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Registration No. 33-_______
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
NAI TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
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New York 3571 11-1798773
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or Classification Code Number) Identification Number)
organization)
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2405 Centre Avenue
Longmont, Colorado 80503
(303) 776-5674
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
Richard A. Schneider
NAI Technologies, Inc.
2405 Centre Avenue
Longmont, Colorado 80503
(303) 776-5674
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copy to:
Sarah Hewitt, Esq.
Whitman Breed Abbott & Morgan
200 Park Avenue
New York, New York 10166
(212) 351-3000
Approximate date of commencement of proposed sale to the public: From time
to time after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. |X|
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule 462(b)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. |_|
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CALCULATION OF REGISTRATION FEE
=================================================================================================================
PROPOSED
PROPOSED MAXIMUM MAXIMUM AGGRE- AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE GATE OFFERING REGISTRATION
SECURITIES TO BE REGISTERED BE REGISTERED PER SHARE (1) PRICE (1) FEE
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12% Convertible Subordinated
Promissory Notes due 2001............. $8,342,000 100% $8,342,000 $2,876.57
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4,119,700
Warrants to Purchase Common Stock..... warrants $2.50 $10,299,250 $3,551.49
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8,904,336
Common Stock, $.10 par value.......... shares $2.78125 $24,765,184.50 $8,539.78
=================================================================================================================
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(1) Estimated pursuant to Rule 457 solely for the purpose of determining the
registration fee on the basis of the exercise price in the case of the warrants
and on the basis of the average of the high and low prices of the Common Stock
as reported on The Nasdaq Stock Market on May 13, 1996 in the case of the shares
of Common Stock.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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NAI TECHNOLOGIES, INC.
(Cross Reference Sheet Furnished Pursuant to
Item 501(b) of Regulation S-K)
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ITEM NUMBER AND CAPTION IN FORM S-1 LOCATION IN PROSPECTUS
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1. Forepart of the Registration Statement and Outside Front
Cover Page of Prospectus..................................... Cover page.
2. Inside Front and Outside Back Cover Pages of Prospectus........ Inside front and outside back
cover page.
3. Summary Information, Risk Factors and Ratio of Earnings
to Fixed Charges............................................. Summary; The Company; Risk
Factors.
4. Use of Proceeds................................................ Summary; Use of Proceeds.
5. Determination of Offering Price................................ Not Applicable
6. Dilution....................................................... Not Applicable
7. Selling Security Holders....................................... Selling Securityholders.
8. Plan of Distribution........................................... Cover page; Plan of
Distribution.
9. Description of Securities to be Registered..................... Cover page; Description of
Securities; Certain Federal
Income Tax Consequences.
10. Interests of Named Experts and Counsel......................... Legal Matters; Experts;
Management.
11. Information with Respect to the Registrant..................... Summary; Capitalization;
Dividend Policy; Selected
Financial Data; Management's
Discussion and Analysis of
Financial Condition and
Results of Operations; The
Company; Management; Security
Ownership of Certain
Beneficial Owners and
Management; Certain
Relationships and Related
Transactions; Description of
Securities; Certain Federal
Income Tax Consequences; and
Index to Financial Statements
and Financial Statement
Schedules.
12. Disclosure of Commission Position on Indemnification for
Securities Act Liabilities................................... Inapplicable.
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INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED MAY __, 1996
PROSPECTUS
12% CONVERTIBLE SUBORDINATED PROMISSORY NOTES DUE 2001
WARRANTS TO PURCHASE COMMON STOCK
8,904,336 SHARES OF COMMON STOCK
NAI TECHNOLOGIES, INC.
This prospectus relates to the offering from time to time of up to (i)
$8,342,000 principal amount of 12% Convertible Subordinated Promissory Notes due
2001 (the "Notes") of Nai Technologies, Inc. (the "Company") by the holders
thereof (the "Noteholders"), (ii) Warrants to Purchase Common Stock (the
"Warrants") of the Company by the holders thereof (the "Warrantholders"), and
(iii) an aggregate of 8,904,336 shares (the "Shares") of common stock, par value
$.10 Per share (the "Common Stock"), of the Company by the holders thereof (the
"Shareholders"), consisting of (1) 4,171,000 shares of Common Stock which may be
issued upon the conversion of the Notes, (2) 4,119,700 shares of Common Stock
which may be issued upon the exercise of the Warrants, (3) 250,000 shares of
Common Stock of the Company previously issued to The Bank of New York and
Chemical Bank (the "Bank Lenders") pursuant to that certain Amended and Restated
Credit Agreement, dated as of aAril 12, 1995, as amended to date (the "Credit
Agreement"), by and between the Company and the Bank Lenders, and (4) 363,636
shares of Common Stock of the Company previously issued to Active Investors II
Ltd. ("Active Investors") pursuant to that certain Common Stock Purchase
Agreement, dated as of November 3, 1994 (the "Stock Purchase Agreement"), by and
between the Company and Active. The Noteholders, the Warrantholders, the
Shareholders, the Bank Lenders and Active are sometimes collectively referred to
as the "Selling securityholders." The Notes, the Warrants and the Shares are
sometimes collectively referred to as the "Securities." The Company will not
receive any of the proceeds from the sale of the Securities by the Selling
Securityholders. The Bompany is paying the expenses of registration of the
Securities.
It is anticipated that sales of the Securities will be made in one of three
ways: (i) through broker-dealers, (ii) through agents or (iii) directly to one
or more purchasers. The period of distribution of the securities may occur over
an extended period of time. See "PLAN OF DISTRIBUTION."
The Common Stock of the Company is traded on the Nasdaq Stock Market
("NASDAQ") under the symbol NATL. On May 13, 1996, the closing price of the
Common Stock on NASDAQ was $2.875 per share. Prior to this offering, there has
been no public market for the Notes or the Warrants offered hereby and no
assurance can be given that one will develop after the commencement of this
offering. See "DESCRIPTION OF SECURITIES--Trading Information."
SEE "RISK FACTORS" FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE
CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE SECURITIES.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION NOR HAS THE SECURITIES AND
EXCHANGE COMMISSION, OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS MAY __, 1996
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AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information filed by the Company may be inspected and
copied at the public reference facilities maintained by the Commission at 450
Fifth Street, N.W., Room 1024, Washington, D.C. 20549, and at its New York
Regional Office, 7 World Trade Center, New York, New York 10048 and at its
Chicago Regional Office, Suite 1400, 500 West Madison Street, Chicago, Illinois
60661-2511. Copies of such material may also be obtained from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549, at prescribed rates. In addition, copies of such reports, proxy
statements and other information concerning the Company may also be inspected
and copied at the offices of The Nasdaq Stock Market at 1735 K Street, N.W.,
Washington, D.C. 20006-1506 on which the Common Stock is traded.
TABLE OF CONTENTS
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AVAILABLE INFORMATION...................................................................... 2
TABLE OF CONTENTS.......................................................................... 2
SUMMARY.................................................................................... 4
RISK FACTORS............................................................................... 8
USE OF PROCEEDS............................................................................ 11
CAPITALIZATION............................................................................. 12
DIVIDEND POLICY............................................................................ 12
SELECTED FINANCIAL DATA.................................................................... 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS............................................................... 14
THE COMPANY................................................................................ 20
MANAGEMENT................................................................................. 29
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT............................. 36
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............................................. 38
DESCRIPTION OF SECURITIES.................................................................. 39
CERTAIN FEDERAL INCOME TAX CONSEQUENCES.................................................... 44
SELLING SECURITYHOLDERS.................................................................... 52
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PLAN OF DISTRIBUTION....................................................................... 59
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE............................................ 60
LEGAL MATTERS.............................................................................. 60
EXPERTS.................................................................................... 60
INDEX TO FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES....................................................... 61
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SUMMARY
The following is a brief summary of certain information contained elsewhere
in this Prospectus. This summary is not intended to be complete and is qualified
in its entirety by the more detailed information appearing elsewhere in this
Prospectus and in the documents referred to herein, all of which should be
carefully reviewed. Capitalized terms used herein are defined on the pages of
this Prospectus referred to in the Glossary found on page 91.
THE COMPANY
NAI Technologies, Inc., through its wholly-owned subsidiaries (the
"Company"), designs, manufactures and markets rugged computer systems, advanced
peripheral products, intelligent terminals, high performance work stations,
TEMPEST computer systems and telecommunications test equipment and transmission
products.
The Company operates in two distinct operating segments: an Electronic
Systems segment and a Telecommunications segment. The Electronic Systems
segment, comprised of three subsidiaries and all of the Company's defense,
military and government-related businesses, provides rugged computer products
specifically designed for deployment in harsh environments that require special
attention to system configurations. This segment's customer base includes United
States and foreign armed services and intelligence agencies. The
Telecommunications segment consists of one company which provides transmission
enhancement products and rugged, hand-held test equipment for analog, digital
and fiber-optic communications and data-interchange networks. This segment has
developed and is marketing a product which enables telephone companies to
enhance the capacity of copper lines for improved voice and data transmission.
This segment's customer base includes the Regional Bell Operating Companies
("RBOCs") and independent telephone companies. The Company sells its products
directly to these customers and serves as a subcontractor to larger prime
contractors serving the same customer base.
The Company was incorporated in the State of New York in 1954. The
Company's principal executive office is located at 2405 Trade Centre Avenue,
Longmont, Colorado 80503, and its telephone number is (303) 776-5674.
THE OFFERING
SECURITIES OFFERED $8,342,000 aggregate principal amount of Notes
Warrants to Purchase Common Stock
8,904,336 shares of Common Stock
See "DESCRIPTION OF SECURITIES."
TERMS OF THE NOTES:
Maturity Date January 15, 2001.
Interest Rate 12% per annum. In the event of a Chapter 11 or
Chapter 7 bankruptcy case in which the Company is the
debtor, the Notes will bear interest from the date of
commencement of the case at a default rate per annum
equal to the lesser of 18% or the highest such rate
allowable by law.
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Interest Payment Date January 15, April 15, July 15 and October 15 of each
year, commencing April 15, 1996.
Conversion Each Note is convertible into shares of Common Stock
at the option of the holder, at any time in whole or
in part at a conversion price equal to $2.00 per
share, subject to adjustment in certain events (the
"Conversion Price"). The Conversion Price will be
adjusted to $1.50 or $1.00, respectively, if earnings
before interest, taxes, depreciation and amortization
("EBITDA") of the Company fall below $6,000,000 or
$4,750,000 in 1996. Should the Company sell the stock
or assets of a subsidiary in 1996, such amounts will
be reduced by certain agreed amounts, depending on
the time of sale. The Conversion Price and the number
of shares of Common Stock to be received upon
conversion are subject to adjustment upon the
occurrence of certain events. See "DESCRIPTION OF
SECURITIES--The Notes."
The Company may at its option require the conversion
of the Notes, at any time prior to maturity, provided
that the closing bid price for the Common Stock
exceeds $6.00 per share for the 30 consecutive
trading days prior to the giving of notice of
conversion.
Prepayment The Notes are subject to prepayment, in whole and not
in part, at the option of the Company, at any time
after the third anniversary of the date of issuance,
without premium or penalty. Upon the occurrence of a
"change in control" of the Company, each holder of
the Notes will have the right to require that the
Company repurchase such holder's Notes in whole and
not in part, without premium or penalty, at a
purchase price in cash in an amount equal to 100% of
the principal amount thereof, together with accrued
and unpaid interest, if any, to the date of purchase,
pursuant to an offer made in accordance with the
procedures described in the Notes.
Subordination; Sinking
Fund The indebtedness evidenced by the Notes is
subordinated to all existing and future Senior
Indebtedness (as hereinafter defined) of the Company.
The Notes do not provide for a sinking fund.
Certain Covenants The Notes contain certain covenants prohibiting the
Company from: (i) creating any liens on its assets,
(ii) incurring or assuming any indebtedness other
than certain specific indebtedness including the
Senior Indebtedness and all extensions, renewals and
refundings thereof, (iii) making any investments,
(iv) paying dividends on its capital stock, (v)
disposing of certain assets, (vi) engaging in certain
affiliated party transactions, and (vii) merging or
consolidating.
Events of Default "Events of Default" under the Notes include the
failure to pay principal or interest, the failure to
pay other indebtedness for borrowed money in excess
of $500,000 when due or the acceleration of such
indebtedness, the failure to pay any judgment in
excess of $500,000 when due or stayed, and the
voluntary or involuntary bankruptcy of the Company.
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TERMS OF THE WARRANTS:
Exercise and Terms Each Warrant entitles the holder to purchase 250
shares of Common Stock at any time and from time to
time on or before February 15, 2002, at an exercise
price equal to $2.50 per share of Common Stock,
subject to adjustment in certain events (the
"Exercise Price"). The Exercise Price will be
adjusted to $2.00 or $1.50, respectively, if the
Company's EBITDA falls below $6,000,000 or $4,750,000
in 1996. Should the Company sell the stock or assets
of a subsidiary in 1996, such amounts will be reduced
by certain agreed amounts, depending on the time of
sale. The Exercise Price and the number of shares of
Common Stock to be received upon exercise are subject
to adjustment upon the occurrence of certain events.
See "DESCRIPTION OF SECURITIES--The Warrants."
TERMS OF THE COMMON STOCK:
Terms Holders of shares of Common Stock are entitled to one
vote for each share of Common Stock held. The holders
of Common Stock are not entitled to preemptive or
subscription rights. Upon liquidation, dissolution or
winding up of the Company, the holders of the Common
Stock are entitled to share ratably in all assets
available for distribution after payment in full of
creditors and after the preferential rights of
holders of shares of Preferred Stock then
outstanding, if any, have been satisfied. The
affirmative vote of the holders of 80% of all Common
Stock of the Company is required for the adoption or
authorization of certain extraordinary matters. See
"DESCRIPTION OF SECURITIES-- Common Stock."
Trading The Common Stock is traded on Nasdaq under the symbol
NATL.
OFFERING PERIOD From time to time after the date hereof.
USE OF PROCEEDS The Company will not receive any proceeds from the
sale of the Securities by the Selling
Securityholders.
RISK FACTORS REFERENCE IS MADE TO "RISK FACTORS" WHICH CONTAINS
MATERIAL INFORMATION THAT SHOULD BE CONSIDERED IN
CONNECTION WITH THE SECURITIES BEING OFFERED HEREBY.
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SUMMARY FINANCIAL DATA
The summary financial data set forth below for the fiscal years 1991
through 1995 are derived from the consolidated financial statements of the
Company which financial statements have been audited by KPMG Peat Marwick LLP,
independent certified public accountants, whose report on the Company's
consolidated financial statements for the three years ended December 31, 1995 is
included elsewhere in this Prospectus.
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Year Ended December 31,
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1991 1992 1993 1994 1995
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(in thousands except share and per share data and ratios)
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Statement of Operations Data
Net Sales ........................................ $ 59,412 $ 67,315 $ 81,024 $ 54,520 $ 60,008
Operating earnings (LOSS)(1)...................... 6,308 8,407 8,960 (14,589) (8,875)
Net earnings (loss)(1) ........................... 3,900 5,051 5,455 (11,591) (11,619)
Per share data:
Net earnings (loss)(2) ......................... .63 .80 .80 (1.69) (1.57)
Cash dividends (3) ............................. -- -- -- -- --
Ratio of earnings to fixed
charges .......................................... 8.14 13.88 11.55 * *
Balance Sheet Data (at end of year)
Working capital .................................. $ 14,134 $ 17,094 $ 19,105 $ 16,665 $ 10,044
Total assets at year end ......................... 33,817 43,704 60,715 53,720 48,012
Long-term debt ................................... 5,017 7,158 10,797 13,990 15,573
Shareholders' equity ............................. 18,897 23,911 30,593 20,296 10,086
Average market price per common share at
year end ....................................... 4-9/16 8-3/16 6-1/4 2-11/16 1-1/2
Weighted average common
shares outstanding(2) .......................... 6,222 6,309 6,843 6,580 7,382
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(1) Includes $7,321 in restructuring costs in 1994.
(2) Prior year per share data has been restated to reflect 4% stock dividends
declared in February 1992, 1993 and 1994 and a three-for-two stock split
declared in August 1993.
(3) There have been no cash dividends paid during the above five fiscal years.
* Earnings are inadequate to cover fixed charges. The coverage deficiency is
$15,983 for 1994 and $11,242 for 1995.
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RISK FACTORS
Before purchasing any of the Securities offered hereby, prospective
investors should consider, among other things, the following factors.
SUBSTANTIAL AND CONTINUING LOSSES. While the Company's operations have
historically provided a positive cash flow, the Company has recently experienced
severe financial difficulties and has incurred substantial losses, including net
losses of approximately $11,619,000 for each of the years ended December 31,
1994 and 1995. At the present time, the Company is a net user of cash. Losses
are continuing through the date of this Prospectus and there can be no assurance
that the Company will ever return to profitable operations.
Although the restructuring activities taken in 1994 and 1995 have
significantly reduced the expense structure of the Company and the Company is
presently taking actions to minimize its cash outlays by deferring or
eliminating discretionary expenses and capital asset purchases, the Company's
return to profitability will depend on its ability to effectively monitor and
control its costs. The Company must also increase its shipment rate to an
acceptable level. It is not certain that the Company will be able to achieve the
operating efficiencies necessary to return to profitability. Furthermore, future
operating results depend upon many factors, including general economic
conditions, the ability of the Company to continue to book and fulfill orders
successfully, the level of competition and defense spending.
DEPENDENCE ON U.S. MILITARY. Approximately 78% of the Company's backlog of
orders totalling $47,800,000 at December 31, 1995 represented orders for
military and government sales. During the years ended December 31, 1994 and
1995, sales under contracts with the U.S. Government were approximately 40% and
38% of the Company's sales, respectively. Such orders are subject to termination
at the convenience of the U.S. Government with negotiated settlements in which
the Company seeks to recover its costs and a reasonable profit. There can be no
assurance that the Company will recover its costs or earn any profit on orders
terminated by the U.S. Government.
In recent years the Company has reduced its dependency on the U.S. defense
budget by expanding its non- military business operations. However, the Company
still expects a substantial portion of 1996 sales to be directly to the military
or through prime contractors to the military. With continuing discussions by
Congress on budget cuts, it is difficult to assess what the impact of budget
cuts, if any, will be on the Company. It appears that defense outlays will be
reduced from past levels. The Company is not aware of any programs in which it
participates that are specifically targeted for termination or curtailment other
than the Navy Standard Teleprinter ("NST") program, which had provided
significant revenues to the Company from 1990 to early 1994. The Company's
products are utilized in many different U.S. Government programs which reduces
the adverse impact of canceling a single specific program. However, reductions
in future U.S. defense spending levels could adversely impact the Company's
future sales volume.
SUBSTANTIAL SECURED INDEBTEDNESS. At March 30, 1996, the Company's
long-term secured indebtedness including current installments totaled
$15,175,000, substantially all of which is due to the Company's primary lending
institutions, The Bank of New York and Chemical Bank (the "Bank Lenders"),
pursuant to the Credit Agreement which provides for quarterly principal payments
of $500,000 on March 31, 1996, June 30, 1996, September 30, 1996 and December
31, 1996, and $750,000 on the last day of each quarter thereafter, commencing
March 31, 1997 and ending on December 31, 1998, together with accrued and unpaid
interest through the applicable payment date. The remaining outstanding
principal amount of $7,975,000 is due and payable on January 15, 1999. In
addition, at March 31, 1996, the Company had $8,242,000 principal amount of
Notes outstanding. Interest on the Notes is payable quarterly in arrears on
January 15, April 15, July 15 and October 15 of each year, commencing April 15,
1996. The Notes mature on January 15, 2001.
The Company has substantial debt service obligations and has no
arrangements with respect to, or sources of, additional financing. Substantially
all of the Company's assets have been pledged to secure the indebtedness
outstanding under the Credit Agreement. It is not certain that the Company will
be able to achieve the revenue level
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necessary to return to profitability and there can be no assurance that the
Company will have sufficient cash flow in the future to meet its obligations
with respect to its indebtedness, including its obligations with respect to the
Notes. The Notes are unsecured and subordinate in right of payment to all Senior
Indebtedness (as defined in the Notes) of the Company.
The Notes provide that the Senior Indebtedness can be increased by the Bank
Lenders in certain circumstances to protect its interest in the collateral
provided by the Company. The Notes also provide that if any Senior Indebtedness
is outstanding on the maturity date of the Notes, the Company cannot pay the
amounts due thereunder. Although the Credit Agreement provides that the Senior
Indebtedness is to paid in full on January 15, 1999, two years prior to the
maturity date of the Notes, there can be no assurance that the Company will in
fact be able to pay such indebtedness at such time.
RANKING OF THE NOTES. The Notes are subordinated to all Senior Indebtedness
of the Company, including indebtedness under the Credit Agreement. Therefore, in
the event of bankruptcy, liquidation or reorganization of the Company, the
assets of the Company will be available to pay obligations on the Notes only
after all Senior Indebtedness has been paid in full, and there may not be
sufficient assets remaining to pay amounts due on the Notes. At March 30, 1996,
the amount of outstanding Senior Indebtedness was $15,175,000. In addition, the
indebtedness under the Credit Agreement is secured by liens on substantially all
of the assets of the Company including the capital stock of certain of its
subsidiaries and is guaranteed by certain of the Company's subsidiaries, which
guarantees are secured by a lien on substantially all of the assets of such
subsidiaries. See "DESCRIPTION OF NOTES--Subordination."
NO ASSURANCE OF COMPANY'S ABILITY TO SERVICE NOTES. The Company presently
intends to service the Notes out of its future cash flow from operations or
proceeds of future financings, if any. There can be no assurance that the
Company will generate sufficient cash flow in the future to pay the interest on
the Notes or on its other indebtedness or to pay the principal on the Notes or
that future financings, if necessary, will be available. See "DESCRIPTION OF
SECURITIES--The Notes."
TRADE DEBT. As of December 31, 1995, the Company had approximately
$5,300,000 in the aggregate past due to vendors primarily for raw materials and
components. The Company's cash constraints strained its relationships with
vendors which adversely impacted the Company's ability to meet its production
targets on a timely and cost- effective basis. Although the Company has used a
portion of the proceeds of the Private Placement to pay vendors and the
Company's relationships with vendors have begun to improve, there can be no
assurance that the Company's relationships with vendors will continue to improve
or that such vendors will continue to provide the Company with raw materials.
INDUSTRY COMPETITION. The Company's business is highly competitive. Many
suppliers in the Company's markets are significantly larger than the Company in
total sales and assets, and many devote significantly more resources to the
development of new products than does the Company. There can be no assurance
that the Company will be able to compete successfully or that competitors will
not commercialize services or products that render the Company's services or
products obsolete or less marketable.
TECHNOLOGICAL CHANGE. The Company's technological base is characterized by
rapid change that frequently results in sudden product and equipment
obsolescence. The Company has reduced its expenditures on independent research
and development over the past few years and anticipates further reducing its
cost of independent research and development in 1996. While the Company expects
to continue to make expenditures in an effort to improve current and proposed
product designs and configurations of already technologically complex products,
there can be no assurance that its efforts will be successful or that
introduction of new products or technological developments by others will not
cause the Company's technology to become uneconomical or obsolete.
LIMITED PROTECTION OF INTELLECTUAL PROPERTY. The Company regards portions
of the hardware designs and operating software incorporated into its products as
proprietary and seeks to protect such proprietary information through its
reliance on patent, copyright, trademark and trade secret laws, non-disclosure
agreements with its
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employees and confidentiality provisions in licensing arrangements with its
customers. There is no assurance that such agreements will be effective to
protect the Company or that the proprietary information deemed confidential by
the Company will be adequately protected by the laws respecting trade secrets.
Consequently, it may be possible for unauthorized third parties to copy certain
portions of the Company's products or to "reverse engineer" or otherwise obtain
the Company's proprietary rights. Moreover, the laws of some foreign countries
do not afford the same protection provided by U.S. laws to the Company's
proprietary rights.
SECURITIES LITIGATION. On or about June 28, 1994, TDA Trading Corp.
("TDA"), individually and on behalf of a class of persons similarly situated,
commenced a securities fraud class action in the United States District Court
for the Eastern District of New York (the "Court") against Robert A. Carlson,
Richard A. Schneider and the Company. TDA commenced its action, entitled TDA
Trading Corp. v. Carlson, et al., by filing a complaint (the "Complaint") with
the Court.
The Complaint principally alleges that the defendants knowingly and/or
recklessly misrepresented to the public that they expected the Company's 1993
fourth quarter and fiscal year sales and earnings results to continue to
increase at levels substantially above those of prior years at a time when they
supposedly knew but failed to disclose that the Company's fourth quarter 1993
sales of its NST and other products would decrease precipitously. The Complaint
further alleges that, as a result of defendants' alleged failure to disclose
these developments, TDA and other purchasers of Common Stock were damaged
because, it is alleged, at the time of purchase the price of Common Stock had
been artificially inflated. Additionally, the Complaint asserts that at the time
these adverse business developments allegedly became known to defendants and
prior to their dissemination to the public, defendants Carlson, Schneider and
other directors of the Company allegedly sold shares of Common Stock owned by
them personally at price levels which TDA claims were higher than the true value
of these shares.
As relief, TDA essentially seeks damages in an amount to be proven at
trial, together with costs and expenses, including reasonable attorneys',
accountants' and experts' fees. The Complaint also requests that the Court
declare its action against the Company and the individual defendants to be a
proper class action and certify it as class representative and plaintiff's
counsel as counsel for the class. On March 24, 1995, the Court granted TDA's
motion for class certification. The litigation is currently in the discovery
phase.
The Company has advised its directors' and officers' liability insurance
carrier of the claims asserted against it and defendants Carlson and Schneider.
Should TDA prove its case and should the Company's insurance carrier decline to
cover the award, the Company could be assessed up to or in excess of $7,500,000
in damages, which would have a materially adverse effect on its financial
position.
ABSENCE OF PUBLIC MARKET. No trading market currently exists for either the
Notes or the Warrants and no assurance can be given that an active market will
develop for such Securities or as to the liquidity of, or the trading market
for, such Notes and Warrants.
RESTRICTIONS ON DIVIDENDS. The Company is prohibited from paying cash
dividends on its Common Stock by certain debt covenants contained in its Credit
Agreement.
ANTI-TAKEOVER RESTRICTIONS. Paragraph 7 of the Company's Certificate of
Incorporation provides that the number of directors of the Company may be
increased from seven to nine and shall be divided into three classes serving
three-year terms upon the occurrence of certain events including the beneficial
ownership by a single entity of 12% or more of the outstanding shares of Common
Stock entitled to vote in the election of directors. It is possible that as a
result of the Private Placement, a single entity may acquire more than 12% of
the outstanding shares of Common Stock triggering this provision. The
classification of the Company's Board of Directors could have the effect of
discouraging attempts by a person or group to take control of the Company.
The Company's Board of Directors may issue Preferred Stock of the Company,
without shareholder approval, in series and with such designations, relative
rights and preferences as the Board of Directors may determine. Any shares of
Preferred Stock issued in the future will rank prior to the Common Stock with
respect to dividend rights
-10-
<PAGE>
<PAGE>
and rights upon liquidation and could have rights which would dilute the voting
power of the Common Stock. The Board of Directors, without shareholder approval,
can issue Preferred Stock with voting and conversion rights which could
adversely affect the voting power of the holders of the Common Stock. Such
issuances may also have the effect of discouraging attempts by a person or group
to take control of the Company.
In addition, the Company's Board of Directors has the ability to issue
shares of Common Stock which would dilute the voting power and equity of the
holders of outstanding Common Stock.
EFFECT OF OUTSTANDING WARRANTS, OPTIONS AND NOTES. The Company has
outstanding at the present time (a) Warrants to purchase up to a maximum of
4,119,700 shares of Common Stock at an exercise price of $2.50 per share, (b)
Notes convertible into a maximum of 4,171,000 shares of Common Stock at a
conversion price of $2.00 per share, and (c) options to purchase 750,055 shares
of Common Stock in the aggregate under the Company's 1991 Stock Option Plan and
1993 Stock Option Plan for Directors at exercise prices ranging from $1.875 to
$8.33 as of March 31, 1996 and 30,000 to Directors at an exercise price of $2.50
as of such date. The terms on which the Company may obtain additional financing
during the respective periods of the outstanding Warrants, options and Notes may
be adversely affected by the existence of such Warrants, options and Notes. The
holders of the Warrants, options and Notes may exercise or convert them at a
time when the Company might be able to obtain additional capital through a new
offering of securities on terms more favorable than those provided by the
Warrants, options and Notes.
