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Registration No. 333-3837
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM S-1/A4
AMENDMENT NO. 4
TO
REGISTRATION STATEMENT
under
THE SECURITIES ACT OF 1933
NAI TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
New York 3575 11-1798773
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or Classification Code Number) Identification Number)
organization)
2405 Trade Centre Avenue
Longmont, Colorado 80503
(303) 776-5674
(Address, including zip code, and telephone number, including area
code, of registrant's principal executive offices)
Richard A. Schneider
NAI Technologies, Inc.
2405 Trade Centre Avenue
Longmont, Colorado 80503
(303) 776-5674
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copy to:
Sarah Hewitt, Esq.
Whitman Breed Abbott & Morgan
200 Park Avenue
New York, New York 10166
(212) 351-3000
Approximate date of commencement of proposed sale to the public: From time
to time after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. /X/
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(b)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED AUGUST 22, 1996
PROSPECTUS
12% Convertible Subordinated Promissory Notes Due 2001
4,119,700 Warrants to Purchase Common Stock
8,904,336 Shares of Common Stock
NAI TECHNOLOGIES, INC.
This Prospectus relates to the offering from time to time of up to (i)
$6,342,000 principal amount of 12% Convertible Subordinated Promissory Notes due
2001 (the "Notes") of NAI Technologies, Inc. (the "Company") by the holders
thereof (the "Noteholders"), (ii) 4,119,700 Warrants to Purchase Common Stock
(the "Warrants") of the Company by the holders thereof (the "Warrantholders")
and the exercise of the Warrants by subsequent holders thereof, and (iii) an
aggregate of 8,904,336 shares (the "Shares") of common stock, par value $.10 per
share (the "Common Stock"), of the Company by the holders thereof (the
"Shareholders"), consisting of (1) 3,171,000 shares of Common Stock which may be
issued upon the conversion of the Notes, (2) 4,119,700 shares of Common Stock
which may be issued upon the exercise of the Warrants, (3) 1,000,000 shares of
Common Stock (the "Holmes Shares") previously issued to Charles S. Holmes upon
the conversion of a Note in the aggregate unpaid principal amount of $2,000,000
held by him, (4) 250,000 shares of Common Stock of the Company previously issued
to The Bank of New York and Chemical Bank (the "Bank Lenders") pursuant to that
certain Amended and Restated Credit Agreement, dated as of April 12, 1995, as
amended to date (the "Credit Agreement"), by and between the Company and the
Bank Lenders, and (5) 363,636 shares of Common Stock of the Company previously
issued to Active Investors II Ltd. ("Active Investors") pursuant to that certain
Common Stock Purchase Agreement, dated as of November 3, 1994 (the "Stock
Purchase Agreement"), by and between the Company and Active. The Noteholders,
the Warrantholders, the Shareholders, the Bank Lenders and Active are sometimes
collectively referred to as the "Selling Securityholders." The Notes, the
Warrants and the Shares are sometimes collectively referred to as the
"Securities." The Company will not receive any of the proceeds from the sale of
the Securities by the Selling Securityholders. The Company is paying the
expenses of registration of the Securities.
The Notes are subordinated to all existing and future Senior Indebtedness
(as hereinafter defined) of the Company, including indebtedness under the Credit
Agreement. See "DESCRIPTION OF SECURITIES -- Subordination."
It is anticipated that sales of the Securities will be made in one of three
ways: (i) through broker-dealers, (ii) through agents or (iii) directly to one
or more purchasers. The period of distribution of the Securities may occur over
an extended period of time. See "PLAN OF DISTRIBUTION."
The Common Stock of the Company is traded on The Nasdaq Stock Market
("Nasdaq") under the symbol NATL. On August 20, 1996, the closing price of the
Common Stock on Nasdaq was $3.813 per share. The Company intends to list the
Warrants on Nasdaq but does not intend to list the Notes on Nasdaq or any
securities exchange. Prior to this offering, there has been no public market for
the Notes or the Warrants offered hereby and no assurance can be given that one
will develop after the commencement of this Offering. See "DESCRIPTION OF
SECURITIES--Trading Information."
See "Risk Factors" beginning on page 8 for a discussion of certain factors
that should be considered in connection with an investment in the Securities.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION NOR HAS THE SECURITIES AND
EXCHANGE COMMISSION, OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
The date of this Prospectus is August __, 1996.
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AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information filed by the Company may be inspected and
copied at the public reference facilities maintained by the Commission at 450
Fifth Street, N.W., Room 1024, Washington, D.C. 20549, and at its New York
Regional Office, 7 World Trade Center, New York, New York 10048 and at its
Chicago Regional Office, Suite 1400, 500 West Madison Street, Chicago, Illinois
60661-2511. Copies of such material may also be obtained from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549, at prescribed rates. In addition, copies of such reports, proxy
statements and other information concerning the Company may also be inspected
and copied at the offices of The Nasdaq Stock Market at 1735 K Street, N.W.,
Washington, D.C. 20006-1506 on which the Common Stock is traded.
TABLE OF CONTENTS
Page
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AVAILABLE INFORMATION...................................................... 2
TABLE OF CONTENTS.......................................................... 2
SUMMARY.................................................................... 4
RISK FACTORS............................................................... 8
USE OF PROCEEDS............................................................ 12
CAPITALIZATION............................................................. 13
DIVIDEND POLICY............................................................ 13
SELECTED FINANCIAL DATA.................................................... 14
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS........................... 15
THE COMPANY................................................................ 25
MANAGEMENT................................................................. 35
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT............. 42
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............................. 44
DESCRIPTION OF SECURITIES.................................................. 45
CERTAIN FEDERAL INCOME TAX CONSEQUENCES.................................... 51
SELLING SECURITYHOLDERS.................................................... 59
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PLAN OF DISTRIBUTION....................................................... 67
LEGAL MATTERS.............................................................. 68
EXPERTS.................................................................... 68
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES............ 69
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SUMMARY
The following is a brief summary of certain information contained elsewhere
in this Prospectus. This summary is not intended to be complete and is qualified
in its entirety by the more detailed information appearing elsewhere in this
Prospectus and in the documents referred to herein, all of which should be
carefully reviewed. Capitalized terms used herein are defined on the pages of
this Prospectus referred to in the Glossary found on page 91.
The Company
NAI Technologies, Inc., through its wholly-owned subsidiaries (the
"Company"), designs, manufactures and markets rugged computer systems, advanced
peripheral products, intelligent terminals, high performance work stations,
TEMPEST computer systems (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, comprised of three subsidiaries, Codar Technology, Inc. ("Codar"), NAI
Technologies-Systems Division Corporation ("Systems"), and Lynwood Scientific
Developments Limited ("Lynwood"), and all of the Company's defense, military and
government-related businesses, provides rugged computer products specifically
designed for deployment in harsh environments that require special attention to
system configurations. This segment's customer base includes United States and
foreign armed services and intelligence agencies. The Telecommunications segment
consists of one company, Wilcom, Inc. ("Wilcom"), which provides transmission
enhancement products and rugged, hand-held test equipment for analog, digital
and fiber-optic communications and data-interchange networks. This segment has
developed and is marketing a product which enables telephone companies to
enhance the capacity of copper lines for improved voice and data transmission.
This segment's customer base includes the Regional Bell Operating Companies
("RBOCs") and independent telephone companies. The Company sells its products
directly to these customers and serves as a subcontractor to larger prime
contractors serving the same customer base.
The Company was incorporated in the State of New York in 1954. The
Company's principal executive office is located at 2405 Trade Centre Avenue,
Longmont, Colorado 80503, and its telephone number is (303) 776-5674.
The Offering
Securities Offered $6,342,000 aggregate principal amount of
Notes 4,119,700 Warrants to Purchase Common Stock
8,904,336 shares of Common Stock
See "DESCRIPTION OF SECURITIES."
Terms of the Notes:
Maturity Date January 15, 2001.
Interest Rate 12% per annum. In the event of a Chapter 11
or Chapter 7 bankruptcy case in which the Company
is the debtor, the Notes will bear interest from
the date
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of commencement of the case at a default rate per
annum equal to the lesser of 18% or the highest
such rate allowable by law.
Interest Payment Dates January 15, April 15, July 15 and October 15 of
each year, commencing April 15, 1996.
Conversion Each Note is convertible into shares of Common
Stock at the option of the holder, at any time in
whole or in part at a conversion price equal to
$2.00 per share, subject to adjustment in certain
events (the "Conversion Price"). The Conversion
Price will be adjusted to $1.50 or $1.00,
respectively, if earnings before interest, taxes,
depreciation and amortization ("EBITDA") of the
Company fall below $6,000,000 or $4,750,000 in
1996. Should the Company sell the stock or assets
of a subsidiary in 1996, such amounts will be
reduced by certain agreed amounts, depending on
the time of sale. The Conversion Price and the
number of shares of Common Stock to be received
upon conversion are subject to adjustment upon the
occurrence of certain events. See "DESCRIPTION OF
SECURITIES--The Notes."
The Company may at its option require the
conversion of the Notes, at any time prior to
maturity, provided that the closing bid price for
the Common Stock exceeds $6.00 per share for the
30 consecutive trading days prior to the giving of
notice of conversion.
Prepayment The Notes are subject to prepayment, in whole and
not in part, at the option of the Company, at any
time after the third anniversary of the date of
issuance, without premium or penalty. Upon the
occurrence of a "change in control" of the
Company, each holder of the Notes will have the
right to require that the Company repurchase such
holder's Notes in whole and not in part, without
premium or penalty, at a purchase price in cash in
an amount equal to 100% of the principal amount
thereof, together with accrued and unpaid
interest, if any, to the date of purchase,
pursuant to an offer made in accordance with the
procedures described in the Notes.
Subordination; Sinking
Fund The indebtedness evidenced by the Notes is
subordinated to all existing and future Senior
Indebtedness (as hereinafter defined) of the
Company. The Notes do not provide for a sinking
fund.
Certain Covenants The Notes contain certain covenants
prohibiting the Company from: (i) creating any
liens on its assets, (ii) incurring or assuming
any indebtedness other than certain specific
indebtedness including the Senior Indebtedness and
all extensions, renewals and refundings thereof,
(iii) making any investments, (iv) paying
dividends on its capital stock, (v) disposing of
certain assets, (vi) engaging in certain
affiliated party transactions, and (vii) merging
or consolidating.
Events of Default "Events of Default" under the Notes include the
failure to pay principal when due or the failure
to pay interest for a period of 10 days after such
payment becomes due, the failure to pay other
indebtedness for borrowed money in
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excess of $500,000 when due or the acceleration of
such indebtedness, the failure to pay any judgment
in excess of $500,000 when due or stayed, and the
voluntary or involuntary bankruptcy of the
Company.
Terms of the Warrants:
Exercise and Terms Each Warrant entitles the holder to purchase 250
shares of Common Stock at any time and from time
to time on or before February 15, 2002, at an
exercise price equal to $2.50 per share of Common
Stock, subject to adjustment in certain events
(the "Exercise Price"). The Exercise Price will be
adjusted to $2.00 or $1.50, respectively, if the
Company's EBITDA falls below $6,000,000 or
$4,750,000 in 1996. Should the Company sell the
stock or assets of a subsidiary in 1996, such
amounts will be reduced by certain agreed amounts,
depending on the time of sale. The Exercise Price
and the number of shares of Common Stock to be
received upon exercise are subject to adjustment
upon the occurrence of certain events. Warrants
will be exercisable, at any time and from time to
time, on or before 5:30 p.m., local time, on or
before February 15, 2002 (the "Expiration Date")
by delivery of an exercise notice duly completed
and tendering of the aggregate Exercise Price.
Each Warrant may be exercised in whole or in part
so long as any exercise in part would not involve
the issuance of fractional shares of Common Stock.
See "DESCRIPTION OF SECURITIES--The Warrants."
Terms of the Common Stock:
Terms Holders of shares of Common Stock are entitled to
one vote for each share of Common Stock held. The
holders of Common Stock are not entitled to
preemptive or subscription rights. Upon
liquidation, dissolution or winding up of the
Company, the holders of the Common Stock are
entitled to share ratably in all assets available
for distribution after payment in full of
creditors and after the preferential rights of
holders of shares of Preferred Stock then
outstanding, if any, have been satisfied. The
affirmative vote of the holders of 80% of all
Common Stock of the Company is required for the
adoption or authorization of certain extraordinary
matters. See "DESCRIPTION OF SECURITIES-- Common
Stock."
Trading The Common Stock is traded on Nasdaq under the
symbol NATL.
Offering Period From time to time after the date hereof.
Use of Proceeds The Company will not receive any proceeds from the
sale of the Securities by the Selling
Securityholders.
Risk Factors Reference is made to "RISK FACTORS" which contains
material information that should be considered in
connection with the Securities being offered
hereby.
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Summary Financial Data
The summary financial data set forth below for the fiscal years 1991
through 1995 are derived from the consolidated financial statements of the
Company which financial statements have been audited by KPMG Peat Marwick LLP,
independent certified public accountants, whose report on the Company's
consolidated financial statements for the three years ended December 31, 1995 is
included elsewhere in this Prospectus. The selected financial data for the six
months ended July 1, 1995 and June 29, 1996 have been derived from the Company's
unaudited consolidated financial statements included in the Company's Quarterly
Report on Form 10-Q for the fiscal quarter ended June 29, 1996. Such unaudited
consolidated financial statements in the opinion of the Company's management
reflect all adjustments (consisting of normal recurring adjustments) necessary
for a fair presentation of interim data.
<TABLE>
<CAPTION>
Year Ended December 31, Six Months Ended
----------------------- ----------------
1991 1992 1993 1994 1995 July 1, June 29,
---- ---- ---- ---- ---- ------- --------
(in thousands except share and per share data and 1995 1996
ratios) ---- ----
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations Data
Net sales $ 59,412 $ 67,315 $ 81,024 $ 54,520 $ 60,008 $ 26,771 $ 33,857
Operating earnings (loss)(1) 6,308 8,407 8,960 (14,589) (8,875) (5,826) 1,789
Net earnings (loss)(1) 3,900 5,051 5,455 (11,591) (11,619) (6,899) 365
Per share data:
Net earnings (loss)(2) .63 .80 .80 (1.69) (1.57) (0.94) 0.05
Cash dividends(3) -- -- -- -- -- -- --
Ratio of earnings to fixed charges 8.14 13.88 11.55 * * * 1.36
Balance Sheet Data (at end of
period)
Working capital $ 14,134 $ 17,094 $ 19,105 $ 16,665 $ 10,044 $ -- $ 14,255
Total assets at end of period 33,817 43,704 60,715 53,720 48,012 -- 48,891
Long-term debt 5,017 7,158 10,797 13,990 15,573 -- 15,951
Shareholders' equity 18,897 23,911 30,593 20,296 10,086 -- 13,515
Average market price
per common share at
end of period 4-9/16 8-3/16 6-1/4 2-11/16 1-1/2 3-1/4 3-5/8
Weighted average common
shares outstanding(2) 6,222 6,309 6,843 6,580 7,382 7,459 8,459
</TABLE>
(1) Includes $7,321 in restructuring costs in 1994.
(2) Prior year per share data has been restated to reflect 4% stock dividends
declared in February 1992, 1993 and 1994 and a three-for-two stock split
declared in August 1993.
(3) There have been no cash dividends paid during the above five fiscal years.
* Earnings are inadequate to cover fixed charges. The coverage deficiency is
$15,983 for 1994, $11,242 for 1995, and $6,789,000 for July 1, 1995.
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RISK FACTORS
Before purchasing any of the Securities offered hereby, prospective
investors should consider, among other things, the following factors.
This Registration Statement on Form S-1, including Risk Factors and
Management's Discussion, contains "forward looking statements" within the
meaning of the federal securities laws, including; management's belief that the
Company will meet its obligations under current debt instruments, working
capital needs and anticipated capital expenditures therefore, the company's
expectations as to funding its operations over the next twelve months, and other
statements of expectations, beliefs, plans, and similar expressions concerning
matters that are not historical facts. These statements are subject to risks and
uncertainties that could cause actual results to differ materially from those
expressed in the statements.
Substantial and Continuing Losses. While the Company's operations have
historically provided a positive cash flow, the Company has recently experienced
severe financial difficulties and has incurred substantial losses, including net
losses of approximately $11,619,000 for each of the years ended December 31,
1994 and 1995. At the present time, the Company is a net user of cash. Losses
are continuing through the date of this Prospectus and there can be no assurance
that the Company will ever return to profitable operations.
Although the restructuring activities taken in 1994 and 1995 have
significantly reduced the expense structure of the Company and the Company is
presently taking actions to minimize its cash outlays by deferring or
eliminating discretionary expenses and capital asset purchases, the Company's
return to profitability will depend on its ability to effectively monitor and
control its costs. The Company must also increase its shipment rate to an
acceptable level. It is not certain that the Company will be able to achieve the
operating efficiencies necessary to return to profitability. Furthermore, future
operating results depend upon many factors, including general economic
conditions, the ability of the Company to continue to book and fulfill orders
successfully, the level of competition and defense spending.
Dependence on U.S. Military. Approximately 78% of the Company's backlog of
orders totalling $47,800,000 at December 31, 1995 represented orders for
military and government sales. During the years ended December 31, 1994 and
1995, sales under contracts with the U.S. Government were approximately 40% and
38% of the Company's sales, respectively. Such orders are subject to termination
at the convenience of the U.S. Government with negotiated settlements in which
the Company seeks to recover its costs and a reasonable profit. There can be no
assurance that the Company will recover its costs or earn any profit on orders
terminated by the U.S. Government.
In recent years the Company has reduced its dependency on the U.S. defense
budget by expanding its non-military business operations. However, the Company
still expects a substantial portion of 1996 sales to be directly to the military
or through prime contractors to the military. With continuing discussions by
Congress on budget cuts, it is difficult to assess what the impact of budget
cuts, if any, will be on the Company. It appears that defense outlays will be
reduced from past levels. The Company is not aware of any programs in which it
participates that are specifically targeted for termination or curtailment other
than the Navy Standard Teleprinter ("NST") program, which had provided
significant revenues to the Company from 1990 to early 1994. The Company's
products are utilized in many different U.S. Government programs which reduces
the adverse impact of canceling a single specific program. However, reductions
in future U.S. defense spending levels could adversely impact the Company's
future sales volume.
Substantial Secured Indebtedness. At June 29, 1996, the Company's long-term
secured indebtedness including current installments totaled $12,675,000,
substantially all of which is due to the Company's primary lending institutions,
The Bank of New York and Chemical Bank (the "Bank Lenders"), pursuant to the
Credit Agreement which provides for quarterly principal payments of $500,000 on
June 30, 1996, September 30, 1996 and December 31, 1996, and $750,000 on the
last day of each quarter thereafter, commencing March 31, 1997 and ending on
December 31, 1998, together with accrued and unpaid interest through the
applicable payment date at
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the prime rate plus 1 3/4% per annum. The remaining outstanding principal amount
of $7,975,000 is due and payable on January 15, 1999. In addition, at June 29,
1996, the Company had $6,342,000 principal amount of Notes outstanding. Interest
on the Notes is payable quarterly in arrears on January 15, April 15, July 15
and October 15 of each year, commencing April 15, 1996 at 12% per annum. The
Notes mature on January 15, 2001.
Estimated cash disbursements pertaining to principal and interest
requirements under the Credit Agreement, the Notes and otherwise over the next
three years can be summarized as follows:
1996 1997 1998
---- ---- ----
Principal on Credit Agreement $2,000,000 $3,000,000 $3,000,000
Principal on Notes -0- -0- -0-
Interest on Credit Agreement 1,318,000 1,168,000 868,000
Interest on Notes 750,000 761,000 761,000
Other interest 5,000 4,000 3,000
---------- ---------- ----------
$4,073,000 $4,933,000 $4,632,000
The Company estimates that its normal working capital requirements are
approximately 20% of its annual sales. Thus the Company estimates that for each
$1,000 in increased sales, the Company would require approximately $200 of
increased working capital. The nature of the Company's business does not require
extensive investment in capital assets. Over the last five years, the Company's
capital expenditures have approximated $1,000,000 per year.
In 1995, the Company's cash flow was inadequate to meet its obligations.
Consequently the Company suspended principal payments under the Credit Agreement
and reduced its payments to key suppliers which resulted in an increase in its
accounts payable. It is essential that the Company return to profitability in
order for it to meet its future commitments.
As of June 29, 1996 approximately $12,675,000 of the Company's interest
bearing debt was subject to variable interest rates. Each 1% change in the prime
rate would result in a change in the interest due of approximately $130,000 per
annum before any future principal reduction.
The Company has substantial debt service obligations and has no
arrangements with respect to, or sources of, additional financing. Substantially
all of the Company's assets have been pledged to secure the indebtedness
outstanding under the Credit Agreement. It is not certain that the Company will
be able to achieve the revenue level necessary to return to profitability and
there can be no assurance that the Company will have sufficient cash flow in the
future to meet its obligations with respect to its indebtedness, including its
obligations with respect to the Notes. The Notes are unsecured and subordinate
in right of payment to all Senior Indebtedness (as defined in the Notes) of the
Company.
The Notes provide that the Senior Indebtedness can be increased by the Bank
Lenders in certain circumstances to protect its interest in the collateral
provided by the Company. The Notes also provide that if any Senior Indebtedness
is outstanding on the maturity date of the Notes, the Company cannot pay the
amounts due thereunder. Although the Credit Agreement provides that the Senior
Indebtedness is to paid in full on January 15, 1999, two years prior to the
maturity date of the Notes, there can be no assurance that the Company will in
fact be able to pay such indebtedness at such time.
Ranking of the Notes. The Notes are subordinated to all Senior Indebtedness
of the Company, including indebtedness under the Credit Agreement. Therefore, in
the event of bankruptcy, liquidation or reorganization of the Company, the
assets of the Company will be available to pay obligations on the Notes only
after all Senior Indebtedness has been paid in full, and there may not be
sufficient assets remaining to pay amounts due on the
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Notes. At March 30, 1996, the amount of outstanding Senior Indebtedness was
$15,175,000. In addition, the indebtedness under the Credit Agreement is secured
by liens on substantially all of the assets of the Company including the capital
stock of certain of its subsidiaries and is guaranteed by certain of the
Company's subsidiaries, which guarantees are secured by a lien on substantially
all of the assets of such subsidiaries. See "DESCRIPTION OF
NOTES--Subordination."
