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, 1997 Commission file number 1-4680
EA INDUSTRIES, INC.
-------------------
(Exact Name of Registrant as Specified in its Charter)
New Jersey 21-0606484
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
185 Monmouth Parkway 07764-9989
West Long Branch, New Jersey (Zip Code)
(Address of Principal Executive Offices)
Registrant's telephone number, including area code: (732) 229-1100
Former Name - Electronic Associates, Inc.
-----------------------------------------
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
-----------------------------------------------------------------
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
--- ---
The aggregate market value of the voting stock held by non-affiliates of
the Registrant was $57,515,755 as of March 6, 1998.
As of March 6, 1998, there were 10,457,410 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 1998 -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. [ ]
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.
Recent Developments
Overview
During 1997, the Company's sales decreased to approximately $76,511,000
from approximately $81,625,000 in 1996. The year to year decrease is
attributable to decreased sales in the first half of 1997, which decreased
approximately $15,111,000 (33%) from the sales during the first half of 1996.
Revenues for the second half of 1997 increased approximately $9,997,000 (28%)
from the sales during the second half of 1996. Cost of sales decreased in total
value but increased 0.2% as a percentage of sales to 99.6% of sales. Selling,
general and administrative expenses also decreased both in total value and as a
percentage of sales.
The Company had a net loss of approximately $18,062,000 for 1997, which
included non-recurring charges of approximately $7,600,000, an inventory
adjustment of approximately $1,500,000 and a gain on the sale of common stock of
Aydin Corporation of approximately $821,000. This compared with a net loss of
approximately $29,954,000 for 1996, which included non-recurring charges of
approximately $12,400,000.
Acquisition of SAI ("SAI" )
The Company agreed in December 1997, subject to certain conditions, to
purchase Service Assembly, Inc. ("SAI"), located in Wareham, Massachusetts,
outside of Boston. The Company has agreed to pay $3,742,000 for SAI by
delivering shares of its Common Stock to the owners of SAI (the "SAI
Shareholders"), and has agreed to register such shares for resale by the SAI
Shareholders ( the registration statement for such shares is referred to as the
"SAI Registration Statement"). The acquisition of SAI will be accounted for as a
purchase.
SAI's net sales for the fiscal year ended October 31, 1997 were
approximately $3,750,000 and its net income was approximately $178,000,
including deductions for compensation and other payments to shareholders. SAI
will become a wholly owned subsidiary of EA Industries, Inc., and the first
TANON EXPRESS facility upon closing of the acquisition. Such facilities will be
dedicated to quick turn and prototype electronic manufacturing services and will
be located near customer engineering and manufacturing operations. They will be
involved with customers early in the product development cycle and provide quick
turn and short lot runs to meet the customer's needs during the final stages of
product design and the early stages of product start up. As the product matures
and the volume increases, production can be transferred to one of Tanon's volume
manufacturing facilities at Fremont, California or West Long Branch, New Jersey.
The Company's strategic plans include the purchase or startup of
2
additional companies which will be operated as Tanon Express facilities with
several satellites around each of these volume manufacturing factories.
The Company has agreed to guarantee that the aggregate proceeds received by
the SAI Shareholders during the twenty trading days after effectiveness of the
SAI Registration Statement is at least equal to the number of shares of Common
Stock sold multiplied by the volume weighted average price of the Common Stock
at the time of effectiveness of the Registration Statement. This guarantee will
determine the number of shares issued in payment of the Purchase Price. The
Company is in no event obligated to issue more than 1,069,257 shares. If the
proceeds of such stock sales are less than $3,742,000 the SAI Shareholders may
elect (i) to deliver to the Company all proceeds they received from the sale of
SAI shares and to rescind the sale of SAI or (ii) to retain the total sale
proceeds from the 1,069,257 shares in full satisfaction of the Purchase Price.
Discontinued Investment Ventures
In 1996 the Company purchased common stock of Aydin Corporation (the "Aydin
Shares"), a New York Stock Exchange listed company (symbol, AYD), for $18 per
share, for an aggregate of approximately $10.8 million. The Company and Aydin
subsequently held discussions ending in October 1996 regarding a potential
merger. In May and June 1997, the Company sold the Aydin Shares for
approximately $6.4 million ($10.75 per share).
On August 5, 1995, the Company entered into a joint venture with Israel
Aircraft Industries, Ltd. ("IAI") to commercialize technology developed by IAI
(the "Joint Venture"). The Company has determined that the Joint Venture is not
an essential element of its core strategy and has been attempting to sell or
otherwise dispose of its interest in the Joint Venture. The investment in the
Joint Venture has been classified as an unconsolidated subsidiary held for sale
in the Company's Consolidated Financial Statements.
On January 16, 1995, the Company acquired an equity interest in BarOn
Technologies, Ltd. ("BarOn"), a privately-owned Israeli corporation based in
Haifa, Israel which was developing an electronic computer input device. During
the fourth quarter of 1996 the Company determined that its investment and
advances to BarOn were unrecoverable and charged those amounts to expense. BarOn
is currently in liquidation proceedings and a receiver has been appointed in
Israel to direct those proceedings. The Company does not expect to recover any
material portion of its investment in BarOn.
On December 23, 1996, the Company agreed to acquire Tri-Star Technologies,
Inc. ("Tri-Star") and the approximately 120,000 square foot building and real
property occupied by Tri-Star in Methuen, Massachusetts. In May, 1997, the
Company and Tri-Star jointly announced that they had decided to terminate
discussions concerning the possible acquisition of Tri-Star by the Company. A
non-refundable deposit of $1,020,000 paid in January 1997 by the Company to
Tri-Star was written off to Other Expenses.
Management Restructuring
Between November 1996 and September 1997 the entire Board of Directors of
the Company and substantially all of its executive officers resigned. Beginning
in May 1997, the Company restructured its senior management and Board of
Directors. First, the Company engaged Frank G. Brandenberg as President and
Chief Executive Officer in May 1997. Second, between May and September 1997, all
of the Company's officers except its General Counsel and Chief Financial Officer
resigned. Third, in July and September 1997, the Company appointed six new
outside directors, who together with the Chief Executive of the Company now
constitute the Board of the Company. Finally, on October 14, 1997, the Company's
Chief Financial Officer, Stanley O. Jester, exercised his right pursuant to his
employment agreement to resign and receive a severance package as a result of
the change in location of his office to West Long Branch, New Jersey. Mr.
Jester was replaced as Chief Financial Officer by James Crofton.
3
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 to be effective as of the close of business on December 27, 1996, so
that each holder of record was entitled to receive 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 (the "Reverse Stock Split"). All references in this
Report to shares, share prices, per share amounts and stock options and warrants
have been adjusted to give retroactive effect to the Reverse Stock Split.
Capital Raised
The Company has incurred significant losses and had negative cash flows
from operations in each of the last seven 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 has raised
approximately $37 million from December, 1995 through February 28, 1998, from
the exercise of stock options and warrants, the sale of the Aydin Shares, and
the sale of convertible notes and debentures.
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. 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;
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, more
recent technology, known as "surface-mount" technology ("SMT") has increased in
prominence in the manufacture of these products and newer technology such as
Ball Grid Array ("BGA") have gained acceptance in portions of product design.
In the past several years, the Company has invested in new manufacturing
equipment to accommodate the increased volume of SMT business, the introduction
of BGA and the integration of procedures as promulgated by the Personal Computer
Memory Card International Association("PCMCIA") . The SMT process is
increasingly replacing the older, through-hole technology previously utilized in
the assembly of printed circuit boards. SMT allows for production of a smaller
circuit board, with greater component and circuit density, resulting in
increased performance. Management believes that SMT and BGA will continue to
constitute an increasing percentage of printed circuit board production and
assembly and that various other new technologies providing further increases in
performance will continue to be developed.
4
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.
Approximately eighty three percent (83%) of the Company's net sales during
the year ended December 31, 1997 were derived from customers which were also
customers of the Company during 1996. In 1997, the customers which accounted for
more than 10% of the Company's net sales were Advanced Fibre Communications,
Inc. ("AFC"), and Dialogic Corporation, which accounted for 35%, and 13% of net
sales, respectively. The Company has been successful in 1997 in broadening its
customer base, thereby reducing its dependence upon a few large customers. 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. In 1997, the Company expanded its
customer base from 18 to 29 customers.
The Company has been informed by its largest customer, AFC, that it intends
to move the production of most of the components assembled by Tanon to
facilities outside of the United States, which have lower labor costs. The
customer has implemented such a move on two prior occasions on a trial basis ,
but has been unsatisfied with the quality, timeliness or responsiveness of the
contract manufacturers that it used. During 1997, approximately $26.6 million of
revenue from that customer was included in the Company's Net Sales. If AFC is
successful in implementing a move offshore, sales to that customer of the
product lines currently assembled by Tanon will decrease significantly in the
second and third quarter of 1998, and will continue to decrease into 1999. The
Company has been conducting discussions with this customer to obtain additional
new business from this customer. Management of the Company believes that the
decrease in sales will be more than offset by sales to new customers and sales
of additional products to AFC, however, no assurance can be given that the
expected increases in sales will occur and be reflected in the Company's
operating results.
Historically, the Company has had substantial recurring sales and long
term relationships with existing customers. 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. Current marketing efforts are aimed at obtaining 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.
5
The Company's contract electronic manufacturing services in 1997 were
provided to customers in the following markets in the approximate percentage of
Company's sales, respectively, indicated :
MARKET SERVED PERCENTAGE OF 1997 SALES CUSTOMERS REPRESENTING 10% OR
- ------------- ------------------------ -----------------------------
BY CUSTOMERS MORE OF SALES
- ------------ -------------
Telecommunications 61% Advanced Fibre
Dialogic Corporation
Communications, Inc.,
Satellite Communications 11%
Computers 7%
High Quality Graphics 6%
Data Communication 6%
Medical Devices 2%
Electronic Controls and other 7%
----
Total 100%
====
Backlog
The Company's backlog consists of 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 1997 was approximately $54,000,000. It is
anticipated that substantially all of the 1997 year-end backlog will be
delivered in 1998. The Company's backlog at the end of 1996 was $27,958,000.
The Company typically receives orders from its customers on a flexible
schedule to meet the sales/delivery schedule to the ultimate consumer. These
purchase orders specify delivery of product over periods ranging from as short
as 30 days or as long as a year and are adjusted as the sales by the Customer to
the ultimate consumers change. Consequently, the Company's backlog at the end of
a period is not necessarily indicative of future shipments to its customers.
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.
6
Employees
As of December 31, 1997, 1996 and 1995, the Company had 474, 449, and 514
total employees, respectively.
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. The Company is also certified to IPC A-610 Level 3 workmanship
standards.
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. In such cases, the Company often
partially assembles a product and holds it in inventory until the parts for
which there was a shortage become available. This increases the inventory costs
of the Company which decreases its income and strains its capital resources. In
addition, shipment delays defer sales by the Company to later time periods.
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. If shortages occur in the future, the Company might be
forced to delay manufacturing and shipments, which could have a material adverse
effect on the Company's results of operations.
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 and purchase orders usually may be accelerated or deferred by
rescheduling or canceled by payment of cancellation charges and typically
provide termination rights for customers, but upon such termination the Company
would generally 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.
Patents and Trademarks
The Company does not hold any patent rights, 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".
7
ITEM 2. PROPERTIES
Currently, the Company's executive offices and the East Coast operating
facility of Tanon are located at 185 Monmouth Parkway, West Long Branch, New
Jersey 07764 at which the Company presently occupies approximately 90,000 square
feet. Tanon occupies a facility with approximately 109,000 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 these leases.
ITEM 3. LEGAL PROCEEDINGS
Lemco Associates
The Company on a regular basis reviews and updates its public disclosure
with respect to this litigation. As previously reported, in October , 1992,
Lemco Associates L.P., a limited partnership ("Lemco"), the owner of property
previously owned by EAI , initiated an action (the "Lemco Suit"), against EAI
and others alleging, among other things, that the defendants created
environmental contamination at the property and seeking damages in unspecified
amounts. EAI filed a response to the complaint in which it denied Lemco's
allegations, asserted numerous defenses to the claims asserted and asserted a
counterclaim against Lemco and crossclaims against co-defendants and others for
indemnification and contribution.
In 1947, the Company purchased land in North Long Branch, New Jersey on
which it subsequently built a number of buildings and conducted a number of
industrial operations. In 1954 the Company built a building known as Building 11
on that land. From the mid - 1950's through 1977, the Company conducted
finishing operations such as metal plating and painting on that site using,
among other machinery, a degreaser to clean metal components using a variety of
solvents. In 1977, EAI leased building 11 to a company called Comax, Inc.
("Comax"), which then began operations in the building. In 1977, Comax, with
technical advice from EAI, filled the degreaser with solvents and used it at
least once. Comax then capped the degreaser without removing the solvents and
did not use it again. In 1979, EAI sold the property and all the buildings on
the site to Lemco for approximately $400,000. Comax continued to operate on the
site until 1984 under a lease from Lemco.
