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 June 27, 1998 Commission file number 1-4680
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EA INDUSTRIES, INC.
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(Exact Name of Registrant as Specified in its Charter)
New Jersey 21-0606484
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(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
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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 No ___
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As of June 27, 1998, there were 13,306,935 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
(thousands of dollars)
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June 27, 1998 Dec. 31, 1997
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(unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 1,018 $ 595
Receivables, less allowance of $1,234 in 1998
and $1,020 in 1997 for doubtful accounts 9,930 12,666
Inventories 8,637 13,175
Prepaid expenses and other assets 443 881
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TOTAL CURRENT ASSETS 20,028 27,317
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Equipment and leasehold improvements 20,952 19,201
Less accumulated depreciation (9,298) (8,397)
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11,654 10,804
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Other Investments held for sale -- 1,050
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Intangible assets 13,261 10,573
Less accumulated amortization (2,785) (2,452)
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10,476 8,121
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Other assets 914 570
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$ 43,072 $ 47,862
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Revolving Credit Facility $ 7,678 $ 8,654
Current portion of Capital Lease Obligations 1,429 1,839
Current portion of Convertible Notes and Debentures 8,385 12,767
Accounts payable 13,839 15,793
Accrued expenses 3,897 5,051
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TOTAL CURRENT LIABILITIES 35,228 44,104
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Long-Term Liabilities:
Long-term portion of Capital Lease Obligations 3,115 2,975
Convertible Notes and Debentures -- 1,000
Mortgage Note Payable 435 --
Accrued excess leased space costs -- 314
Other long-term liabilities 1,059 570
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TOTAL LONG-TERM LIABILITIES 4,609 4,859
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TOTAL LIABILITIES 39,837 48,963
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Shareholders' Equity (Deficit):
Common Stock 101,234 90,270
Accumulated Deficit (97,999) (91,307)
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3,235 (1,037)
Less common stock in treasury, at cost -- (64)
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TOTAL SHAREHOLDERS' EQUITY (DEFICIT) 3,235 (1,101)
========= =========
$ 43,072 $ 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)
Ouarter Ended Six Months Ended
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June 27, June 28, June 27, June 28,
1998 1997 1998 1997
----------- ---------- ----------- ----------
Net Sales $ 12,840 $ 16,677 $ 32,022 $ 31,302
----------- ---------- ----------- ----------
Cost of Sales 13,973 16,751 32,148 31,211
Selling, general and
administrative expenses 2,293 3,426 4,142 5,326
Research and development 170 -- 272 --
----------- ---------- ----------- ----------
Total 16,436 20,177 36,562 36,537
----------- ---------- ----------- ----------
Loss from operations (3,596) (3,500) (4,540) (5,235)
----------- ---------- ----------- ----------
Interest expense 529 3,478 1,188 4,328
Interest Income (2) (17) (4) (25)
Other expenses 1,105 275 968 301
----------- ---------- ----------- ----------
Net Loss $ (5,228) $ (7,236) $ (6,692) $ (9,839)
=========== ========== =========== ==========
Loss per common share $ (0.41) $ (0.93) $ (0.58) $ (1.29)
=========== ========== =========== ==========
Weighted average common
shares outstanding 12,699,933 7,783,262 11,523,502 7,614,003
=========== ========== =========== ==========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
EA INDUSTRIES, INC. AND SUBSIDIARIES
Consolidated Condensed Statement of Shareholders' Equity
For The Six Months Ended June 27, 1998
(UNAUDITED)
(thousands of dollars)
Common Stock Treasury Stock Accumulated Deficit
------------ -------------- -------------------
Shares Amount Shares Amount
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Balance December 31, 1997 9,438,613 $ 90,270 (7,369) $(64) $(91,307)
Net Loss (6,692)
Issuance of Common Stock
SAI Acquisition 1,069,257 3,742
Exercise of stock options 74,267 266
Value of Warrants Issued in
connection with Financing -- 159
Debt conversion 2,479,510 5,374
Value of Shares issued for Services 64,405 173 7,369 64
Exercise of Class A and B Warrants 180,883 1,226
Other -- 24
