SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1994 Commission file number 1-4680
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
Securities registered pursuant to Section 12(b) of
the Act:
<TABLE>
<S> <C>
Title of each class Name of each exchange on which registered
Common Stock New York Stock Exchange
Preferred Stock Purchase Rights New York Stock Exchange
</TABLE>
Securities registered pursuant to Section 12(g) of the Act: None
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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
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
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The aggregate market value of the voting stock held by non-affiliates of the
Registrant was $82,633,360 as of March 24, 1995.
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As of March 24, 1995, there were 10,547,646 outstanding shares of the
Registrant's common stock.
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement with respect to the Company's Annual Meeting of Shareholders
to be held in June 1995 - Part III.
<PAGE>
PART I
ITEM 1. BUSINESS
Introduction
- ------------
During 1994 and through the date hereof, Electronic Associates, Inc. ("EAI"
or the "Company") has been engaged solely in the business of providing contract
electronic manufacturing services to customers ranging from the assembly of
printed circuit boards to the complete procurement, production, assembly, test
and delivery of entire electronic products and systems. The Company, therefore,
provides services to act in part, or in whole, as the manufacturing function of
its customers.
The Contract Electronic Manufacturing Industry
- ----------------------------------------------
In recent years, primarily as a response to rapid technological change and
increased competition in the electronics industry, the contract electronic
manufacturing industry has grown significantly. Original equipment manufacturers
("OEMs") have recognized that by utilizing domestic contract electronic
manufacturers they can improve their competitive position, realize an improved
return on investment, and concentrate in areas of their greatest expertise, such
as research, product design and development, and marketing. In addition,
contract electronic manufacturing allows OEMs to: bring new products to market
rapidly and adjust more quickly to fluctuations in product demand; avoid
additional investment in plant, equipment, and personnel; reduce inventory
carrying and other overhead costs; and establish fixed unit costs over the life
of a contract.
Historically, OEMs in the computer and electronic industries relied on
internal manufacturing capabilities to support their growth. Local job shops
were given short-term overloads and specialty work as required, often creating
underutilized capacity and unpredictable business levels for these
manufacturers. Many OEMs now consider contract electronic manufacturers an
integral part of their business and manufacturing strategy. Accordingly, the
contract electronic manufacturing industry has experienced significant growth as
OEMs have established long-term working arrangements with contract manufacturers
such as the Company.
Several important trends have developed recently in the contract electronic
manufacturing industry. OEMs increasingly require contract electronic
manufacturers to provide complete turnkey manufacturing and material handling
services, rather than working on a consignment basis in which the OEM supplies
all material and the contract electronic manufacturer supplies only labor.
Turnkey contracts involve manufacturing and engineering support, the procurement
of all materials, and sophisticated in-circuit and functional testing. The
manufacturing partnership between OEMs and contract electronic manufacturers
often require the use of increasingly sophisticated inventory management
techniques which minimize the OEM's investment in component inventories,
personnel and related facilities, thereby reducing costs.
Contract Electronic Manufacturing
- ---------------------------------
Currently, the Company's sole business consists of providing contract
electronic manufacturing services to customers ranging from the assembly of
printed circuit boards to the complete procurement, production, assembly, test
and delivery of entire electronic products and systems.
The Company's revenues have increased in each of the last five years, with
an exception of a moderate decline in the level of revenues in 1992 compared
with those of 1991. A summary of the Company's operating performance and
financial position for the last five years is provided in "Selected Financial
Data" at Part II, Item 6 of this Report on Form 10-K. Further, the Company's
financial statements, consisting of the balance sheets as of December 31, 1994
and 1993, together with the statements of operations, shareholders' equity, and
cash flows for each of the three years in the period ended December 31, 1994,
together with supplementary data, are provided in Item 8, Part II of this Report
on Form 10-K. From 1990 through 1993, the Company invested
2
<PAGE>
in new manufacturing equipment to accommodate the increased business for
surface-mount technology ("SMT") equipment. The SMT process is increasingly
replacing the older, through-hole technology previously utilized in the assembly
of printed circuit boards. SMT allows for production of a smaller circuit board,
with greater component and circuit density, resulting in increased performance.
Management believes that SMT will continue to constitute an increasing
percentage of printed circuit board production and assembly.
The Company manufactures over 1500 different assemblies which are
incorporated into product lines of over 30 different companies. The Company
provides contract electronic manufacturing services primarily for manufacturers
of: micro, mini and mainframe computers; computer peripheral equipment; high
quality graphic equipment; office equipment; telecommunications equipment;
consumer appliances, industrial tools and measuring devices.
Research and Development
- ------------------------
The Company continually evaluates the potential for, and feasibility of,
adopting new processes or techniques which can improve manufacturing quality and
efficiency. The cost of these efforts, together with those for manufacturing
training and quality programs, are reported as expenses when incurred. Such
expenses amounted to $54,000 in 1993 and $967,000 in 1992. No research and
development expenses were incurred in 1994. Of the expenses associated with
research and development incurred in 1993 and 1992, approximately $41,000 and
$933,000, respectively, were reimbursed by one customer and were incurred in
connection with operations discontinued by the Company in 1993 and have no
alternative use.
Quality Control
- ---------------
The Company intends to achieve "ISO 9000" certification for all of its
manufacturing facilities in 1995. International Standards Organization ("ISO")
certification refers to a series of quality system standards adopted to ensure
that companies worldwide are in compliance with a documented system of quality
processes and procedures. The Company has created a team to achieve this
important objective.
Suppliers
- ---------
The Company uses the services of numerous suppliers of electronic components
and other material for its manufacturing operations. Substantially all the
materials used in the Company's products are components purchased from
suppliers. Components generally are ordered when the Company has a firm purchase
order or letter of intent from a customer to purchase the completed assemblies.
Generally, the Company is not dependent upon a single source of supply for
materials or components that it considers important to its business, since
multiple suppliers are available for most important components or their
substantial equivalent.
Competition
- -----------
The contract electronic manufacturing services provided by the Company are
available from many independent sources as well as in-house manufacturing
capabilities of current and potential customers. Some of the Company's
competitors have greater financial, manufacturing and marketing resources than
the Company. The Company believes that the primary basis of competition is
quality, service, price and ability to deliver finished products on a timely and
reliable basis. The Company believes that it competes favorably with respect to
those factors.
Contracts
- ---------
The Company's contracts are provided for services to be performed primarily
on a fixed-price basis, although change orders on large contracts are not
unusual. The contracts generally provide termination rights for customers, but
upon such termination the Company would be entitled to reimbursement for
allowable costs
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<PAGE>
already incurred. Other than the contracts with Iris Graphics, Inc. described
below, the Company has no long- term contracts for the sale of products or
services that are individually material.
Customers and Marketing
- -----------------------
Most of the Company's sales are to industrial companies which use the
products in a variety of high-technology applications, including those for
computers, telecommunications devices, high-quality graphics, and medical
testing devices.
Substantially all of the Company's net sales during the year ended December
31, 1994 were derived from customers which were also customers during 1993. In
1994, the customers which accounted for more than 10% of the Company's sales
from continuing operations were Concurrent Computer Corporation, Iris Graphics,
Inc., and Dialogic Corporation which accounted for 33%, 25%, and 11% of sales,
respectively. In 1993, services to Data Switch Corporation, to which the Company
provided more than 10% of its sales in 1993, terminated its relationship with
the Company. The loss of potential future revenue from Data Switch Corporation
was offset, in part, by the Company's ability to expand service to existing
customers and to attract new customers. Currently, the Company remains dependent
upon its large customers. Because the loss of one or more of these customers
could have a material adverse effect on its operations, the Company maintains
continued dialogue with all its customers to ensure satisfactory quality and
on-time delivery services. Also, the Company's marketing programs are focused to
identify and develop opportunities to provide contract electronic manufacturing
services to new customers.
Historically, the Company has had substantial recurring sales from existing
customers. The Company seeks to develop long-term relationships with a small
number of customers. Marketing efforts are aimed at obtaining similar long-term
relationships with new customers, as well as maintaining business with existing
customers. While the Company believes that its relations with its customers are
good and that their business will continue, specific purchase orders are
generally of less than one year in duration, and there is no assurance that
future orders will be obtained. The volume of contract manufacturing business
also depends upon the success of customers' sales.
The Company employs a variety of marketing techniques for the sale of its
products, including direct sales efforts by an employed sales force, and the
utilization of independent sales representatives.
<TABLE>
<CAPTION>
Market Served Representative
by Customers Percentage of 1994 Sales Customers
- ------------ ------------------------ ------------
<S> <C> <C>
Computers 33 Concurrent Computer Corp.
High Quality Graphics 25 Iris Graphics, Inc.
Telecommunications 11 Dialogic Corporation
Consumer Products 9 Stillwater Designs
Industrial Tools 7 Yaskawa Electric America, Inc.
Other 15 Various
</TABLE>
Backlog
- -------
The Company's backlog consists of firm purchase orders which typically are
shipped within twelve months from time of receipt of the order. Backlog may not
increase at the same rate as the Company's net sales due to the increasing trend
of OEMs to reduce their lead time for purchase orders. Since purchase orders may
be accelerated or deferred by rescheduling or cancelled by payment of
cancellation charges, backlog does not necessarily reflect future sales levels.
The approximate amount of the Company's backlog for continuing operations at the
end of 1994 and 1993 was $19,240,000 and $19,453,000, respectively. It is
anticipated that
4
<PAGE>
substantially all of the 1994 year-end backlog will be delivered in 1995. One of
the Company's customers, Iris Graphics, Inc., has placed orders included in the
backlog at December 31, 1994, and December 31, 1993 of approximately $11,101,000
and $12,500,000 respectively.
1994 Developments
- -----------------
During 1994, the Company's sales increased, gross profit increased, and
selling, general and administrative expense declined. The Company's net loss
from continuing operations in 1994 was $4,784,000 which includes the
non-recurring provision for restructuring of $2,400,000, compared to a net loss
of $4,664,000 in 1993 from continuing operations. The improvement in results of
operations was due to a combination of increased sales during the year and
cost-cutting measures imposed during the first quarter of 1994. In the first
quarter of 1994, the Company undertook an intensive effort to eliminate all
unnecessary expenses, including a significant reduction in its use of
consultants and a 20% salary reduction imposed on substantially all employees on
January 15, 1994. Such salary reduction was partially restored later in the
second and third quarters of 1994, and was fully restored in January 1995.
However, the additional expense associated with the elimination of the 20%
salary reduction should be offset, in part, by the reduction in staff resulting
from the Company's restructuring undertaken in December 1994 in anticipation of
the Tanon acquisition.
As a result of negative cash flows from operations and continued operating
losses in 1994, the Company required additional working capital to support its
operations. In February 1994, the Company completed a private placement of
1,200,000 units of securities at a purchase price of $0.85 per unit (the
"February Private Placement"), providing net proceeds to the Company of
approximately $957,000 after the deduction of offering expenses of approximately
$63,000. Each unit consisted of one share of Common Stock, a Class A Warrant and
a Class B Warrant (the "February Units"). On July 25, 1994, a Registration
Statement on Form S-1 was filed by the Company with the Securities and Exchange
Commission to register these shares and certain other shares of common stock
held by certain selling security holders pursuant to their registration rights.
Pre-effective Amendment No. 2 to that registration statement was filed with the
Commission on December 23, 1994 and, as of the date of this report, such
registration statement has not been declared effective by the Securities and
Exchange Commission. Subsequent to the February Private Placement, the Company
continued to require additional working capital to fund its operations.
In order to raise additional capital, the Company commenced a private
placement of 2,500,000 units of securities in June 1994, at a purchase price of
$2.75 per unit for maximum gross proceeds of $6,875,000 (the "June Private
Placement"). Each unit consisted of one share of common stock of the Company and
one Class C Warrant ("Class C Warrant") to purchase one share of common stock of
the Company at an exercise price of $4.60 per share until June 30, 1998 (the
"June Units"). The terms of the Class C Warrants contained certain provisions
which granted the Company redemption rights on the warrants under certain
conditions. In August 1994, the Company completed the June Private Placement in
which the Company issued all 2,500,000 June Units for net proceeds of
$5,900,000. The Class C Warrants were called for redemption by the Company in
September 1994. The redemption was completed in December 1994, at which time
warrants for 1,482,744 shares had been exercised, which provided approximately
$6,600,000 of additional net proceeds to the Company, of which approximately
$4,800,000 net proceeds representing 1,098,833 shares was received in December
1994, with the remainder of proceeds received in January 1995. The 1,017,256
remaining Class C Warrants that were not exercised were redeemed at $0.05 per
share, for a total of $51,000 in redemption fees. In connection with the June
Private Placement, 250,000 unit warrants were issued to the placement agent
(which assigned such unit warrants to certain of its employees) to purchase
units which are exercisable at a price of $3.025 per unit, each unit consisting
of one share of EAI common stock and a Class C Warrant to purchase one share of
EAI common stock at a price of $4.60 per share.
On August 24, 1994, the Company signed a letter of intent to acquire Tanon
Manufacturing, Inc. ("Tanon"), of Fremont, California, formerly a privately-held
company, established in 1982, which provides contract electronic manufacturing
services to original equipment manufacturers. Pursuant to the letter of intent,
the
5
<PAGE>
Company entered into a Business Loan Agreement with Tanon, under which the
Company loaned Tanon the principal sum of $1,000,000 ("Tanon Loan") which
provided for interest to accrue at market rate and to mature on March 1, 1995,
with certain provisions for payment upon demand. On December 12, 1994, pursuant
to such letter of intent, the Company entered into the definitive Agreement and
Plan of Reorganization (the "Tanon Acquisition Agreement") which was consummated
in January 1995. The Tanon Loan was cancelled upon consummation of the Tanon
Acquisition Agreement. (See "Subsequent Events" below.)
In October 1994, the Company signed a letter of intent to acquire up to a
1/3 equity interest in BarOn Technologies Ltd. ("BarOn"), a privately-held
company located in Haifa, Israel. BarOn is engaged in research and development
of a computer input device that can directly digitize handwriting in a variety
of languages, from any surface. Pursuant to the letter of intent, in October
1994, the Company entered into a Business Loan Agreement with BarOn pursuant to
which the Company loaned to BarOn the principal sum of $500,000 ("BarOn Loan")
repayable on December 31, 1994, together with interest accruing at a market
rate. The BarOn Loan was cancelled upon consummation of the BarOn Agreements
(hereinafter defined) in January 1995. (See "Subsequent Events" below.)
In December 1994, in contemplation of the acquisition of Tanon, the Company
committed to a plan to close or sell its Southwest operations in Tucson, Arizona
and Nogales, Sonora, Mexico. The Company also decided to substantially
consolidate its corporate administrative functions, currently being conducted in
West Long Branch, New Jersey, into Tanon's Fremont, California facility. In
connection with these decisions, the Company recorded a $2,400,000 provision for
restructuring expense. The provision includes: $618,000 related to unamortized
goodwill and other intangibles which were acquired in connection with the 1992
acquisition of the Southwest operations; $395,000 representing the present value
of lease commitments in Tucson, Arizona; $279,000 representing book value and
disposal cost of abandoned equipment; $300,000 for inventory which can not be
utilized resulting from the termination of customer contracts; $303,000 of
contractual termination benefits for West Long Branch and Southwest employees;
$285,000 of executive separation costs; $145,000 to be paid to a third party to
assume certain lease obligations of the Company's subsidiary, Milotec S.A. De
C.V. ("Milotec") for the Nogales facility, and for other closing costs with
respect to the sale of Milotec and its operations in Nogales, Sonora, Mexico;
and $75,000 of other costs.
On December 30, 1994, in contemplation of the Tanon acquisition, the Company
purchased 265,957 shares of common stock of Tanon (representing a 13.6% equity
interest) for $2,000,000 comprised of conversion of the Tanon Loan to equity and
$1,000,000 cash. Other costs and expenses incurred in connection with the
acquisition of the stock amounted to approximately $202,000.
Subsequent Events
- -----------------
Tanon Acquisition. On January 4, 1995 (the "Tanon Effective Time"), the
-----------------
Company acquired Tanon pursuant to the Tanon Acquisition Agreement. The Company
intends to report the transaction as a purchase for accounting purposes. On the
Tanon Effective Time, Tanon was merged into a newly-formed wholly-owned
subsidiary of the Company and the Company issued 1,538,462 shares of common
stock of the Company with an appraised value of $13,077,000 in exchange for all
of the remaining outstanding shares of common stock of Tanon. In addition, the
Company granted to certain optionholders 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,
as mentioned above, which consisted, in part, of the cancellation of Tanon's
obligation to repay the Tanon Loan, and (b) the Company 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 transactions consummated pursuant to the Tanon
Acquisition Agreement, the Company, through its wholly-owned subsidiary, Tanon,
entered into an Employment Agreement with Joseph R. Spalliero (formerly the
Chairman and President of Tanon), pursuant to which Mr. Spalliero has been
engaged
6
<PAGE>
as the Chief Operating Officer of Tanon to serve for a term commencing on
January 4, 1995 and ending on January 3, 1997. Mr. Spalliero will receive an
annual base salary of $240,000. 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 signing cash bonus of $300,000 upon execution and
delivery of his Employment Agreement and is eligible, pursuant to the terms
thereof, to earn a cash bonus of up to $750,000, to be paid based upon Tanon
meeting certain goals, in equal installments during 1996, 1997 and 1998. Also,
on January 20, 1995, Mr. Spalliero was elected to serve as a Class III member of
the Board of Directors of the Company for a term expiring in 1997.
In connection with the merger, the Company loaned Mr. Spalliero, the Chief
Operating Officer of Tanon, $1,000,000 for a 30-month term with interest fixed
at the applicable Federal rate and accruing 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. 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.
BarOn Acquisition. 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 the BarOn Loan 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 which will be on May 16, 1995), and
$2,700,000 paid to various shareholders of BarOn in cash at closing 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 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 intends to account for the acquisition as a purchase
of a minority interest using the equity method of accounting. BarOn, which was
formed in 1992, is a privately-held, Israeli corporation based in Haifa, Israel,
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
transaction was consummated by (a) issuance of a series of identical Stock
Purchase Agreements (the "Stock Purchase Agreements") between the Company and
various shareholders of BarOn, pursuant to which the Company acquired an
aggregate 8.33% equity interest in BarOn, and (b) an Investment Agreement (the
"Investment Agreement") between the Company and BarOn, pursuant to which the
Company acquired (1) a 16.68% equity interest in BarOn, and (2) the right to
acquire up to an additional 8.33% equity interest in BarOn. The Stock Purchase
Agreements and Investment Agreement are collectively referred to as the "BarOn
Agreements". Presently, 11 persons unaffiliated with the Company own the
remaining 74.99% of the ordinary shares of BarOn.
Milo Resignation. On February 2, 1995, pursuant to negotiations which had
----------------
commenced in November, 1994, Charles A. Milo resigned as President and director
of the Company to pursue other interests. On that date, the Company entered into
a separation agreement with Mr. Milo pursuant to which (i) the Company agreed to
pay him his regular compensation as an employee through March 31, 1995, (ii) Mr.
Milo was deemed to have earned his $50,000 bonus, which was payable in four
equal installments through March 31, 1995, (iii) the loan to Mr. Milo by the
Company on September 15, 1994 in the principal amount of $160,000 was cancelled
with Mr. Milo having no further liability thereunder, (iv) $10,000 fee for
services to be rendered in connection with the closure or sale of the Company's
Mexican facility, and (v) the exercise period for certain options held by Mr.
Milo and his wife was extended to September 30, 1995. Mr. Milo agreed to limit
the sale of his shares of common stock in the Company during the two calendar
quarters following his resignation to 100,000 shares
7
<PAGE>
per each quarter and during the next six calendar quarters to those shares which
he is eligible to sell pursuant to Rule 144. After such period, there will be no
further restrictions on the sale of his shares.
Governmental Regulation
- -----------------------
The Company's operations are subject to certain federal, state and local
regulatory requirements relating to environmental, waste management, health and
safety matters. Management believes that the Company's business is operated in
compliance with all material applicable environmental, waste management, health
and safety regulations. However, new or modified requirements, which are not
currently anticipated, could be adopted creating additional expense for the
Company.
New Jersey has enacted an Industrial Site Remediation Act ("ISRA"). As is
the case with many other companies doing business in New Jersey, if the Company
were to move from its present facilities in New Jersey, sell its assets or
effect a change in its ownership, such a transaction would be subject to the
requirements of ISRA. Under ISRA, before such a transfer could take place, a
determination would need to be made to ensure there has been no unremediated
discharge of hazardous substances or wastes on the site; or a satisfactory
clean-up plan would need to be submitted to the New Jersey Department of
Environmental Protection and Energy ("DEPE"). Failure to comply with ISRA is
grounds for voiding the transfer by the purchaser or by DEPE, among other
enforcement remedies.
Employees
- ---------
As of December 31, 1994, 1993 and 1992, the Company had 334, 315 and 458
total employees, respectively. Individuals employed at the Company's
manufacturing facility in Nogales, Sonora, Mexico and included in such totals
were 124, 109 and 34 in 1994, 1993 and 1992, respectively.
Facilities
- ----------
See "Properties" at Item 2, Part I of this Form 10-K.
International Operations
- ------------------------
On May 29, 1992, the Company acquired all of the outstanding stock of
Milotec S.A. De C.V. in Nogales, Sonora, Mexico ("Milotec"), in connection with
the acquisition of this contract electronic manufacturing business.
The Company expects to sell its interest in Milotec in 1995.
Patents and Trademarks
- ----------------------
The Company does not hold any patent rights which are material to the
contract electronic manufacturing business, nor does the Company believe that
patent protection is an important competitive factor in its market. The Company
has received federal trademark registration for the mark "EAI", which is also
registered in many other countries.
ITEM 2. PROPERTIES
Currently, EAI's executive offices and East Coast manufacturing operations
are located at 185 Monmouth Parkway, West Long Branch, New Jersey 07764 at which
the Company occupies approximately 81,000 square feet. In addition, the Company
currently leases manufacturing facilities comprised of 33,120 square feet in
Tucson, Arizona and 22,000 square feet in Nogales, Sonora, Mexico. The Arizona
lease provides for a five-year term ending in May 1997, with an option to renew
for five years. The Mexico lease provides for a three-year
8
<PAGE>
term ending in July, 1996. EAI is responsible for all repairs, maintenance, and
utilities in its premises, and in New Jersey, is also responsible for taxes.
The Company, through its wholly-owned subsidiary, Tanon, occupies a single
facility with 105,000 square feet at 46360 Fremont Boulevard, Fremont,
California, through which it conducts production and administrative operations.
Pursuant to its plan of reorganization, the Company intends to substantially
consolidate its corporate administrative functions currently conducted in the
West Long Branch facility into the Fremont facility.
As part of its reorganization plan, the Company is currently negotiating for
the sale of its wholly-owned subsidiary, Milotec, which includes an assumption
by the purchaser of the lease for the manufacturing facility in Nogales, Sonora,
Mexico. The Company also intends to close its operations in Tucson, Arizona.
On September 17, 1993, the Company reached an agreement with the landlord of
its West Long Branch, New Jersey facility (the "Landlord") to amend its Lease.
Under the terms of the amendment (i) EAI surrendered approximately 52% of the
space occupied at such location; (ii) the Landlord granted rent abatement from
1993 to 1999 aggregating approximately $2.7 million; and (iii) the Lease was
extended from March 1999 to March 2006, during which extension period the rent
will be adjusted to the market rates for comparable facilities. In addition, the
Company expects to realize savings for heat, light and power due to the smaller
area to be occupied. In connection with the Lease amendments, the Company issued
the Landlord a warrant to purchase 130,000 shares of the Company's common stock
at an exercise price of $1.50 per Share. The warrant is exercisable from August
4, 1995 until August 4, 1998. In February, 1994, the Lease was further amended
resulting in additional rent abatements for the period February 1994 through
January 1996. In consideration for the Landlord's additional action, the Company
issued to the Landlord 100,000 shares of the Company's common stock.
See Note 6 of the Notes to Consolidated Financial Statements at Item 8, Part
II of this Form 10-K for information regarding the rents payable under the above
leases.
ITEM 3. LEGAL PROCEEDINGS
Bridgeport Rental and Oil Services Superfund Site. By letter dated August
-------------------------------------------------
31, 1988, the United States Environmental Protection Agency ("EPA") notified EAI
that EPA had identified EAI to be one of the parties potentially responsible for
costs incurred to date by EPA in taking corrective action, for future clean up
costs, and for any other possible damages in connection with the Bridgeport
Rental and Oil Services Superfund Site in Logan Township, New Jersey (the
"B.R.O.S. Site"). EAI's alleged connection to the B.R.O.S. Site is through
Rollins Environmental Services (NJ) 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 EPA's files suggests that 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, 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 EPA in connection with the B.R.O.S. Site. EPA estimated
at that time that the costs of the remaining remedial work will be in the range
of $70 - $100 million.
9
<PAGE>
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 EPA responded to 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 EPA's claims. Pursuant to
an interim agreement entered into in 1991 between Rollins and its customers,
including EAI, Rollins has agreed to defend its customers, including EAI, at
Rollins' own expense in connection with EPA and DEPE proceedings concerning the
B.R.O.S. Site.
There have been two actions filed in federal court with respect to the
allegedly required remediation at the B.R.O.S. Site. These two cases are
Rollins Environmental Services (NJ) Inc., et al. v. United States, et al., Civil
- -------------------------------------------------------------------------
Action No. 92-1253 (JEI), and United States v. Allied Signal Inc., et al., Civil
-------------------------------------------
Action No. 92-2726 (JEI). These two cases are being handled as a consolidated
matter for case management purposes. EAI is not named as a party to either of
these actions. However, as part of the case management process, directive order
recipients, such as EAI, were given an opportunity to participate in settlement
negotiations on these consolidated cases without being joined as a party.
In January 1993, EAI agreed to participate in settlement negotiations with
respect to the federal court actions described above without admitting liability
and to provide information regarding its alleged connection through Rollins to
the B.R.O.S. Site. As a result of its participation in the informal discovery
and settlement process, EAI will not be joined as a party to the litigation at
this time, thereby avoiding the costs associated with litigation. While the
administrative expenses of conducting discovery and settlement negotiations will
be shared equally among the participants, each participant is responsible for
fees of its own counsel. 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 may elect to
withdraw from participating in the informal discovery process and settlement
negotiations; however, if EAI withdraws or does not comply with the established
guidelines of the settlement process, or if the settlement process fails to
resolve these actions, EAI may be joined as a party in the legal actions
described above.
EAI has notified its comprehensive general liability insurers of these
potential claims. Because of the long period of time between the alleged
delivery of waste and the notification of claims, coverage may be the
responsibility of more than one insurer. One insurer, which covered occurrences
during five of the fifteen years, has responded and reserved rights. This
insurer has not denied coverage, but has sought to limit its responsibility to a
one-third share which it claims corresponds to its share of the fifteen-year
time period during which the alleged release took place. This insurer has
continued to pay one-third of EAI's defense costs, and although EAI believes
that it is entitled to coverage, it remains to be determined on what basis this
insurer will contribute to any settlement or judgment. The insurer for the
remaining years has denied coverage on grounds that EAI believes are without
merit under New Jersey law. This insurance company recently 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 and that EAI's participation in the
informal discovery and settlement process will not be used in connection with
any coverage decisions made on EAI's claim. Nonetheless, EAI has asked for
reconsideration of its position and is awaiting a response.
Lemco Associates. In October 1992, the following action, Lemco Associates,
---------------- ----------------
L.P. v. Electronic Associates, Inc., COMAX, Inc., American Metal, Inc., David
- -----------------------------------------------------------------------------
McAvoy III, et al. (Docket No. MON-L-6492-92), was instituted in the Law
- -----------------
Division of the Superior Court of New Jersey, Monmouth County, against EAI,
certain other defendants and each of their respective insurance carriers by
Lemco Associates, L.P., a limited partnership ("Lemco").
Lemco's claim involves real property in North Long Branch, New Jersey that
was once owned and used for manufacturing purposes by the United States
Government, EAI and others. The property is now owned by
10
<PAGE>
Lemco. In its complaint, Lemco alleges among other claims that (i) the property
is contaminated with hazardous substances and groundwater contamination exists;
(ii) the contamination is the result of the activities undertaken at the site by
the defendants, including EAI; and (iii) the property requires extensive
remedial work to clean up the contaminants in the soil and to protect against
the threat of migration of contaminants to neighboring properties. The complaint
states that in connection with a proposed sale of the property by Lemco, the
DEPE required Lemco to perform or agree to perform certain activities at the
site which included site characterization, remediation of all contamination and
removal of underground storage tanks. Lemco further asserts that the DEPE has
mandated that before Lemco can transfer title to the property, a cleanup must be
performed in order to restore the site to an environmentally sound condition.
Lemco also alleges that it has incurred, and continues to incur, substantial
costs and expenses in characterizing and remediating the environmental
contamination allegedly created by the defendants. Lemco's claims include, among
others, (i) common law causes of action involving ultrahazardous activity and
abnormally dangerous activity, (ii) failure to comply with certain environmental
statutes, including the New Jersey Environmental Cleanup Responsibility Act, the
New Jersey Environmental Rights Act, the New Jersey Underground Storage of
Hazardous Substances Act and the New Jersey Spill Compensation and Control Act,
(iii) failure to disclose the contamination and presence of certain underground
storage tanks, (iv) failure to properly comply with underground storage tank
regulations, and (v) breach of an implied covenant of good faith and fair
dealing. In its complaint, Lemco seeks compensatory, consequential and
incidental damages in unspecified amounts as well as declaratory relief stating
that defendants are liable for all future damages resulting from the alleged
contamination and compelling the defendants to indemnify Lemco for all damages
sustained by Lemco. In addition, Lemco seeks, among other things,
indemnification from any and all claims and suits brought against Lemco by any
governmental entity or private party for the costs of cleanup or damages
resulting therefrom.
In December of 1992, EAI filed an answer to the complaint denying the
allegations made by Lemco and asserting numerous defenses to such allegations.
In addition, EAI made cross-claims for contribution and indemnification against
all co-defendants to the extent of any liability that EAI may suffer as a result
of this matter and a counterclaim against Lemco which identifies Lemco as a
party responsible for the alleged contamination and seeks contribution and
indemnification from Lemco for any damages that may be incurred by EAI. In
January of 1993, EAI filed a third party complaint against certain named and
other unidentified entities, primarily former tenants or operators at the site
during EAI's ownership, seeking contribution and indemnification for any costs
and damages that EAI may suffer as a result of Lemco's claims.
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 and reimbursement of the costs of same. To date, the Company's
insurance carriers have agreed to pay 71% of its defense costs under a
reservation of rights. EAI will continue to seek full coverage from its
carriers.
Discovery is ongoing in this litigation. 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,
Lemcoclaims that it has expended approximately $424,000 in remediation costs,
including fees for legal oversight and consultation. If 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. At this time,
the Company and its environmental consultants have not evaluated the
information recently received from Lemco nor has any independent analysis
of the site been performed to determine the appropriateness of Lemco's
claim and of the estimated cost of remediation. Investigation of this
matter is ongoing; therefore, it is not possible to predict its outcome
at this time.
Pudles. On April 5, 1994, Stephen Pudles, a former Director of Marketing and
-----
Sales of the Company, filed an action in Superior Court of New Jersey, Law
Division, County of Ocean. The complaint states that (i) Mr. Pudles voluntarily
resigned his position with the Company; (ii) subsequent to his resignation he
agreed to continue to work for the Company for a specified period of time; and
(iii) an oral agreement was reached between Mr. Pudles and the former President
of the Company providing for certain compensation to be paid by the Company to
Mr. Pudles during such period. Mr. Pudles' complaint alleges that (1) the
Company
11
<PAGE>
breached its oral agreement with Mr. Pudles by refusing to pay the agreed upon
compensation to him; (2) the Company made negligent misrepresentation in
inducing Mr. Pudles to enter into such oral contract; and (3) that the Company
defrauded Mr. Pudles. The suit requests compensatory damages of approximately
$50,000 and $1 million in punitive damages from the Company.
The Company has filed an answer to Mr. Pudles' complaint denying the
plaintiff's allegations and asserting affirmative defenses. The Company has
tentatively settled this action for $41,250, payable in four installments over
three months, and is currently negotiating the final terms of a written
settlement agreement, which will include a release by the plaintiff of all
claims against the Company.
Vassalo. EAI was served in August 1988 with a complaint filed in Superior
-------
Court of New Jersey for Middlesex County on behalf of Marie Vassalo individually
and as administratrix of Charles Vassalo. EAI, five identified asbestos
manufacturers, and other unidentified "John Doe" defendants were named in the
complaint which alleged that as an employee of AT&T (the "AT&T Employee") from
1966 to 1986, including an unspecified period as an employee at the premises
rented by AT&T from EAI, the AT&T Employee was exposed to asbestos products and,
as a result, sustained severe personal injury or death. The Company settled this
case in August 1994 for a nominal amount and has been released from all claims
in connection therewith by the plaintiff.
EAI is a party to other litigation from time to time in the ordinary course
of its business, none of which is currently pending.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the security holders during the
fourth quarter of the fiscal year covered by this report.
12
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
EAI's common stock is traded on the New York Stock Exchange ("NYSE"). The
quarterly common stock price for 1994 and 1993 are as follows:
<TABLE>
<CAPTION>
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
- -------------------------------------------------------------------------------------------------------------
High Low High Low High Low High Low
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1994 3-7/8 1-1/8 5-1/8 3-1/8 8-3/8 4-1/2 8-3/4 6
1993 1-7/8 1-1/8 1-5/8 1-3/8 1-1/2 1 1-3/8 1
</TABLE>
There were approximately 4,410 record holders of the Company's common stock
as of March 24, 1995.
There have been no cash dividends declared since 1956 and no stock dividends
declared since 1966. If the Company were to become profitable, it would expect
that all of such earnings would be retained to support the business of the
Company. Accordingly, the Company does not anticipate paying cash dividends on
its common stock in the foreseeable future. Moreover, certain financial
covenants set forth in the Company's current loan agreement prohibit the Company
from paying cash dividends.
Although the Company's common stock is currently listed and trading on the
NYSE, currently and since September 11, 1991, the Company has not been in
compliance with one or more of the criteria necessary for continued listing on
the NYSE. The Company and the NYSE have had discussions with respect to this
issue. As of the date of this report, the Company believes that it is in
compliance with all of the NYSE's continued listing criteria, with the exception
of the minimum average earnings of $600,000 for each of the last three fiscal
years. To the Company's knowledge, the NYSE has not taken any affirmative action
to delist the common stock, but, as it has each time it has authorized the
issuance of additional shares for listing on the NYSE, it has indicated in a
letter dated March 29, 1995, approving the listing of additional shares of
common stock, that consideration is being given to the appropriateness of
continued listing of the Company's common stock. Management of the Company
intends to meet with representatives of the NYSE in April of 1995 in order to
discuss this matter. If the Company's common stock is delisted from the NYSE, it
could have a material adverse effect on the price and liquidity of the Company's
common stock.
13
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
(thousands of dollars except for per share amounts and Other Data)
1994 1993 1992 1991 1990
---- ---- ---- ---- ----
[-------------------Note 1-------------------]
<S> <C> <C> <C> <C> <C>
Operating Results:
Sales from Continuing Operations 30,539 26,024 22,248 22,933 19,620
Provision (Credit) for Restructuring 2,400 (68) 285 -- --
Loss from Continuing Operations before Taxes (4,784) (5,348) (3,524) (6,811) (497)
Loss from Continuing Operations, Net (4,784) (4,664) (3,189) (5,227) (334)
Income from Discontinued Operations, Net - 1,327 651 1,531 793
Net Income (Loss) (4,784) (3,337) (2,538) (3,696) 459
Income (Loss) Per Common Share:
Continuing Operations (.95) (1.76) (1.22) (2.02) (.12)
Discontinued Operations - .50 .25 .59 .28
Net Income (Loss) (.95) (1.26) (.97) (1.43) .16
- -----------------------------------------------------------------------------------------------------------------
Financial Position:
Current Assets 16,969 7,355 14,547 12,267 12,168
Current Liabilities 12,603 8,614 11,594 5,019 4,339
Working Capital 4,366 (1,259) 2,953 7,248 7,829
Net Property and Equipment 2,719 3,603 4,344 2,351 2,610
Total Assets 22,845 12,762 19,836 14,805 15,153
Shareholders' Equity 7,244 (546) 2,776 5,137 9,671
Common Shares Outstanding 8,108 2,661 2,646 2,588 2,602
Book Value per Common Share .89 (.21) 1.05 1.99 3.72
- -----------------------------------------------------------------------------------------------------------------
Other Data:
Number of Shareholders of Record 4,447 4,600 4,718 4,877 4,969
Number of Employees 334 315 458 368 379
Orders Received 30,326 18,805 31,592 20,064 24,656
Sales Backlog at Year-End 19,240 19,453 26,676 17,260 20,239
</TABLE>
Note 1 - Reclassified to reflect sale and discontinuation of operations (See
Note 4 of the Notes to Consolidated Financial Statements at Item 8, Part II of
this Form 10-K).
