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, 1997 Commission file number 1-4680
EA INDUSTRIES, INC.
-------------------
(Exact Name of Registrant as Specified in its Charter)
New Jersey 21-0606484
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
185 Monmouth Parkway 07764-9989
West Long Branch, New Jersey (Zip Code)
(Address of Principal Executive Offices)
Registrant's telephone number, including area code: (732) 229-1100
Former Name - Electronic Associates, Inc.
-----------------------------------------
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
-----------------------------------------------------------------
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
--- ---
The aggregate market value of the voting stock held by non-affiliates of
the Registrant was $57,515,755 as of March 6, 1998.
As of March 6, 1998, there were 10,457,410 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 1998 -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. [ ]
<PAGE>
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.
Recent Developments
Overview
During 1997, the Company's sales decreased to approximately $76,511,000
from approximately $81,625,000 in 1996. The year to year decrease is
attributable to decreased sales in the first half of 1997, which decreased
approximately $15,111,000 (33%) from the sales during the first half of 1996.
Revenues for the second half of 1997 increased approximately $9,997,000 (28%)
from the sales during the second half of 1996. Cost of sales decreased in total
value but increased 0.2% as a percentage of sales to 99.6% of sales. Selling,
general and administrative expenses also decreased both in total value and as a
percentage of sales.
The Company had a net loss of approximately $18,062,000 for 1997, which
included non-recurring charges of approximately $7,600,000, an inventory
adjustment of approximately $1,500,000 and a gain on the sale of common stock of
Aydin Corporation of approximately $821,000. This compared with a net loss of
approximately $29,954,000 for 1996, which included non-recurring charges of
approximately $12,400,000.
Acquisition of SAI ("SAI" )
The Company agreed in December 1997, subject to certain conditions, to
purchase Service Assembly, Inc. ("SAI"), located in Wareham, Massachusetts,
outside of Boston. The Company has agreed to pay $3,742,000 for SAI by
delivering shares of its Common Stock to the owners of SAI (the "SAI
Shareholders"), and has agreed to register such shares for resale by the SAI
Shareholders ( the registration statement for such shares is referred to as the
"SAI Registration Statement"). The acquisition of SAI will be accounted for as a
purchase.
SAI's net sales for the fiscal year ended October 31, 1997 were
approximately $3,750,000 and its net income was approximately $178,000,
including deductions for compensation and other payments to shareholders. SAI
will become a wholly owned subsidiary of EA Industries, Inc., and the first
TANON EXPRESS facility upon closing of the acquisition. Such facilities will be
dedicated to quick turn and prototype electronic manufacturing services and will
be located near customer engineering and manufacturing operations. They will be
involved with customers early in the product development cycle and provide quick
turn and short lot runs to meet the customer's needs during the final stages of
product design and the early stages of product start up. As the product matures
and the volume increases, production can be transferred to one of Tanon's volume
manufacturing facilities at Fremont, California or West Long Branch, New Jersey.
The Company's strategic plans include the purchase or startup of
2
<PAGE>
additional companies which will be operated as Tanon Express facilities with
several satellites around each of these volume manufacturing factories.
The Company has agreed to guarantee that the aggregate proceeds received by
the SAI Shareholders during the twenty trading days after effectiveness of the
SAI Registration Statement is at least equal to the number of shares of Common
Stock sold multiplied by the volume weighted average price of the Common Stock
at the time of effectiveness of the Registration Statement. This guarantee will
determine the number of shares issued in payment of the Purchase Price. The
Company is in no event obligated to issue more than 1,069,257 shares. If the
proceeds of such stock sales are less than $3,742,000 the SAI Shareholders may
elect (i) to deliver to the Company all proceeds they received from the sale of
SAI shares and to rescind the sale of SAI or (ii) to retain the total sale
proceeds from the 1,069,257 shares in full satisfaction of the Purchase Price.
Discontinued Investment Ventures
In 1996 the Company purchased common stock of Aydin Corporation (the "Aydin
Shares"), a New York Stock Exchange listed company (symbol, AYD), for $18 per
share, for an aggregate of approximately $10.8 million. The Company and Aydin
subsequently held discussions ending in October 1996 regarding a potential
merger. In May and June 1997, the Company sold the Aydin Shares for
approximately $6.4 million ($10.75 per share).
On August 5, 1995, the Company entered into a joint venture with Israel
Aircraft Industries, Ltd. ("IAI") to commercialize technology developed by IAI
(the "Joint Venture"). The Company has determined that the Joint Venture is not
an essential element of its core strategy and has been attempting to sell or
otherwise dispose of its interest in the Joint Venture. The investment in the
Joint Venture has been classified as an unconsolidated subsidiary held for sale
in the Company's Consolidated Financial Statements.
On January 16, 1995, the Company acquired an equity interest in BarOn
Technologies, Ltd. ("BarOn"), a privately-owned Israeli corporation based in
Haifa, Israel which was developing an electronic computer input device. During
the fourth quarter of 1996 the Company determined that its investment and
advances to BarOn were unrecoverable and charged those amounts to expense. BarOn
is currently in liquidation proceedings and a receiver has been appointed in
Israel to direct those proceedings. The Company does not expect to recover any
material portion of its investment in BarOn.
On December 23, 1996, the Company agreed to acquire Tri-Star Technologies,
Inc. ("Tri-Star") and the approximately 120,000 square foot building and real
property occupied by Tri-Star in Methuen, Massachusetts. In May, 1997, the
Company and Tri-Star jointly announced that they had decided to terminate
discussions concerning the possible acquisition of Tri-Star by the Company. A
non-refundable deposit of $1,020,000 paid in January 1997 by the Company to
Tri-Star was written off to Other Expenses.
Management Restructuring
Between November 1996 and September 1997 the entire Board of Directors of
the Company and substantially all of its executive officers resigned. Beginning
in May 1997, the Company restructured its senior management and Board of
Directors. First, the Company engaged Frank G. Brandenberg as President and
Chief Executive Officer in May 1997. Second, between May and September 1997, all
of the Company's officers except its General Counsel and Chief Financial Officer
resigned. Third, in July and September 1997, the Company appointed six new
outside directors, who together with the Chief Executive of the Company now
constitute the Board of the Company. Finally, on October 14, 1997, the Company's
Chief Financial Officer, Stanley O. Jester, exercised his right pursuant to his
employment agreement to resign and receive a severance package as a result of
the change in location of his office to West Long Branch, New Jersey. Mr.
Jester was replaced as Chief Financial Officer by James Crofton.
3
<PAGE>
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 to be effective as of the close of business on December 27, 1996, so
that each holder of record was entitled to receive 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 (the "Reverse Stock Split"). All references in this
Report to shares, share prices, per share amounts and stock options and warrants
have been adjusted to give retroactive effect to the Reverse Stock Split.
Capital Raised
The Company has incurred significant losses and had negative cash flows
from operations in each of the last seven 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 has raised
approximately $37 million from December, 1995 through February 28, 1998, from
the exercise of stock options and warrants, the sale of the Aydin Shares, and
the sale of convertible notes and debentures.
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. 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;
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, more
recent technology, known as "surface-mount" technology ("SMT") has increased in
prominence in the manufacture of these products and newer technology such as
Ball Grid Array ("BGA") have gained acceptance in portions of product design.
In the past several years, the Company has invested in new manufacturing
equipment to accommodate the increased volume of SMT business, the introduction
of BGA and the integration of procedures as promulgated by the Personal Computer
Memory Card International Association("PCMCIA") . The SMT process is
increasingly replacing the older, through-hole technology previously utilized in
the assembly of printed circuit boards. SMT allows for production of a smaller
circuit board, with greater component and circuit density, resulting in
increased performance. Management believes that SMT and BGA will continue to
constitute an increasing percentage of printed circuit board production and
assembly and that various other new technologies providing further increases in
performance will continue to be developed.
4
<PAGE>
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.
Approximately eighty three percent (83%) of the Company's net sales during
the year ended December 31, 1997 were derived from customers which were also
customers of the Company during 1996. In 1997, the customers which accounted for
more than 10% of the Company's net sales were Advanced Fibre Communications,
Inc. ("AFC"), and Dialogic Corporation, which accounted for 35%, and 13% of net
sales, respectively. The Company has been successful in 1997 in broadening its
customer base, thereby reducing its dependence upon a few large customers. 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. In 1997, the Company expanded its
customer base from 18 to 29 customers.
The Company has been informed by its largest customer, AFC, that it intends
to move the production of most of the components assembled by Tanon to
facilities outside of the United States, which have lower labor costs. The
customer has implemented such a move on two prior occasions on a trial basis ,
but has been unsatisfied with the quality, timeliness or responsiveness of the
contract manufacturers that it used. During 1997, approximately $26.6 million of
revenue from that customer was included in the Company's Net Sales. If AFC is
successful in implementing a move offshore, sales to that customer of the
product lines currently assembled by Tanon will decrease significantly in the
second and third quarter of 1998, and will continue to decrease into 1999. The
Company has been conducting discussions with this customer to obtain additional
new business from this customer. Management of the Company believes that the
decrease in sales will be more than offset by sales to new customers and sales
of additional products to AFC, however, no assurance can be given that the
expected increases in sales will occur and be reflected in the Company's
operating results.
Historically, the Company has had substantial recurring sales and long
term relationships with existing customers. 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. Current marketing efforts are aimed at obtaining 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.
5
<PAGE>
The Company's contract electronic manufacturing services in 1997 were
provided to customers in the following markets in the approximate percentage of
Company's sales, respectively, indicated :
<TABLE>
<CAPTION>
MARKET SERVED PERCENTAGE OF 1997 SALES CUSTOMERS REPRESENTING 10% OR
- ------------- ------------------------ -----------------------------
BY CUSTOMERS MORE OF SALES
- ------------ -------------
<S> <C> <C>
Telecommunications 61% Advanced Fibre
Dialogic Corporation
Communications, Inc.,
Satellite Communications 11%
Computers 7%
High Quality Graphics 6%
Data Communication 6%
Medical Devices 2%
Electronic Controls and other 7%
----
Total 100%
====
</TABLE>
Backlog
The Company's backlog consists of 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 1997 was approximately $54,000,000. It is
anticipated that substantially all of the 1997 year-end backlog will be
delivered in 1998. The Company's backlog at the end of 1996 was $27,958,000.
The Company typically receives orders from its customers on a flexible
schedule to meet the sales/delivery schedule to the ultimate consumer. These
purchase orders specify delivery of product over periods ranging from as short
as 30 days or as long as a year and are adjusted as the sales by the Customer to
the ultimate consumers change. Consequently, the Company's backlog at the end of
a period is not necessarily indicative of future shipments to its customers.
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.
6
<PAGE>
Employees
As of December 31, 1997, 1996 and 1995, the Company had 474, 449, and 514
total employees, respectively.
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. The Company is also certified to IPC A-610 Level 3 workmanship
standards.
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. In such cases, the Company often
partially assembles a product and holds it in inventory until the parts for
which there was a shortage become available. This increases the inventory costs
of the Company which decreases its income and strains its capital resources. In
addition, shipment delays defer sales by the Company to later time periods.
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. If shortages occur in the future, the Company might be
forced to delay manufacturing and shipments, which could have a material adverse
effect on the Company's results of operations.
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 and purchase orders usually may be accelerated or deferred by
rescheduling or canceled by payment of cancellation charges and typically
provide termination rights for customers, but upon such termination the Company
would generally 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.
Patents and Trademarks
The Company does not hold any patent rights, 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".
7
<PAGE>
ITEM 2. PROPERTIES
Currently, the Company's executive offices and the East Coast operating
facility of Tanon are located at 185 Monmouth Parkway, West Long Branch, New
Jersey 07764 at which the Company presently occupies approximately 90,000 square
feet. Tanon occupies a facility with approximately 109,000 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 these leases.
ITEM 3. LEGAL PROCEEDINGS
Lemco Associates
The Company on a regular basis reviews and updates its public disclosure
with respect to this litigation. As previously reported, in October , 1992,
Lemco Associates L.P., a limited partnership ("Lemco"), the owner of property
previously owned by EAI , initiated an action (the "Lemco Suit"), against EAI
and others alleging, among other things, that the defendants created
environmental contamination at the property and seeking damages in unspecified
amounts. EAI filed a response to the complaint in which it denied Lemco's
allegations, asserted numerous defenses to the claims asserted and asserted a
counterclaim against Lemco and crossclaims against co-defendants and others for
indemnification and contribution.
In 1947, the Company purchased land in North Long Branch, New Jersey on
which it subsequently built a number of buildings and conducted a number of
industrial operations. In 1954 the Company built a building known as Building 11
on that land. From the mid - 1950's through 1977, the Company conducted
finishing operations such as metal plating and painting on that site using,
among other machinery, a degreaser to clean metal components using a variety of
solvents. In 1977, EAI leased building 11 to a company called Comax, Inc.
("Comax"), which then began operations in the building. In 1977, Comax, with
technical advice from EAI, filled the degreaser with solvents and used it at
least once. Comax then capped the degreaser without removing the solvents and
did not use it again. In 1979, EAI sold the property and all the buildings on
the site to Lemco for approximately $400,000. Comax continued to operate on the
site until 1984 under a lease from Lemco.
Between 1977 and the time it ceased operations on the site, Comax was cited
by local authorities for a range of environmental violations. Building 11 was
demolished in or about 1991. Evidence indicates that at the time of removal the
degreaser was empty. EAI believes that, between the time it was capped in 1977
and the time of its removal, the chemicals leached out gradually over time or
the chemicals were spilled at the site before or after the removal of the
degreaser.
The Company believes that Lemco was aware at the time of its purchase of
the site from EAI that some of the underground gasoline storage tanks on the
site had leaked and that there had been previous spills of hazardous materials
on the site.
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Lemco's environmental consultants have analyzed the data from test wells on
the site and have concluded using a mathematical analysis and a modeling
analysis that TCE contamination occurred between 1959 and 1974 and that PCE
contamination occurred no later than 1968. The Company's environmental
consultants have analyzed the data from the same test wells on the site and have
concluded that based on a similar modeling analysis an initial TCE release to
the aquifer occurred in the mid 1970's to the late 1980's and a release of PCE
occurred from the mid `70's to the mid 80's. Their mathematical analysis also
indicates that TCE was most likely released to the aquifer in the mid 1980's and
unlikely to have been released before 1977. In addition, the evidence that would
be presented at trial by EAI is consistent with that conclusion.
The damages sought in the Lemco Suit are (i) recovery for the decreased
value of the property, (ii) recovery for the cost to remediate the contamination
on the property, and (iii) prejudgement interest and expert fees.
In 1988, Lemco signed an agreement of sale for the property subject to
various contingencies for a price of approximately $4 million. Further, Lemco
has provided the Company with appraisal reports made by a real estate appraisal
company engaged by Lemco in connection with the Lemco Suit. The reports state
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 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 has provided the Company with a statement of its remediation costs
through December 18, 1997, as well as an estimate of future remediation costs
associated with the contamination for which it seeks recovery in the Lemco Suit.
Specifically, Lemco claims that it has expended approximately $635,000 in
remediation costs, including fees for legal oversight and consultation and
estimates that its future remediation costs will amount to approximately
$6,316,000. This estimate has been 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 costs
and fees for legal oversight and consultation. 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
approximately $2.4 million.