---------- -------- ----- ---- --------
Balance, June 27, 1998 13,306,935 $101,234 0 0 $(97,999)
========== ======== ===== ==== ========
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)
Six Months Ended
----------------
June 27, 1998 June 28, 1997
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Cash Flows from Operating Activities:
Net Loss $(6,692) $(9,839)
Adjustments to reconcile net loss to net
cash provided/(used) by operating activities:
Depreciation and amortization 1,476 1,580
Non-cash interest charges 7 73
Value of warrants issued in connection with financing 159 990
Value of shares issued for services 237 87
Value of options granted for services -- 589
Discount on Convertible Subordinated Debentures -- 1,761
Value of Convertible Debentures issued for services -- 315
Gain on Sale of Aydin Corp. Common Stock -- (820)
Write-off of Investment-EATI 1,050 --
Cash provided/(used) by changes in:
Receivables 3,158 2,095
Inventories 4,538 (932)
Prepaid expenses & other assets 445 (76)
Accounts payable and accrued expenses (3,296) (4,254)
Accrued excess leased space costs (314) (293)
Other operating items- net 138 (49)
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Net cash provided/(used) by operations 906 (8,773)
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Cash flows from Investing Activities:
Capital Expenditures (728) (2,216)
Net proceeds from sale of Aydin Corp. Common Stock -- 6,425
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Net cash provided/(used) by investing activities (728) 4,209
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Cash flows from Financing Activities:
Net borrowings/(repayments) under credit facilities (976) (1,057)
Net proceeds/(repayments) from capital leases (271) 976
Net proceeds from convertible subordinated debt -- 7,250
Proceeds from the exercise of stock options 266 10
Net proceeds from exercise of warrants 1,226 700
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Net cash provided/(used) by financing activities 245 7,879
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Net Increase/(Decrease) in Cash and Cash Equivalents 423 3,315
Cash and Cash Equivalents at Beginning of Period 595 461
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Cash and Cash Equivalents at End of Period $ 1,018 $ 3,776
======= =======
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)
Six Months Ended
----------------
June 27, 1998 June 28, 1997
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Supplemental disclosure of cash flow information:
Cash paid during the period for interest $1,347 $1,017
====== ======
Non cash financing activities:
Conversion of debt to equity $5,374 $3,708
Imbedded interest on Convertible Debentures -- 1,761
Value of stock issued in connection with acquisitions 3,742 --
Value of Warrants issued in connection with Financings 159 990
Value of Options granted for services -- 589
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TOTAL $9,275 $7,048
====== ======
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
subsidiaries, Tanon Manufacturing, Inc. ("Tanon") and Service Assembly, Inc.
("SAI"), 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 whole, or in part, as the manufacturing function of its customers.
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 June 27, 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. The investment in Electronic Associates Technologies Israel, Ltd.
("EATI"), an unconsolidated subsidiary which was held for sale, and was
reflected in the 1997 year end financial statements at $1,050,000, its estimated
net realizable value, was written-off during the second quarter of 1998. The
Company has had a series of discussions with its partners in EATI regarding the
dissolution of EATI or the sale of the Company's interest in EATI. Based on
those discussions management of the Company concluded at the end of the second
quarter of 1998 that it was unlikely that the Company would recover any material
portion of its investment in EATI. The write-off is reflected in Other Expenses
in the Consolidated Financial Statements.
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.
Statement No. 128, "Earnings Per Share, and "Statement No. 130, "Reporting
Comprehensive Income," have had no impact, and Statement No. 133, "Accounting
for Derivative Instruments and Hedging Activities," promulgated by the Financial
Accounting Standards Board will have no impact on the Company's financial
position or results of operations.
The Company operates on a 52 week year, with each fiscal week ending on a
Saturday, except for the fourth quarter which ends on December 31.
7
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. At June 27, 1998, the Company had outstanding convertible notes and
securities convertible into approximately 3,604,000 shares of its Common Stock
as of that date, warrants to purchase approximately 2,701,000 shares of its
Common Stock and outstanding options to purchase approximately 4,300,000 shares
of its Common Stock.
