SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996 Commission file number 1-4680
EA INDUSTRIES, INC.
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(Exact Name of Registrant as Specified in its Charter)
New Jersey 21-0606484
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
185 Monmouth Parkway 07764-9989
West Long Branch, New Jersey (Zip Code)
(Address of Principal Executive Offices)
Registrant's telephone number, including area code: (908) 229-1100
Former Name - Electronic Associates, Inc.
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Common Stock New York Stock Exchange
Preferred Stock Purchase Rights New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter-period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No ___
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The aggregate market value of the voting stock held by non-affiliates of
the Registrant was $32,140,026 as of April 10, 1997.
As of April 10, 1997, there were 7,501,714 outstanding shares of the
Registrant's Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement with respect to the Company's Annual Meeting of Shareholders to
be held in June 1997 -Part III.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
1
PART I
ITEM 1. BUSINESS
Introduction
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. Accordingly, the
Company provides services to act in part, or in whole, as the manufacturing
function of its customers. 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 ("ITI") with Israel
Aircraft Industries, Ltd., an Israeli government corporation ("IAI"), seeks to
develop and market new, high technology products. The investment in BarOn was
acquired in 1995. BarOn is in the process of developing an electronic computer
input pen that captures handwriting independent of surface or language. See
"1996 Developments".
The Company, through a 52.3% owned subsidiary, Electronic Associates
Technologies Israel, Ltd. ("EATI"), formed the joint venture ("Joint Venture" or
"ITI") with IAI in August 1995 to review, evaluate and exploit the commercial
potential of products based on non-military technologies developed by IAI. See
"1996 Developments."
1996 Developments
Overview. During 1996, the Company's sales increased to approximately $81.6
million from approximately $77.1 million in 1995 and cost of sales increased
both in total value and as a percentage of sales. Selling, general and
administrative expenses also increased both in total value and as a percentage
of sales. The Company had a net loss of approximately $29.9 million for 1996,
which included a charge of approximately $5.2 million for an unrealized loss on
its investment in Aydin Corporation, a charge of approximately $4.2 million
representing additional interest expense incurred in connection with the
issuance of convertible debt, a write down of the Company's investment in the
Joint Venture by $1.6 million resulting from the Company's decision to sell or
otherwise dispose of such investment and charges of approximately $1.4 million
primarily representing the charge to expense of purchased in-process research
and development resulting from the Company's investment in BarOn. This compared
with a net loss of approximately $30.9 million for 1995, which included a charge
of approximately $19.6 million representing the charge to expense of purchased
in-process research and development resulting from the Company's investment in
BarOn and the Joint Venture with IAI.
In October 1996, the Company adopted a plan to refocus on its core business
of contract manufacturing. The key elements of that plan are (i) concentrating
the capital resources of the Company in Tanon, (ii) limiting future funding of
BarOn and ITI by the Company and exploring alternative sources of funding for
BarOn and ITI or selling or otherwise disposing of the Company's interests in
BarOn and ITI, (iii) using the Company's holdings in Aydin Corporation to
provide funding for Tanon and the Company and (iv) attempting to increase
revenues and improve profit margins in Tanon by focusing on sales and margins,
improving purchasing and inventory management and expanding the range of
services provided by Tanon.
Schroder Loan Facility. On May 3, 1996, Tanon replaced the Company's
existing asset based credit facility and the Tanon separate revolving line of
credit with a new asset based credit facility provided by IBJ Schroder Bank &
Trust Company ("Schroder") to Tanon. Under the terms of this new facility,
Schroder will advance up to $13,000,000, (reduced to $11,500,000, the estimated
maximum amount needed, by amendment dated April, 1997) 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 Company
expects that its outstanding balance under the Schroder Loan Facility will be
significantly less than $11,500,000 at all times during 1997. At December 31,
1996,
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$8,054,000 was outstanding under the Schroder Loan Facility, which constituted
the total availability of the borrowing base. 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 Closing fee of $125,000 to Schroder 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 December 31, 1996, Tanon was in compliance with all of these
requirements, except the required ratio of earnings to certain fixed charges. By
agreement dated in April 1997 Schroder has agreed to waive such requirement for
December 31, 1996 and has adjusted the required financial ratios to reflect the
results of operations of Tanon contained in the current business plan of Tanon
for 1997. Substantially all of the assets of the Company are pledged as
collateral to secure the Schroder Loan Facility.
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 its subsidiaries with
EAI providing strategic, financial and other support to such subsidiaries.
Acquisition of Common Stock of Aydin Corporation and Issuance of Convertible
Debentures. On May 6, 1996, the Company purchased 596,927 shares of the common
stock of Aydin Corporation ("Aydin"), a NYSE listed company, in a private
transaction 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 shares acquired 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 NYSE was $15.50. The Company paid a premium
for these shares, representing the single largest block of outstanding stock of
Aydin, in order to facilitate discussions with Aydin concerning a possible
merger or other combination with Aydin as hereinafter discussed. Aydin designs,
manufacturers and sells wireless, digital LOS radios and various other
telecommunications equipment 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, on May 3,
1996, the Company sold certain 9% convertible subordinated 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 subordinated debentures in the aggregate principal amount of
$1,100,000 during the remainder of May and June 1996 (such convertible
subordinated debentures in the aggregate principal amount of $8,100,000 are
collectively referred to herein as the "Original Convertible Debentures"). The
Company paid a placement fee equal to 5% of the proceeds raised in the sale of
the Original Convertible Debentures in cash of $50,000 during August and
September 1996 and by delivery of 125,000 shares of Common Stock of the Company.
These Original Convertible Debentures had a maturity date of May 3, 1998 and
were convertible into shares of the Company's Common Stock at a conversion price
per share equal to the lesser of (i) four dollars ($4) per share or (ii) 80% of
the average closing price of the Company's Common Stock as traded on the NYSE
for the five (5) days preceding the date of the notice to the Company that the
holder wished to exercise its conversion right. The Company agreed to adjust the
ceiling price of each of the Debentures if the holder of such debenture
refrained from conversions and short sales from approximately the middle of
January through April 11, 1997. As a result the conversion price of each of the
original Convertible Debentures has been reduced from $4.00 per share
(pre-Reverse Stock Split price) to $1.50 per share (post-Reverse Stock Split
price). As of the date hereof, $3,786,000 principal amount of such Original
Convertible Debentures have been converted into 2,314,640 shares of Common Stock
(post Reverse Stock Split Shares).
During May 1996, the Company initiated discussions with the Board of
Directors of Aydin concerning a possible merger or other combination with Aydin.
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 terminated
discussions with Aydin. At the present time, the Company continues to hold its
Aydin shares and has pledged such Aydin shares as security for borrowings of
$2,000,000. See "Capital Raised."
3
On January 23, 1997, Aydin and the Company entered into a Registration
Rights Agreement granting the Company and each subsequent holder of at least
250,000 of the shares of Aydin Common Stock currently held by the Company the
right on two occasions to demand registration of such shares and in addition
granting piggyback registration rights. Each demand is deemed to be an offer to
sell to Aydin or its assigns all shares covered by such demand at the then
current market price. The offer must be accepted or it lapses within ten days.
On April 4, 1997, Aydin filed a Registration Statement on Form S-3 (the
"S-3") covering the 596,927 shares of Aydin stock held by the Company (the
"Aydin Shares"). The Company has granted an assignable option (the "Bard
Option") to I. Gary Bard, the Chairman of Aydin, to purchase the Aydin Shares
held by the Company for $11 per share. The option expires on the earliest of (i)
the close of business on the fifth business day following the effective date, as
determined by the Securities and Exchange Commission, of the S-3 or (ii) June 2,
1997. If the option is not exercised, the Company intends to sell the Aydin
Shares in public or private sales at the then prevailing market price or upon
negotiated prices.
As a result of the termination of the merger discussions, and the Company's
decision to sell the Aydin Shares the Company has recorded a $5,156,000 charge
to expense representing the difference between the amount paid by the Company
for the shares of Aydin Common Stock and the estimated net realizable value of
such shares. In addition, approximately $689,000 of costs incurred in connection
with the terminated merger discussions with Aydin has been charged to expense in
1996. The closing price of Aydin common stock as reported by the NYSE at April
7, 1997 was $11 1/8 per share.
Joint Venture with IAI. The Company has determined that the Joint Venture
is not an essential element of its core strategy. As a result, the Company has
concluded that it will not make any further investments of capital in the Joint
Venture and that it will explore its strategic options with respect to the Joint
Venture and has decided to sell or otherwise dispose of its interest in the
Joint Venture. The Company is unable at this time to predict whether it will be
able to sell its interest in the Joint Venture, or the timing or consideration
for such sale or other disposition. If the Company refuses to provide additional
capital to the Joint Venture when necessary, the Company will be in default
under its agreement with IAI and the Company may forfeit its interest in the
Joint Venture.
The Company 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. Based
on the current business plan of VCV, VCV will need additional capital in the
second half of 1997. The $1,000,000 funding for the initial operations of VCV
was made by EATI in June 1996 through a capital contribution of $250,000 to ITI
and a loan of $750,000 to VCV as evidenced by 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.
On June 28, 1996, the Company loaned $1 million to EATI (the "EATI Loan") to
enable EATI to make the above capital contribution to ITI, which, in turn,
funded VCV, and to make the loan to VCV. The EATI 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 EATI Loan and demand
repayment 18 months after the date of issuance of the loan. The EATI Loan is
subordinated to all other debts of EATI but would have a preference over
payments to equity holders of EATI.
At December 31, 1996, the Joint Venture formed with IAI had remaining funds
of $7,608,000. Such funds can only be used to fund expenses of the Joint
Venture. With the exception of the initial investment of $6.3 million in EATI,
and the EATI Loan, the Company is unable to determine at this time the effect,
if any, of the Company's investment in the Joint Venture on the results of
operations of the Company or on its liquidity and capital resources. As a result
of the Company's reduced level of capital (as compared to December 31, 1995) and
its decision to commit such capital to Tanon, the Company has decided not to
provide funding for any additional applications for development and exploitation
and has decided not to provide additional funding for Vista. Failure to make
additional required capital contributions would be a default under the joint
venture agreement with IAI. If the Company is in default as described above, it
may not be able to recover such Restricted Cash and may forfeit its interest in
the Joint Venture. In addition, the Company is reviewing its options relative to
the Joint Venture and has decided to sell or
4
otherwise dispose of its interest in the Joint Venture. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations".
The Company has decided to sell or otherwise dispose of its interest in the
Joint Venture. The Joint Venture has been classified as an unconsolidated
subsidiary held for sale and the carrying value has been adjusted, by a charge
to other expense of $1,647,000 in 1996, to management's best estimate of net
realizable value based on a discounted cash flow analysis of anticipated
proceeds less cost of disposal.
BarOn Investment. BarOn has incurred significant losses and had negative
cash flows from operations since inception. BarOn currently has no revenues from
operations. BarOn's financial projections indicate that operating losses and
negative cash flows will continue at least through the remainder of 1997. BarOn
is currently seeking additional financing to fund its on-going operations and
has indicated that it intends to sell the 95,694 shares of common stock of the
Company that are currently held by BarOn to satisfy a portion of such financing
needs. BarOn has sold 25,200 of such shares and expects to receive gross
proceeds of $125,000 from such sales. These proceeds represent BarOn's only
current available resources. BarOn's other resources consist of approximately
$140,000 being held as security for a letter of credit to one of its vendors.
BarOn is currently negotiating for the release of any such funds beyond the
obligations to this vendor. The Company has ceased making advances under the
BarOn Loan Agreement and has informed BarOn that it will not make further major
advances.
BarOn's current obligations to vendors, employees, attorneys and
accountants for professional services, and otherwise currently exceed $600,000
and BarOn is currently unable to meet such current obligations. In February
1997, James M. Curran, the acting Chief Executive Officer of BarOn resigned to
seek other opportunities. In March 1997, Dr. Ehud Baron resigned as an officer
of BarOn and Irwin L. Gross, Chairman of the Company has been designated acting
President of BarOn. At the request of certain creditors of BarOn, a hearing was
held in the regional court of Haifa, Israel on April 8, 1997 to appoint a
temporary receiver for BarOn. The hearing was adjourned without any action being
taken other than rescheduling the hearing to June 23, 1997.
Management of BarOn is attempting to design a plan to reorganize BarOn to
avoid a liquidation of BarOn. Such a plan would involve restructuring the
operations of BarOn to minimize costs, attempting to negotiate reduced payments
or revised payment schedules with creditors of BarOn, and obtaining additional
debt or equity financing of BarOn. As part of the development of this plan, the
Company has requested that the management of BarOn conduct an intensive review
of the development status of the technology of BarOn along with an estimate of
the additional cost and time necessary to develop a marketable product. No
assurance can be given that BarOn will be successful in the efforts to implement
a restructuring plan.
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 provide to BarOn a revolving line of credit of $2 million until July
1, 1998 ("Revolving Line Period"). During the Revolving Line Period, any unused
availability under the line will be reduced in the event, and to the extent,
that BarOn is able to obtain other funds through equity or debt financing.
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 Schroder 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 March 31, 1997,
BarOn had borrowed $1,368,705, which was outstanding under the BarOn Loan
Agreement. In addition, the entire amount outstanding under the line of credit
during and upon expiration of the Revolving Line Period is due on the earliest
to occur of (i) an initial public offering by BarOn, (ii) the 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 excess
cash flow from operations in an amount equal to or in excess of the amount
outstanding, 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 "BarOn Warrant") to purchase 1 million shares of BarOn's ordinary
shares at any time before
5
July 1, 2001 at an exercise price equal to the Agreed Value. The BarOn Warrant
contains antidilution provisions substantially similar to those described above
and the Company has piggyback and demand registration rights for shares
purchased pursuant to the BarOn 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 a subsidiary of
the Company will manufacture all of BarOn's products on an exclusive basis 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. As
of the date of this report, the Company is not yet manufacturing products for
BarOn.
Tri-Star Technologies. On December 23, 1996, the Company signed letters of
intent to acquire Tri-Star Technologies Co. ("Tri-Star") and the approximately
120,000 square foot building and real property occupied by Tri-Star in Methuen,
Massachusetts. 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. The purchase price for
the building and real property is $3.5 million; payable $2.5 million in cash and
$1.0 million in Common Stock of the Company. The purchase price for Tri-Star is
$16 million, of which $1 million was made as a non-refundable deposit in
January, 1997. The remaining $15 million is payable $9 million in cash at
closing and $6 million in Common Stock of the Company. In addition to the cash
necessary to complete the purchase of Tri-Star, the Company would need
additional capital to provide adequate working capital for the ongoing
operations of Tri-Star. Closing of these purchases is subject to completion of
due diligence by the Company and approval by the Board of Directors of the
Company. If closing does not occur by July 31, 1997, Tri-Star may terminate
discussions and retain the non-refundable deposit.
The Company does not have sufficient available capital resources to
complete the purchase of Tri-Star and the related property. For a more complete
discussion of the Company's capital resources see Item 7. "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources: 1996".
The Company will attempt to negotiate a reduction of the portion of the
purchase price due at closing and in addition will consider raising additional
capital in the form of debt or equity to enable it to complete the purchase of
Tri-Star, however no assurance can be given that the Company will be successful
in such negotiations or in raising the additional capital. Accordingly, no
assurance can be given that such acquisition will occur. See Item 7.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources: 1996".
Resignations. Effective November 15, 1996, Joseph R. Spalliero resigned as
President and Director of the Company. Upon the expiration of Mr. Spalliero's
employment agreement on January 3, 1997, Mr. Spalliero became an independent
sales representative for Tanon. Mr. Spalliero agreed to limit the sale of his
shares of Common Stock in the Company during any calendar quarter through
December 31, 1998 to 25,000 shares per each quarter. After such period, there
will be no further restrictions on the sales of his shares. Irwin L. Gross,
Chairman of the Board of the Company, has succeeded Mr. Spalliero as the
President of the Company. Effective January 17, 1997, Bruce P. Murray resigned
as a Director of the Company. Effective January 27, 1997, David J. Reibstein
resigned as a Director of the Company.
Reverse Stock Split. On December 16, 1996, the Board of Directors of the
Company approved and declared a one-for-four reverse stock split of the shares
of Common Stock of the Company which became effective as of the close of
business on December 27, 1996 (the "Record Date"), such that each holder of
record on the Record Date was entitled to receive, as soon as practicable
thereafter, one (1) share of no par value Common Stock of the Company for every
four (4) shares of no par value Common Stock held by such person on the Record
Date (the "Reverse Stock Split"). All references to shares, share prices, per
share amounts and stock option plans have been adjusted to give retroactive
effect to the one-for-four reverse stock split.
Capital Raised. The Company has incurred significant losses and had negative
cash flows from operations in each of the last three years. 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 $15,870,000 during 1995 and from January 1, 1996 through January
31, 1997, respectively, from the issuance of Common Stock, the exercise of stock
options and warrants, borrowings secured by the Aydin Shares, and the sale of
convertible notes
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and debentures. Among such capital raising activities, in December 1995, the
Company completed the sale of 7% convertible subordinated notes of the Company
in the aggregate principal amount of $10,000,000 to GFL Performance Fund Limited
("GFL Performance Fund") and GFL Advantage Fund Limited ("GFL Advantage Fund").
As of this date, $7,930,000 principal amount of such notes had been converted
into 810,661 shares of the Company's Common Stock in accordance with their
terms. On August 19, 1996, GFL Performance Fund Limited transferred and assigned
its $1,025,000 outstanding principal amount note of the Company to an unrelated
third party, who thereafter converted such note. Also, 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 Convertible Notes of the Company in the aggregate principal
amount of $2,070,000 due December 29, 1997 (the "Original Convertible Notes") to
the Note Holders. These Original Convertible Notes had a maturity date of
December 29, 1997 and were convertible into shares of the Company's Common Stock
at the fixed conversion price per share of $2.67 (pre Reverse Stock Split
basis). On February 6, 1997, the Company amended the Original Convertible Notes
(the "Convertible Notes") by (i) increasing the aggregate principal amount of
such notes to $2,725,000 (the purchase price paid by the Note Holders for the
Original Convertible Notes) and (ii) reducing the fixed conversion price of such
notes to $1.50 per share, such amendments were made in consideration of the Note
Holders foregoing interest and making available certain other loans to the
Company.
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. See "1996 Developments - Acquisition of Common Stock of Aydin
Corporation and Issuance of Convertible Debentures."
During the period beginning on October 25, 1996 and ending on April 10,
1997, the Company has borrowed a total of $4,520,000 from the Chairman of its
Board of Directors, certain related trusts and unaffiliated investors. These
loans are represented by certain 10% Series A Convertible Notes (the "Series A
Notes") issued by the Company. The Series A Notes will mature on January 22,
1999 and are convertible at the option of the holder (i) after January 1, 1998,
into shares of Common Stock of the Company at a conversion price of $3.50 per
share, or (ii) into shares of Common Stock of Tanon after completion of an
initial public offering of shares of Common Stock of Tanon at a conversion price
equal to the quotient of (a) twenty five million dollars ($25 million), divided
by (b) the number of shares of Common Stock of Tanon that were issued and
outstanding at the close of business on the day immediately prior to the
effective date of the registration statement covering the shares of Common Stock
of Tanon offered in such initial public offering, without giving effect to the
number of shares of Common Stock of Tanon being offered in such initial public
offering.
The Series A Notes bear interest at the rate of 10% per annum, payable
annually in arrears on January 15, 1998 and January 22, 1999. Interest is
payable at the option of the holder in cash or stock of the Company or Tanon at
the conversion prices described above. Repayment of the Series A Notes will be
secured by a second lien on the stock of Tanon held by the Company and on
substantially all the assets of Tanon. These notes are subordinated to amounts
owed by Tanon to Schroder and the ability of Tanon to distribute or loan funds
to the Company to make interest payments on the Series A Notes is restricted
pursuant to the Schroder Loan Facility.
