SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996 Commission file number 1-4680
EA INDUSTRIES, INC.
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(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 - Electronic Associates, Inc.
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Common Stock New York Stock Exchange
Preferred Stock Purchase Rights New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter-period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No ___
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The aggregate market value of the voting stock held by non-affiliates of
the Registrant was $32,140,026 as of April 10, 1997.
As of April 10, 1997, there were 7,501,714 outstanding shares of the
Registrant's Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement with respect to the Company's Annual Meeting of Shareholders to
be held in June 1997 -Part III.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
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PART I
ITEM 1. BUSINESS
Introduction
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. Accordingly, the
Company provides services to act in part, or in whole, as the manufacturing
function of its customers. Tanon was acquired by the Company on January 4, 1995.
References to the Company with respect to any time period after January 3, 1995
shall be deemed to include Tanon unless the context otherwise requires.
In addition, the Company, through its one-third investment in BarOn
Technologies, Ltd. ("BarOn"), a privately owned Israeli corporation based in
Haifa, Israel and its indirect interest in a joint venture ("ITI") with Israel
Aircraft Industries, Ltd., an Israeli government corporation ("IAI"), seeks to
develop and market new, high technology products. The investment in BarOn was
acquired in 1995. BarOn is in the process of developing an electronic computer
input pen that captures handwriting independent of surface or language. See
"1996 Developments".
The Company, through a 52.3% owned subsidiary, Electronic Associates
Technologies Israel, Ltd. ("EATI"), formed the joint venture ("Joint Venture" or
"ITI") with IAI in August 1995 to review, evaluate and exploit the commercial
potential of products based on non-military technologies developed by IAI. See
"1996 Developments."
1996 Developments
Overview. During 1996, the Company's sales increased to approximately $81.6
million from approximately $77.1 million in 1995 and cost of sales increased
both in total value and as a percentage of sales. Selling, general and
administrative expenses also increased both in total value and as a percentage
of sales. The Company had a net loss of approximately $29.9 million for 1996,
which included a charge of approximately $5.2 million for an unrealized loss on
its investment in Aydin Corporation, a charge of approximately $4.2 million
representing additional interest expense incurred in connection with the
issuance of convertible debt, a write down of the Company's investment in the
Joint Venture by $1.6 million resulting from the Company's decision to sell or
otherwise dispose of such investment and charges of approximately $1.4 million
primarily representing the charge to expense of purchased in-process research
and development resulting from the Company's investment in BarOn. This compared
with a net loss of approximately $30.9 million for 1995, which included a charge
of approximately $19.6 million representing the charge to expense of purchased
in-process research and development resulting from the Company's investment in
BarOn and the Joint Venture with IAI.
In October 1996, the Company adopted a plan to refocus on its core business
of contract manufacturing. The key elements of that plan are (i) concentrating
the capital resources of the Company in Tanon, (ii) limiting future funding of
BarOn and ITI by the Company and exploring alternative sources of funding for
BarOn and ITI or selling or otherwise disposing of the Company's interests in
BarOn and ITI, (iii) using the Company's holdings in Aydin Corporation to
provide funding for Tanon and the Company and (iv) attempting to increase
revenues and improve profit margins in Tanon by focusing on sales and margins,
improving purchasing and inventory management and expanding the range of
services provided by Tanon.
Schroder Loan 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 IBJ Schroder Bank &
Trust Company ("Schroder") to Tanon. Under the terms of this new facility,
Schroder will advance up to $13,000,000, (reduced to $11,500,000, the estimated
maximum amount needed, by amendment dated April, 1997) in the form of a
revolving loan with availability subject to the amount of a borrowing base
comprised generally of the sum of (1) up to between 80% and 85% of eligible
accounts receivable, (2) up to 18% of eligible inventory subject to an
availability sublimit of $3,000,000 and (3) up to 75% (reduced by one percentage
point on the first day of each month following May 3, 1996) of the liquidation
value of certain of the Company's machinery and equipment, subject to an
availability sublimit of $1,250,000 (the "Schroder Loan Facility"). The Company
expects that its outstanding balance under the Schroder Loan Facility will be
significantly less than $11,500,000 at all times during 1997. At December 31,
1996,
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$8,054,000 was outstanding under the Schroder Loan Facility, which constituted
the total availability of the borrowing base. The Schroder Loan Facility has a
three-year term and bears interest at an annual rate equal to the sum of the
base commercial rate determined by Schroder and publicly announced to be in
effect from time to time plus 1-1/2%. Each fiscal quarter, Tanon will also be
obligated to pay a fee at a rate equal to one-half of one percent (1/2%), per
annum of the average unused portion of the Schroder Loan Facility. The Company
paid a Closing fee of $125,000 to Schroder at the closing of the Schroder Loan
Facility. 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. 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 December 31, 1996, Tanon was in compliance with all of these
requirements, except the required ratio of earnings to certain fixed charges. By
agreement dated in April 1997 Schroder has agreed to waive such requirement for
December 31, 1996 and has adjusted the required financial ratios to reflect the
results of operations of Tanon contained in the current business plan of Tanon
for 1997. Substantially all of the assets of the Company are pledged as
collateral to secure the Schroder Loan Facility.
Concurrent with, and as a condition to, the closing of the Schroder Loan
Facility, the Company consolidated all of its contract electronic manufacturing
business into its wholly-owned subsidiary, 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, EAI is now principally
a holding company with all operations being conducted by its subsidiaries with
EAI providing strategic, financial and other support to such subsidiaries.
Acquisition of Common Stock of Aydin Corporation and Issuance of Convertible
Debentures. On May 6, 1996, the Company purchased 596,927 shares of the common
stock of Aydin Corporation ("Aydin"), a NYSE listed company, in a private
transaction 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 shares acquired 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 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,
manufacturers 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 common stock, on May 3,
1996, the Company sold certain 9% convertible subordinated 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 subordinated 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 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. The Company agreed to adjust the
ceiling price of each of the Debentures if the holder of such debenture
refrained from conversions and short sales from approximately the middle of
January 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). As of the date hereof, $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).
During May 1996, the Company initiated discussions with the Board of
Directors of Aydin concerning a possible 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. See "Capital Raised."
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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 shares of Aydin Common Stock currently held by the Company 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 596,927 shares of Aydin stock held by the Company (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 $11 per share. The option expires on the earliest of (i)
the close of business on the fifth business day following the effective date, as
determined by the Securities and Exchange Commission, of the S-3 or (ii) June 2,
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.
As a result of the termination of the merger discussions, and the Company's
decision to sell the Aydin Shares the Company has recorded a $5,156,000 charge
to expense representing the difference between the amount paid by the Company
for the shares of Aydin Common Stock and the estimated net realizable value of
such shares. In addition, approximately $689,000 of costs incurred in connection
with the terminated merger discussions with Aydin has been charged to expense in
1996. The closing price of Aydin common stock as reported by the NYSE at April
7, 1997 was $11 1/8 per share.
Joint Venture with IAI. The Company has determined that the Joint Venture
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 that it will explore its strategic options with respect to 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. If the Company refuses to provide additional
capital to the Joint Venture when necessary, the Company will be in default
under its agreement with IAI and the Company may forfeit its interest in the
Joint Venture.
The Company has selected one application for development and exploitation,
the Vista Application ("Vista") and a licensee, Vista Computer Vision, Ltd.
("VCV") has been formed. Vista is a system for the automatic inspection of
manufactured parts, capable of detecting defects as small as 20 microns. Based
on the current business plan of VCV, VCV will need additional capital in the
second half of 1997. The $1,000,000 funding for the initial operations of VCV
was made by EATI in June 1996 through a capital contribution of $250,000 to ITI
and a loan of $750,000 to VCV as evidenced by a $750,000 Subordinated Capital
Note. The note matures five years after its issuance and bears interest at 8%
per annum. Payments on the note may be made only out of remaining profits of VCV
after distribution of at least 50% of all accumulated profits. Upon liquidation
of VCV, the note would be subordinate to all other debts of VCV but would have a
preference over payments to equity holders of VCV.
On June 28, 1996, the Company loaned $1 million to EATI (the "EATI Loan") to
enable EATI to make the above capital contribution to ITI, which, in turn,
funded VCV, and to make the loan to VCV. The EATI Loan bears interest at 10% per
annum, payable annually. The principal is repayable in five equal annual
installments beginning on June 1, 2002 and continuing on June 1 of each year
thereafter. The Company may at its option, accelerate the EATI Loan and demand
repayment 18 months after the date of issuance of the loan. The EATI Loan is
subordinated to all other debts of EATI but would have a preference over
payments to equity holders of EATI.
At December 31, 1996, the Joint Venture formed with IAI had remaining funds
of $7,608,000. Such funds can only be used to fund expenses of the Joint
Venture. With the exception of the initial investment of $6.3 million in EATI,
and the EATI Loan, the Company is unable to determine at this time the effect,
if any, of the Company's investment in the Joint Venture on the results of
operations of the Company or on its liquidity and capital resources. As a result
of the Company's reduced level of capital (as compared to December 31, 1995) and
its decision to commit such capital to Tanon, the Company has decided not to
provide funding for any additional applications for development and exploitation
and has decided not to provide additional funding for Vista. Failure to make
additional required capital contributions would be a default under the joint
venture agreement with IAI. If the Company is in default as described above, it
may not be able to recover such Restricted Cash and may forfeit its interest in
the Joint Venture. In addition, the Company is reviewing its options relative to
the Joint Venture and has decided to sell or
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otherwise dispose of its interest in the Joint Venture. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations".
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.
BarOn Investment. BarOn has incurred significant losses and had negative
cash flows from operations since inception. BarOn currently has no revenues from
operations. BarOn's financial projections indicate that operating losses and
negative cash flows will continue at least through the remainder of 1997. BarOn
is currently seeking additional financing to fund its on-going operations and
has indicated that it intends to sell the 95,694 shares of common stock of the
Company that are currently held by BarOn to satisfy a portion of such financing
needs. BarOn has sold 25,200 of such shares and expects to receive gross
proceeds of $125,000 from such sales. These proceeds represent BarOn's only
current available resources. BarOn's other resources consist of approximately
$140,000 being held as security for a letter of credit to one of its vendors.
BarOn is currently negotiating for the release of any such funds beyond the
obligations to this vendor. The Company has ceased making advances under the
BarOn Loan Agreement and has informed BarOn that it will not make further major
advances.
BarOn's current obligations to vendors, employees, attorneys and
accountants for professional services, and otherwise currently exceed $600,000
and BarOn is currently unable to meet such current obligations. In February
1997, James M. Curran, the acting Chief Executive Officer of BarOn resigned to
seek other opportunities. In March 1997, Dr. Ehud Baron resigned as an officer
of BarOn and Irwin L. Gross, Chairman of the Company has been designated acting
President of BarOn. At the request of certain creditors of BarOn, a hearing was
held in the regional court of Haifa, Israel on April 8, 1997 to appoint a
temporary receiver for BarOn. The hearing was adjourned without any action being
taken other than rescheduling the hearing to June 23, 1997.
Management of BarOn is attempting to design a plan to reorganize BarOn to
avoid a liquidation of BarOn. Such a plan would involve restructuring the
operations of BarOn to minimize costs, attempting to negotiate reduced payments
or revised payment schedules with creditors of BarOn, and obtaining additional
debt or equity financing of BarOn. As part of the development of this plan, the
Company has requested that the management of BarOn conduct an intensive review
of the development status of the technology of BarOn along with an estimate of
the additional cost and time necessary to develop a marketable product. No
assurance can be given that BarOn will be successful in the efforts to implement
a restructuring plan.
On July 1, 1996, the Company entered into a Loan Agreement (the "BarOn Loan
Agreement") with BarOn. Pursuant to the BarOn Loan Agreement, the Company has
agreed to provide to BarOn a revolving line of credit of $2 million until July
1, 1998 ("Revolving Line Period"). During the Revolving Line Period, any unused
availability under the line will be reduced in the event, and to the extent,
that BarOn is able to obtain other funds through equity or debt financing.
Advances under the line will be made in the Company's sole discretion. Such
advances bear interest at an annual rate equal to the sum of the base commercial
rate (the "Base Rate") as determined by Schroder from time to time plus one and
one half percent (1-1/2%). Interest is due each calendar quarter and, at the
option of BarOn, any payment for such interest may be deferred until the
succeeding July 1. Deferred interest bears additional interest at the rate of
two and one-half percent (2-1/2%) plus the Base Rate. The Company, at its
option, may require that interest be paid in cash or by issuance of ordinary
shares of BarOn at an agreed value of $4.00 per share (the "Agreed Value").
BarOn, at its option, may make any interest payments due on or before July 1,
1997 in ordinary shares of BarOn at the Agreed Value. As of March 31, 1997,
BarOn had borrowed $1,368,705, which was outstanding under the BarOn Loan
Agreement. In addition, the entire amount outstanding under the line of credit
during and upon expiration of the Revolving Line Period is due on the earliest
to occur of (i) an initial public offering by BarOn, (ii) the sale of equity or
borrowings by BarOn exceeding the amount outstanding by at least $500,000
(unless prohibited by such lender or investor), (iii) availability of excess
cash flow from operations in an amount equal to or in excess of the amount
outstanding, or (iv) June 1, 2000.
In consideration of the Company's agreement to open the line of credit,
BarOn has granted the Company antidilution protection for all shares currently
owned by the Company. This protection provides that the Company will be issued
additional shares if BarOn issues shares of its capital stock, instruments
convertible into such stock, or options or warrants to purchase such shares, at
any price below the Agreed Value. In addition, BarOn issued the Company a
warrant (the "BarOn Warrant") to purchase 1 million shares of BarOn's ordinary
shares at any time before
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July 1, 2001 at an exercise price equal to the Agreed Value. The BarOn Warrant
contains antidilution provisions substantially similar to those described above
and the Company has piggyback and demand registration rights for shares
purchased pursuant to the BarOn Warrant.
The Company and BarOn have also revised their agreement, effective on July
1, 1996, regarding the manufacture of the products of BarOn. The revised
agreement has a five year term and provides that the Company or a subsidiary of
the Company will manufacture all of BarOn's products on an exclusive basis at a
price established based on actual component costs plus labor charges, overhead
and an agreed upon profit margin. This price is consistent with prices charged
to unrelated customers of the Company for comparable manufacturing services. As
of the date of this report, the Company is not yet manufacturing products for
BarOn.
Tri-Star Technologies. On December 23, 1996, the Company signed letters of
intent to acquire Tri-Star Technologies Co. ("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. For a more complete
discussion of the Company's capital resources see Item 7. "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources: 1996".
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 7.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources: 1996".
Resignations. Effective November 15, 1996, Joseph R. Spalliero resigned as
President and Director of the Company. Upon the expiration of Mr. Spalliero's
employment agreement on January 3, 1997, Mr. Spalliero became an independent
sales representative for Tanon. Mr. Spalliero agreed to limit the sale of his
shares of Common Stock in the Company during any calendar quarter through
December 31, 1998 to 25,000 shares per each quarter. After such period, there
will be no further restrictions on the sales of his shares. Irwin L. Gross,
Chairman of the Board of the Company, has succeeded Mr. Spalliero as the
President of the Company. Effective January 17, 1997, Bruce P. Murray resigned
as a Director of the Company. Effective January 27, 1997, David J. Reibstein
resigned as a Director of the Company.
Reverse Stock Split. On December 16, 1996, the Board of Directors of the
Company approved and declared a one-for-four reverse stock split of the shares
of Common Stock of the Company which became effective as of the close of
business on December 27, 1996 (the "Record Date"), such that 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 "Reverse Stock Split"). All references to shares, share prices, per
share amounts and stock option plans have been adjusted to give retroactive
effect to the one-for-four reverse stock split.
Capital Raised. The Company has incurred significant losses and had negative
cash flows from operations in each of the last three years. In order to continue
operations, the Company has had to raise additional capital to offset cash
utilized in operating and investing activities. The Company raised approximately
$33,200,000 and $15,870,000 during 1995 and from January 1, 1996 through January
31, 1997, respectively, from the issuance of Common Stock, the exercise of stock
options and warrants, borrowings secured by the Aydin Shares, and the sale of
convertible notes
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and debentures. Among such capital raising activities, in December 1995, the
Company completed the sale of 7% convertible subordinated notes of the Company
in the aggregate principal amount of $10,000,000 to GFL Performance Fund Limited
("GFL Performance Fund") and GFL Advantage Fund Limited ("GFL Advantage Fund").
As of this date, $7,930,000 principal amount of such notes had been converted
into 810,661 shares of the Company's Common Stock in accordance with their
terms. On August 19, 1996, GFL Performance Fund Limited transferred and assigned
its $1,025,000 outstanding principal amount note of the Company to an unrelated
third party, who thereafter converted such note. Also, on August 19, 1996, GFL
Advantage Fund 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 Convertible Notes of the Company in the aggregate principal
amount of $2,070,000 due December 29, 1997 (the "Original Convertible Notes") to
the Note Holders. These Original Convertible Notes had a maturity date of
December 29, 1997 and were convertible into shares of the Company's Common Stock
at the fixed conversion price per share of $2.67 (pre Reverse Stock Split
basis). On February 6, 1997, the Company amended the Original Convertible Notes
(the "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
Original Convertible Notes) and (ii) reducing the fixed conversion price of such
notes to $1.50 per share, such amendments were made in consideration of the Note
Holders foregoing interest and making available certain other loans to the
Company.
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
Corporation. See "1996 Developments - Acquisition of Common Stock of Aydin
Corporation and Issuance of Convertible Debentures."
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.
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. Interest is
payable at the option of the holder in cash or stock of the Company or Tanon at
the conversion prices described above. 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, payable on the first day of each month beginning as early as March 1,
1997. Repayment of the EAI Notes is secured by a lien on the Aydin Shares. 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").
Contract Electronic Manufacturing
The Company believes that original equipment manufacturers ("OEMs") have
recognized that, by using contract electronic manufacturers, they can improve
their competitive position, realize an improved return on investment, and
concentrate in areas of their greatest expertise, such as research, product
design and development, and marketing.
7
<PAGE>
In addition, contract electronic manufacturing allows OEMs to: bring new
products to market more rapidly and adjust more quickly to fluctuations in
product demand; avoid additional investment in plant, equipment, and personnel;
reduce inventory carrying and other overhead costs; and establish fixed unit
costs over the life of a contract.
The contract electronic manufacturing business consists 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 Company manufactures over 1,500 different assemblies which are
incorporated into product lines of over 30 different companies. The Company
provides contract electronic manufacturing services primarily for manufacturers
of: micro, mini and mainframe computers; computer peripheral equipment; high
quality graphic equipment; office equipment; telecommunications equipment;
consumer appliances, industrial tools and measuring devices.
The technology required to manufacture electronic products is becoming
increasingly costly and complex. Traditionally, manufacturers used the so-called
"through-hole" technology in assembling printed circuit boards. However, a newer
technology, known as "surface-mount" technology ("SMT") has gained acceptance in
the manufacture of these products.
The Company has invested in new manufacturing equipment to accommodate the
increased business for SMT equipment. SMT allows for production of a smaller
circuit board, with greater component and circuit density, resulting in
increased performance. Management believes that SMT will continue to constitute
an increasing percentage of printed circuit board production and assembly.
Research and Development
The Company did not incur any significant research and development
expenditures other than the purchased research and development relating to the
BarOn and IAI transactions.
Customers and Marketing
Most of the Company's sales are to industrial companies which use the
Company's contract electronic manufacturing services to manufacture products for
a variety of high-technology applications, including those for computers,
telecommunications devices, high-quality graphics, and medical testing devices.
Substantially all of the Company's net sales during the year ended December
31, 1996 were derived from customers which were also customers of the Company
during 1995. In 1996, the customers which accounted for more than 10% of the
Company's net sales were Advanced Fibre Communications, Inc., Dialogic
Corporation and Iris Graphics, which accounted for 33%, 16%, and 13% of net
sales, respectively. Currently, the Company remains dependent upon its large
customers. The loss of one or more of these customers could have a material
adverse effect on operations. Since customer contracts can be canceled and
purchase levels can be changed or purchases delayed at any time, the timely
replacement of canceled, delayed or reduced contracts with new orders cannot be
assured. In addition, substantially all of the Company's customers are in the
computer, telecommunications and electronics industries which are each subject
to rapid technological changes. Such technological changes could have a material
adverse effect on the Company's major customers which, in turn, could have a
material adverse effect on the Company's results of operations. Because the loss
of one or more of these customers could have a material adverse effect on its
operations, the Company maintains continuous dialogue with all its customers to
ensure satisfactory quality and an on-time delivery service. Also, the Company's
marketing programs are focused to identify and develop opportunities to provide
contract electronic manufacturing services to new customers.
Historically, the Company has had substantial recurring sales from existing
customers. The Company seeks to develop long-term relationships with a small
number of customers. Current marketing efforts are aimed at obtaining similar
long-term relationships with new customers, as well as maintaining its current
customer base. Although the Company believes that its relations with its
customers are good and that their business will continue, specific purchase
orders are generally of less than one year in duration, and there is no
assurance that future orders will be obtained. The volume of contract
manufacturing business also depends upon the success of customers' sales.
8
<PAGE>
The Company employs a variety of marketing techniques for the sale of its
services, including direct sales efforts by an in-house sales force, and the
utilization of independent sales representatives.
The Company's contract electronic manufacturing services in 1996 were
provided to customers in the following markets in the approximate percentage of
Company sales, respectively, indicated:
<TABLE>
<CAPTION>
Market Served Customers Representing 10% or
- ------------- -----------------------------
by Customers Percentage of 1996 Sales more of Sales
- ------------ ------------------------ -------------
<S> <C> <C>
Telecommunications 62% Advanced Fibre Communications,
Inc., Dialogic Corporation
High Quality Graphics 14 Iris Graphics, Inc.
Computer Peripherals 11
Power Generation 4
Medical Devices 3
Computers 2
Miscellaneous 4
---
Total 100%
===
</TABLE>
9
<PAGE>
Backlog
The Company's backlog consists of firm purchase orders which typically are
shipped within twelve months from time of receipt of the order. Because purchase
orders may be accelerated or deferred by rescheduling or canceled by payment of
cancellation charges, backlog does not necessarily reflect future sales levels.
The Company's backlog at the end of 1996 was $27,958,000. It is anticipated that
substantially all of the 1996 year-end backlog will be delivered in 1997. The
Company's backlog at the end of 1995 was $47,305,000.
Governmental Regulation
The Company's operations are subject to certain federal, state and local
regulatory requirements relating to environmental, waste management, health and
safety matters. Management believes that the Company's business is operated in
compliance with all material applicable environmental, waste management, health
and safety regulations. However, new or modified requirements, which are not
currently anticipated, could be adopted creating additional expense for the
Company.
New Jersey has enacted an Industrial Site Remediation Act ("ISRA"). As is
the case with many other companies doing business in New Jersey, if the Company
were to move from its present facilities in New Jersey, sell its assets or
effect a change in its ownership, such a transaction would be subject to the
requirements of ISRA. Under ISRA, before such a transfer could take place, a
determination would need to be made to ensure there has been no unremediated
discharge of hazardous substances or wastes on the site; or a satisfactory
clean-up plan would need to be submitted to the New Jersey Department of
Environmental Protection and Energy ("DEPE"). Failure to comply with ISRA is
grounds for voiding the transfer by the purchaser or by DEPE, among other
enforcement remedies.
Employees
As of December 31, 1996, 1995 and 1994, the Company had 449, 514, and 334
total employees, respectively. Individuals employed at the Company's
manufacturing facility in Nogales, Sonora, Mexico, which has been sold, and
included in such totals were 124 in 1994 .
Quality Control
The Company achieved "ISO 9000" certification for its West Long Branch
manufacturing facility in 1995 and its Fremont, California facility in early
1996. International Standards Organization ("ISO") certification refers to a
series of quality system standards adopted to ensure that companies worldwide
are in compliance with a documented system of quality control processes and
procedures.
Suppliers
The Company relies on third-party suppliers for components which it uses in
its assembly processes. Components generally are ordered when the Company has a
firm purchase order or letter of intent from a customer to purchase the
completed assemblies. At various times in the electronics industry there have
been shortages of these kind of components. However, the Company is not
dependent upon a single source of supply for materials or components that it
considers important to its business, because multiple suppliers are available
for most important components or their substantial equivalent.
10
<PAGE>
Competition
The Company competes with numerous domestic and offshore contract
manufacturers as well as the in-house manufacturing capabilities of certain of
its existing and potential customers. Some of the Company's competitors have
substantially greater manufacturing, financial and marketing resources than the
Company. The Company believes that the significant competitive factors in
contract manufacturing are technology, quality, service, price and ability to
deliver finished products on a timely and reliable basis. The Company believes
that it competes favorably with respect to these factors.
Contracts
The Company's contracts provide for services to be performed primarily on a
fixed-price basis, although change orders on large contracts are not unusual.
The contracts generally provide termination rights for customers, but upon such
termination the Company would be entitled to reimbursement for allowable costs
already incurred. The Company has no long-term contracts for the sale of
services that are individually material.
Facilities
See "Properties" at Part I, Item 2 of this Annual Report on Form 10-K.
International Operations
BarOn and ITI conduct their operations primarily in Israel.
Patents and Trademarks
The Company does not hold any patent rights which are material to the
contract electronic manufacturing business, nor does the Company believe that
patent protection is an important competitive factor in its market. The Company
has received federal trademark registration for the mark "EAI", which is also
registered in many other countries.
ITEM 2. PROPERTIES
Currently, the Company's executive offices are located at 185 Monmouth
Parkway, West Long Branch, New Jersey 07764 at which the Company presently
occupies approximately 81,000 square feet. During 1996 the lease on the
Company's Tucson, Arizona facility was canceled.
The Company, through its wholly-owned subsidiary, Tanon, occupies a single
facility with 105,000 square feet at 46360 Fremont Boulevard, Fremont,
California, through which it conducts production and administrative operations
for its West Coast customers.
See Note 4 of the Notes to Consolidated Financial Statements at Part II Item
8, of this Annual Report on Form 10-K for information regarding the rents
payable under the above leases.
ITEM 3. LEGAL PROCEEDINGS
Lemco Associates.
11
<PAGE>
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 have commenced and
continued through March 1997 and the case is currently scheduled for trial
beginning on April 28, 1997.
12
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The following information is provided with respect to the Annual
Stockholders Meeting of the Company.
a) Held: May 30, 1996.
b) Directors Elected:
NO. OF VOTES
VOTES WITHHOLDING
FOR AUTHORITY
----- ------------
Seth Joseph Antine 12,053,775 972,786
Mark S. Hauser 12,054,896 971,665
Jules M. Seshens 12,639,441 387,120
Directors whose term continued:
Irwin L. Gross
Bruce P. Murray Resigned January 17, 1997
David J. Reibstein Resigned January 27, 1997
Joseph R. Spalliero Resigned November 15, 1996
William Spier
c) Other Matters Voted on by Shareholders:
1. To amend the Company's Equity Incentive Stock Option Plan to
increase the number of shares of Common Stock of the Company reserved for
issuance under such plan from 1,500,000 to 2,250,000 shares.
VOTES VOTES
FOR AGAINST ABSTAINING
----- ------- ----------
3,088,133 1,885,851 71,091
2. To ratify the selection of Arthur Andersen LLP as the Company's
auditors for the fiscal year 1996.
VOTES VOTES
FOR AGAINST ABSTAINING
----- ------- ----------
12,875,782 120,778 30,001
13
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
EAI's Common Stock is traded on the New York Stock Exchange ("NYSE"). The
range of quarterly Common Stock price for 1996 and 1995 is as follows:
<TABLE>
<CAPTION>
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
- -----------------------------------------------------------------------------------------------------------------------
High Low High Low High Low High Low
------------------- ------------------- ------------------- ----------------------------
<C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1996 21 1/2 12 22 1/2 13 17 10 12 1 5/8 (1)
1995 38 1/2 25 1/2 36 23 47 22 1/2 24 1/2 17 1/2
</TABLE>
(1) Effective as of the close of business on December 27, 1996 (the "Record
Date"), there was a one-for-four reverse stock split of the shares of Common
Stock of the Company. All historical stock prices above and throughout this
document have been restated to reflect the reverse stock split.
There were approximately 4,021 record holders of the Company's Common Stock
as of April 10, 1997.
The Company has not had a profitable year since 1990 and there have been no
cash dividends declared since 1956 and no stock dividends declared since 1966.
If the Company were to become profitable, it would expect that all of such
earnings would be retained to support the business of the Company. Accordingly,
the Company does not anticipate paying cash dividends on its Common Stock in the
foreseeable future.
Although the Company's Common Stock is currently listed and trading on the
NYSE, currently and since September 11, 1991, the Company has not been in
compliance with one or more of the criteria necessary for continued listing on
the NYSE. The Company and the NYSE have had discussions with respect to this
issue. As of the date of this Report, the Company believes that it is in
compliance with all of the NYSE's continued listing criteria, with the exception
of not having the minimum net tangible assets available to Common Stock of
$8,000,000 and minimum average earnings of $600,000 for each of the last three
fiscal years. To the Company's knowledge, as of the date hereof, the NYSE has
not taken any affirmative action to delist the Common Stock, but, as it has each
time it has authorized the listing of additional shares on the NYSE, it stated
in letters dated March 29, 1995, March 14, 1996, August 29, 1996, December 16,
1996 and December 27, 1996 approving the listing of additional shares of Common
Stock, that consideration is being given to the appropriateness of continued
listing of the Company's Common Stock. Management of the Company met with
representatives of the NYSE on March 6, 1996 to discuss this matter and the
Company's financial plan for 1996, after which the NYSE indicated in its letter
dated March 14, 1996 that the Company's financial results for the first quarter
of 1996 will be reviewed and measured against such plan. Management of the
Company met again with representatives of the NYSE on July 31, 1996 to discuss
the Company's results of operations for the first quarter ended March 30, 1996
and the Company's future plans, with no further changes or developments
resulting from such meeting. If the Company's Common Stock is delisted from the
NYSE, it could have a material adverse effect on the price and liquidity of the
Company's Common Stock and the Company's ability to raise capital from the sale
of equity.
In the event that the Company's Common Stock is delisted from the NYSE, it
could seek to list its Common Stock on the National Association of Securities
Dealers Inc.'s Automated Quotation System ("NASDAQ") or on another exchange.
Although the Company believes that it is currently eligible for listing on the
NASDAQ Small-Cap Market System (but not on the NASDAQ National Market System),
there can be no assurance that the Company would be eligible for listing its
Common Stock on NASDAQ or any exchange at such time. If the Company would be
ineligible to list its Common Stock on NASDAQ or any other exchange at such
time, there would be no established trading market for the Company's Common
Stock except as may be established in the National Association of Securities
Dealers Inc.'s OTC Bulletin Board Service or in the "pink sheets," which could
have a material adverse effect on the price and liquidity of the Company's
Common Stock. In addition, the Company's Common Stock could then become subject
to the Commission's "penny stock" rules which regulate broker-dealer sales
practices. Such rules could restrict the ability of broker-dealers to sell the
Company's Common Stock, which could also have a material adverse effect on the
price and liquidity of the Company's Common Stock.
14
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
(Thousands of Dollars Except for Per Share Amounts, Common
Shares Outstanding and Other Data)
1996 1995 1994 1993 1992
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
[----Note 1----]
Operating Results: [------Note 4-------]
Net Sales from Continuing Operations $ 81,625 $ 77,085 $30,539 $26,024 $22,248
Provision for Restructuring $ -- $ -- $ 2,400 $ -- $ 285
Loss from Continuing Operations before Taxes $(29,954) $(30,894) $(4,784) $(5,348) $(3,524)
Loss from Continuing Operations, Net $(29,954) $(30,894) $(4,784) $(4,664) $(3,189)
Income from Discontinued Operations, Net $ -- $ -- $ -- $ 1,327 $ 651
Net Loss $(29,954) $(30,894) $(4,784) $(3,337) $(2,538)
Income (Loss) Per Common Share:
Continuing Operations (Note 3) $ (6.24) $ (10.01) $ (3.79) $ (7.04) $ (4.88)
Discontinued Operations $ -- $ -- $ -- $ 2.00 $ 1.00
Net Loss (Note 3) $ (6.24) $ (10.01) $ (3.79) $ (5.04) $ (3.88)
- --------------------------------------------------------------------------------------------------------------
Financial Position:
Current Assets $ 22,319 $ 37,022 $16,969 $ 7,355 $14,547
Current Liabilities $ 31,485 $ 25,834 $12,603 $ 8,614 $11,594
Long Term Obligations $ 12,400 $ 16,028 $ 2,998 $ 4,694 $ 5,466
Working Capital $ (9,166) $ 11,188 $ 4,366 $(1,259) $ 2,953
Net Equipment and Leasehold Improvements $ 10,522 $ 8,048 $ 2,719 $ 3,603 $ 4,344
Total Assets $ 50,971 $ 61,252 $22,845 $12,762 $19,836
Shareholders' Equity (Deficit) $ 7,086 $ 19,390 $ 7,244 $ (546) $ 2,776
Common Shares Outstanding (Note 3) 5,601 4,011 2,027 665 662
Book Value per Common Share (Note 3) $ 1.27 $ 4.84 $ 3.56 $ (0.84) $ 4.20
- --------------------------------------------------------------------------------------------------------------
Other Data:
Number of Shareholders of Record 4,152 4,254 4,447 4,600 4,718
Number of Employees 449 514 334 315 458
Orders Received (Note 2) $ 62,400 $105,150 $30,326 $18,805 $31,592
Sales Backlog at Year-End $ 27,958 $ 47,305 $19,240 $19,453 $26,676
</TABLE>
Note 1-1995 amounts include the impact of the Tanon Acquisition, BarOn
investment, and Joint Venture with IAI (See Note 3 of the Notes to Consolidated
Financial Statements as Part II, Item 8 of this Annual Report Form 10-K).
Note2-Orders received in 1995 includes $15,710,000 of Tanon backlog at
December 31, 1994.
Note 3-The Board of Directors approved a one-for-four reverse stock split of the
shares of Common Stock of the Company to be effective as of the close of
business on December 27, 1996. The transaction had the effect of reducing the
number of net shares outstanding to 5,600,632 shares from 22,402,528 shares.
In addition, all references referring to shares, share prices and per share
amounts have been adjusted to give retroactive effect to the one-for-four
reverse stock split.
Note 4-The Company has decided to sell or otherwise dispose of its interest
in the Joint Venture and, accordingly, such interest has been classified as an
unconsolidated subsidiary held for sale. 1995 amounts have been reclassified
to conform to the 1996 presentation.
15
<PAGE>
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Overview
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 has terminated
discussions with Aydin. For a more thorough discussion of this transaction. See
Part I, Item 1, "Business -- 1996 Developments-Acquisition of Common Stock of
Aydin Corporation and Issuance of Convertible Debentures."
On June 28, 1996, the Company, through its subsidiary, EATI, provided the
initial funding in the amount of $1,000,000 for the establishment of VCV, the
first licensee formed under the Joint Venture. For a more thorough discussion of
this transaction. See Part I, Item 1, "Business -- 1996 Developments-Joint
Venture with IAI."
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 Tri-Star, Tanon and the Company, as well as execution
of a definitive purchase agreement. For a more thorough discussion of this
transaction. "See Part I, Item 1, Business -- 1996 Developments - Tri-Star
Technologies."
Results of Operations: 1996 compared to 1995
During 1996, the Company's sales increased to approximately $81.6 million
from approximately $77.1 million in 1995 and cost of sales increased both in
total value and as a percentage of sales. Selling, general and administrative
expenses also increased both in total value and as a percentage of sales. The
Company had a net loss of approximately $29.9 million for 1996, which included a
charge of approximately $5.2 million for an unrealized loss on its investment in
Aydin Corporation, a charge of approximately $4.2 million representing
additional interest expense incurred in connection with the issuance of
convertible debt, a write-down of the Company's investment in the Joint Venture
by $1.6 million resulting from the Company's decision to sell or otherwise
dispose of such investment and charges of approximately $1.4 million primarily
representing the charge to expense of purchased in-process research and
development resulting from the Company's investment in BarOn. This compared with
a net loss of approximately $30.9 for 1995, which included a charge of
approximately $19.6 million representing the charge to expense of purchased
in-process research and development resulting from the Company's investments in
BarOn and the Joint Venture with IAI.
The increase in sales to $81,625,000 in 1996 from $77,085,000 in 1995
resulted primarily from an increase in sales to the existing customer base and
sales to several new customers partially offset by the loss of two customers.
Sales to existing customers in 1996 were approximately $69,100,000 and sales to
new customers were approximately $12,500,000.
Cost of sales in 1996 increased to $81,145,000 from $76,422,000 in 1995 and
increased as a percentage of revenue in 1996 to 99.4% compared with 99.1% in
1995. The increase in absolute terms was primarily due to the increase in
revenues. The increase as a percentage of sales was primarily due to the low
margins on one large initial contract with a new customer. Revenues from this
customer in 1996 were approximately $4,000,000. The Company completed this
contract at the end of 1996 and negotiated higher sales prices on a new contract
with this customer in early 1997. The impact on cost of sales resulting from
this contract was partially offset by a decline in material costs resulting from
a market driven decline in prices of memory chips which are a component in many
products assembled by the Company. Cost of sales as a percentage of revenue is
impacted by margins on individual contracts and the total amount of revenues
relative to fixed cost. The Company considers its margins on individual
contracts to be acceptable. Therefore, a reduction in cost of sales as a
percentage of revenue will result from an increase in sales in addition to
improvements in other elements of cost of sales.
16
<PAGE>
Gross profit from contract manufacturing was $480,000 in 1996 compared with
$663,000 in 1995. The decline in profit was due to the same elements that caused
an increase in cost of goods sold between the two periods.
Selling, general and administrative expenses increased to $11,379,000 in
1996 from $9,703,000 in 1995. The increase was primarily a result of additional
expenses in the amount of $689,000 relating to the terminated merger discussions
with Aydin Corporation, an increase in the amount of $800,000 in allowance for
doubtful accounts primarily related to one former customer and, to a lesser
extent, additional sales, general and administrative staff hired during the
fourth quarter of 1995 to support the increased level of sales and sales effort
at Tanon and additional general and administrative expenses incurred in
connection with operating EAI principally as a holding company. All operations
are now conducted by its subsidiaries with EAI providing strategic, financial
and other support to these subsidiaries. Selling, general and administrative
expenses as a percentage of revenue increased to 13.9% in 1996 as compared to
12.6% for the same period in 1995.
Purchased research and development primarily represents approximately
$1,000,000 of the funding provided to BarOn under the BarOn Loan Agreement which
management has determined to be in-process research and development with no
alternative future use and, accordingly, which, was charged to expense.
Interest income of $229,000 in 1996 increased from $180,000 in 1995. This
increase was a result of the investment of funds received from the sale of
convertible notes in December 1995 in the amount of $10,000,000.
Interest expense in 1996 was $7,559,000 compared to $1,357,000 in 1995. The
increase is primarily attributable to a charge to interest expense in the amount
of $4,200,000 reflecting the amortization of the fixed discount feature of
convertible notes and debentures issued in December 1995 and May and June 1996,
and to a lesser extent the stated interest on convertible notes and debentures,
a $655,000 charge representing the increase in the principal amount of the
Original Convertible Notes and interest on capitalized leases related to
equipment acquired in 1995 and 1996.
The loss on investment is a result of the write down of the Company's
investment in Aydin Corporation by $5,156,000 due to a decline in the market
price of Aydin Common Stock considered to be other than temporary
Other expenses in 1996 were $5,186,000 compared to $1,131,000 in 1995. The
increase is primarily attributable to a write down of the Company's investment
in the Joint Venture by $1,647,000 resulting from the Company's decision to sell
or otherwise dispose of such investment (See Item 1 - 1996 Developments -- Joint
Venture with IAI), a decline in the market value of EAI Common Stock securing a
note receivable by $907,000, a write off of fixed assets of $563,000 and an
increase of approximately $350,000 in the Company's share of cost in the Joint
Venture.
Results of Operations: 1995 compared to 1994
During 1995, the Company's sales increased, cost of sales increased (both in
total value and as a percentage of sales), and selling, general and
administrative expenses increased in total but decreased as a percentage of
sales. The Company had a loss from operations of $28,586,000 for 1995, which
included charges of $7,874,000 and $11,672,000, representing the charge to
expense of purchased in-process research and development resulting from its
investments in BarOn and the Joint Venture with IAI, respectively. This loss
compared with a loss from operations of $4,211,000 in 1994 which included a
provision for restructuring of $2,400,000.
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 during the first
quarter of 1995 and the additional 8.33% equity interest acquired on September
30, 1995 represents in-process research and development with no alternative
future use. Accordingly, the estimated value associated with such purchased
research and development of $6,012,000 and $1,862,000, respectively, was charged
to expense.
No portion of the purchase price of the Company's indirect interest in ITI
has been capitalized because all of the technologies are in the initial stage of
development and considered to be in-process research and development. Therefore,
the Company has recorded a charge to expense of $11,672,000 with respect to
formation of ITI.
The increase in sales to $77,085,000 in 1995 from $30,539,000 in 1994,
resulted primarily from the additional sales generated by Tanon, which had sales
of $50,452,000 in 1995. Sales from the Company's prior existing
17
<PAGE>
operations decreased to $26,633,000 from $30,539,000 in 1994 which decrease was
a direct result of the closing of the Company's Tucson, AZ and Nogales, Mexico
plants. The majority of the services provided to customers at the Tucson
facility was transferred to the Company's manufacturing facility in New Jersey;
a moderate level of manufacturing services was transferred to the Company's
Fremont facility at the customer's request, and the assembly-related services
provided at the Nogales, Mexico facility were sold, together with the assets of
that facility. The sales of $50,452,000 for Tanon in 1995 decreased moderately
from sales of $50,735,000 in 1994, which reflects the loss of revenue from two
customers who terminated their relationship with Tanon during this period,
offset by the growth in sales to Tanon's existing customer base.
Cost of sales in 1995 increased to $76,422,000 from $27,759,000 in 1994
primarily due to the additional sales generated by Tanon. Cost of sales
increased, as a percentage of revenue, to 99.1% in 1995 compared with 90.9% in
1994, resulting primarily from (i) the increase in materials cost for a customer
with whom the Company has expanded its material handling services, (ii) a price
reduction in sales of material by Tanon to one of its existing customers, which
was negotiated in response to competitive pricing pressures, and (iii) a shift
in the New Jersey facility's focus from low volume, high margin customers to
high volume, low margin customers which resulted in a lower gross profit margin
and a higher volume break-even point for the facility. In addition, the Company
incurred a loss on services rendered to a major customer. In January, 1996 the
Company renegotiated the pricing on future services for this customer. Also
during the fourth quarter of 1995, the Company initiated action to reduce its
material cost as a percentage of revenues. This action includes hiring new
personnel to increase the Company's material purchasing skill level and
upgrading the Company's material control computer system. Consistent with the
Company's shift in focus to high volume during 1995 the Company began the
process of adding to and upgrading its high speed SMT capabilities. Two new high
speed SMT lines were acquired in 1995 to increase the existing New Jersey
facility capabilities, a new high speed SMT line was acquired in early 1996 to
increase the Fremont facility capabilities and two additional high speed SMT
lines are planned to replace two older lines in 1996. Cost of sales at the
Company's prior existing operation increased to 106% of sales in 1995 from 90.9%
of sales in 1994 as a result of the above. As noted above, the pricing for
services to a major customer was renegotiated in January. This renegotiation,
combined with increased sales volume in the first two months of 1996, has
returned the Company's prior existing operations to a positive gross profit
margin, which Management expects will continue although there can be no
assurance that such operations will continue to have a positive gross profit
margin. Tanon's cost of sales increased moderately from 93.4% of sales to 95.4%
of sales between 1994 and 1995, also as a result of the above.
Selling, general and administrative expenses increased to $9,703,000 from
$4,591,000 in 1994. The increase in the level of selling, general and
administrative expenses was primarily related to the addition of the Tanon
operations. Selling, general and administrative expense for the Company's prior
existing operations increased to $6,167,000 in 1995 from $4,591,000 in 1994 as a
result of fees paid and warrants to purchase the Company's stock granted to
consultants, the payment of consulting fees for several directors, the
elimination of salary reductions for employees of the Company which had been in
effect during 1994 and additional general and administrative expense incurred in
connection with the Company's investment in ITI, partially offset by reductions
in sales, general and administrative staffs during the first and second
quarters. The Company has, however, hired additional sales, general and
administrative staff in the fourth quarter to support the increased level of
sales. Selling, general and administrative expenses declined as a percentage of
revenue to 12.6% in 1995 from 15.0% in 1994 primarily because the increase in
sales exceeded the rate of the increase in selling, general and administrative
expenses. Selling, general and administrative expense for Tanon was at
approximately the same level of $2,768,000 in 1995 as in 1994.
As a result of the Tanon Acquisition, during the first quarter of 1995 the
Company began taking steps to close and sell its Southwest operations in Tucson,
Arizona and Nogales, Mexico to eliminate the operating expenses associated with
these facilities. The closing of the Tucson, Arizona operations and sale of the
Nogales, Mexico operations were completed in the second quarter of 1995. The
majority of the operations which were supporting the Company's sales base out of
the Tucson location were transferred to the New Jersey facility in the second
quarter of 1995. Additionally, the Company reduced indirect manufacturing and
sales, general and administrative staff in its New Jersey facility during the
first quarter in 1995 and in the Fremont, California facility in the second
quarter of 1995. The combined termination expenses for these activities in 1995
was provided for as part of the Company's 1994 restructuring. Management
believes that by these actions it has substantially eliminated duplicate
expenses and improved 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.
Interest income of $180,000 in 1995 increased from $89,000 in 1994 primarily
reflecting investment income from the sale of Common Stock in April, July and
August of 1995. Interest expense increased from $662,000 in 1994 to
18
<PAGE>
$1,357,000 in 1995 primarily as a result of the interest expense on Tanon's
credit facilities and, to a lesser extent, the sale of convertible subordinated
debentures in September and October. Interest expense for the Company's prior
existing operations was $719,000 in 1995 as compared to $662,000 in 1994.
Tanon's interest expense increased from $638,000 in 1994 to $662,000 in 1995
primarily as a result of an increase in the average amount borrowed under
Tanon's Revolving Loan.
Other expense in 1995 is primarily the Company's equity interest in the
results of BarOn. BarOn is a development stage company which was formed in July
1992 and has experienced losses of $3,157,000 and $1,101,000 for 1995 and 1994,
respectively. BarOn had total assets of $3,650,000, total liabilities of
$448,000, and net equity of $3,202,000 at December 31, 1995. BarOn has had no
sales since its formation.
Liquidity and Capital Resources: 1996
At the beginning of 1996, the Company had approximately $9,830,000 cash
(excluding restricted cash). The Company raised approximately $11,957,000 from
financing activities during 1996. The Company, during 1996, purchased shares of
Aydin for $10,752,000, incurred costs of $689,000 related to merger discussions
with Aydin, loaned BarOn approximately $1,310,000 under the BarOn Loan
Agreement, loaned its subsidiary, EATI, $1,000,000 to invest in the Joint
Venture and made capital expenditures of $5,393,000, primarily for its
electronic contract manufacturing operations. The Company's other principal uses
of cash were the day to day operations of its electronics contract
manufacturing, holding company expenses and interest on indebtedness.
Liquidity, as discussed below, is measured in reference to the consolidated
financial position of the Company at December 31, 1996, as compared to the
consolidated financial position of the Company at December 31, 1995. Net cash
used by operations of $2,575,000 in 1996 decreased by $5,764,000 from cash used
in operations of $8,339,000 in 1995.
Liquidity, as measured by cash and cash equivalents, decreased to $461,000
at December 31, 1996 from $9,830,000 at December 31, 1995. Liquidity as measured
by working capital was a negative $9,166,000 at December 31, 1996 as compared
with a positive working capital of $11,188,000 at December 31, 1995. The
decrease in working capital was primarily a result of capital expenditures,
losses from contract manufacturing during 1996, the amounts paid by the Company
in connection with the acquisition of 11.64% of the outstanding shares of Aydin
Corporation, the loan to EATI to fund VCV and advances to BarOn under the BarOn
Loan Agreement. The Company's ability to generate internal cash flows results
primarily from the sale of its contract electronic manufacturing services. The
Schroder Loan Facility prohibits Tanon from distributing or loaning cash
generated by contract manufacturing to the holding Company, except in certain
very limited circumstances. For the year 1996, revenue from contract electronic
manufacturing services increased by $4,540,000 from $77,085,000 in the same
period of 1995. Accounts receivable decreased by $746,000 in 1996 reflecting an
improvement in the collection of receivables. Inventory decreased by $2,910,000
in 1996 due to a decline in revenues forecast for the first quarter of 1997 as
compared to the same period in 1996.
Cash flows from financing activities during 1996 amounted to $11,957,000
resulting from the sale of 9% Convertible Debentures for $8,100,000, the
exercise of 165,714 Class B Warrants, the exercise of stock options, and the net
proceeds from capital leases. Approximately $1,800,000 of such capital lease
financing was applicable to equipment acquired at the end of 1995. During April
1996 the Company obtained additional capital lease financing in the amount of
$750,000 on equipment acquired during the first quarter of 1996. In addition,
the Company in October and November 1996, borrowed a total of $1,270,000 from
the Chairman of its Board of Directors and certain related trusts. These loans
are represented by certain 10% Series A Convertible Notes issued by the Company.
For a more thorough discussion of this transaction. See "Business: 1996
Developments - Capital Raised".
Net cash in the amount of $18,751,000 was used for investing activities
during 1996. Funds in the amount of $5,393,000 were used to purchase capital
equipment, consisting of two high speed surface mount lines along with related
equipment and a new computer system for the Company's California contract
manufacturing facility. In addition, funds in the amount of $13,358,000 were
used in making the investment in Aydin common stock and advances made to BarOn
under the BarOn Loan Agreement.
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
19
<PAGE>
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 December 31, 1996 $8,054,000 was outstanding under the Schroder Loan
Facility, which constituted the total availability of the borrowing base. 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 December 31, 1996, Tanon was in
compliance with all of these requirements, except the required ratio of earnings
to certain fixed charges. By agreement dated April 15, 1997 Schroder has agreed
to waive such requirement for December 31, 1996 and has adjusted the required
financial ratios to reflect the results of operations of Tanon contained in the
current business plan of Tanon for 1997.
The Company has incurred significant losses and had negative cash flows from
operations in each of the last five years. In order to continue operations, the
Company has had to raise additional capital to offset cash utilized in operating
and investing activities. The Company raised approximately $33,200,000 and
$15,870,000 during 1995 and January 1, 1996 through January 31, 1997,
respectively, from the issuance of Common Stock, 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 stock (computed on a post Reverse split basis) 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. On
August 19, 1996, GFL Performance Fund Limited transferred and assigned its
$1,025,000 outstanding principal amount note of the Company to an unrelated
third party, who thereafter converted such note. Also in August 19, 1996, GFL
Advantage Fund 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. 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 Original
Convertible Notes had a maturity date of December 29, 1997 and were convertible
into shares of the Company's Common Stock at the fixed conversion price per
share of $2.67. On February 6, 1997, the Company amended the Original
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 Original
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.
