SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 29, 1997 Commission file number 1-4680
EA INDUSTRIES, INC.
(Exact Name of Registrant as Specified in its Charter)
New Jersey 21-0606484
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
185 Monmouth Parkway 07764-9989
West Long Branch, New Jersey (Zip Code)
(Address of Principal Executive Offices)
Registrant's telephone number, including area code: (908) 229-1100
Former name, former address and former fiscal year, if changed since last report
NOT APPLICABLE
-------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X N
---
------------------------
As of March 29, 1997, there were 7,501,714 outstanding shares of the
Registrant's Common Stock.
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EA INDUSTRIES, INC. AND SUBSIDIARIES
Consolidated Condensed Balance Sheets
(UNAUDITED)
(thousands of dollars)
<TABLE>
<CAPTION>
Mar. 29, 1997 Dec. 31, 1996
------------- -------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 120 $ 461
Receivables, less allowance of $1,111 in 1997
and $1,100 in 1996 for doubtful accounts 8,479 11,211
Inventories 9,996 10,068
Prepaid expenses and other assets 601 579
--------- ---------
TOTAL CURRENT ASSETS 19,196 22,319
--------- ---------
Equipment and leasehold improvements 18,449 18,581
Less accumulated depreciation (7,967) (8,059)
--------- ---------
10,482 10,522
--------- ---------
Investment in Common Stock of Aydin Corp. held for sale 5,605 5,605
--------- ---------
Other Investments held for sale 1,050 1,050
--------- ---------
Other Investments 1,012 --
--------- ---------
Intangible assets 12,331 12,331
Less accumulated amortization (1,836) (1,632)
--------- ---------
10,495 10,699
--------- ---------
Other assets 563 698
Note receivable 78 78
========= =========
$ 48,481 $ 50,971
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Revolving Credit Facility $ 6,555 $ 8,054
Current portion of Capital Lease Obligations 1,455 1,455
Current portion of Convertible Notes and 3,725 2,725
Debentures
Accounts payable 11,562 14,702
Accrued expenses 4,642 4,549
--------- ---------
TOTAL CURRENT LIABILITIES 27,939 31,485
--------- ---------
Long-Term Liabilities:
Long-term portion of Capital Lease Obligations 2,716 2,937
Convertible Notes and Debentures 8,834 8,109
Other long-term liabilities 1,159 1,354
--------- ---------
TOTAL LONG-TERM LIABILITIES 12,709 12,400
--------- ---------
TOTAL LIABILITIES 40,648 43,885
--------- ---------
Shareholders' Equity:
Common Stock 83,885 80,535
Accumulated deficit since January 1, 1986 (75,848) (73,245)
--------- ---------
8,037 7,290
Less common stock in treasury, at cost (204) (204)
--------- ---------
TOTAL SHAREHOLDERS' EQUITY 7,833 7,086
--------- ---------
$ 48,481 $ 50,971
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated
condensed financial statements.
2
<PAGE>
EA INDUSTRIES, INC. AND SUBSIDIARIES
Consolidated Condensed Statements of Operations
(UNAUDITED)
(thousands of dollars, except per share data)
Quarter Ended
----------------------------------
March 29, March 30,
1997 1996
----------- -----------
(Restated)
Net Sales $ 14,625 $ 24,025
----------- -----------
Cost of Sales 14,460 22,634
Selling, general and
administrative expenses 1,901 2,220
----------- -----------
Total 16,361 24,854
----------- -----------
Loss from operations (1,736) (829)
----------- -----------
Interest expense 850 2,630
Interest income (8) (115)
Other expense 25 525
----------- -----------
Net loss ($ 2,603) ($ 3,869)
=========== ===========
Loss per common share ($ 0.35) ($ 0.93)
=========== ===========
Weighted average common
shares outstanding 7,442,863 4,154,236
=========== ===========
The accompanying notes are an integral part of these consolidated
condensed financial statements.
3
<PAGE>
EA INDUSTRIES, INC. AND SUBSIDIARIES
Consolidated Condensed Statement of Shareholders' Equity
For The Three Months Ended March 29, 1997
(UNAUDITED)
(thousands of dollars)
<TABLE>
<CAPTION>
Accumulated
Deficit
Common Stock Treasury Stock Since
------------------------ ----------------------- Jan. 1,
Shares Amount Shares Amount 1986
--------- ------- ----------------------- -----------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1996 5,624,001 $80,535 (23,369) ($204) ($73,245)
Net Loss (2,603)
Exercise of stock
options 2,276 10
Cash received on note
receivable from exercise
of warrant -- 700
Debt conversion 1,898,806 2,431
Value of Warrants Issued in
Connection with Financing -- 175
Value of options issued for
Services -- 68
Other -- (34)
--------- ------- ------- ----- --------
Balance, March 29, 1997 7,525,083 $83,885 (23,369) ($204) ($75,848)
========= ======= ======= ===== ========
</TABLE>
The accompanying notes are an integral part of these consolidated
condensed financial statements.
