a
percentage of sales compared to the second quarter of 1995.
The increase in sales to $46,413,000 in the first six months of 1996 from
$37,233,000 during the same period in 1995 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. Sales of $22,388,000 in the
second quarter of 1996 increased from $18,178,000 during the same period in
1995, however, they were lower by $1,637,000 than the quarter ended March 31,
1996 due to rescheduling of orders to later in the year by the Company's two
largest customers.
Cost of sales increased to $43,433,000 in the first six months of 1996 from
$37,061,000 in the same period in 1995 and decreased, as a percentage of revenue
to 93.6% in the first six months of 1996 compared with 99.5% in the same period
of 1995. Contributing to this decline was the Company's emphasis on inventory
management and purchasing controls in the fourth quarter of 1995 to
reduce its materials 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, specifically memory chips. This decrease in materials cost,
combined with the increased sales volume in the first six months of 1996, has
returned the Company's New Jersey facility to a positive gross margin. Gross
profit from contract manufacturing operations increased from $172,000 in the
first six months of 1995 to $2,980,000 in the first six months of 1996,
reflecting improved margins at both the New Jersey and California facilities.
Selling, general and administrative expenses increased to $4,693,000 in the
first six months of 1996, from $4,195,000 in the same period of 1995. The
increase was a result of fees paid to consultants, additional sales, general and
administrative staff hired during the 4th quarter of 1995 to support the
increased level of sales and additional general and administrative expenses
incurred in connection with establishing EAI principally as a holding company.
All operations are now conducted by various subsidiaries with EAI providing
strategic, financial and other support to these subsidiaries. Selling, general
and administrative expenses declined as a percentage of revenue to 10.1% in 1996
from 11.3% in the same period in 1995 because the increase in sales exceeded the
rate of the increase in selling, general and administrative expenses. Selling,
general and administrative expenses increased to $2,466,000 in the second
quarter of 1996 from $2,037,000 in the second quarter of 1995 and decreased, as
a percentage of revenue to 11.0% in the second quarter of 1996, compared with
11.2% in the same quarter of 1995. The increase in quarterly selling, general
and administrative expenses are primarily the result of the factors discussed
above.
Interest expense was $993,000 in the first six months of 1996 as compared
to $678,000 in the same period of 1995. The increase is attributable to interest
on convertible notes and debentures in the amount of $10,000,000 issued in
December 1995, and $8,100,000 issued in May 1996, interest on capitalized leases
related to equipment additions in 1995 and 1996, 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
expense for the second quarter of 1996 was $558,000 as compared to $350,000 for
the same period in 1995. This increase is primarily due to the factors discussed
above.
Interest income increased by $236,000 in the first six months of 1996 and
$111,000 for the second quarter of 1996, as compared to the same periods,
respectively, in 1995. These increases were a result of the investment of funds
received from the sale of convertible notes in December 1995 in the amount of
$10,000,000, and interest income arising from the investment of funds by ITI,
the Joint Venture formed with IAI.
The increase in other expense during the six months ended June 29, 1996 as
compared to the same period in 1995 is primarily attributable to a decline in
the market value of securities securing a note receivable, an increase in the
Company's equity interest in BarOn's results of operations, and the replacement
of the Company's existing asset based credit facility and Tanon separate
revolving line of credit with a new asset based credit facility. For a more
thorough discussion of this transaction, see "Liquidity and Capital Resources"
below. The increase in other expense during the quarter ended June 29, 1996 as
compared to the same period in 1995 is primarily attributable to the increase in
the Company's equity interest in BarOn's results of operations and the
replacement of the Company's credit facility and Tanon's revolving line of
credit.
At June 29, 1996, the Market Value of the common stock of Aydin was $13.50.
The Company is discussing a possible merger or other combination with Aydin and
accordingly, no adjustment
to current market value has been made for the difference between the purchase
price of $18 per share and the closing price as reported by the New York Stock
Exchange at June 29, 1996 of $13.50 per share.
The Company's consolidated backlog at June 29, 1996 was $35,213,000, a
decrease of $6,875,000 from the balance at March 30, 1996. The Company receives
purchase orders from its customer's in an irregular manner for delivery of
product over periods ranging from as short as 30 days or as long as a year.
Consequently, its backlog at the end of any period is not necessarily indicative
of future shipments to those customers. The backlog at both these dates did not
include any orders from the two customers lost this year. Although it is not
possible to predict with certainty the effect of losing the two customers
indicated above, the Company does not believe their loss will have a material
adverse effect on the Company in 1996 in view of its receipt of larger orders
from existing customers and orders received from new customers as well as the
prospects for receiving orders from existing and new customers.
