SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 1, 1995 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
Non-Applicable
Former name, former address and former fiscal year, if changed since last report
----------------------------------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----------------------------------------------------------------
As of April 1, 1995, there were 10,483,792 outstanding shares of the
Registrant's common stock.
<PAGE>
PART I - FINANCIAL INFORMATION
- ------------------------------
ITEM 1. FINANCIAL STATEMENTS
ELECTRONIC ASSOCIATES, INC. AND SUBSIDIARIES
Consolidated Condensed Balance Sheet
(UNAUDITED)
(thousands of dollars)
<TABLE>
<CAPTION>
April 1, December 31,
1995 1994
--------------------- -------------------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents.......................................... $ 33 $ 6,157
Receivables, less allowance of $327 in 1995 and
$207 in 1994 for doubtful accounts................................. 11,933 5,958
Inventories........................................................ 11,059 4,178
Prepaid expenses and other assets.................................. 952 676
--------------------- -------------------------
Total current assets............................... 23,977 16,969
--------------------- -------------------------
Fixed assets.......................................................... 10,354 7,472
Less accumulated depreciation...................................... (5,215) (4,753)
--------------------- -------------------------
5,139 2,719
--------------------- -------------------------
Investment in affiliates............................................... 669 2,745
--------------------- -------------------------
Intangible assets...................................................... 14,512 --
Less accumulated amortization...................................... (235) --
--------------------- -------------------------
14,277 --
--------------------- -------------------------
Other Assets.......................................................... 654 412
Note receivable....................................................... 1,016 --
--------------------- -------------------------
$ 45,732 $ 22,845
===================== =========================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term liabilities........................... $ 9,843 $ 5,933
Accounts payable................................................... 12,939 4,711
Accrued expenses................................................... 2,472 1,959
--------------------- -------------------------
Total current liabilities.......................... 25,254 12,603
--------------------- -------------------------
Long-Term liabilities:
Long-term debt..................................................... 1,431 690
Other long-term liabilities........................................ 2,680 2,308
--------------------- -------------------------
Total long-term liabilities........................ 4,111 2,998
--------------------- -------------------------
Total liabilities.................................. 29,365 15,601
--------------------- -------------------------
Shareholders' Equity:
Common Stock....................................................... 37,838 20,117
Accumulated deficit since January 1, 1986.......................... (20,996) (12,398)
--------------------- -------------------------
16,842 7,719
Less common stock in treasury, at cost............................. (475) (475)
--------------------- -------------------------
Total Shareholders' Equity ........................ 16,367 7,244
--------------------- -------------------------
$45,732 $22,845
===================== =========================
</TABLE>
The accompanying notes are an integral part of these
consolidated condensed financial statements
(2)
<PAGE>
ELECTRONIC ASSOCIATES, INC. AND SUBSIDIARIES
Consolidated Condensed Statement of Operations
(UNAUDITED)
(thousands of dollars, except per share data)
<TABLE>
<CAPTION>
Quarter Ended
-----------------------------------------------------
April 1, 1995 March 31, 1994
<S> <C> <C>
Sales............................................................. $ 19,056 $ 5,377
--------------------- -------------------------
Cost of sales..................................................... 18,950 5,062
Selling, general and administrative expenses...................... 2,158 851
Purchased research and development (Note 3)....................... 6,012 --
--------------------- -------------------------
Total......................................................... 27,120 5,913
--------------------- -------------------------
Loss from operations............................................... (8,064) (536)
Interest expense................................................... 328 125
Interest income.................................................... (35) --
Other expense ..................................................... 241 --
--------------------- -------------------------
Net loss........................................................... $(8,598) $ (661)
===================== =========================
Loss per common share.............................................. $ (0.84) $(0.19)
--------------------- -------------------------
Average common shares outstanding.................................. 10,241,278 3,407,831
===================== =========================
</TABLE>
The accompanying notes are an integral part of these
consolidated condensed financial statements
(3)
<PAGE>
ELECTRONIC ASSOCIATES, INC. AND SUBSIDIARIES
Consolidated Statement of Shareholders' Equity
For the Three Months Ended April 1, 1994
(UNAUDITED)
(in thousands of dollars)
<TABLE>
<CAPTION>
Common Stock Treasury Stock Accumulated Deficit
------------ -------------- Since
Shares Amount Shares Amount January 1, 1986
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1994 8,326,056 $ 20,117 (218,476) $ (475) $ (12,398)
Net loss (8,598)
Issuance of stock:
Tanon acquisition 1,538,462 14,460
BarOn investment 127,592 1,000
Exercise of stock options 326,297 527
Exercise of Class C warrants 383,861 1,734
-----------------------------------------------------------------------------------------------
Balance, April 1, 1995 10,702,268 $ 37,838 (218,476) $ (475) $ (20,996)
===============================================================================================
</TABLE>
The accompanying notes are an integral part of these
consolidated condensed financial statements.