The Company has been vigorously defending this matter by, among other
things, asserting that the contamination was caused partially or completely by
Comax, not EAI, and that Lemco's damage figure is substantially overstated. To
the extent that it is determined that Comax contaminated the site during its
tenancy with the Company from 1977 to 1979, then the Company may be held liable
for such contamination as owner of the site at the time of the contamination.
The Company will pursue its claim for indemnity against Comax in the event said
liability is established . Additionally, the Company has participated in court
ordered mediation in an effort to explore opportunities for settlement .
Contemporaneously with the institution of the Lemco Suit, the Company made a
demand upon its insurance carriers for coverage for the claims by Lemco. The
Company's insurance carriers in 1992 agreed to pay 71% of its defense costs
under a reservation of rights and have made partial payments for the period
beginning on the date of the Lemco Suit to the date hereof.
Although the Company's insurance carriers have not formally denied coverage
or refused to provide a defense for the Company, the Company believed that
settlement or other resolution of the Lemco Suit would be more likely with the
active participation of the insurance carriers. By court order, after request by
the Company, (i) the carriers were added as third party defendants in the Lemco
Suit, (ii) the court ordered expedited discovery with respect to the insurance
claim, (iii) the court scheduled a settlement conference for April 7, 1998 and
(iv) the court has set a new trial date of May 5, 1998. Discovery in the Lemco
Suit is ongoing.
9
<PAGE>
Management of the Company believes that the range of possible loss by the
Company in this matter is approximately $250,000 to $10,300,000. This range
excludes prejudgement interest, if any, but includes costs and expenses, such as
legal and expert fees. In the third quarter of 1997, the Company established a
reserve of $250,000 to cover anticipated legal and expert fees in connection
with the Lemco Suit. Management of the Company believes that the reserves it has
established, together with its insurance coverage , should be sufficient to
cover the costs of defending or settling the Lemco Suit and the potential losses
that could be incurred by the Company in connection with the Lemco Suit . No
assurance can be given that the costs incurred by the Company , or a potential
award of damages against the Company, will not exceed management's current
estimates, or that the insurance recovery , if any, and available resources of
the Company will not be less than the current estimates of management.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
- ------------------------------------------------------------------------------------------------------------------
High Low High Low High Low High Low
------------------- ------------------- ------------------- ------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1997 5 7/8 1 5/8 4 1/2 3 3/8 9 3/16 2 5/8 8 3/4 5 1/4
1996 21 1/2 12 22 1/2 13 17 10 12 1 5/8 (1)
</TABLE>
(1) Effective as of the close of business on December 27, 1996 , 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 3,897 record holders of the Company's Common Stock
as of March 6, 1998.
The Company has not had a profitable year since 1990, there have been no
cash dividends declared since 1956 and no stock dividends declared since 1966.
If the Company were to become profitable, it would expect that all of such
earnings would be retained to support the business of the Company. Accordingly,
the Company does not anticipate paying cash dividends on its Common Stock in the
foreseeable future. Moreover, certain financial covenants set forth in the
Company's current loan agreement prohibit the Company from paying cash
dividends.
The Company's Common Stock is currently listed and traded on the NYSE,
however, since September 11, 1991, the Company has not been in compliance with
one or more of the criteria necessary for continued listing on the NYSE. The
Company and the NYSE have had discussions with respect to this issue. As of the
date of this Report, the Company believes that it is in compliance with all of
the NYSE's continued listing criteria, with the exception of the minimum net
tangible assets available to Common Stock of $12,000,000 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, each time it has authorized the listing of
additional shares on the NYSE (in letters dated March 29, 1995, March 14, 1996,
August 29, 1996, December 16,
10
<PAGE>
1996, December 27, 1996, January 5, 1998 and January 28, 1998) , and in a letter
dated December 12, 1997, the NYSE has stated that it was considering the
appropriateness of continued listing of the Company's Common Stock. Management
of the Company have discussed this issue with the NYSE during a series of
meetings and phone conferences from September 1991 through January 1998. The
NYSE has indicated that continued listing is dependent, among other factors,
upon the Company achieving the results set forth in the business plan submitted
to the NYSE. The Company has achieved such results in all material respects to
date, although no assurance can be given that it will continue to meet such
goals in the future. 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.
11
<PAGE>
ITEM 6.SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
(Thousands of Dollars Except for Per Share Amounts, Common
Shares Outstanding and Other Data)
1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------
[Note 1]
[--------Note 4--------]
<S> <C> <C> <C> <C> <C>
Operating Results:
Net Sales from Continuing Operations $ 76,511 $ 81,625 $ 77,085 $ 30,539 $ 26,024
Provision for Restructuing $ -- $ -- $ -- $ 2,400 $ --
Loss from Continuing Operations before Taxes $ (18,062) $ (29,954) $ (30,894) $ (4,784) $ (5,348)
Loss from Continuing Operations, Net $ (18,062) $ (29,954) $ (30,894) $ (4,784) $ (4,664)
Income from Discontinued Operations, Net $ -- $ -- $ -- $ -- $ 1,327
Net Loss $ (18,062) $ (29,954) $ (30,894) $ (4,784) $ (3,337)
Income (Loss) Per Common Share:
Continuing Operations (Note 3) $ (2.15) $ (6.24) $ (10.01) $ (3.79) $ (7.04)
Discontinued Operations $ -- $ -- $ -- $ -- $ 2.00
Net Loss (Notes 3 and 5) $ (2.15) $ (6.24) $ (10.01) $ (3.79) $ (5.04)
- ------------------------------------------------------------------------------------------------------------------
Financial Position:
Current Assets $ 27,317 $ 22,319 $ 37,022 $ 16,969 $ 7,355
Current Liabilities $ 44,104 $ 31,485 $ 25,834 $ 12,603 $ 8,614
Long Term Obligations $ 4,859 $ 12,400 $ 16,028 $ 2,998 $ 4,694
Working Capital $ (16,787) $ (9,166) $ 11,188 $ 4,366 $ (1,259)
Net Equipment and Leasehold Improvements $ 10,804 $ 10,522 $ 8,048 $ 2,719 $ 3,603
Total Assets $ 47,862 $ 50,971 $ 61,252 $ 22,845 $ 12,762
Shareholders' Equity (Deficit) $ (1,101) $ 7,086 $ 19,390 $ 7,244 $ (546)
Common Shares Outstanding (Note 3) 9,431 5,601 4,011 2,027 665
Book Value per Common Share (Notes 3and 5) $ (0.12) $ 1.27 $ 4.84 $ 3.56 $ (0.84)
- ------------------------------------------------------------------------------------------------------------------
Other Data:
Number of Shareholders of Record 3,897 4,152 4,254 4,447 4,600
Number of Employees 474 449 514 334 315
Orders Received (Note 2) $ 102,142 $ 62,400 $ 105,150 $ 30,326 $ 18,805
Sales Backlog at Year-End $ 53,589 $ 27,958 $ 47,305 $ 19,240 $ 19,453
</TABLE>
Note 1- 1995 amounts include the impact of the Tanon Acquisition and the
investments in BarOn and the Joint Venture (See Note 3 of the Notes to
Consolidated Financial Statements at Part II, Item 8 of this Annual Report Form
10-K).
Note 2- Orders received in 1995 include $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 in the Company's Consolidated Financial
Statements . 1995 amounts have been reclassified to conform to the 1996
presentation.
Note 5- In 1997, the Company adopted Statement No. 128, "Earnings Per Share".
(See Note 9 to the Consolidated Financial Statements for further information).
12
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
On January 4, 1995, the Company acquired Tanon, a privately-owned contract
electronic manufacturing firm with operations located in Fremont, California. In
May 1996, the Company consolidated all of its contract electronic manufacturing
business into Tanon.
On January 16, 1995, the Company acquired an equity interest in BarOn, a
privately-owned Israeli corporation based in Haifa, Israel. BarOn was a
development stage company which has developed and was in the process of
commercializing an electronic computer input device to directly digitize
handwriting in a variety of languages, from any surface. During the fourth
quarter of 1996 the Company determined that its investment and advances to BarOn
were unrecoverable and charged those amounts to Other Expense.
On August 8, 1995, the Company, through a 52.3 % owned subsidiary, entered
into a Joint Venture Agreement with Israel Aircraft Industries, Ltd. ("IAI") to
review, develop and exploit non-classified technological applications developed
by IAI. The Company has decided to sell or otherwise dispose of its interest in
the Joint Venture. The Joint Venture has been classified as an unconsolidated
subsidiary held for sale.
On May 6, 1996, the Company purchased 596,927 shares of the common stock of
Aydin, representing approximately 11.64% of the outstanding common shares of
Aydin. During May 1996, the Company initiated discussions with the Board of
Directors of Aydin concerning a possible merger or other combination with Aydin.
After due diligence and numerous discussions, the Company made an offer to merge
with Aydin, however, Aydin's Board of Directors rejected the Company's final
offer. The Company withdrew its offer on October 8, 1996 and terminated
discussions with Aydin. During the fourth quarter of 1996 the Company decided to
sell its investment in Aydin and wrote down the investment to its then estimated
net realizable value of $5,605,000. In May and June 1997, the Company sold its
entire investment in Aydin for approximately $6,426,000, resulting in a gain of
$821,000 which is included in Other Expenses.
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 non-refundable deposit of $1.0 million toward the
purchase of Tri-Star. In May, 1997 the Company and Tri-Star mutually agreed to
terminate the acquisition discussions and the $1.0 million deposit was written
off to Other Expenses.
In December 1997, the Company signed a purchase agreement to acquire Boston
area based Service Assembly Inc. ("SAI"), a privately held electronic
manufacturing services company engaged in custom engineering and prototype
electronic manufacturing operations. SAI will become a wholly owned subsidiary
of EA Industries, Inc. and the first TANON EXPRESS facility upon closing of the
acquisition.
In connection with its decisions to sell its interest in the Joint Venture,
cease making advances to BarOn, discontinue the business combination
discussions with Aydin and to refocus its resources on the business of providing
contract manufacturing services, the Company determined in the second quarter of
1997 that it would be necessary to restructure its senior management and Board
of Directors (see Item 1, BUSINESS-Introduction-Recent Developments Management
Restructuring).
Results of Operations: 1997 compared to 1996
During 1997, the Company's sales decreased to approximately $76,511,000
from approximately $81,625,000 in 1996. The year to year decrease is
attributable to decreased sales in the first half of 1997, which decreased
13
<PAGE>
approximately $15,111,000 (33%) from the sales during the first half of 1996.
Revenues for the second half of 1997 increased approximately $9,997,000 (28%)
from the sales during the second half of 1996. Cost of sales decreased in total
value but increased 0.2% as a percentage of sales to 99.6% of sales. Selling,
general and administrative expenses also decreased both in total value and as a
percentage of sales. The decrease in sales resulted primarily from a decrease in
the level of business conducted with the Company's three largest customers and,
to a lesser extent, the phase-out of five customers, partially offset by sales
to seven new customers, and to a lesser extent by sales to 9 start-up customers.
The Company chose to disengage from two of these customers, while the other
three either began their own manufacturing or consolidated their manufacturing
at another manufacturing company. Sales to the three largest customers were
unusually high during the first half of 1996 and then declined to less than
normal levels during the second half of 1996. Sales to existing customers in
1997 were approximately $63,300,000 and sales to new customers were
approximately $13,200,000.
The Company had a net loss of approximately $18,062,000 for 1997. In 1997,
the Company established inventory reserves and charged off certain excess
inventory pursuant to Management's revised strategy to more quickly dispose of
or sell excess inventory to reduce carrying costs which resulted in charges to
cost of sales totaling approximately $1,500,000, which is included in the net
loss. The net loss also included a gain on the sale of the Aydin Shares of
approximately $821,000 and an aggregate of approximately $7,600,000 in
non-recurring charges consisting of:
o $1,761,000 representing the amortization of the fixed discount feature of
convertible notes issued in April, 1997
o a charge of $800,000 representing the value of warrants granted in April and
June, 1997, in connection with a standby financing commitment of $4,500,000
o a charge of $1,410,000 for restructuring of senior management and the Board
of Directors
o a charge of approximately $1,020,000 for the write-off of the non-refundable
deposit paid to Tri-Star
o a charge of $250,000 representing a provision for expenses and legal fees in
connection with the Lemco Suit
o a charge of approximately $1,758,000 representing the write-off of a portion
of certain intangible assets resulting from a decision that certain of the
assets purchased as a part of the Tanon acquisition were no longer
realizable and
o a charge of approximately $555,000 representing a 10% penalty and penalty
interest charges relating to convertible notes issued in April, 1997.
This compared with a net loss of approximately $29,954,000 for 1996, which
included an aggregate of approximately $12,400,000 in non-recurring charges
consisting of:
o approximately $5,200,000 for an unrealized loss on its investment in Aydin
Corporation
o a charge of approximately $4,200,000 representing additional interest
expense incurred in connection with the issuance of convertible debt
o a write-down of the Company's investment in the Joint Venture by $1,600,000
resulting from the Company's decision to sell or otherwise dispose of such
investment
o charges of approximately $1,400,000 primarily representing the charge to
expense of purchased in-process research and development resulting from the
Company's investment in BarOn and the Joint Venture
The Company has been informed by its largest customer, AFC, that it intends
to move the production of most of the components assembled by Tanon to
facilities outside of the United States, which have lower labor costs. The
customer has implemented such a move on two prior occasions on a trial basis,
but has been unsatisfied with the quality, timeliness or responsiveness of the
contract manufacturers that it used. During 1997, approximately $26.6 million of
revenue from that customer was included in the Company's net sales. If AFC is
successful in implementing a move offshore, sales to that customer of the
product lines currently assembled by Tanon will decrease significantly in the
second and third quarter of 1998, and will continue to decrease into 1999. The
14
<PAGE>
Company has been conducting discussions with this customer to obtain additional
new business from this customer. Management of the Company believes that the
decrease in sales will be more than offset by sales to new customers and sales
of additional products to AFC, however, no assurance can be given that the
expected increases in sales will occur and be reflected in the Company's
operating results.
Cost of sales in 1997 decreased to $76,204,000 from $81,145,000 in 1996 and
increased as a percentage of revenue in 1997 to 99.6% compared with 99.4% in
1996. The decline is primarily a result of the lower level of sales in 1997 as
compared to the same period in 1996. A large percentage of cost of sales
consists of fixed costs and, as a result, cost of sales as a percentage of
revenue increases as revenue falls. Gross profit was approximately $307,000 for
1997, compared to approximately $480,000 for the same period in 1996, indicative
of the decline in sales in 1997, as well as a slight increase in fixed overhead.
Selling, general and administrative expenses decreased to approximately
$9,464,000 in 1997 from $11,379,000 in 1996. The decline was primarily a result
of decreased holding company expenses in 1997 and a reduction in expenses at
Tanon. Selling, general and administrative expenses in 1997 included
approximately $1,410,000 in restructuring charges in connection with changes in
the Company's Board of Directors and senior management and a charge for $250,000
representing a provision for expenses and legal fees in connection with the
Lemco Suit. Selling, general and administrative expenses as a percentage of
revenue decreased to 12.4% in 1997 as compared to 13.9% for the same period in
1996.
