SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 28, 1998 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, former address and former fiscal year, if changed since last report
NOT APPLICABLE
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X N
-
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As of March 28, 1998, there were 11,894,363 outstanding shares of the
Registrant's Common Stock.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EA INDUSTRIES, INC. AND SUBSIDIARIES
Consolidated Condensed Balance Sheets
(UNAUDITED)
(thousands of dollars)
Mar. 28, 1998 Dec. 31, 1997
------------- -------------
ASSETS
Current Assets:
Cash and cash equivalents $ 1,054 $ 595
Receivables, less allowance of $1,000 in 1998
and $1,020 in 1997 for doubtful accounts 13,010 12,666
Inventories 9,383 13,175
Prepaid expenses and other assets 804 881
-------- --------
TOTAL CURRENT ASSETS 24,251 27,317
-------- --------
Equipment and leasehold improvements 20,558 19,201
Less accumulated depreciation (8,749) (8,397)
-------- --------
11,809 10,804
-------- --------
Other Investments held for sale 1,050 1,050
-------- --------
Intangible assets 13,262 10,573
Less accumulated amortization (2,608) (2,452)
-------- --------
10,654 8,121
-------- --------
Other assets 644 570
-------- --------
$ 48,408 $ 47,862
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT )
Current Liabilities:
Revolving Credit Facility $ 9,175 $ 8,654
Current portion of Capital Lease Obligations 1,846 1,839
Current portion of Convertible Notes and Debentures 12,115 12,767
Accounts payable 12,665 15,793
Accrued expenses 4,328 5,051
-------- --------
TOTAL CURRENT LIABILITIES 40,129 44,104
-------- --------
Long-Term Liabilities:
Long-term portion of Capital Lease Obligations 2,661 2,975
Convertible Notes and Debentures -- 1,000
Mortgage Note Payable 437 --
Accrued excess leased space costs 156 314
Other long-term liabilities 602 570
-------- --------
TOTAL LONG-TERM LIABILITIES 3,856 4,859
-------- --------
TOTAL LIABILITIES 43,985 48,963
-------- --------
Shareholders' Equity (Deficit):
Common Stock 97,194 90,270
Accumulated Deficit (92,771) (91,307)
-------- --------
4,423 (1,037)
Less common stock in treasury, at cost -- (64)
-------- --------
TOTAL SHAREHOLDERS' EQUITY (DEFICIT) 4,423 (1,101)
-------- --------
$ 48,408 $ 47,862
======== ========
The accompanying notes are an integral part of these consolidated condensed
financial statements.
2
EA INDUSTRIES, INC. AND SUBSIDIARIES
Consolidated Condensed Statements of Operations
(UNAUDITED)
(thousands of dollars, except per share data)
Quarter Ended
---------------------------------
March 28, 1998 March 29, 1997
-------------- --------------
Net Sales $ 19,182 $ 14,625
------------ ------------
Cost of Sales 18,268 14,460
Selling, General and Administrative Expenses 1,756 1,901
Research and Development 102 0
------------ ------------
Total 20,126 16,361
------------ ------------
Loss from Operations (944) (1,736)
------------ ------------
Interest Expense 659 850
Interest Income (2) (8)
Other (Income)/Expense, net (137) 25
------------ ------------
Net Loss ($ 1,464) ($ 2,603)
============ ============
Loss Per Common Share ($ 0.14) ($ 0.35)
============ ============
Weighted Average Common Shares Outstanding 10,333,999 7,442,863
============ ============
The accompanying notes are an integral part of these consolidated
condensed financial statements.
3
EA INDUSTRIES, INC. AND SUBSIDIARIES
Consolidated Condensed Statement of Shareholders' Equity
For The Three Months Ended March 28, 1998
(UNAUDITED)
(thousands of dollars)
Accumulated
Common Stock Treasury Stock Deficit
------------------------ ------------------ -----------
Shares Amount Shares Amount
---------- ------- ------ ------
Balance December 31, 1997 9,438,613 $90,270 (7,369) ($64) ($91,307)
Net Loss ($1,464)
Issuance of Common Stock
SAI Acquisition 1,069,257 3,742
Exercise of Stock Options 41,767 146
Value of Warrants Issued in
Connection with Financing -- 133
Debt conversion 1,101,295 1,652
Value of Shares Issued For Services 62,548 153 7,369 64
Exercise of Class A and B Warrants 180,883 1,081
Other -- 17
---------- ------- ------- ----- ---------
Balance, March 28, 1998 11,894,363 $97,194 0 0 ($92,771)
========== ======= ======= ===== =========
The accompanying notes are an integral part of these consolidated
condensed financial statements.