(4)
<PAGE>
ELECTRONIC ASSOCIATES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
(UNAUDITED)
(thousands of dollars)
<TABLE>
<CAPTION>
Quarter Ended
-----------------------------------------------------------
April 1, 1995 March 31, 1994
--------------------- ----------------------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net loss ........................................................ $(8,598) $(661)
Adjustment to reconcle net income (loss) to net
cash provided (used) by operating activities:
Depreciation and amortization.................................... 697 223
Purchased research and development............................... 6,012 --
Equity in loss of affiliate...................................... 187 --
Provision (credit) for losses on accounts receivable............. 20 (11)
Cash provided (used) by changes in:
Receivables.................................................... 2,585 89
Inventories.................................................... (2,099) (576)
Prepaid expenses & other assets................................ 814 19
Accounts payable and accrued expenses.......................... 845 151
Accrued excess leased space costs.............................. (107) (68)
Other operating items - net.................................... (414) 45
--------------------- -------------------
Operating cash flow from continuing operations................... 8,540 (827)
Operating cash flow from discontinued operations................. -- 53
--------------------- -------------------
Net cash used by operating activities ............................. (58) (774)
--------------------- -------------------
Cash flows from Investing Activities:
Capital expenditures sales, net.................................. (758) (40)
Investment in Affiliates ........................................ (5,325) --
Cash acquired in purchase of Tanon .............................. 890 --
Proceeds from the sale of discontinued operations ............... 200 200
-------------------- -----------------
Net cash provided/(used) by investing activities .................. (4,993) 160
--------------------- -------------------
Cash flows from financing activities:
Net borrowings/(repayments) under line of credit ................ (2,225) 48
Repayment of debt in connection with acquisition ................ -- (9)
Principal repayments of long-term debt .......................... (109) (264)
Proceeds from the exercise of stock options or rights ........... 527 --
Issuance of note receivable in connection with acquisition....... (1,000) --
Net proceeds from sale of common stock (private placement) and
exercise of warrants........................................... 1,734 957
--------------------- -------------------
Net cash provided by/(used for) financing activities ............ (1,073) 732
--------------------- -------------------
Net increase/(decrease) in cash and cash equivalents .............. (6,124) 118
Cash and cash equivalents at beginning of period .................. 6,157 64
--------------------- -------------------
Cash and cash equivalents at end of period ........................ $ 33 $ 182
===================== ===================
(5)
<PAGE>
Supplemental disclosure of cash flow information:
Cash paid during the period for interest........................ $ 328 $ 110
====================== ===================
Noncash investing and financing activities:
Acquisition of business
Fair value of assets acquired, excluding cash .............. $28,960
Liabilities assumed......................................... (15,390)
Common stock and options issued ............................ (14,460)
-------
Cash acquired .......................................... $ 890
=======
Additional common stock valued at $1 million was issued in
connection with the purchase of a minority interest.
</TABLE>
The accompanying notes are an integral part of these
consolidated condensed financial statements
(6)
<PAGE>
ELECTRONIC ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
(1) Basis of Presentation
---------------------
The condensed financial statements included herein have been prepared by
Electronic Associates, Inc. ("EAI" or the "Company"), without audit,
pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included
in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such
rules and regulations, although the Company believes that the disclosures
are adequate to make the information presented not misleading. These
condensed financial statements should be read in conjunction with the
financial statements and the notes thereto included in the Company's
latest annual report on Form 10-K, as amended on Form 10-K/A, for the year
ended December 31, 1994. These condensed financial statements reflect, in
the opinion of management, all adjustments (consisting only of normal
recurring adjustments) necessary to present fairly the results for the
interim periods. Results of operations for the interim period ended April
1, 1995 are not necessarily indicative of results of operations expected
for the full year.
The Company operates on a 52 week year, with each fiscal week and quarter
ending on Saturday, except for the fourth quarter which ends on December
31.
Certain amounts and captions in the 1994 financial statements have been
reclassified in a manner consistent with the presentation of the 1995
financial statements.
Loss per share for the three months ended April 1, 1995 was computed based
on the weighted average number of common shares outstanding. Shares
issuable upon the exercise of stock options and warrants have not been
included in per share computations, because their impact would have been
antidilutive in each period.
(2) Operations and Liquidity
------------------------
At the end of fiscal year 1994, the Company was in the process of
redeeming the outstanding Class C Warrants which were not exercised upon
the Company's call for redemption of such warrants. Total proceeds
received by the Company from the exercise of the Class C Warrants was $6.6
million, of which $4,864,000 was received in December 1994 and net
proceeds of $1,734,000 representing the exercise of Class C Warrants to
purchase 383,861 shares was received in January 1995.
On April 14, 1995, the Company completed the sale of 525,000 shares of
common stock at $5.85 per share for net proceeds of approximately
$3,000,000 in an offering exempt from the registration provisions under
the Securities Act of 1933, as amended. The number of shares issued in
this sale may increase without additional proceeds to the Company 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 closing is less than
$5.85 per share.
The Company has incurred significant losses and had negative cash flows
from operations in each of the last four years and in the quarter ended
April 1, 1995. The Company is implementing measures to reduce expenses,
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. ("Tanon"), and
reduction of certain other administrative expenses, which the Company
expects to complete in the second quarter of 1995. The Company was
successful in raising approximately $11,800,000 of capital during 1994 and
approximately $5,300,000 since the beginning of 1995 through private
placements and the exercise of warrants and options. Although the
Company's projections indicate that operating losses and negative cash
flow
(7)
<PAGE>
ELECTRONIC ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Cont'd.)