14
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
EAI's Results of Operations: 1994 compared to 1993
- --------------------------------------------------
During 1994, the Company's sales increased, gross profit increased, and
selling, general and administrative expenses declined. The Company's net loss
from continuing operations in 1994 was $2,384,000 before the non-recurring
provision for restructuring of $2,400,000, compared to $4,664,000 in 1993.
Sales of $30,539,000 in 1994 increased $4,515,000, or 17.3%, from sales of
$26,024,000 in 1993, resulting primarily from increased orders for contract
electronic manufacturing services from the Company's existing customers.
Cost of sales increased to $27,759,000 in 1994 primarily due to the
Company's increased level of sales. Cost of sales declined as a percentage of
revenue to 90.9% in 1994, compared to 93.5% in 1993. As a result, gross profit
increased to $2,780,000, or 9.1% of revenue, in 1994 compared to $1,680,000, or
6.5% of revenue, in 1993. The reduction in cost of sales as a percentage of
revenue resulted from cost reduction measures put in place during 1994,
consisting primarily of a 20% compensation reduction for substantially all
employees, facility expense reductions in the West Long Branch location
resulting from the Lease renegotiations, and insurance and consultant fee
expense reductions. The 20% compensation reduction for substantially all
employees was completely eliminated in January 1995, with employee compensation
levels returning to prereduction levels. This additional compensation expense
should be offset, in part, by the reduction in staff resulting from the
restructuring activities undertaken in December 1994 as discussed below.
Selling, general and administrative expenses decreased in 1994, both in
amount and as a percentage of revenue. Selling, general and administrative
expenses of $4,591,000 in 1994 declined from $7,000,000 in 1993. As a result,
selling, general and administrative expenses declined to 15% of revenue in 1994
from 26.9% of revenue in 1993. The decline resulted from a reduction in staff,
and the 20% compensation reduction for all employees and reduction in the
Company's use of business advisory consultants in 1994 as discussed above.
Interest income of $89,000 was recorded in 1994, reflecting investment
income from the proceeds of the Company's capital raising efforts, represented
primarily by the June Private Placement. Interest expense of $662,000 in 1994
increased $180,000 compared to $482,000 in 1993 and, as a percentage of revenue,
increased to 2.2% from 1.9% in 1993. The increase in interest expense reflects
both the increase in short-term interest rates during 1994, as well as an
increase in the balance of the Company's revolving credit facility to support
the greater sales volume during the year.
During the fourth quarter of 1994, in anticipation of the Company's
acquisition of Tanon, which is discussed below, the Company evaluated the
operating costs of its existing facilities and the strategy by which it would
combine its manufacturing operations and certain administrative operations with
those of Tanon. As a result, the Company decided to close or sell its
manufacturing facilities in Nogales, Sonora, Mexico, close its manufacturing
facilities in Tucson, Arizona, and to consolidate certain of the Company's
corporate headquarters and administrative operations with Tanon's operations in
Fremont, California, and recorded a non-recurring provision for restructuring of
$2,400,000. The provision was established to record the expense of closing the
Tucson facility, selling the Nogales facility, and eliminating approximately 170
positions in the Tucson, Nogales and West Long Branch facilities. The
restructuring activities are expected to be completed by the second quarter of
1995. The Company's management believes that the acquisition of Tanon,
combined with the restructuring activities undertaken in contemplation thereof,
will have a positive effect on the operations of the Company by increasing
sales, consolidating administrative functions and eliminating duplicate
expenses, and improving 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.
15
<PAGE>
EAI Results of Operations: 1993 compared to 1992
- ------------------------------------------------
Discontinued Operations. On June 30, 1993, the Company sold its Field
-----------------------
Service Division and discontinued the operations of its Product Engineering
Division. Accordingly, the 1992, 1991, 1990, and 1989 financial statements have
been reclassified to reflect these operations as discontinued. These decisions
were based upon several factors, the most prevalent of which was the desire to
focus the Company's resources upon the contract electronic manufacturing
business.
The buyer of the Field Service Division, Halifax Corporation ("Halifax"),
purchased all of the inventory and fixed assets and assumed certain liabilities
of that Division. The net book value of the assets sold was approximately
$1,700,000. In consideration for the sale of these assets, the Company received
$2,400,000 cash at closing, relief from $800,000 of liabilities which were
assumed by Halifax, and a deferred payment not to exceed $1,000,000 payable to
the Company at six month intervals by Halifax (the "Halifax Deferred Payment").
Halifax has acknowledged that the condition precedent with respect to the
Halifax Deferred Payment has been satisfied and, to date, it has paid $394,000
of the Halifax Deferred Payment. However, Halifax has also asserted that it is
entitled to a set-off of certain claims in the aggregate amount of approximately
$230,000 and has deposited $200,000 in escrow related to the payment due August
31, 1994. A reserve of $350,000, to reflect the present value of the expected
cash flows and contingencies related to the sale, was established in connection
with the Halifax Deferred Payment. At December 31, 1994, the reserve was
$240,000 reflecting a reduction of $110,000 since June 30, 1993. Other costs of
the transaction amounted to $450,000. As a result of this transaction, the
Company realized a pretax profit of approximately $1,700,000 which is included
in the Income from Disposition of Discontinued Operations.
As a result of the decision to discontinue the operations of the Product
Engineering Division, the Company recorded a charge of $250,000 principally for
severance costs. This charge has been recorded as Income from Disposition of
Discontinued Operations. In addition, in 1993, (i) the Company took a charge of
$107,000 for all penalty fees incurred under its Mellon Bank loan agreement,
(ii) a charge for the relocation of equipment, which had been taken in the year
ended December 31, 1992, was reversed to the extent of $68,000, (iii) a reserve
of $100,000 established in connection with the sale of the Company's Japanese
subsidiary was deemed to be no longer required and (iv) the Company renegotiated
the lease on its West Long Branch facility, as a result of which, the reserve
established for excess space in December 1991 was deemed to exceed the amount
required by $296,000 and was therefore reversed by such amount.
See Note 4 of the Notes to Consolidated Financial Statements at Item 8, Part
II of this Form 10-K for additional information regarding discontinued
operations.
Continuing Operations. In 1993, sales from continuing operations increased
---------------------
$3,776,000 or 17%. Of this increase $1,151,000 or 30% was due to the Milo
Acquisition (hereinafter defined) in May 1992. The revenue generated by the
Milo Acquisition contributed to the operating results of EAI for the full
fiscal year 1993.
Gross profit and margins of $1,680,000 representing 6.5% as a percentage of
revenue, for fiscal year 1993 declined from $2,863,000, representing 12.9% as a
percentage of revenue in 1992. Contributing to the decline for the year from
prior periods was continued pricing aggressiveness which resulted in higher
volume but lower margins. In addition, competitive price pressure and
manufacturing inefficiencies caused by increased lead times for surface-mount
components and the transfer of certain major projects from New Jersey to Arizona
also put downward pressure on margins.
Selling, general and administrative expenses increased $1,177,000 or 20% to
$7,000,000 in 1993 compared with $5,823,000 in 1992. The increase in selling,
general and administrative expenses was proportionate to the increase in sales
and, as a result, represented 26.9% and 26.2% of revenue in 1993 and 1992,
respectively. The Milo Acquisition contributed approximately $390,000 to the
increase. Furthermore, corporate administrative expenses were higher due to
legal and consulting fees, and penalty fees incurred in connection with
noncompliance with, and restructuring of the Mellon Credit Facility prior to its
retirement upon execution of the
16
<PAGE>
Congress Financial Loan Agreement. (See "EAI's Liquidity and Capital Resources:
1993" below.) Interest costs were $203,000 higher in 1993 than in 1992.
The net loss for 1993 increased $799,000 compared with 1992. The loss from
continuing operations (as described in Note 4 of the Notes to Consolidated
Financial Statements at Item 8, Part II of this Form 10-K) was $4,664,000
compared with $3,189,000 in 1992, resulting primarily from continued delays in
the timing and receipt of orders from customers.
During 1993, the Company renegotiated the lease (the "Lease") on its West
Long Branch, New Jersey facility. As a result of the 1993 negotiation, the
reserve established for excess space in December 1991 was determined to exceed
the amount required and was reversed to the extent of $519,000. The space
occupied by the Company was reduced by 88,000 square feet or approximately 52%
and the term of the Lease was extended from March 1999 to March 2006. The
Company currently occupies 81,000 square feet. The Company issued a warrant to
its landlord to purchase 130,000 shares of the Company's common stock at an
exercise price of $1.50 per share. The warrant is exercisable from August 4,
1995 through August 4, 1998. In return the Company received abatements totaling
approximately $2.7 million. Due to the trend toward miniaturization in the
electronics industry and changes in products that it produces for its customers,
as well as the sale and discontinuance of operations, the Company requires less
space than it did in prior years. The Company has reduced expenses on heat,
light and power due to the reduction in space occupied and has realized savings
of approximately $200,000 on an annual basis. In February 1994, the Lease was
further amended; the Company received a rent abatement of approximately $114,000
over the period February 1994 through March 1995. In consideration for the
amendments, the Company issued 100,000 shares of the Company's common stock to
its landlord. See "Properties" at Item 2, Part I of this Form 10-K and Note 2 of
the Notes to Consolidated Financial Statements at Item 8, Part II of this Form
10-K.
On May 29, 1992, the Company acquired certain assets of Milo Technologies,
Inc. ("MTI") and all of the outstanding stock of Milotec, a contract electronic
manufacturer with facilities in the state of Arizona and in Nogales, Sonora,
Mexico (the "Milo Acquisition"). The Company paid $900,000, consisting of
$300,000 cash, $100,000 of the Company's common stock and $500,000 in promissory
notes, of which $100,000 principal amount was payable in either cash or the
common stock of the Company at the Company's option. The acquisition was
accounted for by the purchase method. The operating results of the Milo
Acquisition are included in the Company's consolidated results of operations
from the date of acquisition. The purchase price was allocated to the assets
acquired and liabilities assumed based on their estimated fair value at the
acquisition date. The excess of the purchase price over the estimated fair value
of the assets acquired of $480,000 was recorded as goodwill to be amortized on a
straight-line basis over 40 years.
Tanon Acquisition
- -----------------
On January 4, 1995, the Company acquired Tanon, a privately-owned contract
electronic manufacturing firm, which provides services to original equipment
manufacturers. The Company intends to report the transaction as a purchase for
accounting purposes and, accordingly, the results of operations of Tanon will
be included in the consolidated financial statementsof the Company in 1995.
Tanon's manufacturing services consist primarily of theassembly of printed
circuit boards, the manufacturing and assembly of integrated electro-mechanical
systems and related engineering support.
Tanon's Results of Operations: 1994 Compared to 1993. Tanon's sales
----------------------------------------------------
of $50,735,000 in 1994 increased 29% from sales of $39,451,000 in 1993. The
increase in Tanon's revenue results primarily from turnkey assembly services in
which the Company procures some or all of the assembly components. Such projects
typically generate greater revenue and gross profit due to the cost of materials
related to these projects. The net loss of $155,000 in 1994 reflects primarily
the lower profit margin on revenues related to the materials management portion
of its turnkey assembly services.
The sales increase in 1994 reflected increased demand for Tanon's
turnkey and consigned contract electronic manufacturing and electro-mechanical
assembly services. During 1994, Tanon's gross profit declined to $3,251,000, or
6.4% of revenue, from $3,584,000 or 9.1% of revenue, in 1993, primarily due to
competitive
17
<PAGE>
pressure on profit margins relating to the materials portion of its business.
Management continually evaluates the margin on the material and labor portion of
its service revenues and is taking necessary action in an attempt to improve the
efficiency and cost of its materials management.
The Company's sales, general and administrative expenses increased
moderately to $2,768,000 in 1994 from $2,653,000 in 1993. However, as a
percentage of sales, selling, general and administrative expenses declined to
5.4% in 1994 from 6.7% in 1993 resulting primarily from a reduction in the
administrative and executive staff of Tanon and increased sales. Tanon continues
to focus on control of non-manufacturing expense in response to the lower than
expected gross profit on turnkey contract electronic manufacturing services.
Tanon's interest expense increased to $638,000 in 1994 from $408,000
in 1993 reflecting the increase in short-term interest rates throughout 1994 and
the increased balance of the Tanon's credit facility to support the greater
sales volume in 1994.
Tanon had total assets of $17,892,000 and total liabilities of
$14,604,000 at December 31, 1994, as compared with total assets of $14,131,000
and total liabilities of $12,633,000 at December 31, 1993.
Tanon's Results of Operations: 1993 Compared to 1992. Sales increased
----------------------------------------------------
to $39,451,000 in 1993 from $21,772,000 in 1992, primarily reflecting the
increased demand for Tanon's electro-mechanical assembly, turnkey and consigned
contract manufacturing services. During 1993, operating and administrative
facilities were consolidated and expanded in Fremont, California and experienced
executive officers were recruited in order to manage the increasing contract
service demands placed upon Tanon. The net loss of $222,000 in 1993 reflects
non-recurring expenses resulting from a facilities consolidation; had this
expense not been recorded, operating income would have been $931,000,
representing 2.4% of revenue, compared to $562,000, or 2.6% of revenue in 1992.
Sales of $39,451,000 in 1993 reflected substantial growth in
surface-mount assembly services, which revenue increased 94.4% to $34,800,000 in
1993 from $17,900,000 in 1992; electro-mechanical assembly revenue increased
21.1% to $4,600,000 in 1993 from $3,800,000 in 1992. As a result of the lower
margin on materials sales and the increased fixed expense associated with
expanded manufacturing facilities, the Company's gross margin declined to 9.1%
in 1993 from 10.7% in 1992.
Tanon's selling, general and administrative expenses increased
primarily as a result of recruiting experienced executives in the marketing,
finance, materials and manufacturing-quality disciplines, together with the
increase in facilities-related expense for expanded administrative operations.
Administrative expenses declined to 6.7% of revenue in 1993 from 8.1% of revenue
in 1992, reflecting the Company's focus to attain competitive expense levels as
revenues continue to grow.
In August 1993, Tanon consolidated its production and administrative
operations into one facility with 105,000 available square feet in Fremont,
California. Prior to that time, Tanon had operated 3 buildings with 71,000
available square feet in Milpitas, California. As a result of the consolidation,
Tanon recorded a non-recurring provision for moving expenses, retirement of
unamortized leasehold improvements and remaining lease payments for the vacated
facilities.
BarOn Acquisition
- -----------------
On January 16, 1995, the Company acquired a 25.01% equity interest
in BarOn and a right to acquire an additional 8.33% equity interest in BarOn,
a privately-owned Israeli corporation based in Haifa, Israel. BarOn is 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 Company
intends to account for this transaction as a purchase of a minority interest
using the equity method of accounting. Accordingly, the Company's investment
in BarOn and 25.01% equity interest in the results of BarOn will be included
in the consolidated results of the Company in 1995.
18
<PAGE>
BarOn is a development stage company which was formed in July 1992 and has
experienced losses of $978,000 and $310,000 for 1994 and 1993, respectively.
BarOn had total assets of $425,000, total liabilities of $334,000, and net
equity of $91,000 at December 31, 1994. BarOn has had no sales since its
formation.
As a result of the acquisition of a 25.01% equity interest in BarOn, the
Company and BarOn entered into a Manufacturing and Consulting Agreement, dated
January 16, 1995, pursuant to which the Company was granted a right of first
refusal to enter into manufacturing contracts with BarOn for the manufacture of
BarOn's products. The Company agreed to provide manufacturing consulting
services to BarOn when BarOn's products are manufactured by an independent third
party.
EAI's Liquidity and Capital Resources: 1994
- -------------------------------------------
Net cash used by operations of $4,342,000 in 1994 increased by $2,558,000
over cash used in operations in 1993 resulting primarily from the net loss and
increases in accounts receivable and inventories. Liquidity, as measured by cash
and cash equivalents, increased to $6,157,000 at December 31, 1994 from $64,000
at December 31, 1993. Liquidity, as measured by working capital, increased to
$4,366,000 at December 31, 1994 from a deficit of ($1,259,000) at December 31,
1993. The improvement in liquidity results primarily from the Company's capital
raising efforts throughout 1994. The Company's ability to generate internal cash
flow is derived primarily from the sale of the material and labor elements of
its contract electronic manufacturing services. During 1994, the revenue from
such services increased 17.3% to $30,539,000. Accounts receivable increased
$2,226,000 or 61.9% as compared to 1993, while inventory increased $1,395,000 or
45.2% as compared to 1993. Such increases in accounts receivable and inventory
were primarily due to the increase in sales orders placed during the fourth
quarter of 1994. The majority of the increase in accounts receivable in 1994
relates to one of the Company's major customers, which is a marginally
profitable enterprise and which is in process of introducing new products to its
market. The Company evaluates this receivable balance continually and maintains
constant dialogue with management of the customer. To date, the receivable
balance has been paid in accordance with terms established with the customer.
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, usage of inventories on alternative customers' assemblies or the
cancellation of purchase commitments with or without the payment of cancellation
penalties.
In January and February 1994, in order to conserve cash and reduce expenses,
the Company imposed a 20% decrease in pay on substantially all employees,
arranged for additional concessions from its West Long Branch landlord, deferred
certain debts and lease payments and arranged to raise capital as described
below.
Cash flows from financing and investment activities during 1994 amounted to
$13,192,000, resulting primarily from the issuance of the February Units in the
February Private Placement and the issuance of the June Units and exercise of
related Class C Warrants issued in the June Private Placement, net of reductions
in outstanding debt. The proceeds from these activities were used to acquire
Tanon and to purchase a 25.01% equity interest in BarOn, and to maintain cash
balances for working capital. The Company disbursed approximately $3,400,000 in
connection with the acquisition of Tanon which was consummated on January 4,
1995 (of which $1,400,000 was disbursed subsequent to year-end), and disbursed
approximately $4,700,000 in connection with the acquisition of a 25.01% equity
interest in BarOn which was consummated on January 16, 1995 (of which $4,200,000
was disbursed subsequent to year-end).
The loan agreement between the Company and its lender, Congress Financial
Corporation ("Congress") contains certain working capital and tangible net worth
covenants. At December 31, 1994, the Company exceeded the working capital
covenant by $9,090,000 and exceeded the tangible net worth covenant by
$7,744,000. As of December 31, 1994, the principal amount outstanding under
the Revolving Loan was $5,219,000, and the outstanding balance of the Term Loan
was $945,000, with additional borrowing availability of $268,000 under the
Congress Loan Agreement. See "EAI's Liquidity and Capital Resources: 1993."
19
<PAGE>
On August 4, 1994, the Company sold the assets of its discontinued Product
Engineering Division to a company organized by certain of its former employees.
The Company is a party to a contract with a Japanese company that may require
future performance. While the sale required an assignment and assumption of such
contract, the Company will be required to perform such contract following the
sale if additional orders are placed by the Japanese company and the purchaser
of the Product Engineering Division assets is unable to perform under such
contract. The Company's discontinuance and sale of the Product Engineering
Division, however, renders it more difficult for the Company to perform such
contract in such event. Due to the lack of any sales of the product covered by
the Japanese contract, management believes that it has little or no exposure
under such contract and such contract should not have a material adverse impact
on the Company's earnings or liquidity.
On August 11, 1994 the Company was informed by Halifax (the purchaser of the
Company's Field Service Division) that it is entitled to a set-off of certain
claims in the aggregate amount of approximately $230,000 and of its intention to
withhold the $200,000 installment of the Halifax Deferred Payment due to the
Company on August 31, 1994 as a result of such claims. The Company has denied
liability for such claims. At the date hereof, Halifax has deposited $200,000 in
escrow related to the payment due August 31, 1994 and approximately $6,000 of
the payment due on February 28, 1995, as required by its agreement with the
Company and both parties have entered into settlement discussions. The balance
of $194,000 of the payment due on February 28, 1995 was paid on schedule.
At March 31, 1995, the Company had accounts payable of approximately
$4,530,000 of which approximately $489,000 had been outstanding for over 90
days. This compares with $4,711,000 of accounts payable at December 31, 1994, of
which $426,000 had been outstanding for over 90 days. At December 31, 1993, the
Company had accounts payable of $3,674,000 of which $929,000 had been
outstanding for over 90 days.
Backlog at December 31, 1994 was $19,240,000, a decrease of $213,000 or 1%
from the balance of $19,453,000 at December 31, 1993. The backlog at both of
these dates did not include any orders from Data Switch Corporation or Whistler
Corporation, which were lost as customers in 1993. The Company does not believe
that the loss of either of them had a material adverse effect on the Company in
1994 and, although it is not possible to predict with certainty the effect of
losing the two customers indicated above, does not believe their loss will have
a material adverse effect on the Company in 1995 in view of its receipt of
larger orders from existing customers and orders received from new customers in
1994, and the prospects for receiving orders from existing and new customers.
In the first quarter of 1995, the Company made commitments for the purchase
of manufacturing equipment of approximately $2,000,000 for the West Long Branch
manufacturing facility and approximately $3,000,000 for the Fremont, California
manufacturing facility; neither the Company, nor Tanon prior to its acquisition
by the Company, made material additions to their capital equipment during 1994.
The Company intends to finance the capital equipment with financing arranged
through existing relationships with equipment lease financers, however, the
Company has not entered into any agreements or commitments for such equipment
lease financing.
As reflected in the accompanying financial statements, the Company has
incurred significant losses and had negative cash flows from operations in each
of the last three years. As discussed above, in contemplation of the Tanon
acquisition in January 1995, the Company had undertaken to restructure its
operations to reduce operating costs and improve operating results, which
restructuring is expected to be completed by the second quarter of 1995.
However, the continued operating losses experienced by the Company through
December 31, 1994 give rise to the need for additional working capital in the
near term to support the Company's existing operations and to support future
growth. As a result of the negative operating cash flow, the recurring
operating losses experienced by the Company in recent years, and the
consummation of the Tanon and BarOn acquisitions in January 1995, the Company
estimated that it would require between $2 million and $3 million of additional
equity or debt financing to meet its obligations through December 31, 1995.
Such capital requirement does not include EAI's commitment to use its best
efforts to make an investment in Tanon of up to $5,000,000 as contemplated by
the Tanon Acquisition Agreement, nor EAI's option to invest $2,000,000 in cash
in BarOn to acquire an additional 8.33% equity interest in BarOn (which would
give EAI an aggregate 33-1/3% equity interest in BarOn) as contemplated by the
Investment Agreement with BarOn. In the first quarter of 1995, the Company
initiated several actions to raise capital, including a private placement of
equity securities, and had also retained an investment bank to assist in its
efforts to raise additional capital.
20
<PAGE>
In addition, the Company is seeking additional debt financing through
existing relationships with commercial lenders. By April 14, 1995, the Company
had raised net proceeds of approximately $3,000,000 through the sale of 525,000
shares of its common stock at $5.85 per share in an offering exempt from the
registration provisions under the Securities Act of 1993, as amended. The number
of shares issued in this sale may increase without additional proceeds to the
Company in the event that 80% of the average market price of the Company's
common stock for the five day period ending forty days after the date of
closing is less than $5.85 per share. The Company intends to use the net
proceeds from this offering for working capital and to satisfy the final
$1,000,000 obligation for the purchase of a 25.01% equity interest in BarOn,
which is due on May 16, 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 during the next year.
The Company's business plan includes making certain additional investments
with respect to the Tanon and BarOn as a result of the acquisitions made in
January, 1995, 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, if exercised, could provide the Company with
additional capital of approximately $4,400,000, however, no assurance can be
given that any 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 has engaged an
investment banking firm to assist in raising additional capital. There can be no
assurance that such additional borrowings or financing will be available.
Reference is made to "Legal Proceedings" at Item 3, Part I of this Form 10-K
for information concerning certain pending claims which could have an adverse
impact on the Company's income and cash flow. Reference is also made to Note 14
of the Notes to Consolidated Financial Statements at Item 8, Part II of this
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.
Inflation has not had any significant impact on the Company's business to
date.
Although the Company does not believe its business is affected by seasonal
factors, 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.
Tanon Acquisition. 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 with an appraised value of $13,077,000 in
exchange for all the outstanding common stock of Tanon. In addition, as further
contemplated by the Tanon Acquisition Agreement (a) the Company invested
$2,000,000 in Tanon (which included the cancellation of Tanon's obligation to
repay the Tanon Loan), 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, Mr. Spalliero 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, the Company loaned Mr.
Spalliero, the Chief Operating Officer of Tanon, $1,000,000 for a 30-month term
with interest fixed at the applicable Federal rate and accruing 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.
Tanon has a revolving line of credit with a commercial bank in the amount of
$5,500,000 which is secured by accounts receivable and inventory. The line of
credit bears interest at the bank's prime rate plus 1.75%. The terms of the
credit agreement provide for 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 compliance
therewith, at December 31, 1994 were: achieving tangible net worth of greater
than $1,268,000 which Tanon achieved with tangible net worth of $3,288,000;
achieving working capital greater than a deficit of ($250,000), for which Tanon
achieved $1,137,000 (excluding prepaid expenses); achieving a debt-to-equity
ratio no greater than 12.5 to 1, for which Tanon achieved 4.4 to 1; and
achieving profitability on a cumulative three-month basis, which Tanon achieved.
At December 31, 1994, Tanon had no unused lines of credit.
Tanon maintains a formal budgeting and forecasting model with a 12 month
future range. Based upon Tanon's anticipated operating margins, inventory turns
and backlog, each of which is based upon currently realized rates, management
expects break-even operating cash flow over the next 12 months on a stand alone
basis.
21
<PAGE>
BarOn Acquisition. 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 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 the BarOn Loan, 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 are due and payable to BarOn the four month
anniversary of the closing on May 16, 1995. 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 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. For a more thorough discussion of these transactions see
"Business - Subsequent Events" at Item 1, Part I of this Form 10-K.
EAI's Liquidity and Capital Resources: 1993
- -------------------------------------------
Working capital decreased $4,212,000 during 1993. The current ratio
decreased from 1.26 at the end of 1992 to .85 at the end of 1993. The change in
working capital and the current ratio resulted primarily from operating losses.
On June 30, 1993, the Company sold substantially all of the assets of its
Field Service Division and discontinued the operations of its Product
Engineering Division. The Company recorded a pretax profit of approximately
$1,700,000 from the sale of its Field Service Division and recorded a charge of
$250,000, attributable principally to severance costs, in connection with the
discontinuation of Product Engineering Division operations. The Company's 1992
Financial Statements have been reclassified to reflect such operations as
discontinued.
On August 13, 1993, the Company entered into a loan agreement (the "Congress
Loan Agreement") with Congress. The Congress Loan Agreement permits borrowings
of up to $8,250,000 (which amount was reduced to $7,500,000 upon repayment of
the Mezzanine Participation on August 12, 1994) comprised of a revolving
loan (the "Revolving Loan"), a term loan (the "Term Loan") and letters of
credit (collectively, the "Loans"). Borrowings under the Revolving Loan may
not exceed a specified borrowing base (the "Borrowing Base"). In addition,
Revolving Loan advances are limited to $8,250,000 less the amounts outstanding
under the Term Loan and letters of credit. The Borrowing Base consists of the
sum of (1) 80% of eligible accounts receivable, (2) 18% of certain raw material
inventory, and (3) 50% of raw material inventory designated for a particular
customer. Loans against inventory are limited to the lesser of (a) the
percentages identified in the previous sentence, (b) $3,000,000, or (c) 50% of
the outstanding loans against accounts receivable. All advances and eligibility
criteria under the Congress Loan Agreement are discretionary. The Company used
approximately $3,000,000 of proceeds from the new credit facility to retire
its loan with Mellon Bank.
The term of the Revolving Loan is three years, with one year renewals
thereafter. The principal amount of the Term Loan was $1,290,000 to be repaid in
monthly installments of approximately $21,500 over a term of five years. Both
the Revolving Loan and Term Loan bear interest at 2 1/4% over the CoreStates
Bank (an affiliate of Congress) prime rate. In addition, the Company must pay a
fee equal to 1/2% of the unused portion of the Revolving Loan plus amounts
borrowed under the letters of credit.
The Loan Agreement includes two financial covenants. The Company must
maintain a minimum tangible net worth of not less than negative $1,400,000
through and including September 30, 1994, negative $500,000 from October 1, 1994
through and including July 31, 1995 and positive $700,000 at all times on and
after August
22
<PAGE>
1, 1995 and it must maintain a minimum level of working capital at all times of
not less than $750,000 excluding amounts due to Congress. At December 31,
1993, the Company exceeded the tangible net worth covenant by $154,000 and
exceeded the working capital covenant by $1,087,000. The agreement further
provides that the Company report certain information to Congress on a daily or
other periodic basis.
Under the terms of the Congress Loan Agreement, Mezzanine Financial Fund,
L.P. ("Mezzanine") acquired a junior participation interest in the Loans in the
principal sum of $750,000 ("Mezzanine Participation"). Mezzanine obtained an
undivided interest in the collateral securing the Loans. In addition, the
Company granted Mezzanine a first priority security interest in the proceeds of
the Halifax Deferred Payment of $1,000,000. On August 12, 1994, the Company
repaid the principal and accrued interest under the Mezzanine Participation. The
principal amount of the Mezzanine Participation bore interest at the rate of 15%
per annum. In addition, the Company was obligated to pay an annual fee to
Mezzanine in an amount equal to 10% of the outstanding Mezzanine portion of the
Loans, but not less than $75,000 per year, payable annually and upon the
termination of the Loan Agreement, together with interest on the unpaid portion
of the fee, at the rate of 10% per annum. At Mezzanine's election, the fee was
payable to the extent of up to 150,000 shares of the Company's common stock
issuable on the basis of the lesser of $1.00 per share or the average closing
price of the Company's common stock for the 30 days prior to such election, with
any remaining portion of such fees payable in cash at an amount equal to 150% of
the balance. On July 18, 1994, Mezzanine elected to receive 75,000 shares of
common stock of the Company in full payment of its fee. Consequently, the
Company issued 75,000 shares of its common stock to Mezzanine on October 4,
1994.
In addition, on August 13, 1993, proceeds from the Congress Loan Agreement
were used to pay a $70,000 bonus due to Charles A. Milo under his 1992
Employment Agreement and to satisfy the balance of a note in the original
principal amount of $100,000 given by the Company in connection with the
purchase of MTI assets. The terms of a note in the initial principal amount of
$400,000 given by the Company in connection with the acquisition (the "MTI
Note") were amended to provide for 19 monthly installment payments of principal
and interest in the approximate amount of $19,926 each commencing August 15,
1993 with a final payment of $16,800 in March 1995. MTI agreed to the suspension
of such payments as of January 1994. At May 31, 1994, Mr. Milo, pursuant to
certain agreements converted the principal amount of the MTI Note ($338,366 at
that date) into February Units at $0.85 per unit.
Backlog at the end of 1993 for continuing operations was $19,453,000, a
decrease of $7,223,000 or 27% from the $26,676,000 reported at the end of 1992.
During 1993, the Company lost two customers who did not have orders with the
Company at December 31, 1993, and whose aggregate backlog amounted to
approximately $6.6 million at December 31, 1992.
In December 1990, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 106 - "Employers' Accounting for
Postretirement Benefits Other Than Pensions". SFAS No. 106 requires that the
expected cost of these benefits must be charged to expense during the years that
the employees render service. The Company adopted the new standard prospectively
effective January 1, 1993. At January 1, 1993, based on the substantive
postretirement benefit plan in effect at that date, the unfunded postretirement
benefit obligation (transition obligation) was estimated to be $1,978,000. The
Company elected to amortize this obligation over a 20-year period beginning in
1993.
In order to contain the cost of providing postretirement benefits, on
December 28, 1993, the Company notified retirees who worked through the date of
their normal retirement that the supplemental health insurance coverage
previously provided to employees over the age of 65 was terminated. The
termination of these benefits significantly reduced future postretirement
benefit costs and the transition obligation. The Company currently continues to
provide life insurance coverage to retirees eligible for those benefits.
Retirees that accepted an early retirement package, which included the Company's
health care program, currently continue to receive health insurance and life
insurance coverage. These benefits are subject to deductibles, copayment
provisions and other limitations and the Company may amend or change the plan
periodically. Based on the Company's current benefit policies on December 31,
1993, the Company reversed substantially all of the deferred transition
obligation initially recorded on January 1, 1993. The remaining liability for
expected postretirement benefits,
23
<PAGE>
included in accrued expenses, totaled $103,000 at December 31, 1993. This
liability will be adjusted periodically as new claims experience becomes
available. The total cost of postretirement benefits for covered individuals,
including retirees over 65, charged to income was $30,000 in 1994, $276,000 in
1993, and $247,000 in 1992. The Company does not fund this plan. (See also Note
11 of the Notes to Consolidated Financial Statements at Item 8, Part II of this
Form 10-K.)
24
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ELECTRONIC ASSOCIATES, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
December 31, 1994
<TABLE>
<CAPTION>
Page Number
<S> <C>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS................................................................ 26
FINANCIAL STATEMENTS:
Consolidated Balance Sheet as of December 31, 1994 and 1993......................................... 27
Consolidated Statement of Operations for the Three Years
Ended December 31, 1994............................................................................. 28
Consolidated Statement of Shareholders' Equity
for the Three Years Ended December 31, 1994......................................................... 29
Consolidated Statement of Cash Flows for the Three Years
Ended December 31, 1994............................................................................. 30
Notes to Consolidated Financial Statements.......................................................... 31
SCHEDULE:
II. Valuation Account................................................................................ 51
</TABLE>
Schedules other than that listed above are omitted as not being applicable
or required, or the required information is included in the accompanying
financial statements or related notes thereto.
25
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Electronic Associates, Inc.:
We have audited the accompanying consolidated balance sheet of Electronic
Associates, Inc. (a New Jersey corporation) and subsidiaries as of December 31,
1994 and 1993, and the related consolidated statements of operations,
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1994. These consolidated financial statements and the
schedule referred to below are the responsibility of the Company's management.
Our responsibility is to express an opinion on these consolidated financial
statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Electronic Associates, Inc.
and subsidiaries as of December 31, 1994 and 1993, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1994 in conformity with generally accepted accounting principles.
As discussed in Note 14, the Company is a party to certain environmental
claims the ultimate resolution of which cannot be determined at this time.
Accordingly, no provision has been made in the accompanying consolidated
financial statements for any liability that may result from the resolution of
these uncertainties.
Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The schedule listed in the
index to consolidated financial statements and schedule is presented for
purposes of complying with the Securities and Exchange Commission's rules and is
not part of the basic financial statements. This schedule has been subjected to
the auditing procedures applied in the audits of the basic consolidated
financial statements and, in our opinion, fairly states in all material respects
the financial data required to be set forth therein in relation to the basic
financial statements taken as a whole.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Roseland, New Jersey
April 14, 1995
26
<PAGE>
ELECTRONIC ASSOCIATES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
December 31, 1994 and 1993
(thousands of dollars, except per share data)
<TABLE>
<CAPTION>
1994 1993
-------- --------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $6,157 $64
Receivables, less allowance of $207 in 1994 and $277 in 1993
for doubtful accounts (Note 1) 5,958 3,598
Inventories (Note 1) 4,178 3,083
Prepaid expenses and other assets (Note 4) 676 610
-------- --------
TOTAL CURRENT ASSETS 16,969 7,355
-------- --------
Equipment and leasehold improvements 7,472 7,712
Less accumulated depreciation (Note 1) (4,753) (4,109)
--------- ---------
2,719 3,603
-------- --------
Investment in affiliates (Note 4) 2,745 -
Intangible assets (Notes 3 and 4) - 830
Less accumulated amortization - (130)
------- ---------
- 700
--------- --------
Other assets (Note 4) 412 1,104
------- --------
$22,845 $12,762
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term liabilities (Notes 3, 5 and 6) $ 5,933 $ 3,763
Accounts payable 4,711 3,674
Accrued expenses 1,959 1,177
-------- -------
TOTAL CURRENT LIABILITIES 12,603 8,614
-------- -------
Long-Term Liabilities:
Long-Term Debt (Notes 5 and 6) 690 1,820
Accrued excess leased space costs, less current portion (Note 3) 1,858 2,434
Other long-term liabilities 450 440
-------- ---------
TOTAL LONG-TERM LIABILITIES 2,998 4,694
------- --------
TOTAL LIABILITIES 15,601 13,308
------- --------
Commitments and Contingencies (Notes 4 and 14) - -
Shareholders' Equity (Deficit) (Notes 1, 2, 4, 7, 10, and 13) Preferred stock,
no par value; authorized 25,000,000 shares;
none issued - -
Common stock, no par value; authorized 25,000,000 shares; issued 8,326,056
shares in 1994 and 2,877,640 shares in
1993. 20,117 2,878
Additional paid-in capital - 4,661
Accumulated deficit since January 1, 1986 (12,398) (7,614)
--------- ---------
7,719 (75)
Less common stock in treasury, at cost: 218,476 shares in
1994 and 216,476 in 1993 (475) (471)
-------- ----------
TOTAL SHAREHOLDERS' EQUITY (DEFICIT) 7,244 (546)
-------- ----------
$22,845 $12,762
======== =========
</TABLE>
The accompanying notes are an integral part of these consolidate
financial statements.
27
<PAGE>
ELECTRONIC ASSOCIATES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
For the Three Years Ended December 31, 1994
(thousands of dollars, except per share
data)
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
(Note 4)
<S> <C> <C> <C>
Sales (Notes 1 & 4) $30,539 $26,024 $22,248
------------------- ------------------ ----------------
Cost of sales 27,759 24,344 19,385
Selling, general and administrative expenses 4,591 7,000 5,823
Nonrecurring (income)/expense items (Note 3) 2,400 (454) 285
------------------- ------------------ ----------------
34,750 30,890 25,493
------------------- ------------------ ----------------
Loss from operations (4,211) (4,866) (3,245)
Other (income) expense:
Interest income (89) - -
Interest expense 662 482 279
------------------- ------------------ ----------------
Loss from continuing operations before benefit for
taxes (4,784) (5,348) (3,524)
Income tax benefit (Note 9) - (684) (335)
------------------- ------------------ ----------------
Loss from continuing operations (4,784) (4,664) (3,189)
Discontinued Operations (Note 4)
Income from discontinued operations net of
applicable taxes of $176 in 1993 and $335 in 1992 - 341 651
Income from disposition of discontinued
operations net of $508 of applicable taxes - 986 -
------------------- ------------------ ----------------
Net loss ($4,784) ($3,337) ($2,538)
=================== ================== ================
Income (Loss) per common share:
Loss from continuing operations ($0.95) ($1.76) ($1.22)
Income from discontinued operations - $0.50 $0.25
------------------- ------------------ ----------------
Loss per common share ($0.95) ($1.26) ($0.97)
=================== ================== ================
Average common shares outstanding 5,052,480 2,646,575 2,621,032
=================== ================== ================
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
28
<PAGE>
ELECTRONIC ASSOCIATES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
For the Three Years Ended December 31, 1994
(thousands of dollars, except per share
data)
<TABLE>
<CAPTION>
Accumulated
Deficit
Additional Since
Paid-In January 1,
Common Stock Capital Treasury Stock 1986
---------------------------- ------------------------------
Shares Amount Shares Amount
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1991 2,862,640 $2,863 $4,612 (275,100) $(599) $(1,739)
Net loss (2,538)
Issuance of Common Stock 47 58,624 128
Tax benefit -- AMT adjustment 2
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1992 2,862,640 2,863 4,661 (216,476) (471) (4,277)
Net loss (3,337)
Issuance of Common Stock 15,000 15
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1993 2,877,640 2,878 4,661 (216,476) (471) (7,614)
Net loss (4,784)
Private Placements of common
stock (Notes 2 and 7) 4,798,884 11,676
Debt Conversion (Notes 2 and 7) 398,042 338
Exercise of common stock options
(Note 7) 67,490 143
Other issuances of common stock
(Notes 3 and 5) 184,000 421
Purchase of treasury stock (2,000) (4)
Elimination of $1.00 par value 4,661 (4,661)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1994 8,326,056 $20,117 $ - (218,476) $(475) $(12,398)
====================================================================================================================================
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
29
<PAGE>
ELECTRONIC ASSOCIATES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
For the Three Years Ended December 31,
1994 (thousands of dollars, except per
share data)
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
(Note 4)
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net Loss ($4,784) ($3,337) ($2,538)
Adjustments to reconcile net loss to net cash
used by continuing operations:
Income from discontinued operations - (1,327) (651)
Provisions (credit) for Restructuring (Note 3) 2,400 (68) 285
Depreciation and amortization 900 822 744
Provision for losses on accounts receivable 134 90 (14)
Cash provided (used) by changes in:
Receivables (2,494) 867 (519)
Inventories (1,395) 1,718 (724)
Accounts payable and accrued expenses 775 (1,871) 2,187
Accrued excess leased space costs (573) (856) (406)
Other operating items -- net 335 (889) 84
------- ------ -------
Net cash used by continuing operations (4,702) (4,851) (1,552)
Net cash provided (used) by discontinued operations 360 3,067 (602)
------- ------- --------
Net cash used by operations (4,342) (1,784) (2,154)
-------- -------- --------
Cash Flows from Investing Activities:
Capital (expenditures) sales - net (212) 1 (2,512)
Investment in affiliates (2,745) - -
Proceeds from sale of discontinued operations 200 2,400 -
Acquisition at cost, net of cash acquired - - (1,031)
-------- ------- --------
Net cash provided/(used) by investing activities (2,757) 2,401 (3,543)
-------- ------- --------
Cash flows from Financing Activities:
Net proceeds from private placements 11,676
Net borrowings (repayments) under line of credit 2,381 (1,087) 5,072
Issuance (repayments) of debt in connection with
acquisition - (164) 500
Payment of U.S. Government obligation - - (191)
Principal (repayments) borrowings of long-term
debt (1,008) 1,695 -
Proceeds from the exercise of stock options or
rights 143 - 75
Issuance of common stock in connection with
acquisition - - 100
Net repayments of short-term debt - (1,488) (110)
Other - 9 (39)
--------- -------- ---------
Net cash provided (used) by financing activities 13,192 (1,035) 5,407
--------- --------- --------
Net Increase (Decrease) in Cash and Cash Equivalents 6,093 (418) (290)
Cash and Cash Equivalents at Beginning of Period 64 482 772
-------- -------- --------
Cash and Cash Equivalents at End of Period 6,157 64 482
======== ======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 662 $ 544 $ 226
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
30
<PAGE>
ELECTRONIC ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Electronic Associates, Inc. and subsidiaries ("EAI" or the
"Company") has been engaged solely in the business of providing contract
electronic manufacturing services to customers ranging from the assembly of
printed circuit boards to the complete procurement, production, assembly, test
and delivery of entire electronic products and systems. The Company, therefore,
provides services to act in part, or in whole, as the manufacturing function of
its customers. In January 1995, the Company acquired a contract electronic
manufacturer in Fremont, California, and a 25.01% interest in a privately-held
Israeli corporation, engaged in the research and development of an input device
for computers. (See Note 4)
Basis of Consolidation
- ----------------------
The consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries. All material intercompany
balances and transactions have been eliminated in consolidation.
Statement of Cash Flows
- -----------------------
For purposes of reporting cash flows, cash and cash equivalents
include cash on hand and highly liquid marketable securities with original
maturities of three months or less. Non-cash investing and financing activities
during 1994 consisted of debt conversion into common stock ($338,000 - see Note
4), common stock issued for rent abatement ($306,000 - see Note 3), common stock
issued for loan fees ($75,000 - see Note 5), and common stock issued for
director compensation of $40,000.
Quasi-Reorganization and Par Value Elimination
- ----------------------------------------------
As of the close of business December 31, 1985, the Company
effected a quasi-reorganization whereby assets were restated to their estimated
current values, income postponed to future periods was reflected in
shareholders' equity and the accumulated deficit was transferred to additional
paid-in capital. Accumulated deficit reflects the Company's cumulative earnings
or losses since the quasi-reorganization. In May 1994, the shareholders of the
Company approved a proposal which eliminated the reference to the $1.00 per
share par value of the Company's common stock. Consequently, all amounts
formerly classified as additional paid-in capital are now classified as common
stock.
Revenue Recognition
- -------------------
The Company records sales as goods are shipped.
Inventories
- -----------
Inventories are stated at the lower of cost (which includes
material, labor and overhead) or market (net realizable value). Costs of such
inventories are determined using average actual costs.
31
<PAGE>
ELECTRONIC ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Inventories at December 31 consisted of:
<TABLE>
<CAPTION>
1994 1993
------ -----
(thousands of dollars)
<S> <C> <C>
Raw Materials $3,352 $2,079
Work-in-Process 826 1,004
------ ------
Total $4,178 $3,083
====== ======
</TABLE>
Equipment and Leasehold Improvements
- ------------------------------------
Equipment and leasehold improvements are stated at cost.
Depreciation and amortization are computed over the estimated
useful lives of the assets or term of the lease using the straight-line method.
When assets are retired or otherwise disposed of, the cost and
accumulated depreciation are removed from the accounts, and any resulting gain
or loss is reflected in income for the period. The cost of maintenance and
repairs is charged to income as incurred.
Research and Development
- ------------------------
Research and development costs, which are charged to income as
incurred, amounted to $54,000 in 1993 and $967,000 in 1992. No research and
development costs were incurred in 1994. Of the amounts spent in 1993 and 1992,
approximately $41,000, and $933,000 were reimbursed by a customer and were
incurred in connection with operations discontinued by the Company in 1993. (See
Note 4)
Reclassifications
- -----------------
Certain reclassifications were made to the 1993 presentation to
conform to the 1994 presentation.
2. OPERATIONS AND LIQUIDITY
In January and February 1994, in order to conserve cash, the
Company imposed a 20% decrease in pay on substantially all employees, arranged
for additional concessions from its West Long Branch landlord (Note 6), deferred
certain debts and lease payments and arranged for the capital infusions
mentioned below.
On February 4, 1994, the Company announced that it had closed a
sale of 1,200,000 units of securities (the "February Units") to a limited number
of investors in a private placement (the "February Private Placement"). This
private placement resulted in gross proceeds to the Company of $1,020,000 or
$0.85 per unit. Net proceeds to the Company totaled approximately $957,000.
Each unit sold in the February Private Placement consists of one
share of EAI Common Stock, one Class A Warrant entitling the holder to purchase
one share of EAI common stock at $1.00 per share and one Class B Warrant
entitling the holder to purchase one share of EAI common stock at $1.75 per
share.
32
<PAGE>
ELECTRONIC ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
The Class A and Class B Warrants each have a term of four years.
The Class A Warrants may expire earlier as to 82% of the shares covered thereby
if the Company satisfies certain financial performance objectives. Purchasers of
the February Units have been granted certain demand and piggyback rights to have
the shares purchased and shares issuable upon exercise of the warrants
registered under the Securities Act of 1933.
In connection with the February Private Placement, Milo
Technologies, Inc. (MTI) (a company controlled by the former EAI President and
CEO), agreed that upon written notice by the holders of not less than 300,000
units issued in the February Private Placement, the Company's indebtedness,
incurred in connection with the acquisition of Milo Technologies, Inc. (See Note
4), in the outstanding amount of approximately $338,000 including accrued
interest, would be automatically converted into February Units on the basis of
$0.85 per Unit. On May 17, 1994 such notice was received and the Milo debt was
converted into 398,042 February Units at $0.85 per unit.
On May 31, 1994, the Company commenced a second private placement
(the "June Private Placement") of 2,500,000 units (the June Units) at a purchase
price of $2.75 per unit. Each June unit consisted of one share of common stock
and one Class C Warrant to purchase one share of common stock for $4.60 per
share until June 30, 1998. In August 1994, the Company completed the June
Private Placement in which the Company issued all 2,500,000 units for net
proceeds of approximately $5,900,000, after related fees, broker commissions,
and other offering expenses of approximately $975,000. In connection with the
June Private Placement, 250,000 unit warrants were issued to the placement agent
(which assigned such unit warrants to certain of its employees) to purchase
units which are exercisable at a price of $3.025 per unit, each unit consisting
of one share of EAI common stock and a Class C Warrant to purchase one share of
EAI common stock at a price of $4.60 per share. As required by the rules of the
New York Stock Exchange, the proposed issuance of the shares pursuant to this
June Private Placement was approved by the Shareholders of the Company at a
Special Meeting of Shareholders held on June 28, 1994. The final closing for the
June Private Placement took place on August 17, 1994.
On September 17, 1994, the Company called the Class C Warrants
for redemption. The redemption and/or exercise of Class C Warrants was completed
on December 23, 1994. Upon completion, 1,482,744 shares were issued in exchange
for net proceeds of approximately $6,600,000 after related redemption and other
offering expenses of approximately $229,000, of which approximately $4,800,000
of net proceeds was received through December 31, 1994, representing 1,098,883
shares. The 1,017,256 remaining Class C Warrants that were not exercised were
redeemed at $0.05 per share, for a total of $51,000 in redemption fees.
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 in an offering exempt from the registration provisions under the
Securities Act of 1993, as amended. The number of shares issued in this sale
may increase without additional proceeds to the Company in the event that 80%
of the average market price of the Company's common stock for the five-day
period ending forty days after the date of closing is less than $5.85 per share.
As reflected in the accompanying financial statements, the
Company has incurred significant losses and had negative cash flows from
operations in each of the last three years. As discussed in Note 3, the Company
is implementing measures to reduce costs, including the closing or sale of its
Southwest operations in Tucson and Mexico, consolidation of its corporate
administrative functions with those of its newly acquired subsidiary, Tanon
Manufacturing Inc., and reduction of certain other administrative expenses.
The Company was successful in raising approximately $11,800,000 of capital
during 1994 and approximately $5,500,000 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 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 during the next year.
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 (see Note 4), 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, if exercised, could provide
the Company with additional capital of approximately $4,400,000, however, no
assurance can be given that any 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 has engaged an
investment banking firm to assist in raising additional capital. There can be no
assurance that such additional borrowings or financing will be available.
33
<PAGE>
ELECTRONIC ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
3. NONRECURRING ITEMS
Nonrecurring items consists of the following:
<TABLE>
<CAPTION>
Charge (Credit)
1994 1993 1992
---- ---- ----
(thousands of dollars)
<S> <C> <C> <C>
(a) & (b) Provision (Credit) for Restructuring $2,400 $ (68) $ 285
(c) Charge for excess Leased Space Costs - (519) -
(d) Executive Severance and Recruitment - 133 -
Expenses ------- ------- -----
Total $2,400 $ (454) $ 285
====== ======= =====
</TABLE>
- ----------------------
<TABLE>
<CAPTION>
<S> <C>
(a) In December 1994, in contemplation of the acquisition of Tanon
Manufacturing, Inc., the Company committed to a plan to close or
sell its Southwest operations in Tucson, Arizona and Nogales,
Mexico. The Company also decided to substantially consolidate
its corporate administrative functions, currently being conducted
in West Long Branch, NJ, into Fremont, California. In connection
with these decisions, the Company recorded a $2,400,000
restructuring charge. This amount includes $618,000 related to
unamortized goodwill and other intangibles which were acquired
in connection with the 1992 acquisition of the Southwest
operations, $395,000 representing the present value of lease
commitments in Tucson, Arizona, $279,000 representing the book
value and disposal cost of abandoned equipment, $300,000 for
inventory which is not utilizable due to severed customer
contracts, $303,000 of contractual termination benefits for West
Long Branch and Southwest employees, $285,000 of executive
separation costs, $145,000 to be paid to a third party to assume
certain lease obligations of Milotec for the Nogales facility
and other closing costs with respect to the sale of Milotec and
its operations in Nogales, Sonora, Mexico and $75,000 of other
costs.
(b) The Company charged operating results $285,000 in December 1992
for estimated restructuring costs primarily related to its
contract manufacturing business. The charge included provisions
of $100,000 for costs associated with the relocation of machinery
and equipment from the Company's West Long Branch facility to its
Tucson, Arizona, facility and $185,000 to record severance pay
obligations for affected employees. During 1993, the Company
managed to limit the costs of the move to Tucson to only $32,000
and reversed $68,000 of the reserve established.
(c) During December 1991, the Company recorded a one-time pretax
charge of $4.6 million against 1991 operating results to cover
the costs of excess leased space. The charge reflected the net
present value of payments required to be made by the Company
during the remainder of the lease (prior to amendments to the
lease described below) for its West Long Branch facility, reduced
by estimated sublease rental income and was applicable to space
which the Company determined unlikely to be beneficially
employed during the period. The Company currently uses
approximately 81,000 square feet of the 169,000 square feet
originally available under the lease, which expires in 2006. On
September 17, 1993, the Company reached an agreement with the
landlord of its West Long Branch, New Jersey facility, to amend
its lease agreement which was further amended on February 2,
1994.
</TABLE>
34
<PAGE>
ELECTRONIC ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Under the terms of these amendments, EAI surrendered
approximately 52% of the space then occupied at that location and
agreed to issue 100,000 shares of common stock and warrants to
purchase 130,000 shares of common stock of EAI at a price of
$1.50 per share to the landlord. The 100,000 shares due to the
landlord were issued in 1994 and the $306,000 value of such
shares originally accrued has been reflected in common stock in
the accompanying consolidated balance sheet. In consideration for
this, the landlord granted rent abatements from 1993 to 1999
aggregating approximately $2.8 million. In addition the term of
the lease was extended to March 2006. The Company reevaluated the
excess leased space reserve originally established based on the
surrendered space, the estimated value of the common shares and
warrants, the rent abatements received and expected savings for
heat, light and power due to the smaller area to be occupied. As
a result, the remaining reserve established for excess space in
December 1991 was determined to exceed the amount required and
was reduced by $519,000 in 1993.
(d) See Note 12 for discussion of Executive Severance.
4. ACQUISITIONS AND DISPOSITIONS
Tanon Acquisition
- -----------------
On August 24, 1994, the Company signed a letter of intent
relating to a business combination with Tanon Manufacturing, Inc. (Tanon) of
Fremont, California. Tanon was a privately-held company which provides
electronic manufacturing services to original equipment manufacturers. Tanon's
manufacturing services include printed circuit board assemblies, integrated
systems manufacturing and engineering support. Under the letter of intent, the
Company was obligated to loan $2,000,000 to Tanon prior to December 31, 1994.
Pursuant to the letter of intent, on September 8, 1994, the Company entered into
a Business Loan Agreement with Tanon, pursuant to which the Company loaned Tanon
the principal sum of $1,000,000 ("Tanon Loan"). On December 30, 1994 in
contemplation of the Tanon acquisition, the Company purchased 265,957 shares of
common stock of Tanon (representing a 13.6% equity interest) for $2,000,000
comprised of conversion of the Tanon Loan to equity and $1,000,000 cash. Other
costs and expenses incurred in connection with the acquisition of the stock
amounted to approximately $202,000.
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 Company intends to reflect the transaction as a
purchase for accounting purposes and, accordingly, the results of operations of
Tanon will be included in the consolidated financial statements of the Company
in 1995. Tanon was merged into a newly-formed wholly-owned subsidiary of the
Company and the Company issued 1,538,462 shares of common stock of the Company
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 optionholders
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, mentioned above, in Tanon and (b) the Company has
agreed to use its best efforts to loan to, or invest in, 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 Chief Operating Officer of Tanon, $1,000,000 for a 30-month term with
interest fixed at the applicable Federal rate and accruing and due together with
principal at the end of the 30-month term. Such loan is non-recourse and is
35
<PAGE>
ELECTRONIC ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
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 of $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.
BarOn Acquisition
- ------------------
On October 20, 1994, the Company signed a letter of intent to
acquire a one-third interest in BarOn Technologies, Ltd. ("BarOn"). BarOn is a
privately-held Israeli corporation based in Haifa, Israel, engaged in the
research and development of input devices for computers that can directly
digitize handwriting in a variety of languages, from any surface.
On January 16, 1995 (the "Closing Date"), 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), 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 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 intends to account for this transaction as a
purchase of a minority interest using the equity method of accounting,
accordingly, the Company's investment in BarOn and 25.01% equity interest in the
results of BarOn will be included in the consolidated results of the Company in
1995.
The excess of the purchase price over the estimated fair value of
the net assets acquired in the Tanon acquisition in the amount of $10,597,000
will be amortized on a straight-line basis over 20 years. 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, will be charged to expense in the first quarter of fiscal 1995.
This charge has not been reflected in the unaudited pro forma summary detailed
below. Other acquired intangibles will be amortized over their estimated
economic lives. The $2,400,000 restructuring charge discussed in Note 3 is also
excluded from the pro forma results. The purchase price allocation for both
acquisitions is based on preliminary estimates of the fair value of net assets
acquired and is subject to adjustment as additional information becomes
available during fiscal 1995. The pro forma loss per common share for 1994
reflects the issuance of 1,239,130 shares of common stock of the Company to
finance the BarOn Acquisition as if such shares had been issued on January 1,
1994.
36
<PAGE>
ELECTRONIC ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
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 Acquisition.
The following unaudited pro forma summary presents the
consolidated results of operations as if the Tanon and BarOn acquisitions
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.
<TABLE>
<CAPTION>
1994
----
(thousands of dollars, except per share data)
<S> <C>
Sales $81,274
Net Loss (6,017)
Loss Per Common Share (.76)
</TABLE>
Milo Technologies Acquisition
- -----------------------------
On May 29, 1992, the Company completed the acquisition of a
contract manufacturing business with facilities in Tucson, Arizona and Nogales,
Sonora, Mexico. The Company acquired certain assets of Milo Technologies, Inc.
and all of the outstanding stock of Milotec S.A. De C.V. for a total
consideration of $900,000. The acquisition was accounted for by the purchase
method. In connection with the restructuring discussed in Note 3, the Company
expects to sell its interest in Milotec S.A. De C.V. and is planning to shut
down the plant in Tucson, Arizona. The estimated loss on this sale and shut-down
is included in the restructuring charge. (See Note 3)
Disposition of Field Service and Product Engineering
- ----------------------------------------------------
On June 30, 1993, the Company sold its Field Service Division and
discontinued the operations of its Product Engineering Division. Accordingly,
the 1992 financial statements have been reclassified to reflect these operations
as discontinued. These decisions were based upon several factors, most prevalent
of which was the desire to focus the Company's resources upon the contract
manufacturing business.
The Buyer of the Field Service Division purchased all of the
inventory and fixed assets and assumed certain liabilities of the Division. The
net book value of the assets sold was approximately $1,700,000. In consideration
for the sale of these assets the Company received approximately $4,200,000
consisting of $2,400,000 cash at closing, $800,000 of liabilities assumed by the
Buyer and a deferred payment not to exceed $1,000,000. A reserve of $350,000, to
reflect the present value of the expected cash flows and contingencies related
to the sale, was established in connection with the deferred payment. Other
costs of the transaction amounted to approximately $450,000. As a result of this
transaction, the Company realized a pretax profit of approximately $1,700,000
which is included in income from disposition of discontinued operations in the
accompanying consolidated statement of operations. The accounts receivable of
this Division which amounted to approximately $2,500,000 have substantially been
collected.
37
<PAGE>
ELECTRONIC ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
On August 11, 1994, the Company was informed by Halifax
Corporation (the purchaser of the Company's Field Service Division) that it is
entitled to a set-off of certain claims in the aggregate amount of approximately
$230,000 and of its intention to withhold the $200,000 payment due to the
Company on August 31, 1994 as a result of such claims. The Company, has denied
liability for such claims. At the date hereof, Halifax has deposited $206,000 in
escrow related to the payment due August 31, 1994 and a portion of the payment
due March 31, 1995 as required by its agreement with the Company and Halifax and
the Company have entered into settlement discussions. Management of the Company
believes that the net receivable from Halifax, included in the accompanying
consolidated balance sheet, is realizable.
As a result of the decision to discontinue the operations of the
Product Engineering Division, the Company recorded a charge of approximately
$250,000, principally for severance costs which is included in the income from
disposition of discontinued operations for 1993.
5. NOTES PAYABLE AND LINE OF CREDIT
Notes payable at December 31 consists of the following:
<TABLE>
<CAPTION>
1994 1993
---- ----
(thousands of dollars)
<S> <C> <C>
Milo Note $ - $ 336
Congress Financial Corporation revolving loan facility 5,219 2,838
Congress Financial Corporation term loan 945 1,203
Loan from Mezzanine Financial Fund - 750
------ -----
6,164 5,127
Current Portion 5,474 3,307
------ ------
Long-term Debt $ 690 $1,820
====== ======
</TABLE>
Milo Note
- ---------
This note, issued in connection with the Acquisition of Milo
Technologies in 1992, was converted into common stock and warrants in May 1994.
(See Note 2).
Congress Financial Revolving and Term Loan Facility
- ---------------------------------------------------
On August 13, 1993, the Company closed a credit facility (the "Loan
Agreement") with Congress Financial Corporation ("Congress Financial"), an
affiliate of CoreStates Financial Corporation. The facility permits borrowings
of up to $7,500,000 comprised of a revolving loan (the "Revolving Loan"), a term
loan (the "Term Loan") and letters of credit (collectively, the "Loans").
Borrowings under the Revolving Loan may not exceed a specified borrowing base
(the "Borrowing Base"). In addition, revolving loan advances are limited to
$7,500,000 less the amounts outstanding under the Term Loan and letters of
credit. The Borrowing Base consists of the sum of 1) 80% of eligible accounts
receivable, 2) 18% of certain raw material inventory, and 3) 50% of raw material
inventory designated for a particular customer. Loans against inventory are
limited to the lesser of (a) the percentages identified in the previous sentence
(b) $3,000,000 or (c) 50% of the outstanding loans against accounts receivable.
All advances and eligibility criteria under the Loans are discretionary.
38
<PAGE>
ELECTRONIC ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
The term of the Revolving Loan is three years, with one year renewals
thereafter. The principal amount of the Term Loan was $1,290,000 to be repaid in
monthly installments over a term of five years. Both the Revolving Loan and Term
Loan bear interest at 2-1/4% over the CoreStates Bank prime rate. In addition,
the Company must pay a fee equal to 1/2% of the unused portion of the Revolving
Loan plus amounts borrowed under the letter of credit facility.
The Loan Agreement includes two financial covenants. The Company must
maintain a minimum tangible net worth of not less than negative $500,000 from
October 1, 1994 through and including July 31, 1995 and positive $700,000 at all
times on and after August 1, 1995 and it must maintain a minimum level of
working capital (as defined) at all times of not less than $750,000 excluding
amounts due to Congress Financial. The agreement further provides that the
Company report certain information to Congress on a daily or other periodic
basis.
The Loan Agreement also provides for letters of credit or similar
financial accommodations to be issued on behalf of the Company in an amount up
to $1,000,000. Letters of credit advances reduce the amount which may be
borrowed under the Revolving Loan and are subject to the Borrowing Base limits.
Substantially all of the assets of the Company and the stock of
Milotec S.A. De C.V., are pledged as collateral to secure the credit facility.
In addition, Milotec has guaranteed the Company's obligations under the Loan
Agreement.
Mezzanine Financial Fund
- ------------------------
In August 1994, the Company paid off the remaining balance of the
Mezzanine Financial Fund Loan with proceeds from the June Private Placement (See
Note 2). Fees of $75,000 due to Mezzanine were satisfied by the issuance of
75,000 shares of the Company's common stock at Mezzanine's election.
6. LEASES
Operating Leases
- ----------------
The Company leases its West Long Branch facility under a lease which
expires in 2006. The monthly rent thereon, as of April 1, 1995 is approximately
$110,000, monthly abatements will be approximately $47,000, yielding a net
monthly rent of $63,000, plus the payment of taxes, repairs, maintenance
replacements and utilities. The lease agreement provides for increases in rental
payments on each April 1, through the year 1999 based upon the increase in the
Consumer Price Index with a minimum and maximum range of 3% to 6-1/2%.
Thereafter, the rent will be adjusted based on market rates for similar
facilities. During 1993 and 1994 the Company negotiated amendments to the lease
which provide for $2.8 million of rent abatements over 5.5 years. See Note 3 for
details of Amendments to Lease Agreement.
In addition, the Company currently leases its manufacturing facility
in Tucson, Arizona from Mr. Milo who was President and Chief Executive Officer
of the Company. The current monthly rent is $15,235.
The Company also entered into a lease for various manufacturing
equipment during 1994. The lease term is for 5 years and provides an option to
purchase the equipment for its fair value.
39
<PAGE>
ELECTRONIC ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
The majority of the other lease commitments have been made under
standard office leases which have initial terms ranging from two to five years.
The aggregate minimum lease commitments under all noncancelable
leases for continuing operations as of December 31, 1994, amounted to
$3,941,000; $1,044,000 in 1995; $969,000 in 1996; $851,000 in 1997; $829,000 in
1998 and $248,000 in 1999. Rent expense amounted to $1,395,000 in 1994;
$1,761,000 in 1993; and $1,565,000 in 1992. A portion of the lease commitments
relating to the West Long Branch and Tucson facilities have been accrued as
described in Note 3.
7. STOCK OPTIONS AND WARRANTS
1972 Employee Stock Option Plan
- -------------------------------
As of December 31, 1994, 1,422,728 shares of common stock were
reserved for issuance to employees under the Company's 1972 Employee Stock
Option Plan (1972 Employee Plan). Incentive stock options are granted to
substantially all employees at either the fair market value on the date of grant
or 85% of the fair market value of EAI common stock at the date of grant and
usually become exercisable over a four-year period commencing one year after
being granted. The Board of Directors may grant non-qualified options at its
discretion for less than fair market value. The Board of Directors may at its
discretion determine the option vesting period.
1991 Directors Plan
- -------------------
A Stock Option Plan for Non-Employee Directors (Directors Plan) was
approved by the Company's shareholders in 1991. This plan has been terminated by
the Board of Directors and replaced by the 1994 Stock Option Plan for
Non-Employee Directors, but outstanding options under the 1991 Plan may still be
exercised.
1994 Stock Option Plan for Non-Employee Directors
- -------------------------------------------------
In March 1994, the EAI Board adopted and in May 1994 the shareholders
approved the Company's 1994 Stock Option Plan for Non-Employee Directors ("The
Directors Plan"). In 1994, options to purchase 260,000 shares were granted at
the fair market value of EAI stock. The Plan was approved based upon a variety
of factors including the reduction in amount and subsequent suspension of
payment of fees payable to non-employee directors of the Company, the
significant commitment of time required from members of the Board to address the
issues arising out of the financial difficulties experienced by the Company in
recent periods and the importance to the Company and its shareholders of
attracting and retaining the services of experienced and knowledgeable
independent directors.
The aggregate number of shares of common stock reserved for issuance
under the 1994 Stock Option Plan is 400,000 shares. Under the terms of the plan,
each person who is an Eligible Director on March 10, 1994, (the "Effective
Date") and each person who becomes an Eligible Director thereafter will be
granted an option to purchase 50,000 shares of Common Stock. An additional
option to purchase 10,000 shares of common stock will be granted to the
individual serving as the Chairman of the Board on the Effective Date and to
each person who serves as the Chairman of the Board thereafter.
40
<PAGE>
ELECTRONIC ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
1994 Incentive Plan
- -------------------
On May 17, 1994, the Board of Directors adopted the Company's Equity
Incentive Plan (the "Equity Incentive Plan"), which was approved by the
shareholders of the Company at the Special Meeting of Shareholders held on June
28, 1994. The EAI Board of Directors believes that the Equity Incentive Plan
will provide a method whereby certain directors, officers, employees and
consultants can share in the long-term growth of the Company. On May 17, 1994,
options to purchase 1.8 million shares were granted to five non-employee
directors, each with exercise prices equal to the fair market value of the
Company's common stock. In order to encourage participants to contribute to such
growth, the Board has included a provision in each option issued under the
Equity Incentive Plan which provides that such option may not be exercised until
the expiration date of such option unless the average of the high and low
trading prices of the Company's common stock equals or exceeds $6.00 per share
for 10 consecutive trading days following the effective date of the Plan. In
September, 1994 this milestone was achieved when the stock price traded above
$6.00 for more than 10 days.
Wall Street Group Options
- -------------------------
On June 28, 1994, the Board of Directors granted the Wall Street Group
an option to purchase 100,000 shares of the Company's common stock which vest
ratably over 1 year at a price of $4.56 in consideration of services to be
provided to the Company. Such options were granted at fair value. The estimated
fair value of these options is being charged to expense over the vesting period.
Waterton Group, LLC Options
- ---------------------------
On October 20, 1994, the Board of Directors granted to the Waterton
Group, LLC options to acquire 200,000 shares of the Company's common stock,
exercisable 50% on the first anniversary of the date of grant and 50% on the
second anniversary at an exercise price of $7.70, which is equal to 110% of the
closing price of the Company's common stock on the date of grant. The Board
also granted additional options which will be issued on October 20, 1995 to
acquire 200,000 shares of the Company's common stock, exercisable 50% on the
first anniversary and 50% on the second anniversary of the October 20, 1995
issue date, at an exercise price equal to 110% of the closing price of the
Company's common stock on October 20, 1995.
Such options were granted in consideration for services to be provided
to the Company. The Company will charge to expense the estimated fair value of
these options over the related vesting periods.
Class A and Class B Warrants
- ----------------------------
In connection with the February Private Placement and the Milo Note
Conversion, there are 1,598,042 Class A Warrants and 1,598,042 Class B Warrants
outstanding as of December 31, 1994. Each class A Warrant entitles the holder to
purchase one share of the Company's common stock at $1.00 per share and each
Class B Warrant entitles the holder to purchase one share of the Company's
common stock at $1.75 per share. At December 31, 1994, the Company had reserved
3,196,084 Common Shares for the Class A and Class B Warrants.
Irwin L. Gross Warrants
- -----------------------
The Company entered into an agreement with Irwin L. Gross in March 1994
pursuant to which Mr. Gross will provide consulting services and financial
advice, for a term of five years ending March 1999. In consideration for such
services Mr. Gross received a warrant to purchase 262,000 shares of the
Company's common stock exercisable 50% on the first anniversary and 50% on the
second anniversary of the grant at a price of $2.77 per share until March 21,
1999. The closing price of the Company's common stock on the date of grant was
$3.25, as reported on the NYSE. The estimated fair value of the warrants is
being charged to expense over the vesting period.
41
<PAGE>
ELECTRONIC ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Neidiger/Tucker/Bruner, Inc. Unit Warrants
- ------------------------------------------
In connection with services rendered to the Company for the June
Private Placement, the Company granted Unit Warrants to the investment banking
firm of Neidiger/Tucker/Bruner, Inc. (NTB Warrants). The NTB Warrants entitle
the holders to purchase 250,000 units at $3.03 per unit. Each unit consists of
one share of common stock and a Class C Warrant. On July 10, 1999, 62,650 Unit
Warrants will expire and on August 16, 1999, 187,350 Unit Warrants will expire
(see above). At December 31, 1994, the Company had reserved 500,000 shares of
the common stock for this purpose.
Other Warrants
- --------------
At December 31, 1994, the Company had certain other warrants
outstanding for issuance of shares of common stock under certain circumstances.