No Assurance of Company's Ability to Service Notes. The Company presently
intends to service the Notes out of its future cash flow from operations or
proceeds of future financings, if any. There can be no assurance that the
Company will generate sufficient cash flow in the future to pay the interest on
the Notes or on its other indebtedness or to pay the principal on the Notes or
that future financings, if necessary, will be available. See "DESCRIPTION OF
SECURITIES--The Notes."
Trade Debt. As of December 31, 1995, the Company had approximately
$5,300,000 in the aggregate past due to vendors primarily for raw materials and
components. The Company's cash constraints strained its relationships with
vendors which adversely impacted the Company's ability to meet its production
targets on a timely and cost-effective basis. Although the Company has used a
portion of the proceeds of the Private Placement to pay vendors and the
Company's relationships with vendors have begun to improve, there can be no
assurance that the Company's relationships with vendors will continue to improve
or that such vendors will continue to provide the Company with raw materials.
Industry Competition. The Company's business is highly competitive. Many
suppliers in the Company's markets are significantly larger than the Company in
total sales and assets, and many devote significantly more resources to the
development of new products than does the Company. There can be no assurance
that the Company will be able to compete successfully or that competitors will
not commercialize services or products that render the Company's services or
products obsolete or less marketable.
Foreign Operations. As of December 31, 1995, the total assets of the
Company were $48,012,000 of which $8,292,000 or approximately 17% were located
outside of the United States primarily in the United Kingdom. The Company's
foreign sales (which are comprised of export sales from the U.S. and foreign
revenues from Lynwood) in 1995 were $12,679,000 which accounted for
approximately 21% of the Company's total sales. Approximately 86% of the
Company's foreign sales are to customers in the United Kingdom and no other
single country accounted for more than 5% of the Company's foreign sales in any
of the past three years. All of the Company's sales to customers in the United
Kingdom are payable in British currency. Therefore, fluctuations in exchange
rates between the U.S. dollar and the British pound will impact on the Company's
operating results. 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. As a result of the political and economic stability of the United
Kingdom, the Company does not believe that there is substantial risk from
foreign operations. However, there can be no assurance that this will continue
to be the case.
Technological Change. The Company's technological base is characterized by
rapid change that frequently results in sudden product and equipment
obsolescence. The Company has reduced its expenditures on independent research
and development over the past few years and anticipates further reducing its
cost of independent research and development in 1996. While the Company expects
to continue to make expenditures in an effort to improve current and proposed
product designs and configurations of already technologically complex products,
there can be no assurance that its efforts will be successful or that
introduction of new products or technological developments by others will not
cause the Company's technology to become uneconomical or obsolete.
Limited Protection of Intellectual Property. The Company regards portions
of the hardware designs and operating software incorporated into its products as
proprietary and seeks to protect such proprietary information through its
reliance on patent, copyright, trademark and trade secret laws, non-disclosure
agreements with its employees and confidentiality provisions in licensing
arrangements with its customers. There is no assurance that such agreements will
be effective to protect the Company or that the proprietary information deemed
confidential by the Company will be adequately protected by the laws respecting
trade secrets. Consequently, it may be possible
-10-
<PAGE>
<PAGE>
for unauthorized third parties to copy certain portions of the Company's
products or to "reverse engineer" or otherwise obtain the Company's proprietary
rights. Moreover, the laws of some foreign countries do not afford the same
protection provided by U.S. laws to the Company's proprietary rights.
Securities Litigation. On or about June 28, 1994, TDA Trading Corp.
("TDA"), individually and on behalf of a class of persons similarly situated,
commenced a securities fraud class action in the United States District Court
for the Eastern District of New York (the "Court") against Robert A. Carlson,
Richard A. Schneider and the Company. TDA commenced its action, entitled TDA
Trading Corp. v. Carlson, et al., by filing a complaint (the "Complaint") with
the Court.
The Complaint principally alleges that between July 21, 1993 and December
22, 1993 (the "Class Period"), in various press releases issued by the Company
and in the Company's Quarterly Report on Form 10-Q for the fiscal period ended
October 2, 1993, the defendants violated Section 10(b) of the Exchange Act, 15
U.S.C. 78j(b), and Rule 10b-5 promulgated thereunder by knowingly and/or
recklessly misrepresented to the public that they expected the Company's 1993
fourth quarter and fiscal year sales and earnings results to continue to
increase at levels substantially above those of prior years at a time when they
supposedly knew but failed to disclose that the Company's fourth quarter 1993
sales of its NST and other products would decrease precipitously. The Complaint
further alleges that, as a result of defendants' alleged failure to disclose
these developments, TDA and other purchasers of Common Stock were damaged
because, it is alleged, at the time of purchase the price of Common Stock had
been artificially inflated and the drop in the price of the Common Stock by
approximately 35% on December 22, 1993 was a result of the alleged
misrepresentations by the Company. Additionally, the Complaint asserts an
alleged violation of ss.20 of the Exchange Act by certain directors and officers
of the Company. Specifically, the Complaint alleges 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, at various times throughout the Class Period,
allegedly sold shares of Common Stock owned by them personally at price levels
which TDA claims were higher than the true value of these shares.
As relief, TDA essentially seeks damages in an amount to be proven at
trial, together with costs and expenses, including reasonable attorneys',
accountants' and experts' fees. The Complaint also requests that the Court
declare its action against the Company and the individual defendants to be a
proper class action and certify it as class representative and plaintiff's
counsel as counsel for the class. On March 24, 1995, the Court granted TDA's
motion for class certification. On June 27, 1996, the Court denied the Company's
motion for summary judgement. The Court has set a trial date of September 4,
1996.
The Company has advised its directors' and officers' liability insurance
carrier of the claims asserted against it and defendants Carlson and Schneider.
Should TDA prove its case and should the Company's insurance carrier decline to
cover the award, the Company could be assessed up to or in excess of $7,500,000
in damages, which would have a materially adverse effect on its financial
position. The Company's insurance carrier has previously notified the Company
that it reserves the right to deny coverage under the insurance policy in
connection with the TDA litigation (i) for claims not covered, such as claims
that do not involve negligent acts, errors or omissions, (ii) for damages that
may be uninsurable under the policy or applicable law, and (iii) for various
exclusions contained in the insurance policy, including dishonest, fraudulent,
willful or criminal acts or omissions.
Absence of Public Market. No trading market currently exists for either the
Notes or the Warrants and no assurance can be given that an active market will
develop for such Securities or as to the liquidity of, or the trading market
for, such Notes and Warrants.
Restrictions on Dividends. The Company is prohibited from paying cash
dividends on its Common Stock by certain debt covenants contained in its Credit
Agreement.
Anti-takeover Restrictions. At the 1996 Annual Meeting of Shareholders held
in August 1996, the Company's shareholders approved a proposal to classify the
Board into two classes containing three and four directors each. The
classification of the Company's Board of Directors could have the effect of
discouraging attempts by a person or group to take control of the Company. See
"DESCRIPTION OF SECURITIES -- Common Stock -- Other Provisions."
-11-
<PAGE>
<PAGE>
The Company's Board of Directors may issue Preferred Stock of the Company,
without shareholder approval, in series and with such designations, relative
rights and preferences as the Board of Directors may determine. Any shares of
Preferred Stock issued in the future will rank prior to the Common Stock with
respect to dividend rights and rights upon liquidation and could have rights
which would dilute the voting power of the Common Stock. The Board of Directors,
without shareholder approval, can issue Preferred Stock with voting and
conversion rights which could adversely affect the voting power of the holders
of the Common Stock. Such issuances may also have the effect of discouraging
attempts by a person or group to take control of the Company.
In addition, the Company's Board of Directors has the ability to issue
shares of Common Stock which would dilute the voting power and equity of the
holders of outstanding Common Stock.
Effect of Outstanding Warrants, Options and Notes. The Company has
outstanding at the present time (a) Warrants to purchase up to a maximum of
4,119,700 shares of Common Stock at an exercise price of $2.50 per share, (b)
additional warrants to purchase up to a maximum of 300,000 shares of Common
Stock at an exercise price of $3.00 per share (the "Additional Warrants"), (c)
Notes convertible into a maximum of 3,171,000 shares of Common Stock at a
conversion price of $2.00 per share, and (d) options to purchase 750,055 shares
of Common Stock in the aggregate under the Company's 1991 Stock Option Plan and
1993 Stock Option Plan for Directors at exercise prices ranging from $1.875 to
$8.33 as of March 31, 1996 and 30,000 to Directors at an exercise price of $2.50
as of such date. The terms on which the Company may obtain additional financing
during the respective periods of the outstanding Warrants, Additional Warrants,
options and Notes may be adversely affected by the existence of such Warrants,
Additional Warrants, options and Notes. The holders of the Warrants, Additional
Warrants, options and Notes may exercise or convert them at a time when the
Company might be able to obtain additional capital through a new offering of
securities on terms more favorable than those provided by the Warrants,
Additional Warrants, options and Notes.
Taxable Income in Excess of Cash Received. For federal income tax purposes,
the purchase price of each Note and Warrant was allocated between the Notes and
the Warrants in accordance with their relative fair market values. The amount
allocable to the Notes was less than the principal amount of the Notes. There
can be no assurance that the Internal Revenue Service will agree with the
aforesaid allocation. The excess of the amount payable upon maturity of the
Notes over the amount of the purchase price allocated to the Notes for federal
income tax purposes will be treated as "Original Issue Discount," as such term
is defined by the Internal Revenue Code of 1986, as amended. Generally,
investors must report the Original Issue Discount in their gross incomes over
the period of time their Notes are held. Investors are urged to consult with
their own tax advisors in connection with the foregoing. See "CERTAIN FEDERAL
INCOME TAX CONSEQUENCES."
USE OF PROCEEDS
The Company will not receive any proceeds from the sale of the Securities
by the Selling Securityholders.
-12-
<PAGE>
<PAGE>
CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Company at June 29, 1996. This material should be read in conjunction with the
separate consolidated financial statements of the Company included elsewhere in
this Prospectus.
June 29, 1996
-------------------------------
Actual
(Unaudited) (In thousands)
Short-term debt........ $ 2,620
Long-term debt......... 15,951
Shareholders' equity
Preferred Stock, no par
value, 2,000,000 shares
authorized and unissued ---
Common Stock, $0.10 par
value, 10,000,000 shares
authorized; 8,459,437 shares
issued................ 846
Capital in excess of par value 19,122
Foreign currency translation
adjustment............ 49
Retained deficit....... (6,502)
Total shareholders' equity 13,515
-------
Total capitalization.. $32,086
=======
DIVIDEND POLICY
The Company did not declare or pay any cash dividends on its Common Stock
in any of the past five fiscal years. The Company is restricted from paying cash
dividends on its Common Stock by certain debt covenants contained in the Credit
Agreement, but is permitted to effect stock splits and declare and pay dividends
payable solely in shares of any class of its capital stock.
-13-
<PAGE>
<PAGE>
SELECTED FINANCIAL DATA
The selected data presented below for each of the years in the five-year
period ended December 31, 1995 are derived from the consolidated financial
statements of the Company which financial statements have been audited by KPMG
Peat Marwick LLP, independent certified public accountants. The selected
financial data for the three months ended July 1, 1995 and June 29, 1996 have
been derived from the Company's unaudited consolidated financial statements
included in the Company's Quarterly Report on Form 10-Q for the fiscal quarter
ended June 29, 1996. Such unaudited consolidated financial statements in the
opinion of the Company's management reflect all adjustments (consisting of
normal recurring adjustments) necessary for a fair presentation of interim data.
The consolidated financial statements as of December 31, 1995 and 1994 and for
each of the three years in the period ended December 31, 1995, and the
independent auditors' report thereon, and the unaudited consolidated financial
statements as of June 29, 1996 and July 1, 1995 are included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
Fiscal Year Six Months Ended
----------------------------------------------------- -------------------
1991 1992 1993 1994 1995 July 1, June 29,
---- ---- ---- ---- ---- ------- --------
1995 1996
---- ----
(unaudited)
(in thousands except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales $ 59,412 $ 67,315 $ 81,024 $ 54,520 $ 60,008 $ 26,771 $ 33,857
Operating earnings (loss)(1) 6,308 8,407 8,960 (14,589) (8,875) (5,826) 1,789
Net earnings (loss)(1) 3,900 5,051 5,455 (11,591) (11,619) (6,899) 363
Per share data:
Net earnings (loss)(3) 0.63 0.80 0.80 (1.69) (1.57) (0.94) 0.05
Cash dividends(2) -- -- -- -- -- -- --
Total assets at end of period 33,817 43,704 60,715 53,720 48,012 -- 48,891
Long-term debt
(excluding current portion) 5,017 7,158 10,797 13,990 15,573 -- 15,951
Working capital 14,134 17,094 19,105 16,665 10,044 -- 14,255
Shareholders' equity 18,897 23,911 30,593 20,296 10,086 -- 13,515
Average market price per
common share at end
of period(3) $4 9/16 $8 3/16 $6 1/4 $2 11/16 $1 1/2 $3 1/4 $3 5/8
Weighted average common shares(3) 6,222 6,309 6,843 6,580 7,382 7,459 8,459
</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.
-14-
<PAGE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
In early 1994, the Company experienced several adverse events: (i) orders
for the Company's NST, which had provided significant revenues to the Company
since 1990, ceased earlier than anticipated and left the Company with excess
staff and facilities; (ii) certain new products within the Company's products
division encountered technical difficulties and cost overruns; (iii) several
anticipated contract awards were delayed; (iv) the TEMPEST business at Systems
declined faster than anticipated; (v) Lynwood sought to reposition itself from a
manufacturer of intelligent terminals to a military systems supplier and
experienced high transition costs; and (vi) Wilcom's customers began a series of
cost cutting moves which resulted in delayed and reduced sales.
Primarily in response to the termination of NST production, the Company
announced in April 1994 that it would close its two New York facilities in
September 1994 and transfer its New York military products operations and
certain key personnel to Codar's Colorado location by the end of September 1994.
This resulted in a $7.3 million restructuring charge. At the same time, the
Company also announced a $2.2 million charge for cost overruns on certain
Company products from the New York operations.
The move to Colorado created additional problems. Codar attempted to
integrate three different lines of business into its Colorado facility, which
had not historically produced the products being introduced in any significant
quantities. Each of the product lines transferred to Colorado was new to the
workforce in Colorado and had been designed by an engineering force and
manufactured under the supervision of managers that did not elect 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.
First Half 1996 Compared With First Half 1995
The nature of the Company's business is such that year-to-year changes in
sales levels are predominantly due to changes in shipping volume or product mix
rather than changing sales prices. Net sales for the first half of 1996 were
$33.9 million, a 26% increase when compared with $26.8 million for the same
period in 1995.
-15-
<PAGE>
<PAGE>
The following chart provides the sales breakdown by segment and subsidiary
for the first six months:
In thousands of dollars 1996 1995 % Change
- ------------------------------------------------------------------------------
Electronic Systems Segment
Codar Technology, Inc. $16,678 $13,060 28%
NAI Systems Division 6,530 5,213 25%
Lynwood Scientific Dev. Ltd. 6,658 5,432 23%
Intercompany (260) (454) %
------- ------- ---
Total Electronic Systems Segment 29,606 23,251 27%
Telecommunications Segment
Wilcom, Inc. $4,251 $ 3,520 21%
------- ------- ---
Total Telecommunications Segment 4,251 3,520 21%
------- ------- ---
Total $33,857 $26,771 26%
======= ======= ===
Sales in the Electronic Systems segment (net of inter-company eliminations)
increased 27% to $29.6 million from $23.3 million for the same period in 1995.
Each of the NAI subsidiaries recorded sales increases in the first half of 1996
as compared to 1995. The largest increase was recorded by Codar and is
attributable to increased shipping volumes. The 1995 revenues were adversely
impacted by production problems on certain contracts. The increases at the NAI
Systems Division and Lynwood are representative of the increased levels of
business at both companies.
In recent years the Company has reduced its dependency on the United States
defense budget by expanding its non-military business operations. However, the
Company still expects approximately 50% 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 increased 21% to $4.3 million, as
compared to $3.5 million for the same period in 1995. The increase in sales was
attributable to increased line treatment revenues principally attributable to
the Company's new telephone line quality improvement products as they continue
to gain acceptance with the Bell operating companies and independent telephone
companies.
The gross margin percentage for the first half of 1996 was 20.1%, as
compared with 2.6% for the same period in 1995. The following chart provides the
gross margin percentage by subsidiary:
1996 1995
---- ----
Codar Technology, Inc. 10.7% (19.4)%
NAI Systems Division 19.7% 13.5%
Lynwood Scientific Development Ltd. 32.9% 31.8%
Wilcom, Inc. 33.5% 22.6%
-16-
<PAGE>
<PAGE>
The margin improvement at Codar is attributable to increased shipping
volumes and cost reduction efforts initiated in late 1995 and early 1996.
Codar's operating performance was still adversely impacted by several large
contracts for which the gross margins are -0-. These contracts are expected to
be substantially completed during the third quarter of 1996. Codar's first half
1995 gross margin was adversely impacted by the recording of a $1,100,000
provision for inventory obsolescence as compared with $100,000 recorded in the
first half of 1996. The Company expects the Codar gross margin percentage to
continue to improve during the year.
The Systems Division's first half 1995 gross margin was adversely impacted
by the recording of a $900,000 provision for inventory obsolescence.
The Lynwood and Wilcom gross margins were favorably impacted by increased
shipping volumes and cost reduction efforts completed in the fourth quarter of
1995.
Selling expense for the first half of 1996 was $2.1 million, as compared
with $2.5 million for the same period in 1995. The 16% decrease despite an
increase in sales of 26% is attributable to the Company's desire to reduce its
operating expenses.
General and administrative expenses for the first half of 1996 were $2.5
million, as compared with $2.8 million for the same period in 1995. A decline in
the corporate office expense, as well as cost cutting moves taken in the fourth
quarter of 1995, account for the decline.
Company-sponsored research and development expenditures for the first half
of 1996 were $0.9 million, as compared with $1.0 million for the same period in
1995. The Company expects that the level of the first-half 1996 IR&D
expenditures will be relatively constant for the remainder of 1996.
For the first half of 1996, the Company had operating income of $1.8
million, as compared with an operating loss of $5.8 million for the same period
in 1995. The first half results were favorably impacted by the recognition of a
gain of approximately $750,000 on the previously announced sale of the Systems
Integration Division to Tracor Aerospace Inc. in June 1996.
Interest expense, net of interest income, was $1.1 million for the first
half of 1996, as compared with $0.7 million for the same period in 1995.
The Company accrued an income tax expense of $0.1 million. The entire tax
expense pertains to the Company's Lynwood subsidiary located in the U.K.
Lynwood's earnings are taxed in the U.K. and, while the Company has a U.S. net
operating loss carry-forward, Lynwood is required to pay taxes in the U.K. The
Company is unable to recognize the tax benefit associated with its U.S. net
operating loss carry-forward due to uncertainties as to whether or not a future
benefit will be realized. Once the Company returns to sustained profitability,
the benefits of such a tax loss carry-forward will be recognized.
For the first half of 1996, the Company had a net profit of $0.4 million,
as compared with a net loss of $6.9 million in the first half of 1995. Earnings
per share were $0.05, as compared with a loss of $0.94 for the same period in
1995, based on a weighted average of 8.0 million and 7.3 million shares
outstanding, respectively.
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.
-17-
<PAGE>
<PAGE>
The following chart provides the sales breakdown by product line:
In thousands of dollars 1995 1994 % change
- ----------------------------------------------------------------------
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%
===============================
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.
A significant portion of the Company's net sales have historically been
directly to the military or through prime contractors to the military. The
Company has not initiated any change in its marketing focus and, as of December
31, 1995, approximately 78% of the Company's backlog of orders represents orders
for military and government sales.
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 a charge of $4.4 million
for cost growth on certain long term contracts due to engineering design
changes, greater than anticipated labor and material and overhead costs and a
$2.2 million charge for increased provisions relating to 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
-18-
<PAGE>
<PAGE>
recognized the entire adverse impact of cost overruns on those contracts for
which the expected final costs exceed the contract value.
Selling expense for 1995 was $5.0 million, as compared with $7.5 million in
1994. This decrease is attributable to the savings associated with the
consolidation of the military products division in the third quarter of 1994 and
cost cutting measures implemented at all of the Company's divisions in 1995.
General and administrative expenses for 1995 were $6.5 million, as compared
to $6.3 million in 1994. This increase is primarily attributable to the Company
moving its corporate headquarters from Woodbury, New York to Longmont, Colorado
in December 1995 and additional administrative expense at Codar as a result of
increased management resources. These cost increases were partially offset by
cost cutting measures 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.
-19-
<PAGE>
<PAGE>
The following chart provides the sales breakdown by product line:
In thousands of dollars 1994 1993 % Change
- ------------------------------------------------------------------------
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%)
================================
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
-20-
<PAGE>
<PAGE>
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 $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%. However, management is
committed to returning the Company to profitability and believes that it has
taken the necessary action to restructure the Company so that it will be
profitable in 1996. There can
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be no assurance, however, that expenses will be reduced or profitability will
improve in 1996 or any other period as a result of these or any other steps.
On 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. There are also limits on capital expenditures and the payment of
cash dividends. The Company believes that it can comply with such loan covenants
during the term of the credit agreement.
On February 15, 1996, February 23, 1996, February 29, 1996, and May 2,
1996, the Company issued an aggregate of $8,342,000 of 12% Convertible
Subordinated Promissory Notes due January 15, 2001 (the "Notes") and warrants to
purchase an aggregate of 2,085,500 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 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 2,034,200 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 $7,534,081 ($2,500,000 was received prior to December 31, 1995)
from the sale of the Notes and the Warrants upon completion of the offering.
Approximately $4.1 million was used to reduce the Company's accounts
payable to its vendors. The remainder of the funds received will be used to meet
operating and working capital needs. As a result of the sale of the Notes and
the debt restructuring, the Company will expend approximately $4,073,000 in
principal and interest payments in 1996, $4,933,000 in 1997 and $4,632,000 in
1998. On January 15, 1999, the Company is required to make a balloon payment of
$7,175,000.