(UNAUDITED)
from operations will continue during 1995, management believes that its
available cash, together with funds available under its existing lines of
credit, will enable the Company to meet its obligations in the normal
course of business through December 31, 1995.
The Company's business plan includes making certain additional investments
with respect to Tanon and BarOn Technologies Ltd. ("BarOn") as a result of
the acquisitions made in January 1995 (see note 3), which may require,
among other things, additional cash resources in excess of those presently
available. The Class A and Class B warrants issued in the February Private
Placement, 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.
(3) Acquisitions
------------
On January 4, 1995, pursuant to an Agreement and Plan of Reorganization
dated December 12, 1994 (the "Tanon Acquisition Agreement"), the Company
acquired Tanon (the "Tanon Acquisition"). The Company reflected the
transaction as a purchase for accounting purposes and, accordingly, the
results of operations of Tanon have been included in the consolidated
financial statements of the Company since January 4, 1995. Tanon was
merged with a newly-formed wholly-owned subsidiary of the Company and the
Company issued 1,538,462 shares of its common stock with an appraised
value of $13,077,000 for the remaining outstanding shares of common stock
of Tanon. In addition, the Company granted to certain option holders of
Tanon in exchange for their options to purchase Tanon capital stock,
options to purchase approximately 201,000 shares of the Company's common
stock at a weighted average exercise price of $1.05 per share with an
appraised value of $1,383,000. As further contemplated by the Tanon
Acquisition Agreement (a) the Company invested $2,000,000 in Tanon and (b)
the Company has agreed to use its best efforts to invest in, or loan to,
Tanon, up to an additional $5,000,000, subject to receipt by the Company
of an acceptable operating plan. In connection with the merger, the
Company loaned Mr. Spalliero, the President of the Company and Chief
Operating Officer of Tanon (formerly the Chairman and President of Tanon
prior to the Tanon Acquisition), $1,000,000 for a 30-month term, with
interest accruing at the applicable Federal rate, and due, together
with principal, at the end of the 30-month term. Such loan is
non-recourse and is secured solely with 192,300 shares of common stock of
the Company acquired by Mr. Spalliero upon consummation of the Tanon
Acquisition Agreement.
In addition, upon closing, Mr. Spalliero and certain other executives of
Tanon received certain compensation, incentives and benefits.
Specifically, the Company granted to Mr. Spalliero at closing, incentive
and non-incentive stock options to acquire an aggregate of 350,000 shares
of common stock of the Company at an exercise price equal to fair market
value with respect to 305,000 shares and 110% of fair market value with
respect to 45,000 shares, which options will vest proportionately over
three years. Mr. Spalliero also received a cash bonus or $300,000 at
closing and will be eligible to earn a cash bonus of up to $750,000, such
bonus to be paid (to the extent earned based upon Tanon meeting certain
goals) in equal installments during 1996, 1997 and 1998.
(8)
<PAGE>
ELECTRONIC ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Cont'd.)
(UNAUDITED)
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.
A summary of the Purchase Price and the resultant Intangibles follows.
<TABLE>
<S> <C> <C>
Cash investment in Tanon...................................................... $ 2,400,000
Appraised value of 1,538,462 shares of common stock of the
Company exchanged for 100% of the outstanding shares of Tanon
common stock................................................................ 13,077,000
Appraised value of options to acquire 201,000 shares of the
Company's common stock exchanged for options to acquire shares
of Tanon common stock....................................................... 1,383,000
Estimated fees, expenses and other accruals................................... 988,000
--------------
TOTAL......................................................... $17,848,000
==============
Allocated as follows:
Historical Stockholders' Equity of Tanon ..................................... $ 3,687,000
Adjustments to acquired assets and liabilities to reflect
estimated fair values:
Equipment..................................................................... 66,000
Deferred Income Taxes......................................................... (417,000)
Intangible Assets:
Customer relationship....................................................... $1,740,000
Excess purchase price over net assets acquired.............................. 12,772,000
-----------
Total Intangible Assets..................................................... 14,512,000
---------------
TOTAL....................................................................... $17,848,000
===============
</TABLE>
(9)
<PAGE>
ELECTRONIC ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Cont'd.)
(UNAUDITED)
During the quarter ended April 1, 1995, the Company charged operations
$235,000 representing the amortization of intangible assets arising from
the Tanon Acquisition. The intangible assets are comprised of $1,740,000
representing the value of customer relationships and excess of purchase
price over net assets acquired of $12,772,000, which are being amortized
over six years and twenty years, respectively.
On January 16, 1995, the Company acquired (i) 25.01% of the ordinary
shares of BarOn for consideration with an estimated value of $6,700,000
comprised of a $4,000,000 capital contribution to BarOn ($1,500,000 cash
and the cancellation of BarOn's obligation to repay the Company $500,000
pursuant to a previous business loan arrangement between the Company and
BarOn at closing, and $1,000,000 cash and 127,592 shares of common stock
of the Company with an estimated value of $1,000,000 to be delivered four
months from closing), and $2,700,000 paid to various shareholders of BarOn
and (ii) an option to acquire an additional 8.33% of the ordinary shares
of BarOn for $2,000,000 in cash and 255,183 shares of common stock of the
Company with an estimated value of $2,000,000 (the "BarOn Investment").