Between 1977 and the time it ceased operations on the site, Comax was cited
by local authorities for a range of environmental violations. Building 11 was
demolished in or about 1991. Evidence indicates that at the time of removal the
degreaser was empty. EAI believes that, between the time it was capped in 1977
and the time of its removal, the chemicals leached out gradually over time or
the chemicals were spilled at the site before or after the removal of the
degreaser.
The Company believes that Lemco was aware at the time of its purchase of
the site from EAI that some of the underground gasoline storage tanks on the
site had leaked and that there had been previous spills of hazardous materials
on the site.
8
Lemco's environmental consultants have analyzed the data from test wells on
the site and have concluded using a mathematical analysis and a modeling
analysis that TCE contamination occurred between 1959 and 1974 and that PCE
contamination occurred no later than 1968. The Company's environmental
consultants have analyzed the data from the same test wells on the site and have
concluded that based on a similar modeling analysis an initial TCE release to
the aquifer occurred in the mid 1970's to the late 1980's and a release of PCE
occurred from the mid `70's to the mid 80's. Their mathematical analysis also
indicates that TCE was most likely released to the aquifer in the mid 1980's and
unlikely to have been released before 1977. In addition, the evidence that would
be presented at trial by EAI is consistent with that conclusion.
The damages sought in the Lemco Suit are (i) recovery for the decreased
value of the property, (ii) recovery for the cost to remediate the contamination
on the property, and (iii) prejudgement interest and expert fees.
In 1988, Lemco signed an agreement of sale for the property subject to
various contingencies for a price of approximately $4 million. Further, Lemco
has provided the Company with appraisal reports made by a real estate appraisal
company engaged by Lemco in connection with the Lemco Suit. The reports state
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 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 has provided the Company with a statement of its remediation costs
through December 18, 1997, as well as an estimate of future remediation costs
associated with the contamination for which it seeks recovery in the Lemco Suit.
Specifically, Lemco claims that it has expended approximately $635,000 in
remediation costs, including fees for legal oversight and consultation and
estimates that its future remediation costs will amount to approximately
$6,316,000. This estimate has been 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 costs
and fees for legal oversight and consultation. 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
approximately $2.4 million.
The Company has been vigorously defending this matter by, among other
things, asserting that the contamination was caused partially or completely by
Comax, not EAI, and that Lemco's damage figure is substantially overstated. To
the extent that it is determined that Comax contaminated the site during its
tenancy with the Company from 1977 to 1979, then the Company may be held liable
for such contamination as owner of the site at the time of the contamination.
The Company will pursue its claim for indemnity against Comax in the event said
liability is established . Additionally, the Company has participated in court
ordered mediation in an effort to explore opportunities for settlement .
Contemporaneously with the institution of the Lemco Suit, the Company made a
demand upon its insurance carriers for coverage for the claims by Lemco. The
Company's insurance carriers in 1992 agreed to pay 71% of its defense costs
under a reservation of rights and have made partial payments for the period
beginning on the date of the Lemco Suit to the date hereof.
Although the Company's insurance carriers have not formally denied coverage
or refused to provide a defense for the Company, the Company believed that
settlement or other resolution of the Lemco Suit would be more likely with the
active participation of the insurance carriers. By court order, after request by
the Company, (i) the carriers were added as third party defendants in the Lemco
Suit, (ii) the court ordered expedited discovery with respect to the insurance
claim, (iii) the court scheduled a settlement conference for April 7, 1998 and
(iv) the court has set a new trial date of May 5, 1998. Discovery in the Lemco
Suit is ongoing.
9
Management of the Company believes that the range of possible loss by the
Company in this matter is approximately $250,000 to $10,300,000. This range
excludes prejudgement interest, if any, but includes costs and expenses, such as
legal and expert fees. In the third quarter of 1997, the Company established a
reserve of $250,000 to cover anticipated legal and expert fees in connection
with the Lemco Suit. Management of the Company believes that the reserves it has
established, together with its insurance coverage , should be sufficient to
cover the costs of defending or settling the Lemco Suit and the potential losses
that could be incurred by the Company in connection with the Lemco Suit . No
assurance can be given that the costs incurred by the Company , or a potential
award of damages against the Company, will not exceed management's current
estimates, or that the insurance recovery , if any, and available resources of
the Company will not be less than the current estimates of management.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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 1997 and 1996 is as follows:
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
- ------------------------------------------------------------------------------------------------------------------
High Low High Low High Low High Low
------------------- ------------------- ------------------- ------------------------
1997 5 7/8 1 5/8 4 1/2 3 3/8 9 3/16 2 5/8 8 3/4 5 1/4
1996 21 1/2 12 22 1/2 13 17 10 12 1 5/8 (1)
(1) Effective as of the close of business on December 27, 1996 , 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 3,897 record holders of the Company's Common Stock
as of March 6, 1998.
The Company has not had a profitable year since 1990, 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. Moreover, certain financial covenants set forth in the
Company's current loan agreement prohibit the Company from paying cash
dividends.
The Company's Common Stock is currently listed and traded on the NYSE,
however, 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 the minimum net
tangible assets available to Common Stock of $12,000,000 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, each time it has authorized the listing of
additional shares on the NYSE (in letters dated March 29, 1995, March 14, 1996,
August 29, 1996, December 16,
10
1996, December 27, 1996, January 5, 1998 and January 28, 1998) , and in a letter
dated December 12, 1997, the NYSE has stated that it was considering the
appropriateness of continued listing of the Company's Common Stock. Management
of the Company have discussed this issue with the NYSE during a series of
meetings and phone conferences from September 1991 through January 1998. The
NYSE has indicated that continued listing is dependent, among other factors,
upon the Company achieving the results set forth in the business plan submitted
to the NYSE. The Company has achieved such results in all material respects to
date, although no assurance can be given that it will continue to meet such
goals in the future. 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.
11
ITEM 6.SELECTED FINANCIAL DATA
(Thousands of Dollars Except for Per Share Amounts, Common
Shares Outstanding and Other Data)
1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------
[Note 1]
[--------Note 4--------]
Operating Results:
Net Sales from Continuing Operations $ 76,511 $ 81,625 $ 77,085 $ 30,539 $ 26,024
Provision for Restructuing $ -- $ -- $ -- $ 2,400 $ --
Loss from Continuing Operations before Taxes $ (18,062) $ (29,954) $ (30,894) $ (4,784) $ (5,348)
Loss from Continuing Operations, Net $ (18,062) $ (29,954) $ (30,894) $ (4,784) $ (4,664)
Income from Discontinued Operations, Net $ -- $ -- $ -- $ -- $ 1,327
Net Loss $ (18,062) $ (29,954) $ (30,894) $ (4,784) $ (3,337)
Income (Loss) Per Common Share:
Continuing Operations (Note 3) $ (2.15) $ (6.24) $ (10.01) $ (3.79) $ (7.04)
Discontinued Operations $ -- $ -- $ -- $ -- $ 2.00
Net Loss (Notes 3 and 5) $ (2.15) $ (6.24) $ (10.01) $ (3.79) $ (5.04)
- ------------------------------------------------------------------------------------------------------------------
Financial Position:
Current Assets $ 27,317 $ 22,319 $ 37,022 $ 16,969 $ 7,355
Current Liabilities $ 44,104 $ 31,485 $ 25,834 $ 12,603 $ 8,614
Long Term Obligations $ 4,859 $ 12,400 $ 16,028 $ 2,998 $ 4,694
Working Capital $ (16,787) $ (9,166) $ 11,188 $ 4,366 $ (1,259)
Net Equipment and Leasehold Improvements $ 10,804 $ 10,522 $ 8,048 $ 2,719 $ 3,603
Total Assets $ 47,862 $ 50,971 $ 61,252 $ 22,845 $ 12,762
Shareholders' Equity (Deficit) $ (1,101) $ 7,086 $ 19,390 $ 7,244 $ (546)
Common Shares Outstanding (Note 3) 9,431 5,601 4,011 2,027 665
Book Value per Common Share (Notes 3and 5) $ (0.12) $ 1.27 $ 4.84 $ 3.56 $ (0.84)
- ------------------------------------------------------------------------------------------------------------------
Other Data:
Number of Shareholders of Record 3,897 4,152 4,254 4,447 4,600
Number of Employees 474 449 514 334 315
Orders Received (Note 2) $ 102,142 $ 62,400 $ 105,150 $ 30,326 $ 18,805
Sales Backlog at Year-End $ 53,589 $ 27,958 $ 47,305 $ 19,240 $ 19,453
Note 1- 1995 amounts include the impact of the Tanon Acquisition and the
investments in BarOn and the Joint Venture (See Note 3 of the Notes to
Consolidated Financial Statements at Part II, Item 8 of this Annual Report Form
10-K).
Note 2- Orders received in 1995 include $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 in the Company's Consolidated Financial
Statements . 1995 amounts have been reclassified to conform to the 1996
presentation.
Note 5- In 1997, the Company adopted Statement No. 128, "Earnings Per Share".
(See Note 9 to the Consolidated Financial Statements for further information).
12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
On January 4, 1995, the Company acquired Tanon, a privately-owned contract
electronic manufacturing firm with operations located in Fremont, California. In
May 1996, the Company consolidated all of its contract electronic manufacturing
business into Tanon.
On January 16, 1995, the Company acquired an equity interest in BarOn, a
privately-owned Israeli corporation based in Haifa, Israel. BarOn was a
development stage company which has developed and was in the process of
commercializing an electronic computer input device to directly digitize
handwriting in a variety of languages, from any surface. During the fourth
quarter of 1996 the Company determined that its investment and advances to BarOn
were unrecoverable and charged those amounts to Other Expense.
On August 8, 1995, the Company, through a 52.3 % owned subsidiary, entered
into a Joint Venture Agreement with Israel Aircraft Industries, Ltd. ("IAI") to
review, develop and exploit non-classified technological applications developed
by IAI. 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.
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 terminated
discussions with Aydin. During the fourth quarter of 1996 the Company decided to
sell its investment in Aydin and wrote down the investment to its then estimated
net realizable value of $5,605,000. In May and June 1997, the Company sold its
entire investment in Aydin for approximately $6,426,000, resulting in a gain of
$821,000 which is included in Other Expenses.
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 non-refundable deposit of $1.0 million toward the
purchase of Tri-Star. In May, 1997 the Company and Tri-Star mutually agreed to
terminate the acquisition discussions and the $1.0 million deposit was written
off to Other Expenses.
In December 1997, the Company signed a purchase agreement to acquire Boston
area based Service Assembly Inc. ("SAI"), a privately held electronic
manufacturing services company engaged in custom engineering and prototype
electronic manufacturing operations. SAI will become a wholly owned subsidiary
of EA Industries, Inc. and the first TANON EXPRESS facility upon closing of the
acquisition.
In connection with its decisions to sell its interest in the Joint Venture,
cease making advances to BarOn, discontinue the business combination
discussions with Aydin and to refocus its resources on the business of providing
contract manufacturing services, the Company determined in the second quarter of
1997 that it would be necessary to restructure its senior management and Board
of Directors (see Item 1, BUSINESS-Introduction-Recent Developments Management
Restructuring).
Results of Operations: 1997 compared to 1996
During 1997, the Company's sales decreased to approximately $76,511,000
from approximately $81,625,000 in 1996. The year to year decrease is
attributable to decreased sales in the first half of 1997, which decreased
13
approximately $15,111,000 (33%) from the sales during the first half of 1996.
Revenues for the second half of 1997 increased approximately $9,997,000 (28%)
from the sales during the second half of 1996. Cost of sales decreased in total
value but increased 0.2% as a percentage of sales to 99.6% of sales. Selling,
general and administrative expenses also decreased both in total value and as a
percentage of sales. The decrease in sales resulted primarily from a decrease in
the level of business conducted with the Company's three largest customers and,
to a lesser extent, the phase-out of five customers, partially offset by sales
to seven new customers, and to a lesser extent by sales to 9 start-up customers.
The Company chose to disengage from two of these customers, while the other
three either began their own manufacturing or consolidated their manufacturing
at another manufacturing company. Sales to the three largest customers were
unusually high during the first half of 1996 and then declined to less than
normal levels during the second half of 1996. Sales to existing customers in
1997 were approximately $63,300,000 and sales to new customers were
approximately $13,200,000.
The Company had a net loss of approximately $18,062,000 for 1997. In 1997,
the Company established inventory reserves and charged off certain excess
inventory pursuant to Management's revised strategy to more quickly dispose of
or sell excess inventory to reduce carrying costs which resulted in charges to
cost of sales totaling approximately $1,500,000, which is included in the net
loss. The net loss also included a gain on the sale of the Aydin Shares of
approximately $821,000 and an aggregate of approximately $7,600,000 in
non-recurring charges consisting of:
o $1,761,000 representing the amortization of the fixed discount feature of
convertible notes issued in April, 1997
o a charge of $800,000 representing the value of warrants granted in April and
June, 1997, in connection with a standby financing commitment of $4,500,000
o a charge of $1,410,000 for restructuring of senior management and the Board
of Directors
o a charge of approximately $1,020,000 for the write-off of the non-refundable
deposit paid to Tri-Star
o a charge of $250,000 representing a provision for expenses and legal fees in
connection with the Lemco Suit
o a charge of approximately $1,758,000 representing the write-off of a portion
of certain intangible assets resulting from a decision that certain of the
assets purchased as a part of the Tanon acquisition were no longer
realizable and
o a charge of approximately $555,000 representing a 10% penalty and penalty
interest charges relating to convertible notes issued in April, 1997.