The Company intends to further reduce its operating expenses and sell all
non-essential assets. The Company intends to pay interest on the Notes, interest
and principal under the credit agreement and operating expenses for the next
three years with cash flow from operations, together with the excess cash
received from the sale of the Notes after the payment of vendors and proceeds
from asset sales, if any. The Company believes that it will be necessary to
refinance its existing bank debt prior to maturity on January 15, 1999, when the
balloon payment of $7,175,000 is due. At that time, the Company intends to
explore all available options, including the issuance of debt or equity
securities of the Company and the sale of one or more of the Company's
subsidiaries.
On May 9, 1996, the Company entered into an agreement with Charles S.
Holmes, a member of the Company's Board of Directors, that in consideration of
his converting the 12% Convertible
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Subordinated Promissory Note due 2001 of the Company in the aggregate unpaid
principal amount of $2,000,000 held by him into 1,000,000 shares of Common Stock
as provided in Section 6 of the Note, the Company would immediately grant him
warrants to purchase 300,000 shares of Common Stock at any time and from time to
time on or before February 15, 2002 at an exercise price of $3.00 per share,
subject to adjustment in certain events.
Net inventory increased by $2.2 million for the first half of 1996.
Approximately $1.4 million of the increase occurred at Lynwood Scientific
Developments Limited and is related to the purchase of long lead material on a
contract with scheduled deliveries in the third and fourth quarters of 1996. The
remainder of the increase is representative of the increased business level of
the Company as compared with the first half of the previous year.
Other non-current assets are comprised primarily of deferred debt expense
($2,270,714). In the first half of 1996, other non-current assets increased
$1,554,000. This increase is attributable to an increase in deferred debt
expense related to expenses incurred in connection with the sale of an aggregate
of $8.4 million principal amount of Notes in February 1996.
Cash and cash equivalents totaled $1.1 million at June 29, 1996, as
compared to $2.6 million at December 31, 1995. Cash used by operating activities
amounted to $7.4 million in the first six months of 1996, as compared to cash
provided by operating activities of $0.8 million in the comparable period of
1995.
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.
New Accounting Standards
Statement of Financial Accounting Standards No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of
(SFAS 121), was issued in March 1995 by the Financial Accounting Standards
Board. It requires that long-lived assets and certain identifiable intangibles
held and used by an entity be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. SFAS 121 is required to be adopted for fiscal years beginning after
December 15, 1995 and will be adopted by the Company for fiscal 1996. Adopting
this statement is not expected to have a significant effect on the consolidated
financial statements of the Company.
Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation (SFAS 123), was issued by the Financial Accounting
Standards Board in October 1995. SFAS 123 establishes financial accounting and
reporting standards for stock-based employee compensation plans as well as
transactions in which an entity issues its equity instruments to acquire goods
or services from non-employees. This statement defines a fair value based method
of accounting for employee stock options or similar equity instruments, and
encourages all entities to adopt this method of accounting for all employee
stock compensation plans. However, it also allows an entity to continue to
measure compensation cost for those plans using the intrinsic value based method
of accounting prescribed by APB Opinion No. 25, Accounting for Stock Issued to
Employees. Entities electing to remain with the accounting method prescribed in
Opinion 25 must make pro forma disclosures of net income and, if presented,
earnings per share, as if the fair value based method of accounting defined by
SFAS 123 had been applied. SFAS 123 is applicable to fiscal years beginning
after December 15, 1995. The Company currently accounts
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for its equity instruments using the accounting method prescribed by
Opinion 25. The Company does not currently expect to adopt the
accounting method prescribed by SFAS 123; however, the Company will
include the pro forma disclosures required by SFAS 123 when required.
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THE COMPANY
General
The Company through its wholly owned subsidiaries, designs, manufactures
and markets rugged computer systems, advanced peripheral products, intelligent
terminals, high performance work stations, TEMPEST computer systems (which
suppress certain radiation to prevent external detectors from reading the data
being transcribed) and telecommunications test equipment and transmission
products. The Company operates in two distinct operating segments: an Electronic
Systems segment and a Telecommunications segment. The Electronic Systems segment
is comprised of all of the Company's defense, military and government-related
businesses and the Telecommunications segment is focused on commercial
communications opportunities, as illustrated below.
[NAI TECHNOLOGIES GRAPHIC OMITTED]
The Electronic Systems segment provides rugged computer products
specifically designed for deployment in harsh environments that require special
attention to system configurations. This segment's customer base includes the
U.S. and foreign armed services and intelligence agencies.
The Telecommunications segment provides transmission enhancement products
and rugged, hand-held test equipment for analog, digital and fiber-optic
communications and data-interchange networks. This segment's customer base
includes the regional Bell operating companies and independent telephone
companies.
The Company's strategy is to be a leading supplier of high quality,
innovative products, systems and services to satisfy specialized customer
requirements in niche information technology and telecommunications markets,
especially in environments with harsh operating requirements.
Electronic Systems Segment
The Electronic Systems segment is comprised of three operating
subsidiaries, as follows:
o Codar Technology, Inc., located in Longmont, Colorado ("Codar");
o NAI Technologies-Systems Division Corporation, based in Columbia,
Maryland ("Systems"); and
o 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.
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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.
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.
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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.
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
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UK. Lynwood also develops secure TEMPEST screened workstation products which are
designed to operate in areas of high security.
Lynwood principally works on discrete projects and delivers solutions to
meet specific customer and project requirements. Lynwood's products include the
RP6200, a rugged, portable PC based on standard COTS technologies and designed
for desktop use or rackmounting. The unit is ruggedized and its specification
allows flexibility in configuration to meet specific project requirements. The
RP6200 is also designed to meet the intermediate TEMPEST standard. The unit can
be configured with the latest Intel Pentium processor, removable disk drives and
a highly readable LCD color display. The unit is in active use with armed forces
in Australia, Europe and the United Kingdom. The RP6120 is a fully sealed,
non-air breathing variant of the RP6200, designed to operate in the harshest of
environments. It has all the features of the RP6200, in addition to which it
will operate in driving rain, excessive humidity, salt fog and heavy dust
environments. The unit is designed for use in desert, tropical and jungle
environments.
Lynwood has the capability to supply integrated systems and subsystems that
meet specific rugged and environmental specifications. Lynwood's design and
manufacturing capabilities are concentrated around the system integration and
final assembly and test of these products. Lynwood strives to respond quickly
with a cost effective 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
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microwave which can send information and data from location to location. The
proliferation of higher speed analog modems has made the need for better quality
phone lines an important issue. Wilcom's products allow the telephone companies
to provide additional services in voice, data and video transmission over their
existing copper networks.
The ELPA product line has been extended by the introduction of a smaller,
lighter, less expensive product called the MB21-Kl. The MB21-Kl has been
designed to be self-powered from the telephone line and permit the improvement
of line transmission quality by automatically adjusting the various electrical
parameters that control signal transmission. The MB21-Kl also requires less
skilled technicians for installation and can be configured and installed from a
remote site, which can result in substantially reduced service calls and cost to
the RBOCs. The Company has received patents on the MB21-Kl and has applications
in process to cover the new remote configuration features.
The development work on the MB21-Kl was completed in early 1995 in
conjunction with Southwestern Bell and resulted in a 10,000 piece order that is
currently being put in service by Southwestern Bell in selected areas. The
product has also been ordered by another RBOC and is under field trials at other
RBOCs and one major independent telephone company.
Marketing and Service
The Company sells its products directly to customers and serves as a
subcontractor to larger prime contractors serving the same customer base. The
Company's products are marketed to customers through sales personnel,
manufacturers' representatives and distributors. The Company maintains sales
offices and sales support in 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.
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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. See "RISK FACTORS -- Foreign Operations."
Foreign sales for the past three years have been as follows:
Approximate
Total Percent of
Foreign Sales Company Sales
------------- -------------
1995....................$12,679,000 21%
1994.................... 13,828,000 25%
1993.................... 17,363,000 21%
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.
Contracts for which the Company competes are primarily awarded on the basis
of either price or "best value" which is a weighted calculation performed on the
basis of technical solution and price. Quality, on-time performance and
financial stability of the contract recipient are also key factors in
determining how contracts are awarded.
A substantial number of the Company's products become obsolete within a
number of years from their initial shipment to customers due to the rapid
technological advances characterized by the Company's business. The alternatives
to the Company's products are products which are
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manufactured by other competitors, are created from design solutions calling for
alternative equipment or procedures, or are ultimately produced as a result of
technological advances which occur in the business over time.
The Company believes it has a reputation with its customers for the timely
delivery of well designed, quality products at a reasonable price. Should any of
these Company attributes be compromised, it could impact on the Company's
long-standing relationship with its customers. Certain customers require Company
personnel to maintain various levels of security clearances in order to receive
access to "sensitive data." Should the Company lose its security clearances, it
would jeopardize the Company's relationship with such customers.
Research and Development
The Company's technological base is characterized by rapid change. As a
result, maintenance and expansion of the Company's business are partially
dependent upon the success of the Company's programs to develop new products and
upgrade existing products. The Company's engineering resources have been devoted
to the development of new products in every major category of its business.
During the years 1995, 1994 and 1993, the Company's total engineering
expenditures were $7,264,000, $9,335,000 and $7,444,000, respectively. Due to
the extensive use of COTS-based equipment in the Company's products, the
Company's cost of independent research in pursuit of new products and
improvements to existing products was approximately $1,807,000, $3,214,000 and
$5,020,000, respectively. Customer-funded engineering included in cost of sales
or inventory as a contract cost was $5,457,000 in 1995, $6,121,000 in 1994 and
$2,424,000 in 1993.
Patents and Trademarks
The Company owns patents and trademarks and seeks patent protection for its
products in cases where the Company believes the technology involved is
sufficiently innovative to warrant such protection. The Company seeks trademark
protection for its products in cases where the Company believes for marketing
reasons such protection is warranted. The Company seeks to protect its
proprietary information through its reliance on patent, copyright, trademark and
trade secret laws, non-disclosure agreements with its employees and
confidentiality provisions in licensing arrangements with its customers. There
is no assurance that such agreements will be effective to protect the Company or
that the proprietary information deemed confidential by the Company will be
adequately protected by the law respecting trade secrets. Consequently, it may
be possible for unauthorized third parties to copy certain portions of the
Company's products or to "reverse engineer" or otherwise obtain the Company's
proprietary rights. Moreover, the laws of some foreign countries do not afford
the same protection provided by U.S. laws to the Company's proprietary rights.
Government Regulation
The Company is subject to the Federal acquisition regulations governing the
issuance of government contracts, Federal Trade Commission regulations governing
its advertising and trade practices, 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
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regulations have not had a material adverse effect on the Company's business.
The Company in the normal course of business is subject to Department of Defense
audits with respect to its government contracts, some of which may result in
pricing adjustments.
The Company's manufacturing operations are subject to various federal,
state and local laws that regulate the discharge of materials into the
environment, or otherwise relating to the protection of the environment. To
date, compliance with such government regulations has not had a material adverse
effect on the Company's business.
Manufacturing and Supplies
Production of the Company's products requires assembly and testing of
components, printed circuit boards and other purchased parts. Quality control,
testing and inspection are performed at various steps throughout the
manufacturing process.
The Company purchases certain materials and components used in its systems
and equipment from independent suppliers. These materials and components are not
normally purchased under long-term contracts. The Company purchases
minicomputers, workstations, personal computers, mass storage subsystems, high
resolution monitors and keyboards under OEM agreements. The Company believes
that most of the items its purchases may be obtained from a variety of suppliers
and it normally obtains alternative sources for major items, although the
Company is sometimes dependent on a single supplier or a few suppliers for some
items.
During 1995 and 1994, the Company's cash constraints strained its
relationships with vendors, which adversely impacted the Company's ability to
meet its production targets on a timely and cost-effective basis.
Employees
At December 31, 1995, the Company had approximately 390 employees. The
Company has never experienced a work stoppage and none of its employees is
represented by a union. The Company believes its relationship with its employees
is good.
Properties
The Company's facilities, which are believed to be adequate to meet the
Company's foreseeable needs, are shown in the table that follows:
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<PAGE>
<PAGE>
Facilities
----------
Approximate
Floor Area Expiration
Division or Subsidiary Location (in Sq. Ft.) Date
- ---------------------- -------- ------------ ----
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) --
The Company also leases several small sales offices. The Company pays
approximately $1,316,000 per annum for the rental of all its facilities.
On November 30, 1995, the Company relocated its executive and
administrative offices from Woodbury, New York, to Longmont, Colorado.
Legal Proceedings
TDA Trading Corp. v. Carlson, et al. On or about June 28, 1994, TDA Trading
Corp. ("TDA"), individually and on behalf of a class of persons similarly
situated, commenced a securities fraud class action in the United States
District Court for the Eastern District of New York against Robert A. Carlson,
Richard A. Schneider and the Company. TDA commenced its action, entitled TDA
Trading Corp. v. Carlson, et al., by filing a complaint (the "Complaint") with
the Court.
The Complaint principally alleges that between July 21, 1993 and December
22, 1993 (the "Class Period"), in various press releases issued by the Company
and in the Company's Quarterly Report on Form 10-Q for the fiscal period ended
October 2, 1993, the defendants violated Section 10(b) of the Exchange Act, 15
U.S.C. 78j(b), and Rule 10b-5 promulgated thereunder by 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 and the drop in the price
of the Common Stock by approximately 35% on December 22, 1993 was a result of
the alleged misrepresentations by the Company. Additionally, the Complaint
asserts an alleged violation of ss.20 of the Exchange Act by certain directors
and officers of the Company. Specifically, the Complaint alleges 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
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<PAGE>
<PAGE>
directors of the Company, at various times throughout the Class Period,
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. On June 27, 1996, the Court denied the Company's
motion for summary judgment. The Court has set a trial date of September 4,
1996.
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. The Company's insurance carrier has previously notified the Company
that it reserves the right to deny coverage under the insurance policy in
connection with the TDA litigation (i) for claims not covered, such as claims
that do not involve negligent acts, errors or omissions, (ii) for damages that
may be uninsurable under the policy or applicable law, and (iii) for various
exclusions contained in the insurance policy, including dishonest, fraudulent,
willful or criminal acts or omissions.
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<PAGE>
<PAGE>
MANAGEMENT
Directors and Executive Officers
The names and ages of the directors and executive officers of the Company,
and their positions with the Company, are as follows:
Name Age Position
- ---- --- --------
Robert A. Carlson 62 Class I Director, Chairman and Chief Executive
Officer
Richard A. Schneider 43 Class II Director, Executive Vice President,
Treasurer, Chief Financial Officer and
Secretary
Stephen A. Barre 56 Class II Director
Edward L. Hennessy, Jr. 68 Class II Director
Charles S. Holmes 51 Class I Director
C. Shelton James 55 Class I Director
Dennis McCarthy 49 Class II Director
The principal occupations for the past five years (and, in some instances,
for prior years) of each of the directors, executive officers and key employees
of the Company are as follows:
Robert A. Carlson is a Director and the Chairman and Chief Executive
Officer of the Company. Mr. Carlson has been an officer of the Company since
1987. Until October 1995, he served as President and Chief Executive Officer
while, until December 1989, he served as President and Chief Operating Officer
of the Company. Prior to joining the Company, Mr. Carlson served as President
and Chief Executive Officer of Millicom Inc., a cellular telephone company, from
1984 through 1985 as well as a director of Racal/Millicom, a United Kingdom
company. From 1977 through 1983, Mr. Carlson served as a Division President of
Simmonds Precision Products, Inc., a military electronic company.
Richard A. Schneider is a Director and the Executive Vice President,
Treasurer, Chief Financial Officer and Secretary of the Company. He was elected
a Director of the Company on February 11, 1993. From October 1988 until December
1992, he served as Vice President - Finance and Treasurer of the Company. He was
elected Secretary of the Company in January 1990. Prior to joining the Company,
from November 1981 to 1988, Mr. Schneider was employed by EDO Corporation, an
electronics company which designs and manufactures advanced electronic and
specialized equipment for military, marine and aviation markets, in a number of
positions, the most recent of which was Controller. Mr. Schneider is a certified
public accountant.
Stephen A. Barre, a Director of the Company since 1989, has been for more
than the past five years the Chairman and Chief Executive Officer of Servo
Corporation of America, a communications and defect detection company.
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<PAGE>
<PAGE>
Edward L. Hennessy, Jr., a Director of the Company since March 6, 1996, Mr.
Hennessy is the retired Chairman and Chief Executive Officer of Allied Signal,
Inc. He is also a director of The Bank of New York, Lockheed Martin Corp.,
National Association of Manufacturers, and Fundamental Management Corporation.
Charles S. Holmes, a Director of the Company since October 3, 1995, is the
President and sole stockholder of Asset Management Associates of New York, Inc.
("Asset Management"), a New York-based firm specializing in acquisitions of
manufacturing businesses. Mr. Holmes founded and was a partner in Asset
Management Associates, a predecessor partnership of Asset Management, from 1978
to 1991. He has served since its formation in 1992 as the Chairman of the Board
of Directors of Chart Industries Inc. which specializes in the design,
manufacture and sale of industrial process equipment used in the hydrocarbon and
industrial gas industries for low-temperature and cryogenic applications, and
manufactures other industrial equipment such as stainless steel tubing,
structural pipe supports and high vacuum systems.
C. Shelton James, a Director of the Company since 1989, has been for more
than the past five years the Chairman of the Board and Chief Executive Officer
of Elcotel Inc., a public communications company. He also is President and a
director of Fundamental Management Corporation, an investment management
company, and is on the Board of Directors of Harris Computer Systems Inc., a
company engaged in the manufacture of electronic computers, SK Technologies, a
company engaged in development and marketing of point of sale and data
communication software and market computer hardware, and CPSI Inc., a company
engaged in high performance computing.
Dennis McCarthy was elected a Director of the Company on March 6, 1996. He
has been employed by Asset Management Associates of New York, Inc., a New
York-based firm specializing in acquisitions of manufacturing businesses, since
1988.
Directors are elected by the shareholders at annual meetings for two year
terms and serve until the next annual meeting of shareholders for the year in
which their term expires or until their successors are duly elected and
qualified. Officers are elected to serve, subject to the discretion of the
Board of Directors, until their successors are elected.
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<PAGE>
<PAGE>
Executive Compensation
The following table sets forth all plan and non-plan compensation awarded
to, earned by or paid to the Company's Chief Executive Officer and each of the
executive officers of the Company other than the Chief Executive Officer whose
total annual salary and bonus exceeded $100,000 for each of the Company's last
three fiscal years (collectively, the "Named Executives").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term Compensation
----------------------------------
Annual Compensation Awards Payouts
--------------------------------------------------------------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Other
Annual Restricted Securities
Compen- Stock Underlying LTIP All Other
Name and Principal Fiscal sation Award(s) Options/ Payouts Compensation
Position Year Salary(5) Bonus ($) ($)(1) ($) SARs (#) ($) ($)
- ------------------- ------ ---------- --------- ------- ----- ---------- ----- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Robert A. Carlson - 1995 $263,000 -- -- -- 250,000(5) -- $59,071(2)
President and Chief 1994 275,000 -- -- -- 138,983(4) -- 66,324(2)
Executive Officer 1993 260,000 $ 68,790 -- -- 64,347 -- 69,652(2)
Richard A. Schneider 1995 152,000 8,500 -- -- 125,000(5) -- 7,630(3)
Executive Vice 1994 149,000 -- -- -- 94,389(4) -- 12,426(3)
President, Treasurer 1993 138,000 27,380 -- -- 23,442 -- 13,993(3)
and Secretary
- --------------------------------------------------------------------------------------------------------
</TABLE>
(1) The aggregate amount of all perquisites and other personal benefits paid to
any Named Executive is not greater than either $50,000 or 10% of the total
of the annual salary and bonus reported for such Named Executive.
(2) Includes $59,122, $59,022 and $59,071 of life insurance premiums paid on
term life and split dollar policies by the Company on behalf of Mr. Carlson
in each of the years 1993, 1994 and 1995, respectively, as well as $7,909,
$7,302 and $0 of matching contributions made by the Company under the
401(k) deferred compensation plan and $2,621, $0 and $0 of matching
contributions made by the Company under the profit sharing portion of such
plan for the benefit of Mr. Carlson for each of the years 1993, 1994 and
1995, respectively.
(3) Includes $7,637, $7,603 and $7,630 of life insurance premiums paid on term
life and split dollar policies by the Company on behalf of Mr. Schneider in
each of the years 1993, 1994 and 1995, respectively, as well as $4,166,
$4,823 and $0 of matching contributions made by the Company under the
401(k) deferred compensation plan and $2,190, $0 and $0 of matching
contributions made by the Company under the profit sharing portion of such
plan for the benefit of Mr. Schneider for each of the years 1993, 1994 and
1995, respectively.
(4) Options to acquire shares of the Company's Common Stock that were granted
in fiscal year 1994. At the same time, options for Mr. Carlson (102,951
shares) and Mr. Schneider (54,996 shares) were canceled.
(5) Options to acquire shares of the Company's Common Stock that were granted
in fiscal year 1995. At the same time, options for Mr. Carlson (214,485
shares) and Mr. Schneider (95,327 shares) were canceled.
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<PAGE>
<PAGE>
Stock Options
The table below summarizes the options granted to the Named Executives in
1995 and their potential realizable values.
Option/SAR Grants in 1995
-------------------------
<TABLE>
<CAPTION>
Potential Realizable Value of
Assumed Annual
Rates of Stock Price
Appreciation
Individual Grants for Option Term (1)
- -----------------------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e) (f) (g)
Number of % of Total
Securities Options/SARs
Underlying Granted to
Options/SARs Employees in Exercise or Base
Name Granted (#) Fiscal Year Price ($/Sh) Expiration 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. Schneider 125,000(3) 24% $2.50 5 years $ - $ 88,316
Executive Vice President,
Treasurer and Secretary
</TABLE>
- ------------------------
(1) Option price at date of grant compounded annually at 5% and 10% over the
ten year term minus the exercise price times the number of shares subject
to the option.
