SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 28, 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
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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 N
---
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As of September 28, 1996, there were 20,739,020 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)
-------------- -------------
Sept. 28, 1996 Dec. 31, 1995
-------------- -------------
ASSETS
Current Assets:
Cash and cash equivalents $ 105 $ 9,830
Restricted cash 8,049 8,004
Receivables, less allowance of $1,004 in 1996
and $385 in 1995 for doubtful accounts 13,338 12,092
Inventories 11,868 12,978
Prepaid expenses and other assets 1,052 1,610
--------- ---------
TOTAL CURRENT ASSETS 34,412 44,514
--------- ---------
Equipment and leasehold improvements 19,718 15,023
Less accumulated depreciation (8,405) (6,952)
--------- ---------
11,313 8,071
--------- ---------
Investments including those in affiliates 6,145 1,083
--------- ---------
Intangible assets 12,331 12,331
Less accumulated amortization (1,428) (813)
--------- ---------
10,903 11,518
--------- ---------
Other assets 765 454
Note receivable 553 985
--------- ---------
$ 64,091 $ 66,625
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Revolving Credit Facility $ 10,219 $ 9,146
Current portion of Capital Lease Obligations 1,272 558
Accounts payable 13,104 13,522
Accrued expenses 3,211 2,712
--------- ---------
TOTAL CURRENT LIABILITIES 27,806 25,938
--------- ---------
Long-Term Liabilities:
Long-term portion of Capital Lease Obligations 3,381 1,731
Convertible Notes and Debentures 10,170 12,200
Other long-term liabilities 3,176 3,672
--------- ---------
TOTAL LONG-TERM LIABILITIES 16,727 17,603
--------- ---------
TOTAL LIABILITIES 44,533 43,541
--------- ---------
Minority Interest 3,546 3,694
--------- ---------
Shareholders' Equity:
Common Stock 74,651 63,397
Accumulated deficit since January 1, 1986 (58,436) (43,532)
--------- ---------
16,215 19,865
Less common stock in treasury, at cost (203) (475)
--------- ---------
TOTAL SHAREHOLDERS' EQUITY 16,012 19,390
--------- ---------
$ 64,091 $ 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 Nine Months Ended
------------- ------------------
Sept. 28, Sept. 30, Sept. 28, Sept. 30,
1996 1995 1996 1995
---- ---- ---- ----
Sales $ 17,595 $ 18,895 $ 64,008 $ 56,128
----------- ----------- ----------- -----------
Cost of Sales 17,737 18,645 61,170 55,715
Selling, general and
administrative expenses 4,080 2,076 8,773 6,262
Purchased research and
development 959 13,534 959 19,546
----------- ----------- ----------- -----------
Total 22,776 34,255 70,902 81,523
----------- ----------- ----------- -----------
Loss from operations (5,181) (15,360) (6,894) (25,395)
----------- ----------- ----------- -----------
Interest expense 667 315 1,660 993
Interest income (182) (111) (495) (188)
Other expense 599 222 1,507 671
----------- ----------- ----------- -----------
Net loss ($6,265) ($15,786) ($9,566) ($26,871)
=========== =========== =========== ===========
Loss per common share ($0.31) ($1.21) ($0.52) ($2.35)
=========== =========== =========== ===========
Weighted average common
shares outstanding 20,154,063 13,088,865 18,568,941 11,437,851
=========== =========== =========== ===========
The accompanying notes are an integral part of these consolidated condensed
financial statements.
3
EA INDUSTRIES, INC. AND SUBSIDIARIES
Consolidated Condensed Statement of Shareholders' Equity
For The Nine Months Ended September 28, 1996
(UNAUDITED)
(thousands of dollars)
Common Stock Treasury Stock Accumulated
------------ -------------- Deficit
Shares Amount Shares Amount Since
Jan. 1,
1986
-------------------------------------------------------------------------------
Balance, December 31,
1995 16,045,447 $63,397 (218,476) ($475) ($43,532)
Net Loss (9,566)
Exercise of stock
options 361,122 1,008
Exercise of Class A
and B Warrants 961,798 1,415
Notes receivable from
stock sales -- (1,096)
Debt conversion 3,442,637 9,805
Shares Issued for Services -- 78 125,000 272
Other 21,492 44
Net unrealized loss on
marketable securities (5,364)
Translation Adjustment 26
==============================================================================
Balance, September 28, 1996 20,832,496 $74,651 (93,476) ($203) ($58,436)
==============================================================================
The accompanying notes are an integral part of these consolidated condensed
financial statements.