TAXABLE INCOME IN EXCESS OF CASH RECEIVED. For federal income tax purposes,
the purchase price of each Note and Warrant was allocated between the Notes and
the Warrants in accordance with their relative fair market values. The amount
allocable to the Notes was less than the principal amount of the Notes. There
can be no assurance that the Internal Revenue Service will agree with the
aforesaid allocation. The excess of the amount payable upon maturity of the
Notes over the amount of the purchase price allocated to the Notes for federal
income tax purposes will be treated as "Original Issue Discount," as such term
is defined by the Internal Revenue Code of 1986, as amended. Generally,
investors must report the Original Issue Discount in their gross incomes over
the period of time their Notes are held. Investors are urged to consult with
their own tax advisors in connection with the foregoing. See "CERTAIN FEDERAL
INCOME TAX CONSEQUENCES."
USE OF PROCEEDS
The Company will not receive any proceeds from the sale of the Securities
by the Selling Securityholders.
-11-
<PAGE>
<PAGE>
CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Company at March 30, 1996. This material should be read in conjunction with the
separate consolidated financial statements of the Company included elsewhere in
this Prospectus.
<TABLE>
<CAPTION>
March 30, 1996
---------------------------
Actual
(Unaudited) (In thousands)
<S> <C>
Short-term debt ............................................ $ 2,175
Long-term debt ............................................. 20,568
Shareholders' equity
Preferred Stock, no par
value, 2,000,000 shares
authorized and unissued ................................... --
Common Stock, $0.10 par
value, 10,000,000 shares
authorized; 7,459,437 shares
issued.....................................................
746
Capital in excess of par value.............................. 17,305
--
Foreign currency translation
adjustment ................................................ 12
Retained earnings (deficit) ............................... (7,315)
--------
Total shareholders' equity ................................ 10,748
--------
Total capitalization ...................................... $ 33,491
========
</TABLE>
DIVIDEND POLICY
The Company did not declare or pay any cash dividends on its Common
Stock in any of the past five fiscal years. The Company is restricted from
paying cash dividends on its Common Stock by certain debt covenants contained in
the Credit Agreement, but is permitted to effect stock splits and declare and
pay dividends payable solely in shares of any class of its capital stock.
-12-
<PAGE>
<PAGE>
SELECTED FINANCIAL DATA
The selected data presented below for each of the years in the five-year
period ended December 31, 1995 are derived from the consolidated financial
statements of the Company which financial statements have been audited by KPMG
Peat Marwick LLP, independent certified public accountants. The consolidated
financial statements as of December 31, 1995 and 1994 and for each of the three
years in the period ended December 31, 1995, and the report thereon, are
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
1991 1992 1993 1994 1995
---- ---- ---- ---- ----
(in thousands except per share data)
<S> <C> <C> <C> <C> <C>
Net sales $59,412 $67,315 $81,024 $ 54,520 $ 60,008
Operating earnings (loss)(1) 6,308 8,407 8,960 (14,589) (8,875)
Net earnings (loss)(1) 3,900 5,051 5,455 (11,591) (11,619)
Per share data:
Net earnings (loss)(3) 0.63 0.80 0.80 (1.69) (1.57)
Cash dividends(2) - - - - -
Total assets at year end 33,817 43,704 60,715 53,720 48,012
Long-term debt
(excluding current portion) 5,017 7,158 10,797 13,990 15,573
Working capital 14,134 17,094 19,105 16,665 10,044
Shareholders' equity 18,897 23,911 30,593 20,296 10,086
Average market price per
common share at year end(3) $4 9/16 $8 3/16 $6 1/4 $2 11/16 $1 1/2
Weighted average common shares(3) 6,222 6,309 6,843 6,580 7,382
</TABLE>
- ------------------------
(1) Includes $7,321 in restructuring costs in 1994.
(2) There have been no cash dividends in the above five fiscal years.
(3) Prior year share data has been restated to reflect 4% stock dividends
declared in February 1992, 1993 and 1994 and a three-for-two stock split
paid in August 1993.
-13-
<PAGE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
In early 1994, the Company experienced several adverse events: (i)
orders for the Company's NST, which had provided significant revenues to the
Company since 1990, ceased earlier than anticipated and left the Company with
excess staff and facilities; (ii) certain new products within the Company's
products division encountered technical difficulties and cost overruns; (iii)
several anticipated contract awards were delayed; (iv) the TEMPEST business at
Systems declined faster than anticipated; (v) Lynwood sought to reposition
itself from a manufacturer of intelligent terminals to a military systems
supplier and experienced high transition costs; and (vi) Wilcom's customers
began a series of cost cutting moves which resulted in delayed and reduced
sales.
Primarily in response to the termination of NST production, the Company
announced in April 1994 that it would close its two New York facilities in
September 1994 and transfer its New York military products operations and
certain key personnel to Codar's Colorado location by the end of September 1994.
This resulted in a $7.3 million restructuring charge. At the same time, the
Company also announced a $2.2 million charge for cost overruns on certain
Company products from the New York operations.
The move to Colorado created additional problems. Codar attempted to
integrate three different lines of business into its Colorado facility, which
had not historically produced the products being introduced in any significant
quantities. Each of the product lines transferred to Colorado was new to the
workforce in Colorado and had been designed by an engineering force and
manufactured under the supervision of managers that did not to move to Colorado
as anticipated. Development and production costs of the newer products that were
introduced to Codar proved difficult to estimate accurately. In addition, Codar
did not have adequate inventory controls, material ordering programs or
production schedules for these products.
As the Company began to miss its targets, particularly at Codar, the
Company's credit facility was amended from an unsecured to a secured facility
and waivers and revisions to financial covenants were sought from the Company's
lenders. In the fourth quarter of 1994, Codar experienced operational
improvement, but still was not profitable. The fourth quarter of 1994 was the
Company's fourth consecutive quarter of losses after positive revenue and income
in each of its previous 15 quarters.
As the Company entered 1995, the Company established conservative
operating objectives for each of its divisions and staffed each division
accordingly. As the year progressed, it became clear that both Lynwood and
Systems would exceed their revenue and operating earnings objectives, but that
Codar and Wilcom would not.
1995 Compared with 1994
Net sales in 1995 were $60.0 million, a 10% increase when compared with
$54.5 million for the same period in 1994. The increase occurred in the
Electronic Systems segment. Year to year changes in the Company's sales levels
are predominantly due to changes in shipping volume or product mix rather than
changing sales prices.
-14-
<PAGE>
<PAGE>
The following chart provides the sales breakdown by product line:
<TABLE>
<CAPTION>
IN THOUSANDS OF DOLLARS 1995 1994 % CHANGE
- ----------------------- ---- ---- --------
<S> <C> <C> <C>
Electronic Systems Segment
Systems $30,862 $16,587 86%
Components 14,334 19,006 (25%)
Service 6,617 10,737 (38%)
------- ------- -----
Total Electronic Systems Segment $51,813 $46,330 12%
Telecommunications Segment
Line Treatment $ 5,652 $ 5,391 5%
Test Equipment 2,472 2,799 (12%)
Data Communications 71 - 100%
-------- ------- ----
Total Telecommunications Segment $ 8,195 $ 8,190 0%
------- ------- --
Total $60,008 $54,520 10%
======= ======= ===
</TABLE>
Sales in the Electronic Systems segment (net of intercompany eliminations)
increased 12% to $51.8 million from $46.3 million in 1994. The sales increase
was primarily attributable to higher systems integration revenue, partially
offset by lower component and service revenues. The increase in systems revenue
was principally attributable to Systems. The decrease in service and components
revenue is primarily attributable to Codar and the closing of the military
products division, which was consolidated into Codar in September 1994.
The Company expects a significant amount of 1996 sales to be directly to the
military or through prime contractors to the military. The Company is not aware
of any programs in which it participates that are specifically targeted for
termination or curtailment. The Company's products are utilized on many
different U.S. Government programs, which reduces the adverse impact of
canceling a single specific program. However, changes in future U.S. defense
spending levels could impact the Company's future sales volume.
Sales in the Telecommunications segment remained flat at $8.2 million in
1995 and 1994. A small increase in line treatment products due to deliveries of
Wilcom's new Enhanced Line Powered Amplifier products was offset by a decline in
test equipment as a result of lower orders from the regional Bell operating
companies and foreign telecommunications companies.
The consolidated gross margin for 1995 was 8.2%, as compared to 18.8% in
1994. The 1995 gross margin was adversely affected by a $6.6 million charge to
operations and an unfavorable mix of high and low margin product deliveries. The
$6.6 million charge to operations was attributable to cost growth on certain
long term contracts due to engineering design changes, greater than anticipated
labor and material and overhead costs and increased provisions for slow moving,
excess and obsolete inventory. Lower than normal margins are expected to
continue at least into the second quarter of 1996, principally at Codar, due to
a disproportionate level of low margin revenue as a result of past cost overruns
on certain long term contracts for which the Company continues to provide
products. The Company believes that it has recognized the entire adverse impact
of cost overruns on those contracts for which the expected final costs exceed
the contract value.
Selling expense for 1995 was $5.0 million, as compared with $7.5 million in
1994. This decrease is attributable to the savings associated with the
consolidation of the military products division in the third quarter of 1994 and
cost cutting measures implemented at all of the Company's divisions in 1995.
General and administrative expenses for 1995 were $6.5 million, as compared
to $6.3 million in 1994. This increase is primarily attributable to the Company
moving its corporate headquarters from Woodbury, New York to Longmont, Colorado
in December 1995 and additional administrative expense at Codar as a result of
increased management resources. These cost increases were partially offset by
cost cutting measures
-15-
<PAGE>
<PAGE>
implemented at the Company's other divisions and the savings associated with the
consolidation of the military products division in the third quarter of 1994.
Company-sponsored research and development expenditures for 1995 were $1.8
million, as compared to $3.2 million in 1994. This decrease is attributable to
savings associated with the previously mentioned consolidation and the change in
mix between Company-sponsored research and development and customer- funded
research and development. The Electronic Systems segment is focusing on its
system integration business. Although systems integration work by its nature
will require significant engineering content, such costs must be classified as
contract costs and charged to cost of sales as opposed to Company-sponsored
research and development (IR&D).
The Company recorded an operating loss of $8.9 million in 1995, as compared
with an operating loss of $14.6 million in 1994. The operating loss in 1995 was
primarily due to the $6.6 million charge previously noted. The 1994 operating
loss included a $7.3 million restructuring expense.
Interest expense, net of interest income, was $2.4 million in 1995, as
compared to $1.4 million in 1994. The 1995 figures also included a $0.9 million
charge for debt restructuring expense related to the April 7, 1995 agreement
reached with the Company's two lending institutions.
The effective income tax expense rate was below the combined statutory
federal and state rates for the first nine months of 1995. The Company was
unable to recognize a tax benefit for its loss in 1995 due to uncertainties as
to whether or not a future benefit would be realized. Any earnings in 1996 will
not be taxed at the statutory rate. The small tax provision is associated with
the operations of Lynwood, the Company's United Kingdom subsidiary.
The Company recorded a net loss of $11.6 million in 1995, substantially the
same as the net loss recorded in 1994. Loss per share was ($1.57), as compared
with a ($1.69) in 1994, based on a weighted average of 7.4 million and 6.9
million shares outstanding, respectively.
1994 Compared with 1993
Net sales in 1994 were $54.5 million, a 33% decrease when compared with $81.0
million for the same period in 1993. The decrease occurred in both segments,
with the largest decrease in the components business which was attributable to
the decline in NST business.
-16-
<PAGE>
<PAGE>
The following chart provides the sales breakdown by product line:
<TABLE>
<CAPTION>
IN THOUSANDS OF DOLLARS 1994 1993 % CHANGE
- ----------------------- ---- ----- --------
<S> <C> <C> <C>
Electronic Systems Segment
Systems ........................... $16,587 $15,870 5%
Component ......................... 19,006 50,662 (62%)
Service ........................... 10,737 4,670 130%
------- ------- -------
Total Electronic Systems Segment ...... $46,330 $71,202 (35%)
Telecommunications Segment
Line treatment .................... $ 5,391 $ 5,895 (9%)
Test equipment .................... 2,799 3,927 (29%)
------- ------- -------
Total Telecommunications Segment ...... $ 8,190 $ 9,822 (17%)
------- ------- -------
Total ................................. $54,520 $81,024 (33%)
======= ======= =======
</TABLE>
Sales in the Electronic Systems segment (net of intercompany eliminations)
decreased 35% to $46.3 million from $71.2 million in 1993. The sales decrease
was primarily attributable to lower component revenue, partially offset by
higher service revenue. The decrease in component revenue was principally due to
the substantial completion in 1993 of the NST contract and a decrease in TEMPEST
printer product shipments. The increase in systems and service revenue was
primarily attributable to the inclusion of revenue from Codar which was acquired
in October 1993.
Sales in the Telecommunications segment decreased 17% to $8.2 million, as
compared to $9.8 million for the same period in 1993. The decrease in sales was
attributable to lower test equipment and line treatment revenues which were
adversely affected by lower orders due to cost cutting initiatives from the
regional Bell operating companies and foreign telecommunications companies.
The gross margin percentage for 1994 was 18.8%, as compared with 33.9% in
1993. The gross margin percentage was adversely affected by an unfavorable mix
of high and low margin product deliveries, reduced shipping volume, continuing
inefficiencies as the Company transitions its military products manufacturing
operations from Hauppauge, New York to Longmont, Colorado and a $2.2 million
first quarter charge associated with cost overruns on two new printer products.
Selling expense for 1994 was $7.5 million, as compared with $7.4 million in
1993. This slight increase is attributable to the inclusion of the selling
expenses associated with Codar which was acquired in October 1993 partially
offset by savings associated with the previously mentioned restructuring and
lower selling expenses due to lower sales volume.
General and administrative expenses for 1994 were $6.3 million as compared
with $5.8 million in 1993. This increase is primarily attributable to increased
one-time charges associated with the Company's previously mentioned
restructuring and the cost of running the Hauppauge facility for the first ten
months of 1994 substantially below capacity.
Company-sponsored research and development expenditures in 1994 were $3.2
million as compared with $5.0 million in 1993. This decrease is attributable to
savings associated with the previously mentioned restructuring and the change in
mix between Company-sponsored research and development and customer-funded
research and development. A key component to the Electronic Systems' segment
strategy is to focus on system integration business. Although systems
integration work by its nature will require significant engineering content,
such costs must be classified as contract costs and charged to cost of sales as
opposed to Company- sponsored research and development (IR&D).
-17-
<PAGE>
<PAGE>
The Company recorded an operating loss of $14.6 million in 1994 as compared
with operating earnings of $9.0 million in 1993. The operating loss was
primarily attributable to lower sales volume and margins, the previously
mentioned restructuring and continuing inefficiencies as the Company transitions
its military products manufacturing operations from Hauppauge, New York to
Longmont, Colorado.
Interest expense, net of interest income, increased by $0.7 million to $1.4
million in 1994. This increase was attributable to increased long-term debt,
short-term bank borrowings and an increase in the prime rate. In October 1993,
the Company increased its long-term debt by $7.5 million in conjunction with the
acquisition of Codar.
The effective income tax recovery rate was below the combined statutory
federal and state rates for 1994. The Company was unable to recognize a tax
benefit to its losses greater than the amount it could carry back due to
uncertainties as to whether or not a future benefit will be realized.
The Company had a recorded loss of $11.6 million in 1994, as compared with
net earnings of $5.5 million in 1993. Earnings (loss) per share were ($1.69), as
compared with $0.80 in 1993, based on a weighted average of 6.9 million and 6.8
million shares outstanding, respectively. The 1993 earnings per share and shares
outstanding figures have been adjusted to reflect the distribution of a 4% stock
dividend on March 14, 1994 to shareholders of record on February 25, 1994.
Liquidity and Capital Resources
Although the Company reported a net loss of $11.6 million in 1995, it still
generated a small positive cash flow from operations due to the receipt of a
Federal tax refund of $4.0 million in January attributable to the 1994 tax loss
carryback. Company operations have historically provided a positive cash flow;
however, the Company is currently experiencing financial difficulties due to
lower shipping volumes and cost overruns on certain long term contracts.
Although the fourth quarter revenue level was up approximately 9% over the
third quarter revenue level, the lower than normal gross margins resulted in
continuing losses and the Company must continue to increase its shipment rate
while reducing costs in order to improve its operating margin.
The restructuring actions taken in 1994 and 1995 have significantly reduced
the expense structure of the Company; however, it is not certain that the
Company will be able to achieve the revenue level necessary to return to
profitability. The Company is taking action to minimize its cash outlays by
deferring or eliminating discretionary expenses and capital asset purchases.
Among the steps taken during the last quarter of 1995 to reduce expenses and
improve profitability during 1996 are the following: (1) the availability of
cash from the sale of the Notes and Warrants described below is expected to
result in improved procurement practices as the confidence of vendors in the
Company's payment ability is improved, which will reduce costs and improve
product delivery; (2) the closing of the Woodbury, New York corporate office,
the elimination of several corporate support personnel and the relocation of the
Company's corporate headquarters to Colorado in December 1995 is expected to
result in cost savings; (3) the Company has reduced Wilcom's workforce from 76
to 41 and commenced an outsourcing effort of up to 70% of Wilcom's present
production; (4) the Company has reduced Codar's workforce by 28 and is
continuing to review and rationalize its operations; and (5) the Company has
reduced its budget for independent research in pursuit of new products and
improvements to existing products by approximately 33%. There can be no
assurance, however, that expenses will be reduced or profitability will improve
as a result of these or any other steps.
Effective February 15, 1996 the Company entered into an amendment to the
Credit Agreement with the Bank Lenders which amended and extended the payment
provisions contained therein and reset certain financial covenants on more
favorable terms for the Company. The revised Credit Agreement provides for
quarterly principal payments of $500,000, beginning on March 31, 1996, and
payments of $750,000 beginning on March 31, 1997 and paid through December 31,
1998. The remaining principal balance is due on January 15, 1999.
-18-
<PAGE>
<PAGE>
Interest is payable monthly at the rate of 1 3/4% above prime. The loan
covenants require that the Company maintain certain minimum levels of net worth,
current ratio and quick ratio. There are also limits on capital expenditures and
the payment of cash dividends.
On February 15, 1996, February 23, 1996 and February 29, 1996 the Company
issued an aggregate of $8,242,000 of Notes and warrants to purchase an aggregate
of 2,060,500 shares of the Company's Common Stock. The Notes are convertible by
the holders into shares of Common Stock at a price equal to $2.00 per share,
subject to adjustment if the Company fails to meet certain earnings thresholds
and in certain other events. Interest on the Notes is payable quarterly in
arrears on January 15, April 15, July 15 and October 15 of each year, commencing
April 15, 1996. The Notes mature on January 15, 2001. The Notes may be prepaid
by the Company without premium or penalty at any time after January 15, 1999.
The Notes are unsecured obligations of the Company and contain certain
restrictions on the Company including a negative pledge of the Company's assets
not otherwise encumbered by the holders of the senior indebtedness.
In addition to the warrants issued with the Notes, the Company issued an
aggregate of 2,024,200 warrants to the lead investor and the placement agent.
All Warrants entitle the holders thereof to purchase shares of Common Stock at
any time and from time to time on or before February 15, 2002, at an exercise
price equal to $2.50 per share of Common Stock, subject to adjustment in certain
events.
The Company received total proceeds (net of placement agency fees and
expenses) of $7,442,081 ($2,500,000 was received prior to December 31, 1995)
from the sale of the Notes and the Warrants upon completion of the offering.
Cash and cash equivalents totaled $2.6 million at December 31, 1995, as
compared to $1.7 million at December 31, 1994. Cash provided by operating
activities amounted to $0.1 million in 1995, as compared to cash used in
operating activities of $0.03 million in 1994.
Cash of $0.5 million was used in investing activities during 1995. The major
components were comprised of $0.9 million for the purchase of property, plant
and equipment. In May 1995, the Company sold its vacated manufacturing facility
located in Hauppauge, New York and received cash of $0.4 million with a note for
the balance payable in two years in the amount of $1.2 million.
During 1995, the Company made debt principal payments of $0.7 million and
made payments against notes payable of $0.1 million.
Inflation
The Company's financial statements are prepared in accordance with
historical accounting systems and, therefore, do not reflect the effect of
inflation. The impact of changing prices on the financial statements is not
considered to be significant.
Backlog
The backlog of unfulfilled orders at December 31, 1995 stood at $47.8
million, compared to $42.0 million at December 31, 1994. Approximately 77% of
the backlog is scheduled for delivery over the next twelve months.
-19-
<PAGE>
<PAGE>
THE COMPANY
GENERAL
The Company through its wholly owned subsidiaries, designs, manufactures
and markets rugged computer systems, advanced peripheral products, intelligent
terminals, high performance work stations, TEMPEST computer systems (which
suppress certain radiation to prevent external detectors from reading the data
being transcribed) and telecommunications test equipment and transmission
products. The Company operates in two distinct operating segments: an Electronic
Systems segment and a Telecommunications segment. The Electronic Systems segment
is comprised of all of the Company's defense, military and government-related
businesses and the Telecommunications segment is focused on commercial
communications opportunities, as illustrated below.
[GRAPHIC OMITTED]
The Electronic Systems segment provides rugged computer products
specifically designed for deployment in harsh environments that require special
attention to system configurations. This segment's customer base includes the
U.S. and foreign armed services and intelligence agencies.
The Telecommunications segment provides transmission enhancement
products and rugged, hand-held test equipment for analog, digital and
fiber-optic communications and data-interchange networks. This segment's
customer base includes the regional Bell operating companies and independent
telephone companies.
The Company's strategy is to be a leading supplier of high quality,
innovative products, systems and services to satisfy specialized customer
requirements in niche information technology and telecommunications markets,
especially in environments with harsh operating requirements.
ELECTRONIC SYSTEMS SEGMENT
The Electronic Systems segment is comprised of three operating
subsidiaries, as follows:
Codar Technology, Inc., located in Longmont, Colorado ("Codar");
NAI Technologies-Systems Division Corporation, based in Columbia,
Maryland ("Systems"); and
Lynwood Scientific Developments Limited, based in Farnham, United
Kingdom ("Lynwood").
CODAR. Codar designs, manufactures, integrates and supports rugged computer
systems and subsystems for the U.S. Department of Defense ("DoD") and its prime
contractors and allies. These systems and subsystems are used in tactical,
planning, communications and intelligence applications.
Codar currently competes primarily in the computer and peripheral product
segment of the military market, with both militarized and ruggedized products.
Additional business is targeted at engineering support service and system
integration opportunities.
-20-
<PAGE>
<PAGE>
Codar's product line includes a range of commercial off-the-shelf
("COTS")-based rugged minicomputers, workstations, personal computers,
industry-compatible, removable mass storage subsystems, high-resolution monitors
and keyboards. These products incorporate technology from other companies. Codar
also provides engineering services and system integration capabilities.
Codar's equipment is designed to allow flexibility in configuration of all
essential components. In addition to complying with system functional
specifications, Codar's products are engineered to be deployed in environments
that require special attention to system configurations with limitations on size
and power consumption, and restraint on electromagnetic emissions. Products are
custom built to withstand shock, vibration, cold, heat, dust, sand, rain and
altitude conditions.
Codar has developed and produced products for a large number of government
programs and departments and more than 100 additional customers aggregating more
than 200 different end-users. The products have met military requirements for
use in a variety of applications in vehicles, shelters and fixed-site
installations. Codar has designed, built, tested and sold equipment for
airborne, ground/mobile and shipboard military environmental specifications and
military requirements. Codar is the prime contractor for several DoD systems
projects including the Fire Direction Data Manager ("FDDM"), which provides
tactical and technical fire control capabilities for field artillery rockets and
missiles and is capable of receiving, processing, displaying, generating,
transmitting messages and performing relay functions for digital messages in the
same network and between communications networks; the Tower Restoration Vehicle
("TRV") Program, which provides rapid restoration of limited air traffic control
services at forward and bare-base operating areas, after loss of assets at fixed
air base locations, with a mobile air traffic control tower and is capable of
mobility over all types of terrain, can be airlifted by a single transport
aircraft and can be rapidly deployed for full operations in 90 minutes; and the
Rapid Anti-Ship Missile Integrated Defense System ("RAIDS"), which is a tactical
decision aid system based on an open-architecture network of processors that
enhances the missile defense effectiveness of ships and performs all system
executive functions, including internal and external data
sharing/communications, anti-ship missile defense system performance and
operational status monitoring, designated target identification, track data
association, limited threat evaluation and maintenance of the status of the
anti-ship missile defense threat environment.
Codar provides a variety of ruggedized and electromagnetic interference
("EMI") compliant workstations, based on processors from other companies, as
well as related peripherals, such as ruggedized/EMI color monitors, keyboards
and mass storage units ("MSEU"). These products are used by the U.S. Army and
Navy. The Codar Model 325M-S Rugged Lightweight SPARC`r'station has been
selected by GTE Government Systems Corp. ("GTE") for use on the U.S. Army's
Common Hardware/Software Program known as CHS-2. Codar will supply computers
with ruggedized color monitors and MSEUs over a five-year period as part of the
basic CHS-2 program as well as engineering services in support of GTE and the
U.S. Army.
Codar also offers ruggedized rackmount and portable personal computers
utilizing the Intel 80486 or Pentium processors. These computers offer rugged
portability in either a compact, modular "lunch box" design or a rackmount
design. Completely sealed from the environment in their non-operating
configuration, these computers are easily transported. In addition to shock and
vibration, these units can operate over a wide range of temperature variations.
Options include a detachable keyboard, color touch screen display and various
memory options.
In addition, Codar's standard product line currently offers two customized
printers that can operate in shipboard, mobile and airborne environments and can
withstand severe environmental conditions while providing letter quality text
and graphic output.
The focus of Codar's new products is the design, manufacture and
integration of rugged computer systems and subsystems to support the upgrade of
large platforms and programs, mobile or transportable systems and subsystems for
command and control applications and the support of the "digitization" of the
battlefield as exemplified by the U.S. Army's "Force 21" programs.
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<PAGE>
<PAGE>
In an effort to maintain its technological capabilities, and be in a
position to provide the latest technology to its customers, Codar works with its
suppliers to permit it to accelerate new product introductions and help its
customers have access to the latest COTS product technology. Codar also makes
significant use of special teaming relationships with various large prime
contractors such as GTE in the CHS-2 program. These relationships allow Codar to
participate in larger programs than it could on its own.
SYSTEMS. Systems provides custom packaged, integrated computer systems for
deployment in shelters, ships, land vehicles and other demanding environments.
Systems' integration expertise encompasses most major industry standard
architectures and most widely used operating systems. Systems produces PC and
workstation products that are based around COTS technology and are configured in
such a manner as to satisfy specific customers' needs. Systems' products are
sold domestically through its own sales force and internationally through the
sales force of Lynwood. For more than 20 years, Systems has been a supplier to
the National Security Agency ("NSA"), the U.S. Navy and other government defense
customers. Systems has engineered solutions that meet a wide variety of unique
specifications including: TEMPEST size and weight constraints, low power
consumption, rack mounting and unattended operation with remote diagnostics.
Systems' strategy is to be able to supply the latest COTS-based products
and technologies to its customers, including primarily the NSA. The NSA is
normally centered around information and intelligence and is not generally
involved with large military platform upgrade programs. The NSA is concerned
with supplying hardware and software to government agencies and departments that
will support the intelligence needs of the country. Systems' activity for the
NSA is therefore associated with electronic systems and subsystems for use in
intelligence and information warfare applications. Systems makes significant use
of technology relationships with third parties. In order to supply products in a
timely fashion, Systems concentrates its efforts in the design and the final
assembly and test of its products rather than providing a fully integrated
vertical manufacturing capability.
LYNWOOD. Lynwood supplies rugged, environmentally and electrically screened
personal computers and workstations based upon standard COTS technology, aimed
at the military and government markets principally in Europe. Lynwood develops,
manufactures, installs and supports complete computer systems for the Government
and Defense markets in Australia, Europe and the United Kingdom. Lynwood adapts
COTS systems for use in harsh and extreme environments. Lynwood also develops
TEMPEST products. In addition to creating its own products, Lynwood also
provides an international marketing and manufacturing capability for the
Company. In some cases, Lynwood provides systems that are made up of its own
products coupled with those of Codar or Systems.
Lynwood produces several personal computer and workstation products
designed to be operated in harsh environments. For example, Lynwood has a
completely compatible PC based upon a standard PC motherboard which operates in
driving rain and at extremes of temperature, and which is completely sealed from
dust and dirt. These products have been sold to armed services in Australia,
Israel and the UK. Lynwood also develops secure TEMPEST screened workstation
products which are designed to operate in areas of high security.
