<PAGE>
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
<TABLE>
<S> <C>
For the quarterly period ended July 1, 1995 Commission file number 1-4680
</TABLE>
ELECTRONIC ASSOCIATES, INC.
(Exact Name of Registrant as Specified in its Charter)
<TABLE>
<S> <C>
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)
</TABLE>
Registrant's telephone number, including area code: (908) 229-1100
Non-Applicable
Former name, former address and former fiscal year, if changed since last report
----------------------------------------------------------------
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
----------------------------------------------------------------
As of July 1, 1995, there were 11,111,411 outstanding shares of the
Registrant's common stock.
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ELECTRONIC ASSOCIATES, INC. AND SUBSIDIARIES
Consolidated Condensed Balance Sheet
(UNAUDITED)
(thousands of dollars)
<TABLE>
<CAPTION>
July 1, December 31,
1995 1994
------------------ ------------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 87 $ 6,157
Receivables, less allowance of $327
in 1995 and $207 in 1994 13,481 5,958
for doubtful accounts
Inventories 9,767 4,178
Prepaid expenses and other assets 705 676
-------------- ----------------
Total current assets 24,040 16,969
-------------- ----------------
Fixed assets 12,795 7,472
Less accumulated depreciation (5,424) (4,753)
-------------- ----------------
7,371 2,719
-------------- ----------------
Investment in affiliates 622 2,745
-------------- ----------------
Intangible assets 14,512 --
Less accumulated amortization (452) --
-------------- ----------------
14,060 --
-------------- ----------------
Other Assets 301 412
Note receivable 1,050 --
-------------- ----------------
$ 47,444 $ 22,845
============== ================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term liabilities $ 10,786 $ 5,933
Accounts payable 14,160 4,711
Accrued expenses 1,673 1,959
-------------- ----------------
Total current liabilities 26,619 12,603
-------------- ----------------
Long-Term liabilities:
Long-term debt 1,144 690
Other long-term liabilities 2,632 2,308
-------------- ----------------
Total long-term liabilities 3,776 2,998
-------------- ----------------
Total liabilities 30,395 15,601
-------------- ----------------
Shareholders' Equity:
Common Stock 41,007 20,117
Accumulated deficit since January 1, 1986 (23,483) (12,398)
-------------- ----------------
17,524 7,719
Less common stock in treasury, at cost (475) (475)
-------------- ----------------
Total Shareholders' Equity 17,049 7,244
-------------- ----------------
$ 47,444 $ 22,845
=============== ================
</TABLE>
The accompanying notes are an integral part of these consolidated
condensed financial statements.
(2)
<PAGE>
ELECTRONIC ASSOCIATES, INC. AND SUBSIDIARIES
Consolidated Condensed Statement of Operations
(UNAUDITED)
(thousands of dollars, except per share data)
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
------------- ----------------
July 1, June 30, July 1, June 30,
1995 1994 1995 1994
------------ ------------ ------------- ---------------
<S> <C> <C> <C> <C>
Sales $18,178 $8,313 $37,233 $13,690
------------ ------------ ------------- -------------
Cost of Sales 18,111 7,300 37,061 12,362
Selling, general and
administrative expenses 2,037 1,061 4,195 1,912
Purchased research and
development (Note 3) -- -- 6,012 --
------------ ------------ ------------- -------------
Total 20,148 8,361 47,268 14,274
------------ ------------ ------------- -------------
Loss from operations (1,970) (48) (10,035) (584)
------------ ------------ ------------- -------------
Interest expense 350 163 678 288
Interest income (44) - (77) --
Other expense 208 - 449 --
------------ ------------ ------------- -------------
Net loss $(2,484) $(211) $(11,085) $(872)
============ ============ ============= =============
Loss per common share $(0.23) $(0.05) $(1.05) $(0.23)
============ ============ ============= =============
Average common shares
outstanding 10,976,330 4,127,862 10,608,804 3,767,846
============ ============ ============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated
condensed financial statements.
(3)
<PAGE>
ELECTRONIC ASSOCIATES, INC. AND SUBSIDIARIES
Consolidated Condensed Statement of Shareholders' Equity
For The Six Months Ended July 1, 1995
(UNAUDITED)
(in thousands of dollars)
<TABLE>
<CAPTION>
Accumulated
Common Stock Treasury Stock Deficit
------------ -------------- Since
Shares Amount Shares Amount January 1, 1986
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1994 8,326,056 $20,117 (218,476) $(475) $(12,398)
Net loss (11,085)
Issuance of stock:
Tanon acquisition 1,538,462 14,460
BarOn investment 127,592 1,000
Exercise of stock options 413,204 790
Exercise of Class C warrants 383,861 1,734
Shares sold in exempt offering 540,712 2,906
-----------------------------------------------------------------------------------------
Balance, July 1, 1995 11,329,887 $41,007 (218,476) $(475) $(23,483)
=========================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated
condensed financial statements.
(4)
<PAGE>
ELECTRONIC ASSOCIATES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
(UNAUDITED)
(thousands of dollars)
<TABLE>
<CAPTION>
Six Months Ended
---------------------------------------
July 1, June 30,
1995 1994
-------- ---------
<S> <C> <C>
Cash Flows from Operating $ (11,085) $ (872)
Activities:
Net loss
Adjustment to reconcile net income (loss) to net
cash provided (used) by operating activiities:
Depreciation and amortization 1,123 453
Purchased research and development 6,012 --
Equity in loss of affiliate 337 --
Cash provided (used) by changes in:
Receivables 1,385 (1,647)
Inventories (807) (1,355)
Prepaid expenses & other assets 667 --
Accounts payable and accrued expenses 1,270 1,201
Accrued excess leased space costs (213) (135)
Other operating items - net 29 (149)
---------- ----------
Operating cash flow from continuing operations (1,282) (2,504)
Operating cash flow from discontinued operations -- 23
---------- ----------
Net cash used by operating actives (1,282) (2,481)
---------- ----------
Cash flows from Investing Activities:
Capital expenditures, net (3,199) (74)
Investment in affiliates (5,431) --
Cash acquired in purchase of Tanon 890 --
Proceeds from the sale of discontinued operations 200 200
---------- ----------
Net cash provided/(used) by investing activities (7,540) 126
---------- ----------
Cash flows from financing activities:
Net borrowings/(repayments) under line of credit (1,271) 1,782
Principal repayments of long-term debt (407) (329)
Proceeds from the exercise of stock options or rights 790 20
Issuance of note receivable in connection with acquisition (1,000) --
Net proceeds from sale of common stock (exempt offerings)
and exercise of warrants 4,640 957
---------- ----------
Net cash provided by/(used for) financing activities 2,752 2,430
---------- ----------
Net increase/(decrease) in cash and cash equivalents (6,070) 75
Cash and cash equivalents at beginning of period 6,157 64
---------- ----------
Cash and cash equivalents at end of period $ 87 $ 139
========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 438 $ 222
========== ===========
Noncash investing and financing activities:
Acquisition of business
Fair value of assets acquired, excluding cash $28,960
Liabilities assumed (15,390)
Common stock and options issued (14,460)
----------
Cash acquired $ 890
===========
</TABLE>
Additional common stock valued at $1 million
was issued in connection with the purchase of a minority interest.
The accompanying notes are an integral part of these consolidated
condensed financial statements.
(5)
<PAGE>
ELECTRONIC ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
(1) Basis of Presentation
The condensed financial statements included herein have been
prepared by Electronic Associates, Inc. ("EAI" or 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, as amended on Form 10-K/A, for the year ended December 31,
1994. 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 periods. Results of operations for the interim
periods are not necessarily indicative of results of operations
expected for the full year.
