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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Fiscal Year Ended
December 31, 1995
Commission File Number 0-3704
NAI TECHNOLOGIES, INC.
A New York Corporation IRS Employer I.D. No. 11-1798773
2405 Trade Centre Avenue, Longmont, Colorado 80503-7602
Telephone No. (303) 776-5674
Securities Registered Pursuant to Section 12 (b) of the Act: None
Securities Registered Pursuant to Section 12 (g) of the Act:
Common Stock, Par Value $0.10 Per Share
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. (X)
As of March 8, 1996, 7,459,437 common shares were outstanding and the aggregate
market value of the common shares (based on the average bid and asked price of
these shares on The Nasdaq Stock Market as of March 7, 1996) of NAI
Technologies, Inc. held by non-affiliates was approximately $18 million.
Documents Incorporated by Reference: None.
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NAI TECHNOLOGIES, INC.
1995 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
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Page
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PART I
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Item 1. Business...................................................................3
Item 2. Properties.................................................................10
Item 3. Legal Proceedings..........................................................10
Item 4. Submission of Matters to a Vote of Security Holders........................11
PART II
Item 5. Market for Registrant's Common Stock
and Related Stockholder Matters...........................................12
Item 6. Selected Financial Data....................................................13
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................................14
Item 8. Consolidated Financial Statements and Supplementary Data...................20
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure........................................20
PART III
Item 10. Directors and Executive Officers of the Registrant.........................21
Item 11. Executive Compensation.....................................................23
Item 12. Security Ownership of Certain Beneficial Owners and Management............27
Item 13. Certain Relationships and Related Transactions.............................29
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K................................................................29
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PART I
ITEM 1.
BUSINESS
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.
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.
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.
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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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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,
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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 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
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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 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.
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Foreign sales for the past three years have been as follows:
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APPROXIMATE
TOTAL PERCENT OF
FOREIGN SALES COMPANY SALES
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1995.........................$ 12,679,000 21%
1994...........................13,828,000 25%
1993...........................17,363,000 21%
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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 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.
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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, 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.
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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.
ITEM 2.
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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FACILITIES
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APPROXIMATE
FLOOR AREA EXPIRATION
DIVISION OR SUBSIDIARY LOCATION (IN SQ. FT.) DATE
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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) --
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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.
ITEM 3.
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
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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 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.
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
A Special Meeting of Shareholders of NAI Technologies, Inc. was held in
Longmont, Colorado, on February 1, 1996. On the record date for the Special
Meeting, December 15, 1995, there were 7,459,437 shares of Common Stock issued
and outstanding and entitled to vote. A quorum of 6,648,551 shares, representing
approximately 89.1% of the total votes, were represented by proxy or in person
and entitled to vote at the Special Meeting.
Three proposals, subject to shareholder approval, were approved at the Special
Meeting by a vote of the shareholders. The first proposal was to approve an
investment transaction and the issuance by the Company of certain debt
securities and warrants convertible or exercisable into or for approximately
8,000,000 shares of the Company's Common Stock to investors in a proposed
private placement which will result in the potential issuance of more than 20%
of the Company's Common Stock and may result in a change of control of the
Company. The proposal was carried with 3,972,295 favorable votes which
represented 89.3% of the Common Stock present at the Special Meeting and voting.
471,621 shares were voted against the proposal and 42,828 abstained.
The second proposal was to increase the number of common shares authorized, and
to amend the Company's Certificate of Incorporation to increase the number of
authorized shares of Common Stock from 10,000,000 to 25,000,000. The proposal
was carried with 6,110,601 favorable votes, which represented 89.3% of
outstanding Common Stock. 495,122 shares were voted against the proposal and
42,828 abstained.
The third proposal was to ratify the appointment of KPMG Peat Marwick, Certified
Public Accountants, as independent auditors to the Company for the year 1995.