Interest expense in 1997 was $6,459,000 compared to $7,559,000 in 1996. The
decline is primarily attributable to a charge to interest expense in the amount
of $4,200,000 in 1996 representing the amortization of the fixed discount
feature of convertible notes and debentures issued in December 1995 and May and
June 1996, as compared to similar charges of (i) $1,761,000 in 1997 (relating to
convertible notes issued in April 1997), (ii) $800,000 (representing the value
of warrants granted in April and June 1997 in connection with a standby
financing commitment of $4,500,000), (iii) $315,000 (representing the placement
fee in connection with the issuance of the $4.5 million convertible notes in
April 1997), (iv) $87,000 (representing the value of a warrant granted in
connection with borrowings by the Company in the aggregate principal amount of
$1,000,000), (v) approximately $176,000 (representing the exercise of a put
option on a warrant granted by the Company), and (vi) approximately $555,000
(representing the 10% penalty and penalty interest charges on the $4.5 million
convertible notes). Interest expense relating to revolving credit agreements,
subordinated debt, and capitalized leases increased from approximately
$2,631,000 in 1996 to $2,760,000 in 1997 as a result of increased levels of
debt, subordinated debt and capital leases.
Interest income of $57,000 in 1997 decreased from $229,000 in 1996 as a
result of Management's decision to pay down certain debt rather than investing
the cash in short term investments.
Other expenses decreased from approximately $5,186,000 in 1996 to
$3,172,000 in 1997. Other expenses in 1997 included (i) the expense relating to
the write-off of the Tri-Star deposit of $1,020,000, (ii) a write-off of
additional goodwill of approximately $1,758,000, (iii) a write-off of BarOn
expenses of $152,000, and (iv) a write-down of certain fixed assets held for
disposal of approximately $390,000. In 1996, Other expenses included (i) the
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, (ii) a decline by $907,000 in the market value of EAI Common Stock
securing a non recourse note receivable, (iii) a write-off of fixed assets of
$563,000, (iv) an increase of approximately $450,000 in the Company's share of
costs incurred by the Joint Venture, (v) unrealized losses of approximately
$811,000 on marketable securities held by BarOn (arising from the Company's
initial equity investment in BarOn), and (vi) a write-off of approximately
$812,000 of expenses of BarOn based on the Company's equity holdings in BarOn.
15
<PAGE>
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 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.
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. The
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.
16
<PAGE>
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, 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
costs incurred by the Joint Venture .
Liquidity and Capital Resources: 1997
Liquidity, as discussed below, is measured in reference to the consolidated
financial position of the Company at December 31, 1997, as compared to the
consolidated financial position of the Company at December 31, 1996. Net cash
used by operations of $13,189,000 in 1997 increased by $10,614,000 from cash
used in operations of $2,575,000 in 1996. The increase in Net cash used by
operations was primarily the result of the increases in accounts receivable and
inventories resulting from increased levels of business during the second half
of 1997.
The Company's primary credit facility is an asset based credit facility
provided by IBJ Schroder Bank & Trust Company ("Schroder") ("Schroder Loan
Facility") to Tanon. Advances under the Schroder Loan Facility can only be used
to fund the operations of Tanon and are secured by substantially all of the
assets of Tanon and a guarantee by the Company. At December 31, 1997, $8,654,000
was outstanding under the Schroder Loan Facility which represented approximately
80% of the available funds, calculated in accordance with the availability
formula of the Schroder Loan Facility. The agreement with Schroder requires
Tanon to maintain certain financial ratios, including current assets to current
liabilities and earnings to fixed charges, and to maintain a minimum net worth.
At December 31, 1997, Tanon was in compliance with all of these requirements,
except the required minimum net worth. Schroder has agreed to waive such
requirement for December 31,1997. Based on the Company's current projections,
the Company would not be able to meet this requirement on December 31, 1998,
however, management has had discussions with Schroder and has requested that
Schroder adjust the required minimum net worth ratio to reflect the results of
operations of Tanon contained in the current business plan of Tanon for 1998.
The Schroder Loan Facility provides for advances of up to $11,065,000 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 has a
three-year term ending on April 30, 1999 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.
Liquidity, as measured by cash and cash equivalents, increased to $595,000
at December 31, 1997 from $461,000 at December 31, 1996. Liquidity as measured
by working capital was a negative $16,787,000 at
17
<PAGE>
December 31, 1997 as compared with a negative working capital of $9,166,000 at
December 31, 1996. The decrease in working capital was primarily a result of the
reclassification of an aggregate of $8,335,000 in convertible notes as current
liabilities based on the right of the note holders to demand immediate repayment
of these notes, as well as capital expenditures and losses from contract
manufacturing during 1997, offset by the issuance of $7,750,000 of promissory
notes and convertible notes (net of repayments) and the sale of the Aydin
Shares. The Company's ability to generate internal cash flows results primarily
from the sales of its contract electronic manufacturing services. The Schroder
Loan Facility prohibits Tanon from distributing or loaning cash generated by
contract manufacturing to EAI, except in certain very limited circumstances. For
the year 1997, revenue from contract electronic manufacturing services decreased
by $5,114,000 from $81,625,000 in the same period of 1996. Accounts receivable
increased by $1,455,000 in 1997 (approximately 13%) as compared to 1996, while
inventory increased by $3,107,000 (approximately 31%) as compared to 1996. These
increases reflect the increased levels of business during the third and fourth
quarter of 1997 as well as the significant increased level of backlog at
December 31, 1997.
Cash flows from financing activities during 1997 amounted to $10,210,000
resulting primarily from the issuance of (i) an aggregate of $2,250,000 in 10%
Series A Convertible Notes, (ii) an aggregate of $1,000,000 in 10% Series B
Notes, (iii) an aggregate of $4,500,000 in 6% Convertible Notes, and (i) the
collection of $700,000 on note receivables related to earlier warrant exercises,
(ii) aggregate proceeds of $207,000 from the exercise of warrants, (iii)
aggregate proceeds of $530,000 from the exercise of stock options, and (iv) an
increase in borrowing under the Schroder Loan Facility of approximately $600,000
.
Net cash in the amount of $3,113,000 was provided by investing activities
during 1997. Funds in the amount of $6,426,000 were provided by the sale of the
Aydin Shares and approximately $3,313,000 was used to purchase equipment and
make leasehold improvements including $2,100,000 used to purchase a new Fuji
high speed SMT line for the Company's New Jersey facility.
A substantial portion of the convertible securities issued by the Company
are currently payable on demand or are due within one year. This includes
certain 6% Notes, the Convertible Notes and the Amended Series A Notes (See
Capital Raised), representing approximately $8.3 million in debt. The Company
has filed a registration statement covering the shares issuable upon conversion
of the 6% Notes. When that registration statement is declared effective, such
notes will no longer be payable upon demand, and the Company expects those notes
to be converted into equity in accordance with their terms. The Company has also
scheduled a meeting of its shareholders for March 31, 1998 to approve of the
revised terms of the Convertible Notes and the Amended Series A Notes. Assuming
that the shareholders approve of such terms, such notes will no longer be
payable upon demand, and the Company expects those notes to be converted into
equity in accordance with their terms.
The Company is forecasting a significant increase in sales for 1998 over
1997 based on improved sales and marketing including sales to new customers
representing contracts signed in the second half of 1997, sales to existing
customers and additional new customers. Management believes this increase will
result in an improvement in cash flows from operations. In the past few years,
the Company has extended the time in which it pays its payable to conserve its
capital resources and to allow the Company to concentrate such resources on the
costs associated with growth. Management of the Company has concluded that it
would be advisable to increase its capital resources that would be available for
contingencies and to bring the Company's timing on payment of payables to a
level more consistent with standard practice in its industry. The Company may
seek to raise additional debt or equity in the second or third quarters of 1998
to accomplish these goals. The Company expects, however, that available funds
under the Schroder Loan Facility together with its available capital resources
would be sufficient to fund its ongoing operations in a fashion consistent with
its past practices, excluding any acquisitions made with cash. . In addition,
continued expansion of the Company's customer base and execution of its strategy
to become a full service provider by expanding "Tanon Express", internal
development of additional service offerings, and select national and/or
international acquisitions would also enhance cash flow. The Company's
18
<PAGE>
independent public accountants have issued their opinion in respect to the
Company's 1997 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. There can be no assurance that management will be successful in
implementing its plans, obtaining additional capital or achieving the results
contained in their current plans and forecasts.
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,
economic, competitive, technological, governmental, and other factors discussed
in the Company's filings with the Securities and Exchange Commission.
Capital Raised
The Company has incurred significant losses and had negative cash flows
from operations in each of the last seven 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
$37 million from December, 1995 through February 28, 1998, from the sale of
convertible notes and debentures, the exercise of stock options and warrants,
and the sale of the Aydin Shares.
The GFL Notes
Among its 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"). GFL
Advantage Fund and GFL Performance Fund converted $7,930,000 principal amount of
such notes 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 a
third party, unrelated to the Company, its management or to the GFL Funds 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, then Chairman of the Company and certain trusts
benefiting his family (the "Gross GFL Note Holders") for a cash payment of
$2,725,000. In connection with such assignment, the Company canceled the prior
note held by GFL Advantage Fund and reissued certain Convertible Notes (the
"Gross GFL Convertible Notes") of the Company in the aggregate principal amount
of $2,070,000 due December 29, 1997 to the Gross GFL Note Holders. These Gross
GFL 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 Gross GFL Convertible Notes (the "February GFL
Convertible Notes") by (i) increasing the aggregate principal amount of such
notes to $2,725,000 (the purchase price paid by the Gross GFL Note Holders) and
(ii) reducing the fixed conversion price of such notes to $1.50 per share. Such
amendments were made in consideration of the Gross GFL Note Holders foregoing
interest and making certain other loans to the Company. The rights of the
holders of the February GFL Convertible Notes to receive additional shares of
Common Stock as a result of lowering the cap on the conversion price to $1.50
per share was subject to listing of the additional shares on the New York Stock
Exchange. The Gross GFL Note Holders subsequently sold February GFL Convertible
Notes in the principal amount of $600,000 to an unaffiliated investor (the
"Gross GFL Note Holders and this investor are referred to as the "GFL Note
Holders"). In October
19
<PAGE>
1997, the Gross GFL Note Holders exercised their conversion rights in accordance
with the terms of the February Convertible Notes with respect to $226,709 in
principal of the notes and received 151,139 shares of Common Stock.
In January 1998, the Company and the GFL Note Holders agreed to amend (the
"January 1998 Amendments") the terms of the February Convertible Notes as
follows:
(i) to extend the maturity date of the February Convertible Notes to December
31, 1998;
(ii) to increase the conversion price to the lesser of (a) eighty percent (80%)
of the average of the volume weighted average price per share of the Company's
Common Stock (as reported by Bloomberg Business Services in its Volume at Price
Service) for the five days immediately preceding the date of notice of
conversion to the Company or (b) $5.00; and
(iii) to provide for interest payments in cash or shares of Common Stock at the
conversion price at the option of the holders or the Company.
These notes as amended in January 1998 are referred to as the "Convertible
Notes". In consideration of the January 1998 Amendments the Company agreed to
issue to the GFL Note Holders warrants (the "Gross Warrants") to purchase an
aggregate of 483,393 shares of Common Stock at a price of $5.00 per share for a
period of five years. The Gross Warrants are nondetachable and may not be sold,
given or transferred separately from the Convertible Notes. The GFL Note Holders
were also granted demand and piggyback registration rights for the Convertible
Notes and the Gross Warrants.
The New York Stock Exchange ("NYSE") formally informed the Company in late
1997, that because the amendments were made when Mr. Gross was a director of the
Company, the listing on the NYSE of the shares of Common Stock issuable upon
conversion of the Convertible Notes would be subject to approval by the
shareholders of the Company. The Company has scheduled a special meeting of its
shareholders on March 31, 1998 to vote on the January 1998 Amendments. If the
shareholders do not approve the amended terms contained in the Convertible Notes
the GFL Note Holders have the right to accelerate the payment of outstanding
principal on the Convertible Notes with a twenty two percent (22%) penalty. In
that case, the Company would be obligated to pay $3,048,000 to the note holders.
The Aydin Convertibles
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 the
Aydin Shares. The 9% Convertible Debentures bear interest at 9% per annum,
payable quarterly and mature on May 3, 1998. The 9% Convertible Debentures were
originally convertible at a conversion price per share equal to the lesser of
(i) eighty percent (80% ) of the average of the closing price per share of the
Company's Common Stock for the five days immediately preceding the date of the
notice of conversion to the Company, or (ii) $4.00. On February 6, 1997, the
Company amended the 9% Convertible Debentures by reducing the fixed conversion
price of such notes to $1.50 per share. Such amendments were made in
consideration of the holders refraining from conversions or short sales until
April 11, 1997.
The Series A Notes
Original Terms
During the period beginning on October 25, 1996 and ending on April 10,
1997, the Company borrowed an additional aggregate total of $3,520,000 from the
then Chairman of its Board of Directors, certain trusts benefiting his family
(collectively, the "Gross Series A Holders") and an unaffiliated investor (the
"Series A Investor"). The proceeds of these loans were used to provide working
capital for the Company, primarily for day to day operations
20
<PAGE>
of Tanon Manufacturing, Inc. ("Tanon"), the Company's principal operating
subsidiary. These loans were represented by certain 10% Series A Convertible
Notes (the "Series A Notes") issued by the Company in January 1997. The Series A
Notes bear interest at the rate of 10% per annum and will mature on January 22,
1999 and were originally 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.
Amended Terms
In January 1998, the Company and the Gross Series A Holders agreed to amend
the terms of the Series A Notes as follows:
(i) to provide for interest payments in cash or stock at the conversion price at
the option of the holders and the Company; and
(ii) to increase the conversion price to the lesser of (a) eighty percent (80%)
of the average of the volume weighted average price per share of the Company's
Common Stock (as reported by Bloomberg Business Services in its Volume at Price
Service) for the five days immediately preceding the date of notice of
conversion to the Company, or (b) $5.00.
These notes as amended in January 1998 are referred to as the "Amended
Series A Notes". In consideration of these amendments (the "Series A
Amendments") the Company agreed to issue to the Gross Series A Holders warrants
(the "Series A Warrants") to purchase an aggregate of 632,700 shares of Common
Stock at a price of $5.00 per share for a period of five years. The Series A
Warrants are nondetachable and may not be sold, given or transferred separately
from the Amended Series A Notes. The Gross Series A Note Holders were also
granted demand and piggyback registration rights for the shares of Common Stock
issuable upon conversion of the Amended Series A Notes and exercise of the
Series A Warrants. These amendments do not affect the terms of one of the Series
A Notes, in the original principal amount of $250,000, issued to the Series A
Investor.
The NYSE formally informed the Company in late 1997, that because the
amendments were made when Mr. Gross was a director of the Company, the listing
on the NYSE of the shares of Common Stock issuable upon conversion of the Series
A Notes would be subject to approval by the shareholders of the Company. If the
shareholders do not approve the amended terms contained in the Amended Series A
Notes, the Gross Series A Note Holders have the right to accelerate the payment
of outstanding principal and interest on the Amended Series A Notes with a
twenty two percent (22%) penalty. In that case, as of December 31, 1997 the
Company would be obligated to pay $4,678,000 to the note holders.