In addition, during January 1997, the Company borrowed $1,000,000 from each
of two unrelated parties, Ace Foundation, Inc. ("Ace") and Millenco, LP
("Millenco"). These loans are represented by two promissory notes in the
principal amount of $1,000,000 each (the "EAI Notes") issued by the Company to
Ace and Millenco, respectively. The EAI Notes will mature on January 6, 1999 and
January 17, 1998, respectively, and are not convertible into Common Stock of
either the Company or Tanon. The EAI Notes bear interest at the rate of 13.5%
per annum, payable on the first day of each month beginning as early as March 1,
1997. Repayment of the EAI Notes is secured by a lien on the Aydin Shares. In
consideration for such loans, the Company also granted a warrant to purchase
50,000 shares of Common Stock of the Company at an exercise price of $1.50 per
share to each of Ace Foundation, Inc. (the "Ace Warrant") and Millenco, LP (the
"Millenco Warrant").
Contract Electronic Manufacturing
The Company believes that original equipment manufacturers ("OEMs") have
recognized that, by using contract electronic manufacturers, they can improve
their competitive position, realize an improved return on investment, and
concentrate in areas of their greatest expertise, such as research, product
design and development, and marketing.
7
In addition, contract electronic manufacturing allows OEMs to: bring new
products to market more rapidly and adjust more quickly to fluctuations in
product demand; avoid additional investment in plant, equipment, and personnel;
reduce inventory carrying and other overhead costs; and establish fixed unit
costs over the life of a contract.
The contract electronic manufacturing business consists 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.
The Company manufactures over 1,500 different assemblies which are
incorporated into product lines of over 30 different companies. The Company
provides contract electronic manufacturing services primarily for manufacturers
of: micro, mini and mainframe computers; computer peripheral equipment; high
quality graphic equipment; office equipment; telecommunications equipment;
consumer appliances, industrial tools and measuring devices.
The technology required to manufacture electronic products is becoming
increasingly costly and complex. Traditionally, manufacturers used the so-called
"through-hole" technology in assembling printed circuit boards. However, a newer
technology, known as "surface-mount" technology ("SMT") has gained acceptance in
the manufacture of these products.
The Company has invested in new manufacturing equipment to accommodate the
increased business for SMT equipment. SMT allows for production of a smaller
circuit board, with greater component and circuit density, resulting in
increased performance. Management believes that SMT will continue to constitute
an increasing percentage of printed circuit board production and assembly.
Research and Development
The Company did not incur any significant research and development
expenditures other than the purchased research and development relating to the
BarOn and IAI transactions.
Customers and Marketing
Most of the Company's sales are to industrial companies which use the
Company's contract electronic manufacturing services to manufacture products for
a variety of high-technology applications, including those for computers,
telecommunications devices, high-quality graphics, and medical testing devices.
Substantially all of the Company's net sales during the year ended December
31, 1996 were derived from customers which were also customers of the Company
during 1995. In 1996, the customers which accounted for more than 10% of the
Company's net sales were Advanced Fibre Communications, Inc., Dialogic
Corporation and Iris Graphics, which accounted for 33%, 16%, and 13% of net
sales, respectively. Currently, the Company remains dependent upon its large
customers. The loss of one or more of these customers could have a material
adverse effect on operations. Since customer contracts can be canceled and
purchase levels can be changed or purchases delayed at any time, the timely
replacement of canceled, delayed or reduced contracts with new orders cannot be
assured. In addition, substantially all of the Company's customers are in the
computer, telecommunications and electronics industries which are each subject
to rapid technological changes. Such technological changes could have a material
adverse effect on the Company's major customers which, in turn, could have a
material adverse effect on the Company's results of operations. Because the loss
of one or more of these customers could have a material adverse effect on its
operations, the Company maintains continuous dialogue with all its customers to
ensure satisfactory quality and an on-time delivery service. Also, the Company's
marketing programs are focused to identify and develop opportunities to provide
contract electronic manufacturing services to new customers.
Historically, the Company has had substantial recurring sales from existing
customers. The Company seeks to develop long-term relationships with a small
number of customers. Current marketing efforts are aimed at obtaining similar
long-term relationships with new customers, as well as maintaining its current
customer base. Although the Company believes that its relations with its
customers are good and that their business will continue, specific purchase
orders are generally of less than one year in duration, and there is no
assurance that future orders will be obtained. The volume of contract
manufacturing business also depends upon the success of customers' sales.
8
The Company employs a variety of marketing techniques for the sale of its
services, including direct sales efforts by an in-house sales force, and the
utilization of independent sales representatives.
The Company's contract electronic manufacturing services in 1996 were
provided to customers in the following markets in the approximate percentage of
Company sales, respectively, indicated:
Market Served Customers Representing 10% or
- ------------- -----------------------------
by Customers Percentage of 1996 Sales more of Sales
- ------------ ------------------------ -------------
Telecommunications 62% Advanced Fibre Communications,
Inc., Dialogic Corporation
High Quality Graphics 14 Iris Graphics, Inc.
Computer Peripherals 11
Power Generation 4
Medical Devices 3
Computers 2
Miscellaneous 4
---
Total 100%
===
9
Backlog
The Company's backlog consists of firm purchase orders which typically are
shipped within twelve months from time of receipt of the order. Because purchase
orders may be accelerated or deferred by rescheduling or canceled by payment of
cancellation charges, backlog does not necessarily reflect future sales levels.
The Company's backlog at the end of 1996 was $27,958,000. It is anticipated that
substantially all of the 1996 year-end backlog will be delivered in 1997. The
Company's backlog at the end of 1995 was $47,305,000.
Governmental Regulation
The Company's operations are subject to certain federal, state and local
regulatory requirements relating to environmental, waste management, health and
safety matters. Management believes that the Company's business is operated in
compliance with all material applicable environmental, waste management, health
and safety regulations. However, new or modified requirements, which are not
currently anticipated, could be adopted creating additional expense for the
Company.
New Jersey has enacted an Industrial Site Remediation Act ("ISRA"). As is
the case with many other companies doing business in New Jersey, if the Company
were to move from its present facilities in New Jersey, sell its assets or
effect a change in its ownership, such a transaction would be subject to the
requirements of ISRA. Under ISRA, before such a transfer could take place, a
determination would need to be made to ensure there has been no unremediated
discharge of hazardous substances or wastes on the site; or a satisfactory
clean-up plan would need to be submitted to the New Jersey Department of
Environmental Protection and Energy ("DEPE"). Failure to comply with ISRA is
grounds for voiding the transfer by the purchaser or by DEPE, among other
enforcement remedies.
Employees
As of December 31, 1996, 1995 and 1994, the Company had 449, 514, and 334
total employees, respectively. Individuals employed at the Company's
manufacturing facility in Nogales, Sonora, Mexico, which has been sold, and
included in such totals were 124 in 1994 .
Quality Control
The Company achieved "ISO 9000" certification for its West Long Branch
manufacturing facility in 1995 and its Fremont, California facility in early
1996. International Standards Organization ("ISO") certification refers to a
series of quality system standards adopted to ensure that companies worldwide
are in compliance with a documented system of quality control processes and
procedures.
Suppliers
The Company relies on third-party suppliers for components which it uses in
its assembly processes. Components generally are ordered when the Company has a
firm purchase order or letter of intent from a customer to purchase the
completed assemblies. At various times in the electronics industry there have
been shortages of these kind of components. However, the Company is not
dependent upon a single source of supply for materials or components that it
considers important to its business, because multiple suppliers are available
for most important components or their substantial equivalent.
10
Competition
The Company competes with numerous domestic and offshore contract
manufacturers as well as the in-house manufacturing capabilities of certain of
its existing and potential customers. Some of the Company's competitors have
substantially greater manufacturing, financial and marketing resources than the
Company. The Company believes that the significant competitive factors in
contract manufacturing are technology, quality, service, price and ability to
deliver finished products on a timely and reliable basis. The Company believes
that it competes favorably with respect to these factors.
Contracts
The Company's contracts provide for services to be performed primarily on a
fixed-price basis, although change orders on large contracts are not unusual.
The contracts generally provide termination rights for customers, but upon such
termination the Company would be entitled to reimbursement for allowable costs
already incurred. The Company has no long-term contracts for the sale of
services that are individually material.
Facilities
See "Properties" at Part I, Item 2 of this Annual Report on Form 10-K.
International Operations
BarOn and ITI conduct their operations primarily in Israel.
Patents and Trademarks
The Company does not hold any patent rights which are material to the
contract electronic manufacturing business, nor does the Company believe that
patent protection is an important competitive factor in its market. The Company
has received federal trademark registration for the mark "EAI", which is also
registered in many other countries.
ITEM 2. PROPERTIES
Currently, the Company's executive offices are located at 185 Monmouth
Parkway, West Long Branch, New Jersey 07764 at which the Company presently
occupies approximately 81,000 square feet. During 1996 the lease on the
Company's Tucson, Arizona facility was canceled.
The Company, through its wholly-owned subsidiary, Tanon, occupies a single
facility with 105,000 square feet at 46360 Fremont Boulevard, Fremont,
California, through which it conducts production and administrative operations
for its West Coast customers.
See Note 4 of the Notes to Consolidated Financial Statements at Part II Item
8, of this Annual Report on Form 10-K for information regarding the rents
payable under the above leases.
ITEM 3. LEGAL PROCEEDINGS
Lemco Associates.
11
In October, 1992, Lemco Associates L.P., a limited partnership ("Lemco"),
the owner of property previously owned by EAI, initiated an action against EAI
and others alleging, among other things, that the defendants created
environmental contamination at the property and is seeking damages in
unspecified amounts. EAI has denied Lemco's allegations, asserted numerous
defenses to the claims asserted and asserted a counterclaim against Lemco and
cross claims against co-defendants and others for indemnification and
contribution. In addition, the Company has made a demand upon its insurance
carriers for coverage for the claims made by Lemco and cross claims and third
party claims may be filed against these insurance companies seeking
indemnification against these claims. To date, the Company's insurance carriers
have agreed to pay 71% of its defense costs under a reservation of rights.
Discovery in this matter is ongoing. By letter dated January 22, 1997, Lemco
provided the Company with a statement of its remediation costs to date, as well
as an estimate of future remediation costs associated with the contamination for
which it seeks recovery in this action. Specifically, Lemco claims that it has
expended approximately $609,000 in remediation costs, including fees for legal
oversight and consultation. It further estimates that its future remediation
costs will amount to approximately $5,000,000. Such amount is included in a
report made by Lemco's environmental consultants based on their current
assessment of the extent of contamination and the method and period required to
complete the remediation, as well as anticipated New Jersey Department of
Environmental Protection and Energy ("DEPE") oversight costs and fees for legal
oversight and consultation. Further, by letter dated June 7, 1995, Lemco
provided the Company with an appraisal report made by a real estate appraisal
company engaged by Lemco in support of Lemco's claim for diminution in the value
of the property. Such report states that it is the appraisal company's opinion
that the market value of the property as of May 23, 1988 was $3.6 million and as
of April 14, 1995 was $750,000. Lemco's appraisal expert subsequently determined
in October 1995 that the value of the property as of April 14, 1995 was
$960,000. Lemco purchased the property in question in 1979 for approximately
$400,000. 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 have estimated that, based upon
hydrogeologic data gathered to date by Lemco's experts, the major source of
continuing contamination of groundwater was released into the water table about
late 1984 or, using more conservative extrapolations, about mid-1979. Based on
the foregoing, management believes that the range of possible loss in this
matter ranges from zero to approximately $8.24 million, not including costs and
expenses, such as legal and expert fees, which will be incurred in connection
with this matter, and not taking into account the amount of any loss which may
be offset by insurance coverage as discussed above. The Company and its
consultants recently completed the investigation and evaluation of additional
information received from Lemco and have determined that Lemco's remediation
cost estimates are overstated. The Company's experts have estimated the cost of
remediation as between $1.5 million and $2.5 million. There is no assurance that
the outcome of this matter will come within the above-mentioned range of
possible loss.
The Company is vigorously defending this matter. On May 3, 1996, the
Superior Court of New Jersey referred this case to mediation in an effort to
explore opportunities for settlement. Mediation proceedings have commenced and
continued through March 1997 and the case is currently scheduled for trial
beginning on April 28, 1997.
12
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The following information is provided with respect to the Annual
Stockholders Meeting of the Company.
a) Held: May 30, 1996.
b) Directors Elected:
NO. OF VOTES
VOTES WITHHOLDING
FOR AUTHORITY
----- ------------
Seth Joseph Antine 12,053,775 972,786
Mark S. Hauser 12,054,896 971,665
Jules M. Seshens 12,639,441 387,120
Directors whose term continued:
Irwin L. Gross
Bruce P. Murray Resigned January 17, 1997
David J. Reibstein Resigned January 27, 1997
Joseph R. Spalliero Resigned November 15, 1996
William Spier
c) Other Matters Voted on by Shareholders:
1. To amend the Company's Equity Incentive Stock Option Plan to
increase the number of shares of Common Stock of the Company reserved for
issuance under such plan from 1,500,000 to 2,250,000 shares.
VOTES VOTES
FOR AGAINST ABSTAINING
----- ------- ----------
3,088,133 1,885,851 71,091
2. To ratify the selection of Arthur Andersen LLP as the Company's
auditors for the fiscal year 1996.
VOTES VOTES
FOR AGAINST ABSTAINING
----- ------- ----------
12,875,782 120,778 30,001
13
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
EAI's Common Stock is traded on the New York Stock Exchange ("NYSE"). The
range of quarterly Common Stock price for 1996 and 1995 is as follows:
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
- -----------------------------------------------------------------------------------------------------------------------
High Low High Low High Low High Low
------------------- ------------------- ------------------- ----------------------------
1996 21 1/2 12 22 1/2 13 17 10 12 1 5/8 (1)
1995 38 1/2 25 1/2 36 23 47 22 1/2 24 1/2 17 1/2
(1) Effective as of the close of business on December 27, 1996 (the "Record
Date"), there was a one-for-four reverse stock split of the shares of Common
Stock of the Company. All historical stock prices above and throughout this
document have been restated to reflect the reverse stock split.
There were approximately 4,021 record holders of the Company's Common Stock
as of April 10, 1997.
The Company has not had a profitable year since 1990 and there have been no
cash dividends declared since 1956 and no stock dividends declared since 1966.
If the Company were to become profitable, it would expect that all of such
earnings would be retained to support the business of the Company. Accordingly,
the Company does not anticipate paying cash dividends on its Common Stock in the
foreseeable future.
Although the Company's Common Stock is currently listed and trading on the
NYSE, currently and since September 11, 1991, the Company has not been in
compliance with one or more of the criteria necessary for continued listing on
the NYSE. The Company and the NYSE have had discussions with respect to this
issue. As of the date of this Report, the Company believes that it is in
compliance with all of the NYSE's continued listing criteria, with the exception
of not having the minimum net tangible assets available to Common Stock of
$8,000,000 and minimum average earnings of $600,000 for each of the last three
fiscal years. To the Company's knowledge, as of the date hereof, the NYSE has
not taken any affirmative action to delist the Common Stock, but, as it has each
time it has authorized the listing of additional shares on the NYSE, it stated
in letters dated March 29, 1995, March 14, 1996, August 29, 1996, December 16,
1996 and December 27, 1996 approving the listing of additional shares of Common
Stock, that consideration is being given to the appropriateness of continued
listing of the Company's Common Stock. Management of the Company met with
representatives of the NYSE on March 6, 1996 to discuss this matter and the
Company's financial plan for 1996, after which the NYSE indicated in its letter
dated March 14, 1996 that the Company's financial results for the first quarter
of 1996 will be reviewed and measured against such plan. Management of the
Company met again with representatives of the NYSE on July 31, 1996 to discuss
the Company's results of operations for the first quarter ended March 30, 1996
and the Company's future plans, with no further changes or developments
resulting from such meeting. If the Company's Common Stock is delisted from the
NYSE, it could have a material adverse effect on the price and liquidity of the
Company's Common Stock and the Company's ability to raise capital from the sale
of equity.
In the event that the Company's Common Stock is delisted from the NYSE, it
could seek to list its Common Stock on the National Association of Securities
Dealers Inc.'s Automated Quotation System ("NASDAQ") or on another exchange.
Although the Company believes that it is currently eligible for listing on the
NASDAQ Small-Cap Market System (but not on the NASDAQ National Market System),
there can be no assurance that the Company would be eligible for listing its
Common Stock on NASDAQ or any exchange at such time. If the Company would be
ineligible to list its Common Stock on NASDAQ or any other exchange at such
time, there would be no established trading market for the Company's Common
Stock except as may be established in the National Association of Securities
Dealers Inc.'s OTC Bulletin Board Service or in the "pink sheets," which could
have a material adverse effect on the price and liquidity of the Company's
Common Stock. In addition, the Company's Common Stock could then become subject
to the Commission's "penny stock" rules which regulate broker-dealer sales
practices. Such rules could restrict the ability of broker-dealers to sell the
Company's Common Stock, which could also have a material adverse effect on the
price and liquidity of the Company's Common Stock.
14
ITEM 6. SELECTED FINANCIAL DATA
(Thousands of Dollars Except for Per Share Amounts, Common
Shares Outstanding and Other Data)
1996 1995 1994 1993 1992
- --------------------------------------------------------------------------------------------------------------
[----Note 1----]
Operating Results: [------Note 4-------]
Net Sales from Continuing Operations $ 81,625 $ 77,085 $30,539 $26,024 $22,248
Provision for Restructuring $ -- $ -- $ 2,400 $ -- $ 285
Loss from Continuing Operations before Taxes $(29,954) $(30,894) $(4,784) $(5,348) $(3,524)
Loss from Continuing Operations, Net $(29,954) $(30,894) $(4,784) $(4,664) $(3,189)
Income from Discontinued Operations, Net $ -- $ -- $ -- $ 1,327 $ 651
Net Loss $(29,954) $(30,894) $(4,784) $(3,337) $(2,538)
Income (Loss) Per Common Share:
Continuing Operations (Note 3) $ (6.24) $ (10.01) $ (3.79) $ (7.04) $ (4.88)
Discontinued Operations $ -- $ -- $ -- $ 2.00 $ 1.00
Net Loss (Note 3) $ (6.24) $ (10.01) $ (3.79) $ (5.04) $ (3.88)
- --------------------------------------------------------------------------------------------------------------
Financial Position:
Current Assets $ 22,319 $ 37,022 $16,969 $ 7,355 $14,547
Current Liabilities $ 31,485 $ 25,834 $12,603 $ 8,614 $11,594
Long Term Obligations $ 12,400 $ 16,028 $ 2,998 $ 4,694 $ 5,466
Working Capital $ (9,166) $ 11,188 $ 4,366 $(1,259) $ 2,953
Net Equipment and Leasehold Improvements $ 10,522 $ 8,048 $ 2,719 $ 3,603 $ 4,344
Total Assets $ 50,971 $ 61,252 $22,845 $12,762 $19,836
Shareholders' Equity (Deficit) $ 7,086 $ 19,390 $ 7,244 $ (546) $ 2,776
Common Shares Outstanding (Note 3) 5,601 4,011 2,027 665 662
Book Value per Common Share (Note 3) $ 1.27 $ 4.84 $ 3.56 $ (0.84) $ 4.20
- --------------------------------------------------------------------------------------------------------------
Other Data:
Number of Shareholders of Record 4,152 4,254 4,447 4,600 4,718
Number of Employees 449 514 334 315 458
Orders Received (Note 2) $ 62,400 $105,150 $30,326 $18,805 $31,592
Sales Backlog at Year-End $ 27,958 $ 47,305 $19,240 $19,453 $26,676
Note 1-1995 amounts include the impact of the Tanon Acquisition, BarOn
investment, and Joint Venture with IAI (See Note 3 of the Notes to Consolidated
Financial Statements as Part II, Item 8 of this Annual Report Form 10-K).
