MEMORANDUM OF UNDERSTANDING
This Memorandum of Understanding dated December 23, 1996, entered into
between Michael P. Downes (hereinafter "Downes"), Tri-Star Technologies Co.,
Inc. (hereinafter "Tri-Star") and Tanon Manufacturing, Inc. (hereinafter
"Tanon") and EA Industries, Inc. (hereinafter "EAI"), is to be incorporated with
a certain letter of intent of even date regarding a purchase of the assets of
Tri-Star (the "Assets") or the stock of Tri-Star (the "Stock") and into a
definitive purchase and sale agreement.
1. Additional Consideration. (a) Tri-Star and Tanon have agreed to an
incentive package ("Earn Out") to be included as additional consideration for
the acquisition of the Assets or the Stock of Tri-Star by Tanon.
(i) Mr. Downes shall receive Earn Out payments based on the revenues of Tri-Star
meeting or exceeding the targets listed below. The revenues of Tri-Star shall be
measured and annualized every six months beginning on June 30, 1997. Based on
such annualized numbers, an estimated Earn Out payment shall be made. The actual
amounts due as an Earn Out for each year shall be determined based on an annual
audit and an adjusted payment shall be made by or to Mr. Downes as appropriate.
Mr. Downes shall have the right to review such determination and shall have the
right to review the audit as it relates to Tri-Star.
Annual Earn
Out Amount 1997 1998 1999 2000 2001
---- ---- ---- ---- ----
Revenue targets:
$250,000 $20,000,000 $24,000,000 $29,000,000 $35,000,000 $39,000,000
$375,000 $22,500,000 $27,000,000 $32,000,000 $39,000,000 $43,000,000
$500,000 $25,000,000 $30,000,000 $35,000,000 $42,000,000 $48,000,000
$562,500 $32,000,000 $40,000,000 $48,000,000 $56,000,000 $64,000,000
$625,000 $34,000,000 $42,000,000 $50,000,000 $58,000,000 $66,000,000
$687,500 $36,000,000 $44,000,000 $52,000,000 $60,000,000 $68,000,000
$750,000 $38,000,000 $46,000,000 $54,000,000 $62,000,000 $70,000,000
(ii) In addition, Mr. Downes shall receive Earn Out payments based on the net
income of Tri-Star (as a stand alone entity, excluding any Earn Out payments and
acquisition costs and before provision for payment of income taxes) meeting or
exceeding the targets listed below. The net income of Tri-Star shall be measured
and annualized every six months beginning on June 30, 1997. Based on such
annualized numbers, an estimated Earn Out payment shall be made. The actual
amounts due as an Earn Out for each year shall be determined based on an annual
audit and an adjusted payment shall be made by or to Mr. Downes as appropriate.
Mr. Downes shall have the right to review such determination and shall have the
right to review the audit as it relates to Tri-Star.
Annual Earn
Out Amount 1997 1998 1999 2000 2001
---- ---- ---- ---- ----
Net income targets:
$62,500 $3,000,000 $7,000,000 $9,500,000 $12,000,000 $13,500,000
$125,000 $4,000,000 $7,500,000 $10,000,000 $12,000,000 $14,000,000
$187,500 $5,000,000 $8,000,000 $10,500,000 $12,500,000 $14,500,000
$250,000 $6,000,000 $9,000,000 $11,000,000 $13,000,000 $15,000,000
(b) Revenues for the 1997 Earn Out year shall include inter-company business
from Tanon West Long Branch Division. The first five million dollars of
inter-company business from other Tanon and/or EAI Subsidiaries or Divisions
shall be excluded from revenues for the 1997 Earn-Out year.
Revenues for Earn Out years after 1997 shall include business from all Tanon
and/or EAI Divisions or Subsidiaries.
EAI or Tanon will provide additional working and expansion capital to Tri-Star
at a level consistent with Tri-Star's current plan as discussed to date with
Tanon and as appropriate in light of Tri-Star's current capacity and the revenue
levels reflected in the Earn Out.
For purposes of calculating Earn Out Payments, revenues from business of Tanon,
EAI or other EAI subsidiaries shall be credited at prices consistent with
Tri-Star's price matrix and discount policies.
(c) Mr. Downes has agreed to enter into an employment agreement with Tanon at
closing. If Mr. Downes' employment under that agreement is terminated as a
result of his resignation or termination for Due Cause (as defined in the
agreement), any future Earn-Out payments shall be reduced to fifty percent (50%)
of the level that would otherwise have been payable. If Mr. Downes employment
terminates for any other reason, any Earn-Out payments earned pursuant to the
formula herein shall be paid to Mr. Downes' successors, heirs or assigns. The
portion of any annual Earn Out payments based on the results of the first six
months of the year shall be made within 60 days after completion of the second
quarter review, if any, of Tanon by Tanon's auditors, and the portion based on
the results of the second six months of the year and any adjustments on the
first portion shall be made within 60 days after completion of the annual audit
of Tanon by Tanon's auditors.
2. Maintenance of Sales Representatives. Tri-Star and Tanon have agreed to
retain in place under current agreements the existing exclusive sales
representative team currently serving Tri-Star, consisting of seven (7) sales
entities (hereinafter the "Sales Team"). The Sales Team shall represent Tri-Star
and Tanon with respect to customers agreed to by Tanon and Tri-Star and shall be
compensated in accordance with a schedule to be agreed to by Tanon and Tri-Star.
Such compensation and customer list shall be included in the current agreements
with such sales representatives.
3. Escrow Closing Agreement. The proceeds from the sale of the Assets, or
the stock of Tri-Star shall be paid to an escrow, established and maintained at
the direction of Michael Downes or his nominee.
4. Binding Memorandum of Understanding. The terms hereof shall be
incorporated into a final definitive purchase agreement referenced in the letter
of intent signed herewith. This memorandum of understanding shall constitute a
legally binding agreement by Tri-Star and Mr. Downes to complete the sale of the
Assets or the Stock in accordance with the terms hereof subject to the agreement
of Tanon, EAI, Mr. Downes and Tri-Star to negotiate in good faith to complete a
definitive purchase and sale agreement. The obligations of Tanon and EAI to
complete such purchase shall be contingent upon satisfactory completion of their
due diligence review of Tri-Star.
If closing does not occur by July 31, 1997 for any reason other than the failure
of Tri-Star or Mr. Downes to fulfill its or his obligations hereunder, Tri-Star
may terminate discussions, retain any funds previously paid to it as an advance
on the Purchase Price and thereafter all terms and conditions of this letter
shall become null and void without recourse to either party.
Tanon Manufacturing, Inc. and
EA Industries, Inc.
_________________________________ By:_________________________
Michael P. Downes, Individually Paul Finer
and as President of Tri-Star
Technologies Co., Inc.