During January 1997, the Company borrowed $1,000,000 from each of two
unrelated parties. 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 the lenders, Ace Foundation, Inc. (the "Ace
Warrant") and Millenco, LP (the "Millenco Warrant"), (collectively, the
"Warrants"). Management charged the estimated value of these Warrants ($175,000)
to Interest Expense in the first quarter of 1997. These loans were repaid in May
and June 1997 in connection with the sale of the shares of common stock of Aydin
held by the Company. Pursuant to a provision contained in the Millenco Warrant,
the Company has repurchased that Warrant for approximately $176,000 in cash ,
charging the net difference between the estimated value of the initial Warrant
and the repurchased amount, or approximately $89,000 to Interest Expense, in the
fourth quarter of 1997.
21
<PAGE>
The Company in April 1997, arranged for standby financing of up to
$4,500,000 to provide additional working capital. This commitment was originally
irrevocable until April 1, 1998 and was to be reduced based on the proceeds the
Company received from the sale of its shares of common stock of Aydin and from
any additional equity or convertible debt financing. The Company has issued
warrants exercisable at $4.125 per share for 600,000 shares as of April 18, 1997
in consideration of this commitment and an additional 200,000 shares as of June
10,1997 also exercisable at $4.125 per share. The estimated value of these
warrants of $800,000 was charged to Interest Expense in the second quarter of
1997. The commitment was terminated in June 1997.
In April and July 1997, the Company borrowed a total of $1,000,000 from an
unaffiliated investor . This loan is represented by certain 10% Series B
Convertible Notes (the "Series B Notes"), issued by the Company. The Series B
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 $2.50 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 B 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 Company in cash or
stock of the Company at the conversion price described above.
In addition, in April 1997 the Company borrowed a total of $4.5 million
from unaffiliated investors. These loans are represented by certain 6%
Convertible Notes due April 30, 1999 (the "6% Convertible Notes"). The 6%
Convertible Notes bear interest at 6% per annum, payable quarterly and mature on
April 30, 1999. The 6% Convertible Notes are convertible at a conversion price
per share equal to the lesser of (i) seventy-six and one-half percent (76.5% )
of the average of the volume weighted average price per share of the Company's
Common Stock (as reported by Bloomberg Business Services in its Volume at Price
Service) for the five days immediately preceding the date of the notice of
conversion to the Company, or (ii) $3.395 . In addition, the Company issued a 6%
Convertible Note which is non-interest bearing in the principal amount of
$315,000 as a placement fee to an unaffiliated party. The Company had agreed to
list the shares issuable upon conversion of the 6% Convertible Notes on the NYSE
by December 1, 1997, or to pay a cash penalty equal to ten percent (10%) of the
outstanding principal and to pay interest from that date through the effective
date of the registration statement at eighteen percent ( 18%) per annum . The
Company has asked the holders of the 6% Convertible Notes to waive or reduce
these penalties . In December 1997, the Company charged Interest Expense for
approximately $555,000 which represented the one-time penalty charge of 10% of
the principal amount of the outstanding notes as well as 18% for one month's
interest charge . As of the date of this report, note holders holding an
aggregate of $1,800,000 in principal have agreed to waive the 10% penalty and
the penalty interest charges of 18% per month. In consideration for this waiver,
the Company has agreed to issue warrants to purchase an aggregate of 90,000
shares of Common Stock at a purchase price of $5.375 per share for a six month
period beginning after the underlying shares have been registered.
The Company believes its business is affected by seasonal factors, based on
its customer's ordering patterns, and that the fourth quarter typically
represents a seasonal peak period, followed by reduced activity in the first
quarter of the following year. Therefore the Company's sales and net income may
vary from quarter to quarter, depending upon the timing of manufacturing orders
and related shipments to customers. The operating results for any particular
quarter may not be indicative of results for any future quarter.
In March 1997, the Financial Accounting Standards Board issued Statement
No. 128, "Earnings Per Share" which is effective for fiscal 1997. This Statement
establishes accounting standards for computing and presenting earnings per share
("EPS"). It replaces the presentation of primary EPS with a presentation of
basic EPS. It also
22
<PAGE>
requires dual presentation of basic EPS and diluted EPS for companies with
complex capital structures. The Company's reported loss per common share is
equivalent to basic loss per share under the new standard. The Company is not
required to present diluted per share amounts because it has incurred a
Net Loss.
.
In June 1997, the Financial Accounting Standards Board issued Statement No.
130, "Reporting Comprehensive Income", which requires a company to report
comprehensive income and its components in a full set of financial statements.
This Statement is effective for full fiscal years beginning after December 15,
1997. Comprehensive income is the change in equity of a business enterprise
during a period from transactions and other events and circumstances from
nonowner sources. It includes net income and other comprehensive income such as
foreign translation adjustments, minimum pension liability adjustments and
unrealized gains and losses on available-for-sale securities. The Statement
applies to all companies that provide a full set of financial statements. It
specifies requirements for reporting formats for comprehensive income and all
its components, calculation and display of reclassification adjustments, display
of the accumulated balance of other comprehensive income in equity, and interim
period reporting. The Company will adopt this Statement as of January 1, 1998,
however this Statement only impacts on disclosure requirements and it is not
expected to have any impact on the Company's financial position or results of
operations.
YEAR 2000
The Company has evaluated its information technology infrastructure and
operations and has determined that its systems have been updated so that they
are compliant with the requirements to process transactions in the Year 2000
("Y2K"). The Company does not currently have any information concerning Y2K
compliance status of its suppliers, banks and customers. In the event that any
of the Company's significant suppliers or customers does not successfully and
timely achieve Y2K compliance, the Company's business or operations could be
adversely affected.
23
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
EA INDUSTRIES, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
<TABLE>
<CAPTION>
Page Number
-----------
<S> <C>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS..............................................................25
FINANCIAL STATEMENTS:
Consolidated Balance Sheets as of December 31, 1997 and 1996......................................26
Consolidated Statements of Operations for the Three Years
Ended December 31, 1997.........................................................................27
Consolidated Statements of Shareholders' Equity
for the Three Years Ended December 31, 1997.....................................................28
Consolidated Statements of Cash Flows for the Three Years
Ended December 31, 1997.........................................................................29
Notes to Consolidated Financial Statements........................................................31
SCHEDULE:
II. Valuation Account..............................................................................52
</TABLE>
Schedules other than that listed above are omitted as not being applicable or
required, or the required information is included in the accompanying financial
statements or related notes thereto.
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, 1997 and 1996, and the
related consolidated statements of operations, shareholders' equity and cash
flows for each of the three years in the period ended December 31, 1997. 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, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997, 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, a significant portion of the Company's convertible notes and
debentures are currently payable on demand, and, at December 31, 1997, the
Company had negative working capital and a shareholders' deficit. 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 into 1998 and that the Company will be in
violation of the covenant under its primary loan facility to maintain a required
minimum net worth. 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
March 13, 1998
25
<PAGE>
EA INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and 1996
(thousands of dollars)
<TABLE>
<CAPTION>
ASSETS 1997 1996
-------- --------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 595 $ 461
Receivables, less allowance of $1,020 in 1997 and $1,100 in 1996 for doubtful
accounts (Note 1) 12,666 11,211
Inventories (Note 1) 13,175 10,068
Prepaid expenses and other assets 881 579
-------- --------
TOTAL CURRENT ASSETS 27,317 22,319
-------- --------
Equipment and leasehold improvements (Note 1) 19,201 18,581
Less accumulated depreciation (8,397) (8,059)
-------- --------
10,804 10,522
-------- --------
Investment in common stock of Aydin Corp. held for sale (Note 3) -- 5,605
-------- --------
Other investment held for sale (Note 3) 1,050 1,050
-------- --------
Intangible assets (Note 1) 10,573 12,331
Less accumulated amortization (2,452) (1,632)
-------- --------
8,121 10,699
-------- --------
Other assets 570 776
-------- --------
TOTAL ASSETS $ 47,862 $ 50,971
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Revolving Credit Facility (Note 4) $ 8,654 $ 8,054
Current portion of Capital Lease Obligations (Note 4) 1,839 1,455
Current portion of Convertible Notes and Debentures (Notes 2 and 4) 12,767 2,725
Accounts payable 15,793 14,702
Accrued expenses 5,051 4,549
-------- --------
TOTAL CURRENT LIABILITIES 44,104 31,485
-------- --------
Long-Term Liabilities:
Long-Term portion of Capital Lease Obligations (Note 4) 2,975 2,937
Convertible Notes and debentures (Notes 2 and 4) 1,000 8,109
Accrued excess leased space costs 314 849
Other long-term liabilities 570 505
-------- --------
TOTAL LONG-TERM LIABILITIES 4,859 12,400
-------- --------
TOTAL LIABILITIES 48,963 43,885
-------- --------
Commitments and Contingencies (Notes 4 and 11) -- --
Shareholders' Equity (Deficit) (Notes 1, 2, 3, 6, and 9):
Preferred stock, no par value; authorized 25,000,000 shares; none issued
Common stock, no par value; authorized 35,000,000 shares;
issued 9,438,613 shares in 1997 and 5,624,001 shares in 1996 90,270 80,535
Accumulated deficit (91,307) (73,245)
-------- --------
(1,037) 7,290
Less common stock in treasury, at cost: 7,369 shares in 1997
and 23,369 shares in 1996 (64) (204)
-------- --------
TOTAL SHAREHOLDERS' EQUITY (DEFICIT) (1,101) 7,086
-------- --------
$ 47,862 $ 50,971
======== ========
</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,
1997 (thousands of dollars, except per share data)
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net Sales (Note 1) $ 76,511 $ 81,625 $77,085
-------- --------- -------
Cost of Sales 76,204 81,145 76,422
Selling, General and Administrative Expenses 9,464 11,379 9,703
Research and development (Note 3) 152 1,383 19,546
-------- --------- -------
Loss from Operations (9,309) (12,282) (28,586)
Interest Expense 6,459 7,559 1,357
Interest Income (57) (229) (180)
(Gain) Loss on Investment in Aydin Corporation (Note 3) (821) 5,156 --
Other Expenses (Note 12) 3,172 5,186 1,131
-------- --------- -------
Net Loss ($18,062) ($29,954) ($30,894)
========= ========= =========
Loss Per Common Share (Note 9) ($2.15) ($6.24) ($10.01)
========= ========= =========
Weighted Average Common Shares Outstanding 8,392,723 4,802,068 3,086,070
========= ========= =========
</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, 1997
(thousands of dollars)
<TABLE>
<CAPTION>
Common Stock Treasury Stock
----------------------------------------------------
Accumulated
Shares Amount Shares Amount Deficit
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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
Granted 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 11,066
Imbedded interest on convertible debentures -- 4,200
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)
Net loss (18,062)
Exercise of stock options 150,631 530
Exercise of Class A and B Warrants 35,442 207
Payments on Notes receivable from Stock Sales -- 700
Value of options granted for Services -- 826
Debt conversion 3,628,539 4,851 16,000 140
Imbedded interest on convertible debentures -- 1,761
Value of Warrants issued in connection with
financing -- 887
Other -- (27)
---------------------------------------------------------------------
Balance, December 31, 1997 9,438,613 $ 90,270 (7,369) ($ 64) ($ 91,307)
=====================================================================
</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, 1997
(thousands of dollars)
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net loss ($18,062) ($29,954) ($30,894)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization 3,375 3,172 3,012
Valuation adjustment - Note Receivable -- 907 --
Valuation adjustment - Investment in Aydin Corporation 5,156 --
Valuation adjustment - Fixed Assets 390 563 --
Valuation adjustment - Investment in BarOn -- 649 --
Valuation adjustment - Investment in EATI -- 1,647 --
Write-off of Intangible Assets 1,758 -- --
Gain on Sale of Aydin common stock (821) -- --
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 128 851 --
Discount on Convertible Subordinated Debentures 1,761 4,200 --
Value of Convertible Debentures issued for Financing 315 -- --
Value of options granted for services 826 233 963
Value of Warrants issued in connection with Financing 887 -- --
Cash used by changes in:
Receivables (1,455) 746 2,451
Inventories (3,107) 2,910 (4,018)
Prepaid expenses & other assets (302) 1,031 --
Accounts payable and accrued expenses 1,593 3,121 372
Accrued excess leased space costs (535) (584) (425)
Other operating items - net 60 494 (148)
-------- -------- --------
Net cash used by operations (13,189) (2,575) (8,339)
-------- -------- --------
Cash Flows from Investing Activities:
Capital expenditures (3,313) (5,393) (5,427)
Investments, including those in affiliates -- (13,358) (12,884)
Net proceeds from sale of Aydin Corp. Common Stock 6,426 -- --
Cash acquired in purchase of Tanon -- -- 890
Proceeds from sale of discontinued operations -- -- 394
-------- -------- --------
Net cash provided/(used) by investing activities 3,113 (18,751) (17,027)
-------- -------- --------
Cash flows from Financing Activities:
Net borrowings/(repayments) under credit facilities 600 (786) (3,161)
Net proceeds from capital leases 422 1,797 1,440
Net proceeds from convertible subordinated debt 7,750 9,370 15,148
Proceeds from the exercise of stock options 530 1,007 --
Net proceeds from sales of common stock (private
placement) and exercise of warrants 907 569 17,479
Issuance of note receivable in connection with acquisition -- -- (1,000)
Other 1 -- (867)
-------- -------- --------
Net cash used by financing activities 10,210 11,957 29,039
-------- -------- --------
Net Increase (Decrease) in Cash and Cash Equivalents 134 (9,369) 3,673
Cash and Cash Equivalents at Beginning of Period 461 9,830 6,157
-------- -------- --------
Cash and Cash Equivalents at End of Period $ 595 $ 461 $ 9,830
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
29
<PAGE>
EA INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
For the Three Years Ended December 31, 1997
(thousands of dollars, except per share data)
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 2,463 $ 2,589 $ 1,315
======= ======= =======
Non cash financing activities:
Conversion of debt to equity $ 4,991 $11,066 $ 3,587
Value of stock and options issued in connection with
acquisitions -- -- 21,251
Value of Warrants issued in connection with
Financing 887 -- --
Imbedded interest on Convertible Debentures 1,761 4,200 --
Value of Options granted for services 826 582 963
------- ------- -------
TOTAL $ 8,465 $15,848 $25,801
======= ======= =======
</TABLE>
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 1995 and 1996, 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 .
The investment in EATI has been written down during 1996 to $1,050,000, its
estimated net realizable value (See Note 3).
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.
Revenue Recognition
Net sales are recognized when products are shipped or title passes to the
customer.
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.
31
<PAGE>
EA INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Inventories at December 31 consisted of:
1997 1996
---- ----
(thousands of dollars)
Raw Materials $ 7,710 $ 7,268
Work-in-Process 5,465 2,800
------- -------
Total inventories $13,175 $10,068
======= =======
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 a
discounted basis.