Lynwood principally works on discrete projects and delivers solutions to
meet specific customer and project requirements. Lynwood's products include the
RP6200, a rugged, portable PC based on standard COTS technologies and designed
for desktop use or rackmounting. The unit is ruggedized and its specification
allows flexibility in configuration to meet specific project requirements. The
RP6200 is also designed to meet the intermediate TEMPEST standard. The unit can
be configured with the latest Intel Pentium processor, removable disk drives and
a highly readable LCD color display. The unit is in active use with armed forces
in Australia, Europe and the United Kingdom. The RP6120 is a fully sealed,
non-air breathing variant of the RP6200, designed to operate in the harshest of
environments. It has all the features of the RP6200, in addition to which it
will operate in driving rain, excessive humidity, salt fog and heavy dust
environments. The unit is designed for use in desert, tropical and jungle
environments.
Lynwood has the capability to supply integrated systems and subsystems that
meet specific rugged and environmental specifications. Lynwood's design and
manufacturing capabilities are concentrated around the system integration and
final assembly and test of these products. Lynwood strives to respond quickly
with a cost effective
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<PAGE>
product using the latest COTS technologies and employs the same technology
relations and teaming programs as Codar and Systems to meet this end.
TELECOMMUNICATIONS SEGMENT
The Telecommunications segment currently consists of one operating company:
Wilcom, Inc. ("Wilcom"), located in Laconia, New Hampshire. Wilcom designs and
manufactures products for use in the telephone industry. The majority of
Wilcom's sales are to the Regional Bell Operating Companies ("RBOCs").
The business of Wilcom is made up of two product lines: analog and digital
telephone test equipment, for use with either fiber or copper cable; and
telephone transmission enhancement products, which are used to enhance or
improve the characteristics of voice, digital data and video over copper wire.
The largest part of Wilcom's business is in telephone transmission enhancement
products.
The test equipment product line is comprised of digital, fiber and analog
test instrumentation used by domestic and international telephone companies.
Current products include line testers, fiber identifiers, power meters and other
such instruments. Wilcom is currently finishing the design of a low cost optical
time domain reflectometer which is used to locate faults or breaks in fiber
cables. This product is expected to be introduced in early 1996.
Telephone transmission enhancement products, which represent the greater
growth opportunity for the division, include two product lines that are
differentiated by their use rather than their technologies. One of the product
lines is referred to as line treatment equipment ("LTE") and is normally
installed on telephone company property, while the other product line, the
enhanced line power amplifier ("ELPA"), is normally installed at the customer's
premises (but can be installed on telephone company property).
Both the LTE and the ELPA are electronic modules, installed for the express
purpose of improving voice quality, increasing data transmission speeds when
using modems and increasing the ability of copper wire to be used for video
transmission in special instances. The LTE has been designed for use with two
and four wire telephone circuits and the ELPA has been designed for use with two
wire circuits. Network upgrading has become important due to the many new
competitive technological alternatives to copper wire such as radio, cellular
telephone, satellite transmission, fiber cables and microwave which can send
information and data from location to location. The proliferation of higher
speed analog modems has made the need for better quality phone lines an
important issue. Wilcom's products allow the telephone companies to provide
additional services in voice, data and video transmission over their existing
copper networks.
The ELPA product line has been extended by the introduction of a smaller,
lighter, less expensive product called the MB21-Kl. The MB21-Kl has been
designed to be self-powered from the telephone line and permit the improvement
of line transmission quality by automatically adjusting the various electrical
parameters that control signal transmission. The MB21-Kl also requires less
skilled technicians for installation and can be configured and installed from a
remote site, which can result in substantially reduced service calls and cost to
the RBOCs. The Company has received patents on the MB21-Kl and has applications
in process to cover the new remote configuration features.
The development work on the MB21-Kl was completed in early 1995 in
conjunction with Southwestern Bell and resulted in a 10,000 piece order that is
currently being put in service by Southwestern Bell in selected areas. The
product has also been ordered by another RBOC and is under field trials at other
RBOCs and one major independent telephone company.
MARKETING AND SERVICE
The Company sells its products directly to customers and serves as a
subcontractor to larger prime contractors serving the same customer base. The
Company's products are marketed to customers through sales personnel,
manufacturers' representatives and distributors. The Company maintains sales
offices and sales support in
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<PAGE>
Columbia, Maryland; Westlake Village, California; Longmont, Colorado; Laconia,
New Hampshire; Australia; England; and Israel.
The Company provides maintenance and field service for its products through
its customer service departments located at each of its manufacturing facilities
and at certain customer sites. Field service for printers is also performed by
some distributors. Most overseas service is performed by the Company's
representatives in Australia, Denmark, England, France, Germany and Israel.
CUSTOMERS
During 1995 and 1994, sales under contracts with the U.S. Government were
approximately 38% and 40%, respectively, of the Company's net sales. Other than
the U.S. Government, no single customer accounted for more than 10% of the
Company's sales in 1995 or 1994. The Company's sales are affected by the U.S.
defense budget. With continuing discussions on budget cuts, it is difficult to
assess what the impact of budget cuts, if any, will be on the Company. It
appears that defense outlays will be reduced from past levels. The Company is
unaware of any targeted cuts specifically affecting its products. The Company's
products are utilized on many different programs. However, changed U.S.
Government spending levels could impact the Company's future sales levels. No
single U.S. Government contract accounted for greater than 10% of the Company's
sales in 1995 or 1994.
The U.S. Government accounted for 44% of the Electronic Systems segment's
1995 sales. Three separate customers accounted for 26%, 23% and 13%,
respectively, of the Telecommunications segment's 1995 sales.
FOREIGN SALES
Foreign sales in 1995 and 1994 accounted for approximately 21% and 25%,
respectively, of total sales. Such sales, which exclude products sold to the
United States Government and resold by the U.S. Government for foreign military
use, are made primarily to customers in Australia, Canada, Hong Kong, India,
Indonesia, Israel, Japan, the United Kingdom and Western Europe.
The Company's foreign sales are comprised of export sales from the U.S. and
foreign revenues from Lynwood. All export sales from the U.S. are payable in
U.S. dollars and, therefore, settlement amounts do not fluctuate with changes in
exchange rates. All of Lynwood's sales are payable in British currency.
Fluctuations in exchange rates between the U.S. dollar and the British pound
will impact on the Company's operating results. No single country, with the
exception of the United Kingdom which accounted for 86% of the Company's foreign
sales, accounted for more than 5% of the Company's foreign sales in any of the
past three years.
Foreign sales for the past three years have been as follows:
<TABLE>
<CAPTION>
APPROXIMATE
TOTAL PERCENT OF
FOREIGN SALES COMPANY SALES
------------- -------------
<S> <C> <C>
1995..........................$12,679,000 21%
1994.......................... 13,828,000 25%
1993.......................... 17,363,000 21%
</TABLE>
BACKLOG
The Company's backlog of orders was $47.8 million at December 31, 1995. Of
this amount, 71% represents orders for U.S. military sales. Such orders are
subject to termination at the convenience of the U.S. Government with negotiated
settlements in which the Company seeks to recover its costs and
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<PAGE>
a reasonable profit. Certain other orders, when subject to cancellation or
return, are handled with a restocking charge or by negotiated settlement.
While the Company's backlog is not subject to seasonal factors, it does
fluctuate due to timing of orders from the U.S. Government. The Company expects
to produce and ship approximately 77% of its current backlog of orders before
the end of 1996.
COMPETITION
The Company's business is highly competitive. Many suppliers in the
Company's markets are significantly larger than the Company in terms of total
sales and assets, and many devote significantly more resources to the
development of new products than does the Company. The Company searches for
certain market niches where it has expertise and can compete successfully.
Competition for the Company's products is based principally on reliability,
performance, price and diversity of the products offered.
RESEARCH AND DEVELOPMENT
The Company's technological base is characterized by rapid change. As a
result, maintenance and expansion of the Company's business are partially
dependent upon the success of the Company's programs to develop new products and
upgrade existing products. The Company's engineering resources have been devoted
to the development of new products in every major category of its business.
During the years 1995, 1994 and 1993, the Company's total engineering
expenditures were $7,264,000, $9,335,000 and $7,444,000, respectively. Due to
the extensive use of COTS-based equipment in the Company's products, the
Company's cost of independent research in pursuit of new products and
improvements to existing products was approximately $1,807,000, $3,214,000 and
$5,020,000, respectively. Customer-funded engineering included in cost of sales
or inventory as a contract cost was $5,457,000 in 1995, $6,121,000 in 1994 and
$2,424,000 in 1993.
PATENTS AND TRADEMARKS
The Company owns patents and trademarks and seeks patent protection for its
products in cases where the Company believes the technology involved is
sufficiently innovative to warrant such protection. The Company seeks trademark
protection for its products in cases where the Company believes for marketing
reasons such protection is warranted. The Company seeks to protect its
proprietary information through its reliance on patent, copyright, trademark and
trade secret laws, non-disclosure agreements with its employees and
confidentiality provisions in licensing arrangements with its customers. There
is no assurance that such agreements will be effective to protect the Company or
that the proprietary information deemed confidential by the Company will be
adequately protected by the law respecting trade secrets. Consequently, it may
be possible for unauthorized third parties to copy certain portions of the
Company's products or to "reverse engineer" or otherwise obtain the Company's
proprietary rights. Moreover, the laws of some foreign countries do not afford
the same protection provided by U.S. laws to the Company's proprietary rights.
GOVERNMENT REGULATION
The Company is subject to the Federal acquisition regulations governing the
issuance of government contracts, Federal Trade Commission regulations governing
its advertising and trade practices,
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Department of Commerce regulations as well as Department of State Defense Trade
Control regulations with respect to goods it imports and exports, and the Truth
in Negotiations Act, which provides for the examination by the U.S. Government
of cost records to determine whether accurate pricing information was disclosed
in connection with government contracts. To date, such government regulations
have not had a material adverse effect on the Company's business. The Company in
the normal course of business is subject to Department of Defense audits with
respect to its government contracts, some of which may result in pricing
adjustments.
The Company's manufacturing operations are subject to various federal,
state and local laws that regulate the discharge of materials into the
environment, or otherwise relating to the protection of the environment. To
date, compliance with such government regulations has not had a material adverse
effect on the Company's business.
MANUFACTURING AND SUPPLIES
Production of the Company's products requires assembly and testing of
components, printed circuit boards and other purchased parts. Quality control,
testing and inspection are performed at various steps throughout the
manufacturing process.
The Company purchases certain materials and components used in its systems
and equipment from independent suppliers. These materials and components are not
normally purchased under long-term contracts. The Company purchases
minicomputers, workstations, personal computers, mass storage subsystems, high
resolution monitors and keyboards under OEM agreements. The Company believes
that most of the items its purchases may be obtained from a variety of suppliers
and it normally obtains alternative sources for major items, although the
Company is sometimes dependent on a single supplier or a few suppliers for some
items.
During 1995 and 1994, the Company's cash constraints strained its
relationships with vendors, which adversely impacted the Company's ability to
meet its production targets on a timely and cost-effective basis.
EMPLOYEES
At December 31, 1995, the Company had approximately 390 employees. The
Company has never experienced a work stoppage and none of its employees is
represented by a union. The Company believes its relationship with its employees
is good.
PROPERTIES
The Company's facilities, which are believed to be adequate to meet the
Company's foreseeable needs, are shown in the table that follows:
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<PAGE>
FACILITIES
<TABLE>
<CAPTION>
APPROXIMATE
FLOOR AREA EXPIRATION
DIVISION OR SUBSIDIARY LOCATION (IN SQ. FT.) DATE
- ---------------------- -------- ------------ -----------
<S> <C> <C> <C>
Corporate headquarters Longmont, Colorado 2,500 (leased) November 1, 1997
Electronic Systems Segment
- --------------------------
Codar Longmont, Colorado 77,500 (leased) November 1, 1997
Systems Columbia, Maryland 25,000 (leased) November 30, 1996
Lynwood Farnham, England 26,000 (leased) December 25, 2014
Telecommunications Segment
- --------------------------
Wilcom Laconia, New Hampshire 52,000 (owned) --
</TABLE>
The Company also leases several small sales offices. The Company pays
approximately $1,316,000 per annum for the rental of all its facilities.
On November 30, 1995, the Company relocated its executive and
administrative offices from Woodbury, New York, to Longmont, Colorado.
LEGAL PROCEEDINGS
TDA TRADING CORP. V. CARLSON, ET AL. On or about June 28, 1994, TDA Trading
Corp. ("TDA"), individually and on behalf of a class of persons similarly
situated, commenced a securities fraud class action in the United States
District Court for the Eastern District of New York against Robert A. Carlson,
Richard A. Schneider and the Company. TDA commenced its action, entitled TDA
Trading Corp. v. Carlson, et al., by filing a complaint (the "Complaint") with
the Court.
The Complaint principally alleges that the defendants knowingly and/or
recklessly misrepresented to the public that they expected the Company's 1993
fourth quarter and fiscal year sales and earnings results to continue to
increase at levels substantially above those of prior years at a time when they
supposedly knew but failed to disclose that the Company's fourth quarter 1993
sales of its Navy Standard Teleprinter and other products would decrease
precipitously. The Complaint further alleges that, as a result of defendants'
alleged failure to disclose these developments, TDA and other purchasers of
Common Stock were damaged because, it is alleged, at the time of purchase, the
price of Common Stock had been artificially inflated. Additionally, the
Complaint asserts that at the time that these adverse business developments
allegedly became known to defendants and prior to their dissemination to the
public, defendants Carlson, Schneider and other directors of the Company
allegedly sold shares of Common Stock owned by them personally at price levels
which TDA claims were higher than the true value of these shares.
As relief, TDA essentially seeks damages in an amount to be proven at
trial, together with costs and expenses, including reasonable attorneys',
accountants' and experts' fees. TDA's Complaint also requests that the Court
declare its action against the Company and the individual
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defendants to be a proper class action and certify it as class representative
and plaintiff's counsel as counsel for the class. On March 24, 1995, the Court
granted TDA's motion for class certification. The litigation is currently in the
discovery phase.
The Company believes that it has meritorious defenses to the allegations
and claims set forth in the Complaint and that a finding of ultimate liability
against it, if any, would not have a materially adverse effect on its financial
position. The Company has advised its directors' and officers' liability
insurance carrier of the claims asserted against it and defendants Carlson and
Schneider.
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<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The names and ages of the directors and executive officers of the
Company, and their positions with the Company, are as follows:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Robert A. Carlson 62 Director, Chairman and Chief Executive Officer
Richard A. Schneider 43 Director, Executive Vice President, Treasurer,
Chief Financial Officer and Secretary
Stephen A. Barre 56 Director
Edward L. Hennessy, Jr. 68 Director
Charles S. Holmes 51 Director
C. Shelton James 55 Director
Dennis McCarthy 49 Director
</TABLE>
The principal occupations for the past five years (and, in some
instances, for prior years) of each of the directors, executive officers and key
employees of the Company are as follows:
ROBERT A. CARLSON is a Director and the Chairman and Chief Executive
Officer of the Company. Mr. Carlson has been an officer of the Company since
1987. Until October 1995, he served as President and Chief Executive Officer
while, until December 1989, he served as President and Chief Operating Officer
of the Company. Prior to joining the Company, Mr. Carlson served as President
and Chief Executive Officer of Millicom Inc., a cellular telephone company, from
1984 through 1985 as well as a director of Racal/Millicom, a United Kingdom
company. From 1977 through 1983, Mr. Carlson served as a Division President of
Simmonds Precision Products, Inc., a military electronic company.
RICHARD A. SCHNEIDER is a Director and the Executive Vice President,
Treasurer, Chief Financial Officer and Secretary of the Company. He was elected
a Director of the Company on February 11, 1993. From October 1988 until December
1992, he served as Vice President Finance and Treasurer of the Company. He was
elected Secretary of the Company in January 1990. Prior to joining the Company,
from November 1981 to 1988, Mr. Schneider was employed by EDO Corporation, an
electronics company which designs and manufactures advanced electronic and
specialized equipment for military, marine and aviation markets, in a number of
positions, the most recent of which was Controller. Mr. Schneider is a certified
public accountant.
STEPHEN A. BARRE, a Director of the Company since 1989, has been for
more than the past five years the Chairman and Chief Executive Officer of Servo
Corporation of America, a communications and defect detection company.
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<PAGE>
EDWARD L. HENNESSY, JR., a Director of the Company since March 6, 1996,
Mr. Hennessy is the retired Chairman and Chief Executive Officer of Allied
Signal, Inc. He is also a director of The Bank of New York, Lockheed Martin
Corp., National Association of Manufacturers, and Fundamental Management
Corporation.
CHARLES S. HOLMES, a Director of the Company since October 3, 1995, is
the President and sole stockholder of Asset Management Associates of New York,
Inc. ("Asset Management"), a New York-based firm specializing in acquisitions of
manufacturing businesses. Mr. Holmes founded and was a partner in Asset
Management Associates, a predecessor partnership of Asset Management, from 1978
to 1991. He has served since its formation in 1992 as the Chairman of the Board
of Directors of Chart Industries Inc. which specializes in the design,
manufacture and sale of industrial process equipment used in the hydrocarbon and
industrial gas industries for low-temperature and cryogenic applications, and
manufactures other industrial equipment such as stainless steel tubing,
structural pipe supports and high vacuum systems.
C. SHELTON JAMES, a Director of the Company since 1989, has been for
more than the past five years the Chairman of the Board and Chief Executive
Officer of Elcotel Inc., a public communications company. He also is President
and a director of Fundamental Management Corporation, an investment management
company, and is on the Board of Directors of Harris Computer Systems Inc., a
company engaged in the manufacture of electronic computers, SK Technologies, a
company engaged in development and marketing of point of sale and data
communication software and market computer hardware, and CPSI Inc., a company
engaged in high performance computing.
DENNIS MCCARTHY, was elected a Director of the Company on March 6, 1996.
He has been employed by Asset Management Associates of New York, Inc., a New
York-based firm specializing in acquisitions of manufacturing businesses, since
1988.
Directors are elected by the shareholders at each annual meeting and
serve until the next annual meeting of shareholders or until their successors
are duly elected and qualified. Officers are elected to serve, subject to the
discretion of the Board of Directors, until their successors are elected.
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<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth all plan and non-plan compensation
awarded to, earned by or paid to the Company's Chief Executive Officer and each
of the executive officers of the Company other than the Chief Executive Officer
whose total annual salary and bonus exceeded $100,000 for each of the Company's
last three fiscal years (collectively, the "Named Executives").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
----------------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
------------------------------------------------------------------------------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
OTHER
ANNUAL RESTRICTED SECURITIES
COMPEN- STOCK UNDERLYING LTIP ALL OTHER
SATION AWARD(S) OPTIONS/ PAYOUTS COMPENSATION
NAME AND PRINCIPAL FISCAL SALARY BONUS SARS (#)
POSITION YEAR ($) ($) ($)(1) ($) ($) ($)
- --------------------------------- ---- ---- ------- ---- ---------- ---- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Robert A. Carlson - 1995 $263,000 -- -- -- 250,000(5) -- $59.071(2)
President and Chief 1994 275,000 -- -- -- 138,983(4) -- 66,324(2)
Executive Officer 1993 260,000 $ 68,790 -- -- 64,347 -- 69,652(2)
Richard A. Schneider - 1995 152,000 8,500 -- -- 125,000(5) -- 7,630(3)
Executive Vice 1994 149,000 -- -- -- 94,389(4) -- 12,426(3)
President, Treasurer 1993 138,000 27,380 -- -- 23,442 -- 13,993(3)
and Secretary
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The aggregate amount of all perquisites and other personal benefits paid to
any Named Executive is not greater than either $50,000 or 10% of the total
of the annual salary and bonus reported for such Named Executive.
(2) Includes $59,122, $59,022 and $59,071 of life insurance premiums paid on
term life and split dollar policies by the Company on behalf of Mr. Carlson
in each of the years 1993, 1994 and 1995, respectively, as well as $7,909,
$7,302 and $0 of matching contributions made by the Company under the 401(k)
deferred compensation plan and $2,621, $0 and $0 of matching contributions
made by the Company under the profit sharing portion of such plan for the
benefit of Mr. Carlson for each of the years 1993, 1994 and 1995,
respectively.
(3) Includes $7,637, $7,603 and $7,630 of life insurance premiums paid on term
life and split dollar policies by the Company on behalf of Mr. Schneider in
each of the years 1993, 1994 and 1995, respectively, as well as $4,166,
$4,823 and $0 of matching contributions made by the Company under the 401(k)
deferred compensation plan and $2,190, $0 and $0 of matching contributions
made by the Company under the profit sharing portion of such plan for the
benefit of Mr. Schneider for each of the years 1993, 1994 and 1995,
respectively.
(4) Options to acquire shares of the Company's Common Stock that were granted in
fiscal year 1994. At the same time, options for Mr. Carlson (102,951 shares)
and Mr. Schneider (54,996 shares) were canceled.
(5) Options to acquire shares of the Company's Common Stock that were granted in
fiscal year 1995. At the same time, options for Mr. Carlson (214,485 shares)
and Mr. Schneider (95,327 shares) were canceled.
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<PAGE>
Stock Options
The table below summarizes the options granted to the Named Executives in 1995
and their potential realizable values.
<TABLE>
<CAPTION>
Option/SAR Grants in 1995
-------------------------
Potential Realizable
Value of
Assumed Annual
Rates of Stock Price
Appreciation
Individual Grants for Option Term 1
- ---------------------------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e) (f) (g)
Number of % of Total
Securities Options/SARs
Underlying Granted to Exercise or
Options/SARs Employees in Base Expiration
Name Granted (#) Fiscal Year Price ($/Sh) Date 5% ($) 10% ($)
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Robert A. Carlson 250,000 2 49% $2.50 5 years $ - $176,631
President and
Chief Executive
Officer
Richard A. Schneider 125,000 3 24% $2.50 5 years $ - $ 88,316
Executive Vice
President,
Treasurer and
Secretary
</TABLE>
- ------------------------
1) Option price at date of grant compounded annually at 5% and 10% over the
ten year term minus the exercise price times the number of shares subject
to the option.
2) Such options were granted on October 16, 1995 in connection with an
employment agreement entered into between Mr. Carlson and the Company to
replace 214,485 previously issued options which were canceled. The closing
price for a share of Common Stock on the grant date was $1.81.
3) Such options were granted on October 16, 1995 in connection with an
employment agreement entered into between Mr. Schneider and the Company to
replace 95,327 previously issued options which were canceled. The closing
price for a share of Common Stock on the grant date was $1.81.
-32-
<PAGE>
<PAGE>
The table below summarizes the exercise of stock options during 1995 for the
Named Executives.
<TABLE>
<CAPTION>
Aggregated Option/SAR Exercises in 1995 and FY-End Option/SAR Values
--------------------------------------------------------------------
(a) (b) (c) (d) (e)
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options/SARs Options/SARs
at FY-End (#) at FY-End ($)
Shares
Acquired on Value Exercisable/ Exercisable/
Name Exercise Realized ($) Unexercisable Unexercisable (1)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Robert A. Carlson - -0- $ 0 0/250,000 $0/0
President and Chief
Executive Officer
Richard A. -0- $ 0 0/125,000 $0/0
Schneider -
Executive Vice
President,
Treasurer and
Secretary
</TABLE>
- ------------------------
(1) Market price at December 31, 1995 minus exercise price times the number of
shares underlying the unexercised options.
Supplemental Retirement Plan
The Corporation has a non-qualified Supplemental Retirement Plan pursuant to
which the Corporation may pay from general revenues to two currently eligible
employees the difference between (i) 2.5% (5.0% for the President/CEO) of the
average of the employees' highest consecutive five year earnings per year of
service to a maximum of 50% and (ii) those benefits payable under the Company's
terminated Pension Plan, Social Security and from any other prior employers'
defined benefit pension plan. It is estimated that Messrs. Carlson and
Schneider, who have 11 and 7 years of credited service, respectively, will
receive each year at normal retirement age the following annual amounts under
the non-qualified Supplemental Retirement Plan: $131,296 and $65,103,
respectively.
Compensation Committee Interlocks and Insider Participation
During the fiscal year ended December 31, 1995, the members of the Compensation
Committee were John M. May (Chairman), Walter Lipkin and Robert D. Rosenthal.
During fiscal year 1995 and formerly, none of such persons was an officer of the
Company or any of its subsidiaries or had any relationship with the Company
other than serving as a director of the Company, except that Mr. Lipkin served
as a Vice President or Senior Vice President and Treasurer of the Company from
1954 through 1989. In addition, during the fiscal year ended December 31, 1995,
no executive officer of the Company served as a director or member of the
compensation committee of another entity, one of whose executive officers served
as a director or on the Compensation Committee of the Company.
Mr. Lipkin resigned as a director of the Company on October 3, 1995 and Messrs.
May and Rosenthal resigned as directors on February 15, 1996. On March 6, 1996,
Messrs. Barre, Hennessy and Holmes were appointed as members of the Compensation
Committee.
-33-
<PAGE>
<PAGE>
EMPLOYMENT AND CHANGE IN CONTROL AGREEMENTS
The Company entered into an Employment Agreement (the "Carlson
Employment Agreement") with Robert A. Carlson on October 16, 1995. Pursuant to
the Carlson Employment Agreement, the term of Mr. Carlson's employment commenced
on October 16, 1995 and will continue until November 30, 1997. Mr. Carlson will
be paid salary at a rate of $214,500 per annum which represents a 25% reduction
in salary from the prior year's level. In addition to such salary and assuming
the Company attains certain annual targets, the Company will pay to Mr. Carlson
an annual bonus equal to 100% of his salary. In addition, Mr. Carlson will be
eligible to participate in all employee benefit programs, will be entitled to
four weeks vacation, will continue to participate in the Company's retirement
program, will be provided with use of a Company car, and has been granted
options to purchase 250,000 shares of Common Stock at a per share exercise price
of $2.50 (such options to replace 225,000 previously issued options which were
canceled). In addition, if the Company decides to terminate Mr. Carlson's
employment without cause, the Company will provide Mr. Carlson with 20 days
written notice, and provide him with a severance payment of a pro rata share of
unused vacation for the full year plus a pro rata share of unused vacation for
the full year plus a pro rata share of his bonus under the Company Bonus Plan,
if the Board in its sole discretion so determines. In addition, the Company will
pay Mr. Carlson either his salary for the remainder of the term under the
agreement or one year's salary, whichever is greater. If the Company decides to
terminate Mr. Carlson's employment for cause, the Company will provide 20 days
written notice, and reason for the termination. Mr. Carlson will have those 20
days to effect a cure to the Company's satisfaction, and, if so cured, such
reason will no longer constitute cause for removal.
The Company entered into an Employment Agreement (the "Schneider
Employment Agreement") with Richard A. Schneider on October 16, 1995. Pursuant
to the Schneider Employment Agreement, the term of Mr. Schneider's employment
commenced on October 16, 1995 and will continue until October 16, 1997. Mr.
Schneider will be paid salary at a rate of $135,000 per annum which represents a
25% reduction in salary from the prior year's level. In addition to such salary
and assuming the Company attains certain annual targets, the Company will pay to
Mr. Schneider an annual bonus equal to 87% of his salary. In addition, Mr.
Schneider will be eligible to participate in all employee benefit programs, will
be entitled to three weeks vacation, will continue to participate in the
Company's retirement program, will be provided with use of a Company car, and
has been granted options to purchase 125,000 shares of Common Stock at a per
share exercise price of $2.50 (such options to replace 100,000 previously issued
options which were canceled). In addition, if the Company decides to terminate
Mr. Schneider's employment without cause, the Company will provide Mr. Schneider
with 20 days written notice, and provide him with a severance payment of a pro
rata share of unused vacation for the full year plus a pro rata share of his
bonus under the Company Bonus Plan, if the Board in its sole discretion so
determines. In addition, the Company will pay Mr. Schneider either his salary
for the remainder of the term under the agreement or one year's salary,
whichever is greater. If the Company decides to terminate Mr. Schneider's
employment for cause, the Company has agreed to provide 20 days written notice,
and reason for the termination. Mr. Schneider will have those 20 days to effect
a cure to the Company's satisfaction, and, if so cured, such reason will no
longer constitute cause for removal. In addition and pursuant to the Schneider
Employment Agreement, the Company will loan to Mr. Schneider the equivalent of
the difference between his net salary and the net salary he was receiving
immediately prior to the execution of the Schneider Employment Agreement
($550.00 per week). This loan will be repayable out of any bonus paid to Mr.