4
<PAGE>
EA INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
(UNAUDITED)
(thousands of dollars)
<TABLE>
<CAPTION>
Quarter Ended
-----------------------------
Mar. 29, Mar. 30,
1997 1996
-------- -------
<S> <C> <C>
Cash Flows from Operating Activities:
Net Loss $ (2,603) $(3,869)
Adjustments to reconcile net loss to net
cash provided/(used) by operating activities:
Depreciation and amortization 766 763
Valuation adjustment - Note Receivable -- 192
Non-cash interest charges 37 2,195
Equity in loss of affiliate -- 225
Value of warrants issued in connection with financing 175 --
Value of options issued for services 68 --
Cash provided/(used) by changes in:
Receivables 2,732 (1,723)
Inventories 72 453
Prepaid expenses & other assets (22) 276
Accounts payable and accrued expenses (3,047) (1,127)
Accrued excess leased space costs (184) (109)
Other operating items - net 7 (52)
-------- --------
Net cash provided/(used) by operations (1,999) (2,776)
-------- --------
Cash flows from Investing Activities:
Capital Expenditures (570) (2,921)
Investments, including those in affiliates (1,012) --
-------- --------
Net cash provided/(used) by investing activities (1,582) (2,921)
-------- --------
Cash flows from Financing Activities:
Net borrowings/(repayments) under credit facilities (1,499) (32)
Net proceeds (repayments) from capital leases (221) 2,034
Net proceeds from convertible subordinated debt 2,250 --
Net proceeds from Promissory Notes 2,000 --
Proceeds from the exercise of stock options 10 5
Net proceeds from exercise of warrants 700 --
-------- --------
Net cash provided/(used) by financing activities 3,240 2,007
-------- --------
Net Increase/(Decrease) in Cash and Cash Equivalents (341) (3,690)
Cash and Cash Equivalents at Beginning of Period 461 9,830
-------- --------
Cash and Cash Equivalents at End of Period $ 120 $ 6,140
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 551 $ 407
======== ========
Non cash financing activities:
Conversion of debt to equity $ 2,525 $ 2,900
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated
condensed financial statements.
5
<PAGE>
EA INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
(1) Description of Business and Basis of Presentation
EA Industries, Inc., a New Jersey corporation formerly known as
"Electronic Associates, Inc." ("EAI" or the "Company"), through
its wholly-owned subsidiary, Tanon Manufacturing, Inc.
("Tanon"), is engaged principally in the business of providing
contract electronic manufacturing services ranging from the
assembly of printed circuit boards to the complete procurement,
production, assembly, test and delivery of entire electronic
products and systems.
The condensed financial statements included herein have been
prepared by the Company, without audit, pursuant to the rules
and regulations of the Securities and Exchange Commission.
Certain information and footnote disclosures normally included
in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations, although the Company
believes that the disclosures are adequate to make the
information presented not misleading. These condensed financial
statements should be read in conjunction with the financial
statements and the notes thereto included in the Company's
latest annual report on Form 10-K/A for the year ended December
31, 1996. These condensed financial statements reflect, in the
opinion of management, all adjustments (consisting only of
normal recurring adjustments) necessary to present fairly the
results for the interim period. Results of operations for the
interim period ended March 29, 1997 are not necessarily
indicative of results of operations expected for the full year.
The consolidated financial statements include the accounts of
all majority-owned subsidiaries other than the investment in
Electronic Associates Technologies Israel, Ltd. ("EATI"), an
unconsolidated subsidiary held for sale, which is reflected in
the accompanying financial statements at $1,050,000, its
estimated net realizable value. Certain reclassifications were
made to the prior year's presentation to conform to the 1997
presentation. The Company has decided to sell or otherwise
dispose of its interest in EATI and accordingly, such interest
has been classified as an unconsolidated subsidiary held for
sale. Amounts in the year 1996 have been reclassified to conform
to the 1997 presentation.
Certain of the convertible notes and debentures issued in
December 1995 and 1996 contained conversion features which
provide for 18 - 20% discounts from the market price of the
Company's Common Stock at the conversion date. This incremental
yield embedded in the conversion terms totaled $4,200,000 in
1996 and was charged to interest expense in the fourth quarter
of 1996. The results for the quarter ended March 30, 1996, have
been restated to reflect the amortization of the incremental
yield applicable to the quarter ended March 30, 1996. As a
result, Interest expense and Net Loss for the quarter ended
March 30, 1996 increased by $2,195,000 and loss per common share
increased by $.83.
6
<PAGE>
During the first quarter of 1997 the Company borrowed $2,250,000
from the Chairman of its Board of Directors, certain related
trusts and an unaffiliated investor. These loans are represented
by certain 10% Series A Convertible Notes. The Company also
borrowed $2,000,000 from two unrelated parties. These loans are
represented by promissory notes and repayment of the notes is
secured by a lien on the common stock of Aydin Corporation owned
by the Company. See Item 2, Management's Discussion and Analysis
of Financial Condition and Results of Operations - Liquidity and
Capital Resources" for a more complete description of these
loans.
All references in the consolidated financial statements
referring to shares, share prices, per share amounts and stock
option plans have been adjusted to give retroactive effect to a
one-for-four reverse stock split (the "Reverse Stock Split") as
of the close of business on December 27, 1996 (the "Record
Date"). Each holder of record on the Record Date was entitled to
receive, as soon as practicable thereafter, one (1) share of no
par value Common Stock of the Company for every four (4) shares
of no par value Common Stock held by such person on the Record
Date.
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.
Loss per share amounts have been computed based on the weighted
average number of common shares outstanding. Shares issuable
upon the exercise of stock options, warrants and convertible
notes and debentures have not been included in per share
computations, because their impact would have been antidilutive
in each period.