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.
Certain amounts and captions in the 1994 financial statements
have been reclassified in a manner consistent with the
presentation of the 1995 financial statements.
Loss per share amounts have been computed based on the weighted
average number of common shares outstanding. Shares issuable upon
the exercise of stock options and warrants have not been included
in per share computations, because their impact would have been
antidilutive in each period.
(2) Operations and Liquidity
At the end of fiscal year 1994, the Company was in the process of
redeeming the outstanding Class C Warrants which were not
exercised upon the Company's call for redemption of such
warrants. Total proceeds received by
(6)
<PAGE>
ELECTRONIC ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Cont'd)
(UNAUDITED)
the Company from the exercise of the Class C Warrants was
approximately $6.6 million, of which $4,864,000 was received in
December 1994 and net proceeds of $1,734,000 representing the
exercise of Class C Warrants to purchase 383,861 shares was
received in January 1995.
On April 14, 1995, the Company completed the sale of 525,000
shares of common stock at $5.85 per share for net proceeds of
approximately $2,906,000 in an offering exempt from the
registration provisions under the Securities Act of 1933, as
amended. The number of shares issued in this sale increased by
15,712 shares on May 22, 1995, without additional proceeds to
the Company pursuant to an adjustment provision set forth in
the purchase agreements for such shares because 80% of the
average market price of the Company's common stock for the five
day period ending forty days after the closing was less than
$5.85 per share.
On July 21, 1995, the Company completed the sale of an additional
416,667 shares of common stock at $4.80 per share for net
proceeds of approximately $2,000,000 in an offering exempt from
the registration provisions under the Securities Act of 1933, as
amended. The number of shares issued in this sale may increase
without additional proceeds to the Company pursuant to an
adjustment provision set forth in the purchase agreements for
such shares, in the event that 75% of the average market price of
the Company's common stock for the five day period ending forty
days after closing is less than $4.80 per share.
On August 3, 1995, the Company completed the sale of an
additional 1,458,333 shares of common stock at $4.80 per share
for net proceeds of approximately $7,000,000 in an offering
exempt from the registration provisions under the Securities Act
of 1933, as amended. The number of shares issued in this sale may
increase without additional proceeds to the Company pursuant to
an adjustment provision set forth in the purchase agreements for
such shares, in the event that 75% of the average market price of
the Company's common stock for the five day period ending forty
days after closing or effectiveness of a registration statement
covering such shares, whichever occurs later, is less than $4.80
per share. See Note (3) for the use of these proceeds.
The Company has incurred significant losses and had negative cash
flows from operations in each of the last four years and for the
six months ended July 1, 1995. The Company has implemented
measures to
(7)
<PAGE>
ELECTRONIC ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Cont'd)
(UNAUDITED)
reduce expenses, including the closing and sale of its Southwest
operations in Arizona and Mexico, respectively, which the Company
completed in the second quarter of 1995, and consolidation of its
corporate administrative functions with those of its newly
acquired subsidiary, Tanon Manufacturing, Inc. ("Tanon"), and
reduction of certain other administrative expenses, which the
Company expects to complete in during the third quarter of 1995.
The Company was successful in raising approximately $11,800,000
of capital during 1994 and approximately $14,000,000 since the
beginning of 1995 through private placements and the exercise of
warrants and options. Although the Company's projections indicate
that operating losses and negative cash flow from operations will
continue during 1995, management believes that its available
cash, together with funds available under its existing lines of
credit, will enable the Company to meet its obligations in the
normal course of business through December 31, 1995.
The Company's business plan includes making certain additional
investments with respect to Tanon and BarOn Technologies Ltd.
("BarOn") as a result of the acquisitions made in January 1995
and the Joint Venture formed with Israel Aircraft Industries,
Ltd. on August 8, 1995 (see note 3), which may require, among
other things, additional cash resources in excess of those
presently available. The Class A and Class B warrants issued in
the February Private Placement (hereinafter defined), if
exercised, could provide the Company with additional capital of
approximately $4,400,000. Although some capital has already been
raised from this source subsequent to July 1, 1995, no assurance
can be given that all such warrants will be exercised. In
addition, the Company is presently in negotiations with its
existing lenders to increase the amount available under its
revolving credit facilities. There can be no assurance that such
additional borrowings or financing will be available.
(3) Acquisitions
On January 4, 1995, pursuant to an Agreement and Plan of
Reorganization dated December 12, 1994 (the "Tanon Acquisition
Agreement"), the Company acquired Tanon (the "Tanon
Acquisition"). The Company reflected the
(8)
<PAGE>
ELECTRONIC ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Cont'd)
(UNAUDITED)
transaction as a purchase for accounting purposes and,
accordingly, the results of operations of Tanon have been
included in the consolidated financial statements of the Company
since January 4, 1995. Tanon was merged with a newly-formed
wholly-owned subsidiary of the Company and the Company issued
1,538,462 shares of its common stock with an appraised value of
$13,077,000 for the remaining outstanding shares of common stock
of Tanon. In addition, the Company granted to certain option
holders of Tanon in exchange for their options to purchase Tanon
capital stock, options to purchase approximately 201,000 shares
of the Company's common stock at a weighted average exercise
price of $1.05 per share with an appraised value of $1,383,000.
As further contemplated by the Tanon Acquisition Agreement (a)
the Company invested $2,000,000 in Tanon and (b) the Company has
agreed to use its best efforts to invest in, or loan to, Tanon,
up to an additional $5,000,000, subject to receipt by the Company
of an acceptable operating plan. In connection with the merger,
the Company loaned Mr. Spalliero, the President of the Company
and Chief Operating Officer of Tanon (formerly the Chairman and
President of Tanon prior to the Tanon Acquisition), $1,000,000
for a 30-month term, with interest accruing at the applicable
Federal rate, and due, together with principal, at the end of the
30-month term. Such loan is non-recourse and is secured solely
with 192,300 shares of common stock of the Company acquired by
Mr. Spalliero upon consummation of the Tanon Acquisition
Agreement.
In addition, upon closing, Mr. Spalliero and certain other
executives of Tanon received certain compensation, incentives and
benefits. Specifically, the Company granted to Mr. Spalliero at
closing, incentive and non-incentive stock options to acquire an
aggregate of 350,000 shares of common stock of the Company at an
exercise price equal to fair market value with respect to 305,000
shares and 110% of fair market value with respect to 45,000
shares, which options will vest proportionately over three years.
Mr. Spalliero also received a cash bonus or $300,000 at closing
and will be eligible to earn a cash bonus of up to $750,000, such
bonus to be paid (to the extent earned based upon Tanon meeting
certain goals) in equal installments during 1996, 1997 and 1998.
Also, upon closing, the company indemnified Mr. Spalliero
for certain outstanding indebtedness of Tanon in the
aggregate amount of $9,450,000, which had been personally
guaranteed by Mr. Spalliero.
(9)
<PAGE>
ELECTRONIC ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Cont'd)
(UNAUDITED)
<TABLE>
<S> <C>
A summary of the Purchase Price and the resultant Intangibles follows.