This compared with a net loss of approximately $29,954,000 for 1996, which
included an aggregate of approximately $12,400,000 in non-recurring charges
consisting of:
o approximately $5,200,000 for an unrealized loss on its investment in Aydin
Corporation
o a charge of approximately $4,200,000 representing additional interest
expense incurred in connection with the issuance of convertible debt
o a write-down of the Company's investment in the Joint Venture by $1,600,000
resulting from the Company's decision to sell or otherwise dispose of such
investment
o charges of approximately $1,400,000 primarily representing the charge to
expense of purchased in-process research and development resulting from the
Company's investment in BarOn and the Joint Venture
The Company has been informed by its largest customer, AFC, that it intends
to move the production of most of the components assembled by Tanon to
facilities outside of the United States, which have lower labor costs. The
customer has implemented such a move on two prior occasions on a trial basis,
but has been unsatisfied with the quality, timeliness or responsiveness of the
contract manufacturers that it used. During 1997, approximately $26.6 million of
revenue from that customer was included in the Company's net sales. If AFC is
successful in implementing a move offshore, sales to that customer of the
product lines currently assembled by Tanon will decrease significantly in the
second and third quarter of 1998, and will continue to decrease into 1999. The
14
Company has been conducting discussions with this customer to obtain additional
new business from this customer. Management of the Company believes that the
decrease in sales will be more than offset by sales to new customers and sales
of additional products to AFC, however, no assurance can be given that the
expected increases in sales will occur and be reflected in the Company's
operating results.
Cost of sales in 1997 decreased to $76,204,000 from $81,145,000 in 1996 and
increased as a percentage of revenue in 1997 to 99.6% compared with 99.4% in
1996. The decline is primarily a result of the lower level of sales in 1997 as
compared to the same period in 1996. A large percentage of cost of sales
consists of fixed costs and, as a result, cost of sales as a percentage of
revenue increases as revenue falls. Gross profit was approximately $307,000 for
1997, compared to approximately $480,000 for the same period in 1996, indicative
of the decline in sales in 1997, as well as a slight increase in fixed overhead.
Selling, general and administrative expenses decreased to approximately
$9,464,000 in 1997 from $11,379,000 in 1996. The decline was primarily a result
of decreased holding company expenses in 1997 and a reduction in expenses at
Tanon. Selling, general and administrative expenses in 1997 included
approximately $1,410,000 in restructuring charges in connection with changes in
the Company's Board of Directors and senior management and a charge for $250,000
representing a provision for expenses and legal fees in connection with the
Lemco Suit. Selling, general and administrative expenses as a percentage of
revenue decreased to 12.4% in 1997 as compared to 13.9% for the same period in
1996.
Interest expense in 1997 was $6,459,000 compared to $7,559,000 in 1996. The
decline is primarily attributable to a charge to interest expense in the amount
of $4,200,000 in 1996 representing the amortization of the fixed discount
feature of convertible notes and debentures issued in December 1995 and May and
June 1996, as compared to similar charges of (i) $1,761,000 in 1997 (relating to
convertible notes issued in April 1997), (ii) $800,000 (representing the value
of warrants granted in April and June 1997 in connection with a standby
financing commitment of $4,500,000), (iii) $315,000 (representing the placement
fee in connection with the issuance of the $4.5 million convertible notes in
April 1997), (iv) $87,000 (representing the value of a warrant granted in
connection with borrowings by the Company in the aggregate principal amount of
$1,000,000), (v) approximately $176,000 (representing the exercise of a put
option on a warrant granted by the Company), and (vi) approximately $555,000
(representing the 10% penalty and penalty interest charges on the $4.5 million
convertible notes). Interest expense relating to revolving credit agreements,
subordinated debt, and capitalized leases increased from approximately
$2,631,000 in 1996 to $2,760,000 in 1997 as a result of increased levels of
debt, subordinated debt and capital leases.
Interest income of $57,000 in 1997 decreased from $229,000 in 1996 as a
result of Management's decision to pay down certain debt rather than investing
the cash in short term investments.
Other expenses decreased from approximately $5,186,000 in 1996 to
$3,172,000 in 1997. Other expenses in 1997 included (i) the expense relating to
the write-off of the Tri-Star deposit of $1,020,000, (ii) a write-off of
additional goodwill of approximately $1,758,000, (iii) a write-off of BarOn
expenses of $152,000, and (iv) a write-down of certain fixed assets held for
disposal of approximately $390,000. In 1996, Other expenses included (i) the
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, (ii) a decline by $907,000 in the market value of EAI Common Stock
securing a non recourse note receivable, (iii) a write-off of fixed assets of
$563,000, (iv) an increase of approximately $450,000 in the Company's share of
costs incurred by the Joint Venture, (v) unrealized losses of approximately
$811,000 on marketable securities held by BarOn (arising from the Company's
initial equity investment in BarOn), and (vi) a write-off of approximately
$812,000 of expenses of BarOn based on the Company's equity holdings in BarOn.
15
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 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.
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. The
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.
16
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, 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
costs incurred by the Joint Venture .
Liquidity and Capital Resources: 1997
Liquidity, as discussed below, is measured in reference to the consolidated
financial position of the Company at December 31, 1997, as compared to the
consolidated financial position of the Company at December 31, 1996. Net cash
used by operations of $13,189,000 in 1997 increased by $10,614,000 from cash
used in operations of $2,575,000 in 1996. The increase in Net cash used by
operations was primarily the result of the increases in accounts receivable and
inventories resulting from increased levels of business during the second half
of 1997.
The Company's primary credit facility is an asset based credit facility
provided by IBJ Schroder Bank & Trust Company ("Schroder") ("Schroder Loan
Facility") to Tanon. Advances under the Schroder Loan Facility can only be used
to fund the operations of Tanon and are secured by substantially all of the
assets of Tanon and a guarantee by the Company. At December 31, 1997, $8,654,000
was outstanding under the Schroder Loan Facility which represented approximately
80% of the available funds, calculated in accordance with the availability
formula of the Schroder Loan Facility. The agreement with Schroder requires
Tanon to maintain certain financial ratios, including current assets to current
liabilities and earnings to fixed charges, and to maintain a minimum net worth.
At December 31, 1997, Tanon was in compliance with all of these requirements,
except the required minimum net worth. Schroder has agreed to waive such
requirement for December 31,1997. Based on the Company's current projections,
the Company would not be able to meet this requirement on December 31, 1998,
however, management has had discussions with Schroder and has requested that
Schroder adjust the required minimum net worth ratio to reflect the results of
operations of Tanon contained in the current business plan of Tanon for 1998.
The Schroder Loan Facility provides for advances of up to $11,065,000 in
the form of a revolving loan with availability subject to the amount of a
borrowing base comprised generally of the sum of (1) up to between 80% and 85%
of eligible accounts receivable, (2) up to 18% of eligible inventory subject to
an availability sublimit of $3,000,000 and (3) up to 75% (reduced by one
percentage point on the first day of each month following May 3, 1996) of the
liquidation value of certain of the Company's machinery and equipment, subject
to an availability sublimit of $1,250,000. The Schroder Loan Facility has a
three-year term ending on April 30, 1999 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.
Liquidity, as measured by cash and cash equivalents, increased to $595,000
at December 31, 1997 from $461,000 at December 31, 1996. Liquidity as measured
by working capital was a negative $16,787,000 at
17
December 31, 1997 as compared with a negative working capital of $9,166,000 at
December 31, 1996. The decrease in working capital was primarily a result of the
reclassification of an aggregate of $8,335,000 in convertible notes as current
liabilities based on the right of the note holders to demand immediate repayment
of these notes, as well as capital expenditures and losses from contract
manufacturing during 1997, offset by the issuance of $7,750,000 of promissory
notes and convertible notes (net of repayments) and the sale of the Aydin
Shares. The Company's ability to generate internal cash flows results primarily
from the sales of its contract electronic manufacturing services. The Schroder
Loan Facility prohibits Tanon from distributing or loaning cash generated by
contract manufacturing to EAI, except in certain very limited circumstances. For
the year 1997, revenue from contract electronic manufacturing services decreased
by $5,114,000 from $81,625,000 in the same period of 1996. Accounts receivable
increased by $1,455,000 in 1997 (approximately 13%) as compared to 1996, while
inventory increased by $3,107,000 (approximately 31%) as compared to 1996. These
increases reflect the increased levels of business during the third and fourth
quarter of 1997 as well as the significant increased level of backlog at
December 31, 1997.
Cash flows from financing activities during 1997 amounted to $10,210,000
resulting primarily from the issuance of (i) an aggregate of $2,250,000 in 10%
Series A Convertible Notes, (ii) an aggregate of $1,000,000 in 10% Series B
Notes, (iii) an aggregate of $4,500,000 in 6% Convertible Notes, and (i) the
collection of $700,000 on note receivables related to earlier warrant exercises,
(ii) aggregate proceeds of $207,000 from the exercise of warrants, (iii)
aggregate proceeds of $530,000 from the exercise of stock options, and (iv) an
increase in borrowing under the Schroder Loan Facility of approximately $600,000
.
Net cash in the amount of $3,113,000 was provided by investing activities
during 1997. Funds in the amount of $6,426,000 were provided by the sale of the
Aydin Shares and approximately $3,313,000 was used to purchase equipment and
make leasehold improvements including $2,100,000 used to purchase a new Fuji
high speed SMT line for the Company's New Jersey facility.
A substantial portion of the convertible securities issued by the Company
are currently payable on demand or are due within one year. This includes
certain 6% Notes, the Convertible Notes and the Amended Series A Notes (See
Capital Raised), representing approximately $8.3 million in debt. The Company
has filed a registration statement covering the shares issuable upon conversion
of the 6% Notes. When that registration statement is declared effective, such
notes will no longer be payable upon demand, and the Company expects those notes
to be converted into equity in accordance with their terms. The Company has also
scheduled a meeting of its shareholders for March 31, 1998 to approve of the
revised terms of the Convertible Notes and the Amended Series A Notes. Assuming
that the shareholders approve of such terms, such notes will no longer be
payable upon demand, and the Company expects those notes to be converted into
equity in accordance with their terms.
The Company is forecasting a significant increase in sales for 1998 over
1997 based on improved sales and marketing including sales to new customers
representing contracts signed in the second half of 1997, sales to existing
customers and additional new customers. Management believes this increase will
result in an improvement in cash flows from operations. In the past few years,
the Company has extended the time in which it pays its payable to conserve its
capital resources and to allow the Company to concentrate such resources on the
costs associated with growth. Management of the Company has concluded that it
would be advisable to increase its capital resources that would be available for
contingencies and to bring the Company's timing on payment of payables to a
level more consistent with standard practice in its industry. The Company may
seek to raise additional debt or equity in the second or third quarters of 1998
to accomplish these goals. The Company expects, however, that available funds
under the Schroder Loan Facility together with its available capital resources
would be sufficient to fund its ongoing operations in a fashion consistent with
its past practices, excluding any acquisitions made with cash. . In addition,
continued expansion of the Company's customer base and execution of its strategy
to become a full service provider by expanding "Tanon Express", internal
development of additional service offerings, and select national and/or
international acquisitions would also enhance cash flow. The Company's
18
independent public accountants have issued their opinion in respect to the
Company's 1997 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. There can be no assurance that management will be successful in
implementing its plans, obtaining additional capital or achieving the results
contained in their current plans and forecasts.
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,
economic, competitive, technological, governmental, and other factors discussed
in the Company's filings with the Securities and Exchange Commission.
Capital Raised
The Company has incurred significant losses and had negative cash flows
from operations in each of the last seven 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
$37 million from December, 1995 through February 28, 1998, from the sale of
convertible notes and debentures, the exercise of stock options and warrants,
and the sale of the Aydin Shares.
The GFL Notes
Among its 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"). GFL
Advantage Fund and GFL Performance Fund converted $7,930,000 principal amount of
such notes 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 a
third party, unrelated to the Company, its management or to the GFL Funds 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, then Chairman of the Company and certain trusts
benefiting his family (the "Gross GFL Note Holders") for a cash payment of
$2,725,000. In connection with such assignment, the Company canceled the prior
note held by GFL Advantage Fund and reissued certain Convertible Notes (the
"Gross GFL Convertible Notes") of the Company in the aggregate principal amount
of $2,070,000 due December 29, 1997 to the Gross GFL Note Holders. These Gross
GFL 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 Gross GFL Convertible Notes (the "February GFL
Convertible Notes") by (i) increasing the aggregate principal amount of such
notes to $2,725,000 (the purchase price paid by the Gross GFL Note Holders) and
(ii) reducing the fixed conversion price of such notes to $1.50 per share. Such
amendments were made in consideration of the Gross GFL Note Holders foregoing
interest and making certain other loans to the Company. The rights of the
holders of the February GFL Convertible Notes to receive additional shares of
Common Stock as a result of lowering the cap on the conversion price to $1.50
per share was subject to listing of the additional shares on the New York Stock
Exchange. The Gross GFL Note Holders subsequently sold February GFL Convertible
Notes in the principal amount of $600,000 to an unaffiliated investor (the
"Gross GFL Note Holders and this investor are referred to as the "GFL Note
Holders"). In October
19
1997, the Gross GFL Note Holders exercised their conversion rights in accordance
with the terms of the February Convertible Notes with respect to $226,709 in
principal of the notes and received 151,139 shares of Common Stock.
