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SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
Filed by the Registrant [x]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential for Use of the Commission Only
(as permitted by Rule 14a-6(e)(2))
[x] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to SS 240.14a-11(c) or SS 240.14a-12
NAI Technologies, Inc.
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(Name of Registrant as Specified In Its Charter)
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(Name of Persons(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[ ] $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), 14a-6(i)(2) or
Item 22(a)(2) of Schedule 14A.
[ ] $500 per each party to the controversy pursuant to Exchange Act
Rule 14a-6(i)(3).
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
1) Title of each class of securities to which transaction applies:
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2) Aggregate number of securities to which transaction applies:
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3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11:(1)
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4) Proposed maximum aggregate value of transaction:
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5) Total fee paid:
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(1) Set forth the amount on which the filing fee is calculated and state how it
was determined.
[x] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
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2) Form, Schedule or Registration Statement No.:
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3) Filing Party:
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4) Date Filed:
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NAI TECHNOLOGIES, INC.
2405 Trade Centre Avenue
Longmont, Colorado 80503
(303) 776-5674
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NOTICE OF A SPECIAL MEETING OF SHAREHOLDERS
to be held on February 1, 1996
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A Special Meeting of Shareholders (the "Special Meeting") of NAI
Technologies, Inc., a New York corporation (the "Company"), will be held on
Thursday, February 1, 1996 at 10 a.m., at the Raintree Conference Center located
at 1850 Industrial Circle, Longmont, Colorado 80503, for the following purposes:
1. to approve the issuance by the Company of certain debt securities and
warrants convertible or exercisable into or for approximately 8,000,000 shares
of the Company's Common Stock to investors in a proposed private placement which
will result in the potential issuance of more than 20% of the Company's Common
Stock and may result in a change of control of the Company;
2. to vote on an amendment to the Company's Certificate of Incorporation to
increase the number of authorized shares of Common Stock from 10,000,000 to
25,000,000;
3. to vote to ratify and approve the selection of KPMG Peat Marwick as the
Company's independent auditors for the year ended December 31, 1995; and
4. to consider and act upon such other matters as may properly come before
the Special Meeting.
All shareholders are cordially invited to attend. Only shareholders of
record at the close of business on December 15, 1995 will be entitled to vote at
the Special Meeting or any adjournment thereof.
By Order of the Board of Directors,
Richard A. Schneider,
Secretary
January 5, 1996
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WHETHER OR NOT YOU EXPECT TO ATTEND THE SPECIAL MEETING, PLEASE READ THE
ACCOMPANYING PROXY STATEMENT AND COMPLETE, DATE AND SIGN THE ENCLOSED PROXY AND
RETURN IT PROMPTLY IN THE ENCLOSED ENVELOPE, WHICH REQUIRES NO POSTAGE IF MAILED
WITHIN THE UNITED STATES OF AMERICA. THE PROXY IS REVOCABLE BY YOU AT ANY TIME
PRIOR TO ITS USE. IF YOU RECEIVE MORE THAN ONE PROXY BECAUSE YOUR SHARES ARE
REGISTERED IN DIFFERENT NAMES OR ADDRESSES, EACH PROXY SHOULD BE SIGNED AND
RETURNED TO ASSURE THAT ALL YOUR SHARES WILL BE VOTED AT THE SPECIAL MEETING.
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NAI TECHNOLOGIES, INC.
2405 Trade Centre Avenue
Longmont, Colorado 80503
(303) 776-5674
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PROXY STATEMENT FOR A SPECIAL MEETING OF SHAREHOLDERS
to be held on February 1, 1996
------------
INTRODUCTION
General
This Proxy Statement is furnished in connection with the solicitation by
the Board of Directors of NAI Technologies, Inc., a New York corporation (the
"Company"), of proxies for use at a special meeting of shareholders (the
"Special Meeting") of the Company to be held at the Raintree Conference Center
located at 1850 Industrial Circle, Longmont, Colorado 80503, on Thursday,
February 1, 1996 at 10 a.m., local time, and at any adjournment thereof. This
Proxy Statement was first mailed to shareholders of the Company on or about
January 5, 1996.
At the Special Meeting, the Company's shareholders will (i) vote to approve
the issuance by the Company of certain debt securities and warrants convertible
or exercisable into or for approximately 8,000,000 shares of the Company's
Common Stock to investors in a proposed private placement (the "Investment
Transaction") which will result in the potential issuance of more than 20% of
the Company's Common Stock and may result in a change of control of the Company,
(ii) vote on an amendment to the Certificate of Incorporation to increase the
number of authorized shares of common stock, par value $.10 per share, of the
Company ("Common Stock") from 10,000,000 to 25,000,000, and (iii) vote to ratify
and approve the selection of KPMG Peat Marwick as the Company's independent
auditors for the fiscal year ended December 31, 1995. The shareholders may also
conduct such other further business as may properly come before the Special
Meeting or any adjournment thereof.