(2) Operations and Liquidity
The Company has incurred significant losses and had negative
cash flows from operations in each of the last five years and in
the three months ended March 29, 1997. The Company's financial
projections indicate that operating losses and negative cash
flows will continue during the second quarter and into the second half
of 1997. The Company is, however, forecasting an increase in sales
during the second half of 1997 resulting from the Company's increase
in its sales force and sales efforts. Management believes such
increase will result in an improvement in cash flows from operations.
The Company's projections with respect to cash needs are based
on its forecasts of the results of operations at Tanon and
expenses of EAI. If the Company's results of operations at Tanon
are significantly below forecasts, or expenses at EAI are
greater than expected, this would raise doubts about the
Company's ability to continue its operations without raising
additional capital or a significant financial restructuring,
which would include a major reduction in general and
administrative expenses and liquidation of assets involving sale
of all or part of Tanon. There can be no assurance that such
restructuring would enable the Company to continue its
operations or that the Company would be successful in raising
additional capital. The financial statements do not reflect any
adjustments that might result from the restructuring and other
measures being unsuccessful. For further discussion see Item 2,
"Management's Discussion and Analysis of Financial Condition and
Results of Operations".
7
<PAGE>
(3) Acquisition of Aydin Corporation ("Aydin") common stock and issuance
of Convertible Debentures.
On May 6, 1996, the Company purchased 596,927 shares of the
common stock of Aydin (the "Aydin Shares"), a New York Stock
Exchange listed company, in a private purchase from the then
Chairman and Chief Executive officer of Aydin. The purchase
price for such shares was $18 per share or an aggregate of
$10,752,186 and the purchase represented approximately 11.64% of
the outstanding shares of common stock of Aydin. On May 6, 1996,
the closing price of the common stock of Aydin as reported by
the New York Stock Exchange (the "NYSE") was $15.50. The Company
paid a premium for these shares, representing the single largest
block of outstanding stock of Aydin, in order to facilitate
discussions with Aydin concerning a possible merger or other
combination with Aydin as hereinafter discussed. Aydin designs,
manufactures and sells wireless, digital los radios and various
other telecommunications equipment systems, computer monitors
and workstations, mostly for utilities, network access
equipment, airborne and ground data acquisition, radar
simulation, modernization and air-defense c3 equipment and
systems.
To fund a portion of the purchase price of the Aydin Shares, the
Company, on May 3, 1996, sold 9% convertible debentures in the
aggregate principal amount of $7,000,000. The balance of the
purchase price was funded with existing cash of the Company. The
Company sold additional 9% convertible debentures in the
aggregate principal amount of $1,100,000 during the remainder of
May and June, 1996 (such convertible subordinated debentures in
the aggregate principal amount of $8,100,000 are collectively
referred to herein as the "Original Convertible Debentures").
The Company paid a placement fee equal to approximately 5% of
the proceeds raised in the sale of the Original Convertible
Debentures in cash of $50,000 during August and September 1996
and by delivery of 125,000 shares of Common Stock of the
Company. These Original Convertible Debentures had a maturity
date of May 3, 1998 and were convertible into shares of the
Company's Common Stock at a conversion price per share equal to
the lesser of (i) four dollars ($4) per share or (ii) 80% of the
average closing price of the Company's Common Stock as traded on
the NYSE for the five (5) days preceding the date of the notice
to the Company that the holder wished to exercise its conversion
right. As of May 1, 1997, $3,786,000 principal amount of such
Original Convertible Debentures have been converted into
2,314,640 shares of Common Stock (post Reverse Stock Split
shares). The Company agreed to adjust the ceiling price of each
of the remaining debentures if the holder of such debenture
refrained from conversions and short sales through April 11,
1997. As a result, the conversion price of each of the Original
Convertible Debentures has been reduced from $4.00 per share
(pre-Reverse Stock Split price) to $1.50 per share (post-Reverse
Stock Split price).
During May 1996, the Company initiated discussions with the
Board of Directors of Aydin concerning the possibility of a
merger or other combination with Aydin. Both companies conducted
due diligence on the business and prospects of each other,
including discussions about the structure and terms of possible
combinations. As a result of these discussions, the Company made
an offer to merge with Aydin, however, Aydin's Board of
Directors rejected the Company's final offer. The Company
withdrew its offer on October 8, 1996 and terminated discussions
with Aydin. At the present time, the Company continues to hold
its Aydin shares and has pledged such Aydin shares as security
for borrowings of $2,000,000.
8
<PAGE>
On January 23, 1997, Aydin and the Company entered into a
Registration Rights Agreement granting the Company and each
subsequent holder of at least 250,000 of the Aydin Shares the
right on two occasions to demand registration of such shares and
in addition granting piggyback registration rights. Each demand
is deemed to be an offer to sell to Aydin or its assigns all
shares covered by such demand at the then current market price.
The offer must be accepted or it lapses within ten days.
On April 4, 1997, Aydin filed a Registration Statement on Form
S-3 (the "S-3") covering the Aydin Shares. The Company has
granted an assignable option (the "Bard Option") to I. Gary
Bard, the Chairman of Aydin, to purchase the Aydin Shares held
by the Company for $10.75 per share. The option expires on May
14, 1997 unless exercised for at least 500,000 shares. If such
exercise occurs, the option will remain exercisable at $10.75
until October 1, 1997. If the option is not exercised, the
Company intends to sell the Aydin Shares in public or private
sales at the then prevailing market price or upon negotiated
prices. The closing price of Aydin common stock as reported by
the NYSE at May 9, 1997 was $10 7/8 per share. As a result of
the Company's decision to sell the Aydin Shares, the Company
wrote down its investment in Aydin at December 31, 1996 to its
estimated net realizable value.