Liquidity and Capital Resources
Liquidity, as discussed below, is measured in reference to the consolidated
financial position of the Company at June 29, 1996, as compared to the
consolidated financial position of the Company at December 31, 1995. Net cash
used by operations of $4,791,000 in the first six months of 1996 increased by
$3,509,000 from cash used in operations of $1,282,000 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 and the net loss for the six months partially offset by a decrease in
inventories.
Liquidity, as measured by cash and cash equivalents, decreased to $729,000
at June 29, 1996 from $9,830,000 at December 31, 1995. Liquidity as measured by
working capital (excluding Restricted Cash of $8,197,000) decreased to
$2,743,000 at June 29, 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 first six months of 1996, the
net loss for the first six months of 1996 and the amounts paid by the Company in
connection with the acquisition of 11.64% of the outstanding shares of Aydin
Corporation and the loan to EATI to fund VCV. The Company's ability to generate
internal cash flows results primarily from the sale of materials and labor
elements of its contract electronic manufacturing services. In the first six
months of 1996, revenue from such services increased by $9,180,000 from
$37,233,000 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 $2,208,000 in the first half of 1996 resulting
primarily from an increase in sales for the first six months of 1996. Inventory
decreased by $2,068,000 during the first six months of 1996.
At June 29, 1996, the Company had accounts payable of approximately
$10,501,000 of which approximately $222,303 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 six months of 1996
amounted to $11,950,000 resulting from the sale of 9% convertible debentures for
$8,100,000, the exercise of 165,714 Class B Warrants and the net proceeds from
capital leases. Approximately
$1,800,000 of such capital lease 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 $16,260,000 was used for investing activities for
the six months ended June 29, 1996. Funds in the amount of $3,859,000 were used
to purchase capital equipment, consisting primarily of two high speed surface
mount lines along with related equipment and a new computer system for the
Company's California contract manufacturing facility. In addition, funds in the
amount of $12,030,000 were used in making the investment in Aydin common stock
and the loan to EATI to fund VCV.
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. At June 29, 1996, Tanon was in
compliance with all of these requirements. 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 has incurred significant losses and had negative cash flows
from operations in each of the last four years and in the six months ended June
29, 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 raised approximately $33,200,000 and $8,100,000 during
1995 and the first six months of 1996, respectively, 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
$6,905,000 of such notes have been converted into 2,211,986 shares of the
Company's stock in accordance with their terms. In May and June, 1996, the
Company raised an additional $8,100,000 from the sale of 9% convertible
debentures which was used in part, in purchasing approximately 11.64% of the
outstanding shares of common stock of Aydin.
On July 1, 1996, the Company entered into a Loan Agreement with BarOn.
Pursuant to the BarOn Loan Agreement, the Company has agreed to maintain a
revolving line of credit of $2 million until July 1, 1998. The amount available
under the line will be reduced by any additional equity obtained by, or
borrowings of, BarOn. Advances under the line will be made in the Company's sole
discretion. Such advances bear interest at an annual rate equal to the sum of
the base commercial rate (the "Base Rate") as determined by IBJ Schroder Bank &
Trust Company from time to time plus one and one half percent (1 1/2%). Interest
is due each calendar quarter and, at the option of BarOn, any payment for such
interest may be deferred until the succeeding July 1. Deferred interest bears
additional interest at the rate of two and one half percent (2 1/2%) plus the
Base Rate. The Company, at its option, may require that interest be paid in cash
or by issuance of ordinary shares of BarOn at an agreed value of $4.00 per share
(the "Agreed Value"). BarOn, at its option, may make any interest payments due
on or before July 1, 1997 in ordinary shares of BarOn at the Agreed Value. As of
July 30, 1996, there was $430,000 of outstanding principal on the line of
credit. The entire amount outstanding under the line of credit is due on the
earliest of (i) an initial public offering by BarOn, (ii) sale of equity or
borrowings by BarOn exceeding the amount outstanding by at least $500,000
(unless prohibited by such lender or investor), (iii) availability of sufficient
cash flow, or (iv) June 1, 2000.
The Company's joint venture with IAI has selected one application for
development and exploitation, the Vista Application and a Licensee, Vista
Computer Vision, Ltd. has been formed. Vista is a system for the automatic
inspection of manufactured parts, capable of detecting defects as small as 20
microns. The funding for the initial operations of VCV was made by EATI in June
1996 as a capital contribution of $250,000 to VCV and a $750,000 Subordinated
Capital Note. The Note matures five years after its issuance and bears interest
at 8% per annum. Payments on the note may be made only out of remaining profits
of VCV after distribution of at least 50% of all accumulated profits. Upon
liquidation of VCV, the note would be subordinate to all other debts of VCV but
would have a preference over payments to equity holders of VCV.