The Board of Directors believes that the approval of the Investment
Transaction and the related authorization of an additional 15,000,000 shares of
Common Stock is necessary to enable the Company to restructure its debt which
otherwise matures, with a payment of $15,225,000, plus interest accrued, being
due and payable, on February 15, 1996 and otherwise to remain financially viable
and to avoid seeking bankruptcy protection.
Record Date; Proxies
The Board of Directors of the Company has fixed the close of business on
December 15, 1995 as the record date (the "Record Date") for determining holders
of Common Stock entitled to notice of and to vote at the Special Meeting. Only
holders of record of the Common Stock at the close of business on such date will
be entitled to vote at the Special Meeting or at any adjournment thereof. At
such date, there were issued and outstanding 7,459,437 shares of Common Stock,
each of which is entitled to one vote on each matter presented at the Special
Meeting.
Each shareholder of the Company is requested to complete, sign, date and
return the enclosed proxy without delay in order to ensure that the shares owned
by such shareholder are voted at the Special Meeting. Any shareholder may revoke
a proxy at any time before it is voted by: (i) delivering a written notice to
the
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Secretary of the Company, at the address of the Company set forth above, stating
that the proxy is revoked; (ii) executing a subsequent proxy and delivering it
to the Secretary of the Company; or (iii) attending the Special Meeting and
voting in person. Each properly executed proxy returned will be voted as
directed. In addition, unless otherwise specified in the proxy, proxies will be
voted IN FAVOR OF the proposal to approve the Investment Transaction, IN FAVOR
OF the proposal to amend the Company's Certificate of Incorporation to increase
the authorized shares of Common Stock from 10,000,000 to 25,000,000, and IN
FAVOR OF ratification and approval of the selection of KPMG Peat Marwick as the
Company's independent auditors for the year ended December 31, 1995.
Required Vote
The holders of a majority of the outstanding shares of Common Stock on the
Record Date are necessary to constitute a quorum at the Special Meeting. The
affirmative vote of the holders of a majority of the shares of Common Stock
present at the Special Meeting and voting is required to approve the Investment
Transaction. Accordingly, votes "withheld" will not count against the
ratification of the Investment Transaction. Brokers do not have discretionary
authority to vote on the proposal to approve the Investment Transaction. See
"Approval of Issuance of Securities in Investment Transaction." The affirmative
vote of the holders of a majority of the outstanding shares of Common Stock is
required to approve the proposal to amend the Company's Certificate of
Incorporation to increase the authorized shares of Common Stock. Accordingly,
votes "withheld" will count against the proposal to amend the Certificate of
Incorporation. Brokers do not have discretionary authority to vote on the
proposal to amend the Certificate of Incorporation. See "Approval of Increase in
Number of Common Shares Authorized." The affirmative vote of the holders of a
majority of the shares of Common Stock present at the Annual Meeting and voting
is required to ratify and approve the selection of auditors. Accordingly, votes
"withheld" will not count against the ratification of the selection of such
auditors. Brokers have discretionary authority to vote on the ratification of
the selection of auditors. See "Ratification of the Selection of Independent
Auditors."
Dissenters' Rights
Shareholders do not have dissenters' rights of appraisal with respect to
any of the matters to be acted upon at the Special Meeting.
Other Action At Special Meeting
The Company does not know of any other matters to be presented at the
Special Meeting. If any additional matters should be properly presented, proxies
will be voted in accordance with the judgment of the proxy holders.
Cost of Solicitation
The Company will bear the cost of soliciting proxies estimated at
approximately $60,000. The Company has retained D.F. King & Co., Inc., a
professional proxy solicitation firm, to assist in the solicitation of proxies
in connection with the Special Meeting for which it will receive an estimated
fee of approximately $15,000 plus reasonable out-of-pocket expenses. Directors,
officers and employees of the Company may also solicit proxies personally or by
telephone, telegram or mail. Such directors, officers and employees will not be
additionally compensated for such solicitation but may be reimbursed for
reasonable out-of-pocket expenses incurred in connection therewith. Arrangements
will also be made with brokerage houses and other custodians, nominees and
fiduciaries for the forwarding of proxy material to the beneficial owners of the
Common Stock held of record by such persons and the Company will, upon request,
reimburse such custodians, nominees and fiduciaries for reasonable out-of-pocket
expenses incurred in connection therewith.