4
EA INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
(UNAUDITED)
(thousands of dollars)
Quarter Ended
-------------------------------
March 28, 1998 March 29, 1997
-------------- --------------
Cash Flows from Operating Activities:
Net Loss $(1,464) $(2,603)
Adjustments to reconcile net loss to net
cash provided/(used) by operating activities:
Depreciation and amortization 699 766
Non-cash interest charges 7 37
Value of warrants issued in connection with financing 133 175
Value of shares issued for services 217 68
Cash provided/(used) by changes in:
Receivables 146 2,732
Inventories 3,792 72
Prepaid expenses & other assets 70 (22)
Accounts payable and accrued expenses (4,089) (3,047)
Accrued excess leased space costs (158) (184)
Other operating items - net (54) 7
------- -------
Net cash provided/(used) by operations (701) (1,999)
------- -------
Cash flows from Investing Activities:
Capital Expenditures (281) (570)
Investments, including those in affiliates -- (1,012)
------- -------
Net cash provided/(used) by investing activities (281) (1,582)
------- -------
Cash flows from Financing Activities:
Net borrowings/(repayments) under credit facilities 521 (1,499)
Net proceeds/(repayments) from capital leases (307) (221)
Net proceeds from convertible subordinated debt -- 2,250
Net proceeds from Promissory Notes -- 2,000
Proceeds from the exercise of stock options 146 10
Net proceeds from exercise of warrants 1,081 700
------- -------
Net cash provided/(used) by financing activities 1,441 3,240
------- -------
Net Increase/(Decrease) in Cash and Cash Equivalents 459 (341)
Cash and Cash Equivalents at Beginning of Period 595 461
------- -------
Cash and Cash Equivalents at End of Period $ 1,054 $ 120
======= =======
The accompanying notes are an integral part of these consolidated
condensed financial statements.
5
EA INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
(UNAUDITED)
(thousands of dollars)
Quarter Ended
--------------------------------
March 28, 1998 March 29, 1997
-------------- --------------
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 949 $ 551
====== ======
Non cash financing activities:
Conversion of debt to equity $1,652 $2,525
Value of stock issued in connection with acquisitions 3,742 --
Value of warrants issued in connection with financings 133 175
Value of shares issued for services 217 68
------ ------
TOTAL $5,744 $2,768
====== ======
The accompanying notes are an integral part of these consolidated condensed
financial statements.
6
EA INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
(1) Description of Business and Basis of Presentation
EA Industries, Inc., a New Jersey corporation formerly known as "Electronic
Associates, Inc." ("EAI" or the "Company"), through its wholly-owned subsidiary,
Tanon Manufacturing, Inc. ("Tanon"), is engaged principally in the business of
providing contract electronic manufacturing services ranging from the assembly
of printed circuit boards to the complete procurement, production, assembly,
test and delivery of entire electronic products and systems. 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.
The condensed financial statements included herein have been prepared by the
Company, without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations, although the Company believes that the disclosures are adequate to
make the information presented not misleading. These condensed financial
statements should be read in conjunction with the financial statements and the
notes thereto included in the Company's latest Annual Report on Form 10-K for
the year ended December 31, 1997. These condensed financial statements reflect,
in the opinion of management, all adjustments (consisting only of normal
recurring adjustments) necessary to present fairly the results for the interim
period. Results of operations for the interim period ended March 28, 1998 are
not necessarily indicative of results of operations expected for the full year.
The consolidated financial statements include the accounts of all majority-owned
subsidiaries other than the investment in Electronic Associates Technologies
Israel, Ltd. ("EATI"), an unconsolidated subsidiary held for sale, which is
reflected in the accompanying financial statements at $1,050,000, its estimated
net realizable value. The Company has decided to sell or otherwise dispose of
its interest in EATI and accordingly, such interest has been classified as an
unconsolidated subsidiary held for sale.
The Company operates on a 52 week year, with each fiscal week and quarter ending
on Saturday, except for the fourth quarter which ends on December 31.
Losses per common share amounts 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 period.