(2) Such options were granted on October 16, 1995 in connection with an
employment agreement entered into between Mr. Carlson and the Company to
replace 214,485 previously issued options which were canceled. The closing
price for a share of Common Stock on the grant date was $1.81.
(3) Such options were granted on October 16, 1995 in connection with an
employment agreement entered into between Mr. Schneider and the Company to
replace 95,327 previously issued options which were canceled. The closing
price for a share of Common Stock on the grant date was $1.81.
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<PAGE>
<PAGE>
The table below summarizes the exercise of stock options during 1995 for
the Named Executives.
Aggregated Option/SAR Exercises in 1995 and FY-End Option/SAR Values
--------------------------------------------------------------------
<TABLE>
<CAPTION>
(a) (b) (c) (d) (e)
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options/SARs Options/SARs
at FY-End (#) at FY-End ($)
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. Schneider -0- $ 0 0/125,000 $ 0/0
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.
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<PAGE>
<PAGE>
Employment and Change in Control Agreements
The Company entered into an Employment Agreement (the "Carlson Employment
Agreement") with Robert A. Carlson on October 16, 1995. Pursuant to the Carlson
Employment Agreement, the term of Mr. Carlson's employment commenced on October
16, 1995 and will continue until November 30, 1997. Mr. Carlson will be paid
salary at a rate of $214,500 per annum which represents a 25% reduction in
salary from the prior year's level. In addition to such salary and assuming the
Company attains certain annual targets, the Company will pay to Mr. Carlson an
annual bonus equal to 100% of his salary. In addition, Mr. Carlson will be
eligible to participate in all employee benefit programs, will be entitled to
four weeks vacation, will continue to participate in the Company's retirement
program, will be provided with use of a Company car, and has been granted
options to purchase 250,000 shares of Common Stock at a per share exercise price
of $2.50 (such options to replace 225,000 previously issued options which were
canceled). In addition, if the Company decides to terminate Mr. Carlson's
employment without cause, the Company will provide Mr. Carlson with 20 days
written notice, and provide him with a severance payment of a pro rata share of
unused vacation for the full year plus a pro rata share of unused vacation for
the full year plus a pro rata share of his bonus under the Company Bonus Plan,
if the Board in its sole discretion so determines. In addition, the Company will
pay Mr. Carlson either his salary for the remainder of the term under the
agreement or one year's salary, whichever is greater. If the Company decides to
terminate Mr. Carlson's employment for cause, the Company will provide 20 days
written notice, and reason for the termination. Mr. Carlson will have those 20
days to effect a cure to the Company's satisfaction, and, if so cured, such
reason will no longer constitute cause for removal.
The Company entered into an Employment Agreement (the "Schneider Employment
Agreement") with Richard A. Schneider on October 16, 1995. Pursuant to the
Schneider Employment Agreement, the term of Mr. Schneider's employment commenced
on October 16, 1995 and will continue until October 16, 1997. Mr. Schneider will
be paid salary at a rate of $135,000 per annum which represents a 25% reduction
in salary from the prior year's level. In addition to such salary and assuming
the Company attains certain annual targets, the Company will pay to Mr.
Schneider an annual bonus equal to 87% of his salary. In addition, Mr. Schneider
will be eligible to participate in all employee benefit programs, will be
entitled to three weeks vacation, will 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.
The Company entered into an amendment of the Schneider Employment Agreement
("Amendment No. 1") with Mr. Schneider on August 8, 1996. Pursuant to Amendment
No. 1, Mr.
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<PAGE>
<PAGE>
Schneider will no longer be eligible to participate in or receive any benefits
under the Company's Supplemental Retirement Plan (the "SERP"). Mr. Schneider's
interest in the SERP was redeemed by the Company for $150,000 which represents
approximately 60% of the actuarial value of his accrued benefit under the SERP
as of February 29, 1996.
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.
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<PAGE>
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information concerning persons or groups who
are known by the Company to be the beneficial owners of more than 5% of the
Common Stock as of June 29, 1996. The information in the table below is based
upon information furnished to the Company by such persons and statements filed
with the Commission.
Number of Shares of
Common Stock Percent of
Name and Address of Beneficial Owner Beneficially Owned (1) Common Stock
- ------------------------------------ ------------------- ------------
Charles S. Holmes
P.O. Box 2850
Southampton, NY 11969 (2) 3,000,000 28.68%
Pioneering Management Corporation
60 State Street
Boston, MA 02114 (3) 696,500 7.61%
Fundamental Management Corporation
4000 Hollywood Boulevard
Suite 610N
Hollywood, FL 33021 (4) 1,075,636 11.28%
- ------------------------
(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 300,000 shares underlying the Additional Warrants exercisable at $3.00
per share. The ownership percentage is calculated as if such Warrants and
Additional Warrants had been converted as of June 29, 1996.
(3) These shares are reportedly owned by a passive investor. Pioneering
Management Corporation is the investment company advisor of such investor
and is registered under Section 203 of the Investment Advisers Act of 1940.
(4) These shares are reportedly owned by various limited partnerships, of which
Fundamental Management Corporation is the general partner. C. Shelton
James, a director of the Company, is the President and a director of
Fundamental Management Corporation. Includes 225,000 shares underlying
certain Warrants exercisable at $2.50 per share and 450,000 shares
underlying $900,000 of Notes convertible into shares at $2.00 per share.
Excludes 14,793 shares of Common Stock owned by Mr. James as to which
shares Fundamental Management Corporation disclaims beneficial ownership.
The ownership percentage is calculated as if such Warrants and Notes had
been converted as of June 29, 1996.
Shares of Common Stock beneficially owned as of June 29, 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 Commission.
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<PAGE>
<PAGE>
Beneficial Ownership of Shares (1)
Number of Shares of
Common Stock Percent of
Name Beneficially Owned (2) Common Stock (3)
- ---- ------------------- ------------
Robert A. Carlson 100,467 1.19%
Stephen A. Barre 17,654 --
Edward L. Hennessy, Jr. -0- --
Charles S. Holmes (4) 1,000,000 11.82
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 13.59%
- ------------------------
- -- = Less than 1%
(1) Directors and executive officers have sole voting power and sole investment
power with respect to the shares listed opposite their names.
(2) Excludes options exercisable within 60 days of March 31, 1996 for such
persons as follows: Mr. Carlson, -0-; Mr. Barre, 3,120; Mr. Hennessy, -0-;
Mr. Holmes, -0-; Mr. James, 7,401; Mr. McCarthy, -0-; Mr. Schneider, -0-;
and all directors and officers as a group, 16,751.
(3) The percentages of Common Stock outstanding are based on 8,459,437 shares
outstanding on June 29, 1996.
(4) Excludes Warrants to purchase 1,700,000 shares of Common Stock and
Additional Warrants to purchase 300,000 shares of Common Stock owned by Mr.
Holmes.
(5) Excludes 385,636 shares of Common Stock, Warrants to purchase 225,000
shares of Common Stock and Notes convertible into 450,000 shares of Common
Stock owned by various limited partnerships of which Fundamental Management
Corporation, an investment company of which Mr. James is President and a
director, as to which shares Mr. James shares voting and dispositive power.
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<PAGE>
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On October 13, 1995, Charles S. Holmes loaned the Company $1,000,000 at 12%
interest, and received a fee of 3% of such principal amount (the "Holmes
Transaction"), and in December 1995, Mr. Holmes loaned the Company an additional
$1,000,000 on the same terms, both of which loans were integrated with the
Company's private placement (the "Holmes Transaction") of 12% Convertible
Subordinated Notes due January 15, 2001 (the "Notes") and Warrants to purchase
Common Stock (the "Warrants") and Mr. Holmes received 2,000 Units consisting of
$2,000,000 aggregate principal amount of Notes and Warrants to purchase 500,000
shares of Common Stock in exchange therefor. In connection with the Holmes
Transaction, Mr. Holmes became a director of the Company in October 1995. In
connection with the Holmes Transaction, the Company issued Warrants to purchase
an aggregate of 1,200,000 additional shares of Common Stock at $2.50 per share
to Mr. Holmes for advisory services in connection with the private placement and
the engagement of Commonwealth Associates as the Company's placement agent.
In December 1995 and January 1996, Active Investors II, Ltd. loaned the
Company $500,000 and $400,000, respectively, at 12% interest (the "James
Transaction"), both of which loans were integrated with the James Transaction
and Active Investors received 900 Units consisting of $900,000 aggregate
principal amount of Notes and Warrants to purchase 225,000 shares of Common
Stock in exchange therefor. On May 2, 1996, Active Investors purchased an
additional 100 Units from the Company consisting of $100,000 aggregate principal
amount of Notes and Warrants to purchase 25,000 shares of Common Stock. C.
Shelton James, a director of the Company, is the President and a director of
Active Investors. Active Investors and certain affiliated limited partnerships
currently own shares of Common Stock of the Company.
In connection with the Private Placement, the Company agreed to use its
best efforts to cause the resignation of two then-current members of the Board
of Directors and cause to be elected as directors two individuals acceptable to
the Company and who are designated by the investors (including one designated
solely by Mr. Holmes) and one designated solely by Active Investors. Dennis
McCarthy was designated to serve in such capacity by Mr. Holmes, while Edward L.
Hennessy, Jr. was designated to serve in such capacity by Active Investors, and
each became a director of the Company on March 6, 1996.
On May 9, 1996, the Company entered into an agreement with Charles S.
Holmes, a member of the Company's Board of Directors, that in consideration of
his converting the 12% Convertible Subordinated Promissory Note due 2001 of the
Company in the aggregate unpaid principal amount of $2,000,000 held by him into
1,000,000 shares of Common Stock as provided in Section 6 of the Note, the
Company would immediately grant him warrants to purchase 300,000 shares of
Common Stock at any time and from time to time on or before February 15, 2002 at
an exercise price of $3.00 per share, subject to adjustment in certain events.
Such warrants are referred to herein as the Additional Warrants and such shares
are referred to as the Holmes Shares and are being registered herewith.
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<PAGE>
<PAGE>
DESCRIPTION OF SECURITIES
The Notes
The Notes mature on January 15, 2001 and bear interest from the date of
issuance at the rate per annum of 12%. Interest on the Notes is payable
quarterly in arrears on January 15, April 15, July 15 and October 15 of each
year commencing April 15, 1996. In the event of a Chapter 11 or Chapter 7
bankruptcy case in which the Company is the debtor, the Notes will bear interest
from the date of commencement of the case at a default rate per annum equal to
the lesser of 18% or the highest such rate allowable by law. The Notes are
subject to prepayment, in whole and not in part, at the option of the Company,
at any time after the third anniversary of the date of issuance, without premium
or penalty. Upon the occurrence of a "change in control" of the Company, each
holder of the Notes will have the right to require that the Company repurchase
such holder's Notes in whole and not in part, without premium or penalty, at a
purchase price in cash in an amount equal to 100% of the principal amount
thereof, together with accrued and unpaid interest, if any, to the date of
purchase, pursuant to an offer made in accordance with the procedures described
in the Notes. The Notes are governed by an Indenture (the "Indenture") dated as
of July 15, 1996 between the Company and First Trust National Association, as
trustee (the "Trustee"). The holders of a majority in principal amount of the
Notes then outstanding by notice in writing to the Company and the Trustee or
any successor trustee may (i) remove the Trustee and (ii) within one year after
a successor trustee appointed by the Company has taken office, appoint a
successor trustee to replace the successor trustee appointed by the Company. The
Notes and the Indenture may not be amended in any material respect for the
purposes of adding any provision to, or changing in any manner or eliminating
any of the provisions of, the Notes or the Indenture without the consent of the
holders of at least 50% in aggregate principal amount of outstanding Notes. The
Notes and the Indenture may not be amended, for the purposes of (i) changing the
maturity of the principal, or any installment of interest, (ii) changing the
currency in which the Notes are payable, (iii) reducing the principal amount or
the interest rate, and (iv) reduce the percentage of the principal amount of the
outstanding Notes required for any amendment or waiver of the provisions of the
Note and the Indenture, without the consent of the holder of each outstanding
Note.
Subordination. The indebtedness evidenced by the Notes, including any
interest thereon, is subordinate and subject in right of payment to the prior
payment when due in full of all Senior Indebtedness. Senior Indebtedness is
defined in the Note to include, unless the terms respecting the particular
indebtedness or obligation otherwise provide, the principal of, premium, if any,
and any interest on, all liabilities of the Company, direct or contingent,
joint, several or independent, now or hereafter existing, due or to become due,
whether created directly or acquired by assignment or otherwise, under or in
respect of the Credit Agreement and all extensions, renewals and refunding of
any of the foregoing up to the original amount. At March 30, 1996, the amount of
Senior Indebtedness outstanding was $15,175,000 which was outstanding pursuant
to the Credit Agreement which provides for quarterly principal payments of
$500,000 on March 31, 1996, June 30, 1996, September 30, 1996 and December 31,
1996, and $750,000 on the last day of each quarter thereafter, commencing March
31, 1997 and ending on December 31, 1998, together with accrued and unpaid
interest through the applicable payment date at the prime rate plus 1 3/4% per
annum. The remaining outstanding principal amount of $7,975,000 is due and
payable on January 15, 1999. Upon the acceleration of any Senior Indebtedness or
upon the maturity of the entire principal amount of any Senior Indebtedness by
lapse of time, acceleration or otherwise, all such Senior Indebtedness
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which has been so accelerated or matured shall first indefeasibly be paid in
full before any payment is made by the Company or any person acting on behalf
of the Company on account of any obligations evidenced by the Notes. There is
no sinking fund for the Notes.
The Notes will be senior to any indebtedness of the Company's subsidiaries.
At March 30, 1996, there was no such indebtedness.
Conversion Rights. The Notes may be converted by the holders as to their
principal amount into Common Stock of the Company at any time at a conversion
price equal to $2.00 per share, subject to adjustment. The conversion price of
the Notes will be adjusted to $1.50 or $1.00, respectively, if the Company's
EBITDA falls below $6,000,000 or $4,750,000 in 1996. Should the Company sell the
stock or assets of a subsidiary in 1996, such amounts will be reduced by
$838,000 if the stock or assets of Wilcom are sold, $2,805,000 if the stock or
assets of Codar are sold, $607,000 if the stock or assets of Systems are sold,
and $1,833,000 if the stock or assets of Lynwood are sold, depending
on the time of sale. The conversion price and the number of shares of
Common Stock to be received upon conversion are subject to adjustment upon the
occurrence of any of the following events: (i) the recapitalization of the
Company or reclassification of the securities to be received upon conversion or
any merger or consolidation of the Company into or with a corporation or other
business entity, or the sale or transfer of all or substantially all of the
Company's assets or any successor corporation's assets to any other corporation
or business entity, (ii) the subdivision or combination of the shares of Common
Stock to be received upon conversion, (iii) the payment of dividends or other
distributions in the form of the securities to be received upon conversion, and
(iv) the issuance of shares of Common Stock at less than the conversion price.
No adjustment of the conversion price is required to be made until cumulative
adjustments otherwise required to be made amount to 1% or more of the conversion
price last adjusted. The Company may force conversion of the Notes if, at any
time prior to maturity, the closing bid price for the Common Stock exceeds $6.00
per share for thirty (30) consecutive trading days prior to the giving of notice
of conversion. Fractional shares will not be issued upon conversion, but cash
adjustment will be paid in lieu thereof. Interest will accrue on the Notes
through the date of conversion. No payment or adjustment will be made for
dividends on securities issued upon conversion.
Restrictive Covenants. The Notes contain certain negative covenants
prohibiting, among other things, the negative pledge of the Company's assets not
otherwise encumbered by its senior lenders.
Events of Default. "Events of Default" under the Notes include failure to
pay principal when due or the failure to pay interest for a period of 10 days
after such payment becomes due, the failure to pay other indebtedness for
borrowed money in excess of $500,000 when due, or the acceleration of such
indebtedness, the failure to pay any judgment in excess of $500,000 when due or
stayed, and voluntary or involuntary bankruptcy of the Company. In the event
that the Company defaults in making any payment of principal required to be made
by the Notes, the Company shall pay interest on such defaulted amount at a rate
of 18%.
If an Event of Default occurs and is continuing, then and in every such
case the Trustee by notice in writing to the Company, or the holders of at least
25% in principal amount of the Notes then outstanding by notice in writing to
the Company and the Trustee, may declare the Notes then outstanding to be
immediately due and payable, whereupon the same will be immediately due and
payable. The holders of a majority in principal amount of the Notes then
outstanding by written notice to the Trustee may rescind an acceleration if all
existing Events of Default have been cured or waived except for nonpayment of
accelerated amounts. A payment default will
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result in the issuance to each Noteholder of a pro rata share of additional
warrants to purchase an aggregate of 2,000,000 shares of Common Stock and
until the Notes are fully repaid, the right of the Noteholders to elect a
majority of the Company's Board of Directors. In the event of a Chapter 11
or Chapter 7 bankruptcy case in which the Company is the debtor, the Notes
will bear interest from the date of commencement of the case at a default
rate per annum equal to the lesser of 18% or the highest such rate allowable
by law. The holders of at least a majority in principal amount of the Notes
then outstanding may waive an existing Event of Default and its consequences;
provided that it is not an Event of Default that is continuing or an Event
of Default in the payment of principal or interest on the Notes.
Remedies. The holders of a majority in principal amount of the Notes then
outstanding may direct the time, method and place of conducting any proceeding
for any remedy available to the Trustee under the Indenture. A Noteholder may
pursue a remedy with respect to the Indenture or the Notes only if (i) the
Noteholder gives to the Trustee notice of a continuing Event of Default, (ii)
the holders of at least 25% in principal amount of the Notes then outstanding
make a written request to the Trustee to pursue the remedy, (iii) such
Noteholder or Noteholders offer to the Trustee indemnity satisfactory to the
Trustee against any loss, liability or expense, (iv) the Trustee does not comply
with the request within 60 days after receipt of the request and the offer of
indemnity, and (v) during such 60-day period, the holders of a majority in
principal amount of the Notes then outstanding do not give the Trustee a
direction inconsistent with the request.
The Warrants
Each Warrant entitles the holder thereof to purchase specified numbers of
shares of Common Stock at an exercise price equal to $2.50 per share, subject to
adjustment. The Exercise Price of the Warrants will be adjusted to $2.00 or
$1.50, respectively, if the Company's EBITDA falls below $6,000,000 or
$4,750,000 in 1996. Should the Company sell the stock or assets of a subsidiary
in 1996, such amounts will be reduced by $838,000 if the stock or assets of
Wilcom are sold, $2,805,000 if the stock or assets of Codar are sold, $607,000
if the stock or assets of Systems are sold, and $1,833,000 if the stock or
assets of Lynwood are sold, depending on the time of sale. The Exercise Price
and the number of shares of Common Stock to be received upon exercise are
subject to adjustment upon the occurrence of any of the following events: (i)
the recapitalization of the Company or reclassification of the securities to be
received upon conversion or any merger or consolidation of the Company
into or with a corporation or other business entity, or the sale or
transfer of all or substantially all of the Company's assets or any successor
corporation's assets to any other corporation or business entity, (ii) the
subdivision or combination of shares of Common Stock to be received upon
exercise, (iii) the payment of dividends or other distributions in the form of
the securities to be received upon exercise, and (iv) the issuance of shares of
Common Stock at less than the Exercise Price. No adjustment of the Exercise
Price is required to be made until cumulative adjustments otherwise required to
be made amount to 1% or more of the Exercise Price last adjusted. Warrants will
be exercisable, at any time and from time to time, on or before 5:30 p.m., local
time, on or before February 15, 2002 (the "Expiration Date") by delivery of an
Exercise Notice duly completed and tendering of the aggregate Exercise Price.
Each Warrant may be exercised in whole or in part so long as any exercise in
part would not involve the issuance of fractional shares of Common Stock.
Discussion of the Notes and Warrants in this Prospectus is qualified
entirely by reference to the forms of the Note and Warrant filed by the Company
with the Commission.
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Common Stock
The Company is authorized to issue 25,000,000 shares of Common Stock, par
value $.10 per share. As of June 29, 1996, 8,459,437 shares of Common Stock were
outstanding.
Voting Rights. Holders of shares of Common Stock are entitled to one vote
for each share of Common Stock held. Under New York law, the affirmative vote of
the holders of a majority of the outstanding shares of Common Stock is required
to approve, among other matters, an amendment of the certificate of
incorporation if the rights or preferences of such holders would be subordinated
or otherwise adversely affected thereby.
Dividends. If all cumulative dividends shall have been paid as declared or
set apart for payment upon shares of Preferred Stock then outstanding, if any,
holders of shares of Common Stock are entitled to receive such dividends as may
be declared by the Company's Board of Directors out of funds legally available
for such purpose. The Credit Agreement prohibits the payment of cash dividends,
but permits stock splits and dividends payable solely in shares of any class of
its capital stock. See "Trading Information" below.
Liquidation Rights. Upon liquidation, dissolution or winding up of the
Company, the holders of the Common Stock are entitled to share ratably in all
assets available for distribution after payment in full of creditors and after
the preferential rights of holders of shares of Preferred Stock then
outstanding, if any, have been satisfied.
Other Provisions. The holders of Common Stock are not entitled to
preemptive or subscription rights. The affirmative vote of the holders of 80% of
all Common Stock of the Company shall be required for the adoption or
authorization of (i) a business combination (as defined in the Certificate of
Incorporation) with any other entity (as defined in the Certificate of
Incorporation) if, as of the record date for the determination of shareholders
entitled to notice thereof and to vote thereon, such other entity is the
beneficial owner, directly or indirectly, of more than 10% of the outstanding
shares of Common Stock, or (ii) a proposed dissolution of the Company or a
proposed amendment of the Certificate of Incorporation of the Company which
would either change the entitlement of the holders of shares of Common Stock of
the Corporation to vote in the election of directors or would authorize the
Company to issue either shares of capital stock (other than shares of its Common
Stock) or bonds, debentures or other obligations, which, if issued, would or
could be entitled to vote in the election of directors if, as of the record
date for the determination of shareholders entitled to notice of and to vote
on such proposed dissolution or such proposed amendment, any other entity
(as defined in the Certificate of Incorporation) is the beneficial owner,
directly or indirectly, of more than 10% of the outstanding shares of Common
Stock; provided that such 80% voting requirement shall not be applicable to
the adoption or authorization of a business combination if certain
circumstances, detailed in the Certificate of Incorporation, exist. This
provision may have the effect of discouraging attempts by a person or group
to take control of the Company. See "RISK FACTORS -- Anti-takeover
Restrictions."