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1995 Annual Meeting
Although the Company intended to hold an annual meeting during 1995, it was
not able to do so. The Company's by-laws provide that the annual meeting of the
shareholders of the Company for the election of directors and for the
transaction of such other business as may properly come before the meeting shall
be held at a time and date selected by the Board of Directors. Under Section
602(b) of the New York Business Corporation Law, the failure to hold the annual
meeting will not work as a forfeiture or give cause for dissolution of the
Company. However, pursuant to Section 603 of the New York Business Corporation
Law, holders of 10% of the shares of the Company's Common Stock, or
approximately 745,944 shares, have the right to demand in writing that the
Company call a special meeting for the election of directors specifying the date
and month thereof, which shall not be less than 60 nor more than 90 days from
the date of such written demand. Representatives of the Company have discussed
the Company's failure to hold an annual meeting during 1995 with representatives
of The Nasdaq National Market, on which the Common Stock is traded, and the
Company has received no indication that there will be any adverse effect on the
Company's trading privileges as a result of such failure. The Company
anticipates that the 1996 annual meeting of shareholders will be held subsequent
to July 1, 1996 and before August 31, 1996.
APPROVAL OF ISSUANCE OF SECURITIES IN INVESTMENT TRANSACTION
General
The Company proposes to offer to selected qualified investors up to 8,000
units (the "Units"), each Unit consisting of $1,000 principal amount of the
Company's 12% Convertible Subordinated Promissory Notes due 2001 (the "Notes")
and a detachable warrant (the "Warrant" and, together with the Notes, the
"Securities") to purchase Common Stock at a purchase price of $1,000 per Unit or
up to an aggregate purchase price of $8,000,000 on a "best efforts -- 6,000
Units or none" basis pursuant to arrangements hereinafter described (the
"Investment Transaction"). If 6,000 Units are sold within a period of 60 days
following the date of the commencement of the offering (which period may be
extended up to an additional 30 days at the election of the Company and the
placement agent), the remaining 2,000 Units will be offered for sale on a "best
efforts" basis until either all of the Units offered thereby are sold or the
offering period ends, whichever occurs first.
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. The Notes will
mature on January 15, 2001. The Notes will be unsecured obligations of the
Company subordinate in right of payment to all Senior Indebtedness (as
hereinafter defined) of the Company. At November 25, 1995, the amount of Senior
Indebtedness outstanding was $15,225,000. See "Approval of Issuance of
Securities in Investment Transaction--Description of the Securities--The
Notes."
Each Warrant entitles the holder thereof to purchase 250 shares of Common
Stock at any time and from time to time on or before January 15, 2001, at an
exercise price equal to $2.50 per share of Common Stock, subject to adjustment.
The Warrants will be immediately detachable and separately transferable. See
"Approval of Issuance of Securities in Investment Transaction--Description of
the Securities--The Warrants."
The conversion price of the Notes will be adjusted to $1.50 or $1.00,
respectively, and the exercise price of the Warrants will be adjusted to $2.00
or $1.50, respectively, if the earnings before interest, taxes, depreciation and
amortization ("EBITDA") of the Company fall below $6,000,000 or $4,750,000 in
1996. EBITDA will be calculated by combining the Company's earnings before
interest and taxes as reported in its consolidated statements of operations for
the relevant period and the Company's depreciation and amortization as reported
in its consolidated statements of cash flows for the same period. 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
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time of sale. The conversion price of the Notes and the exercise price of the
Warrants may be reduced if such reduction is in the opinion of the Company
necessary to effectuate the sale of the Securities. The conversion price and the
number of shares of Common Stock to be received upon conversion and the exercise
price and the number of shares to be received upon exercise are subject to
adjustment upon the occurrence of certain events. The Company may force
conversion of the Notes if, during any period prior to maturity, the closing
price of the Common Stock exceeds $6.00 per share for 30 consecutive trading
days. See "Approval of Issuance of Securities Investment
Transaction--Description of the Securities."
On October 13, 1995, Charles S. Holmes loaned the Company $1,000,000 at 12%
interest (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 will be
integrated with the Investment Transaction. See "Approval of Issuance of
Securities in Investment Transaction--Background of Investment
Transaction--Capital and Credit Transactions." Mr. Holmes became a director of
the Company in October 1995 and will take an active role in the Company
following the completion of the Investment Transaction. Two other individuals
acceptable to the Company and who are designated by the Investors (including one
designated by Mr. Holmes) will also be appointed to the Company's Board of
Directors following the resignation of two then-current members of the Board of
Directors. See "Approval of Issuance of Securities in Investment
Transaction--Board Representation." Prior to the October 1995 investment, the
Company did not have any affiliation with Mr. Holmes or any of his affiliates.