All such warrants were issued in prior years and are included in the summary of
outstanding warrants below.
In March, 1995 an officer of the Company was granted options to acquire
400,000 shares of Common Stock of the Company at the fair value of the Company's
Common Stock at the date of grant exercisable over a period of five years. These
options are not reflected in the summary below.
A summary of activity in the various stock option plans discussed above
and a summary of warrants outstanding at December 31, 1994 follow:
42
<PAGE>
ELECTRONIC ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
<TABLE>
<CAPTION>
Stock Option Plans
------------------
Option Price Available
1972 Employee's Stock Option Plan Per Share Outstanding Exercisable For Grant
- --------------------------------- ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
December 31, 1991, Balance $1.88-5.69 242,800 115,300 260,418
Options Granted 3.25 126,800 - (126,800)
Became Exercisable - - 101,875 -
Options Exercised 2.25-3.06 (25,000) (25,000) -
Options Cancelled 2.25-4.50 (125,700) (125,700) 125,700
--------- --------- --------- -------
December 31, 1992, Balance 1.88-5.69 218,900 66,475 259,318
Options Granted 1.13-1.69 152,000 - (152,000)
Options Returned 2.25-5.69 (179,300) (179,300) 179,300
Became Exercisable - - 128,950 -
----------- ----------- --------- -----------
December 31, 1993, Balance 1.13-3.56 191,600 16,125 286,618
Options Granted 2.00-6.28 921,601 - (921,601)
Options Authorized - - - 1,000,000
Became Exercisable - - 453,519 -
Options Exercised 1.13-3.56 (55,490) (55,490) -
Options Returned 1.13-6.28 (70,875) (70,875) 70,875
----------- ---------- ---------- --------
December 31, 1994, Balance $1.13-6.28 986,836 343,279 435,892
========== ========= ========= =========
1991 Directors Plan
December 31, 1994, Balance $1.50-3.12 6,000 3,000 -
========== ========== ========= ==========
1994 Stock Option Plan For $3.25-4.37 260,000 - 140,000
========== ========= ========== =========
Non-Employee Directors
1994 Incentive Plan $ 4.44 1,800,000 1,800,000 1,200,000
- ------------------- =========== ========= ========= =========
Wall Street Group Options $ 4.56 100,000 - -
- ------------------------- ============ ========= ========== =========
Waterton Group LLC Options $ 7.70 200,000 - -
- -------------------------- ============ ========= ========== =========
Total all Plans $1.13-7.70 3,352,836 2,146,279 1,775,892
============ ========= ========= =========
</TABLE>
43
<PAGE>
ELECTRONIC ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Warrants Outstanding
--------------------
<TABLE>
<CAPTION>
Exercise Price
Per Warrant Outstanding
------------ -----------
<S> <C> <C>
Warrants
- --------
Class A Warrants $ 1.00 1,598,042
Class B Warrants 1.75 1,598,042
Gross Warrants 2.77 262,000
Neidiger/Tucker/Bruner, Inc. Unit Warrants 3.03 250,000
Neidiger/Tucker/Bruner, Inc. Class C Warrants 4.60 250,000
Public Utility Warrants 6.00 300,000
185 Monmouth Parkway 1.50 130,000
Norcross Warrants 1.00 50,000
----------- ---------
Total Warrants outstanding $1.00-6.00 4,438,084
=========== ==========
</TABLE>
44
<PAGE>
ELECTRONIC ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
8. SAVINGS PLAN
The Company has a 401(k) Savings Plan whereby eligible employees may
voluntarily contribute up to 8% of annual compensation, or the maximum allowed
as determined by the Internal Revenue Code. Employee contributions are matched
50% by the Company up to a maximum of 4% of employee compensation. The Company
can also make an additional contribution which is at the discretion of the Board
of Directors and was 1% of employee compensation for 1992. No additional
contributions were made in 1994 or 1993. Company contributions amounted to
$48,000 in 1994; $100,000 in 1993; $291,000 in 1992. Payments upon retirement or
termination of employment are based on vested amounts credited to individual
accounts.
9. INCOME TAXES
The Company accounts for income taxes in accordance with the provisions
of Statement of Financial Accounting Standards ("SFAS") No. 109 - "Accounting
for Income Taxes", which the Company adopted on January 1, 1993. The adoption of
the new standard did not have any impact on the Company's financial statements.
As of December 31, 1994, the Company had a net operating loss
carryforward for tax purposes of approximately $23.4 million ($7.3 million
expiring in 1999, $2 million expiring in 2002, $3.1 million expiring in 2007,
$6.2 million expiring in 2008 and $4.8 million expiring in 2009) that may be
applied to reduce future taxable income. A limitation on the ability to utilize
a portion of the Company's net operating loss carryforwards may result if future
stock ownership changes exceed certain thresholds as defined in Section 382 of
the Internal Revenue Code of 1986. In addition, the Company has investment tax
credit and research activity credit carryforwards as of December 31, 1994 of
approximately $240,000 and $849,000, respectively. As a result of the
quasi-reorganization, the benefits of these carryforwards, as well as the net
benefit of book-tax basis differences, existing at January 1, 1986, are credited
to additional paid-in capital when they reduce taxable income, rather than being
reflected in the statement of operations.
Because of the uncertainties related to the future realization of the
deferred tax asset of $9.1 and $7.4 million at December 31, 1994 and 1993,
respectively, the Company has established a valuation allowance of $9.1 and $7.4
million at December 31, 1994 and 1993, respectively.
There was no U.S. Federal income tax benefit for 1994, 1993 or 1992
since these benefits were fully used in 1991.
10. LOSS PER COMMON SHARE
Losses per common share were computed based on the weighted average
number of common shares outstanding. Shares issuable upon the exercise of stock
options and warrants have not been included in per share computations, because
their impact would have been antidilutive in each year. The weighted average
number of shares used in the computation of earnings (loss) per share was
5,052,480 in 1994, 2,646,575 in 1993, and 2,621,032 in 1992.
45
<PAGE>
ELECTRONIC ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
11. POSTRETIREMENT BENEFITS
In December 1990, the Financial Accounting Standards Board issued SFAS
No. 106 - "Employers' Accounting for Postretirement Benefits Other Than
Pensions". SFAS No. 106 requires that the expected cost of these benefits be
charged to expense during the years that the employees render service. The
Company adopted the new standard prospectively effective January 1, 1993. At
January 1, 1993, based on the substantive postretirement benefit plan in effect
at that date, the unfunded postretirement benefit obligation (transition
obligation) was estimated to be $1,978,000. The Company elected to amortize this
obligation over a 20-year period beginning in 1993.
In order to contain the cost of providing postretirement benefits, on
December 28, 1993, the Company notified retirees who worked through the date of
their normal retirement that the supplemental health insurance coverage
previously provided to employees over the age of 65 was terminated. The
termination of these benefits significantly reduced future postretirement
benefit costs and the transition obligation. The Company currently continues to
provide life insurance coverage to retirees eligible for those benefits.
Retirees that accepted an early retirement package, which included the Company's
health care program, currently continue to receive health insurance and life
insurance coverage. These benefits are subject to deductibles, copayment
provisions and other limitations and the Company may amend or change the plan
periodically. Based on the Company's current benefit policies on December 31,
1993, the Company reversed substantially all of the deferred transition
obligation initially recorded on January 1, 1993. The remaining liability for
expected postretirement benefits, included in accrued expenses, totaled $72,000
and $103,000 at December 31, 1994 and 1993, respectively. This liability will be
adjusted periodically as new claims experience becomes available. The total cost
of postretirement benefits for covered individuals, including retirees over 65,
charged to income was $30,000 in 1994, $276,000 in 1993, and $247,000 in 1992.
There were no postretirement benefit costs in 1994. The Company does not fund
this plan.
12. EXECUTIVE SERVICES AND SEVERANCE AGREEMENTS
On February 2, 1995, pursuant to negotiations which had been commenced
in November, 1994, Charles A. Milo submitted his formal resignation as
President, Chief Executive Officer and Director. At that time, the Company
executed an agreement with Mr. Milo which specifies among other things, the
forgiveness of the $160,000 note due the Company; payment of a $50,000 bonus,
continuation of salary and benefits to March 31, 1995; and payment of $10,000
fee for services to be rendered in connection with the closure of the Company's
Mexican facility. The charges are reflected in the restructuring charge
disclosed in Note 3.
On November 15, 1993, Richard G. Rogers submitted his resignation as
President, Chief Executive Officer and Director. At that time the Company
entered into an Executive Services Agreement with Mr. Rogers which terminated
pursuant to its terms in March 1994 upon Mr. Rogers' reemployment with another
entity. Under the agreement, as amended, Mr. Rogers received 15,000 shares of
common stock upon the cancellation of previously granted stock options, the
assignment of a term life insurance policy and an aggregate amount of $94,615,
which has been paid.
Officers of the Company have agreements that provide for payments of
salary and continuance of certain employee benefits in the event that there is a
change in control of the Company and the occurrence
46
<PAGE>
ELECTRONIC ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
of certain other conditions as defined therein. As of December 31, 1994, the
amount for which the Company would be obligated under such agreements was
approximately $160,000.
13. PREFERRED STOCK PURCHASE RIGHTS
Pursuant to a Shareholder Rights Plan, there is one preferred stock
purchase right outstanding for each outstanding share of common stock. Under
certain conditions, each right may be exercised to purchase one one-hundredth
share of a new series of participating preferred stock at an exercise price of
$11, subject to adjustment. The rights may only be exercised commencing ten days
after a public announcement that a party acquired or obtained the right to
acquire 15% or more of the Company's common stock (except in a transaction
directly with the Company which the Board of Directors determines is in the best
interests of the shareholders) or ten days after commencement of a tender or
exchange offer the consummation of which would result in ownership by a party of
15% or more of the Company's common stock. The rights, which do not have voting
rights, expire in 1998 and may be redeemed by the Company at a price of $0.01
per right at any time prior to their expiration or the acquisition of 15% of the
Company's common stock. In the event that a party acquires 15% or more of the
Company's common stock, in a transaction not approved by the Board of Directors,
each other holder of a right shall have the right to receive that number of
shares of common (or, in certain circumstances, common stock equivalents) of the
Company, which would have a value of twice the exercise price of the right, and
in addition, the Board of Directors, at its option, may exchange each right
(other than rights held by the acquiring party) for one share of common stock
(or common stock equivalents). In the event that the Company is acquired in a
merger or other business combination transaction after the rights become
exercisable, each holder of a right shall have the right to purchase, at the
exercise price, that number of shares of common stock of the acquiring company
which would have a value of twice the exercise price of the right. The Plan will
not become effective if 80% or more of the Company's stock is acquired in an all
cash tender offer meeting certain conditions.
14. CONTINGENCIES
The Company has been notified by the United States Environmental
Protection Agency (EPA) that EPA considers the Company to be one of the parties
potentially responsible for costs incurred to date by the EPA in taking
corrective action, for future cleanup costs, and for other possible damages in
connection with a superfund site in New Jersey. As of March 1992, EPA claimed to
have incurred costs of $17.8 million and estimates that the costs of the
remaining remedial work will be in the range of $70-$100 million. Information in
EPA's files suggests that EPA is likely to assert that one shipment of waste,
allegedly generated by EAI and presumed to constitute less than one-quarter of
1% of the total liquid waste allegedly released at the site, was delivered to
the site in 1973. The Company has notified its comprehensive general liability
insurers of EPA's potential claim. Because of the long period of time between
the alleged delivery of waste and the notification of claim, coverage may be the
responsibility of more than one insurer. One insurer, which covered occurrences
during five of the fifteen years, has responded and reserved rights. This
insurer has not denied coverage, but has sought to limit its responsibility to a
one-third share which it claims corresponds to its share of the fifteen-year
time period during which the alleged release took place. This insurer has
continued to pay one-third of the Company's defense costs, and although the
Company believes that it is entitled to coverage, it remains to be determined on
what basis this insurer will contribute to any settlement or judgment. The
insurer for the remaining years has denied coverage on grounds which the
47
<PAGE>
ELECTRONIC ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Company believes are without merit under New Jersey law and it now appears very
unlikely that such insurer will meet its obligations without litigation.
Nonetheless, EAI has asked for reconsideration of its position and is awaiting a
response.
In October 1992, an action was instituted in the Superior Court of New
Jersey, Monmouth County, against EAI, certain other defendants and each of their
respective insurance carriers by Lemco Associates, L.P., a limited partnership
(Lemco). Lemco's claim involves real property in North Long Branch, New Jersey
that was once owned and used for manufacturing purposes by EAI and others. The
property is now owned by Lemco. In its complaint, Lemco alleges that (i) the
property is contaminated with hazardous substances and groundwater contamination
exists; (ii) the contamination is the result of the activities undertaken at the
site by the defendants, including EAI; and (iii) the property requires extensive
remedial work to clean up the contaminants in the soil and to protect against
the potential threat of migration of contaminants to neighboring properties. The
complaint states that in connection with a proposed sale of the property by
Lemco, the New Jersey Department of Environmental Protection and Energy (the
DEPE) required Lemco to perform or agree to perform certain activities at the
site which included site characterization, remediation of all contamination and
removal of underground storage tanks. Lemco further asserts that the DEPE has
mandated that before Lemco can transfer title to the property, a cleanup must be
performed in order to restore the site to an environmentally sound condition.
Lemco also alleges that it has incurred, and continues to incur, substantial
costs and expenses in characterizing and remediating the environmental
contamination allegedly created by the defendants. Lemco's claims include, among
others, (i) common law causes of action involving ultrahazardous activity and
abnormally dangerous activity, (ii) failure to comply with certain environmental
statutes, including the New Jersey Environmental Cleanup Responsibility Act, the
New Jersey Underground Storage of Hazardous Substance Act and the New Jersey
Spill Compensation and Control Act, (iii) failure to disclose the contamination
and presence of certain underground storage tanks, (iv) failure to properly
comply with underground storage tank regulations, and (v) breach of an implied
covenant of good faith and fair dealing. In its complaint, Lemco seeks
compensatory, consequential and incidental damages in unspecified amounts as
well as declaratory relief stating that defendants are liable for all future
damages resulting from the alleged contamination and compelling the defendants
to indemnify Lemco for all damages sustained by Lemco. In addition, Lemco seeks,
among other things, indemnification from any and all claims and suits brought
against Lemco by any governmental entity or private party for costs of cleanup
or damages resulting therefrom. In December of 1992, EAI filed an answer to the
complaint denying the allegations made by Lemco and asserting numerous defenses
to such allegations. In addition, EAI made cross-claims for contribution and
indemnification against all co-defendants to the extent of any liability that
EAI may suffer as a result of this matter and a counterclaim against Lemco which
identifies Lemco as a party responsible for the alleged contamination and seeks
contribution and indemnification from Lemco for any damages that may be incurred
by EAI. In January of 1993, EAI filed a third party complaint against certain
named and other unidentified entities, primarily former tenants or operators at
the site during EAI's ownership, seeking contribution and indemnification for
any costs and damages that EAI may suffer as a result of Lemco's claims. Prior
to the institution of the action by Lemco, EAI notified its insurance carriers
of the potential claim related to this matter. At that time, the insurers
declined to pay current defense costs and reserved their rights. One insurer has
since agreed, subject to a reservation of rights, to pay its proportionate
share; however, no agreement yet exists as to what constitutes its proportional
share. The Company expects to continue to pursue its demand for coverage from
the presently known insurers and will vigorously pursue its coverage. Discovery
is ongoing in this litigation. 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
48
<PAGE>
ELECTRONIC ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
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. At this time, the Company and its
environmental consultants have not evaluated the information recently received
from Lemco nor has any independent analysis of the site been performed to
determine the appropriateness of Lemco's claim and of the estimated cost of
remediation. Investigation of this matter is ongoing; therefore, it is not
possible to predict its outcome at this time. No reserve has been established in
the accompanying financial statements for the cost of remediation, if any, which
may be attributable to the Company.
On April 5, 1994, Stephen Pudles, a former Director of Marketing and
Sales of the Company, filed an action in Superior Court of New Jersey, Law
Division, County of Ocean. The complaint states that (i) Mr. Pudles voluntarily
resigned his position with the Company; (ii) subsequent to his resignation he
agreed to continue to work for the Company for a specified period of time; and
(iii) an oral agreement was reached between Mr. Pudles and the former President
of the Company providing for certain compensation to be paid by the Company to
Mr. Pudles during such period. Mr. Pudles' complaint alleges that (1) the
Company breached its oral agreement with Mr. Pudles by refusing to pay the
agreed upon compensation to him; (2) the Company made negligent
misrepresentations in inducing Mr. Pudles to enter into such oral contract; and
(3) that the Company defrauded Mr. Pudles. The suit requests compensatory
damages and $1 million in punitive damages from the Company. On May 19, 1994,
the Company filed an answer to the complaint denying the allegations and
demanding a judgment dismissing the suit based upon several defenses, including
estoppel, unclean hands, and the fact that the plaintiff sustained no damage. In
as much as this matter is in its initial stages and discovery has not yet
commenced, it is not possible to predict its outcome at this time.
The Company's contract manufacturing business provides services to a
variety of customers some of which are development stage or marginally
profitable enterprises or which have a highly leveraged capital structure. In
connection with providing its services the Company extends credit to customers,
invests in inventories to supply product scheduled for delivery and enters into
contractual commitments for the purchase of materials. The Company evaluates
each customer's creditworthiness with regard to the amount of credit it is
willing to extend and investment risk it is willing to assume. The Company may
require collateral or conditional commitments from the customer such as standby
letters of credit and financial guarantees in connection with assuming such
credit or investment risk. The amount and nature of the collateral or
commitments is based on management's evaluation of the customer's
creditworthiness, together with competitive circumstances. To date the Company
has had a favorable credit experience with the aforementioned types of
customers.
As of December 31, 1994 and 1993, the Company had the following amounts
outstanding for accounts receivable, inventories and purchase commitments
related to contracts with customers that are development stage or marginally
profitable enterprises or whose capital structure was highly leveraged. If
necessary, these amounts could be reduced through the sale or return of
inventories to suppliers, alternative usage of inventories and cancellation of
purchase commitments with or without the payment of cancellation penalties. One
customer accounted for 95% of the total of such items at December 31, 1994,
while one customer accounted for 100% at December 31, 1993.
49
<PAGE>
ELECTRONIC ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
<TABLE>
<CAPTION>
December 31,
-----------
1994 1993
---- ----
(thousands of dollars)
<S> <C> <C>
Accounts Receivable $2,290 $ 687
Inventories 895 557
Purchase Commitment 855 278
------ ------
Total $4,040 $1,522
====== ======
</TABLE>
50
<PAGE>
ELECTRONIC ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Sales to Major Customers
- ------------------------
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
(thousands of dollars)
<S> <C> <C> <C>
Contract Manufacturing (three customers in
1994, four customers in 1993 and three
customers in 1992) $20,928 $18,257 $13,372
======= ======= =======
</TABLE>
51
<PAGE>
ELECTRONIC ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
15. QUARTERLY FINANCIAL DATA (Unaudited)
Summarized quarterly financial data for the years ended December 31,
1994 and 1993 are as follows:
<TABLE>
<CAPTION>
Calendar Quarter
First Second Third Fourth
----- ------ ----- ------
(thousands of dollars except for per share amounts)
<S> <C> <C> <C> <C>
1994
- ----
Net sales, continuing operations $5,377 $8,313 $8,801 $8,048
Gross profit, continuing operations 315 1,013 1,448 4
------- ------- -------- ----------
Income (Loss) from continuing operations (661) (211) 4 (3,916)
Income from discontinued operations
net of applicable taxes
Income from disposition of discontinued
operations net of applicable taxes - - - -
-------- ------- -------- ----------
Net income (loss) $(661) $(211) $ 4 $(3,916)
======== ======= ======== ==========
Income (Loss) per common share:
Loss from continuing operations $ (.19) $ (.05) $ (-) $ (.56)
Income from discontinued operations
- - - -
-------- -------- -------- ---------
Income (Loss) per common share $ (.19) $ (.05) $ (-) $ (.56)
======== ======= ======== ========
1993
- ----
Net sales, continuing operations $ 7,474 $ 7,067 $ 5,931 $ 5,552
Gross profit (loss), continuing operations 976 378 352 (26)
-------- ------- -------- ---------
Loss from continuing operations (1,062) (816) (1,005) (1,781)
Income from discontinued operations
net of applicable taxes 235 106 - -
Income from disposition of discontinued
operations net of applicable taxes - 964 5 17
-------- ------- -------- ----------
Net income (loss) $ (827) $ 254 $(1,000) $(1,764)
======== ======= ======== ==========
Income (loss) per common share:
Loss from continuing operations $ (.40) $ (.31) $ (.38) $ (.67)
Income from discontinued operations .09 .41 - -
-------- ------- ------ ----------
Income (loss) per common share $ (.31) $ .10 $ (.38) $ (.67)
======== ======= ====== ==========
</TABLE>
52
<PAGE>
ELECTRONIC ASSOCIATES, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION ACCOUNT
For the Three Years Ended December 31, 1994
(thousands of dollars)
<TABLE>
<CAPTION>
Charged
Description Balance at (Credited) Balance
- ----------- Beginning to Costs and at End of
of Period Expenses Deductions(1) Period
--------- --------- ----------- -------
<S> <C> <C> <C> <C>
1994
Allowance for doubtful accounts $277 $134 $(204) $207
==== ==== ====== ====
1993
Allowance for doubtful accounts $253 $ 90 $(66) $277
==== ===== ===== ====
1992
Allowance for doubtful accounts $303 $(14) $(36) $253
==== ===== ===== ====
</TABLE>
(1) Write-off of uncollectible accounts
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
This item is not applicable.
PART III
ITEMS 10, 11, 12 AND 13. DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT; EXECUTIVE COMPENSATION; SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT; CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS
Reference is made to sections of the Company's Proxy Statement caption
"Election of Directors", "Directors and Executive Officers", "Compensation of
Executive Officers", "Security Ownership of Certain Beneficial Owners and
Management," and "Certain Relationships and Related Transactions" included in
the Proxy Statement with respect to the Company's Annual Meeting of Shareholders
to be held in June 1995, and the same are hereby incorporated by reference.
53
<PAGE>
PART IV
ITEM 14(a) 1 AND 2. FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
Reference is made to the Index to Consolidated Financial Statements and
Schedules at Item 8, Part II of this Form 10-K and the same is hereby
incorporated by reference.
ITEM 14(a) 3. EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Description
<S> <C>
2 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
Report on Form 8-K (Date of Report: January 4, 1995), as amended, and is
hereby incorporated by reference.
3.1 Certificate of Incorporation, as amended, was filed as Exhibit 3.1 to the
Company's Registration Statement on Form S-1, No. 33-81892, as amended,
and is hereby incorporated by reference.
3.2 By-Laws, as amended, was filed as Exhibit 3.2 to the Company's Registration
Statement on Form S-1, No. 33-81892, as amended, and is hereby
incorporated by reference.
4.1 Specimen of common stock share Certificate, was filed as Exhibit 4.1 to the
Company's Registration Statement on Form S-1, No. 33-81892, as amended,
and is hereby incorporated by reference.
4.2 Rights Agreement, dated as of February 10, 1988, between the Company and
Manufacturers Hanover Trust Company, as Rights Agent, was filed as Exhibit
1 to the Company's Form 8-A, dated February 11, 1988, and is hereby
incorporated by reference.
4.3 Amendment, dated as of October 24, 1990, to the Rights Agreement, was
filed as Exhibit 2 to the Company's Form 8, dated October 24, 1990, and is
hereby incorporated by reference.
10.1 Form of common stock Purchase Warrants issued pursuant to Settlement
Agreement dated March 10, 1988 between the Company and certain utilities
was filed as Exhibit 2(c) to the Company's Annual Report on Form 10-K for
the year ended December 31, 1990, and is hereby incorporated by reference.
54
<PAGE>
(*)10.2 1972 Stock Option Plan, as amended and restated, was filed as Appendix III
to the Company's Proxy Statement dated April 18, 1994, and is hereby
incorporated by reference.
10.3 Form of grant letter with respect to options granted pursuant to the 1972
Stock Option Plan was filed as Exhibit 10(c) to the Company's Annual Report
on Form 10-K for the year ended December 31, 1990, and is hereby
incorporated by reference.
(*)10.4 1991 Stock Option Plan for Non-Employee Directors, was filed as Exhibit
10(d) to the Company's Annual Report on Form 10-K for the year ended
December 31, 1991, and is hereby incorporated by reference.
(**)10.5 1988 Management Incentive Compensation Plan, as amended as of
January 1, 1992, was filed as Exhibit 10(e) to the Company's
Annual Report on Form 10-K for the year ended December 31,
1991, and is hereby incorporated by reference.
10.6 Second Amendment of Lease and Option Agreement, dated as of April 1,
1989, between the Company and 185 Monmouth Parkway Associates was
filed as Exhibit (a) to the Company's Report on Form 10-Q for the three
months ended March 31, 1989, and is hereby incorporated by reference.
(File No. 1-4680)
(*)10.7 Executive Death Benefit Plan and Amendment, was filed as Exhibit 10(k) to
the Company's Annual Report on Form 10-K for the year ended December
31, 1987, and is hereby incorporated by reference. (File No. 1-4680)
10.8 Stock Purchase Agreement, dated as of February 8, 1990, between the
Company and Nippon Mining Co., Ltd. was filed as Exhibit 10(a) to the
Company's Report on Form 8-K, dated February 21, 1990, and is hereby
incorporated by reference. (File No. 1-4680)
(**)10.9 Executive Severance Agreement, dated as of November 18, 1991, between
the Company and Richard G. Rogers, was filed as Exhibit 10(n) to the
Company's Annual Report on Form 10-K for the year ended December 31,
1991, and is hereby incorporated by reference.
10.10 Development and Distribution Agreement, dated July 30, 1991, between the
Company and Nippon Mining Co., Ltd., was filed as Exhibit 10(o) to the
Company's Annual Report on Form 10-K for the year ended December 31,
1992, and is hereby incorporated by reference.
10.11 Asset Purchase Agreement, dated May 15, 1992, between the Company, Milo
Technologies, Inc., Charles A. Milo and Loretta Milo was filed as Exhibit 10(p)
to the Company's Annual Report on Form 10-K for the year ended December
31, 1993, and is incorporated herein by reference.
55
<PAGE>
10.12 Stock Purchase Agreement, dated May 15, 1992, between the Company,
Milotec S.A. De C.V., Charles A. Milo, Loretta Milo and certain other
individuals, was filed as Exhibit 10(q) to the Company's Annual Report on
Form 10-K for the year ended December 31, 1992, and is hereby
incorporated by reference.
(**)10.13 Employment Agreement, dated May 29, 1992, between the Company and
Charles A. Milo, was filed as Exhibit 10(r) to the Company's Annual
Report on Form 10-K for the year ended December 31, 1992, and is
hereby incorporated by reference.
(**)10.14 Non-Compete Agreement, dated May 29, 1992, between the Company and
Charles A. Milo, was filed as Exhibit 10(s) to the Company's Annual
Report on Form 10-K for the year ended December 31, 1992, and is
hereby incorporated by reference.
(**)10.15 Non-Compete Agreement, dated May 29, 1992, between the Company and
Loretta Milo, was filed as Exhibit 10(t) to the Company's Annual
Report on Form 10-K for the year ended December 31, 1992, and is
hereby incorporated by reference.
10.16 Sublease Agreement, dated May 29, 1992, between the Company and Milo
Technologies, Inc., was filed as Exhibit 10(u) to the Company's Annual
Report on Form 10-K for the year ended December 31, 1992, and is hereby
incorporated by reference.
10.17 Lease Agreement, dated May 22, 1992, between the Company, Charles A.
Milo and Loretta Milo, was filed as Exhibit 10(v) to the Company's Annual
Report on Form 10-K for the year ended December 31, 1992, and is hereby
incorporated by reference.
10.18 Form of Purchase Agreement executed by each purchaser in connection with
the private sale of the Company's securities in January 1994, was filed as
Exhibit 10(w) to the Company's Annual Report on Form 10-K for the year
ended December 31, 1993, and is incorporated by reference.
10.19 Form of Class A Warrant issued to each purchaser in connection with the
private sale of the Company's securities in January 1994, was filed as Exhibit
10(X) to the Company's Annual Report on Form 10-K for the year ended
December 31, 1993, and is hereby incorporated by reference.
10.20 Form of Class B Warrant issued to each purchaser in connection with the
private sale of the Company's securities in January 1994, was filed as Exhibit
10(y) to the Company's Annual Report on Form 10-K for the year ended
December 31, 1993, and is hereby incorporated by reference.
56
<PAGE>
10.21 Agreement to Issue Warrants, dated January 28, 1994, between the Company
and Norcross Securities, Inc. together with a Warrant issued by the Company
and a form of a Warrant issuable under certain circumstances, comprising
Exhibits to the Agreement to Issue Warrants, was filed as Exhibit 10(z) to the
Company's Annual Report on Form 10-K for the year ended December 31,
1993, and is hereby incorporated by reference.
10.22 Subscription Agreement, dated February 4, 1994, between the Company and
185 Monmouth Parkway Associates, L.P., was filed as Exhibit 10(aa) to the
Company's Annual Report on Form 10-K for the year ended December 31,
1993, and is hereby incorporated by reference.
10.23 Second Amendment, dated August 4, 1993, to Second Amendment of Lease
and Option Agreement, dated as of April 1, 1989, between the Company and
185 Monmouth Parkway Associates, L.P. and letter dated August 6, 1993,
modifying Second Amendment, dated August 4, 1993, to Second Amendment
of Lease and Option Agreement, was filed as Exhibit 10(ab) to the
Company's Annual Report on Form 10-K for the year ended December 31,
1993, and is hereby incorporated by reference.
(**)10.24 Employment Agreement, dated as of November 15, 1993, between the Company
and Charles A. Milo, was filed as Exhibit 10(ac) to the Company's Annual
Report on Form 10-K for the year ended December 31, 1993, and is hereby
incorporated by reference.
10.25 Accounts Financing Agreement between Congress Financial Corporation and
the Company, dated August 13, 1993; Covenant Supplement to Accounts
Financing Agreement between Congress Financial Corporation and the
Company, dated August 13, 1993; Term Promissory Note A given to
Congress Financial Corporation, dated August 13, 1993; Term Promissory
Note B given to Congress Financial Corporation, dated August 13, 1993;
Inventory Loan Letter executed by the Company to Congress Financial
Corporation, dated August 13, 1993; Inventory and Equipment Security
Agreement Supplement to Accounts Financing Agreement executed by the
Company to Congress Financial Corporation, dated August 13, 1993; Trade
Financing Agreement Supplement to Accounts Financing Agreement
executed by the Company to Congress Financial Corporation, dated August
13, 1993; Subordination and Intercreditor Agreement between Congress
Financial Corporation and Milo Technologies, Inc., dated August 13, 1993;
Subordination and Intercreditor Agreement between Congress Financial
Corporation and Mezzanine Financial Fund, L.P., dated August 13, 1993; and
Enhancement Fee Agreement between the Company and Mezzanine
Financial Fund, L.P., dated August 13, 1993, was filed as Exhibit 10(ad) to the
Company's Annual Report on Form 10-K for the year ended December 31,
1993, and is hereby incorporated by reference.
57
<PAGE>
10.26 Asset Purchase Agreement, dated June 4, 1993, between the Company and
Halifax Corporation together with a Non-Competition Agreement, Assignment
and Assumption Agreement, Service Mark License Agreement, Low Cost
Host License Agreement, and Master Subcontract Agreement, comprising
Exhibits to the Asset Purchase Agreement, was filed as Exhibit 10(ae) to the
Company's Annual Report on Form 10-K for the year ended December 31,
1993, and is hereby incorporated by reference.
10.27 Lease Agreement, dated August 1, 1993, between the Company and Parque
Industrial de Nogales, S.A. de C.A., Nogales, Sonora, Mexico, was filed as
Exhibit 10(af) to the Company's Annual Report on Form 10-K for the year
ended December 31, 1993, and is hereby incorporated by reference.
10.28 Form of Subscription Agreement executed by each purchaser in connection
with the private placement of the Company's securities which was
commenced in June 1994, was filed as Exhibit 10.28 to the Company's
Registration Statement on Form S-1, No. 33-81892, as amended, and is
hereby incorporated by reference.
10.29 Form of Class C Warrant issued to each purchaser in connection with the
private placement of the Company's securities which was commenced in
June 1994, was filed as Exhibit 10.29 to the Company's Registration
Statement on Form S-1, No. 33-81892, as amended, and is hereby
incorporated by reference.
10.30 1994 Equity Incentive Plan, as adopted by the Company's shareholders on
June 28, 1994 and attached as Appendix I to the Company's Proxy
Statement dated June 7, 1994, is hereby incorporated by reference.
10.31 1994 Stock Option Plan for Non-Employee Directors, as adopted by the
Company's shareholders on May 17, 1994 and is attached as Appendix II to
the Company's Proxy Statement dated April 18, 1994, is hereby incorporated
by reference.
(**)10.32 Executive Services Agreement, dated November 15, 1993, between the
Company and Richard G. Rogers, as amended by Amendment to Executive
Services Agreement, dated March 14, 1994, was filed as Exhibit 10.32
to the Company's Registration Statement on Form S-1, No. 33-81892,
as amended, and is hereby incorporated by reference.
(**)10.33 Employment Agreement, dated as of November 18, 1991, between the
Company and Richard G. Rogers, was filed as Exhibit 10(m) to the
Company's Annual Report on Form 10-K for the year ended December 31,
1991, and is hereby incorporated by reference.
58
<PAGE>
(**)10.34 Form of Consulting Agreement entered into between the Company and
Irwin L. Gross on March 21, 1994, was filed as Exhibit 2 to the
Company's Registration Statement on Form S-1, No. 33-81892, as
amended, and is hereby incorporated by reference.
10.35 Form of Placement Agent's Warrant Agreement entered into between the
Company and Neidiger/Tucker/Bruner, Inc., together with a Form of Warrant
issued by the Company comprising an Exhibit to the Placement Agent's
Warrant Agreement, was filed as Exhibit 10.35 to the Company's Registration
Statement on Form S-1, No. 33-81892, as amended, and is hereby
incorporated by reference.
10.36 Loan and Security Agreement, dated January 17, 1990, between the
Company and Mellon Bank (East) N.A. was filed as Exhibit 4(a) to the
Company's Annual Report on Form 10-K for the year ended December 31,
1989, and is hereby incorporated by reference.
10.37 First Amendment and Modification to Loan and Security Agreement, dated
April 1990, between the Company and Mellon Bank (East) N.A. was filed as
Exhibit 4(e) to the Company's Annual Report on Form 10-K for the year
ended December 31, 1990, and is hereby incorporated by reference.
10.38 Second Amendment and Modification to Loan and Security Agreement, dated
January 17, 1991, between the Company and Mellon Bank (East) N.A. was
filed as Exhibit 4(f) to the Company's Annual Report on Form 10-K for the
year ended December 31, 1990, and is hereby incorporated by reference.
10.39 Third Amendment and Modification to Loan and Security Agreement, dated
March 4, 1992, between the Company and Mellon Bank, N.A., was filed as
Exhibit 4(g) to the Company's Annual Report on Form 10-K for the year
ended December 31, 1991, and is hereby incorporated by reference.
10.40 Fourth Amendment and Modification to Loan and Security Agreement, dated
June 19, 1992, between the Company and Mellon Bank (East) N.A., was filed
as Exhibit 4(h) to the Company's Annual Report on Form 10-K for the year
ended December 31, 1992, and is hereby incorporated by reference.
10.41 Fifth Amendment and Modification to Loan and Security Agreement, dated
July 31, 1992, between the Company and Mellon Bank (East) N.A., was filed
as Exhibit 4(i) to the Company's Annual Report on Form 10-K for the year
ended December 31, 1992, and is hereby incorporated by reference.
10.42 Sixth Amendment and Modification to Loan and Security Agreement, dated
December 31, 1992, between the Company and Mellon Bank (East) N.A., was
filed as Exhibit 4(j) to the Company's Annual Report on Form 10-K for the
year ended December 31, 1992, and is hereby incorporated by reference.