All issued and outstanding shares of Common Stock are, and the Common Stock
reserved for issuance upon conversion of the Notes and exercise of the Warrants
will be, when issued, fully-paid and non-assessable.
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Preferred Stock
The Company is authorized to issue 2,000,000 shares of preferred stock, no
par value (the "Preferred Stock"), none of which are currently outstanding. The
Board of Directors of the Corporation is authorized to establish and designate
series of Preferred Stock and to fix from time to time before issuance the
number, designation, relative rights, preferences and limitations (including,
without limitation, participating, voting, optional or other special rights), of
the shares of any series of Preferred Stock. Except to the extent, if any, that
holders of issued and outstanding shares of preferred Stock are entitled to
vote, the entire voting power for the election of directors and for all other
purposes shall be vested exclusively in the holders of the Common Stock.
Registration Rights
The Company has agreed to include the Notes, the Warrants and the shares of
Common Stock reserved for issuance upon conversion of the Notes and Exercise of
the Warrants (collectively, the "Registrable Securities") in any registration
statement filed with the Commission, at any time prior to December 31, 2005,
with respect to any future public offerings initiated by the Company or any
selling shareholders (the "Piggy-Back Rights") and holders of a majority in
interest of the Registerable Securities will have the right, which right may be
exercised no more than twice, to demand, at any time prior to January 15, 2006,
that the Company file a registration statement with the Commission with respect
to the Registrable Securities (the "Demand Rights"). The Company will bear all
fees and expenses incurred in the preparation and filing of any registration
statement relating to the exercise of Piggy-Back Rights and the first exercise
of Demand Rights.
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Trading Information
The Common Stock trades on The Nasdaq Stock Market under the symbol NATL.
The table below sets forth for the periods indicated the high and low sale
prices for the Common Stock as adjusted for stock dividends and stock splits as
compiled from published sources.
Period High Low
------ ---- ---
1996
First Quarter $ 2 3/8 $ 1 7/16
Second Quarter $ 3 7/8 $ 2
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
As of June 27, 1996, the approximate number of record holders of the Common
Stock as determined from the records of the transfer agent, American Stock
Transfer & Trust Company, was 665. Street names are included collectively as a
single holder of record. Management estimates that the Company has approximately
2,000 additional shareholders holding stock in street names.
The Notes will not be listed for trading following the filing of this
Prospectus.
There have been no cash dividends declared or paid on the Common Stock
during the past five years. The Credit Agreement prohibits the payment of cash
dividends. A 4% stock dividend on the Common Stock was paid to shareholders of
record on February 25, 1994.
Transfer Agent
The Transfer Agent and Registrar for the Common Stock is American Stock
Transfer & Trust Company, 40 Wall Street, New York, New York. The Company acts
as its own transfer agent with respect to the Notes and Warrants.
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CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following summary describes the material United States federal income
tax considerations applicable to the purchase, ownership and disposition of the
Notes and the Warrants, and of the Common Stock received upon conversion of the
Notes or exercise of the Warrants. This summary is limited solely to investors
who acquire securities pursuant to this Prospectus and who own the Notes and the
Warrants, and any Common Stock received on conversion of the Notes or exercise
of the Warrants, as capital assets within the meaning of Section 1221 of the
Internal Revenue Code of 1986, as amended (the "Code"). This summary is based
upon the provisions of the Code and the regulations, administrative rulings and
judicial decisions now in effect, all of which are subject to change (possibly
with retroactive effect) or different interpretations. There can be no assurance
that the Internal Revenue Service (the "Service") will take a similar view as to
any of the tax consequences described below. No ruling has been or will be
requested from the Service on any tax matters relating to the purchase or the
ownership or disposition of the Securities.
This summary does not purport to deal with all aspects of United States
federal income taxation that may be relevant to a particular holder or to
certain types of holders subject to special treatment under the federal income
tax laws (for example, S corporations, banks, dealers in securities, life
insurance companies, tax exempt organizations and foreign taxpayers) or to
investors who acquired their interest in the securities covered by this
Prospectus pursuant to the exercise of employee stock options or otherwise as
compensation. In addition, the following summary does not consider the potential
effect of any applicable foreign, state, local or other tax laws, or estate or
gift tax considerations. This discussion is not intended as tax advice to the
purchasers of the Securities.
The Service announced in 1994 that it is studying the federal income tax
treatment of debt instruments which can be repaid in stock of an issuer and
that, in appropriate circumstances, such debt instruments may be recharacterized
as equity for federal income tax purposes. The Company believes that the Notes
should be characterized as debt for federal income tax purposes, and the
following discussion assumes such treatment. However, because the Company can
require conversion of the Notes in certain circumstances, there can be no
assurance that the Service will not challenge this position.
Investors are advised to consult their own tax advisors with respect to the
consequences to them of the purchase, ownership and disposition of the
securities offered hereby.
Allocation of Issue Price of Units Among the Notes and the Warrants; Initial
Adjusted Basis
As stated above, the Notes and the Warrants were issued together as
"investment units" in the Private Placement. Under applicable Treasury
Regulations, the original issue price for such an investment unit must be
allocated between the Notes and the Warrants based upon their relative fair
market values. Thus, the original issue price of each Note is equal the issue
price of an overall Unit less the amount allocable to the Warrant.
The Company has allocated $875 of the issue price of each Unit to each
$1,000 principal amount of the Notes and $125 of such amount to each Warrant to
purchase 250 shares of Common Stock (at $.50 each). The Company's allocation
reflects its judgment as to the relative fair market values of those instruments
at the time of issuance, but is not binding on the Service.
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The Company's allocation of the issue price of the Units is binding on
holders of the instruments, unless a holder discloses the use of a different
allocation on its federal income tax return for the year that includes the
acquisition date of the Note and/or Warrant. Holders considering the use of an
issue price allocation different from that used by the Company should consult
their tax advisors as to the consequences thereof.
Each Note is legended to indicate the issue date of such Note and the
portion of the issue price of the Unit which, in the Company's opinion, is
properly allocable to the Note.
An investor who acquires a Note or a Warrant from a Selling Securityholder
will receive an initial tax basis in such security equal to his cost therefor.
Taxation of Interest
Each holder of a Note will be required to report, as ordinary income,
stated interest on the Note in accordance with such holder's tax accounting
method. For example, accrual method holders will report the interest on the
Notes as it accrues, and cash method holders will report such interest when it
is received or unconditionally made available for receipt.
Original Issue Discount on the Notes
For federal income tax purposes, when a debt instrument is issued at a
discount, the amount of such discount ("original issue discount" or "OID") is
treated as interest income, and the holder of such instrument must include such
OID in his income for the period during which the OID accrues even though no
cash attributable to such OID income will be received until maturity, redemption
or other disposition of the debt instrument.
The amount of OID, if any, on a debt instrument is the difference between
its "issue price" and its "stated redemption price at maturity" (subject,
generally, to a statutory de minimis exception). The portion of any such OID
that is to be accrued (and included in income) with respect to a debt instrument
with a maturity of more than one year generally will be determined for each
accrual period during the term of such debt instrument under the constant yield
method, applied by multiplying the adjusted issue price of the debt instrument
at the beginning of the accrual period by its yield to maturity, and subtracting
from that product the amount of any interest payments made during that accrual
period that are based on a single fixed rate and are payable unconditionally in
cash or in property (other than debt instruments of the issuer) at intervals of
one year or less during the entire term of the debt instrument ("Qualified
Stated Interest"). The resulting amount is allocated ratably to each day in the
accrual period, and the amount includible in a holder's income (whether on the
cash or accrual method of accounting) with respect to the debt instrument is the
sum of the resulting daily portions of OID for each day of the taxable year on
which the holder held the debt instrument.
The adjusted issue price of a debt instrument at the beginning of any
accrual period is equal to its original issue price increased by all previously
accrued OID and reduced by the amount of all previous payments made on such debt
instrument other than payments of Qualified Stated Interest. Generally, the tax
basis of a debt instrument in the hands of the holder will be increased and
decreased, respectively, by the same amounts.
Because of the required allocation of a portion of the issue price for the
Units to the Warrants (see discussion above), the stated redemption price at
maturity for the Notes exceeded their issue price
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(after giving effect to such allocation). Accordingly, the Notes were issued
with OID equal to this excess. The Company believes the amount of OID per each
$1,000 principal amount of the Notes is $125.
A purchaser of Notes from a Selling Securityholder will generally be
required to include in his gross income in advance of the receipt of cash
representing that income the sum of the daily portions of OID on his Notes for
each day during each taxable year or portion thereof on which he holds such
Notes in the same manner as the Selling Securityholder. (These amounts are in
addition to the actual interest payments on the Notes.) An investor that
acquires Notes from a Selling Securityholder for an amount that exceeds their
adjusted issue price at the time of such acquisition will, however, be
considered to have purchased such Notes at an acquisition premium. The amount of
OID which any such investor is required to include in income with respect to
such Notes for any taxable year will be reduced by the portion of such
acquisition premium properly allocable to such year.
The Company will furnish annually to record holders of the Notes and to the
Service information with respect to the OID, if any, accruing during the
calendar year (as well as interest paid during that year). Because this
information will be based upon the adjusted issue price of the Notes, investors
who purchase the Notes from the Selling Securityholders for an amount in excess
of the adjusted issue price at the time of such acquisition will be required to
determine for themselves (based upon the rules described above) the amount of
OID, if any, they are required to report. Moreover, as stated above, the Service
may not agree with the original issue price allocated by the Company to the
Notes.
On December 15, 1994 the Service issued proposed regulations governing the
inclusion in income of OID for certain contingent payment debt instruments (the
"Proposed Regulations"). The Proposed Regulations are effective only for debt
instruments issued after such regulations become final, and accordingly do not
apply to the Notes. The Service could, however, assert that the inclusion of a
default rate of interest applicable upon the occurrence of a bankruptcy of the
Company, and the right of the Company to prepay the Notes prior to their
scheduled maturity, give rise to contingent payments within the meaning of the
Proposed Regulations. If the Service were successful in such an assertion, the
resulting OID analysis could differ from that set forth herein.
Market Discount
The income which an investor who acquires a Note from a Selling
Securityholder must recognize may also be affected by the market discount
provisions of the Code. Debt instruments such as the Notes which bear OID are
considered to have been purchased at a market discount if, subsequent to their
original issuance, they are purchased at a price below their adjusted issue
price.
Under the market discount rules, if such an investor purchases a Note at a
market discount in excess of a statutorily-defined de minimis amount and
thereafter recognizes gain upon a disposition or retirement of the Note, then
the lesser of the gain so recognized or the portion of the market discount that
accrued while the Note was held by such investor generally will be treated as
ordinary income at the time of the disposition. Moreover, any such market
discount on a Note may be taxable to such an investor at the time of certain
otherwise non-taxable transactions (e.g., gifts). In addition, a holder of a
market discount Note may be required to defer a portion of any interest expense
that otherwise may be deductible on any indebtedness incurred or maintained to
purchase or carry such Note until the holder disposes of the Note in a taxable
transaction.
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Neither the rule treating accrued market discount as ordinary income on
disposition nor the rule deferring interest deductions applies if the holder of
the market- discount Note elects to include the accrued market discount in
income currently. This election to include market discount in income currently,
once made, applies to all market discount obligations acquired during or after
the first taxable year to which the election applies and may not be revoked
without the consent of the Service.
Conversion of Notes into Common Stock
In general, no gain or loss will be recognized for federal income tax
purposes upon a conversion of the Notes into shares of Common Stock. However,
cash paid in lieu of a fractional share of Common Stock will result in taxable
gain (or loss), which will be capital gain (or loss), to the extent that the
amount of such cash exceeds (or is exceeded by) the portion of the adjusted
basis of the Note allocable to such fractional share. The adjusted basis of
shares of Common Stock received on conversion will equal the adjusted basis of
the Note converted, reduced by the portion of adjusted basis allocated to any
fractional share of Common Stock exchanged for cash. The holding period of an
investor in the Common Stock received on conversion will include the period
during which the converted Notes were held.
Exercise of Warrants
No gain or loss will be recognized upon the exercise of a Warrant (except
to the extent, if any, of cash received in lieu of fractional shares). The
holder's tax basis in the Common Stock acquired on such exercise will be the sum
of his tax basis in the Warrants exercised and the cash paid upon exercise. The
holding period for the Common Stock acquired on such exercise will begin on the
date of exercise of the Warrant and will not include the period during which the
Warrant was held.
Upon expiration of an unexercised Warrant, a holder will generally
recognize a loss equal to such holder's adjusted tax basis in the Warrant. If
the Common Stock issuable upon exercise of the Warrant would have been a capital
asset of the holder if acquired by the holder, such loss will be a capital loss.
Adjustment of Conversion Price
The conversion ratio of the Notes and the Warrants is subject to adjustment
under certain circumstances. Section 305 of the Code and the Treasury
Regulations issued thereunder may treat the holders of the Notes and of the
Warrants as having received a constructive distribution, resulting in ordinary
income (subject to a possible dividend-received deduction in the case of
corporate holders) to the extent of the Company's current and/or accumulated
earnings and profits, if, and to the extent that, certain adjustments in the
conversion ratio increase the proportionate interest of a holder of Notes or
Warrants in the fully diluted Common Stock, whether or not such holder ever
exercises its conversion privilege. Such a constructive distribution could
result from the adjustment of the conversion price for the Notes or the Warrants
attributable to the failure of the Company to meet certain specified adjusted
earnings levels for 1996. Adjustments to the conversion ratio of the Notes and
the Warrants also may occur in other limited circumstances. Moreover, if there
is not a full adjustment to the conversion ratio of the Notes or the Warrants to
reflect a stock dividend or other event increasing the proportionate interest of
the holders of outstanding Common Stock in the assets or earnings and profits of
the Company, then such increase in the proportionate interest of the holders of
the Common Stock could be treated as a distribution to such holders of Common
Stock, taxable as ordinary income (subject to a possible dividends-received
deduction in the case of corporate holders) to the extent of
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the Company's current and/or accumulated earnings and profits. The Company
intends that there be a full adjustment to the conversion ratio of the Notes and
the Warrants in any such event. Accordingly, the holders of Common Stock should
not be deemed to receive any such taxable dividend distribution under Section
305 of the Code.
Dividends on Common Stock
Distributions on the shares of Common Stock into which Notes have been
converted or which were received on the exercise of the Warrants will be taxable
as dividends (i.e., as ordinary income) to the extent of the Company's current
and/or accumulated earnings and profits. To the extent that the amount of any
such distribution exceeds the Company's current and accumulated earnings and
profits for a taxable year, the distribution will first be treated as a tax-free
return of capital, causing a reduction in the adjusted basis of the Common Stock
(thereby increasing the amount of gain, or decreasing the amount of loss, to be
recognized by the investor on a subsequent disposition of the Common Stock), and
the balance in excess of adjusted basis will be taxed as if it were capital gain
recognized on a sale or exchange of such stock.
Subject to certain holding period and taxable income requirements imposed
by the Code, a distribution to a corporate shareholder that is treated as a
dividend may qualify for the 70% (or, in certain cases, 80%) dividends-received
deduction available under the Code. However, to the extent that the corporate
shareholder incurs indebtedness that is directly attributable to an investment
in the stock on which the dividend is paid, all or a portion of the
dividends-received deduction may be disallowed. In addition, dividend income
that is not subject to the regular federal income tax as a consequence of the
dividends-received deduction may be subject to the federal alternative minimum
tax. Finally, the tax basis of stock held by a corporate shareholder may be
reduced (but not below zero) by the non-taxed portion of any "extraordinary
dividend" (as defined in Section 1059 of the Code) that is received with respect
to such stock. To the extent a corporate holder's tax basis would have been
reduced below zero but for the foregoing limitation, such holder must increase
the amount of gain recognized on the ultimate sale or exchange of such stock for
the taxable year in which such sale or exchange occurs.
Disposition of Notes and Common Stock
Subject to the discussion above under "Conversion of Notes into Common
Stock," each holder of Notes generally will recognize gain or loss upon the
sale, exchange, redemption, retirement or other disposition of the Notes
measured by the difference (if any) between (i) the amount of cash and the fair
market value of any property received (except to the extent that such cash or
other property is attributable to the payment of accrued interest not previously
included in income, which amount will be taxable as ordinary income) and (ii)
the holder's adjusted tax basis in the Notes. Subject to certain special rules
under Section 302 of the Code in the case of redemptions (whereunder the total
proceeds received by a seller of Common Stock may be treated as a dividend) and
to the discussion of Section 1059 of the Code under "Dividends on Common Stock,"
above, in cases of significant "extraordinary dividends," each holder of Common
Stock received upon a conversion of the Notes or an exercise of the Warrants, in
general, will recognize gain or loss upon the sale, exchange, redemption or
other disposition of the Common Stock in an amount determined similarly to the
calculation described in the preceding sentence for the Notes. Any gain or loss
recognized on the sale, exchange, redemption, retirement or other disposition of
a Note or Common Stock held as a capital asset will be capital gain or loss
(except as discussed under "Market Discount" above). Such capital gain or loss
will be long-
-55-
<PAGE>
<PAGE>
term capital gain or loss if the Note or the Common Stock has been held for more
than one year at the time of the sale or exchange, and otherwise will be a
short-term capital gain or loss.
Effect on Holders of Sale of Warrants
The sale of a Warrant other than to the Company will result in the
recognition of capital gain or loss to the holder if the Warrant is held as a
capital asset and the Common Stock issuable upon exercise would have been a
capital asset if acquired. The gain or loss will be measured by the difference
between the amount realized and the holder's basis in the Warrant, and will be
long-term or short-term capital gain or loss depending on whether the Warrant
has been held for more than one year. If the Warrants are sold to the Company,
the Service may contend that the repurchase of Warrants by the Company is a
relinquishment of the holder's contractual rights and not a sale or exchange of
property. If the Service were to prevail on this argument, gain or loss on the
repurchase of Warrants would be ordinary income or loss even if the Warrants
were held as capital assets.
Back-Up Withholding
A holder of Common Stock or Notes may be subject to "back-up withholding"
at a rate of 31% with respect to certain "reportable payments," which generally
include interest and dividend payments. These back-up withholding rules apply if
such holder, among other things, (i) fails to furnish a social security number
or other taxpayer identification number ("TIN") certified under penalties of
perjury within a reasonable time after the request therefor, (ii) furnishes an
incorrect TIN, (iii) fails to report properly interest or dividends, or (iv)
under certain circumstances, fails to provide a certified statement, signed
under penalties of perjury, that the TIN furnished is the correct number and
that such holder is not subject to back-up withholding. Any amount withheld from
a payment to an investor under the back-up withholding rules is creditable
against such investor's federal income tax liability, provided the required
information is furnished to the Service. Back-up withholding will not apply,
however, with respect to payments made to certain holders of Common Stock and
Notes, including corporations, tax-exempt organizations and certain foreign
persons, provided their exemption from back-up withholding is properly
established.
The Company will report to the holders of Common Stock and Notes and to the
Service the amount of any "reportable payments" for each calendar year and the
amount of tax withheld, if any, with respect to payments on such securities.
Consequences to the Company
The Company is generally required to deduct the OID, if any, on the Notes
as it is included in income by the holder, except that the deductions taken by
the Company will be determined without regard to any reduction in the amount of
OID included in the income of any investor who acquires Notes at an acquisition
premium (discussed above). The Company should not recognize income if it redeems
or acquires the Notes from holders for a price equal to the principal amount of
the Notes less unamortized OID or upon conversion of the Notes. If the Company
acquires, or is considered to have acquired, Notes for a lesser price, the
Company may be required to recognize income or may be entitled to elect to
postpone recognizing such income by reducing its tax basis in other assets.
Alternatively, if the Company acquires the Notes for a greater price, the
Company may be entitled to a deduction equal to such excess.
-56-
<PAGE>
<PAGE>
The Company should not recognize any gain or loss on the conversion by
Charles S. Holmes of his Notes as described above under "Certain Relationships
and Related Transactions" or on the issuance by the Company of the Additional
Warrants in connection with such conversion.
Section 382
As of December 31, 1995, the Company had net operating losses ("NOLs")
available for carryforward for federal income tax purposes equal to
approximately $10 million.
Under Section 382 of the Code, a corporation's ability to utilize NOLs (as
well as certain unrealized "built-in losses") to offset its income following an
"ownership change" (as described below) is generally limited on an annual basis
to an amount of income equal to the product of the fair market value of such
corporation's outstanding stock immediately before the ownership change and the
"long-term tax-exempt rate."
An ownership change occurs under Section 382 if the percentage of stock of
the loss corporation owned actually or constructively by one or more 5-percent
shareholders increases by more than 50 percentage points relative to the lowest
percentage of stock of the loss corporation owned by those 5-percent
shareholders at any time during a statutory "testing period" (generally the
three-year period ending on the testing date). A "5-percent shareholder" is one
who owns at least 5 percent of the stock of the loss corporation (not including
certain nonvoting, nonparticipating preferred stock), and all stock owned by
shareholders who are not 5-percent shareholders (hereinafter referred to as
public shareholders) is generally treated as being owned by one 5-percent
shareholder. In addition, under Section 382 and the regulations promulgated
thereunder, public shareholders of a loss corporation may be segregated into two
or more separate groups, each of which is treated as a separate 5-percent
shareholder. Public shareholders who receive stock from a loss corporation as a
result of certain types of transactions will be segregated and treated
separately from the public shareholders who owned stock of the loss corporation
prior to the transaction.
Certain provisions under the Treasury Regulations treat options to acquire
stock of a loss corporation such as the Company as currently exercised for
purposes of determining whether an ownership change subject to Section 382 has
occurred. Among other requirements, such provisions require generally that a
principal purpose of the issuance, transfer or structuring of the option is to
avoid or ameliorate the impact of an ownership change of the loss corporation.