4
EA INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
(UNAUDITED)
(thousands of dollars)
Nine Months Ended
-------------------------
Sept. 28, Sept. 30,
1996 1995
--------- ----------
Cash Flows from Operating Activities:
Net Loss $ (9,566) $(26,871)
Adjustments to reconcile net loss to net
cash provided/(used) by operating activities:
Depreciation and amortization 2,357 2,035
Valuation adjustment - Note Receivable 432 --
Purchased research and development 959 19,546
Equity in loss of affiliate 812 558
Common shares issued in payment of placement fee (Convertible
Debentures 350
Common shares issued in payment of interest 88
Cash provided/(used) by changes in:
Restricted Cash (430) --
Receivables (1,246) 1,849
Inventories 1,110 (662)
Prepaid expenses & other assets 558 809
Accounts payable and accrued expenses 81 (2,290)
Accrued excess leased space costs (326) (319)
Other operating items - net (644) (715)
-------- --------
Net cash used by operations (5,465) 6,060
-------- --------
Cash flows from Investing Activities:
Capital Expenditures (4,659) (3,390)
Purchase of proprietary software (371) --
Investments, including those in affiliates (12,094) (11,500)
Cash acquired in purchase of Tanon -- 890
Proceeds from the sale of discontinued operations -- 394
-------- --------
Net cash provided/(used) by investing activities (17,124) (13,606)
-------- --------
Cash flows from Financing Activities:
Net borrowings/(repayments) under credit facilities 1,073 (258)
Net proceeds from capital leases 2,364 --
Net proceeds from issuance/(repayments) of long-term debt 8,100 --
Proceeds from the exercise of stock options 1,008 1,546
Net proceeds from sales of common stock (private
placement) and exercise of warrants 319 14,695
Issuance of note receivable in connection with
acquisition -- (1,000)
-------- --------
Net cash provided/(used) by financing activities 12,864 14,983
-------- --------
Net Increase/(Decrease) in Cash and Cash Equivalents (9,725) (4,683)
Cash and Cash Equivalents at Beginning of Period 9,830 6,157
-------- --------
Cash and Cash Equivalents at End of Period $ 105 $ 1,474
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 1,561 $ 955
======== ========
Non cash financing activities:
Conversion of debt to equity $ 9,805
Common shares issued in payment of placement fee (Convertible
Debentures) 350
Common shares issued in payment of interest 88
--------
TOTAL $ 10,243
========
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 (the "Joint Venture" or "ITI") 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 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 September 28, 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.
6
(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 nine months ended September 28, 1996. The Company's
financial projections indicate that operating losses and
negative cash flows will continue during the remainder of 1996
and the first quarter of 1997. The Company is presently seeking
to borrow an additional $3,000,000 for up to twelve months and
the Company will need to raise additional capital during 1997.
Failure to obtain such additional funds could have a material
adverse effect on the Company. For further discussion see
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
(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 the 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
September 28, 1996, Tanon was in compliance with all of these
requirements except the required ratio of earnings to certain
fixed charges. Schroder has, however, agreed to waive this
requirement for the period ended September 28, 1996. Based on
current forecasts, the Company believes that it will not be in
compliance with the required ratio of earnings to certain
fixed charges at December 31, 1996. The Company believes,
however, that Schroder will waive such requirement at that
time although there can be no assurance that Schroder will do
so. Failure to obtain such waiver would result in a default
under the Schroder Line which would have a material adverse
effect on the Company.
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.
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 paid a
placement fee equal to approximately 5% of the proceeds raised
in the sale of the debentures. Fifty-Thousand Dollars of the
placement fee was paid in cash and the remainder was satisfied
by the issuance of 125,000 shares of Common Stock of the
Company. 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.
After the purchase of shares of Aydin the Company initiated
discussions with the management of Aydin concerning the
possibility of a merger or other business combination. Both
companies conducted due diligence on the business and prospects
of each other, including discussions about the structure and
terms of possible combinations. As a result of these
discussions, the Company made an offer to merge with Aydin,
however, Aydin's Board of Directors rejected the Company's final
offer. The Company withdrew its offer on October 8, 1996 and has
terminated discussions with Aydin. At the present time, the
Company will continue to hold its Aydin shares as an investment
but the Company may at some time borrow against such shares,
sell all or a portion of such shares or otherwise dispose of
such shares in another fashion.