Cash investment in Tanon 2,400,000
Appraised value of 1,538,462 shares of common stock of the
Company exchanged for 100% of the outstanding shares of
Tanon common stock 13,077,000
Appraised value of options to acquire 201,000 shares of the
Company's common stock exchanged for options to acquire
shares of Tanon common stock 1,383,000
Estimated fees, expenses and other accruals
988,000
-----------
TOTAL $17,848,000
===========
Allocated as follows:
Historical Stockholders' Equity of Tanon $ 3,687,000
Adjustments to acquired assets and liabilities to reflect
estimated fair values:
Equipment 66,000
Deferred Income Taxes (417,000)
Intangible Assets:
Customer relationship $ 1,740,000
Excess purchase price over net assets acquire 12,772,000
Total Intangible Assets 14,512,000
----------- -----------
TOTAL $17,848,000
===========
</TABLE>
During the quarter and six months ended July 1, 1995, the Company
charged operations $235,000 and $470,000 respectively
representing the amortization of intangible assets arising from
the Tanon Acquisition. The intangible assets are comprised of
$1,740,000 representing the value of customer relationships and
excess of purchase price over net assets acquired of $12,772,000,
which are being amortized over six years and twenty years,
respectively.
(10)
<PAGE>
ELECTRONIC ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Cont'd)
(UNAUDITED)
It is the Company's policy to evaluate the value of goodwill by
estimating the business unit's discounted net income over the
remaining life of the goodwill. The Company feels that the
goodwill incurred in connection with the Tanon acquisition is
fairly stated.
On January 16, 1995, the Company acquired (i) 25.01% of the
ordinary shares of BarOn for consideration with an estimated
value of $6,700,000 comprised of a $4,000,000 capital
contribution to BarOn ($1,500,000 cash and the cancellation of
BarOn's obligation to repay the Company $500,000 pursuant to a
previous business loan arrangement between the Company and BarOn
at closing, and $1,000,000 cash and 127,592 shares of common
stock of the Company with an estimated value of $1,000,000 to be
delivered four months from closing of which $500,000 has been
paid to date), and $2,700,000 paid to various shareholders of
BarOn and (ii) an option to acquire an additional 8.33% of the
ordinary shares of BarOn for $2,000,000 in cash and 255,183
shares of common stock of the Company with an estimated value of
$2,000,000 (the "BarOn Investment"). The option is exercisable on
the earlier of BarOn's reaching certain development milestones or
September 30, 1995. In addition, the Company has certain rights
of first refusal to purchase additional equity in BarOn, but not
to exceed 49% of BarOn's issued and outstanding ordinary stock.
The Company has accounted for this transaction as a purchase of a
minority interest using the equity method of accounting and,
accordingly, the Company's investment in BarOn and 25.01% equity
interest in the results of BarOn for BarOn's second quarter and
first six months of 1995 resulted in charges of approximately
$156,000 and $337,000 respectively for the Company, which has
been included in the consolidated results of the Company for the
quarter and six months ended July 1, 1995.
The following is BarOn's Comparative Condensed Statement of
Operations for the Quarter and Six Months Ended July 1, 1995 and
June 30, 1994:
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
----------------------------------- ----------------------------------
July 1, June 30, July 1, June 30,
1995 1994 1995 1994
-------- --------- ------------ -------------
<S> <C> <C> <C> <C>
Research and Development Costs $ 441,000 $ 112,000 $ 931,000 $ 207,000
General and Administrative Expenses 171,000 73,000 420,000 140,000
Interest Income (9,000) (1,000) -- (2,000)
---------------------------------- ----------- -------------
Net Loss $(603,000) $(184,000) $(1,351,000) $(345,000)
================================== ===========
</TABLE>
(11)
<PAGE>
ELECTRONIC ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Cont'd)
(UNAUDITED)
On August 8, 1995, the Company made an investment of $7,500,000 through a 52.3%
owned subsidiary (Partner) in a newly formed Israeli Corporation ("Joint
Venture") which will be 50.1% owned by Partner and 49.9% owned by Israel
Aircraft Industries, ltd. ("IAI"). The Company's investment in the Joint Venture
will be accounted for as a purchase. The estimated purchase price, the minority
interest in the Joint Venture and the excess of Purchase Price over Net Assets
Acquired have been determined as follows:
<TABLE>
<S> <C>
Purchase:
Cash investment in Joint Venture $ 7,500,000 (1)
Estimated value of options to acquire shares of
common stock of the Company granted in connection
with this transaction 1,650,000 (2)
Estimated fees, expenses and other accruals 100,000 (3)
Total estimated purchase price 9,250,000
Minority interest in equity of Joint Venture (3,750,000)
In process research and development $5,500,000
==========
</TABLE>
The assets of the Joint Venture include the right to review and evaluate certain
technological applications developed by IAI which are in various stages of
development. If a technology is selected for development and exploitation, IAI
will grant a perpetual, royalty free license to exploit the technology. IAI has
advised the Company that the technological applications are in various stages of
development, including certain applications which are fully developed and for
which some products have been sold. To date, the Joint Venture has not completed
its review of the applications and, accordingly, there is no assurance that any
of the applications will be selected for development and exploitation, or if
selected, will be capable of being developed, or if developed, will be
commercially accepted and if commercially accepted, will be profitable. Certain
technologies may be in the initial states of development and considered to be in
process research and development with no alternative future use. The Company
will obtain an appraisal of the technological applications which the Joint
Venture has a right to exploit and selects for development and exploitation.
Upon completion of the appraisal, a determination will be made as to the portion
of the purchase price which will be capitalized as an identified intangible
asset and the portion which will be charged to expense as in process research
and development with no alternative future use. The allocation of the purchase
price detailed above assumes that no portion of the purchase price will be
capitalized, thus resulting in a charge to expense of $5,500,000.
(1) Represents the portion of cash loaned to Partner by the
Company and certain minority shareholders which was
invested in the Joint Venture.
(12)
<PAGE>
ELECTRONIC ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Cont'd)
(UNAUDITED)
(2) Represents the estimated value of options to acquire
1,100,000 shares of common stock of the Company, which
were granted in connection with this transaction, at
an exercise price of $7.25 per share based upon a
recent price of the Company's common stock of $8.75
per share. The total purchase price may change
dependent upon the appraised value of such options.
(3) Represents an estimate of expenses related to the Joint
Venture formation and investment including legal fees,
accounting fees, due diligence costs and other accruals.
The excess of the purchase price over the estimated fair value of EAI's 25.01%
equity interest in the net assets of BarOn in the amount of $6,012,000 has been
determined to be in-process research and development with no alternative future
use and, accordingly, was charged to expense in the first quarter of fiscal
1995. This charge has not been reflected in the unaudited pro forma summary
detailed below. The pro forma summary also does not reflect the Company's
investment in the Joint Venture. The purchase price allocation for both
acquisitions is based on preliminary estimates of the fair value of the net
assets acquired and is subject to adjustment as additional information becomes
available during fiscal 1995. The pro forma loss per common share for the
quarter ended March 31, 1994 reflects the issuance of 1,239,130 shares of common
stock of the Company to finance the BarOn Investment as if such shares had been
issued on January 1, 1994. These shares are based on a portion of the Class C
Warrants exercised in December, 1994 at $4.60 per warrant (note 2) to arrive at
proceeds of $5,700,000 necessary to finance the BarOn Investment.
The following unaudited pro forma summary presents the consolidated results of
operations as if the Tanon Acquisition and BarOn Investment occurred on January
1, 1994 and does not purport to be indicative of what would have occurred had
the acquisitions actually been made as of such date or of results which may
occur in the future.