The proposal was carried with 6,573,075 favorable votes, which represented 88.1%
of the outstanding Common Stock. 46,526 shares were voted against the proposal
and 28,619 abstained.
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PART II
ITEM 5.
MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's 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.
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Period High Low
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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
Fourth Quarter 4 1/8 2 3/16
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There have been no cash dividends declared or paid on the Common Stock in the
above two years. The Company's existing credit agreement restricts cash
dividends. A 4% stock dividend on the Common Stock was paid to shareholders of
record on February 25, 1994.
As of December 31, 1995, there were approximately 700 record holders of Common
Stock as determined from the records of the transfer agent, American Stock
Transfer & Trust Company. 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.
-12-
<PAGE>
<PAGE>
ITEM 6.
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
(in thousands except per share data)
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net sales $60,008 $ 54,520 $81,024 $67,315 $59,412
Operating earnings (loss)( 1) (8,875) (14,589) 8,960 8,407 6,308
Net earnings (loss)(1) (11,619) (11,591) 5,455 5,051 3,900
Per share data:
Net earnings (loss)(3) (1.57) ( 1.69) 0.80 0.80 0.63
Cash dividends(2) -- -- -- -- -
Total assets at year end 48,012 53,720 60,715 43,704 33,817
Long-term debt 15,573 13,990 10,797 7,158 5,017
Working capital 10,044 16,665 19,105 17,094 14,134
Shareholders' equity 10,086 20,296 30,593 23,911 18,897
Average market price per
common share at year end(3) $1 1/2 $2 11/16 $6 1/4 $8 3/16 $4 9/16
Average common shares(3) 7,382 6,580 6,843 6,309 6,222
</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>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations
Recent Operating History
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.
-15-
<PAGE>
<PAGE>
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 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
- -----------------------------------------------------------------------0----
<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 its credit
agreement with its bank lenders which amended and extended the payment
provisions contained therein and reset certain financial convenants 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. There are also limits on capital expenditure 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 12% Convertible Subordinated Promissory Notes due
January 15, 2001 (the "Notes") and warrants to purchase an aggregate of
2,060,500 shares of the Company's Common Stock (the "Warrants"). 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
-18-
<PAGE>
<PAGE>
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>
ITEM 8.
CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following consolidated financial statements of the registrant are submitted
herewith at the end of this document beginning on Page F-1:
Independent Auditors' Report.
Consolidated balance sheets at December 31, 1995 and 1994.
Consolidated statements of operations for the years ended December 31, 1995,
1994 and 1993.
Consolidated statements of shareholders' equity for the years ended December 31,
1995, 1994 and 1993.
Consolidated statements of cash flows for the years ended December 31, 1995,
1994 and 1993.
Notes to consolidated financial statements.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
-20-
<PAGE>
<PAGE>
PART III
ITEM 10.
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors of the Company
The members of the Board of Directors of the Company as of March 28, 1996,
together with certain information furnished to the Company by each such person
as of such date, are set forth below.
<TABLE>
<CAPTION>
Years Served
Name and Age as a Director Biographical Summary
- ------------ ------------- --------------------
<S> <C> <C>
Robert A. Carlson (1), 62 8 Mr. Carlson is Chairman and Chief
Executive Officer of the Company. From
December 1987 until December 1989, he
was President and Chief Operating
Officer of the Company. From December
1989 to October 1995, he was President
and Chief Executive Officer of the
Company.
Richard A. Schneider 1, 43 3 Mr. Schneider is Executive Vice
President, Treasurer 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.
Stephen A. Barre (2,3), 56 6 Mr. Barre is Chairman and Chief
Executive Officer of Servo Corporation
of America, a communications and defect
detection company.
C. Shelton James (1,3), 55 6 Mr. James is 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 which is
the general partner of limited
partnerships which are substantial
investors in the Company, and he is on
the board of directors of Harris
Computer Systems, Inc., SK
Technologies, and CPSI, Inc.