The excess of the purchase price over the appraised value of the net assets
acquired in the purchase of Tanon was $12,331,000 of which $3,223,000 related to
customer relationships and assembled workforce, and $9,108,000 of which was
goodwill. In December 1997, the Company recorded a charge of approximately
$1,758,000 to Other Expenses (See Note 12), representing the write-off of the
total asset value related to the assembled workforce and approximately 55% of
the asset related to customer relationships, as a result of workforce turnover
and the loss of customers. Based on management's forecasts of the operations of
Tanon, the Company has determined that the remaining goodwill and other
intangibles have not been impaired.
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.
32
<PAGE>
EA INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company periodically reviews equipment to determine that the carrying
values have not been impaired. The Company recorded write downs in certain fixed
assets held for disposal resulting in a non-cash charge of approximately
$390,000 for 1997 and $563,000 for 1996. These charges have been reported in the
Statement of Operations in Other Expenses.
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 1997, 1996 and 1995, the Company's top 5 customers represented 67% ,
72% , and 68% , respectively, of its consolidated net sales. In 1997, the
customers which accounted for more than 10% of the Company's net sales were
Advanced Fibre Communications, Inc., and Dialogic Corporation, which accounted
for 35%, and 13%, respectively, of 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. In 1995, the customers which
accounted for more than 10% of the Company's net sales were Advanced Fibre
Communications, Inc., Ungerman Bass, Inc. and Dialogic Corporation, which
accounted for 23%, 14% and 13%, respectively, of net sales. As of December 31,
1997 and 1996, the top five customers represented 55% and 56% , respectively, of
accounts receivable.
The Company has been informed by its largest customer, AFC, that it intends
to move the production of most of the components assembled by Tanon to
facilities outside of the United States, which have lower labor costs. During
1997, approximately $26.6 million of revenue from that customer was included in
the Company's net sales. If AFC is successful in implementing a move offshore,
sales to that customer of the product lines currently assembled by Tanon will
decrease significantly in the second and third quarter of 1998, and will
continue to decrease into 1999.
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.
33
<PAGE>
EA INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Stock Based Compensation
The Company has adopted the "disclosure only" provision of Statement of
Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based
Compensation". Accordingly, compensation cost for stock options issued to
employees and directors 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 or director 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 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.
2. OPERATIONS AND LIQUIDITY
The Company's primary credit facility is an asset based credit facility
provided by IBJ Schroder Bank & Trust Company ("Schroder") ("Schroder Loan
Facility") to Tanon. Advances under the Schroder Loan Facility can only be used
to fund the operations of Tanon. At December 31, 1997, $8,654,000 was
outstanding under the Schroder Loan Facility which represented approximately 80%
of the available funds, calculated in accordance with the availability formula
of the Schroder Loan Facility. The agreement with Schroder requires Tanon to
maintain certain financial ratios, including current assets to current
liabilities and earnings to fixed charges, and to maintain a minimum net worth.
At December 31, 1997, Tanon was in compliance with all of these requirements,
except the required minimum net worth. Schroder has agreed to waive such
requirement for December 31,1997. Based on the Company's current projections,
the Company would not be able to meet this requirement during 1998, however,
management has had discussions with Schroder and has requested that Schroder
adjust the required minimum net worth ratio to reflect the results of operations
of Tanon contained in the current business plan of Tanon for 1998.
The Company's ability to generate internal cash flows results primarily
from the sales of its contract electronic manufacturing services. The Schroder
Loan Facility prohibits Tanon from distributing or loaning cash generated by
contract manufacturing to EAI, except in certain very limited circumstances.
Cash flows from financing activities during 1997 amounted to $10,210,000
resulting primarily from the issuance of (i) an aggregate of $2,250,000 in 10%
Series A Convertible Notes, (ii) an aggregate of $1,000,000 in 10% Series B
Notes, (iii) an aggregate of $4,500,000 in 6% Convertible Notes, and (i) the
collection of $700,000 on notes receivable related to earlier warrant exercises,
(ii) aggregate proceeds of $207,000 from the exercise of warrants, (iii)
aggregate proceeds of $530,000 from the exercise of stock options , and (iv) an
increase in the Schroder Loan Facility of approximately $600,000 .
Net cash in the amount of $3,113,000 was provided by investing activities
during 1997. Funds in the amount of $6,426,000 were provided by the sale of the
Aydin Shares and approximately $2,100,000 was used to purchase a new Fuji high
speed SMT line for the Company's New Jersey facility.
34
<PAGE>
EA INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A substantial portion of the convertible securities issued by the Company
are currently payable on demand or are due within one year. This includes
certain 6% Notes, the Convertible Notes and the Amended Series A Notes,
representing approximately $10.8 million in debt. The Company has filed a
registration statement covering the shares issuable upon conversion of the 6%
Notes. When that registration statement is declared effective, such notes will
no longer be payable upon demand, and the Company expects those notes to be
converted into equity in accordance with their terms. The Company has also
scheduled a special meeting of its shareholders for March 31, 1998 to approve
the revised terms of the Convertible Notes and the Amended Series A Notes.
Assuming that the shareholders approve of such terms, such notes will no longer
be payable upon demand, and the Company expects those notes to be converted into
equity in accordance with their terms.
The Company has incurred significant losses and had negative cash flows
from operations in each of the last seven years. In addition, at December 31,
1997, the Company had negative working capital and a shareholders' deficit and a
significant portion of the Company's Convertible Notes are payable on demand.
The Company's financial projections indicate that operating losses and negative
cash flow will continue into 1998 and that the Company will be in violation of
the covenant under the Schroder Line to maintain a required minimum net worth.
The foregoing conditions, among others, raise doubt about the Company's ability
to continue as a going concern. The Company's Consolidated Financial Statements
have been prepared assuming that the Company will continue as a going concern
and do not contain any adjustments relating to the recoverability and
classification of liabilities that might result should the Company be unable to
continue as a going concern. In order to continue operations, the Company has
had to raise additional capital to offset cash utilized in operating and
investing activities. The Company has raised approximately $37 million from
December, 1995 through February 28, 1998, from the exercise of stock options and
warrants, the sale of the Aydin Shares, and the sale of convertible notes and
debentures. In the past few years, the Company has extended the time in which it
pays its payable to conserve its capital resources and to allow the Company to
concentrate such resources on the costs associated with growth. Management of
the Company has concluded that it would be advisable to increase its capital
resources that would be available for contingencies and to bring the Company's
timing on payment of payables to a level more consistent with standard practice
in its industry. The Company may seek to raise additional debt or equity in the
second or third quarters of 1998 to accomplish these goals. The Company expects,
however, that available funds under the Schroder Loan Facility together with its
available capital resources would be sufficient to fund its ongoing operations
in a fashion consistent with its past practices, excluding any acquisitions made
with cash.
3. ACQUISITIONS AND DISPOSITIONS
BarOn Acquisition
During 1995, the Company acquired an equity interest of 33.33% in BarOn
Technologies, Ltd. ("BarOn") which was a privately-held Israeli Corporation
based in Haifa, Israel, engaged in the research and development of input devices
for computers The consideration for the 33.33% interest totaled $9,987,000. 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 over the estimated fair value of EAI's 33.33% equity interest in the net
assets of BarOn totaled $8,872,000 and was charged to expense as purchased
research and
35
<PAGE>
EA INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
development in the consolidated results of the Company for the years ended
December 31, 1996 ($998,000) and 1995 ($7,874,000), respectively.
During the fourth quarter of 1996, the Company determined that its
investment and advances to BarOn were unrecoverable and charged those amounts to
expense. BarOn is currently in liquidation proceedings and a receiver has been
appointed in Israel to direct those proceedings. The Company does not expect to
recover any material portion of its investment in BarOn.
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"). ITI was formed to commercialize certain technology developed by IAI.
The portion of the purchase price in excess of the Company's equity interest in
the joint venture, which was $11,672,000 was charged to expense as Purchased
Research and Development in 1995. The Company's investment in ITI was accounted
for as a purchase.
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 the Joint Venture. Failure to make additional required capital contributions
would be a default under the joint venture agreement with IAI.
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 determined that the Joint Venture is not an essential
element of its core strategy and has been attempting 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 Expenses 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.
Aydin Corporation Acquisition
During May 1996, the Company purchased 596,927 shares (the "Aydin Shares")
of the common stock of Aydin Corporation ("Aydin"), a NYSE listed company, in a
private transaction for $18 per share (an aggregate of $10,752,000) and the
Company initiated discussions with the Board of Directors of Aydin concerning a
possible merger or other combination with Aydin. The Company withdrew its offer
on October 8, 1996 and terminated discussions with Aydin.
As a result of the merger discussions being terminated, the Company wrote
down its investment in Aydin Corporation by approximately $5,156,000 as a result
of a decrease in the approximate trading price of the Aydin Shares to $9.375 per
share, which was considered to be other than temporary. In addition,
approximately $689,000 of capitalized costs incurred in connection with the
terminated merger discussions with Aydin was charged to
36
<PAGE>
EA INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
expense in 1996. In May and June 1997, the Company sold its entire investment in
Aydin for approximately $6,426,000 resulting in a gain of approximately
$821,000.
Tri-Star
On December 23, 1996, the Company's contract manufacturing subsidiary
Tanon, signed a binding letter 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. In January 1997, the
Company placed an initial non-refundable deposit of approximately $1,000,000
towards the purchase of Tri-Star. In May 1997, the Company and Tri-Star mutually
agreed to terminate the acquisition discussions and $1,020,000 representing
expenses incurred in connection with the purchase and the deposit was written
off to Other Expenses.
SAI
The Company agreed in December 1997, subject to certain conditions, to
purchase Service Assembly, Inc. ("SAI"), located in Wareham, Massachusetts,
outside of Boston. The Company has agreed to pay $3,742,000 for SAI by
delivering shares of its Common Stock to the owners of SAI (the "SAI
Shareholders"), and has agreed to register such shares for resale by the SAI
Shareholders. The acquisition of SAI will be accounted for as a purchase.
4. DEBT AND CAPITAL LEASE OBLIGATIONS
Lines of Credit
The Company's primary credit facility is the Schroder Loan Facility which
provides for advances of up to $11,500,000 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 1998. The Schroder Loan Facility has a
three-year term ending on April 30, 1999 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. Advances under the Schroder Loan Facility can only be used to fund the
operations of Tanon. At December 31, 1997, $8,654,000 was outstanding under the
Schroder Loan Facility, which represented approximately 80% of the available
funds, calculated in accordance with the availability formula of the Schroder
Loan Facility. The agreement with Schroder requires Tanon to maintain certain
financial ratios, including current assets to current liabilities and earnings
to certain fixed charges, and to maintain a minimum net worth. At December 31,
1997, Tanon was in compliance with all of these requirements, except the
required minimum net worth. Schroder has agreed to waive such requirement for
December 31,1997. Based on the Company's current projections, the Company would
not be able to meet this requirement during 1998, however, management has had
37
<PAGE>
EA INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
discussions with Schroder and has requested that Schroder adjust the required
minimum net worth ratio to reflect the results of operations of Tanon contained
in the current business plan of Tanon for 1998. Substantially, all of the assets
of the Company are pledged as collateral to secure the Schroder Loan Facility.
Concurrent with the closing of the Schroder Loan Facility, the Company
consolidated all of its contract electronic manufacturing business into its
wholly-owned subsidiary, Tanon.
Convertible Securities
The following is a description of the material features of the outstanding
convertible securities of the Company:
The GFL Notes
Among its 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. The notes are now held by the former
Chairman of the Board of Directors of the Company, certain trusts benefiting his
family and an unaffiliated investor. In January 1998, the Company and the
remaining holders of such notes agreed to amend (the "January 1998 Amendments")
the terms of the remaining notes as follows:
(i) to extend the maturity date of the notes to December 31, 1998;
(ii) to increase the conversion price to the lesser of (a) eighty percent (80%)
of the average of the volume weighted average price per share of the Company's
Common Stock (as reported by Bloomberg Business Services in its Volume at Price
Service) for the five days immediately preceding the date of notice of
conversion to the Company or (b) $5.00; and
(iii) to provide for interest payments in cash or shares of Common Stock at the
conversion price described above at the option of the holders or the Company.
These notes as amended in January 1998 are referred to as the "Convertible
Notes". In consideration of the January 1998 Amendments the Company agreed to
issue to the holders warrants (the "Gross Warrants") to purchase an aggregate of
483,393 shares of Common Stock at a price of $5.00 per share for a period of
five years. The Gross Warrants are nondetachable and may not be sold, given or
transferred separately from the Amended Series A Notes. The holders were also
granted demand and piggyback registration rights for the Convertible Notes and
the Gross Warrants . The Company has scheduled a special meeting of its
shareholders on March 31, 1998 to vote on the January 1998 Amendments. If the
shareholders do not approve the amended terms contained in the Convertible Notes
the GFL Note Holders have the right to accelerate the payment of outstanding
principal and interest on the Convertible Notes with a twenty two percent (22%)
penalty. In that case, the Company would be obligated to pay $3,048,000 to the
GFL Note Holders.
The Aydin Convertibles
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 the
Aydin Shares. The 9% Convertible Debentures bear interest at
38
<PAGE>
EA INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9% per annum, payable quarterly and mature on May 3, 1998. The 9% Convertible
Debentures are currently convertible at a conversion price per share equal to
the lesser of (i) eighty percent (80% ) of the average of the closing price per
share of the Company's Common Stock for the five days immediately preceding the
date of the notice of conversion to the Company, or (ii) $1.50.
The Series A Notes
During the period beginning on October 25, 1996 and ending on April 10,
1997, the Company borrowed an additional aggregate total of $3,520,000 from the
then Chairman of its Board of Directors, certain trusts benefiting his family
(collectively, the "Gross Series A Holders") and an unaffiliated investor (the
"Series A Investor") and issued Series A Notes. The Series A Notes bear interest
at the rate of 10% per annum and will mature on January 22, 1999.
In January 1998, the Company and the Gross Series A Holders agreed to amend
the terms of the Series A Notes as follows :
(i) to provide for interest payments in cash or stock at the conversion price
described below at the option of the holders and the Company with such payments
to be made in arrears on June 15, 1998 and at maturity; and
(ii) to increase the conversion price to the lesser of (a) eighty percent (80%)
of the average of the volume weighted average price per share of the Company's
Common Stock (as reported by Bloomberg Business Services in its Volume at Price
Service) for the five days immediately preceding the date of notice of
conversion to the Company, or (b) $5.00.
In consideration of these amendments (the "Series A Amendments") the
Company agreed to issue to the Gross Series A Holders warrants (the "Series A
Warrants") to purchase an aggregate of 632,700 shares of Common Stock at a price
of $5.00 per share for a period of five years. The Series A Warrants are
nondetachable and may not be sold, given or transferred separately from the
Amended Series A Notes. The Gross Series A Note Holders were also granted demand
and piggyback registration rights for the shares of Common Stock issuable upon
conversion of the Amended Series A Notes and exercise of the Series A Warrants.
These amendments do not affect the terms of one of the Series A Notes, in the
original principal amount of $250,000, issued to the Series A Investor. These
notes as amended in January 1998 are referred to as the "Amended Series A
Notes".