(thousands of dollars, except per share data)
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
------------- ----------------
June 30, 1994 June 30, 1994
------------- ----------------
<S> <C> <C>
Sales $19,421 $36,150
Net Loss (509) (1,153)
Loss Per Common Share $ (.09) $ (.23)
</TABLE>
(13)
<PAGE>
ELECTRONIC ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Cont'd)
(UNAUDITED)
(4) Restructuring
In anticipation of the Tanon Acquisition, the Company determined
in the fourth quarter of 1994 that it would be necessary to
restructure its operations in order to reduce the operating
expense from redundant activities and achieve greater operating
efficiency from the combined operations subsequent to the Tanon
Acquisition. As a result, a provision for restructuring in the
amount of $2,400,000 was established in the fourth quarter of
1994. In connection therewith, the Company determined to close
its Southwest operations in Tucson, Arizona and Nogales, Sonora,
Mexico in order to reduce the operating expenses in place to
support its existing sales base. Additionally, the Company
reduced indirect manufacturing and sales, general and
administrative staff in its New Jersey facility during the first
six months of 1995. The combined termination costs for these
activities through July 1, 1995 was approximately $410,000. The
Company believes that these actions, together with remaining
actions to reduce redundant operations in the third quarter of
1995, will eliminate duplicate expenses and improve operating
efficiencies for materials procurement and management. However,
no assurance can be given that such effects will be experienced
by the Company as a result thereof.
(5) Lines of Credit
The Company maintains an asset based credit facility which is
described in detail in note 5, "Notes Payable and Line of Credit"
of Notes To Consolidated Financial Statements at Item 8 of the
Company's latest Annual Report on Form 10-K, as amended on Form
10-K/A, for the year ended December 31, 1994. At July 1, 1995,
the Company had $4,754,000 outstanding under this credit facility
and had no additional availability for borrowing. There are two
covenants with which the Company must comply under this facility.
Working capital, as defined, must exceed $750,000 and tangible
net worth must exceed negative $500,000. The Company was in
compliance with both covenants as of July 1, 1995.
(14)
<PAGE>
ELECTRONIC ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Cont'd)
(UNAUDITED)
Tanon maintains a separate revolving line of credit with a
commercial bank that provides for short-term borrowings up to
$5.5 million based on eligible accounts receivable and inventory.
At July 1, 1995, $5,500,000 was outstanding under this line. This
line bears interest at prime plus 1.5% and is due on demand. The
credit agreement pertaining to this line of credit restricts
Tanon from entering into certain transactions and contains
covenants regarding the maintenance of working capital, minimum
net worth and debt-to-equity ratios, together with minimum
profitability requirements. The covenants, together with Tanon's
comparative performance at July 1, 1995, were: maintaining
working capital in an amount greater than deficit $150,000, for
which Tanon achieved $855,000; achieving tangible net worth of
not less than $2.8 million, for which Tanon achieved $3,587,000;
achieving a quick ratio of .50 to 1, for which Tanon achieved .58
to 1; achieving a debt to equity ratio of less than 5.50 to 1,
for which Tanon achieved 4.2 to 1; and, maintaining minimum
quarterly profitability of $20,000, which Tanon did not achieve
for the first and second quarters. Tanon obtained waivers for its
failure to satisfy such minimum quarterly profitability
requirements.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
On January 4, 1995, the Company acquired Tanon Manufacturing,
Inc. ( "Tanon" ), a privately-owned contract electronic manufacturing firm with
operations located in Fremont, California. The acquisition has been reported as
a purchase for accounting purposes and, accordingly, the results of operations
of Tanon are included with those of the Company from January 4, 1995 forward.
Tanon's manufacturing services consist primarily of the assembly of printed
circuit boards, the manufacturing and assembly of integrated electro-mechanical
systems and related engineering support. For a more thorough discussion of this
transaction, see "Liquidity and Capital Resources" below.
In connection with the Tanon Acquisition the Company recorded
approximately $14,000,000 of goodwill. It is the Company's policy to
periodically review the recoverability of such goodwill. In such review the
Company evaluates Tanon's ability to achieve predetermined operating profit
levels, industry growth trends, whether or not the subsidiary has lost any
significant customers and any other factors which might result in a diminution
in the value of the investment. Additionally, the Company evaluates the value of
the goodwill by estimating the undiscounted net income of the subsidiary over
the remaining life of the goodwill.
On January 16, 1995, the Company acquired a 25.01% equity
interest in BarOn Technologies Ltd. ( "BarOn" ), a privately-owned Israeli
corporation based in Haifa, Israel. BarOn is a development stage company engaged
in the research and development of a computer input device that can directly
digitize handwriting in a variety of languages, from any surface. The investment
in BarOn has been accounted for as a purchase of a minority interest using the
equity method of accounting, and, accordingly, the Company's investment in BarOn
and 25.01% equity interest in the results of BarOn are included in the
consolidated results of the Company from January 16, 1995 forward. For a more
thorough discussion of this transaction, see "Liquidity and Capital Resources"
below.
During the first quarter of 1995, the Company determined that the
amount of the purchase price in excess of the estimated fair value of the 25.01%
equity interest in BarOn acquired by the Company represented in-process research
and development with no alternative future use. Accordingly, the estimated value
associated with such purchased research and development of $6,012,000 was
recorded as research and development expense in the first quarter of 1995.
During the first six months of 1995, the Company's sales
increased, its cost of sales increased, both in total value and as a percentage
of sales, and selling, general and administrative expenses increased in total
but decreased as a percentage of sales. The Company had a loss from operations
of $10,035,000 for the first six months of 1995, which included a non-recurring
charge of $6,012,000 representing the write-off of in-process research and
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development resulting from its investment in BarOn. This compared with a loss
from operations of $584,000 in the first six months of 1994. During the second
quarter of 1995, the Company's sales increased, cost of sales increased, both in
total value and as a percentage of sales, and selling, general and
administrative expenses increased in total value but decreased as a percentage
of sales compared to the second quarter of 1994.
The increase in sales to $37,233,000 in the first six months of
1995 from $13,690,000 during the same period in 1994, resulted primarily from
the additional sales generated by Tanon, which had sales of $23,079,000 in that
period. Sales from the Company's prior existing operations during the six month
period increased to $14,154,000 from $13,690,000 in the same six month period of
1994 which increase resulted primarily from an increase in sales to its existing
customer base. A large portion of such increase resulted from greater sales to
one customer for whom the sales increment consisted substantially of materials
and materials handling services. Such material-related sales are generally
provided at a lower profit margin within the industry and, as a result, are less
profitable than manufacturing service sales which consist more of labor
services. Sales of $23,079,000 for Tanon in the first six months of 1995
increased moderately from sales of $22,460,000 during the same period in 1994,
which reflects the loss of revenue from two customers who terminated their
relationship with Tanon during this period which was offset by the growth and
sales to Tanon's existing customer base. Sales of $ 18,178,000 in the second
quarter of 1995 declined moderately from sales of $19,055,000 in the first
quarter of 1995 primarily as a result of the closing and sale of the Company's
manufacturing facilities in Tucson, Arizona and Nogales, Mexico, respectively.
The majority of the services provided to customers at the Tucson facility was
transferred to the Company's manufacturing facility in New Jersey; a moderate
level of manufacturing services was transferred to the Company's Fremont
facility at the customer's request, and the assembly-related services provided
at the Nogales, Mexico facility were sold, together with the assets of that
facility.