20
<PAGE>
The Company's financial projections indicate that operating losses and
negative cash flows will continue during the first 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 purchase of the Aydin common stock, the BarOn Loan
Agreement and the EATI Loan (See "Business -- 1996 Developments - Acquisition of
Common Stock of Aydin Corporation and Issuance of Convertible Debentures, Joint
Venture with IAI and BarOn Investment") have resulted in the need to raise
additional capital. In addition, the Company's contract manufacturing operations
conducted through Tanon, require additional working capital as a result of
operating losses by Tanon and capital expenditures by Tanon. During the period
beginning October 25, 1996 and ending in April 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 through the issuance of Series A Notes. In
addition, during January 1997, the Company borrowed a total of $2,000,000 from
unrelated parties. (See Part I, Item 1 1996 Developments Capital Raised). Such
borrowings have been used to fund a portion of the aggregate amount required to
fund its holding company expenses, and to make advances to BarOn under the BarOn
Loan Agreement, pay costs incurred in connection with the terminated merger
discussions with Aydin, and provide additional working capital to Tanon.
Further, the Company will need to raise additional capital during 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, and
complete the purchase of Tri-Star and provide working capital to Tri-Star. The
Company intends to sell the Aydin Shares beginning in the second quarter
pursuant to the Bard Option or in public or private sale. (See Business -- 1996
Developments - Acquisition of Common Stock of Aydin Corporation and Issuance of
Convertible Debentures, Tri-Star Technologies and Capital Raised). The Company
believes that the net proceeds from such a sale will provide sufficient capital
to meet the above needs except for providing the funding to complete the
purchase of Tri-Star. At the date hereof, the Company does not have any
commitments, understandings or agreements for such a sale or obtaining any other
additional capital, and accordingly, there can be no assurance that the Company
will be successful in (i) completing such a sale or that such a sale will result
in the amount of net proceeds anticipated by the Company or (ii) obtaining such
other additional capital. Failure to complete such a sale in a timely manner or
such a sale resulting in less than the amount of net proceeds anticipated by the
Company could have a material adverse effect on the financial condition and
operations of the Company if the Company was also unable to raise other
additional capital. Additionally, the Company will have to raise other
additional capital in order to complete the purchase of Tri-Star and provide
working capital to Tri-Star. The Company's independent public accounts have
issued their opinion in respect to the Company's 1996 financial statements
modified with respect to uncertainties regarding the ability of the Company to
continue as a going concern. The financial statements do not incorporate any
adjustments relating to the recoverability of asset carrying amounts or the
amount and classification of liabilities that might result should the Company be
unable to continue as a going concern.
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
21
<PAGE>
operations without 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.
At December 31, 1996, the Company had accounts payable of approximately
$14,702,000 of which approximately $2,281,000 had been outstanding for over 90
days. This compares with $13,433,000 of accounts payable at December 31, 1995,
of which $167,000 had been outstanding for over 90 days.
The Company's backlog at the end of 1996 was approximately $27,958,000 as
compared to the backlog at the end of 1995, which was approximately $47,305,000.
BarOn Investment. BarOn has incurred significant losses and had negative
cash flows from operations since inception. BarOn currently has no revenues from
operations. BarOn's financial projections indicate that operating losses and
negative cash flows will continue at least through the remainder of 1997. BarOn
is currently seeking additional financing to fund its on-going operations and
has indicated that it intends to sell the 95,694 shares of Common Stock of the
Company that are currently held by BarOn to satisfy a portion of such financing
needs. BarOn has sold 25,200 of such shares and expects to receive gross
proceeds of $125,000 from such sales. These proceeds represent BarOn's only
current available resources. BarOn's other resources consist of approximately
$140,000 being held as security for a letter of credit to one of its vendors.
BarOn is currently negotiating for the release of any such funds beyond the
obligations to this vendor. The Company has ceased making advances under the
BarOn Loan Agreement and has informed BarOn that it will not make further major
advances.
Joint Venture with IAI - Vista Funding. On June 28, 1996, the Company
loaned $1 million to EATI (the "EATI Loan") to enable EATI to make a $250,000
capital contribution to ITI, which, in turn, funded VCV and to make a $750,000
loan to VCV. The EATI Loan bears interest at 10% per annum, payable annually.
The principal is repayable in five equal annual installments beginning on June
1, 2002 and continuing on June 1 of each year thereafter. The Company may at its
option, accelerate the EATI Loan and demand repayment 18 months after the date
of issuance of the loan. The EATI Loan is subordinated to all other debts of
EATI but would have a preference over payments to equity holders of EATI.
At December 31, 1996, the Joint Venture formed with IAI had remaining funds
of $7,608,000. Such funds can only be used to fund expenses of the Joint
Venture. With the exception of the initial investment of $6.3 million in EATI,
and the EATI Loan, the Company is unable to determine at this time the effect,
if any, of the Company's investment in the Joint Venture on the results of
operations of the Company or on its liquidity and capital resources. As a result
of the Company's reduced level of capital (as compared to December 31, 1995) and
its decision to commit such capital to Tanon, the Company has decided not to
provide funding for any additional applications for development and exploitation
and has decided not to provide additional funding for Vista. Failure to make
additional required capital contributions would be a default under the Joint
Venture agreement with IAI. If the Company is in default as described above, it
may not be able to recover such restricted cash and may forfeit its interest in
the Joint Venture. In addition, the Company is reviewing its options relative to
the Joint Venture and has decided to sell or otherwise dispose of its interest
in the Joint Venture.
The remaining unexercised Class A and Class B warrants issued in February
1994, if exercised, could provide the Company with additional capital of
approximately $1,700,000. To date, Class A and Class B warrants to purchase
550,744 shares have been exercised and the Company received $2,534,121 in
proceeds. In addition, in February 1996, the Company received unsecured
promissory notes in the aggregate principal amount of $1,096,000 as payment for
the exercise of Class A and Class B warrants to purchase 199,021 shares of
Common Stock. These promissory notes bear interest at the rate of 7% per annum
and were due on or before February 14, 1997. The remaining outstanding balance
on these promissory notes, including interest, was approximately $218,000 as of
the date of this Report. No assurance can be given that the remaining
unexercised warrants will be exercised or that such promissory notes will be
paid in full.
22
<PAGE>
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.
Reference is made to "Legal Proceedings" at Part I, Item 3 of this Form 10-K
for information concerning certain pending claims which could have an adverse
impact on the Company's income and cash flow.
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.
23
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
EA INDUSTRIES, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
December 31, 1996 and 1995
Page Number
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS.....................................25
FINANCIAL STATEMENTS:
Consolidated Balance Sheets as of December 31, 1996 and 1995.............26
Consolidated Statements of Operations for the Three Years
Ended December 31, 1996..................................................27
Consolidated Statements of Shareholders' Equity
for the Three Years Ended December 31, 1996..............................28
Consolidated Statements of Cash Flows for the Three Years
Ended December 31, 1996..................................................29
Notes to Consolidated Financial Statements...............................31
SCHEDULE:
II. Valuation Account.......................................................56
Schedules other than that listed above are omitted as not being applicable
or required, or the required information is included in the accompanying
financial statements or related notes thereto.
24
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To EA Industries, Inc.:
We have audited the accompanying consolidated balance sheets of EA
Industries, Inc. and subsidiaries as of December 31, 1996 and 1995 and the
related consolidated statements of operations, shareholders' equity and cash
flows for each of the three years in the period ended December 31, 1996. These
consolidated financial statements and the schedule referred to below are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and schedule based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly in
all material respects, the financial position of EA Industries, Inc. and
subsidiaries as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has incurred significant losses in each of the
last three years and, at December 31, 1996, the Company had negative working
capital. In addition, the Company had negative cash flows from operations in
each of the last three years. The Company's financial projections indicate that
operating losses and negative cash flows will continue during the first half of
1997. These conditions, among others, raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note 2. The financial statements do not
include any adjustments relating to the recoverability and classification of
asset carrying amounts or the amount and classification of liabilities that
might result should the Company be unable to continue as a going concern.
Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The schedule listed in the
index to consolidated financial statements is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic financial statements. This schedule has been subjected to the auditing
procedures applied in the audits of the basic consolidated financial statements
and, in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.
Arthur Andersen LLP
Roseland, New Jersey
April 15, 1997
25
<PAGE>
EA INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1996 and 1995
(thousands of dollars)
<TABLE>
<CAPTION>
ASSETS 1996 1995
---- ----
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 461 $ 9,830
Restricted cash 647
Receivables, less allowance of $1,100
in 1996 and $385 in 1995 for
doubtful accounts 11,211 11,957
Inventories (Note 1) 10,068 12,978
Prepaid expenses and other assets 579 1,610
-------- --------
TOTAL CURRENT ASSETS 22,319 37,022
-------- --------
Equipment and leasehold improvements 18,581 15,000
Less accumulated depreciation (Note 1) (8,059) (6,952)
-------- --------
10,522 8,048
-------- --------
Investment in common stock of Aydin Corp.
held for sale (Notes 1 and 3) 5,605 --
-------- --------
Other investments held for sale (Note 3) 1,050 3,225
-------- --------
Intangible assets (Notes 1 and 3) 12,331 12,331
Less accumulated amortization (1,632) (813)
-------- --------
10,699 11,518
-------- --------
Other assets 698 454
Note receivable (Note 3) 78 985
-------- --------
$ 50,971 $ 61,252
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Revolving Credit Facility (Note 4) $ 8,054 $ 8,840
Current portion of Capital Lease Obligations (Note 4) 1,455 864
Current portion of Convertible Notes and
Debentures (Notes 2 and 4) 2,725 --
Accounts payable 14,702 13,433
Accrued expenses 4,549 2,697
-------- --------
TOTAL CURRENT LIABILITIES 31,485 25,834
-------- --------
Long-Term Liabilities:
Long-Term portion of Capital Lease
Obligations (Note 4) 2,937 1,731
Convertible Notes and debentures (Notes 2 and 4) 8,109 12,200
Accrued excess leased space costs 849 1,433
Other long-term liabilities 505 664
-------- --------
TOTAL LONG-TERM LIABILITIES 12,400 16,028
-------- --------
TOTAL LIABILITIES 43,885 41,862
-------- --------
Commitments and Contingencies (Notes 4 and 14) -- --
Shareholders' Equity (Deficit) (Notes 1, 2, 3, 6, 9 and 12)
Preferred stock, no par value;
authorized 6,250,000 shares; none issued
Common stock, no par value; authorized 12,500,000
shares; issued 5,624,001 shares in 1996 and
4,011,362 shares in 1995 80,535 63,397
Accumulated deficit since January 1, 1986 (73,245) (43,532)
-------- --------
7,290 19,865
Less common stock in treasury, at cost:
23,369 shares in 1996
and 54,619 shares in 1995 (204) (475)
-------- --------
TOTAL SHAREHOLDERS' EQUITY 7,086 19,390
-------- --------
$ 50,971 $ 61,252
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
26
<PAGE>
EA INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Years Ended December 31, 1996
(thousands of dollars, except per share data)
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Net Sales (Notes 1 and 3) $ 81,625 $ 77,085 $ 30,539
----------- ----------- -----------
Cost of sales 81,145 76,422 27,759
Selling, general and administrative expenses 11,379 9,703 4,591
Provision For Restructuring (Note 3) -- -- 2,400
Purchased research and development (Note 3) 1,383 19,546 --
----------- ----------- -----------
Loss from Operations (12,282) (28,586) (4,211)
Interest Expense 7,559 1,357 662
Interest Income (229) (180) (89)
Loss on Investment in Aydin Corporation (Note 3) 5,156 -- --
Other Expenses (Note 3) 5,186 1,131 --
----------- ----------- -----------
Net Loss ($ 29,954) ($ 30,894) ($ 4,784)
=========== =========== ===========
Loss Per Common Share (Note 9) ($ 6.24) ($ 10.01) ($ 3.79)
=========== =========== ===========
Weighted Average Common Shares Outstanding 4,802,068 3,086,070 1,263,120
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
27
<PAGE>
EA INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the Three Years Ended December 31, 1996
(thousands of dollars)
<TABLE>
<CAPTION>
Common Stock Treasury Stock Accumulated
---------------------------- ------------------- Deficit
Additional Since
Paid-In January 1,
Shares Amount Capital Shares Amount 1986
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1993 719,410 $2,878 $4,661 (54,119) ($471) ($7,614)
Net loss (4,784)
Private Placements of common stock 1,199,721 11,676
Debt Conversion 99,511 338
Exercise of common stock options 16,872 143
Other issuances of common stock 46,000 421
Purchase of treasury stock (500) (4)
Elimination of $1.00 par value 4,661 (4,661)
- ------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1994 2,081,514 20,117 -- (54,619) (475) (12,398)
Net loss (30,894)
Issuance of Common Stock
BarOn Investment 95,694 1,995
Tanon Acquisition 384,616 10,473
Warrants, Options and Stock Issued
in connection with IAI Investment 35,180 7,400
Value of Options and Warrants
issued for Tanon -- 1,383
Shares Sold in Exempt Offerings 618,748 11,659
Value of Options and Warrants
Issued for Services -- 963
Exercise of Common Stock Options 175,650 2,763
Exercise of Warrants 419,960 3,057
Debt conversion 200,000 3,587
Net unrealized loss on marketable
securities of investee (240)
- ------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 4,011,362 63,397 -- (54,619) (475) (43,532)
Net loss (29,954)
Exercise of stock options 140,281 1,007
Exercise of Class A and B Warrants 240,450 1,414
Notes receivable from Stock Sales -- (845)
Value of options granted for Services -- 233
Debt conversion 1,226,540 15,266
Shares granted for Services -- 78 31,250 271
Other 5,368 (15) 1
Loss on marketable securities of investee 240
============================= ======================================
Balance, December 31, 1996 5,624,001 $80,535 (23,369) ($204) ($73,245)
============================= ======================================
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
28
<PAGE>
EA INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Years Ended December 31, 1996
(thousands of dollars)
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net Loss ($29,954) ($30,894) ($ 4,784)
Adjustments to reconcile net loss to net cash
provided/(used) by operating activities:
Provision for restructuring -- -- 2,400
Depreciation and amortization 3,172 3,012 900
Valuation adjustment - Note Receivable 907 -- --
Valuation adjustment-Investment in Aydin Corporation 5,156 -- --
Valuation adjustment - Fixed Assets 563 -- --
Valuation adjustment - Investment in BarOn 649 -- --
Valuation adjustment - Investment in EATI 1,647 -- --
Common Shares issued in payment of interest 88 -- --
Purchased Research and Development 1,383 19,546 --
Equity in Loss of Affiliate 812 802 --
Non-cash interest charges 851 -- --
Discount on Convertible Subordinated Debentures 4,200 -- --
Value of options granted for services 233 963 --
Cash provided/(used) by changes in:
Receivables 746 2,451 (2,360)
Inventories 2,910 (4,018) (1,395)
Prepaid expenses & other assets 1,031 -- --
Accounts payable and accrued expenses 3,121 372 775
Accrued excess leased space costs (584) (425) (573)
Other operating items -- net 494 (148) 335
-------- -------- --------
Operating cash flow from continuing operations (2,575) (8,339) (4,702)
Operating cash flow from discontinued operations -- -- 360
-------- -------- --------
Net cash provided/(used) by operations (2,575) (8,339) (4,342)
-------- -------- --------
Cash Flows from Investing Activities:
Capital expenditures (5,393) (5,427) (212)
Investments, including those in affiliates (13,358) (12,884) (2,745)
Cash acquired in purchase of Tanon -- 890 --
Proceeds from sale of discontinued operations -- 394 200
-------- -------- --------
Net cash provided/(used) by investing activities (18,751) (17,027) (2,757)
-------- -------- --------
Cash flows from Financing Activities:
Net borrowings/(repayments) under credit facilities (786) (3,161) 2,381
Net proceeds from capital leases 1,797 1,440 --
Net proceeds from convertible subordinated debt 9,370 15,148 (1,008)
Proceeds from the exercise of stock options 1,007 -- --
Net proceeds from sales of common stock (private
placement) and exercise of warrants 569 17,479 11,819
Issuance of note receivable in connection with acquisition -- (1,000) --
Other -- (867) --
-------- -------- --------
Net cash provided (used) by financing activities 11,957 29,039 13,192
-------- -------- --------
Net Increase (Decrease) in Cash and Cash Equivalents (9,369) 3,673 6,093
Cash and Cash Equivalents at Beginning of Period 9,830 6,157 64
-------- -------- --------
Cash and Cash Equivalents at End of Period $ 461 $ 9,830 $ 6,157
======== ======== ========
</TABLE>
29
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 2,589 $ 1,315 $ 662
======= ======= =======
Non cash financing activities:
Conversion of debt to equity $15,266 $ 3,587 $ 338
Value of stock and options issued in connection with
acquisitions -- 21,251 --
Common shares issued in payment of
Services 582 963 --
Rent abatement -- -- 306
Loan fees -- -- 75
Director compensation -- -- 40
------- ------- -------
TOTAL $15,848 $25,801 $ 759
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
30
<PAGE>
EA INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
EA Industries, Inc. and its subsidiaries ("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 Company, therefore, provides services to act in part,
or in whole, as the manufacturing function of its customers. The Company
provides its services primarily to manufacturers of: micro, mini and mainframe
computers; computer peripheral equipment; high quality graphic equipment; office
equipment; telecommunications equipment; consumer appliances, industrial tools
and measuring devices. In 1996 and 1995 the Company made acquisitions and
investments which had a significant impact on the financial condition and
results of the Company (See Note 3).
Basis of Consolidation
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 using the equity
method of accounting and the investment in which has been written down to
$1,050,000, its estimated net realizable value (See Note 3).
The Company's investments in 20% to 50% owned companies are accounted for
on the equity method. Accordingly, the Company's share of the losses of these
companies is included in the consolidated financial statements.
All significant intercompany transactions have been eliminated.
Consolidated Statement of Cash Flows
Cash and cash equivalents include cash on hand and highly liquid marketable
securities with original maturities of three months or less.
Quasi-Reorganization and Par Value Elimination
As of the close of business December 31, 1985, the Company effected a
quasi-reorganization whereby assets were restated to their estimated current
values, income postponed to future periods was reflected in shareholders' equity
and the accumulated deficit was transferred to additional paid-in capital.
Accumulated deficit reflects the Company's cumulative earnings or losses since
the quasi-reorganization. In May 1994, the shareholders of the Company approved
a proposal which eliminated the reference to the $1.00 per share par value of
the Company's Common Stock. Consequently, all amounts formerly classified as
additional paid-in capital are now classified as Common Stock.
Revenue Recognition
Net sales are generally recognized when products are shipped.
31
<PAGE>
Inventories
Inventories include material, labor and factory overhead and are stated at
the lower of cost or market (net realizable value). Costs of such inventories
are determined using average actual cost. Provision for potentially obsolete or
slow-moving inventory is made based on management's analysis of inventory levels
and future sales forecasts.
Inventories at December 31 consisted of:
1996 1995
---- ----
(thousands of dollars)
Raw Materials $ 7,268 $ 7,435
Work-in-Process 2,800 5,543
------- -------
Total inventories $10,068 $12,978
======= =======
Goodwill and Other Intangibles
Goodwill represents the excess of the cost of acquired businesses over the
fair market value of their net tangible and identified intangible assets.
Goodwill is being amortized on the straight line method over periods not
exceeding 20 years. Acquired research and development with no alternative future
use is charged to expense on the date acquired. Other acquired intangibles
(principally customer relationships and assembled workforce) are being amortized
on the straight line method over their estimated useful lives (6 to 20 years).
The Company periodically reviews goodwill and other intangibles to evaluate
whether changes have occurred that would suggest these assets may be impaired
based on the estimated cash flows of the entity acquired over the remaining
amortization period. If this review indicates that the remaining estimated
useful life requires revision or that the asset is not recoverable, the carrying
amount of the asset is reduced by the estimated shortfall of cash flows on an
undiscounted basis.
Equipment and Leasehold Improvements
Equipment and leasehold improvements are stated at cost. Equipment is
depreciated using the straight-line method over the estimated useful lives of
the assets. Leasehold improvements are amortized using the straight-line method
over the shorter of the estimated life of the asset or the remaining term of the
lease.
When equipment is retired or sold, its costs and related accumulated
depreciation are written off and the resulting gain or loss is included in
income for the period. Maintenance and repair costs are charged directly to
expense as incurred. Major rebuilding costs that substantially extend the useful
life of an asset are capitalized and depreciated.
The Company continually reviews equipment to determine that the carrying
values have not been impaired. During 1996, the Company recorded a write down in
certain fixed assets held for disposal resulting in a non-cash charge of
approximately $563,000. This charge has been reported in the Statement of
Operations in Other Expenses. These assets, with an adjusted book value of
$941,000, are being actively marketed.
32
<PAGE>
Concentration of Credit Risk
The Company's contract manufacturing business provides services to a
variety of customers some of which are development stage or marginally
profitable enterprises or which have a highly leveraged capital structure. In
connection with providing its services the Company extends credit to customers,
invests in inventories to supply product scheduled for delivery, and enters into
contractual commitments for the purchase of materials. The Company evaluates
each customer's creditworthiness with regard to the amount of credit it is
willing to extend and investment risk it is willing to assume. The Company may
require collateral or conditional commitments from the customer such as standby
letters of credit or financial guarantees in connection with assuming such
credit or investment risk. The amount and nature of the collateral or
commitments is based on management's evaluation of the customer's
creditworthiness, together with competitive circumstances. The allowance for
non-collection of accounts receivable is based upon the expected collectability
of all accounts receivable. During 1996, the Company increased its allowance for
doubtful accounts by $800,000 reflecting the Company's determination that the
net amount due from a customer that the Company began servicing in 1995 was not
collectable. The Company has adjusted its credit review and requirements for
early stage development companies as a result of this charge.
During 1996, 1995 and 1994, the Company's top 5 customers represented 72%,
68%, and 87%, respectively, of its consolidated net sales. In 1996, the
customers which accounted for more than 10% of the Company's net sales were
Advanced Fibre Communications, Inc., Dialogic Corporation, and Iris Graphics,
which accounted for 33%,16%, and 13%, respectively, of net sales. As of December
31, 1996 and 1995, the top five customers represented 66% and 74%, respectively,
of accounts receivable.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the consolidated financial
statements and related notes to financial statements. Actual results could
differ from those estimates and changes in such estimates may affect amounts
reported in future periods.
Stock Based Compensation
Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation," encourages, but does not require companies to record
compensation cost for stock-based employee compensation plans based on the fair
value of the option. The Company has adopted the "disclosure only" provision of
SFAS 123. Accordingly, compensation cost for stock options issued to employees
is measured as the excess, if any, of the quoted market price of the Company's
stock at the date of the grant over the amount an employee must pay to acquire
the stock. (See Note 6.)
Stock Split
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 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.
33
<PAGE>
Investments in Marketable Equity Securities
The investment in common stock of Aydin Corporation has been classified as
available-for-sale under the terms of Statement of Financial Accounting
Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity
Securities" (See Note 3). At December 31, 1996, the Company wrote down this
investment by approximately $5,156,000 due to a decline in fair value considered
to be other than temporary. The Company has decided to sell these equity
securities (See Notes 2 and 3).
Reclassifications
Certain reclassifications were made to the prior year's presentation to
conform to the 1996 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
1995 have been reclassified to conform to the 1996 presentation.
2. OPERATIONS AND LIQUIDITY
As a result of negative cash flows from operations in 1996, the purchase of
the common stock of Aydin Corporation, advances to BarOn, the loan to EATI to
fund Vista (See Note 3) and investment in new equipment, the Company required
substantial amounts of additional working capital. To fund a portion of the
purchase price of the Aydin common stock, on May 3, 1996, the Company sold
certain 9% convertible subordinated 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 subordinated
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 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. The Company agreed to adjust the ceiling price of each of the Debentures
if the holder of such debenture refrained from conversions and short sales from
approximately the middle of January 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). As of the date hereof, $3,786,000 principal
amount of such Original Convertible Debentures have been converted into
2,314,640 shares of Common Stock (post Reverse Split Shares).
On August 19, 1996, GFL Advantage Fund transferred and assigned its
$2,070,000 outstanding 7% convertible subordinated 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 Convertible Notes of the
Company in the aggregate principal amount of $2,070,000 due December 29, 1997
(the "Original Convertible Notes") to the Note Holders. These Original
Convertible Notes had a maturity date of December 29, 1997 and were convertible
into shares of the Company's common stock at the fixed conversion price per
share of $2.67 (pre Reverse Stock Split basis). On February 6, 1997, the Company
amended the Original Convertible Notes (the "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 Original Convertible Notes) and
(ii) reducing the fixed conversion price of such notes to $1.50 per share, such
amendments were made in consideration of the Note Holders foregoing interest and
making available certain other loans to the Company. GFL Advantage Fund had
acquired the 7% convertible subordinated note in December, 1995.
During October and November 1996, the Company borrowed $1,270,000 from the
Chairman of its Board of Directors and certain related trusts (the "Company's
Chairman"). In January and April 1997, the Company borrowed
34
<PAGE>
an additional $3,250,000 from the Company's Chairman 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.
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. Interest is
payable at the option of the holder in cash or stock of the Company or Tanon at
the conversion prices described above. Repayment of the Series A Notes is
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, payable on the first day of each month beginning as early as March 1,
1997. Repayment of the EAI Notes is secured by a lien on the shares. 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. and Millenco, LP.
Cash flows from financing activities during 1996 amounted to $11,957,000
resulting from the issuance of the securities referred to above, the exercise of
165,714 Class B Warrants, the exercise of stock options, and the net proceeds
from capital leases. Approximately $1,800,000 of such capital lease financing
was applicable to equipment acquired at the end of 1995. During April 1996 the
Company obtained additional capital lease financing in the amount of $750,000 on
equipment acquired during the first quarter of 1996.
Net cash in the amount of $18,751,000 was used for investing activities
during 1996. Funds in the amount of $5,393,000 were used to purchase capital
equipment, consisting of two high speed surface mount lines along with related
equipment and a new computer system for the Company's California contract
manufacturing facility. In addition, funds in the amount of $13,358,000 were
used in making the investment in Aydin common stock, advances made to BarOn
under the BarOn Loan Agreement and the Vista Application.
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 (the "Schroder Loan 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 December 31, 1996, $8,054,000 was outstanding under the
Schroder Loan Facility, which constituted the total availability of the
borrowing base. 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 December 31,
1996, Tanon was in compliance with all of these requirements, except the
required ratio of earnings to certain fixed charges. By agreement in April 1997
Schroder has agreed to waive such requirement for December 31, 1996 and has
adjusted the required financial ratios to reflect the results of operations of
Tanon contained in the current business plan of Tanon for 1997. (See Note 4)
The Company's financial projections indicate that operating losses and
negative cash flows will continue during the first half of 1997. The Company is,
however, forecasting an increase 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
purchase of the Aydin common stock, the BarOn Loan Agreement and the EATI Loan
have resulted in the need to raise additional capital. In addition, the
Company's contract manufacturing operations, conducted through Tanon, require
additional working capital as a result of operating losses by Tanon and capital
expenditures by Tanon. During the period beginning October 25, 1996 and ending
in April 1997, the Company has borrowed a total of $4,520,000 from the Chairman
of its Board of Directors, certain related trusts
35
<PAGE>
and unaffiliated investors through the issuance of Series A Notes. In addition,
during January 1997, the Company borrowed a total of $2,000,000 from unrelated
parties. Such borrowings have been used to fund a portion of the aggregate
amount required to fund its holding company expenses, make advances to BarOn
under the BarOn Loan Agreement, pay costs incurred in connection with the
terminated merger discussions with Aydin, and provide additional working capital
to Tanon. Further, the Company will need to raise additional capital during 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, and
complete the purchase of Tri-Star (See Note 3) and provide working capital to
Tri-Star. The Company intends to sell the Aydin Shares beginning in the second
quarter pursuant to the Bard Option (See Note 3) or in public or private sales.
Unless there is a diminution in value below the carrying amount, the Company
believes that the net proceeds from such a sale will provide sufficient capital
to meet the above needs except for providing the funding to complete the
purchase of Tri-Star.
The Company's forecast with respect to cash needs is based on its forecast
of the results of operations at Tanon and expenses of EAI. If the Company's
results of operations at Tanon are below forecasts, or expenses at EAI are
greater than expected, this would raise doubts about the Company's ability to
continue its operations without 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.
At the date hereof, the Company does not have any commitments,
understandings or agreements for such a sale or obtaining any other additional
capital, and accordingly, there can be no assurance that the Company will be
successful in (i) completing such a sale or that such a sale will result in the
amount of net proceeds anticipated by the Company or (ii) obtaining such other
additional capital. Failure to complete such a sale in a timely manner or such a
sale resulting in less than the amount of net proceeds anticipated by the
Company could have a material adverse effect on the financial condition and
operations of the Company if the Company was also unable to raise other
additional capital. Additionally, the Company will have to raise other
additional capital in order to complete the purchase of Tri-Star and provide
working capital to Tri-Star.
The remaining unexercised Class A and Class B warrants issued in February
1994, if exercised, could provide the Company with additional capital of
approximately $1,700,000. To date, Class A and Class B warrants to purchase
550,744 shares have been exercised and the Company received $2,534,121 in
proceeds. However no assurance can be given that any additional warrants will be
exercised.
There can be no assurance that the planned sale of Aydin stock will be
successful nor that additional capital will be raised. The accompanying
financial statements have been prepared assuming that the Company will continue
as a going concern. The Company has incurred significant losses in each of the
last three years and, at December 31, 1996, the Company had negative working
capital. In addition, the Company had negative cash flows from operations in
each of the last three years. These conditions, among others, raise substantial
doubt about the Company's ability to continue as a going concern. The financial
statements do not include any adjustments relating to the recoverability and
classification of asset carrying amounts or the amount and classification of
liabilities that might result should the Company be unable to continue as a
going concern.
36
<PAGE>
3. ACQUISITIONS AND DISPOSITIONS
Tanon Acquisition
On January 4, 1995, the Company acquired Tanon Manufacturing, Inc.
("Tanon") which provides contract manufacturing services to original equipment
manufacturers. Tanon was merged with a newly-formed wholly-owned subsidiary of
the Company and the Company issued 384,616 shares of Common Stock of the Company
with an appraised value of $10,473,000 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 50,250 shares of the Company's Common Stock at
a weighted average exercise price of $4.20 per share with an appraised value of
$1,383,000. In connection with the merger, the Company loaned Mr. Spalliero, the
Chief Operating Officer of Tanon, $1,000,000 for a 30-month term with interest
fixed at the applicable Federal rate and due together with principal at the end
of the 30-month term. Such loan is non-recourse and is secured solely with
48,075 shares of Common Stock of the Company acquired by Mr. Spalliero upon
consummation of the Tanon Acquisition Agreement. The carrying amount of such
loan has been adjusted to the value of the collateral.
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 87,500 shares of Common Stock of the Company
at an exercise price equal to fair market value with respect to 76,250 shares
and 110% of fair market value with respect to 11,250 shares, which options will
vest proportionately over three years. Mr. Spalliero also received a cash bonus
of $300,000 at closing and earned a cash bonus of $150,000 with respect to 1995.
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.
The excess of the purchase price over the appraised fair value of the net
assets acquired in the Tanon acquisition amounted to $12,331,000, of which
$1,740,000 relates to customer relationships and assembled workforce and
$10,591,000, which relates to goodwill. These amounts are being amortized on a
straight-line basis over 6 and 20 years, respectively.
BarOn Acquisition
During 1995, the Company acquired an equity interest of 33.33% in BarOn.
BarOn is a privately-held Israeli Corporation based in Haifa, Israel, engaged in
the research and development of input devices for computers that can digitize
handwriting in a variety of languages, from any surface. The consideration for
the 33.33% interest totaled $9,987,000 and was comprised of a $5,000,000 capital
contribution to BarOn and 95,694 shares of Common Stock of the Company with a
fair value of $1,995,000. In addition, $2,700,000 was paid to various
shareholders of BarOn and $292,000 of due diligence costs concerning the BarOn
acquisition were also capitalized. The Company has accounted for this
transaction as a purchase of a minority interest using the equity method of
accounting. The Company's equity share of the 1996 and 1995 BarOn losses totaled
$812,000 and $802,000, respectively and has been included in Other Expenses in
the consolidated results of the Company for the years ended December 31, 1996
and 1995, respectively. The excess of the purchase price of the estimated fair
value of EAI's 33.33% equity interest in the net assets of BarOn totaled
$8,872,000 and was determined to be in-process research and development with no
alternative future use. Accordingly, it was charged to expense in the
consolidated results of the Company for the years ended December 31, 1996
($998,000) and 1995 ($7,874,000), respectively.
BarOn has incurred significant losses and had negative cash flows from
operations since inception. BarOn currently has no revenues from operations.
BarOn's financial projections indicate that operating losses and negative cash
flows will continue at least through the remainder of 1997. The Company has
ceased making advances to BarOn and has informed BarOn that it will not make
further major advances. BarOn's obligations to vendors, employees, attorneys and
accountants for professional services, and otherwise currently exceed $600,000
and BarOn is unable to meet such obligations.
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<PAGE>
In February 1997, James M. Curran, the acting Chief Executive Officer of
BarOn resigned to seek other opportunities. In March 1997, Dr. Ehud Baron
resigned as an officer of Baron and Irwin L. Gross, Chairman of the Company has
been designated acting President of BarOn. At the request of certain creditors
of BarOn, a hearing was held in the regional court of Haifa, Israel on April 8,
1997 to appoint a temporary receiver for BarOn. The hearing was adjourned
without any action being taken other than rescheduling the hearing to June 23,
1997.
Management of BarOn is attempting to design a plan to reorganize BarOn to
avoid a liquidation of BarOn. Such a plan would involve restructuring the
operations of BarOn to minimize costs, attempting to negotiate reduced payments
or revised payment schedules with creditors of BarOn, and obtaining additional
debt or equity financing of BarOn. As part of the development of this plan, the
Company has requested that the management of BarOn conduct an intensive review
of the development status of the technology of BarOn along with an estimate of
the additional cost and time necessary to develop a marketable product. No
assurance can be given that BarOn will be successful in the efforts to implement
a restructuring plan.
The Company determined that its investment in and advances to BarOn were
unrecoverable and charged these amounts to expense in 1996.
Israel Aircraft Industries, Ltd. Joint Venture
On August 8, 1995, the Company made an investment of $7,500,000 through a
52.3% owned subsidiary (EATI) in a newly formed Israeli Corporation (ITI ) which
is 50.1% owned by EATI and 49.9% owned by Israel Aircraft Industries, Ltd.
("IAI"). The assets of ITI include the right to review and evaluate certain
technological applications developed by IAI which are in various stages of
development. Management's review has indicated that the technologies are
primarily in-process research and development with no alternative future use.
Accordingly the portion of the purchase price in excess of the Company's equity
interest in the joint venture, which was $11,672,000 in 1995, has been charged
to expense as Purchased Research and Development. If a technology is selected
for development and exploitation, IAI will grant a perpetual, royalty free
license to exploit the technology. The Company's investment in ITI has been
accounted for as a purchase.
Under the terms of a Preincorporation Agreement, EATI is owned as follows:
(a) the Company owns a 52.3% interest, (b) certain Israeli persons own an
aggregate 25.2% interest, (c) Mark Hauser, a director of the Company, owns a 15%
interest, (d) Irwin L. Gross, Chairman and President of the Company, owns a 5%
interest, and (e) Broad Capital Associates owns a 2.5% interest.
The equity interests in EATI were issued for an aggregate consideration of
$10,000. In addition, the Company and the Israeli citizens advanced $6,300,000
and $1,575,000, respectively, to EATI in exchange for subordinated notes to be
repaid from a percentage of the first profits of EATI.
To fund its obligations under the Preincorporation Agreement, on August 3,
1995 the Company sold 364,583 shares of its Common Stock at a price of $19.20
per share for an aggregate of $7.0 million to five Israeli persons, three of
whom are shareholders in EATI. The purchase agreements pursuant to which the
shares were sold contained an adjustment provision which required the issuance
of additional shares in the event that the average closing price of the shares
for a certain period of time was less than the offering price in the offering.
Such adjustment provision was triggered, and accordingly, the Company issued an
aggregate of 14,820 additional shares to the five Israeli persons for no
additional consideration. In addition, the Company issued 35,180 additional
shares of common stock to Control Centers Ltd. and Mosha Wertheim, an
individual, in exchange for additional services rendered in connection with ITI.
ITI has selected one application for development and exploitation, the
Vista Application ("Vista") and a licensee, Vista Computer Vision, Ltd. ("VCV")
has been formed. Vista is a system for the automatic inspection of manufactured
parts, capable of detecting defects as small as 20 microns. The $1,000,000
funding for the initial operations of VCV was made by EATI in June 1996 through
a capital contribution of $250,000 to ITI and a loan of $750,000 to VCV as
evidenced by a $750,000 Subordinated Capital Note. The note matures five years
after its issuance and bears interest at 8% per annum. Payments on the note may
be made only out of remaining profits of VCV after distribution of at least 50%
of all accumulated profits. Upon liquidation of VCV, the note would be
subordinate to all other debts of VCV but would have a preference over payments
to equity holders of VCV.
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<PAGE>
On June 28, 1996, the Company loaned $1 million to EATI (the "EATI Loan")
to enable EATI to make the above capital contribution to ITI, which, in turn,
funded VCV and to make a $750,000 loan to VCV. The EATI Loan bears interest at
10% per annum, payable annually. The principal is repayable in five equal annual
installments beginning on June 1, 2002 and continuing on June 1 of each year
thereafter. The Company may at its option, accelerate the EATI Loan and demand
repayment 18 months after the date of issuance of the loan. The EATI Loan is
subordinated to all other debts of EATI but would have a preference over
payments to equity holders of EATI.
At December 31, 1996, the Joint Venture formed with IAI had remaining funds
of $7,608,000. Such funds can only be used to fund expenses of the Joint
Venture. With the exception of the initial investment of $6.3 million in EATI,
and the EATI Loan, the Company is unable to determine at this time the effect,
if any, of the Company's investment in the Joint Venture on the results of
operation of the Company or on its liquidity and capital resources. As a result
of the Company's reduced level of capital (as compared to December 31, 1995) and
its decision to commit such capital to Tanon, the Company has decided not to
provide funding for any additional applications for development and exploitation
and has decided not to provide additional funding for Vista. Failure to make
additional required capital contributions would be a default under the joint
venture agreement with IAI. If the Company is in default as described above, it
may not be able to recover such Restricted Cash and may forfeit its interest in
the Joint Venture.
The Company's share of the net loss of EATI amounted to $448,000 and
$49,000 in 1996 and 1995, respectively, and such amounts are included in other
expenses.
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.
Summarized financial information of the Joint Venture is as follows:
1996 1995
---- ----
Assets
Restricted cash $7,608,000 $7,273,000
Accounts receivable 119,000 35,000
Fixed assets 258,000 23,000
Other 34,000 --
---------- ----------
Total Assets $8,019,000 $7,431,000
========== ==========
Liabilities and Equity
Accounts payable and accrued
expenses $ 414,000 $ 104,000
Note payable 750,000 --
Shareholders' equity 6,855,000 7,327,000
---------- ----------
Total Liabilities and Shareholders'
Equity $8,019,000 $7,431,000
========== ==========
Income Statement
Total expenses $1,459,000 $ 152,000
Interest income (562,000) (55,000)
---------- ----------
Net loss $ 897,000 $ 97,000
========== ==========
Aydin Corporation Acquisition
On May 6, 1996, the Company purchased 596,927 shares of the common stock of
Aydin Corporation ("Aydin"), a NYSE listed company, in a private transaction
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 shares
acquired represented approximately 11.64% of the outstanding shares of common
stock of Aydin. On May 6, 1996, the closing
39
<PAGE>
price of the common stock of Aydin as reported by the NYSE was $15.50. 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 common stock, on May 3,
1996, the Company sold certain 9% Convertible Subordinated Debentures in the
aggregate principal amount of $7,000,000. The balance of the purchase price was
funded with existing cash of the Company. See Note 2.
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<PAGE>
During May 1996, the Company initiated discussions with the Board of
Directors of Aydin concerning a possible 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 has
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. In the future, the Company may continue to borrow
against such shares, sell all or a portion of such shares or otherwise dispose
of such shares in another fashion.
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 shares of Aydin Common Stock currently held by the Company 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 January 24, 1997, the Company demanded registration of all 596,927 of the
shares of Aydin common stock that it currently holds in accordance with the
Registration Rights Agreement. Aydin did not exercise its right to purchase such
shares as a result of the initial demand of registration by the Company.
On April 4, 1997, Aydin filed a Registration Statement on Form S-3 (the
"S-3") covering the 596,927 shares of Aydin stock held by the Company (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. The option expires on the earliest (i) the close of
business on the fifth business day following the effective date, as determined
by the Securities and Exchange Commission, of the S-3 or (ii) June 2, 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.
As a result of the merger discussions being terminated, the Company has
written down its investment in Aydin Corporation by approximately $5,156,000 due
to a decline in fair value considered to be other than temporary. In addition,
approximately $689,000 of capitalized costs incurred in connection with the
terminated merger discussions with Aydin has been charged to expense in 1996.
The closing price of the Aydin common stock as reported by the NYSE at April 7,
1997 was $11 1/8 per share.
Tri-Star
On December 23, 1996, the Company signed letters of intent to acquire
Tri-Star Technologies Co. ("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, 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. For a more complete
discussion of the Company's capital resources. See Note 2.
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.
41
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EA INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Disposition of Southwest Operations
In December 1994, in contemplation of the acquisition of Tanon, the Company
committed to a plan to close or sell its Southwest operations in Tucson, Arizona
and Nogales, Mexico. The Company also decided substantially to consolidate its
corporate administrative functions. In connection with these decisions, the
Company recorded a provision for restructuring of $2,400,000.
Other Expenses
Other expenses consist primarily of the following charges in 1996: equity
share of BarOn's loss ($812,000), equity share of EATI loss ($449,000),
valuation adjustment-investment in EATI ($1,647,000), valuation adjustment
investment in BarOn ($649,000), write-down of Spalliero note receivable
($907,000) and the write-off of fixed assets ($563,000).
In 1995, other expense consisted primarily of the equity in loss from BarOn
($802,000) and the equity share of EATI loss ($49,000).
4. DEBT AND CAPITAL LEASE OBLIGATIONS
Debt and Capital Lease Obligations at December 31 consisted of the
following:
1996 1995
---- ----
(thousands of dollars)
IBJ Schroder Bank & Trust $ 8,054 --
Congress Financial Corporation loan facility -- $ 3,646
Comerica Bank of California -- 5,194
Capital lease obligations 4,392 2,595
------- -------
12,446 11,435
Less: Long term portion of debt and capital
lease obligations 2,937 1,731
------- -------
$ 9,509 $ 9,704
======= =======
The above table does not include the convertible notes and debentures
because management believes all such obligations will be satisfied through the
conversion into shares of Common Stock. If not converted, the maturity schedule
of convertible notes and debentures is as follows: 1997 -- $2,725,000, 1998 --
$6,839,000 and 1999 -- $1,270,000. As described in Note 2, certain of the
convertible notes and debentures contain conversion features which provide for
18-20% discounts on the market price of the Company's common stock at the
conversion date. The incremental yield embedded in the conversion terms totaling
$4,200,000 has been charged to interest expense in 1996. The quarterly financial
data in Note 13 has been retroactively restated to reflect this charge.
Lines of Credit
42
<PAGE>
EA INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
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 IBJ Schroder Bank & Trust Company ("Schroder") to
Tanon. Under the terms of this new facility, Schroder will advance up to
$13,000,000 (reduced to $11,500,000 by amendment dated in April 1997) in the
form of a revolving loan with availability subject to the amount of a borrowing
base comprised generally of the sum of (1) up to between 80% and 85% of eligible
accounts receivable, (2) up to 18% of eligible inventory subject to an
availability sublimit of $3,000,000 and (3) up to 75% (reduced by one percentage
point on the first day of each month following May 3, 1996) of the liquidation
value of certain of the Company's machinery and equipment, subject to an
availability sublimit of $1,250,000 (the "Schroder Credit Facility"). The
Company expects that its outstanding balance under the Schroder Credit Facility
will be significantly less than $11,500,000 at all times during 1997. The
Schroder Credit Facility has a three-year term and bears interest at an annual
rate equal to the sum of the base commercial rate determined by Schroder and
publicly announced to be in effect from time to time plus 1-1/2%. Each fiscal
quarter, Tanon will also be obligated to pay a fee at a rate equal to one-half
of one percent (1/2%), per annum of the average unused portion of the Schroder
Credit Facility. The Company paid a Closing fee of $125,000 to Schroder at the
closing of the Schroder Credit Facility. Advances under the Schroder Credit
Facility can only be used to fund the Company's electronic contract
manufacturing operations which are now being conducted solely by Tanon. At
December 31, 1996, $8,054,000 was outstanding under the Schroder Credit
Facility, which constituted the total availability of the borrowing base. 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 December 31, 1996, Tanon was in
compliance with all of these requirements, except the required ratio of earnings
to certain fixed charges. By agreement dated in April 1997 Schroder has agreed
to waive such requirement for December 31, 1996 and has adjusted the required
financial ratios to reflect the results of operations of Tanon contained in the
current business plan of Tanon for 1997. Substantially, all of the assets of the
Company are pledged as collateral to secure the Schroder Credit Facility.
Concurrent with, and as a condition to, the closing of the Schroder Credit
Facility, the Company consolidated all of its contract electronic manufacturing
business into its wholly-owned subsidiary, 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, EAI is now principally
a holding company with all operations being conducted by its subsidiaries with
EAI providing strategic, financial and other support to such subsidiaries.
43
<PAGE>
EA INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Capitalized Lease Obligations
The Company leases fixed assets under capitalized leases with a weighted
average interest rate of 14.1% and the following principal maturity schedule:
(in thousands)
1997 $1,455
1998 1,280
1999 1,413
2000 244
------------
Total 4,392
Current portion (1,455)
------------
Long-term portion $2,937
============
5. OPERATING LEASES
The Company leases its West Long Branch facility under a lease which expires
in 2006. The monthly rent thereon, as of March 1, 1997 is approximately
$114,000, monthly abatements are approximately $47,000, yielding a net monthly
rent of $67,000, plus the payment of taxes, repairs, maintenance replacements
and utilities. The lease agreement provides for increases in rental payments on
each April 1, through the year 1999 based upon the increase in the Consumer
Price Index with a minimum and maximum range of 3% to 6-1/2%. Thereafter, the
rent will be adjusted based on market rates for similar facilities. During 1993
and 1994 the Company negotiated amendments to the lease which provide for $2.8
million of rent abatements over 5.5 years.
The majority of the other lease commitments have been made under standard
office leases which have initial terms ranging from two to five years.
The aggregate minimum lease commitments under all noncancelable operating
leases as of December 31, 1996, amounted to $15,978,000; $2,191,000 in 1997;
$2,241,000 in 1998; $1,962,000 in 1999; $1,865,000 in 2000; $1,892,000 in 2001
and $5,827,000 thereafter. Rent expense amounted to $2,343,000 in 1996,
$2,234,000 in 1995; and $1,395,000 in 1994. The lease on the West Long Branch,
NJ facility was extended to the year 2006 at the fair market value rent in March
1999. Since the fair market value rent at that time cannot now be determined, no
estimate of the future commitment has been included herein.
6. STOCK OPTIONS AND WARRANTS
The Board of Directors grants options and warrants to acquire the Company's
Common Stock to certain non-employee individuals and companies as a means of
payment (often in lieu of cash) for a variety of services rendered. No
significant options or warrants were issued for this purpose in 1996, however,
during 1995 and 1994 options and warrants to acquire 86,250 and 90,500 shares,
respectively of the Company's Common Stock were issued for this purpose. The
Company estimates the value of these options and warrants using an option
pricing model and charges this value to expense over the shorter of the vesting
or service period.
44
<PAGE>
EA INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
In connection with the Company's efforts to raise equity capital, the Board
of Directors grants options and warrants to acquire shares of the Company's
Common Stock to investment bankers and individuals and companies acting in that
capacity. During 1996, 1995 and 1994 options and warrants to acquire 89,286,
118,750 and 250,000 shares of the Company's Common Stock were issued for this
purpose. Options or warrants issued to raise equity capital are accounted for as
part of the equity transactions.
As described in Note 3, option and warrants were issued in connection with
the Tanon Acquisition and also in connection with the Company's investments in
both BarOn and its indirect investment in ITI.
A description of the Company's stock option plans for employees and
non-employee directors and the more significant options and warrants granted for
the purposes described above follows:
1972 Employee Stock Option Plan
As of December 31, 1996, 217,102 shares of Common Stock were reserved for
issuance to employees under the Company's 1972 Employee Stock Option Plan (1972
Employee Plan). Incentive stock options are granted to substantially all
employees at either the fair market value on the date of grant or 85% of the
fair market value of EAI Common Stock at the date of grant and usually become
exercisable over a four-year period commencing one year after being granted. The
Board of Directors may grant non-qualified options at its discretion for less
than fair market value. The Board of Directors may at its discretion determine
the option vesting period. Options can no longer be granted under this plan.
1994 Stock Option Plan for Non-Employee Directors
In March 1994, the EAI Board adopted and in May 1994 the shareholders
approved the Company's 1994 Stock Option Plan for Non-Employee Directors ("The
Directors Plan"). The Plan was approved based upon a variety of factors
including the reduction in amount and subsequent suspension of payment of fees
payable to non-employee directors of the Company, the significant commitment of
time required from members of the Board to address the issues arising out of the
financial difficulties experienced by the Company in recent periods and the
importance to the Company and its shareholders of attracting and retaining the
services of experienced and knowledgeable independent directors.
As of December 31, 1996, the aggregate number of shares of Common Stock
reserved for issuance under the Directors Plan was 501,875 shares. Under the
terms of the plan, each person who was an Eligible Director on March 10, 1994,
(the "Effective Date") and each person who became an Eligible Director
thereafter will be granted an option to purchase 12,500 shares of Common Stock.
An additional option to purchase 2,500 shares of Common Stock will be granted to
the individual serving as the Chairman of the Board on the Effective Date and to
each person who serves as the Chairman of the Board thereafter.
45
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EA INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
1994 Equity Incentive Plan
On May 17, 1994, the Board of Directors adopted the Company's Equity
Incentive Plan (the "Equity Incentive Plan"), which was approved by the
shareholders of the Company at the Special Meeting of Shareholders held on June
28, 1994. On October 12, 1995, the Shareholders voted to approve an amendment to
the Equity Incentive Plan increasing the aggregate number of shares available
for issuance to 1,500,000. On May 30, 1996, the Shareholders voted to approve an
amendment to the Equity Incentive Plan increasing the aggregate number of shares
available for issuance to 2,250,000. The EAI Board of Directors believes that
the Equity Incentive Plan will provide a method whereby certain directors,
officers, employees and consultants can share in the long-term growth of the
Company. As of December 31, 1996, 494,443 shares of Common Stock were reserved
for issuance to eligible individuals under this Plan.
Wall Street Group Options
On June 28, 1994, the Board of Directors granted the Wall Street Group an
option to purchase 25,000 shares of the Company's Common Stock which vested
ratably over 1 year at a price of $18.24 in consideration of services to be
provided to the Company. Such options were granted at fair value at the date of
grant.
Waterton Group LLC Options
On October 20, 1994, in consideration of investment banking services, the
Board of Directors granted to the Waterton Group, LLC options to acquire 50,000
shares of the Company's Common Stock, exercisable 50% on the first anniversary
of the date of grant and 50% on the second anniversary at an exercise price of
$30.80, which is equal to 110% of the closing price of the Company's Common
Stock on the date of grant. The Board also granted additional options which were
issued on October 20, 1995 to acquire 50,000 shares of the Company's Common
Stock, exercisable 50% on the first anniversary and 50% on the second
anniversary of the October 20, 1995 issue date, at an exercise price of $21.47,
which is equal to 110% of the closing price of the Company's Common Stock on
October 20, 1995.