The Investment Transaction will be with a limited number of accredited
investors ("Investors") pursuant to the exemption from registration afforded by
Regulation D under the Securities Act of 1933, as amended (the "Securities
Act"). THE SECURITIES HAVE NOT BEEN AND WILL NOT BE REGISTERED UNDER THE
SECURITIES ACT AND MAY NOT BE OFFERED OR SOLD IN THE UNITED STATES ABSENT
REGISTRATION OR AN APPLICABLE EXEMPTION FROM SUCH REGISTRATION REQUIREMENTS.
This proxy statement does not constitute an offer to sell or a solicitation of
an offer to buy the Securities by the Company or any other person.
Commonwealth Associates, a New York-based investment banking firm founded
in 1988 that specializes in small capitalization (e.g., under $300 million in
market value) and emerging growth companies ("Commonwealth"), will act as the
placement agent for the Company in connection with the Investment Transaction.
Management of the Company was introduced to representatives of Commonwealth in
August 1995 by Mr. Holmes who had no prior relationship with Commonwealth and
was and is unaffiliated with Commonwealth but who knew a senior officer of
Commonwealth socially. The Company selected Commonwealth as its placement agent
because Commonwealth is regularly engaged in private placements as part of its
investment banking services and has substantial experience in transactions
similar to the Investment Transaction. The Company did not interview any other
firms at the time it selected Commonwealth to act as its placement agent but the
Company had interviewed several investment banking firms less than a year
earlier in October 1994 when it retained an investment banker to pursue various
strategic alternatives none of which were successful in raising funds. See
"Approval of Issuance of Securities Investment Transaction--Background of
Investment Transaction--Capital and Credit Transactions." Prior to retaining
Commonwealth to act as its placement agent, the Company had not had any
relationship with Commonwealth or any of its affiliates.
Commonwealth is assisting the Company in the structuring of the Investment
Transaction including the offering price for the Units, the number of shares of
Common Stock issuable upon conversion of the Notes, the other terms of the
Notes, and the exercise price and the other terms of the Warrants. Pursuant to
an engagement letter dated October 20, 1995 with Commonwealth, the Company
agreed to pay Commonwealth a fee equal to 8% of the gross proceeds of the
Investment Transaction together with the reimbursement of accountable expenses.
If the minimum number of Units are sold, Commonwealth's commission (before
reimbursement of expenses) will equal $480,000 while, if the maximum number of
Units are sold, Commonwealth's commission (before reimbursement of expenses)
will equal $640,000. In addition, the
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Company has granted Commonwealth a right of first refusal to act as the
Company's underwriter and placement agent with respect to future public and
private financings and serve as the Company's investment banker with respect to
any potential acquisition, merger, divestiture, strategic planning or other
activity until December 31, 2000, but only if the terms offered by Commonwealth
are then comparable to those being offered by other investment banking firms to
similarly situated companies. Therefore, the Company may in the future have a
material relationship with Commonwealth and may pay additional compensation to
Commonwealth for providing additional services in the future. If the Investment
Transaction does not proceed including as a result of the failure of the
Company's shareholders to vote in favor of Proposals 1 and 2, other than as a
result of a breach by Commonwealth of its obligations, the Company is obligated
to pay Commonwealth a minimum fee of $250,000, plus accountable expenses, such
amount not to exceed $400,000 in the aggregate. The compensation to be paid
Commonwealth by the Company in connection with the Investment Transaction was
determined by arm's-length negotiations between management of the Company and
representatives of Commonwealth. Shareholders are not being asked to approve the
retention by the Company of Commonwealth.
Warrants to purchase an aggregate of 1,700,000 additional shares of
Common Stock at $2.50 per share will be issued to Charles S. Holmes, 1,200,000
of which are for past advisory services in connection with the private placement
and the engagement of Commonwealth and 500,000 of which are as a result of the
Holmes Transaction and the additional $1,000,000 investment. Warrants to
purchase between 600,000 and 800,000 shares of Common Stock (based on the number
of Units sold) at $2.50 per share will be issued to Commonwealth in connection
with the private placement. If the maximum number of Units are sold and warrants
to purchase 800,000 shares of Common Stock are issued to Commonwealth and
exercised by it, Commonwealth will own slightly less than 5% of the Company's
Common Stock on a fully-diluted basis and based on shares currently outstanding.