Note2-Orders received in 1995 includes $15,710,000 of Tanon backlog at
December 31, 1994.
Note 3-The Board of Directors approved a one-for-four reverse stock split of the
shares of Common Stock of the Company to be effective as of the close of
business on December 27, 1996. The transaction had the effect of reducing the
number of net shares outstanding to 5,600,632 shares from 22,402,528 shares.
In addition, all references referring to shares, share prices and per share
amounts have been adjusted to give retroactive effect to the one-for-four
reverse stock split.
Note 4-The Company has decided to sell or otherwise dispose of its interest
in the Joint Venture and, accordingly, such interest has been classified as an
unconsolidated subsidiary held for sale. 1995 amounts have been reclassified
to conform to the 1996 presentation.
15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Overview
On May 6, 1996, the Company purchased 596,927 shares of the common stock of
Aydin, representing approximately 11.64% of the outstanding common shares of
Aydin. During May 1996, the Company initiated discussions with the Board of
Directors of Aydin concerning a possible merger or other combination with Aydin.
After due diligence and numerous 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. For a more thorough discussion of this transaction. See
Part I, Item 1, "Business -- 1996 Developments-Acquisition of Common Stock of
Aydin Corporation and Issuance of Convertible Debentures."
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. For a more thorough discussion of
this transaction. See Part I, Item 1, "Business -- 1996 Developments-Joint
Venture with IAI."
On December 23, 1996, the Company's contract manufacturing subsidiary,
Tanon, signed a binding letter of intent to acquire Tri-Star and in January,
1997 placed an initial deposit of $1.0 million toward the purchase of Tri-Star.
The letter of intent is binding on Tri-Star, but subject to approval by the
Board of Directors of the Company. 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. For a more thorough discussion of this
transaction. "See Part I, Item 1, Business -- 1996 Developments - Tri-Star
Technologies."
Results of Operations: 1996 compared to 1995
During 1996, the Company's sales increased to approximately $81.6 million
from approximately $77.1 million in 1995 and cost of sales increased both in
total value and as a percentage of sales. Selling, general and administrative
expenses also increased both in total value and as a percentage of sales. The
Company had a net loss of approximately $29.9 million for 1996, which included a
charge of approximately $5.2 million for an unrealized loss on its investment in
Aydin Corporation, a charge of approximately $4.2 million representing
additional interest expense incurred in connection with the issuance of
convertible debt, a write-down of the Company's investment in the Joint Venture
by $1.6 million resulting from the Company's decision to sell or otherwise
dispose of such investment and charges of approximately $1.4 million primarily
representing the charge to expense of purchased in-process research and
development resulting from the Company's investment in BarOn. This compared with
a net loss of approximately $30.9 for 1995, which included a charge of
approximately $19.6 million representing the charge to expense of purchased
in-process research and development resulting from the Company's investments in
BarOn and the Joint Venture with IAI.
The increase in sales to $81,625,000 in 1996 from $77,085,000 in 1995
resulted primarily from an increase in sales to the existing customer base and
sales to several new customers partially offset by the loss of two customers.
Sales to existing customers in 1996 were approximately $69,100,000 and sales to
new customers were approximately $12,500,000.
Cost of sales in 1996 increased to $81,145,000 from $76,422,000 in 1995 and
increased as a percentage of revenue in 1996 to 99.4% compared with 99.1% in
1995. The increase in absolute terms was primarily due to the increase in
revenues. The increase as a percentage of sales was primarily due to the low
margins on one large initial contract with a new customer. Revenues from this
customer in 1996 were approximately $4,000,000. The Company completed this
contract at the end of 1996 and negotiated higher sales prices on a new contract
with this customer in early 1997. The impact on cost of sales resulting from
this contract was partially offset by a decline in material costs resulting from
a market driven decline in prices of memory chips which are a component in many
products assembled by the Company. Cost of sales as a percentage of revenue is
impacted by margins on individual contracts and the total amount of revenues
relative to fixed cost. The Company considers its margins on individual
contracts to be acceptable. Therefore, a reduction in cost of sales as a
percentage of revenue will result from an increase in sales in addition to
improvements in other elements of cost of sales.
16
Gross profit from contract manufacturing was $480,000 in 1996 compared with
$663,000 in 1995. The decline in profit was due to the same elements that caused
an increase in cost of goods sold between the two periods.
Selling, general and administrative expenses increased to $11,379,000 in
1996 from $9,703,000 in 1995. The increase was primarily a result of additional
expenses in the amount of $689,000 relating to the terminated merger discussions
with Aydin Corporation, an increase in the amount of $800,000 in allowance for
doubtful accounts primarily related to one former customer and, to a lesser
extent, additional sales, general and administrative staff hired during the
fourth quarter of 1995 to support the increased level of sales and sales effort
at Tanon and additional general and administrative expenses incurred in
connection with operating EAI principally as a holding company. All operations
are now conducted by its subsidiaries with EAI providing strategic, financial
and other support to these subsidiaries. Selling, general and administrative
expenses as a percentage of revenue increased to 13.9% in 1996 as compared to
12.6% for the same period in 1995.
Purchased research and development primarily represents approximately
$1,000,000 of the funding provided to BarOn under the BarOn Loan Agreement which
management has determined to be in-process research and development with no
alternative future use and, accordingly, which, was charged to expense.
Interest income of $229,000 in 1996 increased from $180,000 in 1995. This
increase was a result of the investment of funds received from the sale of
convertible notes in December 1995 in the amount of $10,000,000.
Interest expense in 1996 was $7,559,000 compared to $1,357,000 in 1995. The
increase is primarily attributable to a charge to interest expense in the amount
of $4,200,000 reflecting the amortization of the fixed discount feature of
convertible notes and debentures issued in December 1995 and May and June 1996,
and to a lesser extent the stated interest on convertible notes and debentures,
a $655,000 charge representing the increase in the principal amount of the
Original Convertible Notes and interest on capitalized leases related to
equipment acquired in 1995 and 1996.
The loss on investment is a result of the write down of the Company's
investment in Aydin Corporation by $5,156,000 due to a decline in the market
price of Aydin Common Stock considered to be other than temporary
Other expenses in 1996 were $5,186,000 compared to $1,131,000 in 1995. The
increase is primarily attributable to a write down of the Company's investment
in the Joint Venture by $1,647,000 resulting from the Company's decision to sell
or otherwise dispose of such investment (See Item 1 - 1996 Developments -- Joint
Venture with IAI), a decline in the market value of EAI Common Stock securing a
note receivable by $907,000, a write off of fixed assets of $563,000 and an
increase of approximately $350,000 in the Company's share of cost in the Joint
Venture.
Results of Operations: 1995 compared to 1994
During 1995, the Company's sales increased, cost of sales increased (both in
total value and as a percentage of sales), and selling, general and
administrative expenses increased in total but decreased as a percentage of
sales. The Company had a loss from operations of $28,586,000 for 1995, which
included charges of $7,874,000 and $11,672,000, representing the charge to
expense of purchased in-process research and development resulting from its
investments in BarOn and the Joint Venture with IAI, respectively. This loss
compared with a loss from operations of $4,211,000 in 1994 which included a
provision for restructuring of $2,400,000.
The amount of the purchase price in excess of the estimated fair value of
the 25.01% equity interest in BarOn acquired by the Company during the first
quarter of 1995 and the additional 8.33% equity interest acquired on September
30, 1995 represents in-process research and development with no alternative
future use. Accordingly, the estimated value associated with such purchased
research and development of $6,012,000 and $1,862,000, respectively, was charged
to expense.
No portion of the purchase price of the Company's indirect interest in ITI
has been capitalized because all of the technologies are in the initial stage of
development and considered to be in-process research and development. Therefore,
the Company has recorded a charge to expense of $11,672,000 with respect to
formation of ITI.
The increase in sales to $77,085,000 in 1995 from $30,539,000 in 1994,
resulted primarily from the additional sales generated by Tanon, which had sales
of $50,452,000 in 1995. Sales from the Company's prior existing
17
operations decreased to $26,633,000 from $30,539,000 in 1994 which decrease was
a direct result of the closing of the Company's Tucson, AZ and Nogales, Mexico
plants. The majority of the services provided to customers at the Tucson
facility was transferred to the Company's manufacturing facility in New Jersey;
a moderate level of manufacturing services was transferred to the Company's
Fremont facility at the customer's request, and the assembly-related services
provided at the Nogales, Mexico facility were sold, together with the assets of
that facility. The sales of $50,452,000 for Tanon in 1995 decreased moderately
from sales of $50,735,000 in 1994, which reflects the loss of revenue from two
customers who terminated their relationship with Tanon during this period,
offset by the growth in sales to Tanon's existing customer base.
Cost of sales in 1995 increased to $76,422,000 from $27,759,000 in 1994
primarily due to the additional sales generated by Tanon. Cost of sales
increased, as a percentage of revenue, to 99.1% in 1995 compared with 90.9% in
1994, resulting primarily from (i) the increase in materials cost for a customer
with whom the Company has expanded its material handling services, (ii) a price
reduction in sales of material by Tanon to one of its existing customers, which
was negotiated in response to competitive pricing pressures, and (iii) a shift
in the New Jersey facility's focus from low volume, high margin customers to
high volume, low margin customers which resulted in a lower gross profit margin
and a higher volume break-even point for the facility. In addition, the Company
incurred a loss on services rendered to a major customer. In January, 1996 the
Company renegotiated the pricing on future services for this customer. Also
during the fourth quarter of 1995, the Company initiated action to reduce its
material cost as a percentage of revenues. This action includes hiring new
personnel to increase the Company's material purchasing skill level and
upgrading the Company's material control computer system. Consistent with the
Company's shift in focus to high volume during 1995 the Company began the
process of adding to and upgrading its high speed SMT capabilities. Two new high
speed SMT lines were acquired in 1995 to increase the existing New Jersey
facility capabilities, a new high speed SMT line was acquired in early 1996 to
increase the Fremont facility capabilities and two additional high speed SMT
lines are planned to replace two older lines in 1996. Cost of sales at the
Company's prior existing operation increased to 106% of sales in 1995 from 90.9%
of sales in 1994 as a result of the above. As noted above, the pricing for
services to a major customer was renegotiated in January. This renegotiation,
combined with increased sales volume in the first two months of 1996, has
returned the Company's prior existing operations to a positive gross profit
margin, which Management expects will continue although there can be no
assurance that such operations will continue to have a positive gross profit
margin. Tanon's cost of sales increased moderately from 93.4% of sales to 95.4%
of sales between 1994 and 1995, also as a result of the above.
Selling, general and administrative expenses increased to $9,703,000 from
$4,591,000 in 1994. The increase in the level of selling, general and
administrative expenses was primarily related to the addition of the Tanon
operations. Selling, general and administrative expense for the Company's prior
existing operations increased to $6,167,000 in 1995 from $4,591,000 in 1994 as a
result of fees paid and warrants to purchase the Company's stock granted to
consultants, the payment of consulting fees for several directors, the
elimination of salary reductions for employees of the Company which had been in
effect during 1994 and additional general and administrative expense incurred in
connection with the Company's investment in ITI, partially offset by reductions
in sales, general and administrative staffs during the first and second
quarters. The Company has, however, hired additional sales, general and
administrative staff in the fourth quarter to support the increased level of
sales. Selling, general and administrative expenses declined as a percentage of
revenue to 12.6% in 1995 from 15.0% in 1994 primarily because the increase in
sales exceeded the rate of the increase in selling, general and administrative
expenses. Selling, general and administrative expense for Tanon was at
approximately the same level of $2,768,000 in 1995 as in 1994.
As a result of the Tanon Acquisition, during the first quarter of 1995 the
Company began taking steps to close and sell its Southwest operations in Tucson,
Arizona and Nogales, Mexico to eliminate the operating expenses associated with
these facilities. The closing of the Tucson, Arizona operations and sale of the
Nogales, Mexico operations were completed in the second quarter of 1995. The
majority of the operations which were supporting the Company's sales base out of
the Tucson location were transferred to the New Jersey facility in the second
quarter of 1995. Additionally, the Company reduced indirect manufacturing and
sales, general and administrative staff in its New Jersey facility during the
first quarter in 1995 and in the Fremont, California facility in the second
quarter of 1995. The combined termination expenses for these activities in 1995
was provided for as part of the Company's 1994 restructuring. Management
believes that by these actions it has substantially eliminated duplicate
expenses and improved operating efficiencies for materials procurement and
management. However, no assurance can be given that such effects will be
experienced by the Company as a result thereof.
Interest income of $180,000 in 1995 increased from $89,000 in 1994 primarily
reflecting investment income from the sale of Common Stock in April, July and
August of 1995. Interest expense increased from $662,000 in 1994 to
18
$1,357,000 in 1995 primarily as a result of the interest expense on Tanon's
credit facilities and, to a lesser extent, the sale of convertible subordinated
debentures in September and October. Interest expense for the Company's prior
existing operations was $719,000 in 1995 as compared to $662,000 in 1994.
Tanon's interest expense increased from $638,000 in 1994 to $662,000 in 1995
primarily as a result of an increase in the average amount borrowed under
Tanon's Revolving Loan.
Other expense in 1995 is primarily the Company's equity interest in the
results of BarOn. BarOn is a development stage company which was formed in July
1992 and has experienced losses of $3,157,000 and $1,101,000 for 1995 and 1994,
respectively. BarOn had total assets of $3,650,000, total liabilities of
$448,000, and net equity of $3,202,000 at December 31, 1995. BarOn has had no
sales since its formation.
Liquidity and Capital Resources: 1996
At the beginning of 1996, the Company had approximately $9,830,000 cash
(excluding restricted cash). The Company raised approximately $11,957,000 from
financing activities during 1996. The Company, during 1996, purchased shares of
Aydin for $10,752,000, incurred costs of $689,000 related to merger discussions
with Aydin, loaned BarOn approximately $1,310,000 under the BarOn Loan
Agreement, loaned its subsidiary, EATI, $1,000,000 to invest in the Joint
Venture and made capital expenditures of $5,393,000, primarily for its
electronic contract manufacturing operations. The Company's other principal uses
of cash were the day to day operations of its electronics contract
manufacturing, holding company expenses and interest on indebtedness.
Liquidity, as discussed below, is measured in reference to the consolidated
financial position of the Company at December 31, 1996, as compared to the
consolidated financial position of the Company at December 31, 1995. Net cash
used by operations of $2,575,000 in 1996 decreased by $5,764,000 from cash used
in operations of $8,339,000 in 1995.
Liquidity, as measured by cash and cash equivalents, decreased to $461,000
at December 31, 1996 from $9,830,000 at December 31, 1995. Liquidity as measured
by working capital was a negative $9,166,000 at December 31, 1996 as compared
with a positive working capital of $11,188,000 at December 31, 1995. The
decrease in working capital was primarily a result of capital expenditures,
losses from contract manufacturing during 1996, the amounts paid by the Company
in connection with the acquisition of 11.64% of the outstanding shares of Aydin
Corporation, 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 its contract electronic manufacturing services. The
Schroder Loan Facility prohibits Tanon from distributing or loaning cash
generated by contract manufacturing to the holding Company, except in certain
very limited circumstances. For the year 1996, revenue from contract electronic
manufacturing services increased by $4,540,000 from $77,085,000 in the same
period of 1995. Accounts receivable decreased by $746,000 in 1996 reflecting an
improvement in the collection of receivables. Inventory decreased by $2,910,000
in 1996 due to a decline in revenues forecast for the first quarter of 1997 as
compared to the same period in 1996.
Cash flows from financing activities during 1996 amounted to $11,957,000
resulting from the sale of 9% Convertible Debentures for $8,100,000, the
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 capital lease financing in the amount of
$750,000 on equipment acquired during the first quarter of 1996. In addition,
the Company in October and November 1996, borrowed a total of $1,270,000 from
the Chairman of its Board of Directors and certain related trusts. These loans
are represented by certain 10% Series A Convertible Notes issued by the Company.
For a more thorough discussion of this transaction. See "Business: 1996
Developments - Capital Raised".
Net cash in the amount of $18,751,000 was used for investing activities
during 1996. Funds in the amount of $5,393,000 were used to purchase capital
equipment, consisting 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 $13,358,000 were
used in making the investment in Aydin common stock and advances made to BarOn
under the BarOn Loan Agreement.
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. Advances under the
19
Schroder Loan Facility can only be used to fund the Company's electronic
contract manufacturing operations which are now being conducted solely by Tanon.
At December 31, 1996 $8,054,000 was outstanding under the Schroder Loan
Facility, which constituted the total availability of the borrowing base. 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 December 31, 1996, Tanon was in
compliance with all of these requirements, except the required ratio of earnings
to certain fixed charges. By agreement dated April 15, 1997 Schroder has agreed
to waive such requirement for December 31, 1996 and has adjusted the required
financial ratios to reflect the results of operations of Tanon contained in the
current business plan of Tanon for 1997.
The Company has incurred significant losses and had negative cash flows from
operations in each of the last five years. 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
$15,870,000 during 1995 and January 1, 1996 through January 31, 1997,
respectively, from the issuance of Common Stock, the exercise of stock options
and warrants, borrowings secured by the shares of Aydin owned by the Company and
the sale of convertible notes and debentures. Among such capital raising
activities, 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 810,661 shares of the
Company's stock (computed on a post Reverse split basis) 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
August 19, 1996, GFL Performance Fund Limited transferred and assigned its
$1,025,000 outstanding principal amount note of the Company to an unrelated
third party, who thereafter converted such note. Also in 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. 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 to the Note Holders. These Original
Convertible Notes had a maturity date of December 29, 1997 and were convertible
into shares of the Company's Common Stock at the fixed conversion price per
share of $2.67. On February 6, 1997, the Company amended the Original
Convertible Notes by (i) increasing the aggregate principal amount of such notes
to $2,725,000 (the purchase price paid by the Note Holders for the Original
Convertible Notes) and (ii) reducing the fixed conversion price of such notes to
$1.50 per share, in return for the Note Holders foregoing interest and , making
available certain other loans to the Company.
20
The Company's financial projections indicate that operating losses and
negative cash flows will continue during the first half of 1997. The Company is,
however, forecasting an increase in sales during the second half of 1997
resulting from the Company's increase in its sales force and sales efforts.
Management believes such increase will result in an improvement in cash flows
from operations. The purchase of the Aydin common stock, the BarOn Loan
Agreement and the EATI Loan (See "Business -- 1996 Developments - Acquisition of
Common Stock of Aydin Corporation and Issuance of Convertible Debentures, Joint
Venture with IAI and BarOn Investment") 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
operating losses by Tanon and capital expenditures by Tanon. During the period
beginning October 25, 1996 and ending in April 1997, the Company has borrowed a
total of $4,520,000 from the Chairman of its Board of Directors, certain related
trusts and unaffiliated investors through the issuance of Series A Notes. In
addition, during January 1997, the Company borrowed a total of $2,000,000 from
unrelated parties. (See Part I, Item 1 1996 Developments Capital Raised). Such
borrowings have been used to fund a portion of the aggregate amount required to
fund its holding company expenses, and to make advances to BarOn under the BarOn
Loan Agreement, pay costs incurred in connection with the terminated merger
discussions with Aydin, and provide additional working capital to Tanon.