Schneider on account of work performed during the prior year; provided, however,
that upon a resignation for Good Reason (as defined) or termination without
cause, the full amount outstanding under such loans will be discharged in full.
-34-
<PAGE>
<PAGE>
DIRECTOR COMPENSATION
During 1995, each director who was not also an officer of the Company
was paid an annual retainer of $9,000 plus a uniform fee of $1,000 for each
Board and committee meeting attended in person. During 1995, directors who were
also officers of the Company received no remuneration for attendance at Board
and committee meetings.
-35-
<PAGE>
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information concerning persons or groups
who are known by the Company to be the beneficial owners of more than 5% of the
Common Stock as of March 31, 1996. The information in the table below is based
upon information furnished to the Company by such persons and statements filed
with the Commission.
<TABLE>
<CAPTION>
NUMBER OF SHARES OF
COMMON STOCK PERCENT OF
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIALLY OWNED 1 COMMON STOCK
- ------------------------------------ -------------------- ---------------
<S> <C> <C>
Charles S. Holmes
P.O. Box 2850
Southampton, NY 11969 2 2,700,000 26.60%
Pioneering Management Corporation
60 State Street
Boston, MA 02114 3 696,500 9.34%
Fundamental Management Corporation
4000 Hollywood Boulevard
Suite 610N
Hollywood, FL 33021 4 1,075,636 13.20%
- ------------------------
</TABLE>
1) To the knowledge of the Company, beneficial owners named in the above table
have sole voting power with respect to the shares listed opposite their
names.
2) Mr. Holmes is a director of the Company. These shares are comprised of
1,700,000 shares underlying certain Warrants exercisable at $2.50 per share
and 1,000,000 shares underlying $2,000,000 of Notes convertible into shares
at $2.00 per share. The ownership percentage is calculated as if such
Warrants and Notes had been converted as of March 8, 1996.
3) These shares are reportedly owned by a passive investor. Pioneering
Management Corporation is the investment company advisor of such investor
and is registered under Section 203 of the Investment Advisers Act of 1940.
4) These shares are reportedly owned by various limited partnerships, of which
Fundamental Management Corporation is the general partner. C. Shelton James,
a director of the Company, is the President and a director of Fundamental
Management Corporation. Includes 225,000 shares underlying certain Warrants
exercisable at $2.50 per share and 450,000 shares underlying $900,000 of
Notes convertible into shares at $2.00 per share. Excludes 14,793 shares of
Common Stock owned by Mr. James as to which shares Fundamental Management
Corporation disclaims beneficial ownership. The ownership percentage is
calculated as if such Warrants and Notes had been converted as of March 31,
1996.
Shares of Common Stock beneficially owned as of March 31, 1996 by each
director and executive officer of the Company and by all directors and executive
officers of the Company as a
-36-
<PAGE>
<PAGE>
group are set forth in the following table. This table is based upon information
furnished to the Company by such persons and statements filed with the
Commission.
BENEFICIAL OWNERSHIP OF SHARES 1
<TABLE>
<CAPTION>
NUMBER OF SHARES OF
COMMON STOCK PERCENT OF
NAME BENEFICIALLY OWNED 2 COMMON STOCK 3
- ---- ------------------- ------------
<S> <C> <C>
Robert A. Carlson 100,467 1.40%
Stephen A. Barre 17,654 --
Edward L. Hennessy, Jr. -0- --
Charles S. Holmes 4 -0- --
C. Shelton James 5 14,793 --
Dennis McCarthy -0- --
Richard A. Schneider 16,812 --
All directors and officers as a group
(7 persons) 149,721 2.01%
- ------------------------
</TABLE>
- -- = Less than 1%
1) Directors and executive officers have sole voting power and sole investment
power with respect to the shares listed opposite their names.
2) Excludes options exercisable within 60 days of March 31, 1996 for such
persons as follows: Mr. Carlson, -0-; Mr. Barre, 3,120; Mr. Hennessy, -0-;
Mr. Holmes, -0-; Mr. James, 7,401; Mr. McCarthy, -0-; Mr. Schneider, -0-;
and all directors and officers as a group, 16,751.
3) The percentages of Common Stock outstanding are based on 7,459,437 shares
outstanding on March 31, 1996.
4) Excludes Warrants to purchase 1,700,000 shares of Common Stock and Notes
convertible into 1,000,000 shares of Common Stock owned by Mr. Holmes.
5) Excludes 385,636 shares of Common Stock, Warrants to purchase 225,000
shares of Common Stock and Notes convertible into 450,000 shares of Common
Stock owned by various limited partnerships of which Fundamental Management
Corporation, an investment company of which Mr. James is President and a
director, as to which shares Mr. James shares voting and dispositive power.
-37-
<PAGE>
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On October 13, 1995, Charles S. Holmes loaned the Company $1,000,000 at 12%
interest, and received a fee of 3% of such principal amount (the "Holmes
Transaction"), and in December 1995, Mr. Holmes loaned the Company an additional
$1,000,000 on the same terms, both of which loans were integrated with the
Company's private placement (the "Holmes Transaction") of 12% Convertible
Subordinated Notes due January 15, 2001 (the "Notes") and Warrants to purchase
Common Stock (the "Warrants") and Mr. Holmes received 2,000 Units consisting of
$2,000,000 aggregate principal amount of Notes and Warrants to purchase 500,000
shares of Common Stock in exchange therefor. In connection with the Holmes
Transaction, Mr. Holmes became a director of the Company in October 1995. In
connection with the Holmes Transaction, the Company issued Warrants to purchase
an aggregate of 1,200,000 additional shares of Common Stock at $2.50 per share
to Mr. Holmes for advisory services in connection with the private placement and
the engagement of Commonwealth Associates as the Company's placement agent.
In December 1995 and January 1996, Active Investors II, Ltd. loaned the
Company $500,000 and $400,000, respectively, at 12% interest (the "James
Transaction"), both of which loans were integrated with the James Transaction
and Active Investors received 900 Units consisting of $900,000 aggregate
principal amount of Notes and Warrants to purchase 225,000 shares of Common
Stock in exchange therefor. On May 2, 1996, Active Investors purchased an
additional 100 Units from the Company consisting of $100,000 aggregate principal
amount of Notes and Warrants to purchase 25,000 shares of Common Stock. C.
Shelton James, a director of the Company, is the President and a director of
Active Investors. Active Investors and certain affiliated limited partnerships
currently own shares of Common Stock of the Company.
In connection with the Private Placement, the Company agreed to use its best
efforts to cause the resignation of two then-current members of the Board of
Directors and cause to be elected as directors two individuals acceptable to the
Company and who are designated by the investors (including one designated solely
by Mr. Holmes) and one designated solely by Active Investors. Dennis McCarthy
was designated to serve in such capacity by Mr. Holmes, while Edward L.
Hennessy, Jr. was designated to serve in such capacity by Active Investors, and
each became a director of the Company on March 6, 1996.
-38-
<PAGE>
<PAGE>
DESCRIPTION OF SECURITIES
THE NOTES
The Notes mature on January 15, 2001 and bear interest from the date of
issuance at the rate per annum of 12%. Interest on the Notes is payable
quarterly in arrears on January 15, April 15, July 15 and October 15 of each
year commencing April 15, 1996. In the event of a Chapter 11 or Chapter 7
bankruptcy case in which the Company is the debtor, the Notes will bear interest
from the date of commencement of the case at a default rate per annum equal to
the lesser of 18% or the highest such rate allowable by law. The Notes are
subject to prepayment, in whole and not in part, at the option of the Company,
at any time after the third anniversary of the date of issuance, without premium
or penalty. Upon the occurrence of a "change in control" of the Company, each
holder of the Notes will have the right to require that the Company repurchase
such holder's Notes in whole and not in part, without premium or penalty, at a
purchase price in cash in an amount equal to 100% of the principal amount
thereof, together with accrued and unpaid interest, if any, to the date of
purchase, pursuant to an offer made in accordance with the procedures described
in the Notes. The Notes may not be amended in any material respect without the
consent of the holders of at least 50% in aggregate principal amount of
outstanding Notes.
SUBORDINATION. The indebtedness evidenced by the Notes, including any
interest thereon, is subordinate and subject in right of payment to the prior
payment when due in full of all Senior Indebtedness. Senior Indebtedness is
defined in the Note to include, unless the terms respecting the particular
indebtedness or obligation otherwise provide, the principal of, premium, if any,
and any interest on, all liabilities of the Company, direct or contingent,
joint, several or independent, now or hereafter existing, due or to become due,
whether created directly or acquired by assignment or otherwise, under or in
respect of the Credit Agreement and all extensions, renewals and refunding of
any of the foregoing up to the original amount. At March 30, 1996, the amount of
Senior Indebtedness outstanding was $15,175,000. There is no sinking fund for
the Notes.
CONVERSION RIGHTS. The Notes may be converted by the holders as to their
principal amount into Common Stock of the Company at any time at a conversion
price equal to $2.00 per share, subject to adjustment. The conversion price of
the Notes will be adjusted to $1.50 or $1.00, respectively, if the Company's
EBITDA falls below $6,000,000 or $4,750,000 in 1996. Should the Company sell the
stock or assets of a subsidiary in 1996, such amounts will be reduced by certain
agreed amounts, depending on the time of sale. The conversion price and the
number of shares of Common Stock to be received upon conversion are subject to
adjustment upon the occurrence of any of the following events: (i) the
recapitalization of the Company or reclassification of the securities to be
received upon conversion or any merger or consolidation of the Company into or
with a corporation or other business entity, or the sale or transfer of all or
substantially all of the Company's assets or any successor corporation's assets
to any other corporation or business entity, (ii) the subdivision or combination
of the shares of Common Stock to be received upon conversion, (iii) the payment
of dividends or other distributions in the form of the securities to be received
upon conversion, and (iv) the issuance of shares of Common Stock at less than
the conversion price. No adjustment of the conversion price is required to be
made until cumulative adjustments otherwise required to be made amount to 1% or
more of the conversion price last adjusted. The Company may force conversion of
the Notes if, at any time prior to maturity, the closing bid price for the
Common Stock exceeds $6.00 per share for thirty (30) consecutive trading days
prior to the giving of notice of conversion. Fractional shares will not be
issued upon conversion, but cash adjustment will be paid in lieu thereof.
-39-
<PAGE>
<PAGE>
Interest will accrue on the Notes through the date of conversion. No payment or
adjustment will be made for dividends on securities issued upon conversion.
RESTRICTIVE COVENANTS. The Note contain certain negative covenants
prohibiting, among other things, the negative pledge of the Company's assets not
otherwise encumbered by its senior lenders.
EVENTS OF DEFAULT. "Events of Default" under the Notes include failure to
pay principal or interest, the failure to pay other indebtedness for borrowed
money in excess of $500,000 when due, or the acceleration of such indebtedness,
the failure to pay any judgment in excess of $500,000 when due or stayed, and
voluntary or involuntary bankruptcy of the Company. In the event that the
Company defaults in making any payment of principal required to be made by the
Notes, the Company shall pay interest on such defaulted amount at a rate of 18%.
If an Event of Default occurs and is continuing, then and in every such case
the holders of the Notes may declare the Notes then outstanding to be
immediately due and payable by a notice in writing to the Company, whereupon the
same will be immediately due and payable. A payment default will result in an
increased issuance to Noteholders of warrants to purchase an amount of shares of
Common Stock and until the Notes are fully repaid, the right of the Noteholders
to elect a majority of the Company's Board of Directors. In the event of a
Chapter 11 or Chapter 7 bankruptcy case in which the Company is the debtor, the
Notes will bear interest from the date of commencement of the case at a default
rate per annum equal to the lesser of 18% or the highest such rate allowable by
law.
THE WARRANTS
Each Warrant entitles the holder thereof to purchase specified numbers of
shares of Common Stock at an exercise price equal to $2.50 per share, subject to
adjustment. The Exercise Price of the Warrants will be adjusted to $2.00 or
$1.50, respectively, if the Company's EBITDA falls below $6,000,000 or
$4,750,000 in 1996. Should the Company sell the stock or assets of a subsidiary
in 1996, such amounts will be reduced by certain agreed amounts, depending on
the time of sale. The Exercise Price and the number of shares of Common Stock to
be received upon exercise are subject to adjustment upon the occurrence of any
of the following events: (i) the recapitalization of the Company or
reclassification of the securities to be received upon conversion or any merger
or consolidation of the Company into or with a corporation or other business
entity, or the sale or transfer of all or substantially all of the Company's
assets or any successor corporation's assets to any other corporation or
business entity, (ii) the subdivision or combination of shares of Common Stock
to be received upon exercise, (iii) the payment of dividends or other
distributions in the form of the securities to be received upon exercise, and
(iv) the issuance of shares of Common Stock at less than the Exercise Price. No
adjustment of the Exercise Price is required to be made until cumulative
adjustments otherwise required to be made amount to 1% or more of the Exercise
Price last adjusted. Warrants will be exercisable, at any time and from time to
time, on or before 5:30 p.m., local time, on or before February 15, 2002 (the
"Expiration Date") by delivery of an Exercise Notice duly completed and
tendering of the aggregate Exercise Price.
Discussion of the Notes and Warrants in this Prospectus is qualified
entirely by reference to the forms of the Note and Warrant filed by the Company
with the Commission.
-40-
<PAGE>
<PAGE>
COMMON STOCK
The Company is authorized to issue 25,000,000 shares of Common Stock, par
value $.10 per share. As of March 31, 1996, 7,459,437 shares of Common Stock
were outstanding.
VOTING RIGHTS. Holders of shares of Common Stock are entitled to one vote
for each share of Common Stock held. Under New York law, the affirmative vote of
the holders of a majority of the outstanding shares of Common Stock is required
to approve, among other matters, an amendment of the certificate of
incorporation if the rights or preferences of such holders would be subordinated
or otherwise adversely affected thereby.
DIVIDENDS. If all cumulative dividends shall have been paid as declared or
set apart for payment upon shares of Preferred Stock then outstanding, if any,
holders of shares of Common Stock are entitled to receive such dividends as may
be declared by the Company's Board of Directors out of funds legally available
for such purpose. The Credit Agreement prohibits the payment of cash dividends,
but permits stock splits and dividends payable solely in shares of any class of
its capital stock. See "TRADING INFORMATION" below.
LIQUIDATION RIGHTS. Upon liquidation, dissolution or winding up of the
Company, the holders of the Common Stock are entitled to share ratably in all
assets available for distribution after payment in full of creditors and after
the preferential rights of holders of shares of Preferred Stock then
outstanding, if any, have been satisfied.
OTHER PROVISIONS. The holders of Common Stock are not entitled to preemptive
or subscription rights. The affirmative vote of the holders of 80% of all Common
Stock of the Company shall be required for the adoption or authorization of (i)
a business combination (as defined in the Certificate of Incorporation) with any
other entity (as defined in the Certificate of Incorporation) if, as of the
record date for the determination of shareholders entitled to notice thereof and
to vote thereon, such other entity is the beneficial owner, directly or
indirectly, of more than 10% of the outstanding shares of Common Stock, or (ii)
a proposed dissolution of the Company or a proposed amendment of the Certificate
of Incorporation of the Company which would either change the entitlement of the
holders of shares of Common Stock of the Corporation to vote in the election of
directors or would authorize the Company to issue either shares of capital stock
(other than shares of its Common Stock) or bonds, debentures or other
obligations, which, if issued, would or could be entitled to vote in the
election of directors if, as of the record date for the determination of
shareholders entitled to notice of and to vote on such proposed dissolution or
such proposed amendment, any other entity (as defined in the Certificate of
Incorporation) is the beneficial owner, directly or indirectly, of more than 10%
of the outstanding shares of Common Stock; provided that such 80% voting
requirement shall not be applicable to the adoption or authorization of a
business combination if certain circumstances, detailed in the Certificate of
Incorporation, exist. The Company may submit to shareholders for their approval
at the 1996 Annual Meeting of Shareholders a proposal to eliminate this
super-majority vote requirement. There can be no assurance that shareholders
will approve such charter amendment.
All issued and outstanding shares of Common Stock are, and the Common Stock
reserved for issuance upon conversion of the Notes and exercise of the Warrants
will be, when issued, fully-paid and non-assessable.
-41-
<PAGE>
<PAGE>
PREFERRED STOCK
The Company is authorized to issue 2,000,000 shares of preferred stock, no
par value (the "Preferred Stock"), none of which are currently outstanding. The
Board of Directors of the Corporation is authorized to establish and designate
series of Preferred Stock and to fix from time to time before issuance the
number, designation, relative rights, preferences and limitations (including,
without limitation, participating, voting, optional or other special rights), of
the shares of any series of Preferred Stock. Except to the extent, if any, that
holders of issued and outstanding shares of preferred Stock are entitled to
vote, the entire voting power for the election of directors and for all other
purposes shall be vested exclusively in the holders of the Common Stock.
REGISTRATION RIGHTS
The Company has agreed to include the Notes, the Warrants and the shares of
Common Stock reserved for issuance upon conversion of the Notes and Exercise of
the Warrants (collectively, the "Registrable Securities") in any registration
statement filed with the Commission, at any time prior to December 31, 2005,
with respect to any future public offerings initiated by the Company or any
selling shareholders (the "Piggy-Back Rights") and holders of a majority in
interest of the Registerable Securities will have the right, which right may be
exercised no more than twice, to demand, at any time prior to January 15, 2006,
that the Company file a registration statement with the Commission with respect
to the Registrable Securities (the "Demand Rights"). The Company will bear all
fees and expenses incurred in the preparation and filing of any registration
statement relating to the exercise of Piggy-Back Rights and the first exercise
of Demand Rights.
TRADING INFORMATION
The Common Stock trades on The Nasdaq Stock Market under the symbol NATL.
The table below sets forth for the periods indicated the high and low sale
prices for the Common Stock as adjusted for stock dividends and stock splits as
compiled from published sources.
<TABLE>
<CAPTION>
Period High Low
------ ---- ---
<S> <C> <C>
1996
First Quarter $ 2 3/8 $ 1 7/16
1995
First Quarter $ 3 $ 1 7/8
Second Quarter 3 1/2 2 1/8
Third Quarter 3 1/4 1 1/4
Fourth Quarter 2 3/8 1 1/8
1994
First Quarter 7 5 3/16
Second Quarter 5 7/8 3 5/8
Third Quarter 4 7/8 2 7/8
</TABLE>
As of March 31, 1996, the approximate number of record holders of the
Common Stock as determined from the records of the transfer agent, American
Stock Transfer & Trust Company, was
-42-
<PAGE>
<PAGE>
700. Street names are included collectively as a single holder of record.
Management estimates that the Company has approximately 2,000 additional
shareholders holding stock in street names.
The Notes and Warrants will not be listed for trading following the
filing of this Prospectus.
There have been no cash dividends declared or paid on the Common Stock
during the past five years. The Credit Agreement prohibits the payment of cash
dividends. A 4% stock dividend on the Common Stock was paid to shareholders of
record on February 25, 1994.
TRANSFER AGENT
The Transfer Agent and Registrar for the Common Stock is American Stock
Transfer & Trust Company, 40 Wall Street, New York, New York. The Company acts
as its own transfer agent with respect to the Notes and Warrants.
-43-
<PAGE>
<PAGE>
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following summary describes the material United States federal
income tax considerations applicable to the purchase, ownership and disposition
of the Notes and the Warrants, and of the Common Stock received upon conversion
of the Notes or exercise of the Warrants. This summary is limited solely to
investors who acquire securities pursuant to this Prospectus and who own the
Notes and the Warrants, and any Common Stock received on conversion of the Notes
or exercise of the Warrants, as capital assets within the meaning of Section
1221 of the Internal Revenue Code of 1986, as amended (the "Code"). This summary
is based upon the provisions of the Code and the regulations, administrative
rulings and judicial decisions now in effect, all of which are subject to change
(possibly with retroactive effect) or different interpretations. There can be no
assurance that the Internal Revenue Service (the "Service") will take a similar
view as to any of the tax consequences described below. No ruling has been or
will be requested from the Service on any tax matters relating to the purchase
or the ownership or disposition of the Securities.
This summary does not purport to deal with all aspects of United States
federal income taxation that may be relevant to a particular holder or to
certain types of holders subject to special treatment under the federal income
tax laws (for example, S corporations, banks, dealers in securities, life
insurance companies, tax exempt organizations and foreign taxpayers) or to
investors who acquired their interest in the securities covered by this
Prospectus pursuant to the exercise of employee stock options or otherwise as
compensation. In addition, the following summary does not consider the potential
effect of any applicable foreign, state, local or other tax laws, or estate or
gift tax considerations. This discussion is provided for general informational
purposes only, and is not intended as tax advice to the purchasers of the
Securities.
The Service announced in 1994 that it is studying the federal income tax
treatment of debt instruments which can be repaid in stock of an issuer and
that, in appropriate circumstances, such debt instruments may be recharacterized
as equity for federal income tax purposes. The Company believes that the Notes
should be characterized as debt for federal income tax purposes, and the
following discussion assumes such treatment. However, because the Company can
require conversion of the Notes in certain circumstances, there can be no
assurance that the Service will not challenge this position.
Investors are advised to consult their own tax advisors with respect to
the consequences to them of the purchase, ownership and disposition of the
securities offered hereby.
ALLOCATION OF ISSUE PRICE OF UNITS AMONG THE NOTES AND THE WARRANTS; INITIAL
ADJUSTED BASIS
As stated above, the Notes and the Warrants were issued together as
"investment units" in the Private Placement. Under applicable Treasury
Regulations, the original issue price for such an investment unit must be
allocated between the Notes and the Warrants based upon their relative fair
market values. Thus, the original issue price of each Note is equal the issue
price of an overall Unit less the amount allocable to the Warrant.
The Company has allocated $875 of the issue price of each Unit to each
$1,000 principal amount of the Notes and $125 of such amount to each Warrant to
purchase 250 shares of Common Stock (at $.50 each). The Company's allocation
reflects its judgment as to the relative fair market values of those instruments
at the time of issuance, but is not binding on the Service.
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<PAGE>
The Company's allocation of the issue price of the Units is binding on
holders of the instruments, unless a holder discloses the use of a different
allocation on its federal income tax return for the year that includes the
acquisition date of the Note and/or Warrant. Holders considering the use of an
issue price allocation different from that used by the Company should consult
their tax advisors as to the consequences thereof.
Each Note is legended to indicate the issue date of such Note and the
portion of the issue price of the Unit which, in the Company's opinion, is
properly allocable to the Note.
An investor who acquires a Note or a Warrant from a Selling
Securityholder will receive an initial tax basis in such security equal to his
cost therefor.
TAXATION OF INTEREST
Each holder of a Note will be required to report, as ordinary income,
stated interest on the Note in accordance with such holder's tax accounting
method. For example, accrual method holders will report the interest on the
Notes as it accrues, and cash method holders will report such interest when it
is received or unconditionally made available for receipt.
ORIGINAL ISSUE DISCOUNT ON THE NOTES
For federal income tax purposes, when a debt instrument is issued at a
discount, the amount of such discount ("original issue discount" or "OID") is
treated as interest income, and the holder of such instrument must include such
OID in his income for the period during which the OID accrues even though no
cash attributable to such OID income will be received until maturity, redemption
or other disposition of the debt instrument.
The amount of OID, if any, on a debt instrument is the difference
between its "issue price" and its "stated redemption price at maturity"
(subject, generally, to a statutory de minimis exception). The portion of any
such OID that is to be accrued (and included in income) with respect to a debt
instrument with a maturity of more than one year generally will be determined
for each accrual period during the term of such debt instrument under the
constant yield method, applied by multiplying the adjusted issue price of the
debt instrument at the beginning of the accrual period by its yield to maturity,
and subtracting from that product the amount of any interest payments made
during that accrual period that are based on a single fixed rate and are payable
unconditionally in cash or in property (other than debt instruments of the
issuer) at intervals of one year or less during the entire term of the debt
instrument ("Qualified Stated Interest"). The resulting amount is allocated
ratably to each day in the accrual period, and the amount includible in a
holder's income (whether on the cash or accrual method of accounting) with
respect to the debt instrument is the sum of the resulting daily portions of OID
for each day of the taxable year on which the holder held the debt instrument.
The adjusted issue price of a debt instrument at the beginning of any
accrual period is equal to its original issue price increased by all previously
accrued OID and reduced by the amount of all previous payments made on such debt
instrument other than payments of Qualified Stated Interest. Generally, the tax
basis of a debt instrument in the hands of the holder will be increased and
decreased, respectively, by the same amounts.
Because of the required allocation of a portion of the issue price for the
Units to the Warrants (see discussion above), the stated redemption price at
maturity for the Notes exceeded their issue price
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<PAGE>
(after giving effect to such allocation). Accordingly, the Notes were issued
with OID equal to this excess. The Company believes the amount of OID per each
$1,000 principal amount of the Notes is $125.
A purchaser of Notes from a Selling Securityholder will generally be
required to include in his gross income in advance of the receipt of cash
representing that income the sum of the daily portions of OID on his Notes for
each day during each taxable year or portion thereof on which he holds such
Notes in the same manner as the Selling Securityholder. (These amounts are in
addition to the actual interest payments on the Notes.) An investor that
acquires Notes from a Selling Securityholder for an amount that exceeds their
adjusted issue price at the time of such acquisition will, however, be
considered to have purchased such Notes at an acquisition premium. The amount of
OID which any such investor is required to include in income with respect to
such Notes for any taxable year will be reduced by the portion of such
acquisition premium properly allocable to such year.
The Company will furnish annually to record holders of the Notes and to
the Service information with respect to the OID, if any, accruing during the
calendar year (as well as interest paid during that year). Because this
information will be based upon the adjusted issue price of the Notes, investors
who purchase the Notes from the Selling Securityholders for an amount in excess
of the adjusted issue price at the time of such acquisition will be required to
determine for themselves (based upon the rules described above) the amount of
OID, if any, they are required to report. Moreover, as stated above, the Service
may not agree with the original issue price allocated by the Company to the
Notes.
On December 15, 1994 the Service issued proposed regulations governing
the inclusion in income of OID for certain contingent payment debt instruments
(the "Proposed Regulations"). The Proposed Regulations are effective only for
debt instruments issued after such regulations become final, and accordingly do
not apply to the Notes. The Service could, however, assert that the inclusion of
a default rate of interest applicable upon the occurrence of a bankruptcy of the
Company, and the right of the Company to prepay the Notes prior to their
scheduled maturity, give rise to contingent payments within the meaning of the
Proposed Regulations. If the Service were successful in such an assertion, the
resulting OID analysis could differ from that set forth herein.
MARKET DISCOUNT
The income which an investor who acquires a Note from a Selling
Securityholder must recognize may also be affected by the market discount
provisions of the Code. Debt instruments such as the Notes which bear OID are
considered to have been purchased at a market discount if, subsequent to their
original issuance, they are purchased at a price below their adjusted issue
price.
Under the market discount rules, if such an investor purchases a Note at
a market discount in excess of a statutorily-defined de minimis amount and
thereafter recognizes gain upon a disposition or retirement of the Note, then
the lesser of the gain so recognized or the portion of the market discount that
accrued while the Note was held by such investor generally will be treated as
ordinary income at the time of the disposition. Moreover, any such market
discount on a Note may be taxable to such an investor at the time of certain
otherwise non-taxable transactions (e.g., gifts). In addition, a holder of a
market discount Note may be required to defer a portion of any interest expense
that otherwise may be deductible on any indebtedness incurred or maintained to
purchase or carry such Note until the holder disposes of the Note in a taxable
transaction.
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<PAGE>
Neither the rule treating accrued market discount as ordinary income on
disposition nor the rule deferring interest deductions applies if the holder of
the market- discount Note elects to include the accrued market discount in
income currently. This election to include market discount in income currently,
once made, applies to all market discount obligations acquired during or after
the first taxable year to which the election applies and may not be revoked
without the consent of the Service.
CONVERSION OF NOTES INTO COMMON STOCK
In general, no gain or loss will be recognized for federal income tax
purposes upon a conversion of the Notes into shares of Common Stock. However,
cash paid in lieu of a fractional share of Common Stock will result in taxable
gain (or loss), which will be capital gain (or loss), to the extent that the
amount of such cash exceeds (or is exceeded by) the portion of the adjusted
basis of the Note allocable to such fractional share. The adjusted basis of
shares of Common Stock received on conversion will equal the adjusted basis of
the Note converted, reduced by the portion of adjusted basis allocated to any
fractional share of Common Stock exchanged for cash. The holding period of an
investor in the Common Stock received on conversion will include the period
during which the converted Notes were held.