The option is exercisable on the earlier of BarOn's reaching certain
development milestones or September 30, 1995. In addition, the Company has
certain rights of first refusal to purchase additional equity in BarOn,
but not to exceed 49% of BarOn's issued and outstanding ordinary stock.
The Company has accounted for this transaction as a purchase of a minority
interest using the equity method of accounting and, accordingly, the
Company's investment in BarOn and 25.01% equity interest in the results of
BarOn for BarOn's first quarter of 1995 resulted in a charge of $187,000
for the Company, which has been included in the consolidated results of
the Company for the quarter ended April 1, 1995.
The following is BarOn's Comparative Condensed Statement of Operations for
the Quarters Ended April 1, 1995 and March 31, 1994:
<TABLE>
<CAPTION>
Quarter Ended
-------------
April 1, 1995 March 31, 1994
------------- --------------
<S> <C> <C>
Research and Development Costs $490,314 $95,682
General and Administrative Expenses 254,292 69,778
Interest Expense 3,044 __
-------------------------- -------------------------
Net Loss $747,650 $165,460
========================== =========================
</TABLE>
The excess of the purchase price over the estimated fair value of EAI's
25.01% equity interest in the net assets of BarOn in the amount of
$6,012,000 has been determined to be in-process research and development
with no alternative future use and, accordingly, was charged to expense in
the first quarter of fiscal 1995. This charge has not been reflected in
the unaudited pro forma summary detailed below. The purchase price
allocation for both acquisitions is based on preliminary estimates of the
fair value of the net assets acquired and is subject to adjustment as
additional information becomes available during fiscal 1995. The pro forma
loss per common share for the quarter ended March 31, 1994 reflects the
issuance of 1,239,130 shares of common stock of the Company to finance the
BarOn Investment as if such shares had been issued on January 1, 1994.
These shares are based on a portion of the Class C Warrants exercised in
December, 1994 at $4.60 per warrant (note 2) to arrive at proceeds of
$5,700,000 necessary to finance the BarOn Investment.
(10)
<PAGE>
ELECTRONIC ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Cont'd.)
(UNAUDITED)
The following unaudited pro forma summary presents the consolidated
results of operations as if the Tanon Acquisition and BarOn Investment
occurred on January 1, 1994 and does not purport to be indicative of what
would have occurred had the acquisitions actually been made as of such
date or of results which may occur in the future.
For the Quarter ended March 31, 1994
------------------------------------
(thousands of dollars, except per share data)
Sales $16,730
Net Loss (882)
Loss Per Common Share $(0.14)
(4) Restructuring
-------------
In anticipation of the Tanon Acquisition, the Company determined in the
fourth quarter of 1994 that it would be necessary to restructure its
operations in order to reduce the operating expense from redundant
activities and achieve greater operating efficiency from the combined
operations subsequent to the Tanon Acquisition. As a result, a provision
for restructuring in the amount of $2,400,000 was established in the
fourth quarter of 1994. In connection therewith, the Company determined to
close its Southwest operations in Tucson, Arizona and Nogales, Sonora,
Mexico in order to reduce the operating expenses in place to support its
existing sales base. Additionally, the Company reduced indirect
manufacturing and sales, general and administrative staff in its New
Jersey facility during the first quarter of 1995. The combined termination
costs for these activities in the first quarter was approximately
$250,000. The Company believes that these actions, together with remaining
actions to reduce redundant operations in the second quarter of 1995, will
eliminate duplicate expenses and improve operating efficiencies for
materials procurement and management. However, no assurance can be given
that such effects will be experienced by the Company as a result thereof.
(5) Lines of Credit
---------------
The Company maintains an asset based credit facility which is described in
detail in note 5, "Notes Payable and Line of Credit" of Notes To
Consolidated Financial Statements at Item 8 of the Company's latest Annual
Report on Form 10-K, as amended on Form 10-K/A, for the year ended
December 31, 1994. At April 1, 1995, the Company had $4,324,000
outstanding under this credit facility and had $62,000 available for
borrowing. There are two covenants with which the Company must comply
under this facility. Working capital, as defined, must exceed $750,000 and
tangible net worth must exceed negative $500,000. The Company was in
compliance with both covenants as of April 1, 1995.
Tanon maintains a separate revolving line of credit with a commercial bank
that provides for short-term borrowings up to $5.5 million based on
eligible accounts receivable and inventories. At April 1, 1995,
(11)
<PAGE>
ELECTRONIC ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Cont'd.)