Further, the Company will need to raise additional capital during 1997 to pay
the remaining unpaid cost incurred in connection with the terminated merger
discussions with Aydin, fund the future holding company expenses, provide
additional working capital to Tanon to fund (i) unpaid prior losses of Tanon,
(ii) projected Tanon losses for the first half of 1997 and (iii) costs
associated with projected growth in sales during the second half of 1997, and
complete the purchase of Tri-Star and provide working capital to Tri-Star. The
Company intends to sell the Aydin Shares beginning in the second quarter
pursuant to the Bard Option or in public or private sale. (See Business -- 1996
Developments - Acquisition of Common Stock of Aydin Corporation and Issuance of
Convertible Debentures, Tri-Star Technologies and Capital Raised). The Company
believes that the net proceeds from such a sale will provide sufficient capital
to meet the above needs except for providing the funding to complete the
purchase of Tri-Star. At the date hereof, the Company does not have any
commitments, understandings or agreements for such a sale or obtaining any other
additional capital, and accordingly, there can be no assurance that the Company
will be successful in (i) completing such a sale or that such a sale will result
in the amount of net proceeds anticipated by the Company or (ii) obtaining such
other additional capital. Failure to complete such a sale in a timely manner or
such a sale resulting in less than the amount of net proceeds anticipated by the
Company could have a material adverse effect on the financial condition and
operations of the Company if the Company was also unable to raise other
additional capital. Additionally, the Company will have to raise other
additional capital in order to complete the purchase of Tri-Star and provide
working capital to Tri-Star. The Company's independent public accounts have
issued their opinion in respect to the Company's 1996 financial statements
modified with respect to uncertainties regarding the ability of the Company to
continue as a going concern. The financial statements do not incorporate any
adjustments relating to the recoverability of asset carrying amounts or the
amount and classification of liabilities that might result should the Company be
unable to continue as a going concern.
The Company's projections with respect to cash needs are based on its
forecasts of the results of operations at Tanon and expenses of EAI. If the
Company's results of operations at Tanon are significantly below forecasts, or
expenses at EAI are greater than expected, this would raise doubts about the
Company's ability to continue its
21
operations without a significant financial restructuring, which would include a
major reduction in general and administrative expenses and liquidation of assets
involving sale of all or part of Tanon. There can be no assurance that such
restructuring would enable the Company to continue its operations.
At December 31, 1996, the Company had accounts payable of approximately
$14,702,000 of which approximately $2,281,000 had been outstanding for over 90
days. This compares with $13,433,000 of accounts payable at December 31, 1995,
of which $167,000 had been outstanding for over 90 days.
The Company's backlog at the end of 1996 was approximately $27,958,000 as
compared to the backlog at the end of 1995, which was approximately $47,305,000.
BarOn Investment. BarOn has incurred significant losses and had negative
cash flows from operations since inception. BarOn currently has no revenues from
operations. BarOn's financial projections indicate that operating losses and
negative cash flows will continue at least through the remainder of 1997. BarOn
is currently seeking additional financing to fund its on-going operations and
has indicated that it intends to sell the 95,694 shares of Common Stock of the
Company that are currently held by BarOn to satisfy a portion of such financing
needs. BarOn has sold 25,200 of such shares and expects to receive gross
proceeds of $125,000 from such sales. These proceeds represent BarOn's only
current available resources. BarOn's other resources consist of approximately
$140,000 being held as security for a letter of credit to one of its vendors.
BarOn is currently negotiating for the release of any such funds beyond the
obligations to this vendor. The Company has ceased making advances under the
BarOn Loan Agreement and has informed BarOn that it will not make further major
advances.
Joint Venture with IAI - Vista Funding. On June 28, 1996, the Company
loaned $1 million to EATI (the "EATI Loan") to enable EATI to make a $250,000
capital contribution to ITI, which, in turn, funded VCV and to make a $750,000
loan to VCV. The EATI 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 EATI Loan and demand repayment 18 months after the date
of issuance of the loan. The EATI Loan is subordinated to all other debts of
EATI but would have a preference over payments to equity holders of EATI.
At December 31, 1996, the Joint Venture formed with IAI had remaining funds
of $7,608,000. Such funds can only be used to fund expenses of the Joint
Venture. With the exception of the initial investment of $6.3 million in EATI,
and the EATI Loan, the Company is unable to determine at this time the effect,
if any, of the Company's investment in the Joint Venture on the results of
operations of the Company or on its liquidity and capital resources. As a result
of the Company's reduced level of capital (as compared to December 31, 1995) and
its decision to commit such capital to Tanon, the Company has decided not to
provide funding for any additional applications for development and exploitation
and has decided not to provide additional funding for Vista. Failure to make
additional required capital contributions would be a default under the Joint
Venture agreement with IAI. If the Company is in default as described above, it
may not be able to recover such restricted cash and may forfeit its interest in
the Joint Venture. In addition, the Company is reviewing its options relative to
the Joint Venture and has decided to sell or otherwise dispose of its interest
in the Joint Venture.
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
550,744 shares have been exercised and the Company received $2,534,121 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 199,021 shares of
Common Stock. These promissory notes bear interest at the rate of 7% per annum
and were due on or before February 14, 1997. The remaining outstanding balance
on these promissory notes, including interest, was approximately $218,000 as of
the date of this Report. No assurance can be given that the remaining
unexercised warrants will be exercised or that such promissory notes will be
paid in full.
22
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, economic, competitive,
technological, governmental, and other factors discussed in the Company's
filings with the Securities and Exchange Commission.
Reference is made to "Legal Proceedings" at Part I, Item 3 of this Form 10-K
for information concerning certain pending claims which could have an adverse
impact on the Company's income and cash flow.
Although the Company does not believe its business is affected by seasonal
factors, the Company's sales and net income may vary from quarter to quarter,
depending primarily upon the timing of manufacturing orders and related
shipments to customers. The operating results for any particular quarter may not
be indicative of results for any future quarter.
23
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
EA INDUSTRIES, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
December 31, 1996 and 1995
Page Number
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS.....................................25
FINANCIAL STATEMENTS:
Consolidated Balance Sheets as of December 31, 1996 and 1995.............26
Consolidated Statements of Operations for the Three Years
Ended December 31, 1996..................................................27
Consolidated Statements of Shareholders' Equity
for the Three Years Ended December 31, 1996..............................28
Consolidated Statements of Cash Flows for the Three Years
Ended December 31, 1996..................................................29
Notes to Consolidated Financial Statements...............................31
SCHEDULE:
II. Valuation Account.......................................................56
Schedules other than that listed above are omitted as not being applicable
or required, or the required information is included in the accompanying
financial statements or related notes thereto.
24
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To EA Industries, Inc.:
We have audited the accompanying consolidated balance sheets of EA
Industries, Inc. and subsidiaries as of December 31, 1996 and 1995 and the
related consolidated statements of operations, shareholders' equity and cash
flows for each of the three years in the period ended December 31, 1996. These
consolidated financial statements and the schedule referred to below are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and schedule based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly in
all material respects, the financial position of EA Industries, Inc. and
subsidiaries as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has incurred significant losses in each of the
last three years and, at December 31, 1996, the Company had negative working
capital. In addition, the Company had negative cash flows from operations in
each of the last three years. The Company's financial projections indicate that
operating losses and negative cash flows will continue during the first half of
1997. These conditions, among others, raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note 2. The financial statements do not
include any adjustments relating to the recoverability and classification of
asset carrying amounts or the amount and classification of liabilities that
might result should the Company be unable to continue as a going concern.
Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The schedule listed in the
index to consolidated financial statements is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic financial statements. This schedule has been subjected to the auditing
procedures applied in the audits of the basic consolidated financial statements
and, in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.
Arthur Andersen LLP
Roseland, New Jersey
April 15, 1997
25
EA INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1996 and 1995
(thousands of dollars)
ASSETS 1996 1995
---- ----
Current Assets:
Cash and cash equivalents $ 461 $ 9,830
Restricted cash 647
Receivables, less allowance of $1,100
in 1996 and $385 in 1995 for
doubtful accounts 11,211 11,957
Inventories (Note 1) 10,068 12,978
Prepaid expenses and other assets 579 1,610
-------- --------
TOTAL CURRENT ASSETS 22,319 37,022
-------- --------
Equipment and leasehold improvements 18,581 15,000
Less accumulated depreciation (Note 1) (8,059) (6,952)
-------- --------
10,522 8,048
-------- --------
Investment in common stock of Aydin Corp.
held for sale (Notes 1 and 3) 5,605 --
-------- --------
Other investments held for sale (Note 3) 1,050 3,225
-------- --------
Intangible assets (Notes 1 and 3) 12,331 12,331
Less accumulated amortization (1,632) (813)
-------- --------
10,699 11,518
-------- --------
Other assets 698 454
Note receivable (Note 3) 78 985
-------- --------
$ 50,971 $ 61,252
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Revolving Credit Facility (Note 4) $ 8,054 $ 8,840
Current portion of Capital Lease Obligations (Note 4) 1,455 864
Current portion of Convertible Notes and
Debentures (Notes 2 and 4) 2,725 --
Accounts payable 14,702 13,433
Accrued expenses 4,549 2,697
-------- --------
TOTAL CURRENT LIABILITIES 31,485 25,834
-------- --------
Long-Term Liabilities:
Long-Term portion of Capital Lease
Obligations (Note 4) 2,937 1,731
Convertible Notes and debentures (Notes 2 and 4) 8,109 12,200
Accrued excess leased space costs 849 1,433
Other long-term liabilities 505 664
-------- --------
TOTAL LONG-TERM LIABILITIES 12,400 16,028
-------- --------
TOTAL LIABILITIES 43,885 41,862
-------- --------
Commitments and Contingencies (Notes 4 and 14) -- --
Shareholders' Equity (Deficit) (Notes 1, 2, 3, 6, 9 and 12)
Preferred stock, no par value;
authorized 6,250,000 shares; none issued
Common stock, no par value; authorized 12,500,000
shares; issued 5,624,001 shares in 1996 and
4,011,362 shares in 1995 80,535 63,397
Accumulated deficit since January 1, 1986 (73,245) (43,532)
-------- --------
7,290 19,865
Less common stock in treasury, at cost:
23,369 shares in 1996
and 54,619 shares in 1995 (204) (475)
-------- --------
TOTAL SHAREHOLDERS' EQUITY 7,086 19,390
-------- --------
$ 50,971 $ 61,252
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
26
EA INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Years Ended December 31, 1996
(thousands of dollars, except per share data)
1996 1995 1994
---- ---- ----
Net Sales (Notes 1 and 3) $ 81,625 $ 77,085 $ 30,539
----------- ----------- -----------
Cost of sales 81,145 76,422 27,759
Selling, general and administrative expenses 11,379 9,703 4,591
Provision For Restructuring (Note 3) -- -- 2,400
Purchased research and development (Note 3) 1,383 19,546 --
----------- ----------- -----------
Loss from Operations (12,282) (28,586) (4,211)
Interest Expense 7,559 1,357 662
Interest Income (229) (180) (89)
Loss on Investment in Aydin Corporation (Note 3) 5,156 -- --
Other Expenses (Note 3) 5,186 1,131 --
----------- ----------- -----------
Net Loss ($ 29,954) ($ 30,894) ($ 4,784)
=========== =========== ===========
Loss Per Common Share (Note 9) ($ 6.24) ($ 10.01) ($ 3.79)
=========== =========== ===========
Weighted Average Common Shares Outstanding 4,802,068 3,086,070 1,263,120
=========== =========== ===========
The accompanying notes are an integral part of these
consolidated financial statements.
27
EA INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the Three Years Ended December 31, 1996
(thousands of dollars)
Common Stock Treasury Stock Accumulated
---------------------------- ------------------- Deficit
Additional Since
Paid-In January 1,
Shares Amount Capital Shares Amount 1986
-------------------------------------------------------------------------------
Balance, December 31, 1993 719,410 $2,878 $4,661 (54,119) ($471) ($7,614)
Net loss (4,784)
Private Placements of common stock 1,199,721 11,676
Debt Conversion 99,511 338
Exercise of common stock options 16,872 143
Other issuances of common stock 46,000 421
Purchase of treasury stock (500) (4)
Elimination of $1.00 par value 4,661 (4,661)
- ------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1994 2,081,514 20,117 -- (54,619) (475) (12,398)
Net loss (30,894)
Issuance of Common Stock
BarOn Investment 95,694 1,995
Tanon Acquisition 384,616 10,473
Warrants, Options and Stock Issued
in connection with IAI Investment 35,180 7,400
Value of Options and Warrants
issued for Tanon -- 1,383
Shares Sold in Exempt Offerings 618,748 11,659
Value of Options and Warrants
Issued for Services -- 963
Exercise of Common Stock Options 175,650 2,763
Exercise of Warrants 419,960 3,057
Debt conversion 200,000 3,587
Net unrealized loss on marketable
securities of investee (240)
- ------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 4,011,362 63,397 -- (54,619) (475) (43,532)
Net loss (29,954)
Exercise of stock options 140,281 1,007
Exercise of Class A and B Warrants 240,450 1,414
Notes receivable from Stock Sales -- (845)
Value of options granted for Services -- 233
Debt conversion 1,226,540 15,266
Shares granted for Services -- 78 31,250 271
Other 5,368 (15) 1
Loss on marketable securities of investee 240
============================= ======================================
Balance, December 31, 1996 5,624,001 $80,535 (23,369) ($204) ($73,245)
============================= ======================================
The accompanying notes are an integral part of these
consolidated financial statements.
28
EA INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Years Ended December 31, 1996
(thousands of dollars)
1996 1995 1994
---- ---- ----
Cash Flows from Operating Activities:
Net Loss ($29,954) ($30,894) ($ 4,784)
Adjustments to reconcile net loss to net cash
provided/(used) by operating activities:
Provision for restructuring -- -- 2,400
Depreciation and amortization 3,172 3,012 900
Valuation adjustment - Note Receivable 907 -- --
Valuation adjustment-Investment in Aydin Corporation 5,156 -- --
Valuation adjustment - Fixed Assets 563 -- --
Valuation adjustment - Investment in BarOn 649 -- --
Valuation adjustment - Investment in EATI 1,647 -- --
Common Shares issued in payment of interest 88 -- --
Purchased Research and Development 1,383 19,546 --
Equity in Loss of Affiliate 812 802 --
Non-cash interest charges 851 -- --
Discount on Convertible Subordinated Debentures 4,200 -- --
Value of options granted for services 233 963 --
Cash provided/(used) by changes in:
Receivables 746 2,451 (2,360)
Inventories 2,910 (4,018) (1,395)
Prepaid expenses & other assets 1,031 -- --
Accounts payable and accrued expenses 3,121 372 775
Accrued excess leased space costs (584) (425) (573)
Other operating items -- net 494 (148) 335
-------- -------- --------
Operating cash flow from continuing operations (2,575) (8,339) (4,702)
Operating cash flow from discontinued operations -- -- 360
-------- -------- --------
Net cash provided/(used) by operations (2,575) (8,339) (4,342)
-------- -------- --------
Cash Flows from Investing Activities:
Capital expenditures (5,393) (5,427) (212)
Investments, including those in affiliates (13,358) (12,884) (2,745)
Cash acquired in purchase of Tanon -- 890 --
Proceeds from sale of discontinued operations -- 394 200
-------- -------- --------
Net cash provided/(used) by investing activities (18,751) (17,027) (2,757)
-------- -------- --------
Cash flows from Financing Activities:
Net borrowings/(repayments) under credit facilities (786) (3,161) 2,381
Net proceeds from capital leases 1,797 1,440 --
Net proceeds from convertible subordinated debt 9,370 15,148 (1,008)
Proceeds from the exercise of stock options 1,007 -- --
Net proceeds from sales of common stock (private
placement) and exercise of warrants 569 17,479 11,819
Issuance of note receivable in connection with acquisition -- (1,000) --
Other -- (867) --
-------- -------- --------
Net cash provided (used) by financing activities 11,957 29,039 13,192
-------- -------- --------
Net Increase (Decrease) in Cash and Cash Equivalents (9,369) 3,673 6,093
Cash and Cash Equivalents at Beginning of Period 9,830 6,157 64
-------- -------- --------
Cash and Cash Equivalents at End of Period $ 461 $ 9,830 $ 6,157
======== ======== ========
29
The accompanying notes are an integral part of these
consolidated financial statements.
1996 1995 1994
---- ---- ----
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 2,589 $ 1,315 $ 662
======= ======= =======
Non cash financing activities:
Conversion of debt to equity $15,266 $ 3,587 $ 338
Value of stock and options issued in connection with
acquisitions -- 21,251 --
Common shares issued in payment of
Services 582 963 --
Rent abatement -- -- 306
Loan fees -- -- 75
Director compensation -- -- 40
------- ------- -------
TOTAL $15,848 $25,801 $ 759
======= ======= =======
The accompanying notes are an integral part of these
consolidated financial statements.
30
EA INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
EA Industries, Inc. and its subsidiaries ("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. The Company, therefore, provides services to act in part,
or in whole, as the manufacturing function of its customers. The Company
provides its services primarily to manufacturers of: micro, mini and mainframe
computers; computer peripheral equipment; high quality graphic equipment; office
equipment; telecommunications equipment; consumer appliances, industrial tools
and measuring devices. In 1996 and 1995 the Company made acquisitions and
investments which had a significant impact on the financial condition and
results of the Company (See Note 3).
Basis of Consolidation
The consolidated financial statements include the accounts of all
majority-owned subsidiaries other than the investment in Electronic Associates
Technologies Israel, Ltd. ("EATI"), an unconsolidated subsidiary held for sale,
which is reflected in the accompanying financial statements using the equity
method of accounting and the investment in which has been written down to
$1,050,000, its estimated net realizable value (See Note 3).
The Company's investments in 20% to 50% owned companies are accounted for
on the equity method. Accordingly, the Company's share of the losses of these
companies is included in the consolidated financial statements.
All significant intercompany transactions have been eliminated.
Consolidated Statement of Cash Flows
Cash and cash equivalents include cash on hand and highly liquid marketable
securities with original maturities of three months or less.
Quasi-Reorganization and Par Value Elimination
As of the close of business December 31, 1985, the Company effected a
quasi-reorganization whereby assets were restated to their estimated current
values, income postponed to future periods was reflected in shareholders' equity
and the accumulated deficit was transferred to additional paid-in capital.
Accumulated deficit reflects the Company's cumulative earnings or losses since
the quasi-reorganization. In May 1994, the shareholders of the Company approved
a proposal which eliminated the reference to the $1.00 per share par value of
the Company's Common Stock. Consequently, all amounts formerly classified as
additional paid-in capital are now classified as Common Stock.
Revenue Recognition
Net sales are generally recognized when products are shipped.
31
Inventories
Inventories include material, labor and factory overhead and are stated at
the lower of cost or market (net realizable value). Costs of such inventories
are determined using average actual cost. Provision for potentially obsolete or
slow-moving inventory is made based on management's analysis of inventory levels
and future sales forecasts.
Inventories at December 31 consisted of:
1996 1995
---- ----
(thousands of dollars)
Raw Materials $ 7,268 $ 7,435
Work-in-Process 2,800 5,543
------- -------
Total inventories $10,068 $12,978
======= =======
Goodwill and Other Intangibles
Goodwill represents the excess of the cost of acquired businesses over the
fair market value of their net tangible and identified intangible assets.
Goodwill is being amortized on the straight line method over periods not
exceeding 20 years. Acquired research and development with no alternative future
use is charged to expense on the date acquired. Other acquired intangibles
(principally customer relationships and assembled workforce) are being amortized
on the straight line method over their estimated useful lives (6 to 20 years).