(4) Joint Venture with Israel Aircraft Industries, Ltd. ("IAI").
The Company has determined that its joint venture with IAI (the
"Joint Venture") conducted through its partially owned
subsidiary EATI is not an essential element of its core
strategy. As a result, the Company has concluded that it will
not make any further investments of capital in the Joint Venture
and has decided to sell or otherwise dispose of its interest in
the Joint Venture. The Company is unable at this time to predict
whether it will be able to sell its interest in the Joint
Venture, or the timing or consideration for such sale or other
disposition. Failure to make additional capital contributions
would be a default under the Joint Venture agreement with IAI.
If the Company is in default as described above, the Company may
forfeit its interest in the Joint Venture.
The Company has decided to sell or otherwise dispose of its
interest in the Joint Venture. The Joint Venture has been
classified as an unconsolidated subsidiary held for sale and the
carrying value has been adjusted, by a charge to Other Expense
of $1,647,000 in 1996, to management's best estimate of net
realizable value based on a discounted cash flow analysis of
anticipated proceeds less cost of disposal.
(5) BarOn Investment.
The Company determined that its investment in and advances to
BarOn were unrecoverable and charged these amounts to expense in
1996.
9
<PAGE>
(6) Tri-Star Technologies Co., Inc.
On December 23, 1996, the Company signed letters of intent to
acquire Tri-Star Technologies Co., Inc. ("Tri-Star") and the
approximately 120,000 square foot building and real property
occupied by Tri-Star in Methuen, Massachusetts. Tri-Star is a
full service contract manufacturer that fabricates PC boards,
designs and builds electronic prototypes, and assembles and
tests a wide range of products, including printed circuit
boards. The purchase price for the building and real property is
$3.5 million, payable $2.5 million in cash and $1.0 million in
Common Stock of the Company. The purchase price for Tri-Star is
$16 million, of which $1 million was made as a non-refundable
deposit in January, 1997. The remaining $15 million is payable
$9 million in cash at closing and $6 million in Common Stock of
the Company. In addition to the cash necessary to complete the
purchase of Tri-Star, the Company would need additional capital
to provide adequate working capital for the ongoing operations
of Tri-Star. Closing of these purchases is subject to completion
of due diligence by the Company and approval by the Board of
Directors of the Company. If closing does not occur by July 31,
1997, Tri-Star may terminate discussions and retain the
non-refundable deposit.
The Company does not have sufficient available capital resources
to complete the purchase of Tri-Star and the related property.
The Company will attempt to negotiate a reduction of the portion
of the purchase price due at closing and in addition will
consider raising additional capital in the form of debt or
equity to enable it to complete the purchase of Tri-Star,
however, no assurance can be given that the Company will be
successful in such negotiations or in raising the additional
capital. Accordingly, no assurance can be given that such
acquisition will occur. See Item 2, "Management's Discussion and
Analysis of Financial Condition and Results of Operations".
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
On January 4, 1995, the Company acquired Tanon, a
privately-owned contract electronic manufacturing firm with operations located
in Fremont, California. In May 1996, concurrent with, and as a condition to,
closing a new loan facility with IBJ Schroder Bank & Trust Company ("Schroder")
("Schroder Loan Facility"), the Company consolidated all of its contract
electronic manufacturing business into Tanon, by assigning to Tanon all of the
assets and liabilities related to the contract electronic manufacturing business
conducted directly by the Company. As a result, the Company is now principally a
holding company with all of its operations being conducted by its subsidiaries
with the Company providing strategic, financial and other support to such
subsidiaries.
On January 16, 1995, the Company acquired an equity interest in
BarOn, a privately-owned Israeli corporation based in Haifa, Israel. BarOn is a
development stage company which has developed and was in the process of
commercializing an electronic computer input device that can directly digitize
handwriting in a variety of languages, from any surface. During the fourth
quarter of 1996 the Company determined that its investment and advances to BarOn
were unrecoverable and charged those amounts to expense.
On August 8, 1995, the Company, through a 52.3% owned
subsidiary, EATI, entered into a Joint Venture Agreement with IAI to review,
develop and exploit non-classified technological applications developed by IAI.
The Company has decided to sell or otherwise dispose of its interest in the
Joint Venture. The Joint Venture has been classified as an unconsolidated
subsidiary held for sale.
On May 6, 1996, the Company purchased 596,927 shares of the
common stock of Aydin, representing approximately 11.64% of the outstanding
common shares of Aydin. During May 1996, the Company initiated discussions with
the Board of Directors of Aydin concerning a possible merger or other
combination with Aydin. After due diligence and numerous discussions, the
Company made an offer to merge with Aydin, however, Aydin's Board of Directors
rejected the Company's final offer. The Company withdrew its offer on October 8,
1996 and terminated discussions with Aydin. During the fourth quarter of 1996
the Company decided to sell its investment in Aydin and wrote down the
investment to its estimated net realizable value of $5,605,000.