(UNAUDITED)
$5,217,000 was outstanding under this line and $162,000 was available for
borrowing under the line. This line bears interest at prime plus 1.5% and
is due on demand. The credit agreement pertaining to this line of credit
restricts Tanon from entering into certain transactions and contains
covenants regarding the maintenance of working capital, minimum net worth
and debt-to-equity ratios, together with minimum profitability
requirements. The covenants, together with Tanon's comparative performance
at April 1, 1995, were: maintaining working capital in an amount greater
than deficit $150,000, for which Tanon achieved $1,021,000; achieving
tangible net worth of not less than $3 million, for which Tanon achieved
$2,836,000; achieving a quick ratio of .50 to 1, for which Tanon achieved
.58 to 1; achieving a debt to equity ratio of less than 5.50 to 1, for
which Tanon achieved 5.1 to 1; and, maintaining minimum quarterly
profitability of $20,000, which Tanon did not achieve. Tanon has obtained
a waiver for the covenants which were not met.
(12)
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations
- ---------------------
On January 4, 1995, the Company acquired Tanon Manufacturing, Inc.
("Tanon"), a privately owned contract electronic manufacturing firm with
operations located in Fremont, California. The acquisition has been reported as
a purchase for accounting purposes and, accordingly, the results of operations
of Tanon are included with those of the Company from January 4, 1995 forward.
Tanon's manufacturing services consist primarily of the assembly of printed
circuit boards, the manufacturing and assembly of integrated electro-mechanical
systems and related engineering support. For a more thorough discussion of this
transaction, see "Liquidity and Capital Resources" below.
On January 16, 1995, the Company acquired a 25.01% equity interest in
BarOn Technologies Ltd. ("BarOn"), a privately-owned Israeli corporation based
in Haifa, Israel. BarOn is a development stage company engaged in the research
and development of a computer input device that can directly digitize
handwriting in a variety of languages, from any surface. The investment in BarOn
has been accounted for as a purchase of a minority interest using the equity
method of accounting, and, accordingly, the Company's investment in BarOn and
25.01% equity interest in the results of BarOn are included in the consolidated
results of the Company from January 16, 1995 forward. For a more thorough
discussion of this transaction, see "Liquidity and Capital Resources" below.
During the first quarter of 1995, the Company's sales increased, its cost
of sales increased, both in total values and as a percentage of sales, and
selling, general and administrative expenses increased in total value but
decreased as a percentage of sales. The Company had a loss from operations of
$8,064,000 for the first quarter of 1995, which included a non-recurring charge
of $6,012,000 representing the write-off of in-process research and development
resulting from its investment in BarOn. This compared with a loss from
operations of $536,000 for the first quarter of 1994.
The increase in sales to $19,056,000 in the first quarter of 1995 resulted
primarily from the additional sales generated by Tanon, which had sales of
$11,654,000 in the first quarter. Sales from the Company's prior existing
operations increased to $7,402,000 in the first quarter of 1995 from $5,377,000
in the first quarter of 1994, which increase resulted primarily from an increase
in sales to its existing customer base. A large portion of such increase
resulted from greater sales to one customer for whom the sales increment
consisted substantially of materials and materials handling services. Such
material-related sales are generally provided at a lower profit margin within
the industry and, as a result, are less profitable than manufacturing sales
which consist more of labor services. Sales of $11,654,000 for Tanon in the
first quarter of 1995 increased from sales of $11,353,000 in the same quarter of
1994 which reflects the loss of approximately $1.5 million in revenue from two
customers who terminated their relationship with Tanon during the quarter which
was offset by the growth in sales to Tanon's existing customer base.
Cost of sales increased to $18,950,000 in the first quarter of 1995 from
$5,062,000 in the same quarter of 1994. Cost of sales increased, as a percentage
of revenue to 99.4% in the first quarter of 1995 compared with 94.1% in the same
quarter of 1994. The increase in the cost of sales as a percentage of revenue
resulted primarily from the increase in materials cost for the above mentioned
customer with whom the Company has expanded its materials handling services,
combined with a one-time price reduction in sales of material by Tanon to one of
its existing customers which was negotiated in response to competitive pricing
pressures.
Sales, general and administrative expenses increased to $2,158,000 in the
first quarter of 1995 from $851,000 in the same quarter of 1994. The increase in
the level of sales, general and administrative expenses was related to the
addition of the Tanon operations, the amortization of approximately $235,000 of
intangibles resulting from the Tanon Acquisition, the payment of consulting fees
for several directors, and the elimination of salary reductions for employees of
the Company which were in effect since the first quarter of 1994. Selling,
general and administrative
(13)
<PAGE>
expenses declined as a percentage of revenue to 11.3% in the first quarter
of 1995 from 15.8% in the same quarter in 1994 primarily because the increase in
sales exceeded the rate of the increase in selling, general and administrative
expenses. The Company has taken action to reduce the level of selling, general
and administrative expenses, which is discussed below.
During the first quarter of 1995, the Company determined that the amount
of the purchase price in excess of the estimated fair value of the 25.01% equity
interest in BarOn acquired by the Company represented in-process research and
development with no alternative future use. Accordingly, the estimated value
associated with such purchased research and development of $6.012 million was
recorded as research and development expense in the first quarter of 1995.