EXERCISE OF WARRANTS
No gain or loss will be recognized upon the exercise of a Warrant
(except to the extent, if any, of cash received in lieu of fractional shares).
The holder's tax basis in the Common Stock acquired on such exercise will be the
sum of his tax basis in the Warrants exercised and the cash paid upon exercise.
The holding period for the Common Stock acquired on such exercise will begin on
the date of exercise of the Warrant and will not include the period during which
the Warrant was held.
Upon expiration of an unexercised Warrant, a holder will generally
recognize a loss equal to such holder's adjusted tax basis in the Warrant. If
the Common Stock issuable upon exercise of the Warrant would have been a capital
asset of the holder if acquired by the holder, such loss will be a capital loss.
ADJUSTMENT OF CONVERSION PRICE
The conversion ratio of the Notes and the Warrants is subject to
adjustment under certain circumstances. Section 305 of the Code and the Treasury
Regulations issued thereunder may treat the holders of the Notes and of the
Warrants as having received a constructive distribution, resulting in ordinary
income (subject to a possible dividend-received deduction in the case of
corporate holders) to the extent of the Company's current and/or accumulated
earnings and profits, if, and to the extent that, certain adjustments in the
conversion ratio increase the proportionate interest of a holder of Notes or
Warrants in the fully diluted Common Stock, whether or not such holder ever
exercises its conversion privilege. Such a constructive distribution could
result from the adjustment of the conversion price for the Notes or the Warrants
attributable to the failure of the Company to meet certain specified adjusted
earnings levels for 1996. Adjustments to the conversion ratio of the Notes and
the Warrants also may occur in other limited circumstances. Moreover, if there
is not a full adjustment to the conversion ratio of the Notes or the Warrants to
reflect a stock dividend or other event increasing the proportionate interest of
the holders of outstanding Common Stock in the assets or earnings and profits of
the Company, then such increase in the proportionate interest of the holders of
the Common Stock could be treated as a distribution to such holders of Common
Stock, taxable as
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<PAGE>
ordinary income (subject to a possible dividends-received deduction in the case
of corporate holders) to the extent of the Company's current and/or accumulated
earnings and profits. The Company intends that there be a full adjustment to the
conversion ratio of the Notes and the Warrants in any such event. Accordingly,
the holders of Common Stock should not be deemed to receive any such taxable
dividend distribution under Section 305 of the Code.
DIVIDENDS ON COMMON STOCK
Distributions on the shares of Common Stock into which Notes have been
converted or which were received on the exercise of the Warrants will be taxable
as dividends (i.e., as ordinary income) to the extent of the Company's current
and/or accumulated earnings and profits. To the extent that the amount of any
such distribution exceeds the Company's current and accumulated earnings and
profits for a taxable year, the distribution will first be treated as a tax-free
return of capital, causing a reduction in the adjusted basis of the Common Stock
(thereby increasing the amount of gain, or decreasing the amount of loss, to be
recognized by the investor on a subsequent disposition of the Common Stock), and
the balance in excess of adjusted basis will be taxed as if it were capital gain
recognized on a sale or exchange of such stock.
Subject to certain holding period and taxable income requirements
imposed by the Code, a distribution to a corporate shareholder that is treated
as a dividend may qualify for the 70% (or, in certain cases, 80%)
dividends-received deduction available under the Code. However, to the extent
that the corporate shareholder incurs indebtedness that is directly attributable
to an investment in the stock on which the dividend is paid, all or a portion of
the dividends-received deduction may be disallowed. In addition, dividend income
that is not subject to the regular federal income tax as a consequence of the
dividends-received deduction may be subject to the federal alternative minimum
tax. Finally, the tax basis of stock held by a corporate shareholder may be
reduced (but not below zero) by the non-taxed portion of any "extraordinary
dividend" (as defined in Section 1059 of the Code) that is received with respect
to such stock. To the extent a corporate holder's tax basis would have been
reduced below zero but for the foregoing limitation, such holder must increase
the amount of gain recognized on the ultimate sale or exchange of such stock for
the taxable year in which such sale or exchange occurs.
DISPOSITION OF NOTES AND COMMON STOCK
Subject to the discussion above under "Conversion of Notes into Common
Stock," each holder of Notes generally will recognize gain or loss upon the
sale, exchange, redemption, retirement or other disposition of the Notes
measured by the difference (if any) between (i) the amount of cash and the fair
market value of any property received (except to the extent that such cash or
other property is attributable to the payment of accrued interest not previously
included in income, which amount will be taxable as ordinary income) and (ii)
the holder's adjusted tax basis in the Notes. Subject to certain special rules
under Section 302 of the Code in the case of redemptions (whereunder the total
proceeds received by a seller of Common Stock may be treated as a dividend) and
to the discussion of Section 1059 of the Code under "Dividends on Common Stock,"
above, in cases of significant "extraordinary dividends," each holder of Common
Stock received upon a conversion of the Notes or an exercise of the Warrants, in
general, will recognize gain or loss upon the sale, exchange, redemption or
other disposition of the Common Stock in an amount determined similarly to the
calculation described in the preceding sentence for the Notes. Any gain or loss
recognized on the sale, exchange, redemption, retirement or other disposition of
a Note or Common Stock held as a capital asset will be capital gain or loss
(except as discussed under "Market Discount" above). Such
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<PAGE>
capital gain or loss will be long-term capital gain or loss if the Note or the
Common Stock has been held for more than one year at the time of the sale or
exchange, and otherwise will be a short-term capital gain or loss.
EFFECT ON HOLDERS OF SALE OF WARRANTS
The sale of a Warrant other than to the Company will result in the
recognition of capital gain or loss to the holder if the Warrant is held as a
capital asset and the Common Stock issuable upon exercise would have been a
capital asset if acquired. The gain or loss will be measured by the difference
between the amount realized and the holder's basis in the Warrant, and will be
long-term or short-term capital gain or loss depending on whether the Warrant
has been held for more than one year. If the Warrants are sold to the Company,
the Service may contend that the repurchase of Warrants by the Company is a
relinquishment of the holder's contractual rights and not a sale or exchange of
property. If the Service were to prevail on this argument, gain or loss on the
repurchase of Warrants would be ordinary income or loss even if the Warrants
were held as capital assets.
BACK-UP WITHHOLDING
A holder of Common Stock or Notes may be subject to "back-up
withholding" at a rate of 31% with respect to certain "reportable payments,"
which generally include interest and dividend payments. These back-up
withholding rules apply if such holder, among other things, (i) fails to furnish
a social security number or other taxpayer identification number ("TIN")
certified under penalties of perjury within a reasonable time after the request
therefor, (ii) furnishes an incorrect TIN, (iii) fails to report properly
interest or dividends, or (iv) under certain circumstances, fails to provide a
certified statement, signed under penalties of perjury, that the TIN furnished
is the correct number and that such holder is not subject to back-up
withholding. Any amount withheld from a payment to an investor under the back-up
withholding rules is creditable against such investor's federal income tax
liability, provided the required information is furnished to the Service.
Back-up withholding will not apply, however, with respect to payments made to
certain holders of Common Stock and Notes, including corporations, tax-exempt
organizations and certain foreign persons, provided their exemption from back-up
withholding is properly established.
The Company will report to the holders of Common Stock and Notes and to
the Service the amount of any "reportable payments" for each calendar year and
the amount of tax withheld, if any, with respect to payments on such securities.
CONSEQUENCES TO THE COMPANY
The Company is generally required to deduct the OID, if any, on the
Notes as it is included in income by the holder, except that the deductions
taken by the Company will be determined without regard to any reduction in the
amount of OID included in the income of any investor who acquires Notes at an
acquisition premium (discussed above). The Company should not recognize income
if it redeems or acquires the Notes from holders for a price equal to the
principal amount of the Notes less unamortized OID or upon conversion of the
Notes. If the Company acquires, or is considered to have acquired, Notes for a
lesser price, the Company may be required to recognize income or may be entitled
to elect to postpone recognizing such income by reducing its tax basis in other
assets. Alternatively, if the Company acquires the Notes for a greater price,
the Company may be entitled to a deduction equal to such excess.
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<PAGE>
SECTION 382
As of December 31, 1995, the Company had net operating losses ("NOLs")
available for carryforward for federal income tax purposes equal to
approximately $10 million.
Under Section 382 of the Code, a corporation's ability to utilize NOLs
(as well as certain unrealized "built-in losses") to offset its income following
an "ownership change" (as described below) is generally limited on an annual
basis to an amount of income equal to the product of the fair market value of
such corporation's outstanding stock immediately before the ownership change and
the "long-term tax-exempt rate."
An ownership change occurs under Section 382 if the percentage of stock
of the loss corporation owned actually or constructively by one or more
5-percent shareholders increases by more than 50 percentage points relative to
the lowest percentage of stock of the loss corporation owned by those 5-percent
shareholders at any time during a statutory "testing period" (generally the
three-year period ending on the testing date). A "5-percent shareholder" is one
who owns at least 5 percent of the stock of the loss corporation (not including
certain nonvoting, nonparticipating preferred stock), and all stock owned by
shareholders who are not 5-percent shareholders (hereinafter referred to as
public shareholders) is generally treated as being owned by one 5-percent
shareholder. In addition, under Section 382 and the regulations promulgated
thereunder, public shareholders of a loss corporation may be segregated into two
or more separate groups, each of which is treated as a separate 5-percent
shareholder. Public shareholders who receive stock from a loss corporation as a
result of certain types of transactions will be segregated and treated
separately from the public shareholders who owned stock of the loss corporation
prior to the transaction.
Certain provisions under the Treasury Regulations treat options to
acquire stock of a loss corporation such as the Company as currently exercised
for purposes of determining whether an ownership change subject to Section 382
has occurred. Among other requirements, such provisions require generally that a
principal purpose of the issuance, transfer or structuring of the option is to
avoid or ameliorate the impact of an ownership change of the loss corporation.
The Company believes that such principal purpose does not exist, and therefor it
would not appear that the issuance of the Notes and the Warrants would result in
a deemed exercise of all related conversion and purchase rights under these
provisions. It is not possible to predict with accuracy the timing and potential
effect under Section 382 of any future actual exercise of conversion rights
under the Notes or purchase rights under the Warrants. It is possible that the
actual exercise of such rights could result in an ownership change under Section
382. If such an ownership change were to result, the Company's prospective
ability to utilize its NOLs would be limited as described above. At the date of
this Prospectus, no Notes have been converted into, and no Warrants have been
exercised to purchase, Common Stock, and the Company does not expect that any
significant amount of the Notes would be converted into Common Stock, or that
any significant number of the Warrants would be exercised, prior to 1997.
PENDING LEGISLATION
During the latter part of 1995, there were presented before Congress
certain legislative proposals which, if enacted into law, may affect portions of
the above tax discussion, including a reduction in tax on capital gains and
provisions modifying certain of the extraordinary dividend rules of Section 1059
of the Code. Investors should consider the potential effect of the possible
enactment into law of these provisions in making their investment decision.
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<PAGE>
On March 19, 1996, President Clinton released a set of legislative
proposals as a part of his plan to balance the federal budget. These proposals
include, among other things, proposals to (i) deny a deduction for interest and
OID for certain long-term debt as well as for certain debt which is mandatorily
convertible into the issuer's stock or is so convertible at the issuer's option,
(ii) defer the deduction for OID on convertible debt until actual payment (which
would exclude conversion) of the debt, and (iii) reduce the 70-percent
dividends-received deduction to 50 percent. The Company cannot predict with any
degree of certainty which, if any, of the president's proposals will ultimately
become law or, if enacted into law, what the effective dates of such provisions
would be. Investors should consider the potential effect of the President's
proposals in making their investment decision.
THE FOREGOING SUMMARY IS INCLUDED FOR GENERAL INFORMATION ONLY. EACH
HOLDER IS URGED TO CONSULT WITH SUCH HOLDER'S OWN TAX ADVISOR WITH RESPECT TO
THE TAX CONSEQUENCES OF THE RIGHTS OFFERING TO SUCH HOLDER'S OWN PARTICULAR TAX
SITUATION, INCLUDING THE APPLICATION AND EFFECT OF STATE AND LOCAL INCOME AND
OTHER TAX LAWS.
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SELLING SECURITYHOLDERS
All of the Securities being offered hereby are being offered
on behalf of the Selling Securityholders.
The Noteholders and the Warrantholders acquired the Notes and
the Warrants in conjunction with the Private Placement which was consummated on
February 15, 1996, February 23, 1996 and February 29, 1996. The lead investor in
the Private Placement, Charles S. Holmes, serves as a director of the Company.
See "MANAGEMENT -- Directors and Executive Officers of the Company," "SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT" and "CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS." Commonwealth Associates served as the
Company's Placement Agent in connection with the private placement and received
its Warrants as partial compensation for such service.
The Bank Lenders acquired the shares of Common Stock owned by
them on or about April 12, 1996 pursuant to the Credit Agreement. The Bank
Lenders currently serve as the Company's primary bank lenders pursuant to the
Credit Agreement.
Active Investors acquired 363,636 shares of Common Stock on
November 3, 1994 pursuant to the Stock Purchase Agreement. C. Shelton James, a
director of the Company, is the President and a director of Active Investors.
Active Investors and certain affiliated limited partnerships currently own
shares of Common Stock of the Company as well as Notes and Warrants. See
"MANAGEMENT -- Directors and Executive Officers of the Company," "SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT" and "CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS."
Except as otherwise noted, the Selling Securityholders have
advised the Company that they do not own any shares of Common Stock in addition
to the Shares.
The Selling Securityholders have indicated that they intend to
sell all of the Securities set forth opposite their names below. The number of
Securities which may actually be sold by the Selling Securityholders will be
determined from time to time by such Selling Securityholders and will depend on
a number of factors including the price of the Securities from time to time. The
table below sets forth information as of May 8, 1996 concerning the beneficial
ownership of the Securities by the Selling Securityholders. All information as
to beneficial ownership has been furnished to Company by the Selling
Securityholders.
<TABLE>
<CAPTION>
Name Amount of Warrants Shares Presently Percent of
and Address Notes Presently Owned Owned Class
<S> <C> <C> <C>
Active Investors II, Ltd. $ 1,000,000 250,000 363,636(1)
4000 Hollywood Boulevard
Suite 610 North
Miami, FL 33021
The Bank of New York 125,000
One Wall Street
New York, NY 10286
</TABLE>
- ------------------------
(1) Excludes 37,000 shares of Common Stock previously registered. See Note 4 to
the table under the caption "Security Ownership of Certain Beneficial
Owners and Management."
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<PAGE>
<TABLE>
<CAPTION>
Name Amount of Warrants Shares Presently Percent of
and Address Notes Presently Owned Owned Class
<S> <C> <C> <C>
Chemical Bank 125,000
7600 Jericho Turnpike
Woodbury, New York 11797
Christopher P. Baker $ 50,000 12,500
4 Rollins Place
Boston, MA 02114
Hans C. Bodmer $ 75,000 18,750
Muehlestrasse 15
8803 Rueschlikon
Switzerland
Churchill Associates L.P. $ 125,000 31,250
by Churchill International, Inc.
G.P.
by James Pinto, President
1149 Windsong Trail
Richardson, TX 75081
William Forman $ 200,000 50,000
70 Timber Ridge Drive
Holbrook, NY 11741
Arthur Freilich $ 100,000 25,000
11 Radnor Road
Plainview, NY 11803
Sydney J. Goldstein $ 57,000 14,250
IRA Account
P.O. Box 24181
2741 Kersdale Road
Cleveland, OH 44124
The Hart Family Trust $ 50,000 12,500
Andrew B. Hart and
Loni A. Hart, Trustees
12570 Skyline Blvd.
Oakland, CA 94619
Charles S. Holmes $2,000,000 1,700,000
117 White Lane
Southampton, NY 10068
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Name Amount of Warrants Shares Presently Percent of
and Address Notes Presently Owned Owned Class
<S> <C> <C>
Information Age Partners, L.P. $ 50,000 12,500
by Newmark Research, G.P.
by Amy Newmark, President
18 Sidney Lanier Lane
Greenwich, CT 06831
Michael T. Jackson Trust $ 200,000 50,000
Michael T. Jackson, Trustee
71 Bellevue Avenue
Belvedere, CA 94920
David S. Lawi $ 25,000 6,250
3 Ramapo Trail
Harrison, NY 10528
MK'S OMO Contracting Inc. $ 25,000 6,250
Employees' Profit Sharing Trust
Sanford Kirschenbaum, Trustee
P.O. Box 847
East Brunswick, NJ 08816
Timothy Moran $ 100,000 25,000
33 Woodland Drive
Bayport, NY 11705
Orbis Pension Trustees Ltd. $1,000,000 250,000
David J. Lewis,
Investment Manager
1 Connaught Place
London W2 2DY
England
Claudia C. Rouhana $ 25,000 6,250
5 Prospect Lane
Sands Point, NY 11050
William J. Rouhana, Jr. $ 25,000 6,250
5 Prospect Lane
Sands Point, NY 11050
S & A Enterprises, Inc. $ 55,000 13,750
Profit Sharing Fund
Sydney J. Goldstein, Trustee
1630 East Main Street
Kent, OH 44240
</TABLE>
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<TABLE>
<CAPTION>
Name Amount of Warrants Shares Presently Percent of
and Address Notes Presently Owned Owned Class
<S> <C> <C>
Leonard M. Schiller $ 50,000 12,500
1110 N. Lake Shore Drive
Apt. 95
Chicago, IL 60611
Philip J. Schiller $ 50,000 12,500
1419 Waverly Road
Highland Park, IL 60035
William R. Schoen $ 25,000 6,250
5 Kenilworth Court
Novato, CA 94945
SJG Management, Inc. $ 100,000 25,000
Profit Sharing Fund
Sydney J. Goldstein, Trustee
P.O. Box 24181
2741 Kersdale Road
Cleveland, OH 44124
S.J. Warner Charitable $ 100,000 25,000
Remainder Unitrust
Stephen J. Warner, Trustee
1617 N. Flagler Dr.
Apt. 4A
West Palm Beach, FL 33407
Tel Com Partners L.P. $ 100,000 25,000
by James Pinto, G.P.
10369 Blue Arrow Ct.
Columbia, MD 21044-4123
Winfield Capital Corp. $ 400,000 100,000
c/o Paul A. Perlin, CEO
237 Mamaroneck Avenue
White Plains, NY 10605
Michael S. Falk, IRA $ 25,000 6,250
One Beekman Place, Apt. 15A
New York, NY 10022
Robert O'Sullivan $ 10,000 21,230
215 East 95th Street, Apt. 33B
New York, NY 10128
</TABLE>
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<TABLE>
<CAPTION>
Name Amount of Warrants Shares Presently Percent of
and Address Notes Presently Owned Owned Class
<S> <C> <C>
E&M RP Trust $ 400,000 100,000
Edward H. Shea, Jr., Trustee
655 Brea Canyon Road
Walnut, CA 91789
Tahoe Partnership I $ 100,000 25,000
Peter O. Shea, Managing Partner
655 Brea Canyon Road
Walnut, CA 91789
Siam Partners II $ 100,000 25,000
Edmund H. Shea, Jr.,
Managing Partner
655 Brea Canyon Road
Walnut, CA 91789
Patrick H. Miller Jr. and $ 200,000 50,000
Lee M. Miller, JTWROS
1300 West Garmon Road, N.W.
Atlanta, GA 30327
Gerald B. Cramer $ 600,000 150,000
1330 Journeys End Road
Croton-on-Hudson, NY 10520
S. Marcus Finkle $ 200,000 50,000
117 AABC
Aspen, CO 81611
Paul D. Goldenheim $ 10,000 2,500
4 Bald Hill Place
Wilton, CT 06897
David Morley $ 20,000 5,000
2 Longbeach
Corey Groville, Jersey
Channel Islands
Edward J. Rosenthal $ 100,000 25,000
Journeys End Road
Croton-on-Hudson, NY 10520
</TABLE>
-56-
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
Name Amount of Warrants Shares Presently Percent of
and Address Notes Presently Owned Owned Class
<S> <C> <C>
Cameron Capital Ltd. $ 200,000 50,000
10 Cavendish Road
Hamilton HM19
Bermuda
Amy Gail Treitel $ 15,000 3,750
190 East 72nd Street
New York, NY 10021
Jo-Bar Enterprises, LLC $ 100,000 25,000
By Joel A. Stone, Managing
Member
8700 Bryn Mawr, 9th Floor
Chicago, IL 60062
Lawrence Field $ 100,000 25,000
2540 East 28th
Tulsa, OK 74114
J. Michael Wolfe $ 100,000 25,000
40 Greenwich Avenue
Clarksville, TN 37040
Kent A. Rodriguez $ 25,000 6,250
7020 Lanham Lane
Edina, MN 55439
Benjamin Rosenbloom $ 50,000 12,500
44 Coconut Road
Palm Beach Towers,
Apt. A321
Palm Beach, FL 33480
Commonwealth Associates 218,870
733 Third Avenue
New York, NY 10017
Ed Downe 50,000
c/o Commonwealth Associates
733 Third Avenue
New York, NY 10017
James Pinto 200,000
1149 Windsong Trail
Richardson, TX 75081
</TABLE>
-57-
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
Name Amount of Warrants Shares Presently Percent of
and Address Notes Presently Owned Owned Class
<S> <C>
Michael S. Falk 210,000
Beth Lipman 5,000
Vincent Labarbara 9,000
Lisa Jagerman 10,000
Eric Rand 12,000
Paul Sterios 8,000
Keith Rosenbloom 72,600
James L. Lynch 20,000
</TABLE>
-58-
<PAGE>
<PAGE>
PLAN OF DISTRIBUTION
The Securities are being sold by the Selling Securityholders
for their own account; the Company will not receive any proceeds from the sales
of the Securities by the Selling Securityholders. The Selling Securityholders
are not restricted as to the price or prices at which they may sell the
Securities. The proceeds to the Selling Securityholders from the sale of the
Securities will be the purchase price of such Securities sold less the agents'
or brokers' discounts or commissions and other expenses of issuance and
distribution not borne by the Company. Further, the Selling Securityholders are
not restricted as to the number of Securities which may be sold at any one time.
The Selling Securityholders, or their pledgees, donees,
transferees or other successors, may sell the Securities in any of three ways:
(i) through broker-dealers; (ii) through agents or (iii) directly to one or more
purchasers. The distribution of the Securities may be effected from time to time
in one or more transactions (which may involve crosses or block transactions)
(A) in the over-the-counter market, (B) in transactions otherwise than in the
over-the-counter market or (C) through the writing of options on the Securities
(whether such options are listed on an options exchange or otherwise). Any of
such transactions may be effected at market prices prevailing at the time of
sale, at prices related to such prevailing market prices, at negotiated prices
or at fixed prices. The Selling Securityholders may effect such transactions by
selling Securities to or through broker-dealers, and such broker-dealers may
receive compensation in the form of discounts, concessions or commissions from
the Selling Securityholders and/or commissions from purchasers of Securities for
whom they may act as agent (which discounts, concessions or commissions as to a
particular broker-dealer might be in excess of those customary in the types of
transactions involved). There is no plan to offer such Securities through
underwriters or any existing arrangement between the Selling Securityholders and
any broker or dealer.
In connection with any sales, the Selling Securityholders and
any broker-dealer participating in such sales may be deemed to be underwriters
within the meaning of the Securities Act of 1933, as amended (the "Securities
Act"). Any commissions paid or any discounts or concessions allowed to any such
broker-dealers, and, if any such broker-dealers purchase shares as principal,
any profits received on the resale of such shares, may be deemed to be
underwriting discounts and commissions under the Securities Act. The Selling
Securityholders may indemnify any broker-dealer that participates in
transactions involving the sale of the Securities against certain liabilities,
including liabilities arising under the Securities Act.
The Selling Securityholders must comply with the requirements
of the Securities Act and the Exchange Act and the rules and regulations
thereunder in offers and sales of their Securities. In particular, the Selling
Securityholders may not: (i) pay commissions or finder's fees to anyone other
than normal brokers' commissions paid to their brokers who execute orders for
sales; (ii) bid for or purchase for their own account or the account of any
affiliate or induce others to bid for or purchase any of the Company's shares,
including the Securities, until the Securities have been sold; or (iii) make any
bids for or purchases of such shares, directly or indirectly, for the purpose of
stabilizing the price of the Common Stock. Additionally, the Selling
Securityholders, including brokers through whom their sales are made as well as
dealers who purchase the Securities being offered hereby for resale, must comply
with the Prospectus delivery requirements of the Securities Act during the term
of this offering.
-59-
<PAGE>
<PAGE>
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents subsequently filed by the Company pursuant to Section 13(a),
13(c), 14 or 15(d) of the Exchange Act prior to the termination of the offering
of the Securities shall be deemed to be incorporated by reference in this
Prospectus and to be a part hereof from the respective date of filing of each
such document. Any statement contained in a document incorporated or deemed to
be incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein
or in any other subsequently filed document which also is, or is deemed to be,
incorporated by reference herein modifies or supersedes such statement. Any such
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this Prospectus.
The Company will provide without charge to each person to whom this
Prospectus is delivered, upon written or oral request, a copy of any or all of
the documents incorporated by reference herein, other than certain exhibits to
such documents. Requests for such documents should be directed to Richard A.
Schneider, Executive Vice President, NAI Technologies, Inc., 2405 Trade Centre
Avenue, Longmont, Colorado 80503.
LEGAL MATTERS
The legality of the Securities offered hereby will be passed upon for the
Company by Whitman Breed Abbott & Morgan, New York, New York.
EXPERTS
The consolidated financial statements and schedule of NAI Technologies,
Inc. and subsidiaries as of December 31, 1995 and 1994 and for each of the years
in the three year period ended December 31, 1995 have been included herein and
in the Registration Statement in reliance on the report of KPMG Peat Marwick
LLP, independent certified public accountants, appearing elsewhere herein upon
the authority of such firm as experts on accounting and auditing.
-60-
<PAGE>
<PAGE>
INDEX TO FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
Page
<S> <C>
Independent Auditors' Report 62
Consolidated Balance Sheets at December 31, 1995 and 1994 63
Consolidated Statements of Operations - Years ended 64
December 31, 1995, 1994 and 1993
Consolidated Statements of Shareholders' Equity - 65
Years ended December 31, 1995, 1994 and 1993
Consolidated Statements of Cash Flows - Years ended 66
December 31, 1995, 1994 and 1993
Notes to Consolidated Financial Statements 67
Independent Auditors' Report 89
Consolidated Financial Statement Schedules:
II - Valuation and Qualifying Accounts 90
</TABLE>
-61-
<PAGE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
and Stockholders
NAI Technologies, Inc.
We have audited the accompanying consolidated balance sheets of NAI
Technologies, Inc. and subsidiaries as of December 31, 1995 and 1994, and the
related consolidated statements of operations, shareholders' equity, and cash
flows for each of the years in the three-year period ended December 31, 1995.
These consolidated financial statements are the responsibility of the Company's
management. our responsibility is to express an opinion on these consolidated
financial statements 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of NAI Technologies,
Inc. and subsidiaries as of December 31, 1995 and 1994, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1995, in conformity with generally accepted accounting
principles.