On December 23, 1996, the Company's contract manufacturing
subsidiary, Tanon, signed a binding letter of intent to acquire Tri-Star and in
January, 1997 placed an initial deposit of $1.0 million toward the purchase of
Tri-Star. The letter of intent is binding on Tri-Star, but subject to approval
by the Board of Directors of the Company. Completion of the acquisition is
subject to due diligence reviews by Tanon and the Company, as well as execution
of a definitive purchase agreement.
Results of Operations
The Company had a net loss of approximately $2,603,000 for the
first quarter of 1997 which included a charge of approximately $175,000
representing the value of warrants granted in connection with the issuance of
two promissory notes in the principal amount of $1,000,000 each. This compared
with a net loss of approximately $3,869,000 for the same period in 1996, which
included a charge of approximately $2,195,000 which represents the amortization
of the fixed discount feature of convertible notes issued in December, 1995.
11
<PAGE>
The decrease in sales to $14,625,000 in the first quarter of
1997 resulted primarily from a decrease in the level of business conducted with
the Company's three largest customers and, to a lesser extent, the phase out of
five customers, two of whom the Company disengaged from while the other three
either began their own manufacturing or consolidated their manufacturing at
another manufacturing company, partially offset by sales to seven new customers.
Sales to the three large customers were unusually high during the first half of
1996 and then declined to less than normal levels during the second half of
1996. The Company expects reduced sales volume to the three large customers to
continue through the second quarter of 1997 and then to begin improving in the
second half of 1997. The Company also expects an increase in sales to new
customers in the second half of 1997. Cost of sales decreased to $14,460,000 in
the first quarter of 1997 from $22,634,000 in the same quarter of 1996 but
increased, as a percentage of revenue to 98.9% in the first quarter of 1997
compared with 94.2% in the same period of 1996. The decline is primarily a
result of the lower level of sales in the first quarter of 1997 as compared to
the first quarter of 1996. A large percentage of cost of sales consists of fixed
costs and, as a result, cost of sales as a percentage of revenue increases as
revenue falls. The increase in cost of sales as a percentage of revenue was
primarily due to the lower volume of revenues partially offset by a reduction in
fixed manufacturing overhead of approximately $600,000, principally from a
reduction in indirect labor. Gross profit decreased from $1,391,000 in the first
quarter of 1996 to $165,000 in the first quarter of 1997 reflecting the decline
in sales partially offset by the reduction in fixed manufacturing overhead. Also
mitigating the decline in gross profit was a reduction in direct cost, i.e.,
labor, material and variable overhead as a percentage of revenue of
approximately 1.5%.
Selling, general and administrative expenses decreased to
approximately $1,901,000 in the first quarter of 1997, from approximately
$2,220,000 in the same quarter of 1996. The decline is primarily due to
reductions in non-essential personnel at Tanon. Selling, general and
administrative expenses as a percentage of revenue increased from 9.2% to 13.0%
primarily as a result of the decline in sales.
Interest expense was $850,000 in the first quarter of 1997
compared with $2,630,000 in the first quarter of 1996. The decline is primarily
due to charges of $2,195,000 in the first quarter of 1996 representing the
amortization of the fixed discount feature of convertible notes issued in
December, 1995 which charges were not repeated in the first quarter of 1997.
Interest expense related to revolving credit agreements, subordinated debt, and
capitalized leases increased from $435,000 in the first quarter of 1996 to
$850,000 in the first quarter of 1997 due to higher subordinated debt
borrowings, capital leases which were entered into in early 1996 offset by a
slight decline in revolving credit borrowed amounts.
Interest income decreased to $8,000 in the first quarter of 1997
reflecting the Company's reduced level of cash. Interest income for the first
quarter of 1996 was primarily the result of the investment of funds received
from the sale of convertible notes in December, 1995.
Other expense decreased from approximately $525,000 in the first
quarter of 1996 to an expense of approximately $25,000 in the first quarter of
1997. The decrease was primarily due to the Company's decision to not provide
additional funding to BarOn. As a result, the Company did not record a loss from
BarOn in the first quarter of 1997 as compared to approximately $300,000 in the
same period in 1996. In addition, the Company recorded a charge of approximately
$190,000 in the first quarter of 1996 reflecting the reduction in the market
value of the Company's Common Stock securing a note receivable.
The Company's consolidated backlog at March 29, 1997 was
$31,822,000, as compared to $42,088,000 for the same period in 1996. The Company
typically receives orders from its customers on a flexible schedule to meet the
12
<PAGE>
sales/delivery schedule to the ultimate consumer. These purchase orders specify
delivery of product over periods ranging from as short as 30 days or as long as
a year and are adjusted as the sales by the Company's customers to ultimate
consumers change. The amount of inventory produced and stored on behalf of
customers also varies from time to time. Consequently, the Company's backlog at
the end a period is not necessarily indicative of future shipments to those
customers.
Liquidity and Capital Resources
Liquidity, as discussed below, is measured in reference to the
consolidated financial position of the Company at March 29, 1997, as compared to
the consolidated financial position of the Company at December 31, 1996. Net
cash used by operations of $1,999,000 in the first three months of 1997
decreased by $777,000 from cash used in operations of $2,776,000 in the same
period in 1996. Net cash used by operations was primarily the result of the net
loss for the three months ended March 29, 1997 and a decrease in accounts
payable, partially offset by a decrease in accounts receivable.