In anticipation of the Tanon Acquisition, the Company determined in the
fourth quarter of 1994 that it would be necessary to restructure its operations
in order to reduce the operating expenses associated with redundant activities
and to achieve greater operating efficiency from combined operations subsequent
to the Tanon Acquisition. As a result, a provision for restructuring in the
amount of $2.4 million was established in the fourth quarter of 1994. Pursuant
to such determination, during the first quarter of 1995, the Company began
taking steps to close or sell its Southwest operations in Tucson, Arizona and
Nogales, Mexico in order to eliminate the operating expenses associated with
such facilities. All operations which were supporting the Company's sales base
out of the Tucson and Nogales locations are being transferred to the Tanon
facility in Fremont, California. Such closures are expected to be completed in
the second quarter of 1995. Additionally, the Company reduced indirect
manufacturing and sales, general and administrative staff in its New Jersey
facility during the first quarter of 1995. The combined termination costs for
these activities in the first quarter was approximately $250,000. The Company
believes that these actions, together with remaining actions to reduce redundant
operations in the second quarter of 1995, will eliminate duplicate expenses and
improve operating efficiencies for materials procurement and management.
However, no assurance can be given that such effects will be experienced by the
Company as a result thereof.
Consolidated backlog at April 1, 1995 was $33,536,000.
Liquidity and Capital Resources
- -------------------------------
Net cash used by operations of $58,000 in the first quarter of 1995
decreased by $716,000 from cash used in operations of $774,000 in the same
quarter of 1994, resulting primarily from a decline in the consolidated balance
of accounts receivable, together with those expenses which did not use cash
consisting of depreciation, amortization, purchased research and development,
and equity in loss of affiliate. Liquidity, as measured by cash and cash
equivalents, decreased to $33,000 at April 1, 1995 from $6,157,000 at
December 31, 1994. Liquidity as measured by working capital decreased to a
deficit of $1,277,000 at April 1, 1995 compared to $4,366,000 at
December 31, 1994. The decrease in working capital resulted primarily from the
amounts paid by the Company in connection with the consummation of the Tanon
Acquisition and BarOn Investment in January 1995 as are more fully discussed
below. The Company's ability to generate internal cash flows results primarily
from the sale of material and labor elements of its contract electronic
manufacturing services. In the first quarter of 1995, revenue from such
services increased $13,679,000 from $5,377,000 in the same quarter of 1994,
primarily resulting from the acquisition of Tanon. Consolidated accounts
receivable declined by $2,585,000 in the first quarter of 1995 reflecting
the collection of receivables at a rate greater than sales were generated
in the quarter. The balance of accounts receivable in the first quarter
of 1995 includes a receivable from 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 the
management of this customer. To date, the receivable balance has been
paid in accordance with the terms established with the customer. Also,
during the quarter, one of the Company's major customers requested a
delay in payment terms in order to assist the customer as it adjusted
the sale of its products from distribution to sales directly to original
equipment manufacturers; the balance is being paid in accordance with
the terms established with this customer. Consolidated inventory
increased by $2,099,000 during the quarter largely reflecting: the
increase in materials purchasing near the end of the quarter for the
manufacturing services to be provided for two new customers; and a delay
in shipments at the request of one customer for manufactured products
which have been shipped in the second quarter. Management of the Company
constantly evaluates inventory levels on hand with respect to orders
placed by customers and, if necessary, inventory amounts which may
become excess could be reduced by the sale or return of inventories to
suppliers, uses of inventories on alternative customers' assemblies or
the cancellation of purchase commitments with or without the payment of
cancellation penalties.
(14)
<PAGE>
In January and February of 1994, in order to conserve cash and reduce
expenses, the Company imposed a 20% decrease in pay on substantially all
employees at its existing facilities, arranged for additional concessions from
its West Long Branch landlord, deferred certain debts and lease payments and
arranged to raise capital as described below. Effective with the beginning of
the first quarter of 1995, such salary reductions were eliminated and the
salaries of all indirect manufacturing and sales, general and administrative
staff were returned to normal levels.
At April 1, 1995, the Company had consolidated accounts payable of
approximately $12,939,000 of which approximately $489,000 had been outstanding
for over 90 days. This compares with $10,928,000 of consolidated accounts
payable at December 31, 1994, of which $426,000 had been outstanding for over 90
days.
In the first quarter of 1995, the Company made commitments for the
purchase of manufacturing equipment of approximately $2.0 million for the West
Long Branch manufacturing facility and approximately $3.0 million for the
Fremont, California manufacturing facility. In April 1995, the Company cancelled
the purchase order for $3.0 million of new equipment for the Fremont, California
manufacturing facility, deciding instead to move certain equipment from the
Tucson facility to the Fremont facility upon closure of the Tucson facility. The
Company intends to finance the capital equipment for the West Long Branch
manufacturing facility with financing arranged through existing relationships
with equipment lease financers, however, as of the date of this report the
Company has not entered into any agreements or commitments for such equipment
lease financing.
Cash flows from financing activities during the first quarter of 1995
amounted to a use of $1,073,000 resulting primarily from the repayment of
balances under the lines of credit and the issuancce of a note receivable,
partially offset by the exercise of initial Class C Warrants and employee
stock options.