KPMG PEAT MARWICK LLP
March 1, 1996
Boulder, Colorado
-62-
<PAGE>
<PAGE>
NAI TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31,
(in thousands, except share amounts) 1995 1994
---- ----
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 2,605 $ 1,658
Accounts receivable, net 13,735 12,508
Income taxes receivable -- 4,732
Inventories, net 11,995 14,052
Deferred tax asset 384 378
Other current assets 813 871
-------- ---------
Total current assets 29,532 34,199
------- -------
Property, plant and equipment, net 5,351 7,657
Excess of cost over fair value of net assets acquired, net 10,339 10,865
Notes receivable 1,190 --
Other assets 1,600 999
-------- ---------
Total assets $ 48,012 $ 53,720
======== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 9,797 $ 7,484
Notes payable -- 127
Current installments of long-term debt 2,177 2,179
Accrued payroll and commissions 768 535
Other accrued expenses 6,376 6,435
Income taxes payable 370 774
-------- ---------
Total current liabilities 19,488 17,534
------- -------
Notes payable -- 6,000
Long-term debt 15,573 7,990
Other accrued expenses 2,481 1,522
Deferred income taxes 384 378
-------- ---------
Total liabilities $ 37,926 $ 33,424
-------- ---------
Commitments and contingent liabilities
Shareholders' Equity:
Capital Stock:
Preferred stock, no par value, 2,000,000
shares authorized and unissued -- --
Common stock, $.10 par value, 25,000,000
shares authorized; shares issued:
7,459,437 in 1995 and 7,174,592 in 1994 746 717
Capital in excess of par value 16,162 14,718
Foreign currency translation adjustment 43 107
Retained earnings (deficit) (6,865) 4,754
-------- ---------
Total shareholders' equity 10,086 20,296
-------- ---------
Total liabilities and shareholders' equity $ 48,012 $ 53,720
======== =========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
-63-
<PAGE>
<PAGE>
NAI TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Years ended December 31,
(in thousands except per share amounts) 1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Net sales $ 60,008 $ 54,520 $ 81,024
--------- --------- ---------
Cost of sales 55,100 44,254 53,526
--------- --------- ---------
Gross margin 4,908 10,266 27,498
--------- --------- ---------
Selling expenses 4,971 7,490 7,351
General and administrative expenses 6,517 6,313 5,794
Research and development costs 1,807 3,214 5,020
Restructuring expenses -- 7,321 --
Other expenses 488 517 373
--------- --------- ---------
Total expenses 13,783 24,855 18,538
--------- --------- ---------
Operating earnings (loss) (8,875) (14,589) 8,960
--------- --------- ---------
Non-operating income (expense)
Interest income 195 83 21
Interest expense (2,562) (1,477) (786)
--------- --------- ---------
(2,367) (1,394) (665)
--------- --------- ---------
Earnings (loss) before income taxes (11,242) (15,983) 8,295
Income tax expense (benefit) 377 (4,392) 2,840
Net earnings (loss) ($11,619) ($11,591) $ 5,455
========= ========= =========
Earnings (loss) per common share ($ 1.57) ($ 1.69) $ 0.80
========= ========= =========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
-64-
<PAGE>
<PAGE>
NAI TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
For the three years ended December 31, 1995
<TABLE>
<CAPTION>
Capital Total
Common in excess Note Translation Retained shareholders'
(in thousands) stock of par receivable adjustment earnings equity
- -------------- ----- ------ ---------- ---------- -------- ------
<S> <C> <C> <C> <C> <C> <C>
Balance January 1, 1993 $ 384 $ 8,828 ($ 26) - $ 14,725 $ 23,911
Net earnings - - - - 5,455 5,455
Common stock acquired and retired (2) (336) - - - (338)
4% common stock dividend 16 2,252 - - (2,268) -
Three for two common stock split 214 (214) - - - -
Exercise of common stock warrants 8 (8) - - - -
Foreign currency translation adjustment - - - (54) - (54)
Common stock issued in connection
with the acquisition of Lynwood 20 1,100 - - - 1,120
Tax benefit from exercise of employee
stock options - 220 - - - 220
Exercise of employee stock options and
stock purchase plan, net of shares
tendered 11 254 14 - - 279
-------- -------- ------- -------- -------- --------
Balance December 31, 1993 651 12,096 (12) (54) 17,912 30,593
Net (loss) - - - - (11,591) (11,591)
4% common stock dividend 26 1,541 - - (1,567) -
Foreign currency translation adjustment - - - 161 - 161
Sale of common stock 36 964 - - - 1,000
Tax benefit from exercise of employee
stock options - 23 - - - 23
Exercise of employee stock options and
purchases under stock purchase plan 4 106 - - - 110
-------- -------- ------- -------- -------- --------
Balance December 31, 1994 717 14,730 (12) 107 4,754 20,296
Net (loss) - - - - (11,619) (11,619)
Foreign currency translation adjustment - - - (64) - (64)
Common stock issued in debt restructuring 25 475 - - - 500
Issuance of stock warrants in connection
with debt offering - 913 - - - 913
Exercise of employee stock options and
purchases under stock purchase plan 4 56 - - - 60
-------- -------- ------- -------- -------- --------
Balance December 31, 1995 $ 746 $ 16,174 ($ 12) $ 43 ($ 6,865) $ 10,086
======== ======== ======= ======== ======== ========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
-65-
<PAGE>
<PAGE>
NAI TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
(in thousands) 1995 1994 1993
- -------------- ---- ---- ----
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net earnings (loss) ($11,619) ($11,591) $ 5,455
Adjustments to reconcile net earnings (loss) to cash (used in)
provided by operating activities:
Depreciation and amortization 2,979 2,435 2,508
Loss on disposal of property, plant and equipment 1 2,298 -
Tax benefit from exercise of employee stock options - 23 220
Changes in assets and liabilities, excluding effects from
acquisitions and foreign currency adjustments:
Accounts receivable (1,227) 2,534 (1,374)
Inventories 2,057 2,910 (2,125)
Accounts payable and other accrued expenses 3,545 4,215 (4,885)
Income taxes 4,328 (2,775) (1,199)
Other, net 57 (82) 336
-------- ------- --------
Net cash (used in) provided by operating activities 121 (33) (1,064)
-------- ------- --------
Cash Flows from Investing Activities:
Contingent payment on purchase of KMS Advanced Products (103) (189) (227)
Payment for purchase of Lynwood, net of cash acquired - - (3,986)
Payment for purchase of Codar, net of cash acquired - - (4,592)
Purchase of property, plant and equipment (886) (935) (1,484)
Proceeds from sale of property, plant and equipment 443 1,053 70
-------- ------- --------
Net cash used in investing activities (546) (71) (10,219)
-------- ------- --------
Cash Flows from Financing Activities:
Issuances of notes payable 6 8,636 250
Issuances of 12% convertible subordinated notes 2,500 - -
Payments of notes payable (133) (5,283) -
Payments for debt restructuring (345) - -
Proceeds from long-term borrowings - - 7,500
Payments of long-term debt (656) (4,777) (2,748)
Receipts on notes receivable - 223 433
Proceeds from exercise of stock options and stock purchase plan 60 110 265
Proceeds from sale of common stock - 1,000 -
Purchase and retirement of common stock - - (338)
-------- ------- --------
Net cash (used in) provided by financing activities 1,432 (91) 5,362
-------- ------- --------
Effect of foreign currency exchange rates on cash (60) 136 (35)
-------- ------- --------
Net (decrease) increase in cash and cash equivalents 947 (59) (5,956)
Cash and cash equivalents at beginning of year 1,658 1,717 7,673
-------- ------- --------
Cash and cash equivalents at end of year $ 2,605 $ 1,658 $ 1,717
======== ======= ========
Supplemental disclosure of cash flow information:
Cash paid for (received):
Interest $ 1,506 $ 1,462 $ 771
Income taxes (4,697) (773) 3,859
Non-cash investing and financing activities:
Common stock issued in Lynwood acquisition - - 1,120
Notes payable issued in Codar acquisition - - 2,524
Common stock issued in debt restructuring 500 - -
Notes receivable from sale of property, plant and equipment 1,190 - -
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
-66-
<PAGE>
<PAGE>
NAI TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1994 and 1993
1. SUMMARY OF ACCOUNTING POLICIES
Description of Business: NAI Technologies designs, manufactures and
markets rugged computer systems, advanced peripheral products, high
performance workstations, TEMPEST computer systems and
telecommunications test equipment and transmission products, and
integrated systems for defense, military, government-related and
commercial businesses. The Company's customer base includes commercial
markets requiring rugged, mobile computer and communications systems,
U.S. and foreign armed services and intelligence agencies, and the
regional Bell operating companies and independent telephone companies.
Net sales to the U.S. Government for the years ended December 31, 1995,
1994 and 1993 were $22,665,000, $21,819,000, and $41,559,000,
respectively. With the exception of the U.S. Government, no single
customer accounted for more than 10% of annual sales in any of the
years presented.
Basis of Presentation: The accompanying consolidated financial
statements include the accounts of the Company and its wholly-owned
subsidiaries. All significant intercompany transactions and balances
have been eliminated in consolidation.
Management Estimates: The preparation of financial statements in
conformity with generally accepted accounting principals requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Foreign Currency Translation: The financial statements and transactions
of the Company's foreign subsidiary are maintained in its functional
currency. For consolidation purposes, assets and liabilities of the
Company's U.K. subsidiary have been translated at rates of exchange at
the end of the period. Revenues and expenses have been translated at
the weighted average rates of exchange in effect during each period.
Translation gains and losses are accumulated as a separate component of
shareholders' equity. Gains and losses resulting from transactions
denominated in a currency other than the entity's functional currency
are included in other operating expense in the consolidated statements
of operations. There were no significant gains or losses from foreign
currency transactions in the years presented.
Financial Statement Reclassification: Certain reclassifications have
been made to prior years' financial statements to conform to the 1995
presentation.
Cash equivalents: The Company classifies investments that are readily
convertible into cash, and have original maturities of three months or
less, as cash equivalents.
Inventories: Inventories are valued at the lower of cost or market on a
first-in, first-out (FIFO) basis. Work in process is stated at total
cost incurred, reduced by estimated costs of units delivered, not in
excess of net realizable value. The Company's business is characterized
by rapid change that frequently results in product obsolescence. The
Company continually reviews its on-hand quantities
-67-
<PAGE>
<PAGE>
and compares such to current business levels and future expectations.
Adjustments to the carrying values of inventory are made when
considered necessary.
Property, Plant and Equipment: Property, plant and equipment are
recorded at historical cost. Depreciation and amortization have been
computed using the straight-line method over the following estimated
useful lives of the assets: equipment and furniture and fixtures,
generally -- 2 to 10 years, and buildings -- 33 years. Leasehold
improvements are amortized over the shorter of the estimated useful
life of the improvements or the lease term.
Excess of Cost over Fair Value of Net Assets Acquired: The excess of
cost over fair value of net assets acquired (goodwill) is being
amortized on a straight line basis over a period of twenty years. The
Company reviews the significant assumptions which underlie the twenty
year amortization period on a quarterly basis and will shorten the
amortization period if considered necessary. The Company assesses the
recoverability of this intangible asset by determining whether the
amortization of the goodwill balance over its remaining life can be
recovered through projected un-discounted future results. Accumulated
amortization was approximately $1,730,000 and $1,100,000 at December
31, 1995 and 1994, respectively. The amortization expense associated
with these amounts is included in other operating expense in the
consolidated statements of operations and amounted to $630,000,
$620,000 and $359,000 in 1995, 1994 and 1993, respectively.
Revenue Recognition: Sales are recorded when title passes (either at
shipment or customer acceptance). In some limited cases, a sale may be
recorded upon the completion of a specific contractual task such as the
issuance of a test report. Cost of goods sold is based upon average
estimated cost per unit. Sales and profits on cost reimbursable
contracts are recognized as costs are incurred. Sales and estimated
profits under long-term contracts are recorded under the percentage of
completion method of accounting using the cost to cost method. Costs
include direct engineering and manufacturing costs, applicable overhead
costs and special tooling and test equipment. All selling, general and
administrative expenses are charged to operations as incurred. Warranty
expense is accrued based upon the historical relationship between sales
and warranty claims. Estimated losses are provided for in full when
identified.
Income Taxes: Effective January 1, 1993 the Company adopted Statement
of Financial Accounting Standards (SFAS) No. 109, "Accounting for
Income Taxes". This statement requires the use of the asset and
liability approach for financial accounting and reporting of income
taxes. Under this method, deferred tax assets and liabilities are
recognized based on the temporary differences between the carrying
amounts of assets and liabilities for financial statement purposes and
income tax purposes using enacted rates expected to be in effect when
such amounts are realized or settled.
Stock Dividends: On March 14, 1994 the Company issued 261,139 shares of
common stock in connection with a 4% stock dividend to shareholders of
record on February 25, 1994. On March 26, 1993 the Company issued
252,784 shares (as adjusted for stock dividend and stock split) of
common stock in connection with a 4% stock dividend to shareholders of
record on February 26, 1993. All references to earnings per share,
stock option plan data and common shares have been adjusted to give
effect to the stock dividends. The stock dividends were accounted for
by transferring approximately $1,567,000 and $2,268,000 from retained
earnings to common stock and capital in excess of par value in 1994 and
1993, respectively.
Stock Split: On September 17, 1993 the Company issued 2,219,621 shares
(as adjusted for stock dividend) of common stock in connection with a
three for two stock split payable in the form of a 50% stock dividend
to shareholders of record on August 16, 1993. The stock split was
accounted for by transferring approximately $214,000 from additional
paid in capital to common stock. All
-68-
<PAGE>
<PAGE>
references to earnings per share, stock option plan data and common
shares have been adjusted to give effect to the stock split.
Earnings (Loss) Per Share: Earnings (loss) per share is computed based
upon the weighted average number of common shares and common share
equivalents outstanding. Common share equivalents consist of dilutive
common stock options, common stock subscribed to under the Employee
Stock Purchase Plan and common stock warrants, net of assumed buy-back.
The computation of fully diluted earnings (loss) per share does not
materially differ from that presented in the consolidated statements of
operations. Earnings (loss) per share amounts are based on 7,382,000,
6,850,000 and 6,843,000 average shares outstanding (including common
stock equivalents) for 1995, 1994 and 1993, respectively.
2. ACQUISITIONS
On October 14, 1993, the Company acquired Codar Technology, Inc.
(Codar) via a merger of a wholly-owned subsidiary with and into Codar
for approximately $6.5 million consisting of cash and notes payable.
Additional costs incurred pursuant to the transaction resulted in a
final total acquisition cost of approximately $7.6 million. The Company
increased its term loan borrowings by $7.5 million in conjunction with
the acquisition. The excess of the total acquisition cost over the fair
value of net assets acquired, amounting to approximately $5.4 million,
is being amortized using the straight line method over 20 years.
On January 13, 1993, the Company acquired all of the outstanding common
stock of Lynwood Scientific Developments Limited (Lynwood), a U.K.
company, for approximately $4 million in cash, 330,497 shares (adjusted
for stock dividends and stock split) of common stock and warrants to
purchase 39,000 shares of common stock at a price of $8.89 per share.
The common stock was valued at approximately $1.1 million based on an
appraisal by an investment company. The cash portion of the purchase
price was paid from existing cash balances. The excess of the total
acquisition cost over the fair value of net assets acquired, amounting
to approximately $3.7 million, is being amortized using the straight
line method over 20 years.
Each of the acquisitions was accounted for as a purchase and the
operating results of each are included in the consolidated statements
of operations from the date of acquisition.
The following unaudited pro-forma consolidated results of operations
assume that these acquisitions occurred on January 1, 1993 and reflect
the historical operations of the purchased businesses adjusted for
increased interest expense as a result of borrowings, reduced interest
income as a result of cash utilization and increased depreciation and
amortization net of applicable income taxes resulting from the
acquisitions.
<TABLE>
<CAPTION>
(in thousands, except per share data) 1993
----
<S> <C>
Net sales $ 92,870
Net earnings $ 3,894
Earnings per share $ 0.57
========
</TABLE>
The pro-forma results of operations are not necessarily indicative of
the actual results of operations that would have occurred had the
purchases been made at the beginning of the period, or of results which
may occur in the future.
-69-
<PAGE>
<PAGE>
3. ACCOUNTS RECEIVABLE
Accounts receivable at December 31 consisted of the following:
<TABLE>
<CAPTION>
(in thousands) 1995 1994
-------------- ---- ----
<S> <C> <C>
Amounts receivable from United States Government
Amounts billed $ 3,764 $ 4,008
Unbilled contract receivables 2,004 1,629
-------- --------
5,768 5,637
Amounts receivable from others
Amounts billed 7,729 6,728
Unbilled contract receivables 380 276
8,109 7,004
13,877 12,641
Allowance for doubtful accounts (142) (133)
-------- --------
$ 13,735 $ 12,508
======== ========
</TABLE>
Unbilled contract receivables represent revenue earned but not yet
billed to customers at year end. The Company expects that substantially
all such amounts will be billed and collected within one year. The
Company has one contract which, under its terms, will result in a
maximum unbilled receivable of approximately $1,400,000 in late 1996 or
early 1997. This amount is expected to be fully collected in 1997 as
the Company begins to make deliveries under this contract.
-70-
<PAGE>
<PAGE>
4. INVENTORIES
Inventories at December 31, summarized by major classification, were as
follows:
<TABLE>
<CAPTION>
(in thousands) 1995 1994
-------------- ---- ----
<S> <C> <C>
Raw materials and components $ 8,159 $ 9,698
Work-in-process 4,121 3,849
Finished goods 477 662
Unliquidated progress payments (762) (157)
------- --------
$11,995 $ 14,052
======= ========
</TABLE>
5. OTHER CURRENT ASSETS
Other current assets at December 31 consisted of the following:
<TABLE>
<CAPTION>
(in thousands) 1995 1994
-------------- ---- ----
<S> <C> <C>
Prepaid insurance $ 219 $ 482
Other prepaid expenses 594 389
------- --------
$ 813 $ 871
======= ========
</TABLE>
6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at December 31 consisted of the
following:
<TABLE>
<CAPTION>
(in thousands) 1995 1994
-------------- ---- ----
<S> <C> <C>
Land $ 1,306 $ 1,612
Buildings 1,900 3,302
Machinery and equipment 8,829 8,185
Furniture and fixtures 679 635
Leasehold improvements 317 279
------- --------
13,031 14,013
Less accumulated depreciation and amortization (7,680) (6,356)
------- --------
$ 5,351 $ 7,657
======= ========
</TABLE>
-71-
<PAGE>
<PAGE>
7. RESTRUCTURING
On April 8, 1994 the Company announced that as part of its transition
from the design and manufacture of computer peripherals toward both
producing and integrating computer systems, it would close its
Hauppauge, New York based Military Products Division and transfer the
division's operations to its Codar facility in Longmont, Colorado. As a
direct result of the above, during the first quarter of 1994 the
Company recorded a $9,500,000 charge, of which $7,300,000 was
classified as a restructuring charge and $2,200,000 was charged to cost
of sales. The major components of the $7.3 million restructuring charge
relate to employee expense ($2,731,000), disposition of assets
($2,000,000), inventory write downs on discontinued products
($1,120,000), idle facility costs ($590,000) and lease termination
costs ($370,000). The major components of the $2.2 million charge to
cost of sales pertain to inventory write-offs related primarily to
excess start-up costs associated with the NST-II production. The
transfer of operations to Colorado was substantially completed by the
fourth quarter of 1994.
At December 31, 1995 the restructuring liability totaled $153,000,
comprised principally of lease termination costs.
8. OTHER ACCRUED EXPENSES - CURRENT
Other accrued expenses - current at December 31, 1995, consisted of the
following:
<TABLE>
<CAPTION>
(in thousands) 1995 1994
-------------- ---- ----
<S> <C> <C>
Customer advances $ 1,143 $ -
Employee benefits 756 1,599
Restructuring 153 981
Insurance payable 168 305
Purchase liabilities 453 682
Warranty 658 348
Deferred revenue 589 763
Contract losses 583 -
Taxes, other than income 365 -
Interest 162 -
Moving expense 513 -
Other 833 1,757
------- --------
$ 6,376 $ 6,435
======= ========
</TABLE>
-72-
<PAGE>
<PAGE>
9. DEBT
Long term debt at December 31 consisted of the following:
<TABLE>
<CAPTION>
(in thousands) 1995 1994
-------------- ---- ----
<S> <C> <C>
Secured revolving credit with quarterly
step-downs of $500 in 1996 with interest
at prime plus 1 3/4% $15,175 $ 9,175
Midland Bank PLC, secured 5 year business term loan, monthly principal
installments of `L'7,257 (approximately $11,000) through July
1995 with interest at 2% above the
U.K. base rate (6.25% at December 31, 1994) - 80
Notes payable, generally secured by specified
machinery and equipment, with interest at
rates ranging from 8.875% to 12.43% 388 680
Industrial Development Bond, payable in monthly principal installments
of $4,775 through February 1999 with interest at 70% of prime,
repaid in 1995
(8.5% at December 31, 1994) - 234
12% Convertible Subordinated Promissory
Notes due January 15, 2001 2,500 -
------- --------
18,063 10,169
Original issue discount on 12% Notes (313) -
Less current installments (2,177) (2,179)
------- --------
$15,573 $ 7,990
======= ========
</TABLE>
Aggregate principal payments for the five years subsequent to December
31, 1995 are as follows:
<TABLE>
<S> <C>
1996 $ 2,177,000
1997 3,144,000
1998 3,067,000
1999 7,175,000
2000 -
thereafter 2,500,000
--------------
$ 18,063,000
==============
</TABLE>
-73-
<PAGE>
<PAGE>
Effective February 15, 1996 the Company entered into an amendment to
its credit agreement with its bank lenders which amended and extended
the payment provisions contained therein and reset certain financial
covenants on more favorable terms for the Company. The revised credit
agreement provides for quarterly principal payments of $500,000,
beginning on March 31, 1996, and payments of $750,000 beginning on
March 31, 1997 and paid through December 31, 1998. The remaining
principal balance is due on January 15, 1999. Interest is payable
monthly at the rate of 1 3/4% above prime. The loan covenants require
that the Company maintain certain minimum levels of net worth, current
ratio and quick ratio. They also limit capital expenditures and the
payment of cash dividends.
In November and December 1995, the Company borrowed an aggregate of
$2,500,000 and agreed that the loans would be converted into
convertible debt in conjunction with the anticipated sale of 12%
Convertible Subordinated Promissory Notes. Such loans are recorded as
Convertible Subordinated Promissory Notes as of December 31, 1995 in
the Company's financial statements.
On February 15, 1996, February 23, 1996 and February 29, 1996, the
Company issued an aggregate of $8,242,000 of 12% Convertible
Subordinated Promissory Notes due January 15, 2001 and warrants to
purchase an aggregate of 2,060,500 shares of the Company's Common
Stock. The Notes are convertible by the holders into shares of Common
Stock at a conversion price equal to $2.00 per share, subject to
adjustment if the Company fails to meet certain earnings thresholds and
in certain other events. Interest on the Notes is payable quarterly in
arrears on January 15, April 15, July 15 and October 15 of each year,
commencing April 15, 1996. The Notes mature on January 15, 2001. The
Notes may be prepaid by the Company without premium or penalty at any
time after January 15, 1999. The Notes are unsecured obligations of the
Company and contain certain restrictions on the Company including
relating to a negative pledge of the Company's assets not otherwise
encumbered by the holders of the senior indebtedness.
In addition to the Warrants noted above, the Company issued 2,024,200
Warrants to the lead investor and placement agent. All Warrants entitle
the holders thereof to purchase shares of Common Stock at any time and
from time to time on or before February 15, 2002, at an exercise price
equal to $2.50 per share of Common Stock, subject to adjustment in
certain events. The Warrants are detachable and separately
transferable. The Warrants are valued at $0.50 per share. Such value
was derived based upon an evaluation by an independent third party.
Such evaluation included a review of both current and historical stock
price data, the lack of liquidity afforded to the Warrants, the results
of various quantitative methodologies, the Company's financial position
and historical and projected cash flows. The Warrants issued in
conjunction with the Notes are recorded as original issued discount on
the Company's balance sheet. The Warrants issued to the lead investor
and the placement agent are recorded as deferred debt expense on the
Company's balance sheet.
The Company's U.K. subsidiary has a credit facility (sterling
overdraft) with a U.K. bank. The credit facility amounts to 'L'600,000
(approximately $938,000) and bears interest at 2 1/4% above the U.K.
base rate (6 3/4% at December 31, 1995). This facility is renewable in
March 1996. The maximum month end borrowings under the credit facility
during the years ended December 31, 1995 and 1994 were `L'84,000 and
`L'355,000 (approximately $130,000 and $555,000, respectively). The
average short term borrowings for the years ended December 31, 1994 and
1993 were `L'19,000 and `L'89,000 (approximately $30,000 and $139,000,
respectively). The weighted average interest rate during the years
ended December 31, 1995 and 1994 was 8.88% and 7.23%, respectively.
-74-
<PAGE>
<PAGE>
10. OTHER ACCRUED EXPENSES - NON-CURRENT
Other Accrued Expenses - non-current at December 31 consisted of the
following:
<TABLE>
<CAPTION>
(in thousands) 1995 1994
-------------- ---- ----
<S> <C> <C>
Supplemental retirement plan $ 1,235 $ 899
Other taxes 748 0
Deferred compensation 498 623
------- --------
$ 2,481 $ 1,522
======= ========
</TABLE>
The supplemental retirement plan is described in Note 13.
In 1981, the Company entered into agreements with two former officers
which provide for the payments to each of $25,000 per year, adjusted
for the cumulative effects of inflation from inception of the
agreement, over a period of 15 years. Such deferred compensation
payments commenced on January 1, 1990. The 1996 payment to each of the
former officers will be approximately $40,800.
11. INCOME TAXES
The Company and its domestic subsidiaries file a consolidated Federal
income tax return. The provision for income taxes consisted of the
following items:
<TABLE>
<CAPTION>
(in thousands) 1995 1994 1993
-------------- ---- ---- ----
<S> <C> <C> <C>
Current:
Federal $ - ($ 4,286) $ 2,407
State - - 362
Foreign 377 (446) 181
-------- -------- --------
377 (4,732) 2,950
-------- -------- --------
Deferred:
Federal - 360 (110)
State - - -
Foreign - (20) -
-------- -------- --------
- 340 (110)
-------- -------- --------
Total income tax expense (benefit) $ 377 ($ 4,392) $ 2,840
======== ======== ========
</TABLE>
-75-
<PAGE>
<PAGE>
The tax effects of temporary differences that gave rise to significant
portions of the net deferred tax asset and (liability) at December 31,
1995, and 1994 are as follows:
<TABLE>
<CAPTION>
(in thousands) 1995 1994
-------------- ---- ----
<S> <C> <C>
Deferred tax assets:
Net operating loss carry forward $ 3,335 $ -
AMT credit carry forward 319 545
Restructure 52 333
Inventories 1,422 356
Supplemental retirement 317 268
Accrued vacation 146 127
Deferred compensation 195 236
Other 224 114
Valuation allowance (5,626) (1,601)
-------- -------
$ 384 $ 378
======== =======
Deferred tax liabilities:
Plant and equipment ($ 384) ($ 372)
Other - (6)
-------- -------
(384) (378)
$ - $ -
======== ========
</TABLE>
The Company has recorded a valuation allowance to reflect the estimated
amount of deferred tax assets which, more likely than not, will not be
realized.
-76-
<PAGE>
<PAGE>
The sources of the deferred tax provision and the related tax effect
for the years ended December 31, 1995, 1994 and 1993 are as follows:
<TABLE>
<CAPTION>
(in thousands) 1995 1994 1993
-------------- ---- ---- ----
<S> <C> <C> <C>
Net operating loss carry forward ($ 3,335) $ - $ -
AMT credit carry forward 227 (545) -
Accelerated depreciation for
tax purposes 12 (142) (77)
Decrease (increase) in inventory
reserves (1,066) 235 (8)
Deferred compensation 41 (4) 2
Supplemental retirement (50) (96) (79)
Accrued restructure costs 282 (333) -
Accrued vacation (19) 148 (11)
Other (117) (524) 63
Valuation allowance 4,025 1,601 -
--------- --------- --------
$ - $ 340 ($ 110)
========= ========= =========
</TABLE>
A reconciliation of the provision for income taxes computed at the
Federal statutory rate to the actual provision for income taxes is as
follows:
<TABLE>
<CAPTION>
(in thousands) 1995 1994 1993
-------------- ---- ---- ----
<S> <C> <C> <C>
Expected tax expense (benefit) ($ 3,822) ($ 5,434) $ 2,820
Increases (decreases) resulting from:
Adjustment of prior years' income taxes (350) (665) (264)
State income taxes, net of
Federal benefit - - 239
Non-deductible expenses 278 167 143
Other 246 (61) (98)
Valuation allowance 4,025 1,601 -
--------- --------- --------
Actual income tax expense (benefit) $ 377 ($ 4,392) $ 2,840
========= ========= ========
</TABLE>
At December 31, 1995 the retained earnings of the Company's foreign
subsidiary were negative. No United States income tax impact pertaining
to the foreign subsidiary has been reflected in the Company's financial
statements.
-77-
<PAGE>
<PAGE>
12. SHAREHOLDERS' EQUITY
The Company has two stock option plans - the 1991 Stock Option Plan and
the 1993 Stock Option Plan for Directors - which together cover 773,448
shares of common stock which may be issued pursuant to the plans to key
employees and directors.
The 1991 Stock Option Plan covers 617,448 shares. Options under the
1991 Stock Option Plan are non-qualified stock options and are granted
at the option price fixed by the Compensation Committee of the Board of
Directors but in no event may the option price be less than the fair
market value of a share of common stock on the date of grant. Options
under the 1991 Stock Option Plan have such term as is fixed by the
Compensation Committee but no option may be exercised during the first
year after its date of grant or after the expiration of ten years from
its date of grant.