</TABLE>
-21-
<PAGE>
<PAGE>
<TABLE>
<S> <C> <C>
Edward L. Hennessy, Jr. (2), 68 1 month Mr. Hennessy is the retired Chairman
and Chief Executive Officer of Allied
Signal, Inc. He also is a director of
The Bank of New York, Lockheed Martin
Corp., National Association of
Manufacturers, and Fundamental
Management Corporation. He was elected
a director of the Company on March 6,
1996.
Charles S. Holmes (1,2), 51 6 months A director of the Company since October 3,
1995, Mr. Holmes is President and sole
stockholder of Asset Management Associates
of New York, Inc., 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
Vice 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.
Dennis McCarthy (3), 49 1 month Mr. 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.
</TABLE>
- ------------------------
1) Member of the Executive Committee
2) Member of the Compensation Committee
3) Member of the Audit Committee
Messrs. Walter Lipkin, John M. May and Robert D. Rosenthal resigned as
directors on October 3, 1995, February 15, 1996 and February 15,
1996, respectively.
-22-
<PAGE>
<PAGE>
Executive Officers of the Company
The current executive officers of the Company are as follows:
Robert A. Carlson, 62, is the Chairman and Chief Executive Officer of the
Company. From December 1987 until December 1989, he was President and Chief
Operating Officer of the Company. From December 1989 until October 1995, he was
President and Chief Executive Officer of the Company.
Richard A. Schneider, 43, is the Executive Vice President, Treasurer and
Secretary of the Company. 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.
ITEM 11.
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 $100,000 (collectively, the "Named
Executives") for each of the Company's last three fiscal years.
<TABLE>
<CAPTION>
Long Term Compensation
-----------------------------------------------
Annual Compensation Awards Payouts
---------------------------------------------------------------------------------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Securities
Other Annual Restricted Underlying All Other
Name and Principal Fiscal Compensation Stock Options/ LTIP Compensation
Position Year Salary($) Bonus($) ($)(1) Award(s)($) SARs (#) Payouts ($)
- ----------------------------------------------------------------------------------------------------------------------------------
<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 President, 1994 149,000 -- -- -- 94,389(4) -- 12,426(3)
Treasurer and Secretary 1993 138,000 27,380 -- -- 23,442 -- 13,993(3)
- ----------------------------------------------------------------------------------------------------------------------------------
</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 $0 of matching
contributions made by the Company under the profit sharing portion of such
plan for the benefit of Mr. Schneider for each of the years 1993, 1994 and
1995, respectively.
-23-
<PAGE>
<PAGE>
(4) Options to acquire shares of Common Stock that were granted in fiscal year
1994. At the same time, options for Mr. Carlson (102,951 shares) and Mr.
Schneider (54,996 shares) were canceled.
(5) Options to acquire shares of Common Stock that were granted in fiscal year
1995. At the same time, options for Mr. Carlson (214,485 shares) and Mr.
Schneider (95,327 shares) were cancelled.
Stock Options
The table below summarizes the options granted to the Named Executives in 1995
and their potential realizable values.
Option/SAR Grants in 1995
<TABLE>
<CAPTION>
Potential Realizable
Value of
Assumed Annual
Rates of Stock Price
Appreciation
Individual Grants for Option Term(1)
- ------------------------------------------------------------------------ -----------------------
(a) (b) (c) (d) (e) (f) (g)
Number of % of Total
Securities Options/SARs
Underlying Granted to
Options/SARs Employees Exercise or
Granted (#) in Fiscal Base Expiration
Name Year Price ($/Sh) Date 5% ($) 10% ($)
- ------------------- -------------- ----------- ------------- ----------- ----------- -----------
<S> <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. 125,000(3) 24% $2.50 5 years $ - $ 88,316
Schneider
Executive Vice
President
Treasurer and
Secretary
</TABLE>
- ------------------------
(1) Option price 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 $1.81.
-24-
<PAGE>
<PAGE>
The table below summarizes the exercise of stock options during 1995 for the
Named Executives.