In January 1998, the Company and the GFL Note Holders agreed to amend (the
"January 1998 Amendments") the terms of the February Convertible Notes as
follows:
(i) to extend the maturity date of the February Convertible Notes to December
31, 1998;
(ii) to increase the conversion price to the lesser of (a) eighty percent (80%)
of the average of the volume weighted average price per share of the Company's
Common Stock (as reported by Bloomberg Business Services in its Volume at Price
Service) for the five days immediately preceding the date of notice of
conversion to the Company or (b) $5.00; and
(iii) to provide for interest payments in cash or shares of Common Stock at the
conversion price at the option of the holders or the Company.
These notes as amended in January 1998 are referred to as the "Convertible
Notes". In consideration of the January 1998 Amendments the Company agreed to
issue to the GFL Note Holders warrants (the "Gross Warrants") to purchase an
aggregate of 483,393 shares of Common Stock at a price of $5.00 per share for a
period of five years. The Gross Warrants are nondetachable and may not be sold,
given or transferred separately from the Convertible Notes. The GFL Note Holders
were also granted demand and piggyback registration rights for the Convertible
Notes and the Gross Warrants.
The New York Stock Exchange ("NYSE") formally informed the Company in late
1997, that because the amendments were made when Mr. Gross was a director of the
Company, the listing on the NYSE of the shares of Common Stock issuable upon
conversion of the Convertible Notes would be subject to approval by the
shareholders of the Company. The Company has scheduled a special meeting of its
shareholders on March 31, 1998 to vote on the January 1998 Amendments. If the
shareholders do not approve the amended terms contained in the Convertible Notes
the GFL Note Holders have the right to accelerate the payment of outstanding
principal on the Convertible Notes with a twenty two percent (22%) penalty. In
that case, the Company would be obligated to pay $3,048,000 to the note holders.
The Aydin Convertibles
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 the
Aydin Shares. The 9% Convertible Debentures bear interest at 9% per annum,
payable quarterly and mature on May 3, 1998. The 9% Convertible Debentures were
originally convertible at a conversion price per share equal to the lesser of
(i) eighty percent (80% ) of the average of the closing price per share of the
Company's Common Stock for the five days immediately preceding the date of the
notice of conversion to the Company, or (ii) $4.00. On February 6, 1997, the
Company amended the 9% Convertible Debentures by reducing the fixed conversion
price of such notes to $1.50 per share. Such amendments were made in
consideration of the holders refraining from conversions or short sales until
April 11, 1997.
The Series A Notes
Original Terms
During the period beginning on October 25, 1996 and ending on April 10,
1997, the Company borrowed an additional aggregate total of $3,520,000 from the
then Chairman of its Board of Directors, certain trusts benefiting his family
(collectively, the "Gross Series A Holders") and an unaffiliated investor (the
"Series A Investor"). The proceeds of these loans were used to provide working
capital for the Company, primarily for day to day operations
20
of Tanon Manufacturing, Inc. ("Tanon"), the Company's principal operating
subsidiary. These loans were represented by certain 10% Series A Convertible
Notes (the "Series A Notes") issued by the Company in January 1997. The Series A
Notes bear interest at the rate of 10% per annum and will mature on January 22,
1999 and were originally 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.
Amended Terms
In January 1998, the Company and the Gross Series A Holders agreed to amend
the terms of the Series A Notes as follows:
(i) to provide for interest payments in cash or stock at the conversion price at
the option of the holders and the Company; and
(ii) to increase the conversion price to the lesser of (a) eighty percent (80%)
of the average of the volume weighted average price per share of the Company's
Common Stock (as reported by Bloomberg Business Services in its Volume at Price
Service) for the five days immediately preceding the date of notice of
conversion to the Company, or (b) $5.00.
These notes as amended in January 1998 are referred to as the "Amended
Series A Notes". In consideration of these amendments (the "Series A
Amendments") the Company agreed to issue to the Gross Series A Holders warrants
(the "Series A Warrants") to purchase an aggregate of 632,700 shares of Common
Stock at a price of $5.00 per share for a period of five years. The Series A
Warrants are nondetachable and may not be sold, given or transferred separately
from the Amended Series A Notes. The Gross Series A Note Holders were also
granted demand and piggyback registration rights for the shares of Common Stock
issuable upon conversion of the Amended Series A Notes and exercise of the
Series A Warrants. These amendments do not affect the terms of one of the Series
A Notes, in the original principal amount of $250,000, issued to the Series A
Investor.
The NYSE formally informed the Company in late 1997, that because the
amendments were made when Mr. Gross was a director of the Company, the listing
on the NYSE of the shares of Common Stock issuable upon conversion of the Series
A Notes would be subject to approval by the shareholders of the Company. If the
shareholders do not approve the amended terms contained in the Amended Series A
Notes, the Gross Series A Note Holders have the right to accelerate the payment
of outstanding principal and interest on the Amended Series A Notes with a
twenty two percent (22%) penalty. In that case, as of December 31, 1997 the
Company would be obligated to pay $4,678,000 to the note holders.
During January 1997, the Company borrowed $1,000,000 from each of two
unrelated parties. 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 the lenders, Ace Foundation, Inc. (the "Ace
Warrant") and Millenco, LP (the "Millenco Warrant"), (collectively, the
"Warrants"). Management charged the estimated value of these Warrants ($175,000)
to Interest Expense in the first quarter of 1997. These loans were repaid in May
and June 1997 in connection with the sale of the shares of common stock of Aydin
held by the Company. Pursuant to a provision contained in the Millenco Warrant,
the Company has repurchased that Warrant for approximately $176,000 in cash ,
charging the net difference between the estimated value of the initial Warrant
and the repurchased amount, or approximately $89,000 to Interest Expense, in the
fourth quarter of 1997.
21
The Company in April 1997, arranged for standby financing of up to
$4,500,000 to provide additional working capital. This commitment was originally
irrevocable until April 1, 1998 and was to be reduced based on the proceeds the
Company received from the sale of its shares of common stock of Aydin and from
any additional equity or convertible debt financing. The Company has issued
warrants exercisable at $4.125 per share for 600,000 shares as of April 18, 1997
in consideration of this commitment and an additional 200,000 shares as of June
10,1997 also exercisable at $4.125 per share. The estimated value of these
warrants of $800,000 was charged to Interest Expense in the second quarter of
1997. The commitment was terminated in June 1997.
In April and July 1997, the Company borrowed a total of $1,000,000 from an
unaffiliated investor . This loan is represented by certain 10% Series B
Convertible Notes (the "Series B Notes"), issued by the Company. The Series B
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 $2.50 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 B 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 Company in cash or
stock of the Company at the conversion price described above.
In addition, in April 1997 the Company borrowed a total of $4.5 million
from unaffiliated investors. These loans are represented by certain 6%
Convertible Notes due April 30, 1999 (the "6% Convertible Notes"). The 6%
Convertible Notes bear interest at 6% per annum, payable quarterly and mature on
April 30, 1999. The 6% Convertible Notes are convertible at a conversion price
per share equal to the lesser of (i) seventy-six and one-half percent (76.5% )
of the average of the volume weighted average price per share of the Company's
Common Stock (as reported by Bloomberg Business Services in its Volume at Price
Service) for the five days immediately preceding the date of the notice of
conversion to the Company, or (ii) $3.395 . In addition, the Company issued a 6%
Convertible Note which is non-interest bearing in the principal amount of
$315,000 as a placement fee to an unaffiliated party. The Company had agreed to
list the shares issuable upon conversion of the 6% Convertible Notes on the NYSE
by December 1, 1997, or to pay a cash penalty equal to ten percent (10%) of the
outstanding principal and to pay interest from that date through the effective
date of the registration statement at eighteen percent ( 18%) per annum . The
Company has asked the holders of the 6% Convertible Notes to waive or reduce
these penalties . In December 1997, the Company charged Interest Expense for
approximately $555,000 which represented the one-time penalty charge of 10% of
the principal amount of the outstanding notes as well as 18% for one month's
interest charge . As of the date of this report, note holders holding an
aggregate of $1,800,000 in principal have agreed to waive the 10% penalty and
the penalty interest charges of 18% per month. In consideration for this waiver,
the Company has agreed to issue warrants to purchase an aggregate of 90,000
shares of Common Stock at a purchase price of $5.375 per share for a six month
period beginning after the underlying shares have been registered.
The Company believes its business is affected by seasonal factors, based on
its customer's ordering patterns, and that the fourth quarter typically
represents a seasonal peak period, followed by reduced activity in the first
quarter of the following year. Therefore the Company's sales and net income may
vary from quarter to quarter, depending 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.
In March 1997, the Financial Accounting Standards Board issued Statement
No. 128, "Earnings Per Share" which is effective for fiscal 1997. This Statement
establishes accounting standards for computing and presenting earnings per share
("EPS"). It replaces the presentation of primary EPS with a presentation of
basic EPS. It also
22
requires dual presentation of basic EPS and diluted EPS for companies with
complex capital structures. The Company's reported loss per common share is
equivalent to basic loss per share under the new standard. The Company is not
required to present diluted per share amounts because it has incurred a
Net Loss.
.
In June 1997, the Financial Accounting Standards Board issued Statement No.
130, "Reporting Comprehensive Income", which requires a company to report
comprehensive income and its components in a full set of financial statements.
This Statement is effective for full fiscal years beginning after December 15,
1997. Comprehensive income is the change in equity of a business enterprise
during a period from transactions and other events and circumstances from
nonowner sources. It includes net income and other comprehensive income such as
foreign translation adjustments, minimum pension liability adjustments and
unrealized gains and losses on available-for-sale securities. The Statement
applies to all companies that provide a full set of financial statements. It
specifies requirements for reporting formats for comprehensive income and all
its components, calculation and display of reclassification adjustments, display
of the accumulated balance of other comprehensive income in equity, and interim
period reporting. The Company will adopt this Statement as of January 1, 1998,
however this Statement only impacts on disclosure requirements and it is not
expected to have any impact on the Company's financial position or results of
operations.
YEAR 2000
The Company has evaluated its information technology infrastructure and
operations and has determined that its systems have been updated so that they
are compliant with the requirements to process transactions in the Year 2000
("Y2K"). The Company does not currently have any information concerning Y2K
compliance status of its suppliers, banks and customers. In the event that any
of the Company's significant suppliers or customers does not successfully and
timely achieve Y2K compliance, the Company's business or operations could be
adversely affected.