59
<PAGE>
10.43 Seventh Amendment and Modification to Loan and Security Agreement,
dated January 22, 1993, between the Company and Mellon Bank (East) N.A.,
was filed as Exhibit 4(k) to the Company's Annual Report on Form 10-K for
the year ended December 31, 1992, and is hereby incorporated by reference.
10.44 Eighth Amendment and Modification to Loan and Security Agreement, dated
February 26, 1993, between the Company and Mellon Bank (East) N.A., was
filed as Exhibit 4(l) to the Company's Annual Report on Form 10-K for the
year ended December 31, 1992, and is hereby incorporated by reference.
10.45 Amended and Restated Loan and Security Agreement, dated March 31, 1993,
between the Company and Mellon Bank N.A., was filed as Exhibit 4(m) to the
Company's Annual Report on Form 10-K for the year ended December 31,
1992, and is hereby incorporated by reference.
10.46 Form of Investment Agreement dated January 15, 1995 by and between
Electronic Associates, Inc. and BarOn Technologies, Ltd., was filed as Exhibit
10.1 to the Company's Report on Form 8-K (Date of Report: January 16,
1995), as amended, and is hereby incorporated herein by reference.
10.47 Form of Stock Purchase Agreement between the Company and various
shareholders of BarOn Technologies, Ltd., was filed as Exhibit 10.2 to the
Company's Report on Form 8-K (Date of Report: January 16, 1995), as
amended, and is hereby incorporated herein by reference.
10.48 Form of Shareholders Agreement among the Company, BarOn Technologies,
Ltd. and the shareholders of BarOn Technologies, Ltd., was filed as Exhibit
10.3 to the Company's Report on Form 8-K (Date of Report: January 16,
1995), as amended, and is hereby incorporated herein by reference.
10.49 Business Loan Agreement dated as of October 20, 1994 by and between
Electronic Associates, Inc., and BarOn R&D Ltd.
10.50 Business Loan Agreement dated September 8, 1994 by and between
Electronic Associates, Inc. and Tanon Manufacturing, Inc.
(**) 10.51 Employment Agreement dated as of January 4, 1995 between Tanon
Manufacturing, Inc. and Joseph R. Spalliero.
(**) 10.52 Non-Competition and Confidentiality Agreement dated as of January 4, 1995
by and among Electronic Associates, Inc., Tanon Manufacturing, Inc. and
Joseph R. Spalliero.
10.53 Promissory Note dated January 4, 1995 in the principal amount of $1,000,000
from Joseph R. Spalliero and Patricia Spalliero to Electronic Associates, Inc.
(**) 10.54 Letter Agreement dated February 2, 1995 between Charles A. Milo and
Electronic Associates, Inc.
60
<PAGE>
(**) 10.55 Amendment dated March 23, 1995 to Consulting Agreement dated March 21,
1994 between Irwin L. Gross and Electronic Associates, Inc.
10.56 Manufacturing and Consulting Agreement, dated as of January 16, 1995,
between BarOn Technologies Ltd. and Electronic Associates, Inc.
</TABLE>
61
<PAGE>
<TABLE>
<S> <C> <C> <C>
22 Subsidiaries of the registrant
a. The Company has two active subsidiaries:
1. Milotec S.A. De C.V.
Nogales, Sonora, Mexico
2. Tanon Manufacturing, Inc.
Fremont, California
24 Consents of experts and counsel
a. Consent of Arthur Anderson, LLP, Independent Public Accountants of
Electronic Associates, Inc.
27 Financial Data Schedule
99.1 The audited balance sheet of BarOn Technologies Ltd. as of December 31, 1993
and December 31, 1992 and related statements of operations, shareholders'
equity and cash flow for the year ended December 31, 1993 and for the period
from inception in 1992 through December 31, 1992, together with the unaudited
balance sheet of BarOn Technologies Ltd. as of September 30, 1994 and related
statements of operations, shareholders' equity and cash flows for the nine
months ended September 30, 1994, were filed as Exhibit 99.1 to the Company's
Report on Form 8-K (date of Report: January 16, 1995), as amended, and are
hereby incorporated herein by reference.
99.2 The audited balance sheet of Tanon Manufacturing, Inc. as of December 31, 1993
and December 31, 1992 and related statements of operations, shareholders'
equity and cash flows for the years ended December 31, 1993, 1992 and 1991,
together with the unaudited balance sheet of Tanon Manufacturing, Inc. as of
October 1, 1994 and related statements of operations, shareholders' equity and
cash flows for the nine months ended October 1, 1994 and October 2, 1993, were
filed as Exhibit 99 to the Company's Report on Form 8-K (date of Report: January
4, 1995), as amended, and are hereby incorporated herein by reference.
(*) Constitutes a compensatory plan filed pursuant to Item 14(c) of the Company's Annual
Report on Form 10-K.
(**) Constitutes a management contract filed pursuant to Item 14(c) of the Company's
Annual Report on Form 10-K.
</TABLE>
The Company will provide copies of the above Exhibits to shareholders
upon the payment of a fee of $4 per order to cover postage and handling plus
seven cents per page. Requests for such copies should be directed to Mrs. Karin
Gaskill, Electronic Associates, Inc., 185 Monmouth Parkway, West Long Branch,
New Jersey 07764.
ITEM 14(b). REPORTS ON FORM 8-K
The Company did not file a Report on Form 8-K during the calendar
quarter ended December 31, 1994.
The Company filed the following Reports on Form 8-k during January 1995:
62
<PAGE>
Form 8-K dated January 4, 1995, as amended, reporting that the Company
acquired by merger Tanon Manufacturing, Inc. of Fremont, California, a
privately held company which provides electronic manufacturing services
to original equipment manufacturers.
Form 8-K dated January 16, 1995, as amended, reporting that the Company
acquired a 25% equity interest in BarOn Technologies, Ltd., a privately
held company located in Haifa, Israel, engaged in the research and
development of input devices for computers that can directly digitize
handwriting in a variety of languages, from any surface, and a right to
acquire an additional 8.33% equity interest in BarOn Technologies, Ltd.
ITEM 14 (c). EXHIBITS REQUIRED BY ITEM 601 OF REGULATION S-K
See Item 14(a) 3 above.
ITEM 14 (d). (STATEMENTS EXCLUDED FROM ANNUAL REPORT TO SHAREHOLDERS
None.
63
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ELECTRONIC ASSOCIATES, INC.
Registrant
By: /s/ Joseph R. Spalliero
-----------------------------
Joseph R. Spalliero, President
Date: April 14, 1995
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Irwin L. Gross Chairman of the Board April 14, 1995
- -----------------------------------------
Irwin L. Gross
/s/ Joseph R. Spalliero Director and President April 14, 1995
- ----------------------------------------- (Principal Executive Officer)
Joseph R. Spalliero
/s/ Jonathan R. Wolter Treasurer and Vice April 14, 1995
- ----------------------------------------- President, Finance
Jonathan R. Wolter (Principal Financial and
Accounting Officer)
/s/ Bruce P. Murray Director April 14, 1995
- -----------------------------------------
Bruce P. Murray
/s/ Jules M. Seshens Director April 14, 1995
- -----------------------------------------
Jules M. Seshens
</TABLE>
[Signatures continued on next page]
64
<PAGE>
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ G. Corson Ellis Director April 14, 1995
- ---------------------------------------
G. Corson Ellis
/s/ Seth Joseph Antine Director April 14, 1995
- ----------------------------------------
Seth Joseph Antine
Director _________________, 1995
- ----------------------------------------
Michael M. Michigami
</TABLE>
65
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description Page
- ---------- ----------- ----
<S> <C> <C>
2 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 Report on Form 8-K (Date of Report: January 4, 1995), as
amended, and is hereby incorporated by reference.
3.1 Certificate of Incorporation, as amended, was filed as Exhibit 3.1 to the
Company's Registration Statement on Form S-1, No. 33-81892, as
amended, and is hereby incorporated by reference.
3.2 By-Laws, as amended, was filed as Exhibit 3.2 to the Company's
Registration Statement on Form S-1, No. 33-81892, as amended, and is
hereby incorporated by reference.
4.1 Specimen of Common Stock share Certificate, was filed as Exhibit 4.1 to
the Company's Registration Statement on Form S-1, No. 33-81892, as
amended, and is hereby incorporated by reference.
4.2 Rights Agreement, dated as of February 10, 1988, between the
Company and Manufacturers Hanover Trust Company, as Rights
Agent, was filed as Exhibit 1 to the Company's Form 8-A,
dated February 11, 1988, and is hereby incorporated by
reference.
4.3 Amendment, dated as of October 24, 1990, to the Rights Agreement, was
filed as Exhibit 2 to the Company's Form 8, dated October 24, 1990, and
is hereby incorporated by reference.
10.1 Form of Common Stock Purchase Warrants issued pursuant to Settlement
Agreement dated March 10, 1988 between the Company and certain
utilities was filed as Exhibit 2(c) to the Company's Annual Report on Form
10-K for the year ended December 31, 1990, and is hereby incorporated by
reference.
10.2 1972 Stock Option Plan, as amended and restated, was filed as Appendix
III to the Company's Proxy Statement dated April 18, 1994, and is hereby
incorporated by reference.
<PAGE>
Exhibit No. Description Page
- ---------- ----------- ----
<S> <C> <C>
10.3 Form of grant letter with respect to options granted pursuant to the 1972
Stock Option Plan was filed as Exhibit 10(c) to the Company's Annual
Report on Form 10-K for the year ended December 31, 1990, and is
hereby incorporated by reference.
10.4 1991 Stock Option Plan for Non-Employee Directors, was filed as Exhibit
10(d) to the Company's Annual Report on Form 10-K for the year ended
December 31, 1991, and is hereby incorporated by reference.
10.5 1988 Management Incentive Compensation Plan, as amended as
of January 1, 1992, was filed as Exhibit 10(e) to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1991, and is hereby incorporated by reference.
10.6 Second Amendment of Lease and Option Agreement, dated as of
April 1, 1989, between the Company and 185 Monmouth Parkway
Associates was filed as Exhibit (a) to the Company's Report
on Form 10-Q for the three months ended March 31, 1989, and
is hereby incorporated by reference.
10.7 Executive Death Benefit Plan and Amendment, was filed as Exhibit 10(k)
to the Company's Annual Report on Form 10-K for the year ended
December 31, 1987, and is hereby incorporated by reference.
10.8 Stock Purchase Agreement, dated as of February 8, 1990,
between the Company and Nippon Mining Co., Ltd. was filed as
Exhibit 10(a) to the Company's Report on Form 8-K, dated
February 21, 1990, and is hereby incorporated by reference.
10.9 Executive Severance Agreement, dated as of November 18, 1991, between
the Company and Richard G. Rogers, was filed as Exhibit 10(n) to the
Company's Annual Report on Form 10-K for the year ended December 31,
1991, and is hereby incorporated by reference.
10.10 Development and Distribution Agreement, dated July 30, 1991,
between the Company and Nippon Mining Co., Ltd., was filed
as Exhibit 10(o) to the Company's Annual Report on Form 10-K
for the year ended December 31, 1992, and is hereby
incorporated by reference.
10.11 Asset Purchase Agreement, dated May 15, 1992, between the
Company, Milo Technologies, Inc., Charles A. Milo and
Loretta Milo was filed as Exhibit 10(p) to the Company's
Annual Report on Form 10-K for the year ended December 31,
1993, and is incorporated herein by reference.
<PAGE>
Exhibit No. Description Page
- ---------- ----------- ----
<S> <C> <C>
10.12 Stock Purchase Agreement, dated May 15, 1992, between the Company,
Milotec S.A. De C.V., Charles A. Milo, Loretta Milo and certain other
individuals, was filed as Exhibit 10(q) to the Company's Annual Report on
Form 10-K for the year ended December 31, 1992, and is hereby
incorporated by reference.
10.13 Employment Agreement, dated May 29, 1992, between the Company and
Charles A. Milo, was filed as Exhibit 10(r) to the Company's Annual
Report on Form 10-K for the year ended December 31, 1992, and is
hereby incorporated by reference.
10.14 Non-Compete Agreement, dated May 29, 1992, between the Company and
Charles A. Milo, was filed as Exhibit 10(s) to the Company's Annual
Report on Form 10-K for the year ended December 31, 1992, and is
hereby incorporated by reference.
10.15 Non-Compete Agreement, dated May 29, 1992, between the Company and
Loretta Milo, was filed as Exhibit 10(t) to the Company's Annual Report
on Form 10-K for the year ended December 31, 1992, and is hereby
incorporated by reference.
10.16 Sublease Agreement, dated May 29, 1992, between the Company and Milo
Technologies, Inc., was filed as Exhibit 10(u) to the Company's Annual
Report on Form 10-K for the year ended December 31, 1992, and is
hereby incorporated by reference.
10.17 Lease Agreement, dated May 22, 1992, between the Company,
Charles A. Milo and Loretta Milo, was filed as Exhibit 10(v)
to the Company's Annual Report on Form 10-K for the year
ended December 31, 1992, and is hereby incorporated by
reference.
10.18 Form of Purchase Agreement executed by each purchaser in connection
with the private sale of the Company's securities in January 1994, was filed
as Exhibit 10(w) to the Company's Annual Report on Form 10-K for the
year ended December 31, 1993, and is incorporated by reference.
10.19 Form of Class A Warrant issued to each purchaser in
connection with the private sale of the Company's securities
in January 1994, was filed as Exhibit 10(X) to the Company's
Annual Report on Form 10-K for the year ended December 31,
1993, and is hereby incorporated by reference.
<PAGE>
Exhibit No. Description Page
- ---------- ----------- ----
<S> <C> <C>
10.20 Form of Class B Warrant issued to each purchaser in
connection with the private sale of the Company's securities
in January 1994, was filed as Exhibit 10(y) to the Company's
Annual Report on Form 10-K for the year ended December 31,
1993, and is hereby incorporated by reference.
10.21 Agreement to Issue Warrants, dated January 28, 1994, between
the Company and Norcross Securities, Inc. together with a
Warrant issued by the Company and a form of a Warrant
issuable under certain circumstances, comprising Exhibits to
the Agreement to Issue Warrants, was filed as Exhibit 10(z)
to the Company's Annual Report on Form 10-K for the year
ended December 31, 1993, and is hereby incorporated by
reference.
10.22 Subscription Agreement, dated February 4, 1994, between the
Company and 185 Monmouth Parkway Associates, L.P., was filed
as Exhibit 10(aa) to the Company's Annual Report on Form
10-K for the year ended December 31, 1993, and is hereby
incorporated by reference.
10.23 Second Amendment, dated August 4, 1993, to Second Amendment
of Lease and Option Agreement, dated as of April 1, 1989,
between the Company and 185 Monmouth Parkway Associates,
L.P. and letter dated August 6, 1993, modifying Second
Amendment, dated August 4, 1993, to Second Amendment of
Lease and Option Agreement, was filed as Exhibit 10(ab) to
the Company's Annual Report on Form 10-K for the year ended
December 31, 1993, and is hereby incorporated by reference.
10.24 Employment Agreement, dated as of November 15, 1993, between the
Company and Charles A. Milo, was filed as Exhibit 10(ac) to the
Company's Annual Report on Form 10-K for the year ended December 31,
1993, and is hereby incorporated by reference.
<PAGE>
Exhibit No. Description Page
- ---------- ----------- ----
<S> <C> <C>
10.25 Accounts Financing Agreement between Congress Financial
Corporation and the Company, dated August 13, 1993; Covenant
Supplement to Accounts Financing Agreement between Congress
Financial Corporation and the Company, dated August 13,
1993; Term Promissory Note A given to Congress Financial
Corporation, dated August 13, 1993; Term Promissory Note B
given to Congress Financial Corporation, dated August 13,
1993; Inventory Loan Letter executed by the Company to
Congress Financial Corporation, dated August 13, 1993;
Inventory and Equipment Security Agreement Supplement to
Accounts Financing Agreement executed by the Company to
Congress Financial Corporation, dated August 13, 1993; Trade
Financing Agreement Supplement to Accounts Financing
Agreement executed by the Company to Congress Financial
Corporation, dated August 13, 1993; Subordination and
Intercreditor Agreement between Congress Financial
Corporation and Milo Technologies, Inc., dated August 13,
1993; Subordination and Intercreditor Agreement between
Congress Financial Corporation and Mezzanine Financial Fund,
L.P., dated August 13, 1993; and Enhancement Fee Agreement
between the Company and Mezzanine Financial Fund, L.P.,
dated August 13, 1993, was filed as Exhibit 10(ad) to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1993, and is hereby incorporated by reference.
10.26 Asset Purchase Agreement, dated June 4, 1993, between the
Company and Halifax Corporation together with a
Non-Competition Agreement, Assignment and Assumption
Agreement, Service Mark License Agreement, Low Cost Host
License Agreement, and Master Subcontract Agreement,
comprising Exhibits to the Asset Purchase Agreement, was
filed as Exhibit 10(ae) to the Company's Annual Report on
Form 10-K for the year ended December 31, 1993, and is
hereby incorporated by reference.
10.27 Lease Agreement, dated August 1, 1993, between the Company
and Parque Industrial de Nogales, S.A. de C.A., Nogales,
Sonora, Mexico, was filed as Exhibit 10(af) to the Company's
Annual Report on Form 10-K for the year ended December 31,
1993, and is hereby incorporated by reference.
10.28 Form of Subscription Agreement executed by each purchaser in
connection with the private placement of the Company's
securities which was commenced in June 1994, was filed as
Exhibit 10.28 to the Company's Registration Statement on
Form S-1, No. 33-81892, as amended, and is hereby
incorporated by reference.
<PAGE>
Exhibit No. Description Page
- ---------- ----------- ----
<S> <C> <C>
10.29 Form of Class C Warrant issued to each purchaser in
connection with the private placement of the Company's
securities which was commenced in June 1994, was filed as
Exhibit 10.29 to the Company's Registration Statement on
Form S-1, No. 33-81892, as amended, and is hereby
incorporated by reference.
10.30 1994 Equity Incentive Plan, as adopted by the Company's shareholders on
June 28, 1994 and attached as Appendix I to the Company's Proxy
Statement dated June 7, 1994, is hereby incorporated by reference.
10.31 1994 Stock Option Plan for Non-Employee Directors, as
adopted by the Company's shareholders on May 17, 1994 and is
attached as Appendix II to the Company's Proxy Statement
dated April 18, 1994, is hereby incorporated by reference.
10.32 Executive Services Agreement, dated November 15, 1993, between the
Company and Richard G. Rogers, as amended by Amendment to Executive
Services Agreement, dated March 14, 1994, was filed as Exhibit 10.32 to
the Company's Registration Statement on Form S-1, No. 33-81892, as
amended, and is hereby incorporated by reference.
10.33 Employment Agreement, dated as of November 18, 1991, between the
Company and Richard G. Rogers, was filed as Exhibit 10(m) to the
Company's Annual Report on Form 10-K for the year ended December 31,
1991, and is hereby incorporated by reference.
10.34 Form of Consulting Agreement entered into between the
Company and Irwin L. Gross on March 21, 1994, was filed as
Exhibit 2 to the Company's Registration Statement on Form
S-1, No. 33-81892, as amended, and is hereby incorporated by
reference.
10.35 Form of Placement Agent's Warrant Agreement entered into
between the Company and Neidiger/Tucker/Bruner, Inc.,
together with a Form of Warrant issued by the Company
comprising an Exhibit to the Placement Agent's Warrant
Agreement, was filed as Exhibit 10.35 to the Company's
Registration Statement on Form S-1, No. 33-81892, as
amended, and is hereby incorporated by reference.
10.36 Loan and Security Agreement, dated January 17, 1990, between the
Company and Mellon Bank (East) N.A. was filed as Exhibit 4(a) to the
Company's Annual Report on Form 10-K for the year ended December 31,
1989, and is hereby incorporated by reference.
<PAGE>
Exhibit No. Description Page
- ---------- ----------- ----
<S> <C> <C>
10.37 First Amendment and Modification to Loan and Security
Agreement, dated April 1990, between the Company and Mellon
Bank (East) N.A. was filed as Exhibit 4(e) to the Company's
Annual Report on Form 10-K for the year ended December 31,
1990, and is hereby incorporated by reference.
10.38 Second Amendment and Modification to Loan and Security Agreement,
dated January 17, 1991, between the Company and Mellon Bank (East)
N.A. was filed as Exhibit 4(f) to the Company's Annual Report on Form
10-K for the year ended December 31, 1990, and is hereby incorporated by
reference.
10.39 Third Amendment and Modification to Loan and Security
Agreement, dated March 4, 1992, between the Company and
Mellon Bank, N.A., was filed as Exhibit 4(g) to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1991, and is hereby incorporated by reference.
10.40 Fourth Amendment and Modification to Loan and Security
Agreement, dated June 19, 1992, between the Company and
Mellon Bank (East) N.A., was filed as Exhibit 4(h) to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1992, and is hereby incorporated by reference.
10.41 Fifth Amendment and Modification to Loan and Security
Agreement, dated July 31, 1992, between the Company and
Mellon Bank (East) N.A., was filed as Exhibit 4(i) to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1992, and is hereby incorporated by reference.
10.42 Sixth Amendment and Modification to Loan and Security
Agreement, dated December 31, 1992, between the Company and
Mellon Bank (East) N.A., was filed as Exhibit 4(j) to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1992, and is hereby incorporated by reference.
10.43 Seventh Amendment and Modification to Loan and Security
Agreement, dated January 22, 1993, between the Company and
Mellon Bank (East) N.A., was filed as Exhibit 4(k) to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1992, and is hereby incorporated by reference.
<PAGE>
Exhibit No. Description Page
- ---------- ----------- ----
<S> <C> <C>
10.44 Eighth Amendment and Modification to Loan and Security
Agreement, dated February 26, 1993, between the Company and
Mellon Bank (East) N.A., was filed as Exhibit 4(l) to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1992, and is hereby incorporated by reference.
10.45 Amended and Restated Loan and Security Agreement, dated
March 31, 1993, between the Company and Mellon Bank N.A.,
was filed as Exhibit 4(m) to the Company's Annual Report on
Form 10-K for the year ended December 31, 1992, and is
hereby incorporated by reference.
10.46 Form of Investment Agreement dated January 15, 1995 by and between
Electronic Associates, Inc. and BarOn Technologies, Ltd., was filed as
Exhibit 10.1 to the Company's Report on Form 8-K (Date of Report:
January 16, 1995), as amended, and is hereby incorporated herein by
reference.
10.47 Form of Stock Purchase Agreement between the Company and various
shareholders of BarOn Technologies, Ltd., was filed as Exhibit 10.2 to the
Company's Report on Form 8-K (date of report: January 16, 1995), as
amended, and is hereby incorporated herein by reference.
10.48 Form of Shareholders Agreement among the Company, BarOn
Technologies, Ltd. and the shareholders of BarOn Technologies, Ltd., was
filed as Exhibit 10.3 to the Company's Report on Form 8-K (Date of
Report: January 16, 1995), as amended, and is hereby incorporated herein
by reference.
10.49 Business Loan Agreement dated as of October 20, 1994 by and between
Electronic Associates, Inc., and BarOn R&D Ltd.
10.50 Business Loan Agreement dated September 8, 1994 by and between
Electronic Associates, Inc. and Tanon Manufacturing, Inc.
10.51 Employment Agreement dated as of January 4, 1995 between Tanon
Manufacturing, Inc. and Joseph R. Spalliero.
10.52 Non-Competition and Confidentiality Agreement dated as of
January 4, 1995 by and among Electronic Associates, Inc.,
Tanon Manufacturing, Inc.
and Joseph R. Spalliero.
<PAGE>
Exhibit No. Description Page
- ---------- ----------- ----
<S> <C> <C>
10.53 Promissory Note dated January 4, 1995 in the principal amount of
$1,000,000 from Jospeh R. Spalliero and Patricia Spalliero to Electronic
Associates, Inc.
10.54 Letter Agreement dated February 2, 1995 between Charles A. Milo and
Electronic Associates, Inc.
10.55 Amendment dated March 23, 1995 to Consulting Agreement dated March
21, 1994 between Irwin L. Gross and Electronic Associates, Inc.
10.56 Manufacturing and Consulting Agreement dated Janaury 16, 1995
between BarOn Technologies, Ltd. and Electronic Associates, Inc.
99.1 The audited balance sheet of BarOn Technologies Ltd. as of
December 31, 1993 and December 31, 1992 and related
statements of operations, shareholders' equity and cash flow
for the year ended December 31, 1993 and for the period from
inception in 1992 through December 31, 1992, together with the
unaudited balance sheet of BarOn Technologies Ltd. as of
September 30, 1994 and related statements of operations,
shareholders' equity and cash flows for the nine months ended
September 30, 1994 were filed as Exhibit 99.1 to the Company's
Report on Form 8-K (date of Report: January 16, 1995), as
amended, and are hereby incorporated herein by reference.
99.2 The audited balance sheet of Tanon Manufacturing, Inc. as of
December 31, 1993 and December 31, 1992 and related
statements of operations, shareholders' equity and cash flows
for the years ended December 31, 1993, 1992 and 1991, together
with the unaudited balance sheet of Tanon Manufacturing, Inc.
as of October 1, 1994 and related statements of operations,
shareholders' equity and cash flows for the nine months ended
October 1, 1994 and October 2, 1993, were filed as Exhibit 99
to the Company's Report on Form 8-K (date of Report:
January 4, 1995), as amended, and are hereby incorporated
herein by reference.
</TABLE>
EXHIBIT 10.49
BUSINESS LOAN AGREEMENT
-----------------------
<PAGE>
ELECTRONIC ASSOCIATES, INC.
BUSINESS LOAN AGREEMENT
This Business Loan Agreement made and entered into as of the 20th day
of October, 1994, by and between Electronic Associates, Inc., a New Jersey
corporation with offices at 185 Monmouth Parkway, West Long Branch, New Jersey
07764-9989 ("Lender") and BarOn R&D Ltd., an Israeli corporation with offices at
Gutwirth Science Park, Technion City, Haifa 32000 Israel ("Borrower").
BACKGROUND
- ----------
This Business loan Agreement is being entered into in connection with
the execution and delivery of that certain letter of intent dated October 20,
1994 between Lender and Borrower ("Letter of Intent"), and in contemplation of
the consummation of the transactions set forth in the Letter of Intent, to be
evidenced by a definitive Agreement, as contemplated by the Letter of Intent
(the "Definitive Agreement").
The amount loaned hereunder shall be deemed an advance on the cash
contribution to Borrower's capital to be paid by Lender, subject to and upon the
execution of the Definitive Agreement as contemplated by the Letter of Intent.
If the transactions contemplated by the Letter of Intent shall not
close before December 31, 1994 (unless extended by Lender and Borrower), all
amounts due hereunder shall be paid by Borrower to Lender, either by cash or in
the capital stock of Borrower, as provided in this Business Loan Agreement.
NOW, THEREFORE, the parties hereto, in consideration of the premises
and of the mutual obligations set forth herein, and intending to be legally
bound hereby agree as follows:
ARTICLE I. DEFINITIONS
- --------- -----------
"Closing" or "Closing Date" means the date hereof.
"Indebtedness" means all amounts of principal, interest, fees, expenses
or other costs owed Lender by Borrower arising under on in connection with this
Business Loan Agreement or any other Loan Document including, but not limited
to, costs and expenses of collection and any amounts incurred by Lender, in its
discretion, to maintain or protect any Collateral or other property securing a
Loan.
<PAGE>
"Loan" means the sum which Lender agrees to lend to Borrower as
specified in Section 2.1 of this Business Loan Agreement and pursuant to the
terms and provision hereof.
"Loan Documents" means this Business Loan Agreement and each other
document delivered pursuant to this Business Loan Agreement including, but not
limited to, the Note and any security agreement, pledge agreement and guarantee.
"Note" means the promissory note executed by Borrower
hereunder to evidence the Loan.
"Officer Compensation" means the annualized aggregate amount of
salaries, withdrawals or compensation paid to the Chief Executive Officer,
President, Chief Financial Officer, Secretary and Vice Presidents of Borrower,
such amount to be determined as of the closing Date.
"Prime Rate" means that the rate of interest per annum announced by
CoreStates National Bank, N.A. from time to time as its "prime rate", at any
time, or from time to time.
"Term" means the period of time commencing on the closing Date and
ending on the Termination Date.
"Termination Date" means the earlier of the consummation of the
transactions (i.e. the execution and delivery of the Definitive Agreement) as
contemplated by Letter of Intent or December 31, 1994, unless extended by the
mutual consent of Lender and Borrower.
ARTICLE II. THE LOAN
- ---------- --------
2.1 Under and subject to the terms and provisions hereof Lender
agrees to lend to Borrower, and Borrower hereby agrees to
repay to Lender, the sum of Five Hundred Thousand Dollars
($500,000.00)
2.2 The Loan shall bear interest at the rate of Prime Rate plus
2.25%. Interest on the unpaid balance of principal shall be
computed on a 365 day basis and the actual number of days
elapsed. The variable interest rate shall change when and as
the Prime Rate changes.
2.3 The entire outstanding principal balance of the Loan, together
with all accrued and unpaid interest thereon, and any other
amounts due hereunder (collectively, the "Outstanding
Balance"), shall be due and payable by Borrower to Lender on
the Termination Date and Borrower shall repay to Lender the
outstanding balance in the manner set forth in Sections 2.4,
2.5, and 2.6. The amount of the Outstanding Balance shall be
determined in
<PAGE>
good faith by Lender, and shall be binding on the parties
absent manifest error.
2.4 If the Definitive Agreement has been consummated on or before
December 31, 1994 or such later date if mutually extended by
Lender and Borrower (i.e. the "Termination Date") the
Outstanding Balance shall be credited towards the $2,000,000
cash contribution due Borrower from Lender at time of Closing
as set forth in paragraph 1.A of the Letter of Intent.
2.5 If the Definitive Agreement has not been consummated on or
before December 31, 1994 (unless extended by the mutual
consent of Lender and Borrower), the Outstanding Balance shall
be immediately due and payable, and Borrower shall either (a)
pay the Outstanding Balance in cash (unless Lender exercises
its right to receive payment of the Outstanding Balance in
stock of Borrower, as set forth in Section 2.6) or, (b) in
lieu of paying the Outstanding Balance in cash, Borrower may
issue and deliver to Lender the Conversion amount of common
stock outstanding shares:
2.6 a. If the Definitive Agreement has not been consummated
on or before December 31, 1994 (unless extended by
mutual consent of Lender and Borrower). and Borrower
has not as of such time issued and delivered to
Lender, in repayment of the Loan, common stock
representing the equity stock of Borrower set forth
in Section 2.6(b), Lender may, at its option,
require Borrower to (a) immediately repay the
Outstanding Balance in cash, or,
b. Conversion amount shall mean: issue and deliver to
Lender common stock of Borrower representing (i) 5%
of Borrower's equity capital, if the failure to
consummate the Definitive Agreement is caused by
Borrower, or (ii) 2.5% of Borrower's equity capital,
if the failure to consummate the Definitive Agreement
is caused by Lender.
ARTICLE III REPRESENTATIONS AND WARRANTIES OF BORROWER
- ----------- ------------------------------------------
Borrower makes the following representations and warranties,
both with respect to itself and all subsidiaries of Borrower, to
Lender:
3.1 Borrower is and on the Closing Date will be a corporation duly
organized, validly existing and in good standing as such under
the laws of the jurisdiction in which it is organized and is
and on the closing Date will be entitled to own its properties
and conduct its business in the places where such properties
are now owned and such business is now conducted.
<PAGE>
3.2 Neither the execution nor delivery of this compliance with the
terms and conditions hereof or thereof will conflict with or
result in a breach of or constitute a default under the terms,
conditions or provisions, of Borrower's charter documents or
By-Laws or of any contract, agreement or instrument (including
any provisions of any debt) to which Borrower is a party or by
which Borrower or any of its properties is bound.
3.3 All corporate action on the part of Borrower, its officers,
directors and shareholders necessary for the authorization,
execution, delivery and performance of this Business Loan
Agreement have been duly taken and the Loan Documents
constitute valid and binding obligations of Borrower
enforceable against Borrower in accordance with its and their
terms.
3.4 The proceeds of the Loan made hereunder shall be used by
Borrower exclusively for working capital and for no other
purpose.
3.5 There are no actions, suits or proceedings pending, or
threaten against Borrower or its property by or before any
court or administrative agency. Borrower has complied in all
material respects with all laws, rules and regulations
relating to the conduct of Borrower's business.
3.6 All of Borrower's financial statements furnished to Lender
were prepared in accordance with Israeli Accounting rules
consistently applied, are true and correct and fully and
accurately present Borrower's financial condition and results
of operations at and for the periods therein specified; and
there has been and on the Closing date hereunder there will
have been no material adverse change in the conditions,
financial or otherwise, of Borrower since the date of the last
financial statement provided to Lender, other than normal
seasonal variations occurring in the ordinary course of
business.
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF LENDER
- ---------- ----------------------------------------
4.1 Lender is and on the Closing Date will be a corporation
duly organized, validly existing and in good standing as such
under the laws of the state in which it is organized and is
and on the Closing Date will be entitled to own its properties
and conduct its business in the places where such properties
are now owned and such business is now conducted
4.2 Neither the execution nor delivery of this Business Loan
Agreement or any other Loan Document nor the fulfillment
<PAGE>
of compliances with the terms and conditions hereof or thereof
will conflict with or result in a breach of or constitute a
default under the terms, conditions or provisions, of
Borrower's charter documents or By-Laws or of any contract,
agreement or instrument (including any provisions of any debt)
to which Borrower is a party or by which Borrower or any of
its properties is bound.
4.3 All corporate action on the part of Lender, its officers,
directors and shareholders necessary for the authorization,
execution, delivery and performance of this Business Loan
Agreement and the Loan Documents constitute valid binding
obligations of Lender enforceable against Lender in accordance
with its and their terms.
ARTICLE V SECURITY
- --------- --------
As a security for the loan made hereunder, BarOn undertakes to provide EA with
documents satisfactory to EA, evidencing that:
5.1 Mr. Yossi Shimoni ("The Trustee") received from BarOn the
following documents:
-A power of attorney authorizing him to register 389,555
shares of common stock of BarOn representing 5% of BarOn's
outstanding and issued stock (The Conversion Shares).
-BarOn's Board of Director's resolution under which the Board
of Directors irrevocably authorizes the allotment, issuance &
registration of 389,555 the conversion shares to EA.
-Two blank dated forms of stock registration customary at the
Israeli companies registerer each one of them for a number of
shares which is 50% of the amount of Conversion Shares.
5.2 The Trustee received irrevocable instructions signed by BarOn
and EA under which the Trustee is instructed to register 50%
of the conversion stock in the name of EA within 14 days of
receipt of a written request by either EA or BarOn to do so,
unless within 7 days following a notice sent by him to both
parties, either of them can show that a Definitive Investment
Agreement between the parties has been executed.
In the event that EA requests: the registration of the second
part of 50% of the Conversion Shares in its name, and BarOn is
rejecting such a request, the Trustee shall act as a sole
arbitrator authorized the resolve (within 3 months) whether
under the Business loan Agreement EA is
<PAGE>
entitled to the full amount of the Conversion Shares or
to 50% only.
The Trustee's judgment as an arbitrator shall become final and
binding upon the parties.
5.3 The Trustee accepts his nomination as trustee and as a sole
arbitrator between the parties according to this article V of
the Business Loan Agreement and undertakes to act in
compliance thereof.
5.4 No action will be taken by the Trustee before the proposed
closing date (Dec. 31, 1994) or any postponed date to which
the parties may mutually agree.
ARTICLE VI CONDITIONS TO CLOSING
- ---------- ---------------------
As conditions precedent to the performance by Lender of any of its
obligations hereunder, Borrower shall deliver (or cause to be
delivered) to Lender, on or before the Closing Date, in form and
substance satisfactory to Lender, in addition to this Business loan
Agreement and an executed Letter of Intent: (a) the Note; (b) the
documents list in article V. (c) and Incumbency Certificate of
Borrower; (d) Certified Copy of Borrower's Articles of Incorporation
and By-Laws or other charter documents; (e) Certified Copy of
Borrower's Authorizing Board of Director's Resolutions; and (f) such
other documents as Lender shall require.