Aggregated Option/SAR Exercises in 1995 and FY-End Option/SAR Values
<TABLE>
<CAPTION>
(a) (b) (c) (d) (e)
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options/SARs Options/SARs
at FY-End (#) at FY-End ($)
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.
-25-
<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 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.
-26-
<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.
ITEM 12.
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 8, 1996. The information in the table below is based upon
information furnished to the Company by such persons and statements filed with
the Securities and Exchange 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 Promissory 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 Promissory 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
-27-
<PAGE>
<PAGE>
ownership percentage is calculated as if such Warrants and Notes had been
converted as of March 8, 1996.
Shares of Common Stock beneficially owned as of March 8, 1996 by each director
and executive officer of the Company and by all directors and executive officers
of the Company as a 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 Securities and Exchange 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 8, 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 8, 1996.
(4) Excludes Warrants to purchase 1,700,000 shares of Common Stock and
Promissory 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 Promissory 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.
-28-
<PAGE>
<PAGE>
PART IV
ITEM 13.
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 "Investment 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 therefore. In connection with the Holmes
Transaction, Mr. Holmes became a director of the Company in October 1995. In
connection with the Investment 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 past 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 Investment 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
therefore. 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 Investment Transaction, 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. Hennessey, Jr. was designated to serve in such capacity by Active Investors,
and each became a director of the Company on March 6, 1996.
ITEM 14.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements and Financial Statement Schedules
The consolidated financial statements and schedules listed in the
accompanying index to financial statements are filed as part of this Annual
Report on Form 10-K.
(b) Reports on Form 8-K
A Form 8-K was filed with the Commission on February 26, 1996 to report that
the Company had completed a private placement of $7,995,000 aggregate
principal amount of 12% Convertible Subordinated Promissory Notes and had
entered into a Fifth Amendment to the Credit Agreement which amended and
extended the provisions therein.
(c) Exhibits
21 List of Subsidiaries
23 Accountants' Consent
27 Financial Data Schedules (Edgar filing only)
(d) Not applicable.
-29-
<PAGE>
<PAGE>
S I G N A T U R E S
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
NAI TECHNOLOGIES, INC.
By: /s/ Richard A. Schneider
---------------------------
Richard A. Schneider
Date: March 28, 1996 Executive Vice President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the date indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Robert A. Carlson Chairman, Chief Executive March 28, 1996
- ------------------------ Officer and Director
(Robert A. Carlson) (Chief Executive Officer)
/s/ Stephen Barre Director March 28, 1996
- ------------------------
(Stephen Barre)
/s/ Edward L. Hennessy, Jr. Director March 28, 1996
- -------------------------------
(Edward L. Hennessy, Jr.)
/s/ Charles S. Holmes Director March 28, 1996
- ---------------------------
(Charles S. Holmes)
/s/ C. Shelton James Director March 28, 1996
- ------------------------
(C. Shelton James)
/s/ Dennis McCarthy Director March 28, 1996
(Dennis McCarthy)
/s/ Richard A. Schneider Executive Vice President, March 28, 1996
- -------------------------- CFO, Treasurer,
(Richard A. Schneider) Secretary and Director
(Chief Financial and
Accounting Officer)
</TABLE>
-30-
<PAGE>
<PAGE>
NAI TECHNOLOGIES, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report F-2
Consolidated Balance Sheets at December 31, 1995 and 1994 F-3
Consolidated Statements of Operations - Years ended F-4
December 31, 1995, 1994 and 1993
Consolidated Statements of Shareholders' Equity - F-5
Years ended December 31, 1995, 1994 and 1993
Consolidated Statements of Cash Flows - Years ended F-6
December 31, 1995, 1994 and 1993
Notes to Consolidated Financial Statements F-7
Independent Auditors Report F-29
Consolidated Financial Statement Schedules:
II - Valuation and Qualifying Accounts F-30
</TABLE>
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.