23
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
EA INDUSTRIES, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
Page Number
-----------
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS..............................................................25
FINANCIAL STATEMENTS:
Consolidated Balance Sheets as of December 31, 1997 and 1996......................................26
Consolidated Statements of Operations for the Three Years
Ended December 31, 1997.........................................................................27
Consolidated Statements of Shareholders' Equity
for the Three Years Ended December 31, 1997.....................................................28
Consolidated Statements of Cash Flows for the Three Years
Ended December 31, 1997.........................................................................29
Notes to Consolidated Financial Statements........................................................31
SCHEDULE:
II. Valuation Account..............................................................................52
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, 1997 and 1996, and the
related consolidated statements of operations, shareholders' equity and cash
flows for each of the three years in the period ended December 31, 1997. 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, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997, 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, a significant portion of the Company's convertible notes and
debentures are currently payable on demand, and, at December 31, 1997, the
Company had negative working capital and a shareholders' deficit. 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 into 1998 and that the Company will be in
violation of the covenant under its primary loan facility to maintain a required
minimum net worth. 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
March 13, 1998
25
EA INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and 1996
(thousands of dollars)
ASSETS 1997 1996
-------- --------
Current Assets:
Cash and cash equivalents $ 595 $ 461
Receivables, less allowance of $1,020 in 1997 and $1,100 in 1996 for doubtful
accounts (Note 1) 12,666 11,211
Inventories (Note 1) 13,175 10,068
Prepaid expenses and other assets 881 579
-------- --------
TOTAL CURRENT ASSETS 27,317 22,319
-------- --------
Equipment and leasehold improvements (Note 1) 19,201 18,581
Less accumulated depreciation (8,397) (8,059)
-------- --------
10,804 10,522
-------- --------
Investment in common stock of Aydin Corp. held for sale (Note 3) -- 5,605
-------- --------
Other investment held for sale (Note 3) 1,050 1,050
-------- --------
Intangible assets (Note 1) 10,573 12,331
Less accumulated amortization (2,452) (1,632)
-------- --------
8,121 10,699
-------- --------
Other assets 570 776
-------- --------
TOTAL ASSETS $ 47,862 $ 50,971
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Revolving Credit Facility (Note 4) $ 8,654 $ 8,054
Current portion of Capital Lease Obligations (Note 4) 1,839 1,455
Current portion of Convertible Notes and Debentures (Notes 2 and 4) 12,767 2,725
Accounts payable 15,793 14,702
Accrued expenses 5,051 4,549
-------- --------
TOTAL CURRENT LIABILITIES 44,104 31,485
-------- --------
Long-Term Liabilities:
Long-Term portion of Capital Lease Obligations (Note 4) 2,975 2,937
Convertible Notes and debentures (Notes 2 and 4) 1,000 8,109
Accrued excess leased space costs 314 849
Other long-term liabilities 570 505
-------- --------
TOTAL LONG-TERM LIABILITIES 4,859 12,400
-------- --------
TOTAL LIABILITIES 48,963 43,885
-------- --------
Commitments and Contingencies (Notes 4 and 11) -- --
Shareholders' Equity (Deficit) (Notes 1, 2, 3, 6, and 9):
Preferred stock, no par value; authorized 25,000,000 shares; none issued
Common stock, no par value; authorized 35,000,000 shares;
issued 9,438,613 shares in 1997 and 5,624,001 shares in 1996 90,270 80,535
Accumulated deficit (91,307) (73,245)
-------- --------
(1,037) 7,290
Less common stock in treasury, at cost: 7,369 shares in 1997
and 23,369 shares in 1996 (64) (204)
-------- --------
TOTAL SHAREHOLDERS' EQUITY (DEFICIT) (1,101) 7,086
-------- --------
$ 47,862 $ 50,971
======== ========
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,
1997 (thousands of dollars, except per share data)
1997 1996 1995
---- ---- ----
Net Sales (Note 1) $ 76,511 $ 81,625 $77,085
-------- --------- -------
Cost of Sales 76,204 81,145 76,422
Selling, General and Administrative Expenses 9,464 11,379 9,703
Research and development (Note 3) 152 1,383 19,546
-------- --------- -------
Loss from Operations (9,309) (12,282) (28,586)
Interest Expense 6,459 7,559 1,357
Interest Income (57) (229) (180)
(Gain) Loss on Investment in Aydin Corporation (Note 3) (821) 5,156 --
Other Expenses (Note 12) 3,172 5,186 1,131
-------- --------- -------
Net Loss ($18,062) ($29,954) ($30,894)
========= ========= =========
Loss Per Common Share (Note 9) ($2.15) ($6.24) ($10.01)
========= ========= =========
Weighted Average Common Shares Outstanding 8,392,723 4,802,068 3,086,070
========= ========= =========
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, 1997
(thousands of dollars)
Common Stock Treasury Stock
----------------------------------------------------
Accumulated
Shares Amount Shares Amount Deficit
-------------------------------------------------------------------
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
Granted 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 11,066
Imbedded interest on convertible debentures -- 4,200
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)
Net loss (18,062)
Exercise of stock options 150,631 530
Exercise of Class A and B Warrants 35,442 207
Payments on Notes receivable from Stock Sales -- 700
Value of options granted for Services -- 826
Debt conversion 3,628,539 4,851 16,000 140
Imbedded interest on convertible debentures -- 1,761
Value of Warrants issued in connection with
financing -- 887
Other -- (27)
---------------------------------------------------------------------
Balance, December 31, 1997 9,438,613 $ 90,270 (7,369) ($ 64) ($ 91,307)
=====================================================================
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, 1997
(thousands of dollars)
1997 1996 1995
---- ---- ----
Cash Flows from Operating Activities:
Net loss ($18,062) ($29,954) ($30,894)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization 3,375 3,172 3,012
Valuation adjustment - Note Receivable -- 907 --
Valuation adjustment - Investment in Aydin Corporation 5,156 --
Valuation adjustment - Fixed Assets 390 563 --
Valuation adjustment - Investment in BarOn -- 649 --
Valuation adjustment - Investment in EATI -- 1,647 --
Write-off of Intangible Assets 1,758 -- --
Gain on Sale of Aydin common stock (821) -- --
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 128 851 --
Discount on Convertible Subordinated Debentures 1,761 4,200 --
Value of Convertible Debentures issued for Financing 315 -- --
Value of options granted for services 826 233 963
Value of Warrants issued in connection with Financing 887 -- --
Cash used by changes in:
Receivables (1,455) 746 2,451
Inventories (3,107) 2,910 (4,018)
Prepaid expenses & other assets (302) 1,031 --
Accounts payable and accrued expenses 1,593 3,121 372
Accrued excess leased space costs (535) (584) (425)
Other operating items - net 60 494 (148)
-------- -------- --------
Net cash used by operations (13,189) (2,575) (8,339)
-------- -------- --------
Cash Flows from Investing Activities:
Capital expenditures (3,313) (5,393) (5,427)
Investments, including those in affiliates -- (13,358) (12,884)
Net proceeds from sale of Aydin Corp. Common Stock 6,426 -- --
Cash acquired in purchase of Tanon -- -- 890
Proceeds from sale of discontinued operations -- -- 394
-------- -------- --------
Net cash provided/(used) by investing activities 3,113 (18,751) (17,027)
-------- -------- --------
Cash flows from Financing Activities:
Net borrowings/(repayments) under credit facilities 600 (786) (3,161)
Net proceeds from capital leases 422 1,797 1,440
Net proceeds from convertible subordinated debt 7,750 9,370 15,148
Proceeds from the exercise of stock options 530 1,007 --
Net proceeds from sales of common stock (private
placement) and exercise of warrants 907 569 17,479
Issuance of note receivable in connection with acquisition -- -- (1,000)
Other 1 -- (867)
-------- -------- --------
Net cash used by financing activities 10,210 11,957 29,039
-------- -------- --------
Net Increase (Decrease) in Cash and Cash Equivalents 134 (9,369) 3,673
Cash and Cash Equivalents at Beginning of Period 461 9,830 6,157
-------- -------- --------
Cash and Cash Equivalents at End of Period $ 595 $ 461 $ 9,830
======== ======== ========
The accompanying notes are an integral part of these
consolidated financial statements.
29
EA INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
For the Three Years Ended December 31, 1997
(thousands of dollars, except per share data)
1997 1996 1995
---- ---- ----
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 2,463 $ 2,589 $ 1,315
======= ======= =======
Non cash financing activities:
Conversion of debt to equity $ 4,991 $11,066 $ 3,587
Value of stock and options issued in connection with
acquisitions -- -- 21,251
Value of Warrants issued in connection with
Financing 887 -- --
Imbedded interest on Convertible Debentures 1,761 4,200 --
Value of Options granted for services 826 582 963
------- ------- -------
TOTAL $ 8,465 $15,848 $25,801
======= ======= =======
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 1995 and 1996, 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 .
The investment in EATI has been written down during 1996 to $1,050,000, its
estimated net realizable value (See Note 3).
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.
Revenue Recognition
Net sales are recognized when products are shipped or title passes to the
customer.
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.
31
EA INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Inventories at December 31 consisted of:
1997 1996
---- ----
(thousands of dollars)
Raw Materials $ 7,710 $ 7,268
Work-in-Process 5,465 2,800
------- -------
Total inventories $13,175 $10,068
======= =======
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 a
discounted basis.
The excess of the purchase price over the appraised value of the net assets
acquired in the purchase of Tanon was $12,331,000 of which $3,223,000 related to
customer relationships and assembled workforce, and $9,108,000 of which was
goodwill. In December 1997, the Company recorded a charge of approximately
$1,758,000 to Other Expenses (See Note 12), representing the write-off of the
total asset value related to the assembled workforce and approximately 55% of
the asset related to customer relationships, as a result of workforce turnover
and the loss of customers. Based on management's forecasts of the operations of
Tanon, the Company has determined that the remaining goodwill and other
intangibles have not been impaired.
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.
32
EA INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company periodically reviews equipment to determine that the carrying
values have not been impaired. The Company recorded write downs in certain fixed
assets held for disposal resulting in a non-cash charge of approximately
$390,000 for 1997 and $563,000 for 1996. These charges have been reported in the
Statement of Operations in Other Expenses.
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 1997, 1996 and 1995, the Company's top 5 customers represented 67% ,
72% , and 68% , respectively, of its consolidated net sales. In 1997, the
customers which accounted for more than 10% of the Company's net sales were
Advanced Fibre Communications, Inc., and Dialogic Corporation, which accounted
for 35%, and 13%, respectively, of 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. In 1995, the customers which
accounted for more than 10% of the Company's net sales were Advanced Fibre
Communications, Inc., Ungerman Bass, Inc. and Dialogic Corporation, which
accounted for 23%, 14% and 13%, respectively, of net sales. As of December 31,
1997 and 1996, the top five customers represented 55% and 56% , respectively, of
accounts receivable.
The Company has been informed by its largest customer, AFC, that it intends
to move the production of most of the components assembled by Tanon to
facilities outside of the United States, which have lower labor costs. During
1997, approximately $26.6 million of revenue from that customer was included in
the Company's net sales. If AFC is successful in implementing a move offshore,
sales to that customer of the product lines currently assembled by Tanon will
decrease significantly in the second and third quarter of 1998, and will
continue to decrease into 1999.
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.
33
EA INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Stock Based Compensation
The Company has adopted the "disclosure only" provision of Statement of
Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based
Compensation". Accordingly, compensation cost for stock options issued to
employees and directors 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 or director 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 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.
2. OPERATIONS AND LIQUIDITY
The Company's primary credit facility is an asset based credit facility
provided by IBJ Schroder Bank & Trust Company ("Schroder") ("Schroder Loan
Facility") to Tanon. Advances under the Schroder Loan Facility can only be used
to fund the operations of Tanon. At December 31, 1997, $8,654,000 was
outstanding under the Schroder Loan Facility which represented approximately 80%
of the available funds, calculated in accordance with the availability formula
of the Schroder Loan Facility. The agreement with Schroder requires Tanon to
maintain certain financial ratios, including current assets to current
liabilities and earnings to fixed charges, and to maintain a minimum net worth.
At December 31, 1997, Tanon was in compliance with all of these requirements,
except the required minimum net worth. Schroder has agreed to waive such
requirement for December 31,1997. Based on the Company's current projections,
the Company would not be able to meet this requirement during 1998, however,
management has had discussions with Schroder and has requested that Schroder
adjust the required minimum net worth ratio to reflect the results of operations
of Tanon contained in the current business plan of Tanon for 1998.
The Company's ability to generate internal cash flows results primarily
from the sales of its contract electronic manufacturing services. The Schroder
Loan Facility prohibits Tanon from distributing or loaning cash generated by
contract manufacturing to EAI, except in certain very limited circumstances.
Cash flows from financing activities during 1997 amounted to $10,210,000
resulting primarily from the issuance of (i) an aggregate of $2,250,000 in 10%
Series A Convertible Notes, (ii) an aggregate of $1,000,000 in 10% Series B
Notes, (iii) an aggregate of $4,500,000 in 6% Convertible Notes, and (i) the
collection of $700,000 on notes receivable related to earlier warrant exercises,
(ii) aggregate proceeds of $207,000 from the exercise of warrants, (iii)
aggregate proceeds of $530,000 from the exercise of stock options , and (iv) an
increase in the Schroder Loan Facility of approximately $600,000 .
Net cash in the amount of $3,113,000 was provided by investing activities
during 1997. Funds in the amount of $6,426,000 were provided by the sale of the
Aydin Shares and approximately $2,100,000 was used to purchase a new Fuji high
speed SMT line for the Company's New Jersey facility.
34
EA INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A substantial portion of the convertible securities issued by the Company
are currently payable on demand or are due within one year. This includes
certain 6% Notes, the Convertible Notes and the Amended Series A Notes,
representing approximately $10.8 million in debt. The Company has filed a
registration statement covering the shares issuable upon conversion of the 6%
Notes. When that registration statement is declared effective, such notes will
no longer be payable upon demand, and the Company expects those notes to be
converted into equity in accordance with their terms. The Company has also
scheduled a special meeting of its shareholders for March 31, 1998 to approve
the revised terms of the Convertible Notes and the Amended Series A Notes.
Assuming that the shareholders approve of such terms, such notes will no longer
be payable upon demand, and the Company expects those notes to be converted into
equity in accordance with their terms.
The Company has incurred significant losses and had negative cash flows
from operations in each of the last seven years. In addition, at December 31,
1997, the Company had negative working capital and a shareholders' deficit and a
significant portion of the Company's Convertible Notes are payable on demand.
The Company's financial projections indicate that operating losses and negative
cash flow will continue into 1998 and that the Company will be in violation of
the covenant under the Schroder Line to maintain a required minimum net worth.