Cost of sales in the first six months of 1995 increased to
$37,061,000 from $12,362,000 during the same period in 1994. Cost
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of sales increased, as a percentage of revenue, to 99.5% in the first six months
of 1995 compared to 90.3% in the same period of 1994, resulting primarily from
the increase in materials cost for the above described customer with whom the
Company has expanded its material handling services, combined with a one-time
price reduction in sales of material by Tanon to one of its existing customers,
which was negotiated in response to competitive pricing pressures. Cost of
sales, as a percentage of revenue, was substantially the same in the second
quarter of 1995 compared with that of the first quarter of 1995.
Sales, general and administrative expensed increased to
$4,195,000 in the first six months of 1995, from $1,912,000 in the same period
of 1994. The increase in the level of sales, general and administrative expenses
was related to the addition of the Tanon operations, the amortization of
approximately $470,000 of intangible assets resulting from the Tanon
acquisition, the payment of consulting fees for several directors and the
elimination of salary reductions for employees of the Company which had been in
effect during the first half of 1994. Selling, general and administrative
expenses declined as a percentage of revenue to 11.3% in the first six months of
1995 from 14.0% in the same period in 1994 primarily because the increase in
sales exceeded the rate of the increase in selling, general and administrative
expenses. Selling, general and administrative expenses declined to $2,037,000 in
the second quarter of 1995 from $2,158,000 in the first quarter of 1995 and
decreased to 11.2% from 11.3% of total revenue primarily as the result of the
Company's actions to reduce the level of operating expenses discussed below.
In anticipation of the Tanon Acquisition, the Company determined
in the fourth quarter of 1994 that it would be necessary to restructure its
operations in order to reduce the operating expenses associated with redundant
activities and to achieve greater operating efficiency from combined operations
subsequent to the Tanon Acquisition. As a result, a provision for restructuring
in the amount of $2,400,000 was established in the fourth quarter of 1994.
Pursuant to such determination, during the
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first quarter of 1995 the Company began taking steps to close and sell its
Southwest operations in Tucson, Arizona and Nogales, Mexico in order to
eliminate the operating expenses associated with these facilities. The majority
of the operations which were supporting the Company's sales base out of the
Tucson location were transferred to the New Jersey facility in the second
quarter of 1995. Additionally, the Company reduced indirect manufacturing and
sales, general and administrative staff in its New Jersey facility during the
first quarter in 1995 and in the Fremont facility in the second quarter of 1995.
The combined termination expenses for these activities in the first and second
quarters were approximately $250,000 and $160,000 respectively. The Company
believes that these actions, together with remaining actions to reduce redundant
operations will eliminate duplicate expenses and improve operating efficiencies
for materials procurement and management. However, no assurance can be given
that such effects will be experienced by the Company as a result thereof.
The Company's consolidated backlog at July 1, 1995 was $41,970,000.
Liquidity and Capital Resources
Liquidity, as discussed below, is measured in reference to the
consolidated financial position of the Company at July 1, 1995, as compared to
the financial position of the Company at December 31, 1994, adjusted to reflect
the balance sheet of Tanon at December 31, 1994. Net cash used by operations of
$1,282,000 in the first six months of 1995 decreased by $1,199,000 from cash
used in operations of $2,481,000 in the same period of 1994, resulting primarily
from a decline in the consolidated balance of accounts receivable, together with
those expenses which did not use cash, which consisted of depreciation,
amortization, purchased research and development, and equity in loss of
affiliate, offset by the $11,085,000 loss from operations. Liquidity, as
measured by cash and cash equivalents, decreased to $87,000 at July 1, 1995 from
$6,157,000 at December 31, 1994. Liquidity as measured by working capital
decreased to a deficit of $2,129,000 at July 1, 1995 compared to $4,366,000 at
December 31, 1994. The decrease in working capital resulted primarily from the
amounts paid by the Company in connection with the consummation of the Tanon
Acquisition and BarOn Investment in January 1995 as are more fully discussed
below. The Company's ability to generate internal cash flows results primarily
from the sale of material and labor elements of its contract electronic
manufacturing services. In the first six months of 1995, revenue from such
services increased by $23,543,000 from $13,690,000 in the same period of 1994,
primarily resulting from the acquisition of Tanon. Consolidated accounts
receivable declined by $1,385,000 in the first half of 1995 reflecting the
collection of receivables at a rate greater than sales were generated in the six
months. A marginally profitable enterprise which had over $2,100,000 payable to
the Company at year end is currently paying its account in accordance with
established terms and the balance has been reduced to $527,000 at August 4,
1995. Consolidated inventory increased by $807,000 during the first six months
which represented a decline of $1,292,000 during the second quarter. Management
of the company constantly evaluates inventory levels on hand with respect to
orders placed by customers and, if necessary, inventory amounts which may become
excess could be reduced by the sale or return of inventories to suppliers, uses
of inventories on alternative customers' assemblies or the cancellation of
purchase commitments with or without the payment of cancellation penalties.
In January and February of 1994, in order to conserve cash and
reduce expenses, the Company among other things imposed a 20% decrease in pay on
substantially all employees at its existing facilities. Effective with the
beginning of the first quarter of 1995, such salary
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reductions were eliminated and the salaries of all indirect manufacturing and
sales, general and administrative staff were returned to normal levels.
At July 1, 1995, the Company had consolidated accounts payable of
approximately $14,160,000 of which approximately $633,000 had been outstanding
for over 90 days. This compares with $10,928,000 of consolidated accounts
payable at December 31, 1994, of which $426,000 had been outstanding for over 90
days.
In the first quarter of 1995, the Company made commitments for
the purchase of manufacturing equipment of approximately $2.0 million for the
West Long Branch manufacturing facility, which amount is included in accounts
payable at July 31, 1995 and approximately $3.0 million for the Fremont,
California manufacturing facility. In April 1995, the Company cancelled the
purchase order for $3.0 million of new equipment for the Fremont, California
manufacturing facility, deciding instead to move certain equipment from the
Tucson facility to the Fremont facility upon closure of the Tucson facility. The
Company intends to finance the capital equipment for the West Long Branch
manufacturing facility with financing arranged through existing relationships
with equipment lease financers, however, as of the date of this report the
Company has not entered into any agreements or commitments for such equipment
lease financing.
Net Cash flows from financing activities during the first half
of 1995 amounted to a source of $5,430,000 which resulted primarily from the
issuance of an aggregate of 540,712 shares of common stock in an offering in
April, as discussed below, and the exercise of 383,861 Class C Warrants and
413,204 of employee stock options, after the repayment of balances under the
Company's and Tanon's lines of credit and the loan to Joseph Spalliero,
President of the Company, in connection with the Tanon Acquisition discussed
below.
Net cash in the amount of $7,540,000 was used for investing
activities during the six months ended July 1, 1995. Funds in the amount of
$3,199,000 were used in making capital expenditures and $5,431,000 used in
making investments in affiliates pursuant to the terms of the Tanon Acquisition
and the BarOn Investment discussed below. These uses were partially offset by
cash acquired in the acquisition of Tanon of $890,000 and the proceeds from the
sale of discontinued operations of $200,000. The cash required to consummate
such acquisitions was financed, in large part, from the cash flows from
financing activities during 1994 which amounted to $13,192,000, resulting
primarily from the issuance of 1,200,000 units (each unit consisting of one
share of Common Stock, a Class A Warrant and a Class B Warrant (the "February
Units") in the private placement completed in February 1994 (the "February 1994
Private Placement"), the issuance of 2,500,000 units (each unit consisting of
one share of Common Stock and one Class C Warrant) (the "June Units") in the
private placement commenced in June 1994 (the "June 1994 Private Placement") and
exercise of related Class C Warrants issued in the June 1994 Private Placement,
net of reductions in outstanding debt. The proceeds from these activities which
were not used to consummate the Tanon Acquisition and BarOn Investment were used
to maintain cash balances for working capital. As previously disclosed, a
Registration Statement was filed with the Securities & Exchange Commission
covering an aggregate of 9,800,523 issued and outstanding shares of common stock
for resale by selling shareholders, which included, among other shares, the
shares sold in the February 1994 Private Placement and the June 1994 Private
Placement. Such Registration Statement was declared effective on August 14,
1995. The Registration Statement will permit existing shareholders to resell
shares of common stock of the Company which they had purchased directly from the
Company. The Company will not receive any proceeds directly from the offering.