Broad Capital Associates Options and Warrants
On April 27, 1995, in consideration of investment banking services, the
Board of Directors granted to Broad Capital Associates ("Broad"), options to
acquire 93,750 shares of common stock of the Company, exercisable 33 1/3% on the
date of grant, 33 1/3% on the first anniversary, and 33 1/3% on the second
anniversary of the April 27, 1995 date of grant at an exercise price of $32.75
per share which is equal to the fair market value on the date of grant. The
exercise price of such options was subsequently reduced to $18.00 per share and
then increased to $20.00 per share but automatically reverted to $32.75 per
share as of March 1, 1996.
In August 1996, the exercise price of such options was reduced to $11.20 per
share, exercisable immediately, but will automatically revert to the terms of
the original grant on August 1, 1997. On September 3, 1996 Broad exercised its
option to purchase 89,286 of such shares at $11.20 per share.
On July 5, 1995, in connection with the formation of the Joint Venture with
IAI, the Board of Directors granted Broad options to purchase 106,250 shares of
the Company's common stock at an exercise price of $32.50 which options vest and
are exercisable 33 1/3% on the date of grant, 33 1/3% on the first anniversary
of the date of the grant, and 33 1/3% on the second anniversary of the date of
the grant. Such options were subsequently amended to an exercise price of $18.00
per share and which reverted to an exercise price of $32.50 on March 1, 1996.
46
<PAGE>
On November 21, 1995 Broad exercised its option to purchase 50,000 of such
shares at $18.00 per share. In consideration for such exercise, the exercise
period for the options to purchase the remaining 56,250 shares was extended for
an additional period of six months and the exercise price was increased from
$18.00 to $20.00 per share. In consideration of Broad's commitment to purchase
89,286 shares of the Company's common stock from the April 27, 1995 grant, the
options to purchase the remaining 56,250 shares of the July 5, 1995 grant were
amended to an exercise price of $11.20 in August, 1996 but will revert to $32.50
on August 1, 1997.
On September 3, 1996, also in consideration for Broad's commitment to
purchase 89,286 shares of the Company's common stock from the April 27, 1995
grant, the Board of Directors granted Broad warrants to purchase 89,286 shares
of the Company's common stock at an exercise price of $12.00 per share until
July 31, 1997 and thereafter at $32.50 per share, expiring on July 5, 2000.
Mark Hauser Options
On July 5, 1995, in connection with the formation of the Joint Venture with
IAI, the Board of Directors granted Mark Hauser options to purchase 25,000
shares of the Company's common stock at an exercise price of $32.50 per share
which options vest and are exercisable 33 1/3% on the date of grant, 33 1/3% on
the first anniversary of the date of the grant, and 33 1/3% on the second
anniversary of the date of the grant.
Dedi Graucher Options
On July 5, 1995, in connection with the formation of the Joint Venture with
IAI, the Board of Directors granted Dedi Graucher options to purchase 106,250
share of the Company's common stock at an exercise price of $32.50 per share
which options vest and are exercisable 33 1/3% on the date of grant, 33 1/3% on
the first anniversary of the date of the grant, and 33 1/3% on the second
anniversary of the date of the grant. Such options were subsequently amended to
an exercise price of $18.00 per share, which reverted to an exercise price of
$32.50 per share on March 1, 1996.
Class A and Class B Warrants
In connection with the February 1994 Private Placement, there were 7,354
Class A Warrants and 240,928 Class B Warrants outstanding as of December 31,
1996. Each Class A Warrant entitles the holder to purchase one share of the
Company's Common Stock at $4.00 per share and each Class B Warrant entitles the
holder to purchase one share of the Company's Common Stock at $7.00 per share.
Irwin L. Gross Warrants
The Company entered into an agreement with Irwin L. Gross in March 1994
pursuant to which Mr. Gross will provide consulting services and financial
advice, for a term of five years ending March 1999. In consideration for such
services Mr. Gross received a warrant to purchase 65,500 shares of the Company's
Common Stock exercisable 50% on the first anniversary and 50% on the second
anniversary of the grant at a price of $11.08 per share. These options are
exercisable through March 21, 1999.
47
<PAGE>
EA INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Neidiger/Tucker/Bruner, Inc. Unit Warrants
In connection with services rendered to the Company for the June 1994
Private Placement, the Company granted Unit Warrants to the investment banking
firm of Neidiger/Tucker/Bruner, Inc. ("NTB Warrants"). The NTB Warrants entitle
the holders to purchase 62,500 units at $12.12 per unit. Each unit consists of
one share of Common Stock and a Class C Warrant. On July 10, 1999, 15,663 Unit
Warrants will expire and on August 17, 1999, 46,838 Unit Warrants will expire.
For each unit there is an Underlying Warrant with an exercise price of $18.40
with the same expiration dates.
VistaQuest Options
In connection with consulting services performed for the Company on December
13, 1995, the Board of Directors granted VistaQuest warrants to purchase 60,000
shares at an exercise price of $23.52 per share, which exercise price was the
fair market value on the date of the grant.
ITI Joint Venture
In connection with the formation of ITI, warrants to purchase 125,000 and
150,000 shares of the Company's Common Stock were granted to IAI and AMP
Argonauts, Ltd., respectively. The warrants have an exercise price of $29.00 per
share, and expire on August 7, 1998.
Other Warrants
At December 31, 1996, the Company had certain other warrants outstanding for
issuance of shares of Common Stock under certain circumstances. All such
warrants were issued in prior years and are included in the summary of
outstanding warrants below.
48
<PAGE>
EA INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
A summary of activity in the various stock option plans discussed above and
a summary of warrants outstanding at December 31, 1996 follow:
<TABLE>
<CAPTION>
Stock Option Plans
------------------
Price Available
Per Share Outstanding Exercisable for Grant
--------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
1972 Stock Option Plan
December 31, 1994, Balance $ 4.52-25.12 246,709 85,820 108,974
Options Granted -- 100,000 -- (100,000)
Became Exercisable -- -- 131,411 --
Options Exercised $ 4.52- 5.48 (86,745) (86,745) --
Options Returned $ 4.52-25.12 (193,597) -- 193,597
------------ ------ ------ -------
December 31, 1995 Balance $ 4.52-25.12 66,367 130,486 202,571
Became Exercisable $ 4.52-20.252 4,432
Options Exercised $13.00 (312) (312)
Options Returned $ 4.52-14.00 (14,531) (11,107) 14,531
Options Exercisable Adjustment $ 4.52-25.12 -- (77,523) --
------------ ------ ------ -------
December 31, 1996, Balance $ 4.52-25.12 51,524 45,976 217,102
============ ====== ====== =======
1994 Stock Option Plan for
Non-Employee Directors
December 31, 1994, Balance $13.00-17.48 65,000 19,500 35,000
Options Granted $22.28 40,000 (40,000)
Became Exercisable $13.00-22.28 21,000
Options Exercised $13.00-17.48 (11,250) (11,250)
Options Returned $13.00 (6,875) (6,875) 6,875
Options Authorized 500,000
------------ ------ ------ -------
December 31, 1995 Balance $13.00-22.28 86,875 22,375 501,875
Became Exercisable $13.00-30.00 -- 14,625 --
Options Exercised $13.00 (2,500) (2,500)
Options Returned Adjustment $13.00 -- 6,875 --
------------ ------ ------ -------
December 31, 1996, Balance $13.00-30.00 84,375 41,375 501,875
============ ====== ====== =======
</TABLE>
49
<PAGE>
EA INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
<TABLE>
<CAPTION>
Stock Option Plans
Price ------------------ Available
Per Share Outstanding Exercisable for Grant
--------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
1994 Equity Incentive Plan
- -----------------------------
December 31, 1994, Balance $ 17.76 450,000 300,000
Options Granted $ 4.20-34.50 1,102,080 1,102,080)
Became Exercisable $ 17.76 452,199
Options Exercised $ 4.20-18.00 (121,876) (121,876)
Options Returned $ 17.76 (114,380) (114,380) 114,380
Options Authorized 750,000
----------- ------------- ----------- ------------
December 31, 1995, Balance $ 4.20-34.50 1,315,824 215,943 62,300
Options Granted $ 14.50-20.50 362,500 (362,500)
Options Granted -- Adjustment $ 30.50 (6,250) 6,250
Options Granted -- Adjustment $ 18.00 25,000 (25,000)
Became Exercisable $ 3.96-34.50 501,960
Options Exercised $ 3.96-34.50 (91,479) (91,479)
Options Returned $ 5.00-34.50 (44,888) (3,125) 44,888
Options Returned Adjustment $ 3.96-34.50 (18,497) 113,183 18,505
Options Authorized 750,000
----------- ------------- ----------- ------------
December 31, 1996, Balance $ 3.96-34.50 1,542,210 736,482 494,443
=========== ============= =========== ============
Wall Street Group Options $ 18.24 25,000 25,000 --
=========== ============= =========== ============
Waterton Group LLC Options $ 22.00-30.80 100,000 75,000 --
=========== ============= =========== ============
Total All Options $ 3.96-34.50 1,803,109 923,833 1,213,420
=========== ============= =========== ============
</TABLE>
50
<PAGE>
EA INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Warrants Outstanding
<TABLE>
Exercise Price
Warrants Per Warrant Outstanding
- -------- ----------- -----------
<S> <C> <C>
Class A Warrants $4.00 7,354
Class B Warrants 7.00 240,928
Gross Warrants 11.08 65,500
Neidiger/Tucker/Bruner, Inc. Unit Warrants 12.10 62,501
Neidiger/Tucker/Bruner, Inc. Class C Warrants 18.40 62,501
Public Utility Warrants 24.00 75,000
185 Monmouth Parkway 6.00 32,500
Norcross Warrants 4.00 12,500
IAI Warrants 29.00 125,000
A.M.P. Argonauts Ltd. Warrants 29.00 150,000
Broad Capital Associates, Inc. Warrants 12.00 89,286
VistaQuest Warrants 23.50 60,000
----------- ---------
Total Warrants Outstanding $4.00-29.00 983,070
=========== =========
</TABLE>
The number of shares and average price of options exercisable at December
31, 1996 and 1995 were 923,833 shares at $19.23 and 418,804 shares at $19.34,
respectively. At December 31, 1996 and 1995, 1,213,420 shares and 766,718
shares, respectively, were available for future grants under these plans.
At December 31, 1996 an aggregate of 3,999,599 shares of Common Stock
was reserved for the exercise of options and warrants.
Effective January 1, 1996, the Company adopted the provisions of Statement
No. 123, Accounting for Stock-Based Compensation. As permitted by the Statement,
the Company has chosen to continue to account for stock-based compensation using
the intrinsic value method. Accordingly, no compensation expense has been
recognized for its stock-based compensation plans other than for
performance-based awards, which was not significant. Had the fair value method
of accounting been applied to the Company's stock option plans, which requires
recognition of compensation cost ratably over the vesting period of the
underlying equity instruments, Net Loss would have been increased by $5.2
million, or $1.08 per share in 1996 and $2.9 million, or $0.95 per share in
1995. This pro forma impact only takes into account options granted since
January 1, 1995 and is likely to increase in future years as additional options
are granted and amortized ratably over the vesting period. The average fair
value of options granted during 1996 and 1995 was $16.91 and $29.43,
respectively. The fair value was estimated using the Black-Scholes
option-pricing model based on the weighted average market price at grant date of
$8.78 in 1996 and $14.10 in 1995 and the following weighted average assumptions:
risk-free interest rate of 5.8% for 1996 and 6.4% for 1995, expected life of 3
years for 1996 and 1995, volatility of 73% for 1996 and 70% for 1995, and no
dividend yield for 1996 or 1995.
7. SAVINGS PLAN AND POST RETIREMENT BENEFITS
51
<PAGE>
EA INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
The Company has a 401(k) Savings Plan whereby eligible employees may
voluntarily contribute up to 15% of annual compensation, or the maximum allowed
as determined by the Internal Revenue Code. Employee contributions are matched
50% by the Company up to a maximum of 4% of employee compensation. The Company
can also make an additional contribution which is at the discretion of the Board
of Directors. No additional contributions were made in 1996, 1995, or 1994 .
Company contributions amounted to approximately $84,000 in 1996, $68,000 in
1995, and $48,000 in 1994. Payments upon retirement or termination of employment
are based on vested amounts credited to individual accounts. The Company does
not provide any material postretirement benefits.
8. INCOME TAXES
As of December 31, 1996, the Company had a net operating loss carry forward
for tax purposes of approximately $45.6 million ($7.3 million expiring in 1999,
$2.0 million expiring in 2002, $3.1 million expiring in 2007, $6.2 million
expiring in 2008, $5.2 million expiring in 2009, $9.6 million expiring in 2010
and $12.2 million expiring in 2011) that may be applied to reduce future taxable
income. There is an annual limitation of $4,860,000 on the utilization of the
Company's net operating loss carry forwards which resulted from stock ownership
change in January 1995, as defined in Section 382 of the Internal Revenue Code
of 1986. Further limitations may occur if additional stock ownership changes
occur which exceed certain thresholds as defined by Section 382 of the Code.
Because of the uncertainties related to the future realization of the
deferred tax asset of $17.8 and $13.0 million at December 31, 1996 and 1995,
respectively, the Company has established a valuation allowance of $17.8 and
$13.0 million at December 31, 1996 and 1995, respectively.
There was no net U.S. Federal income tax benefit for 1996, 1995 or 1994
because losses incurred in those years cannot be carried back to prior years and
the future realization is uncertain.
9. LOSS PER COMMON SHARE
Losses per common share were computed based on the weighted average number
of common shares outstanding. Shares issuable upon the exercise of stock
options, warrants and convertible notes and debentures have not been included in
per share computations, because their impact would have been antidilutive in
each year. The weighted average common shares outstanding used in the
computation of (loss) per share was 4,802,068 in 1996, 3,086,070 in 1995 and
1,263,120 in 1994.
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 as of
the close of business on December 27, 1996 (the "Record Date").
10. EXECUTIVE SERVICES AND SEVERANCE AGREEMENTS
Effective November 15, 1996, Joseph R. Spalliero resigned as President and
Director of the Company. Upon the expiration of Mr. Spalliero's employment
agreement on January 3, 1997, Mr. Spalliero became an independent sales
representative for Tanon. Irwin L. Gross, Chairman of the Board of the Company,
has succeeded Mr. Spalliero as President of the Company.
On February 2, 1995, pursuant to negotiations which had been commenced in
November, 1994, Charles A. Milo submitted his formal resignation as President,
Chief Executive Officer and Director. At that time, the
52
<PAGE>
EA INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Company executed an agreement with Mr. Milo which specifies among other things,
the forgiveness of the $160,000 note due the Company; payment of a $50,000
bonus, continuation of salary and benefits to March 31, 1995; and payment of
$10,000 fee for services to be rendered in connection with the closure of the
Company's Mexican facility. The charges are reflected in the restructuring
charge disclosed in Note 3.
On December 20, 1996, the Company entered into employment agreements with
those of its executive officers who served as full time employees - Paul Finer,
Howard Kamins, Stanley Jester and Jules Seshens. The agreements have an initial
term expiring on December 31, 1997, and automatically renew unless notice given
at least 180 days before expiration of the then current term. Each of the
agreements provide for severance in a lump sum equal to one year's salary and
guideline bonus, if any, continuation of benefits for 18 months, and vesting of
any unvested options if (i) the executive is terminated for any reason other
than due cause, (ii) a change of control of the Company occurs, (iii) Irwin L.
Gross is no longer Chairman, (iv) the executive's principal location is moved
more than 30 miles from its current location or (v) the executive's position is
materially changed.
11. PREFERRED STOCK PURCHASE RIGHTS
Pursuant to a Shareholder Rights Plan, there is one preferred stock
purchase right outstanding for each outstanding share of Common Stock. Under
certain conditions, each right may be exercised to purchase one one-hundredth
share of a new series of participating preferred stock at an exercise price of
$11, subject to adjustment. The rights may only be exercised commencing ten days
after a public announcement that a party acquired or obtained the right to
acquire 15% or more of the Company's Common Stock (except in a transaction
directly with the Company which the Board of Directors determines is in the best
interests of the shareholders) or ten days after commencement of a tender or
exchange offer the consummation of which would result in ownership by a party of
15% or more of the Company's Common Stock. The rights, which do not have voting
rights, expire in 1998 and may be redeemed by the Company at a price of $0.01
per right at any time prior to their expiration or the acquisition of 15% of the
Company's Common Stock. In the event that a party acquires 15% or more of the
Company's Common Stock, in a transaction not approved by the Board of Directors,
each other holder of a right shall have the right to receive that number of
shares of common (or, in certain circumstances, Common Stock equivalents) of the
Company, which would have a value of twice the exercise price of the right, and
in addition, the Board of Directors, at its option, may exchange each right
(other than rights held by the acquiring party) for one share of Common Stock
(or Common Stock equivalents). In the event that the Company is acquired in a
merger or other business combination transaction after the rights become
exercisable, each holder of a right shall have the right to purchase, at the
exercise price, that number of shares of Common Stock of the acquiring company
which would have a value of twice the exercise price of the right. The Plan will
not become effective if 80% or more of the Company's stock is acquired in an all
cash tender offer meeting certain conditions.
53
<PAGE>
EA INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
12. CONTINGENCIES
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
through March 1997. In the event the matter cannot be resolved through
mediation, the case will be referred back to the Court and a trial has been
scheduled to commence on April 28, 1997.
No reserve has been established in the accompanying financial statements
for the cost of remediation, if any, which may be attributable to the Company.
Estimated legal and environmental expert fees have been reserved to the extent
not covered by insurance. The Company's liquidity assessment described in Note 2
does not include any estimate for cost of remediation.
54
<PAGE>
EA INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
13. QUARTERLY FINANCIAL DATA (Unaudited)
Summarized quarterly financial data for the years ended December 31, 1996
and 1995 are as follows:
<TABLE>
<CAPTION>
First Second Third Fourth
----- ------ ----- ------
<S> <C> <C> <C> <C>
1996
- ----
Net sales $24,025 (1) $22,388 (1) $ 17,595 (1) $ 17,617
Gross profit (loss) 1,391 (1) 1,589 (1) (142)(1) (2,358)
Net loss $(1,674)(1) $(1,627)(1) $ (6,265)(1) $(16,188)
------- ------- -------- --------
Loss per common share $ (0.40)(1) $ (0.34)(1) $ (1.24)(1) $ (3.37)
======= ======= ======== ========
Adjustment for discount on
convertible debt $(2,195) $(2,005)
Restated net loss $(3,869)(2) $(3,632)(2) $ (6,265) $(16,188)
------- ------- -------- --------
Restated loss per common share $ (0.92)(2) $ (0.77)(2) $ (1.24) $ (3.37)
======= ======= ======== ========
1995
- ----
Net sales $19,056 (1) $18,178 (1) $ 18,895 (1) $ 20,956
Gross profit 106 (1) 67 (1) 250 (1) 240
Net loss $(8,598)(1) $(2,484)(1) $(15,786)(1) $ (4,026)
------- ------- -------- --------
Loss per common share $ (3.36)(1) $ (0.92)(1) $ (4.84)(1) $ (1.08)
======= ======= ======== ========
</TABLE>
(1) As reported on quarterly report on Form 10-Q.
(2) Restated to reflect interest expense resulting from the incremental yield
embedded in the conversion terms of certain convertible notes and debentures
described in Note 4.
55
<PAGE>
EA INDUSTRIES, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION ACCOUNT
For the Three Years Ended December 31, 1996
(thousands of dollars)
<TABLE>
<CAPTION>
Charged Deductions(1)
Description Balance at (Credited) ------------- Balance
Beginning to Costs and at End of
Of Period Expenses Period
--------- ------------ ---------
<C> <C> <C> <C> <C> <C>
1996: Allowance for doubtful accounts $385 $899 (3) ($184) $1,100
==== ==== ====== ========
1995: Allowance for doubtful accounts $307(2) $ 91 $(13) $385
======= ==== ===== ====
1994: Allowance for doubtful accounts $277 $134 $(204) $207
==== ==== ====== ====
</TABLE>
(1) Write-off of uncollectible accounts
(2) Adjusted to include Tanon Balance
(3) Includes provisions for Gyration Inc. of $750
56
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
EA INDUSTRIES, INC.
Registrant
By:/s/ Stanley O. Jester
-----------------------
Stanley O. Jester, Treasurer
and Vice President - Finance
Chief Financial Officer
(Principal Financial and Chief Accounting Officer)
Dated: April 15, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Irwin L. Gross Chairman of the Board April 15, 1997
- -------------------------------- and President
Irwin L. Gross
/s/ Stanley O. Jester Treasurer and Vice April 15, 1997
- -------------------------------- President, Finance
Stanley O. Jester
(Principal Financial and
Accounting Officer)
/s/ Jules M. Seshens Executive Vice President April 15, 1997
- -------------------------------- and Director
Jules M. Seshens
[Signatures continued on next page]
60
<PAGE>
/s/ William Spier Director April 15, 1997
- --------------------------------
William Spier
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The required information with respect to each director and executive
officer is contained in the Company's definitive Proxy Statement to be prepared
in connection with its Annual Meeting to be filed within 120 days of the
Registrant's year ended December 31, 1996 ("1997 Annual Meeting"), which is
hereby incorporated by reference in this Annual Report on Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
The required information with respect to executive compensation is
contained in the Company's definitive Proxy Statement to be prepared in
connection with its 1997 Annual Meeting, which is hereby incorporated by
reference in this Annual Report on Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The required information with respect to security ownership of certain
beneficial owners and management is contained in the Company's definitive Proxy
Statement to be prepared in connection with its 1997 Annual Meeting, which is
hereby incorporated by reference in this Annual Report on Form 10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The required information with respect to certain relationships and
related transactions is contained in the Company's definitive Proxy Statement to
be prepared in connection with its 1997 Annual Meeting, which is hereby
incorporated by reference in this Annual Report on Form 10-K.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) Reference is made to the Consolidated Financial Statements and
Schedules at Part II, Item 8 of this Annual Report on Form 10-K and the same are
hereby incorporated by reference.
2
<PAGE>
EXHIBITS
Exhibit No. Description
---------- -----------
2.1 Agreement and Plan of Reorganization by and among Electronic
Associates, Inc., Tanon Manufacturing, Inc., EA Acquisition
Corp. and Joseph R. Spalliero, dated December 12, 1994, was
filed as Exhibit 2 to the Company's Report on Form 8-K (Date
of Report: January 4, 1995), as amended, and is hereby
incorporated by reference.
2.2 Form of Investment Agreement dated January 16, 1995 by and
between Electronic Associates, Inc. and BarOn Technologies,
Ltd., was filed as Exhibit 10.1 to the Company's Current
Report on Form 8-K (Date of Report: January 16, 1995), as
amended, and is hereby incorporated herein by reference.
2.3 Form of Stock Purchase Agreement, dated January 10, 1995,
between the company and various shareholders of BarOn
Technologies, Ltd., was filed as Exhibit 10.2 to the Company's
Current Report on Form 8-K (date of report: January 16, 1995),
as amended, and is hereby incorporated herein by reference.
2.4 Form of Shareholders Agreement, dated January 16, 1995, among
the Company, BarOn Technologies Ltd. and the shareholders of
BarOn Technologies Ltd. was filed as Exhibit 10.3 to the
Company's Current Report on Form 8-K (Date of Report: January
16, 1995), as amended, and is hereby incorporated herein by
reference.
2.5 Form of Pre-Incorporation Agreement in connection with the IAI
Joint Venture was filed as Exhibit 2.1 to the Company's
Current Report on Form 8-K (Date of Report: August 3, 1995)
and is hereby incorporated herein by reference.
2.6 Form of Joint Venture Agreement in connection with IAI Joint
Venture was filed as Exhibit 2.2 to the Company's Current
Report on Form 8-K (Date of Report: August 3, 1995) and is
hereby incorporated herein by reference.
3.1 Certificate of Incorporation, as amended, was filed as Exhibit
3.1 to the Company's Registration on Form S-1, No. 33-81892,
as amended and is hereby incorporated by reference.
3.2 Amendment to Certificate of Incorporation was filed as Exhibit
3.11 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1995, and is hereby incorporated by
reference.
3.3 Amendment to Certificate of Incorporation Reflecting Reverse
Stock Split.
3.4 By-Laws, as amended, were filed as Exhibit 3.2 to the
Company's Annual Report on Form 10-KA for the year ended
December 31, 1994, and are hereby incorporated by reference.
4.1 Specimen of Common Stock share Certificate.
3
<PAGE>
4.2 Rights Agreement, dated as of February 10, 1988, between the
Company and Manufacturers Hanover Trust Company, as Rights
Agent, was filed as Exhibit 1 to the Company's Form 8-A, dated
February 11, 1988, and is hereby incorporated by reference.
4.3 Amendment, dated as of October 24, 1990, to the Rights
Agreement, was filed as Exhibit 2 to the Company's Form 8,
dated October 24, 1990, and is hereby incorporated by
reference.
10.1 Form of common stock Purchase Warrants issued pursuant to
Settlement Agreement dated March 10, 1988 between the Company
and certain utilities was filed as Exhibit 2(c) to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1990, and is hereby incorporated by reference.
(*)10.2 1972 Stock Option Plan, as amended and restated, was
filed as Appendix III to the Company's Proxy Statement dated
April 18, 1994, and is hereby incorporated by reference.
10.3 Form of grant letter with respect to options granted pursuant
to the 1972 Stock Option Plan was filed as Exhibit 10(c) to
the Company's Annual Report on Form 10-K for the year ended
December 31, 1990, and is hereby incorporated by reference.
(*)10.4 1991 Stock Option Plan for Non-Employee Directors, was
filed as Exhibit 10(d) to the Company's Annual Report on Form
10-K for the year ended December 31, 1991, and is hereby
incorporated by reference.
(**)10.5 1988 Management Incentive Compensation Plan, as amended as of
January 1, 1992, was filed as Exhibit 10(e) to the Company's
Annual Report on Form 10-K for the year ended December 31,
1991, and is hereby incorporated by reference.
10.6 Second Amendment of Lease and Option Agreement, dated as of
April 1, 1989, between the Company and 185 Monmouth Parkway
Associates was filed as Exhibit (a) to the Company's Report on
Form 10-Q for the three months ended March 31, 1989, and is
hereby incorporated by reference (File No. 1-4680).
10.7 Stock Purchase Agreement, dated as of February 8, 1990,
between the Company and Nippon Mining Co., Ltd. was filed as
Exhibit 10(a) to the Company's Report on Form 8-K, dated
February 21, 1990, and is hereby incorporated by reference
(File No. 1-4680).
4
<PAGE>
10.8 Asset Purchase Agreement, dated May 15, 1992, between the
Company, Milo Technologies, Inc., Charles A. Milo and Loretta
Milo was filed as Exhibit 10(p) to the Company's Annual Report
on Form 10-K for the year ended December 31, 1993, and is
incorporated herein by reference.
10.9 Stock Purchase Agreement, dated May 15, 1992, between the
Company, Milotec S.A. De C.V., Charles A. Milo, Loretta Milo
and certain other individuals, was filed as Exhibit 10(q) to
the Company's Annual Report on Form 10-K for the year ended
December 31, 1992, and is hereby incorporated by reference.
10.10 Form of Class A Warrant issued to each purchaser in connection
with the private sale of the Company's securities in January
1994, was filed as Exhibit 10(x) to the Company's Annual
Report on Form 10-K for the year ended December 31, 1993, and
is hereby incorporated by reference.
10.11 Revolving Credit and Security Agreement dated May 3, 1996,
between IBJ Schroder Bank & Trust Company and Tanon
Manufacturing was filed as Exhibit 10.1 to the Company's
quarterly report on form 10-Q for the quarter ended March 30,
1996 and is hereby incorporated by reference.
10.12 Stock Purchase Agreement dated May 3, 1996, between the
Company and Ayhan Hakimoglu was filed as Exhibit 10.2 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
March 30, 1996 and is hereby incorporated by reference.
10.13 Form of Subscription Agreement and Form of 9% Convertible
Subordinated Debenture issued in connection with raising $8.1
million in May and June 1996 to fund a portion of the purchase
price for approximately 11.64% of the issued and outstanding
Aydin Common Stock purchased from Mr. Hakimoglu and for other
uses was filed as Exhibit 10.3 to the Company's Quarterly
Report on Form 10-Q for the quarter ended March 30, 1996 and
is hereby incorporated by reference.
10.14 Master Note dated July 1, 1996 from BarOn Technologies, Ltd.
to the Company was filed as exhibit 10.2 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 26,
1996 and is hereby incorporated by reference.
10.15 Master Note Agreement dated July 1, 1996, between the Company
and BarOn Technologies, Ltd. was filed as exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
June 26, 1996 and is hereby incorporated by reference.
10.16 Manufacturing and Consulting Agreement dated as of July 1,
1996 between the Company and BarOn Technologies, Ltd. was
filed as exhibit 10.3 to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 26, 1996 and is hereby
incorporated by reference.
10.17 Warrant to Purchase Ordinary Shares of BarOn Technologies,
Ltd. was filed as exhibit 10.4 to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 26, 1996 and is
hereby incorporated by reference.
10.18 Form of Class B Warrant issued to each purchaser in connection
with the private sale of the Company's securities in January
1994, was filed as Exhibit 10(y) to the Company's Annual
Report on Form 10-K for the year ended December 31, 1993, and
is hereby incorporated by reference.
5
<PAGE>
10.19 Agreement to Issue Warrants, dated January 28, 1994, between
the Company and Norcross Securities, Inc. together with a
Warrant issued by the Company and a form of a Warrant issuable
under certain circumstances, comprising Exhibits to the
Agreement to Issue Warrants, was filed as Exhibit 10(z) to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1993, and is hereby incorporated by reference.
10.20 Second Amendment, dated August 4, 1993, to Second Amendment of
Lease and Option Agreement, dated as of April 1, 1989, between
the Company and 185 Monmouth Parkway Associates, L.P. and
letter dated August 6, 1993, modifying Second Amendment, dated
August 4, 1993, to Second Amendment of Lease and Option
Agreement, was filed as Exhibit 10(ab) to the Company's Annual
Report on Form 10-K for the year ended December 31, 1993, and
is hereby incorporated by reference.
10.21 Asset Purchase Agreement, dated June 4, 1993, between the
Company and Halifax Corporation together with a
Non-Competition Agreement, Assignment and Assumption
Agreement, Service Mark License Agreement, Low Cost Host
License Agreement, and Master Subcontract Agreement,
comprising Exhibits to the Asset Purchase Agreement, was filed
as Exhibit 10(ae) to the Company's Annual Report on Form 10-K
for the year ended December 31, 1993, and is hereby
incorporated by reference.
10.22 Form of Subscription Agreement executed by each purchaser in
connection with the private placement of the Company's
securities which was commenced in June 1994, was filed as
Exhibit 10.28 to the Company's Registration Statement on Form
S-1, No. 33-81892, as amended, and is hereby incorporated by
reference.
10.23 Form of Class C Warrant issued to each purchaser in connection
with the private placement of the Company's securities which
was commenced in June 1994, was filed as Exhibit 10.29 to the
Company's Registration Statement on Form S-1, No. 33-81892, as
amended, and is hereby incorporated by reference.
(*)10.24 1994 Equity Incentive Plan, as adopted by the Company's
shareholders on June 28, 1994, as amended and restated.
(*)10.25 1994 Stock Option Plan for Non-Employee Directors, as adopted
by the Company's shareholders on May 17, 1994, as amended and
restated.
(**)10.26 Form of Consulting Agreement entered into between the
Company and Irwin L. Gross on March 21, 1994, was filed as
Exhibit 2 to the Company's Registration Statement on Form S-1,
No. 33-81892, as amended, and is hereby incorporated by
reference.
10.27 Form of Placement Agent's Warrant Agreement entered into
between the Company and Neidiger/Tucker/Bruner, Inc., together
with a Form of Warrant issued by the Company comprising an
Exhibit to the Placement Agent's Warrant Agreement, was filed
as Exhibit 10.35 to the Company's Registration Statement on
Form S-1, No. 33-81892, as amended, and is hereby incorporated
by reference.
6
<PAGE>
10.28 Form of Investment Agreement dated January 15, 1995 by and
between Electronic Associates, Inc. and BarOn Technologies,
Ltd., was filed as Exhibit 10.1 to the Company's Report on
Form 8-K (Date of Report: January 16, 1995), as amended, and
is hereby incorporated herein by reference.
10.29 Form of Stock Purchase Agreement between the Company and
various shareholders of BarOn Technologies, Ltd., was filed as
Exhibit 10.2 to the Company's Report on Form 8-K (Date of
Report: January 16, 1995), as amended, and is hereby
incorporated herein by reference.
10.30 Form of Shareholders Agreement among the Company, BarOn
Technologies, Ltd. and the shareholders of BarOn Technologies,
Ltd., was filed as Exhibit 10.3 to the Company's Report on
Form 8-K (Date of Report: January 16, 1995), as amended, and
is hereby incorporated herein by reference.
(**)10.31 Employment Agreement dated as of January 4, 1995 between
Tanon Manufacturing, Inc. and Joseph R. Spalliero was filed as
Exhibit 10.51 to the Company's Annual Report on Form 10-K/A
for the year ended December 31, 1994, and is hereby
incorporated by reference.
(**)10.32 Non-Competition and Confidentiality Agreement dated as
of January 4, 1995 by and among Electronic Associates, Inc.,
Tanon Manufacturing, Inc. and Joseph R. Spalliero, was filed
as Exhibit 10.52 in the Company's Annual Report on Form 10-K/A
for the year ended December 31, 1994, and is hereby
incorporated by reference.
10.33 Promissory Note dated January 4, 1995 in the principal amount
of $1,000,000 from Joseph R. Spalliero and Patricia Spalliero
to Electronic Associates, Inc. filed as Exhibit 10.53 to the
Company's Annual Report on Form 10-K/A for the year ended
December 31, 1994, and is hereby incorporated by reference.
(**)10.34 Amendment dated March 23, 1995 to Consulting Agreement
dated March 21, 1994 between Irwin L. Gross and Electronic
Associates, Inc. filed as Exhibit 10.55 to the Company's
Annual Report on Form 10-K/A for the year ended December 31,
1994, and is hereby incorporated by reference.
(**)10.35 Employment Agreement dated December 20, 1996 between the
Company and Paul E. Finer.
(**)10.36 Employment Agreement dated December 20, 1996 between the
Company and Howard P. Kamins.
(**)10.37 Employment Agreement dated December 20, 1996 between the
Company and Stanley O. Jester.
7
<PAGE>
(**)10.38 Employment Agreement dated December 20, 1996 between the
Company and Jules Seshens.
10.39 Form of Subscription Agreement and Form of 10% Series A
Convertible Notes issued by the Company.
10.40 Registration Rights Agreement dated January 23, 1997 between
Aydin Corporation and the Company.
10.41 Letter Agreement dated February 25, 1997 between Aydin
Corporation and the Company regarding option to be granted to
the Chairman of Aydin Corporation.
10.42 Stock Option Agreement dated February 27, 1997 the Company and
the Chairman of Aydin Corporation.
10.43 Letter of Intent dated December 23, 1996 by and among Tanon
Manufacturing, Inc., Tri-Star Technologies Co., Inc. and
Michael P. Downes.
10.44 Letter of Intent dated December 23, 1996 by and among Tanon
Manufacturing, Inc., Tri-Star Realty Trust and Michael P.
Downes.
10.45 Memorandum of Understanding dated December 23, 1996 by and
among the Company, Tanon Manufacturing, Inc., Tri-Star
Technologies Co., Inc., and Michael P. Downes.
10.46 Promissory Note dated January 20, 1997 in the principal amount
of $1 million issued by the Company to Millenco, L.P.
10.47 Stock Pledge Agreement dated January 20, 1997 between the
Company and Millenco, L.P.
10.48 Warrant dated January 20, 1997 to purchase 50,000 shares of
the Company's Common Stock issued to Millenco L.P.
10.49 Promissory Note dated January 6, 1997 in the principal amount
of $1 million issued by the Company to ACE Foundation, Inc.
10.50 Stock Pledge Agreement dated January 6, 1997 between the
Company and Ace Foundation, Inc.
10.51 Warrant dated January 6, 1997 to purchase 50,000 shares of
Company's Common Stock issued to ACE Foundation, Inc.
10.53 Warrant, dated September 3, 1996, to purchase 357,143 shares
of Common Stock issued by the Company to Broad Capital
Associates, Inc.
8
<PAGE>
22 Subsidiaries of the registrant
a. The Company has three active subsidiaries:
1. BarOn Technologies Ltd.
Haifa, Israel
2. Tanon Manufacturing, Inc.
Fremont, California
3. Electronic Associates Technologies Israel, Ltd.
23 Consents of experts and counsel
a. Consent of Arthur Andersen, LLP, Independent Public
Accountants of EA Industries, Inc.
b. Consent of Luboshitz Kasierer & Co., and Yosef Shimony,
Independent Public Accountants of BarOn Technologies
Ltd.
27 Financial Data Schedule
99.1 The audited balance sheet of BarOn Technologies Ltd. as of
December 31, 1993 and December 31, 1992 and related statements
of operations, shareholders' equity and cash flow for the year
ended December 31, 1993 and for the period from inception in
1992 through December 31, 1992, together with the unaudited
balance sheet of BarOn Technologies Ltd. as of September 30,
1994 and related statements of operations, shareholders'
equity and cash flows for the nine months ended September 30,
1994, were filed as Exhibit 99.1 to the Company's Report on
Form 8-K (date of Report: January 16, 1995), as amended, and
are hereby incorporated herein by reference.
99.2 The audited balance sheet of Tanon Manufacturing, Inc. as of
December 31, 1993 and December 31, 1992 and related statements
of operations, shareholders' equity and cash flows for the
years ended December 31, 1993, 1992 and 1991, together with
the unaudited balance sheet of Tanon Manufacturing, Inc. as of
October 1, 1994 and related statements of operations,
shareholders' equity and cash flows for the nine months ended
October 1, 1994 and October 2, 1993, were filed as Exhibit 99
to the Company's Report on Form 8-K (date of Report: January
4, 1995), as amended, and are hereby incorporated herein by
reference.
(*) Constitutes a compensatory plan filed pursuant to Item 14(c) of the
Company's Annual Report on Form 10-K.
(**) Constitutes a management contract filed pursuant to Item 14(c) of the
Company's Annual Report on Form 10-K.
The Company will provide copies of the above Exhibits to shareholders
upon the payment of a fee of $4 per order to cover postage and handling plus
seven cents per page. Requests for such copies should be directed to James
Shanley, EA Industries, Inc., 185 Monmouth Parkway, West Long Branch,
New Jersey 07764.
9
<PAGE>
The Company filed a report on Form 8-K on December 18, 1996 regarding
the one for four reverse stock split of the Company's Common Stock approved by
the Board of Directors of the Company and effective on December 27, 1996.
(c) See Item 14(a) above.
10
CERTIFICATE OF AMENDMENT
TO
THE CERTIFICATE OF INCORPORATION
OF
EA INDUSTRIES, INC.
TO: SECRETARY OF STATE
STATE OF NEW JERSEY
This is to certify that the Certificate of Incorporation of EA Industries,
Inc. (herein referred to as the "Corporation") which was filed and recorded in
the office of the Secretary of State, State of New Jersey on October 31, 1945,
as amended, is hereby amended, such amendment becoming effective as of the close
of business on December 27, 1996, pursuant to the provisions of N.J. Stat. Ann.
SS. 14A:9-2 of the "New Jersey Business Corporation Act." This Certificate of
Amendment amends and restates that certain Certificate of Amendment filed on
December 23, 1996 (the "Prior Certificate of Amendment") and the amendment to
Article FOURTH set forth in paragraph 5 below ("Amendment") is a restatement of
the amendment to Article FOURTH set forth in the Prior Certificate of
Amendment.
1. NAME OF CORPORATION
The name of the Corporation is EA Industries, Inc.
2. DATE OF ADOPTION BY BOARD OF DIRECTORS OF RESOLUTION
APPROVING RESERVE STOCK SPLIT
On December 16, 1996 the Board of Directors of the Corporation approved and
declared a one-for-four reverse stock split of shares of Common Stock of the
Corporation to be effective as of the close of business on December 27, 1996
(the "Record Date"), such that each holder of the shares of Common Stock of
record on the Record Date will be entitled to receive, as soon as practicable
thereafter, one (1) share of Common Stock of the Corporation for every four (4)
shares of Common Stock held by such person on the Record Date (the "Reverse
Stock Split").
3. NO ADVERSE EFFECT ON OUTSTANDING SHARES
This Amendment will not adversely affect the rights or preferences of the
holders of outstanding shares of any class or series and is being filed to
reduce the authorized shares of Common Stock by the same percentage by which the
issued shares of Common Stock are being reduced as a result of the Reverse Stock
Split in accordance with N.J. Stat. Ann. SS. 14A:7-15.1(5).
4. CLASS OR SERIES SUBJECT TO THE REVERSE STOCK SPLIT
The class of share subject to the Reverse Stock Split is the Common Stock
of the Corporation.
<PAGE>
5. DATE OF ADOPTION, TEXT AND APPROVAL OF AMENDMENTS
The following amendment to the Certificate of Incorporation of EA
Industries, Inc. (the "Amendment") was duly adopted by the Board of Directors of
the Corporation as of the 16th day of December, 1996:
In the first sentence of the first paragraph of Article FOURTH, (i)
delete the words "seventy-five million (75,000,000)" and substitute
therefor the words "thirty-seven million five hundred thousand
(37,500,000)"; and (ii) delete the words "fifty million (50,000,000)
shares of Common Stock" and substitute therefor the words "twelve million
five hundred thousand (12,500,000) shares of Common Stock".
6. EFFECTIVE DATE OF REVERSE STOCK SPLIT
The Reverse Stock Split will become effective at the close of business on
December 27, 1996.
IN WITNESS WHEREOF, the undersigned corporation has caused this Certificate
of Amendment to be signed by a duly authorized officer thereof this 26th day of
December, 1996.
ATTEST: EA INDUSTRIES, INC.
/s/___________________________ /s/________________________________
RICHARD P. JAFFE, Secretary HOWARD P. KAMINS,
Vice President - General Counsel
COMMON COMMON
NUMBER SHARES
E
INCORPORATED UNDER CUSIP 26822P 20 4
THE LAWS OF THE SEE REVERSE FOR
STATE OF NEW JERSEY CERTAIN DEFINITIONS
[LOGO OMMITTED]
EA INDUSTRIES, INC.
This Certifies that
is the owner of
FULLY PAID AND NON-ASSESSABLE SHARES OF THE NO PAR VALUE COMMON STOCK OF
EA Industries, Inc. (herein called the "Corporation"), transferable on the books
of the Corporation in person or by duly authorized attorney upon surrender of
this Certificate properly endorsed. This Certificate and the shares of stock
represented hereby are issued and shall be held subject to all the provisions of
the Certificate of Incorporation of the Corporation and all amendments thereto,
to all of which the holder by acceptance hereof, assents. This certificate is
not valid until countersigned by the Transfer Agent and registered by the
Registrar. Witness the facsimile seal of the Corporation and the facsimile
signatures of its duly authorized officers.
Dated
/s/ _________________________ [SEAL OMITTED] /s/ _________________________
SECRETARY PRESIDENT
COUNTERSIGNED AND REGISTERED:
AMERICAN STOCK TRANSFER & TRUST COMPANY,
TRANSFER AGENT
AND REGISTRAR,
BY: AUTHORIZED OFFICER
<PAGE>
This certificate also evidences and entitles the holder hereof to certain Rights
as set forth in the Rights Agreement between EA Industries, Inc. (the "Company")
and Manufacturers Hanover Trust Company, dated as of February 10, 1988, as
amended as of October 24, 1990 (the "Rights Agreement"), the terms of which are
hereby incorporated herein by reference and a copy of which is on file at the
principal executive offices of the Company. Under certain circumstances, as set
forth in the Rights Agreement, such Rights will be evidenced by separate
certificates and will no longer be evidenced by this certificate. The Company
will mail to the holder of this certificate a copy of the Rights Agreement,
without charge promptly after receipt of a written request therefor. As
described in the Rights Agreement, Rights beneficially owned by (i) an Acquiring
Person or any Associate or Affiliate thereof (as such terms are defined in the
Rights Agreement), (ii) a transferee of an Acquiring Person (or of any such
Associate or Affiliate) who becomes a transferee after the Acquiring Person
becomes such or (iii) under certain circumstances, a transferee of an Acquiring
Person (or of any such Associate or Affiliate) who becomes a transferee before
or concurrently with the Acquiring Person becoming such, shall become null and
void.
The Company will furnish to any shareholder without charge, upon request
addressed to the Secretary or its transfer agent, a full statement of the
designations, relative rights, preferences and limitations of the shares of each
authorized class, and of each series of preferred shares authorized to be
issued, so far as the same may have been determined, and a statement of the
authority of the Board of Directors to divide the preferred shares into series
and to determine and change the relative rights, preferences and limitations
of any series.
The following abbreviations, when used in the inscription on the face of this
certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM -- as tenants in common
TEN ENT -- as tenants by the entireties
JT TEN -- as joint tenants with right of
survivorship and not as tenants in common
UNIF GIFT MIN ACT _________________ Custodian ____________________
(Cust) (Minor)
under Uniform Gifts to Minors
Act __________________________
(State)
Additional abbreviations may also be used though not in the above list.
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS
WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARICULAR, WITHOUT ALTERATION
OR ENLARGEMENT, OR ANY CHANGE WHATEVER.
For value received, _________________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS
INCLUDING POSTAL ZIP CODE OF ASSIGNEE
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- ------------------------------------------------------------------------- Shares
of the capital stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint _____________________________________________
- --------------------------------------------------------------------------------
Attorney to transfer the said stock on the books of the within-named Corporation
with full power of substitution in the premises.
Dated, _______________________
-------------------------------------------------
-------------------------------------------------
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST
CORRESPOND WITH THE NAME AS WRITTEN UPON
THE FACE OF THE CERTIFICATE IN EVERY
PARTICULAR, WITHOUT ALTERATION OR
ENLARGEMENT OR ANY CHANGE WHATEVER.
Signature(s) Guaranteed:
- -------------------------------------------------------
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN
ELIGIBLE GUARANTOR INSTITUTION (BANKS, STOCKBROKERS,
SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH
MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION
PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15.
EA INDUSTRIES, INC.
1994 EQUITY INCENTIVE PLAN (AS AMENDED AND RESTATED)
1. PURPOSE
The purpose of this 1994 Equity Incentive Plan (the "Plan") is to advance
the interests of Electronic Associates, Inc. (the "Company") and its
subsidiaries by enhancing the ability of the Company to (i) attract and retain
employees and other persons or entities who are in a position to make
significant contributions to the success of the Company and its subsidiaries;
(ii) reward such persons or entities for such contributions; and (iii) encourage
such persons or entities to take into account the long-term interest of the
Company through ownership of shares ("Shares") of the Company's Common Stock
("Stock").
The Plan is intended to accomplish these goals by enabling the Company to
grant awards ("Awards") in the form of Options, Stock Appreciation Rights,
Restricted Stock or Deferred Stock, all as more fully described below.
2. ADMINISTRATION
The Plan will be administered by the Compensation Committee (the
"Committee") of the Board of Directors of the Company (the "Board"). The
Committee will determine the recipients of Awards, the times at which Awards
will be made and the size and type or types of Awards to be made to each
recipient and will set forth in such Awards the terms, conditions and
limitations applicable to it. Awards may be made singly, in combination or in
tandem. The Committee will have full and exclusive power to interpret the Plan,
to adopt rules, regulations and guidelines relating to the Plan, to grant
waivers of Plan restrictions and to make all of the determinations necessary for
this administration. In its discretion, the Board of Directors may elect to
administer all or any aspects of the Plan and to perform any of the duties or
exercise any of the rights delegated or granted to the Committee under the terms
of the Plan; provided, however, that the Board may not make such election if the
election would result in the failure of the Plan to comply with Rule 16b-3
promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), at a time at which the Plan would otherwise be in compliance with such
rule. Such determinations and actions of the Committee (or the Board as the case
may be), and all other determinations and actions of the Committee (or the Board
as the case may be) made or taken under authority granted by any provision of
the Plan, will be conclusive and binding on all parties. Nothing in this
paragraph shall be construed as limiting the power of the Committee to make
adjustments under Section 11 or to amend or terminate the Plan under Section 16.
3. EFFECTIVE DATE AND TERM OF PLAN
Subject to the approval of the Plan by the Company's shareholders*, the
Plan will be deemed effective on May 17, 1994. Grants of Awards under the Plan
may be made prior to the receipt of shareholder approval, subject to such
approval of the Plan.
The Plan will terminate ten (10) years after the effective date of the
Plan, subject to earlier termination of the Plan by the Board pursuant to
Section 16. No Award may be granted under the Plan after the termination date of
the Plan, but Awards previously granted may extend beyond that date.
- ----------
* Approved by the shareholders on June 28, 1994.
<PAGE>
4. SHARES SUBJECT TO THE PLAN
Subject to adjustment as provided in Section 11 below, the maximum
aggregate number of Shares of Stock that may be delivered for all purposes under
the Plan shall be nine million (9,000,000)**.
If any Award requiring exercise by the Participant for delivery of Stock is
canceled or terminates without having been exercised in full, or if any Award
payable in Stock or cash is satisfied in cash rather than Stock, the number of
Shares of Stock as to which such Award was not exercised or for which cash was
substituted will be available for future grants of Stock except that Stock
subject to an Option canceled upon the exercise of an SAR shall not again be
available for Awards under the Plan unless, and to the extent that, the SAR is
settled in cash. Likewise, if any Award payable in Stock or cash is satisfied in
Stock rather than cash, the amount of cash for which such Stock was substituted
will be available for future Awards of cash compensation. Shares of Stock
tendered by a Participant or withheld by the Company to pay the exercise price
of an Option or to satisfy the tax withholding obligations of the exercise or
vesting of an Award shall be available again for Awards under the Plan, but only
to Participants who are not subject to Section 16 of the Exchange Act. Shares of
Restricted Stock forfeited to the Company in accordance with the Plan and the
terms of the particular Award shall be available again for Awards under the Plan
unless the Participant has received the benefits of ownership (within the
applicable interpretation under Rule 16b-3 under the Exchange Act), in which
case such Shares may only be available for Awards to Participants who are not
subject to Section 16 of the Exchange Act.
Stock delivered under the Plan may be either authorized but unissued Stock
or previously issued Stock acquired by the Company and held in treasury. No
fractional Shares of Stock will be delivered under the Plan and the Committee
shall determine the manner in which fractional share value will be treated.
5. ELIGIBILITY AND PARTICIPATION
Those eligible to receive Awards under the Plan ("Participants") will be
persons in the employ of the Company or any of its subsidiaries ("Employees")
and other persons or entities who, in the opinion of the Committee, are in a
position to make a significant contribution to the success of the Company or its
subsidiaries, including non-employee directors of the Company or a subsidiary of
the Company and consultants to the Company or a subsidiary of the Company. A
"subsidiary" for purposes of the Plan will be a corporation in which the Company
owns, directly or indirectly, stock possessing 50% or more of the total combined
voting power of all classes of stock.
6. OPTIONS
a. Nature of Options. An Option is an Award entitling the Participant to
purchase a specified number of Shares at a specified exercise price. Both
"incentive stock options," as defined in Section 422 of the Internal Revenue
Code of 1986, as amended (the "Code") (referred to herein as an "ISO") and
non-incentive stock options may be granted under the Plan. ISOs may be awarded
only to Employees.
b. Exercise Price. The exercise price of each Option shall be determined by
the Committee, but in the case of an ISO shall not be less than 100% (110% in
the case of an ISO granted to a ten (10%) percent shareholder) of the Fair
Market Value of a Share at the time the ISO is granted. For purposes of this
Plan, "Fair Market Value" shall have the same meaning as it does in the
provisions of the Code and the regulations thereunder applicable to ISOs. For
purposes of this Plan, "ten-percent shareholder" shall mean any Employee who at
the time of grant owns directly, or is deemed to own by reason of the
attribution rules set forth in Section 424(d) of the Code, Stock possessing more
than ten (10%) percent of the total combined voting power of all classes of
stock of the Company or any of its subsidiaries.
c. Duration of Options. In no case shall an Option be exercisable more than
ten (10) years (five (5) years, in the case of an ISO granted to a "ten-percent
shareholder" as defined in (b) above) from the date the Option was granted.