The foregoing conditions, among others, raise doubt about the Company's ability
to continue as a going concern. The Company's Consolidated Financial Statements
have been prepared assuming that the Company will continue as a going concern
and do not contain any adjustments relating to the recoverability and
classification of liabilities that might result should the Company be unable to
continue as a going concern. In order to continue operations, the Company has
had to raise additional capital to offset cash utilized in operating and
investing activities. The Company has raised approximately $37 million from
December, 1995 through February 28, 1998, from the exercise of stock options and
warrants, the sale of the Aydin Shares, and the sale of convertible notes and
debentures. In the past few years, the Company has extended the time in which it
pays its payable to conserve its capital resources and to allow the Company to
concentrate such resources on the costs associated with growth. Management of
the Company has concluded that it would be advisable to increase its capital
resources that would be available for contingencies and to bring the Company's
timing on payment of payables to a level more consistent with standard practice
in its industry. The Company may seek to raise additional debt or equity in the
second or third quarters of 1998 to accomplish these goals. The Company expects,
however, that available funds under the Schroder Loan Facility together with its
available capital resources would be sufficient to fund its ongoing operations
in a fashion consistent with its past practices, excluding any acquisitions made
with cash.
3. ACQUISITIONS AND DISPOSITIONS
BarOn Acquisition
During 1995, the Company acquired an equity interest of 33.33% in BarOn
Technologies, Ltd. ("BarOn") which was a privately-held Israeli Corporation
based in Haifa, Israel, engaged in the research and development of input devices
for computers The consideration for the 33.33% interest totaled $9,987,000. 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 over the estimated fair value of EAI's 33.33% equity interest in the net
assets of BarOn totaled $8,872,000 and was charged to expense as purchased
research and
35
EA INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
development in the consolidated results of the Company for the years ended
December 31, 1996 ($998,000) and 1995 ($7,874,000), respectively.
During the fourth quarter of 1996, the Company determined that its
investment and advances to BarOn were unrecoverable and charged those amounts to
expense. BarOn is currently in liquidation proceedings and a receiver has been
appointed in Israel to direct those proceedings. The Company does not expect to
recover any material portion of its investment in BarOn.
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"). ITI was formed to commercialize certain technology developed by IAI.
The portion of the purchase price in excess of the Company's equity interest in
the joint venture, which was $11,672,000 was charged to expense as Purchased
Research and Development in 1995. The Company's investment in ITI was accounted
for as a purchase.
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 the Joint Venture. Failure to make additional required capital contributions
would be a default under the joint venture agreement with IAI.
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 determined that the Joint Venture is not an essential
element of its core strategy and has been attempting 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 Expenses 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.
Aydin Corporation Acquisition
During May 1996, the Company purchased 596,927 shares (the "Aydin Shares")
of the common stock of Aydin Corporation ("Aydin"), a NYSE listed company, in a
private transaction for $18 per share (an aggregate of $10,752,000) and the
Company initiated discussions with the Board of Directors of Aydin concerning a
possible merger or other combination with Aydin. The Company withdrew its offer
on October 8, 1996 and terminated discussions with Aydin.
As a result of the merger discussions being terminated, the Company wrote
down its investment in Aydin Corporation by approximately $5,156,000 as a result
of a decrease in the approximate trading price of the Aydin Shares to $9.375 per
share, which was considered to be other than temporary. In addition,
approximately $689,000 of capitalized costs incurred in connection with the
terminated merger discussions with Aydin was charged to
36
EA INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
expense in 1996. In May and June 1997, the Company sold its entire investment in
Aydin for approximately $6,426,000 resulting in a gain of approximately
$821,000.
Tri-Star
On December 23, 1996, the Company's contract manufacturing subsidiary
Tanon, signed a binding letter 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. In January 1997, the
Company placed an initial non-refundable deposit of approximately $1,000,000
towards the purchase of Tri-Star. In May 1997, the Company and Tri-Star mutually
agreed to terminate the acquisition discussions and $1,020,000 representing
expenses incurred in connection with the purchase and the deposit was written
off to Other Expenses.
SAI
The Company agreed in December 1997, subject to certain conditions, to
purchase Service Assembly, Inc. ("SAI"), located in Wareham, Massachusetts,
outside of Boston. The Company has agreed to pay $3,742,000 for SAI by
delivering shares of its Common Stock to the owners of SAI (the "SAI
Shareholders"), and has agreed to register such shares for resale by the SAI
Shareholders. The acquisition of SAI will be accounted for as a purchase.
4. DEBT AND CAPITAL LEASE OBLIGATIONS
Lines of Credit
The Company's primary credit facility is the Schroder Loan Facility which
provides for advances of up to $11,500,000 in the form of a revolving loan with
availability subject to the amount of a borrowing base comprised generally of
the sum of (1) up to between 80% and 85% of eligible accounts receivable, (2) up
to 18% of eligible inventory subject to an availability sublimit of $3,000,000
and (3) up to 75% (reduced by one percentage point on the first day of each
month following May 3, 1996) of the liquidation value of certain of the
Company's machinery and equipment, subject to an availability sublimit of
$1,250,000 (the "Schroder Loan Facility"). The Company expects that its
outstanding balance under the Schroder Loan Facility will be significantly less
than $11,500,000 at all times during 1998. The Schroder Loan Facility has a
three-year term ending on April 30, 1999 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. Advances under the Schroder Loan Facility can only be used to fund the
operations of Tanon. At December 31, 1997, $8,654,000 was outstanding under the
Schroder Loan Facility, which represented approximately 80% of the available
funds, calculated in accordance with the availability formula of the Schroder
Loan Facility. 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,
1997, Tanon was in compliance with all of these requirements, except the
required minimum net worth. Schroder has agreed to waive such requirement for
December 31,1997. Based on the Company's current projections, the Company would
not be able to meet this requirement during 1998, however, management has had
37
EA INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
discussions with Schroder and has requested that Schroder adjust the required
minimum net worth ratio to reflect the results of operations of Tanon contained
in the current business plan of Tanon for 1998. Substantially, all of the assets
of the Company are pledged as collateral to secure the Schroder Loan Facility.
Concurrent with the closing of the Schroder Loan Facility, the Company
consolidated all of its contract electronic manufacturing business into its
wholly-owned subsidiary, Tanon.
Convertible Securities
The following is a description of the material features of the outstanding
convertible securities of the Company:
The GFL Notes
Among its 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. The notes are now held by the former
Chairman of the Board of Directors of the Company, certain trusts benefiting his
family and an unaffiliated investor. In January 1998, the Company and the
remaining holders of such notes agreed to amend (the "January 1998 Amendments")
the terms of the remaining notes as follows:
(i) to extend the maturity date of the notes to December 31, 1998;
(ii) to increase the conversion price to the lesser of (a) eighty percent (80%)
of the average of the volume weighted average price per share of the Company's
Common Stock (as reported by Bloomberg Business Services in its Volume at Price
Service) for the five days immediately preceding the date of notice of
conversion to the Company or (b) $5.00; and
(iii) to provide for interest payments in cash or shares of Common Stock at the
conversion price described above at the option of the holders or the Company.
These notes as amended in January 1998 are referred to as the "Convertible
Notes". In consideration of the January 1998 Amendments the Company agreed to
issue to the holders warrants (the "Gross Warrants") to purchase an aggregate of
483,393 shares of Common Stock at a price of $5.00 per share for a period of
five years. The Gross Warrants are nondetachable and may not be sold, given or
transferred separately from the Amended Series A Notes. The holders were also
granted demand and piggyback registration rights for the Convertible Notes and
the Gross Warrants . The Company has scheduled a special meeting of its
shareholders on March 31, 1998 to vote on the January 1998 Amendments. If the
shareholders do not approve the amended terms contained in the Convertible Notes
the GFL Note Holders have the right to accelerate the payment of outstanding
principal and interest on the Convertible Notes with a twenty two percent (22%)
penalty. In that case, the Company would be obligated to pay $3,048,000 to the
GFL Note Holders.
The Aydin Convertibles
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 the
Aydin Shares. The 9% Convertible Debentures bear interest at
38
EA INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9% per annum, payable quarterly and mature on May 3, 1998. The 9% Convertible
Debentures are currently convertible at a conversion price per share equal to
the lesser of (i) eighty percent (80% ) of the average of the closing price per
share of the Company's Common Stock for the five days immediately preceding the
date of the notice of conversion to the Company, or (ii) $1.50.
The Series A Notes
During the period beginning on October 25, 1996 and ending on April 10,
1997, the Company borrowed an additional aggregate total of $3,520,000 from the
then Chairman of its Board of Directors, certain trusts benefiting his family
(collectively, the "Gross Series A Holders") and an unaffiliated investor (the
"Series A Investor") and issued Series A Notes. The Series A Notes bear interest
at the rate of 10% per annum and will mature on January 22, 1999.
In January 1998, the Company and the Gross Series A Holders agreed to amend
the terms of the Series A Notes as follows :
(i) to provide for interest payments in cash or stock at the conversion price
described below at the option of the holders and the Company with such payments
to be made in arrears on June 15, 1998 and at maturity; and
(ii) to increase the conversion price to the lesser of (a) eighty percent (80%)
of the average of the volume weighted average price per share of the Company's
Common Stock (as reported by Bloomberg Business Services in its Volume at Price
Service) for the five days immediately preceding the date of notice of
conversion to the Company, or (b) $5.00.
In consideration of these amendments (the "Series A Amendments") the
Company agreed to issue to the Gross Series A Holders warrants (the "Series A
Warrants") to purchase an aggregate of 632,700 shares of Common Stock at a price
of $5.00 per share for a period of five years. The Series A Warrants are
nondetachable and may not be sold, given or transferred separately from the
Amended Series A Notes. The Gross Series A Note Holders were also granted demand
and piggyback registration rights for the shares of Common Stock issuable upon
conversion of the Amended Series A Notes and exercise of the Series A Warrants.
These amendments do not affect the terms of one of the Series A Notes, in the
original principal amount of $250,000, issued to the Series A Investor. These
notes as amended in January 1998 are referred to as the "Amended Series A
Notes".
If the shareholders do not approve the amended terms contained in the
Amended Series A, the Gross Series A Note Holders have the right to accelerate
the payment of outstanding principal and interest on the Amended Series A Notes
with a twenty two percent (22%) penalty. In that case, the Company would be
obligated to pay $4,678,000 to the noteholders.
Other Borrowings
During January 1997, the Company borrowed $1,000,000 from each of two
unrelated parties. 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 the lenders, Ace Foundation, Inc. (the "Ace
Warrant") and Millenco, LP (the "Millenco Warrant"), (collectively, the
"Warrants"). The Company charged the estimated value of these Warrants,
$175,000, to Interest Expense in the first quarter of 1997. These loans were
repaid in May and
39
EA INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 1997 in connection with the sale of the shares of common stock of Aydin
held by the Company. Pursuant to a provision contained in the Millenco Warrant,
the Company has repurchased that Warrant for approximately $176,000 in cash,
charging the net difference between the estimated value of the initial Warrant
and the repurchased amount, or approximately $89,000 to Interest Expense, in the
fourth quarter of 1997.
The Company in April 1997, arranged for standby financing of up to
$4,500,000 to provide additional working capital. This commitment was originally
irrevocable until April 1, 1998 and was to be reduced based on the proceeds the
Company received from the sale of its shares of common stock of Aydin and from
any additional equity or convertible debt financing. The Company has issued
warrants exercisable at $4.125 per share for 600,000 shares as of April 18, 1997
in consideration of this commitment and an additional 200,000 shares as of June
10, 1997 also exercisable at $4.125 per share. The estimated value of these
warrants of $800,000 was charged to Interest Expense in the second quarter of
1997. The commitment was terminated in June 1997.
Series B Convertible Notes
In April and July 1997, the Company borrowed a total of $1,000,000 from an
unaffiliated investor . This loan is represented by certain 10% Series B
Convertible Notes ( the "10% Series B Notes" ), issued by the Company. The
Series B 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 $2.50 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 B 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 Company in cash
or stock of the Company at the conversion price described above.
6% Convertible Notes
In addition, in April 1997 the Company borrowed a total of $4.5 million
from unaffiliated investors. These loans are represented by certain 6%
Convertible Notes due April 30, 1999 (the "6% Convertible Notes"). The 6%
Convertible Notes bear interest at 6% per annum, payable quarterly and mature on
April 30, 1999. The 6% Convertible Notes are convertible at a conversion price
per share equal to the lesser of (i) seventy-six and one-half percent (76.5% )
of the average of the volume weighted average price per share of the Company's
Common Stock (as reported by Bloomberg Business Services in its Volume at Price
Service) for the five days immediately preceding the date of the notice of
conversion to the Company, or (ii) $3.395 . In addition, the Company issued a 6%
Convertible Note which is non-interest bearing in the principal amount of
$315,000 as a placement fee to an unaffiliated party. The Company had agreed to
list the shares issuable upon conversion of the 6% Convertible Notes on the NYSE
by December 1, 1997, or to pay a cash penalty equal to ten percent (10%) of the
outstanding principal and to pay interest from that date through the effective
date of the registration statement at eighteen percent (18%) per annum . The
Company has asked the holders of the 6% Convertible Notes to waive or reduce
these penalties . In December 1997, the Company charged Interest Expense for
approximately $555,000 which represented the one-time penalty charge of 10% of
the principal amount of the outstanding notes as well as 18% for
40
EA INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
one month's interest charge. Note holders holding an aggregate of $1,800,000 in
principal have agreed to waive the 10% penalty and the penalty interest charges
of 18% per month. In consideration for this waiver, the Company has agreed to
issue warrants to purchase an aggregate of 90,000 shares of Common Stock at a
purchase price of $5.375 per share for a six month period beginning after the
underlying shares have been registered.