Liquidity, as measured by cash and cash equivalents, decreased
to $120,000 at March 29, 1997 from $461,000 at December 31, 1996. Liquidity as
measured by working capital, was a negative $8,743,000 at March 29, 1997 as
compared with a negative working capital of $9,166,000 at December 31, 1996. The
increase in working capital was primarily a result of the issuance of $4,250,000
of promissory notes and convertible notes partially offset by a reduction in the
amount borrowed under the Schroder Loan Facility and the net loss for the
quarter. For the first quarter of 1997, revenue from contract manufacturing
services decreased by $9,400,000 from $24,025,000 in the same period in 1996.
Accounts receivable decreased by $2,732,000 in the first quarter of 1997,
primarily reflecting the decrease in revenue from contract manufacturing
services.
Cash flows from financing activities during the first quarter of
1997 were $3,240,000 resulting primarily from the issuance of the 10% Series A
Convertible Notes for $2,250,000 and two promissory notes in the principal
amount of $1,000,000 each, the collection of $700,000 on a note receivable from
a 1996 exercise of Class A and Class B Warrants, partially offset by a reduction
in the Schroder Loan Facility of approximately $1,499,000.
Net cash in the amount of $1,582,000 was used for investing
activities for the first quarter of 1997. Funds in the amount of $1,000,000 were
used as a deposit toward the purchase of Tri-Star. In addition, funds in the
amount of $570,000 were used to purchase capital equipment consisting primarily
of the support equipment for a new high speed surface mount line on order for
the Company's New Jersey facility.
On May 3, 1996, Tanon replaced the Company's existing asset
based credit facility and the Tanon separate revolving line of credit with a new
asset based credit facility provided by Schroder to Tanon. Advances under the
Schroder Loan Facility can only be used to fund the Company's electronic
contract manufacturing operations which are now being conducted solely by Tanon.
At March 29, 1997, $6,555,000 was outstanding under the Schroder Loan Facility
which represented 95% of the calculated availability, calculated in accordance
with the availability formula of the Schroder Loan Facility. The agreement with
Schroder requires Tanon to maintain certain financial ratios, including current
assets to current liabilities and earnings to certain fixed charges, and to
maintain a minimum net worth. At March 29, 1997, Tanon was in compliance with
all of these requirements, except the required ratio of earnings to certain
fixed charges. By agreements dated April 15 and May 5, 1997, Schroder has agreed
to waive such requirements for March 29, 1997 and has adjusted the future
required financial ratios to reflect the forecast results of operations of Tanon
contained in Tanon's 1997 business plan.
13
<PAGE>
The Company has incurred significant losses and had negative
cash flows from operations in each of the last five years and in the three
months ended March 29, 1997. The Company raised approximately $10,000,000 in
December, 1995 and $9,370,000 and $9,750,000 during 1996 and January 1, 1997
through May 9, 1997, respectively, from the exercise of stock options and
warrants, borrowings secured by the shares of Aydin owned by the Company and the
sale of convertible notes and debentures. Among such capital raising activities,
in December 1995, the Company completed the sale of 7% convertible notes of the
Company in the aggregate principal amount of $10,000,000 to GFL Advantage Fund
Limited and GFL Performance Fund Limited. As of this date $7,930,000 of such
notes have been converted into 810,661 shares of the Company's Common Stock in
accordance with their terms. In May and June, 1996, the Company raised an
additional $8,100,000 from the sale of 9% convertible debentures which was used
in part, in purchasing approximately 11.64% of the outstanding shares of common
stock of Aydin (see Note 3 to Financial Statements in Part I of this Report). On
August 19, 1996, GFL Performance Fund Limited transferred and assigned its
$2,070,000 outstanding principal amount note of the Company to Irwin L. Gross,
Chairman of the Company and certain related family trusts (the "Note Holders").
In connection with such assignment, the Company canceled the prior note held by
GFL Advantage Fund and reissued certain 7% convertible subordinated notes of the
Company in the aggregate principal amount of $2,070,000 due December 29, 1997 to
the Note Holders. These convertible notes had a maturity date of December 29,
1997 and were convertible into shares of the Company's Common Stock at the
conversion price per share of $2.67. On February 6, 1997, the Company amended
these convertible notes by (i) increasing the aggregate principal amount of such
notes to $2,725,000 (the purchase price paid by the Note Holders for the
convertible notes) and (ii) reducing the fixed conversion price of such notes to
$1.50 per share, in return for the Note Holders foregoing interest and making
available certain other loans to the Company.
The Company's financial projections indicate that operating
losses and negative cash flows will continue during the second quarter and into
the second half of 1997. The Company is, however, forecasting an increase in
sales during the second half of 1997 resulting from the Company's increase in
its sales force and sales efforts. Management believes such increase will result
in an improvement in cash flows from operations. However, the purchase of the
Aydin common stock and advances to BarOn and EATI in 1996 resulted in the need
to raise additional capital. In addition, the Company's contract manufacturing
operations conducted through Tanon required additional working capital as a
result of operating losses by Tanon and capital expenditures by Tanon.
During the period beginning on October 25, 1996 and ending on
April 10, 1997, the Company has borrowed a total of $4,520,000 from the Chairman
of its Board of Directors, certain related trusts and unaffiliated investors.