Net cash used for investing activity of $4,993,000 results primarily from
investments in affiliates and the purchase of capital equipment. The Company
paid approximately $4.7 million in connection with the acquisition of a 25.01%
equity interest in BarOn which was consummated on January 16, 1995 (of which
$4.2 million was paid in the first quarter of 1995). The cash required to
consummate such acquisitions was financed, in large part, from the cash flows
from financing activities during 1994 which amounted to $13,192,000, resulting
primarily from the issuance of 1,200,000 units (each unit consisting of one
share of Common Stock, a Class A Warrant and a Class B Warrant (the "February
Units") in the private placement completed in February 1994 (the "February
1994 Private Placement"), the issuance of 2,500,000 units (each unit consisting
of one share of Common Stock and one Class C Warrant) (the "June Units") in the
private placement commenced in June 1994 (the "June 1994 Private Placement")
and exercise of related Class C Warrants issued in the June 1994 Private
Placement, net of reductions in outstanding debt. The proceeds from these
activities which were not used to consummate the Tanon Acquisition and BarOn
Investment were used to maintain cash balances for working capital.
On January 4, 1995, the Company acquired by merger Tanon pursuant to the
Tanon Acquisition Agreement. At closing, the Company issued 1,538,462 shares of
its common stock and granted options to purchase its common stock with a
combined appraised value of $14,460,000 in exchange for all the outstanding
common stock of Tanon and outstanding options to purchase common stock of Tanon.
In addition, (a) the Company invested $2,000,000 in Tanon, and (b) the Company
has agreed to use its best efforts to invest in (or, at the Company's option,
loan to) Tanon (in form and on terms acceptable to the Company and its lenders)
up to an additional $5,000,000, subject to receipt by the Company of an
acceptable operating plan. In connection with the merger, Joseph R. Spalliero,
President of the Company and Chief Operating Officer of Tanon (formerly the
Chairman and President of Tanon prior to the Tanon Acquisition), entered into an
Employment Agreement with Tanon and received a cash bonus of $300,000 at
closing, and will be eligible to earn a cash bonus of up to $750,000, payable to
the extent earned, in equal installments, during 1996, 1997 and 1998. Also, in
connection with the Tanon Acquisition the Company loaned to Mr. Spalliero
$1,000,000 for a 30-month term, with interest accruing at the applicable Federal
rate, and due, together with principal, at the end of the 30-month
term. Such loan is non-recourse and is secured solely with 192,300 shares of
common stock of the Company acquired by Mr. Spalliero upon consummation of the
Tanon Acquisition Agreement. In addition, upon closing the Company indemnified
Mr. Spalliero for certain outstanding
(15)
<PAGE>
indebtedness of Tanon in the aggregate amount of $9,450,000 which had been
personally guaranteed by Mr. Spalliero.
On January 16, 1995, the Company acquired 25.01% of the ordinary shares of
BarOn for a consideration of cash and shares of common stock in the Company and
a right to acquire an additional 8.33% of the ordinary shares of BarOn. The
Company acquired 8.33% of the 25.01% equity interest in BarOn from certain
shareholders of BarOn for $2,700,000 which was paid in cash at closing on
January 16, 1995. The balance of 16.68% was acquired from BarOn in exchange for
$3,000,000 in cash and 127,592 shares of common stock of the Company with an
estimated value of $1,000,000 payable as follows: (i) of such $3,000,000 cash
payment, $2,000,000 was paid at closing on January 16, 1995 in the form of
$1,500,000 in cash and the cancellation of BarOn's obligation to repay the
Company $500,000 pursuant to the terms of a business loan to BarOn, and (ii) the
$1,000,000 balance due BarOn and the issuance and delivery of the 127,592 shares
of common stock of the Company are due and payable to BarOn on the four month
anniversary of the closing, 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 would
aggregate $2,000,000 in cash and 255,183 shares of common stock of the Company
with an estimated value of $2,000,000, are at the option of the Company, which
is exercisable on the earlier of BarOn's reaching certain development milestones
or September 30, 1995.
The Company maintains an asset based credit facility with its lender,
Congress Financial Corporation, which is described in detail in note 5, "Notes
Payable and Line of Credit" of Notes To Consolidated Financial Statements at
Item 8 of the Company's latest Annual Report on Form 10-K, as amended on Form
10-K/A, for its fiscal year ended December 31, 1994 ("Form 10-K"). At April 1,
1995, the Company had $4,324,000 principal amount of borrowings outstanding
under this credit facility and had $62,000 available for borrowing. There are
two covenants with which the Company must comply under this facility. Working
capital, as defined, must exceed $750,000 and tangible net worth must exceed a
negative $500,000. The Company was in compliance with both covenants as of April
1, 1995.
Tanon maintains a separate revolving line of credit with a commercial
bank that provides for short-term borrowing up to $5.5 million based on eligible
accounts receivable and inventories. At April 1, 1995, $5,217,000 was
outstanding under this line and $162,000 was available for borrowing under the
line. The line of credit bears interest at the bank's prime rate plus 1.50% and
is due on demand. The credit agreement pertaining to this line of credit
restricts Tanon from entering into certain transactions and contains covenants
regarding the maintenance of working capital, minimum net worth and debt-to-
equity ratios, together with minimum profitability requirements. The covenants,
together with Tanon's comparative performance at April 1, 1995, were:
maintaining working capital in an amount greater than deficit $150,000, for
which Tanon achieved $1,021,000; achieving tangible net worth of not less than
$3 million, for which Tanon achieved $2,836,000; achieving a quick ratio of .50
to 1, for which Tanon achieved .58 to 1; achieving a debt to equity ratio of
less than 5.50 to 1, for which Tanon achieved 5.1 to 1; and, maintaining minimum
quarterly profitability of $20,000, which Tanon did not achieve. Tanon has
obtained a waiver for the covenants which were not met.