Imbedded Discounts
As described above, certain of the convertible notes and debentures contain
conversion features which provide for 18% - 23.5% discounts on the market price
of the Company's common stock at the conversion date. The incremental yield
embedded in the conversion terms charged to interest expense totaled $1,761,000
and $4,200,000 in 1997 and 1996, respectively.
Convertible Notes and Debentures outstanding at December 31 consisted of
the following:
1997 1996
---- ----
GFL Notes $ 2,498,000 $ 2,725,000
Aydin Convertibles 1,934,000 6,839,000
Series A Notes 3,520,000 1,270,000
Series B Convertible Notes 1,000,000 -
6% Convertible Notes 4,815,000 -
------------ ------------
Total $ 13,787,000 $ 10,834,000
============ ============
Current Portion $ 12,767,000 $ 2,725,000
Long Term Portion $ 1,000,000 $ 8,109,000
41
EA INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Capital Lease Obligations
The Company leases fixed assets under capital leases with a weighted
average interest rate of 14.1% and the following principal maturity schedule:
(in thousands)
1998 $1,839
1999 1,880
2000 809
2001 286
2002 -
-------------
Total 4,814
Less: Current portion (1,839)
-------------
Long-term portion $2,975
=============
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, 1998 is approximately
$90,000, 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.
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, 1997 amounted to $19,906,000; $2,495,000 in 1998;
$2,619,000 in 1999; $2,652,000 in 2000; $2,689,000 in 2001; $2,735,000 in 2002
and $6,716,000 thereafter. Rent expense amounted to $2,402,000 in 1997,
$2,343,000 in 1996; and $2,234,000 in 1995. 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 increase in rental payments, if any, 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. During 1997,
and 1995 options and warrants to acquire 198,000 and 86,250 shares, respectively
of the Company's Common Stock were issued for this purpose. No significant
options or warrants were issued for this purpose in 1996. 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.
42
EA INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 1997, 1996 and 1995 options and warrants to acquire 850,000,
89,286, and 118,750 shares, respectively, 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.
In 1997, 800,000 warrants with an estimated value of $800,000 were granted
in connection with a standby financing commitment of $4.5 million. The value of
the warrants were charged to interest expense in 1997.
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, 1997, 268,001 shares of Common Stock were reserved for
issuance to employees under the Company's 1972 Employee Stock Option 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, also determine the option
vesting period. The Company has decided not to grant any future options under
this Plan .
1994 Stock Option Plan for Non-Employee Directors
During 1997, the Company has decided to terminate this Plan in its
entirety.
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. On August 22, 1997, the Shareholders voted
to approve an amendment to the Equity Incentive Plan increasing the aggregate
number of shares available for issuance to 5,000,000 shares. 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, 1997, 4,136,647 shares of
Common Stock were reserved for issuance under this Plan.
43
EA INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A summary of activity in the various stock option plans discussed above
follows:
Stock Option Plans
------------------
Price Available
Per Share Outstanding Exercisable for Grant
--------- ----------- ----------- ---------
1972 Stock Option Plan
- ----------------------
December 31, 1995, Balance $ 4.52-25.12 66,367 130,486 202,571
Became Exercisable $ 4.52-20.25 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
Became Exercisable $ 4.50-20.25 3,486
Options Exercised $ 4.83 (625) (625)
Options Returned $ 4.50-20.25 (24,731) (22,981) 24,731
------------ ------- ------- ---------
December 31, 1997, Balance $ 4.83-25.12 26,168 25,856 241,833
============ ======= ======= =========
1994 Stock Option Plan for
Non-Employee Directors
- --------------------------
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
Became Exercisable $22.50-30.00 6,000
Options Returned $13.00-30.00 (84,375) (47,375) 84,375
------------ ------- ------- ---------
December 31, 1997, Balance -- -- -- 586,250
============ ======= ======= =========
44
EA INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Stock Option Plans
------------------
Price Available
Per Share Outstanding Exercisable for Grant
--------- ----------- ----------- ---------
1994 Equity Incentive Plan
- --------------------------
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
Options Granted $ 2.25-6.94 3,730,502 -- (3,730,502)
Became Exercisable $ 3.25-34.50 -- 1,364,695 --
Options Exercised $ 3.25-4.20 (150,006) (150,006) --
Options Returned $ 3.25-34.50 (1,848,424) (1,141,347) 1,848,424
Options Authorized -- -- -- 2,250,000
----------- ---------- ---------- ----------
December 31, 1997, Balance $ 2.25-6.94 3,274,282 809,824 862,365
============ ========== ========== ==========
The number of shares and average price of options, granted under these
plans, exercisable at December 31, 1997 and 1996 were 835,680 shares at $ 4.60
and 923,833 shares at $19.23, respectively. At December 31, 1997 and 1996,
1,690,448 shares and 1,213,420 shares, respectively, were available for future
grants under these plans.
45
EA INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Other options and warrants issued in connection with financing transactions
or for services rendered are as follows:
Other Outstanding Warrants and Options
Outstanding and
Warrants Exercise Price Exercisable Expiration Date
- -------- -------------- ----------- ---------------
$4.00 4,412 1/6/98
7.00 240,928 1/6/98
11.08 65,500 3/21/99
12.10 62,500 7/10/99
18.40 62,500 8/16/99
4.00 12,500 1/6/98
29.00 125,000 8/7/98
1.50 50,000 1/6/99
29.00 150,000 8/7/98
32.50 89,286 7/5/00
4.13 800,000 4/18/00
23.50 60,000 12/15/99
Options
- ------- $18.24 25,000 7/24/99
$22.00-30.80 100,000 10/19/99
------------ ---------
Total Outstanding $1.50-32.50 1,847,626
============ =========
At December 31, 1997 an aggregate of 6,913,524 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, compensation expense has been
recognized only for certain options granted in 1997 at prices below the fair
market at the time of grant. The amount charged to compensation during 1997 for
such options was $826,000. 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 $3.6 million, or $0.43 per share in 1997, $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 1997, 1996, and 1995 was $1.78, $8.78, and
$14.10, respectively. The fair value was estimated using the Black-Scholes
option-pricing model based on the weighted average market price of $4.12 in
1997, $16.91 in 1996 and $29.43 in 1995 and the following weighted average
assumptions- risk-free interest rate of 5.5% for 1997, 5.8% for 1996, and 6.4%
for 1995; expected life of
46
EA INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
options: 2.5 years for 1997, 3 years for 1996, and 3 years for 1995; projected
volatility of 63% for 1997, 73% for 1996, and 70% for 1995. There was no
dividend yield factor for 1997 , 1996 and 1995, respectively .
7. SAVINGS PLAN AND POST RETIREMENT BENEFITS
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 1997, 1996, or 1995.
Company contributions amounted to approximately $107,000 in 1997, $84,000 in
1996, and $68,000 in 1995. 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, 1997, the Company had a net operating loss carry forward
for tax purposes of approximately $66.1 million ($7.3 million expiring in 1999,
$2.0 million expiring in 2002, $3.3 million expiring in 2007, $5.8 million
expiring in 2008, $4.9 million expiring in 2009, $10.2 million expiring in 2010
, $18.4 million expiring in 2011, and $14.1 million expiring in 2012) 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 $25.8 and $17.8 million at December 31, 1997 and 1996,
respectively, the Company has established a valuation allowance of $25.8 and
$17.8 million at December 31, 1997 and 1996, respectively.
There was no net U.S. Federal income tax benefit for 1997, 1996 or 1995
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 common share was 8,392,723 in 1997, 4,802,068 in 1996
and 3,086,070 in 1995.
In March 1997, the Financial Accounting Standards Board issued Statement
No. 128, "Earnings Per Share" which is effective for fiscal 1997. This Statement
establishes accounting standards for computing and presenting earnings per share
("EPS"). It replaces the presentation of primary EPS with a presentation of
basic EPS. It also requires dual presentation of basic EPS and diluted EPS for
companies with complex capital structures. The
47
EA INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Company's reported loss per common share is equivalent to basic loss per share
under the new standard. The Company is not required to present diluted per share
amounts because it has incurred a net loss.
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.
10. MANAGEMENT RESTRUCTURING
In connection with the restructuring of its management and board of
directors, the Company established a $1,410,000 provision in the second and
third quarters of 1997, which is included in Selling, General & Administrative
Expenses.
The restructuring provision consisted primarily of the following charges:
o $360,000 in recruiting fees paid in connection with the hiring of a Chief
Executive Officer and Board members
o $142,000 in relocation expenses paid to the Chief Executive Officer
o $175,000 in charges related to restructuring of operations of Tanon
o $430,000 in charges related to stock options granted to now former directors
and officers of the Company
o $303,000 for the cost of severance and other expenses
11. COMMITMENTS AND CONTINGENCIES
Lemco Associates
The Company on a regular basis reviews and updates its public disclosure
with respect to this litigation. As previously reported, in October, 1992,
Lemco Associates L.P., a limited partnership ("Lemco"), the owner of property
previously owned by EAI, initiated an action (the "Lemco Suit"), against EAI
and others alleging, among other things, that the defendants created
environmental contamination at the property and seeking damages in unspecified
amounts. EAI filed a response to the complaint in which it denied Lemco's
allegations, asserted numerous defenses to the claims asserted and asserted a
counterclaim against Lemco and crossclaims against co-defendants and others for
indemnification and contribution.
In 1947, the Company purchased land in North Long Branch, New Jersey on
which it subsequently built a number of buildings and conducted a number of
industrial operations. In 1954 the Company built a building known as Building 11
on that land. From the mid - 1950's through 1977, the Company conducted
finishing operations such as metal plating and painting on that site using,
among other machinery, a degreaser to clean metal components using a variety of
solvents. In 1977, EAI leased building 11 to a company called Comax, Inc.
("Comax"), which then began operations in the building. In 1977, Comax, with
technical advice from EAI, filled the degreaser with solvents and used it at
least once. Comax then capped the degreaser without removing the solvents and
did not use it again. In 1979, EAI sold the property and all the buildings on
the site to Lemco for approximately $400,000. Comax continued to operate on the
site until 1984 under a lease from Lemco.
48
EA INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Between 1977 and the time it ceased operations on the site, Comax was cited
by local authorities for a range of environmental violations. Building 11 was
demolished in or about 1991. Evidence indicates that at the time of removal the
degreaser was empty. EAI believes that, between the time it was capped in 1977
and the time of its removal, the chemicals leached out gradually over time or
the chemicals were spilled at the site before or after the removal of the
degreaser.
The Company believes that Lemco was aware at the time of its purchase of
the site from EAI that some of the underground gasoline storage tanks on the
site had leaked and that there had been previous spills of hazardous materials
on the site.
Lemco's environmental consultants have analyzed the data from test wells on
the site and have concluded using a mathematical analysis and a modeling
analysis that TCE contamination occurred between 1959 and 1974 and that PCE
contamination occurred no later than 1968. The Company's environmental
consultants have analyzed the data from the same test wells on the site and have
concluded that based on a similar modeling analysis an initial TCE release to
the aquifer occurred in the mid 1970's to the late 1980's and a release of PCE
occurred from the mid '70's to the mid 80's. Their mathematical analysis also
indicates that TCE was most likely released to the aquifer in the mid 1980's and
unlikely to have been released before 1977. In addition, the evidence that would
be presented at trial by EAI is consistent with that conclusion.
The damages sought in the Lemco Suit are (i) recovery for the decreased
value of the property, (ii) recovery for the cost to remediate the contamination
on the property, and (iii) prejudgement interest and expert fees.
In 1988, Lemco signed an agreement of sale for the property subject to
various contingencies for a price of approximately $4 million. Further, Lemco
has provided the Company with appraisal reports made by a real estate appraisal
company engaged by Lemco in connection with the Lemco Suit. The reports state
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 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 has provided the Company with a statement of its remediation costs
through December 18, 1997, as well as an estimate of future remediation costs
associated with the contamination for which it seeks recovery in the Lemco Suit.
Specifically, Lemco claims that it has expended approximately $635,000 in
remediation costs, including fees for legal oversight and consultation and
estimates that its future remediation costs will amount to approximately
$6,316,000. This estimate has been 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 costs
and fees for legal oversight and consultation. 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
approximately $2.4 million.
49
EA INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company has been vigorously defending this matter by, among other
things, asserting that the contamination was caused partially or completely by
Comax, not EAI, and that Lemco's damage figure is substantially overstated. To
the extent that it is determined that Comax contaminated the site during its
tenancy with the Company from 1977 to 1979, then the Company may be held liable
for such contamination as owner of the site at the time of the contamination .
The Company will pursue its claim for indemnity against Comax in the event said
liability is established . Additionally, the Company has participated in court
ordered mediation in an effort to explore opportunities for settlement .