See "Approval of Issuance of Securities in Investment Transaction-- Commonwealth
Placement Agreement."
Completion of the Investment Transaction is subject to the restructuring of
and amendment of certain other terms under the Company's Amended and Restated
Credit Agreement, dated as of April 12, 1995, and as amended to date (the
"Existing Credit Agreement"), with two bank lenders (the "Bank Lenders"), and
the completion of a due diligence review by Commonwealth. If all of the Notes
are sold and converted, an aggregate of 4,000,000 shares of Common Stock will be
issued. Of these shares, 1,000,000 shares will be issued to Mr. Holmes for
$2,000,000 of Notes. If all the Warrants (including the advisory warrants) are
exercised, an aggregate of 4,000,000 additional shares of Common Stock will be
issued. Of these additional shares, an aggregate of 1,700,000 shares will be
issued to Mr. Holmes consisting of warrants for 500,000 shares and advisory
warrants for 1,200,000 shares and 800,000 shares will be issued to Commonwealth
for its advisory warrants. Upon the happening of such events, the Company will
have received gross proceeds of $18,000,000 (approximately $16,860,000 net) in
exchange for the sale of approximately 49.6% of the shares of Common Stock on a
fully-diluted basis and based on shares currently outstanding. See "Approval of
Issuance of Securities in Investment Transaction--Dilution of Holders of Common
Stock."
The Board of Directors has unanimously approved the Investment Transaction
and the issuance of the Securities in the Investment Transaction. The issuance
of the Securities in the Investment Transaction is subject to the approval of
the shareholders of the Company because insufficient shares are authorized for
issuance under the Company's Certificate of Incorporation (see "Approval of
Increase in Number of Common Shares Authorized") and to comply with certain
rules of The Nasdaq National Market ("Nasdaq"). Such Nasdaq rules require that
the Company seek shareholder approval prior to the sale or issuance by the
Company of Common Stock or securities like the Securities convertible into or
exercisable for Common Stock equal to 20% or more of the Common Stock or 20% or
more of the voting power outstanding before the issuance for less than the
greater of the book or market value of the Common Stock by a majority of the
votes cast on the proposal in person or by proxy. As previously stated, the
consummation of the Investment Transaction will result in the sale of
approximately 49.6% of the shares of Common Stock on a fully-diluted basis and
based on shares currently outstanding for less than the book value per share of
Common Stock as at September 30, 1995 which
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was $1.56 (assuming that the conversion price of the Notes and the exercise
price of the Warrants are adjusted as provided by the terms of such Securities
which adjustment cannot be predicted by the Company). On December 22, 1995, the
closing price of the Common Stock on Nasdaq was $2 per share. Section 6(i)(1)(b)
of Schedule D of the Nasdaq rules also requires that, prior to issuing shares of
a listed class such as the Common Stock that would result in the "change of
control," the Company obtain approval of the proposed issuance by a majority of
the votes cast at the Special Meeting. The consummation of the Investment
Transaction may result in a change of control of the Company.
The Company is seeking shareholder approval of the issuance by it of the
Securities, having the terms and conditions described in "Approval of Issuance
of Securities in Investment Transaction--Description of Securities," which are
convertible into or exercisable for approximately 8,000,000 shares of its Common
Stock, to investors in the Investment Transaction, in the manner described
herein, which will result in the potential issuance of more than 20% of its
Common Stock and may result in a change of control of the Company. The Company
is not seeking shareholder approval of any other aspect of the Investment
Transaction. A vote in favor of the issuance of the Securities in the Investment
Transaction will not estop a shareholder from bringing a legal action against
the Company related to such issuance in the Investment Transaction. However,
under New York law, the Company would likely assert as a defense to any legal
challenge by a shareholder of the issuance of the Securities in the Investment
Transaction a vote for or an abstention to such issuance by such challenging
shareholder.
If the Company is unable to conclude the Investment Transaction, the
Company and Mr. Holmes have agreed that the Company would retain an investment
banker to sell certain assets or the stock of one or more subsidiaries, and that
Mr. Holmes would have the option to purchase an additional $1,000,000 principal
amount of Notes and receive Warrants to purchase an additional 1,300,000 shares
of Common Stock (the "Holmes Alternative"). If he made such new investment, the
Company would use its best efforts to promptly cause the resignation of two
then-current members of the Board of Directors of the Company and to cause the
vacancies resulting thereby to be filled by individuals designated by Mr. Holmes
and acceptable to the Company. See "Approval of Issuance of Securities in
Investment Transaction--The Holmes Alternative."