If the shareholders do not approve the amended terms contained in the
Amended Series A, the Gross Series A Note Holders have the right to accelerate
the payment of outstanding principal and interest on the Amended Series A Notes
with a twenty two percent (22%) penalty. In that case, the Company would be
obligated to pay $4,678,000 to the noteholders.
Other Borrowings
During January 1997, the Company borrowed $1,000,000 from each of two
unrelated parties. 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 the lenders, Ace Foundation, Inc. (the "Ace
Warrant") and Millenco, LP (the "Millenco Warrant"), (collectively, the
"Warrants"). The Company charged the estimated value of these Warrants,
$175,000, to Interest Expense in the first quarter of 1997. These loans were
repaid in May and
39
<PAGE>
EA INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 1997 in connection with the sale of the shares of common stock of Aydin
held by the Company. Pursuant to a provision contained in the Millenco Warrant,
the Company has repurchased that Warrant for approximately $176,000 in cash,
charging the net difference between the estimated value of the initial Warrant
and the repurchased amount, or approximately $89,000 to Interest Expense, in the
fourth quarter of 1997.
The Company in April 1997, arranged for standby financing of up to
$4,500,000 to provide additional working capital. This commitment was originally
irrevocable until April 1, 1998 and was to be reduced based on the proceeds the
Company received from the sale of its shares of common stock of Aydin and from
any additional equity or convertible debt financing. The Company has issued
warrants exercisable at $4.125 per share for 600,000 shares as of April 18, 1997
in consideration of this commitment and an additional 200,000 shares as of June
10, 1997 also exercisable at $4.125 per share. The estimated value of these
warrants of $800,000 was charged to Interest Expense in the second quarter of
1997. The commitment was terminated in June 1997.
Series B Convertible Notes
In April and July 1997, the Company borrowed a total of $1,000,000 from an
unaffiliated investor . This loan is represented by certain 10% Series B
Convertible Notes ( the "10% Series B Notes" ), issued by the Company. The
Series B 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 $2.50 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 B 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 Company in cash
or stock of the Company at the conversion price described above.
6% Convertible Notes
In addition, in April 1997 the Company borrowed a total of $4.5 million
from unaffiliated investors. These loans are represented by certain 6%
Convertible Notes due April 30, 1999 (the "6% Convertible Notes"). The 6%
Convertible Notes bear interest at 6% per annum, payable quarterly and mature on
April 30, 1999. The 6% Convertible Notes are convertible at a conversion price
per share equal to the lesser of (i) seventy-six and one-half percent (76.5% )
of the average of the volume weighted average price per share of the Company's
Common Stock (as reported by Bloomberg Business Services in its Volume at Price
Service) for the five days immediately preceding the date of the notice of
conversion to the Company, or (ii) $3.395 . In addition, the Company issued a 6%
Convertible Note which is non-interest bearing in the principal amount of
$315,000 as a placement fee to an unaffiliated party. The Company had agreed to
list the shares issuable upon conversion of the 6% Convertible Notes on the NYSE
by December 1, 1997, or to pay a cash penalty equal to ten percent (10%) of the
outstanding principal and to pay interest from that date through the effective
date of the registration statement at eighteen percent (18%) per annum . The
Company has asked the holders of the 6% Convertible Notes to waive or reduce
these penalties . In December 1997, the Company charged Interest Expense for
approximately $555,000 which represented the one-time penalty charge of 10% of
the principal amount of the outstanding notes as well as 18% for
40
<PAGE>
EA INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
one month's interest charge. Note holders holding an aggregate of $1,800,000 in
principal have agreed to waive the 10% penalty and the penalty interest charges
of 18% per month. In consideration for this waiver, the Company has agreed to
issue warrants to purchase an aggregate of 90,000 shares of Common Stock at a
purchase price of $5.375 per share for a six month period beginning after the
underlying shares have been registered.
Imbedded Discounts
As described above, certain of the convertible notes and debentures contain
conversion features which provide for 18% - 23.5% discounts on the market price
of the Company's common stock at the conversion date. The incremental yield
embedded in the conversion terms charged to interest expense totaled $1,761,000
and $4,200,000 in 1997 and 1996, respectively.
Convertible Notes and Debentures outstanding at December 31 consisted of
the following:
1997 1996
---- ----
GFL Notes $ 2,498,000 $ 2,725,000
Aydin Convertibles 1,934,000 6,839,000
Series A Notes 3,520,000 1,270,000
Series B Convertible Notes 1,000,000 -
6% Convertible Notes 4,815,000 -
------------ ------------
Total $ 13,787,000 $ 10,834,000
============ ============
Current Portion $ 12,767,000 $ 2,725,000
Long Term Portion $ 1,000,000 $ 8,109,000
41
<PAGE>
EA INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Capital Lease Obligations
The Company leases fixed assets under capital leases with a weighted
average interest rate of 14.1% and the following principal maturity schedule:
(in thousands)
1998 $1,839
1999 1,880
2000 809
2001 286
2002 -
-------------
Total 4,814
Less: Current portion (1,839)
-------------
Long-term portion $2,975
=============
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, 1998 is approximately
$90,000, 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.
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, 1997 amounted to $19,906,000; $2,495,000 in 1998;
$2,619,000 in 1999; $2,652,000 in 2000; $2,689,000 in 2001; $2,735,000 in 2002
and $6,716,000 thereafter. Rent expense amounted to $2,402,000 in 1997,
$2,343,000 in 1996; and $2,234,000 in 1995. 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 increase in rental payments, if any, 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. During 1997,
and 1995 options and warrants to acquire 198,000 and 86,250 shares, respectively
of the Company's Common Stock were issued for this purpose. No significant
options or warrants were issued for this purpose in 1996. 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.
42
<PAGE>
EA INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 1997, 1996 and 1995 options and warrants to acquire 850,000,
89,286, and 118,750 shares, respectively, 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.
In 1997, 800,000 warrants with an estimated value of $800,000 were granted
in connection with a standby financing commitment of $4.5 million. The value of
the warrants were charged to interest expense in 1997.
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, 1997, 268,001 shares of Common Stock were reserved for
issuance to employees under the Company's 1972 Employee Stock Option 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, also determine the option
vesting period. The Company has decided not to grant any future options under
this Plan .
1994 Stock Option Plan for Non-Employee Directors
During 1997, the Company has decided to terminate this Plan in its
entirety.
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. On August 22, 1997, the Shareholders voted
to approve an amendment to the Equity Incentive Plan increasing the aggregate
number of shares available for issuance to 5,000,000 shares. 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, 1997, 4,136,647 shares of
Common Stock were reserved for issuance under this Plan.
43
<PAGE>
EA INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A summary of activity in the various stock option plans discussed above
follows:
<TABLE>
<CAPTION>
Stock Option Plans
------------------
Price Available
Per Share Outstanding Exercisable for Grant
--------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
1972 Stock Option Plan
- ----------------------
December 31, 1995, Balance $ 4.52-25.12 66,367 130,486 202,571
Became Exercisable $ 4.52-20.25 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
Became Exercisable $ 4.50-20.25 3,486
Options Exercised $ 4.83 (625) (625)
Options Returned $ 4.50-20.25 (24,731) (22,981) 24,731
------------ ------- ------- ---------
December 31, 1997, Balance $ 4.83-25.12 26,168 25,856 241,833
============ ======= ======= =========
1994 Stock Option Plan for
Non-Employee Directors
- --------------------------
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
Became Exercisable $22.50-30.00 6,000
Options Returned $13.00-30.00 (84,375) (47,375) 84,375
------------ ------- ------- ---------
December 31, 1997, Balance -- -- -- 586,250
============ ======= ======= =========
</TABLE>
44
<PAGE>
EA INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Stock Option Plans
------------------
Price Available
Per Share Outstanding Exercisable for Grant
--------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
1994 Equity Incentive Plan
- --------------------------
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
Options Granted $ 2.25-6.94 3,730,502 -- (3,730,502)
Became Exercisable $ 3.25-34.50 -- 1,364,695 --
Options Exercised $ 3.25-4.20 (150,006) (150,006) --
Options Returned $ 3.25-34.50 (1,848,424) (1,141,347) 1,848,424
Options Authorized -- -- -- 2,250,000
----------- ---------- ---------- ----------
December 31, 1997, Balance $ 2.25-6.94 3,274,282 809,824 862,365
============ ========== ========== ==========
</TABLE>
The number of shares and average price of options, granted under these
plans, exercisable at December 31, 1997 and 1996 were 835,680 shares at $ 4.60
and 923,833 shares at $19.23, respectively. At December 31, 1997 and 1996,
1,690,448 shares and 1,213,420 shares, respectively, were available for future
grants under these plans.
45
<PAGE>
EA INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Other options and warrants issued in connection with financing transactions
or for services rendered are as follows:
Other Outstanding Warrants and Options
Outstanding and
Warrants Exercise Price Exercisable Expiration Date
- -------- -------------- ----------- ---------------
$4.00 4,412 1/6/98
7.00 240,928 1/6/98
11.08 65,500 3/21/99
12.10 62,500 7/10/99
18.40 62,500 8/16/99
4.00 12,500 1/6/98
29.00 125,000 8/7/98
1.50 50,000 1/6/99
29.00 150,000 8/7/98
32.50 89,286 7/5/00
4.13 800,000 4/18/00
23.50 60,000 12/15/99
Options
- ------- $18.24 25,000 7/24/99
$22.00-30.80 100,000 10/19/99
------------ ---------
Total Outstanding $1.50-32.50 1,847,626
============ =========
At December 31, 1997 an aggregate of 6,913,524 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, compensation expense has been
recognized only for certain options granted in 1997 at prices below the fair
market at the time of grant. The amount charged to compensation during 1997 for
such options was $826,000. 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 $3.6 million, or $0.43 per share in 1997, $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 1997, 1996, and 1995 was $1.78, $8.78, and
$14.10, respectively. The fair value was estimated using the Black-Scholes
option-pricing model based on the weighted average market price of $4.12 in
1997, $16.91 in 1996 and $29.43 in 1995 and the following weighted average
assumptions- risk-free interest rate of 5.5% for 1997, 5.8% for 1996, and 6.4%
for 1995; expected life of
46
<PAGE>
EA INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
options: 2.5 years for 1997, 3 years for 1996, and 3 years for 1995; projected
volatility of 63% for 1997, 73% for 1996, and 70% for 1995. There was no
dividend yield factor for 1997 , 1996 and 1995, respectively .
7. SAVINGS PLAN AND POST RETIREMENT BENEFITS
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 1997, 1996, or 1995.
Company contributions amounted to approximately $107,000 in 1997, $84,000 in
1996, and $68,000 in 1995. 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, 1997, the Company had a net operating loss carry forward
for tax purposes of approximately $66.1 million ($7.3 million expiring in 1999,
$2.0 million expiring in 2002, $3.3 million expiring in 2007, $5.8 million
expiring in 2008, $4.9 million expiring in 2009, $10.2 million expiring in 2010
, $18.4 million expiring in 2011, and $14.1 million expiring in 2012) 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 $25.8 and $17.8 million at December 31, 1997 and 1996,
respectively, the Company has established a valuation allowance of $25.8 and
$17.8 million at December 31, 1997 and 1996, respectively.
There was no net U.S. Federal income tax benefit for 1997, 1996 or 1995
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 common share was 8,392,723 in 1997, 4,802,068 in 1996
and 3,086,070 in 1995.
In March 1997, the Financial Accounting Standards Board issued Statement
No. 128, "Earnings Per Share" which is effective for fiscal 1997. This Statement
establishes accounting standards for computing and presenting earnings per share
("EPS"). It replaces the presentation of primary EPS with a presentation of
basic EPS. It also requires dual presentation of basic EPS and diluted EPS for
companies with complex capital structures. The
47
<PAGE>
EA INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Company's reported loss per common share is equivalent to basic loss per share
under the new standard. The Company is not required to present diluted per share
amounts because it has incurred a net loss.
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.
10. MANAGEMENT RESTRUCTURING
In connection with the restructuring of its management and board of
directors, the Company established a $1,410,000 provision in the second and
third quarters of 1997, which is included in Selling, General & Administrative
Expenses.
The restructuring provision consisted primarily of the following charges:
o $360,000 in recruiting fees paid in connection with the hiring of a Chief
Executive Officer and Board members
o $142,000 in relocation expenses paid to the Chief Executive Officer
o $175,000 in charges related to restructuring of operations of Tanon
o $430,000 in charges related to stock options granted to now former directors
and officers of the Company
o $303,000 for the cost of severance and other expenses
11. COMMITMENTS AND CONTINGENCIES
Lemco Associates
The Company on a regular basis reviews and updates its public disclosure
with respect to this litigation. As previously reported, in October, 1992,
Lemco Associates L.P., a limited partnership ("Lemco"), the owner of property
previously owned by EAI, initiated an action (the "Lemco Suit"), against EAI
and others alleging, among other things, that the defendants created
environmental contamination at the property and seeking damages in unspecified
amounts. EAI filed a response to the complaint in which it denied Lemco's
allegations, asserted numerous defenses to the claims asserted and asserted a
counterclaim against Lemco and crossclaims against co-defendants and others for
indemnification and contribution.
In 1947, the Company purchased land in North Long Branch, New Jersey on
which it subsequently built a number of buildings and conducted a number of
industrial operations. In 1954 the Company built a building known as Building 11
on that land. From the mid - 1950's through 1977, the Company conducted
finishing operations such as metal plating and painting on that site using,
among other machinery, a degreaser to clean metal components using a variety of
solvents. In 1977, EAI leased building 11 to a company called Comax, Inc.
("Comax"), which then began operations in the building. In 1977, Comax, with
technical advice from EAI, filled the degreaser with solvents and used it at
least once. Comax then capped the degreaser without removing the solvents and
did not use it again. In 1979, EAI sold the property and all the buildings on
the site to Lemco for approximately $400,000. Comax continued to operate on the
site until 1984 under a lease from Lemco.
48
<PAGE>
EA INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Between 1977 and the time it ceased operations on the site, Comax was cited
by local authorities for a range of environmental violations. Building 11 was
demolished in or about 1991. Evidence indicates that at the time of removal the
degreaser was empty. EAI believes that, between the time it was capped in 1977
and the time of its removal, the chemicals leached out gradually over time or
the chemicals were spilled at the site before or after the removal of the
degreaser.
The Company believes that Lemco was aware at the time of its purchase of
the site from EAI that some of the underground gasoline storage tanks on the
site had leaked and that there had been previous spills of hazardous materials
on the site.
Lemco's environmental consultants have analyzed the data from test wells on
the site and have concluded using a mathematical analysis and a modeling
analysis that TCE contamination occurred between 1959 and 1974 and that PCE
contamination occurred no later than 1968. The Company's environmental
consultants have analyzed the data from the same test wells on the site and have
concluded that based on a similar modeling analysis an initial TCE release to
the aquifer occurred in the mid 1970's to the late 1980's and a release of PCE
occurred from the mid '70's to the mid 80's. Their mathematical analysis also
indicates that TCE was most likely released to the aquifer in the mid 1980's and
unlikely to have been released before 1977. In addition, the evidence that would
be presented at trial by EAI is consistent with that conclusion.