(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 June 27, 1998, $7,678,000 was outstanding under the
Schroder Loan Facility which represented approximately 67% of the total
($11,500,000) facility, and 86% of the borrowings allowed based on collateral
existing at the time. 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 June
27, 1998, Tanon was not in compliance with certain of these requirements,
including the requirement to maintain a minimum tangible net worth, the
requirement to meet a set ratio of current assets to current liabilities, the
requirement to maintain a minimum net worth, and the requirement to meet a set
ratio of fixed charge coverage. The Company has requested that Schroder waive
such requirements for June 27, 1998 and has requested that Schroder adjust these
requirements to reflect the operations of Tanon contained in the current
business plan of Tanon for 1998.
On July 20, 1998, the Company completed a private placement of 6% Convertible
Notes (the "Notes") in the aggregate principal amount of $4,000,000. The Notes
have the following terms: (i) a three year term, with a maturity date of July
16, 2001, (ii) an interest rate of 6% per annum, payable in shares of Common
Stock of the Company as and upon conversion, (iii) convertible (a) in the first
90 days after issuance, and for conversions exceeding certain volume
limitations, at 100% of the last closing bid price ("Closing Bid Price") of the
Company's Common Stock (the "Common Stock") on the New York Stock Exchange
("NYSE") on the trading day immediately preceding a conversion or (b) in other
cases, at 85% of the Market Price (as defined in the Notes) on the date of
conversion, (iv) a maximum conversion price in each case initially equal to
$4.125 per share and reset to the lower of $4.125 per share or the lowest
Closing Bid Price during the 20 trading days ended on January 15, 1999, (v)
adjustments to the conversion formulae for major changes in the Company's
capital structure such as stock splits, (vi) restrictions on the Company`s
rights to raise additional capital in excess of one million dollars for one
year, (vii) a one year right of first refusal for the placement agent to conduct
future offerings and for the holders of the Notes to be investors, (viii) a
right by the Company if a conversion price would be at or below $2.00 per share
to satisfy conversion with cash equivalent to the market price of the number of
shares of Common Stock which would have been received on conversion with minimum
payment equal to 110% of the converted principal plus interest and a maximum
payment of 130% of the converted principal plus interest, (ix) a right of the
holders if the Company concludes a major transaction such as certain mergers or
asset sales, to require prepayment of the Notes at 125% of outstanding principal
and interest or at an amount equal to the value of the stock which would have
been received upon a conversion before the announcement of the transaction, (x)
may trigger an event of default if the Common Stock is not tradeable on the
NYSE, the American
8
Stock Exchange, the NASDAQ National Market System or the NASDAQ Small Cap
market. and (xi) other provisions typically found in convertible notes.
The Company currently has approximately $12.4 million in outstanding convertible
securities. As of June 27, 1998 approximately $8.4 million of convertible
securities issued by the Company were due within one year.
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 six months ended June 27, 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 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 is being accounted for as a
purchase, effective March 1, 1998. The Company has estimated the fair value of
the assets acquired and intends to obtain an appraisal and adjust that estimate
if necessary. Goodwill in the amount of $2,089,000 was recorded, and is being
amortized over a 20 year period.
SAI is being operated as a Tanon Express facility and its results of operations
from March 1, 1998 forward have been included in the Consolidated Financial
Statements for the period ended June 27, 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.
9
(4) Contingencies
The Company on a regular basis reviews and updates its public disclosure with
respect to the following 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 property (the "Site") sold to Lemco by the
Company and seeking damages in unspecified amounts.
The Company and Lemco had agreed in March, 1998 to settle the Lemco Suit for the
sum of $8,500,000 (the "Settlement") with the Company assigning 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 was to be subject to final approval by the courts of New
Jersey, including all appeals. In July 1998, Lemco, the Company, and the
Company's general liability insurers for the relevant time periods (the
"Insurers") agreed in principle to a new settlement (the "Final Settlement").
The Final Settlement would provide for (i) voiding of the Settlement, (ii) a
dismissal with prejudice of the Lemco Suit, (iii) remediation of any
environmental contamination at the Site at the expense of Lemco, (iv) waiver by
the Company of any future claims under the insurance policies issued by the
Insurers based on environmental contamination, (v) settlement payments by the
Insurers to Lemco or related parties, and (vi) no payment by the Company to
Lemco or the Insurers and no further reimbursement to the Company of fees or
expenses incurred by the Company. The Company expects that the remaining
expenses to be incurred by the Company in connection with the Lemco Suit will
not exceed the remaining reserves on the Company's financial statements.