The Company believes that such principal purpose does not exist, and therefor it
would not appear that the issuance of the Notes and the Warrants would result in
a deemed exercise of all related conversion and purchase rights under these
provisions. It is not possible to predict with accuracy the timing and potential
effect under Section 382 of any future actual exercise of conversion rights
under the Notes or purchase rights under the Warrants. It is possible that the
actual exercise of such rights could result in an ownership change under Section
382. If such an ownership change were to result, the Company's prospective
ability to utilize its NOLs would be limited as described above. At the date of
this Prospectus, except for the conversion by Charles S. Holmes of $2,000,000 of
aggregate unpaid principal amount of the Notes effective on May 9, 1996 (see
"Certain Relationships and Related Transactions" above), no Notes have been
converted into, and no Warrants have been exercised to purchase, Common Stock,
and the Company does not expect that any additional significant amount of the
Notes would be converted into Common Stock, or that any significant number of
the Warrants would be exercised, prior to 1997.
-57-
<PAGE>
<PAGE>
Pending Legislation
During the latter part of 1995, there were presented before Congress
certain legislative proposals which, if enacted into law, may affect portions of
the above tax discussion, including a reduction in tax on capital gains and
provisions modifying certain of the extraordinary dividend rules of Section 1059
of the Code. Investors should consider the potential effect of the possible
enactment into law of these provisions in making their investment decision.
On March 19, 1996, President Clinton released a set of legislative
proposals as a part of his plan to balance the federal budget. These proposals
include, among other things, proposals to (i) deny a deduction for interest and
OID for certain long-term debt as well as for certain debt which is mandatorily
convertible into the issuer's stock or is so convertible at the issuer's option,
(ii) defer the deduction for OID on convertible debt until actual payment (which
would exclude conversion) of the debt, and (iii) reduce the 70-percent
dividends-received deduction to 50 percent. The Company cannot predict with any
degree of certainty which, if any, of the president's proposals will ultimately
become law or, if enacted into law, what the effective dates of such provisions
would be. Investors should consider the potential effect of the President's
proposals in making their investment decision.
THE FOREGOING SUMMARY IS NOT INTENDED AS TAX ADVICE TO THE PURCHASERS OF
THE SECURITIES. EACH PURCHASER IS URGED TO CONSULT WITH SUCH PURCHASER'S OWN TAX
ADVISOR WITH RESPECT TO THE TAX CONSEQUENCES OF THE INVESTMENT IN THE SECURITIES
TO SUCH PURCHASER'S OWN PARTICULAR TAX SITUATION, INCLUDING THE APPLICATION AND
EFFECT OF STATE AND LOCAL INCOME AND OTHER TAX LAWS.
-58-
<PAGE>
<PAGE>
SELLING SECURITYHOLDERS
All of the Securities being offered hereby are being offered on behalf of
the Selling Securityholders.
The Noteholders and the Warrantholders acquired the Notes and the Warrants
in conjunction with the Private Placement which was consummated on February 15,
1996, February 23, 1996 and February 29, 1996. The lead investor in the Private
Placement, Charles S. Holmes, serves as a director of the Company. See
"MANAGEMENT -- Directors and Executive Officers of the Company," "SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT" and "CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS." Commonwealth Associates served as the
Company's Placement Agent in connection with the private placement and received
its Warrants as partial compensation for such service.
The Bank Lenders acquired the shares of Common Stock owned by them on or
about April 12, 1996 pursuant to the Credit Agreement. The Bank Lenders
currently serve as the Company's primary bank lenders pursuant to the Credit
Agreement.
Active Investors acquired 363,636 shares of Common Stock on November 3,
1994 pursuant to the Stock Purchase Agreement. C. Shelton James, a director of
the Company, is the President and a director of Active Investors. Active
Investors and certain affiliated limited partnerships currently own shares of
Common Stock of the Company as well as Notes and Warrants. See "MANAGEMENT
- --Directors and Executive Officers of the Company," "SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT" and "CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS."
Mr. Holmes acquired the Holmes Shares upon conversion of the Notes of the
Company in the aggregate unpaid principal amount of $2,000,000 held by him into
1,000,000 shares of Common Stock of the Company. See "MANAGEMENT -- Directors
and Executive Officers of the Company," "SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT" and "CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS."
Arthur Freilich beneficially owns five shares of Common Stock.
Except as otherwise noted, the Selling Securityholders have advised the
Company that they do not own any shares of Common Stock in addition to the
Shares.
The Selling Securityholders have indicated that they intend to sell all of
the Securities set forth opposite their names below. The number of Securities
which may actually be sold by the Selling Securityholders will be determined
from time to time by such Selling Securityholders and will depend on a number of
factors including the price of the Securities from time to time. The table below
sets forth information as of August 13, 1996 concerning the beneficial ownership
of the Securities by the Selling Securityholders. All information as to the
beneficial ownership has been furnished to the Company by the Selling
Securityholders.
-59-
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
Name Amount of Warrants Shares Presently Percent of
and Address Notes Presently Owned Owned Class
- ----------- ----- --------------- ----- -----
<S> <C> <C> <C>
Active Investors II, Ltd. $ 1,000,000 250,000 363,636
4000 Hollywood Boulevard
Suite 610 North
Miami, FL 33021
The Bank of New York 125,000
One Wall Street
New York, NY 10286
Chemical Bank 125,000
7600 Jericho Turnpike
Woodbury, New York 11797
Christopher P. Baker $ 50,000 12,500
4 Rollins Place
Boston, MA 02114
Hans C. Bodmer $ 75,000 18,750
Muehlestrasse 15
8803 Rueschlikon
Switzerland
Churchill Associates L.P. $ 125,000 31,250
by Churchill International, Inc.
G.P.
by James Pinto, President
1149 Windsong Trail
Richardson, TX 75081
William Forman $ 200,000 50,000
70 Timber Ridge Drive
Holbrook, NY 11741
Arthur Freilich $ 100,000 25,000
11 Radnor Road
Plainview, NY 11803
Sydney J. Goldstein $ 57,000 14,250
IRA Account
P.O. Box 24181
2741 Kersdale Road
Cleveland, OH 44124
</TABLE>
-60-
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
Name Amount of Warrants Shares Presently Percent of
and Address Notes Presently Owned Owned Class
- ----------- ----- --------------- ----- -----
<S> <C> <C> <C>
The Hart Family Trust $ 50,000 12,500
Andrew B. Hart and
Loni A. Hart, Trustees
12570 Skyline Blvd.
Oakland, CA 94619
Charles S. Holmes 1,700,000* 1,000,000
117 Whites Lane
Southampton, NY 11968
Information Age Partners, LP. $ 50,000 12,500
by Newmark Research, G.P.
by Amy Newmark, President
18 Sidney Lanier Lane
Greenwich, CT 06831
Michael T. Jackson Trust $ 200,000 50,000
Michael T. Jackson, Trustee
71 Bellevue Avenue
Belvedere, CA 94920
David S. Lawi $ 25,000 6,250
3 Ramapo Trail
Harrison, NY 10528
MK'S OMO Contracting Inc. $ 25,000 6,250
Employees' Profit Sharing Trust
Sanford Kirschenbaum, Trustee
P.O. Box 847
East Brunswick, NJ 08816
Timothy Moran $ 100,000 25,000
33 Woodland Drive
Bayport, NY 11705
Orbis Pension Trustees Ltd. $1,000,000 250,000
David J. Lewis,
Investment Manager
1 Connaught Place
London W2 2DY
England
Claudia C. Rouhana $ 25,000 6,250
5 Prospect Lane
Sands Point, NY 11050
</TABLE>
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<PAGE>
<PAGE>
<TABLE>
<CAPTION>
Name Amount of Warrants Shares Presently Percent of
and Address Notes Presently Owned Owned Class
- ----------- ----- --------------- ----- -----
<S> <C> <C> <C>
William J. Rouhana, Jr. $ 25,000 6,250
5 Prospect Lane
Sands Point, NY 11050
S & A Enterprises, Inc. $ 55,000 13,750
Profit Sharing Fund
Sydney J. Goldstein, Trustee
P.O. Box 24181
2741 Kersdale Road
Cleveland, OH 44124
Leonard M. Schiller $ 50,000 12,500
1110 N. Lake Shore Drive
Apt. 9S
Chicago, IL 60611
Philip J. Schiller $ 50,000 12,500
1419 Waverly Road
Highland Park, IL 60035
William R. Schoen $ 25,000 6,250
5 Kenilworth Court
Novato, CA 94945
SJG Management, Inc. $ 100,000 25,000
Profit Sharing Fund
Sydney J. Goldstein, Trustee
P.O. Box 24181
2741 Kersdale Road
Cleveland, OH 44124
S.J. Warner Charitable $ 100,000 25,000
Remainder Unitrust
Stephen J. Warner, Trustee
1617 N. Flagler Dr.
Apt. 4A
West Palm Beach, FL 33407
Tel Com Partners L.P. $ 100,000 25,000
by James Pinto, G.P.
10369 Blue Arrow Ct.
Columbia, MD 21044-4123
</TABLE>
-62-
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
Name Amount of Warrants Shares Presently Percent of
and Address Notes Presently Owned Owned Class
- ----------- ----- --------------- ----- -----
<S> <C> <C> <C>
Winfield Capital Corp. $ 400,000 100,000
c/o Paul A. Perlin, CEO
237 Mamaroneck Avenue
White Plains, NY 10605
Michael S. Falk, IRA $ 25,000 6,250
One Beekman Place, Apt. 15A
New York, NY 10022
Robert O'Sullivan $ 10,000 21,230
215 East 95th Street, Apt. 33B
New York, NY 10128
E&M RP Trust $ 400,000 100,000
Edward H. Shea, Jr., Trustee
655 Brea Canyon Road
Walnut, CA 91789
Tahoe Partnership I $ 100,000 25,000
Peter O. Shea, Managing Partner
655 Brea Canyon Road
Walnut, CA 91789
Siam Partners II $ 100,000 25,000
Edmund H. Shea, Jr.,
Managing Partner
655 Brea Canyon Road
Walnut, CA 91789
Patrick H. Miller Jr. and $ 200,000 50,000
Lee M. Miller, JTWROS
1266 W. Pacesferry Rd, N.W.
Suite 457
Atlanta, GA 30327
Gerald B. Cramer $ 600,000 150,000
1330 Journeys End Road
Croton-on-Hudson, NY 10520
Weiss Peck & Greer, Trustee $ 200,000 50,000
IRA Account of
S. Marcus Finkle
1 New York Plaza, 31st Floor
New York, NY 10004
</TABLE>
-63-
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
Name Amount of Warrants Shares Presently Percent of
and Address Notes Presently Owned Owned Class
- ----------- ----- --------------- ----- -----
<S> <C> <C> <C>
Paul D. Goldenheim $ 10,000 2,500
4 Bald Hill Place
Wilton, CT 06897
David Morley $ 20,000 5,000
2 Longbeach
Corey Groville, Jersey
Channel Islands
Edward J. Rosenthal ISERP $ 100,000 25,000
707 Westchester Avenue
White Plains, NY 10604
Cameron Capital Ltd. $ 200,000 50,000
10 Cavendish Road
Hamilton HM 19
Bermuda
Keith Rosenbloom $ 15,000 76,350
Commonwealth Associates
733 Third Avenue
New York, NY 10017
Jo-Bar Enterprises, LLC $ 100,000 25,000
By Joel A. Stone, Managing
Member
8700 Bryn Mawr, 9th Floor
Chicago, IL 60062
Lawrence Field $ 100,000 25,000
2540 East 28th
Tulsa, OK 74114
J. Michael Wolfe $ 100,000 25,000
403 Greenwood Avenue
Clarksville, TN 37040
Kent A. Rodriguez $ 25,000 6,250
7020 Lanham Lane
Edina, MN 55439
</TABLE>
-64-
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
Name Amount of Warrants Shares Presently Percent of
and Address Notes Presently Owned Owned Class
- ----------- ----- --------------- ----- -----
<S> <C> <C> <C>
Benjamin Rosenbloom $ 50,000 12,500
44 Coconut Road
Palm Beach Towers,
Apt. A321
Palm Beach, FL 33480
Commonwealth Associates 218,870
733 Third Avenue
New York, NY 10017
Ed Downe 50,000
c/o Commonwealth Associates
733 Third Avenue
New York, NY 10017
James Pinto 200,000
1149 Windsong Trail
Richardson, TX 75081
Michael S. Falk 210,000
c/o Commonwealth Associates
733 Third Avenue
New York, NY 10017
Beth Lipman 5,000
c/o Commonwealth Associates
733 Third Avenue
New York, NY 10017
Vincent Labarbara 9,000
c/o Commonwealth Associates
733 Third Avenue
New York, NY 10017
Lisa Jagerman 10,000
c/o Commonwealth Associates
733 Third Avenue
New York, NY 10017
Eric Rand 12,000
c/o Commonwealth Associates
733 Third Avenue
New York, NY 10017
</TABLE>
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<PAGE>
<PAGE>
<TABLE>
<CAPTION>
Name Amount of Warrants Shares Presently Percent of
and Address Notes Presently Owned Owned Class
- ----------- ----- --------------- ----- -----
<S> <C> <C> <C>
Paul Sterios 8,000
c/o Commonwealth Associates
733 Third Avenue
New York, NY 10017
James L. Lynch 20,000
c/o Commonwealth Associates
733 Third Avenue
New York, NY 10017
</TABLE>
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<PAGE>
<PAGE>
PLAN OF DISTRIBUTION
The Securities are being sold by the Selling Securityholders for their own
account; the Company will not receive any proceeds from the sales of the
Securities by the Selling Securityholders. The Selling Securityholders are not
restricted as to the price or prices at which they may sell the Securities. The
proceeds to the Selling Securityholders from the sale of the Securities will be
the purchase price of such Securities sold less the agents' or brokers'
discounts or commissions and other expenses of issuance and distribution not
borne by the Company. Further, the Selling Securityholders are not restricted as
to the number of Securities which may be sold at any one time.
The Selling Securityholders, or their pledgees, donees, transferees or
other successors, may sell the Securities in any of three ways: (i) through
broker-dealers; (ii) through agents or (iii) directly to one or more purchasers.
The distribution of the Securities may be effected from time to time in one or
more transactions (which may involve crosses or block transactions) (A) in the
over-the-counter market, (B) in transactions otherwise than in the
over-the-counter market or (C) through the writing of options on the Securities
(whether such options are listed on an options exchange or otherwise). Any of
such transactions may be effected at market prices prevailing at the time of
sale, at prices related to such prevailing market prices, at negotiated prices
or at fixed prices. The Selling Securityholders may effect such transactions by
selling Securities to or through broker-dealers, and such broker-dealers may
receive compensation in the form of discounts, concessions or commissions from
the Selling Securityholders and/or commissions from purchasers of Securities for
whom they may act as agent (which discounts, concessions or commissions as to a
particular broker-dealer might be in excess of those customary in the types of
transactions involved). There is no plan to offer such Securities through
underwriters or any existing arrangement between the Selling Securityholders and
any broker or dealer.
In connection with any sales, the Selling Securityholders and any
broker-dealer participating in such sales may be deemed to be underwriters
within the meaning of the Securities Act of 1933, as amended (the "Securities
Act"). Any commissions paid or any discounts or concessions allowed to any such
broker-dealers, and, if any such broker-dealers purchase shares as principal,
any profits received on the resale of such shares, may be deemed to be
underwriting discounts and commissions under the Securities Act. The Selling
Securityholders may indemnify any broker-dealer that participates in
transactions involving the sale of the Securities against certain liabilities,
including liabilities arising under the Securities Act.
The Selling Securityholders must comply with the requirements of the
Securities Act and the Exchange Act and the rules and regulations thereunder in
offers and sales of their Securities. In particular, the Selling Securityholders
may not: (i) pay commissions or finder's fees to anyone other than normal
brokers' commissions paid to their brokers who execute orders for sales; (ii)
bid for or purchase for their own account or the account of any affiliate or
induce others to bid for or purchase any of the Company's shares, including the
Securities, until the Securities have been sold; or (iii) make any bids for or
purchases of such shares, directly or indirectly, for the purpose of stabilizing
the price of the Common Stock. Additionally, the Selling Securityholders,
including brokers through whom their sales are made as well as dealers who
purchase the Securities being offered hereby for resale, must comply with the
Prospectus delivery requirements of the Securities Act during the term of this
offering.
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<PAGE>
<PAGE>
LEGAL MATTERS
The legality of the Securities offered hereby will be passed upon for the
Company by Whitman Breed Abbott & Morgan, New York, New York.
EXPERTS
The consolidated financial statements and schedule of NAI Technologies,
Inc. and subsidiaries as of December 31, 1995 and 1994 and for each of the years
in the three year period ended December 31, 1995 have been included herein and
in the Registration Statement in reliance on the report of KPMG Peat Marwick
LLP, independent certified public accountants, appearing elsewhere herein upon
the authority of such firm as experts on accounting and auditing.
-68-
<PAGE>
<PAGE>
INDEX TO FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
Page
----
Independent Auditors' Report 70
Consolidated Balance Sheets at December 31, 1995 and 1994 71
Consolidated Statements of Operations - Years ended 72
December 31, 1995, 1994 and 1993
Consolidated Statements of Shareholders' Equity - 73
Years ended December 31, 1995, 1994 and 1993
Consolidated Statements of Cash Flows - Years ended 74
December 31, 1995, 1994 and 1993
Notes to Consolidated Financial Statements 75
Consolidated Balance Sheets at
June 29, 1996 (unaudited) Consolidated and December 31, 1995 98
Consolidated Statements of Operations - (unaudited)
Three months ended June 29, 1996 and 99
July 1, 1995 Consolidated
Consolidated Statements of Operations - (unaudited)
Six months ended June 29, 1996 and 100
July 1, 1995 Consolidated
Consolidated Statements of Cash Flows - (unaudited)
Six months ended June 29, 1996 and 101
July 1, 1995 Consolidated
Other Financial Information 102
Independent Auditors' Report 103
Consolidated Financial Statement Schedules:
II - Valuation and Qualifying Accounts 104
-69-
<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
-70-
<PAGE>
<PAGE>
NAI TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31,
(in thousands, except share amounts) 1995 1994
---- ----
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
======= =======
The accompanying notes to consolidated financial statements are an integral part
of these statements.
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<PAGE>
NAI TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended December 31,
(in thousands except per share amounts) 1995 1994 1993
---- ---- ----
Net sales $60,008 $54,520 $81,024
------- ------- -------
Cost of sales 55,100 44,254 53,526
------- ------- -------
Gross margin 4,908 10,266 27,498
------- ------- -------
Selling expenses 4,971 7,490 7,351
General and administrative expenses 6,517 6,313 5,794
Research and development costs 1,807 3,214 5,020
Restructuring expenses -- 7,321 --
Other expenses 488 517 373
------- ------- -------
Total expenses 13,783 24,855 18,538
------- ------- -------
Operating earnings (loss) (8,875) (14,589) 8,960
------- ------- -------
Non-operating income (expense)
Interest income 195 83 21
Interest expense (2,562) (1,477) (786)
------- ------- -------
(2,367) (1,394) (665)
------- ------- -------
Earnings (loss) before income taxes (11,242) (15,983) 8,295
Income tax expense (benefit) 377 (4,392) 2,840
Net earnings (loss) ($11,619) ($11,591) $ 5,455
======= ======= =======
Earnings (loss) per common share ($1.57 ) ($1.69 ) $ 0.80
======= ======= =======
The accompanying notes to consolidated financial statements are an integral part
of these statements.
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<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 11 254 14 -- -- 279
tendered ------- ------- ------- ------- ------- -------
Balance December 31, 1993 651 12,096 (12) (54) 17,912 30,593
Net (loss) -- -- -- -- (11,591) (11,591)
4% common stock dividend 26 1,541 -- -- (1,567) --
Foreign currency translation adjustment -- -- -- 161 -- 161
Sale of common stock 36 964 -- -- -- 1,000
Tax benefit from exercise of employee
stock options -- 23 -- -- -- 23
Exercise of employee stock options and
purchases under stock purchase plan 4 106 -- -- -- 110
------- ------- ------- ------- ------- -------
Balance December 31, 1994 717 14,730 (12) 107 4,754 20,296
Net (loss) -- -- -- -- (11,619) (11,619)
Foreign currency translation adjustment -- -- -- (64) -- (64)
Common stock issued in debt restructuring 25 475 -- -- -- 500
Issuance of stock warrants in connection
with debt offering -- 913 -- -- -- 913
Exercise of employee stock options and
purchases under stock purchase plan 4 56 -- -- -- 60
------- ------- ------- ------- ------- -------
Balance December 31, 1995 $ 746 $16,174 ($ 12) $ 43 ($6,865) $10,086
======= ======= ======= ======= ======= =======
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
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<PAGE>
NAI TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(in thousands) 1995 1994 1993
- -------------- ---- ---- ----
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 --
Provision for inventory obsolescence 2,248 2,031 387
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 ( 191) 879 (2,512)
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 -- --
The accompanying notes to consolidated financial statements are an integral part
of these statements.
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<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
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<PAGE>
and compares such to current business levels and future expectations.
Adjustments to the carrying values of inventory are made when considered
necessary.
Property, Plant and Equipment: Property, plant and equipment are recorded
at historical cost. Depreciation and amortization have been computed using
the straight-line method over the following estimated useful lives of the
assets: equipment and furniture and fixtures, generally -- 2 to 10 years,
and buildings -- 33 years. Leasehold improvements are amortized over the
shorter of the estimated useful life of the improvements or the lease term.
Excess of Cost over Fair Value of Net Assets Acquired: The excess of cost
over fair value of net assets acquired (goodwill) is being amortized on a
straight line basis over a period of twenty years. The Company reviews the
significant assumptions which underlie the twenty year amortization period
on a quarterly basis and will shorten the amortization period if considered
necessary. The Company assesses the recoverability of this intangible asset
on a disaggregated basis by acquired economic entity 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
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<PAGE>
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.
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.
(in thousands, except per share data) 1993
----
Net sales $ 92,870
Net earnings $ 3,894
Earnings per share $ 0.57
========
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<PAGE>
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.