- ----------
** Increase from 3,000,000 to 6,000,000 shares approved by the shareholders
on October 12, 1995. Increase from 6,000,000 to 9,000,000 shares approved by the
shareholders on May 30, 1996.
<PAGE>
d. Exercise of Options and Conditions. Options granted under any single
Award will become exercisable at such time or times, and on and subject to such
conditions, as the Committee may specify; provided, however, that no Option will
become exercisable until the expiration date of such Option if subsequent to the
effectiveness of the Plan, the Sale Price (as defined below) of the Company's
Common Stock does not equal or exceed $6.00 per share for ten (10) consecutive
trading days. For purposes of this Plan, the Sale Price of the Company's Common
Stock shall be the average of the high and low sale prices or, in case no such
sale takes place on such day, the average of the high bid and low asked prices,
in either case as reported in the principal consolidated transaction reporting
system with respect to securities listed or admitted to trading on the New York
Stock Exchange-or, if the Common Stock is not then listed or admitted to trading
on the New York Stock Exchange, as reported in the principal consolidated
transaction reporting system with respect to securities listed on the principal
national securities exchange on which the Common Stock is listed or admitted to
trading or, if the Common Stock is not listed or admitted to trading on any
national securities exchange, the average of the high bid and low asked prices
in the over-the-counter market, as reported by the National Association of
Securities Dealers, Inc. Automated Quotations System ("NASDAQ") or such other
system then in use, or, if on any such date the Common Stock is not quoted by
any such organization, the average of the high bid and low asked prices as
furnished by a professional market maker making a market in the Common Stock
selected by the Board of Directors. In addition, options will not be exercisable
unless the shares subject thereto have been approved for listing on the New York
Stock Exchange or such other exchange or quotation system on which the Common
Stock is then listed or quoted. Subject to the conditions described above with
respect to the Sale Price and listing of the Common Stock, the Committee may at
any time and from time to time accelerate the time at which all or any part of
the Option may be exercised.
e. Payment for and Delivery of Stock. Full payment for Shares purchased
will be made at the time of the exercise of the Option, in whole or in part.
Payment of the purchase price will be made in cash or in such other form of
consideration as the Committee may approve, including, without limitation,
delivery of Shares of Stock.
7. STOCK APPRECIATION RIGHTS
a. Nature of Stock Appreciation Rights. A Stock Appreciation Right (an
"SAR") is an Award entitling the recipient to receive payment, in cash and/or
Stock, determined in whole or in part by reference to appreciation in the value
of a Share. In general, an SAR entitles the recipient to receive, with respect
to each Share as to which the SAR is exercised, the excess of the Fair Market
Value of a Share on the date of exercise over the Fair Market Value of a Share
on the date the SAR was granted. However, the Committee may provide at the time
of grant that the amount the recipient is entitled to receive will be adjusted
upward or downward under rules established by the Committee to take into account
the performance of the Shares in comparison with the performance of other stocks
or an index or indices of other stocks.
b. Grant of SARs. SARs may be granted in tandem with, or independently of,
Options granted under the Plan. An SAR granted in tandem with an Option which is
not an ISO may be granted either at or after the time the Option is granted. An
SAR granted in tandem with an ISO may be granted only at the time the Option is
granted.
c. Exercise of SARs. An SAR not granted in tandem with an Option will
become exercisable at such time or times, and on such conditions, as the
Committee may specify. An SAR granted in tandem with an Option will be
exercisable only at such times, and to the extent, that the related Option is
exercisable. An SAR granted in tandem with an ISO may be exercised only when the
market price of the Shares subject to the Option exceeds the exercise price of
such Option. The Committee may at any time and from time to time accelerate the
time at which all or part of the SAR may be exercised.
8. RESTRICTED STOCK
A Restricted Stock Award entitles the recipient to acquire Shares, subject
to certain restrictions or conditions, for no cash consideration, if permitted
by applicable law, or for such other consideration as determined by the
Committee. The Award may be subject to such restrictions, conditions and
forfeiture provisions as the Committee may determine, including, but not limited
to, restrictions on transfer, continuous service with the Company or any of its
subsidiaries; achievement of business objectives, and individual, unit and
Company performance. Subject to such restrictions, conditions and forfeiture
provisions as may be established by the Committee, any Participant receiving an
Award will have all the rights of a shareholder
<PAGE>
of the Company with respect to Shares of Restricted Stock, including the right
to vote the Shares and the right to receive any dividends thereon.
9. DEFERRED STOCK
A Deferred Stock Award entitles the recipient to receive Shares to be
delivered in the future. Delivery of the Shares will take place at such time or
times, and on such conditions, as the Committee may specify. The Committee may
at any time accelerate the time at which delivery of all or any part of the
Shares will take place. At the time any Deferred Stock Award is granted, the
Committee may provide that the Participant will receive an instrument evidencing
the Participant's right to future delivery of Deferred Stock.
10. TRANSFERS
No Award (other than an Award in the form of an outright transfer of cash
or Stock) may be assigned, pledged or transferred other than by will or by the
laws of descent and distribution and during a Participant's lifetime will be
exercisable only by the Participant or, in the event of a Participant's
incapacity, his or her guardian or legal representative.
11. ADJUSTMENTS
a. In the event of a stock dividend, stock split or combination of Shares,
recapitalization or other change in the Company's capitalization, or other
distribution to holders of the Company's Common Stock other than normal cash
dividends, after the effective date of the Plan, the Committee will make any
appropriate adjustments to the maximum number of Shares that may be delivered
under the Plan and to any Participant under Section 4 above.
b. In any event referred to in paragraph (a), the Committee will also make
any appropriate adjustments to the number and kind of Shares of Stock or
securities subject to Awards then outstanding or subsequently granted, any
exercise prices relating to Awards and any other provision of Awards affected by
such change, including the requirement that the Sale Price of the Common Stock
equal or exceed the threshold described in Section 6(d). The Committee may also
make such adjustments to take into account material changes in law or in
accounting practices or principles, mergers, consolidations, acquisitions,
dispositions or similar corporate transactions, or any other event, if it is
determined by the Committee that adjustments are appropriate to avoid distortion
in the operation of the Plan.
12. RIGHTS AS A SHAREHOLDER
Except as specifically provided by the Plan, the receipt of an Award will
not give a Participant rights as a shareholder; the Participant will obtain such
rights, subject to any limitations imposed by the Plan or the instrument
evidencing the Award, upon actual receipt of Shares. However, the Committee may,
on such conditions as it deems appropriate, provide that a Participant will
receive a benefit in lieu of cash dividends that would have been payable on any
or all Shares subject to the Participant's Award had such Shares been
outstanding.
13. CONDITIONS ON DELIVERY OF STOCK
The Company will not be obligated to deliver any Shares pursuant to the
Plan or to remove any restrictions or legends from Shares previously delivered
under the Plan until, (a) in the opinion of the Company's counsel, all
applicable federal and state laws and regulations have been complied with, (b)
if the outstanding Shares are at the time listed on any stock exchange, until
the Shares to be delivered have been listed or authorized to be listed on such
exchange upon official notice of notice of issuance, and (c) until all other
legal matters in connection with the issuance and delivery of such Shares have
been approved by the Company's counsel. If the sale of Shares has not been
registered under the Securities Act of 1933, as amended, the Company may
require, as a condition to exercise of the Award, such representations and
agreements as counsel for the Company may consider appropriate to avoid
violation of such Act and may require that the certificates evidencing such
Shares bear an appropriate legend restricting transfer. If an Award is exercised
by the Participant's legal representative, the Company will be under no
obligation to deliver Shares pursuant to such exercise until the Company is
satisfied as to the authority of such representative.
14. TAX WITHHOLDING
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The Company will have the right to deduct from any cash payment under the
Plan taxes that are required to be withheld and further to condition the
obligation to deliver or vest Shares under this Plan upon the Participant's
paying the Company such amount as it may request to satisfy any liability for
applicable withholding taxes. The Committee may in its discretion permit
Participants to satisfy all or part of their withholding liability by delivery
of Shares with a Fair Market Value equal to such liability or by having the
Company withhold from Stock delivered upon exercise of an Award, Shares whose
Fair Market Value is equal to such liability.
15. MERGERS; ETC.
In the event of any merger or consolidation involving the Company, any sale
of substantially all of the Company's assets or any other transaction or series
of related transactions as a result of which a single person or several persons
acting in concert own a majority of the Company's then outstanding Stock (such
merger, consolidation, sale or other transaction being hereinafter referred to
as a "Transaction"), all outstanding Options and SARs shall become immediately
exercisable and each outstanding share of Restricted Stock and each outstanding
Deferred Stock Award shall immediately become free of all restrictions and
conditions. Upon consummation of the Transaction, all outstanding Options and
SARs shall terminate and cease to be exercisable. There shall be excluded from
the foregoing any Transaction as a result of which (a) the holders of Stock
prior to the Transaction retain or acquire securities constituting a majority of
the outstanding voting Common Stock of the acquiring or surviving corporation or
other entity and (b) no single person owns more than half of the outstanding
voting Common Stock of the acquiring or surviving corporation or other entity.
For purposes of this Section, voting Common Stock of the acquiring or surviving
corporation or other entity that is issuable upon conversion of convertible
securities or upon exercise of warrants or options shall be considered
outstanding, and all securities that vote in the election of directors (other
than solely as the result of a default in the making of any dividend or other
payment) shall be deemed to constitute that number of shares of voting Common
Stock which is equivalent to the number of such votes that may be cast by the
holders of such securities.
In lieu of the foregoing, if there is an acquiring or surviving corporation
or entity, the Committee may by vote of a majority of the members of the
Committee who are Continuing Directors (as defined below), arrange to have such
acquiring or surviving corporation or entity or an Affiliate (as defined below)
thereof grant to Participants holding outstanding Awards replacement Awards
which, in the case of ISOs, satisfy, in the determination of the Committee, the
requirements of Section 425 (e) of the Code. The term "Continuing Director"
shall mean any director of the Company who (i) is not an Acquiring Person or an
Affiliate of an Acquiring Person and (ii) either was (A) a member of the Board
of Directors of the Company on the effective date of the Plan or (B) nominated
for his or her initial term of office by a majority of the Continuing Directors
in office at the time of such nomination. The term "Acquiring Person" shall
mean, with respect to any Transaction, each Person who is a party to or a
participant in such Transaction or who, as a result of such Transaction, would
(together with other Persons acting in concert) own a majority of the Company's
outstanding Common Stock; provided, however, that none of the Company, any
wholly-owned subsidiary of the Company, any employee benefit plan of the Company
or any trustee in respect thereof acting in such capacity shall, for purposes of
this Section, be deemed an "Acquiring Person." The term "Affiliate", with
respect to any Person, shall mean any other Person who is, or would be deemed to
be an "affiliate" or an "associate" of such Person within the respective
meanings ascribed to such terms in Rule 12b-2 of the General Rules and
Regulations under the Securities Exchange Act of 1934, as amended. The term
"Person" shall mean a corporation, association, partnership, joint venture,
trust, organization, business, individual or government or any governmental
agency or political subdivision thereof.
16. AMENDMENTS AND TERMINATION
The Committee will have the authority to make such amendments to any terms
and conditions applicable to outstanding Awards as are consistent with this Plan
provided that, except for adjustments under Section 11 hereof, no such action
will modify such Award in a manner adverse to the Participant without the
Participant's consent except as such modification is provided for or
contemplated in the terms of the Award.
The Board may amend, suspend or terminate the Plan without shareholder
approval.
17. NO GUARANTEE OF EMPLOYMENT
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The grant of an Award under this Plan shall not constitute an assurance of
continued employment for any period.
18. MISCELLANEOUS
This Plan shall be governed by and construed in accordance with the laws of
the State of New Jersey.
EMPLOYMENT AGREEMENT
AGREEMENT made the 20th day of December, 1996 by and between EA
Industries, Inc., a New Jersey corporation (the "Company") and Paul E. Finer
(the "Executive").
W I T N E S S E T H:
WHEREAS, the Company wishes to assure itself of the services of the
Executive, and the Executive wishes to serve in the employ of the Company, upon
the terms and conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the premises and the mutual
agreements hereinafter set forth, the parties hereto, intending to be legally
bound, hereby agree as follows:
1. Employment, Term.
1.1 The Company agrees to employ the Executive, and the Executive
agrees to serve in the employ of the Company, for the term set forth in Section
1.2, in the position and with the responsibilities, duties and authority set
forth in Section 2 and on the other terms and conditions set forth in this
Agreement.
1.2 The term of the Executive's employment under this Agreement
shall be the period commencing on the date hereof and continuing through
December 31, 1997, unless sooner terminated in accordance with this Agreement.
1.3 Unless either party elects to terminate this Agreement at the
end of the original or any renewal term by giving the other party notice of such
election in writing at least 180 days before the expiration of the then current
term, this Agreement shall be deemed to have been renewed for an additional term
of one year commencing on the day after the expiration of the then current term.
2. Position, Duties. The Executive shall serve the Company as President
and Chief Executive Officer of Tanon Manufacturing, Inc. and at the request of
the Board of Directors shall serve as an officer and director of the Company,
its parents, subsidiaries and/or affiliates without payment of any additional
compensation. The Executive shall have such duties and responsibilities,
appropriate to said positions as the Board of Directors of the Company (the
"Board") shall assign to the Executive. The Executive shall perform his duties
and responsibilities hereunder, faithfully and diligently and shall report to
the Chairman of the Board of Directors of the Company. The Executive shall
devote his full business time and attention to the performance of his duties and
responsibilities hereunder. The Executive hereby represents that he is not bound
by any confidentiality agreements or restrictive covenants which restrict or may
restrict his ability to perform his duties hereunder, and agrees that he will
not enter into any such agreements or covenants during the term of his
employment hereunder, except such restrictive covenants or confidentiality
agreements which are required by the Company.
<PAGE>
3. Cash Compensation. During the term of this Agreement, in consideration
of the performance by the Executive of the services set forth in Section 2 and
his observance of the other covenants set forth herein, the Company shall pay
the Executive, and the Executive shall accept, a salary at the rate of $240,000
per annum, payable in accordance with the standard payroll practices of the
Company. In addition to the salary payable hereunder, the Executive may be
entitled to receive merit increases in salary during the term hereof in amounts
and at such times as shall be determined by the Board in its sole discretion. In
no event shall the failure to grant any such increase (or the amount of any such
increase) give rise to a claim by the Executive under this Agreement.
(b) The Company agrees that the Executive shall be eligible to
participate in any executive bonus plan established by the Company.
4. Expense Reimbursement. During the term of this Agreement, consistent
with the Company's policies and procedures as may be in effect from time to
time, the Company shall reimburse the Executive for all reasonable and necessary
out-of-pocket expenses (including the cost for purchase and installation of a
telephone in the Executive's automobile, minimum monthly usage charges, and all
calls on Company business) incurred by him in connection with the performance of
his duties hereunder, upon the presentation of proper accounts therefor in
accordance with the Company's policies.
5. Other Benefits. (a) During the term of this Agreement, the Executive
shall be entitled to receive vacation time in an amount equal to other
executives of the Company at levels comparable to the Executive, but in no event
less than four (4) weeks paid vacation time per annum and such other benefits,
including, subject to meeting standard eligibility requirements, participation
in any 401(k) plan in which the Company's Executives are eligible to
participate, customary medical insurance and continuing education benefits, as
are from time to time made available to other similarly situated employees of
the Company on the same terms as are available to such similarly situated
Executives, it being understood that the Executive shall be required to make the
same contributions and payments in order to receive any of such benefits as may
be required of such similarly situated Executives. In addition, the Executive
shall receive an automobile allowance of seven hundred fifty dollars ($750) per
month during the term of this Agreement. If the Executive transfers his
principal place of residence during the term of this Agreement closer to his
principal office location he shall be reimbursed for the reasonable costs
associated with that move, such as costs of shipping furniture and other
personal property, sales commissions, customary closing costs, and other costs
typically reimbursed to senior executives. In addition, the Company shall
"gross-up" the reimbursement to compensate the Executive for the actual tax
effect of such reimbursement.
(b) The Company has granted or agreed to grant the Executive options
to purchase 400,000 shares of the Company's Common Stock under the Company's
1994 Equity Incentive Plan and the Company or its subsidiaries may grant the
Executive additional warrants or options under this plan or otherwise (such
options or warrants are collectively referred to as the "Options"). If the
Company terminates the employment of the Executive for any reason
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<PAGE>
other than Due Cause as defined in paragraph 6.3 of this Agreement, or the
Executive terminates his employment pursuant to a Change of Control or for Good
Reason, any remaining unvested Options then held by Executive shall become
immediately vested and exercisable and shall be amended to remain exercisable
for the remainder of their original term or shall be replaced by warrants or
options with such revised terms and the shares issuable under the Options shall
be registered under the Securities Act of 1933 and listed on the New York Stock
Exchange or such other exchange as the Company's Common Stock is then traded.
6. Termination of Employment.
6.1 Death. In the event of the death of the Executive during the
term of this Agreement, the Company shall pay to the estate or other legal
representative of the Executive the salary provided for in Section 3(a) (at the
annual rate then in effect) (the "Base Salary") accrued to the Executive's date
of death and not theretofore paid, and the estate or other legal representative
of the Executive shall have no further rights under this Agreement. Rights and
benefits of the Executive, his estate or other legal representative under the
Executive benefit plans and programs of the Company, if any, will be determined
in accordance with the terms and provisions of such plans and programs.
6.2 Disability. If the Executive shall become incapacitated by
reason of sickness, accident or other physical or mental disability and shall
for a period of one hundred eighty (180) consecutive days be unable to perform
his normal duties hereunder, the employment of the Executive hereunder may be
terminated by the Company upon thirty (30) days' prior written notice to the
Executive. Within thirty (30) days after such termination, the Company shall pay
to the Executive the Base Salary accrued to the date of such termination and not
theretofore paid. Rights and benefits of the Executive, his estate or other
legal representative under the Executive benefit plans and programs of the
Company, if any, will be determined in accordance with the terms and provisions
of such plans and programs. Neither the Executive nor the Company shall have
further rights or obligations under this Agreement, except as provided in
Sections 7 and 8.
6.3 Due Cause. The employment of the Executive hereunder may be
terminated by the Company at any time during the term of this Agreement for Due
Cause (as hereinafter defined). In the event of such termination, the Company
shall pay to the Executive the Base Salary accrued to the date of such
termination and not theretofore paid to the Executive, and, after the
satisfaction of any claim of the Company against the Executive arising as a
direct and proximate result of such Due Cause, neither the Executive nor the
Company shall have any further rights or obligations under this Agreement,
except as provided in Sections 7 and 8. Rights and benefits of the Executive,
his estate or other legal representative under the Executive benefit plans and
programs of the Company, if any, will be determined in accordance with the terms
and provisions of such plans and programs. For purposes hereof, "Due Cause"
shall mean (i) the Executive's willful and continued failure substantially to
perform his duties with the Company, (ii) fraud, misappropriation or intentional
material damage to the property or business of the Company by the Executive of
(iii) the Executive's conviction of, or plea of nolo
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<PAGE>
contendere to, any felony that, in the judgment of the Board adversely affects
the Company's reputation or the Executive's ability to carry out his obligations
under this Agreement. In the event of an occurrence under this Section 6.3, the
Executive shall be given written notice by the Company that it intends to
terminate the Executive's employment for Due Cause under this Section, which
written notice shall specify the act or acts upon the basis of which the Company
intends so to terminate the Executive's employment. If the basis for such
written notice is an act or acts described in clause (i) above the Executive
shall be given ten (10) days to cease or correct the performance (or
nonperformance) giving rise to such written notice and, upon failure of the
Executive within such ten (10) days to cease or correct such performance (or
nonperformance), the Executive's employment by the Company shall automatically
be terminated hereunder for Due Cause.
6.4 Other Termination. (a) The Company may terminate the Executive's
employment prior to the expiration of the term of this Agreement for whatever
reason it deems appropriate; provided, however, that in the event that such
termination is not pursuant to Sections 6.1, 6.2 or 6.3, in lieu of notice or
any other termination payment pursuant to shortening the then current term of
this Agreement, the Company shall pay to the Executive:
(i) on the date of termination, the Base Salary accrued to the
date of termination and not theretofore paid to the Executive:
(ii) within three weeks after the date of termination
severance pay, in the form of a lump sum payment in an amount equal to the
greater of (a) the amount of cash compensation earned by Executive in the
calendar year (whether or not paid in such calendar year) immediately preceding
the calendar year in which termination occurs, or (b) the then current annual
Base Salary, Executive's annual automobile allowance as described in paragraph
5(a) and the guideline or annual target amount for the Executive for the then
current year pursuant to the bonus plan described in paragraph 3(b). Cash
compensation shall consist of (i) Executive's Base Salary (ii) Executive's
automobile allowance as described in paragraph 5(a) and (iii) the amount of any
cash incentive compensation or bonus earned by the Executive in such immediately
preceding calendar year.
(iii) sufficient funds, payable monthly in advance, to enable
the Executive to continue coverage under COBRA for a period of eighteen months
after termination for any benefits he elects to continue after termination or to
obtain comparable benefits if coverage under COBRA is unavailable.
(b) The Executive shall have the right to terminate this Agreement
during the one year period following a Change of Control or for Good Reason and
in that event the Company shall pay to the Executive:
(i) on the date of termination, the Base Salary accrued to the
date of termination and not theretofore paid to the Executive.
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<PAGE>
(ii) within three weeks after the date of termination
severance pay, in the form of a lump sum payment in an amount equal to the
greater of (a) the amount of cash compensation earned by Executive in the
calendar year (whether or not paid in such calendar year) immediately preceding
the calendar year in which termination occurs, or (b) the then current annual
Base Salary, Executive's annual automobile allowance as described in paragraph
5(a) and the guideline or annual target amount for the Executive for the then
current year pursuant to the bonus plan described in paragraph 3(b). Cash
compensation shall consist of (i) Executive's Base Salary (ii) Executive's
automobile allowance as described in paragraph 5(a) and (iii) the amount of any
cash incentive compensation or bonus earned by the Executive in such immediately
preceding calendar year.
(iii) sufficient funds, payable monthly in advance, to enable
the Executive to continue coverage under COBRA for a period of eighteen months
after termination for any benefits he elects to continue after termination or to
obtain comparable benefits if coverage under COBRA is unavailable.
(c) In the event of a termination pursuant to this paragraph 6(4),
rights and benefits of the Executive, his estate or other legal representative
under the Executive benefit plans and programs of the Company, if any, will be
determined in accordance with the terms and provisions of such plans and
programs and neither the Executive nor the Company shall have any further rights
or obligations under this Agreement, except as provided in Sections 7 and 8.
(d) For purposes of this Agreement, a Change in Control of the
Company shall be deemed to have occurred if:
(i) a "person" (meaning an individual, a partnership, or other
group or association as defined in Sections 13(d) and 14(d) the Securities
Exchange Act of 1934), acquires thirty percent (30%) or more of the combined
voting power of the outstanding securities of the Company having a right to vote
in elections of directors, or
(ii) Continuing Directors shall for any reason cease to
constitute a majority of the Board of Directors of the Company; or
(iii) all or substantially all of the business and/or assets
of the Company is disposed of by the Company to a party or parties other than a
parent, subsidiary or other affiliate of the Company, pursuant to a partial or
complete liquidation of the Company, sale of assets (including stock of a
subsidiary of the Company) or otherwise.
For purposes of this Agreement, the term "Continuing Director" shall
mean a member of the Board of Directors of the Company who either was a member
of the Board of Directors of the Company on the date hereof or who subsequently
became a Director and whose election, or nomination for election, was approved
by a vote of at least two-thirds of the Continuing Directors then in office.
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<PAGE>
(e) Good Reason. For purposes of this Agreement, "Good Reason"
means:
(i) (A) the assignment to the Executive of any duties
inconsistent in any respect with the Executive's position (including status,
offices, titles and reporting requirements), authority, duties or
responsibilities as contemplated by Section 2 of this Agreement, (B) any other
action by the Company which results in a diminution in such position, authority,
duties or responsibilities, other than an insubstantial and inadvertent action
which is remedied by the Company promptly after receipt of notice thereof given
by the Executive, (C) Irwin L. Gross shall resign or be removed as Chairman of
the Board of Directors of the Company, or (D) the principal office location of
the Executive is moved more than 30 miles from its current location at 185
Monmouth Parkway, West Long Branch, N.J.;
(ii) any failure by the Company to comply with any of the provisions
of Section 3 of this Agreement, other than an insubstantial and inadvertent
failure which is remedied by the Company promptly after receipt of notice
thereof given by the Executive.
7. Confidential Information.
7.1 (a) The Executive shall, during the Executive's employment with
the Company and at all times thereafter, treat all confidential material (as
hereinafter defined) of the Company or any member of the Company Group (as
hereinafter defined) confidentially. The Executive shall not, without the prior
written consent of the Board of Directors of the Company, disclose such
confidential material, directly or indirectly, to any party, who at the time of
such disclosure is not an Executive or agent of any member of the Company Group,
or remove from the Company's premises any notes or records relating thereto,
copies or facsimiles thereof (whether made by electronic, electrical, magnetic,
optical, laser, acoustic or other means), or any other property of any member of
the Company Group. The Executive agrees that all confidential material, together
with all notes and records of the Executive relating thereto, and all computer
disks, copies or facsimiles thereof in the possession of the Executive (whether
made by the foregoing or other means) are the exclusive property of the Company.
The Executive shall not in any manner use any confidential material of the
Company Group, or any other property of any member of the Company Group, in any
manner not specifically directed by the Company or in any way which is
detrimental to any member of the Company Group, as determined by the Board of
Directors of the Company in its sole discretion.
(b) For the purposes hereof, the term Company Group, shall
mean collectively, the Company and the Company's subsidiaries, affiliates and
parent entities, and the term "confidential material" shall mean all information
in any way concerning the activities, business or affairs of any member of the
Company Group or any of the customers and clients of any member of the Company
Group, including, without limitation, information concerning trade secrets,
together with all sales and financial information concerning any member of the
Company Group and any and all information concerning projects in research and
development or marketing plans for any products or projects of the Company
Group, and all information concerning the practices, customers and clients of
any member of the Company Group, and all information in
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<PAGE>
any way concerning the activities, business or affairs of any of such customers
or clients, as such, which is furnished to the Executive by any member of the
Company Group or any of its agents, customers or clients, as such, or otherwise
acquired by the Executive in the course of the Executive's employment with the
Company; provided, however, that the term "confidential material" shall not
include information which (i) becomes generally available to the public other
than as a result of a disclosure by the Executive, (ii) was available to the
Executive on a non-confidential basis prior to his employment with any member of
the Company Group or (iii) becomes available to the Executive on a
non-confidential basis from a source other than any member of the Company Group
or any of its agents, customers or clients, as such, provided that such source
is not bound by a confidentiality agreement with any member of the Company Group
or any of such agents, customers or clients.
7.2 Promptly upon the request of the Company, the Executive shall
deliver to the Company all confidential material relating to any member of the
Company Group in the possession of the Executive without retaining a copy
thereof, unless, in the opinion of counsel for the Company, either returning
such confidential material or failing to retain a copy thereof would violate any
applicable Federal, state, local or foreign law, in which event such
confidential material shall be returned without retaining any copies thereof as
soon as practicable after such counsel advises that the same may be lawfully
done.
7.3 In the event that the Executive is required, by oral questions,
interrogatories, requests for information or documents, subpoena, civil
investigative demand or similar process, to disclose any confidential material
relating to any member of the Company Group, the Executive shall provide the
Company with prompt notice thereof so that the Company may seek an appropriate
protective order and/or waive compliance by the Executive with the provisions
hereof; provided, however, that if in the absence of a protective order or the
receipt of such a waiver, the Executive is, in the opinion of counsel for the
Company, compelled to disclose confidential material not otherwise disclosable
hereunder to any legislative, judicial or regulatory body, agency or authority,
or else be exposed to liability for contempt, fine or penalty or to other
censure, such confidential material may be so disclosed.
8. Equitable Relief. In the event of a breach or threatened breach by the
Executive of any of the provisions of Section 7 of this Agreement, the Executive
hereby consents and agrees that the Company shall be entitled to pre-judgment
injunctive relief or similar equitable relief restraining the Executive from
committing or continuing any such breach or threatened breach or granting
specific performance of any act required to be performed by the Executive under
any of such provisions, without the necessity of showing any actual damage or
that money damages would not afford an adequate remedy and without the necessity
of posting any bond or other security. The parties hereto hereby consent to the
jurisdiction of the Federal courts for the Eastern District of Pennsylvania and
the state courts located in such District for any proceedings under this Section
8. Nothing herein shall be construed as prohibiting the Company from pursuing
any other remedies at law or in equity which it may have.
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9. Indemnification. The Company shall indemnify the Executive to the
fullest extent permitted by the laws of the state of incorporation of the
Company, as amended from time to time, for all amounts (including, without
limitation, judgments, fines, settlement payments, expenses and attorney's fees)
incurred or paid by the Executive in connection with any action, suit,
investigation or proceeding arising out of or relating to the performance by the
Executive of services for, or acting by the Executive as a director, officer or
executive of, the Company or any other person or enterprise at the Company's
request, and shall to the fullest extent permitted by the laws of the state of
incorporation of the Company, as amended from time to time, advance all expenses
incurred or paid by the Executive in connection with, and until disposition of
any action, suit, investigation or proceeding arising out of or relating to the
performance by the Executive of services for, or acting by the Executive as a
director, officer or executive of, the Company or any other person or enterprise
at the Company's request.
10. Successors and Assigns.
10.1 Assignment by the Company. The Company shall require any
successors (whether direct or indirect, by purchase, merger, consolidation or
otherwise) to all or substantially all of the business and/or assets of the
Company to assume and agree to perform this Agreement in the same manner and to
the same extent that the Company would be required to perform if no such
succession had taken place. As used in this Section, the "Company" shall mean
the Company as hereinbefore defined and any successor to its business and/or
assets as aforesaid which otherwise becomes bound by all the terms and
provisions of this Agreement by operation of law and this Agreement shall be
binding upon, and inure to the benefit of, the Company, as so defined.
10.2 Assignment by the Executive. The Executive may not assign this
Agreement or any part thereof without the prior written consent of the Chairman
of the Board of the Company; provided, however, that nothing herein shall
preclude one or more beneficiaries of the Executive from receiving any amount
that may be payable following the occurrence of his legal incompetency or his
death and shall not preclude the legal representative of his estate from
receiving such amount or from assigning any right hereunder to the person or
persons entitled thereto under his will or, in the case of intestacy, to the
person or persons entitled thereto under the laws of intestacy applicable to his
estate. The term "beneficiaries," as used in this Agreement, shall mean a
beneficiary or beneficiaries so designated to receive any such amount or, if no
beneficiary has been so designated, the legal representative of the Executive
(in the event of his incompetency) or the Executive's estate.
11. Governing Law. This Agreement shall be deemed a contract made under,
and for all purposes shall be construed in accordance with, the laws of the
State of New Jersey applicable to contracts to be performed entirely within such
State.
12. Entire Agreement. This Agreement contains all the understandings and
representations between the parties hereto pertaining to the subject matter
hereof and supersede
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all undertakings and agreements, whether oral or in writing, if there be any,
previously entered into by them with respect thereto. No modification of this
Agreement shall be effective unless in writing and signed by the party against
which enforcement is sought to be enforced.
13. Modification and Amendment; Waiver. The provisions of this Agreement
may be modified, amended or waived, but only upon the written consent of the
party against whom enforcement of such modification, amendment or waiver is
sought and then such modification, amendment or waiver shall be effective only
to the extent set forth in such writing. No delay or failure on the part of any
party hereto in exercising any right, power or remedy hereunder shall effect or
operate as a waiver thereof, nor shall any single or partial exercise thereof or
any abandonment or discontinuance of steps to enforce such right, power or
remedy preclude any further exercise thereof or of any other right, power or
remedy.
14. Notices. All notices, requests or instructions hereunder shall be in
writing and delivered personally, sent by telecopier or sent by registered or
certified mail, postage prepaid, as follows:
If to the Company:
EA Industries, Inc.
185 Monmouth Parkway
West Long Branch, NJ 07764
Attn: Chairman of the Board
With a copy delivered in the same manner to:
Richard P. Jaffe, Esquire
Mesirov Gelman Jaffe Cramer & Jamieson
1735 Market Street
Philadelphia, PA 19103
If to the Executive:
17 Laurel Mountain Way
Califon, N.J. 07830
Any of the above addresses may be changed at any time by notice given as
provided above; provided, however, that any such notice of change of address
shall be effective only upon receipt. All notices, requests or instructions
given in accordance herewith shall be deemed received on the date of delivery,
if hand delivered or telecopied, and two business days after the date of
mailing, if mailed.
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14. Severability. Should any provision of this Agreement be held by a
court of competent jurisdiction to be enforceable only if modified, such holding
shall not affect the validity of the remainder of this Agreement, the balance of
which shall continue to be binding upon the parties hereto with any such
modification to become a part hereof and treated as though originally set forth
in this Agreement. The parties further agree that any such court is expressly
authorized to modify any such unenforceable provision of this Agreement in lieu
of severing such unenforceable provision from this Agreement in its entirety,
whether by rewriting the offending provision, deleting any or all of the
offending provision, adding additional language to this Agreement, or by making
such other modifications as it deems warranted to carry out the intent and
agreement of the parties as embodied herein to the maximum extent permitted by
law. The parties expressly agree that this Agreement as so modified by the court
shall be binding upon and enforceable against each of them. In any event, should
one or more of the provisions of this Agreement be held to be invalid, illegal
or unenforceable in any respect, such invalidity, illegality or unenforceability
shall not affect any other provisions hereof, and if such provision or
provisions are not modified as provided above, this Agreement shall be construed
as if such invalid, illegal or unenforceable provisions had never been set forth
herein.
15. Withholding. Anything to the contrary notwithstanding, all payments
required to be made by the Company hereunder to the Executive or his
beneficiaries, including his estate, shall be subject to withholding of such
amounts relating to taxes as the Company may reasonably determine it should
withhold pursuant to any applicable law or regulation. In lieu of withholding
such amounts, in whole or in part, the Company, may, in its sole discretion,
accept other provision for payment of taxes as permitted by law, provided it is
satisfied in its sole discretion that all requirements of law affecting its
responsibilities to withhold such taxes have been satisfied.
16. Survivorship. The respective rights and obligations of the parties
hereunder shall survive any termination of this Agreement to the extent
necessary to the intended preservation of such rights and obligations.
17. Expenses. Each of the parties hereto shall bear his or its own costs
and expenses, including attorneys' fees and disbursements, incurred in
connection with this Agreement and the transactions contemplated hereby.
18. Titles. Titles of the sections of this Agreement are intended solely
for convenience and no provision of this Agreement is to be construed by
reference to the title of any section.
19. Counterparts. This Agreement may be executed in counterparts, each of
which shall be deemed an original, but all of which taken together shall
constitute one and the same instrument.
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* * *
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
on the date first above written.
EA Industries, Inc.
By:_________________________________
____________________________________
Paul E. Finer
EMPLOYMENT AGREEMENT
AGREEMENT made the 20th day of December, 1996 by and between EA Industries,
Inc., a New Jersey corporation (the "Company") and Howard P. Kamins (the
"Executive").
W I T N E S S E T H:
WHEREAS, the Company wishes to assure itself of the services of the
Executive, and the Executive wishes to serve in the employ of the Company, upon
the terms and conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the premises and the mutual agreements
hereinafter set forth, the parties hereto, intending to be legally bound, hereby
agree as follows:
1. Employment, Term.
1.1 The Company agrees to employ the Executive, and the Executive agrees
to serve in the employ of the Company, for the term set forth in Section 1.2, in
the position and with the responsibilities, duties and authority set forth in
Section 2 and on the other terms and conditions set forth in this Agreement.
1.2 The term of the Executive's employment under this Agreement shall be
the period commencing on the date hereof and continuing through December 31,
1997, unless sooner terminated in accordance with this Agreement.
1.3 Unless either party elects to terminate this Agreement at the end of
the original or any renewal term by giving the other party notice of such
election in writing at least 180 days before the expiration of the then current
term, this Agreement shall be deemed to have been renewed for an additional term
of one year commencing on the day after the expiration of the then current term.
2. Position, Duties. The Executive shall serve the Company as Vice
President and General Counsel and at the request of the Board of Directors shall
serve as an officer and director of the Company, its parents, subsidiaries
and/or affiliates without payment of any additional compensation. The Executive
shall have such duties and responsibilities, appropriate to said positions as
the Board of Directors of the Company (the "Board") shall assign to the
Executive. The Executive shall perform his duties and responsibilities
hereunder, faithfully and diligently and shall report to the Chairman of the
Board of Directors of the Company. The Executive shall devote his full business
time and attention to the performance of his duties and responsibilities
hereunder. The Executive hereby represents that he is not bound by any
confidentiality agreements or restrictive covenants which restrict or may
restrict his ability to perform his duties hereunder, and agrees that he will
not enter into any such agreements or covenants during the term of his
employment hereunder, except such restrictive covenants or confidentiality
agreements which are required by the Company.
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3. Cash Compensation. During the term of this Agreement, in consideration
of the performance by the Executive of the services set forth in Section 2 and
his observance of the other covenants set forth herein, the Company shall pay
the Executive, and the Executive shall accept, a salary at the rate of $150,000
per annum, payable in accordance with the standard payroll practices of the
Company. In addition to the salary payable hereunder, the Executive may be
entitled to receive merit increases in salary during the term hereof in amounts
and at such times as shall be determined by the Board in its sole discretion. In
no event shall the failure to grant any such increase (or the amount of any such
increase) give rise to a claim by the Executive under this Agreement.
(b) The Company agrees that the Executive shall be eligible to
participate in any executive bonus plan established by the Company.
4. Expense Reimbursement. During the term of this Agreement, consistent
with the Company's policies and procedures as may be in effect from time to
time, the Company shall reimburse the Executive for all reasonable and necessary
out-of-pocket expenses (including the cost for purchase and installation of a
telephone in the Executive's automobile, minimum monthly usage charges, and all
calls on Company business) incurred by him in connection with the performance of
his duties hereunder, upon the presentation of proper accounts therefor in
accordance with the Company's policies.
5. Other Benefits. (a) During the term of this Agreement, the Executive
shall be entitled to receive vacation time in an amount equal to other
executives of the Company at levels comparable to the Executive, but in no event
less than four (4) weeks paid vacation time per annum and such other benefits,
including, subject to meeting standard eligibility requirements, participation
in any 401(k) plan in which the Company's Executives are eligible to
participate, customary medical insurance and continuing education benefits, as
are from time to time made available to other similarly situated employees of
the Company on the same terms as are available to such similarly situated
Executives, it being understood that the Executive shall be required to make the
same contributions and payments in order to receive any of such benefits as may
be required of such similarly situated Executives.
(b) The Company has granted the Executive options to purchase 200,000
shares of the Company's Common Stock under the Company's 1994 Equity Incentive
Plan and the Company of its subsidiaries may grant the Executive additional
warrants or options under this plan or otherwise (such options or warrants are
collectively referred to as the "Options"). If the Company terminates the
employment of the Executive for any reason other than Due Cause as defined in
paragraph 6.3 of this Agreement, or the Executive terminates his employment
pursuant to a Change of Control or for Good Reason, any remaining unvested
Options then held by Executive shall become immediately vested and exercisable
and shall be amended to remain exercisable for the remainder of their original
term or shall be replaced by warrants or options with such revised terms and the
shares issuable under the Options shall be registered under the
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Securities Act of 1933 and listed on the New York Stock Exchange or such other
exchange as the Company's Common Stock is then traded.
6. Termination of Employment.
6.1 Death. In the event of the death of the Executive during the term of
this Agreement, the Company shall pay to the estate or other legal
representative of the Executive the salary provided for in Section 3(a) (at the
annual rate then in effect) (the "Base Salary") accrued to the Executive's date
of death and not theretofore paid, and the estate or other legal representative
of the Executive shall have no further rights under this Agreement. Rights and
benefits of the Executive, his estate or other legal representative under the
Executive benefit plans and programs of the Company, if any, will be determined
in accordance with the terms and provisions of such plans and programs.
6.2 Disability. If the Executive shall become incapacitated by reason of
sickness, accident or other physical or mental disability and shall for a period
of one hundred eighty (180) consecutive days be unable to perform his normal
duties hereunder, the employment of the Executive hereunder may be terminated by
the Company upon thirty (30) days' prior written notice to the Executive. Within
thirty (30) days after such termination, the Company shall pay to the Executive
the Base Salary accrued to the date of such termination and not theretofore
paid. Rights and benefits of the Executive, his estate or other legal
representative under the Executive benefit plans and programs of the Company, if
any, will be determined in accordance with the terms and provisions of such
plans and programs. Neither the Executive nor the Company shall have further
rights or obligations under this Agreement, except as provided in Sections 7 and
8.
6.3 Due Cause. The employment of the Executive hereunder may be
terminated by the Company at any time during the term of this Agreement for Due
Cause (as hereinafter defined). In the event of such termination, the Company
shall pay to the Executive the Base Salary accrued to the date of such
termination and not theretofore paid to the Executive, and, after the
satisfaction of any claim of the Company against the Executive arising as a
direct and proximate result of such Due Cause, neither the Executive nor the
Company shall have any further rights or obligations under this Agreement,
except as provided in Sections 7 and 8. Rights and benefits of the Executive,
his estate or other legal representative under the Executive benefit plans and
programs of the Company, if any, will be determined in accordance with the terms
and provisions of such plans and programs. For purposes hereof, "Due Cause"
shall mean (i) the Executive's willful and continued failure substantially to
perform his duties with the Company, (ii) fraud, misappropriation or intentional
material damage to the property or business of the Company by the Executive of
(iii) the Executive's conviction of, or plea of nolo contendere to, any felony
that, in the judgment of the Board adversely affects the Company's reputation or
the Executive's ability to carry out his obligations under this Agreement. In
the event of an occurrence under this Section 6.3, the Executive shall be given
written notice by the Company that it intends to terminate the Executive's
employment for Due Cause under this Section, which written notice shall specify
the act or acts upon the basis of which the Company
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intends so to terminate the Executive's employment. If the basis for such
written notice is an act or acts described in clause (i) above the Executive
shall be given ten (10) days to cease or correct the performance (or
nonperformance) giving rise to such written notice and, upon failure of the
Executive within such ten (10) days to cease or correct such performance (or
nonperformance), the Executive's employment by the Company shall automatically
be terminated hereunder for Due Cause.
6.4 Other Termination. (a) The Company may terminate the Executive's
employment prior to the expiration of the term of this Agreement for whatever
reason it deems appropriate; provided, however, that in the event that such
termination is not pursuant to Sections 6.1, 6.2 or 6.3, in lieu of notice or
any other termination payment pursuant to shortening the then current term of
this Agreement, the Company shall pay to the Executive:
(i) on the date of termination, the Base Salary accrued to the date
of termination and not theretofore paid to the Executive:
(ii) within three weeks after the date of termination severance pay,
in the form of a lump sum payment, in an amount equal to the greater of (a) the
amount of cash compensation earned by Executive in the calendar year (whether or
not paid in such calendar year) immediately preceding the calendar year in which
termination occurs, or (b) the then current annual Base Salary and the guideline
or annual target amount for the Executive for the then current year pursuant to
the bonus plan described in paragraph 3(b). Cash compensation shall consist of
(i) Executive's Base Salary and (ii) the amount of any cash incentive
compensation or bonus earned by the Executive in such immediately preceding
calendar year.
(iii) sufficient funds, payable monthly in advance, to enable the
Executive to continue coverage under COBRA for a period of eighteen months after
termination for any benefits he elects to continue after termination or to
obtain comparable benefits if coverage under COBRA is unavailable.
(b) The Executive shall have the right to terminate this Agreement
during the one year period following a Change of Control or for Good Reason and
in that event the Company shall pay to the Executive:
(i) on the date of termination, the Base Salary accrued to the date
of termination and not theretofore paid to the Executive.
(ii) within three weeks after the date of termination severance pay,
in the form of a lump sum payment in an amount equal to the greater of (a) the
amount of cash compensation earned by Executive in the calendar year (whether or
not paid in such calendar year) immediately preceding the calendar year in which
termination occurs, or (b) the then current annual Base Salary and the guideline
or annual target amount for the Executive for the then current year pursuant to
the bonus plan described in paragraph 3(b). Cash compensation
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shall consist of (i) Executive's Base Salary and (ii) the amount of any cash
incentive compensation or bonus earned by the Executive in such immediately
preceding calendar year.
(iii) sufficient funds, payable monthly in advance, to enable the
Executive to continue coverage under COBRA for a period of eighteen months after
termination for any benefits he elects to continue after termination or to
obtain comparable benefits if coverage under COBRA is unavailable.
(c) In the event of a termination pursuant to this paragraph 6(4),
rights and benefits of the Executive, his estate or other legal representative
under the Executive benefit plans and programs of the Company, if any, will be
determined in accordance with the terms and provisions of such plans and
programs and neither the Executive nor the Company shall have any further rights
or obligations under this Agreement, except as provided in Sections 7 and 8.
(d) For purposes of this Agreement, a Change in Control of the Company
shall be deemed to have occurred if:
(i) a "person" (meaning an individual, a partnership, or other group
or association as defined in Sections 13(d) and 14(d) the Securities Exchange
Act of 1934), acquires thirty percent (30%) or more of the combined voting power
of the outstanding securities of the Company having a right to vote in elections
of directors, or
(ii) Continuing Directors shall for any reason cease to constitute a
majority of the Board of Directors of the Company; or
(iii) all or substantially all of the business and/or assets of the
Company is disposed of by the Company to a party or parties other than a parent,
subsidiary or other affiliate of the Company, pursuant to a partial or complete
liquidation of the Company, sale of assets (including stock of a subsidiary of
the Company) or otherwise.
For purposes of this Agreement, the term "Continuing Director" shall
mean a member of the Board of Directors of the Company who either was a member
of the Board of Directors of the Company on the date hereof or who subsequently
became a Director and whose election, or nomination for election, was approved
by a vote of at least two-thirds of the Continuing Directors then in office.
(e) Good Reason. For purposes of this Agreement, "Good Reason" means:
(i) (A) the assignment to the Executive of any duties inconsistent
in any respect with the Executive's position (including status, offices, titles
and reporting requirements), authority, duties or responsibilities as
contemplated by Section 2 of this Agreement, (B) any other action by the Company
which results in a diminution in such position, authority, duties or
responsibilities, other than an insubstantial and inadvertent action which is
remedied by the Company promptly after receipt of notice thereof given by the
Executive,
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(C) Irwin L. Gross shall resign or be removed as Chairman of the Board of
Directors of the Company, or (D) the principal office location of the Executive
is moved more than 30 miles from its current location at 441 North 5th Street,
Philadelphia, PA;
(ii) any failure by the Company to comply with any of the provisions
of Section 3 of this Agreement, other than an insubstantial and inadvertent
failure which is remedied by the Company promptly after receipt of notice
thereof given by the Executive.
7. Confidential Information.
7.1 (a) The Executive shall, during the Executive's employment with the
Company and at all times thereafter, treat all confidential material (as
hereinafter defined) of the Company or any member of the Company Group (as
hereinafter defined) confidentially. The Executive shall not, without the prior
written consent of the Board of Directors of the Company, disclose such
confidential material, directly or indirectly, to any party, who at the time of
such disclosure is not an Executive or agent of any member of the Company Group,
or remove from the Company's premises any notes or records relating thereto,
copies or facsimiles thereof (whether made by electronic, electrical, magnetic,
optical, laser, acoustic or other means), or any other property of any member of
the Company Group. The Executive agrees that all confidential material, together
with all notes and records of the Executive relating thereto, and all computer
disks, copies or facsimiles thereof in the possession of the Executive (whether
made by the foregoing or other means) are the exclusive property of the Company.
The Executive shall not in any manner use any confidential material of the
Company Group, or any other property of any member of the Company Group, in any
manner not specifically directed by the Company or in any way which is
detrimental to any member of the Company Group, as determined by the Board of
Directors of the Company in its sole discretion.
(b) For the purposes hereof, the term Company Group, shall mean
collectively, the Company and the Company's subsidiaries, affiliates and parent
entities, and the term "confidential material" shall mean all information in any
way concerning the activities, business or affairs of any member of the Company
Group or any of the customers and clients of any member of the Company Group,
including, without limitation, information concerning trade secrets, together
with all sales and financial information concerning any member of the Company
Group and any and all information concerning projects in research and
development or marketing plans for any products or projects of the Company
Group, and all information concerning the practices, customers and clients of
any member of the Company Group, and all information in any way concerning the
activities, business or affairs of any of such customers or clients, as such,
which is furnished to the Executive by any member of the Company Group or any of
its agents, customers or clients, as such, or otherwise acquired by the
Executive in the course of the Executive's employment with the Company;
provided, however, that the term "confidential material" shall not include
information which (i) becomes generally available to the public other than as a
result of a disclosure by the Executive, (ii) was available to the Executive on
a non-confidential basis prior to his employment with any member of the Company
Group or (iii) becomes available to the Executive on a non-confidential basis
from a source other than any
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member of the Company Group or any of its agents, customers or clients, as such,
provided that such source is not bound by a confidentiality agreement with any
member of the Company Group or any of such agents, customers or clients.
7.2 Promptly upon the request of the Company, the Executive shall
deliver to the Company all confidential material relating to any member of the
Company Group in the possession of the Executive without retaining a copy
thereof, unless, in the opinion of counsel for the Company, either returning
such confidential material or failing to retain a copy thereof would violate any
applicable Federal, state, local or foreign law, in which event such
confidential material shall be returned without retaining any copies thereof as
soon as practicable after such counsel advises that the same may be lawfully
done.
7.3 In the event that the Executive is required, by oral questions,
interrogatories, requests for information or documents, subpoena, civil
investigative demand or similar process, to disclose any confidential material
relating to any member of the Company Group, the Executive shall provide the
Company with prompt notice thereof so that the Company may seek an appropriate
protective order and/or waive compliance by the Executive with the provisions
hereof; provided, however, that if in the absence of a protective order or the
receipt of such a waiver, the Executive is, in the opinion of counsel for the
Company, compelled to disclose confidential material not otherwise disclosable
hereunder to any legislative, judicial or regulatory body, agency or authority,
or else be exposed to liability for contempt, fine or penalty or to other
censure, such confidential material may be so disclosed.
8. Equitable Relief. In the event of a breach or threatened breach by the
Executive of any of the provisions of Section 7 of this Agreement, the Executive
hereby consents and agrees that the Company shall be entitled to pre-judgment
injunctive relief or similar equitable relief restraining the Executive from
committing or continuing any such breach or threatened breach or granting
specific performance of any act required to be performed by the Executive under
any of such provisions, without the necessity of showing any actual damage or
that money damages would not afford an adequate remedy and without the necessity
of posting any bond or other security. The parties hereto hereby consent to the
jurisdiction of the Federal courts for the Eastern District of Pennsylvania and
the state courts located in such District for any proceedings under this Section
8. Nothing herein shall be construed as prohibiting the Company from pursuing
any other remedies at law or in equity which it may have.