On January 4, 1995, the Company acquired by merger Tanon pursuant
to the Tanon Acquisition Agreement. At closing, the Company issued 1,538,462
shares of its common stock and granted options to purchase its common stock with
a combined appraised value of $14,460,000 in exchange for all the outstanding
common stock of Tanon and outstanding options to purchase common stock of Tanon.
In addition, (a) the Company invested $2,000,000 in Tanon, and (b) the Company
has agreed to use its best efforts to invest in (or, at the Company's option,
loan to) Tanon (in form and on terms acceptable to the Company and its lenders)
up to an additional $5,000,000, subject to receipt by the Company of an
acceptable operating plan. In connection with the merger, Joseph R. Spalliero,
President of the Company and Chief Operating Officer of Tanon (formerly the
Chairman and President of Tanon prior to the Tanon Acquisition), entered into an
Employment Agreement with Tanon and received a cash bonus of $300,000 at
closing, and will be eligible to earn a cash bonus of up to $750,000, payable to
the extent earned, in equal installments, during 1996, 1997 and 1998. Also, in
connection with the Tanon Acquisition, the
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Company loaned to Mr. Spalliero $1,000,000 for a 30-month term, with interest
accruing at the applicable Federal rate, and due, together with principal, at
the end of the 30-month term. Such loan is non-recourse and is secured solely
with 192,300 shares of common stock of the Company acquired by Mr. Spalliero
upon consummation of the Tanon Acquisition Agreement. In addition, upon closing,
the Company indemnified Mr. Spalliero for certain outstanding indebtedness of
Tanon in the aggregate amount of $9,450,000 which had been personally guaranteed
by Mr. Spalliero.
On January 16, 1995, the Company acquired 25.01% of the ordinary
shares of BarOn for a consideration of cash and shares of common stock in the
Company and a right to acquire an additional 8.33% of the ordinary shares of
BarOn. The Company acquired 8.33% of the 25.01% equity interest in BarOn from
certain shareholders of BarOn in exchange for $2,700,000 which was paid in cash
at closing on January 16, 1995. The balance of 16.68% was acquired from BarOn in
exchange for $3,000,000 in cash and 127,592 shares of common stock of the
Company with an estimated value of $1,000,000 payable as follows: (i) of such
$3,000,000 cash payment, $2,000,000 was paid at closing on January 16, 1995 in
the form of $1,500,000 in cash and the cancellation of BarOn's obligation to
repay the Company $500,000 pursuant to the terms of a business loan to BarOn,
and (ii) the $1,000,000 balance due BarOn and the issuance and delivery of the
127,592 shares of common stock of the Company were due and payable to BarOn on
the four month anniversary of the closing, May 16, 1995. Such payment was
postponed by mutual agreement and, as of the date of this report, $500,000 of
such amount has been paid. Pursuant to the terms of the Investment Agreement
with BarOn, BarOn is obligated to issue to the Company ordinary shares to
increase the Company's equity interest by 8.33%, which would give the Company an
aggregate equity interest of up to 33-1/3% of the outstanding ordinary shares of
BarOn, in the event that the Company elects to make certain subsequent
investments. The subsequent investments, which would aggregate $2,000,000 in
cash and 255,183 shares of common stock of the Company with an estimated value
of $2,000,000 are at the option of the Company, which is exercisable on the
earlier of BarOn's reaching certain development milestones or September 30,
1995.
The Company maintains an asset based credit facility with its
lender, Congress Financial Corporation, which is described in detail in Note 5,
"Notes Payable and Line of Credit" of Notes to Consolidated Financial Statements
at Item 8 of the Company's latest Annual Report on Form 10-K, as amended on Form
10-K/A, for its fiscal year ended December 31, 1994 ("Form 10-K"). At July 1,
1995, the Company had $4,754,000 principal amount of borrowings outstanding
under this credit facility with no additional availability for borrowing. There
are two financial covenants with which the Company must comply under this
facility. Working capital, as defined, must exceed $750,000 and tangible net
worth must exceed a negative $500,000. The Company was in compliance with both
covenants as of July 1, 1995.
Tanon maintains a separate revolving line of credit with a
commercial bank that provides for short-term borrowing up to $5.5 million based
on eligible accounts receivable and inventories. At July 1, 1995, $5,500,000 was
outstanding under this line. The line of credit bears interest at the bank's
prime rate plus 1.50% and is due on demand. The credit agreement pertaining to
this line of credit restricts Tanon from entering into certain transactions and
contains covenants regarding the maintenance of working capital, minimum net
worth and debt-to-equity ratios, together with minimum profitability
requirements. The covenants, together with Tanon's comparative performance at
July 1, 1995, were: maintaining working capital in an amount greater than
deficit $150,000, for which Tanon achieved $855,000; achieving tangible net
worth of not less than $2.8 million, for which Tanon achieved $3,587,000;
achieving a quick ratio of .50 to 1, for which Tanon achieved .58 to 1;
achieving a debt to equity ratio of less than 5.50 to 1, for which Tanon
achieved 4.2 to 1; and, maintaining minimum quarterly profitability of $20,000,
which Tanon did not achieve for the first and second quarters of 1995. Tanon
obtained waivers for its failure to satisfy such minimum profitability
requirements.
The Company has incurred significant losses and had negative cash
flows from operations in each of the last four years and in the six months ended
July 1, 1995. As reflected in the accompanying financial
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statements, the continued negative cash flow from operating loss experienced by
the Company through July 1, 1995, gave rise to the need for additional working
capital. In order to provide additional capital, on April 14, 1995, the Company
completed the sale of 525,000 shares of Common Stock at $5.85 per share for net
proceeds of approximately $3,000,000 and, separately, on July 21, 1995, the
Company completed the sale of 416,667 shares of Common Stock at $4.80 per share
for net proceeds of approximately $2,000,000, in each case in an offering exempt
from the registration provisions under the Securities Act. The proceeds from
these offerings are being used for working capital purposes. In addition, in
contemplation of the Tanon Acquisition, the Company has implemented measures to
reduce costs, including the closing and sale of its Southwest operations in
Arizona and Mexico, which the Company completed in the second quarter of 1995,
and consolidation of its corporate administrative functions with those of its
newly acquired subsidiary, Tanon, and reduction of certain other administrative
expenses, which the Company expects to complete during the third quarter of
1995. Although the Company's projections indicate that operating losses and
negative cash flows from operations will continue during 1995, management
believes that its available cash, together with funds available under its
existing lines of credit, will enable the Company to meet its obligations in the
normal course of business through December 31, 1995, however, no assurance can
be given in that regard.