The Company's accounting policy is to accrue for legal expenses as they are
billed to the Company except to the extent an earlier accrual is required for
litigation and other claims.
7
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 Company's reported net 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. At March 28, 1998 the Company had outstanding convertible
notes and debentures convertible into approximately 3,200,000 shares of its
Common Stock as of that date, warrants to purchase approximately 2,668,000
shares of its Common Stock and outstanding options to purchase approximately
3,800,000 shares of its Common Stock.
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 adopted this Statement as of January 1, 1998,
however this Statement only impacts on disclosure requirements and, therefore,
has no impact on the Company's financial position or results of operations.
Since the Company had no other elements of comprehensive income for the quarter
covered by this report the comprehensive income was equal to the net loss and
the statement did not have any impact on the disclosure herein.
(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 March 28, 1998, $9,175,000 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 tangible net worth. At March 28,
1998, Tanon was in compliance with all of these requirements, except the
required minimum tangible net worth. The Company has requested that Schroder
waive such requirement for March 28, 1998. Based on the Company's current
projections, the Company will not be able to meet this requirement during the
first half of 1998, however, management has had discussions with Schroder and
has requested that Schroder adjust the required minimum net worth ratio to
reflect the operations of Tanon contained in the current business plan of Tanon
for 1998.
8
All of the convertible securities issued by the Company are currently due within
one year. As of March 28, 1998 this included 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. The Registration Statement was
declared effective on April 7, 1998, and as such these Notes are no longer
payable upon demand. The Company also held a special meeting of its shareholders
on April 14, 1998 at which time the revised terms of the Convertible Notes and
the Amended Series A Notes were approved. None of the Company's convertible debt
is currently due on demand, however, all of such debt is currently due and
payable within one year. The Company expects these notes will be converted into
equity in accordance with their terms.
A portion of the Company's strategy is to acquire or internally develop
additional sites for Tanon Express facilities. In addition, in the past few
years, the Company has periodically extended the time in which it pays its
accounts payables 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 acquisitions, for operating contingencies
and to bring the Company's timing on payment of accounts 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 quarter of this year in
order to accomplish these goals.
The Company's financial projections indicate that operating losses and negative
cash flow for the Company as a whole will continue through the second quarter of
1998. The Company is also forecasting an increase in sales during the remainder
of 1998 resulting from the Company's recent success in attracting new customers
as well as retaining existing customers. Management believes that, even if it
does not raise such additional capital the expected increase in sales will
result in an improvement in cash flows from operations, and that such improved
cash flow, along with available funds under the Schroder Loan Facility together
with its available capital resources will be sufficient to fund its ongoing
operations in a fashion consistent with its past practices, excluding any
acquisitions made with cash. No assurance can be given that such a sales
increase will occur or be reflected in the Company's operating results.
The Company's projections with respect to cash needs are based on its forecasts
of the results of operations at Tanon and expenses of EAI. If the Company's
results of operations are significantly below forecasts, or expenses at EAI are
greater than expected, this would raise doubts about the Company's ability to
continue its operations without raising additional capital or a significant
restructuring, which could include a major reduction in general and
administrative expenses and liquidation of assets involving the sale of all or
part of Tanon. There can be no assurance that such restructuring would enable
the Company to continue its operations or that the Company would be successful
in raising additional capital.
The Company has incurred significant losses and had negative cash flows from
operations for the last seven years and the three months ended March 28, 1998.
The Company's independent public accountants 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
Company's Financial Statements do not
9
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, failure to obtain anticipated
contracts or orders from new 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 .
(3) Acquisition of Service Assembly, Inc. ("SAI")
The Company purchased Service Assembly, Inc. ("SAI"), which is based in Wareham,
Massachusetts, outside of Boston. The Company paid $3,742,400 (the "Purchase
Price") for SAI by delivering the equivalent number of shares of its Common
Stock to the owners of SAI (the "SAI Shareholders"), and agreed to register such
shares for resale by the SAI Shareholders.
SAI's net sales for the fiscal year ended October 31, 1997 were approximately
$3,700,000 and its net income was approximately $178,000, after deductions for
compensation and other payments to the shareholders of SAI. SAI will be operated
as a Tanon Express facility and its results of operations for the month of March
1998 have been included in the Consolidated Financial Statements for the period
ended March 28, 1998. Each Tanon Express facility will be dedicated to quick
turn and prototype electronic manufacturing services located in close proximity
to customer engineering and manufacturing operations. These facilities will
engage the customer early in the product cycle and will 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.