ARTICLE VII. BORROWER'S NEGATIVE COVENANTS.
- ----------- -----------------------------
During the term of this Agreement, and so long as any part of the
indebtedness shall remain unpaid, Borrower and its Subsidiaries will
operate only in the ordinary course of its business, and will not do
any of the following, without the prior written consent of Lender:
7.1 Create or permit to exist against any properties or assets,
real or personal, tangible or intangible, now or hereafter
acquired, any mortgage, security interest, or other lien or
encumbrance, other than those already existing as of the date
of this Business Loan Agreement;
7.2 Purchase or acquire all or substantially all of the
property, assets or business of any other person, firm or
corporation;
7.3 Purchase or acquire, directly or indirectly, any shares
of stock, evidences of indebtedness or other securities
of any person, firm, partnership, or corporation
<PAGE>
(including a subsidiary), except in settlement of
customers' accounts;
7.4 Liquidate, or discontinue its normal operations with intention
to liquidate, or merge or consolidate with or into any other
corporation or company (including a parent or subsidiary
company) other than Lender or a subsidiary or nominee of
Lender, or convey, lease, sell or license all or substantially
all, or any important part of its property, assets or business
to any other person, firm or corporation;
7.5 Create or incur any indebtedness for borrowed money, except
(a) as provided under this Agreement; or (b) pursuant to
existing indebtedness as disclosed on Schedule 7.5(b) attached
hereto;
7.6 Sell, assign, transfer or dispose of any of its accounts
or notes receivable, with or without recourse, except to
Lender;
7.7 Make loans to others;
7.8 Become a guarantor, ?surety? or otherwise liable for the
debts or obligations of others, except to Lender, and
except as an endorser of checks or drafts negotiated in
the ordinary course of business;
7.9 Declare or pay any dividends or make any form of
withdrawal from capital, including the purchase of
treasury stock;
7.10 Incur, create or assume any commitment to make any Lease
Payments except as set forth on Schedule 7.10 attached
hereto;
7.11 Enter into any sale-leaseback transaction;
7.12 Prepay any amounts not required or cause to be
accelerated any amounts on any outstanding indebtedness
now existing or hereafter arising;
7.13 Pay salaries, withdrawals or compensation to officers of
Borrower in an amount exceeding Officer Compensation in
the aggregate per year;
7.14 Make capital expenditures during the term of the Loan, or
until all Indebtedness has been repaid hereunder, in an
<PAGE>
amount in excess of One Hundred Thousand Dollars
($100,000.00);
7.15 Sell, issue, or agree to sell or issue, any shares (voting,
non-voting, preferred or common of any class) of Borrower, or
purchase such shares except (a) with respect to the exercise
of stock options outstanding as of the Closing Date, or (b) to
Lender, as contemplated by the Letter of Intent.
7.16 Take any action to diminish the value of the Collateral.
ARTICLE VIII. DEFAULT
- ------------ -------
8.1 Borrower shall be in default under this Business Loan
Agreement and under the Note, and the other Loan Documents,
upon the occurrence of any of the following:
(a) Borrower fails to pay Lender the principal, interest or other
liabilities incurred pursuant to this Business Loan Agreement
or any other Loan Document when the same is due and payable
(unless Borrower has issued stock to Lender in lieu of such a
payment, in a manner permitted in Section 2.4, 2.5 or 2.6 of
this Business Loan Agreement);
(b) Borrower's failure to observe, perform or comply with any
of Borrower's obligations under the Letter of Intent or
under this Business Loan Agreement;
(c) Any warranty or representation of Borrower set forth
herein being or becoming untrue;
(d) Any default by Borrower under the provisions of the Note,
or any other Loan Document;
(e) The filing by or against Borrower of any proceeding under any
applicable law relating to bankruptcy, insolvency,
receivership, reorganization or debt adjustment, or the
appointment of a trustee or receiver for property of or
assignment for the benefit of creditors by Borrower.
8.2 Upon any default by Borrower, Lender, at its option, may
declare immediately due and payable, the unpaid balance of the
Loan and may exercise all rights and remedies provided to
Lender in this Business Loan Agreement, in the Note, and any
other Loan Document or otherwise available to Lender in law or
in equity.
<PAGE>
ARTICLE IX. MISCELLANEOUS
- ---------- -------------
9.1 Lender shall not be deemed to have waived any of the terms,
agreements, conditions and covenants hereof, except by writing
signed by an authorized officer of Lender and delivered to
Borrower.
9.2 Borrower hereby forever indemnifies and saves Lender and its
directors, officers, employees and agents harmless from and
against any and all liability which Lender or any of them may
incur or which may be assessed against Lender or any of them
with respect to this Business Loan Agreement or any other Loan
Document, provided that such liability is not due to the
negligence or intentional acts of or on the part of the Lender
or any of its directors, officers, employees or agents.
9.3 This Business Loan Agreement contains the entire agreement and
understanding of the parties hereto with respect to the
subject matter hereof and supersedes all prior or
contemporaneous agreements with respect to such subject
matter. The terms of any other Loan Documents are expressly
incorporated herein and made a part hereof; provided, however,
that in any case where a term or condition contained in any
other Loan Document cannot be construed (despite every effort
to do so) as consistent with the terms of this Business Loan
Agreement, this Business Loan Agreement shall govern. This
Business Loan Agreement may be amended only by a written
instrument which is signed by the parties hereto and which
specifically refers to this Business Loan Agreement and states
that it is an amendment hereto.
9.4 This Business Loan Agreement and all rights hereunder shall be
governed by the laws of the State of Israel and shall be
binding upon Borrower, its successors and assigns, and shall
inure to the benefit of Lender, and its successors and
assigns.
9.5 If any term of this Business Loan Agreement shall be held to
be invalid, illegal or unenforceable, the validity of all
other terms hereof shall in no way be affected thereby.
9.6 This Business Loan Agreement shall be in full force and effect
until Borrower shall have satisfied in full or been released
from all of Borrower's liabilities and obligations to Lender
hereunder and Lender shall have no further obligations to
Borrower pursuant to the terms hereof.
<PAGE>
9.7 Any and all actions at law or in equity relating to this
Business Loan Agreement, the Note, any other Loan Documents or
the Loan shall be brought and jurisdiction shall be had
exclusively in Israel.
9.8 If Borrower shall pay any interest under the terms of the Note
at a rate higher than the maximum rate allowed by applicable
law, then such excess payment shall be credited as a payment
of principal of the Loan, unless Borrower notifies Lender in
writing to return any excess payment to Borrower.
9.9 Any notices required or permitted to be given pursuant to this
Business Loan Agreement or any Loan Document shall be
sufficiently given if delivered in person or by overnight
delivery service or sent by United States mail, postage
prepaid to the addresses set forth on the first page hereof.
9.10 Until the Indebtedness has been paid in full and Lender has no
further obligations to Borrower hereunder, Lender shall have
the right of first refusal to offer loans to Borrower of all
types (including capital leases) and Borrower shall promptly
deliver to Lender a copy of all commitment letters or
proposals received by Borrower with respect thereto. Lender
shall have 10 days after receipt of each such commitment
letter or proposal to exercise the right of first refusal
granted hereby.
9.11 This Business Loan Agreement may be executed on one or more
counterparts and all such counterparts shall together
constitute one Business Loan Agreement notwithstanding that
all of the parties are not signatories to the original or same
counterpart.
IN WITNESS WHEREOF, the parties hereto, intending to be legally bound
hereby, have executed this Business Loan Agreement this 20th day of October,
1994.
Attest ELECTRONIC ASSOCIATES, INC.
By: /s/ Jules M. Seshens
- ---------------------- -------------------------
Secretary Director
Attest
By: /s/ Ehud Baron
- ---------------------- -------------------------
Secretary President
<PAGE>
EXHIBIT 10.50
BUSINESS LOAN AGREEMENT
-----------------------
<PAGE>
ELECTRONIC ASSOCIATES, INC.
BUSINESS LOAN AGREEMENT
This Business Loan Agreement made this 8th day of September,
1994, by and between Electronic Associates, Inc., a New Jersey corporation with
offices at 185 Monmouth Parkway, West Long Branch, New Jersey 07764-9989
("Lender") and Tanon Manufacturing, Inc., a California corporation with offices
at 46360 Fremont Boulevard, Fremont, California 94538-6406 ("Borrower").
ARTICLE I. DEFINITIONS
"Closing" or "Closing Date" means the date hereof or , 1994.
"Collateral" means all tangible and intangible personal property held
by the Borrower for use primarily in business as more fully set forth in the
Security Agreement of even date herewith.
"GAAP" means generally accepted accounting principles as set forth in
the opinions and pronouncements of the Accounting Principles Board of the
American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board as the same shall
exist from time to time.
"Guaranty" means that certain Guaranty of even date herewith executed
by Joseph Spalliero and his wife, Patricia Spalliero, which Guaranty is secured
by a pledge of the stock held by Joseph and Patricia Spalliero in Tanon
Manufacturing, Inc.
"Indebtedness" means all amounts of principal, interest, fees, expenses
or other costs owed Lender by Borrower arising under or in connection with this
Business Loan Agreement or any other Loan Document including, but not limited
to, costs and expenses of collection and any amounts incurred by Lender, in its
discretion, to maintain or protect any Collateral or other property securing a
Loan.
"Lease Payments" means any direct or indirect payments or payments
whether as rent or otherwise, including fees, service or finance charges, under
any capital or operating lease, rental or other arrangement for the use of
property of any other person and whether or not there is an option to purchase.
"Loan" means the sum which Lender agrees to lend to Borrower as
specified in Section 2.1 of this Business Loan Agreement and pursuant to the
terms and provisions hereof.
<PAGE>
"Loan Documents" means this Business Loan Agreement and each other
document delivered pursuant to this Business Loan Agreement including, but not
limited to, the Note and any security agreement, pledge agreement, guaranty or
assignment of rents and leases.
"Note" means the promissory note executed by Borrower
hereunder to evidence the Loan.
"Officer Compensation" means the annualized aggregate amount of
salaries, withdrawals or compensation paid to the Chief Executive Officer,
President, Chief Financial Officer, Secretary and Vice-Presidents of Borrower,
such amount to be determined as of the Closing Date.
"Pledge Agreement" means that certain Pledge Agreement of even date
herewith executed by Joseph Spalliero and his wife, Patricia Spalliero, pursuant
to which Joseph Spalliero and Patricia Spalliero pledged stock held in Tanon
Manufacturing, Inc. as security for the Guaranty.
"Prime Rate" means that rate of interest per annum announced by
Congress Financial Corporation from time to time as its "prime rate" which may
represent the lowest rate charged by Congress Financial Corporation to other
borrowers, or to any class of borrowers, at any time, or from time to time.
"RICO" means the Racketeer Influenced and Corrupt Organization Act, as
amended by the Comprehensive Act of 1984, 18 USC Sections 1961- 68.
"Security Agreement" means that certain Security Agreement of even date
herewith by and between Lender and Borrower pursuant to which Borrower grants a
security interest in all of Borrower's Collateral as security for the Loan.
"Term" means the period of time commencing on the Closing Date and
ending on the Termination Date.
"Termination Date" means the earlier of (i) the date on which Lender
demands payment of the Loan or (ii) March 1, 1995, unless extended by the mutual
consent of Lender and Borrower.
"Unmatured Event of Default" means any event which with the passage of
time or giving of notice, or both, could become an Event of Default.
<PAGE>
ARTICLE II. THE LOAN
2.1 Under and subject to the terms and provisions hereof
Lender agrees to lend to Borrower the sum of One Million Dollars
($1,000,000.00).
2.2 The entire outstanding principal balance of the Loan,
together with all accrued and unpaid interest thereon, shall be due and payable
by Borrower to Lender on the earlier of the 30th day following written demand
for payment by Lender or March 1, 1995.
2.3 The Loan shall bear interest at the rate of the Prime
Rate plus 2.25%. Interest on the unpaid balance of principal shall be computed
on a 365 day basis and the actual number of days elapsed. The variable interest
rate shall change when and as the Prime Rate changes.
ARTICLE III. REPRESENTATIONS AND WARRANTIES OF BORROWER
Borrower makes the following representations and warranties,
both with respect to itself and all subsidiaries of Borrower, to Lender:
3.1 Borrower is and on the Closing Date will be a corporation
duly organized, validly existing and in good standing as such under the laws of
the state in which it is organized and is and on the Closing Date will be
entitled to own its properties and conduct its business in the places where such
properties are now owned and such business is now conducted.
3.2 Neither the execution nor delivery of this Agreement or
any other Loan Document nor the fulfillment or compliance with the terms and
conditions hereof or thereof will conflict with or result in a breach of or
constitute a default under the terms, conditions or provisions, of Borrower's
charter documents or By-Laws or of any contract, agreement or instrument
(including any provisions of any debt) to which Borrower is a party or by which
Borrower or any of its properties is bound.
3.3 All corporate action on the part of Borrower, its
officers, directors and shareholders necessary for the authorization, execution,
delivery and performance of this Agreement and the Loan Documents has been duly
and properly taken; and Borrower intends that this Agreement and the Loan
Documents shall be valid and binding obligations of Borrower enforceable against
Borrower in accordance with its and their terms.
3.4 The proceeds of the Loan made hereunder shall be used by
Borrower exclusively for working capital and for no other purpose. Borrower's
business operations are the contract manufacturing of electronic circuit boards
and computer components.
<PAGE>
3.5 There are no actions, suits or proceedings pending, or
threatened against Borrower or its property by or before any court or
administrative agency. Borrower has complied in all material respects with all
laws, rules and regulations relating to the conduct of Borrower's business
including, but not limited to, those applying to the use, storage or disposal of
hazardous waste or toxic materials and RICO.
3.6 No debt of Borrower is now or at Closing will be in
default under the provisions thereof.
3.7 All of Borrower's financial statements furnished to Lender
were prepared in accordance with GAAP consistently applied, are true and correct
and fully and accurately present Borrower's financial condition and results of
operations at and for the periods therein specified; and there has been and on
the Closing Date hereunder there will have been no material adverse change in
the conditions, financial or otherwise, of Borrower since the date of the last
financial statement provided to Lender, other than normal seasonal variations
occurring in the ordinary course of business.
3.8 Borrower is not engaged principally, or as one of
Borrower's important activities, in the business of extending credit for the
purpose of purchasing or carrying margin stock (within the meanings of
Regulations T, U and X of the Board of Governors of the Federal Reserve System).
ARTICLE IV. REPRESENTATIONS AND WARRANTIES OF LENDER
4.1 Lender is and on the Closing Date will be a corporation
duly organized, validly existing and in good standing as such under the laws of
the state in which it is organized and is and on the Closing Date will be
entitled to own its properties and conduct its business in the places where such
properties are now owned and such business is now conducted.
4.2 Neither the execution nor delivery of this Agreement or
any other Loan Document nor the fulfillment or compliance with the terms and
conditions hereof or thereof will conflict with or result in a breach of or
constitute a default under the terms, conditions or provisions, of Borrower's
charter documents or By-Laws or of any contract, agreement or instrument
(including any provisions of any debt) to which Borrower is a party or by which
Borrower or any of its properties is bound.
4.3 All corporate action on the part of Lender, its officers,
directors and shareholders necessary for the authorization, execution, delivery
and performance of this Agreement and the Loan Documents has been duly and
properly taken; and this Agreement and the Loan Documents constitute valid and
<PAGE>
binding obligations of Lender enforceable against Lender in accordance with its
and their terms.
4.4 Except as set forth on Exhibit "A" hereto, there are no
actions, suits or proceedings pending, or threatened against Lender or its
property by or before any court or administrative agency. Lender has complied in
all material respects with all laws, rules and regulations relating to the
conduct of Lender's business including, but not limited to, those applying to
the use, storage or disposal of hazardous waste or toxic materials and RICO.
4.5 Lender acknowledges that Lender has reviewed Borrower's
business records including financial statements of Borrower.
ARTICLE V. SECURITY
5.1 The Loan shall be secured by all of the Borrower's
Collateral as more fully set forth in the Security Agreement and Borrower will
comply with all terms, conditions and provisions set forth in the Security
Agreement.
5.2 The Loan shall be guarantied by Joseph Spalliero and his
wife, Patricia Spalliero (the "Spallieros"), as set forth in the Guaranty, which
Guaranty shall be secured by the Spallieros' pledge of the stock they hold in
Tanon Manufacturing, Inc. pursuant to the Pledge Agreement, and Borrower will
comply with all terms, conditions and provisions set forth in the Guaranty and
the Pledge Agreement.
ARTICLE VI. CONDITIONS TO CLOSING.
6.1 As conditions precedent to the performance by Lender of
any of its obligations hereunder, Borrower shall deliver to Lender, on or before
the Closing Date, in form and substance satisfactory to Lender, in addition to
this Business Loan Agreement: (i) the Note; (ii) the Security Agreement; (iii)
the Pledge Agreement; (iv) the Guaranty; (v) Opinion of Borrower's Counsel in a
form acceptable to Lender's Counsel; (vi) Incumbency Certificate of Borrower;
(vii) Certified Copy of Borrower's Articles of Incorporation and By-Laws; (viii)
Certified Copy of Borrower's Authorizing Board of Directors' Resolutions; (ix)
Financing Statements on Forms UCC-1; (x) Lien Searches; (xi) Landlord or
Mortgagee Waiver; (xii) Insurance Certificates with Lender as additional Loss
Payee; and (xii) Such other documents as Lender shall require.
ARTICLE VII. BORROWER'S AFFIRMATIVE COVENANTS.
- ----------- --------------------------------
During the Term hereof, Borrower agrees to:
<PAGE>
7.1 Furnish Lender within 45 days after the close of each
fiscal quarter, a balance sheet as of the close of such quarter and an operating
statement and statement of cash flows for such quarter, each prepared in
accordance with GAAP consistently applied, and certified as accurate by an
authorized officer of Borrower who shall also certify that this Business Loan
Agreement is not in default by its terms. Upon written request of Lender,
Borrower will provide this information in consolidating, as well as consolidated
form;
7.2 Furnish Lender within 90 days after the close of each
fiscal year audited annual financial statements including a statement of cash
flows and an operating statement for the fiscal year and a balance sheet as of
the close of the fiscal year, prepared in accordance with GAAP consistently
applied, reviewed by a certified public accountant satisfactory to Lender. Upon
written request of Lender, Borrower will provide this information in
consolidating as well as consolidating form. Borrower shall furnish to Lender,
together with such annual financial statement, a certificate of non-default, in
form and substance satisfactory to Lender, executed by such accounting firm and
the president or general partner of Borrower;
7.3 Make available for inspection to a duly authorized
representative of Lender any of Borrower's (and Borrower's subsidiaries') books
and records when requested to do so and to furnish Lender any information
regarding Borrower's (and Borrower's subsidiaries') business affairs and
financial condition within a reasonable time after written request by Lender
therefor and provide Lender with all annual and quarterly reports, proxy
statements, and other reports sent to such stockholders of Borrower at the time
such reports are sent to stockholders;
7.4 Keep Collateral insured against such casualties as Lender
shall reasonably require, provided that the amount of such insurance shall not
exceed the replacement value of the Collateral. All insurance policies shall be
written for the benefit of the Borrower as the insured, and shall name the
Lender as loss payee, and such policies shall be delivered to and held by the
Lender. All such policies shall provide for at least ten days' advance notice in
writing to the Lender of any cancellation thereof, and shall insure Lender
notwithstanding the act or neglect to act of Borrower. If the Borrower fails to
pay the premiums on any such insurance, the Lender shall have the right (but
shall be under no obligation) to pay such premiums for the Borrower's account.
The Borrower shall repay to the Lender any sums which the Lender shall have so
paid. The Borrower hereby assigns to the Lender any return or unearned premium
which may be due upon cancellation of any such policies for any reason
whatsoever and directs the insurers to pay to the Lender any amounts so due;
<PAGE>
7.5 Maintain Collateral in good condition and repair, and will
pay the cost of repairs to or maintenance of the same and will not permit
anything to be done that may impair the value of the Collateral;
7.6 Promptly notify the Lender of any event causing
deterioration, loss or depreciation in value of any substantial portion of the
Borrower's Collateral and the amount of such loss or depreciation. The Borrower
shall permit the Lender's agents to have access to its Collateral from time to
time, as requested by the Lender, for purposes of examination, inspection, and
appraisal thereof and verification of the Borrower's records pertaining thereto.
Upon demand by the Lender, and upon default by the Borrower, the Borrower shall
permit Lender's agents access to the Collateral at such time designated by the
Lender which is reasonably convenient to both parties; and
7.7 Pay (and to require subsidiaries to pay) all taxes,
assessments and other governmental charges, provided, however, that nothing
herein contained shall be interpreted to require Borrower to pay any tax so long
as its validity is contested in good faith and adequate reserves are maintained
therefor.
ARTICLE VIII. BORROWER'S NEGATIVE COVENANTS.
During the term of this Agreement, and so long as any part of
the Indebtedness shall remain unpaid, Borrower and its subsidiaries will not
without the prior written consent of Lender:
8.1 Create or permit to exist against any properties or
assets, real or personal, tangible or intangible, now or hereafter acquired, any
mortgage, security interest, or other lien or encumbrance, other than those
granted pursuant to this Business Loan Agreement, except for: deposits or
pledges in connection with or to secure statutory obligations, surety or appeal
bonds; or payment of workmen's compensation, unemployment insurance, old age
pension or other social security; or any lien for taxes or governmental charges
not overdue and payable; or any lien of the kinds normally incident to and
resulting from the usual operations of the business in which Borrower is engaged
and securing claims not overdue and payable;
8.2 Purchase or acquire all or substantially all of the
property, assets or business of any other person, firm or
corporation;
8.3 Purchase or acquire, directly or indirectly, any shares of
stock, evidences of indebtedness or other securities of any person, firm
partnership, or corporation (including a subsidiary) other than direct
obligations of Lender or an affiliate
<PAGE>
of Lender or the U.S. Government and except in settlement of
customers' accounts;
8.4 Liquidate, or discontinue its normal operations with
intention to liquidate, or merge or consolidate with or into any other
corporation or company other than Lender or a subsidiary of Lender (including a
parent or subsidiary company), or convey, lease or sell all or substantially all
of its property, assets or business to any other person, firm or corporation;
8.5 Create or incur any indebtedness for borrowed money,
including the sale of commercial paper, except;
(i) as provided under this Agreement;
(ii) existing indebtedness as disclosed on Schedule 8.5
(ii) attached hereto;
8.6 Sell, assign, transfer or dispose of any of its
accounts or notes receivable, with or without recourse, except to
Lender;
8.7 Make loans or advances to others;
8.8 Become a guarantor, surety or otherwise liable for the
debts or obligations of others, except to Lender, and except as an endorser of
checks or drafts negotiated in the ordinary course of business;
8.9 Declare or pay any dividends or make any form of
withdrawal from capital, including the purchase of treasury stock;
8.10 Incur, create or assume any commitment to make any Lease
Payments except as set forth on Schedule 7.10 attached hereto;
8.11 Enter into any sale-leaseback transaction;
8.12 Prepay any amounts not required or cause to be
accelerated any amounts on any outstanding indebtedness now existing or
hereafter arising, except to Lender;
8.13 Pay salaries, withdrawals or compensation to
officers of Borrower in an amount exceeding Officer Compensation in
the aggregate per year;
8.14 Make capital expenditures during any one fiscal year in
an amount in excess of One Hundred Thousand Dollars ($100,000.00);
8.15 Sell, issue, or agree to sell or issue, any shares
(voting, non-voting, preferred or common of any class) of Borrower,
<PAGE>
or purchase such shares except (i) with respect to the exercise of stock options
outstanding as of the Closing Date or (ii) under such circumstances as will in
the opinion of Lender not result in a material adverse change in the financial
condition of Borrower or the value of any security held by Lender or unfavorably
alter the control of Borrower; or
8.16 Sell or otherwise dispose of its Collateral, except
in the ordinary course of business.
ARTICLE IX. OPPORTUNITY TO CURE DEFAULT.
Upon the occurrence of an Event of Default (as defined in
Article IX. hereof), Lender shall provide written notice (the "Default Notice")
to Borrower of such Event of Default stating the grounds for such default and
referencing the section(s) of this Business Loan Agreement and/or any Loan
Documents related to such default. During the fifteen-day period following such
written notice (the "Cure Period"), Borrower shall have the opportunity to cure
or correct such Event of Default. In the event the Borrower fails to cure the
Event of Default to the reasonable satisfaction of Lender within the Cure
Period, Borrower shall be in default under this Business Loan Agreement.
ARTICLE X. DEFAULT.
Borrower shall be in default (an "Event of Default") under
this Business Loan Agreement and under the Note, and the other Loan Documents
upon the expiration of the Cure Period, provided that during the Cure Period
such Event of Default is not cured or corrected as provided in Article IX.
hereof, whereupon Lender, at its option, may declare immediately due and
payable, the unpaid balance of the Loan and may exercise all rights and remedies
provided to Lender in this Business Loan Agreement, in the Note, and any other
Loan Document or otherwise available to Lender in law or in equity, including,
but not limited to, Lender's right to set off against any account of any
Borrower or any guarantor or surety for Borrower with Lender:
10.1 Borrower's failure to pay Lender the principal, interest
or other liabilities incurred pursuant to this Business Loan Agreement or any
other Loan Document when the same is due and payable;
10.2 Borrower's failure to observe, perform or comply with any
of Borrower's obligations under this Business Loan Agreement;
10.3 Any warranty or representation of Borrower set
forth herein being or becoming untrue;
<PAGE>
10.4 Any default by Borrower or by any guarantor or
surety for Borrower under the provisions of the Note, or any other
Loan Document;
10.5 The determination by an officer of Lender, in such
officer's reasonable judgment, that a material adverse change in the business or
financial condition of Borrower, or of any guarantor or surety for Borrower, has
occurred;
10.6 The default by Borrower with respect to any obligation of
Borrower to Lender or of Borrower to any person, firm or corporation extending
credit or loans to Borrower; or
10.7 The filing by or against Borrower or any guarantor or
surety for Borrower of any proceeding under the Federal Bankruptcy Code or under
any other Federal or State law relating to insolvency, receivership,
reorganization or debt adjustment, or the appointment of a trustee or receiver
for the property of, or assignment for the benefit of creditors by, Borrower or
any guarantor or surety for Borrower.
ARTICLE XI. MISCELLANEOUS.
11.1 Lender shall not be deemed to have waived any of the
terms, agreements, conditions and covenants hereof, except by a writing signed
by an officer of Lender and delivered to Borrower.
11.2 Borrower will pay all costs of filing of any financing,
continuation or termination statements; mortgages, or suretyship agreements with
respect to the security interest created pursuant to this Business Loan
Agreement; Borrower will pay any stamp taxes or taxes in the nature thereof
which may be payable in connection with the execution of delivery of the Loan
Documents.
11.3 Borrower hereby forever indemnifies and saves Lender and
its directors, officers, employees and agents harmless from and against any and
all liability which Lender or any of them may incur or which may be assessed
against Lender or any of them with respect to this Business Loan Agreement or
any other Loan Document, provided that such liability is not due to the
negligence or intentional acts of or on the part of the Lender or any of its
directors, officers, employees or agents.
11.4 This Business Loan Agreement contains the entire
agreement and understanding of the parties hereto with respect to the subject
matter hereof and supersedes all prior or contemporaneous agreements with
respect to such subject matter. The terms of any other Loan Documents are
expressly incorporated herein and made a part hereof; provided, however, that in
any case where a term or condition contained in any other Loan Document cannot
be construed (despite every effort to do so) as consistent
<PAGE>
with the terms of this Business Loan Agreement, this Business Loan Agreement
shall govern. This Business Loan Agreement may be amended only by a written
instrument which is signed by the parties hereto and which specifically refers
to this Business Loan Agreement and states that it is an amendment hereto.
11.5 This Business Loan Agreement and all rights hereunder
shall be governed by the laws of the Commonwealth of Pennsylvania and shall be
binding upon Borrower, its successors and assigns, and shall inure to the
benefit of Lender, and its successors and assigns.
11.6 If any term of this Business Loan Agreement shall be held
to be invalid, illegal or unenforceable, the validity of all other terms hereof
shall in no way be affected thereby.
11.7 This Business Loan Agreement shall be in full force and
effect until Borrower shall have satisfied in full or been released from all of
Borrower's liabilities and obligations to Lender hereunder and Lender shall have
no further obligations to Borrower pursuant to the terms hereof.
11.8 Any and all actions at law or in equity relating to this
Business Loan Agreement, the Note, any other Loan Documents or the Loan shall be
brought, and jurisdiction shall be had exclusively, in the courts of
Philadelphia County, Pennsylvania or the United States District Court for the
Eastern District of Pennsylvania, provided that any action involving the
Collateral may be brought in any jurisdiction in which any of the Collateral is
located. BORROWER AND LENDER EACH EXPRESSLY WAIVE ANY RIGHT TO TRIAL BY JURY IN
ANY CASE BROUGHT BY ANY PARTY WITH RESPECT TO THIS BUSINESS LOAN AGREEMENT, THE
NOTE, ANY OTHER LOAN DOCUMENT OR THE LOAN.
11.9 If Borrower shall pay any interest under the terms of the
Note at a rate higher than the maximum rate allowed by applicable law, then such
excess payment shall be credited as a payment of principal of the Loan, unless
Borrower notifies Lender in writing to return any excess payment to Borrower.
11.10 Any notices required or permitted to be given pursuant
to this Business Loan Agreement or any Loan Document shall be sufficiently given
if delivered in person or by overnight delivery service or sent by United States
mail, postage prepaid to the addresses set forth on the first page hereof.
11.11 Until the Indebtedness has been paid in full and Lender
has no further obligations to Borrower hereunder, Lender shall have the right of
first refusal to offer loans to Borrower of all types (including capital leases)
and Borrower shall promptly deliver to Lender a copy of all commitment letters
or proposals received by Borrower with respect thereto. Lender shall have 10
<PAGE>
days after receipt of each such commitment letter or proposal to exercise the
right of first refusal granted hereby.
11.12 This Business Loan Agreement may be executed on one or
more counterparts and all such counterparts shall together constitute one
Business Loan Agreement notwithstanding that all of the parties are not
signatories to the original or same counterpart.
IN WITNESS WHEREOF, the parties hereto, intending to be
legally bound hereby, have executed this Business Loan Agreement this 8th day of
September, 1994.
Attest ELECTRONIC ASSOCIATES, INC.
_________________________ By: /s/ Charles A. Milo
Secretary
Attest TANON MANUFACTURING, INC.
_________________________ By: /s/ Joseph R. Spalliero
Secretary
<PAGE>
EXHIBIT "A"
Litigation
*Lender is a not a party, but a directive order recipient, to
the two following actions:
Rollins Environmental Services (NJ) Inc., et al. v. United
----------------------------------------------------------
States, et. al., Civil Action No. 92-1253 (JEI);
- ---------------
United States v. Allied Signal Inc., et al., Civil Action No.
-------------------------------------------
92-2726 (JEI)
*Lender was served in August 1988 with a complaint filed in Superior
Court of New Jersey for Middlesex County on behalf of Marie Vassalo individually
and as administratrix of Charles Vassalo. Lender, five identified asbestos
manufacturers, and other unidentified "John Doe" defendants were named in the
complaint which alleges that as an employee of AT&T from 1966 to 1986, including
an unspecified period as an employee at the premises rented by AT&T from Lender,
the AT&T employee was exposed to asbestos products and, as a result, sustained
severe personal injury and death.
*The following action was instituted in the Law Division of the
Superior Court of New Jersey, Monmouth County in October 1992:
Lemco Associates, L.P. v. Electronic Associates, Inc., COMAX,
-------------------------------------------------------------
Inc., american Metal, Inc., David McAvoy III et al. (Docket No.
- --------------------------------------------------
MON-L-6492-92)
*On April 5, 1994, Stephen Pudles filed an action in Superior Court of
New Jersey, Law Division, County of Ocean alleging that: (i) Lender breached an
oral agreement with Mr. Pudles by refusing to pay certain agreed upon
compensation to him; (ii) Lender made negligent misrepresentations in inducing
Mr. Pudles to enter into such oral contract per the period following Mr. Pudles'
voluntary resignation from his employment with Lender; and (iii) Lender
defrauded Mr. Pudles.
EXHIBIT 10.51
EMPLOYMENT AGREEMENT
--------------------
<PAGE>
EMPLOYMENT AGREEMENT
--------------------
EMPLOYMENT AGREEMENT dated as of the 4th day of January, 1995 between
Tanon Manufacturing, Inc., a California corporation ("Tanon") with its principal
offices at 46360 Fremont Boulevard, Fremont California 94538 (the "Company") and
Joseph R. Spalliero, an individual residing at 5114 Blackhawk Drive, Danville CA
94506 (the "Employee").
BACKGROUND
----------
EA Acquisition Corp. ("Acquisition"), a wholly-owned subsidiary of
Electronic Associates, Inc. ("EA") merged with and into the Company pursuant to
an Agreement and Plan of Reorganization dated December 12, 1994 by and among the
Company, EA, Acquisition and the Employee (the "Merger Agreement"). Pursuant to
the Merger contemplated by the Merger Agreement, the Company became a
wholly-owned subsidiary of EA, effective as of the date hereof. The Employee was
a majority shareholder and the chief executive officer of Tanon Manufacturing,
Inc, prior to the Merger.
In consideration of their mutual promises and covenants set forth
herein, and intending to be legally bound hereby, Company and Employee agree as
follows:
l. Employment. The Company hereby employs the Employee
----------
through January 3, 1997 and the Employee accepts such employment on
the terms and conditions hereinafter set forth.
2. Term. The term of this Agreement shall begin on January
----
4, 1995 and shall terminate on January 3, 1997 unless sooner
terminated in accordance with Paragraph 7 hereof.
3. Duties. The Employee is engaged hereunder as Chief Operating Officer
------
of the Company and he shall perform the duties and services incident to that
position, or such other or further duties and services of a similar nature as
may be reasonably required of him by the Board of Directors of EA or its
designee. The Employee agrees to serve as an officer of the Company and of any
subsidiary of the Company or affiliated company (including EA) without
additional compensation. Employee shall be a member of a two-person "Office of
the President" of the Company and at all times be subject to the supervision of,
and shall report directly to, the Board of Directors of the Company.
The Employee shall devote at least 40 hours per week, subject to
regular vacations, holidays, death or disability, to the performance of his
duties hereunder and to the promotion of the business and interests of the
Company and of any corporate
<PAGE>
subsidiaries or affiliated companies. The foregoing shall not be construed,
however, as preventing the Employee from investing his assets in such form or
manner as will not require services on the part of the Employee in the
operations of the business in which such investment is made and provided such
business is not in competition with the Company or, if in competition, such
business has a class of securities registered under the Securities Exchange Act
of 1934 and the interest of Employee therein is solely that of an investor
owning not more than 5% of any class of the outstanding equity securities of
such business.
The Employee recognizes that he may be required by the Company to
travel throughout the United States in order to perform a portion of the
services to be rendered hereunder, but the nature or extent of such travelling
or the location of Employee's office shall not be such as to make it reasonably
necessary for the Employee to relocate his permanent residence from the
Danville, California area.
4. Compensation; Expenses.
----------------------
(a) Base Salary. The Employee shall be paid a salary at the
-----------
rate of not less than $240,000 per year (the "Base Salary"). The Base Salary
shall be paid in installments in arrears in accordance with the Company's
regular payroll practices but not less often than bi-weekly. The Company may, in
its discretion, increase the Employee's Base Salary and his other compensation
provided for herein.