The Company on June 28, 1996, loaned $1 million to EATI to enable EATI to
make the above capital contribution and loan to VCV. The Loan bears interest at
10% per annum, payable annually each year. The principal is repayable in five
equal annual installments beginning on June 1, 2002 and continuing on June 1 of
each year thereafter. The Company may at its option, accelerate the loan and
demand repayment 18 months after the date of issuance of the loan. This loan is
subordinated to all other debts of EATI but would have a preference over payment
to equity holders of EATI.
The Company has initiated discussions with the Board of Directors of Aydin
concerning a possible merger or other combination with Aydin. The Company is
presently conducting due diligence reviews in concert with Aydin, and the
Company and Aydin have had a number of discussions about the structure and terms
of possible combinations. Any merger or other combination with Aydin would be
subject to the outcome of these due diligence reviews, the execution of a
definitive acquisition agreement and the approval of such transaction by both
Boards of Directors. There can be no assurance that these conditions will be
satisfied and that a transaction will be consummated. A merger may require,
among other things additional cash resources in excess of those presently
available.
The purchase of the Aydin common stock, the Loan Agreement with BarOn and
the Loan to EATI in the amount of $1,000,000 to enable EATI to fund VISTA have
resulted in the need to raise additional capital. The Company is presently
seeking to borrow up to $3,000,000 for up to six months to fund its holding
company expenses, make advances to BarOn under the Loan Agreement and pay cost
incurred and to be incurred in conducting the Aydin due diligence reviews. Such
loan will be secured by the Aydin common stock owned by the Company. The
Company's financial projections indicate that operating losses and negative cash
flows will continue, although at a declining rate, during most of 1996. Although
the Company's credit facility with Schroder is sufficient to fund the Company's
contract manufacturing operations conducted through Tanon, the Company will need
to raise additional capital during the second half of 1996 or the first half of
1997 through the sale of common stock or the issuance of debt securities to
repay the $3,000,000 short term loan, to fund future holding company expenses
and anticipated expansion of contract manufacturing operations conducted through
Tanon. There can, however, be no assurance that the Company will be successful
in obtaining the $3,000,000 short term loan or the subsequent raising of
additional capital.
The remaining unexercised Class A and Class B warrants issued in February
1994, if exercised, could provide the Company with additional capital of
approximately $1,700,000. To date, Class A and Class B warrants to purchase
2,202,977 shares have been exercised and the Company received $1,584,121 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, Item 1,
Part II of the Company's Quarterly Report on Form 10-Q for the quarter ended
March 30, 1996 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.
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. Discovery in this matter is ongoing and there
have been no material developments in this matter during the period of time
covered by this report.
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 Item
1, Part II of the Company's Quarterly Report on Form 10-Q for the quarter ended
March 30, 1996 for additional information concerning this claim and other
pending claims.
PART II - OTHER INFORMATION
ITEM 3. STOCKHOLDERS MEETING
The Company held its annual meeting of shareholders on May 30, 1996. At
that meeting the shareholders re-elected Jules M. Seshens, Seth Joseph Antine
and Mark S. Hauser to the Board of Directors. In addition, the shareholders (by
a vote of 2,736,761 for and 1,564,795 against with 66,191 abstentions) approved
a proposal to amend the Company's 1994 Equity Incentive Stock Option Plan to
increase the number of shares of the Common Stock of the Company reserved for
issuance under such plan from 6 million to 9 million shares. Finally, the
shareholders (by a vote of 10,707,020 for and 118,278 against with 23,101
abstentions) ratified the selection of Arthur Andersen, LLP as the Company's
auditors for the fiscal year ending December 31, 1996.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
Exhibit No. Description
----------- -----------
10.1 Master Note dated July 1, 1996 from BarOn
Technologies, Ltd. to the Company.
10.2 Master Note Agreement dated July 1, 1996, between
the Company and BarOn Technologies, Ltd.
10.3 Manufacturing and Consulting Agreement dated as of
July 1, 1996 between the Company and BarOn
Technologies, Ltd.
10.4 Warrant to Purchase Ordinary Shares of BarOn
Technologies, Ltd.
27 Financial Data Schedule
(b) The registrant filed the following Form 8-K during the quarter
for which this report is filed:
NONE
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: August 13, 1996 By: /s/ Stanley O. Jester
---------------------
Stanley O. Jester,
Treasurer and Vice President - Finance
Chief Financial Officer
(Principal Financial and
Chief Accounting Officer)