The 1993 Stock Option Plan for Directors covers 156,000 shares. Options
under the Directors' Plan are non-qualified stock options and are
granted in increments of 1,560 shares upon each non-employee director's
election or re-election to the Board of Directors. The option price is
equal to the fair market value of a share of common stock on the date
of grant. Options are granted for a term of ten years and become
exercisable eleven months after their date of grant. In no event may an
option be exercised after the expiration of the term of such option.
Full payment of the exercise price under all stock option plans may be
made in cash or in shares of common stock valued at the fair market
value thereof on the date of exercise. The Company's policy is that
such shares must have been acquired by the optionee at least six months
prior to the exercise date. In 1995 and 1994, all payments were made in
cash. In 1993, 38,345 shares were received as payment for the exercise
price of options. In 1993, 36,288 shares were withheld from employee
stock option exercises to cover required income tax withholdings. Such
shares, with a fair market value of $338,000, were retired by the
Company.
-78-
<PAGE>
<PAGE>
Employee Stock Option Plans
The following is a summary of activity related to all stock option
plans:
<TABLE>
<CAPTION>
Number Weighted average
of option price
shares per share
<S> <C> <C>
Outstanding at January 1, 1993 583,341 4.01
Granted 237,130 8.63
Exercised (168,227) 3.02
Expired/canceled (34,293) 4.63
------- ----
Outstanding at December 31, 1993 617,951 6.20
Granted 498,998 5.28
Exercised (30,472) 2.62
Expired/canceled (424,126) 7.60
-------- ----
Outstanding at December 31, 1994 662,351 4.77
Granted 515,000 2.43
Exercised (37,962) 1.93
Expired/canceled (486,656) 4.81
-------- ----
Outstanding at December 31, 1995 652,733 3.06
======= ====
</TABLE>
At December 31, 1995, 80,289 options were exercisable and 803,731
shares were reserved for issuance under all stock option plans.
Warrants
At December 31, 1995, there were 40,560 warrants outstanding which are
exercisable at $8.55 per share. The warrants expire January 13, 1996.
There were also 1,825,000 warrants outstanding which are exercisable at
$2.50 per share. The warrants expire February 15, 2002.
In 1993, warrants to purchase 148,481 (as adjusted) shares of common
stock at an exercise price of $4.14 per share were exercised. The
Company and the warrant holder agreed to issue 83,165 shares which
represented 95% of the appreciation on the warrants as measured by the
fair market value of the common stock at the date of exercise ($10.12
per share).
-79-
<PAGE>
<PAGE>
Employee Stock Purchase Plan
Under the 1992 Employee Stock Purchase Plan, which commenced July 1,
1992, employees may subscribe to purchase shares of common stock at the
lesser of 85% of the market price on the first day of the purchase
period or the date purchased one year later. Payment for the shares is
made through payroll deductions of up to 5% of annual base pay over a
one year period. A total of 113,177 shares has been reserved for
issuance under the Employee Stock Purchase Plan and as of December 31,
1995, 49,063 shares have been issued pursuant to the plan. The
following is a summary of employee stock purchase plan activity:
<TABLE>
<CAPTION>
Number of Price
Shares Range
<S> <C> <C>
Outstanding at January 1, 1993 30,623 $ 4.45
Subscriptions 27,253 7.02
Purchases (25,365) 4.45
Cancellations (8,971) 4.45-7.02
------- ----
Outstanding at December 31, 1993 23,540 $ 7.02
Subscriptions 31,410 3.13
Purchases (9,828) 3.13
Cancellations (22,202) 3.13-7.02
------- ----
Outstanding at December 31, 1994 22,920 $ 3.13
Subscriptions - -
Purchases (13,870) 3.13
Cancellations (9,050) 3.13
--------- --------
Outstanding at December 31, 1995 - -
========= ========
</TABLE>
At December 31, 1995 there was an outstanding loan which an employee
received from the Company in the amount of approximately $12,000 for
the exercise of previously granted stock options. The note bears
interest at approximately 7% and is collateralized by the stock issued
and is due in 1997. The note is presented as a reduction to
shareholders' equity in the Company's Financial Statements.
-80-
<PAGE>
<PAGE>
13. EMPLOYEE BENEFIT PLANS
Pension Plan
Until December 1995, when the plan was terminated and all assets were
distributed, the Company had a noncontributory defined benefit pension
plan covering all eligible employees. The plan provided for normal
retirement at age 65, or at least age 62 with 30 years of service, and
optional early retirement.
In December 1993, the Board of Directors approved an amendment to the
pension plan which resulted in the freezing of all future benefits
under the plan as of January 3, 1994. As a result, in 1993, the Company
recognized a gain of $362,000 which substantially offset the pension
expense for 1993.
The Company's funding policy was to make annual contributions to the
extent such contributions were actuarially determined and tax
deductible. Pension expense (income) for 1995, 1994 and 1993 was
$3,000, $(5,000) and $367,000, respectively.
The following table sets forth the funded status of the Company's
defined benefit pension plan at December 31, 1995, 1994 and 1993:
<TABLE>
<CAPTION>
(in thousands) 1995 1994 1993
-------------- ---- ---- ----
<S> <C> <C> <C>
Accumulated benefit obligation,
including vested benefits of
$2,473 and $3,493 in 1994 and 1993 $ - ($ 2,473) ($ 3,715)
======== ========== =========
Projected benefit obligation - (2,473) (3,715)
Plan assets at fair value - 2,515 3,727
-------- ---------- ---------
Plan assets greater (less) than
projected benefit obligation - 42 12
Unrecognized transition asset - - -
Unrecognized net (gain) loss - (24) -
-------- ---------- ---------
Prepaid pension asset $ - $ 18 $ 12
======== ========== =========
Net pension expense is comprised of the following:
Service cost $ - $ 9 $ 373
Interest cost 171 208 270
Return on assets (94) 35 (175)
Net amortization and deferral (74) (257) (101)
-------- ---------- ---------
Net pension expense $ 3 ($ 5) $ 367
- --------- ======== ========== =========
</TABLE>
Prepaid pension costs are included in other non-current assets. The
actuarial computations assume a discount rate on benefit obligations of
7.25% in 1994 and 6% in 1993. The expected long-term rate of return on
plan assets was 6% in 1994 and 9% in 1993. Pension Plan assets were
primarily invested in short and intermediate term cash investments,
corporate bonds and common and preferred stock. No compensation
increases were assumed in 1994 and 1993.
-81-
<PAGE>
<PAGE>
Supplemental Retirement Plan
In 1991 the Company adopted the NAI Technologies Supplemental
Retirement Plan which is a non-qualified, unfunded pension plan under
which the Company will pay supplemental pension benefits to certain
officers. The expense related to this plan amounted to $146,000,
$281,000 and $232,000 in 1995, 1994 and 1993, respectively. The pension
cost for this plan is based on substantially the same actuarial methods
and economic assumptions as those used for the defined benefit pension
plan for 1994 and 1993. In 1995, the actuarial computations assume a
discount rate of 6.75% on benefit obligations and an assumed
compensation increase of 5%. Such benefits will be paid from the
Company's assets and not from retirement plan assets.
The following table sets forth the funded status and cost components of
the Company's supplemental retirement plan at December 31, 1995, 1994
and 1993:
<TABLE>
<CAPTION>
(In thousands) 1995 1994 1993
-------------- ---- ---- ----
<S> <C> <C> <C>
Accumulated benefit obligation including
vested benefits of $1,215 only in 1995 $ 1,221 ($ 899) ($ 706)
======== ========== =========
Projected benefit obligation for service
rendered to date (1,442) (1,224) (1,047)
Plan assets at fair value - - -
-------- ---------- ---------
Projected benefit obligation in excess
of plan assets (1,442) (1,224) (1,047)
Unrecognized prior service cost 332 360 388
Unrecognized net loss 178 77 153
Adjustment required to recognize
minimum liability (289) (112) (200)
-------- ---------- ---------
Unfunded accrued supplementary costs ($ 1,221) ($ 899) ($ 706)
======== ========== =========
Net pension expense is comprised of the following:
Service cost $ 25 $ 156 $ 134
Interest cost 93 84 63
Net amortization and deferral 28 41 35
Net pension expense $ 146 $ 281 $ 232
======== ========== =========
</TABLE>
The unfunded accrued supplementary costs are included in other
long-term accrued expenses.
-82-
<PAGE>
<PAGE>
Retirement Savings Plan
The Company has a voluntary Retirement Savings Plan for all eligible
employees which provides for basic (up to 15% of compensation) employee
contributions. In 1993, the Company's policy was to provide a matching
provision equal to 100% of the first 3% of the employee's basic
contribution. In December 1993, the Board of Directors approved an
amendment to the Retirement Savings Plan which increased the matching
provision to 100% of the first 3% and 50% of the second 3% of the
employee's basic contribution effective January 3, 1994. Effective
August 20, 1994, the Board of Directors suspended the matching
provisions. Plan participants may invest in a combination of equity,
fixed income and money market funds. The Company's 1994 and 1993
contributions under the totaled $365,143 and $386,000, respectively. No
contributions were made in 1995.
The plan also provides for a discretionary profit sharing contribution
as determined by the Board of Directors, which is contributed to each
of the participant's individual accounts. There was no contribution for
1995 or 1994. In 1993, the Company provided $128,000 for a profit
sharing contribution.
14. INFORMATION BY GEOGRAPHIC AREA
Information about the Company's foreign operations and export sales is
provided in the following table. Export revenue is foreign revenue
produced by identifiable assets located in the United States while
foreign revenue is generated by identifiable assets located in foreign
countries.
In order to achieve an appropriate sharing of operating results between
the Company's subsidiaries, transfers between geographic areas are
accounted for on the basis of a mark-up of manufacturing costs.
Operating earnings are total sales less operating expenses. In
computing operating earnings, none of the following items has been
added or deducted: general corporate expenses, interest income,
interest expense and income taxes.
Identifiable assets are those assets of the Company that are identified
with the operations in each geographic area. Corporate assets consisted
primarily of cash and cash equivalents, property, plant and equipment
and notes receivable.
-83-
<PAGE>
<PAGE>
NAI TECHNOLOGIES, INC. AND SUBSIDIARIES
INFORMATION BY GEOGRAPHIC AREA
<TABLE>
<CAPTION>
Years ending December 31,
(in thousands) 1995 1994 1993
-------------- ---- ---- ----
<S> <C> <C> <C>
SALES TO UNAFFILIATED CUSTOMERS:
United States $ 47,329 $ 40,692 $ 63,661
Export 1,786 2,723 4,637
United Kingdom 10,893 11,105 12,726
--------- ---------- ---------
Total $ 60,008 $ 54,520 $ 81,024
========= ========== =========
TRANSFERS BETWEEN GEOGRAPHIC AREAS:
United States $ 831 $ 787 $ 1,011
Europe 0 11 9
--------- ---------- ---------
Total $ 831 $ 798 $ 1,020
========= ========== =========
TOTAL SALES:
United States $ 48,160 $ 41,479 $ 64,672
Export 1,786 2,723 4,637
United Kingdom 10,893 11,116 12,735
Eliminations (831) (798) (1,020)
--------- ---------- ---------
Total $ 60,008 $ 54,520 $ 81,024
========= ========== =========
OPERATING EARNINGS (LOSS):
United States ($ 6,232) ($ 11,068) $ 10,617
Europe 1,226 (1,232) 798
--------- ---------- ---------
Subtotal (5,006) (12,300) 11,415
Corporate expenses and other (3,869) (2,289) (2,455)
--------- ---------- ---------
Total operating earnings (loss) (8,875) (14,589) 8,960
Net interest expense & other (2,367) (1,394) (665)
--------- ---------- ---------
Earnings (loss) before income taxes ($ 11,242) ($ 15,983) $ 8,295
========= ========== =========
IDENTIFIABLE ASSETS:
United States $ 34,103 $ 33,795 $ 48,226
Europe 8,283 8,761 8,038
--------- ---------- ---------
Subtotal 42,386 42,556 56,264
Corporate and other 5,626 11,164 4,451
--------- ---------- ---------
Total $ 48,012 $ 53,720 $ 60,715
========= ========== =========
</TABLE>
-84-
<PAGE>
<PAGE>
15. INFORMATION BY BUSINESS SEGMENT
The Company's operations are classified into two business segments:
Electronic Systems and Telecommunications. The Electronic Systems
segment includes Codar Technology, Inc. based in Longmont, Colorado,
NAI Technologies -- Systems Division Corporation in Columbia, Maryland,
and Lynwood Scientific Developments Limited in Farnham, England.
Codar Technology designs, manufactures, integrates and supports rugged
computer systems, advanced computer peripherals and memory systems for
military and commercial use. Systems provides custom packaged,
integrated computer systems for deployment in shelters, ships, land
vehicles and other demanding environments. Lynwood supplies rugged,
environmentally and electrically screened personal computers and
workstations based upon standard commercial off the shelf technology,
targeted to the military and government markets principally in Europe.
With the exception of the U.S. Government, which accounted for
$22,665,000 or 44% of the Electronic Systems segment's 1995 sales, no
single customer accounted for greater than 10% of the Segment's sales.
The Telecommunications segment currently consists of Wilcom, Inc. in
Laconia, New Hampshire. Wilcom designs and manufactures products for
use in the telephone industry. Wilcom's customer base includes the
regional Bell operating companies and independent telephone companies.
Three such customers accounted for 26%, 23% and 13%, respectively, of
the Telecommunications segment's 1995 sales.
Inter-segment sales are accounted for on the basis of a mark-up of
manufacturing costs. Operating earnings are total sales less operating
expenses. In computing operating earnings, none of the following items
has been added or deducted: general corporate expenses, interest
income, interest expense and income taxes.
Identifiable assets by segment are those assets of the Company that are
used in the Company's operations in each segment. Corporate assets
consist primarily of cash and cash equivalents, property, plant and
equipment and notes receivable.
-85-
<PAGE>
<PAGE>
NAI TECHNOLOGIES, INC. AND SUBSIDIARIES
INFORMATION BY INDUSTRIAL SEGMENT
<TABLE>
<CAPTION>
Years ending December 31,
(in thousands) 1995 1994 1993
- -------------- ---- ---- ----
<S> <C> <C> <C>
SALES TO UNAFFILIATED CUSTOMERS:
Electronic Systems $ 51,813 $ 46,330 $ 71,202
Telecommunications 8,195 8,190 9,822
--------- --------- ---------
Total $ 60,008 $ 54,520 $ 81,024
========= ========= =========
INTERSEGMENT SALES:
Electronic Systems $ 831 $ 798 $ 1,020
--------- --------- ---------
Total $ 831 $ 798 $ 1,020
========= ========= =========
TOTAL SALES:
Electronic Systems $ 52,644 $ 47,128 $ 72,222
Telecommunications 8,195 8,190 9,822
Eliminations (831) (798) (1,020)
--------- --------- ---------
Total $ 60,008 $ 54,520 $ 81,024
========= ========= =========
OPERATING EARNINGS (LOSS):
Electronic Systems ($ 4,273) ($ 11,788) $ 10,655
Telecommunications (733) (512) 760
--------- --------- ---------
Subtotal (5,006) (12,300) 11,415
Corporate expenses and other (3,869) (2,289) (2,455)
--------- --------- ---------
Total operating earnings (loss) (8,875) (14,589) 8,960
Net interest expense & other (2,367) (1,394) (665)
--------- --------- ---------
Earnings (loss) before income taxes ($ 11,242) ($ 15,983) $ 8,295
========= ========= =========
IDENTIFIABLE ASSETS:
Electronic Systems $ 35,577 $ 35,529 $ 48,198
Telecommunications 6,809 7,027 8,066
--------- --------- ---------
Subtotal 42,386 42,556 56,264
Corporate and other 5,626 11,164 4,451
--------- --------- ---------
Total $ 48,012 $ 53,720 $ 60,715
========= ========= =========
CAPITAL EXPENDITURES:
Electronic Systems $ 746 $ 716 $ 1,326
Telecommunications 120 114 146
--------- --------- ---------
Subtotal 866 830 1,472
Corporate and other 20 105 12
--------- --------- ---------
Total $ 886 $ 935 $ 1,484
========= ========= =========
DEPRECIATION:
Electronic Systems $ 1,680 $ 2,078 $ 2,202
Telecommunications 359 320 288
--------- --------- ---------
Subtotal 2,039 2,398 2,490
Corporate and other 940 37 18
--------- --------- ---------
Total $ 2,979 $ 2,435 $ 2,508
========= ========= =========
</TABLE>
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<PAGE>
<PAGE>
16. COMMITMENTS AND CONTINGENCIES
The Company and its subsidiaries lease office and manufacturing
facilities, automobiles, computers and other equipment under various
non-cancelable operating leases.
Future minimum rental commitments for leases with non-cancelable terms
in excess of one year are as follows:
<TABLE>
<CAPTION>
(in thousands) Amount
-------------------------------------------------------
<S> <C>
1996 $1,629,000
1997 1,108,000
1998 1,043,000
1999 852,000
2000 314,000
2001 and thereafter 4,391,000
-----------
Total minimum lease payments $9,337,000
===========
</TABLE>
With the acquisition of Lynwood, the Company assumed a 25 year
operating lease for office and manufacturing facilities. Annual future
minimum lease payments through the year 2014, which are included in the
above table, amount to approximately $314,000 per year.
Rental expense amounted to $1,725,000, $1,170,000 and $1,132,000 in
1995, 1994 and 1993, respectively. There was no sublease income in
these periods.
Most leases provide for additional payments of real estate taxes,
insurance and other operating expenses applicable to the property,
generally over a base period level. Total rental expense includes such
base period expenses and the additional expense payments as part of the
minimum lease payments.
The Company and its subsidiaries are subject to certain legal actions
which arise in the normal course of business. It is management's belief
that these actions will not have a material effect on the Company's
consolidated financial position.
On or about June 28, 1994, TDA Trading Corp. ("TDA"), individually and
on behalf of a class of persons similarly situated, commenced a
securities fraud class action in the United Stated District Court for
the Eastern District of New York against Robert A. Carlson, Richard A.
Schneider and the Company. TDA commenced its action, entitled TDA
Trading Corp. v. Carlson, et al., by filing a complaint (the
"Complaint") with the Court.
The Complaint principally alleges that the defendants knowingly and/or
recklessly misrepresented to the public that they expected the
Company's 1993 fourth quarter and fiscal year sales and earnings
results to continue to increase at levels substantially above those of
prior years at a time when they supposedly knew but failed to disclose
that the Company's fourth quarter 1993 sales of its Navy Standard
Teleprinter and other products would decrease precipitously. The
Complaint further alleges that, as a result of defendants' alleged
failure to disclose these developments, TDA and other purchasers of
common stock were damaged because, it is alleged, at the time of
purchase the price of common stock had been artificially inflated.
Additionally, the Complaint asserts that at the time
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<PAGE>
<PAGE>
these adverse business developments allegedly became known to
defendants and prior to their dissemination to the public, defendants
Carlson, Schneider and other directors of the Company allegedly sold
shares of common stock owned by them personally at price levels which
TDA claims were higher than the true value of these shares.
As relief, TDA essentially seeks damages in an amount to be proven at
trial, together with costs and expenses, including reasonable
attorneys', accountants' and experts' fees. The Complaint also requests
that the Court declare its action against the Company and the
individual defendants to be a proper class action and certify it as
class representative and plaintiff's counsel as counsel for the class.
On March 24, 1995, the Court granted TDA's motion for class
certification. The litigation is currently in the discovery phase.
The Company believes that it has meritorious defenses to the
allegations and claims set forth in the Complaint and that a finding of
ultimate liability against it, if any, would not have a material
adverse effect on its financial position.
17. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following table sets forth quarterly financial information for 1995
and 1994:
<TABLE>
<CAPTION>
Loss
(in thousands, Net Gross Net per
except per share data) sales margin loss share
<S> <C> <C> <C> <C>
1995
First Quarter $ 12,687 $ 2,518 ($ 1,094) ($ .15)
Second Quarter 14,084 (1,827) (5,805) (.78)
Third Quarter 15,887 1,790 (2,296) (.31)
Fourth Quarter 17,350 2,427 (2,424) (.33)
--------- --------- ---------- --------
Total $ 60,008 $ 4,908 ($ 11,619) ($ 1.57)
========= ========= ========== ========
1994
First Quarter $ 15,516 $ 1,555 ($ 7,340) ($ 1.08)
Second Quarter 14,909 4,258 (374) (0.06)
Third Quarter 12,093 2,666 (831) (0.12)
Fourth Quarter 12,002 1,787 (3,046) (0.43)
--------- --------- ---------- --------
Total $ 54,520 $ 10,266 ($ 11,591) ($ 1.69)
========= ========= ========== ========
</TABLE>
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<PAGE>
<PAGE>
Independent Auditors' Report
on Consolidated Financial Statement Schedule
Board of Directors and Shareholders
NAI Technologies, Inc.:
Under date of March 1, 1996, we reported on the consolidated balance sheets of
NAI Technologies, Inc. and subsidiaries as of December 31, 1995 and 1994, and
the related consolidated statements of operations, shareholders' equity, and
cash flows for each of the years in the three-year period ended December 31,
1995, as contained in the annual report on Form 10-K for the year 1995. In
connection with our audits of the aforementioned consolidated financial
statements, we have also audited the related consolidated financial statement
Schedule II (Valuation and Qualifying Accounts). This financial statement
schedule is the responsibility of the Company's management. Our responsibility
is to express an opinion on this financial statement schedule based on our
audits.
In our opinion, the related financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
KPMG Peat Marwick LLP
Boulder, Colorado
March 1, 1996
-89-
<PAGE>
<PAGE>
Schedule II
NAI TECHNOLOGIES, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
(in thousands of dollars)
- ------------------------------------------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E
- ------------------------------------------------------------------------------------------------------------------------------------
Additions
----------------------------------
(1) (2)
Balance at Charged to Charged to Balance
Beginning Costs Other Accounts Deductions at End
Description of Period and Expenses Describe Describe of Period
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Allowance deducted from
asset to which it applies
Allowance for doubtful accounts:
Year ended December 31, 1995 $ 133 $ 205 $ 0 $ 196 (A) $ 142
Year ended December 31, 1994 172 11 0 50 (A) 133
Year ended December 31, 1993 130 42 99 99 (A) 172
Allowance for inventory obsolescence reserve:
Year ended December 31, 1995 $2,250 $ 2,248 $ 23 $ 985 (B) $ 3,536
Year ended December 31, 1994 4,018 2,031 7 3,806 (B) 2,250
Year ended December 31, 1993 3,322 387 1,429 (C) 1,120 (B) 4,018
</TABLE>
- ------------------------
Note A - Uncollected receivables written off, net of recoveries.
Note B - Obsolete inventory scrapped, net of recoveries.
Note C - Included in the purchase of Codar Technology, Inc. - $563.
Included in the purchase price of Lynwood Scientific Dev. Ltd. - $810.
Included in the purchase of the Tollgrade assets - $56.
-90-
<PAGE>
<PAGE>
GLOSSARY
Definitions of the following terms can be found on the
pages indicated.
<TABLE>
<CAPTION>
Page
<S> <C>
Active Investors....................................................................................................... 2
Additional Units....................................................................................................... 6
Asset Management....................................................................................................... 31
Bank Lenders........................................................................................................... 2
Bank Lenders........................................................................................................... 8
Carlson Employment Agreement........................................................................................... 35
Code................................................................................................................... 45
Commission............................................................................................................. 3
Common Stock........................................................................................................... 5
Common Stock........................................................................................................... 2
Company................................................................................................................ 2
Company................................................................................................................ 4
Complaint.............................................................................................................. 10
Conversion Price....................................................................................................... 5
Court.................................................................................................................. 10
Credit Agreement....................................................................................................... 2
Demand Rights.......................................................................................................... 43
EBITDA................................................................................................................. 5
Events of Default...................................................................................................... 5
Exchange Act........................................................................................................... 3
Exercise Price......................................................................................................... 6
Expiration Date........................................................................................................ 41
Further Units.......................................................................................................... 6
Named Executives....................................................................................................... 32
Nasdaq................................................................................................................. 2
NOLs................................................................................................................... 50
Noteholders............................................................................................................ 2
Notes.................................................................................................................. 5
Notes.................................................................................................................. 2
NST.................................................................................................................... 8
OID.................................................................................................................... 46
original issue discount................................................................................................ 46
Piggy-Back Rights...................................................................................................... 43
Placement Agent's Warrants............................................................................................. 6
Preferred Stock........................................................................................................ 43
Private Placement.........................................................................................................
Proposed Regulations................................................................................................... 47
Qualified Stated Interest.............................................................................................. 46
RBOCs.................................................................................................................. 4
Registrable Securities................................................................................................. 43
Registrant............................................................................................................. 5
Schneider Employment Agreement......................................................................................... 35
Securities Act......................................................................................................... 59
Securities............................................................................................................. 2
</TABLE>
-91-
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
Page
<S> <C>
Selling Securityholders................................................................................................ 2
Service................................................................................................................ 45
Shareholders........................................................................................................... 2
Shares................................................................................................................. 2
Stock Purchase Agreement............................................................................................... 2
TDA.................................................................................................................... 10
TIN.................................................................................................................... 50
Unit................................................................................................................... 45
Units.................................................................................................................. 5
Warrant................................................................................................................ 5
Warrantholders......................................................................................................... 2
Warrants............................................................................................................... 2
</TABLE>
-92-
<PAGE>
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
The estimated expenses in connection with the offering of the Securities
are as follows:
<TABLE>
<S> <C>
SEC registration fee ........................................... $ 14,967.84
Legal fees and expenses ........................................ 55,000.00*
Accounting fees and expenses ................................... 15,000.00*
Miscellaneous expenses ......................................... 5,032.16*
-------------
Total ................................................ $ 90,000.00*
</TABLE>
- ---------------
* Estimated
Item 14. Indemnification of Directors and Officers.
Sections 721-726 of the New York Business Corporation Law provide the following
with respect to the indemnification of directors, officers and employees:
`ss'. 721. Nonexclusivity of statutory provisions for indemnification of
directors and officers.- The indemnification and advancement of expenses granted
pursuant to, or provided by, this article shall not be deemed exclusive of any
other rights to which a director or officer seeking indemnification or
advancement of expenses may be entitled, whether contained in the certificate of
incorporation or the by-laws or, when authorized by such certificate of
incorporation or by-laws, (i) a resolution of shareholders, (ii) a resolution of
directors, or (iii) an agreement providing for such indemnification, provided
that no indemnification may be made to or on behalf of any director or officer
if a judgment or other final adjudication adverse to the director or officer
establishes that his acts were committed in bad faith or were the result of
active and deliberate dishonesty and were material to the cause of action so
adjudicated, or that he personally gained in fact a financial profit or other
advantage to which he was not legally entitled. Nothing contained in this
article shall affect any rights to indemnification to which corporate personnel
other than directors and officers may be entitled by contract or otherwise under
law.
`ss'. 722. Authorization for indemnification and officers.-(a) A corporation may
indemnify any person made, or threatened to be made, a party to an action or
proceeding (other than one by or in the right of the corporation to procure a
judgment in its favor), whether civil or criminal, including an action by or in
the right of any other corporation of any type or kind, domestic or foreign, or
any partnership, joint venture, trust, employee benefit plan or other
enterprise, which any director or officer of the corporation served in any
capacity at the request of the corporation, by reason of the fact that he, his
testator or intestate, was a director or officer of the corporation, or served
such other corporation, partnership, joint venture, trust, employee benefit plan
or other enterprise in any capacity, against judgments, fines, amounts paid in
settlement and reasonable expenses, including attorneys' fees actually and
necessarily incurred as a result of such action or proceeding, or any appeal
therein, if such director or officer acted, in good faith, for a purpose which
he reasonably believed to be in, or, in the case of service for any other
corporation or any partnership, joint venture, trust, employee benefit plan or
other enterprise, not opposed to, the best interests
<PAGE>
<PAGE>
of the corporation and, in criminal actions or proceedings, in addition, had no
reasonable cause to believe that his conduct was unlawful.
(b) The termination of any such civil or criminal action or proceeding by
judgment, settlement, conviction or upon a plea of nolo contendere, or its
equivalent, shall not in itself create a presumption that any such director or
officer did not act, in good faith, for a purpose which he reasonably believed
to be in, or, in the case of service for any other corporation or any
partnership, joint venture, trust, employee benefit plan or other enterprise,
not opposed to, the best interest of the corporation or that he had reasonable
cause to believe that his conduct was unlawful.