(b) Incentive Compensation. In addition to the Base Salary,
----------------------
Company shall pay to employee (i) a signing bonus (the "Signing Bonus") in the
amount of $270,000 ($300,000 signing bonus less $30,000 previously loaned to the
Employee by the Company in relation thereto, which $30,000 loan is deemed
satisfied and paid in full as of the date hereof) to be paid upon the execution
and delivery of this Employment Agreement and (ii) a bonus of up to $750,000
paid quarterly, based on the performance criteria and subject to the other terms
and conditions set forth in Schedule 1 (the "Performance Bonus"). In addition,
the Employee shall be eligible to participate in the other bonus programs for
executives of the Company, as contemplated by and as set forth in Schedule 2 to
hereto. All performance criteria for all such bonuses shall be adjusted to
eliminate the accounting effects of the Merger and the nonrecurring expenses
relating to the consolidation of EA's contract manufacturing business with
Tanon's contract manufacturing business.
(c) Fringe Benefits. Employee shall be entitled to participate
---------------
in all insurance, vacation and other fringe benefit programs of the Company to
the extent and on the same terms and conditions as he presently receives,
including without limitation those items on Schedule 3; provided, however, that
nothing herein
<PAGE>
shall be deemed to require grants or awards to Employee under any benefit plans
which provide for awards or grants at the discretion of the Board of Directors
or of any committee or administrator.
(d) Business Expenses. The Company will pay, or reimburse the
-----------------
Employee for, all ordinary and reasonable out-of-pocket business expenses
incurred by Employee in connection with his performance of services hereunder
during the Employment Term in accordance with the Company's expense
authorization and approval procedures then in effect, upon presentation to the
Company of an itemized account and written proof of such expenses.
(e) Options. Simultaneously with the execution of this
-------
Agreement, the Company shall grant to the Employee (i) a non-statutory stock
option under the Company's 1994 Equity Incentive Plan (the "Plan") to purchase
approximately 314,000 shares of the Company's Common Stock at an exercise price
equal to the Fair Market Value (as that term is defined in the Plan) per share
of such stock, exercisable commencing on January 4, 1996 at the rate of 33 and
1/3% on each anniversary date, plus the amount of any portion of such option
which could have been exercised previously and was not exercised and ending on
the tenth anniversary date of this Agreement, and (ii) an incentive stock option
under the Plan to purchase approximately 36,000 shares of the Company's Common
Stock at an exercise price equal to 110% of the Fair Market Value (as that term
is defined in the Plan) per share of such stock, exercisable commencing on
January 4, 1996 at the rate of 33 and 1/3% on each anniversary date, plus the
amount of any portion of such option which could have been exercised previously
and was not exercised and ending on the tenth anniversary date of this
Agreement, each of the above grants as contemplated by and as set forth in
Schedule 2 to the Merger Agreement. The exact number of shares subject to each
option shall be determined by dividing $300,000 by the closing sale price of
common stock on the date hereof. The result of such division shall be the number
of shares of Company Common Stock subject to the incentive stock option; and the
result of the subtraction of such number from 350,000 shall be the number of
shares subject to the non-statutory stock option.
(f) Entire Compensation. The compensation provided for
-------------------
in this Agreement is in full payment of the services to be rendered
by the Employee to the Company hereunder.
5. Insurance. The Company, in its sole discretion and at its own
---------
expense, may apply for and procure in its own name and for its own benefit life
insurance on the life of the Employee in any amount or amounts considered
advisable by the Company, and the Employee shall submit to any medical or other
examination and execute and deliver such application or other instrument as may
be reasonably necessary to effectuate such insurance.
6. Death or Total Disability of the Employee.
-----------------------------------------
<PAGE>
(a) Death. In the event of the death of the Employee during
-----
the term of this Agreement, this Agreement shall terminate effective as of the
date of the Employee's death, and the Company shall not have any further
obligation or liability hereunder except that the Company shall pay to
Employee's designated beneficiary or, if none, his estate the portion, if any,
of the Employee's Base Salary, accrued Performance Bonus and bonuses in
accordance with Schedule 2 hereto for the period up to the Employee's date of
death which remains unpaid.
(b) Total Disability. In the event of the Total Disability (as
----------------
that term is hereinafter defined) of the Employee, the Company shall have the
right to terminate the Employee's employment hereunder by giving the Employee 10
days' written notice thereof and, upon expiration of such 10-day period, the
Company shall not have any further obligation or liability under this Agreement
except that the Company shall pay to the Employee the portion, if any, of the
Employee's Base Salary and accrued Performance Bonus and bonuses in accordance
with Schedule 2 hereto for the period up to the date of termination which
remains unpaid, and an amount per annum equal to two-thirds of his Base Salary
as in effect from time to time, provided that if the Employee, during any period
of disability, receives any periodic payments representing lost compensation
under any health and accident policy or under any salary continuation insurance
policy, the premiums for which have been paid by the Company, the amount of Base
Salary that the Employee would be entitled to receive from the Company during
such period of disability shall be decreased by the amounts of such payments.
The term "Total Disability," when used herein, shall mean a
mental, emotional or physical condition which either (i) has rendered the
Employee for a period of 60 consecutive days, or for a total of 90 days during
any period of 12 consecutive months, during the term of this Agreement, or (ii)
in the reasonable opinion of the Company is expected to render the Employee, for
a period of 6 months, unable or incompetent to carry out, on a substantially
full-time basis, the job responsibilities he held or tasks that he was assigned
at the time the disability was incurred. The Employee agrees, in the event of
any dispute as to the determination made pursuant to this paragraph, to submit
to a physical or other examination by a licensed physician selected by the
Company, the cost of which examination shall be paid by the Company.
7. Termination of Employment. (a) Termination of
-------------------------
Company. In addition to termination pursuant to paragraph 6, the
Company may discharge the Employee and thereby terminate his employment
hereunder for the following reasons ("for cause"): (a) (i) habitual
intoxication; (ii) drug addiction; (iii) conviction of a felony; (iv)
adjudication as an incompetent; (v) misappropriation of corporate funds or other
acts of dishonesty; or (vi) the Employee's material breach of this Agreement in
any other respect
<PAGE>
or (b) immediately upon the Company discontinuing its business operations or
upon the filing by or against the Company of a petition in bankruptcy or a
petition for reorganization under any state or federal bankruptcy law. The
merger, consolidation or sale of the business shall not be deemed a
discontinuance of its business operations for purposes of this clause.
In the event that the Company shall discharge the Employee
pursuant to this paragraph 7(a), the Company shall not have any further
obligations or liability under this Agreement, except that the Company shall pay
to Employee the portion, if any, of the Employee's Base Salary for the period up
to the date of termination which remains unpaid and except as provided in
paragraph 8 for termination pursuant to paragraph 7(a).
(b) Severance Pay. Upon termination of Employee's employment,
-------------
the severance pay of the Employee, if any, shall be determined by the Board of
Directors of EA, as contemplated by and as set forth in Schedule 2 to the Merger
Agreement, but if Employee is terminated other than for cause in the last six
months of the term, his severance pay shall in no event be less than $120,000
paid in a single installment within 30 days of termination. Severance pay shall
be in addition to, and not in substitution for, the Company's other obligations
under this Agreement.
8. Non-Competition and Confidentiality. The Company and Employee shall
-----------------------------------
enter into a Non-Competition and Confidentiality Agreement dated and effective
as of the date hereof, substantially in the form attached hereto as Exhibit "A".
The obligations of the Employee under the Non-Competition and Confidentiality
Agreement shall be independent of his obligations hereunder, and such agreement
shall survive the termination of this Agreement for any reason. A material
breach by Employee of the Non-Competition and Confidentiality Agreement shall be
a material breach of this Agreement.
9. Remedies Cumulative; No Waiver. No remedy conferred upon the Company
------------------------------
by this Employment Agreement (or in the Non-Competition and Confidentiality
Agreement) is intended to be exclusive of any other remedy, and each and every
such remedy shall be cumulative and shall be in addition to any other remedy
given hereunder or now or hereafter existing at law or in equity. No delay or
omission by the Company in exercising any right, remedy or power hereunder or
existing at law or in equity shall be construed as a waiver thereof, and any
such right, remedy or power may be exercised by the Company from time to time
and as often as may be deemed expedient or necessary by the Company in its sole
discretion.
10. Enforceability. If any provision of this Agreement shall
--------------
be invalid or unenforceable, in whole or in part, then such
<PAGE>
provision shall be deemed to be modified or restricted to the extent and in the
manner necessary to render the same valid and enforceable, or shall be deemed
excised from this Agreement, as the case may require, and this Agreement shall
be construed and enforced to the maximum extent permitted by law, as if such
provision had been originally incorporated herein as so modified or restricted,
or as if such provision had not been originally incorporated herein, as the case
may be.
11. Notices. All notices, requests, demands, claims, and other
-------
communications hereunder will be in writing. Any notice, request, demand, claim,
or other communication hereunder shall be deemed duly given if (and then two
business days after) it is sent by registered or certified mail, return receipt
requested, postage prepaid, or by overnight courier and addressed to the
intended recipient at the address set forth below:
If to Employee: 5114 Blackhawk Drive
Danville CA 94506
If to the Company: c/o Electronic Associates, Inc.
185 Monmouth Parkway
West Long Branch, New Jersey 07764
Attention: President
Any party hereto may give any notice, request, demand, claim or other
communication hereunder using any other means (including personal delivery,
expedited courier, messenger service, telecopy, telex, ordinary mail, or
electronic mail), but no such notice, request, demand, claim, or other
communication shall be deemed to have been duly given unless and until it
actually is received by the individual for whom it is intended. Any party hereto
may change the address to which notices, requests, demands, claims, and other
communications hereunder are to be delivered by giving the other parties hereto
notice in the manner herein set forth.
12. Governing Law. This Agreement shall be governed by and
-------------
construed in accordance with the internal laws (and not the law of
conflicts) of the State of New Jersey.
13. Contents of Agreement; Amendment and Assignment. This Agreement sets
-----------------------------------------------
forth the entire understanding between the parties hereto with respect to the
subject matter hereof and supersedes and is instead of all other employment
arrangement between the Employee and the Company. This agreement cannot be
changed, modified or terminated except upon written amendment duly executed by
the parties hereto. All of the terms and provisions of this Agreement shall be
binding upon and inure to the benefit of and be enforceable by the respective
heirs, representatives, successors and assigns of the parties hereto, except
that the duties and responsibilities of the Employee hereunder are of a
<PAGE>
personal nature and shall not be assignable in whole or in part by
the Employee.
IN WITNESS WHEREOF, this Agreement has been executed by the parties on
the date first above written.
Tanon Manufacturing, Inc.
By: /s/ Joseph R. Spalliero
/s/ Joseph R. Spalliero
Joseph R. Spalliero
Acknowledged, Agreed and Accepted
Electronic Associates, Inc.
BY:/s/ Bruce P. Murray
Bruce P. Murray, Chairman
EXHIBIT 10.52
NON-COMPETITION AND CONFIDENTIALITY AGREEMENT
---------------------------------------------
<PAGE>
NON-COMPETITION AND CONFIDENTIALITY AGREEMENT
---------------------------------------------
THIS NON-COMPETITION AND CONFIDENTIALITY AGREEMENT (this "Agreement"),
made and effective as of this 4th day of January, 1995, by and among Electronic
Associates, Inc., a New Jersey corporation ("EA"), Tanon Manufacturing, Inc., a
California corporation ("Tanon"), and Joseph R. Spalliero ("Spalliero").
BACKGROUND
----------
Pursuant to the terms of an Agreement and Plan of Reorganization by and
among EA, Tanon and Spalliero, among others, dated December 12, 1994 (the
"Merger Agreement"), effective as of the date hereof, Tanon has merged with a
wholly-owned subsidiary of EA, such that Tanon has become a wholly-owned
subsidiary of EA. EA and Tanon are sometimes hereafter collectively referred to
as the "Company". Any term not otherwise defined herein shall have the meaning
ascribed to such term in the Merger Agreement.
EA and Tanon each operate a business in the contract electronics
manufacturing industry. Pursuant to the terms of the Merger Agreement, the
contract electronics manufacturing operations of EA will be consolidated with
Tanon (the "Business"). Spalliero was the Chief Executive Officer of Tanon prior
to the Merger and, pursuant to and following the Merger, Spalliero shall be the
Chief Operating Officer of Tanon and a member of the Board of Directors of EA.
Spalliero possesses unique knowledge of the business and operations of
the Company and the future prospects of the Business and of the Company are
dependent in significant part on the knowledge, contacts and efforts of
Spalliero. Spalliero, in the course of his employment with Tanon, represented
Tanon, and will continue to represent the Company, in its dealings with
customers, suppliers and employees, and the competitive survival and goodwill of
the Company and its successors with respect to the Business will be dependent
upon its maintaining favorable relations with customers, suppliers and
employees. The provisions contained in this Agreement are required to preserve
for the Company the substantial rights and goodwill acquired upon consummation
of the Merger. The execution and delivery of this Agreement is a condition to
EA's obligations under the Merger Agreement.
NOW, THEREFORE, as a material inducement for EA to enter into the
Merger Agreement, and to carry out the transactions contemplated thereby, and
for other good and valuable consideration, the receipt and sufficiency of which
is hereby acknowledged by Spalliero, and intending to be legally bound, the
parties agree as follows:
<PAGE>
Section 1. Company Information and Customer Information.
--------------------------------------------
1.1 During the two year period following the date of the
termination of his employment, Spalliero shall not, directly or indirectly,
disclose or use in any manner whatsoever, except as may be required by law, any
Company Information or Customer Information, as defined below, that Spalliero
may possess on the date hereof or at any time hereafter.
1.2 The term "Company Information" as used in this Non-
Competition Agreement means secret, confidential, or proprietary information not
released to the public by the Company in the ordinary course of its business,
including, without limitation, technical, financial, compensation and marketing
information and information respecting customers (including customer lists),
prices, strategies, markets, methods of operation or doing business, suppliers,
business forecasts, selling procedures, "know-how", software, drawings, and new
product and engineering information and any other technical data relating to the
Company or the Business, all of the above including, without limitation,
information received from third parties under confidential conditions; provided,
--------
however, that "Company Information" does not include information that has become
- -------
publicly known other than as a result of a breach of this Non-Competition
Agreement by Spalliero, information that has been disclosed by the Company to a
third party without a similar restriction on the third party, or information
about the business or any other industry in which the Company is engaged which
is not proprietary to the Company and which Spalliero possesses as a result of
his education, skill, experience and knowledge of the industry.
1.3 The term "Customer Information" as used in this Agreement
means secret, confidential, or proprietary information, relating to the
customers of the Company not released to the public by the Company in the
ordinary course of its business, including, without limitation, technical,
marketing and financial information and customer lists, received by the Company
or Spalliero from any customer or potential customer of the Company; provided,
--------
however, that the term "Customer Information" does not include information that
- -------
has become publicly known other than as a result of a breach by Spalliero of
this Non-Competition Agreement, information that has been disclosed by the
Company to a third party without a similar restriction on the third party, or
information about the business or any other industry in which the Company is
engaged which is not proprietary to the Company and which Spalliero possesses as
a result of his education, skill, experience and knowledge of the industry.
Section 2. Noncompetition; Customer and Employee Solicitation.
--------------------------------------------------
Except as provided below, for a period commencing on the date hereof and
ending on the third anniversary of the date
<PAGE>
hereof, Spalliero shall not, without the prior written consent of the Company,
either separately or in association with others:
(A) anywhere in the United States or its territories
and possessions or any other territory in which Tanon conducts its business as
of the date hereof, directly or indirectly, engage in the operation of or have
any financial interest in, whether as an officer, employee, partner, owner,
shareholder, operator, consultant or otherwise, any person, firm, corporation or
business that itself engages in, or through a subsidiary or affiliate engages
in, the business of Tanon as conducted on the date hereof; or
(B) solicit any customers of the Company for the
purpose of engaging, in the geographical area described in clause (A) above, in
any business of the type or nature described in clause (A) above;
(C) employ, attempt to employ or otherwise interfere
or attempt to interfere, directly or indirectly, with the employment or
contractual relationships between the Company, on the one hand, and any of its
officers, directors, employees, customers, suppliers or agents, on the other
hand for the purpose of engaging in the geographical area described in clause
(A) above, in any business of the type or nature described in clause (A) above;
(D) Nothing in this Agreement shall prohibit
Spalliero from owning five percent (5%) or less of the issued and outstanding
securities of a company which is primarily engaged in the business described in
clause (A) above whose securities are listed on a national securities exchange
or actively traded in the over-the-counter market;
(E) If any portion of the covenants set forth in
Subsection 2(A) above shall be held unreasonable because of the term, geographic
zones, activities or services, or other matters covered thereby, the covenants
shall nevertheless be enforced in such reduced scope or form as may be
determined by a court of competent jurisdiction or as may otherwise be
appropriate.
Section 3. Remedy. It is acknowledged and agreed that Spalliero's
------
talents, knowledge and background are unusual and extraordinary and that the
restrictions contained in Sections l and 2 of this Non-Competition Agreement are
necessary and reasonable in order to protect the legitimate interests of the
Company. Therefore, the parties agree that any violation thereof would result in
irreparable injury to the Company and that therefore the remedy at law for the
breach of any covenants contained in this Non-Competition Agreement would be
inadequate and that the Company shall be entitled to injunctive relief with
respect to any such breach in addition to any other rights or remedies to which
the Company may be entitled, and Spalliero hereby waives any argument
<PAGE>
that an adequate remedy exists at law for the Company for any breach of Sections
1 and 2 of this Non-Competition Agreement.
Section 4. Assignment. This Non-Competition Agreement may
----------
be assigned by the Company to any successor in interest of the
Company, as the case may be, by merger, consolidation, transfer of
all or substantially all of its assets or otherwise, without the
consent of Spalliero.
Section 5. Binding Effect. This Non-Competition Agreement
--------------
shall be binding upon and inure to the benefit of the parties
hereto, their respective heirs, executors, administrators,
successors and assigns.
Section 6. Waiver. The waiver by any party to this Non-
------
Competition Agreement of a breach of any of the provisions of this
Non-Competition Agreement shall not operate or be construed as a
waiver of any subsequent breach.
Section 7. Entire Agreement. This Non-Competition Agreement and the
----------------
Merger Agreement constitute the entire agreement between the parties with
respect to the subject matter hereof and supersedes any prior agreements or
understandings between the parties with respect to such subject matter.
Section 8. Governing Law. This Non-Competition Agreement
-------------
shall be governed by the laws of the State of California.
Section 9. Notice. All notices or other communications required or
------
permitted under this Non-Competition Agreement shall be sufficiently given if in
writing and delivered in person to, or telecopied or telexed to and received by,
the below named parties, or sent by registered or certified mail, return receipt
requested, postage prepaid, or overnight delivery service, addressed as set
forth on the signature page of this Non-Competition Agreement, or to such other
person and address as the party to be charged with such notice shall designate
by notice given in the aforesaid manner.
<PAGE>
Section 10. Counterparts. This Non-Competition Agreement
------------
may be executed in any number of counterparts, each of which shall
be deemed to be an original, but all of which together shall
constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have duly executed and delivered
this Non-Competition Agreement the date first above written.
/s/ Joseph R. Spalliero
Joseph R. Spalliero
address: 5114 Blackhawk Drive
Danville, CA 94506
Electronic Associates, Inc.
185 Monmouth Parkway
West Long Branch, NJ 07764
By: /s/ Bruce P. Murray
Bruce P. Murray, Chairman
Tanon Manufacturing, Inc.
46360 Fremont Boulevard
Fremont CA 94538
By: /s/ Joseph R. Spalliero
Joseph R. Spalliero, Chief
Operating Officer
EXHIBIT 10.53
PROMISSORY NOTE
---------------
<PAGE>
PROMISSORY NOTE
$1,000,000 January 4, 1995
FOR VALUE RECEIVED AND INTENDING TO BE LEGALLY BOUND HEREBY, Joseph R.
Spalliero and Patricia Spalliero (together, "Borrower"), residing at 5114
Blackhawk Drive, Danville, California 94506, promise to pay to the order of
Electronic Associates, Inc., a New Jersey corporation ("Lender"), at Lender's
offices located at 185 Monmouth Parkway, West Long Branch, New Jersey, the
principal sum of One Million Dollars ($ 1,000,000.00) in lawful money of the
United States with interest thereon as provided herein on June 30, 1997 (or
earlier as provided in the Section of this Note entitled "MANDATORY PAYMENTS").
Subject to mandatory prepayments as set forth in the Section entitled "Mandatory
Payments" below, the entire outstanding principal balance hereof shall be paid
in a lump sum together with all accrued and unpaid interest thereon. Interest on
the principal shall accrue from the date of this Note at the lowest available
federal rate for a 30 month loan made on the date of this Note. All capitalized
terms used herein shall have the meanings ascribed to them in the Merger
Agreement (hereafter defined) unless the context clearly requires the contrary.
MERGER AGREEMENT.
- ----------------
This Promissory Note ("Note") and the loan evidenced hereby (the
"Loan") is given under and subject to the Agreement and Plan of Reorganization
dated as of December 12, 1994 by and among Borrower, Lender, EA Acquisition
Corp., a Pennsylvania corporation and a wholly-owned subsidiary of Lender, and
Tanon Manufacturing, Inc., a California corporation (the "Merger Agreement"),
which Merger Agreement may be amended, modified, renewed or substituted without
affecting in any way the validity or enforceability of this Note.
NON-RECOURSE LIABILITY.
- ----------------------
Notwithstanding the above or anything to the contrary contained or
implied in the Merger Agreement or this Note, Borrower's liability hereunder
shall be non-recourse, and shall be secured solely by a pledge by Borrower of
192,308 shares of common stock of Lender (the "Collateral"), pursuant to a
Collateral Pledge Agreement of even date herewith (the "Pledge Agreement").
Subject to the immediately preceding paragraph, Borrower's liability
under the Loan and this Note shall be unconditional and without regard to the
liability of any other person, and shall not be affected by any indulgence,
extension of time, renewal, waiver
<PAGE>
or modification of the Loan or this Note, or the release, substitution and/or
addition of collateral security for the Loan or this Note. Borrower consents to
any and all extensions of time, renewals or waivers, as well as the release
substitution or addition of persons liable hereunder without affecting
Borrower's liability hereunder provided that Borrower shall have received three
(3) days' prior notice from Lender of the same.
EVENT OF DEFAULT.
- ----------------
A material default under or material breach of the Pledge Agreement
which remains uncured for a period of ten days after receipt by Borrower of
written notice thereof shall be an Event of Default hereunder.
LENDER'S RIGHTS UPON DEFAULT.
- ----------------------------
Upon the occurrence and continuation of any Event of Default, Lender
may do any or all of the following:
(a) accelerate the maturity of this Note and demand immediate
payment of all outstanding indebtedness hereunder, including but
not limited to principal and accrued interest.
(b) exercise all of the rights, privileges and remedies of a secured
party under the Uniform Commercial Code of Pennsylvania (or of any other
applicable state) with respect to the Collateral and all of its rights and
remedies under the Collateral Pledge Agreement, all of which remedies shall be
cumulative and not alternative.
MANDATORY PAYMENTS.
- ------------------
Pursuant to the Merger Agreement, Spalliero received 992,259 shares of
common stock of Lender of which 496,130 shares are not registered under the 1933
Act (the latter shares being the "Unregistered Shares"). The Collateral consists
of Unregistered Shares. All proceeds of the sale, if any, of any of the
Unregistered Shares other than the Collateral prior to the date the indebtedness
hereunder is due shall immediately upon receipt be paid to Lender (the
"Mandatory Payments"), notwithstanding that the principal and interest hereunder
is not otherwise due until June 30, 1997. All such Mandatory Payments shall be
applied first to accrued interest and then on account of principal. Spalliero is
not hereby obligated to sell the Unregistered Shares in order to repay the Loan
or otherwise satisfy his obligations under this Note. The effectiveness of this
Section shall terminate on June 30, 1997.
<PAGE>
PREPAYMENTS.
- -----------
This Note may be prepaid in whole or in part, at any time without
penalty. Any such prepayments shall be applied first to accrued interest to the
date of prepayment and then on account of principal.
MISCELLANEOUS.
- -------------
(a) Borrower hereby waives protest, notice of protest,
presentment, dishonor, notice of dishonor and demand.
(b) Lender shall not be deemed to have waived any of the terms,
agreements, conditions and covenants hereof, except by a writing signed by an
officer of Lender and delivered to Borrower.
(c) This Note may be amended only by a written instrument which is
signed by the parties hereto and which specifically refers to this Note and
states that it is an amendment hereto.
(d) This Note and all rights hereunder shall be governed by the
internal laws of the Commonwealth of Pennsylvania (without regard to laws of
conflict) and shall be binding upon Borrower, its successors and assigns, and
shall inure to the benefit of Lender, and its successors and assigns.
(e) If any term of this Note shall be held to be invalid, illegal or
unenforceable, the validity of all other terms hereof shall in no way be
affected thereby.
(f) If Borrower shall pay any interest under the terms of this Note at
a rate higher than the maximum rate allowed by applicable law, then such excess
payment shall be credited as a payment of principal of the Loan, unless Borrower
notifies Lender in writing to return any excess payment to Borrower.
(g) Any notices required or permitted to be given pursuant to this Note
or the Loan shall be sufficiently given if delivered in person or by overnight
delivery service or sent by United States mail, postage prepaid to the addresses
set forth on the first page hereof. If sent by mail, notice shall be deemed
received on the third day following deposit in the mail.
<PAGE>
IN WITNESS WHEREOF, Borrower has duly executed this Note the day and
year first above written and has hereunto set Borrower's hand and seal.
Witness:_______________________ /s/ Joseph R. Spalliero
Joseph R. Spalliero
Witness:_______________________ /s/ Patricia Spalliero
Patricia Spalliero
EXHIBIT 10.54
LETTER AGREEMENT
----------------
<PAGE>
ELECTRONIC ASSOCIATES, INC.
February 2, 1995
Mr. Charles A. Milo
Electronic Associates, Inc.
1715 South Research Loop
Tucson, Arizona 85710
Dear Chuck:
This will confirm the discussions that you have been having
with various members of the Board of Directors with respect to your
separation from Electronic Associates, Inc. ("EAI").
It is the understanding that:
1. Retirement (a) You will resign as an officer, director and
----------
employee of EAI effective on the date hereof. You will continue to receive your
regular compensation as an employee through March 31, 1995, payable in
accordance with EAI's policy. You will be available to meet in Tucson with
current management of EAI to effect a smooth transition with customers,
suppliers and others.
(b) Loretta Milo will resign as an employee of EAI
effective on the date hereof. Loretta will continue to receive her regular
compensation as an employee through March 31, 1995, payable in accordance with
EAI's policy.
(c) The payments made to you hereunder shall be in
lieu of severance payments under your employment agreement dated November 15,
1993.
2. Bonus. Upon the execution of this Agreement, you will be
-----
deemed to have earned your $50,000 bonus, which will be payable in four (4)
equal installments of $12,500 each, on February 12, 1995 and March 3; and March
12; and March 31, 1995.
<PAGE>
3. Stock, Class A and Class B Warrants. On the date hereof,
-----------------------------------
you are the owner of 429,166 shares of Common Stock of EAI and Class A Warrants
to purchase 398,042 shares of EA Stock at $1.00 per share and Class B Warrants
to purchase 398,042 shares of EA Stock at $1.75 per share. To the extent that
you desire and are otherwise able to sell your shares of EAI, you agree that you
will limit any such sales as follows: (a) 100,000 shares per quarter, on a
non-cumulative basis, for the first two calendar quarters in 1995; (b) the
number of shares you would be permitted to sell pursuant to Rule 144 under the
Securities Act of 1933, assuming you were otherwise eligible for the next six
(6) calendar quarters. After such period, there will be no further contractual
restrictions on your ability to sell your shares.
4. Options. Schedule A attached hereto lists of all of
-------
the options which you and Loretta are currently entitled to
exercise. The exercise period for all of such options shall be
extended to and terminated on, the end of business on September 30,
1995. All other options you may have shall be cancelled effective
immediately.
5. $160,000 Note. Upon the execution of this Letter,
-------------
the loan that EAI made to you in the amount of $160,000 shall be
cancelled and you shall have no further liability thereunder.
6. Mexican Plant. You will devote up to 14 business days
-------------
during the period of 45 days from the date hereof to assist EAI in closing the
plant in Nogales, Mexico with a minimum expense to EAI for which you will be
paid $10,000 plus reasonable expenses.
7. Mutual Release. Upon the execution of this letter,
--------------
EAI and you will execute mutual general releases.
<PAGE>
8. Miscellaneous. (a) You shall be entitled to retain
-------------
your laptop computer after you have unloaded the information; and
(b) you shall be entitled to be reimbursed for reasonable expenses
incurred in connection with one trip to West Long Branch, New
Jersey to remove your personal belongings from your apartment.
9. Press Release. EAI will consult with you prior to
-------------
making a joint announcement of your separation from EAI.
If the foregoing accurately and completely sets forth our
understanding, kindly so indicate by signing and returning a copy of this letter
to the undersigned whereupon it shall become a binding agreement between us and
we will proceed to prepare the documents necessary to effectuate the agreement.
Very truly yours,
ELECTRONIC ASSOCIATES, INC.
By: /s/ Bruce P. Murray
Accepted and Agreed to:
/s/ Charles A. Milo
Charles A. Milo
/s/ Loretta Milo
Loretta Milo
EXHIBIT 10.55
AMENDMENT TO CONSULTING AGREEMENT
---------------------------------
<PAGE>
March 23, 1995
ELECTRONIC ASSOCIATES, INC.
185 Monmouth Parkway
West Long Branch NJ 07764
Gentlemen:
Reference is hereby made to that certain letter agreement dated March
21, 1994 whereby Electronic Associates, Inc. (the "Company") has engaged the
undersigned, Irwin L. Gross (the "Consultant"), to render consulting services to
the Company (the "Consulting Agreement"). This is to confirm our agreement to
amend the Consulting Agreement whereby the Company has requested the
undersigned, and the undersigned has agreed, to amend and restate Paragraph 3 of
the Consulting Agreement to provide as follows:
"3. Compensation.
For all services rendered by the Consultant to the
Company pursuant to this Agreement, the Company shall issue to the Consultant, a
warrant to purchase 262,000 shares of Common Stock of the Company, in the form
attached hereto as Exhibit A (the "Warrant"). Such compensation shall be deemed
fully earned by, and vested in, the Consultant, as follows: (i) the Warrant
shall become vested and exercisable to the extent of 50% of the number of shares
of Common Stock of the Company covered by such Warrant (131,000 shares) on March
31, 1995, and (ii) thereafter, the Warrant shall become vested and exercisable
for the balance of shares of Common Stock of the Company covered by such Warrant
(131,000 shares) on March 31, 1996. The death, incapacity or disability of
Consultant or termination of this Agreement by the Company shall not reduce the
compensation earned by Consultant hereunder."
Except as specifically provided in this letter, the terms of the
Consulting Agreement shall remain unmodified and the Consulting Agreement, as
amended hereby, shall remain in full force and effect.
If the foregoing correctly sets forth the understanding between
Consultant and the Company with respect to the foregoing, please indicate your
agreement by signing in the place provided below at which time this letter shall
become a binding contract.
Very truly yours,
/s/ Irwin L. Gross
Irwin L. Gross
ACCEPTED AND AGREED:
ELECTRONIC ASSOCIATES, INC.
By: /s/ Joseph R. Spalliero
__________________________________
Joseph R. Spalliero, President
- -------------------------------------------------------------------------------
MANUFACTURING AND CONSULTING AGREEMENT
Dated as January 16, 1995
BETWEEN
BARON TECHNOLOGIES, LTD.
AND
ELECTRONICS ASSOCIATES, INC.
- -------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
<S> <C> <C> <C>
SECTION 1 Definitions...............................................................
SECTION 2 General Agreement.........................................................
2.1. Exclusive License.........................................................
2.2. Procedures................................................................
SECTION 3 Manufacturing Contract....................................................
3.1. The Manufacturing Contract................................................
SECTION 4 [Manufacturing] Consulting
Fees of EA................................................................
SECTION 5 Term of Agreement, Renewal, Insolvency Event,
Material Breach Noncompliance, Noncompete.................................
5.1. Term of Agreement.........................................................
5.2. Insolvency Event..........................................................
5.3. Material Breach...........................................................
5.4. Noncompliance.............................................................
5.5. Covenant Not to Compete...................................................
5.6. Continuing Obligations....................................................
SECTION 6 Covenants of the Parties..................................................
6.1. Confidential Information..................................................
6.2. Licenses..................................................................
6.3. Governmental Filings......................................................
6.4. Indemnification...........................................................
SECTION 7 Miscellaneous Provisions..................................................
7.1. Entire Agreement; Amendment...............................................
7.2. Notices...................................................................
7.3. Governing Law.............................................................
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Page
<S> <C> <C> <C>
7.4. Captions..................................................................
7.5. Benefit; No Third-Party
Beneficiaries.............................................................
7.6. Construction..............................................................
7.7. Waiver....................................................................
7.8. Non-Business Days.........................................................
7.9. Counterparts..............................................................
7.10. Exhibits and Schedules...................................................
7.11. Limitations on Assignment................................................
7.12. Survival of Representations..............................................
7.13. No Joint Venture, Etc.....................................................
7.14. Severability.............................................................
7.15. Dispute Resolution........................................................
7.16. Waiver of Specific Performance...........................................
7.17. Jurisdiction..............................................................
</TABLE>
(ii)
<PAGE>
MANUFACTURING AND CONSULTING AGREEMENT
--------------------------------------
This MANUFACTURING AND CONSULTING AGREEMENT, dated as of the
16th day of January 1995 (this "Agreement"), by and between BarOn Technologies,
Ltd., a corporation duly organized and existing under the laws of Israel, with
offices at Gutwirth Science Park, Technion City, Haifa 32000 Israel (together
with all of its subsidiaries, hereinafter "BarOn") and Electronics Associates,
Inc., a corporation duly organized and existing under the laws of the State of
New Jersey in the United States of America, with offices at 185 Monmouth
Parkway, West Long Branch, New Jersey 07664 (hereinafter "EA").
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, BarOn is a designer and developer of technology for
pen-based computer inputting devices and other computer technology and the owner
of proprietary rights related to BarOn Technical Information (as hereinafter
defined);
WHEREAS, EA is a contract electronic manufacturing company
specializing in electronic products, subassemblies and systems;
WHEREAS, EA is willing to provide consulting services to
BarOn in its preparation for production of various products which are currently
in the research and development phase of BarOn and for the production thereof;
WHEREAS, BarOn is interested in solidifying an ongoing
business relationship with a reliable and established contract manufacturer;
WHEREAS, EA is interested in becoming, for the term of this
Agreement, the manufacturer of the hardware elements needed by BarOn for the
present and future sale of its products; and
WHEREAS, subject to the terms and conditions set forth in
this Agreement, BarOn wishes to grant to EA a right of first refusal to the
manufacture of certain Assemblies (as hereinafter defined) and EA wishes to be
granted and, from time to time, to exercise such right to manufacture such
Assemblies for BarOn to BarOn's Specifications.
<PAGE>
NOW, THEREFORE, for valuable consideration, the receipt and
sufficiency of which are hereby acknowledged the parties hereto, intending to be
legally bound, hereby agree and covenant as follows:
SECTION 1 Definitions
- --------- -----------
For purposes of this Agreement, the following terms shall
have the meanings set forth below:
"Affiliate" means, with respect to any Person, any other
---------
Person that, directly or indirectly, controls, is controlled by or is under
common control with such Person.
"Assemblies" or "Unit" means all hardware and electronic
----------
elements of present or future products developed by BarOn which are to be
manufactured for BarOn for its own demand and/or as a result of products ordered
pursuant to its Customer Contracts.
"Authorized Representative" means, with respect to a Party,
----------
such person or persons as may be designated as such in writing by such Party to
the other Party.
"BarOn Technical Information" shall have the meaning set
---------------------------
forth in Section 6.1(a).
"CERCLA" means the Comprehensive Environmental Response,
------
Compensation and Recovery Act 42 U.S.C. ss. 9601, et seq.
-- ---
"Consulting Fee" shall have the meaning set forth in
--------------
Section 4.
"Cost of Components" shall have the meaning set forth in
------------------
Section 2.2(e).