The Company periodically reviews goodwill and other intangibles to evaluate
whether changes have occurred that would suggest these assets may be impaired
based on the estimated cash flows of the entity acquired over the remaining
amortization period. If this review indicates that the remaining estimated
useful life requires revision or that the asset is not recoverable, the carrying
amount of the asset is reduced by the estimated shortfall of cash flows on an
undiscounted basis.
Equipment and Leasehold Improvements
Equipment and leasehold improvements are stated at cost. Equipment is
depreciated using the straight-line method over the estimated useful lives of
the assets. Leasehold improvements are amortized using the straight-line method
over the shorter of the estimated life of the asset or the remaining term of the
lease.
When equipment is retired or sold, its costs and related accumulated
depreciation are written off and the resulting gain or loss is included in
income for the period. Maintenance and repair costs are charged directly to
expense as incurred. Major rebuilding costs that substantially extend the useful
life of an asset are capitalized and depreciated.
The Company continually reviews equipment to determine that the carrying
values have not been impaired. During 1996, the Company recorded a write down in
certain fixed assets held for disposal resulting in a non-cash charge of
approximately $563,000. This charge has been reported in the Statement of
Operations in Other Expenses. These assets, with an adjusted book value of
$941,000, are being actively marketed.
32
Concentration of Credit Risk
The Company's contract manufacturing business provides services to a
variety of customers some of which are development stage or marginally
profitable enterprises or which have a highly leveraged capital structure. In
connection with providing its services the Company extends credit to customers,
invests in inventories to supply product scheduled for delivery, and enters into
contractual commitments for the purchase of materials. The Company evaluates
each customer's creditworthiness with regard to the amount of credit it is
willing to extend and investment risk it is willing to assume. The Company may
require collateral or conditional commitments from the customer such as standby
letters of credit or financial guarantees in connection with assuming such
credit or investment risk. The amount and nature of the collateral or
commitments is based on management's evaluation of the customer's
creditworthiness, together with competitive circumstances. The allowance for
non-collection of accounts receivable is based upon the expected collectability
of all accounts receivable. During 1996, the Company increased its allowance for
doubtful accounts by $800,000 reflecting the Company's determination that the
net amount due from a customer that the Company began servicing in 1995 was not
collectable. The Company has adjusted its credit review and requirements for
early stage development companies as a result of this charge.
During 1996, 1995 and 1994, the Company's top 5 customers represented 72%,
68%, and 87%, respectively, of its consolidated net sales. In 1996, the
customers which accounted for more than 10% of the Company's net sales were
Advanced Fibre Communications, Inc., Dialogic Corporation, and Iris Graphics,
which accounted for 33%,16%, and 13%, respectively, of net sales. As of December
31, 1996 and 1995, the top five customers represented 66% and 74%, respectively,
of accounts receivable.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the consolidated financial
statements and related notes to financial statements. Actual results could
differ from those estimates and changes in such estimates may affect amounts
reported in future periods.
Stock Based Compensation
Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation," encourages, but does not require companies to record
compensation cost for stock-based employee compensation plans based on the fair
value of the option. The Company has adopted the "disclosure only" provision of
SFAS 123. Accordingly, compensation cost for stock options issued to employees
is measured as the excess, if any, of the quoted market price of the Company's
stock at the date of the grant over the amount an employee must pay to acquire
the stock. (See Note 6.)
Stock Split
All references in the consolidated financial statements referring to
shares, share prices, per share amounts and stock option plans have been
adjusted to give retroactive effect to a one-for-four reverse stock split as of
the close of business on December 27, 1996 (the "Record Date"). Each holder of
record on the Record Date was entitled to receive, as soon as practicable
thereafter, one (1) share of no par value Common Stock of the Company for every
four (4) shares of no par value Common Stock held by such person on the Record
Date.
33
Investments in Marketable Equity Securities
The investment in common stock of Aydin Corporation has been classified as
available-for-sale under the terms of Statement of Financial Accounting
Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity
Securities" (See Note 3). At December 31, 1996, the Company wrote down this
investment by approximately $5,156,000 due to a decline in fair value considered
to be other than temporary. The Company has decided to sell these equity
securities (See Notes 2 and 3).
Reclassifications
Certain reclassifications were made to the prior year's presentation to
conform to the 1996 presentation. The Company has decided to sell or otherwise
dispose of its interest in EATI and accordingly, such interest has been
classified as an unconsolidated subsidiary held for sale. Amounts in the year
1995 have been reclassified to conform to the 1996 presentation.
2. OPERATIONS AND LIQUIDITY
As a result of negative cash flows from operations in 1996, the purchase of
the common stock of Aydin Corporation, advances to BarOn, the loan to EATI to
fund Vista (See Note 3) and investment in new equipment, the Company required
substantial amounts of additional working capital. To fund a portion of the
purchase price of the Aydin common stock, on May 3, 1996, the Company sold
certain 9% convertible subordinated 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 subordinated
debentures in the aggregate principal amount of $1,100,000 during the remainder
of May and June 1996 (such convertible subordinated debentures in the aggregate
principal amount of $8,100,000 are collectively referred to herein as the
"Original Convertible Debentures"). The Company paid a placement fee equal to 5%
of the proceeds raised in the sale of the Original Convertible Debentures in
cash of $50,000 during August and September 1996 and by delivery of 125,000
shares of Common Stock of the Company. These Original Convertible Debentures had
a maturity date of May 3, 1998 and were convertible into shares of the Company's
Common Stock at a conversion price per share equal to the lesser of (i) four
dollars ($4) per share or (ii) 80% of the average closing price of the Company's
Common Stock as traded on the NYSE for the five (5) days preceding the date of
the notice to the Company that the holder wished to exercise its conversion
right. The Company agreed to adjust the ceiling price of each of the Debentures
if the holder of such debenture refrained from conversions and short sales from
approximately the middle of January through April 11, 1997. As a result the
conversion price of each of the original Convertible Debentures has been reduced
from $4.00 per share (pre-Reverse Stock Split price) to $1.50 per share
(post-Reverse Stock Split price). As of the date hereof, $3,786,000 principal
amount of such Original Convertible Debentures have been converted into
2,314,640 shares of Common Stock (post Reverse Split Shares).
On August 19, 1996, GFL Advantage Fund transferred and assigned its
$2,070,000 outstanding 7% convertible subordinated 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 Convertible Notes of the
Company in the aggregate principal amount of $2,070,000 due December 29, 1997
(the "Original Convertible Notes") to the Note Holders. These Original
Convertible Notes had a maturity date of December 29, 1997 and were convertible
into shares of the Company's common stock at the fixed conversion price per
share of $2.67 (pre Reverse Stock Split basis). On February 6, 1997, the Company
amended the Original Convertible Notes (the "Convertible Notes") by (i)
increasing the aggregate principal amount of such notes to $2,725,000 (the
purchase price paid by the Note Holders for the Original Convertible Notes) and
(ii) reducing the fixed conversion price of such notes to $1.50 per share, such
amendments were made in consideration of the Note Holders foregoing interest and
making available certain other loans to the Company. GFL Advantage Fund had
acquired the 7% convertible subordinated note in December, 1995.
During October and November 1996, the Company borrowed $1,270,000 from the
Chairman of its Board of Directors and certain related trusts (the "Company's
Chairman"). In January and April 1997, the Company borrowed
34
an additional $3,250,000 from the Company's Chairman and unaffiliated investors.
These loans are represented by certain 10% Series A Convertible Notes (the
"Series A Notes") issued by the Company. The Series A Notes will mature on
January 22, 1999 and are convertible at the option of the holder (i) after
January 1, 1998, into shares of Common Stock of the Company at a conversion
price of $3.50 per share, or (ii) into shares of Common Stock of Tanon after
completion of an initial public offering of shares of Common Stock of Tanon at a
conversion price equal to the quotient of (a) twenty five million dollars ($25
million), divided by (b) the number of shares of Common Stock of Tanon that were
issued and outstanding at the close of business on the day immediately prior to
the effective date of the registration statement covering the shares of Common
Stock of Tanon offered in such initial public offering, without giving effect to
the number of shares of Common Stock of Tanon being offered in such initial
public offering.
The Series A Notes bear interest at the rate of 10% per annum, payable
annually in arrears on January 15, 1998 and January 22, 1999. Interest is
payable at the option of the holder in cash or stock of the Company or Tanon at
the conversion prices described above. Repayment of the Series A Notes is
secured by a second lien on the stock of Tanon held by the Company and on
substantially all the assets of Tanon. These notes are subordinated to amounts
owed by Tanon to Schroder and the ability of Tanon to distribute or loan funds
to the Company to make interest payments on the Series A Notes is restricted
pursuant to the Schroder Loan Facility.
In addition, during January 1997, the Company borrowed $1,000,000 from each
of two unrelated parties, Ace Foundation, Inc. ("Ace") and Millenco, LP
("Millenco"). These loans are represented by two Promissory Notes in the
principal amount of $1,000,000 each (the "EAI Notes") issued by the Company to
Ace and Millenco, respectively. The EAI Notes will mature on January 6, 1999 and
January 17, 1998, respectively, and are not convertible into Common Stock of
either the Company or Tanon. The EAI Notes bear interest at the rate of 13.5%
per annum, payable on the first day of each month beginning as early as March 1,
1997. Repayment of the EAI Notes is secured by a lien on the shares. In
consideration for such loans, the Company also granted a warrant to purchase
50,000 shares of Common Stock of the Company at an exercise price of $1.50 per
share to each of Ace Foundation, Inc. and Millenco, LP.
Cash flows from financing activities during 1996 amounted to $11,957,000
resulting from the issuance of the securities referred to above, the 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 capital lease financing in the amount of $750,000 on
equipment acquired during the first quarter of 1996.
Net cash in the amount of $18,751,000 was used for investing activities
during 1996. Funds in the amount of $5,393,000 were used to purchase capital
equipment, consisting 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 $13,358,000 were
used in making the investment in Aydin common stock, advances made to BarOn
under the BarOn Loan Agreement and the Vista Application.
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 (the "Schroder Loan Facility") provided by Schroder to Tanon.
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. At December 31, 1996, $8,054,000 was outstanding under the
Schroder Loan Facility, which constituted the total availability of the
borrowing base. 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 December 31,
1996, Tanon was in compliance with all of these requirements, except the
required ratio of earnings to certain fixed charges. By agreement in April 1997
Schroder has agreed to waive such requirement for December 31, 1996 and has
adjusted the required financial ratios to reflect the results of operations of
Tanon contained in the current business plan of Tanon for 1997. (See Note 4)
The Company's financial projections indicate that operating losses and
negative cash flows will continue during the first half of 1997. The Company is,
however, forecasting an increase during the second half of 1997 resulting from
the Company's increase in its sales force and sales efforts. Management believes
such increase will result in an improvement in cash flows from operations. 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 operating losses by Tanon and capital
expenditures by Tanon. During the period beginning October 25, 1996 and ending
in April 1997, the Company has borrowed a total of $4,520,000 from the Chairman
of its Board of Directors, certain related trusts
35
and unaffiliated investors through the issuance of Series A Notes. In addition,
during January 1997, the Company borrowed a total of $2,000,000 from unrelated
parties. Such borrowings have been used 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 discussions with Aydin, and provide additional working capital
to Tanon. Further, the Company will need to raise additional capital during 1997
to pay the remaining unpaid cost incurred in connection with the terminated
merger discussions with Aydin, fund the future holding company expenses, provide
additional working capital to Tanon to fund (i) unpaid prior losses of Tanon,
(ii) projected Tanon losses for the first half of 1997 and (iii) costs
associated with projected growth in sales during the second half of 1997, and
complete the purchase of Tri-Star (See Note 3) and provide working capital to
Tri-Star. The Company intends to sell the Aydin Shares beginning in the second
quarter pursuant to the Bard Option (See Note 3) or in public or private sales.
Unless there is a diminution in value below the carrying amount, the Company
believes that the net proceeds from such a sale will provide sufficient capital
to meet the above needs except for providing the funding to complete the
purchase of Tri-Star.
The Company's forecast with respect to cash needs is based on its forecast
of the results of operations at Tanon and expenses of EAI. If the Company's
results of operations at Tanon are below forecasts, or expenses at EAI are
greater than expected, this would raise doubts about the Company's ability to
continue its operations without a significant financial restructuring, which
would include a major reduction in general and administrative expenses and
liquidation of assets involving sale of all or part of Tanon. There can be no
assurance that such restructuring would enable the Company to continue its
operations.
At the date hereof, the Company does not have any commitments,
understandings or agreements for such a sale or obtaining any other additional
capital, and accordingly, there can be no assurance that the Company will be
successful in (i) completing such a sale or that such a sale will result in the
amount of net proceeds anticipated by the Company or (ii) obtaining such other
additional capital. Failure to complete such a sale in a timely manner or such a
sale resulting in less than the amount of net proceeds anticipated by the
Company could have a material adverse effect on the financial condition and
operations of the Company if the Company was also unable to raise other
additional capital. Additionally, the Company will have to raise other
additional capital in order to complete the purchase of Tri-Star and provide
working capital to Tri-Star.
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
550,744 shares have been exercised and the Company received $2,534,121 in
proceeds. However no assurance can be given that any additional warrants will be
exercised.
There can be no assurance that the planned sale of Aydin stock will be
successful nor that additional capital will be raised. The accompanying
financial statements have been prepared assuming that the Company will continue
as a going concern. The Company has incurred significant losses in each of the
last three years and, at December 31, 1996, the Company had negative working
capital. In addition, the Company had negative cash flows from operations in
each of the last three years. These conditions, among others, raise substantial
doubt about the Company's ability to continue as a going concern. The financial
statements do not include any adjustments relating to the recoverability and
classification of asset carrying amounts or the amount and classification of
liabilities that might result should the Company be unable to continue as a
going concern.
36
3. ACQUISITIONS AND DISPOSITIONS
Tanon Acquisition
On January 4, 1995, the Company acquired Tanon Manufacturing, Inc.
("Tanon") which provides contract manufacturing services to original equipment
manufacturers. Tanon was merged with a newly-formed wholly-owned subsidiary of
the Company and the Company issued 384,616 shares of Common Stock of the Company
with an appraised value of $10,473,000 for the remaining outstanding shares of
Common Stock of Tanon. In addition, the Company granted to certain option
holders of Tanon in exchange for their options to purchase Tanon capital stock,
options to purchase approximately 50,250 shares of the Company's Common Stock at
a weighted average exercise price of $4.20 per share with an appraised value of
$1,383,000. In connection with the merger, the Company loaned Mr. Spalliero, the
Chief Operating Officer of Tanon, $1,000,000 for a 30-month term with interest
fixed at the applicable Federal rate and due together with principal at the end
of the 30-month term. Such loan is non-recourse and is secured solely with
48,075 shares of Common Stock of the Company acquired by Mr. Spalliero upon
consummation of the Tanon Acquisition Agreement. The carrying amount of such
loan has been adjusted to the value of the collateral.
In addition, upon closing, Mr. Spalliero and certain other executives of
Tanon received certain compensation, incentives and benefits. Specifically, the
Company granted to Mr. Spalliero at closing, incentive and non-incentive stock
options to acquire an aggregate of 87,500 shares of Common Stock of the Company
at an exercise price equal to fair market value with respect to 76,250 shares
and 110% of fair market value with respect to 11,250 shares, which options will
vest proportionately over three years. Mr. Spalliero also received a cash bonus
of $300,000 at closing and earned a cash bonus of $150,000 with respect to 1995.
Also, upon closing, the Company indemnified Mr. Spalliero for certain
outstanding indebtedness of Tanon in the aggregate amount of $9,450,000, which
had been personally guaranteed by Mr. Spalliero.
The excess of the purchase price over the appraised fair value of the net
assets acquired in the Tanon acquisition amounted to $12,331,000, of which
$1,740,000 relates to customer relationships and assembled workforce and
$10,591,000, which relates to goodwill. These amounts are being amortized on a
straight-line basis over 6 and 20 years, respectively.
BarOn Acquisition
During 1995, the Company acquired an equity interest of 33.33% in BarOn.
BarOn is a privately-held Israeli Corporation based in Haifa, Israel, engaged in
the research and development of input devices for computers that can digitize
handwriting in a variety of languages, from any surface. The consideration for
the 33.33% interest totaled $9,987,000 and was comprised of a $5,000,000 capital
contribution to BarOn and 95,694 shares of Common Stock of the Company with a
fair value of $1,995,000. In addition, $2,700,000 was paid to various
shareholders of BarOn and $292,000 of due diligence costs concerning the BarOn
acquisition were also capitalized. The Company has accounted for this
transaction as a purchase of a minority interest using the equity method of
accounting. The Company's equity share of the 1996 and 1995 BarOn losses totaled
$812,000 and $802,000, respectively and has been included in Other Expenses in
the consolidated results of the Company for the years ended December 31, 1996
and 1995, respectively. The excess of the purchase price of the estimated fair
value of EAI's 33.33% equity interest in the net assets of BarOn totaled
$8,872,000 and was determined to be in-process research and development with no
alternative future use. Accordingly, it was charged to expense in the
consolidated results of the Company for the years ended December 31, 1996
($998,000) and 1995 ($7,874,000), respectively.
BarOn has incurred significant losses and had negative cash flows from
operations since inception. BarOn currently has no revenues from operations.
BarOn's financial projections indicate that operating losses and negative cash
flows will continue at least through the remainder of 1997. The Company has
ceased making advances to BarOn and has informed BarOn that it will not make
further major advances. BarOn's obligations to vendors, employees, attorneys and
accountants for professional services, and otherwise currently exceed $600,000
and BarOn is unable to meet such obligations.
37
In February 1997, James M. Curran, the acting Chief Executive Officer of
BarOn resigned to seek other opportunities. In March 1997, Dr. Ehud Baron
resigned as an officer of Baron and Irwin L. Gross, Chairman of the Company has
been designated acting President of BarOn. At the request of certain creditors
of BarOn, a hearing was held in the regional court of Haifa, Israel on April 8,
1997 to appoint a temporary receiver for BarOn. The hearing was adjourned
without any action being taken other than rescheduling the hearing to June 23,
1997.
Management of BarOn is attempting to design a plan to reorganize BarOn to
avoid a liquidation of BarOn. Such a plan would involve restructuring the
operations of BarOn to minimize costs, attempting to negotiate reduced payments
or revised payment schedules with creditors of BarOn, and obtaining additional
debt or equity financing of BarOn. As part of the development of this plan, the
Company has requested that the management of BarOn conduct an intensive review
of the development status of the technology of BarOn along with an estimate of
the additional cost and time necessary to develop a marketable product. No
assurance can be given that BarOn will be successful in the efforts to implement
a restructuring plan.
The Company determined that its investment in and advances to BarOn were
unrecoverable and charged these amounts to expense in 1996.
Israel Aircraft Industries, Ltd. Joint Venture
On August 8, 1995, the Company made an investment of $7,500,000 through a
52.3% owned subsidiary (EATI) in a newly formed Israeli Corporation (ITI ) which
is 50.1% owned by EATI and 49.9% owned by Israel Aircraft Industries, Ltd.
("IAI"). The assets of ITI include the right to review and evaluate certain
technological applications developed by IAI which are in various stages of
development. Management's review has indicated that the technologies are
primarily in-process research and development with no alternative future use.
Accordingly the portion of the purchase price in excess of the Company's equity
interest in the joint venture, which was $11,672,000 in 1995, has been charged
to expense as Purchased Research and Development. If a technology is selected
for development and exploitation, IAI will grant a perpetual, royalty free
license to exploit the technology. The Company's investment in ITI has been
accounted for as a purchase.