Contemporaneously with the institution of the Lemco Suit, the Company made a
demand upon its insurance carriers for coverage for the claims by Lemco. The
Company's insurance carriers in 1992 agreed to pay 71% of its defense costs
under a reservation of rights and have made partial payments for the period
beginning on the date of the Lemco Suit to the date hereof.
Although the Company's insurance carriers have not formally denied coverage
or refused to provide a defense for the Company, the Company believed that
settlement or other resolution of the Lemco Suit would be more likely with the
active participation of the insurance carriers. By court order, after request by
the Company, (i) the carriers were added as third party defendants in the Lemco
Suit, (ii) the court ordered expedited discovery with respect to the insurance
claim, (iii) the court scheduled a settlement conference for April 7, 1998 and
(iv) the court has set a new trial date of May 5, 1998. Discovery in the Lemco
Suit is ongoing.
Management of the Company believes that the range of possible loss by the
Company in this matter is approximately $250,000 to $10,300,000. This range
excludes prejudgement interest, if any, but includes costs and expenses, such as
legal and expert fees. In the third quarter of 1997, the Company established a
reserve of $250,000 to cover anticipated legal and expert fees in connection
with the Lemco Suit. Management of the Company believes that the reserves it has
established, together with its insurance coverage , should be sufficient to
cover the costs of defending or settling the Lemco Suit and the potential losses
that could be incurred by the Company in connection with the Lemco Suit . No
assurance can be given that the costs incurred by the Company , or a potential
award of damages against the Company, will not exceed management's current
estimates, or that the insurance recovery , if any, and available resources of
the Company will not be less than the current estimates of management.
Employment Agreements
The Company is a party to employment agreements with its executive officers
and certain key operating executives which provide for severance benefits
ranging from three months to two years of salary, bonus and other benefits and
in some cases for vesting of any unvested options. Each such agreement has
various triggering events including some or all of the following (i) the
executive is terminated for any reason other than due cause, (ii) a change of
control of the Company occurs, (iii) the executive's principal location is moved
more than 30 miles from its current location or (iv) the executive's position is
materially changed.
12. OTHER EXPENSES
Other Expenses consist primarily of the following charges in 1997: (i)
write-off of certain intangibles of ($1,758,000), relating to the Tanon
acquisition, (ii) write-off of non-refundable deposit of ($1,020,000) paid to
Tri-Star, (iii) write-off of fixed assets of ($390,000).
50
EA INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Other Expenses consist primarily of the following charges in 1996: (i)
($812,000) representing equity share of BarOn's losses, (ii) ($449,000)
representing equity share of EATI's losses, (iii) valuation adjustment of
($1,647,000) on the investment in EATI, (iv) valuation adjustment of ($649,000)
on the investment in BarOn, (v) write-down of ($907,000) in non-recourse note
receivable from former owner of Tanon secured by pledge of Common Stock of the
Company, and (vi) the write-off of fixed assets of ($563,000).
Other Expenses consist primarily of the following charges in 1995: (i)
($802,000) representing equity share of BarOn's losses and (ii) ($49,000)
representing equity share of EATI's losses.
13. QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data for the years ended December 31, 1997
and 1996 are as follows:
First Second Third Fourth
----- ------ ----- ------
1997
- ----
Net Sales $14,625 $16,677 $21,243 $ 23,966
Gross profit (loss) 165 (74) 1,026 (810)
Net Loss $(2,603) $(7,236) $(1,502) $ (6,721)
------- ------- ------- --------
Loss per common share $ (0.35) $ (0.93) $ (0.17) $ (0.72)
======= ======= ======= ========
1996
- ----
Net Sales $24,025 $22,388 $17,595 $ 17,617
Gross profit (loss) 1,391 1,589 (142) (2,358)
Net Loss $(3,869)(1) $(3,633)(1) $(6,265)(1) $(16,187)
------- ------- ------- --------
Loss per common share $ (0.93)(1) $ (0.77)(1) $ (1.24)(1) $ (3.07)
======= ======= ======= ========
(1) 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.
51
EA Industries, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION ACCOUNT
For the Three Years Ended December 31, 1997
(thousands of dollars)
Description Balance at (Charged) Deductions(1) Balance
- ----------- Beginning Credited ------------- at End of
Of Period to Costs and Period
--------- Expenses ------
--------
1997: Allowance for doubtful accounts $(1,100) ($134) $214 ($1,020)
======= ===== ==== =======
1996: Allowance for doubtful accounts $(385) ($899)(3) $184 $(1,100)
======= ===== ==== =======
1995: Allowance for doubtful accounts $(307)(2) ($91) $13 $(385)
======= ===== ==== =======
(1) Write-off of uncollectible accounts
(2) Adjusted to include Tanon Balance
(3) Includes provisions for Gyration Inc. of $750
53
PART III
Items 10-13 are hereby incorporated by reference to the Company's Proxy
Statement for its 1998 Annual Meeting of Shareholders which will be filed with
the Securities and Exchange Commission within 120 days after the end of the
fiscal year covered by this report.
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.
EXHIBITS
Exhibit No. Description
- ----------- -----------
2.1 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.
2.2 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 herein by
reference.
3.3 Amendment to Certificate of Incorporation was filed as Exhibit
3.3 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1996 and is hereby incorporated herein by
reference.
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, was filed as an
exhibit to the Company's Annual Report on Form 10-K for the
year ended December 31,
54
1996 and is hereby incorporated herein by reference.
(*) 10.1 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.
10.2 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.
(*) 10.3 1994 Stock Option Plan for Non-Employee Directors, was
filed as Exhibit 10.30 to the Company's Annual Report on Form
10-K for the year ended December 31, 1995, and is hereby
incorporated by reference.
(*)10.4 1994 Equity Incentive Plan as amended and restated, and
approved by the shareholders of the Company was filed as an
appendix to the Company's Proxy Statement dated July 23, 1997
and is hereby incorporated by reference.
10.5 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).
10.6 Revolving Credit and Security Agreement dated May 3, 1996,
between IBJ Schroder Bank & Trust Company and Tanon
Manufacturing, Inc. 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 incorporated by reference,
10.7 Form of Subscription Agreement and Form of 9% Convertible
Subordinated Debenture issued in May and June 1996 in
connection with the investment in Aydin Corporation 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.
(**)10.8 Employment Agreement dated December 20, 1996 between the
Company and Howard Kamins was filed as Exhibit 10.36 to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1996 and is hereby incorporated herein by
reference.
10.9 Form of Subscription Agreement and Form of 10% Series A
Convertible Notes issued by the Company was filed as Exhibit
10.39 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1996 and is hereby incorporated by
reference.
55
10.10 Registration Rights Agreement dated January 23, 1997 between
Aydin Corporation and the Company was filed as Exhibit 10.40 to
the Company's Annual Report on Form 10-K for the year ended
December 31, 1996 and is hereby incorporated by reference.
10.11 Letter Agreement and dated February 25, 1997 between Aydin
Corporation and the Company regarding option to be granted to
the Chairman of Aydin Corporation was filed as Exhibit 10.41 to
the Company's Annual Report on Form 10-K for the year ended
December 31, 1996 and is hereby incorporated by reference.
10.12 Stock Option Agreement dated February 27, 1997 between the
Company and the Chairman of Aydin Corporation was filed as
Exhibit 10.42 to the Company's Annual Report on Form 10-K for
the year ended December 31, 1996 and is hereby incorporated by
reference.
10.13 Letter of Intent dated December 23, 996 by and among Tanon
Manufacturing, Inc., Tri-Star Technologies Co., Inc. and
Michael P. Downes was filed as Exhibit 10.43 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1996
and is hereby incorporated by reference.
10.14 Letter of Intent dated December 23, 1996 by and among Tanon
Manufacturing, Inc., Tri-Star Realty Trust and Michael P.
Downes was filed as Exhibit 10.44 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1996 and is
hereby incorporated by reference.
10.15 Memorandum of Understanding dated December 23, 1996 by and
among the Company, Tanon Manufacturing, Inc., Tri-Star
Technologies Co., Inc., and Michael P. Downes was filed as
Exhibit 10.45 to the Company's Annual Report on Form 10-K for
the year ended December 31, 1996 and is hereby incorporated
by reference.
10.16 Promissory Note dated January 20, 1997 in the principal amount
of $1 million issued by the Company to Millenco, L.P. was filed
as Exhibit 10.46 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1996 and is hereby incorporated
by reference.
10.17 Stock Pledge Agreement dated January 20, 1997 between the
Company and Millenco, L.P. was filed as Exhibit 10.47 to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1996 and is hereby incorporated by reference.
56
10.18 Warrant dated January 20, 1997 to purchase 50,000 shares of the
Company's Common Stock issued to Millenco, L.P. was filed as
Exhibit 10.48 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1996
10.19 Promissory Note dated January 6, 1997 in the principal amount
of $1 million issued by the Company to ACE Foundation, Inc. was
filed as Exhibit 10.49 to the Company's Annual Report on Form
10-K for the year ended December 31, 1996 and is hereby
incorporated by reference.
10.20 Stock Pledge Agreement, dated January 6, 1997 between the
Company and ACE Foundation, Inc. was filed as Exhibit 10.50 to
the Company's Annual Report on Form 10-K for the year ended
December 31, 1996 and is hereby incorporated by reference.
10.21 Warrant dated January 6, 1997 to purchase 50,000 shares of
Company's Common Stock issued to ACE Foundation, Inc. was filed
as Exhibit 10.51 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1996 and is hereby incorporated
by reference.
10.22 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.
10.23 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.
10.24 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.
10.25 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.
57
(**)10.26 Employment Agreement, dated as of May 8, 1996 between the Company
and Frank G. Brandenberg.
10.27 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.
(*)10.28 1994 Equity Incentive Plan, as adopted by the Company's
shareholders on June 28, 1994, as amended and restated.
(*)10.29 1994 Stock Option Plan for Non-Employee Directors, as adopted
by the Company's shareholders on May 17, 1994, as amended and
restated.
(**)10.30 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.
10.31 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.
(**)10.32 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.
10.33 Form of 6% Convertible Notes Issued in April 1997 was filed as
Exhibit 4.5 to the Company's Form S-3A (File No. 333-21605 and
is hereby incorporated by reference.
10.34 Form of Amended GFL Note was filed as Attachment A to the
Company's Preliminary Proxy Statement filed on February 17,
1998 and is hereby incorporated by reference.
58
10.35 Form of Warrant issued in connection with Amended GFL Notes was
filed as Attachment B to the Company's Preliminary Proxy
Statement filed on February 17, 1998 and is hereby incorporated
by reference.
10.36 Form of Amended 10% Series A Note was filed as Attachment C to
the Company's Preliminary Proxy Statement filed on February 17,
1998 and is hereby incorporated by reference.
10.37 Form of Warrant issued in connection with Amended 10% Series A
Notes was filed as Attachment D to the Company's Preliminary
Proxy Statement filed on February 17, 1998 and is hereby
incorporated by reference.
10.38 Form of Warrant issued in connection with Stand-by financing
commitment.
10.39 Letter dated December 12, 1997 from the New York Stock Exchange
to the Company was filed as Exhibit 4.4 to the Company's Form
S-3A (File No. 333- 21605 and is hereby incorporated by
reference.
10.40 Agreement of Purchase and Sale dated as of December 23, 1997 by
and among Service Assembly, Inc., the Company and the
shareholders of Service Assembly was filed as Exhibit 2.3 to
the Company's Form S-3 (File No. 333-4483 and is hereby
incorporated by reference.
10.41 Form of 10% Series B Convertible Notes.
59
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.
27 Financial Data Schedule
(*) 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 Claudia Rose, EA
Industries, Inc., 185 Monmouth Parkway, West Long Branch, New Jersey 07764.
(b) The Company did not file a Report on Form 8-K during the calendar
quarter ended December 31, 1997.
(c) See Item 14(a) above.
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/ James Crofton
----------------------------------
James Crofton, Treasurer
and Vice President - Finance
Chief Financial Officer
(Principal Financial and Chief Accounting Officer)
Dated: March 13, 1998
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/ Frank G. Brandenberg President, Chief Executive March 13, 1998
- -------------------------------- Officer and Director
Frank G. Brandenberg (Principal Executive
Officer)
/s/ James Crofton Treasurer, Vice President- March 13, 1998
- -------------------------------- Finance and
James Crofton Chief Financial Officer
(Principal Financial and
Accounting Officer)
/s/ Edward A. Blechschmidt Director March 5, 1998
- --------------------------------
Edward A. Blechschmidt
/s/ Kenneth W. Cannestra Director, Chairman of the March 9, 1998
- -------------------------------- Board
Kenneth W. Cannestra
/s/ Brian I. Finkel Director March 13, 1998
- --------------------------------
Brian I. Finkel
/s/ Ross Manire Director March 13, 1998
- --------------------------------
Ross Manire
/s/ Shrawan K. Singh Director March 11, 1998
- --------------------------------
Shrawan K. Singh
/s/ Ronald Verdoorn Director March 13, 1998
- --------------------------------
Ronald Verdoorn
52