As a result of the merger discussions being terminated, the
Company reflected a direct charge to Shareholders' Equity of
approximately $4,782,000 reflecting a net unrealized loss on
marketable securities of investee. In addition, approximately
$800,000 of capitalized costs incurred in connection with the
possible merger with Aydin has been charged to expense in the
third quarter of 1996.
(6) BarOn Loan Agreement and Joint Venture--Vista funding
-----------------------------------------------------
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 determinate 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 October 31, 1996, there was
$1,201,000 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 an 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, EATI (hereinafter defined) in
June 1996 as a capital contribution of $250,000 to ITI 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
ITI. 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 September 28, 1996, the Joint Venture formed with IAI had
remaining cash of $8,049,000. Such cash can only be used to fund
expenses of the Joint Venture and accordingly has been
classified as Restricted Cash by the Company.
7
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
October 31, 1996, the Company has loaned additional funds to BarOn of
$1,201,000, under the BarOn Loan Agreement.
On August 8, 1995, the Company, through a 52.3% owned
subsidiary, Electronic Associates Technologies Israel, Ltd. ("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, 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 Vista Computer Vision, Limited ("VCV"), the first licensee formed under the
Joint Venture Agreement.
On October 9, 1996, the Company's contract manufacturing
subsidiary, Tanon, signed a letter of intent to acquire Tri-Star Technologies,
Inc. ("Tri-Star"). Tri-Star is a full-service contract manufacturer that
fabricates PC Boards, designs and builds electronic prototypes, and assembles
and tests a wide range of products, including printed circuit boards. Completion
of the acquisition is subject to due diligence reviews by Tri-Star, Tanon and
the Company, as well as execution of a definitive purchase agreement.
Results of Operations
- ---------------------
During the first nine 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 admin istrative expenses increased
both in total and as a percentage of sales. The Company had a loss from
operations of $6,894,000 for the nine months of 1996 which included a charge of
$959,000 representing the charge to expense for purchased in process-research
and development resulting from the Company's investments in BarOn and the Joint
Venture. This compared with a loss from operations of $25,395,000 in the nine
months of 1995 which included a charge of $19,546,000 representing the charge to
expense for purchased in-process research and development resulting from the
Company's investments in BarOn and the Joint Venture.
The increase in sales to $64,008,000 in the first nine months of
1996 from $56,128,000 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 $17,595,000 in
the third quarter of 1996 decreased from $18,895,000 during the same period in
1995 and were also lower by $4,793,000 than the quarter ended June 30, 1996 due
to a decline in orders from some of the Company's more significant customers.
The Company expects reduced sales volumes to these customers to continue through
the fourth
8
quarter of 1996 and then to begin improving in the first quarter of 1997 at
which time the Company also expects sales to new customers should also begin.
Cost of sales increased to $61,170,000 in the nine months of
1996 from $55,715,000 in the same period in 1995 and decreased, as a percentage
of revenue to 95.6% in the first nine months of 1996 compared with 99.3% in the
same period of 1995. Contributing to this decline was the Company's emphasis on
inventory management and purchasing controls begun 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 of
memory chips which are a component in many products assembled by the Company.
Gross profit from contract manufacturing operations increased from $413,000 in
the first nine months of 1995 to $2,838,000 in the first nine months of 1996,
reflecting increased revenue and improved margins at both the New Jersey and
California facilities. Gross margin in the quarter ended September 28, 1996 was
slightly negative as a result of sales volume dropping, as discussed above,
below the Company's break-even point.
Selling, general and administrative expenses increased to
$8,773,000 in the first nine months of 1996, from $6,262,000 in the same period
of 1995. The increase was primarily a result of additional expenses in the
amount of $800,000 relating to the terminated merger discussions with Aydin
Corporation, the increase in allowance for doubtful accounts, the Company's
share of selling, general and administrative expenses of VCV and, to a lesser
extent, 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 operating 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 increased as a
percentage of revenue to 13.7% in the first nine months of 1996 from 11.2% in
the same period in 1995 primarily due to the factors discussed above. Selling,
general and administrative expenses increased to $4,080,000 in the third quarter
of 1996 from $2,076,000 in the third quarter of 1995 and also increased as a
percentage of revenue to 23.2% in the third quarter of 1996, compared with 11.0%
in the same quarter of 1995. The increase in quarterly selling, general and
administrative expenses is the result of the factors discussed above.