The Company has incurred significant losses and had negative cash flows
from operations in each of the last four years and in the quarter ended April 1,
1995. As reflected in the accompanying financial statements, the continued
negative cash flow from operations and operating loss experienced by the Company
through April 1, 1995 gave rise to the need for additional working capital. In
order to provide additional capital, on April 14, 1995, the Company completed
the sale of 525,000 shares of common stock at $5.85 per share for net proceeds
of approximately $3,000,000 in an offering exempt from the registration
provisions under the Securities Act of 1933, as amended. The Company has used
the net proceeds from this offering for working capital and intends to use a
portion of such proceeds to satisfy the final $1,000,000 obligation for the
purchase price of the 25.01% equity interest in BarOn, which is due on May 16,
1995. In addition, in contemplation of the Tanon Acquisition, the Company has
implemented measures to reduce costs, including the closing or sale of its
Southwest operations in Arizona and Mexico, consolidation of its corporate
administrative functions with those of its newly acquired subsidiary, Tanon, and
reduction of certain other administrative expenses, which the Company expects to
complete
(16)
<PAGE>
during the second quarter of 1995. Although the Company's projections
indicate that operating losses and negative cash flows from operations will
continue during 1995, management believes that its available cash, together with
funds available under its existing lines of credit, will enable the Company to
meet its obligations in the normal course of business through December 31, 1995,
however, no assurance can be given in that regard.
Further, the Company's business plan includes making certain additional
investments with respect to Tanon and BarOn as a result of the acquisitions made
in January 1995, which consist of the Company's commitment to use its best
efforts to make an investment in Tanon of up to $5.0 million as contemplated by
the Tanon Acquisition Agreement, and the Company's option to invest $2.0 million
in cash in BarOn to acquire an additional 8.33% equity interest in BarOn (which
would give the Company an aggregate 33-1/3% equity interest in BarOn) as
contemplated by the Investment Agreement with BarOn. Such additional investments
may require, among other things, additional cash resources in excess of those
presently available. The Class A and Class B Warrants issued in the February
1994 Private Placement, if exercised, could provide the Company with additional
capital of approximately $4.4 million, however, none of these Warrants have been
exercised and 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 the
Company's Form 10-K for information concerning certain pending claims which
could have an adverse impact on the Company's income and cash flows. Reference
is also made to Note 14 of the Notes to Consolidated Financial Statements at
Item 8, Part II of the Form 10-K for information concerning services provided
by contract electronic manufacturing to certain customers which are development
stage or marginally profitable enterprises or have highly leveraged capital
structures.
PART II - OTHER INFORMATION
- ---------------------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
Exhibit No. Description
----------- -----------
27 Financial Data Schedule
(b) The registrant filed the following two Forms 8-K,
as amended, during the quarter for which this
report is filed:
Date of Report,
as amended Item
- --------------- ----
January 4, 1995 EAI acquired by merger Tanon Manufacturing, Inc. of Fremont,
California, a privately held company which provides electronic
contract manufacturing services to original equipment
manufacturers.
January 16, 1995 EAI acquired a 25.01% equity interest in BarOn Technologies
Ltd., a privately held company located in Haifa, Israel,
engaged in the research and development of an input device
for computers that can directly digitalize handwriting in a
variety of languages, from any surface, and a right to acquire
an additional 8.33% equity interest in BarOn Technologies Ltd.
(17)
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ELECTRONIC ASSOCIATES, INC.
(Registrant)
Date: May 15, 1995 By: /s/ Jonathan R. Wolter
-------------------------------
Jonathan R. Wolter,
Treasurer and
Vice President - Finance
(18)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENT OF INCOME FOR THE QUARTER ENDED APRIL 1, 1995 AND THE
CONSOLIDATED BALANCE SHEET AS OF APRIL 1, 1995 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> APR-1-1995
<CASH> 33
<SECURITIES> 0
<RECEIVABLES> 11,933
<ALLOWANCES> (327)
<INVENTORY> 11,059
<CURRENT-ASSETS> 23,977
<PP&E> 10,354
<DEPRECIATION> (5,215)
<TOTAL-ASSETS> 45,732
<CURRENT-LIABILITIES> 25,254
<BONDS> 1,431
<COMMON> 37,838
0
0
<OTHER-SE> (21,471)
<TOTAL-LIABILITY-AND-EQUITY> 45,732
<SALES> 19,056
<TOTAL-REVENUES> 19,056
<CGS> 18,950
<TOTAL-COSTS> 27,120
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 328
<INCOME-PRETAX> (8,598)
<INCOME-TAX> 0
<INCOME-CONTINUING> (8,598)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,598)
<EPS-PRIMARY> $(.84)
<EPS-DILUTED> $(.84)
</TABLE>