9. Indemnification. The Company shall indemnify the Executive to the
fullest extent permitted by the laws of the state of incorporation of the
Company, as amended from time to time, for all amounts (including, without
limitation, judgments, fines, settlement payments, expenses and attorney's fees)
incurred or paid by the Executive in connection with any action, suit,
investigation or proceeding arising out of or relating to the performance by the
Executive of services for, or acting by the Executive as a director, officer or
executive of, the Company or any other person or enterprise at the Company's
request, and shall to the fullest extent permitted by the laws of the state of
incorporation of the Company, as amended from time to time, advance all expenses
incurred or paid by the Executive in connection with, and until disposition of
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any action, suit, investigation or proceeding arising out of or relating to the
performance by the Executive of services for, or acting by the Executive as a
director, officer or executive of, the Company or any other person or enterprise
at the Company's request.
10. Successors and Assigns.
10.1 Assignment by the Company. The Company shall require any
successors (whether direct or indirect, by purchase, merger, consolidation or
otherwise) to all or substantially all of the business and/or assets of the
Company to assume and agree to perform this Agreement in the same manner and to
the same extent that the Company would be required to perform if no such
succession had taken place. As used in this Section, the "Company" shall mean
the Company as hereinbefore defined and any successor to its business and/or
assets as aforesaid which otherwise becomes bound by all the terms and
provisions of this Agreement by operation of law and this Agreement shall be
binding upon, and inure to the benefit of, the Company, as so defined.
10.2 Assignment by the Executive. The Executive may not assign this
Agreement or any part thereof without the prior written consent of the Chairman
of the Board of the Company; provided, however, that nothing herein shall
preclude one or more beneficiaries of the Executive from receiving any amount
that may be payable following the occurrence of his legal incompetency or his
death and shall not preclude the legal representative of his estate from
receiving such amount or from assigning any right hereunder to the person or
persons entitled thereto under his will or, in the case of intestacy, to the
person or persons entitled thereto under the laws of intestacy applicable to his
estate. The term "beneficiaries," as used in this Agreement, shall mean a
beneficiary or beneficiaries so designated to receive any such amount or, if no
beneficiary has been so designated, the legal representative of the Executive
(in the event of his incompetency) or the Executive's estate.
11. Governing Law. This Agreement shall be deemed a contract made under,
and for all purposes shall be construed in accordance with, the laws of the
State of New Jersey applicable to contracts to be performed entirely within such
State.
12. Entire Agreement. This Agreement contains all the understandings and
representations between the parties hereto pertaining to the subject matter
hereof and supersede all undertakings and agreements, whether oral or in
writing, if there be any, previously entered into by them with respect thereto.
No modification of this Agreement shall be effective unless in writing and
signed by the party against which enforcement is sought to be enforced.
13. Modification and Amendment; Waiver. The provisions of this Agreement
may be modified, amended or waived, but only upon the written consent of the
party against whom enforcement of such modification, amendment or waiver is
sought and then such modification, amendment or waiver shall be effective only
to the extent set forth in such writing. No delay or failure on the part of any
party hereto in exercising any right, power or remedy hereunder shall
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effect or operate as a waiver thereof, nor shall any single or partial exercise
thereof or any abandonment or discontinuance of steps to enforce such right,
power or remedy preclude any further exercise thereof or of any other right,
power or remedy.
14. Notices. All notices, requests or instructions hereunder shall be in
writing and delivered personally, sent by telecopier or sent by registered or
certified mail, postage prepaid, as follows:
If to the Company:
EA Industries, Inc.
185 Monmouth Parkway
West Long Branch, NJ 07764
Attn: Chairman of the Board
With a copy delivered in the same manner to:
Richard P. Jaffe, Esquire
Mesirov Gelman Jaffe Cramer & Jamieson
1735 Market Street
Philadelphia, PA 19103
If to the Executive:
317 North Broad Street #814
Philadelphia, PA 19107
Any of the above addresses may be changed at any time by notice given as
provided above; provided, however, that any such notice of change of address
shall be effective only upon receipt. All notices, requests or instructions
given in accordance herewith shall be deemed received on the date of delivery,
if hand delivered or telecopied, and two business days after the date of
mailing, if mailed.
14. Severability. Should any provision of this Agreement be held by a court
of competent jurisdiction to be enforceable only if modified, such holding shall
not affect the validity of the remainder of this Agreement, the balance of which
shall continue to be binding upon the parties hereto with any such modification
to become a part hereof and treated as though originally set forth in this
Agreement. The parties further agree that any such court is expressly authorized
to modify any such unenforceable provision of this Agreement in lieu of severing
such unenforceable provision from this Agreement in its entirety, whether by
rewriting the offending provision, deleting any or all of the offending
provision, adding additional language to this Agreement, or by making such other
modifications as it deems warranted to carry out the
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intent and agreement of the parties as embodied herein to the maximum extent
permitted by law. The parties expressly agree that this Agreement as so modified
by the court shall be binding upon and enforceable against each of them. In any
event, should one or more of the provisions of this Agreement be held to be
invalid, illegal or unenforceable in any respect, such invalidity, illegality or
unenforceability shall not affect any other provisions hereof, and if such
provision or provisions are not modified as provided above, this Agreement shall
be construed as if such invalid, illegal or unenforceable provisions had never
been set forth herein.
15. Withholding. Anything to the contrary notwithstanding, all payments
required to be made by the Company hereunder to the Executive or his
beneficiaries, including his estate, shall be subject to withholding of such
amounts relating to taxes as the Company may reasonably determine it should
withhold pursuant to any applicable law or regulation. In lieu of withholding
such amounts, in whole or in part, the Company, may, in its sole discretion,
accept other provision for payment of taxes as permitted by law, provided it is
satisfied in its sole discretion that all requirements of law affecting its
responsibilities to withhold such taxes have been satisfied.
16. Survivorship. The respective rights and obligations of the parties
hereunder shall survive any termination of this Agreement to the extent
necessary to the intended preservation of such rights and obligations.
17. Expenses. Each of the parties hereto shall bear his or its own costs
and expenses, including attorneys' fees and disbursements, incurred in
connection with this Agreement and the transactions contemplated hereby.
18. Titles. Titles of the sections of this Agreement are intended solely
for convenience and no provision of this Agreement is to be construed by
reference to the title of any section.
19. Counterparts. This Agreement may be executed in counterparts, each of
which shall be deemed an original, but all of which taken together shall
constitute one and the same instrument.
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<PAGE>
* * *
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the
date first above written.
EA Industries, Inc.
By:
-------------------------------
------------------------------
Howard P. Kamins
EMPLOYMENT AGREEMENT
AGREEMENT made the 20th day of December, 1996 by and between
EA Industries, Inc., a New Jersey corporation (the "Company") and Stanley O.
Jester (the "Executive").
W I T N E S S E T H:
WHEREAS, the Company wishes to assure itself of the services
of the Executive, and the Executive wishes to serve in the employ of the
Company, upon the terms and conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the premises and the
mutual agreements hereinafter set forth, the parties hereto, intending to be
legally bound, hereby agree as follows:
1. Employment, Term.
1.1 The Company agrees to employ the Executive, and the
Executive agrees to serve in the employ of the Company, for the term set forth
in Section 1.2, in the position and with the responsibilities, duties and
authority set forth in Section 2 and on the other terms and conditions set forth
in this Agreement.
1.2 The term of the Executive's employment under this
Agreement shall be the period commencing on the date hereof and continuing
through December 31, 1997, unless sooner terminated in accordance with this
Agreement.
1.3 Unless either party elects to terminate this Agreement at
the end of the original or any renewal term by giving the other party notice of
such election in writing at least 180 days before the expiration of the then
current term, this Agreement shall be deemed to have been renewed for an
additional term of one year commencing on the day after the expiration of the
then current term.
2. Position, Duties. The Executive shall serve the Company as Vice
President and Chief Financial Officer and at the request of the Board of
Directors shall serve as an officer and director of the Company, its parents,
subsidiaries and/or affiliates without payment of any additional compensation.
The Executive shall have such duties and responsibilities, appropriate to said
positions as the Board of Directors of the Company (the "Board") shall assign to
the Executive. The Executive shall perform his duties and responsibilities
hereunder, faithfully and diligently and shall report to the Chairman of the
Board of Directors of the Company. The Executive shall devote his full business
time and attention to the performance of his duties and responsibilities
hereunder. The Executive hereby represents that he is not bound by any
confidentiality agreements or restrictive covenants which restrict or may
restrict his ability to perform his duties hereunder, and agrees that he will
not enter into any such agreements or covenants during the term of his
employment hereunder, except such restrictive covenants or confidentiality
agreements which are required by the Company.
<PAGE>
3. Cash Compensation. During the term of this Agreement, in
consideration of the performance by the Executive of the services set forth in
Section 2 and his observance of the other covenants set forth herein, the
Company shall pay the Executive, and the Executive shall accept, a salary at the
rate of $150,000 per annum, payable in accordance with the standard payroll
practices of the Company. In addition to the salary payable hereunder, the
Executive may be entitled to receive merit increases in salary during the term
hereof in amounts and at such times as shall be determined by the Board in its
sole discretion. In no event shall the failure to grant any such increase (or
the amount of any such increase) give rise to a claim by the Executive under
this Agreement.
(b) The Company agrees that the Executive shall be eligible to
participate in any executive bonus plan established by the Company.
4. Expense Reimbursement. During the term of this Agreement, consistent
with the Company's policies and procedures as may be in effect from time to
time, the Company shall reimburse the Executive for all reasonable and necessary
out-of-pocket expenses (including the cost for purchase and installation of a
telephone in the Executive's automobile, minimum monthly usage charges, and all
calls on Company business) incurred by him in connection with the performance of
his duties hereunder, upon the presentation of proper accounts therefor in
accordance with the Company's policies.
5. Other Benefits. (a) During the term of this Agreement, the Executive
shall be entitled to receive vacation time in an amount equal to other
executives of the Company at levels comparable to the Executive, but in no event
less than four (4) weeks paid vacation time per annum and such other benefits,
including, subject to meeting standard eligibility requirements, participation
in any 401(k) plan in which the Company's Executives are eligible to
participate, customary medical insurance and continuing education benefits, as
are from time to time made available to other similarly situated employees of
the Company on the same terms as are available to such similarly situated
Executives, it being understood that the Executive shall be required to make the
same contributions and payments in order to receive any of such benefits as may
be required of such similarly situated Executives.
(b) The Company has granted the Executive options to purchase
200,000 shares of the Company's Common Stock under the Company's 1994 Equity
Incentive Plan and the Company or its subsidiaries may grant the Executive
additional warrants or options under this plan or otherwise (such options or
warrants are collectively referred to as the "Options"). If the Company
terminates the employment of the Executive for any reason other than Due Cause
as defined in paragraph 6.3 of this Agreement, or the Executive terminates his
employment pursuant to a Change of Control or for Good Reason, any remaining
unvested Options then held by Executive shall become immediately vested and
exercisable and shall be amended to remain exercisable for the remainder of
their original term or shall be replaced by warrants or options with such
revised terms and the shares issuable under the Options shall be registered
under the Securities Act of 1933 and listed on the New York Stock Exchange or
such other exchange as the Company's Common Stock is then traded.
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<PAGE>
6. Termination of Employment.
6.1 Death. In the event of the death of the Executive during
the term of this Agreement, the Company shall pay to the estate or other legal
representative of the Executive the salary provided for in Section 3(a) (at the
annual rate then in effect) (the "Base Salary") accrued to the Executive's date
of death and not theretofore paid, and the estate or other legal representative
of the Executive shall have no further rights under this Agreement. Rights and
benefits of the Executive, his estate or other legal representative under the
Executive benefit plans and programs of the Company, if any, will be determined
in accordance with the terms and provisions of such plans and programs.
6.2 Disability. If the Executive shall become incapacitated by
reason of sickness, accident or other physical or mental disability and shall
for a period of one hundred eighty (180) consecutive days be unable to perform
his normal duties hereunder, the employment of the Executive hereunder may be
terminated by the Company upon thirty (30) days' prior written notice to the
Executive. Within thirty (30) days after such termination, the Company shall pay
to the Executive the Base Salary accrued to the date of such termination and not
theretofore paid. Rights and benefits of the Executive, his estate or other
legal representative under the Executive benefit plans and programs of the
Company, if any, will be determined in accordance with the terms and provisions
of such plans and programs. Neither the Executive nor the Company shall have
further rights or obligations under this Agreement, except as provided in
Sections 7 and 8.
6.3 Due Cause. The employment of the Executive hereunder may
be terminated by the Company at any time during the term of this Agreement for
Due Cause (as hereinafter defined). In the event of such termination, the
Company shall pay to the Executive the Base Salary accrued to the date of such
termination and not theretofore paid to the Executive, and, after the
satisfaction of any claim of the Company against the Executive arising as a
direct and proximate result of such Due Cause, neither the Executive nor the
Company shall have any further rights or obligations under this Agreement,
except as provided in Sections 7 and 8. Rights and benefits of the Executive,
his estate or other legal representative under the Executive benefit plans and
programs of the Company, if any, will be determined in accordance with the terms
and provisions of such plans and programs. For purposes hereof, "Due Cause"
shall mean (i) the Executive's willful and continued failure substantially to
perform his duties with the Company, (ii) fraud, misappropriation or intentional
material damage to the property or business of the Company by the Executive of
(iii) the Executive's conviction of, or plea of nolo contendere to, any felony
that, in the judgment of the Board adversely affects the Company's reputation or
the Executive's ability to carry out his obligations under this Agreement. In
the event of an occurrence under this Section 6.3, the Executive shall be given
written notice by the Company that it intends to terminate the Executive's
employment for Due Cause under this Section, which written notice shall specify
the act or acts upon the basis of which the Company
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<PAGE>
intends so to terminate the Executive's employment. If the basis for such
written notice is an act or acts described in clause (i) above the Executive
shall be given ten (10) days to cease or correct the performance (or
nonperformance) giving rise to such written notice and, upon failure of the
Executive within such ten (10) days to cease or correct such performance (or
nonperformance), the Executive's employment by the Company shall automatically
be terminated hereunder for Due Cause.
6.4 Other Termination. (a) The Company may terminate the
Executive's employment prior to the expiration of the term of this Agreement for
whatever reason it deems appropriate; provided, however, that in the event that
such termination is not pursuant to Sections 6.1, 6.2 or 6.3, in lieu of notice
or any other termination payment pursuant to shortening the then current term of
this Agreement, the Company shall pay to the Executive:
(i) on the date of termination, the Base Salary
accrued to the date of termination and not theretofore paid to the Executive:
(ii) within three weeks after the date of
termination severance pay, in the form of a lump sum payment in an amount equal
to the greater of (a) the amount of cash compensation earned by Executive in the
calendar year (whether or not paid in such calendar year) immediately preceding
the calendar year in which termination occurs, or (b) the then current annual
Base Salary and the guideline or annual target amount for the Executive for the
then current year pursuant to the bonus plan described in paragraph 3(b). Cash
compensation shall consist of (i) Executive's Base Salary and (ii) the amount of
any cash incentive compensation or bonus earned by the Executive in such
immediately preceding calendar year.
(iii) sufficient funds, payable monthly in
advance, to enable the Executive to continue coverage under COBRA for a period
of eighteen months after termination for any benefits he elects to continue
after termination or to obtain comparable benefits if coverage under COBRA is
unavailable.
(b) The Executive shall have the right to terminate this
Agreement during the one year period following a Change of Control or for Good
Reason and in that event the Company shall pay to the Executive:
(i) on the date of termination, the Base Salary
accrued to the date of termination and not theretofore paid to the Executive.
(ii) within three weeks after the date of
termination severance pay, in the form of a lump sum payment in an amount equal
to the greater of (a) the amount of cash compensation earned by Executive in the
calendar year (whether or not paid in such calendar year) immediately preceding
the calendar year in which termination occurs, or (b) the then current annual
Base Salary and the guideline or annual target amount for the Executive for the
then current year pursuant to the bonus plan described in paragraph 3(b). Cash
compensation
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shall consist of (i) Executive's Base Salary and (ii) the amount of
any cash incentive compensation or bonus earned by the Executive in such
immediately preceding calendar year.
(iii) sufficient funds, payable monthly in
advance, to enable the Executive to continue coverage under COBRA for a period
of eighteen months after termination for any benefits he elects to continue
after termination or to obtain comparable benefits if coverage under COBRA is
unavailable.
(c) In the event of a termination pursuant to this paragraph
6(4), rights and benefits of the Executive, his estate or other legal
representative under the Executive benefit plans and programs of the Company, if
any, will be determined in accordance with the terms and provisions of such
plans and programs and neither the Executive nor the Company shall have any
further rights or obligations under this Agreement, except as provided in
Sections 7 and 8.
(d) For purposes of this Agreement, a Change in Control of
the Company shall be deemed to have occurred if:
(i) a "person" (meaning an individual, a
partnership, or other group or association as defined in Sections 13(d) and
14(d) the Securities Exchange Act of 1934), acquires thirty percent (30%) or
more of the combined voting power of the outstanding securities of the Company
having a right to vote in elections of directors, or
(ii) Continuing Directors shall for any reason
cease to constitute a majority of the Board of Directors of the Company; or
(iii) all or substantially all of the business
and/or assets of the Company is disposed of by the Company to a party or parties
other than a parent, subsidiary or other affiliate of the Company, pursuant to a
partial or complete liquidation of the Company, sale of assets (including stock
of a subsidiary of the Company) or otherwise.
For purposes of this Agreement, the term "Continuing Director"
shall mean a member of the Board of Directors of the Company who either was a
member of the Board of Directors of the Company on the date hereof or who
subsequently became a Director and whose election, or nomination for election,
was approved by a vote of at least two-thirds of the Continuing Directors then
in office.
(e) Good Reason. For purposes of this Agreement, "Good Reason"
means:
(i) (A) the assignment to the Executive of any
duties inconsistent in any respect with the Executive's position (including
status, offices, titles and reporting requirements), authority, duties or
responsibilities as contemplated by Section 2 of this Agreement, (B) any other
action by the Company which results in a diminution in such position, authority,
duties or responsibilities, other than an insubstantial and inadvertent action
which is remedied by the Company promptly after receipt of notice thereof given
by the Executive,
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(C) Irwin L. Gross shall resign or be removed as Chairman of the Board of
Directors of the Company, or (D) the principal office location of the Executive
is moved more than 30 miles from its current location at 441 North 5th Street,
Philadelphia, PA;
(ii) any failure by the Company to comply with any of the
provisions of Section 3 of this Agreement, other than an insubstantial and
inadvertent failure which is remedied by the Company promptly after receipt of
notice thereof given by the Executive.
7. Confidential Information.
7.1 (a) The Executive shall, during the Executive's employment
with the Company and at all times thereafter, treat all confidential material
(as hereinafter defined) of the Company or any member of the Company Group (as
hereinafter defined) confidentially. The Executive shall not, without the prior
written consent of the Board of Directors of the Company, disclose such
confidential material, directly or indirectly, to any party, who at the time of
such disclosure is not an Executive or agent of any member of the Company Group,
or remove from the Company's premises any notes or records relating thereto,
copies or facsimiles thereof (whether made by electronic, electrical, magnetic,
optical, laser, acoustic or other means), or any other property of any member of
the Company Group. The Executive agrees that all confidential material, together
with all notes and records of the Executive relating thereto, and all computer
disks, copies or facsimiles thereof in the possession of the Executive (whether
made by the foregoing or other means) are the exclusive property of the Company.
The Executive shall not in any manner use any confidential material of the
Company Group, or any other property of any member of the Company Group, in any
manner not specifically directed by the Company or in any way which is
detrimental to any member of the Company Group, as determined by the Board of
Directors of the Company in its sole discretion.
(b) For the purposes hereof, the term Company Group, shall
mean collectively, the Company and the Company's subsidiaries, affiliates and
parent entities, and the term "confidential material" shall mean all information
in any way concerning the activities, business or affairs of any member of the
Company Group or any of the customers and clients of any member of the Company
Group, including, without limitation, information concerning trade secrets,
together with all sales and financial information concerning any member of the
Company Group and any and all information concerning projects in research and
development or marketing plans for any products or projects of the Company
Group, and all information concerning the practices, customers and clients of
any member of the Company Group, and all information in any way concerning the
activities, business or affairs of any of such customers or clients, as such,
which is furnished to the Executive by any member of the Company Group or any of
its agents, customers or clients, as such, or otherwise acquired by the
Executive in the course of the Executive's employment with the Company;
provided, however, that the term "confidential material" shall not include
information which (i) becomes generally available to the public other than as a
result of a disclosure by the Executive, (ii) was available to the Executive on
a non-confidential basis prior to his employment with any member of the Company
Group or (iii) becomes available to the Executive on a non-confidential basis
from a source other than any
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<PAGE>
member of the Company Group or any of its agents, customers or clients, as such,
provided that such source is not bound by a confidentiality agreement with any
member of the Company Group or any of such agents, customers or clients.
7.2 Promptly upon the request of the Company, the Executive
shall deliver to the Company all confidential material relating to any member of
the Company Group in the possession of the Executive without retaining a copy
thereof, unless, in the opinion of counsel for the Company, either returning
such confidential material or failing to retain a copy thereof would violate any
applicable Federal, state, local or foreign law, in which event such
confidential material shall be returned without retaining any copies thereof as
soon as practicable after such counsel advises that the same may be lawfully
done.
7.3 In the event that the Executive is required, by oral
questions, interrogatories, requests for information or documents, subpoena,
civil investigative demand or similar process, to disclose any confidential
material relating to any member of the Company Group, the Executive shall
provide the Company with prompt notice thereof so that the Company may seek an
appropriate protective order and/or waive compliance by the Executive with the
provisions hereof; provided, however, that if in the absence of a protective
order or the receipt of such a waiver, the Executive is, in the opinion of
counsel for the Company, compelled to disclose confidential material not
otherwise disclosable hereunder to any legislative, judicial or regulatory body,
agency or authority, or else be exposed to liability for contempt, fine or
penalty or to other censure, such confidential material may be so disclosed.
8. Equitable Relief. In the event of a breach or threatened breach by
the Executive of any of the provisions of Section 7 of this Agreement, the
Executive hereby consents and agrees that the Company shall be entitled to
pre-judgment injunctive relief or similar equitable relief restraining the
Executive from committing or continuing any such breach or threatened breach or
granting specific performance of any act required to be performed by the
Executive under any of such provisions, without the necessity of showing any
actual damage or that money damages would not afford an adequate remedy and
without the necessity of posting any bond or other security. The parties hereto
hereby consent to the jurisdiction of the Federal courts for the Eastern
District of Pennsylvania and the state courts located in such District for any
proceedings under this Section 8. Nothing herein shall be construed as
prohibiting the Company from pursuing any other remedies at law or in equity
which it may have.
9. Indemnification. The Company shall indemnify the Executive to the
fullest extent permitted by the laws of the state of incorporation of the
Company, as amended from time to time, for all amounts (including, without
limitation, judgments, fines, settlement payments, expenses and attorney's fees)
incurred or paid by the Executive in connection with any action, suit,
investigation or proceeding arising out of or relating to the performance by the
Executive of services for, or acting by the Executive as a director, officer or
executive of, the Company or any other person or enterprise at the Company's
request, and shall to the fullest extent permitted by the laws of the state of
incorporation of the Company, as amended from time to time, advance all expenses
incurred or paid by the Executive in connection with, and until disposition of
any
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<PAGE>
action, suit, investigation or proceeding arising out of or relating to the
performance by the Executive of services for, or acting by the Executive as a
director, officer or executive of, the Company or any other person or enterprise
at the Company's request.
10. Successors and Assigns.
10.1 Assignment by the Company. The Company shall require any
successors (whether direct or indirect, by purchase, merger, consolidation or
otherwise) to all or substantially all of the business and/or assets of the
Company to assume and agree to perform this Agreement in the same manner and to
the same extent that the Company would be required to perform if no such
succession had taken place. As used in this Section, the "Company" shall mean
the Company as hereinbefore defined and any successor to its business and/or
assets as aforesaid which otherwise becomes bound by all the terms and
provisions of this Agreement by operation of law and this Agreement shall be
binding upon, and inure to the benefit of, the Company, as so defined.
10.2 Assignment by the Executive. The Executive may not assign
this Agreement or any part thereof without the prior written consent of the
Chairman of the Board of the Company; provided, however, that nothing herein
shall preclude one or more beneficiaries of the Executive from receiving any
amount that may be payable following the occurrence of his legal incompetency or
his death and shall not preclude the legal representative of his estate from
receiving such amount or from assigning any right hereunder to the person or
persons entitled thereto under his will or, in the case of intestacy, to the
person or persons entitled thereto under the laws of intestacy applicable to his
estate. The term "beneficiaries," as used in this Agreement, shall mean a
beneficiary or beneficiaries so designated to receive any such amount or, if no
beneficiary has been so designated, the legal representative of the Executive
(in the event of his incompetency) or the Executive's estate.
11. Governing Law. This Agreement shall be deemed a contract made
under, and for all purposes shall be construed in accordance with, the laws of
the State of New Jersey applicable to contracts to be performed entirely within
such State.
12. Entire Agreement. This Agreement contains all the understandings
and representations between the parties hereto pertaining to the subject matter
hereof and supersede all undertakings and agreements, whether oral or in
writing, if there be any, previously entered into by them with respect thereto.
No modification of this Agreement shall be effective unless in writing and
signed by the party against which enforcement is sought to be enforced.
13. Modification and Amendment; Waiver. The provisions of this
Agreement may be modified, amended or waived, but only upon the written consent
of the party against whom enforcement of such modification, amendment or waiver
is sought and then such modification, amendment or waiver shall be effective
only to the extent set forth in such writing. No delay or failure on the part of
any party hereto in exercising any right, power or remedy hereunder shall
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<PAGE>
effect or operate as a waiver thereof, nor shall any single or partial exercise
thereof or any abandonment or discontinuance of steps to enforce such right,
power or remedy preclude any further exercise thereof or of any other right,
power or remedy.
14. Notices. All notices, requests or instructions hereunder shall be
in writing and delivered personally, sent by telecopier or sent by registered or
certified mail, postage prepaid, as follows:
If to the Company:
EA Industries, Inc.
185 Monmouth Parkway
West Long Branch, NJ 07764
Attn: Chairman of the Board
With a copy delivered in the same manner to:
Richard P. Jaffe, Esquire
Mesirov Gelman Jaffe Cramer & Jamieson
1735 Market Street
Philadelphia, PA 19103
If to the Executive:
Stanley O. Jester
423 West Moreland
Hatboro, PA 19040
Any of the above addresses may be changed at any time by notice given as
provided above; provided, however, that any such notice of change of address
shall be effective only upon receipt. All notices, requests or instructions
given in accordance herewith shall be deemed received on the date of delivery,
if hand delivered or telecopied, and two business days after the date of
mailing, if mailed.
14. Severability. Should any provision of this Agreement be held by a
court of competent jurisdiction to be enforceable only if modified, such holding
shall not affect the validity of the remainder of this Agreement, the balance of
which shall continue to be binding upon the parties hereto with any such
modification to become a part hereof and treated as though originally set forth
in this Agreement. The parties further agree that any such court is expressly
authorized to modify any such unenforceable provision of this Agreement in lieu
of severing such unenforceable provision from this Agreement in its entirety,
whether by rewriting the offending provision, deleting any or all of the
offending provision, adding additional language to
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this Agreement, or by making such other modifications as it deems warranted to
carry out the intent and agreement of the parties as embodied herein to the
maximum extent permitted by law. The parties expressly agree that this Agreement
as so modified by the court shall be binding upon and enforceable against each
of them. In any event, should one or more of the provisions of this Agreement be
held to be invalid, illegal or unenforceable in any respect, such invalidity,
illegality or unenforceability shall not affect any other provisions hereof, and
if such provision or provisions are not modified as provided above, this
Agreement shall be construed as if such invalid, illegal or unenforceable
provisions had never been set forth herein.
15. Withholding. Anything to the contrary notwithstanding, all payments
required to be made by the Company hereunder to the Executive or his
beneficiaries, including his estate, shall be subject to withholding of such
amounts relating to taxes as the Company may reasonably determine it should
withhold pursuant to any applicable law or regulation. In lieu of withholding
such amounts, in whole or in part, the Company, may, in its sole discretion,
accept other provision for payment of taxes as permitted by law, provided it is
satisfied in its sole discretion that all requirements of law affecting its
responsibilities to withhold such taxes have been satisfied.
16. Survivorship. The respective rights and obligations of the parties
hereunder shall survive any termination of this Agreement to the extent
necessary to the intended preservation of such rights and obligations.
17. Expenses. Each of the parties hereto shall bear his or its own
costs and expenses, including attorneys' fees and disbursements, incurred in
connection with this Agreement and the transactions contemplated hereby.
18. Titles. Titles of the sections of this Agreement are intended
solely for convenience and no provision of this Agreement is to be construed by
reference to the title of any section.
19. Counterparts. This Agreement may be executed in counterparts, each
of which shall be deemed an original, but all of which taken together shall
constitute one and the same instrument.
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* * *
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on
the date first above written.
EA Industries, Inc.
By:___________________________________
--------------------------------------
Stanley O. Jester
11
EMPLOYMENT AGREEMENT
AGREEMENT made the 20th day of December, 1996 by and between
EA Industries, Inc., a New Jersey corporation (the "Company") and Jules M.
Seshens (the "Executive").
W I T N E S S E T H:
WHEREAS, the Company wishes to assure itself of the services
of the Executive, and the Executive wishes to serve in the employ of the
Company, upon the terms and conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the premises and the
mutual agreements hereinafter set forth, the parties hereto, intending to be
legally bound, hereby agree as follows:
1. Employment, Term.
1.1 The Company agrees to employ the Executive, and the
Executive agrees to serve in the employ of the Company, for the term set forth
in Section 1.2, in the position and with the responsibilities, duties and
authority set forth in Section 2 and on the other terms and conditions set forth
in this Agreement.
1.2 The term of the Executive's employment under this
Agreement shall be the period commencing on January 1, 1997 and continuing
through December 31, 1997, unless sooner terminated in accordance with this
Agreement.
1.3 Unless either party elects to terminate this Agreement at
the end of the original or any renewal term by giving the other party notice of
such election in writing at least 180 days before the expiration of the then
current term, this Agreement shall be deemed to have been renewed for an
additional term of one year commencing on the day after the expiration of the
then current term.
2. Position, Duties. The Executive shall serve the Company as Executive
Vice President and at the request of the Board of Directors shall serve as an
officer and director of the Company, its parents, subsidiaries and/or affiliates
without payment of any additional compensation. The Executive shall have such
duties and responsibilities, appropriate to said positions as the Board of
Directors of the Company (the "Board") shall assign to the Executive. The
Executive shall perform his duties and responsibilities hereunder, faithfully
and diligently and shall report to the Chairman of the Board of Directors of the
Company. The Executive shall devote his full business time and attention to the
performance of his duties and responsibilities hereunder. The Executive hereby
represents that he is not bound by any confidentiality agreements or restrictive
covenants which restrict or may restrict his ability to perform his duties
hereunder, and agrees that he will not enter into any such agreements or
covenants during the term of his employment hereunder, except such restrictive
covenants or confidentiality agreements which are required by the Company.
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3. Cash Compensation. During the term of this Agreement, in
consideration of the performance by the Executive of the services set forth in
Section 2 and his observance of the other covenants set forth herein, the
Company shall pay the Executive, and the Executive shall accept, a salary at the
rate of $150,000 per annum, payable in accordance with the standard payroll
practices of the Company. In addition, the Company shall pay the Executive a
monthly stipend of $675 to purchase medical benefits. In addition to the salary
payable hereunder, the Executive may be entitled to receive merit increases in
salary during the term hereof in amounts and at such times as shall be
determined by the Board in its sole discretion. In no event shall the failure to
grant any such increase (or the amount of any such increase) give rise to a
claim by the Executive under this Agreement.
(b) The Company agrees that the Executive shall be eligible to
participate in any executive bonus plan established by the Company.
4. Expense Reimbursement. During the term of this Agreement, consistent
with the Company's policies and procedures as may be in effect from time to
time, the Company shall reimburse the Executive for all reasonable and necessary
out-of-pocket expenses (including the cost for purchase and installation of a
telephone in the Executive's automobile, minimum monthly usage charges, and all
calls on Company business) incurred by him in connection with the performance of
his duties hereunder, upon the presentation of proper accounts therefor in
accordance with the Company's policies.
5. Other Benefits. (a) During the term of this Agreement, the Executive
shall be entitled to receive vacation time in an amount equal to other
executives of the Company at levels comparable to the Executive, but in no event
less than four (4) weeks paid vacation time per annum and such other benefits,
including, subject to meeting standard eligibility requirements, participation
in any 401(k) plan in which the Company's Executives are eligible to
participate, customary medical insurance and continuing education benefits, as
are from time to time made available to other similarly situated employees of
the Company on the same terms as are available to such similarly situated
Executives, it being understood that the Executive shall be required to make the
same contributions and payments in order to receive any of such benefits as may
be required of such similarly situated Executives.
(b) The Company has granted the Executive options to purchase
400,000 shares of the Company's Common Stock under the Company's 1994 Equity
Incentive Plan and the Company's Non-Employee Directors Plan and the Company or
its subsidiaries may grant the Executive additional warrants or options under
this plan or otherwise (such options or warrants are collectively referred to as
the "Options"). If the Company terminates the employment of the Executive for
any reason other than Due Cause as defined in paragraph 6.3 of this Agreement,
or the Executive terminates his employment pursuant to a Change of Control or
for Good Reason, any remaining unvested Options then held by Executive shall
become immediately vested and exercisable and shall be amended to remain
exercisable for the remainder of their original term or shall be replaced by
warrants or options with such revised terms and the shares issuable under the
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Options shall be registered under the Securities Act of 1933 and listed on the
New York Stock Exchange or such other exchange as the Company's Common Stock is
then traded.
6. Termination of Employment.
6.1 Death. In the event of the death of the Executive during
the term of this Agreement, the Company shall pay to the estate or other legal
representative of the Executive the salary provided for in Section 3(a) (at the
annual rate then in effect) (the "Base Salary") accrued to the Executive's date
of death and not theretofore paid, and the estate or other legal representative
of the Executive shall have no further rights under this Agreement. Rights and
benefits of the Executive, his estate or other legal representative under the
Executive benefit plans and programs of the Company, if any, will be determined
in accordance with the terms and provisions of such plans and programs.
6.2 Disability. If the Executive shall become incapacitated by
reason of sickness, accident or other physical or mental disability and shall
for a period of one hundred eighty (180) consecutive days be unable to perform
his normal duties hereunder, the employment of the Executive hereunder may be
terminated by the Company upon thirty (30) days' prior written notice to the
Executive. Within thirty (30) days after such termination, the Company shall pay
to the Executive the Base Salary accrued to the date of such termination and not
theretofore paid. Rights and benefits of the Executive, his estate or other
legal representative under the Executive benefit plans and programs of the
Company, if any, will be determined in accordance with the terms and provisions
of such plans and programs. Neither the Executive nor the Company shall have
further rights or obligations under this Agreement, except as provided in
Sections 7 and 8.
6.3 Due Cause. The employment of the Executive hereunder may
be terminated by the Company at any time during the term of this Agreement for
Due Cause (as hereinafter defined). In the event of such termination, the
Company shall pay to the Executive the Base Salary accrued to the date of such
termination and not theretofore paid to the Executive, and, after the
satisfaction of any claim of the Company against the Executive arising as a
direct and proximate result of such Due Cause, neither the Executive nor the
Company shall have any further rights or obligations under this Agreement,
except as provided in Sections 7 and 8. Rights and benefits of the Executive,
his estate or other legal representative under the Executive benefit plans and
programs of the Company, if any, will be determined in accordance with the terms
and provisions of such plans and programs. For purposes hereof, "Due Cause"
shall mean (i) the Executive's willful and continued failure substantially to
perform his duties with the Company, (ii) fraud, misappropriation or intentional
material damage to the property or business of the Company by the Executive of
(iii) the Executive's conviction of, or plea of nolo contendere to, any felony
that, in the judgment of the Board adversely affects the Company's reputation or
the Executive's ability to carry out his obligations under this Agreement. In
the event of an occurrence under this Section 6.3, the Executive shall be given
written notice by the Company that it intends to terminate the Executive's
employment for Due Cause under this Section, which written notice shall specify
the act or acts upon the basis of which the Company intends so to terminate the
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Executive's employment. If the basis for such written notice is an act or acts
described in clause (i) above the Executive shall be given ten (10) days to
cease or correct the performance (or nonperformance) giving rise to such written
notice and, upon failure of the Executive within such ten (10) days to cease or
correct such performance (or nonperformance), the Executive's employment by the
Company shall automatically be terminated hereunder for Due Cause.
6.4 Other Termination. (a) The Company may terminate the
Executive's employment prior to the expiration of the term of this Agreement for
whatever reason it deems appropriate; provided, however, that in the event that
such termination is not pursuant to Sections 6.1, 6.2 or 6.3, in lieu of notice
or any other termination payment pursuant to shortening the then current term of
this Agreement, the Company shall pay to the Executive:
(i) on the date of termination, the Base
Salary accrued to the date of termination and not theretofore paid to the
Executive:
(ii) within three weeks after the date of
termination severance pay, in the form of a lump sum payment in an amount equal
to the greater of (a) the amount of cash compensation earned by Executive in the
calendar year (whether or not paid in such calendar year) immediately preceding
the calendar year in which termination occurs, or (b) the then current annual
Base Salary and the guideline or annual target amount for the Executive for the
then current year pursuant to the bonus plan described in paragraph 3(b). Cash
compensation shall consist of (i) Executive's salary for such year and (ii) the
amount of any cash incentive compensation or bonus earned by the Executive in
such immediately preceding calendar year.
(iii) six hundred and seventy five dollars
($675) per month, payable monthly in advance, to enable the Executive to
purchase medical benefits.
(b) The Executive shall have the right to terminate this
Agreement during the one year period following a Change of Control or for Good
Reason and in that event the Company shall pay to the Executive:
(i) on the date of termination, the Base
Salary accrued to the date of termination and not theretofore paid to the
Executive.
(ii) within three weeks after the date of
termination severance pay, in the form of a lump sum payment in an amount equal
to the greater of (a) the amount of cash compensation earned by Executive in the
calendar year (whether or not paid in such calendar year) immediately preceding
the calendar year in which termination occurs, or (b) the then current annual
Base Salary and the guideline or annual target amount for the Executive for the
then current year pursuant to the bonus plan described in paragraph 3(b). Cash
compensation shall consist of (i) Executive's salary for such year and (ii) the
amount of any cash incentive compensation or bonus earned by the Executive in
such immediately preceding calendar year.
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(iii) a monthly stipend for a period of
eighteen months after the termination date of six hundred seventy five dollars
($675) to enable the Executive to purchase medical benefits.
(c) In the event of a termination pursuant to this paragraph
6(4), rights and benefits of the Executive, his estate or other legal
representative under the Executive benefit plans and programs of the Company, if
any, will be determined in accordance with the terms and provisions of such
plans and programs and neither the Executive nor the Company shall have any
further rights or obligations under this Agreement, except as provided in
Sections 7 and 8.
(d) For purposes of this Agreement, a Change in Control of the
Company shall be deemed to have occurred if:
(i) a "person" (meaning an individual, a
partnership, or other group or association as defined in Sections 13(d) and
14(d) the Securities Exchange Act of 1934), acquires thirty percent (30%) or
more of the combined voting power of the outstanding securities of the Company
having a right to vote in elections of directors, or
(ii) Continuing Directors shall for any reason cease
to constitute a majority of the Board of Directors of the Company; or
(iii) all or substantially all of the business
and/or assets of the Company is disposed of by the Company to a party or parties
other than a parent, subsidiary or other affiliate of the Company, pursuant to a
partial or complete liquidation of the Company, sale of assets (including stock
of a subsidiary of the Company) or otherwise.
For purposes of this Agreement, the term "Continuing Director"
shall mean a member of the Board of Directors of the Company who either was a
member of the Board of Directors of the Company on the date hereof or who
subsequently became a Director and whose election, or nomination for election,
was approved by a vote of at least two-thirds of the Continuing Directors then
in office.
(e) Good Reason. For purposes of this Agreement, "Good
Reason" means:
(i) (A) the assignment to the Executive of any duties
inconsistent in any respect with the Executive's position (including status,
offices, titles and reporting requirements), authority, duties or
responsibilities as contemplated by Section 2 of this Agreement, (B) any other
action by the Company which results in a diminution in such position, authority,
duties or responsibilities, other than an insubstantial and inadvertent action
which is remedied by the Company promptly after receipt of notice thereof given
by the Executive, (C) Irwin L. Gross shall resign or be removed as Chairman of
the Board of Directors of the Company, or (D) the principal office location of
the Executive is located more than 30 miles from both (i) 185 Monmouth Parkway,
West Long Branch, New Jersey, and (ii) 441 North 5th Street, Philadelphia, PA;
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(ii) any failure by the Company to comply with any of the
provisions of Section 3 of this Agreement, other than an insubstantial and
inadvertent failure which is remedied by the Company promptly after receipt of
notice thereof given by the Executive.
7. Confidential Information.
7.1 (a) The Executive shall, during the Executive's employment
with the Company and at all times thereafter, treat all confidential material
(as hereinafter defined) of the Company or any member of the Company Group (as
hereinafter defined) confidentially. The Executive shall not, without the prior
written consent of the Board of Directors of the Company, disclose such
confidential material, directly or indirectly, to any party, who at the time of
such disclosure is not an Executive or agent of any member of the Company Group,
or remove from the Company's premises any notes or records relating thereto,
copies or facsimiles thereof (whether made by electronic, electrical, magnetic,
optical, laser, acoustic or other means), or any other property of any member of
the Company Group. The Executive agrees that all confidential material, together
with all notes and records of the Executive relating thereto, and all computer
disks, copies or facsimiles thereof in the possession of the Executive (whether
made by the foregoing or other means) are the exclusive property of the Company.
The Executive shall not in any manner use any confidential material of the
Company Group, or any other property of any member of the Company Group, in any
manner not specifically directed by the Company or in any way which is
detrimental to any member of the Company Group, as determined by the Board of
Directors of the Company in its sole discretion.
(b) For the purposes hereof, the term Company Group,
shall mean collectively, the Company and the Company's subsidiaries, affiliates
and parent entities, and the term "confidential material" shall mean all
information in any way concerning the activities, business or affairs of any
member of the Company Group or any of the customers and clients of any member of
the Company Group, including, without limitation, information concerning trade
secrets, together with all sales and financial information concerning any member
of the Company Group and any and all information concerning projects in research
and development or marketing plans for any products or projects of the Company
Group, and all information concerning the practices, customers and clients of
any member of the Company Group, and all information in any way concerning the
activities, business or affairs of any of such customers or clients, as such,
which is furnished to the Executive by any member of the Company Group or any of
its agents, customers or clients, as such, or otherwise acquired by the
Executive in the course of the Executive's employment with the Company;
provided, however, that the term "confidential material" shall not include
information which (i) becomes generally available to the public other than as a
result of a disclosure by the Executive, (ii) was available to the Executive on
a non-confidential basis prior to his employment with any member of the Company
Group or (iii) becomes available to the Executive on a non-confidential basis
from a source other than any member of the Company Group or any of its agents,
customers or clients, as such, provided that such source is not bound by a
confidentiality agreement with any member of the Company Group or any of such
agents, customers or clients.
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7.2 Promptly upon the request of the Company, the Executive
shall deliver to the Company all confidential material relating to any member of
the Company Group in the possession of the Executive without retaining a copy
thereof, unless, in the opinion of counsel for the Company, either returning
such confidential material or failing to retain a copy thereof would violate any
applicable Federal, state, local or foreign law, in which event such
confidential material shall be returned without retaining any copies thereof as
soon as practicable after such counsel advises that the same may be lawfully
done.
7.3 In the event that the Executive is required, by oral
questions, interrogatories, requests for information or documents, subpoena,
civil investigative demand or similar process, to disclose any confidential
material relating to any member of the Company Group, the Executive shall
provide the Company with prompt notice thereof so that the Company may seek an
appropriate protective order and/or waive compliance by the Executive with the
provisions hereof; provided, however, that if in the absence of a protective
order or the receipt of such a waiver, the Executive is, in the opinion of
counsel for the Company, compelled to disclose confidential material not
otherwise disclosable hereunder to any legislative, judicial or regulatory body,
agency or authority, or else be exposed to liability for contempt, fine or
penalty or to other censure, such confidential material may be so disclosed.
8. Equitable Relief. In the event of a breach or threatened breach by
the Executive of any of the provisions of Section 7 of this Agreement, the
Executive hereby consents and agrees that the Company shall be entitled to
pre-judgment injunctive relief or similar equitable relief restraining the
Executive from committing or continuing any such breach or threatened breach or
granting specific performance of any act required to be performed by the
Executive under any of such provisions, without the necessity of showing any
actual damage or that money damages would not afford an adequate remedy and
without the necessity of posting any bond or other security. The parties hereto
hereby consent to the jurisdiction of the Federal courts for the Eastern
District of Pennsylvania and the state courts located in such District for any
proceedings under this Section 8. Nothing herein shall be construed as
prohibiting the Company from pursuing any other remedies at law or in equity
which it may have.
9. Indemnification. The Company shall indemnify the Executive to the
fullest extent permitted by the laws of the state of incorporation of the
Company, as amended from time to time, for all amounts (including, without
limitation, judgments, fines, settlement payments, expenses and attorney's fees)
incurred or paid by the Executive in connection with any action, suit,
investigation or proceeding arising out of or relating to the performance by the
Executive of services for, or acting by the Executive as a director, officer or
executive of, the Company or any other person or enterprise at the Company's
request, and shall to the fullest extent permitted by the laws of the state of
incorporation of the Company, as amended from time to time, advance all expenses
incurred or paid by the Executive in connection with, and until disposition of
any action, suit, investigation or proceeding arising out of or relating to the
performance by the Executive of services for, or acting by the Executive as a
director, officer or executive of, the Company or any other person or enterprise
at the Company's request.
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10. Successors and Assigns.
10.1 Assignment by the Company. The Company shall require any
successors (whether direct or indirect, by purchase, merger, consolidation or
otherwise) to all or substantially all of the business and/or assets of the
Company to assume and agree to perform this Agreement in the same manner and to
the same extent that the Company would be required to perform if no such
succession had taken place. As used in this Section, the "Company" shall mean
the Company as hereinbefore defined and any successor to its business and/or
assets as aforesaid which otherwise becomes bound by all the terms and
provisions of this Agreement by operation of law and this Agreement shall be
binding upon, and inure to the benefit of, the Company, as so defined.
10.2 Assignment by the Executive. The Executive may not assign
this Agreement or any part thereof without the prior written consent of the
Chairman of the Board of the Company; provided, however, that nothing herein
shall preclude one or more beneficiaries of the Executive from receiving any
amount that may be payable following the occurrence of his legal incompetency or
his death and shall not preclude the legal representative of his estate from
receiving such amount or from assigning any right hereunder to the person or
persons entitled thereto under his will or, in the case of intestacy, to the
person or persons entitled thereto under the laws of intestacy applicable to his
estate. The term "beneficiaries," as used in this Agreement, shall mean a
beneficiary or beneficiaries so designated to receive any such amount or, if no
beneficiary has been so designated, the legal representative of the Executive
(in the event of his incompetency) or the Executive's estate.
11. Governing Law. This Agreement shall be deemed a contract made
under, and for all purposes shall be construed in accordance with, the laws of
the State of New Jersey applicable to contracts to be performed entirely within
such State.
12. Entire Agreement. This Agreement contains all the understandings
and representations between the parties hereto pertaining to the subject matter
hereof and supersede all undertakings and agreements, whether oral or in
writing, if there be any, previously entered into by them with respect thereto.
No modification of this Agreement shall be effective unless in writing and
signed by the party against which enforcement is sought to be enforced.
13. Modification and Amendment; Waiver. The provisions of this
Agreement may be modified, amended or waived, but only upon the written consent
of the party against whom enforcement of such modification, amendment or waiver
is sought and then such modification, amendment or waiver shall be effective
only to the extent set forth in such writing. No delay or failure on the part of
any party hereto in exercising any right, power or remedy hereunder shall effect
or operate as a waiver thereof, nor shall any single or partial exercise thereof
or any abandonment or discontinuance of steps to enforce such right, power or
remedy preclude any further exercise thereof or of any other right, power or
remedy.
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14. Notices. All notices, requests or instructions hereunder shall be
in writing and delivered personally, sent by telecopier or sent by registered or
certified mail, postage prepaid, as follows:
If to the Company:
EA Industries, Inc.
185 Monmouth Parkway
West Long Branch, NJ 07764
Attn: Chairman of the Board
With a copy delivered in the same manner to:
Richard P. Jaffe, Esquire
Mesirov Gelman Jaffe Cramer & Jamieson
1735 Market Street
Philadelphia, PA 19103
If to the Executive:
1405 Dreshertown Road
Box 456
Dresher, PA 19025-0456
Any of the above addresses may be changed at any time by notice given as
provided above; provided, however, that any such notice of change of address
shall be effective only upon receipt. All notices, requests or instructions
given in accordance herewith shall be deemed received on the date of delivery,
if hand delivered or telecopied, and two business days after the date of
mailing, if mailed.
14. Severability. Should any provision of this Agreement be held by a
court of competent jurisdiction to be enforceable only if modified, such holding
shall not affect the validity of the remainder of this Agreement, the balance of
which shall continue to be binding upon the parties hereto with any such
modification to become a part hereof and treated as though originally set forth
in this Agreement. The parties further agree that any such court is expressly
authorized to modify any such unenforceable provision of this Agreement in lieu
of severing such unenforceable provision from this Agreement in its entirety,
whether by rewriting the offending provision, deleting any or all of the
offending provision, adding additional language to this Agreement, or by making
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such other modifications as it deems warranted to carry out the intent and
agreement of the parties as embodied herein to the maximum extent permitted by
law. The parties expressly agree that this Agreement as so modified by the court
shall be binding upon and enforceable against each of them. In any event, should
one or more of the provisions of this Agreement be held to be invalid, illegal
or unenforceable in any respect, such invalidity, illegality or unenforceability
shall not affect any other provisions hereof, and if such provision or
provisions are not modified as provided above, this Agreement shall be construed
as if such invalid, illegal or unenforceable provisions had never been set forth
herein.
15. Withholding. Anything to the contrary notwithstanding, all payments
required to be made by the Company hereunder to the Executive or his
beneficiaries, including his estate, shall be subject to withholding of such
amounts relating to taxes as the Company may reasonably determine it should
withhold pursuant to any applicable law or regulation. In lieu of withholding
such amounts, in whole or in part, the Company, may, in its sole discretion,
accept other provision for payment of taxes as permitted by law, provided it is
satisfied in its sole discretion that all requirements of law affecting its
responsibilities to withhold such taxes have been satisfied.
16. Survivorship. The respective rights and obligations of the parties
hereunder shall survive any termination of this Agreement to the extent
necessary to the intended preservation of such rights and obligations.
17. Expenses. Each of the parties hereto shall bear his or its own
costs and expenses, including attorneys' fees and disbursements, incurred in
connection with this Agreement and the transactions contemplated hereby.
18. Titles. Titles of the sections of this Agreement are intended
solely for convenience and no provision of this Agreement is to be construed by
reference to the title of any section.
19. Counterparts. This Agreement may be executed in counterparts, each
of which shall be deemed an original, but all of which taken together shall
constitute one and the same instrument.
<PAGE>
* * *
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement on the date first above written.
EA Industries, Inc.