3. ACCOUNTS RECEIVABLE
Accounts receivable at December 31 consisted of the following:
(in thousands) 1995 1994
-------------- ---- ----
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
======= =======
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.
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<PAGE>
4. INVENTORIES
Inventories at December 31, summarized by major classification, were as
follows:
(in thousands) 1995 1994
-------------- ---- ----
Raw materials and components $ 11,695 $ 11,948
Work-in-process 4,121 3,849
Finished goods 477 662
Allowance for obsolescence (3,536) (2,250)
Unliquidated progress payments (762) (157)
-------- --------
$ 11,995 $ 14,052
======== ========
5. OTHER CURRENT ASSETS
Other current assets at December 31 consisted of the following:
(in thousands) 1995 1994
-------------- ---- ----
Prepaid insurance $ 219 $ 482
Other prepaid expenses 594 389
-------- --------
$ 813 $ 871
======== ========
6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at December 31 consisted of the following:
(in thousands) 1995 1994
-------------- ---- ----
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
======== ========
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<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:
(in thousands) 1995 1994
-------------- ---- ----
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
====== ======
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<PAGE>
9. DEBT
Long term debt at December 31 consisted of the following:
(in thousands) 1995 1994
-------------- ---- ----
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
======= ======
Aggregate principal payments for the five years subsequent to December 31,
1995 are as follows:
1996 $ 2,177,000
1997 3,144,000
1998 3,067,000
1999 7,175,000
2000 -
thereafter 2,500,000
$18,063,000
In April 1995, the Company restructured its existing indebtedness with its
bank lenders. In consideration for the April 1995 restructuring, the
Company issued an aggregate of 250,000 shares of its Common Stock to the
bank lenders. The shares were valued at an aggregate of $500,000 based upon
the then-current market price of the Common Stock of $2.00 per share.
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<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 which combined the Company's existing
note payable obligation of $600,000 with the previously existing term
obligation 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. For financial statement purposes, the Company
has presented the secured revolving credit as if the amendment had been
agreed to as of December 31, 1995.
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 in exchange for advisory
services related to the issuance of the Notes. The lead investor, Mr.
Charles S. Holmes (1,200,000), and the placement agent, Commonwealth
Associates (824,200 warrants), are two separate parties that have no
affiliation. Mr. Holmes, a director of the Company, received Warrants to
purchase an aggregate of 1,700,000 shares of Common Stock in two separate
blocks. Through the purchase of $2,000,000 aggregate principal amount of
Notes, Mr. Holmes received Warrants to purchase 500,000 shares of Common
Stock in accordance with the terms of the issuance to each purchaser of the
Notes which provided for the issuance of 1/4 warrant for each $1.00 of
Notes purchased. The value of these Warrants is classified as original
issue discount. The Warrants issued in exchange for advisory services in
connection with the issuance of the Notes is recorded as deferred debt
expense on the Company's balance sheet. As of December 31, 1995, a total of
1,825,000 Warrants has been recorded. 625,000 Warrants were recorded in
connection with the $2,500,000 of Notes sold as of that date and 1,200,000
Warrants have been recorded in connection with the advisory services
performed by Mr. Holmes. 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.
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<PAGE>
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.
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10. OTHER ACCRUED EXPENSES - NON-CURRENT
Other Accrued Expenses - non-current at December 31 consisted of the
following:
(in thousands) 1995 1994
-------------- ---- ----
Supplemental retirement plan $ 1,235 $ 899
Other taxes 748 0
Deferred compensation 498 623
------- ------
$ 2,481 $1,522
======= ======
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:
(in thousands) 1995 1994 1993
-------------- ---- ---- ----
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
====== ======= ======
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<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:
(in thousands) 1995 1994
-------------- ---- ----
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)
$ - $ -
====== ======
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.
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<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:
(in thousands) 1995 1994 1993
-------------- ---- ---- ----
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)
====== ====== ======
A reconciliation of the provision for income taxes computed at the Federal
statutory rate to the actual provision for income taxes is as follows:
(in thousands) 1995 1994 1993
-------------- ---- ---- ----
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
====== ======= ======
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.
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<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.
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<PAGE>
<PAGE>
Employee Stock Option Plans
The following is a summary of activity related to all stock option plans:
Number Weighted average
of option price
shares per share
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
======= ====
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).
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<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:
Number of Price
Shares Range
------ -----
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 - -
====== ===========
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.
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<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:
(in thousands) 1995 1994 1993
-------------- ---- ---- ----
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
===== ====== ======
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.
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<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:
(In thousands) 1995 1994 1993
------------------ ---- ---- ----
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
======= ====== ======
The unfunded accrued supplementary costs are included in other long-term
accrued expenses.
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<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.
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<PAGE>
<PAGE>
NAI TECHNOLOGIES, INC. AND SUBSIDIARIES
INFORMATION BY GEOGRAPHIC AREA
Years ending December 31,
(in thousands) 1995 1994 1993
-------------- ---- ---- ----
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
======= ======= =======
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<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.
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<PAGE>
<PAGE>
NAI TECHNOLOGIES, INC. AND SUBSIDIARIES
INFORMATION BY INDUSTRIAL SEGMENT
Years ending December 31,
(in thousands) 1995 1994 1993
- -------------- ---- ---- ----
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
======= ======= =======
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<PAGE>
<PAGE>
16. COMMITMENTS AND CONTINGENCIES
The Company and its subsidiaries lease office and manufacturing facilities,
automobiles, computers and other equipment under various non-cancelable
operating leases.
Future minimum rental commitments for leases with non-cancelable terms in
excess of one year are as follows:
(in thousands) Amount
-----------------------------------------
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
With the acquisition of Lynwood, the Company assumed a 25 year operating
lease for office and manufacturing facilities. Annual future minimum lease
payments through the year 2014, which are included in the above table,
amount to approximately $314,000 per year.
Rental expense amounted to $1,725,000, $1,170,000 and $1,132,000 in 1995,
1994 and 1993, respectively. There was no sublease income in these periods.
Most leases provide for additional payments of real estate taxes, insurance
and other operating expenses applicable to the property, generally over a
base period level. Total rental expense includes such base period expenses
and the additional expense payments as part of the minimum lease payments.
The Company and its subsidiaries are subject to certain legal actions which
arise in the normal course of business. It is management's belief that
these actions will not have a material effect on the Company's consolidated
financial position.
On or about June 28, 1994, TDA Trading Corp. ("TDA"), individually and on
behalf of a class of persons similarly situated, commenced a securities
fraud class action in the United Stated District Court for the Eastern
District of New York against Robert A. Carlson, Richard A. Schneider and
the Company. TDA commenced its action, entitled TDA Trading Corp. v.
Carlson, et al., by filing a complaint (the "Complaint") with the Court.
The Complaint principally alleges that the defendants knowingly and/or
recklessly misrepresented to the public that they expected the Company's
1993 fourth quarter and fiscal year sales and earnings results to continue
to increase at levels substantially above those of prior years at a time
when they supposedly knew but failed to disclose that the Company's fourth
quarter 1993 sales of its Navy Standard Teleprinter and other products
would decrease precipitously. The Complaint further alleges that, as a
result of defendants' alleged failure to disclose these developments, TDA
and other purchasers of common stock were damaged because, it is alleged,
at the time of purchase the price of common stock had been artificially
inflated. Additionally, the Complaint asserts that at the time
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<PAGE>
<PAGE>
these adverse business developments allegedly became known to defendants
and prior to their dissemination to the public, defendants Carlson,
Schneider and other directors of the Company allegedly sold shares of
common stock owned by them personally at price levels which TDA claims were
higher than the true value of these shares.
As relief, TDA essentially seeks damages in an amount to be proven at
trial, together with costs and expenses, including reasonable attorneys',
accountants' and experts' fees. The Complaint also requests that the Court
declare its action against the Company and the individual defendants to be
a proper class action and certify it as class representative and
plaintiff's counsel as counsel for the class. On March 24, 1995, the Court
granted TDA's motion for class certification. The litigation is currently
in the discovery phase.
The Company believes that it has meritorious defenses to the allegations
and claims set forth in the Complaint and that a finding of ultimate
liability against it, if any, would not have a material adverse effect on
its financial position, liquidity or results of operations.
17. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following table sets forth quarterly financial information for 1995 and
1994:
Loss
(in thousands, Net Gross Net per
except per share data) sales margin loss share
---------------------- ----- ------ ---- -----
1995
----
First Quarter $12,687 $2,518 ($1,094) ($.15)
Second Quarter 14,084 (1,827)(1) (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)
======= ======= ======== ======
(1) The Company recorded a charge to cost of sales in the amount of $2,700,000
for increased provisions for slow moving, excess and obsolete inventory and
$2,000,000 for anticipated cost growth on certain long term contracts.
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<PAGE>
<PAGE>
NAI TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands)
June 29, Dec. 31,
1996 1995
---------- -------
(Audited)
ASSETS
Current Assets:
Cash and cash equivalents $ 1,095 $ 2,605
Accounts receivable, net 14,637 13,735
Inventories, net 14,208 11,995
Deferred tax asset 384 384
Other current assets 446 813
------- -------
Total current assets 30,770 29,532
------- -------
Property, plant and equipment, net 4,945 5,351
Excess of cost over fair value of assets
acquired, net 10,022 10,339
Long-term notes receivable -- 1,190
Other assets 3,154 1,600
------- -------
Total assets $48,891 $48,012
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Notes payable $ 537 $ --
Current installments of long-term debt 2,620 2,177
Accounts payable 8,783 9,797
Accrued payroll and commissions 532 768
Other accrued expenses 3,534 6,376
Income taxes payable 509 370
------- -------
Total current liabilities 16,515 19,488
------- -------
Long-term debt 15,951 15,573
Other accrued expenses 2,526 2,481
Deferred income taxes 384 384
------- -------
Total liabilities $35,376 $37,926
------- -------
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: 8,459,437 846 746
in 1996 and 7,459,437 in 1995 19,122 16,162
Foreign currency translation adjustment 49 43
Retained earnings (deficit) (6,502) (6,865)
------- -------
Total shareholders' equity 13,515 10,086
------- -------
Total liabilities and shareholders' equity $48,891 $48,012
======= =======
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<PAGE>
NAI TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(in thousands except per share amounts)
(Unaudited)
For the Three Months Ended
June 29, July 1,
1996 1995
---- ----
Net sales $17,354 $14,084
------- -------
Cost of sales 13,804 15,911
------- -------
Gross margin 3,550 (1,827)
------- -------
Selling expense 1,002 1,242
General and administrative expense 1,140 1,408
Research and development 505 485
Other (636) 196
------- -------
Total expenses 2,011 3,331
------- -------
Operating income (loss) 1,539 (5,158)
------- -------
Non-operating income (expense)
Other 15 --
Deferred debt expense (170) (300)
Interest income 46 34
Interest expense (609) (357)
------- -------
(718) (623)
Income (loss) before income taxes 821 (5,781)
Provision for income taxes 6 24
------- -------
Net income (loss) $ 815 $(5,805)
======= =======
Earnings (loss) per common share $ 0.10 $ (0.78)
======= =======
Average shares outstanding 8,513 7,418
======= =======
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<PAGE>
NAI TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(in thousands except per share amounts)
(Unaudited)
For the Six Months Ended
June 29, July 1,
1996 1995
---- ----
Net sales $33,857 $26,771
------- -------
Cost of sales 27,042 26,080
------- -------
Gross margin 6,815 691
------- -------
Selling expense 2,116 2,506
General and administrative expense 2,510 2,759
Research and development 872 1,026
Other (472) 226
------- -------
Total expenses 5,026 6,517
------- -------
Operating income (loss) 1,789 (5,826)
------- -------
Non-operating income (expense)
Other 15 --
Deferred debt expense (225) (300)
Interest income 101 88
Interest expense (1,174) (751)
------- -------
(1,283) (963)
Income (loss) before income taxes 506 (6,789)
Provision for income taxes 141 110
------- -------
Net income (loss) $ 365 $(6,899)
======= =======
Earnings (loss) per common share $ 0.05 $ (0.94)
======= =======
Average shares outstanding 7,988 7,304
======= =======
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<PAGE>
NAI TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)
For the Six Months Ended
June 29, July 1,
1996 1995
---- ----
Cash Flows from Operating Activities:
Net earnings (loss) $ 363 $(6,899)
Adjustments to reconcile net loss to cash
provided by (used in) operating activities:
Depreciation and amortization 1,290 1,377
Gain on disposal of property, plant & equipment
and other (790) (4)
Provision for inventory obsolescence 207 2,113
Loss on sale of notes receivable 89 --
Change in assets and liabilities, excluding effects
from acquisitions and foreign currency adjustments:
Accounts receivable (1,296) (188)
Inventories (2,492) 805
Accounts payable and other accrued expenses (4,117) (697)
Income taxes 139 4,184
Other, net (827) 73
------- -------
Net cash flow (used in) provided by
operating activities (7,434) 764
------- -------
Cash Flows from Investing Activities:
Contingent payment on purchase of
KMS Advanced Products -- (26)
Purchase of property, plant and equipment (325) (378)
Proceeds from sale of property, plant and
equipment & other 1,363 417
------- -------
Net cash provided by investing activities 1,038 13
------- -------
Cash Flows from Financing Activities:
Issuances of notes payable 590 6
Issuance of 12% convertible bonds 5,842 --
Payments of notes payable (53) (133)
Payments of long-term debt (2,601) (461)
Receipts of notes receivable 1,101 --
Payments for debt restructuring -- (340)
Proceeds from exercise of stock options
and stock purchase plan -- 25
Net cash provided by (used in) financing activities 4,879 (903)
------- -------
Effect of foreign currency exchange rates on cash 7 40
------- -------
Net decrease in cash and cash equivalents (1,510) (86)
Cash and cash equivalents at beginning of year 2,605 1,658
------- -------
Cash and cash equivalents at end of period $ 1,095 $ 1,572
======= =======
Supplemental disclosure of cash flow information:
Cash paid for (refunded):
Interest $ 1,057 $ 753
Income taxes $ 3 $(3,949)
Non-cash investing and financing activities
Notes receivable from sale of property, plant &
equipment $ -- $ 1,190
Conversion of 12% Notes into common stock $ 2,000 $ --
Common stock issued in debt restructuring $ -- $ 500
-101-
<PAGE>
<PAGE>
OTHER FINANCIAL INFORMATION
UNAUDITED FINANCIAL STATEMENTS
The accompanying unaudited consolidated financial statements have been prepared
by the Company pursuant to the rules and regulations of the Securities and
Exchange Commission ("SEC") and, in the opinion of management, include all
adjustments (consisting of normal recurring accruals) necessary for a fair
presentation of financial position, results of operations and cash flows for the
interim periods. Certain information and footnote disclosures normally included
in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to the rules and
regulations of the SEC. The Company believes that the disclosures contained
herein are adequate to make the information presented not misleading. The
consolidated statements of operations for the six months ended June 30, 1996 are
not necessarily indicative of the results to be expected for the full year.
These unaudited financial statements should be read in conjunction with the
audited financial statements and accompanying notes included in the Company's
1995 Annual Report on Form 10-K for the year ended December 31, 1995.
INVENTORIES
Inventories are summarized by major classification as follows:
- --------------------------------------------------------------------------------
June 29, Dec. 31,
1996 1995
---------- -------
(Audited)
(In thousands of dollars)
Raw materials and components $10,105 $11,695
Work-in-process 5,983 4,121
Finished goods 1,050 477
Allowance for obsolescence (2,714) (3,536)
Unliquidated progress payments (216) (762)
------- -------
Inventories, net $14,208 $11,995
======= =======
-102-
<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
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<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.
-104-
<PAGE>
<PAGE>
GLOSSARY
Definitions of the following terms can be found on the pages indicated.
Page
----
Active Investors .......................................................... 1
Additional Warrants ....................................................... 12
Asset Management .......................................................... 36
Bank Lenders .............................................................. 1
Bank Lenders .............................................................. 8
Carlson Employment Agreement .............................................. 40
Codar ..................................................................... 4
Code ...................................................................... 51
Commission ................................................................ 2
Common Stock .............................................................. 5
Common Stock .............................................................. 1
Company ................................................................... 1
Company ................................................................... 4
Complaint ................................................................. 11
Conversion Price .......................................................... 5
Court ..................................................................... 11
Credit Agreement .......................................................... 1
Demand Rights ............................................................. 49
EBITDA .................................................................... 5
Events of Default ......................................................... 5
Exchange Act .............................................................. 2
Exercise Price ............................................................ 6
Expiration Date ........................................................... 47
Further Units ............................................................. 5
Holmes Shares ............................................................. 1
Investment Transaction .................................................... 5
Lynwood ................................................................... 4
Named Executives .......................................................... 37
Nasdaq .................................................................... 1
NOLs ...................................................................... 57
Noteholders ............................................................... 1
Notes ..................................................................... 5
Notes ..................................................................... 1
NST ....................................................................... 8
OID ....................................................................... 52
original issue discount ................................................... 52
Piggy-Back Rights ......................................................... 49
Placement Agent's Warrants ................................................ 5
Preferred Stock ........................................................... 49
Proposed Regulations ...................................................... 53
Qualified Stated Interest ................................................. 52
RBOCs ..................................................................... 4
Registrable Securities .................................................... 49
Registrant ................................................................ 5
Schneider Employment Agreement ............................................ 40
Securities ................................................................ 1
Securities Act ............................................................ 67
Selling Securityholders ................................................... 1
Service ................................................................... 51
Shareholders .............................................................. 1
Shares .................................................................... 1
Stock Purchase Agreement .................................................. 1
Systems ................................................................... 4
TDA ....................................................................... 11
TEMPEST ................................................................... 4
TIN ....................................................................... 56
Trustee ................................................................... 45
Units ..................................................................... 5
Warrant ................................................................... 5
Warrantholders ............................................................ 1
Warrants .................................................................. 1
Wilcom .................................................................... 4
-105-
<PAGE>
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
The estimated expenses in connection with the offering of the Securities
are as follows:
SEC registration fee.................................................$14,967.84
Legal fees and expenses...............................................55,000.00*
Accounting fees and expenses..........................................15,000.00*
Miscellaneous expenses.................................................5,032.16*
--------
Total......................................................$90,000.00*
- ---------------
* Estimated
Item 14. Indemnification of Directors and Officers.
Sections 721-726 of the New York Business Corporation Law provide the following
with respect to the indemnification of directors, officers and employees:
ss. 721. Nonexclusivity of statutory provisions for indemnification of directors
and officers.- The indemnification and advancement of expenses granted pursuant
to, or provided by, this article shall not be deemed exclusive of any other
rights to which a director or officer seeking indemnification or advancement of
expenses may be entitled, whether contained in the certificate of incorporation
or the by-laws or, when authorized by such certificate of incorporation or
by-laws, (i) a resolution of shareholders, (ii) a resolution of directors, or
(iii) an agreement providing for such indemnification, provided that no
indemnification may be made to or on behalf of any director or officer if a
judgment or other final adjudication adverse to the director or officer
establishes that his acts were committed in bad faith or were the result of
active and deliberate dishonesty and were material to the cause of action so
adjudicated, or that he personally gained in fact a financial profit or other
advantage to which he was not legally entitled. Nothing contained in this
article shall affect any rights to indemnification to which corporate personnel
other than directors and officers may be entitled by contract or otherwise under
law.
ss. 722. Authorization for indemnification and officers.-(a) A corporation may
indemnify any person made, or threatened to be made, a party to an action or
proceeding (other than one by or in the right of the corporation to procure a
judgment in its favor), whether civil or criminal, including an action by or in
the right of any other corporation of any type or kind, domestic or foreign, or
any partnership, joint venture, trust, employee benefit plan or other
enterprise, which any director or officer of the corporation served in any
capacity at the request of the corporation, by reason of the fact that he, his
testator or intestate, was a director or officer of the corporation, or served
such other corporation, partnership, joint venture, trust, employee benefit plan
or other enterprise in any capacity, against judgments, fines, amounts paid in
settlement and reasonable expenses, including attorneys' fees actually and
necessarily incurred as a result of such action or proceeding, or any appeal
therein, if such director or officer acted, in good faith, for a purpose which
he reasonably believed to be in, or, in the case of service for any other
corporation or any partnership, joint venture, trust, employee benefit plan or
other enterprise, not opposed to, the best interests of the corporation and, in
criminal actions or proceedings, in addition, had no reasonable cause to believe
that his conduct was unlawful.
(b) The termination of any such civil or criminal action or proceeding by
judgment, settlement, conviction or upon a plea of nolo contendere, or its
equivalent, shall not in itself create a presumption that any such director or
officer did not act, in good faith, for a purpose which he reasonably believed
to be in, or, in the case of service for any other corporation or any
partnership, joint venture, trust, employee benefit plan or other enterprise,
not opposed to, the best interest of the corporation or that he had reasonable
cause to believe that his conduct was unlawful.
II-1
<PAGE>
<PAGE>
(c) A corporation may indemnify any person made, or threatened to be made, a
party to an action by or in the right of the corporation to procure a judgment
in its favor by reason of the fact that he, his testator or intestate, is or was
a director or officer of the corporation, or is or was serving at the request of
the corporation as a director or officer of any other corporation of any type or
kind, domestic or foreign, of any partnership, joint venture, trust, employee
benefit plan or other enterprise, against amounts paid in settlement and
reasonable expenses, including attorneys' fees, actually and necessarily
incurred by him in connection with the defense or settlement of such action, or
in connection with an appeal therein, if such director or officer acted, in good
faith, for a purpose which he reasonably believed to be in, or, in the case of
service for any other corporation or any partnership, joint venture, trust,
employee benefit plan or other enterprise, not opposed to, the best interests of
the corporation, except that no indemnification under this paragraph shall be
made in respect of (1) a threatened action, or a pending action which is settled
or otherwise disposed of, or (2) any claim, issue or matter as to which such
person shall have been adjudged to be liable to the corporation, unless and only
to the extent that the court in which the action was brought, or, if no action
was brought, any court of competent jurisdiction, determines upon application
that, in view of all the circumstances of the case, the person is fairly and
reasonably entitled to indemnity for such portion of the settlement amount and
expenses as the court deems proper.