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.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations
EA Industries, Inc., a New Jersey corporation formerly known as
"Electronic Associates, Inc." ("EAI" or the "Company"), through its wholly-owned
subsidiaries, Tanon Manufacturing, Inc. ("Tanon") and Service Assembly, Inc.
("SAI"), 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 whole, or in part, as the manufacturing function of its customers.
During the first six months of 1998, the Company's sales and cost of
sales increased in total value compared to the same period in 1997. Cost of
sales as a percentage of sales was basically the same for both six month
periods. Selling, general and administrative expenses decreased in total value
and as a percentage of sales compared to the same period in 1997. The Company
had a net loss of approximately $6,692,000 for the first six months of 1998 as
compared to a net loss of approximately $9,839,000 for the same period in 1997.
The increase in sales to approximately $32,022,000 in the first six
months of 1998 resulted primarily from the inclusion of SAI's sales
($1,029,000), for the period of March 1, 1998 forward. There was a decrease in
Tanon's sales for the first six months of 1998 as compared to the same period in
1997, primarily caused by the decrease in sales to the Company's largest
customer in 1997, Advanced Fibre Communications ("AFC"). The Company's sales of
$12,840,000 in the second quarter of 1998 decreased from $16,677,000 during the
same period in 1997 also as a result of the decreased sales to AFC. Sales to AFC
were approximately $5,000,000 in the first quarter of 1997 and $ 6,600,000 in
the second quarter of 1997 as compared to approximately $4.3 million for the
first quarter of 1998 and $400,000 for the second quarter of 1998. The Company
does not expect to make any sales to AFC after the second quarter of 1998.
During the fourth quarter of 1997 and the first half of 1998 the
Company obtained 11 new customers and management believes that by the end of the
year on a run rate basis revenues from these new accounts will more than offset
the lost revenues from AFC. It is difficult to predict how quickly the
businesses of these new customers will grow and, as a result, the timing of
Tanon's increased revenue from these customers is also difficult to predict
precisely. The improvement in obtaining new customers resulted from, among other
factors, a number of steps taken by the new management team in late 1997 and
early 1998 including (i) replacing of the President of the East Coast Operations
with an executive experienced in sales and marketing in the electronics
industry, (ii) hiring new sales executives at each facility and (iii) adding
additional services to the Company's product mix, such as those provided by the
Tanon EXPRESS facilities.
Cost of sales in the first six months of 1998 was approximately equal
to Net Sales for the first half of 1997 and 1998. Gross profit was approximately
($126,000) for the first six months of 1998, compared to approximately $91,000
for the same period in 1997, reflecting the decline in sales for the first six
months of 1998. As a result of expense reductions implemented in late 1997 and
continued in 1998 the Company has significantly lowered its break-even level.
Selling, general and administrative expenses decreased to approximately
$4,142,000 (12.9% of revenues) in the first six months of 1998, from
approximately $5,326,000 (17.0% of revenues) in the first half of 1997. Selling,
general and administrative expenses decreased to approximately $2,293,000 (17.9%
of revenues) in the second quarter of 1998 from $3,426,000 in the second quarter
of 1997 (20.5% of revenues). The decrease in such expenses is primarily
attributable to a charge to selling, general and administrative expenses in the
11
first six months of 1997 in the amount of $1,260,000 representing the charge for
restructuring in connection with changes in the Company's Board of Directors and
senior management, as well as a slight decline in holding company expenses in
the first six months of 1998 as compared to the same period in 1997.
Interest expense was approximately $1,188,000 in the first six months
of 1998 compared to approximately $4,328,000 in the first six months of 1997.
Interest expense for the first half of 1997 included one time charges of
approximately $2,876,000 which were not repeated in 1998 . The other reasons
for the reduction in interest expense in 1998 are (i) lower interest and other
charges related to borrowings and convertible securities, and (ii) lower
interest costs on capital leases, offset by (iii) a slight increase in revolving
credit borrowings in 1998. Interest expense for the second quarter of 1998 was
$529,000 as compared to $3,478,000 for the same period in 1997 largely as a
result of these same factors.