A summary of the accounting for the Purchase Price and the resultant intangibles
follows.
Equivalent fair market value of shares of EAI
Common Stock exchanged for 100% of the
outstanding shares of SAI common stock $3,742,000
Investment Costs (due diligence, etc.) 75,000
----------
Total Investment 3,817,000
Estimated Fair Value of Tangible Net Assets 1,128,000
----------
Goodwill $2,689,000
==========
10
The Company has estimated the fair value of the assets acquired and intends to
obtain an appraisal and adjust that estimate if necessary. The Company initially
issued 1,069,257 shares to an agent for the shareholders of SAI in payment of
the Purchase Price. The agent sold a portion of such shares until he had
received net proceeds of $3,742,400 and the remaining shares have been returned
to the Company. The agent sold a total of 890,100 shares of the Company's Common
Stock.
11
(4) Joint Venture with WKK America (Holdings), Inc.
On April 15, 1998, the Company announced a marketing agreement between its
operating subsidiary, Tanon Manufacturing, Inc. and WKK America (Holdings), Inc.
("WKK"), a $300 million, multi-national electronic contract manufacturer.
The marketing agreement provides for the electronics manufacturing services of
both companies to be jointly marketed to both companies' customers and for each
company to be paid a fee for referral of business. This joint marketing
agreement provides Tanon with access to a low labor cost manufacturing source
located in The People's Republic of China ("PRC"), for labor intensive products.
This addition complements the existing automated factory high volume
capabilities located in West Long Branch, New Jersey and Fremont, California as
well as the recently acquired Tanon Express quick-turn prototype center in
Wareham, Massachusetts. WKK's presence in the PRC also gives Tanon a customer
service point in the Far East.
The agreement provides WKK with highly automated, volume manufacturing
capabilities, prototype and other product startup services and customer support
in the USA, thereby expanding its ability to serve its customers worldwide.
(5) Contingencies
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.
The Company and Lemco have agreed to settle the Lemco Suit for the sum of
$8,500,000 (the "Settlement") and the Company has assigned to Lemco all of its
rights to be indemnified by the insurance carriers who have issued policies
covering claims of the type asserted in the Lemco Suit for the relevant time
periods. The Settlement is subject to final approval by the courts of New
Jersey, including all appeals, that (a) the Settlement is fair, reasonable and
non-collusive, (b) a determination that the carriers have policies of insurance
which would require them to act as indemnitors with respect to the claims
asserted in the Lemco Suit and to pay the Settlement and (c) a determination
that the indemnification is assignable to Lemco as part of the Settlement. If it
is determined by the courts that the carriers have defenses that would reduce
their obligations to an amount less than $8,500,000, then the Company would be
responsible to pay Lemco one third of the difference between the Settlement and
the amount awarded by the court to the carriers, up to a maximum of $333,333. If
the court determines that the responsibility of the carriers is less than
$7,500,000, Lemco at its sole discretion may void the Settlement. If Lemco
settles the claims against the carriers for less than $8,500,000, the Company
has no responsibility to pay Lemco any part of the difference. The Company has
agreed to cooperate with Lemco in obtaining court approval of the Settlement and
in prosecuting the claims against the carriers. On March 26, 1998, Lemco and the
Company
12
petitioned the Superior Court of New Jersey, Law Division, Monmouth County to
approve the Settlement.
For further information including a more complete description of the Lemco Suit
please see the Company's Annual Report on Form 10-K for 1997.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
On January 4, 1995, the Company acquired Tanon, a privately-owned
contract electronic manufacturing firm with operations located in Fremont,
California. In May 1996, the Company consolidated all of its contract electronic
manufacturing business into Tanon.
On August 5,1995, the Company entered into a Joint Venture Agreement
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.
In March, 1998, the Company acquired Boston area based Service
Assembly, Inc. ("SAI"), a privately held electronic manufacturing services
company engaged in custom engineering and prototype electronic manufacturing
operations. The consolidated financial statements include SAI's March 1998
results of operations. SAI is a wholly owned subsidiary of EA Industries, Inc.
and the first Tanon Express facility.
Results of Operations
During the first quarter of 1998, the Company's sales and cost of sales
increased in total value but cost of sales decreased as a percentage of sales.