The damages sought in the Lemco Suit are (i) recovery for the decreased
value of the property, (ii) recovery for the cost to remediate the contamination
on the property, and (iii) prejudgement interest and expert fees.
In 1988, Lemco signed an agreement of sale for the property subject to
various contingencies for a price of approximately $4 million. Further, Lemco
has provided the Company with appraisal reports made by a real estate appraisal
company engaged by Lemco in connection with the Lemco Suit. The reports state
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 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 has provided the Company with a statement of its remediation costs
through December 18, 1997, as well as an estimate of future remediation costs
associated with the contamination for which it seeks recovery in the Lemco Suit.
Specifically, Lemco claims that it has expended approximately $635,000 in
remediation costs, including fees for legal oversight and consultation and
estimates that its future remediation costs will amount to approximately
$6,316,000. This estimate has been 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 costs
and fees for legal oversight and consultation. 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
approximately $2.4 million.
49
<PAGE>
EA INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company has been vigorously defending this matter by, among other
things, asserting that the contamination was caused partially or completely by
Comax, not EAI, and that Lemco's damage figure is substantially overstated. To
the extent that it is determined that Comax contaminated the site during its
tenancy with the Company from 1977 to 1979, then the Company may be held liable
for such contamination as owner of the site at the time of the contamination .
The Company will pursue its claim for indemnity against Comax in the event said
liability is established . Additionally, the Company has participated in court
ordered mediation in an effort to explore opportunities for settlement .
Contemporaneously with the institution of the Lemco Suit, the Company made a
demand upon its insurance carriers for coverage for the claims by Lemco. The
Company's insurance carriers in 1992 agreed to pay 71% of its defense costs
under a reservation of rights and have made partial payments for the period
beginning on the date of the Lemco Suit to the date hereof.
Although the Company's insurance carriers have not formally denied coverage
or refused to provide a defense for the Company, the Company believed that
settlement or other resolution of the Lemco Suit would be more likely with the
active participation of the insurance carriers. By court order, after request by
the Company, (i) the carriers were added as third party defendants in the Lemco
Suit, (ii) the court ordered expedited discovery with respect to the insurance
claim, (iii) the court scheduled a settlement conference for April 7, 1998 and
(iv) the court has set a new trial date of May 5, 1998. Discovery in the Lemco
Suit is ongoing.
Management of the Company believes that the range of possible loss by the
Company in this matter is approximately $250,000 to $10,300,000. This range
excludes prejudgement interest, if any, but includes costs and expenses, such as
legal and expert fees. In the third quarter of 1997, the Company established a
reserve of $250,000 to cover anticipated legal and expert fees in connection
with the Lemco Suit. Management of the Company believes that the reserves it has
established, together with its insurance coverage , should be sufficient to
cover the costs of defending or settling the Lemco Suit and the potential losses
that could be incurred by the Company in connection with the Lemco Suit . No
assurance can be given that the costs incurred by the Company , or a potential
award of damages against the Company, will not exceed management's current
estimates, or that the insurance recovery , if any, and available resources of
the Company will not be less than the current estimates of management.
Employment Agreements
The Company is a party to employment agreements with its executive officers
and certain key operating executives which provide for severance benefits
ranging from three months to two years of salary, bonus and other benefits and
in some cases for vesting of any unvested options. Each such agreement has
various triggering events including some or all of the following (i) the
executive is terminated for any reason other than due cause, (ii) a change of
control of the Company occurs, (iii) the executive's principal location is moved
more than 30 miles from its current location or (iv) the executive's position is
materially changed.
12. OTHER EXPENSES
Other Expenses consist primarily of the following charges in 1997: (i)
write-off of certain intangibles of ($1,758,000), relating to the Tanon
acquisition, (ii) write-off of non-refundable deposit of ($1,020,000) paid to
Tri-Star, (iii) write-off of fixed assets of ($390,000).
50
<PAGE>
EA INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Other Expenses consist primarily of the following charges in 1996: (i)
($812,000) representing equity share of BarOn's losses, (ii) ($449,000)
representing equity share of EATI's losses, (iii) valuation adjustment of
($1,647,000) on the investment in EATI, (iv) valuation adjustment of ($649,000)
on the investment in BarOn, (v) write-down of ($907,000) in non-recourse note
receivable from former owner of Tanon secured by pledge of Common Stock of the
Company, and (vi) the write-off of fixed assets of ($563,000).
Other Expenses consist primarily of the following charges in 1995: (i)
($802,000) representing equity share of BarOn's losses and (ii) ($49,000)
representing equity share of EATI's losses.
13. QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data for the years ended December 31, 1997
and 1996 are as follows:
<TABLE>
<CAPTION>
First Second Third Fourth
----- ------ ----- ------
<S> <C> <C> <C> <C>
1997
- ----
Net Sales $14,625 $16,677 $21,243 $ 23,966
Gross profit (loss) 165 (74) 1,026 (810)
Net Loss $(2,603) $(7,236) $(1,502) $ (6,721)
------- ------- ------- --------
Loss per common share $ (0.35) $ (0.93) $ (0.17) $ (0.72)
======= ======= ======= ========
1996
- ----
Net Sales $24,025 $22,388 $17,595 $ 17,617
Gross profit (loss) 1,391 1,589 (142) (2,358)
Net Loss $(3,869)(1) $(3,633)(1) $(6,265)(1) $(16,187)
------- ------- ------- --------
Loss per common share $ (0.93)(1) $ (0.77)(1) $ (1.24)(1) $ (3.07)
======= ======= ======= ========
</TABLE>
(1) 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.
51
<PAGE>
EA Industries, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION ACCOUNT
For the Three Years Ended December 31, 1997
(thousands of dollars)
<TABLE>
<CAPTION>
Description Balance at (Charged) Deductions(1) Balance
- ----------- Beginning Credited ------------- at End of
Of Period to Costs and Period
--------- Expenses ------
--------
<S> <C> <C> <C> <C>
1997: Allowance for doubtful accounts $(1,100) ($134) $214 ($1,020)
======= ===== ==== =======
1996: Allowance for doubtful accounts $(385) ($899)(3) $184 $(1,100)
======= ===== ==== =======
1995: Allowance for doubtful accounts $(307)(2) ($91) $13 $(385)
======= ===== ==== =======
</TABLE>
(1) Write-off of uncollectible accounts
(2) Adjusted to include Tanon Balance
(3) Includes provisions for Gyration Inc. of $750
53
<PAGE>
PART III
Items 10-13 are hereby incorporated by reference to the Company's Proxy
Statement for its 1998 Annual Meeting of Shareholders which will be filed with
the Securities and Exchange Commission within 120 days after the end of the
fiscal year covered by this report.
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.
EXHIBITS
Exhibit No. Description
- ----------- -----------
2.1 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.
2.2 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 herein by
reference.
3.3 Amendment to Certificate of Incorporation was filed as Exhibit
3.3 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1996 and is hereby incorporated herein by
reference.
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, was filed as an
exhibit to the Company's Annual Report on Form 10-K for the
year ended December 31,
54
<PAGE>
1996 and is hereby incorporated herein by reference.
(*) 10.1 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.
10.2 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.
(*) 10.3 1994 Stock Option Plan for Non-Employee Directors, was
filed as Exhibit 10.30 to the Company's Annual Report on Form
10-K for the year ended December 31, 1995, and is hereby
incorporated by reference.
(*)10.4 1994 Equity Incentive Plan as amended and restated, and
approved by the shareholders of the Company was filed as an
appendix to the Company's Proxy Statement dated July 23, 1997
and is hereby incorporated by reference.
10.5 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).
10.6 Revolving Credit and Security Agreement dated May 3, 1996,
between IBJ Schroder Bank & Trust Company and Tanon
Manufacturing, Inc. 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 incorporated by reference,
10.7 Form of Subscription Agreement and Form of 9% Convertible
Subordinated Debenture issued in May and June 1996 in
connection with the investment in Aydin Corporation 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.
(**)10.8 Employment Agreement dated December 20, 1996 between the
Company and Howard Kamins was filed as Exhibit 10.36 to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1996 and is hereby incorporated herein by
reference.
10.9 Form of Subscription Agreement and Form of 10% Series A
Convertible Notes issued by the Company was filed as Exhibit
10.39 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1996 and is hereby incorporated by
reference.
55
<PAGE>
10.10 Registration Rights Agreement dated January 23, 1997 between
Aydin Corporation and the Company was filed as Exhibit 10.40 to
the Company's Annual Report on Form 10-K for the year ended
December 31, 1996 and is hereby incorporated by reference.
10.11 Letter Agreement and dated February 25, 1997 between Aydin
Corporation and the Company regarding option to be granted to
the Chairman of Aydin Corporation was filed as Exhibit 10.41 to
the Company's Annual Report on Form 10-K for the year ended
December 31, 1996 and is hereby incorporated by reference.
10.12 Stock Option Agreement dated February 27, 1997 between the
Company and the Chairman of Aydin Corporation was filed as
Exhibit 10.42 to the Company's Annual Report on Form 10-K for
the year ended December 31, 1996 and is hereby incorporated by
reference.
10.13 Letter of Intent dated December 23, 996 by and among Tanon
Manufacturing, Inc., Tri-Star Technologies Co., Inc. and
Michael P. Downes was filed as Exhibit 10.43 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1996
and is hereby incorporated by reference.
10.14 Letter of Intent dated December 23, 1996 by and among Tanon
Manufacturing, Inc., Tri-Star Realty Trust and Michael P.
Downes was filed as Exhibit 10.44 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1996 and is
hereby incorporated by reference.
10.15 Memorandum of Understanding dated December 23, 1996 by and
among the Company, Tanon Manufacturing, Inc., Tri-Star
Technologies Co., Inc., and Michael P. Downes was filed as
Exhibit 10.45 to the Company's Annual Report on Form 10-K for
the year ended December 31, 1996 and is hereby incorporated
by reference.
10.16 Promissory Note dated January 20, 1997 in the principal amount
of $1 million issued by the Company to Millenco, L.P. was filed
as Exhibit 10.46 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1996 and is hereby incorporated
by reference.
10.17 Stock Pledge Agreement dated January 20, 1997 between the
Company and Millenco, L.P. was filed as Exhibit 10.47 to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1996 and is hereby incorporated by reference.
56
<PAGE>
10.18 Warrant dated January 20, 1997 to purchase 50,000 shares of the
Company's Common Stock issued to Millenco, L.P. was filed as
Exhibit 10.48 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1996
10.19 Promissory Note dated January 6, 1997 in the principal amount
of $1 million issued by the Company to ACE Foundation, Inc. was
filed as Exhibit 10.49 to the Company's Annual Report on Form
10-K for the year ended December 31, 1996 and is hereby
incorporated by reference.
10.20 Stock Pledge Agreement, dated January 6, 1997 between the
Company and ACE Foundation, Inc. was filed as Exhibit 10.50 to
the Company's Annual Report on Form 10-K for the year ended
December 31, 1996 and is hereby incorporated by reference.
10.21 Warrant dated January 6, 1997 to purchase 50,000 shares of
Company's Common Stock issued to ACE Foundation, Inc. was filed
as Exhibit 10.51 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1996 and is hereby incorporated
by reference.
10.22 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.
10.23 Form of Class B Warrant issued to each purchaser in connection
with the private sale of the Company's securities in January
1994, was filed as Exhibit 10(y) to the Company's Annual Report
on Form 10-K for the year ended December 31, 1993, and is
hereby incorporated by reference.
10.24 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.
10.25 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.
57
<PAGE>
(**)10.26 Employment Agreement, dated as of May 8, 1996 between the Company
and Frank G. Brandenberg.
10.27 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.
(*)10.28 1994 Equity Incentive Plan, as adopted by the Company's
shareholders on June 28, 1994, as amended and restated.
(*)10.29 1994 Stock Option Plan for Non-Employee Directors, as adopted
by the Company's shareholders on May 17, 1994, as amended and
restated.
(**)10.30 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.
10.31 Form of Placement Agent's Warrant Agreement entered into
between the Company and Neidiger/Tucker/Bruner, Inc., together
with a Form of Warrant issued by the Company comprising an
Exhibit to the Placement Agent's Warrant Agreement, was filed
as Exhibit 10.35 to the Company's Registration Statement on
Form S-1, No. 33-81892, as amended, and is hereby incorporated
by reference.
(**)10.32 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.
10.33 Form of 6% Convertible Notes Issued in April 1997 was filed as
Exhibit 4.5 to the Company's Form S-3A (File No. 333-21605 and
is hereby incorporated by reference.
10.34 Form of Amended GFL Note was filed as Attachment A to the
Company's Preliminary Proxy Statement filed on February 17,
1998 and is hereby incorporated by reference.
58
<PAGE>
10.35 Form of Warrant issued in connection with Amended GFL Notes was
filed as Attachment B to the Company's Preliminary Proxy
Statement filed on February 17, 1998 and is hereby incorporated
by reference.
10.36 Form of Amended 10% Series A Note was filed as Attachment C to
the Company's Preliminary Proxy Statement filed on February 17,
1998 and is hereby incorporated by reference.
10.37 Form of Warrant issued in connection with Amended 10% Series A
Notes was filed as Attachment D to the Company's Preliminary
Proxy Statement filed on February 17, 1998 and is hereby
incorporated by reference.
10.38 Form of Warrant issued in connection with Stand-by financing
commitment.
10.39 Letter dated December 12, 1997 from the New York Stock Exchange
to the Company was filed as Exhibit 4.4 to the Company's Form
S-3A (File No. 333- 21605 and is hereby incorporated by
reference.
10.40 Agreement of Purchase and Sale dated as of December 23, 1997 by
and among Service Assembly, Inc., the Company and the
shareholders of Service Assembly was filed as Exhibit 2.3 to
the Company's Form S-3 (File No. 333-4483 and is hereby
incorporated by reference.
10.41 Form of 10% Series B Convertible Notes.
59
<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.
27 Financial Data Schedule
(*) 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 Claudia Rose, EA
Industries, Inc., 185 Monmouth Parkway, West Long Branch, New Jersey 07764.
(b) The Company did not file a Report on Form 8-K during the calendar
quarter ended December 31, 1997.
(c) See Item 14(a) above.
<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/ James Crofton
----------------------------------
James Crofton, Treasurer
and Vice President - Finance
Chief Financial Officer
(Principal Financial and Chief Accounting Officer)
Dated: March 13, 1998
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/ Frank G. Brandenberg President, Chief Executive March 13, 1998
- -------------------------------- Officer and Director
Frank G. Brandenberg (Principal Executive
Officer)
/s/ James Crofton Treasurer, Vice President- March 13, 1998
- -------------------------------- Finance and
James Crofton Chief Financial Officer
(Principal Financial and
Accounting Officer)
/s/ Edward A. Blechschmidt Director March 5, 1998
- --------------------------------
Edward A. Blechschmidt
/s/ Kenneth W. Cannestra Director, Chairman of the March 9, 1998
- -------------------------------- Board
Kenneth W. Cannestra
/s/ Brian I. Finkel Director March 13, 1998
- --------------------------------
Brian I. Finkel
/s/ Ross Manire Director March 13, 1998
- --------------------------------
Ross Manire
/s/ Shrawan K. Singh Director March 11, 1998
- --------------------------------
Shrawan K. Singh
/s/ Ronald Verdoorn Director March 13, 1998
- --------------------------------
Ronald Verdoorn
</TABLE>
52
EMPLOYMENT AGREEMENT
AGREEMENT made as of the 8th day of May, 1997 by and between EA Industries,
Inc., a New Jersey corporation (the "Company") and Frank G. Brandenberg (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 May 8, 1997 and continuing through
May 8, 2001, unless sooner terminated in accordance with this Agreement.