Other expenses in the first six months of 1998 included the write-off
of the investment in the Israeli joint venture ("EATI"), of $1,050,000 and other
minor offsetting expenses and gains unrelated to the Company's core business.
The Company has had a series of discussions with its partners in EATI regarding
the dissolution of EATI or the sale of the Company's interest in EATI. Based on
those discussions management of the Company concluded at the end of the second
quarter of 1998 that it was unlikely that the Company would recover any material
portion of its investment in EATI in the near future. In the first six months of
1997, there was a write-off of expenses of the non-refundable deposit of
$1,020,000 paid to Tri-Star, a gain on the sale of the Company's investment in
Aydin Corporation of ($821,000) and other minor offsetting expenses and gains
mainly unrelated to the Company's core business.
The Company's consolidated backlog at June 27, 1998 was approximately
$45,113,000, as compared to approximately $46,416,000 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 the
amount or timing of future shipments to those customers.
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. In addition, 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.
12
Liquidity and Capital Resources
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 circumstances. At June 27,
1998, $7,678,000 was outstanding under the Schroder Loan Facility which
represented approximately 67% of the total ($11,500,000) facility. This
represented 86% of the funds available based on the then existing collateral,
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 June 27,
1998, Tanon was not in compliance with certain of these requirements, including
the requirement to maintain a minimum tangible net worth, the requirement to
meet a set ratio of current assets to current liabilities, the requirement to
maintain a minimum net worth, and the requirement to meet a set ratio of fixed
charge coverage. The Company has requested that Schroder waive such requirements
for June 27, 1998 and has requested that Schroder adjust such requirements to
reflect the operations of Tanon contained in the current business plan of Tanon
for 1998.
During the second quarter of 1998, the Company incurred significant
expenses in preparation for the start-up of volume production for new customers.
It is difficult to predict how quickly the businesses of these new customers
will grow and, as a result the timing of Tanon's increased revenue from these
customers is also difficult to predict precisely. During the second quarter of
1998, the Company's sales to these customers were delayed significantly beyond
the dates forecast by the Company. In addition, a number of the Company's
current customers are development stage companies or have products in their
development stage. As a result, these companies often have unpredictable
internal cash flows, have significant difficulty in predicting the engineering
difficulties in designing their products for volume production and may be
dependent on obtaining additional financing. These factors often result in such
customers delaying the placement of orders to Tanon from time to time, request
that Tanon delay shipping and billing for finished products, and may require
extended payment terms. Such events increase the working capital required to
support these customers. In addition, if such delays are extended beyond ninety
days the corresponding receivables are not eligible for borrowing under the
Schroder Loan Facility. During the second quarter of 1998, the Company also made
substantial investments in the software development conducted by its subsidiary,
SupplyPoint Solutions, Inc. Finally, from time to time during the past few
years, and in the first half of 1998, 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. As a result of all of these factors, during the second quarter of
1998, the Company had sporadic difficulty in obtaining parts from certain
vendors and this resulted in additional delays in shipments by the Company which
exacerbated the Company's liquidity problems.
Management of the Company concluded that it would be advisable to
increase its capital resources that would be available for operating
contingencies, to bring the Company's timing on payment of accounts payables to
a level more consistent with standard practice in its industry and for other
working capital needs. As a result the Company completed a private placement of
convertible securities in the aggregate of $4.0 million on July 20, 1998.
The Company's projections forecast 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 and additional expense reductions.
Management believes that such improvements in 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. No assurance can be
given that the forecasted sales increase and expense reductions will occur, such
funds will remain available or that other negative events will not occur, or
that the forecasted improvements will be reflected in the Company's operating
results.
13
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.
Liquidity, as discussed below, is measured in reference to the
consolidated financial position of the Company at June 27, 1998 as compared to
the consolidated financial position of the Company at December 31, 1997.