Further, the Company's business plan includes making certain
additional investments with respect to Tanon and BarOn as a result of the
acquisitions made in January 1995, which consist of the Company's commitment to
use its best efforts to make an investment in Tanon of up to $5.0 million as
contemplated by the Tanon Acquisition Agreement, and the Company's option to
invest $2.0 million in cash in BarOn to acquire an additional 8.33% equity
interest in BarOn (which would give the Company an aggregate 33- 1/3% equity
interest in BarOn) as contemplated by the Investment Agreement with BarOn. Such
additional investments may require, among other things, additional cash
resources in excess of those presently available. The Class A and Class B
warrants issued in the February 1994 Private Placement, if exercised, could
provide the company with additional capital of approximately $4.4 million.
Subsequent to July 1, 1995, approximately $190,000 was raised through exercise
of these warrants, but no assurance can be given that any more of such Warrants
will be exercised. In addition, the Company is presently in negotiations with
its existing lenders to increase the amount available under its revolving credit
facilities and is attempting to raise additional capital. There can be no
assurance that such additional borrowings or financing will be available.
The Company, through a 52.3% owned subsidiary, has entered into a
Joint Venture Agreement ("JVA") with Israel Aircraft Industries, Ltd., an Israel
government corporation ("IAI"), for the purpose of forming a joint venture
("Joint Venture") with IAI to review, develop, and exploit certain non-military,
non-classified technological applications ("Applications") developed by IAI. The
transaction was consummated on August 8, 1995. To implement the JVA, in early
August, 1995, the Company entered into a Preincorporation Agreement to form an
Israeli corporation ("Partner") which is the joint venture partner and owns
50.1% of the Joint Venture. IAI owns 49.9% of the Joint Venture. Under the
Preincorporation Agreement, Partner is owned as follows: (a) the Company owns a
52.3% interest, (b) certain Israeli persons own an aggregate of 25.2%, (c) Mark
Hauser owns a 15% interest, (d) Irwin L. Gross, Chairman of the Company, owns a
5% interest, and (e) Broad Capital Associates owns a 2.5% interest. The equity
interests in Partner were issued for an aggregate consideration of $10,000 to
each of the shareholders. In addition, the Company and the Israeli citizens have
advanced $6.3 million and $1.575 million, respectively, to Partner. Of such
funds, $7.5 million has been advanced to the Joint Venture to be used solely for
working capital purposes. The remaining $375,000 will be used by Partner for
working capital purposes.
The JVA provides that the Joint Venture will review and evaluate
Applications developed by IAI, which are in various stages of development. To
review and evaluate the Applications, an investment committee ("Investment
Committee") comprised of seven persons will be formed. Partner will be entitled
to select four of the seven members of the Investment Committee. If an
Application is selected for development and exploitation, an entity will be
formed ("Licensee") in which Partner will own a 50% interest and IAI will own a
50% interest, and IAI will grant such Licensee a perpetual, royalty free license
for such Application. The Investment Committee will prepare a business plan to
exploit each application selected, including a funding plan. The Company will be
primarily responsible to raise the funds necessary to exploit the Application
selected. However, the Company will not be under any obligation to raise any
funds for such purpose unless and until the Investment Committee selects an
Application for exploitation. In the event the Company is unable to raise the
funds necessary to exploit any Application which the Investment Committee
selects, IAI can terminate the JVA. The JVA can also be terminated under certain
other circumstances.
To fund its obligations under the Preincorporation Agreement, on
August 3, 1995 the Company sold 1,458,333 shares of its Common Stock at a price
of $4.80 per share for an aggregate of $7.0 million to five Israeli persons,
three of whom are shareholders in Partner. The offering was made pursuant to an
exemption under the Securities Act of 1933, as amended. The purchase agreements
pursuant to which the shares were sold contain an adjustment provision which
requires the issuance of additional shares in the event that the average closing
price of the shares for a certain period of time is less than the offering price
in the offering. The proceeds from the offering were placed in escrow and were
released upon the execution of the JVA.
At the present time, the Company is unable to determine whether,
or the extent to which, any of the Applications of IAI which the Investment
Committee reviews will be selected and exploited. Accordingly, with the
exception of the initial investment of $6.3 million in Partner, the Company is
unable to determine at this time the effect, if any, of this transaction on the
results of operation of the Company or on its liquidity and capital resources.
Reference is made to "Legal Proceedings" at Item 3, Part I of the
Company's Form 10-K and in Part II of this Report for information concerning
certain pending claims which could have an adverse impact on the Company's
income and cash flows. Reference is also made to Note 14 of the Notes to
Consolidated Financial Statements at Item 8, Part II of the Form 10-K for
information concerning services provided by contract electronic manufacturing to
certain customers which are development stage or marginally profitable
enterprises or have highly leveraged capital structures.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As previously disclosed, there are two lawsuits presently pending
which involve environmental claims against EAI, namely, the Lemco Associates
lawsuit and the Bridgeport Rental and Oil Services Superfund Site lawsuit. In
October, 1992, Lemco Associates L.P., a limited partnership ("Lemco"), the owner
of property previously owned by EAI, initiated an action against EAI and others
alleging, among other things, that the defendants created environmental
contamination at the property and is seeking damages in unspecified amounts. EAI
has denied Lemco's allegations, asserted numerous defenses to the claims
asserted and made cross claims for indemnification and contribution against
co-defendants and others. In addition, the Company has made a demand upon its
insurance carriers for coverage for the claims made by Lemco and cross claims
and third party claims may be filed against these insurance companies seeking
indemnification against these claims. To date, the Company's insurance carriers
have agreed to pay 71% of its defense costs under a reservation of rights.
Discovery in this matter is ongoing. By letter dated March 30, 1995, Lemco has
provided the Company with a statement of its remediation costs to date, as well
as an estimate of future remediation costs associated with the contamination for
which it seeks recovery in this action. Specifically, Lemco claims that it has
expended approximately $424,000 in remediation costs, including fees for legal
oversight and consultation. It further estimates that its future remediation
costs will amount to approximately $4,900,000. Such amount is included in a
report made by Lemco's environmental consultants based on their current
assessment of the extent of contamination and the method and period required to
complete the remediation. Further, by letter dated June 7, 1995, Lemco has
provided the Company with an appraisal report made by a real estate appraisal
company engaged by Lemco in support of Lemco's claim for diminution in the value
of the property. Such report states that it is the appraisal company's opinion
that the market value of the property as of May 23, 1988 was $3.6 million and as
of April 14, 1995 was $750,000. Based on the foregoing, management believes that
the range of possible loss in this matter ranges from zero to approximately $8.2
million, not including costs and expenses, such as legal and expert fees, which
will be incurred in connection with this matter, and not taking into account the
amount of any loss which may be offset by insurance coverage as discussed above.
At this time, the Company and its consultants have not completed the
investigation and evaluation of the information recently received from Lemco nor
has an independent analysis of the site been performed to determine the
appropriateness of Lemco's claims and of the estimated cost of remediation and
diminution in value of the property. Such investigation, evaluation and analysis
of this matter is expected to be completed by September 1995; therefore, it is
not possible to predict its outcome at this time. Moreover, there is no
assurance that the outcome of this matter will come within the above-mentioned
range of possible loss.
The second matter involves environmental claims against EAI and
others regarding the Bridgeport Rental and Oil Services Superfund Site in Logan
Township, New Jersey (the "B.R.O.S. Site"). By letter dated August 31, 1988, the
United States Environmental Protection Agency ("EPA") notified EAI that the EPA
had identified EAI as one of the parties potentially responsible for clean up
costs at, and for any other possible damages in connection with, the B.R.O.S.