(c) A corporation may indemnify any person made, or threatened to be made, a
party to an action by or in the right of the corporation to procure a judgment
in its favor by reason of the fact that he, his testator or intestate, is or was
a director or officer of the corporation, or is or was serving at the request of
the corporation as a director or officer of any other corporation of any type or
kind, domestic or foreign, of any partnership, joint venture, trust, employee
benefit plan or other enterprise, against amounts paid in settlement and
reasonable expenses, including attorneys' fees, actually and necessarily
incurred by him in connection with the defense or settlement of such action, or
in connection with an appeal therein, if such director or officer acted, in good
faith, for a purpose which he reasonably believed to be in, or, in the case of
service for any other corporation or any partnership, joint venture, trust,
employee benefit plan or other enterprise, not opposed to, the best interests of
the corporation, except that no indemnification under this paragraph shall be
made in respect of (1) a threatened action, or a pending action which is settled
or otherwise disposed of, or (2) any claim, issue or matter as to which such
person shall have been adjudged to be liable to the corporation, unless and only
to the extent that the court in which the action was brought, or, if no action
was brought, any court of competent jurisdiction, determines upon application
that, in view of all the circumstances of the case, the person is fairly and
reasonably entitled to indemnity for such portion of the settlement amount and
expenses as the court deems proper.
(d) For the purpose of this section, a corporation shall be deemed to have
requested a person to serve an employee benefit plan where the performance by
such person of his duties to the corporation also imposes duties on, or
otherwise involves services by, such person to the plan or participants or
beneficiaries of the plan; excise taxes assessed on a person with respect to an
employee benefit plan pursuant to applicable law shall be considered fines; and
action taken or omitted by a person with respect to an employee benefit plan in
the performance of such person's duties for a purpose reasonably believed, by
such person to be in the interest of the participants and beneficiaries of the
plan shall be deemed to be for a purpose which is not opposed to the best
interests of the corporation.
`ss`. 723. Payment of indemnification other than by court award.-(a) A person
who has been successful, on the merits or otherwise, in the defense of a civil
or criminal action or proceeding of the character described in section 722 shall
be entitled to indemnification as authorized in such section.
(b) Except as provided in paragraph (a), any indemnification under section 722
or otherwise permitted by section 721, unless ordered by a court under section
724 (Indemnification of directors and officers by a court) shall be made by the
corporation, only if authorized in the specific case:
(1) By the board acting by a quorum consisting of directors who are not parties
to such action or proceeding upon a finding that the director or officer has met
the standard of conduct set forth in section 722 or established pursuant to
section 721, as the case may be, or,
(2) If a quorum under subparagraph (1) is not obtainable or, even if obtainable,
a quorum of disinterested directors so directs:
-2-
<PAGE>
<PAGE>
(A) By the board upon the opinion in writing of independent legal counsel that
indemnification is proper in the circumstances because the applicable standard
of conduct set forth in such sections has been met by such director or officer,
or
(B) By the shareholders upon a finding that the director or officer has met the
applicable standard of conduct set forth in such sections.
(c) Expenses incurred in defending a civil or criminal action or proceeding may
be paid by the corporation in advance of the final disposition of such action or
proceeding upon receipt of an undertaking by or on behalf of such director or
officer to repay such amount as, and to the extent, required by paragraph (a) of
section 725.
`ss'. 724. Indemnification of directors and officers by a court.-(a)
Notwithstanding the failure of a corporation to provide indemnification, and
despite any contrary resolution of the board or of the shareholders in the
specific case under section 723 (Payment of indemnification other than by court
award), indemnification shall be awarded by a court to the extent authorized
under section 722 (Authorization for indemnification of directors and officers),
and paragraph (a) of section 723. Application therefor may be made, in every
case, either:
(1) In the civil action or proceeding in which the expenses were incurred or
other amounts were paid, or
(2) To the supreme court in a separate proceeding, in which case the application
shall set forth the disposition of any previous application made to any court
for the same or similar relief and also reasonable cause for the failure to make
application for such relief in the action or proceeding in which the expenses
were incurred or other amounts were paid.
(b) The application shall be made in such manner and form as may be required by
the applicable rules of court or, in the absence thereof, by direction of a
court to which it is made. Such application shall be upon notice to the
corporation. The court may also direct that notice be given at the expense of
the corporation to the shareholders and such other persons as it may designate
in such manner as it may require.
(c) Where indemnification is sought by judicial action, the court may allow a
person such reasonable expenses, including attorneys' fees, during the pendency
of the litigation as are necessary in connection with his defense therein, if
the court shall find that the defendant has by his pleadings or during the
course of the litigation raised genuine issues of fact or law.
`ss'. 725. Other provisions affecting indemnification of directors and
officers.-(a) All expenses incurred in defending a civil or criminal action or
proceeding which are advanced by the corporation under paragraph (c) of section
723 (Payment of indemnification other than by court award) or allowed by a court
under paragraph (c) of section 724 (Indemnification of directors and officers by
a court) shall be repaid in case the person receiving such advancement or
allowance is ultimately found, under the procedure set forth in this article,
not to be entitled to indemnification or, where indemnification is granted, to
the extent the expenses so advanced by the corporation or allowed by the court
exceed the indemnification to which he is entitled.
(b) No indemnification, advancement or allowance shall be made under this
article in any circumstance where it appears:
(1) That the indemnification would be inconsistent with the law of the
jurisdiction of incorporation of a foreign corporation which prohibits or
otherwise limits such indemnification;
-3-
<PAGE>
<PAGE>
(2) That the indemnification would be inconsistent with a provision of the
certificate of incorporation, a by-law, a resolution of the board or of the
shareholders, an agreement or other proper corporate action, in effect at the
time of the accrual of the alleged cause of action asserted in the threatened or
pending action or proceeding in which the expenses were incurred or other
amounts were paid, which prohibits or otherwise limits indemnification; or
(3) If there has been a settlement approved by the court, that the
indemnification would be inconsistent with any condition with respect to
indemnification expressly imposed by the court in approving the settlement.
(c) If any expenses or other amounts are paid by way of indemnification,
otherwise than by court order or action by the shareholders, the corporation
shall, not later than the next annual meeting of shareholders unless such
meeting is held within three months from the date of such payment, and, in any
event, within fifteen months from the date of such payment, mail to its
shareholders of record at the time entitled to vote for the election of
directors a statement specifying the persons paid, the amounts paid, and the
nature and status at the time of such payment of the litigation or threatened
litigation.
(d) If any action with respect to indemnification of directors and officers is
taken by way of amendment of the by-laws, resolution of directors, or by
agreement, then the corporation shall, not later than the next annual meeting of
shareholders, unless such meeting is held within three months from the date of
such action, and, in any event, within fifteen months from the date of such
action, mail to its shareholders of record at the time entitled to vote for the
election of directors a statement specifying the action taken.
(e) Any notification required to be made pursuant to the foregoing paragraph (c)
or (d) of this section by any domestic mutual insurer shall be satisfied by
compliance with the corresponding provisions of section one thousand two hundred
sixteen of the insurance law.
(f) The provisions of this article relating to indemnification of directors and
officers and insurance therefor shall apply to domestic corporations and foreign
corporations doing business in this state, except as provided in section 1320
(Exemption from certain provisions).
`ss'. 726. Insurance for indemnification of directors and officers.-(a) Subject
to paragraph (b), a corporation shall have power to purchase and maintain
insurance:
(1) To indemnify the corporation for any obligation which it incurs as a result
of the indemnification of directors and officers under the provisions of this
article, and
(2) To indemnify directors and officers in instances in which they may be
indemnified by the corporation under the provisions of this article, and
(3) To indemnify directors and officers in instances in which they may not
otherwise be indemnified by the corporation under the provisions of this article
provided the contract of insurance covering such directors and officers
provides, in a manner acceptable to the superintendent of insurance, for a
retention amount and for co-insurance.
(b) No insurance under paragraph (a) may provide for any payment, other than
cost of defense, to or on behalf of any director or officer:
(1) If a judgment or other final adjudication adverse to the insured director or
officer establishes that his acts of active and deliberate dishonesty were
material to the cause of action so adjudicated, or that he personally gained in
fact a financial profit or other advantage to which he was not legally entitled,
or
-4-
<PAGE>
<PAGE>
(2) In relation to any risk the insurance of which is prohibited under the
insurance law of this state.
(c) Insurance under any or all subparagraphs of paragraph (a) may be included in
a single contract or supplement thereto. Retrospective rated contracts are
prohibited.
(d) The corporation shall, within the time and to the persons provided in
paragraph (c) of section 725 (Other provisions affecting indemnification of
directors or officers), mail a statement in respect of any insurance it has
purchased or renewed under this section, specifying the insurance carrier, date
of the contract, cost of the insurance, corporate positions insured, and a
statement explaining all sums, not previously reported in a statement to
shareholders, paid under any indemnification insurance contract.
(e) This section is the public policy of this state to spread the risk of
corporate management, notwithstanding any other general or special law of this
state or of any other jurisdiction including the federal government.
Paragraph 15 of the Restated Certificate of Incorporation of the Company
provides as follows:
The liability to the Corporation and its shareholders of each and every person
who is at any time a director of the Corporation, in such person's capacity as
such director, is, and shall be, limited and eliminated to the full extent
authorized or permitted by law (as now or hereafter in effect). Any repeal or
modification of this Paragraph shall not adversely affect any right or
protection of any person existing at the time of such repeal or modification.
Section 6.1 of the Amended and Restated By-laws of the Company provides as
follows:
Section 6.1. Indemnification. To the full extent authorized or permitted by law
(as now or hereafter in effect), the Corporation shall indemnify any person who
shall at any time be made or be threatened to be made a party to or otherwise
involved in any civil or criminal action or proceeding by reason of the fact
that such person, or such person's testator or intestate, is or was a director
or officer of the Corporation or by reason of the fact that such director or
officer, at the request of the Corporation, is or was serving any other
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise in any capacity, and the Corporation shall pay the expenses incurred
by any such person in defending any such action or proceeding as such expenses
are incurred, including in advance of the final disposition of such action or
proceeding. Nothing contained herein shall affect any rights to indemnification
to which employees other than directors and officers may be entitled by law. No
amendment or repeal of this Section 6.1 shall apply to or have any effect on any
right to indemnification or advancement of expenses provided hereunder with
respect to any acts or omissions occurring prior to such amendment or repeal.
In furtherance and not in limitation of the powers conferred by statute, the
Corporation may enter into agreements providing indemnification to the full
extent authorized or permitted by law (as now or hereafter in effect) and
including as part thereof provisions with respect to the creation of trust
funds, the granting of security interests and the use of other means (including,
without limitation, letters of credit, surety bonds and other similar
arrangements) to ensure the payment of such amounts as may become necessary to
effect indemnification as provided therein or elsewhere.
-5-
<PAGE>
<PAGE>
Item 15. Recent Sales of Unregistered Securities.
On February 15, 1996, NAI Technologies, Inc., a New York corporation (the
"Registrant"), sold in a private offering 7,235 units (the "Units"), each Unit
consisting of $1,000 principal amount of the Registrant's 12% Convertible
Subordinated Promissory Notes due 2001 (the "Notes") and a detachable warrant
(the "Warrant") to purchase the Registrant's common stock, par value $.10 per
share (the "Common Stock"), at a purchase price of $1,000 per Unit, for an
aggregate purchase price of $7,235,000 to selected qualified investors (the
"Investment Transaction").
On February 23, 1996, the Registrant sold 760 additional Units (the "Additional
Units") for an aggregate purchase price of approximately $760,000 as part of the
Investment Transaction while on February 29, 1996, the Registrant sold 247
additional Units (the "Further Units") for an aggregate purchase price of
approximately $247,000 as part of the Investment Transaction.
On February 15, 1996, Commonwealth Associates, who acted as the Registrant's
Placement Agent in connection with the Investment Transaction, and its designees
purchased for $.001 per warrant, warrants to purchase 723,500 shares of Common
Stock, each at an exercise price of $2.50 per share, subject to adjustment in
certain events (the "Placement Agent's Warrants"). The Placement Agent purchased
100,700 additional warrants on when the Additional Units and the Further Units
were purchased. Commonwealth received a fee equal to 8% of the gross proceeds of
the Investment Transaction together with the reimbursement of accountable
expenses up to $200,000 for its services.
On October 13, 1995 and December 14, 1995, Charles S. Holmes, a director of the
Registrant, purchased two subordinated notes of the Registrant each in the
principal amount of $1,000,000. Such notes were exchanged for 2,000 Units in the
Investment Transaction. Warrants to purchase an aggregate of 1,200,000 shares
were issued to Mr. Holmes for past advisory services in connection with the
Investment Transaction and the engagement of the Commonwealth.
In December 1995 and January 1996, Active Investors II, Ltd. purchased
subordinated notes of the Registrant in the aggregate principal amount of
$900,000. C. Shelton James, a director of the Registrant, is the President and a
director of Active Investors II, Ltd. Such notes were exchanged for 900 Units in
the Investment Transaction. On May 2, 1996, Active Investors II, Ltd. purchased
an additional 100 Units as part of the Investment Transaction. Active Investors
II, Ltd. and certain affiliated limited partnerships currently own approximately
5.57% of the Registrant's Common Stock.
The foregoing securities were issued and sold in the Investment Transaction in
accordance with Section 4(2) of the Securities Act of 1933, as amended.
In April 1995, The Bank of New York and Chemical Bank each received 125,000
shares of Common Stock in connection with the execution of the Amended and
Restated Credit Agreement dated as of April 12, 1995 between such entities and
the Registrant. No further consideration was given for such shares. Such
issuance was made in accordance with Section 4(2) of the Securities Act of 1933,
as amended.
On November 3, 1994, Active Investors II, Ltd. purchased 363,636 shares of
Common Stock of the Registrant for $1,000,000 in cash. Such sale was made in
accordance with Section 4(2) of the Securities Act of 1933, as amended.
Item 16. Exhibits and Financial Statement Schedules.
(a) Exhibits:
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<PAGE>
<TABLE>
<S> <C>
3.1 Restated Certificate of Incorporation of the Company (incorporated
by reference to Exhibit 3(a) to the Registrant's Quarterly Report on
Form 10-Q for the quarterly period ended June 29, 1991).
3.2 Amended and Restated By-laws (incorporated by reference to Exhibit
3(b) to the Registrant's Quarterly Report on Form 10-Q for the
quarterly period ended June 29, 1991).
4.1 Form of 12% Convertible Subordinated Promissory Note, due January
15, 2001, of the Registrant (incorporated by reference to Exhibit 1
to the Registrant's Current Report on Form 8-K dated February 15,
1996 filed with the Commission).
4.2 Form of Warrant to Purchase Common Stock of the Registrant, on or
before February 15, 2002 (incorporated by reference to Exhibit 2 to
the Registrant's Current Report on Form 8-K dated February 15, 1996
filed with the Commission).
5 Opinion of Whitman Breed Abbott & Morgan.
10.1 Amended and Restated Credit Agreement among the Registrant and Chemical Bank,
a New York banking corporation ("Chemical"), The Bank of New York, a New
York Banking corporation ("BNY"), and each of the other financial institutions
which from time to time becomes a party thereto (together with Chemical and BNY,
the "Banks"), BNY, as administrative agent, and Chemical as collateral agent
(incorporated by reference to Exhibit 10 to the Registrant's Annual Report on Form
10-K for the fiscal year ended December 31, 1994 filed with the Commission).
10.2 First Amendment, dated as of August 14, 1995, to the Amended and Restated Credit
Agreement, dated as of April 12, 1995, among the Registrant and the Bank Lenders
(incorporated by reference to Exhibit 10.5 to the Registrant's Quarterly Report on
Form 10-Q for the quarterly period ended September 30, 1995 filed with the
Commission).
10.3 Second Amendment, dated as of October 13, 1995, to the Amended and Restated
Agreement, dated as of April 12, 1995, among the Registrant and the Bank Lenders
(incorporated by reference to Exhibit 10.6 to the Registrant's Quarterly Report on
Form 10-Q for the quarterly period ended September 30, 1995 filed with the
Commission).
10.4 Third Amendment, dated as of November 6, 1995, to the Amended and Restated
Credit Agreement, dated as of April 12, 1995, among the Registrant and the Bank
Lenders (incorporated by reference to Exhibit 10.7 to the Registrant's Quarterly
Report on Form 10-Q for the quarterly period ended September 30, 1995 filed with
the Commission).
10.5 Fourth Amendment, dated as of January 5, 1996, to Amended and Restated Credit
Agreement, dated as of April 12, 1995, as previously amended, among the
Registrant, Chemical Bank and BNY (incorporated by reference to Exhibit 6 to the
Registrant's Current Report on Form 8-K dated February 15, 1996 filed with the
Commission).
10.6 Fifth Amendment, dated as of February 13, 1996, to Amended and Restated Credit
Agreement, dated as of April 12, 1995, as previously amended (the "Credit
Agreement"), among the Registrant, Chemical Bank and BNY (incorporated by
reference to Exhibit 7 to the Registrant's Current Report on Form 8-K dated
February 15, 1996 filed with the Commission).
10.7 Amendment No. 1 to Registration Rights Agreement, dated as of February 13,
1996, to that certain Registration Rights Agreement, dated as of April 12, 1995, as
amended, between the Registrant and BNY and Chemical (incorporated by reference
to Exhibit 8 to the Registrant's Current Report on Form 8-K dated February 15,
1996 filed with the Commission).
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
10.8 Securities Purchase Agreement, dated as of October 13, 1995, by and between the
Registrant and Charles S. Holmes (incorporated by reference to Exhibit 10.1 to the
Registrant's Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 1995 filed with the Commission).
10.9 12% Subordinated Promissory Note due 1996 of the Registrant (incorporated by
reference to Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 1995 filed with the Commission).
10.10 Placement Agency Agreement dated as of December 14, 1995, between the
Company and Commonwealth Associates (incorporated by reference to Exhibit 2 to
the Registrant's Current Report on Form 8-K dated February 15, 1996 filed with the
Commission).
4.3 Registration Rights Agreement, dated as of February 13, 1996,
between the Registrant and the Noteholders and Warrantholders
(incorporated by reference to Exhibit 4 to the Registrant's Current
Report on Form 8-K dated February 15, 1996 filed with the Commission).
10.11 Employment Agreement, dated as of October 16, 1995, between the Registrant and
Robert A. Carlson (incorporated by reference to Exhibit 10.3 to the Registrant's
Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1995
filed with the Commission).
10.12 Employment Agreement, dated as of October 16, 1995, between the Registrant and
Richard A. Schneider (incorporated by reference to Exhibit 10.4 to the Registrant's
Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1995
filed with the Commission).
10.13 Agreement, dated January 13, 1993, among the shareholders of Lynwood and the
Registrant, including the form of warrant delivered in connection therewith
(incorporated by reference to Exhibit 1 to the Registrant's Report on Form 8-K
dated January 13, 1993 filed with the Commission).
12 Computation of Ratios.
21 List of Subsidiaries (incorporated by reference to
the Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1995).
23.1 Consent of KPMG Peat Marwick LLP.
23.2 Consent of Whitman Breed Abbott & Morgan (included in Exhibit 5).
24 Power of Attorney (included in Part II of this Registration Statement).
</TABLE>
(b) Financial Statement Schedules:
Schedule II -- Valuation and Qualifying Accounts (included on pages 89
and 90 of this Registration Statement).
Schedules not listed above have been omitted either because they are not
applicable or the required information is shown in the Consolidated Financial
Statements or Notes thereto.
Item 17. Undertakings.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of
the Securities Act of 1933;
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<PAGE>
<PAGE>
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the Registration Statement (or the most
recent post-effective amendment thereof) which, individually or in
the aggregate, represent a fundamental change in the information set
forth in the Registration Statement;
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the Registration
Statement or any material change to such information in the
Registration Statement;
provided, however, that paragraphs (l)(i) and (l)(ii) do not apply if
the information required to be included in a post-effective amendment by
those paragraphs is contained in periodic reports filed by the
Registrant pursuant to Section 13 or Section 15(d) of the Securities
Exchange Act of 1934 that are incorporated by reference in the
Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at
the termination of the offering.
(4) That, for purposes of determining any liability under the
Securities Act of 1933, each filing of the Registrant's annual report
pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of
1934 that is incorporated by reference in the Registration Statement
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the provisions
described under Item 15 above, or otherwise, the Registrant has been
advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the
Securities Act of 1933 and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than
the payment by the Registrant of expenses incurred or paid by a
director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the
securities being registered, the Registrant will, unless in the opinion
of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the
Securities Act of 1933 and will be governed by the final adjudication of
such issue.
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<PAGE>
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as
amended, the Company certifies that it has reasonable grounds to believe that it
meets all of the requirements for filing on Form S-1 and has duly caused this
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the Town of Longmont, State of Colorado, on the 13th day of
May, 1996.
NAI TECHNOLOGIES, INC.
By /s/ Robert A. Carlson
--------------------------
Robert A. Carlson
Chairman and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below hereby constitutes and appoints Robert A. Carlson and Richard A.
Schneider, and each of them, his true and lawful attorneys-in-fact and agents
with full power of substitution and resubstitution, for him and in his name,
place and stead, in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this Registration Statement, and to
file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto such
attorneys-in-fact and agents full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as they might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, or any of them, or their substitutes, may lawfully do or cause to be
done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as
amended, this Registration Statement has been signed below by the following
persons, in the capacities indicated, on May 13, 1996.
By /s/ Robert A. Carlson
-----------------------------
Robert A. Carlson
Chairman and Chief Executive Officer
and Director (principal executive officer)
By /s/ Richard A. Schneider
-----------------------------
Richard A. Schneider
Executive Vice President, Treasurer,
Chief Financial Officer, Secretary
and Director (principal financial
and accounting officer)
By /s/ Stephen A. Barre
-----------------------------
Stephen A. Barre
Director
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<PAGE>
<PAGE>
By /s/ C. Shelton James
-----------------------------
C. Shelton James
Director
By /s/ Charles S. Holmes
-----------------------------
Charles S. Holmes
Director
By
-----------------------------
Edward L. Hennessy
Director
By /s/ Dennis McCarthy
-----------------------------
Dennis McCarthy
Director
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STATEMENT OF DIFFERENCES
The registered trademark symbol shall be expressed as............. `r'
The symbol for the British currency pound shall be expressed as....`L'
The section symbol shall be expressed as...........................`ss'
<PAGE>
<PAGE>
[Letterhead of Whitman Breed Abbott & Morgan]
May 15, 1996
NAI Technologies Inc.
2405 Trade Centre Avenue
Longmont, Colorado 80503-7602
Re: Securities of NAI Technologies, Inc.
Gentlemen:
We refer to the Registration Statement on Form S-1 (the "Registration
Statement") under the Securities Act of 1933, as amended (the "Securities Act"),
filed by NAI Technologies Inc., a New York corporation (the "Company"), with the
Securities and Exchange Commission (the "Commission"). The Registration
Statement covers an aggregate of up to (i) $8,342,000 principal amount of 12%
Convertible Subordinated Promissory Notes due 2001 (the "Notes") of the Company
by the holders thereof (the "Noteholders"), (ii) Warrants to Purchase Common
Stock (the "Warrants") of the Company by the holders thereof (the
"Warrantholders"), and (iii) an aggregate of 8,904,336 shares (the "Shares") of
common stock, par value $.10 per share (the "Common Stock"), of the Company by
the holders thereof (the "Shareholders"), consisting of (1) 4,171,000 shares of
Common Stock which may be issued upon the conversion of the Notes (the
"Noteholders' Shares"), (2) 4,119,700 shares of Common Stock which may be issued
upon the exercise of the Warrants (the "Warrantholders' Shares"), (3) 250,000
shares of Common Stock of the Company previously issued to The Bank of New York
and Chemical Bank (the "Bank Lenders") pursuant to that certain Amended and
Restated Credit Agreement, dated as of April 12, 1995, as amended to date (the
"Credit Agreement"), by and between the Company and the Bank Lenders (the "Bank
Lenders' Shares"), and (4) 363,636 shares of Common Stock of the Company
previously issued to Active Investors II Ltd. ("Active Investors") pursuant to
that certain Common Stock Purchase Agreement, dated as of November 3, 1994 (the
"Stock Purchase Agreement"), by and between the Company and Active ("Active's
Shares").
We are attorneys admitted to practice in the State of New York and we
are not, and do not purport to be, experts in the law of any other jurisdiction
other than Federal law. The opinions set forth in this opinion letter are
limited to the law of the State of New York and Federal law.
We have examined the original, or a photostatic or certified copy, of
such records of the Company, certificates of public officials and such other
documents as we have deemed relevant and necessary as the basis for the opinion
set forth below. In such examination, we have assumed the genuineness of all
signatures, the authenticity of all documents submitted to us as originals, the
conformity to original documents of all documents submitted to us as certified
or photostatic copies and the authenticity of the originals of such copies.
Based upon our examination mentioned above, subject the assumptions
stated and relying on statements of fact contained in the documents that we have
examined, we are of the opinion that (i) the Notes issued and
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<PAGE>
sold by the Company to the Noteholders were duly authorized for issuance and are
validly issued and are binding obligations of the Company, (ii) the Warrants
issued and sold by the Company to the Warrantholders were duly authorized for
issuance and are validly issued, (iii) the Noteholders' Shares were duly
authorized for issuance and are presently reserved for issuance upon conversion
of the Notes and upon issuance in accordance with the terms thereof will be
validly issued, fully paid and non-assessable, (iv) the Warrantholders' Shares
were duly authorized for issuance and are presently reserved for issuance upon
exercise of the Warrants and upon issuance in accordance with the terms thereof
will be validly issued, fully paid and non-assessable, (v) the Bank Lenders'
Shares were duly authorized for issuance and are validly issued, fully paid and
non-assessable and (vi) Active's Shares were duly authorized for issuance and
are validly issued, fully paid and non-assessable.
We consent to the filing of this opinion as an Exhibit to the
Registration Statement. In giving this consent, we do not admit that we are
within the category of persons whose consent is required under section 7 of the
Securities Act or the General Rules and Regulations of the Commission.
Very truly yours,
WHITMAN BREED ABBOTT & MORGAN
<PAGE>
<PAGE>
NAI TECHNOLOGIES, INC.
RATIO OF EARNINGS TO FIXED CHARGES
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
FIRST QUARTER YEAR ENDED DECEMBER 31,
-------------------------- ----------------------------------------
1995 1996 1991 1992 1993 1994 1995
------- ----- ------ ------ ------ -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Income (loss from continuing operations).......... ($1,094) ($450) $3,900 $5,051 $5,455 ($11,591) ($11,619)
Income taxes (benefit)............................. 86 135 1,684 2,920 2,840 (4,392) 377
------- ----- ------ ------ ------ -------- --------
Income (loss) from continuing operations before
income taxes..................................... (1,008) (315) 5,584 7,971 8,295 (15,983) (11,242)
------- ----- ------ ------ ------ -------- --------
Add fixed charges:
Interest expense............................... 394 565 782 619 786 1,477 1,662
Deferred debt expense.......................... -- 55 -- -- -- -- 900
------- ----- ------ ------ ------ -------- --------
Total fixed charges................................ 394 620 782 619 786 1,477 2,562
------- ----- ------ ------ ------ -------- --------
Total income (loss) and fixed charges.............. ($ 614) $ 305 $6,366 $8,590 $9,081 ($14,506) ($ 8,680)
------- ----- ------ ------ ------ -------- --------
------- ----- ------ ------ ------ -------- --------
Ratio.............................................. (1.56) 0.49 8.14 13.88 11.55 * *
------- ----- ------ ------ ------ -------- --------
------- ----- ------ ------ ------ -------- --------
</TABLE>
- ------------
* Earnings are inadequate to cover fixed charges. The coverage deficiency is
$1,008 for the 1st quarter of 1995, $315 for the 1st quarter of 1996,
$15,983 for 1994 and $11,242 for 1995.
<PAGE>
<PAGE>
INDEPENDENT AUDITORS' CONSENT
We consent to the inclusion in this Registration Statement on Form S-1 of NAI
Technologies, Inc. of our report dated March 1, 1996, with respect to the
consolidated financial statements of NAI Technologies, Inc. and subsidiaries for
the year ended December 31, 1995, and to the reference to us under the heading
"Experts" in the Prospectus, which is part of this Registration Statement.
KPMG Peat Marwick LLP
Jericho, New York
May 15, 1996
<PAGE>