By:
----------------------------
--------------------------------
Jules M. Seshens
NEITHER THE NOTE NOR ANY SHARES OF COMMON STOCK ISSUABLE UPON CONVERSION
THEREOF HAVE BEEN OR WILL BE REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "SECURITIES ACT") OR ANY STATE SECURITIES LAWS, EXCEPT AS EXPRESSLY
PROVIDED IN THE NOTE, AND MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED,
HYPOTHECATED, OR OTHERWISE TRANSFERRED IN THE ABSENCE OF (A) AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE SECURITIES ACT AND ANY APPLICABLE STATE
SECURITIES LAWS, OR (B) AN OPINION OF COUNSEL ACCEPTABLE TO COUNSEL FOR THE
ISSUER THAT SUCH REGISTRATION IS NOT REQUIRED AND THAT THE PROPOSED TRANSFER MAY
BE MADE WITHOUT VIOLATION OF THE SECURITIES ACT AND ANY APPLICABLE STATE
SECURITIES LAW.
SUBSCRIPTION AGREEMENT
This Subscription Agreement ("Agreement"), made as of ___________________, 1997
and effective as set forth herein, by (i) the undersigned subscriber
("Subscriber"), on the one hand, and (ii) EA Industries, Inc., a New Jersey
corporation ("EA", "Seller ", or the "Company") and Tanon Manufacturing, Inc.
("Tanon"), on the other hand, will confirm the complete understanding and
agreement among the parties with respect to the following.
1. Purchase, Sale and Delivery of Notes.
(a) Upon the terms and conditions herein set forth, and on the basis of
the respective representations herein contained, Subscriber hereby subscribes
for and agrees to purchase from the Seller, 10% Series A Convertible Notes
("Notes") of Seller in the form of, and containing the terms set forth in,
Exhibit "A" attached hereto. The principal amount of the Notes subscribed for by
Subscriber, the purchase price to be paid by Subscriber ("Purchase Price") are
set forth in Schedule 1 annexed hereto (the "Schedule") (Notes and shares of
Common Stock of Tanon or Seller ("Shares") which are issued or issuable upon
conversion of the Notes, are sometimes hereinafter collectively referred to as
"Securities").
(b) The Subscriber shall pay the Purchase Price by wire transfer to EA
Industries, Account No. 2 492 056, Mellon Bank, ABA # 031000047, Bank Location:
1735 Market Street, Philadelphia, Pa. 19103. In addition, the Subscriber should
return two executed, completed copies of this Subscription Agreement promptly to
EA Industries, Inc., 441 North Fifth Street, Philadelphia, Pa. 19123, Attention:
Stanley O. Jester.
The Company expects to hold an initial closing (the "Initial Closing")
promptly after it accepts subscriptions to purchase Notes aggregating $500,000,
and may hold one or more additional closings thereafter (each, a "Subsequent
Closing" and, collectively with the Initial Closing, the "Closings") until the
earlier of (i) February 28, 1997 (the "Termination Date") or (ii) the date on
which the Company has accepted subscriptions to purchase an aggregate of up to
$6,000,000 principal amount of Notes. The Company reserves the right to extend
the Termination Date by thirty days in its sole discretion. Subject to the
Company's acceptance of this subscription, in whole or in part, the Company
shall issue all or some Notes subscribed for hereby, as the case may be (such
Notes which the Company shall have accepted subscriptions for, the "Subject
Notes"). At any Closing with respect to the Subject Notes, the Company shall
issue to the Subscriber the Notes, dated the closing date, and deliver to the
Subscriber a fully executed copy of this Subscription Agreement. If the Company
does not accept this subscription, in whole or in part, it will to refund to the
Subscriber, without deduction therefrom or interest thereon, any subscription
payment received from the Subscriber for Notes other than the Subject Notes.
(c) The Subscriber understands that the proceeds will be used for working
capital purposes of Seller and/or Tanon.
<PAGE>
(d) Upon Closing, Certificates in the form of Exhibit "A" evidencing the
Notes shall be delivered by the Seller to the Subscriber.
2. Representations and Covenants of Subscriber. Subscriber hereby represents,
warrants and covenants to the Seller and Tanon as follows:
(a) Subscriber has full power and lawful authority to execute and deliver
this Agreement and to purchase the Notes in accordance with the terms hereof and
this Agreement constitutes the legally valid and binding agreement of
Subscriber;
(b) The execution and delivery of this Agreement and the consummation of
the sale of the Notes and the transactions contemplated hereby do not and will
not conflict with or result in the breach by Subscriber of any of the terms or
provisions of, or constitute a default under, any indenture, mortgage, deed of
trust or other material agreement or instrument to which the Subscriber is a
party or by which Subscriber or any of the Subscriber's properties or assets are
bound, or any existing applicable law, rule or regulation or any applicable
decree, judgment or order of any court, regulatory body, administrative agency
or other governmental body having jurisdiction over any of Subscriber's
properties or assets;
(c) Subscriber has made its own investigation of EA and Tanon and their
business prospects and of the risks associated with an investment in Tanon's and
Seller's Securities and has received, read and understands the information
contained in the Exhibit "B" attached hereto consisting of (i) the 1995 Annual
Report of EA, (ii) Form 10-Q of EA for the period ended March 30, 1996,
(iii) Form 10-Q of EA for the period ended June 29, 1996, (iv) Form 10-QA of EA
for the period ended September 28, 1996, (v) Amendment No. 1 to Form S-3
Registration Statement of EA, Registration No. 333-12691, and (vi) Proxy
Statement of EA dated April 29, 1996 (the "SEC Filings") and acknowledges that
no representation or warranty with respect to Tanon's or Seller's business
prospects has been made in this Agreement by or on behalf of EA or Seller. Tanon
and the Seller strongly advise you to review their business, properties and
affairs before entering into this Subscription Agreement or buying the Subject
Notes.
(d) Subscriber is acquiring the Notes for his own account, for investment
only, and not with a view toward resale or distribution in a manner that would
require registration under the Securities Act of 1933, as amended (the
"Securities Act"), or any applicable state securities laws, and that he will not
sell or otherwise transfer the Notes or the underlying Shares, except in
compliance with state and federal law;
(e) Subscriber has, either alone or together with his Purchaser
Representative, if any, such knowledge and experience in financial and business
matters that he (or they) is (are) capable of evaluating the merits and risks of
his investment in the Securities;
(f) Subscriber is able to bear the economic risk of losing his entire
investment in the Securities;
(g) Subscriber's overall commitment to investments which are not readily
marketable is not disproportionate to his net worth and current and foreseeable
needs, and his investment in the Securities will not cause such overall
commitment to become excessive;
(h) That (i) if a natural person, Subscriber is at least twenty-one (21)
years of age, (ii) he has adequate means of providing for his current and
foreseeable needs and personal contingencies, (iii) he is aware that no market
exists or may exist for the resale of the Notes or the underlying Shares and he
has no need for liquidity in his investment in the Notes or the underlying
Shares, (iv) he maintains his domicile (and is not a transient or temporary
resident) at the address shown on the Schedule, (v) all of his
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investments in and commitments to non-liquid investments are, and after his
purchase of the Notes and the underlying Shares will be, reasonable in relation
to the undersigned's net worth and current and foreseeable needs and (vi) the
personal financial information provided by the undersigned accurately reflects
his financial condition, with respect to which he does not anticipate any
material adverse changes;
(i) Subscriber agrees and understands that Seller shall have the right, in
its sole discretion, to accept or reject this subscription, in whole or in part,
at any time prior to Closing or the Termination Date, or to allocate to him only
part of the Notes for which he has subscribed. Seller will notify him whether
this subscription is accepted or rejected. In the event his subscription is
rejected, his payment will be returned to him, without interest, and all of his
obligations hereunder shall terminate;
(j) Subscriber agrees, acknowledges and understands that neither the Notes
nor the underlying Shares have been registered under the Securities Act of 1933,
as amended, or the securities law of any state and, as the result thereof, is
subject to substantial restrictions on transfer, which restrictions are
described herein;
(k) Subscriber agrees and understands that he will not sell or otherwise
transfer any Securities or any interest therein except pursuant to an effective
registration statement under the Securities Act and applicable state law or
unless the Subscriber provides Seller with an opinion of counsel which is
reasonably satisfactory to counsel for Seller (both as to the issuer of the
opinion and the form and substance thereof) that the transfer of Security:
(i) may be effected without registration under the Securities Act, and (ii) does
not cause the violation of any state securities law (including any investment
suitability standards) applicable to Seller.
(l) Subscriber may be precluded from selling or otherwise transferring or
disposing of any Securities, or any portion thereof for an indefinite period of
time or at any particular time and may, therefore, have to bear the economic
risk of investment in the Securities for an indefinite period;
(m) Subscriber understands that an investment in Tanon or Seller involves
certain risks and has taken full cognizance of and understands all of the risk
factors relating to the purchase of Notes and the underlying Shares upon
conversion;
(n) Subscriber understands that no federal or state agency has approved or
disapproved the Notes or the underlying Shares upon conversion, passed upon or
endorsed the merits of the offering thereof, or made any finding or
determination as to the fairness of the Notes or the underlying Shares upon
conversion for investment;
(o) Subscriber acknowledges that Seller has made available to him and his
Purchaser Representative, if any, the opportunity to ask questions of, and
receive answers from, Seller concerning the terms and conditions of the offering
and to obtain any additional information, to the extent that Seller or any
officer thereof possesses such information, or can acquire it without
unreasonable effort or expense, necessary to verify the accuracy of the
information given to him or otherwise to make an informed investment decision;
(p) Subscriber acknowledges that, if he has used the services of a
Purchaser Representative in connection with his investment in Seller, his
Purchaser Representative has disclosed, by submitting to him a Purchaser
Representative's Letter, in the form given to him by Seller, any material
relationship between such Purchaser Representative or his affiliates and Seller
and its affiliates, which now exists or mutually is understood to be
contemplated or which has existed at any time during the previous two (2)
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years, and further setting forth any compensation received or to be received as
a result of such relationship;
(q) SUBSCRIBER ACKNOWLEDGES THAT HE UNDERSTANDS THAT IF HE IS A
PENNSYLVANIA RESIDENT, HE HAS THE RIGHT TO CANCEL AND WITHDRAW THIS SUBSCRIPTION
AGREEMENT AND HIS PURCHASE OF NOTES WITHOUT INCURRING ANY LIABILITY TO SELLER,
UNDERWRITER (IF ANY) OR ANY OTHER PERSON, UPON WRITTEN NOTICE TO SELLER GIVEN
WITHIN TWO BUSINESS DAYS FOLLOWING THE DATE OF RECEIPT BY SELLER OF HIS WRITTEN
BINDING CONTRACT FOR THE PURCHASE OF THE NOTES, OR IF THERE IS NO WRITTEN
BINDING CONTRACT OF PURCHASE FOR THE NOTES, TWO BUSINESS DAYS AFTER HE MAKES THE
INITIAL PAYMENT FOR THE NOTES BEING OFFERED. UPON SUCH CANCELLATION OR
WITHDRAWAL, HE WILL HAVE NO OBLIGATION OR DUTY UNDER THIS SUBSCRIPTION AGREEMENT
TO SELLER, OR TO ANY OTHER PERSON AND WILL BE ENTITLED TO THE FULL RETURN OF ALL
MONIES PAID BY HIM PURSUANT TO THIS SUBSCRIPTION AGREEMENT. THE UNDERSIGNED
FURTHER ACKNOWLEDGES THAT HE UNDERSTANDS THAT ANY NOTICE OF CANCELLATION OR
WITHDRAWAL SHOULD BE MADE BY TELEGRAPH OR CERTIFIED OR REGISTERED MAIL, RETURN
RECEIPT REQUESTED, POSTAGE OR OTHER TRANSMITTAL FEES PAID, AND SHOULD BE SENT
AND POSTMARKED BY THE END OF THE AFOREMENTIONED SECOND BUSINESS DAY. THE
UNDERSIGNED FURTHER ACKNOWLEDGES THAT HE UNDERSTANDS THAT IF HE MAKES HIS
REQUEST TO WITHDRAW ORALLY, HE SHOULD ASK FOR WRITTEN CONFIRMATION THAT THE
REQUEST HAS BEEN RECEIVED;
(r) SUBSCRIBER ACKNOWLEDGES AND AGREES THAT IF HE IS A PENNSYLVANIA
RESIDENT, HE MAY NOT RESELL ANY OF THE NOTES OR UNDERLYING SHARES UPON
CONVERSION FOR A PERIOD OF 12 MONTHS FROM AND AFTER THE DATE OF PURCHASE, EXCEPT
IN ACCORDANCE WITH REGULATION SECTION 204.011 PROMULGATED UNDER THE PENNSYLVANIA
SECURITIES ACT OF 1972;
(s) SUBSCRIBER ACKNOWLEDGES THAT IF HE IS A NEW YORK RESIDENT, NEITHER
THIS SUBSCRIPTION AGREEMENT NOR ANY OTHER OFFERING MATERIAL HAS BEEN FILED WITH
OR REVIEWED BY THE ATTORNEY GENERAL OF THE STATE OF NEW YORK PRIOR TO ITS
ISSUANCE AND USE AND THAT THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT
PASSED ON OR ENDORSED THE MERITS OF THE OFFERING;
(t) SUBSCRIBER ACKNOWLEDGES THAT IF HE IS A NEW JERSEY RESIDENT, NEITHER
THE ATTORNEY GENERAL OF THE STATE OF NEW JERSEY NOR THE BUREAU OF SECURITIES OF
THE STATE OF NEW JERSEY HAS PASSED ON OR ENDORSED THE MERITS OF THE NOTES OR THE
OFFERING THEREOF. THIS SUBSCRIPTION AGREEMENT HAS NOT BEEN FILED WITH OR
OTHERWISE APPROVED BY THE BUREAU OF SECURITIES OF THE STATE OF NEW JERSEY:
(u) Subscriber is an "Accredited Investor" as such term is defined in
Section 2(15) of the Securities Act of 1933 (the "Act") and Rule 501 of
Regulation D promulgated by the Securities and Exchange Commission under the
Securities Act. Specifically, the Subscriber is (check appropriate items:
___________(i) A bank defined in Section 3(a)(2) of the Act, or a savings and
loan association or other institution as defined in Section 3(a)(5)(A) of the
Act, whether acting in its individual or fiduciary capacity; a broker or dealer
registered pursuant to Section 15 of the Securities Exchange Act of 1934; an
insurance company as defined in Section 2(13) of the Act; an investment company
registered under the Investment Company Act of 1940 (the "Investment Company
Act") or a business development company
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as defined in Section 2(a)(48) of the Investment Company Act; a Small Business
Investment Company licensed by the U.S. Small Business Administration under
Section 301(c) or (d) of the Small Business Investment Act of 1958; a plan
established and maintained by a state, its political subdivisions or any agency
or instrumentality of a state or its political subdivisions for the benefit of
its employees, if such plan has total assets greater than $5,000,000; an
employee benefit plan within the meaning of the Employee Retirement Income
Security Act of 1974 ("ERISA"), if the investment decision is made by a plan
fiduciary, as defined in Section 3(21) of ERISA, which is either a bank, savings
and loan association, insurance company, or a registered investment advisor, or
if the employee benefit plan has total assets greater than $5,000,000 or, if a
self-directed plan, with investment decisions made solely by persons that are
accredited investors.
___________(ii) A private business development company as defined in Section
202(a)(22) of the Investment Advisors Act of 1940.
___________(iii) An organization described in Section 501(c)(3) of the Internal
Revenue Code, corporation, Massachusetts or similar business trust, or
partnership, not formed for the specific purpose of acquiring the securities
offered, with total assets greater than 5,000,000.
___________(iv) A director or executive officer of the Company.
___________(v) A natural person whose individual net worth, or joint net worth
with that person's spouse, at the time of his or her purchase exceeds
$1,000,000. (California and Massachusetts residents: If the Subscriber is a
California resident, its investment in EA and/or the Seller will not exceed 10%
of its net worth (or joint net worth with his spouse). If the Subscriber is a
Massachusetts resident, its investment in EA and/or the Seller will not exceed
25% of its joint net worth with his spouse (exclusive of principal residence and
its furnishings).
__________(vi) A natural person who had an individual income greater than
$200,000 in each of the two most recent years or joint income with that person's
spouse greater than $300,000 in each of those years and has a reasonable
expectation of reaching the same income level in the current year. (California
and Massachusetts residents: please see Paragraph 2(u)(v) above)
___________(vii) A trust, with total assets greater than $5,000,000 not formed
for the specific purpose of acquiring the securities offered, whose purchase is
directed by a sophisticated person as described in Rule 506(b)(2)(ii) (i.e., a
person who has such knowledge and experience in financial and business matters
that he is capable of evaluating the merits and risks of the prospective
investment.)
__________(viii) An entity in which all of the equity owners are accredited
investors. (If this alternative is checked, the Subscriber must identify each
equity owner and provide statements signed by each demonstrating how each is
qualified as an accredited investor.)
(v) If the Subscriber is a corporation, trust, partnership or other
entity, it was not formed for the specific purpose of acquiring the Notes;
(w) Subscriber agrees and understands that he is not entitled to cancel,
terminate or revoke this subscription or any agreement hereunder, except as set
forth elsewhere herein;
(x) Subscriber has relied solely upon his own knowledge and experience, or
that of his personal advisors, in determining the economic and tax benefits, if
any, of the investment with respect to
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his individual economic and tax situation and in determining the tax
consequences to him of being an investor in EA or Seller;
(y) Subscriber understands that the Notes are being offered and sold in
reliance on specific exemptions from the registration requirements of federal
and state securities laws and that Seller and controlling persons thereof are
relying upon the truth and accuracy of the representations, warranties,
covenants, agreements, acknowledgments, and understandings set forth herein in
order to determine the applicability of such exemptions and the suitability of
the Subscriber to acquire such Notes;
(z) Subscriber acknowledges that, if he is purchasing the Notes subscribed
for hereby in a fiduciary capacity, the above representations, warranties,
covenants, agreements, acknowledgments and understandings in this Paragraph 2
shall be deemed to have been made on behalf of the person or persons for whom he
is so purchasing.
(aa) THE SUBSCRIBER UNDERSTANDS THAT THE CONVERSION OF THE NOTE INTO
EITHER SHARES OF COMMON STOCK OF TANON OR SELLER IS EXPRESSLY CONDITIONED UPON,
AMONG OTHER THINGS, IN EACH CASE UPON (i) SUFFICIENT AUTHORIZED, UNISSUED AND
UNRESERVED COMMON STOCK OF THE ISSUER OF SUCH SHARES TO PERMIT SUCH CONVERSION,
AND (ii) OFFICIAL NOTICE OF THE LISTING (THE "LISTING") OF SUCH SHARES ON THE
NEW YORK STOCK EXCHANGE OR THE NASDAQ NATIONAL MARKET SYSTEM, IF APPLICABLE. IN
THE EVENT THERE IS INSUFFICIENT AUTHORIZED, UNISSUED AND UNRESERVED COMMON STOCK
OF THE ISSUER OF THE SHARES TO BE ACQUIRED UPON CONVERSION OR SUCH LISTING OF
THE SHARES TO BE ACQUIRED UPON CONVERSION DOES NOT OCCUR, THE NOTE SHALL NOT BE
CONVERTIBLE INTO SUCH SHARES.
3. Representations of Seller and Tanon. Seller and Tanon, jointly and severally,
represent and warrant to Subscriber that:
(a) EA is an issuer (other than an investment company registered or
required to register under the U.S. Investment Company Act of 1940, as amended)
that (i) has a class of securities registered pursuant to Section 12(b) or 12(g)
of the Securities and Exchange Act of 1934, as amended (the "Exchange Act"), or
is required to file reports pursuant to Section 15(d); and (ii) has timely filed
all material required to be filed by it pursuant to Section 13(a) or 15(d) of
the Exchange Act for at least the twelve (12) months immediately preceding the
date hereof.
(b) Subject to Paragraph 2(aa) hereof, Tanon and the Seller presently
have, and as of the Closing will have, full legal right, power and capacity and
all necessary consents, approvals and authorizations as may be required to
execute and deliver this Agreement and to issue and sell the Notes and the
underlying Shares to Subscriber pursuant hereto and thereto and in the manner
contemplated hereby and thereby;
(c) When delivered pursuant hereto, the Notes will be duly and validly
authorized and issued, and free and clear of any and all liens, charges,
restrictions (except as may be imposed by U.S. federal and state securities
laws), claims and encumbrances;
(d) Assuming compliance by the Holder with the terms of the conversion
provisions of the Notes, the Shares of Common Stock when delivered pursuant to a
conversion of the Notes will be duly and validly authorized and issued, and free
and clear of any and all liens, charges, restrictions (except as may be imposed
by U.S. federal and state securities laws), claims and encumbrances;
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(e) EA is a corporation duly incorporated, validly existing and in good
standing under the laws of the State of New Jersey and Seller is a corporation
duly incorporated, validly existing and in good standing under the laws of the
State of California;
(f) When executed and delivered by Seller and Tanon, this Agreement will
be duly and validly executed and delivered by Seller and Tanon and will be
Tanon's and Seller's legally binding obligation enforceable against each of them
in accordance with its terms, except to the extent that: (i) such enforcement
may be limited by bankruptcy, insolvency or similar laws now or hereafter in
effect relating to creditors' rights and remedies generally; and (ii) the remedy
of specific performance and injunctive and other forms of equitable relief may
be subject to equitable defenses and to the discretion of the court before which
any proceeding therefor may be brought;
(g) The execution and delivery of this Agreement and the consummation of
the issuance of the Notes and the transactions contemplated hereby do not and
will not conflict with or result in the breach by Seller or Tanon of any of the
terms or provisions of, or constitute a default under, any indenture, mortgage,
deed of trust or other material agreement or instrument to which Tanon or Seller
is a party or by which Seller or Tanon or any of their properties or assets are
bound, or any existing applicable law, rule or regulation or any applicable
decree, judgment or order of any court, Federal or State regulatory body,
administrative agency or other governmental body having jurisdiction over any of
Tanon's or Seller's properties or assets;
(h) There are no preemptive rights, rights of first refusal, repurchase
rights or any other right of EA or Seller or any third party as to the Notes,
except as described in the Notes;
4. Indemnification. The Subscriber acknowledges that he understands the meaning
of the representations, warranties, covenants, agreements, acknowledgments and
understandings made by him in this Subscription Agreement and hereby agrees to
indemnify and hold harmless Seller and Tanon, and each shareholder, officer,
director, employee or agent of any of the foregoing, from and against any and
all losses, costs, expenses, damages, liabilities and interest (including,
without limitation, court costs and attorneys' fees) arising out of or due to a
breach by the Subscriber or any inaccuracy or incompleteness, of any such
representations, warranties, covenants, agreements, acknowledgments or
understandings contained herein. All such representations, warranties,
covenants, agreements, acknowledgments and understandings contained herein shall
survive the delivery of this Subscription Agreement and the purchase by the
undersigned of any Notes or underlying Shares.
5. Effective Date. This Agreement shall become effective upon the date signed by
Tanon, Seller and the Subscriber.
6. Governing Law. This Agreement shall be construed and enforced in accordance
with the laws of the State of New Jersey without regard to the conflicts of laws
rules thereof.
7. Presumption. In interpreting the terms of this Agreement, no presumption
shall arise as a result of the role of any party in the drafting of this
Agreement.
8. Counterparts and Facsimile. This Agreement may be executed on facsimile
copies in two (2) or more counterparts, each of which shall be deemed an
original, but all of which together shall constitute one and the same
instrument.
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9. No Assignment. The undersigned agrees not to transfer or assign this
Subscription Agreement or any interest of the undersigned in the subscription in
the Notes hereunder. Any attempted transfer or assignment shall be void and
without force or effect.
10. Binding Agreement; Survival. This Subscription Agreement (a) shall be
binding upon the undersigned and the heirs, executors, administrators, personal
representatives and successors of the undersigned, (b) shall survive the
purchase of the Notes and the underlying Shares, and (c) shall, if the
undersigned consists of more than one person, be the joint and several
obligation of all such persons. For purposes of this Subscription Agreement, the
singular shall include the plural and the plural shall include the singular, and
the masculine shall include the feminine and the neuter, as the context may
require.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first written above.
"Subscriber"
[Insert Name]
By:________________________________
Tanon Manufacturing, Inc.
By:________________________________
"Seller"
EA Industries, Inc.
By:________________________________
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SCHEDULE 1
TO THE
SUBSCRIPTION AGREEMENT
1. Principal Amount of Notes: _________________ Dollars ($--------)
2. Total Purchase Price: _________________ Dollars ($---------)
3. Name and Address of Subscriber: ______________________________
______________________________
______________________________
4. Social Security Number or Employer
Identification Number of Subscriber ______________________________
5. Number of certificates: _______________________________
6. Denominations: __________________ Dollars ($-------)
7. Name appearing on Notes: ____________________________
8. Delivery method for Notes: Federal Express
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<PAGE>
NEITHER THIS NOTE, NOR THE SHARES OF COMMON STOCK ISSUABLE UPON CONVERSION
HEREOF HAVE BEEN OR WILL BE REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, (THE "SECURITIES ACT") OR ANY STATE SECURITIES LAWS, EXCEPT AS
EXPRESSLY PROVIDED HEREIN, AND MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED,
HYPOTHECATED, OR OTHERWISE TRANSFERRED IN THE ABSENCE OF (A) AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE SECURITIES ACT AND ANY APPLICABLE STATE
SECURITIES LAWS, OR (B) AN OPINION OF COUNSEL ACCEPTABLE TO COUNSEL FOR THE
ISSUER THAT SUCH REGISTRATION IS NOT REQUIRED AND THAT THE PROPOSED TRANSFER MAY
BE MADE WITHOUT VIOLATION OF THE SECURITIES ACT AND ANY APPLICABLE STATE
SECURITIES LAW.
No. ___________, 1997
$ ________________
EA INDUSTRIES, INC.
10% SERIES A CONVERTIBLE NOTE
DUE JANUARY 22, 1999
EA INDUSTRIES, INC. (the "Company"), a New Jersey corporation, for value
received, and intending to be legally bound, hereby promises to pay to the order
of ______________, or its registered assigns, the principal amount of
____________________ ($_________) on January 22, 1999 ("Maturity Date"), with
interest from the date hereof (computed on the basis of a 360-day year of twelve
30-day months) payable in arrears on January 15, 1998 and on the Maturity Date,
on the unpaid principal balance at the rate of 10% per annum until such unpaid
principal balance shall become due and payable (whether at maturity or by
acceleration or otherwise). Overdue principal payments and (to the extent
permitted by applicable law) any overdue interest shall accrue interest at
eighteen percent (18%) per annum until paid, which interest shall be payable on
demand. This Note is one of a number of 10% Series A Convertible Notes issued by
the Company in a private placement of up to $6,000,000 aggregate principal
amount of 10% Series A Convertible Notes (this Note and such other 10% Series A
Convertible Notes are collectively referred to herein as the "10% Series A
Convertible Notes"). The terms and conditions of all 10% Series A Convertible
Notes shall be identical in all respects and all 10% Series A Convertible Notes
shall rank pari passu.
Payments of principal and interest on this Note shall be made in lawful money
of the United States of America by delivery of a check to the address provided
by the payee as shown on the Note Register. The Company may treat the person in
whose name this Note is registered (the "Holder") on the Note Register kept by
the Company as the owner of this Note for the purpose of receiving payment and
for all other purposes, and the Company shall not be affected by any notice to
the contrary. This Note is transferable only (i) in accordance with the terms
hereof and (ii) by surrender thereof at the office of the Company at 185
Monmouth Parkway, West Long Branch, New Jersey, duly endorsed or accompanied by
a written instrument duly executed by the Holder of this Note or his attorney
duly authorized in writing.
The Company shall have the right, exercisable on not less than 15 days
written notice to the Holder, at any time after the date hereof, to prepay the
unpaid principal balance under this Note in whole or in any part, without
penalty or premium and with the interest due to the date of prepayment,
provided, however, that the Company shall at the same time prepay an equal
unpaid principal amount of all other outstanding 10% Series A Convertible Notes.
Any notice of prepayment shall be delivered to the Holder at its registered
address appearing on the
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records of the Company and shall state (1) that the Company is exercising its
right to prepay all or a portion of the principal of this Note, (2) the
principal amount to be repaid and (3) the date of prepayment. Upon the
prepayment of less than the entire unpaid principal amount of this Note, a new
Note containing the same date and provisions as this Note shall be issued by the
Company to the Holder for the principal balance of this Note which shall not
have been prepaid. In addition to, and not in limitation of, the foregoing, in
the event of an equity or debt financing conducted by the Company after the date
hereof, the Company shall, promptly following receipt thereof, apply fifty
percent (50%) of the amount, if any, by which the aggregate net proceeds
received by the Company from any such equity or debt financing exceeds twenty
million dollars ($20 Million), to the repayment of outstanding principal and
interest on all 10% Series A Convertible Notes, pari passu, to each holder's 10%
Series A Convertible Note. This provision shall not apply to equity or debt
financings to the extent that proceeds from such financings are utilized for
acquisitions of other businesses.
The Holder shall have the option to have interest payments made to it in
fully paid and non-assessable shares of Common Stock of EA ("EA Shares") or
fully-paid and non-assessable shares of Common Stock of the Tanon Manufacturing,
Inc. ("Tanon Shares"). The terms EA Shares and Tanon Shares are sometimes
collectively referred to herein as the "Shares." This option may be exercised on
any one or more of the dates interest is payable under this Note by delivery of
written notice to the Company at least fifteen (15) days before such payment
date. If this option is elected, EA or the Company shall issue and dispatch to
the Holder one or more Certificates for the aggregate number of whole Shares of
Common Stock of EA or the Company determined by dividing the Conversion Price
(determined pursuant to paragraph 2 as if the Holder was converting a portion of
the principal of this Note) into the total amount of lawful money of the United
States of America which the Holder would have received if the aggregate amount
of interest on this Note which is being paid in EA Shares or Tanon Shares were
being paid in such lawful money. No fractional shares will be issued in payment
of interest on this Note. In lieu thereof, the Holder may be issued a number of
Shares which reflects a rounding up to the next whole number or may be paid in
lawful money of the United States of America.
NOTWITHSTANDING THE FOREGOING, PAYMENT OF INTEREST IN EITHER EA SHARES OR
TANON SHARES IS EXPRESSLY CONDITIONED IN EACH CASE UPON (i) SUFFICIENT
AUTHORIZED, UNISSUED AND UNRESERVED COMMON STOCK OF THE ISSUER OF SUCH SHARES TO
PERMIT SUCH PAYMENT, (ii) IN THE CASE OF PAYMENT IN TANON SHARES, COMPLETION OF
AN INITIAL PUBLIC OFFERING OF THE COMMON STOCK OF THE COMPANY PRIOR TO SUCH
PAYMENT, (iii) OFFICIAL NOTICE OF THE LISTING (THE "LISTING") OF SUCH SHARES ON
THE NEW YORK STOCK EXCHANGE OR THE NASDAQ NATIONAL MARKET SYSTEM, IF APPLICABLE,
PRIOR TO SUCH PAYMENT, AND (iv) COMPLIANCE WITH ALL FEDERAL AND STATE SECURITIES
LAWS AND REGULATIONS. IN THE EVENT (i) THERE IS INSUFFICIENT AUTHORIZED,
UNISSUED AND UNRESERVED COMMON STOCK OF THE ISSUER OF THE SHARES TO BE ACQUIRED
UPON AN INTEREST PAYMENT DATE, (ii) IN THE CASE OF PAYMENT IN TANON SHARES, THE
COMPANY HAS NOT COMPLETED AN INITIAL PUBLIC OFFERING OF ITS COMMON STOCK PRIOR
TO AN INTEREST PAYMENT DATE, (iii) SUCH LISTING OF THE SHARES TO BE ACQUIRED
UPON AN INTEREST PAYMENT DATE DOES NOT OCCUR PRIOR TO SUCH DATE, OR (iv) THE
ISSUER OF THE SHARES TO BE ACQUIRED UPON AN INTEREST PAYMENT DATE IS UNABLE TO
COMPLY WITH ALL FEDERAL AND STATE SECURITIES LAWS IN ISSUING SUCH SHARES, SUCH
INTEREST PAYMENT SHALL BE MADE IN U.S. DOLLARS.
1. Restrictions on Transfer of Securities. By accepting this Note, the Holder
hereby acknowledges that, except as expressly set forth herein, neither this
Note nor any Shares issuable in the event of conversion have been, or will be,
registered under the Securities Act of 1933, as amended (the "Securities Act"),
or any state securities laws and represents for himself and his legal
representative that he is acquiring this Note and will acquire any Shares
(hereinafter defined) issued upon conversion hereof, for his own account, for
investment purposes only and not with a view to, or for sale in connection with,
any distribution of such securities, and agrees to reaffirm in writing this
investment representation at the time of exercise of the conversion right set
forth below, subject to the Company's agreement to register the Shares as set
forth in Section 4 below. The Holder shall not
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transfer this Note or any Shares (or any interest therein) until (i) it shall
have first given written notice to the Company describing the manner of any such
proposed transfer, and (ii) either (a) the Company has received from Holder's
counsel an opinion satisfactory to the Company and its counsel that such
transfer may be made without compliance with the registration provisions of the
Securities Act and that the proposed transfer may be made without violation of
the Securities Act and any applicable state securities law, or (b) a
registration statement filed by the Company covering the Note or Shares to be
transferred is in effect under the Securities Act and there has been compliance
with the applicable state securities laws.
2. Conversion of Note. This Note may be converted into shares of Common Stock of
Tanon Manufacturing, Inc., a California corporation ("Tanon"), or the Company,
as follows:
(a) Conversion. Subject to and upon compliance with the provisions of this
section captioned "Conversion of Note", at the option of the Holder, at any time
after January 1, 1998 and prior to the close of business on the Maturity Date,
the unpaid principal balance of the Note may be converted in whole, or from time
to time in part, into EA Shares, at a conversion price per EA Share equal to
$3.50 ("EA Conversion Price").
Subject to and upon compliance with the provisions of this section
captioned "Conversion of Note", at the option of the Holder, at any time after
closing of an initial public offering of the Common Stock of Tanon and prior to
the close of business on the Maturity Date, the unpaid principal balance of the
Note may be converted in whole, or from time to time in part, into Tanon Shares
at a conversion price per Tanon Share equal to the quotient of (i) twenty five
million dollars ($25 million), divided by (ii) the number of shares of Common
Stock of Tanon that were issued and outstanding at the close of business on the
day immediately prior to the effective date of the registration statement
covering the shares of Common Stock of Tanon offered in such initial public
offering, without giving effect to the number of shares of Common Stock of Tanon
being offered in such initial public offering.
The terms EA Share Price and Tanon Share Price are sometimes collectively
referred to herein as the "Conversion Price." The conversion as set forth herein
shall be subject to such adjustment or adjustments, if any, of such Conversion
Price and of the securities or other property issuable upon such conversion as
set forth below, upon delivery of the Note to the offices of the Company,
together with the form of conversion notice attached thereto (the "Conversion
Notice"), duly executed by the Holder thereof. The Conversion Notice shall state
the principal amount thereof to be so converted, the Shares into which such
amount is being converted and shall include or be accompanied by representations
as to the Holder's investment intent substantially similar to those contained in
this Note. Shares issuable upon conversion of the Note shall be issued in the
name of the Holder and shall be transferable only in accordance with all of the
terms and restrictions contained herein and in the Subscription Agreement of
even date hereof to which the original Holder hereof is a party. Upon such
conversion, Company shall pay, in cash, all accrued and unpaid interest through
the conversion date on the Note or such part thereof delivered for conversion.
No fractional Shares shall be issued or delivered upon conversion of the Note.
In case the Note shall be surrendered for the conversion of only a portion of
the principal amount thereof, the Company shall, at the time of issuing the
Shares issuable upon the conversion of such portion, execute and deliver to the
Holder of the Note so surrendered a new note equal in principal amount to the
unconverted portion of the surrendered Note, dated the most recent date to which
interest shall have been paid on the surrendered Note.
NOTWITHSTANDING THE FOREGOING, THE CONVERSION OF THE NOTE INTO EITHER EA
SHARES OR TANON SHARES IS EXPRESSLY CONDITIONED IN EACH CASE UPON (i) SUFFICIENT
AUTHORIZED, UNISSUED AND UNRESERVED COMMON STOCK OF THE ISSUER OF SUCH SHARES TO
PERMIT SUCH CONVERSION, (ii) OFFICIAL NOTICE OF THE LISTING (THE "LISTING") OF
SUCH SHARES ON THE NEW YORK STOCK EXCHANGE OR THE NASDAQ NATIONAL MARKET SYSTEM,
IF APPLICABLE, PRIOR TO SUCH CONVERSION, AND (iii) COMPLIANCE WITH ALL FEDERAL
AND STATE SECURITIES LAWS AND REGULATIONS. IN THE EVENT (i) THERE IS
INSUFFICIENT AUTHORIZED, UNISSUED AND
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UNRESERVED COMMON STOCK OF THE ISSUER OF THE SHARES TO BE ACQUIRED UPON
CONVERSION, (ii) SUCH LISTING OF THE SHARES TO BE ACQUIRED UPON CONVERSION DOES
NOT OCCUR PRIOR THERETO, OR (iii) THE ISSUER OF THE SHARES TO BE ACQUIRED UPON
CONVERSION IS UNABLE TO COMPLY WITH ALL FEDERAL AND STATE SECURITIES LAWS AND
REGULATIONS IN ISSUING SUCH SHARES, THIS NOTE SHALL NOT BE CONVERTIBLE INTO SUCH
SHARES AS AFORESAID.
(b) Adjustments.
(i) Subdivision or Combination. Whenever the Company or Tanon shall
subdivide or combine the outstanding shares of its Common Stock issuable upon
conversion of this Note, including stock dividends and stock splits, the
Conversion Price in effect with respect to such Shares being subdivided or
combined immediately prior to such subdivision or combination shall be
proportionately decreased in the case of subdivision or increased in the case of
combination effective at the time of such subdivision or combination.
(ii) Reclassification or Change. Whenever any reclassification or change
of the outstanding shares of Common Stock of the Company or Tanon shall occur
(other than a change in par value, or from par value to no par, or from no par
to par value, or as a result of a subdivision or combination) effective
provision shall be made whereby the Holder shall have the right, at any time
thereafter, to receive upon conversion of this Note the kind of stock, other
securities or property receivable upon such reclassification or change by a
holder of the number of shares of Common Stock of the Company or Tanon, as the
case may be, issuable upon conversion of this Note immediately prior to such
reclassification or change. Thereafter, the rights of the Holder with respect to
the adjustment of the amount of securities or other property obtainable upon
conversion of this Note shall be appropriately continued and preserved, so as to
afford as nearly as may be possible protection of the nature afforded by this
paragraph (c). The provisions of this clause (iii) shall apply to successive
transactions of the nature to which it relates.
(iii) Notices of Record Date. In case
(A) the Company or Tanon shall declare a dividend (or make any other
distribution) on its shares of Common Stock payable otherwise than in cash out
of its earned surplus; or
(B) the Company or Tanon shall grant the holders of its Common Stock
the right to subscribe for or purchase any shares of its capital stock of any
class; or
(C) the Company or Tanon shall make any distribution on or in respect
of the Common Stock in connection with the dissolution, liquidation or winding
up of the Company or Tanon; or
(D) there is to be a reclassification or change of the Common Stock
of the Company or Tanon (other than the subdivision or combination of its
outstanding shares of Common Stock), a consolidation or merger to which the
Company or Tanon is a party and in connection with which approval of any class
of stockholders of the Company or Tanon is required, or a sale or conveyance of
the property of the Company or Tanon as an entirety or substantially as an
entirety, then and in each such event, the Company shall mail or cause to be
mailed to the Holder a notice specifying the date on which any record is to be
taken for the purpose of such dividend, distribution or granting of rights, or
the date on which such reclassification, consolidation or merger is expected to
become effective, and the time, if any, as of which the holders of record of
Common Stock shall be entitled to exchange their shares of Common Stock for
securities or other property deliverable upon such reorganization or
reclassification. Such notice shall be mailed at least 30 days prior to the
record or effective date therein specified.
(iv) Notice of Adjustment of Conversion Price, etc. If there shall be any
adjustment as provided in (b) hereof, or if securities or property other than
shares of Common Stock of the Company or Tanon shall become issuable or
deliverable in lieu of shares of such Common Stock upon the conversion of this
Note, the Company
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shall forthwith cause written notice thereof to be sent by registered or
certified mail, postage prepaid, to the Holder, which notice shall be
accompanied by a certificate of the principal financial officer of the Company
setting forth in reasonable detail the facts requiring any such adjustment and
the Conversion Price and number of Shares issuable upon the conversion of this
Note after such adjustment, or the kind and amount of any such securities or
property so issuable or deliverable upon the conversion of this Note, as the
case may be.
3. Default. If any of the following conditions or events ("Events of Default")
shall occur and be continuing:
(a) if the Company shall default in the payment of principal of this Note
when the same becomes due and payable, whether at maturity or by declaration of
acceleration or otherwise;
(b) if the Company shall default in the payment of any interest on this Note
and shall fail to cure such default within ten days after receipt of written
notice thereof from the Holder to the Company;
(c) if the Company shall materially default in the performance of or
compliance with any term contained herein and such default shall not have been
remedied within thirty days after receipt of written notice thereof from the
Holder to the Company;
(d) if the Company shall make an assignment for the benefit of creditors, or
shall admit in writing its inability to pay its debts as they become due, or a
voluntary petition for reorganization under Title 11 of the United States Code
("Title 11") shall be filed by the Company or an order shall be entered granting
relief to the Company under Title 11 or a petition shall be filed by the Company
in bankruptcy, or the Company shall be adjudicated a bankrupt or insolvent, or
shall file any petition or answer seeking for itself any reorganization,
arrangement, composition, readjustment, liquidation, dissolution or similar
relief under any present or future statute, law or regulation, or shall file any
answer admitting or not contesting the material allegations of a petition filed
against the Company in any such proceeding, or shall seek or consent to or
acquiesce in the appointment of any trustee, receiver or liquidator of the
Company or of all or any substantial part of the properties of the Company or if
the Company or its directors or majority shareholders shall take any action
looking to the dissolution or liquidation of the Company;
(e) if within 90 days after the commencement of an action against the Company
seeking a reorganization, arrangement, composition, readjustment, liquidation,
dissolution or similar relief under any present or future statute, law or
regulation, such action shall not have been dismissed or nullified or all orders
or proceedings thereunder affecting the operations or the business of the
Company stayed, or if the stay of any such order or proceeding shall thereafter
be set aside, or if, within 90 days after the appointment without the consent or
acquiescence of the Company of any trustee, receiver or liquidator of the
Company or of all or any substantial part of the properties of the Company such
appointment shall not have been vacated; or
(f) if Tanon shall be in default under the Revolving Credit and Security
Agreement between I.B.J. Schroder Bank & Trust Company and Tanon Manufacturing,
Inc. and such default shall not be cured within 30 days;
then, and in any such event, Holder may at any time (unless such Event of
Default shall theretofore have been remedied) at its option, by written notice
to the Company, declare the Note to be due and payable, whereupon the Note shall
forthwith mature and become due and payable, together with interest accrued
thereon, and thereafter interest shall be due, at the rate of eighteen percent
(18%) per annum on the entire principal balance until the same is fully paid,
and on any overdue interest (but only to the extent permitted by law), without
presentment, demand, protest or notice, all of which are hereby waived.
In case of a default in the payment of any principal of or interest on the
Note, (whether at maturity or by acceleration) the Company will pay to the
Holder such further amount as shall be sufficient to cover the cost and expenses
of collection, including, without limitation, reasonable attorneys' fees,
expenses and disbursements. No course of dealing and no delay on the part of
Holder in exercising any right shall operate as a waiver thereof or
5
<PAGE>
otherwise prejudice such Holder's rights, powers or remedies. No right, power or
remedy conferred by this Note upon Holder shall be exclusive of any other right,
power or remedy referred to herein or now or hereafter available at law, in
equity, by statute or otherwise.
4. Registration Rights.
(a) Piggyback registration. If the Company or Tanon proposes to file a
registration statement under the Securities Act with respect to an offering by
the Company or Tanon for its own account of its Common Stock (other than a
registration statement on Form S-4, S-8 or S-14 or any form substituting
therefor or filed in connection with an exchange offer or an offering of
securities solely to existing stockholders or employees) during the period
commencing on the date hereof and ending on January 22, 1999, the Company or
Tanon shall in each case give written notice of such proposed filing to the
Holder and such notice shall offer the Holder the opportunity to register such
number of Shares as the Holder has acquired or contemplates acquiring upon
conversion and requests in writing within ten days after receipt of such notice.
If such offering is an underwritten offering, the amount of Shares included by
Holder may be reduced in the sole discretion of the managing underwriter. In
connection with a piggy-back registration pursuant to this subsection 4(a), the
Company or Tanon will bear all registration expenses, except sales commissions
and the fees and expenses of counsel to the Holder which shall be borne by
Holder. The Holder shall deliver such documents, and provide the Company or
Tanon with such information, as is necessary or desirable to effectuate such
registration.
(b) Demand Rights. In addition, upon written notice at any time beginning on
January 1, 1998 (with respect to EA Shares) or immediately after closing of an
initial public offering of the Common Stock of Tanon (with respect to Tanon
Shares) and in both cases ending on January 22, 1999, from holders of at least
$500,000 in aggregate principal of the 10% Series Convertible Notes that he, she
or it contemplates conversion and transfer of all or any of his, her or its
Shares under such circumstances that a public offering, within the meaning of
the Securities Act of such Securities will be involved, the Company or Tanon,
depending on which entity will issue the underlying Shares, as promptly as
possible after the receipt of such notice, shall file at its expense a
post-effective amendment or a new registration statement under the Securities
Act with respect to the offering and sale or other disposition of the subject
Shares with respect to which it shall have received such notice. Within 10 days
after receiving any such notice, the Company shall give notice to the other
holders of 10% Series A Convertible Notes advising them that the Company or
Tanon is proceeding with such registration and offering to include therein the
underlying Shares of such holders. If audited interim financial statements are
required to be prepared for use in connection with the registration statement,
the holders of 10% Series A Convertible Notes will bear the expense. The holders
of 10% Series A Convertible Notes will also bear the expense of fees of counsel
for the holders and sales commissions on the underlying Shares of such holders.
The Company or Tanon, depending on which entity will issue the underlying
Shares, agrees to use its best efforts to cause the registration statement to
become effective. In no event shall the Company or Tanon be required to file a
registration statement pursuant to the requirements of this subsection (b) more
than once.
(c) In the event that the Company or Tanon shall take action to permit a
public offering or sale or other distribution of the Shares pursuant to
Subsection 4(a) or (b) above, the Company shall:
(i) Supply to the Holder two executed copies of each registration
statement and a reasonable number of copies of the preliminary, final and other
prospectus or offering circular in conformity with requirements of the
Securities Act and the Rules and Regulations promulgated thereunder and such
other documents as the Holder shall reasonably request.
(ii) Cooperate in taking such action as may be necessary to register or
qualify the Shares under such other securities acts or blue sky laws of such
jurisdictions as the Holder shall reasonably request and to do any and all other
acts and things which may be necessary or advisable to enable the Holder of such
Shares to consummate such proposed sale or other disposition of the Shares in
any such jurisdiction; provided, however,
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<PAGE>
that in no event shall the Company or Tanon be obligated, in connection
therewith, to qualify to do business or to file a general consent to service of
process in any jurisdiction where it shall not then be qualified.
(iii) Indemnify and hold harmless Holder and each underwriter, within the
meaning of the Act, who may purchase from or sell for Holder, any Shares, from
and against any and all losses, claims, damages, and liabilities (including, but
not limited to, any and all expenses whatsoever reasonably incurred in
investigating, preparing, defending or settling any claim) arising from (A) any
untrue statement of a material fact contained in a registration statement
furnished pursuant to of this Section 4, or any prospectus or offering circular
included therein, or (B) any omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not misleading
(unless such untrue statement or omission was based upon information furnished
or required to be furnished in writing to the Company by such Holder or
underwriter expressly for use therein), which indemnification shall include each
person, if any, who controls any such Holder or underwriter, within the meaning
of the Securities Act; provided, however, that the Company shall not be so
obligated to indemnify any such Holder or underwriter or controlling person
unless such Holder and underwriter shall at the same time indemnify the Company,
Tanon, their respective directors, each officer signing any registration
statement or any amendment to any registration statement and each person, if
any, who controls the Company or Tanon within the meaning of the Securities Act,
from and against any and all losses, claims, damages and liabilities (including,
but not limited to, any and all expenses whatsoever reasonably incurred in
investigating, preparing, defending or settling and claim) arising from (C) any
untrue statement of a material fact contained in any registration statement or
any amendment to any registration statement or prospectus or offering circular
furnished pursuant to of this Section 4, or (D) any omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, but the indemnity of such Holder, underwriter or
controlling person shall be limited to liability based upon untrue statements of
a material fact or omission to state a material fact required to make such
statements not misleading contained within information furnished in writing to
the Company by such Holder or underwriter or controlling person expressly for
use therein. The indemnity agreement of the Company herein shall not inure to
the benefit of any such underwriter (or to the benefit of any person who
controls such underwriter) on account of any losses, claims, damages,
liabilities (or actions or proceedings in respect thereof) arising from the sale
of any of such Shares by such underwriter to any person if such underwriter
failed to send or give a copy of the prospectus or offering circular furnished
pursuant to of this Section 4, as the same may then be supplemented or amended,
to such person with or prior to the written confirmation of the sale involved.
(iv) Keep effective for a period of not less than three (3) months nor
more than (9) months after the initial effectiveness thereof all such
registrations under the Securities Act.
(d) The Company's obligation under Subsection (a) and (b) shall be
conditioned upon a timely receipt by the Company in writing of:
(i) Information as to the terms of such public offering furnished
by or on behalf of Holder intending to make a public distribution of his
Shares; and
(ii) Such other information as the Company may reasonably require
from Holder or any underwriter for inclusion in such registration statement or
post-effective amendment.
Notwithstanding any provision contained in this Note to the contrary, the
Company's liability for payment of interest shall not exceed the limits imposed
by applicable usury law. If any provision hereof requires interest payments in
excess of the then legally permitted maximum rate, such provision shall
automatically be deemed to require such payment at the then legally-permitted
maximum rate.
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<PAGE>
5. Miscellaneous
(a) Notices. All notices required or permitted to be given under this Note
shall be in writing (delivered by hand or sent certified or registered mail,
return receipt requested) addressed to the following addresses:
If to Holder: At its address on the Note
Register of the Company
If to Company 185 Monmouth Parkway
or Tanon: West Long Branch, NJ 07764-9989
Attn: Stanley O. Jester
and a copy to:
Richard P. Jaffe, Esquire
Mesirov Gelman Jaffe Cramer & Jamieson
1735 Market Street
Philadelphia, PA 19103
All notices shall be deemed given upon personal delivery or upon deposit of such
notice in the United States mails, with all postage affixed.
(b) Failure or Indulgence Not Waiver. No failure or delay on the part of
Holder hereof in the exercise of any power, right or privilege hereunder shall
operate as a waiver thereof, nor shall any single or partial exercise of any
such power, right or privilege preclude other or further exercise thereof or of
any right, power or privilege. All rights and remedies existing hereunder are
cumulative to, and not exclusive of, any rights or remedies otherwise available.
(c) Assignability. Subject to Section 1 hereof, this Note shall be binding
upon Company, its successors and assigns, and shall inure to the benefit of
Holder and Holder's successors, assigns, legal representatives, heirs and
guardians.
(d) Governing Law. This Note shall be governed by the laws of the State of
New Jersey without regard to the conflict of law provisions thereof.