Selling, general and administrative expenses decreased in total value and as a
percentage of sales. The Company had a net loss of approximately $1,464,000 for
the first quarter of 1998. Due to a change in the calendarization of the
reporting periods, the first quarter of 1998 was one full week shorter than the
comparable quarter last year.
The increase in sales to approximately $19,182,000 in the first quarter
of 1998 resulted primarily from an increase in sales to the existing customer
base and sales to several new customers partially offset by the decrease in
sales to the Company's largest customer, Advanced Fibre Communications ("AFC").
Sales to AFC during the first quarter were approximately $4.3 million, projected
sales to AFC during the second quarter are expected to be less than $1,000,000
and the Company is projecting no sales to AFC after the second quarter. Sales
volume to the existing customer base (excluding AFC) increased significantly
from the first quarter of 1997 as compared to the first quarter of 1998 and the
Company expects continued improvement (excluding AFC) for the remainder of 1998.
The Company also expects an increase in sales to new customers for the remainder
of 1998. During the fourth quarter of 1997 and the first quarter of 1998 the
Company obtained 11 new customers and management believes that by the end of the
year revenues from these new accounts will more than offset the lost revenues
from the projected termination of business from AFC. Many of these customers are
in the early stage of their product development and it is difficult to predict
how quickly their businesses will develop and, as a result, the timing of when
their order volume with Tanon will increase is also difficult to predict
precisely.
14
The improvement in marketing has resulted from, among other factors,
the following steps taken by the new management team in late 1997 and early
1998:
o Replacing of the President of the East Coast Operations with an executive
experienced in sales and marketing in the electronics industry.
o Hiring new sales executives at each facility.
o Replacing under-performing representative firms.
o Hiring additional representative firms to expand geographic sales coverage for
the Company.
o Establishing customer specific performance metrics to assure customer
satisfaction.
o Adding additional services to the Company's product mix such as "quick-turn"
and prototype services, depot maintenance, and engineering support services.
Each additional offering generates incremental sales, as well as strengthening
customer relationships.
o Establishing Tanon EXPRESS facilities in geographic concentrations of
potential customers.
o Enhancing relationships with several distributors of electronics parts to
cooperate in joint bids for work with the Company's existing and new
customers.
o Refining the process of selecting prospects so as to maximize sales.
o Involving the new Board of Directors in the process of customer referrals.
o Signing marketing agreement with WKK Holdings (America), Inc.
o Automating the quotation process to handle a much larger volume of customer
requests for quotes at a much faster speed.
Cost of sales increased to approximately $18,268,000 in the first
quarter of 1998 from approximately $14,460,000 in the same quarter in 1997 but
decreased as a percentage of revenue to 95.2% in the first quarter of 1998
compared with 98.9% in the same period in 1997. A large percentage of cost of
sales consists of fixed costs and, as a result, cost of sales as a percentage of
revenue decreases as revenue increases. Gross profit was approximately $914,000
for the first quarter of 1998, compared to approximately $165,000 for the same
period in 1997, reflecting the significant increase in sales for the first
quarter of 1998.
Selling, general and administrative expenses decreased to approximately
$1,756,000 in the first quarter of 1998, from approximately $1,901,000 in the
same quarter of 1997. The decline was primarily a result of decreased holding
company expenses in the first quarter of 1998 as compared to the same period in
1997. Selling, general and administrative expenses as a percentage of revenue
decreased to 9.2% in the first quarter of 1998 as compared to 13.0% for the same
period in 1997.
Interest expense was approximately $659,000 in the first quarter of
1998 compared to approximately $850,000 in the first quarter of 1997. The
decline is primarily attributable to a decrease in aggregate interest and other
charges in 1998 related to borrowings and convertible securities issued by the
Company, and declining balances and corresponding declines in interest charges
on capital leases offset by a slight increase in revolving credit borrowings.
Other (income)/expense, net in the first quarter of 1998 included (i)
$75,000 from the sale of warrants to purchase common stock of Aydin Corporation
("Aydin") (NYSE:AYD), (ii) approximately $36,000 from the gain on the sale of
excess capital equipment, and (iii) other income of $26,000. In the first
quarter of 1997, there was a write-off of expenses of approximately $93,000
related to the
15
Company's investment in BarOn Technologies, Ltd. offset by a gain on the sale of
excess capital equipment of $68,000.