Site. EAI's alleged connection to the B.R.O.S. Site is through Rollins
Environmental Services, Inc. ("Rollins") which is a waste transporter that was
allegedly hired by EAI to transport certain waste material alleged to be
hazardous from EAI's operations for appropriate disposal. Information in the
EPA's files suggests that the EPA is likely to assert that one shipment of waste
allegedly generated by EAI and presumed to constitute less than one quarter of
one percent of the total liquid waste allegedly released at the B.R.O.S. Site,
was delivered to the B.R.O.S. Site in 1973 by Rollins. On March 29, 1989, the
New Jersey Department of Environmental Protection and Energy ("DEPE") issued an
administrative directive under New Jersey's Spill Compensation and Control Act
to over one hundred companies, including EAI, demanding payment by May 15, 1989
of $9,224,189 as DEPE's share of remedial costs at the B.R.O.S. Site. By letter
dated August 29, 1989, and by similar letters to fifty-seven other alleged waste
generators, or transporters of waste allegedly released at the B.R.O.S. Site,
the EPA demanded that the targeted companies, individually or jointly, pay to
the "EPA Hazardous Substances Trust Fund" the sum of $17.8 million by September
29, 1989 in full reimbursement of past costs incurred by the EPA in connection
with the B.R.O.S. Site. The EPA estimated at that time that the costs of the
remaining remedial work will be in the range of $70 - $100 million. On May 15,
1989, a group of companies among those which had received demands from DEPE,
including EAI, without admitting liability, made a "good faith" payment of
$1,344,500 in response to DEPE's directive demanding payment of $9,224,189.
EAI's share of this payment was $5,000. On September 29, 1989, a group of
companies, including EAI, targeted by the EPA responded to the EPA's demand
letter for past costs of $17.8 million by declining to make any payments at that
time and by offering to negotiate a settlement of the EPA's claims. Litigation
has been initiated in the federal courts with respect to the remediation alleged
to be required at the B.R.O.S. Site. EAI is not a party to this litigation but
is participating in informal discovery and settlement negotiations with respect
to the federal court actions without admitting liability. Rollins has agreed to
pay administrative expenses which may be assessed against EAI in connection with
its participation in the settlement process as well as defend EAI should EAI be
sued after participating in the settlement process. Rollins has not agreed to
assume any liability that any of its customers may incur as a result of these
claims, including liability for any amount that EAI may agree to pay in
settlement. EAI has pursued insurance coverage for these claims. To date, one
carrier has responded, has agreed to pay one-third of EAI's defense costs and
has otherwise reserved rights. The other carrier to which EAI has submitted the
B.R.O.S. claims has denied coverage on grounds that EAI believes are without
merit under New Jersey law. This insurance company advised EAI that it has no
information at this time that would support EAI's claim of coverage under any of
the policies issued by it to EAI. EAI has asked for reconsideration of its
position and is awaiting a response. Based solely upon the alleged single
shipment of waste generated by EAI and presumed to constitute less than one
quarter of one percent of the total liquid waste allegedly released at the
B.R.O.S. Site discussed above, management believes that the range of possible
loss in this matter ranges from zero to approximately $300,000, not including
costs and expenses which will be incurred in connection with this matter which
are not paid by Rollins as discussed above, and not taking into account the
amount of any loss which may be offset by insurance coverage as discussed above
or which may be recoverable from Rollins based on indemnification claims.
Settlement discussions in this matter are ongoing and the Company's
participation in such settlement discussions has been limited to date;
therefore, it is not possible to predict its outcome at this time. Moreover,
there is no assurance that the outcome of this matter will come within the
above-referenced range of possible loss.
In April, the Company settled the action brought by Stephen
Pudles in accordance with the terms of the tentative settlement previously
disclosed by the Company for $41,250, payable by the Company in four
installments over three months in accordance with the terms of a written
settlement agreement, which includes mutual general releases by the plaintiff
and the Company of all claims against each other.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
<TABLE>
<CAPTION>
Exhibit No. Description
----------- ------------
<S> <C>
2.1 Agreement and Plan of Reorganization by and among
Electronic Associates, Inc., Tanon Manufacturing,
Inc., EA Acquisition Corp. and Joseph R.
Spalliero, dated December 12, 1994 was filed as
Exhibit 2 to the Company's Current report on Form
8-K (Date of Report: January 4, 1995), as
amended, and is hereby incorporated by reference.
2.2 Form of Investment Agreement dated January 16,
1995 by and between Electronic Associates, Inc.
and BarOn Technologies Ltd., was filed as Exhibit
10.1 to the Company's Current Report on Form 8-K
(Date of Report: January 16, 1995), as amended,
and is hereby incorporated herein by reference.
2.3 Form of Stock Purchase Agreement, dated January
10, 1995, between the Company and various
shareholders of BarOn Technologies Ltd., was
filed as Exhibit 10.2 to the Company's Current
Report on Form 8-K (Date of Report: January 16,
1995), as amended, and is hereby incorporated
herein by reference.
2.4 Form of Shareholders Agreement, dated January 16,
1995, among the Company, BarOn Technologies Ltd.
and the shareholders of BarOn Technologies Ltd.,
was filed as Exhibit 10.3 to the Company's
Current Report on Form 8-K (Date of Report:
January 16, 1995), as amended, and is hereby
incorporated herein by reference.
2.5 Form of Pre-Incorporation Agreement in connection
with the IAI Joint Venture was filed as Exhibit 2.1
to the Company's Current Report on Form 8-K (Date of
Report: August 3, 1995) as amended, and is hereby incorporated by
reference.
2.6 Form of Joint Venture Agreement in connection with
the IAI Joint Venture was filed as Exhibit 2.2 to the
Company's Current Report on Form 8-K (Date of Report:
August 3, 1995) as amended, and is hereby incorporated by
reference.
27 Financial Data Schedule
</TABLE>
(23)
<PAGE>
(b) The registrant filed the following Form 8-K during the
quarter for which this report is filed:
<TABLE>
<CAPTION>
Date of Report Item
-------------- ----
<S> <C>
May 24, 1995 Updated pro forma financial data and historical financial statements for Tanon
Manufacturing, Inc. and BarOn Technologies, Ltd.
</TABLE>
(24)
<PAGE>
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.
ELECTRONIC ASSOCIATES, INC.
(Registrant)
Date: August 15, 1995 By: /s/ Jonathan R. Wolter
--------------------------------------
Jonathan R. Wolter,
Treasurer and Vice President - Finance
(25)
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENT OF INCOME FOR THE QUARTER ENDED JULY 1, 1995 AND THE
CONSOLIDATED BALANCE SHEET AS OF JULY 1, 1995 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> JUL-1-1995
<CASH> 87
<SECURITIES> 0
<RECEIVABLES> 13,798
<ALLOWANCES> (313)
<INVENTORY> 9,767
<CURRENT-ASSETS> 24,040
<PP&E> 12,795
<DEPRECIATION> (5,424)
<TOTAL-ASSETS> 47,444
<CURRENT-LIABILITIES> 26,619
<BONDS> 1,144
<COMMON> 41,007
0
0
<OTHER-SE> (23,483)
<TOTAL-LIABILITY-AND-EQUITY> 47,444
<SALES> 37,233
<TOTAL-REVENUES> 37,233
<CGS> 37,061
<TOTAL-COSTS> 47,268
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 678
<INCOME-PRETAX> (11,085)
<INCOME-TAX> 0
<INCOME-CONTINUING> (11,085)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (11,085)
<EPS-PRIMARY> $(1.05)
<EPS-DILUTED> $(1.05)
</TABLE>