2. Position, Duties. The Executive shall serve the Company as President
and Chief Executive Officer and at the request of the Board of Directors of the
Company 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. At the 1997 Annual Meeting of Shareholders the Company shall
nominate the Executive to serve as a Director or the Board shall at its next
meeting following such Annual Meeting increase the size of the Board and elect
the Executive to fill such vacancy. 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, restrictive covenants or other agreements
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.
3. Cash Compensation. 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
1
<PAGE>
Company shall pay the Executive, and the Executive shall accept, a base
salary at the rate of $275,000 per annum during the first year of the term of
this Agreement, and $325,000 during the second year of the term of this
Agreement: The Company and the Executive shall negotiate in good faith to
determine the base salary of the Executive for the third and fourth years of
this Agreement, with a target date of February 18, 1999 to agree on the base
salary, but in any event, the base salary for the third and fourth years of this
Agreement shall not be less than $325,000 per annum. The base salary shall be
payable in accordance with the standard payroll practices of the Company. In
addition to the base 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. .
4. Bonus Plan. The Board of Directors shall establish an operating
budget for the Company for the remainder of 1997 by July 1, 1997, and for each
succeeding fiscal year by the beginning of such year, which shall include
targets for revenue, operating profit, market capitalization and other financial
and operating goals. The Board shall also weigh such factors as it deems
appropriate in determining how much of the Executive's salary shall be payable
as a bonus, in addition to the Executive's base salary, for achieving or
exceeding each such factor in its sole discretion. The calculation of a bonus
shall be based on the Company's annual audited financial statements. The
Executive shall be paid a bonus of up to sixty percent of his base salary for
the preceding fiscal year as an annual bonus for each year during the term
hereof. Such payment, if any, shall be made within thirty days after completion
of the Company's annual audit. The Executive shall be entitled to a minimum
bonus of $125,000 for the period beginning on May 8, 1997 and ending on May 8,
1998. This minimum bonus shall be paid $31,250 on each of July 1, 1997, October
1, 1997, January 1, 1998, and April 1, 1998. The Executive shall also be
entitled to a minimum bonus of $50,000 for the period beginning on May 9, 1998
and ending on May 8, 1999, payable on June 30, 1998. Such minimum payments shall
be credited against the bonus earned pursuant to the Bonus Plan for the portion
of the fiscal years included therein.
5. Stock Options. (a) On or before June 1, 1997, the Company will grant
the Executive options or warrants to purchase 340,000 of the Company's Common
Stock. The exercise price for such shares shall be the lower of $4.00 or the
closing price of the Common Stock of the Company on the New York Stock Exchange
on the date this Agreement is executed by the Company, but in no event less than
$3.00 per share (the "Option Price") and the options will vest 100,000 shares on
the date of grant. The remainder of the shares will vest, so long as the
Executive continues to be an employee of the Company, 80,000 shares on May 8,
1998, 80,000 shares on May 8, 1999 and the remainder on May 8, 2000. If the
Company terminates the employment of the Executive for any reason other than Due
Cause as defined in paragraph 8.3 of this Agreement, or the Executive terminates
his employment pursuant to a Change of Control, any remaining unvested options
then held by Executive shall become immediately vested and exercisable.
2
<PAGE>
(b) The Executive shall be entitled to separate grants of immediately
vested five year options or warrants to purchase 85,000 shares of Common Stock
with an exercise price equal to the Option Price upon the occurrence during the
term of this Agreement of each of the following:
(i) the Company's consolidated net income, as determined in
accordance with generally accepted accounting standards and as reported in its
Reports on Form 10-Q or 10-K, for any two consecutive fiscal quarters equals or
exceeds $550,000 for each of such quarters.
(ii) the trading price of the Company's Common Stock shall exceed
$6.50 for each of 30 consecutive trading days. Such trading price shall be the
volume weighted average per share of the Company's Common Stock as reported by
Bloomberg Business Service in its volume at price service.
(iii) the Company's consolidated net income, as determined in
accordance with generally accepted accounting standards and as reported in its
Reports on Form 10-Q or 10-K, for any two consecutive fiscal quarters equals or
exceeds $1,100,000 for each of such quarters.
(iv) the trading price of the Company's Common Stock shall exceed
$9.50 for each of 30 consecutive trading days. Such trading price shall be the
volume weighted average per share of the Company's Common Stock as reported by
Bloomberg Business Service in its volume at price service.
If each of the foregoing targets are met, the Company and the Executive
shall negotiate in good faith to agree on further extraordinary performance
targets and related option grants.
6. 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.
7. 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
3
<PAGE>
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 ($750) dollars per month during the term of this Agreement.
(b) If the Executive transfers his principal place of residence to New
Jersey or a neighboring state on or before May 8, 1999 he shall be reimbursed
for the reasonable out of pocket costs associated with that move, such as costs
of shipping furniture and other personal property, sales commissions and
customary closing costs on the sale of his current residence and the purchase of
his new residence. The Company shall also reimburse the Executive for the
reasonable costs of renting an apartment in New Jersey for the period beginning
on May 8, 1997 and ending on the earlier of May 8, 1999 or the date of such
relocation. In addition, the Company shall "gross-up" the reimbursement to
compensate the Executive for the actual tax effect of such reimbursement.
8. Termination of Employment.
8.1 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.
8.2 Disability. If the Executive shall become incapacitated by reason of
sickness, accident or other physical or mental disability and shall for a period
of ninety (90) 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 9 and
10.
8.3 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 9 and 10.
4
<PAGE>
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 8.3, 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.
8.4 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 8.1, 8.2 or 8.3, 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) severance pay, in the form of (x) continuation of base salary
payments and other benefits described in Section 7 for a period commencing on
the date of termination and ending on May 8, 1999 or six months after the date
of termination, whichever is greater, at a rate equal to the base salary
provided for in Section 3(a) (at the annual rate then in effect) and (y) the
minimum bonus payments specified in Section 4 hereof to the extent they have not
been previously paid.
(b) The Executive shall have the right to terminate this Agreement
during the three month period following a Change of Control occurring on or
before May 8, 1999 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) severance pay, in the form of (x) continuation of base salary
payments and other benefits described in Section 7 for a period commencing on
the date of termination and ending on May 8, 1999, or six months after the date
of termination,
5
<PAGE>
whichever is greater at a rate equal to the base salary provided for
in Section 3(a) (at the annual rate then in effect) and (y) the minimum bonus
payments specified in Section 4 hereof to the extent they have not been
previously paid.
(c) In the event of a termination pursuant to this paragraph 8.4, rights
and benefits of the Executive, his estate or other legal representative under
the 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 9 and 10.
(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), other than a "person" who currently is a beneficial owner of five
percent (5%) or more of the Company's Common Stock, 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. The Executive's employment may be terminated by the
Executive for Good Reason. For purposes of this Agreement, "Good Reason" shall
mean:
(i) the assignment to the Executive of any duties inconsistent in any
material 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, or any other action by the Company
which results in a material diminution in such position, authority, duties or
responsibilities, excluding for this purpose an isolated, insubstantial and
inadvertent action not taken in bad faith and which is remedied in all material
respects by the Company promptly after receipt of notice thereof given by the
Executive;
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(ii) any failure by the Company to comply with any of the provisions of
Sections 2-7 of this Agreement, other than an isolated, insubstantial and
inadvertent failure not occurring in bad faith and which is remedied in all
material respects by the Company promptly after receipt of notice thereof given
by the Executive;
(iii) the Company's requiring the Executive to be based at any office or
location more than fifty(50 miles from the Company's current location in West
Long Branch, New Jersey.
(iv) any purported termination by the Company of the Executive's
employment otherwise than as expressly permitted by this Agreement;
In the event the Executive exercises his right to terminate this Agreement as
described in this Section 8.4(e), The Company shall pay 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) Severance pay in the form of (x) continuation of base salary
payments and other benefits described in Section 7 for a period commencing on
the date of termination and ending May 8, 1999, or six months after the date of
termination, whichever is greater, at a rate equal to the Base Salary provided
in Section 3(a) (at the annual rate then in effect) and (y) The minimum bonus
payments specified in Section 4 hereof to the extent not previously paid.
9. Confidential Information.
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9.1 (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.
9.2 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.
9.3 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.
10. Equitable Relief. In the event of a breach or threatened breach by the
Executive of any of the provisions of Section 9 of this Agreement, the Executive
hereby consents and agrees that the Company shall be entitled to pre-judgment
injunctive relief or similar equitable
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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 10. Nothing herein shall be
construed as prohibiting the Company from pursuing any other remedies at law or
in equity which it may have.
11. 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.
12. Successors and Assigns.
12.1 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.
12.2 Assignment by the Executive. The Executive may not assign this
Agreement or any part thereof; 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.
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13. 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.
14. 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.
15. 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.
16. 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
Telecopier: (908) 229-6162
With a copy delivered in the same manner to:
Richard P. Jaffe, Esquire
Mesirov Gelman Jaffe Cramer & Jamieson
1735 Market Street
Philadelphia, PA 19103
Telecopier: (212) 994-1111
If to the Executive:
18150 Crystal Drive
Morgan Hill, CA 95037
Telecopier: (408) 779-7519
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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.
17. 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.
18. 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.
19. 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.
20. 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.
21. 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.
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22. 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.
* * *
IN WITNESS WHEREOF, a duly authorized officer of EA and Mr. Brandenberg
have executed this Agreement.
EA Industries, Inc.
By:
----------------------------
----------------------------
Frank G. Brandenberg
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 June 10, 1997
Number of Shares: ______
Holder: The Laura Huberfeld & Naomi Bodner Partnership
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 $4.125 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. The obligations
of the Company hereunder are conditioned upon approval of the terms of the
commitment letter agreement dated the date hereof by the Holder and other
related parties to the Company by Arthur Anderson LLP and their reissuance of
their opinion on the financial statements of the Company, without a going
concern qualification.
1. All rights granted under this Warrant shall expire on April 14, 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 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.
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 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. The Holder currently holds certain convertible notes, convertible
debentures, options and/or warrants (collectively the "Derivative Securities")
enabling it upon exercise or conversion to receive shares of Common Stock, no
par value (the "Common Stock") of EA Industries, Inc. ("EAI"). The Holder
confirms that, without the Company's prior written consent, it will not exercise
options, warrants or conversion rights under debentures, warrants or options
which would result in it becoming the beneficial owner of 5% or more of the
Common Stock. For purposes of this Warrant, beneficial ownership shall be
determined in accordance with Section 13 (d) of the Securities Exchange Act of
1934, as amended, and Regulation 13D-G thereunder.
11. 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:________________________________
Howard P. Kamins, Vice President
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.
______, 1997
No.1
$500,000
EA INDUSTRIES, INC.
10% SERIES B CONVERTIBLE NOTE
DUE JANUARY 22, 1999
EA INDUSTRIES, INC. (the "Company" or "EA"), a New Jersey corporation, for
value received, and intending to be legally bound, hereby promises to pay to the
order of ___________ her registered assigns, the principal amount of on January
22, 1999 ("Maturity Date"), with interest from April 7, 1997 (computed on the
basis of a 360-day year of twelve 30-day months) payable quarterly on the first
day of each calendar quarter, commencing January 1, 1998, 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 B Convertible Notes issued by the Company in a
private placement of 10% Series B Convertible Notes (this Note and such other
10% Series B Convertible Notes are collectively referred to herein as the "10%
Series B Convertible Notes"). The terms and conditions of all 10% Series B
Convertible Notes shall be identical in all respects and all 10% Series B
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 her 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 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
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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.
The Company shall have the option to make interest payments to the Holder
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 Tanon Manufacturing,
Inc. ("Tanon"), a California Corporation ("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 Holder at least fifteen
(15) days before such payment date. If this option is elected, Tanon 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 Tanon 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,
TANON 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 herself and her legal
representative that she is acquiring this Note and will acquire any Shares
(hereinafter defined) issued upon conversion hereof, for her 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 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 or the Company as follows:
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(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 the listing on the NYSE of the shares issuable upon conversion has been
effected 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 two dollars
and fifty cents ($2.50) ("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 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.
3
<PAGE>
(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 Tanon or EA, 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 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;
4
<PAGE>
(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 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) Registration.The Company shall use its best efforts to file and cause
to be declared effective on or before January 1, 1998, a Registration Statement
under the Securities Act of 1933, as amended, on Form S-3 covering the shares of
Common Stock of EA underlying in this Note. 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
5
<PAGE>
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, 2000, 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) 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) 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, that in no event shall the Company 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
6
<PAGE>
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) 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 her
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.
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 EA: 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.
7
<PAGE>
(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.
IN WITNESS WHEREOF, the Company has caused this Note to be signed in its
name by its duly authorized officer this 30th day of July, 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:
-----------------------------
8
<PAGE>
CONVERSION NOTICE
TO: [TANON MANUFACTURING, INC.]
[EA IINDUSTRIES, INC.]
185 Monmouth Parkway
West Long Branch, NJ 07764-9989
The undersigned Holder of this Note hereby confirms that it irrevocably
exercises her 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 she is acquiring the Shares for her 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
9
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
To EA Industries, Inc.:
As independent public accountants, we hereby consent to the incorporation by
reference of our report dated April 15, 1997, included in this Form 10-K/A, into
the Company's previously filed Registration Statement File Nos. 333-257,
33-81892, 33-88056, 33-59509, 33-59511, 333-06149, 333-21605, 333-44883 and
333-12691.
/s/ Arthur Andersen LLP
------------------------------
ARTHUR ANDERSEN LLP
Roseland, New Jersey
March 13, 1998
<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, 1997 AND THE
CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1997 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-31-1997
<PERIOD-END> DEC-31-1997
<CASH> $595
<SECURITIES> 0
<RECEIVABLES> 13,686
<ALLOWANCES> (1,020)
<INVENTORY> 13,175
<CURRENT-ASSETS> 27,317
<PP&E> 19,201
<DEPRECIATION> (8,397)
<TOTAL-ASSETS> 47,862
<CURRENT-LIABILITIES> 44,104
<BONDS> 1,000
0
0
<COMMON> 90,270
<OTHER-SE> (91,307)
<TOTAL-LIABILITY-AND-EQUITY> 47,862
<SALES> 76,511
<TOTAL-REVENUES> 76,511
<CGS> 76,204
<TOTAL-COSTS> 85,820
<OTHER-EXPENSES> 2,351
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,459
<INCOME-PRETAX> (18,062)
<INCOME-TAX> 0
<INCOME-CONTINUING> (18,062)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (18,062)
<EPS-PRIMARY> (2.15)
<EPS-DILUTED> (2.15)
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