The Company's consolidated backlog at March 28, 1998 was approximately
$50,894,000, as compared to approximately $31,822,000 for the same period in
1997. 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 Company's
customers to ultimate consumers change. The amount of inventory produced and
stored on behalf of customers also varies from time to time. Consequently, the
Company's backlog at the end of a period is not necessarily indicative of future
shipments to those customers.
Liquidity and Capital Resources
Liquidity, as discussed below, is measured in reference to the
consolidated financial position of the Company at March 28 1998 as compared to
the consolidated financial position of the Company at December 31, 1997. Net
cash used by operations of $552,000 in the first three months of 1998 decreased
by $1,447,000 from cash used in operations of $1,999,000 in the same period in
1997. The decrease in net cash used by operations was primarily the result of
the decrease in inventories, offset with a related reduction in accounts
payables.
Liquidity, as measured by cash and cash equivalents, increased to
$1,054,000 at March 28, 1998 from $595,000 at December 31, 1997. Liquidity as
measured by working capital, was a negative $15,878,000 at March 28, 1998 as
compared with a negative working capital of $16,787,000 at December 31, 1997.
The increase in working capital was primarily a result of the significant
reduction in accounts payables and accrued expenses by approximately $4,100,000,
the reduction in the current portion of convertible debentures by approximately
$700,000, offset by a decrease in inventories of approximately $3,800,000 and a
slight increase in the amount borrowed under the Schroder Loan Facility. The
Company's ability to generate internal cash flows results primarily from the
sales of its contract electronic manufacturing services. For the first quarter
of 1998, revenue from contract manufacturing services increased by $4,557,000
from $14,625,000 in the same period in 1997. Accounts receivable increased
slightly in the first quarter while inventory decreased by approximately
$3,800,000 as a result of the Company's plan to increase inventory turns during
the year by ordering materials only to the extent such ordering is based on firm
customer orders.
Cash flows from financing activities during the first quarter of 1998
were $1,441,000 resulting primarily from the exercise of Class A and Class B
Warrants for $1,081,000, and an increase in borrowing under the Schroder Loan
Facility of approximately $500,000.
Net cash in the amount of $281,000 was used for investing activities
for the first quarter of 1998. Funds were utilized for capital equipment
purchases for the Company's New Jersey facility.
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. The Schroder Loan Facility
prohibits Tanon from distributing or loaning cash generated by contract
manufacturing to EAI, except in certain very limited
16
circumstances. At March 28, 1998, $9,175,000 was outstanding under the Schroder
Loan Facility which represented approximately 80% of the funds available,
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 tangible net worth. At March
28, 1998, Tanon was in compliance with all of these requirements, except the
required minimum tangible net worth. The Company has requested that Schroder
waive such requirement for March 28, 1998. Based on the Company's current
projections, the Company will not be able to meet this requirement at the end of
the second quarter of 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.
All of the convertible securities issued by the Company are currently
due within one year. At March 28, 1998 this included certain 6% Notes, the
Convertible Notes, and the Amended Series A Notes, representing approximately
$10.8 million in debt. Approximately $1.3 million of these Notes have been
converted into equity in accordance with their terms and at May 4, 1998
approximately $10,250,000 of the Company's convertible debt is due within one
year and no portion of this debt was due on demand. The Company also expects all
of these notes to be converted into equity in accordance with their terms.
A portion of the Company's strategy is to acquire or internally develop
additional sites for Tanon Express facilities. In addition, in the past few
years, the Company has periodically extended the time in which it pays its
accounts payables 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 acquisitions, for operating contingencies
and to bring the Company's timing on payment of accounts 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 quarter of this year in
order to accomplish these goals.
The Company's financial projections indicate that operating losses and
negative cash flow for the Company as a whole will continue through the second
quarter of 1998. The Company is also forecasting an increase in sales during the
remainder of 1998 resulting from the Company's recent success in attracting new
customers as well as retaining existing customers. Management believes that,
even if it does not raise such additional capital the expected increase in sales
will result in an improvement in cash flows from operations, and that such
improved cash flow, along with available funds under the Schroder Loan Facility
together with its available capital resources will be sufficient to fund its
ongoing operations in a fashion consistent with its past practices, excluding
any acquisitions made with cash. No assurance can be given that such a sales
increase will occur or be reflected in the Company's operating results.