Purchased research and development primarily represents the
funding provided to BarOn under the BarOn Loan Agreement (hereinafter defined)
in excess of the Company's one third interest in the net assets of BarOn which
management has determined to be in-process research and development with no
alternative future use and, accordingly, was charged to expense.
Interest expense was $1,660,000 in the first nine months of 1996
as compared to $993,000 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 Schroder Loan Facility. Interest expense
for the third quarter of 1996 was $667,000 as compared to $315,000 for the same
period in 1995. This increase is primarily due to the factors discussed above.
Interest income increased by $307,000 for the first nine months
of 1996 and by $71,000 for the third 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 the Joint Venture.
The increase in other expense during the nine months ended
September 28, 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
9
and Tanon separate revolving line of credit with a new asset based credit
facility with Schroder. The increase in other expense during the quarter ended
September 28, 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 with the Schroder Loan Facility.
The Company's consolidated backlog at September 28, 1996 was
$38,745,000, an increase of $3,532,000 from the balance at June 29, 1996.
The Company typically receives orders from its customers on a flexible schedule
to meet the sales/delivery schedule to the ultimate consumer. These purchase
orders specify delivery of product over periods ranging from as short as 30 days
or as long as a year and are adjusted as the sales to ultimate consumers change.
The amount of inventory produced and stored on behalf of customers also varies
from time to time. Consequently, the Company's backlog at the end of any period
is not necessarily indicative of future shipments to those customers.
Liquidity and Capital Resources
- -------------------------------
Liquidity, as discussed below, is measured in reference to the
consolidated financial position of the Company at September 28, 1996, as
compared to the consolidated financial position of the Company at December 31,
1995. Net cash used by operations of $5,465,000 in the first nine months of 1996
decreased by $595,000 from cash used in operations of $6,060,000 in the same
period in 1995. Net cash used by operations was primarily a result of an
increase in accounts receivable and the net loss for the nine months partially
offset by a decrease in inventories.
Liquidity, as measured by cash and cash equivalents, decreased
to $105,000 at September 28, 1996 from $9,830,000 at December 31, 1995.
Liquidity as measured by working capital (excluding Restricted Cash of
$8,049,000) was a negative $1,443,000 at September 28, 1996 as compared with a
positive working capital of $10,572,000 at December 31, 1995. The negative
position in working capital was a result of capital expenditures, the net loss
for the first nine 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 as well as the loan to EATI to fund VCV and advances to BarOn under
the BarOn Loan Agreement. 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 nine months of 1996, revenue
from such services increased by $7,880,000 from $56,128,000 in the same period
of 1995. Accounts receivable increased by $1,246,000 in the first nine months of
1996 resulting primarily from an increase in average days outstanding of
balances owed by a few of the Company's customers. The Company continually
evaluates these receivable balances and maintains constant dialogue with the
management of these customers. Inventory decreased by $1,110,000 during the
first nine months of 1996.
At September 28, 1996, the Company had accounts payable of
approximately $13,104,000 of which approximately $955,802 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 nine
months of 1996 amounted to $12,864,000 resulting from the sale of 9% convertible
debentures for $8,100,000, the
10
exercise of 165,714 Class B Warrants, the exercise of stock options, 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 $17,124,000 was used for investing
activities for the nine months ended September 28, 1996. Funds in the amount of
$4,659,000 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 $12,094,000 were used in making the investment
in Aydin common stock and advances made to BarOn under the BarOn Loan Agreement.
The Company has incurred significant losses and had negative
cash flows from operations in each of the last four years and in the nine months
ended September 28, 1996. In order to continue operations, the Company has had
to raise additional capital to offset cash
11
utilized in operating and investing activities. The Company raised
approximately $33,200,000 and $9,400,000 during 1995 and the first nine 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 $7,930,000 of such notes have been
converted into 2,595,881 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"). On August 19, 1996, GFL Advantage Fund transferred and
assigned its $2,070,000 outstanding principal amount note of the Company to
Irwin L. Gross, Chairman of the Company and certain related family trusts (the
"Note Holders"). In connection with such assignment, the Company canceled the
prior note held by GFL Advantage Fund and reissued certain 7% convertible
subordinated notes of the Company in the aggregate principal amount of
$2,070,000 due December 29, 1997 (the "Convertible Notes") to the Note Holders.