Liquidity, as measured by cash and cash equivalents, increased to $1,018,000 at
June 27, 1998 from $595,000 at December 31, 1997. Liquidity as measured by
working capital, was a negative $15,200,000 at June 27, 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 $3,296,000, the reduction in the
current portion of convertible debentures by approximately $4,382,000, offset by
decreases in accounts receivables and inventories of approximately $3,158,000
and $4,538,000, respectively. In addition, the Company received proceeds from
the exercise of warrants and stock options of $1,492,000 offset by the reduction
in the Schroder loan of $976,000 and capital expenditures of $728,000. The
Company's ability to generate internal cash flows results primarily from the
sales of its contract electronic manufacturing services. For the first six
months of 1998, revenue from contract manufacturing services increased slightly
by $720,000 from $31,302,000 in the same period in 1997. Accounts receivable
decreased significantly in the first six months of 1998 reflecting the decreased
sales during the second quarter of 1998. Inventory also decreased significantly
by approximately $4,500,000 primarily as a result of the Company's plan to
increase inventory turns during the year by delaying the ordering of materials
until the Company has a firm customer order requiring such materials.
Cash flows from financing activities during the first six months of
1998 were $245,000 resulting primarily from proceeds from the exercise of Class
A and Class B Warrants of $1,226,000, and a decrease in borrowing under the
Schroder Loan Facility of approximately $976,000.
Net cash in the amount of $728,000 was used for investing activities
for the first six months of 1998. Funds were utilized for a new Genrad 2287L
Test System for the Company's New Jersey facility.
The Company currently has approximately $12.4 million in outstanding
convertible securities. At August 6, 1998 approximately $8,385,000 of the
Company's convertible debt is due within one year.
A portion of the Company's strategy is to acquire or internally develop
additional sites for Tanon Express facilities. The Company requires capital for
expansion of its business through development of existing and new customers,
acquisition and development of additional sites for Tanon Express facilities,
and the development of Supply Point Solutions.
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 six months ended June 27, 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 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
14
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.
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 $42 million from December, 1995
through August 6, 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:
GFL Financing
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 unaffiliated investors. Those notes were subsequently sold to the
then chairman of the Company and certain trusts benefiting his family. The notes
were later amended and as a result the holders of such notes at the current time
hold notes (the "GFL Notes") in the aggregate principal amount of $2,498,291
with a maturity date of December 31, 1998. The GFL Notes are non-interest
bearing and are convertible into Common Stock of the Company on or before
maturity 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 trading days immediately preceding the date of notice of
conversion to the Company or (b) $5.00. The holders of the GFL Notes also hold
five year warrants (the "GFL Warrants") to purchase an aggregate of 483,393
shares of Common Stock at an exercise price of $5.00 per share. The Company has
agreed to include the shares issuable upon conversion of the GFL Notes and
exercise of the GFL Warrants in a registration statement to be filed under the
Securities Act of 1933, as amended (the "Securities Act").
Series A Notes
During the period beginning on October 25, 1996 and ending on April 10,
1997, the Company borrowed an 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 of Tanon
Manufacturing, Inc. ("Tanon"), the Company's principal operating subsidiary.
The notes held by the Gross Series A Holders were subsequently amended
and as a result the holders of such notes at the current time hold notes (the
"Gross Series A Notes") in the aggregate principal amount of $3,270,000 plus
accrued interest of approximately $531,000. The Gross Series A Notes have a
maturity date of January 22, 1999 and bear interest at the rate of 10% per
annum, payable at the option of the Company or the
15
Holder in cash or Common Stock. The Gross Series A Notes are convertible into
Common Stock of the Company on or before maturity 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 trading days
immediately preceding the date of notice of conversion to the Company or (b)
$5.00. The holders of the Gross Series A Notes also hold five year warrants (the
"Series A Warrants") to purchase an aggregate of 632,700 shares of Common Stock
at an exercise price of $5.00 per share.
The Series A Investor continues to hold a 10% Series A Convertible Note
(the "Series A Note") in the principal amount of $250,000 issued by the Company
in January 1997. The Series A Note will mature on January 22, 1999 and is
convertible at the option of the holder (i) into shares of Common Stock of the
Company at a conversion price of $3.50 per share, or (ii) into shares of Common
Stock of Tanon, after completion of an initial public offering of shares of
Common Stock of Tanon at a conversion price equal to the quotient of (a) twenty
five million dollars ($25 million), divided by (b) the number of shares of
Common Stock of Tanon that were issued and outstanding at the close of business
on the day immediately prior to the effective date of the registration statement
covering the shares of Common Stock of Tanon offered in such initial public
offering, without giving effect to the number of shares of Common Stock of Tanon
being offered in such initial public offering.