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<PAGE>
IN WITNESS WHEREOF, the Company has caused this Note to be signed in its name
by its duly authorized officer this ____ day of _______, 1997.
EA INDUSTRIES, INC.
By:____________________________________
The undersigned, intending to be legally bound, hereby acknowledges the
foregoing Note and agrees to be bound by Sections 2 and 4 thereof.
TANON MANUFACTURING, INC.
By:______________________________________
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<PAGE>
CONVERSION NOTICE
TO: TANON MANUFACTURING, INC.
185 Monmouth Parkway
West Long Branch, NJ 07764-9989
The undersigned Holder of this Note hereby confirms that it irrevocably
exercises his right to convert [all] [or $___________] of this Note into
___________ shares of Common Stock of [EA INDUSTRIES, INC.] [TANON
MANUFACTURING, INC.] at the Conversion Price of $_________________ per share in
accordance with the terms of this Note, and directs that the Shares issuable and
deliverable upon such conversion be registered in the name of the undersigned
and delivered to the undersigned, together with a Note for the balance of the
principal amount of this Note, if any.
The undersigned hereby acknowledges that the Shares (i) have not been and will
not be at the time of acquisition by the undersigned registered under the
Securities Act of 1933, as amended, or under any state securities laws, except
as set forth in this Note, and hereby represents and warrants to the Company
that he is acquiring the Shares for his own account, for investment, and not
with a view to, or for sale in connection with, any distribution of such Shares;
and (ii) are transferable only in accordance with all the terms and restrictions
contained in the Note and in the Subscription Agreement pursuant to which the
Holder purchased this Note and to which the Holder is, or hereby agrees to
become, a party.
Dated:_____________________ 19__
_________________________________ ___________________________________
Witness Signature of Holder
______________________________
(Print Name of Holder)
Social Security Number or
Taxpayer ID Number:__________
_____________________________
_____________________________
_____________________________
Address
10
REGISTRATION RIGHTS AGREEMENT
REGISTRATION RIGHTS AGREEMENT (this "Agreement") made as of January ,
1997 between Aydin Corporation, a Delaware corporation (the "Corporation") and
EA Industries, Inc., a New Jersey corporation (the "Stockholder").
RECITALS:
WHEREAS, the Stockholder holds 596,927 shares (the "Shares") of Common
Stock of the Corporation which the Stockholder purchased in January 1996 in
connection with the Stockholder's intention to propose a business combination
transaction between the Corporation and the Stockholder;
WHEREAS, the Corporation and the Stockholder conducted negotiations
regarding a possible business combination until October 8, 1996 on which date
the Corporation and the Stockholder terminated their negotiations; and
WHEREAS, the Stockholder has requested certain registration rights to
facilitate its disposition of the Shares in a registered public offering and the
Corporation has agreed to grant the Stockholder certain registration rights as
set forth in this Agreement in order to facilitate the orderly distribution of
the Shares;
NOW, THEREFORE, in consideration of the premises and covenants set forth
herein, and intending to be legally bound hereby, the parties hereto agree as
follows:
1. Definitions. As used in this Agreement:
"Commission" shall mean the Securities and Exchange Commission, or any
other federal agency at the time administering the Securities Act.
"Common Stock" shall mean the Corporation's $1.00 par value Common Stock.
"Person" shall mean and include an individual, a corporation, a
partnership, a trust, an unincorporated organization and a government or any
department, agency or political subdivision thereof.
"Restricted Common Stock" shall mean shares of Common Stock constituting
Restricted Securities.
"Restricted Securities" shall mean the Shares, including any shares of
Common Stock or other securities convertible into or exchangeable for Common
Stock or received as a stock dividend or other distribution in respect to any of
the foregoing, held by the Stockholder or its successors and assigns evidenced
by certificates bearing a restrictive legend prohibiting transfer of such
Restricted
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<PAGE>
Securities unless the transfer of the Restricted Securities evidenced thereby is
registered under the Securities Act or the transfer complies with an exemption
from such registration (a "Restrictive Legend").
"Securities Act" shall mean the Securities Act of 1933, as amended, or any
similar federal statute, and the rules and regulations of the Commission
thereunder, all as the same shall be in effect at the time.
"Transfer" shall include any disposition of any shares of Restricted
Securities or of any interest therein which would constitute a sale thereof
within the meaning of the Securities Act.
2. Required Registration. If at any time the Corporation shall be
requested in writing by the Stockholder, or any holder of not less than 250,000
shares of Restricted Common Stock, to effect the registration under the
Securities Act of not less than an aggregate of 250,000 shares of Restricted
Common Stock, such request shall be deemed an offer (the "Offer") to sell to the
Corporation or its assigns for cash all of the shares of Restricted Common Stock
for which registration is requested (the "Offered Securities") at a price equal
to the average of the daily "market price" (as hereinafter defined) per share of
the Common Stock for the ten consecutive trading days immediately preceding the
date of receipt of such request by the Corporation. The "market price" for each
trading day shall be the last reported sale price regular way of the Common
Stock on the Composite Tape of the New York Stock Exchange on each such trading
day upon which such a sale shall have been effected, or if no sale takes place
on any such day on such exchange, the average of the closing bid and asked
prices on such day as officially quoted on such exchange. The Offer shall remain
open for a period of ten calendar days immediately following the date of receipt
by the Corporation of the registration request (the "Offer Period"). To accept
the Offer, the Corporation or its assigns must give written notice (the "Notice
of Acceptance") to the requesting holder prior to the end of the Offer Period of
the Corporation's intention to accept the Offer. The Corporation shall purchase
from the requesting holder(s), and the requesting holder(s) shall sell to the
Corporation, upon the terms of the Offer, the Offered Securities pursuant to the
Notice of Acceptance within ten business days after the date that the Notice of
Acceptance is received by the requesting holder(s). If the Corporation does not
accept the Offer prior to the expiration of the Offer Period, the Corporation
shall promptly give written notice of such proposed registration to all other
holders of Restricted Securities, including the Stockholder, and thereupon the
Corporation shall promptly use its best efforts to effect the registration under
the Securities Act of the shares of Restricted Common Stock that the Corporation
has been requested to register by any holder in any response received by the
Corporation within 30 days after the date of the written notice by the
Corporation; provided, however, that the Corporation shall not be obligated to
effect any registration under the Securities Act except in accordance with the
following provisions:
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<PAGE>
(a) The Corporation shall not be obligated to file any registration
statement with respect to Restricted Common Stock if in the opinion of counsel
satisfactory to the Corporation and the holder of such securities the proposed
transfer may be effected without registration under the Securities Act, and any
certificate evidencing the shares so to be transferred need not bear a
Restrictive Legend.
(b) The Corporation shall not be obligated to effect any registration
except at the request of the holder or holders of Restricted Common Stock who
shall request registration of Restricted Common Stock then owned or obtainable
by them representing in the aggregate not less than 250,000 shares of
outstanding Restricted Common Stock.
(c) The Corporation shall not be obligated to file and cause to become
effective (i) more than two registration statements in which shares of
Restricted Common Stock are registered under the Securities Act pursuant to this
Section 2 at the request of the Stockholder, or (ii) any registration statement
within three months after the effective date of any other registration statement
filed by the Corporation relating to any public offering of securities of the
Corporation for cash for the Corporation's own account.
3. Incidental Registration. If the Corporation at any time proposes for any
reason to register any of its Common Stock under the Securities Act in
connection with a proposed offering to the general public, the Corporation shall
at such time promptly give written notice to all holders of Restricted Common
Stock of its intention to do so, and, upon the written request, received by the
Corporation within 30 days after the date of any such notice, of the holders of
any Restricted Common Stock to register any shares of Restricted Common Stock,
the Corporation shall use its best efforts to cause all such shares of
Restricted Common Stock the holders of which shall have so requested
registration thereof to be registered under the Securities Act promptly upon
receipt of the written request of such holders for such registration, all to the
extent necessary to permit the sale or other disposition by the prospective
seller or sellers of the shares of Restricted Common Stock so registered. In the
event that the proposed registration by the Corporation is, in whole or in part,
an underwritten public offering of securities of the Corporation, any request
pursuant to this Section 3 to register shares of Restricted Common Stock may
specify that such shares are to be included in the underwriting on the same
terms and conditions as the shares of Common Stock, if any, otherwise being sold
through underwriters under such registration; provided, however, that if the
managing underwriter determines and advises the holders thereof in writing that
the inclusion of all shares of the Restricted Common Stock and other Common
Stock of the Corporation entitled to be included in the registration ("Other
Registrable Stock") originally covered by a request for registration would
interfere with the successful marketing of such securities, the number of shares
of Restricted Common Stock and Other Registrable Stock that may, in the sole
discretion of the managing underwriter, be included in the underwritten public
offering on behalf of the holders thereof, if any, shall be allocated: first, to
the Stockholder, second to the
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holders of the Restricted Common Stock in proportion, as nearly as practicable,
to the respective number of shares of Restricted Common Stock which they had
requested to be included in such underwritten public offering and, thereafter,
among the holders of the Other Registrable Securities in proportion, as nearly
as practicable, to the respective number of shares of Other Registrable Stock
which they had requested to be included in such underwritten public offering.
4. Preparation and Filing. If and whenever the Corporation is under an
obligation pursuant to the provisions of this Agreement to use its best efforts
to effect the registration of any shares of Restricted Common Stock, the
Corporation shall, as expeditiously as practicable:
(a) prepare and file with the Commission a registration statement with
respect to such shares (on Commission Form S-3 to the extent the Corporation is
eligible to use Form S-3) and use its best efforts to cause such registration
statement to become and remain effective;
(b) prepare and file with the Commission such amendments and supplements
to such registration statements and the prospectus used in connection therewith
as may be necessary to keep such registration statement effective for at least
six months (two years to the extent such registration statement was prepared and
filed on Form S-3) and to comply with the provisions of the Securities Act with
respect to the sale or other disposition of all shares of Restricted Common
Stock covered by such registration statement;
(c) furnish to each seller such number of copies of a summary prospectus
or other prospectus, including a preliminary prospectus, in conformity with the
requirements of the Securities Act and such other documents as such seller may
reasonably request in order to facilitate the public sale or other disposition
of such shares of Restricted Common Stock;
(d) use its best efforts to register or qualify the shares of Restricted
Common Stock covered by such registration statement under the securities or blue
sky laws of such jurisdictions as each such seller shall reasonably request and
do any and all other acts or things that may be necessary or advisable to enable
such seller to consummate the public sale or other disposition in such
jurisdictions of such shares;
(e) notify each seller of shares of Restricted Common Stock covered by
such registration statement, at any time when a prospectus relating thereto is
required to be delivered under the Securities Act within the appropriate period
mentioned in clause (b) of this Section 4, of the happening of any event as a
result of which the prospectus included in such registration statement, as then
in effect, includes an untrue statement of a material fact or omits to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading in the light of the circumstances then existing and, at
the request of any such seller, prepare and furnish to such seller a reasonable
number of copies of a
-4-
<PAGE>
supplement to or an amendment of such prospectus as may be necessary so that, as
thereafter delivered to the purchasers of such shares, such prospectus shall not
include an untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading in the light of the circumstances then existing; and
(f) file, on a timely basis, all reports and other documents required
to be filed by it pursuant to the Securities Exchange Act of 1934.
5. Expenses. The Corporation shall pay all expenses incurred in complying
with Sections 2, 3 and 4 hereof, including, without limitation, all registration
and filing fees, fees and expenses of complying with securities and blue sky
laws, printing expenses, and fees and disbursements of the Corporation's
counsel; provided, however, that all underwriting discounts and selling
commissions applicable to the Restricted Common Stock covered by any such
registration shall be borne by the respective sellers thereof, in proportion to
the respective number of shares of Restricted Common Stock sold by each of them.
6. Holdback Agreements.
(a) EA and each other holder of Restricted Common Stock agrees not to
effect any public sale or distribution of equity securities of the Corporation,
or any securities convertible into or exchangeable or exercisable for such
securities, during the seven days prior to and during the 90-day period
beginning on the effective date of any underwritten registration effected by the
Corporation (except as part of such underwritten registration), unless the
managing underwriter otherwise agrees.
(b) The Corporation agrees not to effect any public sale or distribution
of equity securities, or any securities convertible into or exchangeable or
exercisable for such securities, during the seven days prior to and during the
90-day period beginning on the effective date of any underwritten registration
pursuant to a registration statement in which any shares of Restricted Common
Stock are included, unless the managing underwriters otherwise agrees.
7. Cooperation of Holders of Restricted Securities. Each prospective seller
of shares of Restricted Common Stock registered or to be registered under any
registration hereunder shall furnish to the Corporation such information and
execute such documents regarding the shares held by such seller and the intended
method of disposition thereof as the Corporation shall reasonably request and as
shall be required in connection with the registration or qualification to be
made by the Corporation.
8. Indemnification. In the event of any registration of any shares of
Restricted Common Stock under the Securities Act pursuant to this Agreement or
registration or qualification of any shares of Restricted Common Stock pursuant
to Section 4(d) hereof, the Corporation shall indemnify and hold harmless the
seller of such shares,
-5-
<PAGE>
each underwriter of such shares, if any, each broker or any other person acting
on behalf of such seller and each other person, if any, who controls any of the
foregoing persons, within the meaning of the Securities Act, against any losses,
claims, damages or liabilities, joint or several, to which any of the foregoing
persons may become subject under the Securities Act or otherwise, insofar as
such losses, claims, damages or liabilities (or actions in respect thereof)
arise out of or are based upon an untrue statement or alleged untrue statement
of a material fact contained in any registration statement under which such
shares were registered under the Securities Act, any preliminary prospectus
contained therein, or any amendment or supplement thereto, or any document
incident to registration or qualification of any shares of Restricted Common
Stock pursuant to Section 4(d) hereof, or arise out of or are based upon the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading or,
with respect to any prospectus, necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading, or any
violation by the Corporation of the Securities Act or state securities or blue
sky laws applicable to the Corporation and relating to action or inaction
required of the Corporation in connection with such registration or
qualification under such state securities or blue sky laws; and shall reimburse
each person indemnified hereunder for all legal or other expenses reasonably and
as incurred by him or it in connection with investigating or defending any such
loss, claim, damage, liability or action; provided, however, that the
Corporation shall not be liable in any such case to the extent that any such
loss, claim, damage or liability arises out of or is based upon an untrue
statement or alleged untrue statement or omission or alleged omission made in
said registration statement, said preliminary prospectus or said prospectus or
said amendment or supplement or any document incident to registration or
qualification of any Restricted Common Stock pursuant to Section 4(d) hereof in
reliance upon and in conformity with written information furnished to the
Corporation through an instrument duly executed by such seller or underwriter
specifically for use in the preparation thereof.
Before shares of Restricted Common Stock held by any prospective seller
shall be included in any registration pursuant to this Agreement, such
prospective seller and any underwriter acting on its behalf shall have agreed to
indemnify and hold harmless the Corporation, each director of the Corporation,
each officer of the Corporation who shall sign such registration statement and
any person who controls the Corporation within the meaning of the Securities Act
with respect to any material statement or omission from such registration
statement, any preliminary prospectus or final prospectus contained therein, or
any amendment or supplement thereto, if such statement or omission was made in
reliance upon and in conformity with written information furnished to the
Corporation through an instrument duly executed by such seller or underwriter
specifically for use in the preparation of such registration statement,
preliminary prospectus, final prospectus or amendment or supplement.
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<PAGE>
Promptly after receipt by a person indemnified hereunder of notice of the
commencement of any action involving a claim referred to in either of the
preceding paragraphs of this Section 8, such indemnified person will, if a claim
in respect thereof is made against any indemnifying person, give written notice
to the latter of the commencement of such action, the failure of which shall not
relieve the indemnifying party of any liability hereunder unless the failure to
give such notice prejudiced the indemnifying party. In case any such action is
brought against an indemnified person, the indemnifying person will be entitled
to participate in and to assume the defense thereof, jointly with any other
indemnifying person similarly notified to the extent that it may wish, with
counsel reasonably satisfactory to such indemnified person, and after notice
from the indemnifying person to such indemnified person of its election so to
assume the defense thereof, the indemnifying person shall be responsible for any
legal or other expenses subsequently incurred by the latter in connection with
the defense thereof.
9. Restrictions on Future Agreements to Register Shares. Without the prior
written consent of the holders of at least 60% of the voting power of the
outstanding Restricted Common Stock, the Corporation agrees not to enter into
any other agreement that grants the holder of any of the Corporation's
securities the right to require the Corporation to cause such securities to be
registered under the Securities Act.
10. Notices. Any notice provided for in this Agreement must be in writing
and must be mailed by certified mail, return receipt requested, or sent via
overnight delivery service, to the recipient at the address indicated below:
To the Corporation:
Aydin Corporation
700 Dresher Road
Horsham, PA 19044
Attention: I. Gary Bard, Chairman,
President and Chief Executive Officer
with a copy to:
Duane, Morris & Heckscher
4200 One Liberty Place
Philadelphia, PA 19103-7396
Attention: Frederick W. Dreher, Esq.
To the Stockholder:
EA Industries, Inc.
185 Monmouth Parkway
West Long Branch, NJ 07764
Attention: President
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<PAGE>
with a copy to:
Mesirov Gelman Jaffe Cramer & Jamieson
1735 Market Street
Philadelphia, PA 19103
Attention: Richard P. Jaffe, Esq.
or to such other address or to the attention of such other person as the
recipient party shall have specified by prior written notice to the sending
party. Any notice under this Agreement shall be deemed to have been given when
received by the party to whom it is ad dressed.
11. Severability. Whenever possible, each provision of this Agreement
shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be invalid,
illegal or unenforceable in any respect under any applicable law or rule in any
jurisdiction, such invalidity, illegality or unenforceability shall not affect
any other provision or any other jurisdiction, but this Agreement shall be
reformed, construed and enforced in such jurisdiction as if such invalid,
illegal or unenforceable provision had never been contained herein.
12. Counterparts. This Agreement may be executed on separate counterparts,
each of which is deemed to be an original and all of which taken together shall
constitute one and the same agreement.
13. Successors and Assigns. This Agreement is intended to bind and inure to
the benefit of and be enforceable by each of the parties hereto and their
respective heirs, personal representatives, successors and assigns.
14. Choice of Law. All questions concerning the construction, validity and
interpretation of this Agreement shall be governed by the internal law, and not
the law of conflicts, of the State of Delaware.
15. Supersedes Other Agreements. If this Agreement shall conflict in any
respect with all or any portion of any other agreement or instrument to which
any party hereto is a party, the provisions of this Agreement shall supersede
such conflicting agreement or instrument or portion thereof.
-8-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
AYDIN CORPORATION
By:
--------------------------
I. Gary Bard,
Chairman, President and
Chief Executive Officer
EA INDUSTRIES, INC.
By:
--------------------------
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Irwin L. Gross
Page 1
February 25, 1997
[on Aydin letterhead]
February 25, 1997
Irwin L. Gross, Chairman
EA Industries, Inc.
441 North Fifth Street
Philadelphia, PA 19123
Dear Irv:
The purpose of this letter is to set forth the agreements we have
reached in connection with the October 9, 1996 termination of the merger
negotiations between Aydin and EA, the registration rights agreement entered
into between Aydin and EA dated January __, 1997 (the "Registration Rights
Agreement") and EA's January 27, 1997 request for registration of 596,927 Shares
(the "Shares") of Aydin Common Stock pursuant thereto. As you and I have
discussed, Aydin does not have the financial ability to repurchase the Shares as
permitted by Section 2 of the Registration Rights Agreement before the
expiration of the repurchase right and Aydin believes that the interests of its
stockholders would be best protected if the Shares were not offered for sale in
a non-underwritten public offering at this time.
Accordingly, Aydin and EA have agreed as follows:
1. EA will grant I. Gary Bard and his assigns, an option (the "Option")
to purchase the Shares as set forth in the form of Option Agreement attached
hereto as Appendix A.
2. Upon the closing of the exercise of the Option, Aydin will issue EA a
warrant to purchase up to 200,000 shares of Aydin Common Stock (the "Warrant")
in the form of Warrant attached hereto as Appendix B. The shares purchasable
upon exercise of the Warrant will be subject to a registration rights agreement
in the form attached hereto as Appendix C. EA agrees to serve as a consultant to
Aydin during the three-year term of the Warrant for the purpose of providing
such assistance to Aydin in soliciting customers internationally and exploring
strategic joint ventures as EA and Aydin mutually deem appropriate in their
reasonable discretion.
3. If the Option is exercised in accordance with its terms for the
purchase of all of the Shares, Irwin L. Gross will thereupon resign as a
director of Aydin.
<PAGE>
Irwin L. Gross
Page 2
February 25, 1997
4. In the event that the Option is not exercised in full, the provisions
of paragraphs 2 and 3 hereof shall terminate and be of no force or effect.
If the foregoing correctly sets forth the agreements between Aydin and
EA, please sign and return the enclosed copy of this letter to me.
Sincerely,
-------------------------------
I. Gary Bard, President
Accepted and agreed to this
____ day of February, 1997
EA INDUSTRIES, INC.
By:
-----------------------------
Irwin L. Gross, Chairman
APPENDIX A
THE SECURITIES ISSUABLE UPON EXERCISE HEREOF (THE "SECURITIES") WILL BE ACQUIRED
FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR
ANY OTHER SECURITIES LAWS, AND MAY NOT BE OFFERED, SOLD, PLEDGED OR HYPOTHECATED
UNTIL SUCH SHARES HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 AND
OTHER APPLICABLE SECURITIES LAWS, OR IN THE OPINION OF COUNSEL IN FORM AND
SUBSTANCE REASONABLY SATISFACTORY TO THE COMPANY, SUCH OFFER, SALE OR TRANSFER,
PLEDGE OR HYPOTHECATION IS IN COMPLIANCE THEREWITH.
STOCK OPTION AGREEMENT
STOCK OPTION AGREEMENT dated February 25, 1997 executed by EA
INDUSTRIES, INC., a New Jersey corporation ("EA"), for the benefit of I. GARY
BARD and his assigns (collectively, the "Optionee").
EA and the Optionee wish to set forth the terms and conditions whereby
the Optionee and/or the Optionee's assigns will have the option to purchase
shares of the $1.00 par value common stock (the "Stock") of Aydin Corporation
("Aydin"). Accordingly, in consideration of the mutual covenants and agreements
contained herein and intending to be legally bound hereby, EA and the Optionee
hereby agree as follows:
1. Grant of the Option. Subject to the terms and conditions set
forth in this Agreement, EA grants to the Optionee the option (the "Option") to
purchase all of 596,927 shares of the Stock (the "Option Shares") for the
purchase price of $11.00 per Option Share.
2. Term of the Option. The Option granted hereunder shall expire at
5:00 p.m., Eastern Standard Time on March 19, 1997 (the "Expiration Time").
3. Exercise of the Option. The Optionee may exercise the Option with
respect to all of the Option Shares at any time prior to the Expiration Time by
tendering to EA payment in full of the purchase price for the Option Shares
together with written notice to EA of such exercise that states the following:
(a) an acknowledgment that the Option Shares are being purchased for
investment and not for distribution or resale (other than a distribution or
resale which, in the opinion of counsel reasonably satisfactory to Aydin, may be
made without violating the provisions of the Securities Act of 1933, as amended
(the "Act"), or any other applicable securities laws); and
-1-
<PAGE>
(b) an acknowledgment that the Optionee understands that the Option
Shares are "restricted securities" within the meaning of Rule 144 promulgated by
the Securities and Exchange Commission, that the Option Shares have not been
registered under the Act or any other applicable securities laws and must be
held indefinitely unless they are subsequently registered under such Act and
applicable laws or an exemption from registration is available.
EA shall (i) transfer to the Optionee a stock certificate or certificates
representing the Option Shares, free and clear of all pledges, claims, liens,
encumbrances and other security interests, immediately upon the actual receipt
by EA of any such written notice and payment of the purchase price (ii) deliver
an assignment to the Optionee of EA's rights under the Registration Rights
Agreement between Aydin and EA dated January , 1997 and (ii) deliver an
irrevocable stock power, which shall be coupled with an interest, to the
Optionee authorizing the Optionee to vote the Option Shares then being purchased
at any meeting of stockholders of the Corporation for which EA is deemed the
record holder with respect to such Option Shares.
4. Transfer of the Option. This Option and all rights hereunder are
assignable by the Optionee subject to compliance with applicable federal and
state securities laws.
5. Miscellaneous.
(a) Notices. All notices to EA provided for in this Agreement shall
be in writing and shall either be hand delivered, sent by registered or
certified mail, or delivered by a nationally recognized overnight delivery
service to the following address (or such other address as may be designated by
notice duly given in the manner provided herein):
EA Industries, Inc.
441 North Fifth Street
Philadelphia, PA 19123
Attention: President
Any such notice, including but not limited to notices and tenders under Section
3 hereof, shall be deemed delivered (i) when hand delivered or (ii) on the day
deposited with the nationally recognized overnight delivery service or in the
U.S. registered or certified mail, addressed as provided above.
(b) Integration; Modification. This Agreement constitutes the entire
understanding and agreement between EA and the Optionee regarding the subject
matter hereof and supersedes all prior negotiations and agreements, whether
oral or written, between EA and the Optionee with respect to the subject matter
of this Agreement. This Agreement may not be modified except by a written
agreement signed by the Optionee and a duly authorized officer of EA.
(c) Severability. In the event of the invalidity or unenforceability
of any part or provisions of this Agreement, such invalidity or unenforceability
shall not affect the validity or
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<PAGE>
enforceability of any other part or provision of this Agreement, and the
remainder of this Agreement shall continue in full force and effect in
accordance with its terms.
(d) Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY THE INTERNAL
LAWS OF THE COMMONWEALTH OF PENNSYLVANIA.
(e) Headings. The headings of paragraphs have been included herein
for convenience only and shall not be considered in interpreting this Agreement.
(f) Binding Effect. This Agreement shall be binding upon EA and
shall inure to the benefit of EA and the Optionee and their respective heirs,
legal representatives, successors and permitted assigns.
IN WITNESS WHEREOF, EA, by its duly authorized officer, has executed
this Agreement as of the date first above written.
EA INDUSTRIES, INC.
By: /s/ Irwin L. Gross
-----------------------------
Irwin L. Gross, President
Accepted and agreed to this
25th day of February, 1997
/s/ I. Gary Bard
- --------------------------------
I. Gary Bard
-3-
December 23, 1996
Mr. Michael P. Downes, President
Tri-Star Technologies Co., Inc.
126 Merrimack Street
Methuen, MA 01844
Dear Mike:
The purpose of this letter is to serve as our letter of intent with
regard to the purchase by Tanon Manufacturing, Inc. ("Tanon") or its nominee of
all of the assets (the "Assets") owned by or used in the operations of Tri-Star
Technologies Co., Inc. ("Tri-Star" or the "Company") or all of the issued and
outstanding shares of stock (the "Stock") of the Company. The form of the
purchase (Assets or Stock) shall be set at the sole discretion of Michael Downes
and the Company by notice to EA and Tanon at the time of execution of a
definitive purchase and sale agreement
EAI, the Company, Tanon and Michael Downes will in good faith undertake
promptly after the date hereof to complete a definitive purchase and sale
agreement regarding such purchase. Consummation of the transaction is contingent
upon (i) approval of the transaction by the Board of Directors of Tanon's parent
corporation, EA Industries, Inc. ("EAI"), (ii) simultaneous closing of the
acquisition of the building currently occupied by the Company, and (iii)
completion to their satisfaction by Tanon and EAI of due diligence. The
definitive purchase and sale agreement will contain the standard representations
and warranties designed to protect a seller between signing and closing
consistent with a transaction in which the purchase price consists of cash and
stock.
During the course of this process, the Company will continue to be
operated in accordance with its past practices and will not sell or transfer any
stock or assets, declare any dividends or make any distributions in cash, stock
or assets of any kind except for those necessary to make income tax payments.
The Company may distribute cash as necessary for Mr. Downes to make income tax
payments of any kind or nature, including but not limited to the Alternative
Minimum Tax, for the 1996 and 1997 tax years without reduction in the Purchase
Price for the Stock or the Assets. Additionally, the Company will not after the
date hereof increase the compensation paid to management or employees, except in
accordance with previously scheduled reviews or raises.
<PAGE>
Based upon our discussions and our review of the preliminary financial
information you have sent us, we have agreed as follows:
1. Tanon will purchase all of the Assets or the Stock free and clear of
any liens and encumbrances other than those reflected in the financial
statements of the Company as of June 30, 1996, previously delivered to Tanon
(the "Financial Statements"). All of the assets currently used in the business
of the Company but not owned by or leased to the Company, except the building
and property ( the "Building") occupied by the Company and one Excellon router
currently on loan, will be transferred to the Company before closing, without
payment by the Company, EAI or Tanon, free and clear of any liens, claims or
encumbrances.
2. Tanon will in addition to purchasing the Assets assume the debt
obligations (the "Debt"), or in purchasing the Stock will assume the Debt,
represented on the balance sheet of the Company in accordance with GAAP as Line
of Credit, Current Maturities of Long-Term Debt, Current Maturities of Capital
Lease Obligations, Long-Term Debt, Net of Current Maturities and Capital Lease
Obligations, Net of Current Maturities. The manner of the transfer of
responsibility for these obligations shall be reasonably satisfactory to Mr.
Downes. Other debt obligations will be satisfied before closing. Based on a
review of your internal financial statements, we understand that the Debt was
approximately $7 million at June 30, 1996. At closing the Debt will not exceed
$7.5 million and an appropriate adjustment will be made to reflect Debt above
that level, with equal offsets for cash proceeds of that additional debt which
the Company has retained, additional inventory or assets purchased with such
additional debt.
3. The Purchase Price for the Assets or the Stock shall be $16 million;
payable (i) $700,000 on or before January 3, 1997, (ii) $300,000 on or before
January 31, 1997, (iii) $9 million in cash at closing, and (iv) at closing $6
million in Tanon common stock at the price such stock is first sold to the
public in an initial public offering of the Common Stock of Tanon or EAI Common
Stock at the market price at closing of the acquisition of the Stock or the
Assets.
4. Any shares of stock issued in payment of the Purchase Price will be
issued in a private placement and will consist of restricted securities only
tradable subject to the restrictions of Rule 144 under the Securities Act of
1944, as amended. EAI and Tanon will covenant to comply with the requirements of
Rule 144 pertaining to timely filing of reports. The sales of such stock will
also be subject to restrictions to the extent that the insider trading rules are
applicable and to the extent that the seller is then subject to restrictions
under section 16 of the Securities Exchange Act of 1934.
5. Tanon will enter into a five year written employment agreement with
Michael Downes at his current salary level, with benefits and perquisites
similar to those of comparable executives of Tanon, and with a two year
non-compete agreement beginning when Mr. Downes leaves Tri-Star. If Mr. Downes
is terminated for any reason other than Due Cause, disability, death or his
resignation he shall be paid his salary for the remainder of the term. If Tanon
defaults in its payment obligations under the employment agreement, then Mr.
Downes may terminate the Agreement, and in such event he shall be paid his
salary for the remainder of the term. Due Cause shall mean, (1) the commission
2
<PAGE>
of an act of fraud or embezzlement (including the unauthorized disclosure of
properly identified confidential or proprietary information of Tanon) which
results in material injury to Tanon, (2) a felony conviction or plea of guilty
with respect to a felony which conviction would adversely impact on Tanon, (3)
willful misconduct as an employee of Tanon which results in material injury to
Tanon, or (4) the substantial failure to render services to Tanon in accordance
with the terms of employment, which failure amounts to a material neglect of
duties to Tanon and directly results in material injury to Tanon. Mr. Downes
will serve as President of the Tri-Star Division of Tanon reporting to the
President of Tanon and at closing will be elected to the Board of Directors of
Tanon. Mr. Downes will be nominated as a director of Tanon, and EAI will vote
all shares of Tanon it holds to elect Mr. Downes as a director, throughout his
employment term.
6. Tanon will enter into a one year employment agreement with Tony
Lautieri at his current salary level and with his current level of perquisites
and benefits. If Mr. Lautieri is terminated for any reason other than Due Cause,
disability, death or his resignation he shall be paid his salary and benefits
for the remainder of the term.
7. Mr. Lautieri and six key employees of the Company will be granted
stock options in Tanon pending approval of the Board of Directors of Tanon,
pursuant to a stock option plan approved by the stockholders of Tanon covering
all similarly situated employees of Tanon.
8. EAI and Tanon will cause any personal guarantees of Mr. Downes for
obligations of the Company to be removed on or before closing. The manner and
timing of the transfer of responsibility for these obligations shall be
reasonably satisfactory to Mr. Downes.
9. In consideration of the substantial expenditures of time, effort and
expense to be undertaken by EAI and Tanon in connection with the preparation and
execution of a definitive Purchase Agreement, and the various investigations and
reviews referred to above, you agree that neither you nor the Company shall for
the period until closing or the termination hereof as set forth below enter into
or conduct any discussions with any other prospective purchaser of the stock or
the assets of the Company, and that you shall cause the Company to use its best
efforts to preserve intact its business organization and the goodwill of its
customers, suppliers and others having business relations with it and to conduct
its business in the ordinary course pending the closing.
10. Tanon and EAI agree that if the acquisition is structured as a
stock purchase they will not make an election under Section 338(h)(10) of the
Internal Revenue Code of 1986, as amended, or attempt to use any other legal
theory,
3
<PAGE>
position election or method to convert the tax treatment from that applicable to
a stock sale to that applicable to an asset sale without the prior permission of
Mr. Downes.
It is agreed that the Purchase Agreement between the Company, Tanon and
EAI will include the customary representations and warranties required by a
prudent investor concerning the fair presentation of historical financial
statements of the Company, the absence of undisclosed liabilities, matters of
title, litigation, taxes and the like.
We believe that time is of the essence in consummating the proposed
transaction. Accordingly, we have instructed our counsel to work with your
counsel promptly after your approval of this letter to prepare the Purchase
Agreement in accordance with the provisions of this letter. After you sign this
letter, the Company shall give EAI, Tanon and their representatives access to
the facilities and books and records of the Company in accordance with a
mutually agreed schedule to conduct a due diligence review. EAI and Tanon will
provide comparable access to their facilities and records to Downes and
Tri-Star.
This letter of intent shall constitute a legally binding agreement by
the Company and Mr. Downes to complete the sale of the Assets or the Stock in
accordance with the terms hereof subject to the agreement of Tanon, EAI, Mr.
Downes and Tri-Star to negotiate in good faith to complete a definitive purchase
and sale agreement. The obligations of Tanon and EAI to complete such purchase
shall be contingent upon satisfactory completion of their due diligence review
of Tri-Star.
Either party may terminate discussions regarding the acquisition of
Tri-Star at any time if EAI and Tanon fail to pay any installments of the
Purchase Price, and after July 31, 1997 if closing has not occurred, by
delivering written notice to the other party. Thereafter all terms and
conditions of this letter shall become null and void without recourse to either
party.
If closing does not occur by July 31, 1997 for any reason other than
the failure of Tri-Star or Mr. Downes to fulfill its or his obligations
hereunder, Tri-Star may terminate discussions, retain any funds previously paid
to it as an advance on the Purchase Price and thereafter all terms and
conditions of this letter shall become null and void without recourse to either
party.
4
<PAGE>
If the foregoing accurately reflects your understanding of our
intentions at this point, please sign where indicated below and return a copy to
me.
Very truly yours,
Paul E. Finer
President & CEO
Tanon Manufacturing, Inc.
Vice President
EA Industries, Inc.
Agreed to and Accepted
this day of December, 1996
- --------------------------------------
Michael P. Downes, Individually and
as President of Tri-Star Technologies, Co., Inc.
5
December 23, 1996
Mr. Michael P. Downes, President
Tri-Star Technologies Co., Inc.
126 Merrimack Street
Methuen, MA 01844
Dear Mike:
The purpose of this letter is to serve as our letter of intent with
regard to the purchase by Tanon Manufacturing, Inc. ("Tanon") or its nominee
from Tri-Star Realty Trust (the "Trust") the approximately 120,000 square foot
building and the property it is located on (the "Building") currently occupied
by Tri-Star Technologies Co. ("Tri-Star" or the "Company").
The Trust and Tanon will in good faith undertake promptly after the
date hereof to complete a definitive purchase and sale agreement regarding such
purchase. Consummation of the transaction is contingent upon (i) approval of the
transaction by the Board of Directors of Tanon's parent corporation, EA
Industries, Inc. ("EAI"), (ii) simultaneous closing of the acquisition of the
assets or stock of Tri-Star, and (iii) completion to their satisfaction by Tanon
and EAI of due diligence.
Based upon our discussions and our review of the preliminary financial
information you have sent us, we have agreed as follows:
1. Tanon will purchase the Building free and clear of all liens,
claims, and encumbrances and there shall be no liens or encumbrances other than
the current loan obligations, (the "Debt") not to exceed $2.5 million, currently
secured by a mortgage on the Building which at Tanon's option will be assumed by
Tanon or paid off at closing. If the Debt is not assumable it shall be paid off
at closing. The manner of the transfer of responsibility for the debt shall be
reasonably satisfactory to Mr. Downes and shall include such releases as in the
judgment of counsel to the Trust are necessary or appropriate.
2. The Purchase Price for the Building shall be $3.5 million; payable,
(i) $2.5 million in cash at closing, and (ii) at closing $1.0 million in Tanon
common stock at the price such stock is first sold to the public in an initial
public offering of the Common Stock of Tanon or EAI Common Stock at the market
price at closing of the acquisition of the Building . Any shares of stock issued
in payment of the Purchase Price will be issued in a private placement and will
<PAGE>
consist of restricted securities only tradable subject to the restrictions of
Rule 144 under the Securities Act of 1944, as amended. EA and Tanon will
covenant to comply with the requirements of Rule 144 pertaining to timely filing
of reports. The sales of such stock will also be subject to restrictions to the
extent that the insider trading rules are applicable and to the extent that the
seller is then subject to restrictions under section 16 of the Securities
Exchange Act of 1934.
3. EAI and Tanon will cause any personal guarantees of Mr. Downes for
obligations of the Company related to the Building to be removed on or before
closing. The manner and timing of the transfer of responsibility for the
guarantees shall be reasonably satisfactory to Mr. Downes and shall include such
releases as in the judgment of counsel to Mr. Downes are necessary or
appropriate.
4. In consideration of the substantial expenditures of time, effort and
expense to be undertaken by EAI and Tanon in connection with the preparation and
execution of a definitive Purchase Agreement, and the various investigations and
reviews referred to above, you agree that neither you nor the Company shall for
the period until closing or the termination hereof as set forth below enter into
or conduct any discussions with any other prospective purchaser of the Building.
It is agreed that the Purchase Agreement between the Trust, Tanon and
EAI will include the customary representations and warranties required by a
prudent investor concerning the state of title, environmental compliance and
condition, state of repair and other conditions with respect to the Building.
This letter of intent shall constitute a legally binding agreement by
the Trust to complete the sale of the Building in accordance with the terms
hereof subject to the agreement of Tanon, EA, and the Trust to negotiate in good
faith to complete a definitive purchase and sale agreement. The obligations of
Tanon and EAI to complete such purchase shall be contingent upon satisfactory
completion of their due diligence review of Tri-Star and the Building.
If closing does not occur by July 31, 1997 for any reason other than
the failure of the Trust to fulfill its obligations hereunder, the Trust may
terminate discussions, retain any funds previously paid to it as an advance on
the Purchase Price and thereafter all terms and conditions of this letter shall
become null and void without recourse to either party.
<PAGE>
If the foregoing accurately reflects your understanding of our
intentions at this point, please sign where indicated below and return a copy to
me.
Very truly yours,
Paul E. Finer
President & CEO
Tanon Manufacturing, Inc.
Vice President
EA Industries, Inc.
Agreed to and Accepted
this day of December, 1996
- -----------------------------------
Michael P. Downes, Individually and
as Trustee of Tri-Star Realty Trust
MEMORANDUM OF UNDERSTANDING
This Memorandum of Understanding dated December 23, 1996, entered into
between Michael P. Downes (hereinafter "Downes"), Tri-Star Technologies Co.,
Inc. (hereinafter "Tri-Star") and Tanon Manufacturing, Inc. (hereinafter
"Tanon") and EA Industries, Inc. (hereinafter "EAI"), is to be incorporated with
a certain letter of intent of even date regarding a purchase of the assets of
Tri-Star (the "Assets") or the stock of Tri-Star (the "Stock") and into a
definitive purchase and sale agreement.
1. Additional Consideration. (a) Tri-Star and Tanon have agreed to an
incentive package ("Earn Out") to be included as additional consideration for
the acquisition of the Assets or the Stock of Tri-Star by Tanon.
(i) Mr. Downes shall receive Earn Out payments based on the revenues of Tri-Star
meeting or exceeding the targets listed below. The revenues of Tri-Star shall be
measured and annualized every six months beginning on June 30, 1997. Based on
such annualized numbers, an estimated Earn Out payment shall be made. The actual
amounts due as an Earn Out for each year shall be determined based on an annual
audit and an adjusted payment shall be made by or to Mr. Downes as appropriate.
Mr. Downes shall have the right to review such determination and shall have the
right to review the audit as it relates to Tri-Star.
Annual Earn
Out Amount 1997 1998 1999 2000 2001
---- ---- ---- ---- ----
Revenue targets:
$250,000 $20,000,000 $24,000,000 $29,000,000 $35,000,000 $39,000,000
$375,000 $22,500,000 $27,000,000 $32,000,000 $39,000,000 $43,000,000
$500,000 $25,000,000 $30,000,000 $35,000,000 $42,000,000 $48,000,000
$562,500 $32,000,000 $40,000,000 $48,000,000 $56,000,000 $64,000,000
$625,000 $34,000,000 $42,000,000 $50,000,000 $58,000,000 $66,000,000
$687,500 $36,000,000 $44,000,000 $52,000,000 $60,000,000 $68,000,000
$750,000 $38,000,000 $46,000,000 $54,000,000 $62,000,000 $70,000,000
(ii) In addition, Mr. Downes shall receive Earn Out payments based on the net
income of Tri-Star (as a stand alone entity, excluding any Earn Out payments and
acquisition costs and before provision for payment of income taxes) meeting or
exceeding the targets listed below. The net income of Tri-Star shall be measured
and annualized every six months beginning on June 30, 1997. Based on such
annualized numbers, an estimated Earn Out payment shall be made. The actual
amounts due as an Earn Out for each year shall be determined based on an annual
audit and an adjusted payment shall be made by or to Mr. Downes as appropriate.
Mr. Downes shall have the right to review such determination and shall have the
right to review the audit as it relates to Tri-Star.
<PAGE>
Annual Earn
Out Amount 1997 1998 1999 2000 2001
---- ---- ---- ---- ----
Net income targets:
$62,500 $3,000,000 $7,000,000 $9,500,000 $12,000,000 $13,500,000
$125,000 $4,000,000 $7,500,000 $10,000,000 $12,000,000 $14,000,000
$187,500 $5,000,000 $8,000,000 $10,500,000 $12,500,000 $14,500,000
$250,000 $6,000,000 $9,000,000 $11,000,000 $13,000,000 $15,000,000
(b) Revenues for the 1997 Earn Out year shall include inter-company business
from Tanon West Long Branch Division. The first five million dollars of
inter-company business from other Tanon and/or EAI Subsidiaries or Divisions
shall be excluded from revenues for the 1997 Earn-Out year.
Revenues for Earn Out years after 1997 shall include business from all Tanon
and/or EAI Divisions or Subsidiaries.
EAI or Tanon will provide additional working and expansion capital to Tri-Star
at a level consistent with Tri-Star's current plan as discussed to date with
Tanon and as appropriate in light of Tri-Star's current capacity and the revenue
levels reflected in the Earn Out.
For purposes of calculating Earn Out Payments, revenues from business of Tanon,
EAI or other EAI subsidiaries shall be credited at prices consistent with
Tri-Star's price matrix and discount policies.
(c) Mr. Downes has agreed to enter into an employment agreement with Tanon at
closing. If Mr. Downes' employment under that agreement is terminated as a
result of his resignation or termination for Due Cause (as defined in the
agreement), any future Earn-Out payments shall be reduced to fifty percent (50%)
of the level that would otherwise have been payable. If Mr. Downes employment
terminates for any other reason, any Earn-Out payments earned pursuant to the
formula herein shall be paid to Mr. Downes' successors, heirs or assigns. The
portion of any annual Earn Out payments based on the results of the first six
months of the year shall be made within 60 days after completion of the second
quarter review, if any, of Tanon by Tanon's auditors, and the portion based on
the results of the second six months of the year and any adjustments on the
first portion shall be made within 60 days after completion of the annual audit
of Tanon by Tanon's auditors.
2. Maintenance of Sales Representatives. Tri-Star and Tanon have agreed to
retain in place under current agreements the existing exclusive sales
representative team currently serving Tri-Star, consisting of seven (7) sales
entities (hereinafter the "Sales Team"). The Sales Team shall represent Tri-Star
and Tanon with respect to customers agreed to by Tanon and Tri-Star and shall be
compensated in accordance with a schedule to be agreed to by Tanon and Tri-Star.
Such compensation and customer list shall be included in the current agreements
with such sales representatives.
<PAGE>
3. Escrow Closing Agreement. The proceeds from the sale of the Assets, or
the stock of Tri-Star shall be paid to an escrow, established and maintained at
the direction of Michael Downes or his nominee.
4. Binding Memorandum of Understanding. The terms hereof shall be
incorporated into a final definitive purchase agreement referenced in the letter
of intent signed herewith. This memorandum of understanding shall constitute a
legally binding agreement by Tri-Star and Mr. Downes to complete the sale of the
Assets or the Stock in accordance with the terms hereof subject to the agreement
of Tanon, EAI, Mr. Downes and Tri-Star to negotiate in good faith to complete a
definitive purchase and sale agreement. The obligations of Tanon and EAI to
complete such purchase shall be contingent upon satisfactory completion of their
due diligence review of Tri-Star.
If closing does not occur by July 31, 1997 for any reason other than the failure
of Tri-Star or Mr. Downes to fulfill its or his obligations hereunder, Tri-Star
may terminate discussions, retain any funds previously paid to it as an advance
on the Purchase Price and thereafter all terms and conditions of this letter
shall become null and void without recourse to either party.
Tanon Manufacturing, Inc. and
EA Industries, Inc.
_________________________________ By:_________________________
Michael P. Downes, Individually Paul Finer
and as President of Tri-Star
Technologies Co., Inc.
PROMISSORY NOTE
$1,000,000 January 22, 1997
FOR VALUE RECEIVED, EA Industries, Inc., a New Jersey corporation
("Borrower") promises to pay to the order of Millenco L.P. ("Lender") the
principal sum of One Million Dollars ($1,000,000) together with interest thereon
from the date hereof at an annual rate of thirteen and one-half percent (13.5%).
After the occurrence of a Default which has not been cured, all outstanding
principal and interest on this Note shall accrue interest at the rate of twenty
percent (20%) per annum.
Interest shall be payable on the first day of each month beginning
on March 1, 1997 and continuing thereafter until the maturity date of this note.
All outstanding principal and interest shall be payable on the maturity date of
January 17, 1998. Interest shall be calculated on the basis of a 360 day year,
but charged for the number of days actually elapsed during any year or part
thereof.
All payments of principal, interest, and fees hereunder shall be
made by Borrower without defense, set off, or counterclaim and in same day funds
and delivered to Lender by wire transfer not later than 5:00 P.M. (New York
time) on the date due at Lender's office located at 111 Broadway, New York, NY
10006 or such other place as shall be designated in writing by Lender for such
purpose. Funds received by Lender after that time shall be deemed to have been
paid by Borrower on the next succeeding Business Day.
Amounts outstanding under this Note may be prepaid in whole or in
part at any time without premium or penalty, with any such prepayments being
applied first to accrued and unpaid interest then to principal in the inverse
order of maturity.
Whenever any payment on this Note shall be stated to be due on a day
which is not a Business Day, such payment shall be made on the next succeeding
Business Day and such extension of time shall be included in the computation of
the payment of interest on this Note.
The occurrence of any one or more of the following events shall be
an event of default ("Default") hereunder:
(a) Default shall be made in the payment of the principal of or
interest on this Note when and as the same shall become due and payable, whether
at a date fixed for payment, by acceleration or otherwise;
(b) The Borrower shall:
<PAGE>
(i) admit in writing its inability to pay its debts generally
as they become due;
(ii) file a petition in bankruptcy under the bankruptcy laws
of the United States or any other jurisdiction (as such laws are now
or in the future amended) or any admission seeking the relief
therein provided;
(iii) make an assignment for the benefit of its creditors;
(iv) consent to the filing of a petition against it under said
bankruptcy laws; or
(v) be adjudicated a bankrupt;
(c) A court order shall be entered appointing a receiver or trustee
for all or a substantial part of the property of the Borrower, or approving as
filed in good faith a petition filed against the Borrower under said bankruptcy
laws.
(d) If the weighted average price per share of the Aydin Corporation
Common Stock as reported by Bloomberg Business Services in its Volume at Price
Service at the close of business, averaged for any three consecutive trading
days, is less than $5.00 per share.
(e) If the Shares of Aydin Corporation pledged to the Lender
pursuant to the Stock Pledge Agreement (the "Pledge Agreement") dated January
21, 1997 between Borrower and Lender are not transferred into the name of the
Lender within one month after the date hereof.
If any of the events described in paragraph (a) - (e) occur,
Borrower shall have five (5) days to cure the default by paying Lender all
outstanding principal and interest on the Note. If Borrower does not cure such
default within that 5 day period, Borrower shall pay Lender a liquidated damages
penalty of one hundred thousand dollars ($100,000) in addition to all other
amounts, including without limitation, principal and interest as otherwise
payable hereunder.
If a registration statement covering the shares of Common Stock of
the Company issuable pursuant to a Warrant issued to Lender on the date hereof
has not become effective on or before April 20, 1998 so as to permit the
disposition of all shares that have been or may be acquired under the Warrant
dated January 21, 1997 between Borrower and Lender and the Lender has not
exercised the right to demand repurchase granted therein, the Borrower shall pay
the Lender the sum of fifty thousand dollars ($50,000) within three (3) days.
<PAGE>
In addition to other remedies of Lender as set forth in this Note
upon the occurrence of a Default, Lender may, without demand, by written notice
to Borrower, cause this Note to become immediately due and payable.
Borrower hereby waives presentment, demand for payment, notice of
dishonor, protest or notice of protest and any and all notices or demands and,
to the full extent permitted by law, the right to plead any statute of
limitations as a defense to any demand hereunder in connection with the
delivery, acceptance, performance, or default of this Note.
The liabilities and obligations of Borrower hereunder shall be
unconditional without regard to the liability or obligations of any other party
and shall not be in any manner affected by any indulgence whatsoever granted or
consented to by Lender, including, but not limited to, any extension of time,
renewal, waiver or other modification. Any failure of Lender to exercise any
right hereunder shall not be construed as a waiver of the right to exercise the
same or any other right at any time and from time to time thereafter.
This Note has been executed, delivered, and accepted by the parties
and will be deemed to have been made in New York and will be interpreted and the
rights of the parties determined in accordance with the laws of the United
States of America applicable thereto and the internal laws of the State of New
York applicable to an agreement executed, delivered and performed therein
without giving effect to the choice-of-law rules thereof or any other principle
that could require the application of the substantive law of any other
jurisdiction.