"Customer Contract" shall have the meaning set forth in
-----------------
Section 2.2(a).
"Environmental Laws" means all federal, state, local and
------------------
foreign laws, statutes, rules, regulations, ordinances, codes, judicial or
administrative orders, requirements, standards, guidelines, and the like
(including any future amendments thereto) (collectively "laws"), relating to
pollution, worker and public health and safety, or the protection of the
environment, including but not limited to CERCLA, RCRA, the Federal Water
Pollution Control Act, 33 U.S.C. ss. 1251 et seq., the Clean Air Act, 42
-- ---
(2)
<PAGE>
U.S.C. ss. 1857 et seq., the Occupational Safety and Health Act of 1970, 29
-- ---
U.S.C. ss. 651 et seq., and the Toxic Substances Control Act, 15 U.S.C. ss. 2601
-- ---
et seq., and including but not limited to all laws relating to the releases,
- -- ---
use, manufacture, storage, treatment, transportation, discharge, disposal, or
other handling of hazardous materials, hazardous substances, or wastes. The term
"Environmental Laws" shall also include Liabilities and duties arising under any
state or federal common law in connection with any of the foregoing.
"Expiration Date" shall have the meaning set forth in
---------------
Section 5.1(a).
"Initial Term" shall have the meaning set forth in
------------
Section 5.1(a).
"Liabilities" means liabilities, debts or obligations,
-----------
whether accrued, absolute, contingent or otherwise, known or unknown.
"Manufacturing Contract" shall have the meaning set forth in
----------------------
Section 2.3.
"Party" shall mean either BarOn or EA.
-----
"Permits" means all permits, licenses, orders, approvals,
-------
registrations and any other authorizations of any federal, state, local or
foreign governmental, regulatory or judicial body or authority.
"Person" means a natural person, a corporation, a
------
partnership, a trust, a joint venture, any governmental authority or any other
entity or organization.
"Purchase Order" means a purchase order, signed by an
--------------
Authorized Representative of BarOn, which may be substantially similar to a
purchase order delivered to BarOn by one of its customers, containing the
following information:
a. purchase order number
b. Assemblies Number or Unit Numbers, names and quantities
c. desired delivery schedules
d. Unit Price and Total Price
e. shipping instructions
f. bill of materials
g. terms of payment
"Purchase Order Proposal" means a proposal submitted by BarOn
-----------------------
to EA relating to the quantity and type of Assemblies BarOn requires for its own
account or
(3)
<PAGE>
to fulfill its obligations under a Customer Contract, which will include the
bill of materials and all terms of conditions requested by BarOn.
"RCRA" means Resource Conservation and Recovery Act, 42
----
U.S.C. ss. 6901, et seq.
-- ---
"Right" means any right or benefit of any nature whatsoever.
-----
"Total Price" means the respective Unit Price for each
-----------
Assembly multiplied by the number of such Units, subject to the limitation set
forth in Section 3.1(b).
"Unit Price" has the meaning set forth in Section 3.1(a),
----------
subject to the limitation set forth in Section 3.1(b).
SECTION 2 General Agreement
_________ _________________
2.1. Mutual Obligations. Subject to compliance by EA with the
------------------
terms and conditions set forth in this Agreement, BarOn hereby, for the term of
this Agreement, grants to EA a right of first refusal to enter into
manufacturing agreements with BarOn for the manufacture of Assemblies for
BarOn's own needs and as required by it in order to fulfill BarOn's obligations
under its Customer Contracts all in accordance with the procedures set forth in
2.2 hereof.
2.2. Procedures. The following shall be the procedures for
----------
processing an order to deliver any of BarOn's products to one of its customers
(a "Customer Contract"):
(a) Each time BarOn receives a Customer Contract, BarOn
shall submit to EA a Purchase Order Proposal reflecting the terms of the
Customer Contract (a "Purchase Order Proposal").
(b) Within 15 business days of receiving the Purchase
Order Proposal, EA (which for purposes of fulfilling its manufacturing and
consulting obligations under this Agreement, shall include through subsidiaries
and Affiliates, including through its wholly-owned subsidiary, Tanon
Manufacturing, Inc.) shall either (i) submit to BarOn a quotation for the work
required by the Purchase Order Proposal, with the Unit Price based on 140% of
EA's Cost of Materials, indicating any special requirements to be included in
the terms of any Purchase Order which may be issued related to the work
described in the Purchase Order Proposal, or (ii) notify BarOn that
(4)
<PAGE>
EA either (A) does not have the technical capability to manufacture the
Assemblies, or (B) EA cannot manufacture the necessary quantity of the
Assemblies within the time period required under the Purchase Order Proposal.
(c) If EA submits a quotation in response to the
Purchase Order Proposal, BarOn shall, within 15 business days thereafter, either
(i) accept such quotation, and issue a Purchase Order to EA for the manufacture
of such Assemblies, or (ii) notify EA that BarOn intends to solicit written
quotations for the manufacture of the Assemblies under the Purchase Order
Proposal. If BarOn elects to solicit written quotations it shall, within 15 days
of its notifying EA of its intention to do so, either issue a Purchase Order to
EA for the manufacture of such Assemblies (i.e. if BarOn was unable to find any
acceptable "more competitive" quotation), or, submit to EA a quotation BarOn has
deemed "more competitive" than EA's terms. A quotation shall not be deemed "more
competitive" than EA's quotation unless the price is more than 10% below the
price in the Purchase Order Proposal to EA, includes delivery times in
quantities as large or larger in the same time or sooner than those in the
Purchase Order Proposal to EA, and includes quality and quality control
specifications at least as stringent as those in the Purchase Order Proposal to
EA or as regularly practiced by EA. If BarOn indicates that it has received and
intends to accept a "more competitive" quotation, EA shall have the right to
match the terms of such quotation (i.e. such that EA's revised proposed Unit
Price is not more than 10% greater than the previously "more competitive"
quotation) and upon notifying BarOn of its intention to do so, BarOn shall issue
a Purchase Order to EA on such terms. If EA fails to match such "more
competitive" quotation within 10 days of being notified of such quotation, BarOn
may issue a Purchase Order to such third party manufacturer on the terms
rejected by EA.
(d) If EA has notified BarOn that EA does not possess
the technical capability to manufacture the Assemblies subject to the Purchase
Order Proposal, BarOn shall have the right to have the Assemblies required under
such Purchase Order Proposal manufactured by a third party.
(e) If EA has notified BarOn that EA does not possess
the manufacturing capacity to manufacture the Assemblies required by the
Purchase Order Proposal within the time frame required by the Purchase Order
Proposal, BarOn shall have the right to have such Assemblies required under such
Purchase Order Proposal to be manufactured by a third party manufacturer,
provided however, that BarOn shall use its best efforts to permit EA to
manufacture up to the number of Assemblies which EA notifies BarOn it can
manufacture.
(5)
<PAGE>
(f) If, notwithstanding EA's notification to BarOn of
its ability to manufacture all or a portion of the Assemblies under the Purchase
Order Proposal, BarOn in good faith and on substantial grounds believes that EA
is not able to do so, or if BarOn determines that it is otherwise desirable (or
if the amount EA has determined it cannot manufacture is less than a commercial
quantity for a third party manufacturer), BarOn shall have the right to have up
to 30% of the Assemblies under such Purchase Order Proposal manufactured by a
third party manufacturer (with 70% of such Assemblies being manufactured by EA).
(g) In the event that BarOn's obligation is for the
supply of parts of one of BarOn's products, all of the foregoing provision shall
apply mutatis mutandis for such parts.
------- --------
(h) Whenever a Purchase Order is required hereunder,
such Purchase Order shall contain such terms as the Parties may mutually agree,
it being intended that the Purchase Order should reflect the terms of the
Purchase Order Proposal, and such other or additional terms as the parties may
mutually agree.
(i) BarOn's needs for Assemblies not in relation to
Customer Contracts shall be processed in the same manner as set forth above.
SECTION 3: Manufacturing Contract.
- --------- ----------------------
3.1 The Manufacturing Contract. Each time BarOn issues EA a
--------------------------
Purchase Order, BarOn and EA, or one of their designated Affiliates, shall enter
into a manufacturing contract (the "Manufacturing Contract") reflecting the
terms and conditions set forth in the accepted Purchase Order, including such
additional or other terms as the Parties may mutually agree. In the absence of a
Manufacturing Contract, the accepted Purchase Order shall be deemed to be the
Manufacturing Contract.
(a) The Manufacturing Contract shall indicate the cost
of such materials to be incurred by EA in the manufacturing process for the
Assemblies required under the accepted Purchase Order (the "Cost of Materials")
and all other information included in the Purchase Order, including the Total
Price. The initial Unit Price to be paid by BarOn to EA for each Assembly shall
be determined by multiplying the Cost of Materials for all of the Assemblies
under the Purchase Order by 140% of the Cost of Materials (which will equal the
Total Price), and dividing the result by the number of Assemblies under the
Purchase Order (to equal the initial Unit Price).
(6)
<PAGE>
(b) With respect to each Manufacturing Contract: (i)
once every six (6) months; and (ii) at the time of renewal of such Purchase
Order or relevant Customer Contract, an Authorized Representative of BarOn may
solicit from independent third party manufacturers bids for the relevant
Assembly. If BarOn elects to seek competitive quotation it shall, within 15
business days of its notifying EA of its intention to do so, submit to EA a bid
BarOn has deemed "more competitive" than EA's terms. If BarOn shall not submit a
"more competitive" quotation within such time, EA shall continue to manufacture
the Assemblies under the terms set forth in (a) above. If BarOn indicates that
it has received and intends to accept a "more competitive" quotation, EA shall
have the right to match the terms of such quotation, (i.e. to adjust its price
such that the third party manufacturer bid is not priced more than 10% less than
EA's price), and upon notifying BarOn of its intention to do so, EA shall
continue to manufacture the Assemblies, subject to such new terms. If EA fails
to match such "more competitive" quotation within 10 days of being notified of
such quotation, BarOn may enter into a Manufacturing Contract with such third
party manufacturer on the terms rejected by EA (if such terms are modified, EA
shall have the right again to match such terms, as modified, as set forth
above). A quotation shall not be deemed "more competitive" than EA's bid unless
it is priced more than 10% below EA's quotation, includes delivery times in
quantities as large or larger in the same time or sooner than those in the
original Purchase Order Proposal, and includes quality and quality control
specifications at least as stringent as those in the original Purchase Order
Proposal.
(c) Notwithstanding the procedure set forth in
paragraph (a) of this Section 3, at any time and from time to time, EA or BarOn
may identify a supplier who is able to supply a component to EA at a cost which
is lower than the cost of such component listed in the Cost of Materials. In
such case, EA shall order the part from such supplier, and shall substitute such
part in the list of materials listed in the Manufacturing Contract, and adjust
the price by subtracting 140% of the cost of the replaced part from 140% of the
replacement part, for all Assemblies utilizing such less expensive parts.
SECTION 4 Manufacturing Consulting Fees of EA
- --------- -----------------------------------
4.1 EA agrees to become BarOn's manufacturing consultant based
on its manufacturing experience by performing various consulting services as
BarOn may from time to time request, including, without limitation:
(i) the evaluation, as to suitability, dependability,
etc., of any other manufacturer with whom BarOn may be interested in doing
business;
(7)
<PAGE>
(ii) assistance with regard to any other manufacturing
contracts into which BarOn may enter;
(iii) assistance with obtaining the best available
price on certain components utilizing EA's purchasing and sourcing departments.
(iv) subject to the acceptance by other manufacturers,
supervision over the quality assurance programs of other manufacturers with whom
BarOn has contracted;
(v) any of the activities of EA listed in the preamble
of this Agreement.
(vi) assistance with acquiring a second contract
manufacturer in those cases where EA will not do all of the manufacturing;
(vii) assistance with the compliance by BarOn with any
United States regulatory requirements; and
(viii) acting as a troubleshooter for BarOn's
manufacturing activities.
(Services listed in iii, vii and viii about shall be utilized only if all or
some of the manufacturing is carried out by a manufacturer other than EA.
4.2 With respect to any such services provided by EA, BarOn shall pay
to EA for the term of this Agreement an amount equal to three percent (3%) of
the cost of manufacturing; provided that such amount shall not apply to any
--------
manufacturing done by EA and its Affiliates. In addition, BarOn shall promptly
pay to EA any out-of-pocket expenses incurred by EA during the performance of
their services; provided, that such out-of-pocket expenses are approved in
--------
advance by BarOn.
(8)
<PAGE>
SECTION 5 Term of Agreement, Renewal, Insolvency Event, Material Breach,
- --------- -------------------------------------------------------------
Breach, Noncompliance, Noncompete
---------------------------------
5.1. Term of Agreement.
-----------------
(a) Unless otherwise provided herein, this Agreement shall
continue in effect for an initial term the ("Initial Term") from the date of
this Agreement until the date that is three (3) years from the date of this
Agreement (the "Expiration Date"), unless extended in accordance with the
provisions of paragraph (b) below.
(b) Notwithstanding the foregoing, BarOn, at its option,
shall have the right to request that EA extend and renew this Agreement for a
period not to exceed one (1) year upon written notice given to EA at least one
hundred and twenty (120) days prior to the end of the Initial Term and any
subsequent term and EA shall use its best efforts to comply with such request.
EA shall, upon its receipt of a notice of extension from BarOn, use all
commercially reasonable efforts to retain the services of those employees who
are then employed by EA in connection with its performance of its obligations
hereunder and who are required by EA to enable it to fulfill its obligations
hereunder during such extension, but EA shall not be liable to BarOn for failure
to deliver Assemblies hereunder to the extent that EA's failure arises as a
consequence of the departure of any of such employees subsequent to the date
that is three (3) years from the date of this Agreement.
5.2. Insolvency Event. If either BarOn or EA (i) makes a general
----------------
assignment for the benefit of creditors or becomes insolvent; (ii) files an
insolvency petition in bankruptcy; (iii) petitions for or acquiesces in the
appointment of any receiver, trustee or similar officer to liquidate or conserve
its business or any substantial part of its assets; (iv) commences under the
laws of any jurisdiction any proceeding involving its insolvency, bankruptcy,
reorganization, adjustment of debt, dissolution, liquidation or any other
similar proceeding for the release of financially distressed debtors; or (v)
becomes a party to any proceeding or action of the type described above in (iii)
or (iv) and such proceeding or action remains undismissed or unstayed for a
period of more than sixty (60) days, then the other Party may by written notice
terminate this Agreement with immediate effect.
(9)
<PAGE>
5.3. Material Breach.
---------------
Each of BarOn and EA shall (except as provided in Section
7.1) have the right to terminate this Agreement for default upon the other's
failure to comply in any material respect with the material provisions of
Sections 5.2, 5.5 (right to terminate only on the part of BarOn) and 6 of the
Agreement.
5.4. Noncompliance. BarOn shall have the right to contract another
-------------
manufacturer any discontinue specific Purchase Order placed with EA or its
Affiliate and any related Purchase Order upon EA's failure to comply in any
material respect with any of the material terms and conditions of such Purchase
Order. Within a reasonable period after such noncompliance, BarOn shall give
written notice of its intention to seek another manufacturer, which notice shall
set forth the act of noncompliance which forms the basis for such Purchase Order
termination. If EA fails to correct such noncompliance to the reasonable
satisfaction of BarOn within thirty (30) days after receipt of the notification
or if the same reasonably cannot be corrected or remedied within thirty (30)
days, then BarOn immediately may terminate such Purchase Order without the
requirement of any payment to EA except with respect to payments required in
connection with Assemblies shipped by EA and accepted by BarOn prior to the date
of such termination, including, without limitation, any compensation,
reimbursement, damages, loss of prospective profit or anticipated sales,
expenditures or investments. With respect to any inventory related to such
Assembly, BarOn shall purchase such inventory according to terms and conditions
negotiated in good faith between EA and BarOn.
5.5. Covenant Not to Compete. EA or any affiliate therefor shall
-----------------------
not, directly or indirectly, own, manage, operate or control or participate in
the ownership, management, operation or control of, or become associated in any
capacity with, or have any financial interest in [or lend its name or any
combination thereof ] to, any enterprise, firm or corporation which is engaged
in the sale or distribution of Restricted Products (as hereinafter defined) .
"Restricted Products" shall mean products in competition with the
products currently being sold, or currently under development, by BarOn.
(10)
<PAGE>
5.6. In view of the intimate relations hereunder created between
the parties, the parties hereby specifically agree that all intellectual
property including any inventions, patents or patent applications developed by
EA (or any EA employee) whether alone or together with BarOn during the term of
this Agreement and for two (2) years following its termination, which may
enhance, improve or otherwise complement BarOn's products shall be assigned,
royalty free, to BarOn on a fully paid up basis.
5.7. Continuing Obligations. No termination of this Agreement,
----------------------
whether on the Expiration Date or otherwise, shall serve to terminate
obligations of the Parties hereto under the confidentiality provisions of
Section 6, and such obligations shall survive any such termination.
SECTION 6 Covenants of the Parties
- --------- ------------------------
6.1. Confidential Information.
------------------------
(a) All information concerning the Specifications, Quality
Assurance Standards and any other information relating to the design of the
Assemblies (the "BarOn Technical Information") shall hereafter be deemed to be
the sole and exclusive property of BarOn.
(b) All BarOn Technical Information and business information
relating to the conduct of BarOn's business which EA may receive from BarOn,
directly or indirectly, whether by oral or written communication or by
observation, shall be treated and regarded as confidential, proprietary and
trade secret information. EA shall keep this information strictly confidential
and secret and shall not divulge, communicate or transmit this information to
third parties, nor utilize this information in any commercial manner, except for
the limited purposes of producing Assemblies solely and exclusively for BarOn
under this Agreement. EA shall restrict disclosure of such information only to
such directors, officers and employees of EA who require such information in
connection with the performance of their duties. EA shall take whatever action
may be necessary, including legal proceedings, to prevent its directors,
officers and employees from using or disclosing such information without BarOn's
written permission except for the purposes
(11)
<PAGE>
specifically set forth herein. The foregoing disclosure and use
restrictions shall not apply to any portion of such information which:
(i) at the time of disclosure to EA is, or thereafter
becomes, through no violation of this Agreement, part of the
public domain;
(ii) corresponds in substance to that which has been
furnished to EA by others not under a then-binding
confidentiality obligation to BarOn;
(iii) corresponds to that which is independently
developed by EA for application in areas other than the
manufacture of Assemblies ; or
(iv) is required to be disclosed by law.
The obligations of confidentiality and limits on use of information shall
survive the termination or expiration of this Agreement.
(c) BarOn acknowledges that it may have access, through
observation, or otherwise, to certain specifications used by EA in the
production of products and other information relating to EA's customers, other
than BarOn (the "EA Technical Information"). All EA Technical Information and
business information relating to the conduct of EA's business concerning the
Assemblies, which is observed by, or is otherwise disclosed to, BArOn, its
employees, representatives and/or agents, shall be treated and regarded as
confidential, proprietary and trade secret information. BarOns shall keep this
information strictly confidential and secret and shall not divulge, communicate
or transmit this information to third parties, nor utilize this information in
any commercial manner. BarOn shall restrict disclosure of such information only
to such directors, officers and employees of BarOn who require such information
in connection with the performance of their duties; provided those duties are
related to this Agreement. BarOn shall take whatever action may be necessary,
including legal proceedings, to prevent its directors, officers and employees
from using or disclosing such information without EA's written permission except
for the purposes specifically set forth herein. The foregoing disclosure and use
restrictions shall not apply to any portion of such information which:
(12)
<PAGE>
(i) corresponds in substance to that developed or known
by BarOn before its observation by, or disclosure to, BarOn;
(ii) at the time of observation by, or disclosure to,
BarOn, is or thereafter becomes, through no violation of this
agreement, part of the public domain;
(iii) corresponds in substance to that which has been
furnished to BarOn by others not under a then-binding
confidentiality obligation to EA; or
(iv) is required to be disclosed by law.
The obligations of confidentiality and limits on use of such information shall
survive the termination or expiration of this Agreement.
(d) EA hereby acknowledges and certifies that, to the best
of its knowledge, all information concerning BarOn Technical Information,
Specifications, Quality Assurance Standards and any other business or technical
information relating to the Assemblies is
proprietary to BarOn.
The provision of this section 6.1 shall apply to EA's affiliated as well and EA
is undertaking full responsibility for a breach committed by any of its
affiliated.
6.2. Licenses. EA shall obtain and maintain all necessary federal,
--------
state and/or local Permits which may be required to be obtained by it in
connection with the performance of its obligations hereunder, and shall
otherwise comply with all applicable federal, state or local laws or regulations
applicable to its performance hereunder.
6.3. Governmental Filings. EA shall keep all records and reports
--------------------
required to be filed by it with governmental agencies in connection with the
performance of its obligations hereunder, and EA shall make its facilities and
Assemblies available at reasonable business hours for inspection by
representatives of the same.
6.4. Indemnification.
---------------
(13)
<PAGE>
(a) EA hereby agrees to defend, hold harmless and indemnify
BarOn in respect of any Damages incurred or suffered by BarOn as a consequence
of:
(i) all Liabilities, including any product liability,
resulting from any Claims asserted by a third person in
connection with the manufacture of the Assemblies or the testing
performed by EA;
(ii) any breach of any of EA's covenants herein; and
(iii) all Liabilities arising under the Environmental
Laws in connection with the manufacture and testing of the
Assemblies by EA.
(b) BarOn hereby agrees to defend, hold harmless and
indemnify EA with respect to any Damages incurred or suffered by EA as a
consequence of:
(i) all liabilities resulting from any Claim asserted
by a third person against EA that any product manufactured by EA
according to BarOn's specifications is in an alleged infringement
of such third parties patent rights.
(c) If BarOn or EA, or any of their successors or assigns
(each, an "Indemnified Party") believes that it has suffered or incurred any
Damages which are the subject of an indemnification obligation hereunder, it
promptly shall give notice to the other party, or its successors or assigns, as
the case may be (the "Indemnifying Party"), in writing, describing in reasonable
detail the facts and circumstances giving rise to the claim for indemnification,
the Damages suffered or incurred, including the amount of such Damages, if
known, or as estimated, the method of computation of such Damages, and the
provisions of this Agreement relating to such claim for indemnification. The
failure of an Indemnified Party to give notice in the manner provided herein
shall not relieve the Indemnifying Party of its obligations under this Section,
except to the extent that the Indemnifying Party actually is prejudiced by such
failure to give notice.
Upon receipt of a notice of a claim for indemnification, the Indemnifying
Party shall promptly pay to the Indemnified Party the amount of such
(14)
<PAGE>
damages in accordance with and subject to the provisions of this Section;
provided, however, that no such payment shall be due during any period in which
- -------- -------
the Indemnifying Party is contesting in good faith either its obligation to make
such indemnification or the amount of Damages payable, or both; and provided
--------
further that (i) in the case of estimated Damages, the Indemnifying Party shall
- -------
not be required to provide indemnification in excess of the amount of such
Damages as it reasonably determines are due from time to time and, (ii) in the
case of Damages resulting from third party Claims, the Indemnifying Party shall
not be required to provide indemnification until the Liability to the
third-party claimant has been determined finally by settlement or by the
judgment of a court of competent jurisdiction and all appeals therefrom have
been exhausted.
(d) If any Claim is instituted by a third party with respect
to which an Indemnified Party intends to, or may be entitled to, seek
indemnification hereunder, the Indemnified Party promptly shall notify the
Indemnifying Party of such Claim. The Indemnifying Party shall control, through
counsel of its choosing, the defense of any such third party Claim, and may
compromise or settle the same in its own discretion without consultation with or
consent of the Indemnified Party. The Indemnifying Party shall permit the
Indemnified Party to participate at its own expense in the defense of any such
Claim through counsel chosen by the Indemnified Party, subject, however, to the
right of the Indemnifying Party to control fully the defense of such Claim.
Notwithstanding anything contained herein to the contrary, however, BarOn shall
control, through counsel of its choosing, the defense of all third-party Claims,
regardless of whether they are brought against EA or BarOn, or both, which
allege or seek to enforce any limitation on, or which seek any Damages as a
consequence of, EA's or BarOn's use of any of the BarOn Technical Information;
provided that BarOn may compromise or settle the same at its own disposition.
- --------
BarOn shall permit EA to participate at its own expense in the defense of any
such Claim through counsel chosen by EA, subject, however, to the right of BarOn
to control fully the defense of such Claim.
(e) At no time may an Indemnifying Party assert as a defense
to its obligation to provide indemnification as set forth in this Section that
the Indemnified Party or any of its employees or agents, including any former
employees of the Indemnifying Party who may
(15)
<PAGE>
become employees of the Indemnified Party, had any knowledge of the matter to
which the claim for indemnification relates, or conducted any investigation
relating thereto prior to the date hereof, and each party hereby irrevocably
waives all such defenses.
SECTION 7 Miscellaneous Provisions
- --------- ------------------------
7.1. Entire Agreement; Amendment. This Agreement and the Exhibits
---------------------------
and Schedules appended hereto embody and constitute the entire understanding
between the Parties with respect to the transactions contemplated herein, and,
all prior agreements, understandings, representations and statements, oral or
written, are merged into this Agreement. Neither this Agreement nor any
provision hereof may be waived, modified, amended, discharged or terminated
except by an instrument signed by the Party against whom the enforcement of such
waiver, modification, amendment, discharge or termination is sought, and then
only to the extent set forth in such instrument.
7.2. Notices. All notices, demands, requests, or other
-------
communications which may be or are required to be given, served or sent by
either Party to the other Party pursuant to this Agreement, shall be in writing
and shall be hand delivered, sent by express mail or other overnight delivery
service or mailed by registered or certified mail, return receipt requested,
postage prepaid, or transmitted by telegram, telex or telecopy, addressed as
follows:
(i) if to EA:
Electronic Associates, Inc.
185 Monmouth Parkway
West Long Branch, New Jersey 07764
Telecopier No. (908) 571-0583
--------------
Telephone No. (908) 229-1100
--------------
Attn: Mr. Jules M. Seshens
with a copy (which shall not constitute notice) to its counsel:
Richard P. Jaffe, Esq.
Mesirov Gelman Jaffe
Cramer & Jamieson
(16)
<PAGE>
1735 Market Street
Philadelphia, PA 19103-7598
Telecopier No. (215) 994-1111
Telephone No. (215) 994- 1046
----
(ii) if to BarOn:
BarOn Technologies Ltd.
Gutwirth Science Park
Technion City,
Haifa 32000 Israel
Telecopier No. 011 972 4 228 881
Telephone No. 011 972 4 226 388
Attn: Dr. Ehud Baron
with a copy (which shall not constitute notice) to its counsel:
Steven G. Tepper, Esq.
Arnold & Porter
399 Park Avenue
New York, New York 10022
Telecopier No. (212) 715-1399
Telephone No. (212) 715-1140
Each party may designate by notice in writing a new address to which any notice,
demand, request or communication may thereafter be so given, served or sent.
Each notice, demand, request, or communication which shall be mailed, sent,
delivered, telefaxed or telexed in the manner described above, or which shall be
delivered to a telegraph company, shall be deemed sufficiently given, served,
sent or received for all purposes at such time as it is delivered to the
addressee (with the return receipt, the delivery receipt or, with respect to a
telex or telefax, the answerback being deemed conclusive evidence of such
delivery) or at such time as delivery is refused by the addressee upon
presentation.
7.3. Governing Law. This Agreement shall be governed by,
-------------
and construed in accordance with, the laws of Israel, without giving effect
to the conflicts of laws provisions thereof.
(17)
<PAGE>
7.4. Captions. The captions in this Agreement are inserted for
--------
convenience of reference only and in no way define, describe or limit the
scope or intent of this Agreement or any of the provisions hereof.
7.5. Benefit; No Third-Party Beneficiaries. This Agreement shall
-------------------------------------
be binding upon and shall inure to the benefit of the Parties hereto and their
permitted assigns. This Agreement is entered into solely for the benefit of the
Parties hereto, and the provisions of this Agreement shall be for the sole and
exclusive benefit of such Parties. Nothing herein contained shall be deemed to
create any third party beneficiaries or confer any benefit or Rights on or to
any Person not a party hereto, and no Person not a party hereto shall be
entitled to enforce any provisions hereof or exercise any rights hereunder.
7.6. Construction. As used in this Agreement, the masculine shall
------------
include the feminine and neuter, the singular shall include the plural and the
plural shall include the singular, as the context may require. This Agreement
shall be deemed to have been drafted by both EA and BarOn and shall not be
construed against either Party as the drafts person hereof.
7.7. Waiver. Neither the waiver by either of the parties hereto of
------
a breach of or a default under any of the provisions of this Agreement, nor the
failure of either of the Parties, on one or more occasions, to enforce any of
the provision of this Agreement or to exercise any right or privilege hereunder
shall thereafter be construed as a waiver of any subsequent breach or default of
a similar nature, or as a waiver of any such provisions, Rights, or privileges
hereunder.
7.8. Non-Business Days. If any obligation of a party hereto falls
-----------------
due on a Saturday, Sunday or a legal holiday recognized by the United States
Government or the State of New York, then such obligation shall automatically be
postponed until the next business day.
7.9. Counterparts. To facilitate execution, this Agreement may
------------
be executed in any number of counterparts, each of which shall
constitute an original but together shall be construed as one and same
document.
(18)
<PAGE>
7.10. Exhibits and Schedules. Each Exhibit hereto is
----------------------
incorporated by reference and made a part of this Agreement.
7.11. Limitations on Assignment. This Agreement shall not be
-------------------------
assignable by either Party hereto, whether by written instrument or by operation
of law, without the written consent of the other Party; provided that BarOn may
assign this Agreement in whole or in part to one or more separate corporations
formed by BarOn or any of its Affiliates for the purpose of performing any
obligations of BarOn hereunder, it being understood that such assignment shall
become effective only when EA has received written notice of such assignment
from BarOn together with a written confirmation by the assignee, reasonably
satisfactory in form and substance to EA, that such assignee agrees to, and
agrees to be bound by, all of the terms and conditions of this Agreement. Upon
the effectiveness (i) of any such assignment by BarOn, the assignee shall be
deemed to be "BarOn" for all purposes hereunder with the same effect as if it
were the original signatory hereto; provided, however, that no such assignment
-------- -------
shall, without the written consent of EA hereto, relieve BarOn from any of its
liabilities hereunder.
7.12. Survival of Representations. Each of the representations and
---------------------------
warranties made herein shall, for a period of [three (3) years], survive the
expiration or earlier termination of this Agreement and any and all
investigations and inquiries by BarOn and EA made prior to such expiration or
termination in connection with this Agreement and the transactions contemplated
hereby; provided, however, that the expiration of such period shall have no
-------- -------
effect on any action or proceeding that is pending as of the date of such
expiration.
7.13. No Joint Venture, Etc. Nothing contained herein shall be
---------------------
deemed to create any joint venture or partnership between the Parties hereto or
a license granted by BarOn for any of its technology, and, except as is
expressly set forth herein, neither Party shall have any right by virtue of this
Agreement to bind the other Party in any manner whatsoever.
7.14. Severability. If any provision of this Agreement is held
------------
to be illegal, invalid, or unenforceable under present or future laws effective
while this Agreement remains in effect, the legality, validity and
enforceability of the remaining provisions shall not be affected thereby,
(19)
<PAGE>
and in lieu of each such illegal, invalid or unenforceable provision there shall
be added automatically as a part of the document a provision that is legal,
valid, and enforceable, and is similar in terms to such illegal, invalid or
unenforceable provision as may be possible while giving effect to the benefits
and burdens for which the parties have bargained hereunder.
7.15. Dispute Resolution. The Parties shall follow these
------------------
dispute-resolution processes in connection with all disputes, controversies or
claims, whether based on contract, tort, statute, fraud, misrepresentation or
any other legal theory (hereinafter collectively "Disputes"), except as
otherwise noted, arising out of or relating to this Agreement:
(i) the Parties will attempt to settle all Disputes
through good-faith negotiations;
(ii) if those attempts fail to resolve the Dispute to
the satisfaction of both Parties within forty-five (45) days of the
date of initial demand for negotiation, then each Party shall
nominate a senior officer of the rank of Vice President or higher
as its representative. These representatives shall meet in person
and alone (except for one assistant) and shall attempt in good
faith to resolve the Dispute. This meeting shall be a required
prerequisite before either Party may seek resolution of the Dispute
as provided below; and
(iii) where the Parties cannot resolve the Dispute to
the reasonable satisfaction of both Parties after the meeting
required under paragraph (ii) above, the Dispute shall be settled
by binding arbitration conducted in Camden, New Jersey in
accordance with the then-current Commercial Arbitration Rules of
the American Arbitration Association ("AAA"). Any such arbitration
shall be heard by a panel of three arbitrators, one chosen by
BarOn, one by EA and the third chosen by the arbitrators appointed
by BarOn and EA. A majority decision of two of the three
arbitrators shall be deemed sufficient for judgment to be rendered.
Each Party shall bear its own expenses, and the Parties shall
equally share the filing and other administrative fees of the AAA
and the expenses of the arbitrators. Any award of the arbitrators
shall be in writing, shall
(20)
<PAGE>
state the reasons for the award (including any findings of fact and
conclusions of law) and shall explain the breakout of any damages
awarded. Judgment upon an award may be entered in any court having
competent jurisdiction. Notwithstanding the foregoing provisions of
this paragraph (iii), but subject to paragraphs (i) and (ii) of
this Section 7.15, either Party may apply to a court of competent
jurisdiction for injunctive or other equitable relief without
breach of this Arbitration provision.]
7.16. Waiver of Specific Performance. Accordingly, EA waives
------------------------------
its right to seek specific performance or injunctions to prevent BarOn
from manufacturing or have the unit being manufactured for it by a third
party.
(b) To the fullest extent permitted by applicable law, BarOn hereby
irrevocably and unconditionally agrees that any suit, action or
proceeding with respect to this Agreement, or any action or
proceeding to execute or otherwise enforce any judgment in respect
of a breach thereof, brought by BarOn against EA or any of its
property shall be brought in the United States, and by execution
and delivery of this Agreement, BarOn irrevocably submits to the
nonexclusive jurisdiction of such court. In addition, [BarOn hereby
irrevocably waives, to the fullest extent permitted by law, any
objection which it may now or hereafter have to the laying of venue
in any suit, action or proceeding arising out of or relating to
this Agreement, brought in any such court, and hereby irrevocably
waives any claim that any such suit, action or proceeding brought
in any such court has been brought in an inconvenient forum.]
7.17. Jurisdiction. (a) To the fullest extent permitted by
------------
applicable law, EA hereby irrevocably and unconditionally agrees that any suit,
action or proceeding with respect to this Agreement, or any action or proceeding
to execute or otherwise enforce any judgment in respect of a breach thereof,
brought by EA against BarOn or any of its property shall be brought in Israel,
and by execution and delivery of this Agreement, EA irrevocably submits to the
exclusive jurisdiction of such court.
(21)
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
as of the date first above written.
ELECTRONICS ASSOCIATION, INC.
By: /s/ JULES SESHENS
----------------------------
BARON TECHNOLOGIES, LTD.
By: /s/ EHUD BARON
----------------------------
(22)
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENT OF INCOME FOR THE YEARS ENDED DECEMBER 31, 1994 AND THE
CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1994 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> DEC-31-1994
<CASH> 6,157
<SECURITIES> 0
<RECEIVABLES> 6,165
<ALLOWANCES> (207)
<INVENTORY> 4,178
<CURRENT-ASSETS> 16,969
<PP&E> 7,472
<DEPRECIATION> (4,753)
<TOTAL-ASSETS> 22,845
<CURRENT-LIABILITIES> 12,603
<BONDS> 2,998
<COMMON> 20,117
0
0
<OTHER-SE> (12,873)
<TOTAL-LIABILITY-AND-EQUITY> 22,845
<SALES> 30,539
<TOTAL-REVENUES> 30,539
<CGS> 27,759
<TOTAL-COSTS> 34,750
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 662
<INCOME-PRETAX> (4,784)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,784)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,784)
<EPS-PRIMARY> $(.95)
<EPS-DILUTED> $(.95)
</TABLE>