These loans are represented by certain 10% Series A Convertible Notes (the
"Series A Notes") issued by the Company. The Series A Notes will mature on
January 22, 1999 and are convertible at the option of the holder (i) after
January 1, 1998, into shares of Common Stock of the Company at a conversion
price of $3.50 per share, or (ii) into shares of Common Stock of Tanon after
completion of an initial public offering of shares of Common Stock of Tanon at a
conversion price equal to the quotient of (a) twenty five million dollars ($25
million), divided by (b) the number of shares of Common Stock of Tanon that were
issued and outstanding at the close of business on the day immediately prior to
the effective date of the registration statement covering the shares of Common
Stock of Tanon offered in such initial public offering, without giving effect to
the number of shares of Common Stock of Tanon being offered in such initial
public offering.
14
<PAGE>
The Series A Notes bear interest at the rate of 10% per annum,
payable annually in arrears on January 15, 1998 and January 22, 1999. Repayment
of the Series A Notes will be secured by a second lien on the stock of Tanon
held by the Company and on substantially all the assets of Tanon. These notes
are subordinated to amounts owed by Tanon to Schroder and the ability of Tanon
to distribute or loan funds to the Company to make interest payments on the
Series A Notes is restricted pursuant to the Schroder Loan Facility.
In addition, during January 1997, the Company borrowed
$1,000,000 from each of two unrelated parties, Ace Foundation, Inc. ("Ace") and
Millenco, LP ("Millenco"). These loans are represented by two promissory notes
in the principal amount of $1,000,000 each (the "EAI Notes") issued by the
Company to Ace and Millenco, respectively. The EAI Notes will mature on January
6, 1999 and January 17, 1998, respectively, and are not convertible into Common
Stock of either the Company or Tanon. The EAI Notes bear interest at the rate of
13.5% per annum. Repayment of the EAI Notes is secured by a lien on the common
stock of Aydin Shares owned by the Company. In consideration for such loans,
the Company also granted a warrant to purchase 50,000 shares of Common Stock of
the Company at an exercise price of $1.50 per share to each of Ace Foundation,
Inc. (the "Ace Warrant") and Millenco, LP (the "Millenco Warrant"). Management
charged the estimated value of these warrants, $175,000, to expense in the first
quarter of 1997.
To pay the remaining unpaid cost incurred in connection with the
terminated merger discussions with Aydin, fund the future holding company
expenses, provide additional working capital to Tanon to fund (i) unpaid prior
losses of Tanon, (ii) projected Tanon losses for the first half of 1997 and
(iii) costs associated with projected growth in sales during the second half of
1997, the Company sold convertible notes in the aggregate amount of $4,500,000
in April 1997. These notes bear interest at 6% per annum payable quarterly and
have a maturity date of April 30, 1999. These notes are convertible into shares
of the Company's Common Stock at a conversion price per share equal to the
lesser of (i) three dollars and fifty cents ($3.50) per share or (ii) eighty
percent of the volume weighted average price of the Company's Common Stock as
traded on the NYSE for the five days preceding the date of notice to the Company
that the holder wishes to exercise its conversion right. The Company has granted
piggyback registration rights to the note holders and has agreed that if the
shares underlying the convertible notes are not covered by an effective
registration statement and listed on the NYSE within one hundred and twenty
days, to pay a ten percent penalty, and the holders may accelerate the entire
balance of the notes.
The Company also intends to sell the Aydin Shares beginning in
the second quarter of 1997 in public or private sale. In addition, the Company
has arranged for standby financing of up to $4,500,000 to provide additional
working capital. This commitment is irrevocable until April 1, 1998 and will be
reduced to the extent the Company receives proceeds from the sale of its shares
of common stock of Aydin or from additional equity or convertible debt
financing. The Company has agreed to issue warrants exercisable at $4.125 per
share for 600,000 shares in consideration of this commitment and an additional
400,000 shares if this commitment remains open for more than four weeks or is
drawn upon. The Company believes that the net proceeds from the sale of the
Aydin shares along with the funds from the convertible notes sold in April 1997
will provide sufficient capital to meet its capital needs during 1997. The
Company will, however, need to raise additional funds to complete the purchase
of Tri-Star and provide working capital to Tri-Star. At the date hereof, the
Company does not have any commitments, understandings or agreements for
obtaining any additional capital, and accordingly, there can be no assurance the
Company will be successful in obtaining such additional capital.
15
<PAGE>
The Company's projections with respect to cash needs are based
on its forecasts of the results of operations at Tanon and expenses of EAI. If
the Company's results of operations at Tanon are significantly below forecasts,
or expenses at EAI are greater than expected, this would raise doubts about the
Company's ability to continue its operations without obtaining additional
capital or conducting a significant financial restructuring, which would include
a major reduction in general and administrative expenses and liquidation of
assets involving sale of all or part of Tanon. There can be no assurance that
such additional capital can be obtained or that such restructuring would enable
the Company to continue its operations.
At March 29, 1997, the Company had accounts payable of
$11,562,000 of which approximately $1,477,000 had been outstanding for over 90
days. This compares with $14,702,000 of accounts payable at December 31, 1996,
of which approximately $2,281,000 had been outstanding for over 90 days.
Except for historical matters contained in this report,
statements made in this Report are forward-looking and are made pursuant to the
safe harbor provisions of the Private Securities Litigation Reform Act of 1995.
Investors are cautioned that these forward-looking statements reflect numerous
assumptions and involve risks and uncertainties which may affect the Company's
business and prospects and cause actual results to differ materially from these
forward-looking statements, including loss of current customers, reductions in
orders from current customers, or delays in ordering by current customers,
failure to obtain anticipated contracts or orders from new customers, or
expected order volume from such customers, failure to obtain financing, higher
material or labor costs, unfavorable results in litigation against the Company,
failure to consummate the acquisition of Tri-Star, economic, competitive,
technological, governmental, and other factors discussed in the Company's
filings with the Securities and Exchange Commission.