The Company has agreed to include the shares issuable upon conversion
of the Series A Notes, the Gross Series A Notes and exercise of the Series A
Warrants in a registration statement to be filed under the Securities Act.
10% Series B Convertible Notes
In April and July 1997, the Company issued 10% Series B Convertible
Notes (the "Series B Notes") in the aggregate principal amount of $1,000,000. As
of July 31, 1998, there was $500,000 in remaining principal outstanding under
the Series B Notes and accrued interest of approximately $103,000. 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 prices described
above.
The Series B Notes will mature on January 22, 1999 and are convertible
at the option of the holder (i) 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 resale of shares of Common Stock
issuable upon conversion of the Series B Notes, are covered by a registration
statement which has been declared effective.
April 1997 Convertible Notes
In April 1997, the Company issued certain Convertible Notes in the
aggregate principal amount of $4,500,000 (the "1997 Convertible Notes"). In
addition, the Company issued a 1997 Convertible Note which was non-interest
bearing in the principal amount of $315,000 as a placement fee to an
unaffiliated party. The 1997 Convertible Notes bear interest at 6% per annum,
payable quarterly and mature on April 30, 1999. The 1997 Convertible Notes are
convertible at a conversion price per share equal to the lesser of (i)
seventy-six and one-half
16
percent (76.5%) of the average of the volume weighed 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 trading days immediately preceding the
date of notice of conversion to the Company, or (ii) $3.395. As of August 8,
1998, there was $1,559,220 in remaining outstanding principal on the April 1997
Convertible Notes.
6% Convertible Notes
On July 20, 1998, the Company completed a private placement of 6%
Convertible Notes (the "Notes") in the aggregate principal amount of $4,000,000.
The Notes have the following terms: (i) a three year term, with a maturity date
of July 16, 2001, (ii) an interest rate of 6% per annum, payable in shares of
Common Stock of the Company as and upon conversion, (iii) convertible (a) in the
first 90 days after issuance, and for conversions exceeding certain volume
limitations, at 100% of the last closing bid price ("Closing Bid Price") of the
Company's Common Stock (the "Common Stock") on the New York Stock Exchange
("NYSE") on the trading day immediately preceding a conversion or (b) in other
cases, at 85% of the Market Price (as defined in the Notes) on the date of
conversion, (iv) a maximum conversion price in each case initially equal to
$4.125 per share and reset to the lower of $4.125 per share or the lowest
Closing Bid Price during the 20 trading days ended on January 15, 1999, (v)
adjustments to the conversion formulae for major changes in the Company's
capital structure such as stock splits, (vi) restrictions on the Company`s
rights to raise additional capital in excess of one million dollars for one
year, (vii) a one year right of first refusal for the placement agent to conduct
future offerings and for the holders of the Notes to be investors, (viii) a
right by the Company if a conversion price would be at or below $2.00 per share
to satisfy conversion with cash equivalent to the market price of the number of
shares of Common Stock which would have been received on conversion with minimum
payment equal to 110% of the converted principal plus interest and a maximum
payment of 130% of the converted principal plus interest, (ix) a right of the
holders if the Company concludes a major transaction such as certain mergers or
asset sales, to require prepayment of the Notes at 125% of outstanding principal
and interest or at an amount equal to the value of the stock which would have
been received upon a conversion before the announcement of the transaction, (x)
may trigger an event of default if the Common Stock is not tradeable on the
NYSE, the American Stock Exchange, the NASDAQ National Market System or the
NASDAQ Small Cap market. and (xi) other provisions typically found in
convertible notes. The proceeds of the offering were used to provide additional
working capital for the Company, primarily to support the anticipated growth in
the Company's contract manufacturing operations.
In addition, as part of the offering of the Notes, the Company issued
warrants (the "Investor Warrants") to the holders of the Notes. The Investor
Warrants entitle the holders to purchase an aggregate of 900,000 shares of
Common Stock at a price of $3.1625 per share for a period of three years. As
part of the offering of the Notes the Company paid a cash placement fee of
$280,000 and issued certain warrants (the "Placement Agent Warrants") to the
placement agent for the Notes entitling the placement agent of the Notes to
purchase an aggregate of 102,857 shares of Common Stock at an initial price of
$2.625 per share, which price would be reset in certain cases, for a period of
five years. The placement agent is unrelated to the Company.