If the Company is unable to consummate either the Investment Transaction or
the Holmes Alternative and to amend the Existing Credit Agreement, it may be
forced to seek bankruptcy protection.
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The following chart summarizes the principal terms of each transaction
between the Company, Mr. Holmes and Commonwealth:
<TABLE>
<CAPTION>
Transaction Date Parties Principal Components
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<S> <C> <C> <C>
Purchase by Mr. Holmes of 10/13/95 Mr. Holmes and the Payment by Mr. Holmes of an
$1,000,000 principal amount Company aggregate of $2,000,000 to the
of the Company's 12% Company for the notes; agreement
subordinated promissory notes by the Company to pay Mr.
due February 15, 1996 and Holmes interest thereon at 12%
commitment by Mr. Holmes per annum; agreement by the
to purchase an additional Company to pay Mr. Holmes a
$1,000,000 of Notes (which fee of 3% of the gross proceeds
investment was made in of any investment made by him in
December 1995) the notes; agreement by the
Company to issue warrants to
purchase an aggregate of
1,700,000 shares of Common
Stock at $2.50 per share (subject
to adjustment) to Mr. Holmes;
and commitment by Mr. Holmes
to integrate such investment with
the Investment Transaction.
Retention by the Company of 10/20/95 Commonwealth and Fee of 8% of the gross proceeds
Commonwealth Associates as the Company of the Investment Transaction plus
the placement agent for the accountable expenses; minimum
Investment Transaction termination fee of $250,000 if the
Investment Transaction is not
completed, plus accountable
expenses, such amount not to exceed
$400,000; agreement by the Company
to issue warrants to purchase
between 600,000 and 800,000 shares
of Common Stock (based on the
amount of Notes sold) at $2.50 per
share (subject to adjustment) to
Commonwealth; and grant by the
Company to Commonwealth of a right
of first refusal to act as the
Company's underwriter and placement
agent and to serve as the Company's
investment banker in certain
circumstances.
</TABLE>
Background of Investment Transaction
The Company has experienced substantial financial difficulty in 1994 and
1995 and has a current liability under the Existing Credit Agreement of
$15,225,000, which is due February 15, 1996, and approximately $3,120,000 of
unpaid past due trade debt as of November 25, 1995. The Company has operated
during this period with a series of amendments and waivers from the Bank
Lenders, one of which was given on
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October 13, 1995 in connection with the Holmes Transaction. If the Company is
not able to restructure the repayment schedule with the Bank Lenders, it will be
unable to meet its payment obligations at February 15, 1996.
In addition, the Company lost $11,600,000 in 1994 and an additional
$9,200,000 in the nine months ended September 30, 1995. The Company's net book
value has declined from $4.52 per share at January 1, 1994 to $1.56 per share at
September 30, 1995.
The Company has negotiated the Investment Transaction with Commonwealth.
The completion thereof is subject to the Company's ability to work out
satisfactory terms for amendments to the Existing Credit Agreement with the Bank
Lenders. The Bank Lenders have reviewed the Investment Transaction and have
stated that, subject to satisfactory review prior to the closing of the
Investment Transaction, they will consent to the Investment Transaction and will
amend the Existing Credit Agreement to provide for an amortization of principal
in equal installments of $500,000 at March 31, 1996, June 30, 1996, September
30, 1996 and December 31, 1996, and equal quarterly installments of $750,000
beginning on March 31, 1997, with a payment of $7,975,000 due on January 15,
1999 (the "Revised Credit Agreement"). Commonwealth and Mr. Holmes have agreed
that such terms are acceptable to them. See "Approval of Issuance of Securities
in Investment Transaction--Background of Investment Transaction--Capital and
Credit Transactions."
If the Company is unable to conclude the Revised Credit Agreement and the
Investment Transaction, the Company and Mr. Holmes have agreed to implement the
Holmes Alternative. The Bank Lenders have reviewed the Holmes Alternative and
stated that they will consent to the Holmes Alternative and will amend the
Existing Credit Agreement to provide for an amortization of principal in equal
quarterly installments of $125,000 at March 31, 1996, June 30, 1996, September
30, 1996 and December 31, 1996 with the balance due on January 15, 1997. While
the Company reasonably believes that the Bank Lenders will enter into a written
agreement as described above based on the receipt by the Company of a draft
letter of intent from the Bank Lenders which is subject to execution, the
absence of the occurrence of an event of default under the Existing Credit
Agreement, the receipt of credit committee approval and the preparation,
execution and delivery of appropriate documents, no assurance can be given that
the Bank Lenders will do so or renegotiate the Existing Credit Agreement in a
manner to permit the Company to continue to operate upon the implementation of
the Holmes Alternative.