The Company's projections with respect to cash needs are based on its
forecasts of the results of operations at Tanon and expenses of EAI. If the
Company's results of operations are significantly below forecasts, or expenses
at EAI are greater than expected, this would raise doubts about the Company's
ability to continue its operations without raising additional capital or a
significant restructuring, which could include a major reduction in general and
administrative expenses and liquidation of assets involving the sale of all or
part of Tanon. There can be no assurance that such restructuring would enable
the Company to continue its operations or that the Company would be successful
in raising additional capital.
The Company has incurred significant losses and had negative cash flows
from operations for the last seven years and the three months ended March 28,
1998. The Company's independent public
17
accountants 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 Company's 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.
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 $38 million from December, 1995
through April 10, 1998 from the sale of convertible notes and debentures, the
exercise of stock options and warrants, and the sale of the shares of common
stock of Aydin held by the Company.
The following is a listing of currently outstanding convertible
securities and their terms:
The Convertible Notes
Certain notes in the aggregate principal amount of $2,498,291 held by
the former Chairman of its Board of Directors, certain trusts benefiting his
family and an unaffiliated investor. These notes (the "Convertible Notes") do
not bear interest and have a maturity date of December 31, 1998. They are
convertible at a conversion price equal 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. The terms of the Convertible Notes were
approved by the vote of the shareholders of the Company. Conversion of the notes
is subject to approval by the New York Stock Exchange ("NYSE") of the listing on
the NYSE of the shares issuable upon such conversion. In consideration of prior
amendments to such notes 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 Convertible Notes. The terms of the Gross Warrants were approved by the
vote of the shareholders of the Company. Exercise of the Warrants is subject to
approval by the NYSE of the listing on the NYSE of the shares issuable upon such
exercise. The Holders were also granted demand and piggyback registration rights
for the Convertible Notes and the Gross Warrants.
The Series A Notes
18
Certain notes in the principal amount of $250,000 are held by an
unaffiliated investor (the "Original Notes"). The Original Notes bear interest
at the rate of 10% per annum and will mature on January 22, 1999 and are
convertible at the option of the holder (i) after January 1, 1998, into shares
of Common Stock of the Company at a conversion price of $3.50 per share, or (ii)
into shares of Common Stock of Tanon after completion of an initial public
offering of shares of Common Stock of Tanon at a conversion price equal to the
quotient of (a) twenty five million dollars ($25 million), divided by (b) the
number of shares of Common Stock of Tanon that were issued and outstanding at
the close of business on the day immediately prior to the effective date of the
registration statement covering the shares of Common Stock of Tanon offered in
such initial public offering, without giving effect to the number of shares of
Common Stock of Tanon being offered in such initial public offering.
Certain Series A Notes (the "Series A Notes") in the aggregate
principal amount $3,270,000 are held by the former Chairman of its Board of
Directors and certain trusts benefiting his family (the "Series A Holders"). The
Series A Notes bear interest at the rate of 10% per annum and will mature on
January 22, 1999 and are convertible at the option of the holder at a conversion
price equal 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. Interest payments may be made in cash or stock at the conversion
price at the option of the holders and the Company. The terms of the Series A
Notes and the Original Notes were approved by the vote of the shareholders of
the Company. Conversion of the notes is subject to approval by the NYSE of the
listing on the NYSE of the shares issuable upon such conversion. In
consideration of certain amendments agreed to by the holders the Company agreed
to issue to the 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 Series A Notes. The Series A
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. The terms of the Series A Warrants were
approved by the vote of the shareholders of the Company. Exercise of the
Warrants is subject to approval by the New York Stock Exchange ("NYSE") of the
listing on the NYSE of the shares issuable upon such exercise.
10% Series B Convertible Notes
In April and July 1997, the Company borrowed a total of $1,000,000 from
an investor who was not affiliated with the Company 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 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. As of the date
of this Report, $500,000 of these Notes has been converted into equity in
accordance with their terms.
19
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 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.