These Convertible Notes will mature on December 29, 1997 and are convertible
into shares of the Company's Common Stock at the conversion price per share of
$2.67. In order to induce the Note Holders to convert the Convertible Notes, the
Company has agreed to issue an aggregate of 245,318 additional Shares of Common
Stock of the Company to the Note Holders in exchange for the Note Holders'
conversion of the Convertible Notes prior to December 31, 1996. In such event,
no interest payments will be made on the Convertible Notes.
12
The Company's financial projections indicate that operating
losses and negative cash flows will continue, during the remainder of 1996
and the first quarter of 1977. The purchase of the Aydin common stock, the BarOn
Loan agreement and the EATI Loan have resulted in the need to raise additional
capital. In addition, the Company's contract manufacturing operations conducted
through Tanon require additional working capital as a result of delaying the
shipments of orders at the requests of customers, operating losses by Tanon and
capital expenditures by Tanon. On October 28, 1996, the Company borrowed
$1,000,000 from Irwin L. Gross, Chairman of the Company. The terms of such
borrowing will be the same terms as the Additional Borrowings (as hereinafter
defined). The Company is presently seeking to borrow an additional $3,000,000
(the "Additional Borrowings") for up to twelve months to fund a portion of the
aggregate amount required to fund its holding company expenses, make advances to
BarOn under the BarOn Loan Agreement, pay costs incurred in connection with the
terminated merger negotiations with Aydin, and provide additional working
capital to Tanon. Although the company has no current plans to sell the Aydin
common stock owned by the Company, such loan may be secured by the Aydin common
stock. Further, the Company will need to raise additional capital during 1997
through the sale of Common Stock or the issuance of debt securities to repay the
$4,000,000 short term loan, to fund the future holding company expenses, provide
additional working capital to Tanon, fund anticipated expansion of contract
manufacturing operations conducted through Tanon, and complete the purchase of
Tri-Star. At the date hereof, the Company does not have any commitments,
understandings or agreements for the $3,000,000 short term loan or additional
capital needs, and accordingly, there can be no assurance that the Company will
be successful in obtaining the $3,000,000 short term loan or the additional
capital. Failure to obtain such short term loan or the additional capital could
have a material adverse effect on the financial condition and operations of the
Company.
Except for historical matters contained in this report,
statements made in this report are forward-looking and are made pursuant to
the safe harbor provisions of the Private Securities Litigation Reform Act of
1995. Investors are cautioned that these forward-looking statements reflect
numerous assumptions and involve risks and uncertainties which may affect the
Company's business and prospects and cause actual results to differ materially
from these forward-looking statements, including loss of current customers,
reductions in orders from current customers, or delays in ordering by current
customers, failure to obtain anticipated contracts or orders from new customers,
or expected order volume from such customers, failure to obtain financing,
higher material or labor costs, unfavorable results in litigation against the
Company, failure to consummate the acquisition of Tri-Star Technologies, Inc.,
economic, competitive, technological, governmental, and other factors discussed
in the Company's filings with the Securities and Exchange Commission.
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
13
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. 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 of data, about mid-1979. Lemco's environmental consultants have
recently issued a new report indicating that, based upon further hydrogeologic
data, the contamination occurred before 1979. The Company's experts believe that
the data upon which Lemco's experts base their opinion is unreliable and seek
further data from additional hydrogeologic tests which have not yet been
performed. 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 have commenced and are expected to continue through December, 1996.
In the event the matter cannot be resolved through mediation, the case will be
referred back to the Court for trial.
In addition, by letter dated August 31, 1988, the United States
Environmental Protection Agency ("EPA") notified EAI that the EPA had
identified EAI as one of the parties potentially responsible for clean up costs
at, and for any other possible damages in connection with the Bridgeport Rental
and Oil Services Superfund Site in Logan Township, New Jersey (the "B.R.O.S.
Site"). Rollins Environmental Services, Inc., (which allegedly transported waste
to the site on behalf of EAI) and the other defendants have negotiated a
settlement in principle with the governmental plaintiffs and a consent decree is
expected to be filed with the court in or before December of 1996. Rollins has
agreed to make payments pursuant to the expected consent decree on behalf of
EAI, and to include the claims against EAI in the release from the government
entities.
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 these claims.
14
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
Exhibit 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: November 12, 1996 By: /s/ Stanley O. Jester
---------------------------------
Stanley O. Jester,
Treasurer and Vice President - Finance
Chief Financial Officer
(Principal Financial and
Chief Accounting Officer)