If the Company is unable to consummate either the Investment Transaction or
the Holmes Alternative and to amend the Existing Credit Agreement, it may be
forced to seek bankruptcy protection. All of the assets of the Company and its
United States subsidiaries are pledged as collateral to the Bank Lenders.
Completion of the transactions above will not ensure the Company's survival.
Continuation of the Company as a going concern is also dependent upon the return
of the Company to profitable operations.
The completion of these transactions will result in substantial dilution of
the shareholdings of all shareholders. See "Approval of Issuance of Securities
in Investment Transaction--Dilution of Holders of Common Stock."
Summary of Business Activities. In 1990, management adopted a long range
strategy to enhance the growth of the Company both by internal and external
means. Management sought to grow the Company's U.S. military business by
increasing its internal sales and engineering resources while simultaneously
reducing the Company's dependence on the military budget by increasing its
commercial and foreign customer base. Between 1990 and 1993, the Company
acquired five businesses, primarily for cash and notes in the aggregate amount
of approximately $25,300,000, and the assumption of certain liabilities.
-8-
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<PAGE>
The Company acquired the Systems Division, based in Columbia, Maryland, in
November 1990 for approximately $6,000,000 in cash. The Systems Division
specializes in the integration of various manufacturers' computer software and
hardware to address specific customer needs.
In May 1992, the Company acquired a line of ruggedized computers and
peripheral products marketed under the name KMS for approximately $1,700,000 in
cash and assumed liabilities of approximately $400,000. Additional costs
pursuant to the transaction resulted in a total acquisition cost of
approximately $2,500,000. The purchase price was paid from the Company's cash
balances. KMS operations were moved to Hauppauge, New York following the
acquisition.
In August 1992, the Company acquired assets and assumed certain liabilities
and obligations related to the production of telecommunications test equipment
and transmission enhancement products in Laconia, New Hampshire for
approximately $6,000,000 in cash and assumed liabilities of approximately
$1,000,000. Additional costs incurred pursuant to the transaction resulted in a
total acquisition cost of approximately $8,000,000. The acquisition cost was
funded by existing cash balances and $5,000,000 of additional borrowings under
the Company's long-term credit agreement with the Bank Lenders.
In January 1993, the Company acquired Lynwood Scientific Developments
Limited, a U.K. company located in Farnham, England, for approximately
$4,000,000 in cash, 330,497 shares (adjusted for stock dividends and stock
splits) 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
$1,100,000. The cash portion of the purchase price was paid from existing cash
balances. Lynwood produces intelligent terminals, terminal emulators, TEMPEST
computer products and high performance work stations for commercial and
government markets.
In October 1993, the Company acquired Codar Technology, Inc., located in
Longmont, Colorado ("Codar"), for approximately $6,500,000 consisting of cash
and notes payable. Additional costs incurred pursuant to the transaction
resulted in a final total acquisition cost of approximately $7,600,000. The
Company increased its term loan borrowings by $7,500,000 in conjunction with the
acquisition. Codar produces ruggedized computers and equipment and provides
systems integration and design services.
Following the Codar acquisition in 1993, the Company structured its
operations into two business segments: the Electronic Systems segment and the
Telecommunications segment. The Electronic Systems segment included the Military
Systems Group (the Military Products Division, based in Hauppauge, New York and
the Codar Division, based in Longmont, Colorado), the Systems Division (based in
Columbia, Maryland) and the Lynwood Division (based in Farnham, United Kingdom).
The Telecommunications segment consists of the Wilcom Division (based in
Laconia, New Hampshire).
In April 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 transfer of operations to Colorado was substantially
completed by the fourth quarter of 1994.
The transition of the Military Systems Group to Colorado placed strains on
the existing management and information systems at Codar which resulted in
delayed shipments and significant cost overruns on long-term contracts,
substantial losses on operations and significant cash flow issues. During the
second half of 1994, the Codar subsidiary reported sales at a level
substantially below earlier expectations.
-9-
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<PAGE>
In 1995, the Company reorganized Codar's management. During the second
quarter of 1995, which was the first full quarter under the new management team,
the Company recorded mixed results. Revenue was $7,500,000, the highest in
Codar's history. Operating losses during the quarter were $3,000,000, primarily
due to cost-overruns on long-term contracts which were recognized during the
quarter and inventory write-downs on slow moving or obsolete inventory. During
the third quarter ended September 30, 1995, Codar had $6,400,000 in sales and
reported a loss of $1,800,000. See the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1995 set forth in its entirety in Appendix 2
hereto.