Under the terms of a Preincorporation Agreement, EATI is owned as follows:
(a) the Company owns a 52.3% interest, (b) certain Israeli persons own an
aggregate 25.2% interest, (c) Mark Hauser, a director of the Company, owns a 15%
interest, (d) Irwin L. Gross, Chairman and President of the Company, owns a 5%
interest, and (e) Broad Capital Associates owns a 2.5% interest.
The equity interests in EATI were issued for an aggregate consideration of
$10,000. In addition, the Company and the Israeli citizens advanced $6,300,000
and $1,575,000, respectively, to EATI in exchange for subordinated notes to be
repaid from a percentage of the first profits of EATI.
To fund its obligations under the Preincorporation Agreement, on August 3,
1995 the Company sold 364,583 shares of its Common Stock at a price of $19.20
per share for an aggregate of $7.0 million to five Israeli persons, three of
whom are shareholders in EATI. The purchase agreements pursuant to which the
shares were sold contained an adjustment provision which required the issuance
of additional shares in the event that the average closing price of the shares
for a certain period of time was less than the offering price in the offering.
Such adjustment provision was triggered, and accordingly, the Company issued an
aggregate of 14,820 additional shares to the five Israeli persons for no
additional consideration. In addition, the Company issued 35,180 additional
shares of common stock to Control Centers Ltd. and Mosha Wertheim, an
individual, in exchange for additional services rendered in connection with ITI.
ITI 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 $1,000,000
funding for the initial operations of VCV was made by EATI in June 1996 through
a capital contribution of $250,000 to ITI and a loan of $750,000 to VCV as
evidenced by 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.
38
On June 28, 1996, the Company loaned $1 million to EATI (the "EATI Loan")
to enable EATI to make the above capital contribution to ITI, which, in turn,
funded VCV and to make a $750,000 loan to VCV. The EATI 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 EATI Loan and demand
repayment 18 months after the date of issuance of the loan. The EATI Loan is
subordinated to all other debts of EATI but would have a preference over
payments to equity holders of EATI.
At December 31, 1996, the Joint Venture formed with IAI had remaining funds
of $7,608,000. Such funds can only be used to fund expenses of the Joint
Venture. With the exception of the initial investment of $6.3 million in EATI,
and the EATI Loan, the Company is unable to determine at this time the effect,
if any, of the Company's investment in the Joint Venture on the results of
operation of the Company or on its liquidity and capital resources. As a result
of the Company's reduced level of capital (as compared to December 31, 1995) and
its decision to commit such capital to Tanon, the Company has decided not to
provide funding for any additional applications for development and exploitation
and has decided not to provide additional funding for Vista. Failure to make
additional required capital contributions would be a default under the joint
venture agreement with IAI. If the Company is in default as described above, it
may not be able to recover such Restricted Cash and may forfeit its interest in
the Joint Venture.
The Company's share of the net loss of EATI amounted to $448,000 and
$49,000 in 1996 and 1995, respectively, and such amounts are included in other
expenses.
The Company has decided to sell or otherwise dispose of its interest in the
Joint Venture. The Joint Venture has been classified as an unconsolidated
subsidiary held for sale and the carrying value has been adjusted, by a charge
to other expense of $1,647,000 in 1996, to management's best estimate of net
realizable value based on a discounted cash flow analysis of anticipated
proceeds less cost of disposal.
Summarized financial information of the Joint Venture is as follows:
1996 1995
---- ----
Assets
Restricted cash $7,608,000 $7,273,000
Accounts receivable 119,000 35,000
Fixed assets 258,000 23,000
Other 34,000 --
---------- ----------
Total Assets $8,019,000 $7,431,000
========== ==========
Liabilities and Equity
Accounts payable and accrued
expenses $ 414,000 $ 104,000
Note payable 750,000 --
Shareholders' equity 6,855,000 7,327,000
---------- ----------
Total Liabilities and Shareholders'
Equity $8,019,000 $7,431,000
========== ==========
Income Statement
Total expenses $1,459,000 $ 152,000
Interest income (562,000) (55,000)
---------- ----------
Net loss $ 897,000 $ 97,000
========== ==========
Aydin Corporation Acquisition
On May 6, 1996, the Company purchased 596,927 shares of the common stock of
Aydin Corporation ("Aydin"), a NYSE listed company, in a private transaction
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 shares
acquired represented approximately 11.64% of the outstanding shares of common
stock of Aydin. On May 6, 1996, the closing
39
price of the common stock of Aydin as reported by the NYSE was $15.50. Aydin
designs, manufactures and sells wireless, digital LOS radios and various other
telecommunications equipment 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, on May 3,
1996, the Company sold certain 9% Convertible Subordinated Debentures in the
aggregate principal amount of $7,000,000. The balance of the purchase price was
funded with existing cash of the Company. See Note 2.
40
During May 1996, the Company initiated discussions with the Board of
Directors of Aydin concerning a possible merger or other combination with Aydin.
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 continues to
hold its Aydin shares and has pledged such Aydin shares as security for
borrowings of $2,000,000. In the future, the Company may continue to borrow
against such shares, sell all or a portion of such shares or otherwise dispose
of such shares in another fashion.
On January 23, 1997, Aydin and the Company entered into a Registration
Rights Agreement granting the Company and each subsequent holder of at least
250,000 of the shares of Aydin Common Stock currently held by the Company the
right on two occasions to demand registration of such shares and in addition
granting piggyback registration rights. Each demand is deemed to be an offer to
sell to Aydin or its assigns all shares covered by such demand at the then
current market price. The offer must be accepted or it lapses within ten days.
On January 24, 1997, the Company demanded registration of all 596,927 of the
shares of Aydin common stock that it currently holds in accordance with the
Registration Rights Agreement. Aydin did not exercise its right to purchase such
shares as a result of the initial demand of registration by the Company.
On April 4, 1997, Aydin filed a Registration Statement on Form S-3 (the
"S-3") covering the 596,927 shares of Aydin stock held by the Company (the
"Aydin Shares"). The Company has granted an assignable option (the "Bard
Option") to I. Gary Bard, the Chairman of Aydin, to purchase the Aydin Shares
held by the Company. The option expires on the earliest (i) the close of
business on the fifth business day following the effective date, as determined
by the Securities and Exchange Commission, of the S-3 or (ii) June 2, 1997. If
the option is not exercised, the Company intends to sell the Aydin Shares in
public or private sales at the then prevailing market price or upon negotiated
prices.
As a result of the merger discussions being terminated, the Company has
written down its investment in Aydin Corporation by approximately $5,156,000 due
to a decline in fair value considered to be other than temporary. In addition,
approximately $689,000 of capitalized costs incurred in connection with the
terminated merger discussions with Aydin has been charged to expense in 1996.
The closing price of the Aydin common stock as reported by the NYSE at April 7,
1997 was $11 1/8 per share.
Tri-Star
On December 23, 1996, the Company signed letters of intent to acquire
Tri-Star Technologies Co. ("Tri-Star") and the approximately 120,000 square foot
building and real property occupied by Tri-Star in Methuen, Massachusetts.
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. The purchase price for the
building and real property is $3.5 million; payable $2.5 million in cash and
$1.0 million in Common Stock of the Company. The purchase price for Tri-Star is
$16 million, which $1 million was made as a non-refundable deposit in January
1997. The remaining $15 million is payable $9 million in cash at closing and $6
million in Common Stock of the Company. In addition to the cash necessary to
complete the purchase of Tri-Star, the Company would need additional capital to
provide adequate working capital for the ongoing operations of Tri-Star. Closing
of these purchases is subject to completion of due diligence by the Company and
approval by the Board of Directors of the Company. If closing does not occur by
July 31, 1997, Tri-Star may terminate discussions and retain the non-refundable
deposit.
The Company does not have sufficient available capital resources to
complete the purchase of Tri-Star and the related property. For a more complete
discussion of the Company's capital resources. See Note 2.
The Company will attempt to negotiate a reduction of the portion of the
purchase price due at closing and in addition will consider raising additional
capital in the form of debt or equity to enable it to complete the purchase of
Tri-Star, however no assurance can be given that the Company will be successful
in such negotiations or in raising the additional capital Accordingly, no
assurance can be given that such acquisition will occur.
41
EA INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Disposition of Southwest Operations
In December 1994, in contemplation of the acquisition of Tanon, the Company
committed to a plan to close or sell its Southwest operations in Tucson, Arizona
and Nogales, Mexico. The Company also decided substantially to consolidate its
corporate administrative functions. In connection with these decisions, the
Company recorded a provision for restructuring of $2,400,000.
Other Expenses
Other expenses consist primarily of the following charges in 1996: equity
share of BarOn's loss ($812,000), equity share of EATI loss ($449,000),
valuation adjustment-investment in EATI ($1,647,000), valuation adjustment
investment in BarOn ($649,000), write-down of Spalliero note receivable
($907,000) and the write-off of fixed assets ($563,000).
In 1995, other expense consisted primarily of the equity in loss from BarOn
($802,000) and the equity share of EATI loss ($49,000).
4. DEBT AND CAPITAL LEASE OBLIGATIONS
Debt and Capital Lease Obligations at December 31 consisted of the
following:
1996 1995
---- ----
(thousands of dollars)
IBJ Schroder Bank & Trust $ 8,054 --
Congress Financial Corporation loan facility -- $ 3,646
Comerica Bank of California -- 5,194
Capital lease obligations 4,392 2,595
------- -------
12,446 11,435
Less: Long term portion of debt and capital
lease obligations 2,937 1,731
------- -------
$ 9,509 $ 9,704
======= =======
The above table does not include the convertible notes and debentures
because management believes all such obligations will be satisfied through the
conversion into shares of Common Stock. If not converted, the maturity schedule
of convertible notes and debentures is as follows: 1997 -- $2,725,000, 1998 --
$6,839,000 and 1999 -- $1,270,000. As described in Note 2, certain of the
convertible notes and debentures contain conversion features which provide for
18-20% discounts on the market price of the Company's common stock at the
conversion date. The incremental yield embedded in the conversion terms totaling
$4,200,000 has been charged to interest expense in 1996. The quarterly financial
data in Note 13 has been retroactively restated to reflect this charge.
Lines of Credit
42
EA INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
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 (reduced to $11,500,000 by amendment dated in April 1997) 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 Credit Facility"). The
Company expects that its outstanding balance under the Schroder Credit Facility
will be significantly less than $11,500,000 at all times during 1997. The
Schroder Credit 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
Credit Facility. The Company paid a Closing fee of $125,000 to Schroder at the
closing of the Schroder Credit Facility. Advances under the Schroder Credit
Facility can only be used to fund the Company's electronic contract
manufacturing operations which are now being conducted solely by Tanon. At
December 31, 1996, $8,054,000 was outstanding under the Schroder Credit
Facility, which constituted the total availability of the borrowing base. 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 December 31, 1996, Tanon was in
compliance with all of these requirements, except the required ratio of earnings
to certain fixed charges. By agreement dated in April 1997 Schroder has agreed
to waive such requirement for December 31, 1996 and has adjusted the required
financial ratios to reflect the results of operations of Tanon contained in the
current business plan of Tanon for 1997. Substantially, all of the assets of the
Company are pledged as collateral to secure the Schroder Credit Facility.
Concurrent with, and as a condition to, the closing of the Schroder Credit
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 its subsidiaries with
EAI providing strategic, financial and other support to such subsidiaries.
43
EA INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Capitalized Lease Obligations
The Company leases fixed assets under capitalized leases with a weighted
average interest rate of 14.1% and the following principal maturity schedule:
(in thousands)
1997 $1,455
1998 1,280
1999 1,413
2000 244
------------
Total 4,392
Current portion (1,455)
------------
Long-term portion $2,937
============
5. OPERATING LEASES
The Company leases its West Long Branch facility under a lease which expires
in 2006. The monthly rent thereon, as of March 1, 1997 is approximately
$114,000, monthly abatements are approximately $47,000, yielding a net monthly
rent of $67,000, plus the payment of taxes, repairs, maintenance replacements
and utilities. The lease agreement provides for increases in rental payments on
each April 1, through the year 1999 based upon the increase in the Consumer
Price Index with a minimum and maximum range of 3% to 6-1/2%. Thereafter, the
rent will be adjusted based on market rates for similar facilities. During 1993
and 1994 the Company negotiated amendments to the lease which provide for $2.8
million of rent abatements over 5.5 years.
The majority of the other lease commitments have been made under standard
office leases which have initial terms ranging from two to five years.
The aggregate minimum lease commitments under all noncancelable operating
leases as of December 31, 1996, amounted to $15,978,000; $2,191,000 in 1997;
$2,241,000 in 1998; $1,962,000 in 1999; $1,865,000 in 2000; $1,892,000 in 2001
and $5,827,000 thereafter. Rent expense amounted to $2,343,000 in 1996,
$2,234,000 in 1995; and $1,395,000 in 1994. The lease on the West Long Branch,
NJ facility was extended to the year 2006 at the fair market value rent in March
1999. Since the fair market value rent at that time cannot now be determined, no
estimate of the future commitment has been included herein.
6. STOCK OPTIONS AND WARRANTS
The Board of Directors grants options and warrants to acquire the Company's
Common Stock to certain non-employee individuals and companies as a means of
payment (often in lieu of cash) for a variety of services rendered. No
significant options or warrants were issued for this purpose in 1996, however,
during 1995 and 1994 options and warrants to acquire 86,250 and 90,500 shares,
respectively of the Company's Common Stock were issued for this purpose. The
Company estimates the value of these options and warrants using an option
pricing model and charges this value to expense over the shorter of the vesting
or service period.
44
EA INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
In connection with the Company's efforts to raise equity capital, the Board
of Directors grants options and warrants to acquire shares of the Company's
Common Stock to investment bankers and individuals and companies acting in that
capacity. During 1996, 1995 and 1994 options and warrants to acquire 89,286,
118,750 and 250,000 shares of the Company's Common Stock were issued for this
purpose. Options or warrants issued to raise equity capital are accounted for as
part of the equity transactions.
As described in Note 3, option and warrants were issued in connection with
the Tanon Acquisition and also in connection with the Company's investments in
both BarOn and its indirect investment in ITI.
A description of the Company's stock option plans for employees and
non-employee directors and the more significant options and warrants granted for
the purposes described above follows:
1972 Employee Stock Option Plan
As of December 31, 1996, 217,102 shares of Common Stock were reserved for
issuance to employees under the Company's 1972 Employee Stock Option Plan (1972
Employee Plan). Incentive stock options are granted to substantially all
employees at either the fair market value on the date of grant or 85% of the
fair market value of EAI Common Stock at the date of grant and usually become
exercisable over a four-year period commencing one year after being granted. The
Board of Directors may grant non-qualified options at its discretion for less
than fair market value. The Board of Directors may at its discretion determine
the option vesting period. Options can no longer be granted under this plan.
1994 Stock Option Plan for Non-Employee Directors
In March 1994, the EAI Board adopted and in May 1994 the shareholders
approved the Company's 1994 Stock Option Plan for Non-Employee Directors ("The
Directors Plan"). The Plan was approved based upon a variety of factors
including the reduction in amount and subsequent suspension of payment of fees
payable to non-employee directors of the Company, the significant commitment of
time required from members of the Board to address the issues arising out of the
financial difficulties experienced by the Company in recent periods and the
importance to the Company and its shareholders of attracting and retaining the
services of experienced and knowledgeable independent directors.
As of December 31, 1996, the aggregate number of shares of Common Stock
reserved for issuance under the Directors Plan was 501,875 shares. Under the
terms of the plan, each person who was an Eligible Director on March 10, 1994,
(the "Effective Date") and each person who became an Eligible Director
thereafter will be granted an option to purchase 12,500 shares of Common Stock.
An additional option to purchase 2,500 shares of Common Stock will be granted to
the individual serving as the Chairman of the Board on the Effective Date and to
each person who serves as the Chairman of the Board thereafter.
45
EA INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
1994 Equity Incentive Plan
On May 17, 1994, the Board of Directors adopted the Company's Equity
Incentive Plan (the "Equity Incentive Plan"), which was approved by the
shareholders of the Company at the Special Meeting of Shareholders held on June
28, 1994. On October 12, 1995, the Shareholders voted to approve an amendment to
the Equity Incentive Plan increasing the aggregate number of shares available
for issuance to 1,500,000. On May 30, 1996, the Shareholders voted to approve an
amendment to the Equity Incentive Plan increasing the aggregate number of shares
available for issuance to 2,250,000. The EAI Board of Directors believes that
the Equity Incentive Plan will provide a method whereby certain directors,
officers, employees and consultants can share in the long-term growth of the
Company. As of December 31, 1996, 494,443 shares of Common Stock were reserved
for issuance to eligible individuals under this Plan.
Wall Street Group Options
On June 28, 1994, the Board of Directors granted the Wall Street Group an
option to purchase 25,000 shares of the Company's Common Stock which vested
ratably over 1 year at a price of $18.24 in consideration of services to be
provided to the Company. Such options were granted at fair value at the date of
grant.
Waterton Group LLC Options
On October 20, 1994, in consideration of investment banking services, the
Board of Directors granted to the Waterton Group, LLC options to acquire 50,000
shares of the Company's Common Stock, exercisable 50% on the first anniversary
of the date of grant and 50% on the second anniversary at an exercise price of
$30.80, which is equal to 110% of the closing price of the Company's Common
Stock on the date of grant. The Board also granted additional options which were
issued on October 20, 1995 to acquire 50,000 shares of the Company's Common
Stock, exercisable 50% on the first anniversary and 50% on the second
anniversary of the October 20, 1995 issue date, at an exercise price of $21.47,
which is equal to 110% of the closing price of the Company's Common Stock on
October 20, 1995.
Broad Capital Associates Options and Warrants
On April 27, 1995, in consideration of investment banking services, the
Board of Directors granted to Broad Capital Associates ("Broad"), options to
acquire 93,750 shares of common stock of the Company, exercisable 33 1/3% on the
date of grant, 33 1/3% on the first anniversary, and 33 1/3% on the second
anniversary of the April 27, 1995 date of grant at an exercise price of $32.75
per share which is equal to the fair market value on the date of grant. The
exercise price of such options was subsequently reduced to $18.00 per share and
then increased to $20.00 per share but automatically reverted to $32.75 per
share as of March 1, 1996.
In August 1996, the exercise price of such options was reduced to $11.20 per
share, exercisable immediately, but will automatically revert to the terms of
the original grant on August 1, 1997. On September 3, 1996 Broad exercised its
option to purchase 89,286 of such shares at $11.20 per share.
On July 5, 1995, in connection with the formation of the Joint Venture with
IAI, the Board of Directors granted Broad options to purchase 106,250 shares of
the Company's common stock at an exercise price of $32.50 which options vest and
are exercisable 33 1/3% on the date of grant, 33 1/3% on the first anniversary
of the date of the grant, and 33 1/3% on the second anniversary of the date of
the grant. Such options were subsequently amended to an exercise price of $18.00
per share and which reverted to an exercise price of $32.50 on March 1, 1996.
46
On November 21, 1995 Broad exercised its option to purchase 50,000 of such
shares at $18.00 per share. In consideration for such exercise, the exercise
period for the options to purchase the remaining 56,250 shares was extended for
an additional period of six months and the exercise price was increased from
$18.00 to $20.00 per share. In consideration of Broad's commitment to purchase
89,286 shares of the Company's common stock from the April 27, 1995 grant, the
options to purchase the remaining 56,250 shares of the July 5, 1995 grant were
amended to an exercise price of $11.20 in August, 1996 but will revert to $32.50
on August 1, 1997.
On September 3, 1996, also in consideration for Broad's commitment to
purchase 89,286 shares of the Company's common stock from the April 27, 1995
grant, the Board of Directors granted Broad warrants to purchase 89,286 shares
of the Company's common stock at an exercise price of $12.00 per share until
July 31, 1997 and thereafter at $32.50 per share, expiring on July 5, 2000.