(d) For the purpose of this section, a corporation shall be deemed to have
requested a person to serve an employee benefit plan where the performance by
such person of his duties to the corporation also imposes duties on, or
otherwise involves services by, such person to the plan or participants or
beneficiaries of the plan; excise taxes assessed on a person with respect to an
employee benefit plan pursuant to applicable law shall be considered fines; and
action taken or omitted by a person with respect to an employee benefit plan in
the performance of such person's duties for a purpose reasonably believed, by
such person to be in the interest of the participants and beneficiaries of the
plan shall be deemed to be for a purpose which is not opposed to the best
interests of the corporation.
ss. 723. Payment of indemnification other than by court award.-(a) A person who
has been successful, on the merits or otherwise, in the defense of a civil or
criminal action or proceeding of the character described in section 722 shall be
entitled to indemnification as authorized in such section.
(b) Except as provided in paragraph (a), any indemnification under section 722
or otherwise permitted by section 721, unless ordered by a court under section
724 (Indemnification of directors and officers by a court) shall be made by the
corporation, only if authorized in the specific case:
(1) By the board acting by a quorum consisting of directors who are not parties
to such action or proceeding upon a finding that the director or officer has met
the standard of conduct set forth in section 722 or established pursuant to
section 721, as the case may be, or,
(2) If a quorum under subparagraph (1) is not obtainable or, even if obtainable,
a quorum of disinterested directors so directs:
(A) By the board upon the opinion in writing of independent legal counsel that
indemnification is proper in the circumstances because the applicable standard
of conduct set forth in such sections has been met by such director or officer,
or
(B) By the shareholders upon a finding that the director or officer has met the
applicable standard of conduct set forth in such sections.
(c) Expenses incurred in defending a civil or criminal action or proceeding may
be paid by the corporation in advance of the final disposition of such action or
proceeding upon receipt of an undertaking by or on behalf of such director or
officer to repay such amount as, and to the extent, required by paragraph (a) of
section 725.
ss. 724. Indemnification of directors and officers by a court.-(a)
Notwithstanding the failure of a corporation to provide indemnification, and
despite any contrary resolution of the board or of the shareholders in the
specific case under section 723 (Payment of indemnification other than by court
award), indemnification shall be awarded by a court to the extent authorized
under section 722 (Authorization for indemnification of directors and officers),
and paragraph (a) of section 723. Application therefor may be made, in every
case, either:
(1) In the civil action or proceeding in which the expenses were incurred or
other amounts were paid, or
II-2
<PAGE>
<PAGE>
(2) To the supreme court in a separate proceeding, in which case the application
shall set forth the disposition of any previous application made to any court
for the same or similar relief and also reasonable cause for the failure to make
application for such relief in the action or proceeding in which the expenses
were incurred or other amounts were paid.
(b) The application shall be made in such manner and form as may be required by
the applicable rules of court or, in the absence thereof, by direction of a
court to which it is made. Such application shall be upon notice to the
corporation. The court may also direct that notice be given at the expense of
the corporation to the shareholders and such other persons as it may designate
in such manner as it may require.
(c) Where indemnification is sought by judicial action, the court may allow a
person such reasonable expenses, including attorneys' fees, during the pendency
of the litigation as are necessary in connection with his defense therein, if
the court shall find that the defendant has by his pleadings or during the
course of the litigation raised genuine issues of fact or law.
ss. 725. Other provisions affecting indemnification of directors and
officers.-(a) All expenses incurred in defending a civil or criminal action or
proceeding which are advanced by the corporation under paragraph (c) of section
723 (Payment of indemnification other than by court award) or allowed by a court
under paragraph (c) of section 724 (Indemnification of directors and officers by
a court) shall be repaid in case the person receiving such advancement or
allowance is ultimately found, under the procedure set forth in this article,
not to be entitled to indemnification or, where indemnification is granted, to
the extent the expenses so advanced by the corporation or allowed by the court
exceed the indemnification to which he is entitled.
(b) No indemnification, advancement or allowance shall be made under this
article in any circumstance where it appears:
(1) That the indemnification would be inconsistent with the law of the
jurisdiction of incorporation of a foreign corporation which prohibits or
otherwise limits such indemnification;
(2) That the indemnification would be inconsistent with a provision of the
certificate of incorporation, a by-law, a resolution of the board or of the
shareholders, an agreement or other proper corporate action, in effect at the
time of the accrual of the alleged cause of action asserted in the threatened or
pending action or proceeding in which the expenses were incurred or other
amounts were paid, which prohibits or otherwise limits indemnification; or
(3) If there has been a settlement approved by the court, that the
indemnification would be inconsistent with any condition with respect to
indemnification expressly imposed by the court in approving the settlement.
(c) If any expenses or other amounts are paid by way of indemnification,
otherwise than by court order or action by the shareholders, the corporation
shall, not later than the next annual meeting of shareholders unless such
meeting is held within three months from the date of such payment, and, in any
event, within fifteen months from the date of such payment, mail to its
shareholders of record at the time entitled to vote for the election of
directors a statement specifying the persons paid, the amounts paid, and the
nature and status at the time of such payment of the litigation or threatened
litigation.
(d) If any action with respect to indemnification of directors and officers is
taken by way of amendment of the by-laws, resolution of directors, or by
agreement, then the corporation shall, not later than the next annual meeting of
shareholders, unless such meeting is held within three months from the date of
such action, and, in any event, within fifteen months from the date of such
action, mail to its shareholders of record at the time entitled to vote for the
election of directors a statement specifying the action taken.
(e) Any notification required to be made pursuant to the foregoing paragraph (c)
or (d) of this section by any domestic mutual insurer shall be satisfied by
compliance with the corresponding provisions of section one thousand two hundred
sixteen of the insurance law.
(f) The provisions of this article relating to indemnification of directors and
officers and insurance therefor shall apply to domestic corporations and foreign
corporations doing business in this state, except as provided in section 1320
(Exemption from certain provisions).
ss. 726. Insurance for indemnification of directors and officers.-(a) Subject to
paragraph (b), a corporation shall have power to purchase and maintain
insurance:
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<PAGE>
<PAGE>
(1) To indemnify the corporation for any obligation which it incurs as a result
of the indemnification of directors and officers under the provisions of this
article, and
(2) To indemnify directors and officers in instances in which they may be
indemnified by the corporation under the provisions of this article, and
(3) To indemnify directors and officers in instances in which they may not
otherwise be indemnified by the corporation under the provisions of this article
provided the contract of insurance covering such directors and officers
provides, in a manner acceptable to the superintendent of insurance, for a
retention amount and for co-insurance.
(b) No insurance under paragraph (a) may provide for any payment, other than
cost of defense, to or on behalf of any director or officer:
(1) If a judgment or other final adjudication adverse to the insured director or
officer establishes that his acts of active and deliberate dishonesty were
material to the cause of action so adjudicated, or that he personally gained in
fact a financial profit or other advantage to which he was not legally entitled,
or
(2) In relation to any risk the insurance of which is prohibited under the
insurance law of this state.
(c) Insurance under any or all subparagraphs of paragraph (a) may be included in
a single contract or supplement thereto. Retrospective rated contracts are
prohibited.
(d) The corporation shall, within the time and to the persons provided in
paragraph (c) of section 725 (Other provisions affecting indemnification of
directors or officers), mail a statement in respect of any insurance it has
purchased or renewed under this section, specifying the insurance carrier, date
of the contract, cost of the insurance, corporate positions insured, and a
statement explaining all sums, not previously reported in a statement to
shareholders, paid under any indemnification insurance contract.
(e) This section is the public policy of this state to spread the risk of
corporate management, notwithstanding any other general or special law of this
state or of any other jurisdiction including the federal government.
Paragraph 15 of the Restated Certificate of Incorporation of the Company
provides as follows:
The liability to the Corporation and its shareholders of each and every person
who is at any time a director of the Corporation, in such person's capacity as
such director, is, and shall be, limited and eliminated to the full extent
authorized or permitted by law (as now or hereafter in effect). Any repeal or
modification of this Paragraph shall not adversely affect any right or
protection of any person existing at the time of such repeal or modification.
Section 6.1 of the Amended and Restated By-laws of the Company provides as
follows:
Section 6.1. Indemnification. To the full extent authorized or permitted by law
(as now or hereafter in effect), the Corporation shall indemnify any person who
shall at any time be made or be threatened to be made a party to or otherwise
involved in any civil or criminal action or proceeding by reason of the fact
that such person, or such person's testator or intestate, is or was a director
or officer of the Corporation or by reason of the fact that such director or
officer, at the request of the Corporation, is or was serving any other
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise in any capacity, and the Corporation shall pay the expenses incurred
by any such person in defending any such action or proceeding as such expenses
are incurred, including in advance of the final disposition of such action or
proceeding. Nothing contained herein shall affect any rights to indemnification
to which employees other than directors and officers may be entitled by law. No
amendment or repeal of this Section 6.1 shall apply to or have any effect on any
right to indemnification or advancement of expenses provided hereunder with
respect to any acts or omissions occurring prior to such amendment or repeal.
In furtherance and not in limitation of the powers conferred by statute, the
Corporation may enter into agreements providing indemnification to the full
extent authorized or permitted by law (as now or hereafter in effect) and
including as part thereof provisions with respect to the creation of trust
funds, the granting of security interests and the use of other means (including,
without limitation, letters of credit, surety bonds
II-4
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<PAGE>
and other similar arrangements) to ensure the payment of such amounts as may
become necessary to effect indemnification as provided therein or elsewhere.
Item 15. Recent Sales of Unregistered Securities.
On February 15, 1996, NAI Technologies, Inc., a New York corporation (the
"Registrant"), sold in a private offering 7,235 units (the "Units"), each Unit
consisting of $1,000 principal amount of the Registrant's 12% Convertible
Subordinated Promissory Notes due 2001 (the "Notes") and a detachable warrant
(the "Warrant") to purchase the Registrant's common stock, par value $.10 per
share (the "Common Stock"), at a purchase price of $1,000 per Unit, for an
aggregate purchase price of $7,235,000 to selected qualified investors (the
"Investment Transaction"). The Notes may be converted by the holders into Common
Stock of the Company at any time at a conversion price equal to $2.00 per share,
subject to adjustment. Each Warrant entitles the holder thereof to purchase
specified numbers of shares of Common Stock at an exercise price equal to $2.50
per share, subject to adjustment.
On February 23, 1996, the Registrant sold 760 additional Units (the "Additional
Units") for an aggregate purchase price of approximately $760,000 as part of the
Investment Transaction while on February 29, 1996, the Registrant sold 247
additional Units (the "Further Units") for an aggregate purchase price of
approximately $247,000 as part of the Investment Transaction.
On February 15, 1996, Commonwealth Associates, who acted as the Registrant's
Placement Agent in connection with the Investment Transaction, and its designees
purchased for $.001 per warrant, warrants to purchase 723,500 shares of Common
Stock, each at an exercise price of $2.50 per share, subject to adjustment in
certain events (the "Placement Agent's Warrants"). The Placement Agent purchased
100,700 additional warrants on when the Additional Units and the Further Units
were purchased. Commonwealth received a fee equal to 8% of the gross proceeds of
the Investment Transaction together with the reimbursement of accountable
expenses up to $200,000 for its services.
On October 13, 1995 and December 14, 1995, Charles S. Holmes, a director of the
Registrant, purchased two subordinated notes of the Registrant each in the
principal amount of $1,000,000. Such notes were exchanged for 2,000 Units in the
Investment Transaction. Warrants to purchase an aggregate of 1,200,000 shares
were issued to Mr. Holmes for past advisory services in connection with the
Investment Transaction and the engagement of the Commonwealth.
In December 1995 and January 1996, Active Investors II, Ltd. purchased
subordinated notes of the Registrant in the aggregate principal amount of
$900,000. C. Shelton James, a director of the Registrant, is the President and a
director of Active Investors II, Ltd. Such notes were exchanged for 900 Units in
the Investment Transaction. On May 2, 1996, Active Investors II, Ltd. purchased
an additional 100 Units as part of the Investment Transaction. Active Investors
II, Ltd. and certain affiliated limited partnerships currently own approximately
5.57% of the Registrant's Common Stock.
The foregoing securities were issued and sold in the Investment Transaction in
accordance with Section 4(2) of the Securities Act of 1933, as amended.
In April 1995, The Bank of New York and Chemical Bank each received 125,000
shares of Common Stock in connection with the execution of the Amended and
Restated Credit Agreement dated as of April 12, 1995 between such entities and
the Registrant. No further consideration was given for such shares. Such
issuance was made in accordance with Section 4(2) of the Securities Act of 1933,
as amended.
On November 3, 1994, Active Investors II, Ltd. purchased 363,636 shares of
Common Stock of the Registrant for $1,000,000 in cash. Such sale was made in
accordance with Section 4(2) of the Securities Act of 1933, as amended.
Item 16. Exhibits and Financial Statement Schedules.
(a) Exhibits:
3.1 Restated Certificate of Incorporation of the Company (incorporated by
reference to Exhibit 3(a) to the Registrant's Quarterly Report on Form
10-Q for the quarterly period ended June 29, 1991).
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<PAGE>
3.2 Amended and Restated By-laws (incorporated by reference to Exhibit
3(b) to the Registrant's Quarterly Report on Form 10-Q for the
quarterly period ended June 29, 1991).
4.1 Warrant registered in the name of Mr. Holmes to Purchase 300,000
shares of Common Stock of the Company on or before February 15, 2002
(incorporated by reference to Exhibit 3 to Mr. Holmes Current Report
on Schedule 13D dated May 9, 1996 filed with the Commission).
4.1 Form of 12% Convertible Subordinated Promissory Note, due January 15,
2001, of the Registrant (incorporated by reference to Exhibit 1 to the
Registrant's Current Report on Form 8-K dated February 15, 1996 filed
with the Commission).
4.2 Form of Warrant to Purchase Common Stock of the Registrant, on or
before February 15, 2002 (incorporated by reference to Exhibit 2 to
the Registrant's Current Report on Form 8-K dated February 15, 1996
filed with the Commission).
4.3 Registration Rights Agreement, dated as of February 13, 1996, between
the Registrant and the Noteholders and Warrantholders (incorporated by
reference to Exhibit 4 to the Registrant's Current Report on Form 8-K
dated February 15, 1996 filed with the Commission).
5 Opinion of Whitman Breed Abbott & Morgan.*
10.1 Letter Agreement, dated May 9, 1996, between Charles S. Holmes and the
Company (incorporated by reference to Exhibit 1 to the Registrant's
Current Report on Form 8-K dated May 9, 1996 filed with the
Commission).
10.2 Amended and Restated Credit Agreement among the Registrant and
Chemical Bank, a New York banking corporation ("Chemical"), The Bank
of New York, a New York Banking corporation ("BNY"), and each of the
other financial institutions which from time to time becomes a party
thereto (together with Chemical and BNY, the "Banks"), BNY, as
administrative agent, and Chemical as collateral agent (incorporated
by reference to Exhibit 10 to the Registrant's Annual Report on Form
10-K for the fiscal year ended December 31, 1994 filed with the
Commission).
10.3 First Amendment, dated as of August 14, 1995, to the Amended and
Restated Credit Agreement, dated as of April 12, 1995, among the
Registrant and the Bank Lenders (incorporated by reference to Exhibit
10.5 to the Registrant's Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 1995 filed with the Commission).
10.4 Second Amendment, dated as of October 13, 1995, to the Amended and
Restated Agreement, dated as of April 12, 1995, among the Registrant
and the Bank Lenders (incorporated by reference to Exhibit 10.6 to the
Registrant's Quarterly Report on Form 10-Q for the quarterly period
ended September 30, 1995 filed with the Commission).
10.5 Third Amendment, dated as of November 6, 1995, to the Amended and
Restated Credit Agreement, dated as of April 12, 1995, among the
Registrant and the Bank Lenders (incorporated by reference to Exhibit
10.7 to the Registrant's Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 1995 filed with the Commission).
10.6 Fourth Amendment, dated as of January 5, 1996, to Amended and Restated
Credit Agreement, dated as of April 12, 1995, as previously amended,
among the Registrant, Chemical Bank and BNY (incorporated by reference
to Exhibit 6 to the Registrant's Current Report on Form 8-K dated
February 15, 1996 filed with the Commission).
10.7 Fifth Amendment, dated as of February 13, 1996, to Amended and
Restated Credit Agreement, dated as of April 12, 1995, as previously
amended (the "Credit Agreement"), among the Registrant, Chemical Bank
and BNY (incorporated by reference to Exhibit 7 to the Registrant's
Current Report on Form 8-K dated February 15, 1996 filed with the
Commission).
10.8 Amendment No. 1 to Registration Rights Agreement, dated as of February
13, 1996, to that certain Registration Rights Agreement, dated as of
April 12, 1995, as amended, between the Registrant and BNY and
Chemical (incorporated by reference to Exhibit 8 to the Registrant's
Current Report on Form 8-K dated February 15, 1996 filed with the
Commission).
10.9 Securities Purchase Agreement, dated as of October 13, 1995, by and
between the Registrant and Charles S. Holmes (incorporated by
reference to Exhibit 10.1 to the
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Registrant's Quarterly Report on Form 10-Q for the quarterly period
ended September 30, 1995 filed with the Commission).
10.10 12% Subordinated Promissory Note due 1996 of the Registrant
(incorporated by reference to Exhibit 10.2 to the Registrant's
Quarterly Report on Form 10-Q for the quarterly period ended September
30, 1995 filed with the Commission).
10.11 Placement Agency Agreement dated as of December 14, 1995, between the
Company and Commonwealth Associates (incorporated by reference to
Exhibit 2 to the Registrant's Current Report on Form 8-K dated
February 15, 1996 filed with the Commission).
10.12 Employment Agreement, dated as of October 16, 1995, between the
Registrant and Robert A. Carlson (incorporated by reference to Exhibit
10.3 to the Registrant's Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 1995 filed with the Commission).
10.13 Employment Agreement, dated as of October 16, 1995, between the
Registrant and Richard A. Schneider (incorporated by reference to
Exhibit 10.4 to the Registrant's Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 1995 filed with the Commission).
10.14 Common Stock Purchase Agreement dated as of November 3, 1994 by and
between the Registrant and Active Investors II, Ltd. (incorporated by
reference to Exhibit 10(a) to the Registrant's Quarterly Report on
Form 10-Q for the quarterly period ended October 1, 1994 filed with
the Commission).
10.15 Agreement, dated January 13, 1993, among the shareholders of Lynwood
and the Registrant, including the form of warrant delivered in
connection therewith (incorporated by reference to Exhibit 1 to the
Registrant's Report on Form 8-K dated January 13, 1993 filed with the
Commission).
10.16 Indenture, dated July 15, 1996, between the Registrant and First
Trust National Association, as trustee.*
12 Computation of Ratios.*
21 List of Subsidiaries (incorporated by reference to the Registrant's
Annual Report on Form 10-K for the fiscal year ended December 31,
1995).
23.1 Consent of KPMG Peat Marwick LLP.
23.2 Consent of Whitman Breed Abbott & Morgan (included in Exhibit 5).*
24 Power of Attorney (included in Part II of the Registration Statement
(Registration No. 333-3837) filed with the Commission on May 16,
1996).
25 Statement of Eligibility of Trustee.*
*Previously filed.
(b) Financial Statement Schedules:
Schedule II -- Valuation and Qualifying Accounts (included on pages 98
and 99 of this Registration Statement).
Schedules not listed above have been omitted either because they are not
applicable or the required information is shown in the Consolidated Financial
Statements or Notes thereto.
Item 17. Undertakings.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the Registration Statement (or the most
recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the Registration Statement;
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(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the Registration
Statement or any material change to such information in the
Registration Statement;
provided, however, that paragraphs (l)(i) and (l)(ii) do not apply if the
information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed by the Registrant
pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of
1934 that are incorporated by reference in the Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(4) That, for purposes of determining any liability under the
Securities Act of 1933, each filing of the Registrant's annual report
pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934
that is incorporated by reference in the Registration Statement shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the provisions described
under Item 15 above, or otherwise, the Registrant has been advised that in
the opinion of the Securities and Exchange Commission such indemnification
is against public policy as expressed in the Securities Act of 1933 and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of
expenses incurred or paid by a director, officer or controlling person of
the Registrant in the successful defense of any action, suit or proceeding)
is asserted by such director, officer or controlling person in connection
with the securities being registered, the Registrant will, unless in the
opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question
whether such indemnification by it is against public policy as expressed in
the Securities Act of 1933 and will be governed by the final adjudication
of such issue.
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Company certifies that it has reasonable grounds to believe that it meets all of
the requirements for filing on Form S-1 and has duly caused this Amendment No. 4
to Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the Town of Longmont, State of Colorado, on the
21st day of August, 1996.
NAI TECHNOLOGIES, INC.
By /s/ Robert A. Carlson
------------------------------
Robert A. Carlson
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment No. 4 to Registration Statement has been signed below by the
following persons, in the capacities indicated, on August 21, 1996.
By /s/ Robert A. Carlson
------------------------------
Robert A. Carlson
Chairman and Chief Executive Officer
and Director (principal executive officer)
By /s/ Richard A. Schneider
------------------------------
Richard A. Schneider
Executive Vice President, Treasurer,
Chief Financial Officer, Secretary
and Director (principal financial
and accounting officer)
By /s/ Stephen A. Barre*
------------------------------
Stephen A. Barre
Director
By /s/ C. Shelton James*
------------------------------
C. Shelton James
Director
By /s/ Charles S. Holmes*
------------------------------
Charles S. Holmes
Director
By
------------------------------
Edward L. Hennessy
Director
By /s/ Dennis McCarthy*
------------------------------
Dennis McCarthy
Director
- --------------------
* Richard A. Schneider, pursuant to a Power of Attorney executed by each of the
directors and officers noted above and filed with the Securities and Exchange
Commission, by signing his name hereto, does hereby sign and execute this
Amendment No. 4 to Registration Statement on Form S-1 on behalf of each of the
persons noted above in the capacities indicated.
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Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the use of our reports included in the registration statement on
Form S-1 of NAI Technologies, Inc. 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 schedule, and to
the reference to our firm under the heading "Experts".
KPMG Peat Marwick LLP
Boulder, Colorado
August 20, 1996
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