These 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 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 had 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% in one month's interest. As of the date of this
Report, note holders holding an aggregate of $2,300,000 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 issued warrants to purchase an
aggregate of 120,000 shares of Common Stock at a purchase price of $5.375 per
share for a six-month period beginning on the date the shares underlying such
warrants are covered by an effective registration statement under the Securities
Act of 1933, as amended. The Company has reversed the related one-time penalty
charges and penalty interest charges incurred in December 1997, totaling
approximately $236,000, for those Note Holders who waived the penalty charges,
reflecting said credit in Interest Expense for the three months ended March 28,
1998. In addition, the Company has charged Interest Expense for approximately
$133,000 representing the valuation of warrants issued to the aforementioned
Note Holders, determined by utilizing the Black-Scholes methodology. As of the
date of this Report, Note Holders representing an aggregate of approximately
$1.3 million have converted their notes into equity in accordance with the terms
of the Notes.
New York Stock Exchange
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 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, 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 April 1998. The NYSE has indicated that continued listing is dependent,
among
20
other factors, upon the Company achieving the results set forth in the business
plan submitted to the NYSE. The Company did not meet certain of the targets in
its business plan for the first quarter, as a result of the timing of certain
events. The Company has explained these departures from its business plan to the
NYSE. 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 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.
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 primarily upon the timing of
manufacturing orders and related shipments to customers. The operating results
for any particular quarter may not be indicative of results for any future
quarter.
21
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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.
The Company and Lemco have agreed to settle the Lemco Suit for the sum
of $8,500,000 (the "Settlement") and the Company has assigned to Lemco all of
its rights to be indemnified by the insurance carriers who have issued policies
covering claims of the type asserted in the Lemco Suit for the relevant time
periods. The Settlement is subject to final approval by the courts of New
Jersey, including all appeals, that (a) the Settlement is fair, reasonable and
non-collusive, (b) a determination that the carriers have policies of insurance
which would require them to act as indemnitors with respect to the claims
asserted in the Lemco Suit and to pay the Settlement and (c) a determination
that the indemnification is assignable to Lemco as part of the Settlement. If it
is determined by the courts that the carriers have defenses that would reduce
their obligations to an amount less than $8,500,000, then the Company would be
responsible to pay Lemco one third of the difference between the Settlement and
the amount awarded by the court to the carriers, up to a maximum of $333,333. If
the court determines that the responsibility of the carriers is less than
$7,500,000, Lemco at its sole discretion may void the Settlement. If Lemco
settles the claims against the carriers for less than $8,500,000, the Company
has no responsibility to pay Lemco any part of the difference. The Company has
agreed to cooperate with Lemco in obtaining court approval of the Settlement and
in prosecuting the claims against the carriers. On March 26, 1998, Lemco and the
Company petitioned the Superior Court of New Jersey, Law Division, Monmouth
County to approve the Settlement.
For further information including a more complete description of the
Lemco Suit please see the Company's Annual Report on Form 10-K for 1997.
ITEM 5. OTHER INFORMATION
SPECIAL STOCKHOLDERS MEETING
The following information is provided with respect to the Special
Stockholders Meeting of the Company.
(a) Held : April 14, 1998. Total number of shares eligible to vote
9,758,360.
(b) Matters voted on by Shareholders:
Proposal to approve amendments to the Convertible Notes held by the
former Chairman of the Board of Directors of the Company, certain trusts for the
benefit of members of his family and an unaffiliated investor and the issuance
of the Gross Warrants to purchase shares of Common Stock of the Company in
connection with such amendments.
22
Votes for the proposal 5,097,590
Votes against the proposal 172,713
Abstentions 62,241
Proposal to approve amendments to the 10% Series A Subordinated
Convertible Notes of the Company originally issued to the former Chairman of the
Board of Directors of the Company, certain trusts for the benefit of members of
his family and an unaffiliated investor, the issuance of the Series A Warrants
to purchase shares of Common Stock of the Company in connection with such
amendments and the terms of the Original Notes.
Votes for the proposal 5,103,482
Votes against the proposal 171,287
Abstentions 57,775
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
Exhibit 27, Financial Data Schedule
(b) The registrant filed the following Reports on Form 8-K during the
quarter for which this report is filed:
1. Form 8K filed on March 26, 1998 concerning Lemco litigation.
2. Form 8K filed on March 31, 1998 concerning adjournment to April 14, 1998 of
Special Meeting of Shareholders.
23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EA INDUSTRIES, INC.
(Registrant)
Date: May 12, 1998 By: /s/ James Crofton
-------------------------
James Crofton
Vice President-Finance
Chief Financial Officer
(Principal Financial and
Chief Accounting Officer)