Mark Hauser Options
On July 5, 1995, in connection with the formation of the Joint Venture with
IAI, the Board of Directors granted Mark Hauser options to purchase 25,000
shares of the Company's common stock at an exercise price of $32.50 per share
which options vest and are exercisable 33 1/3% on the date of grant, 33 1/3% on
the first anniversary of the date of the grant, and 33 1/3% on the second
anniversary of the date of the grant.
Dedi Graucher Options
On July 5, 1995, in connection with the formation of the Joint Venture with
IAI, the Board of Directors granted Dedi Graucher options to purchase 106,250
share of the Company's common stock at an exercise price of $32.50 per share
which options vest and are exercisable 33 1/3% on the date of grant, 33 1/3% on
the first anniversary of the date of the grant, and 33 1/3% on the second
anniversary of the date of the grant. Such options were subsequently amended to
an exercise price of $18.00 per share, which reverted to an exercise price of
$32.50 per share on March 1, 1996.
Class A and Class B Warrants
In connection with the February 1994 Private Placement, there were 7,354
Class A Warrants and 240,928 Class B Warrants outstanding as of December 31,
1996. Each Class A Warrant entitles the holder to purchase one share of the
Company's Common Stock at $4.00 per share and each Class B Warrant entitles the
holder to purchase one share of the Company's Common Stock at $7.00 per share.
Irwin L. Gross Warrants
The Company entered into an agreement with Irwin L. Gross in March 1994
pursuant to which Mr. Gross will provide consulting services and financial
advice, for a term of five years ending March 1999. In consideration for such
services Mr. Gross received a warrant to purchase 65,500 shares of the Company's
Common Stock exercisable 50% on the first anniversary and 50% on the second
anniversary of the grant at a price of $11.08 per share. These options are
exercisable through March 21, 1999.
47
EA INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Neidiger/Tucker/Bruner, Inc. Unit Warrants
In connection with services rendered to the Company for the June 1994
Private Placement, the Company granted Unit Warrants to the investment banking
firm of Neidiger/Tucker/Bruner, Inc. ("NTB Warrants"). The NTB Warrants entitle
the holders to purchase 62,500 units at $12.12 per unit. Each unit consists of
one share of Common Stock and a Class C Warrant. On July 10, 1999, 15,663 Unit
Warrants will expire and on August 17, 1999, 46,838 Unit Warrants will expire.
For each unit there is an Underlying Warrant with an exercise price of $18.40
with the same expiration dates.
VistaQuest Options
In connection with consulting services performed for the Company on December
13, 1995, the Board of Directors granted VistaQuest warrants to purchase 60,000
shares at an exercise price of $23.52 per share, which exercise price was the
fair market value on the date of the grant.
ITI Joint Venture
In connection with the formation of ITI, warrants to purchase 125,000 and
150,000 shares of the Company's Common Stock were granted to IAI and AMP
Argonauts, Ltd., respectively. The warrants have an exercise price of $29.00 per
share, and expire on August 7, 1998.
Other Warrants
At December 31, 1996, the Company had certain other warrants outstanding for
issuance of shares of Common Stock under certain circumstances. All such
warrants were issued in prior years and are included in the summary of
outstanding warrants below.
48
EA INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
A summary of activity in the various stock option plans discussed above and
a summary of warrants outstanding at December 31, 1996 follow:
Stock Option Plans
------------------
Price Available
Per Share Outstanding Exercisable for Grant
--------- ----------- ----------- ---------
1972 Stock Option Plan
December 31, 1994, Balance $ 4.52-25.12 246,709 85,820 108,974
Options Granted -- 100,000 -- (100,000)
Became Exercisable -- -- 131,411 --
Options Exercised $ 4.52- 5.48 (86,745) (86,745) --
Options Returned $ 4.52-25.12 (193,597) -- 193,597
------------ ------ ------ -------
December 31, 1995 Balance $ 4.52-25.12 66,367 130,486 202,571
Became Exercisable $ 4.52-20.252 4,432
Options Exercised $13.00 (312) (312)
Options Returned $ 4.52-14.00 (14,531) (11,107) 14,531
Options Exercisable Adjustment $ 4.52-25.12 -- (77,523) --
------------ ------ ------ -------
December 31, 1996, Balance $ 4.52-25.12 51,524 45,976 217,102
============ ====== ====== =======
1994 Stock Option Plan for
Non-Employee Directors
December 31, 1994, Balance $13.00-17.48 65,000 19,500 35,000
Options Granted $22.28 40,000 (40,000)
Became Exercisable $13.00-22.28 21,000
Options Exercised $13.00-17.48 (11,250) (11,250)
Options Returned $13.00 (6,875) (6,875) 6,875
Options Authorized 500,000
------------ ------ ------ -------
December 31, 1995 Balance $13.00-22.28 86,875 22,375 501,875
Became Exercisable $13.00-30.00 -- 14,625 --
Options Exercised $13.00 (2,500) (2,500)
Options Returned Adjustment $13.00 -- 6,875 --
------------ ------ ------ -------
December 31, 1996, Balance $13.00-30.00 84,375 41,375 501,875
============ ====== ====== =======
49
EA INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Stock Option Plans
Price ------------------ Available
Per Share Outstanding Exercisable for Grant
--------- ----------- ----------- ---------
1994 Equity Incentive Plan
- -----------------------------
December 31, 1994, Balance $ 17.76 450,000 300,000
Options Granted $ 4.20-34.50 1,102,080 1,102,080)
Became Exercisable $ 17.76 452,199
Options Exercised $ 4.20-18.00 (121,876) (121,876)
Options Returned $ 17.76 (114,380) (114,380) 114,380
Options Authorized 750,000
----------- ------------- ----------- ------------
December 31, 1995, Balance $ 4.20-34.50 1,315,824 215,943 62,300
Options Granted $ 14.50-20.50 362,500 (362,500)
Options Granted -- Adjustment $ 30.50 (6,250) 6,250
Options Granted -- Adjustment $ 18.00 25,000 (25,000)
Became Exercisable $ 3.96-34.50 501,960
Options Exercised $ 3.96-34.50 (91,479) (91,479)
Options Returned $ 5.00-34.50 (44,888) (3,125) 44,888
Options Returned Adjustment $ 3.96-34.50 (18,497) 113,183 18,505
Options Authorized 750,000
----------- ------------- ----------- ------------
December 31, 1996, Balance $ 3.96-34.50 1,542,210 736,482 494,443
=========== ============= =========== ============
Wall Street Group Options $ 18.24 25,000 25,000 --
=========== ============= =========== ============
Waterton Group LLC Options $ 22.00-30.80 100,000 75,000 --
=========== ============= =========== ============
Total All Options $ 3.96-34.50 1,803,109 923,833 1,213,420
=========== ============= =========== ============
50
EA INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Warrants Outstanding
Exercise Price
Warrants Per Warrant Outstanding
- -------- ----------- -----------
Class A Warrants $4.00 7,354
Class B Warrants 7.00 240,928
Gross Warrants 11.08 65,500
Neidiger/Tucker/Bruner, Inc. Unit Warrants 12.10 62,501
Neidiger/Tucker/Bruner, Inc. Class C Warrants 18.40 62,501
Public Utility Warrants 24.00 75,000
185 Monmouth Parkway 6.00 32,500
Norcross Warrants 4.00 12,500
IAI Warrants 29.00 125,000
A.M.P. Argonauts Ltd. Warrants 29.00 150,000
Broad Capital Associates, Inc. Warrants 12.00 89,286
VistaQuest Warrants 23.50 60,000
----------- ---------
Total Warrants Outstanding $4.00-29.00 983,070
=========== =========
The number of shares and average price of options exercisable at December
31, 1996 and 1995 were 923,833 shares at $19.23 and 418,804 shares at $19.34,
respectively. At December 31, 1996 and 1995, 1,213,420 shares and 766,718
shares, respectively, were available for future grants under these plans.
At December 31, 1996 an aggregate of 3,999,599 shares of Common Stock
was reserved for the exercise of options and warrants.
Effective January 1, 1996, the Company adopted the provisions of Statement
No. 123, Accounting for Stock-Based Compensation. As permitted by the Statement,
the Company has chosen to continue to account for stock-based compensation using
the intrinsic value method. Accordingly, no compensation expense has been
recognized for its stock-based compensation plans other than for
performance-based awards, which was not significant. Had the fair value method
of accounting been applied to the Company's stock option plans, which requires
recognition of compensation cost ratably over the vesting period of the
underlying equity instruments, Net Loss would have been increased by $5.2
million, or $1.08 per share in 1996 and $2.9 million, or $0.95 per share in
1995. This pro forma impact only takes into account options granted since
January 1, 1995 and is likely to increase in future years as additional options
are granted and amortized ratably over the vesting period. The average fair
value of options granted during 1996 and 1995 was $16.91 and $29.43,
respectively. The fair value was estimated using the Black-Scholes
option-pricing model based on the weighted average market price at grant date of
$8.78 in 1996 and $14.10 in 1995 and the following weighted average assumptions:
risk-free interest rate of 5.8% for 1996 and 6.4% for 1995, expected life of 3
years for 1996 and 1995, volatility of 73% for 1996 and 70% for 1995, and no
dividend yield for 1996 or 1995.
7. SAVINGS PLAN AND POST RETIREMENT BENEFITS
51
EA INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
The Company has a 401(k) Savings Plan whereby eligible employees may
voluntarily contribute up to 15% of annual compensation, or the maximum allowed
as determined by the Internal Revenue Code. Employee contributions are matched
50% by the Company up to a maximum of 4% of employee compensation. The Company
can also make an additional contribution which is at the discretion of the Board
of Directors. No additional contributions were made in 1996, 1995, or 1994 .
Company contributions amounted to approximately $84,000 in 1996, $68,000 in
1995, and $48,000 in 1994. Payments upon retirement or termination of employment
are based on vested amounts credited to individual accounts. The Company does
not provide any material postretirement benefits.
8. INCOME TAXES
As of December 31, 1996, the Company had a net operating loss carry forward
for tax purposes of approximately $45.6 million ($7.3 million expiring in 1999,
$2.0 million expiring in 2002, $3.1 million expiring in 2007, $6.2 million
expiring in 2008, $5.2 million expiring in 2009, $9.6 million expiring in 2010
and $12.2 million expiring in 2011) that may be applied to reduce future taxable
income. There is an annual limitation of $4,860,000 on the utilization of the
Company's net operating loss carry forwards which resulted from stock ownership
change in January 1995, as defined in Section 382 of the Internal Revenue Code
of 1986. Further limitations may occur if additional stock ownership changes
occur which exceed certain thresholds as defined by Section 382 of the Code.
Because of the uncertainties related to the future realization of the
deferred tax asset of $17.8 and $13.0 million at December 31, 1996 and 1995,
respectively, the Company has established a valuation allowance of $17.8 and
$13.0 million at December 31, 1996 and 1995, respectively.
There was no net U.S. Federal income tax benefit for 1996, 1995 or 1994
because losses incurred in those years cannot be carried back to prior years and
the future realization is uncertain.
9. LOSS PER COMMON SHARE
Losses per common share were 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 year. The weighted average common shares outstanding used in the
computation of (loss) per share was 4,802,068 in 1996, 3,086,070 in 1995 and
1,263,120 in 1994.
All references in the consolidated financial statements referring to
shares, share prices, per share amounts, and stock option plans have been
adjusted to give retroactive effect to a one-for-four reverse stock split as of
the close of business on December 27, 1996 (the "Record Date").
10. EXECUTIVE SERVICES AND SEVERANCE AGREEMENTS
Effective November 15, 1996, Joseph R. Spalliero resigned as President and
Director of the Company. Upon the expiration of Mr. Spalliero's employment
agreement on January 3, 1997, Mr. Spalliero became an independent sales
representative for Tanon. Irwin L. Gross, Chairman of the Board of the Company,
has succeeded Mr. Spalliero as President of the Company.
On February 2, 1995, pursuant to negotiations which had been commenced in
November, 1994, Charles A. Milo submitted his formal resignation as President,
Chief Executive Officer and Director. At that time, the
52
EA INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Company executed an agreement with Mr. Milo which specifies among other things,
the forgiveness of the $160,000 note due the Company; payment of a $50,000
bonus, continuation of salary and benefits to March 31, 1995; and payment of
$10,000 fee for services to be rendered in connection with the closure of the
Company's Mexican facility. The charges are reflected in the restructuring
charge disclosed in Note 3.
On December 20, 1996, the Company entered into employment agreements with
those of its executive officers who served as full time employees - Paul Finer,
Howard Kamins, Stanley Jester and Jules Seshens. The agreements have an initial
term expiring on December 31, 1997, and automatically renew unless notice given
at least 180 days before expiration of the then current term. Each of the
agreements provide for severance in a lump sum equal to one year's salary and
guideline bonus, if any, continuation of benefits for 18 months, and vesting of
any unvested options if (i) the executive is terminated for any reason other
than due cause, (ii) a change of control of the Company occurs, (iii) Irwin L.
Gross is no longer Chairman, (iv) the executive's principal location is moved
more than 30 miles from its current location or (v) the executive's position is
materially changed.
11. PREFERRED STOCK PURCHASE RIGHTS
Pursuant to a Shareholder Rights Plan, there is one preferred stock
purchase right outstanding for each outstanding share of Common Stock. Under
certain conditions, each right may be exercised to purchase one one-hundredth
share of a new series of participating preferred stock at an exercise price of
$11, subject to adjustment. The rights may only be exercised commencing ten days
after a public announcement that a party acquired or obtained the right to
acquire 15% or more of the Company's Common Stock (except in a transaction
directly with the Company which the Board of Directors determines is in the best
interests of the shareholders) or ten days after commencement of a tender or
exchange offer the consummation of which would result in ownership by a party of
15% or more of the Company's Common Stock. The rights, which do not have voting
rights, expire in 1998 and may be redeemed by the Company at a price of $0.01
per right at any time prior to their expiration or the acquisition of 15% of the
Company's Common Stock. In the event that a party acquires 15% or more of the
Company's Common Stock, in a transaction not approved by the Board of Directors,
each other holder of a right shall have the right to receive that number of
shares of common (or, in certain circumstances, Common Stock equivalents) of the
Company, which would have a value of twice the exercise price of the right, and
in addition, the Board of Directors, at its option, may exchange each right
(other than rights held by the acquiring party) for one share of Common Stock
(or Common Stock equivalents). In the event that the Company is acquired in a
merger or other business combination transaction after the rights become
exercisable, each holder of a right shall have the right to purchase, at the
exercise price, that number of shares of Common Stock of the acquiring company
which would have a value of twice the exercise price of the right. The Plan will
not become effective if 80% or more of the Company's stock is acquired in an all
cash tender offer meeting certain conditions.
53
EA INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
12. CONTINGENCIES
Lemco Associates
In October, 1992, Lemco Associates L.P., a limited partnership ("Lemco"),
the owner of property previously owned by EAI, initiated an action against EAI
and others alleging, among other things, that the defendants created
environmental contamination at the property and is seeking damages in
unspecified amounts. EAI has denied Lemco's allegations, asserted numerous
defenses to the claims asserted and asserted a counterclaim against Lemco and
cross claims against co-defendants and others for indemnification and
contribution. In addition, the Company has made a demand upon its insurance
carriers for coverage for the claims made by Lemco and cross claims and third
party claims may be filed against these insurance companies seeking
indemnification against these claims. To date, the Company's insurance carriers
have agreed to pay 71% of its defense costs under a reservation of rights.
Discovery in this matter is ongoing. By letter dated January 22, 1997, Lemco
provided the Company with a statement of its remediation costs to date, as well
as an estimate of future remediation costs associated with the contamination for
which it seeks recovery in this action. Specifically, Lemco claims that it has
expended approximately $609,000 in remediation costs, including fees for legal
oversight and consultation. It further estimates that its future remediation
costs will amount to approximately $5,000,000. Such amount is included in a
report made by Lemco's environmental consultants based on their current
assessment of the extent of contamination and the method and period required to
complete the remediation, as well as anticipated New Jersey Department of
Environmental Protection and Energy ("DEPE") oversight costs and fees for legal
oversight and consultation. Further, by letter dated June 7, 1995, Lemco
provided the Company with an appraisal report made by a real estate appraisal
company engaged by Lemco in support of Lemco's claim for diminution in the value
of the property. Such report states that it is the appraisal company's opinion
that the market value of the property as of May 23, 1988 was $3.6 million and as
of April 14, 1995 was $750,000. Lemco's appraisal expert subsequently determined
in October 1995 that the value of the property as of April 14, 1995 was
$960,000. Lemco purchased the property in question in 1979 for approximately
$400,000. 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 have estimated that, based upon
hydrogeologic data gathered to date by Lemco's experts, the major source of
continuing contamination of groundwater was released into the water table about
late 1984 or, using more conservative extrapolations, about mid-1979. Based on
the foregoing, management believes that the range of possible loss in this
matter ranges from zero to approximately $8.24 million, not including costs and
expenses, such as legal and expert fees, which will be incurred in connection
with this matter, and not taking into account the amount of any loss which may
be offset by insurance coverage as discussed above. The Company and its
consultants recently completed the investigation and evaluation of additional
information received from Lemco and have determined that Lemco's remediation
cost estimates are overstated. The Company's experts have estimated the cost of
remediation as between $1.5 million and $2.5 million. There is no assurance that
the outcome of this matter will come within the above-mentioned range of
possible loss.
The Company is vigorously defending this matter. On May 3, 1996, the
Superior Court of New Jersey referred this case to mediation in an effort to
explore opportunities for settlement. Mediation proceedings commenced and
through March 1997. In the event the matter cannot be resolved through
mediation, the case will be referred back to the Court and a trial has been
scheduled to commence on April 28, 1997.
No reserve has been established in the accompanying financial statements
for the cost of remediation, if any, which may be attributable to the Company.
Estimated legal and environmental expert fees have been reserved to the extent
not covered by insurance. The Company's liquidity assessment described in Note 2
does not include any estimate for cost of remediation.
54
EA INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
13. QUARTERLY FINANCIAL DATA (Unaudited)
Summarized quarterly financial data for the years ended December 31, 1996
and 1995 are as follows:
First Second Third Fourth
----- ------ ----- ------
1996
- ----
Net sales $24,025 (1) $22,388 (1) $ 17,595 (1) $ 17,617
Gross profit (loss) 1,391 (1) 1,589 (1) (142)(1) (2,358)
Net loss $(1,674)(1) $(1,627)(1) $ (6,265)(1) $(16,188)
------- ------- -------- --------
Loss per common share $ (0.40)(1) $ (0.34)(1) $ (1.24)(1) $ (3.37)
======= ======= ======== ========
Adjustment for discount on
convertible debt $(2,195) $(2,005)
Restated net loss $(3,869)(2) $(3,632)(2) $ (6,265) $(16,188)
------- ------- -------- --------
Restated loss per common share $ (0.92)(2) $ (0.77)(2) $ (1.24) $ (3.37)
======= ======= ======== ========
1995
- ----
Net sales $19,056 (1) $18,178 (1) $ 18,895 (1) $ 20,956
Gross profit 106 (1) 67 (1) 250 (1) 240
Net loss $(8,598)(1) $(2,484)(1) $(15,786)(1) $ (4,026)
------- ------- -------- --------
Loss per common share $ (3.36)(1) $ (0.92)(1) $ (4.84)(1) $ (1.08)
======= ======= ======== ========
(1) As reported on quarterly report on Form 10-Q.