The Company relied on an exemption from the registration provisions of
the Securities Act of 1933, as amended (the "Act"), in connection with the
issuance of the Notes, the Placement Agent Warrants and the Investor Warrants.
The Company has agreed to file a registration statement on Form S-3 under the
Act for the resale of the shares on Form S-3 under the Act issuable upon
conversions under the Notes and upon exercise of the Investor Warrants and the
Placement Agent Warrants, and to cause the Registration Statement to become
effective on or before October 31, 1998. In addition the Company has granted a
security interest in the stock of Service Assembly, Inc. to the holders of the
Notes to secure the performance of the Company's obligations under the Notes and
the related agreements.
17
New York Stock Exchange
The Company's Common Stock is currently listed and traded on the NYSE,
however, on August 4, 1998, the New York Stock Exchange ("NYSE") announced that
effective on August 19, 1998 (or the date the Company is eligible for trading on
another system or exchange, if earlier) it would suspend trading in the Common
Stock of the Company (the "Stock") and recommend that the Stock be de-listed
from the NYSE. The Company is attempting to become eligible for trading on
another exchange or, alternatively, the National Association of Securities
Dealers Inc.'s OTC Bulletin Board Service (the "Bulletin Board") in the event it
is unable to do so before the suspension to prevent any gap between such
suspension and the start of trading on the Bulletin Board. Failure to become
eligible for trading on another exchange (other than the Bulletin Board) would
constitute a default under the 6% Notes, which permit the holders to cause
acceleration of such Notes in addition to other remedies including a 30%
penalty. This change in trading 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.
18
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company on a regular basis reviews and updates its public
disclosure with respect to the following 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 property (the "Site") sold to Lemco by the
Company and seeking damages in unspecified amounts.
The Company and Lemco had agreed in March, 1998 to settle the Lemco
Suit for the sum of $8,500,000 (the "Settlement") with the Company assigning 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 was to be subject to final approval by the
courts of New Jersey, including all appeals. In July 1998, Lemco, the Company,
and the Company's general liability insurers for the relevant time periods (the
"Insurers") agreed in principle to a new settlement (the "Final Settlement").
The Final Settlement would provide for (i) voiding of the Settlement, (ii) a
dismissal with prejudice of the Lemco Suit, (iii) remediation of any
environmental contamination at the Site at the expense of Lemco, (iv) waiver by
the Company of any future claims under the insurance policies issued by the
Insurers based on environmental contamination, (v) settlement payments by the
Insurers to Lemco or related parties, and (vi) no payment by the Company to
Lemco or the Insurers and no further reimbursement to the Company of fees or
expenses incurred by the Company. The Company expects that the remaining
expenses to be incurred by the Company in connection with the Lemco Suit will
not exceed the remaining reserves on the Company's financial statements.
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
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
Exhibit 10.1 Form of 6% Convertible Note. Incorporated by reference to Form
8-K dated July 20, 1998.
Exhibit 10.2 Form of Regulation D Subscription Agreement for 6% Convertible
Notes. Incorporated by reference to Form 8-K dated July 20, 1998.
Exhibit 10.3 Form of Registration Rights Agreement for holders of 6%
Convertible Notes. Incorporated by reference to Form 8-K dated July 20,
1998.
Exhibit 10.4 Form of Stock Pledge Agreement. Incorporated by reference to
Form 8-K dated July 20, 1998.
Exhibit 10.5 Placement Agent Agreement regarding 6% Convertible Notes.
Incorporated by reference to Form 8-K dated July 20, 1998.
Exhibit 10.6 Form of Investor Warrant. Incorporated by reference to Form
8-K dated July 20, 1998.
Exhibit 10.7 Form of Placement Agent Warrant. Incorporated by reference to
Form 8-K dated July 20, 1998.
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 8-K filed on March 31, 1998.
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: August 11, 1998 By: /s/ James Crofton
-----------------
James Crofton
Vice President- Finance
Chief Financial Officer
(Principal Financial and
Chief Accounting Officer)
20