Pledgor hereby irrevocably: (i) in any legal proceeding brought in
connection with this Note: (1) submits to the exclusive in personam jurisdiction
of any state or United States court of competent jurisdiction sitting in or with
jurisdiction in, the State of New York; (ii) waives any objection that it may
now or hereafter have to the venue of such proceeding in any such court or that
such proceeding was brought in an inconvenient court; and (iii) agrees that
nothing contained herein shall affect Pledgee's right to effect service of
process in any manner permitted by law. Any and all actions at law or in equity
relating to this Note and the indebtedness shall be brought, and jurisdiction
shall be had exclusively, in the courts of the State of New York, or at the
election of the holder hereof, the United States District Court for the Eastern
District of New York. Borrower consents in advance to service of process by mail
to the address set forth in the Pledge Agreement.
This Note may not be changed or amended orally but only by an
agreement in writing and signed by the party against whom enforcement of any
waiver, change, modification or discharge is sought.
If any provision of this Note is invalid and unenforceable then, to
the fullest extent permitted by law: (i) the other provisions hereof shall
remain in full force and effect in order to carry out the intentions of the
parties hereto as nearly as may be possible; (ii) the invalidity or
unenforceability of any provision hereof in any jurisdiction shall not affect
the validity or
<PAGE>
enforceability of any such provision in any other jurisdiction; and (iii) such
invalidity and unenforceability shall not affect any other provision hereof, but
this Note shall be construed as if such invalid or unenforceable provision had
never been contained herein.
Nothing in this Note or otherwise shall require Borrower to pay any
interest, liquidated damages or any other charge which might be construed as
interest, in an amount which would subject Lender to any penalty or permit any
declaration of invalidity of the Note or any payments of principal or interest
made or to be made under the Note under any applicable usury or other law. In
the event any payment of interest or any other amount which might be construed
as interest pursuant to this Note or otherwise would subject Lender to such a
penalty or permit any such declaration of invalidity, then such payments of
interest, liquidated damages or other charges required to be made by the
Borrower shall not be greater than the highest amount which, if construed as
interest, would be authorized under applicable law without penalty or invalidity
and any amounts otherwise paid in excess of any lawful amount shall, for all
purposes, be deemed to have been a payment of principal hereunder.
The parties acknowledge that the funds loaned to Borrower hereunder
were funded to Borrower by wire transfer from Lender to Borrower at Borrower's
bank located within the State of New York.
Notwithstanding that the Obligations under this Note are secured
under the Pledge Agreement, the Obligations under this Note and all Obligations
under the Pledge Agreement are and shall be deemed to be full recourse
obligations of the Borrower in all respects.
IN WITNESS WHEREOF, and intending to be legally bound hereby,
Borrower has executed this Note as an instrument under seal, and Lender has
received this Note on the day and year first above written.
EA Industries, Inc.
By:____________________________
STOCK PLEDGE AGREEMENT
THIS AGREEMENT, made this 22nd day of January, 1997, by and between the
following parties:
I. EA Industries, Inc. ("Pledgor"), 185 Monmouth Parkway, West Long
Branch, NJ 07764.
II. Millenco L.P.("Pledgee"), 111 Broadway, 20th Floor, New York, NY
10006.
W I T N E S S E T H:
Pledgor has borrowed from Pledgee, and has agreed to repay, the sum of $1
million, plus interest thereon, in accordance with the terms of a Note (the
"Note") attached hereto as Exhibit "A" (all of the liabilities and obligations
of Pledgor pursuant to the Note and hereunder are herein collectively called the
"Obligations").
NOW, THEREFORE, for good and valuable consideration, and intending to be
legally bound hereby, the parties hereto agree as follows:
1. Pledge. To secure the payment and performance, when due, of the
Obligations, Pledgor hereby pledges and assigns to Pledgee and grants Pledgee a
security interest in the following stock, which stock is currently evidenced by
certificates as follows:
Name of Issuer
(each a "Corporation") No. of Shares Certificate No.
- ---------------------- ------------- ---------------
Aydin Corporation 298,463 S 24052
1
<PAGE>
(which shares of stock of Corporation are referred to as the "Pledged Shares"
and which certificates are referred to as the "Certificates"), together with all
rights of Pledgor in and to any dividends or other distributions made on or with
respect to the Pledged Shares, or in exchange therefore, whether as dividends in
cash or property, stock dividends, stock splits, as a result of any
recapitalization, reorganization, merger, exchange of shares, or otherwise
(collectively, the "Pledged Fund"). Promptly after Closing, Pledgor shall
request transfer of 298,463 of the Pledged Shares into Pledgee's name as a
separate certificate and Pledgee shall promptly send the Pledged Shares to the
transfer agent of Aydin Corporation.
2. Delivery of Pledged Shares. Pledgor has delivered, and by these
presents does hereby deliver to Pledgee all of the Certificates, together with
stock powers for each Certificate duly executed in blank for transfer by the
registered owner of the Pledged Shares evidenced by each Certificate. Pledgee
shall retain such Certificates and stock powers in its possession in pledge
subject to the terms of this Agreement. Pledgee shall have the right to have the
Pledged Shares reissued in the name of Pledgee.
3. Additional Obligations. In addition to the Obligations, as
defined in the recitals hereto, the security interests and pledges created
hereby shall secure reimbursement of Pledgee for all reasonable costs and
expenses incurred in collection of all amounts due to Pledgee.
4. Representations. The Pledgor warrants and represents that it owns
the Pledged Shares, that with the exception of restrictions under the Securities
Act of 1933, as amended, and rules and regulations thereunder, there are no
restrictions upon the transfer of the Pledged Shares, and that the Pledgor has
the right to transfer the Pledged Shares to Pledgee free of any liens,
encumbrances or restrictions and without obtaining the consent of any person,
corporation, or other legal entity.
2
<PAGE>
5. Capital Structure. In the event that during the term of this
Agreement any stock dividend, reclassification, readjustment, or other change is
declared or made in the capital structure of the Corporation, Pledgor shall,
immediately after receipt thereof, deliver to Pledgee, all new, substituted or
additional shares, or other securities of any kind, issued by reason of any such
change, to be held by Pledgee under the terms of this Agreement and in the same
manner as the Pledged Shares originally pledged hereunder.
6. Pledgor's Covenants. Until the termination of this Agreement and
the pledge created hereby, and subject to the provisions of paragraph 11 hereof:
Pledgor shall not, and shall not permit, without the prior written consent of
Pledgee, the sale, transfer, pledge, hypothecation or other encumbrance or the
execution of an agreement contemplating any of the foregoing for all or any part
of the Pledged Shares.
7. Further Assurances. Pledgor will, upon Pledgee's request, and in
confirmation of the security interest hereby created, execute and deliver to
Pledgee such further deeds, transfers, assurances, financing and continuation
statements, and agreements, and take such other action, as Pledgee may
reasonably request.
8. Defaults. There shall be an "Event of Default" for purposes of
this Agreement if Pledgor shall fail to pay when due any amount due under the
Note or any other portion of the Obligations or there shall have occurred an
Event of Default under the Note.
9. Remedies. In the event that Pledgee claims that an Event of
Default shall have occurred, Pledgee shall so notify Pledgor which notice shall
be in writing and specify the basis upon which Pledgee claims that an Event of
Default shall have occurred. Thereafter, the Pledgee shall be entitled to
exercise all of the rights and remedies available to a secured party under the
Uniform Commercial Code as in effect in New York and all other applicable laws.
If, in the enforcement of the foregoing rights and remedies,
Pledgee shall propose to dispose of all or any portion
3
<PAGE>
of the Pledged Shares, Pledgor agrees that five (5) calendar days prior written
notice, sent to Pledgor shall be adequate and reasonable notice.
Pledgor acknowledges and agrees that Pledgee may be unable to
effect a public sale of the Pledged Shares, or any part thereof, by reason of
certain prohibitions contained in the Securities Act of 1933, as amended, or
state securities laws and that private sales made at prices and other terms less
favorable than those which might be obtainable at public sales shall not for
that reason be deemed to have not been made in a commercially reasonable manner
and that Pledgee has no obligation to delay any such private sale to permit the
registration of any of the Pledged Shares under said Act or other laws.
In connection with any sale or other disposition of the Pledged
Shares, Pledgee shall be permitted to act as, and is hereby irrevocably
appointed, attorney-in-fact of the Pledgor with power and authority to execute
on behalf of the Pledgor all documents and instruments necessary to transfer the
Pledged Shares with full representations and warranties given by Pledgor, free
and clear of all liens, claims and encumbrances. The Pledgee or anyone else may
be the purchaser or recipient of any or all of the Pledged Shares so disposed of
at any public sale or at any private sale or at any broker's board or on any
securities exchange, and such purchaser shall thereafter hold the same
absolutely, free from any claim or right of whatsoever kind, including any
equity or redemption, any such demand, notice or right and equity being hereby
expressly waived and released. The proceeds of each collection, sale or other
disposition under this Section 9 shall be applied (i) first, to the payment of
the costs and expenses of such collection, sale or other realization, including
reasonable out-of-pocket costs and expenses of the Pledgee and the reasonable
fees and expenses of its agents and counsel, and all expenses and advances made
or incurred by Pledgee in connection therewith; (ii) next, to the payment in
full of the Obligations, in each case equally and ratably in accordance with the
respective amounts thereof then due and owing or as the Pledgor may otherwise
agree; and (iii) finally, to the payment to the Pledgor, or its successors or
assigns, or as a court of competent jurisdiction may direct, of any surplus then
remaining. The Pledgee may, without notice or publication,
4
<PAGE>
adjourn any public or private sale or cause the same to be adjourned from time
to time by announcement at the time or place of which the same may be so
adjourned. In case of any sale of all or any part of the Pledged Shares on
credit or for future delivery, the Pledged Shares so sold may be retained by the
Pledgee until the selling price is paid by the purchaser thereof, but the
Pledgee shall incur no liability in the case of the failure of such purchaser to
take up and pay for the Pledged Shares so sold and in case of any such failure
such Pledged Shares may again be sold on like notice. Any private sale of the
Pledged Shares shall, for all purposes, be deemed to be commercially reasonable
if the Pledgee provides at least two nationally recognized securities
broker-dealers to have an opportunity within five (5) days following notice
thereof, to submit a bid to acquire such shares.
If the proceeds of sale, collection or other realization of or upon
the Pledged Shares are insufficient to cover the costs and expenses of such
realization and the payment in full of the Obligations, the Pledgor shall
nevertheless remain liable for any deficiency in respect of the Obligations.
Pledgor shall reimburse, indemnify and hold Pledgee hereunder
harmless from all costs and expenses incurred in enforcing its rights hereunder
and under the Note, including without limitation, reasonable fees and
disbursements of Counsel.
Upon the occurrence and continuance of an Event of Default, Pledgee
may retain the Pledged Shares, and register the same in Pledgee's name or the
name of its nominee, in full and complete satisfaction of the Obligations by
providing written notice to Pledgor of its intention to so retain the Pledged
Shares. Such notice shall be delivered to Pledgor within thirty (30) days after
the occurrence of the Event of Default giving rise to such remedy and shall
specify a date not less than 7 days later than the date of receipt by the
Pledgor of the notice (the "Retention Date") on which Pledgee intends to retain
the Pledged Shares in satisfaction of the Obligations. Pledgee's retention of
the Pledged Stock shall fully and completely discharge Pledgor from any and all
indebtedness arising under the Note and any fees (including, without limitation,
attorneys' fees), costs or other amounts due to Pledgee under this Agreement or
the Note. Pledgor
5
<PAGE>
shall have the right to retain ownership of the Pledged Shares by paying Pledgee
the full amount of outstanding obligations under the Note on or before the
Retention Date.
Following the occurrence of any Event of Default, Pledgee may seek
to hedge the risks inherent in this transaction and with respect to the
Obligations, the Note and the Pledged Shares by, among other things, options,
swaps and/or engaging in "short sales" of a number of shares of securities of
the class and type of securities as the Pledged Shares equal to or less than the
number of shares included in the Pledged Shares (collectively, "Hedging
Transactions"). Any such Hedging Transaction may, at the option and sole and
absolute discretion of the Pledgee, be "covered" with the Pledged Shares or any
other securities. All costs, expenses and losses, including all taxes and
without limitation any income taxes, incurred by Pledgee in engaging in any such
Hedging Transactions and other hedging transactions shall be added to and
increase the Obligations. Any gains achieved through such Hedging Transactions
and other hedging transactions, determined after all such short positions have
been closed out (after taking into account all related losses, costs and
expenses, including all taxes and without limitation any income taxes) shall
reduce the Obligations.
10. Rights of Pledgor in Pledged Shares. For so long as there is no
Event of Default, Pledgor shall retain and may exercise all rights of or
incident to the ownership of the Pledged Shares, including voting rights, which
are not inconsistent with the terms of this Agreement and have the right to vote
or consent with respect to the Pledged Shares in a manner consistent with the
covenants of Pledgor herein, and Pledgee, upon written request, will execute one
or more proxies in favor of Pledgor to enable it to so vote or consent. Until an
Event of Default shall have occurred, Pledgee shall have the rights to receive
and retain as additional collateral hereunder cash and all other dividends with
respect to the Pledged Shares.
11. Termination. This Agreement and the security interest and pledge
created hereby shall terminate on the payment and performance in full by Pledgor
of all the Obligations. Upon termination, Pledgee shall deliver to Pledgor all
the
6
<PAGE>
Certificates, with all stock powers therefor, and the balance of the Pledged
Fund.
Pledgor shall have the right to sell any or all of the Pledged
Shares and Pledgee agrees to deliver certificates to the purchaser of such
shares promptly after prepayment of principal on the Note in an amount equal to
$5.00 for each of the Pledged Shares which have been sold.
12. Waivers. Pledgee shall at all times have the right to enforce
the provisions of this Agreement in strict accordance with the terms hereof,
notwithstanding any conduct or custom to the contrary. The failure of Pledgee at
any time to enforce its rights hereunder shall not be construed as having
created a custom contrary to the provisions of this Agreement, as having
modified in any manner the terms hereof, or as preventing Pledgee from
thereafter enforcing strict compliance. All rights and remedies of Pledgee are
cumulative and concurrent and the exercise of one right or remedy shall not be
deemed a waiver or release of any other right or remedy.
13. Miscellaneous.
(a) Notices. All notices, requests, demands, claims, and other
communications hereunder will be in writing. Any notice, request, demand, claim,
or other communication hereunder shall be deemed duly given if (and then two
business days after) it is sent by registered or certified mail, return receipt
requested, postage prepaid, and addressed to the intended recipient as set forth
below:
If to Pledgor : Copy to: Richard P. Jaffe, Esquire
185 Monmouth Parkway Mesirov Gelman Jaffe
West Long Branch, NJ 07764 Cramer & Jamieson
ATTN: President 1735 Market Street
Philadelphia, PA 19103
If to Pledgee : Copy to:
Millenco L.P.
111 Broadway, 20th Floor
New York, NY 10006
7
<PAGE>
Any party hereto may give any notice, request, demand, claim or other
communication hereunder using any other means (including personal delivery,
expedited courier, messenger service, telecopy, telex, ordinary mail, or
electronic mail), but no such notice, request, demand, claim, or other
communication shall be deemed to have been duly given unless and until it
actually is received by the individual for whom it is intended. Any party hereto
may change the address to which notices, requests, demands, claims, and other
communications hereunder are to be delivered by giving the other parties hereto
notice in the manner herein set forth.
(b) Entire Agreement. This Agreement constitutes the entire
agreement between the parties with respect to the subject matter hereof, and may
not be changed, nor any rights or remedies waived, except in writing, signed by
the party sought to be bound by such change or waiver.
(c) Headings. The headings of sections and paragraphs of this
Agreement are for convenience of reference only, and in case of any conflict the
text of this Agreement, rather than such headings, shall control.
(d) Governing Law. This Agreement has been executed,
delivered, and accepted by the parties and will be deemed to have been made in
New York and will be interpreted and the rights of the parties determined in
accordance with the laws of the United States of America applicable thereto and
the internal laws of the State of New York applicable to an agreement executed,
delivered and performed therein without giving effect to the choice-of-law rules
thereof or any other principle that could require the application of the
substantive law of any other jurisdiction.
Pledgor hereby irrevocably: (i) in any legal proceeding
brought in connection with the Agreement: (1) submits to the nonexclusive in
personam jurisdiction of any state or United States court of competent
jurisdiction sitting in or with jurisdiction in, the State of New York; (ii)
waives any objection that it may now or hereafter have to the venue of such
proceeding
8
<PAGE>
in any such court or that such proceeding was brought in an inconvenient court;
and (iii) agrees that nothing contained herein shall affect Pledgee's right to
effect service of process in any manner permitted by law. Any and all actions at
law or in equity relating to this Agreement and the indebtedness shall be
brought, and jurisdiction shall be had exclusively, in the courts of the State
of New York, or at the election of the holder hereof, the United States District
Court for the Eastern District of New York. Borrower consents in advance to
service of process by mail to the address set forth in this Agreement.
If any provision of this Agreement is invalid and
unenforceable then, to the fullest extent permitted by law: (i) the other
provisions hereof shall remain in full force and effect in order to carry out
the intentions of the parties hereto as nearly as may be possible; (ii) the
invalidity or unenforceability of any provision hereof in any jurisdiction shall
not affect the validity or enforceability of any such provision in any other
jurisdiction; and (iii) such invalidity and unenforceability shall not affect
any other provision hereof, but this Agreement shall be construed as if such
invalid or unenforceable provision had never been contained herein.
(e) Counterparts. This Agreement may be executed in any number
of copies, and by the different parties hereto on the same or separate
counterparts, each of which shall be deemed to be an original instrument.
IN WITNESS WHEREOF, the parties have executed this Agreement, under seal,
the day and year first above written.
EA Industries, Inc.
By:__________________________ (PLEDGOR) (SEAL)
Millenco L.P.
9
<PAGE>
By:__________________________ (PLEDGEE) (SEAL)
10
This Warrant and the Common Stock issuable on exercise of this
Warrant (the "Underlying Shares") may be transferred, sold, assigned
or hypothecated, only if registered by the Company under the
Securities Act of 1933 (the "Act") and if registered or qualified in
every applicable state, or if the Company has received the favorable
opinion of counsel to the Holder, which opinion and counsel shall be
satisfactory to counsel to the Company, to the effect that such
registration or qualification of the Warrant or the Underlying
Shares is not necessary in connection with such transfer, sale,
assignment or hypothecation.
EA INDUSTRIES, INC.
WARRANT
DATED: as of January 22, 1997
Number of Shares: 50,000
Holder: Millenco L.P.
Address: 111 Broadway, 20th Floor
New York, NY 10006
- --------------------------------
THIS CERTIFIES THAT the Holder is entitled to purchase from EA INDUSTRIES,
INC., a New Jersey corporation (hereinafter called the "Company"), at $1.50 per
share the number of shares of the Company's common stock set forth above
("Common Stock").
1. All rights granted under this Warrant shall expire on July 20, 1999,
and no shares of Common Stock may be acquired under this Warrant from and after
such date.
2. This Warrant and the Common Stock issuable on exercise of this Warrant
(the "Shares" or "Underlying Shares") may be transferred, sold, assigned or
hypothecated, only if registered by the Company under the Securities Act of 1933
(the "Act") and registered and qualified in every applicable state or if the
Company has received the opinion of counsel to the Holder, which opinion and
counsel shall be satisfactory to counsel to the Company, to the effect that
registration of the Warrant or the Underlying Shares and registration and
qualification in every applicable state is not necessary in connection with such
transfer, sale, assignment or hypothecation. The Underlying Shares shall be
appropriately legended to reflect this restriction and stop
<PAGE>
transfer instructions shall apply. The restrictions on transfer contained in
this Section shall apply to all successive transfers.
3. Any permitted assignment of this Warrant shall be effected by the
Holder by (i) executing an appropriate form of assignment, (ii) surrendering the
Warrant for cancellation at the office of the Company, accompanied by the
opinion of Counsel referred to above; and (iii) unless in connection with an
effective registration statement which covers the sale of this Warrant and or
the Underlying Shares, delivery to the Company of a statement by the Holder (in
a form reasonably acceptable to the Company and its counsel) that such Warrant
is being acquired by the Holder for investment and not with a view to its
distribution or resale; whereupon the Company shall issue, in the name or names
specified by the Holder (including the Holder) new Warrants representing in the
aggregate rights to purchase the same number of Shares as are purchasable under
the Warrant surrendered. Such Warrants shall be exercisable immediately upon any
such assignment of the number of Warrants assigned.
4. The term "Holder" should be deemed to include any transferee Holder of
this Warrant pursuant to a transfer in compliance with the requirements
described herein.
5. The Company covenants and agrees that all shares of Common Stock which
may be issued upon exercise hereof will, upon issuance, be duly and validly
issued, fully paid and non-assessable.
6. This Warrant shall not entitle the Holder to any voting rights or other
rights as a stockholder of the Company.
7. In the event that the outstanding shares of Common Stock of the Company
are at any time increased or decreased or changed into or exchanged for a
different number or kind of share or other security of the Company or of another
corporation through reorganization, merger, consolidation, liquidation,
recapitalization, stock split, combination of shares or stock dividends payable
with respect to such Common Stock, appropriate adjustments in the number and
kind of such securities then subject to this Warrant shall be made effective as
of the date of such occurrence so that the position of the Holder upon exercise
will be the same as it would have been had he owned immediately prior to the
occurrence of such events the Common Stock subject to this Warrant. Such
adjustment shall be made successively whenever any event listed above shall
occur and the Company will notify the Holder of the Warrant of each such
adjustment. Any fraction of a share resulting from any adjustment shall be
eliminated.
8. The rights represented by this Warrant may be exercised at any time
within the period above specified by (i) surrender of this Warrant, before
issuance of the Underlying Shares, at the principal executive office of the
Company (or such other office or agency of the Company as it may designate by
notice in writing to the Holder at the address of the Holder appearing on the
books of the Company); (ii) payment to the
<PAGE>
Company by check or wire transfer of the exercise price for the number of Shares
specified in the above-mentioned purchase form together with applicable stock
transfer taxes, if any and (iii) unless in connection with an effective
registration statement which covers the sale of the shares underlying the
Warrant, the delivery to the Company of a statement by the Holder (in a form
acceptable to the Company and its counsel) that such Shares are being acquired
by the Holder for investment and not with a view to their distribution or
resale. The certificates for the Common Stock so purchased shall be delivered to
the Holder within a reasonable time, not exceeding five (5) days, after the
rights represented by this Warrant shall have been so exercised, and shall bear
a restrictive legend with respect to any applicable securities laws.
9. If the Company proposes to file a registration statement under the Act
with respect to an offering by the Company for its own account of its Common
Stock (other than a registration statement on Form S-4, S-8 or S-14 or any form
substituting therefor or filed in connection with an exchange offer or an
offering of securities solely to the Company's existing stockholders or
employees) during the period commencing on the date hereof and ending on
expiration of this Warrant, the Company shall in each case give written notice
of such proposed filing to the Holder and such notice shall offer the Holder the
opportunity to register such number of the Shares as the Holder may request in
writing within ten days after receipt of such notice. If such offering is an
underwritten offering, the amount of shares included by Holder may be reduced in
the sole discretion of the managing underwriter. In connection with a piggy-back
registration, the Company will bear all Registration Expenses. The Holder shall
deliver such documents, and provide the Company with such information, as is
necessary or desirable to effectuate such registration
10. If a registration statement covering the Shares has not been declared
effective on or before July 20, 1997 so as to permit the disposition of all
Shares that have been or may be acquired hereunder and the Holder has not waived
its rights to have Shares included in any prior registration statement filed by
the Company, the Holder shall have the right to demand that the Company
repurchase the Warrant. This right shall be exercisable by written notice to the
Company anytime between July 20, 1997 and the earlier of April 20, 1998 or the
date such registration statement has been declared effective. The price to be
paid by the Company for the Warrant shall be (a) the weighted average price per
Share of the Common Stock of the Company as reported by Bloomberg Business
Services in its Volume At Price service for the day on which the Company
receives such notice or the next succeeding business day if the NYSE is not open
for business on that day less the exercise price for the Warrant Shares
multiplied by (b) the number of Shares for which the Warrant is then
exercisable. The purchase price shall be paid by the Company within three (3)
days after receipt by the Company of such demand.
11. This Warrant shall be governed by and construed in accordance with the
internal laws of New Jersey.
<PAGE>
IN WITNESS WHEREOF, EA INDUSTRIES, INC. and the Holder have each caused
this Warrant to be signed by its duly authorized officer under its corporate
seal, and to be dated as of the date set forth above.
EA INDUSTRIES, INC.
By:_______________________
MILLENCO L.P.
By:_______________________
PROMISSORY NOTE
$1,000,000 January 6, 1997
FOR VALUE RECEIVED, EA Industries, Inc., a New Jersey corporation
("Borrower") promises to pay to the order of Ace Foundation, Inc. ("Lender") the
principal sum of One Million Dollars ($1,000,000) together with interest thereon
at an annual rate of thirteen and one-half percent (13.5%).
Interest shall be payable on the first day of each month beginning on April
1, 1997 and continuing thereafter until the maturity date of this note. All
outstanding principal and interest shall be payable on the maturity date of
January 6, 1999. Interest shall be calculated on the basis of a 360 day year,
but charged for the number of days actually elapsed during any year or part
thereof.
All payments of principal, interest, and fees hereunder shall be made by
Borrower without defense, set off, or counterclaim and in same day funds and
delivered to Lender not later than 5:00 P.M. (New York time) on the date due at
Lender's office located at 1650 49th Street, Brooklyn, NY 11204 or such other
place as shall be designated in writing for such purpose. Funds received by
Lender after that time shall be deemed to have been paid by Borrower on the next
succeeding Business Day.
Amounts outstanding under this Note may be prepaid in whole or in part at
any time without premium or penalty, with any such prepayments being applied
first to accrued and unpaid interest then to principal in the inverse order of
maturity.
Whenever any payment on this Note shall be stated to be due on a day which
is not a Business Day, such payment shall be made on the next succeeding
Business Day and such extension of time shall be included in the computation of
the payment of interest on this Note.
The occurrence of any one or more of the following events shall be an event
of default ("Default") hereunder:
(a) Default shall be made in the payment of the principal of or interest on
this Note when and as the same shall become due and payable, whether at a date
fixed for payment, by acceleration or otherwise;
(b) The Borrower shall:
(i) admit in writing its inability to pay its debts generally as they
become due;
<PAGE>
(ii) file a petition in bankruptcy under the bankruptcy laws of the
United States or any other jurisdiction (as such laws are now or in the
future amended) or any admission seeking the relief therein provided;
(iii) make an assignment for the benefit of its creditors;
(iv) consent to the filing of a petition against it under said
bankruptcy laws; or
(v) be adjudicated a bankrupt;
(c) A court order shall be entered appointing a receiver or trustee for all
or a substantial part of the property of the Borrower, or approving as filed in
good faith a petition filed against the Borrower under said bankruptcy laws.
(d) If the average Closing Price of Aydin Corporation Common Stock as
traded on the New York Stock Exchange for any seven consecutive trading days is
less than $5.00 per share.
(e) If the Shares of Aydin Corporation are not transferred into the name of
the Lender within three weeks after such transfer is requested by Lender.
In addition to other remedies of Lender as set forth in this Note upon the
occurrence of a Default, Lender may, without demand, by written notice to
Borrower, cause this Note to become immediately due and payable.
Borrower hereby waives presentment, demand for payment, notice of dishonor,
protest or notice of protest and any and all notices or demands and, to the full
extent permitted by law, the right to plead any statute of limitations as a
defense to any demand hereunder in connection with the delivery, acceptance,
performance, or default of this Note.
The liabilities and obligations of Borrower hereunder shall be
unconditional without regard to the liability or obligations of any other party
and shall not be in any manner affected by any indulgence whatsoever granted or
consented to by Lender, including, but not limited to, any extension of time,
renewal, waiver or other modification. Any failure of Lender to exercise any
right hereunder shall not be construed as a waiver of the right to exercise the
same or any other right at any time and from time to time thereafter.
This Note shall be governed as to its validity, interpretation and effect
by the internal laws of the State of New York. Any and all actions at law or in
equity relating to this Note and the indebtedness shall be brought, and
jurisdiction shall be had exclusively, in the courts of the
<PAGE>
State of New York, or at the election of the holder hereof, the United States
District Court for the Eastern District of New York. Borrower consents in
advance to service of process by mail to the address set forth in the Pledge
Agreement.
This Note may not be changed or amended orally but only by an agreement in
writing and signed by the party against whom enforcement of any waiver, change,
modification or discharge is sought.
If any provision of this Note shall for any reason be held to be invalid or
unenforceable, such invalidity or unenforceability shall not affect any other
provision hereof, but this Note shall be construed as if such invalid or
unenforceable provision had never been contained herein.
IN WITNESS WHEREOF, and intending to be legally bound hereby, Borrower has
executed this Note as an instrument under seal, and Lender has received this
Note on the day and year first above written.
EA Industries, Inc.
By:____________________________
STOCK PLEDGE AGREEMENT
THIS AGREEMENT, made this _____ day of January, 1997, by and between the
following parties:
I. EA Industries, Inc. ("Pledgor"), 185 Monmouth Parkway, West Long
Branch, NJ 07764.
II. Ace Foundation, Inc. ("Pledgee"), 1650 49th Street, Brooklyn, NY
11204.
W I T N E S S E T H:
Pledgor has borrowed from Pledgee, and has agreed to repay, the sum of $1
million, plus interest thereon, in accordance with the terms of a Note (the
"Note") attached hereto as Exhibit "A" (all of which liabilities and obligations
of Pledgor are herein collectively called the "Obligations").
NOW, THEREFORE, for good and valuable consideration, and intending to be
legally bound hereby, the parties hereto agree as follows:
1. Pledge. To secure the payment and performance, when due, of the
Obligations, Pledgor hereby pledges and assigns to Pledgee and grants Pledgee a
security interest in the following stock, which stock is currently evidenced by
certificates as follows:
Name of Issuer
(each a "Corporation") No. of Shares Certificate No.
- ---------------------- ------------- ---------------
Aydin Corporation 3,750 S 24015
Aydin Corporation 593,177 S 24019
1
<PAGE>
(which shares of stock of Corporation are referred to as the "Pledged Shares"
and which certificates are referred to as the "Certificates"), together with all
rights of Pledgor in and to any dividends or other distributions made on or with
respect to the Pledged Shares, or in exchange therefore, whether as dividends in
cash or property, stock dividends, stock splits, as a result of any
recapitalization, reorganization, merger, exchange of shares, or otherwise
(collectively, the "Pledged Fund"). After Closing, Pledgor shall request
transfer of 298,463 of the Pledged Shares into Pledgor's name as a separate
certificate. Pledgee agrees to release such shares to Pledgor and shall retain
only the remaining shares as Pledged Shares.
2. Delivery of Pledged Shares. Pledgor has delivered, and by these presents
does hereby deliver to Pledgee all of the Certificates, together with stock
powers for each Certificate duly executed in blank for transfer by the
registered owner of the Pledged Shares evidenced by each Certificate. Pledgee
shall retain such Certificates and stock powers in its possession in pledge
subject to the terms of this Agreement. Pledgee shall have the right to have the
Pledged Shares reissued in the name of Pledgee.
3. Additional Obligations. In addition to the Obligations, as defined in
the recitals hereto, the security interests and pledges created hereby shall
secure reimbursement of Pledgee for all reasonable costs and expenses incurred
in collection of all amounts due to Pledgee.
4. Representations. The Pledgor warrants and represents that it owns the
Pledged Shares, that with the exception of restrictions under the Securities Act
of 1933, as amended, and rules and regulations thereunder, there are no
restrictions upon the transfer of the Pledged Shares, and that the Pledgor has
the right to transfer the Pledged Shares to Pledgee free of any liens,
encumbrances or restrictions and without obtaining the consent of any person,
corporation, or other legal entity.
5. Capital Structure. In the event that during the term of this Agreement
any stock dividend, reclassification,
2
<PAGE>
readjustment, or other change is declared or made in the capital structure of
the Corporation, Pledgor shall, immediately after receipt thereof, deliver to
Pledgee, all new, substituted or additional shares, or other securities of any
kind, issued by reason of any such change, to be held by Pledgee under the terms
of this Agreement and in the same manner as the Pledged Shares originally
pledged hereunder.
6. Pledgor's Covenants. Until the termination of this Agreement and the
pledge created hereby, and subject to the provisions of paragraph 11 hereof:
Pledgor shall not, and shall not permit, without the prior written consent of
Pledgee, the sale, transfer, pledge, hypothecation or other encumbrance or the
execution of an agreement contemplating any of the foregoing for all or any part
of the Pledged Shares.
7. Further Assurances. Pledgor will, upon Pledgee's request, and in
confirmation of the security interest hereby created, execute and deliver to
Pledgee such further deeds, transfers, assurances, financing and continuation
statements, and agreements, and take such other action, as Pledgee may
reasonably request.
8. Defaults. There shall be an "Event of Default" for purposes of this
Agreement if Pledgor shall fail to pay when due any amount due under the Note or
any other portion of the Obligations or there shall have occurred an Event of
Default under the Note.
9. Remedies. In the event that Pledgee claims that an Event of Default
shall have occurred, Pledgee shall so notify Pledgor which notice shall be in
writing and specify the basis upon which Pledgee claims that an Event of Default
shall have occurred. Thereafter, the Pledgee shall be entitled to exercise all
of the rights and remedies available to a secured party under the Uniform
Commercial Code as in effect in New York and all other applicable laws.
If, in the enforcement of the foregoing rights and remedies, Pledgee
shall propose to dispose of all or any portion of the Pledged Shares, Pledgor
agrees that ten (10) calendar days prior written notice, sent to Pledgor shall
be adequate and reasonable notice.
3
<PAGE>
Pledgor acknowledges and agrees that Pledgee may be unable to effect a
public sale of the Pledged Shares, or any part thereof, by reason of certain
prohibitions contained in the Securities Act of 1933, as amended, or state
securities laws and that private sales made at prices and other terms less
favorable than those which might be obtainable at public sales shall not for
that reason be deemed to have not been made in a commercially reasonable manner
and that Pledgee has no obligation to delay any such private sale to permit the
registration of any of the Pledged Shares under said Act or other laws.
10. Rights of Pledgor in Pledged Shares. For so long as there is no Event
of Default, Pledgor shall retain and may exercise all rights of or incident to
the ownership of the Pledged Shares, including voting rights, which are not
inconsistent with the terms of this Agreement. Until an Event of Default shall
have occurred, Pledgor shall retain the rights to receive cash dividends and
have the right to vote or consent with respect to the Pledged Shares in a manner
consistent with the covenants of Pledgor herein, and Pledgee, upon written
request, will execute one or more proxies in favor of Pledgor to enable it to so
vote or consent.
11. Termination. This Agreement and the security interest and pledge
created hereby shall terminate on the payment and performance in full by Pledgor
of all the Obligations. Upon termination, Pledgee shall deliver to Pledgor all
the Certificates, with all stock powers therefor, and the balance of the Pledged
Fund.
Pledgor shall have the right to sell any or all of the Pledged Shares
and Pledgee agrees to deliver certificates to the purchaser of such shares
promptly after prepayment of the Note in an amount equal to $5.00 for each of
the Pledged Shares which have been sold. In addition, Pledgor shall have the
right to grant a right of first refusal to Aydin Corporation to repurchase the
Pledged Shares if the shares are to be sold in a private transaction and the
pledge of the Pledged Shares hereunder shall be subject to such rights.
4
<PAGE>
12. Waivers. Pledgee shall at all times have the right to enforce the
provisions of this Agreement in strict accordance with the terms hereof,
notwithstanding any conduct or custom to the contrary. The failure of Pledgee at
any time to enforce its rights hereunder shall not be construed as having
created a custom contrary to the provisions of this Agreement, as having
modified in any manner the terms hereof, or as preventing Pledgee from
thereafter enforcing strict compliance. All rights and remedies of Pledgee are
cumulative and concurrent and the exercise of one right or remedy shall not be
deemed a waiver or release of any other right or remedy.
13. Miscellaneous.
(a) Notices. All notices, requests, demands, claims, and other
communications hereunder will be in writing. Any notice, request, demand, claim,
or other communication hereunder shall be deemed duly given if (and then two
business days after) it is sent by registered or certified mail, return receipt
requested, postage prepaid, and addressed to the intended recipient as set forth
below:
If to Pledgor : Copy to: Richard P. Jaffe, Esquire
185 Monmouth Parkway Mesirov Gelman Jaffe
West Long Branch, NJ 07764 Cramer & Jamieson
ATTN: President 1735 Market Street
Philadelphia, PA 19103
If to Pledgee : Copy to: David Selengut, Esquire
Ace Foundation, Inc. Singer, Zamansky
1650 49th Street 40 Exchange Place
Brooklyn, NY 11204 New York, NY 10005
Any party hereto may give any notice, request, demand, claim or other
communication hereunder using any other means (including personal delivery,
expedited courier, messenger service, telecopy, telex, ordinary mail, or
electronic mail), but no such notice, request, demand, claim, or other
communication shall be deemed to have been duly given unless and until it
actually is received by the individual for whom it is intended. Any party hereto
may change the address to which notices, requests, demands, claims, and other
communications hereunder are to be
5
<PAGE>
delivered by giving the other parties hereto notice in the manner herein set
forth.
(b) Entire Agreement. This Agreement constitutes the entire agreement
between the parties with respect to the subject matter hereof, and may not be
changed, nor any rights or remedies waived, except in writing, signed by the
party sought to be bound by such change or waiver.
(c) Headings. The headings of sections and paragraphs of this
Agreement are for convenience of reference only, and in case of any conflict the
text of this Agreement, rather than such headings, shall control.
(d) Governing Law. This Agreement shall be governed by and construed
in accordance with the internal laws (and not the law of conflicts) of the State
of New York.
(e) Counterparts. This Agreement may be executed in any number of
copies, and by the different parties hereto on the same or separate
counterparts, each of which shall be deemed to be an original instrument.
IN WITNESS WHEREOF, the parties have executed this Agreement, under seal,
the day and year first above written.
EA Industries, Inc.
By:__________________________ (PLEDGOR) (SEAL)
Ace Foundation, Inc.
By:__________________________ (PLEDGEE) (SEAL)
6
<PAGE>
Notes to Draftsman
(1) This form of Agreement includes provisions for possible utilization of
an Escrow Agent to hold the pledged securities. If an Escrow Agent is used, the
Agreement provides that the Escrow Agent is holding the securities on behalf of
the Pledgee, which is necessary to assure perfection of the security interest.
If the Pledgee is to hold the securities directly, then all references to the
Escrow Agent should be deleted.
(2) The Agreement contains provisions which are relevant only if
obligations of one of the Corporations, as defined, are being secured by the
Pledgor. Those references to the Corporation should be deleted if Corporation
debt is not being secured. Those references appear, for example, in Paragraph 3,
clauses (iii) and (iv); Paragraph 9, clauses (i), (iii), (iv); and Paragraph 14.
(3) At certain locations within the Agreement references are made to "the
Note" on the assumption that the Obligation, as defined, or a principal portion
of the Obligation, consists of a Note. The references should be deleted if there
is no Note.
(4) Paragraph 5A (which, of course, will be renumbered if the clause is
retained) grants the Pledgee the right to transfer the pledged securities to its
own name or the name of a nominee. It will be an unusual situation in which the
Pledgor will agree to this, unless, at least, the Pledgee is an institution, and
frequently not even in that case. It is worth considering, however, because the
transfer of record assures that all dividends and other distributions and
notices with respect to the pledged shares will be received by the Pledgee or
the Escrow Agent.
7
This Warrant and the Common Stock issuable on exercise of this
Warrant (the "Underlying Shares") may be transferred, sold,
assigned or hypothecated, only if registered by the Company
under the Securities Act of 1933 (the "Act") and if registered
or qualified in every applicable state, or if the Company has
received the favorable opinion of counsel to the Holder, which
opinion and counsel shall be satisfactory to counsel to the
Company, to the effect that such registration or qualification
of the Warrant or the Underlying Shares is not necessary in
connection with such transfer, sale, assignment or
hypothecation.
EA INDUSTRIES, INC.
WARRANT
DATED: as of January 6, 1997
Number of Shares: 50,000
Holder: Ace Foundation, Inc.
Address: 1650 49th Street
Brooklyn, NY 11204
- --------------------------------
THIS CERTIFIES THAT the Holder is entitled to purchase from EA
INDUSTRIES, INC., a New Jersey corporation (hereinafter called the "Company"),
at $1.50 per share times the number of shares of the Company's common stock set
forth above ("Common Stock"). Notwithstanding the foregoing, this Warrant may
not be exercised prior to the first day on which the Company shall have
sufficient authorized and unreserved Common Stock to permit such exercise.
1. All rights granted under this Warrant shall expire on
January 6, 1999, and no shares of Common Stock may be acquired under this
Warrant from and after such date.
2. This Warrant and the Common Stock issuable on exercise of
this Warrant (the "Underlying Shares") may be transferred, sold, assigned or
hypothecated, only if registered by the Company under the Securities Act of 1933
(the "Act") and registered and qualified in every applicable state or if the
Company has received the favorable opinion of counsel to the Holder, which
<PAGE>
opinion and counsel shall be satisfactory to counsel to the Company, to the
effect that registration of the Warrant or the Underlying Shares and
registration and qualification in every applicable state is not necessary in
connection with such transfer, sale, assignment or hypothecation. The Underlying
Shares shall be appropriately legended to reflect this restriction and stop
transfer instructions shall apply. The restrictions on transfer contained in
this Section shall apply to all successive transfers.
3. Any permitted assignment of this Warrant shall be effected
by the Holder by (i) executing an appropriate form of assignment, (ii)
surrendering the Warrant for cancellation at the office of the Company,
accompanied by the opinion of Counsel referred to above; and (iii) unless in
connection with an effective registration statement which covers the sale of
this Warrant and or the Underlying Shares, delivery to the Company of a
statement by the Holder (in a form acceptable to the Company and its counsel)
that such Warrant is being acquired by the Holder for investment and not with a
view to its distribution or resale; whereupon the Company shall issue, in the
name or names specified by the Holder (including the Holder) new Warrants
representing in the aggregate rights to purchase the same number of Shares as
are purchasable under the Warrant surrendered. Such Warrants shall be
exercisable immediately upon any such assignment of the number of Warrants
assigned.
4. The term "Holder" should be deemed to include any
transferee Holder of this Warrant pursuant to a transfer in compliance with the
requirements described herein.
5. The Company covenants and agrees that all shares of Common
Stock which may be issued upon exercise hereof will, upon issuance, be duly and
validly issued, fully paid and non-assessable.
6. This Warrant shall not entitle the Holder to any voting
rights or other rights as a stockholder of the Company.
7. In the event that the outstanding shares of Common Stock of
the Company are at any time increased or decreased or changed into or exchanged
for a different number or kind of share or other security of the Company or of
another corporation through reorganization, merger, consolidation, liquidation,
recapitalization, stock split, combination of shares or stock dividends payable
with respect to such Common Stock, appropriate adjustments in the number and
kind of such securities then subject to this Warrant shall be made effective as
of the date of such occurrence so that the position of the Holder upon exercise
will be the same as it would have been had he owned immediately prior to the
occurrence of such events the Common Stock subject to this Warrant. Such
adjustment shall be made successively whenever any event listed above shall
occur and the Company will notify the Holder of the Warrant of each such
adjustment. Any fraction of a share resulting from any adjustment shall be
eliminated.
8. The rights represented by this Warrant may be exercised at
any time within the period above specified by (i) surrender of this Warrant at
the principal executive office of the Company (or such other office or agency of
the Company as it may designate by notice in writing to the Holder at the
2
<PAGE>
address of the Holder appearing on the books of the Company); (ii) payment to
the Company by check or wire transfer of the exercise price for the number of
Shares specified in the above-mentioned purchase form together with applicable
stock transfer taxes, if any and (iii) unless in connection with an effective
registration statement which covers the sale of the shares underlying the
Warrant, the delivery to the Company of a statement by the Holder (in a form
acceptable to the Company and its counsel) that such Shares are being acquired
by the Holder for investment and not with a view to their distribution or
resale. The certificates for the Common Stock so purchased shall be delivered to
the Holder within a reasonable time, not exceeding ten (10) days, after the
rights represented by this Warrant shall have been so exercised, and shall bear
a restrictive legend with respect to any applicable securities laws.
9. If the Company proposes to file a registration statement
under the Act with respect to an offering by the Company for its own account of
its Common Stock (other than a registration statement on Form S-4, S-8 or S-14
or any form substituting therefor) or filed in connection with an exchange offer
or an offering of securities solely to the Company's existing stockholders or
employees) during the period commencing on the date hereof and ending on
expiration of this Warrant, the Company shall in each case give written notice
of such proposed filing to the Holder and such notice shall offer the Holder the
opportunity to register such number of the Shares as the Holder may request in
writing within ten days after receipt of such notice. If such offering is an
underwritten offering, the amount of shares included by Holder may be reduced in
the sole discretion of the managing underwriter. In connection with a piggy-back
registration, the Company will bear all Registration Expenses. The Holder shall
deliver such documents, and provide the Company with such information, as is
necessary or desirable to effectuate such registration
10. This Warrant shall be governed by and construed in
accordance with the internal laws of New Jersey.
IN WITNESS WHEREOF, EA INDUSTRIES, INC. and the Holder have
each caused this Warrant to be signed by its duly authorized officer under its
corporate seal, and to be dated as of the date set forth above.
EA INDUSTRIES, INC.
By:
--------------------------------
ACE FOUNDATION, INC.
By:
--------------------------------
This Warrant and the Common Stock issuable on exercise of this
Warrant (the "Underlying Shares") may be transferred, sold,
assigned or hypothecated, only if registered by the Company under
the Securities Act of 1933 (the "Act") and if registered or
qualified in every applicable state, or if the Company has
received the favorable opinion of counsel to the Holder, which
opinion and counsel shall be satisfactory to counsel to the
Company, to the effect that such registration or qualification of
the Warrant or the Underlying Shares is not necessary in
connection with such transfer, sale, assignment or hypothecation.
EA INDUSTRIES, INC.
WARRANT
DATED: as of September 3, 1996
Number of Shares: 357,143
Holder: Broad Capital Associates, Inc.
Address: 152 West 57th Street
New York, NY 10019
- --------------------------------
THIS CERTIFIES THAT the Holder is entitled to purchase from EA INDUSTRIES,
INC., a New Jersey corporation (hereinafter called the "Company"), at $3.00 per
share until July 31, 1997 and thereafter at $8.125 per share the number of
shares of the Company's common stock set forth above ("Common Stock").
Notwithstanding the foregoing, this Warrant may not be exercised prior to the
first day on which the Company shall have sufficient authorized and unreserved
Common Stock to permit such exercise.
1. All rights granted under this Warrant shall expire on July 5, 2000, and
no shares of Common Stock may be acquired under this Warrant from and after such
date.
2. This Warrant and the Common Stock issuable on exercise of this Warrant
(the "Underlying Shares") may be transferred, sold, assigned or hypothecated,
only if registered by the Company under the Securities Act of 1933 (the "Act")
and registered and qualified in every applicable state or if the Company has
received the favorable opinion of counsel to the Holder, which opinion and
counsel shall be satisfactory to counsel to the Company, to the effect that
registration of the Warrant or the Underlying Shares and registration and
qualification in every applicable state is not
<PAGE>
necessary in connection with such transfer, sale, assignment or hypothecation.
The Underlying Shares shall be appropriately legended to reflect this
restriction and stop transfer instructions shall apply. The restrictions on
transfer contained in this Section shall apply to all successive transfers.
3. The Company shall include the underlying shares in the next registration
statement filed by the Company on Form S-3, or such other Form as the Company
shall select, provided, however, that the filing of such registration statement
shall not, in the Company's reasonable discretion, have a material adverse
effect on the Company.
4. Any permitted assignment of this Warrant shall be effected by the Holder
by (i) executing an appropriate form of assignment, (ii) surrendering the
Warrant for cancellation at the office of the Company, accompanied by the
opinion of Counsel referred to above; and (iii) unless in connection with an
effective registration statement which covers the sale of this Warrant and or
the Underlying Shares, delivery to the Company of a statement by the Holder (in
a form acceptable to the Company and its counsel) that such Warrant is being
acquired by the Holder for investment and not with a view to its distribution or
resale; whereupon the Company shall issue, in the name or names specified by the
Holder (including the Holder) new Warrants representing in the aggregate rights
to purchase the same number of Shares as are purchasable under the Warrant
surrendered. Such Warrants shall be exercisable immediately upon any such
assignment of the number of Warrants assigned.
5. The term "Holder" should be deemed to include any transferee Holder of
this Warrant pursuant to a transfer in compliance with the requirements
described herein.
6. The Company covenants and agrees that all shares of Common Stock which
may be issued upon exercise hereof will, upon issuance, be duly and validly
issued, fully paid and non-assessable and no personal liability will attach to
the Holder thereof.
7. This Warrant shall not entitle the Holder to any voting rights or other
rights as a stockholder of the Company.
8. In the event that the outstanding shares of Common Stock of the Company
are at any time increased or decreased or changed into or exchanged for a
different number or kind of share or other security of the Company or of another
corporation through reorganization, merger, consolidation, liquidation,
recapitalization, stock split, combination of shares or stock dividends payable
with respect to such Common Stock, appropriate adjustments in the number and
kind of such securities then subject to this Warrant shall be made effective as
of the date of such occurrence so that the position of the Holder upon exercise
will be the same as it would have been had he owned immediately prior to the
occurrence of such events the Common Stock subject to
<PAGE>
this Warrant. Such adjustment shall be made successively whenever any event
listed above shall occur and the Company will notify the Holder of the Warrant
of each such adjustment. Any fraction of a share resulting from any adjustment
shall be eliminated.
9. The rights represented by this Warrant may be exercised at any time
within the period above specified by (i) surrender of this Warrant at the
principal executive office of the Company (or such other office or agency of the
Company as it may designate by notice in writing to the Holder at the address of
the Holder appearing on the books of the Company); (ii) payment to the Company
by check or wire transfer of the exercise price for the number of Shares
specified in the above-mentioned purchase form together with applicable stock
transfer taxes, if any and (iii) unless in connection with an effective
registration statement which covers the sale of the shares underlying the
Warrant, the delivery to the Company of a statement by the Holder (in a form
acceptable to the Company and its counsel) that such Shares are being acquired
by the Holder for investment and not with a view to their distribution or
resale. The certificates for the Common Stock so purchased shall be delivered to
the Holder within a reasonable time, not exceeding ten (10) days, after the
rights represented by this Warrant shall have been so exercised, and shall bear
a restrictive legend with respect to any applicable securities laws.
10. This Warrant shall be governed by and construed in accordance with the
internal laws of New Jersey.
IN WITNESS WHEREOF, EA INDUSTRIES, INC. has caused this Warrant to be
signed by its duly authorized officer under its corporate seal, and to be dated
as of the date set forth above.
EA INDUSTRIES, INC.
By:_______________________
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1996 AND THE
CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1996 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 461
<SECURITIES> 0
<RECEIVABLES> 12,311
<ALLOWANCES> 1,100
<INVENTORY> 10,068
<CURRENT-ASSETS> 22,319
<PP&E> 18,581
<DEPRECIATION> (8,059)
<TOTAL-ASSETS> 50,971
<CURRENT-LIABILITIES> 31,485
<BONDS> 8,109
0
0
<COMMON> 80,535
<OTHER-SE> (73,245)
<TOTAL-LIABILITY-AND-EQUITY> 50,971
<SALES> 81,625
<TOTAL-REVENUES> 81,625
<CGS> 81,145
<TOTAL-COSTS> 93,907
<OTHER-EXPENSES> 5,186
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,559
<INCOME-PRETAX> (29,954)
<INCOME-TAX> 0
<INCOME-CONTINUING> (29,954)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (29,954)
<EPS-PRIMARY> (6.24)
<EPS-DILUTED> (6.24)
</TABLE>