F-1
<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
F-2
<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.
F-3
<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 83 121
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.
F-4
<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 -- 913 -- -- -- 913
with debt offering
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.
F-5
<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 consolidate financial statements are an
integral part of these statements
F-6
<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 and compares such to
current business levels and future expectations. Adjustments to the
carrying values of inventory are made when considered necessary.
F-7
<PAGE>
<PAGE>
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 references to earnings per share, stock
option plan data and common shares have been adjusted to give effect to
the stock split.
F-8
<PAGE>
<PAGE>
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.
F-9
<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.
F-10
<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>
F-11
<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>
F-12
<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 (pound)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
F-13
<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 (pound)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 (pound)84,000 and
(pound)355,000 (approximately $130,000 AND $555,000, respectively). The
average short term borrowings for the years ended December 31, 1994 and
1993 were (pound)19,000 and (pound)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.
F-14
<PAGE>
<PAGE>
10. OTHER ACCRUED EXPENSES - NON-CURRENT
Other Accrued Expenses - non-current at December 31 consisted of the
following:
</TABLE>
<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>
F-15
<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.
F-16
<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.
F-17
<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.
F-18
<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).
F-19
<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.
F-20
<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.
F-21
<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.
F-22
<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.
F-23
<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>
F-24
<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.
F-25
<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>
F-26
<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>
(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 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.
F-27
<PAGE>
<PAGE>
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>
F-28
<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
F-29
<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.
F-30
STATEMENT OF DIFFERENCES
The British Pound Sterling symbol shall be expressed as 'L'
<PAGE>
<PAGE>
Exhibit 21
LIST OF SUBSIDIARIES
The following are subsidiaries of the Company, respective jurisdictions of their
incorporation and names (if any) under which they do business. The Company owns
all of the voting securities of each subsidiary.
<TABLE>
<CAPTION>
NAME UNDER WHICH
JURISDICTION OF SUBSIDIARY DOES
NAME INCORPORATION BUSINESS
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
NAI Technologies-- New York NAI Systems Division
Systems Division Corporation
Wilcom, Inc. New York Wilcom, Inc.
Lynwood Scientific United Kingdom Lynwood
Developments Ltd.
Arathon V.I., Inc. U.S. Virgin Islands Arathon
Codar Technology, Inc. Colorado Codar
</TABLE>
<PAGE>
<PAGE>
Exhibit 23
INDEPENDENT AUDITORS' CONSENT
THE BOARD OF DIRECTORS
NAI TECHNOLOGIES, INC.:
We consent to incorporation by reference in the registration statements (Nos.
33-85957, 33-24073, 33-46868, 33-57324, 33-66666 and 33-66664) on Form S-8 of
NAI Technologies, Inc. of our reports dated March 1, 1996, relating to 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, and related financial statement
schedule, which reports appear in the December 31, 1995, annual report on Form
10-K of NAI Technologies, Inc.
KPMG PEAT MARWICK LLP
Boulder, Colorado
March 1, 1996
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 2,605
<SECURITIES> 0
<RECEIVABLES> 13,735
<ALLOWANCES> 0
<INVENTORY> 11,995
<CURRENT-ASSETS> 29,532
<PP&E> 13,031
<DEPRECIATION> (7,680)
<TOTAL-ASSETS> 48,012
<CURRENT-LIABILITIES> 19,488
<BONDS> 15,573
<COMMON> 746
0
0
<OTHER-SE> 9,340
<TOTAL-LIABILITY-AND-EQUITY> 48,012
<SALES> 60,008
<TOTAL-REVENUES> 60,008
<CGS> 55,100
<TOTAL-COSTS> 68,883
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,367
<INCOME-PRETAX> (11,242)
<INCOME-TAX> 377
<INCOME-CONTINUING> (11,619)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (11,619)
<EPS-PRIMARY> (1.57)
<EPS-DILUTED> 0
</TABLE>