(2) Restated to reflect interest expense resulting from the incremental yield
embedded in the conversion terms of certain convertible notes and debentures
described in Note 4.
55
EA INDUSTRIES, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION ACCOUNT
For the Three Years Ended December 31, 1996
(thousands of dollars)
Charged Deductions(1)
Description Balance at (Credited) ------------- Balance
Beginning to Costs and at End of
Of Period Expenses Period
--------- ------------ ---------
1996: Allowance for doubtful accounts $385 $899 (3) ($184) $1,100
==== ==== ====== ========
1995: Allowance for doubtful accounts $307(2) $ 91 $(13) $385
======= ==== ===== ====
1994: Allowance for doubtful accounts $277 $134 $(204) $207
==== ==== ====== ====
(1) Write-off of uncollectible accounts
(2) Adjusted to include Tanon Balance
(3) Includes provisions for Gyration Inc. of $750
56
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
EA INDUSTRIES, INC.
Registrant
By:/s/ Stanley O. Jester
-----------------------
Stanley O. Jester, Treasurer
and Vice President - Finance
Chief Financial Officer
(Principal Financial and Chief Accounting Officer)
Dated: April 15, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated:
Signature Title Date
- --------- ----- ----
/s/ Irwin L. Gross Chairman of the Board April 15, 1997
- -------------------------------- and President
Irwin L. Gross
/s/ Stanley O. Jester Treasurer and Vice April 15, 1997
- -------------------------------- President, Finance
Stanley O. Jester
(Principal Financial and
Accounting Officer)
/s/ Jules M. Seshens Executive Vice President April 15, 1997
- -------------------------------- and Director
Jules M. Seshens
[Signatures continued on next page]
60
/s/ William Spier Director April 15, 1997
- --------------------------------
William Spier
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The required information with respect to each director and executive
officer is contained in the Company's definitive Proxy Statement to be prepared
in connection with its Annual Meeting to be filed within 120 days of the
Registrant's year ended December 31, 1996 ("1997 Annual Meeting"), which is
hereby incorporated by reference in this Annual Report on Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
The required information with respect to executive compensation is
contained in the Company's definitive Proxy Statement to be prepared in
connection with its 1997 Annual Meeting, which is hereby incorporated by
reference in this Annual Report on Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The required information with respect to security ownership of certain
beneficial owners and management is contained in the Company's definitive Proxy
Statement to be prepared in connection with its 1997 Annual Meeting, which is
hereby incorporated by reference in this Annual Report on Form 10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The required information with respect to certain relationships and
related transactions is contained in the Company's definitive Proxy Statement to
be prepared in connection with its 1997 Annual Meeting, which is hereby
incorporated by reference in this Annual Report on Form 10-K.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) Reference is made to the Consolidated Financial Statements and
Schedules at Part II, Item 8 of this Annual Report on Form 10-K and the same are
hereby incorporated by reference.
2
EXHIBITS
Exhibit No. Description
---------- -----------
2.1 Agreement and Plan of Reorganization by and among Electronic
Associates, Inc., Tanon Manufacturing, Inc., EA Acquisition
Corp. and Joseph R. Spalliero, dated December 12, 1994, was
filed as Exhibit 2 to the Company's Report on Form 8-K (Date
of Report: January 4, 1995), as amended, and is hereby
incorporated by reference.
2.2 Form of Investment Agreement dated January 16, 1995 by and
between Electronic Associates, Inc. and BarOn Technologies,
Ltd., was filed as Exhibit 10.1 to the Company's Current
Report on Form 8-K (Date of Report: January 16, 1995), as
amended, and is hereby incorporated herein by reference.
2.3 Form of Stock Purchase Agreement, dated January 10, 1995,
between the company and various shareholders of BarOn
Technologies, Ltd., was filed as Exhibit 10.2 to the Company's
Current Report on Form 8-K (date of report: January 16, 1995),
as amended, and is hereby incorporated herein by reference.
2.4 Form of Shareholders Agreement, dated January 16, 1995, among
the Company, BarOn Technologies Ltd. and the shareholders of
BarOn Technologies Ltd. was filed as Exhibit 10.3 to the
Company's Current Report on Form 8-K (Date of Report: January
16, 1995), as amended, and is hereby incorporated herein by
reference.
2.5 Form of Pre-Incorporation Agreement in connection with the IAI
Joint Venture was filed as Exhibit 2.1 to the Company's
Current Report on Form 8-K (Date of Report: August 3, 1995)
and is hereby incorporated herein by reference.
2.6 Form of Joint Venture Agreement in connection with IAI Joint
Venture was filed as Exhibit 2.2 to the Company's Current
Report on Form 8-K (Date of Report: August 3, 1995) and is
hereby incorporated herein by reference.
3.1 Certificate of Incorporation, as amended, was filed as Exhibit
3.1 to the Company's Registration on Form S-1, No. 33-81892,
as amended and is hereby incorporated by reference.
3.2 Amendment to Certificate of Incorporation was filed as Exhibit
3.11 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1995, and is hereby incorporated by
reference.
3.3 Amendment to Certificate of Incorporation Reflecting Reverse
Stock Split.
3.4 By-Laws, as amended, were filed as Exhibit 3.2 to the
Company's Annual Report on Form 10-KA for the year ended
December 31, 1994, and are hereby incorporated by reference.
4.1 Specimen of Common Stock share Certificate.
3
4.2 Rights Agreement, dated as of February 10, 1988, between the
Company and Manufacturers Hanover Trust Company, as Rights
Agent, was filed as Exhibit 1 to the Company's Form 8-A, dated
February 11, 1988, and is hereby incorporated by reference.
4.3 Amendment, dated as of October 24, 1990, to the Rights
Agreement, was filed as Exhibit 2 to the Company's Form 8,
dated October 24, 1990, and is hereby incorporated by
reference.
10.1 Form of common stock Purchase Warrants issued pursuant to
Settlement Agreement dated March 10, 1988 between the Company
and certain utilities was filed as Exhibit 2(c) to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1990, and is hereby incorporated by reference.
(*)10.2 1972 Stock Option Plan, as amended and restated, was
filed as Appendix III to the Company's Proxy Statement dated
April 18, 1994, and is hereby incorporated by reference.
10.3 Form of grant letter with respect to options granted pursuant
to the 1972 Stock Option Plan was filed as Exhibit 10(c) to
the Company's Annual Report on Form 10-K for the year ended
December 31, 1990, and is hereby incorporated by reference.
(*)10.4 1991 Stock Option Plan for Non-Employee Directors, was
filed as Exhibit 10(d) to the Company's Annual Report on Form
10-K for the year ended December 31, 1991, and is hereby
incorporated by reference.
(**)10.5 1988 Management Incentive Compensation Plan, as amended as of
January 1, 1992, was filed as Exhibit 10(e) to the Company's
Annual Report on Form 10-K for the year ended December 31,
1991, and is hereby incorporated by reference.
10.6 Second Amendment of Lease and Option Agreement, dated as of
April 1, 1989, between the Company and 185 Monmouth Parkway
Associates was filed as Exhibit (a) to the Company's Report on
Form 10-Q for the three months ended March 31, 1989, and is
hereby incorporated by reference (File No. 1-4680).
10.7 Stock Purchase Agreement, dated as of February 8, 1990,
between the Company and Nippon Mining Co., Ltd. was filed as
Exhibit 10(a) to the Company's Report on Form 8-K, dated
February 21, 1990, and is hereby incorporated by reference
(File No. 1-4680).
4
10.8 Asset Purchase Agreement, dated May 15, 1992, between the
Company, Milo Technologies, Inc., Charles A. Milo and Loretta
Milo was filed as Exhibit 10(p) to the Company's Annual Report
on Form 10-K for the year ended December 31, 1993, and is
incorporated herein by reference.
10.9 Stock Purchase Agreement, dated May 15, 1992, between the
Company, Milotec S.A. De C.V., Charles A. Milo, Loretta Milo
and certain other individuals, was filed as Exhibit 10(q) to
the Company's Annual Report on Form 10-K for the year ended
December 31, 1992, and is hereby incorporated by reference.
10.10 Form of Class A Warrant issued to each purchaser in connection
with the private sale of the Company's securities in January
1994, was filed as Exhibit 10(x) to the Company's Annual
Report on Form 10-K for the year ended December 31, 1993, and
is hereby incorporated by reference.
10.11 Revolving Credit and Security Agreement dated May 3, 1996,
between IBJ Schroder Bank & Trust Company and Tanon
Manufacturing was filed as Exhibit 10.1 to the Company's
quarterly report on form 10-Q for the quarter ended March 30,
1996 and is hereby incorporated by reference.
10.12 Stock Purchase Agreement dated May 3, 1996, between the
Company and Ayhan Hakimoglu was filed as Exhibit 10.2 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
March 30, 1996 and is hereby incorporated by reference.
10.13 Form of Subscription Agreement and Form of 9% Convertible
Subordinated Debenture issued in connection with raising $8.1
million in May and June 1996 to fund a portion of the purchase
price for approximately 11.64% of the issued and outstanding
Aydin Common Stock purchased from Mr. Hakimoglu and for other
uses was filed as Exhibit 10.3 to the Company's Quarterly
Report on Form 10-Q for the quarter ended March 30, 1996 and
is hereby incorporated by reference.
10.14 Master Note dated July 1, 1996 from BarOn Technologies, Ltd.
to the Company was filed as exhibit 10.2 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 26,
1996 and is hereby incorporated by reference.
10.15 Master Note Agreement dated July 1, 1996, between the Company
and BarOn Technologies, Ltd. was filed as exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
June 26, 1996 and is hereby incorporated by reference.
10.16 Manufacturing and Consulting Agreement dated as of July 1,
1996 between the Company and BarOn Technologies, Ltd. was
filed as exhibit 10.3 to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 26, 1996 and is hereby
incorporated by reference.
10.17 Warrant to Purchase Ordinary Shares of BarOn Technologies,
Ltd. was filed as exhibit 10.4 to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 26, 1996 and is
hereby incorporated by reference.
10.18 Form of Class B Warrant issued to each purchaser in connection
with the private sale of the Company's securities in January
1994, was filed as Exhibit 10(y) to the Company's Annual
Report on Form 10-K for the year ended December 31, 1993, and
is hereby incorporated by reference.
5
10.19 Agreement to Issue Warrants, dated January 28, 1994, between
the Company and Norcross Securities, Inc. together with a
Warrant issued by the Company and a form of a Warrant issuable
under certain circumstances, comprising Exhibits to the
Agreement to Issue Warrants, was filed as Exhibit 10(z) to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1993, and is hereby incorporated by reference.
10.20 Second Amendment, dated August 4, 1993, to Second Amendment of
Lease and Option Agreement, dated as of April 1, 1989, between
the Company and 185 Monmouth Parkway Associates, L.P. and
letter dated August 6, 1993, modifying Second Amendment, dated
August 4, 1993, to Second Amendment of Lease and Option
Agreement, was filed as Exhibit 10(ab) to the Company's Annual
Report on Form 10-K for the year ended December 31, 1993, and
is hereby incorporated by reference.
10.21 Asset Purchase Agreement, dated June 4, 1993, between the
Company and Halifax Corporation together with a
Non-Competition Agreement, Assignment and Assumption
Agreement, Service Mark License Agreement, Low Cost Host
License Agreement, and Master Subcontract Agreement,
comprising Exhibits to the Asset Purchase Agreement, was filed
as Exhibit 10(ae) to the Company's Annual Report on Form 10-K
for the year ended December 31, 1993, and is hereby
incorporated by reference.
10.22 Form of Subscription Agreement executed by each purchaser in
connection with the private placement of the Company's
securities which was commenced in June 1994, was filed as
Exhibit 10.28 to the Company's Registration Statement on Form
S-1, No. 33-81892, as amended, and is hereby incorporated by
reference.
10.23 Form of Class C Warrant issued to each purchaser in connection
with the private placement of the Company's securities which
was commenced in June 1994, was filed as Exhibit 10.29 to the
Company's Registration Statement on Form S-1, No. 33-81892, as
amended, and is hereby incorporated by reference.
(*)10.24 1994 Equity Incentive Plan, as adopted by the Company's
shareholders on June 28, 1994, as amended and restated.
(*)10.25 1994 Stock Option Plan for Non-Employee Directors, as adopted
by the Company's shareholders on May 17, 1994, as amended and
restated.
(**)10.26 Form of Consulting Agreement entered into between the
Company and Irwin L. Gross on March 21, 1994, was filed as
Exhibit 2 to the Company's Registration Statement on Form S-1,
No. 33-81892, as amended, and is hereby incorporated by
reference.
10.27 Form of Placement Agent's Warrant Agreement entered into
between the Company and Neidiger/Tucker/Bruner, Inc., together
with a Form of Warrant issued by the Company comprising an
Exhibit to the Placement Agent's Warrant Agreement, was filed
as Exhibit 10.35 to the Company's Registration Statement on
Form S-1, No. 33-81892, as amended, and is hereby incorporated
by reference.
6
10.28 Form of Investment Agreement dated January 15, 1995 by and
between Electronic Associates, Inc. and BarOn Technologies,
Ltd., was filed as Exhibit 10.1 to the Company's Report on
Form 8-K (Date of Report: January 16, 1995), as amended, and
is hereby incorporated herein by reference.
10.29 Form of Stock Purchase Agreement between the Company and
various shareholders of BarOn Technologies, Ltd., was filed as
Exhibit 10.2 to the Company's Report on Form 8-K (Date of
Report: January 16, 1995), as amended, and is hereby
incorporated herein by reference.
10.30 Form of Shareholders Agreement among the Company, BarOn
Technologies, Ltd. and the shareholders of BarOn Technologies,
Ltd., was filed as Exhibit 10.3 to the Company's Report on
Form 8-K (Date of Report: January 16, 1995), as amended, and
is hereby incorporated herein by reference.
(**)10.31 Employment Agreement dated as of January 4, 1995 between
Tanon Manufacturing, Inc. and Joseph R. Spalliero was filed as
Exhibit 10.51 to the Company's Annual Report on Form 10-K/A
for the year ended December 31, 1994, and is hereby
incorporated by reference.
(**)10.32 Non-Competition and Confidentiality Agreement dated as
of January 4, 1995 by and among Electronic Associates, Inc.,
Tanon Manufacturing, Inc. and Joseph R. Spalliero, was filed
as Exhibit 10.52 in the Company's Annual Report on Form 10-K/A
for the year ended December 31, 1994, and is hereby
incorporated by reference.
10.33 Promissory Note dated January 4, 1995 in the principal amount
of $1,000,000 from Joseph R. Spalliero and Patricia Spalliero
to Electronic Associates, Inc. filed as Exhibit 10.53 to the
Company's Annual Report on Form 10-K/A for the year ended
December 31, 1994, and is hereby incorporated by reference.
(**)10.34 Amendment dated March 23, 1995 to Consulting Agreement
dated March 21, 1994 between Irwin L. Gross and Electronic
Associates, Inc. filed as Exhibit 10.55 to the Company's
Annual Report on Form 10-K/A for the year ended December 31,
1994, and is hereby incorporated by reference.
(**)10.35 Employment Agreement dated December 20, 1996 between the
Company and Paul E. Finer.
(**)10.36 Employment Agreement dated December 20, 1996 between the
Company and Howard P. Kamins.
(**)10.37 Employment Agreement dated December 20, 1996 between the
Company and Stanley O. Jester.
7
(**)10.38 Employment Agreement dated December 20, 1996 between the
Company and Jules Seshens.
10.39 Form of Subscription Agreement and Form of 10% Series A
Convertible Notes issued by the Company.
10.40 Registration Rights Agreement dated January 23, 1997 between
Aydin Corporation and the Company.
10.41 Letter Agreement dated February 25, 1997 between Aydin
Corporation and the Company regarding option to be granted to
the Chairman of Aydin Corporation.
10.42 Stock Option Agreement dated February 27, 1997 the Company and
the Chairman of Aydin Corporation.
10.43 Letter of Intent dated December 23, 1996 by and among Tanon
Manufacturing, Inc., Tri-Star Technologies Co., Inc. and
Michael P. Downes.
10.44 Letter of Intent dated December 23, 1996 by and among Tanon
Manufacturing, Inc., Tri-Star Realty Trust and Michael P.
Downes.
10.45 Memorandum of Understanding dated December 23, 1996 by and
among the Company, Tanon Manufacturing, Inc., Tri-Star
Technologies Co., Inc., and Michael P. Downes.
10.46 Promissory Note dated January 20, 1997 in the principal amount
of $1 million issued by the Company to Millenco, L.P.
10.47 Stock Pledge Agreement dated January 20, 1997 between the
Company and Millenco, L.P.
10.48 Warrant dated January 20, 1997 to purchase 50,000 shares of
the Company's Common Stock issued to Millenco L.P.
10.49 Promissory Note dated January 6, 1997 in the principal amount
of $1 million issued by the Company to ACE Foundation, Inc.
10.50 Stock Pledge Agreement dated January 6, 1997 between the
Company and Ace Foundation, Inc.
10.51 Warrant dated January 6, 1997 to purchase 50,000 shares of
Company's Common Stock issued to ACE Foundation, Inc.
10.53 Warrant, dated September 3, 1996, to purchase 357,143 shares
of Common Stock issued by the Company to Broad Capital
Associates, Inc.
8
22 Subsidiaries of the registrant
a. The Company has three active subsidiaries:
1. BarOn Technologies Ltd.
Haifa, Israel
2. Tanon Manufacturing, Inc.
Fremont, California
3. Electronic Associates Technologies Israel, Ltd.
23 Consents of experts and counsel
a. Consent of Arthur Andersen, LLP, Independent Public
Accountants of EA Industries, Inc.
b. Consent of Luboshitz Kasierer & Co., and Yosef Shimony,
Independent Public Accountants of BarOn Technologies
Ltd.
27 Financial Data Schedule
99.1 The audited balance sheet of BarOn Technologies Ltd. as of
December 31, 1993 and December 31, 1992 and related statements
of operations, shareholders' equity and cash flow for the year
ended December 31, 1993 and for the period from inception in
1992 through December 31, 1992, together with the unaudited
balance sheet of BarOn Technologies Ltd. as of September 30,
1994 and related statements of operations, shareholders'
equity and cash flows for the nine months ended September 30,
1994, were filed as Exhibit 99.1 to the Company's Report on
Form 8-K (date of Report: January 16, 1995), as amended, and
are hereby incorporated herein by reference.
99.2 The audited balance sheet of Tanon Manufacturing, Inc. as of
December 31, 1993 and December 31, 1992 and related statements
of operations, shareholders' equity and cash flows for the
years ended December 31, 1993, 1992 and 1991, together with
the unaudited balance sheet of Tanon Manufacturing, Inc. as of
October 1, 1994 and related statements of operations,
shareholders' equity and cash flows for the nine months ended
October 1, 1994 and October 2, 1993, were filed as Exhibit 99
to the Company's Report on Form 8-K (date of Report: January
4, 1995), as amended, and are hereby incorporated herein by
reference.
(*) Constitutes a compensatory plan filed pursuant to Item 14(c) of the
Company's Annual Report on Form 10-K.
(**) Constitutes a management contract filed pursuant to Item 14(c) of the
Company's Annual Report on Form 10-K.
The Company will provide copies of the above Exhibits to shareholders
upon the payment of a fee of $4 per order to cover postage and handling plus
seven cents per page. Requests for such copies should be directed to James
Shanley, EA Industries, Inc., 185 Monmouth Parkway, West Long Branch,
New Jersey 07764.
9
The Company filed a report on Form 8-K on December 18, 1996 regarding
the one for four reverse stock split of the Company's Common Stock approved by
the Board of Directors of the Company and effective on December 27, 1996.
(c) See Item 14(a) above.
10