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.
In March 1997, the Financial Accounting Standards Board issued
Statement No. 128, "Earnings per Share" which is effective for fiscal 1997. This
statement establishes accounting standards for computing and presenting earnings
per shares (EPS). It replaces the presentation of primary EPS with a
presentation of basic EPS. It also requires dual presentation of basic EPS and
diluted EPS for companies with complex capital structures. The Company's
reported loss per share is equivalent to basic loss per share under the new
standard. The Company is not required to present diluted per share amounts
because it has incurred a net loss.
16
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Lemco Associates.
In October, 1992, Lemco Associates L.P., a limited partnership
("Lemco"), the owner of property previously owned by EAI, initiated an action
against EAI and others alleging, among other things, that the defendants created
environmental contamination at the property and is seeking damages in
unspecified amounts. EAI has denied Lemco's allegations, asserted numerous
defenses to the claims asserted and asserted a counterclaim against Lemco and
cross claims against co-defendants and others for indemnification and
contribution. In addition, the Company has made a demand upon its insurance
carriers for coverage for the claims made by Lemco and cross claims and third
party claims may be filed against these insurance companies seeking
indemnification against these claims. To date, the Company's insurance carriers
have agreed to pay 71% of its defense costs under a reservation of rights.
Discovery in this matter is ongoing. By letter dated January 22, 1997, Lemco
provided the Company with a statement of its remediation costs to date, as well
as an estimate of future remediation costs associated with the contamination for
which it seeks recovery in this action. Specifically, Lemco claims that it has
expended approximately $609,000 in remediation costs, including fees for legal
oversight and consultation. It further estimates that its future remediation
costs will amount to approximately $5,000,000. 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, as well as anticipated New Jersey Department of
Environmental Protection and Energy ("DEPE") oversight costs and fees for legal
oversight and consultation. Further, by letter dated June 7, 1995, Lemco
provided the Company with an appraisal report made by a real estate appraisal
company engaged by Lemco in support of Lemco's claim for diminution in the value
of the property. Such report states that it is the appraisal company's opinion
that the market value of the property as of May 23, 1988 was $3.6 million and as
of April 14, 1995 was $750,000. Lemco's appraisal expert subsequently determined
in October 1995 that the value of the property as of April 14, 1995 was
$960,000. Lemco purchased the property in question in 1979 for approximately
$400,000. Lemco's environmental consultants have recently issued a new report
indicating that, based upon further hydrogeologic data, the contamination
occurred before 1979. The Company's experts have estimated that, based upon
hydrogeologic data gathered to date by Lemco's experts, the major source of
continuing contamination of groundwater was released into the water table about
late 1984 or, using more conservative extrapolations, about mid-1979. Based on
the foregoing, management believes that the range of possible loss in this
matter ranges from zero to approximately $8.24 million, not including costs and
expenses, such as legal and expert fees, which will be incurred in connection
with this matter, and not taking into account the amount of any loss which may
be offset by insurance coverage as discussed above. The Company and its
consultants recently completed the investigation and evaluation of additional
information received from Lemco and have determined that Lemco's remediation
cost estimates are overstated. The Company's experts have estimated the cost of
remediation as between $1.5 million and $2.5 million. There is no assurance that
the outcome of this matter will come within the above-mentioned range of
possible loss.
The Company is vigorously defending this matter. On May 3, 1996, the
Superior Court of New Jersey referred this case to mediation in an effort to
explore opportunities for settlement. Mediation proceedings commenced and
continued through March 1997 and the case is currently scheduled for trial
beginning on October 6, 1997.
17
<PAGE>
ITEM 5. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
Exhibit 27, Financial Data Schedule
(b) The registrant filed the following Form 8-K during the
quarter for which this report is filed:
NONE
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
EA INDUSTRIES, INC.
(Registrant)
Date: May 13, 1997 By: /s/ Stanley O. Jester
--------------------------------------
Stanley O. Jester,
Treasurer and Vice President - Finance
Chief Financial Officer
(Principal Financial and
Chief Accounting Officer)
18
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXPTACTED FROM THE
CONSOLIDATED STATEMENT OF INCOME FOR THE QUARTER ENDED MARCH 29, 1997 AND THE
CONSOLIDATED BALANCE SHEET AS OF MARCH 29, 1997 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL ATATEMENT
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-29-1997
<CASH> 120
<SECURITIES> 0
<RECEIVABLES> 9,590
<ALLOWANCES> (1,111)
<INVENTORY> 9,996
<CURRENT-ASSETS> 19,196
<PP&E> 18,449
<DEPRECIATION> (7,967)
<TOTAL-ASSETS> 48,481
<CURRENT-LIABILITIES> 27,939
<BONDS> 8,834
0
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<COMMON> 83,885
<OTHER-SE> (75,848)
<TOTAL-LIABILITY-AND-EQUITY> 48,481
<SALES> 14,625
<TOTAL-REVENUES> 14,625
<CGS> 14,460
<TOTAL-COSTS> 16,361
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 850
<INCOME-PRETAX> (2,603)
<INCOME-TAX> 0
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<NET-INCOME> (2,603)
<EPS-PRIMARY> $(0.35)
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