Capital and Credit Transactions. Until May 1994, the Company's borrowings
were under unsecured credit lines and term loans. During 1992 and 1993, the
Company borrowed no funds under these facilities, but borrowed $12,500,000 under
term loans in connection with the acquisitions of Wilcom and Codar. In May 1994,
the Company restructured its credit facilities to create secured lines of credit
with its two principal lending institutions amounting to $6,000,000 and term
loans of $9,175,000.
On April 7, 1995, the Company entered into the Existing Credit Agreement.
Under the terms of the Existing Credit Agreement, the then-existing term debt
and lines of credit were converted into a revolving credit arrangement in
exchange for a cash payment of $100,000 and the issuance of 125,000 shares of
Common Stock to each of the Bank Lenders which the Company agreed to register
with the Securities and Exchange Commission. The $100,000 cash payment, the
issuance of the shares of Common Stock and other costs associated with the
refinancing resulted in a charge against the Company's earnings of approximately
$900,000 which is being amortized over the last three quarters of 1995. The
Existing Credit Agreement required quarterly payments of $875,000, commencing in
September 1995, which the Company was not able to make. The Existing Credit
Agreement expires on February 15, 1996 at which time the remaining principal
balance of $15,225,000 is due. Unless the Investment Transaction and
restructuring take place, the Company will be unable to meet this obligation
when it becomes due.
In October 1994, the Company retained an investment banker to pursue
strategic alternatives, including the sale of common or preferred stock,
issuance of convertible debt, a business combination, the sale of all or a
portion of the Company and establishment of a borrowing arrangement with new
lending institutions. Separately, in November 1994, the Company sold 363,636
shares of Common Stock at $2.75 per share to an affiliate of Fundamental
Management Corp. ("Fundamental"). C. Shelton James, a director of the Company,
is the President and a director of Fundamental. In May 1995, the Company reached
the letter of intent stage with a prospective purchaser to acquire the Company
for publicly-traded stock of the acquiring company, which, based upon the price
of the stock of the acquiring company, valued the Common Stock at approximately
$3.45 per share. Subsequent to the completion of the prospective purchaser's due
diligence, in July 1995, the prospective purchaser informed the Company that it
would not proceed with the transaction on the terms previously announced. The
Company continued to pursue other financing alternatives. The prospective
purchaser has had further discussions with the Company, including as recently as
December 13, 1995, but has not made any firm offers to the Company.
In March 1995, the Company received a proposal for Charles S. Holmes to
invest up to $8,000,000 in the Company in the form of convertible preferred
stock with voting rights with the Common Stock coupled with warrants to purchase
additional shares of Common Stock. Such proposal would have given Mr. Holmes an
approximate 45% interest in the Company on a fully-diluted basis together with
the right to designate three directors of the Company. The Company provided Mr.
Holmes with certain information concerning the financial position of the Company
and its projects and discussed Mr. Holmes' investment proposal with him.
On August 4, 1995, Mr. Holmes introduced management of the Company to
representatives of Commonwealth who proposed to raise up to $8,000,000. After
discussions between management of the Company, Mr. Holmes and representatives of
Commonwealth, a draft letter from Commonwealth proposing the
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<PAGE>
Investment Transaction was presented to the Board of Directors at its meeting on
October 3, 1995. Management was authorized to negotiate final terms with Mr.
Holmes of the Holmes Transaction providing for an investment of $1,000,000 and
to execute a letter of intent with Commonwealth with respect to the Investment
Transaction which was executed by the Company on October 20, 1995.
The Board of Directors considered several different options including a
potential disposition or merger of the Company, the possible sale of certain
assets or the stock of one or more subsidiaries, the Holmes Transaction and the
Investment Transaction. In approving the Holmes Transaction and the Investment
Transaction, the Board considered the interests of all shareholders of the
Company, the dilutive effects upon the current shareholders of the Company of
various alternatives, the inability of the Company's investment bankers to find
alternatives, the failure of the prospective purchaser to make a firm offer, and
the obligations to the Bank Lenders which the Company would not be able to meet.
On October 13, 1995, the Banks agreed to waive certain financial covenant
defaults and to permit the Company and Mr. Holmes to proceed with the Holmes
Transaction. On November 6, 1995, the Bank Lenders agreed to certain other
amendments to the Existing Credit Agreement. Before or contemporaneously with
the initial closing of the Investment Transaction, the Company contemplates
entering into an amendment to the Existing Credit Agreement under which the Bank
Lenders will agree to amend and extend the payment provisions contained in the
Existing Credit Agreement, as well as reset certain financial covenants, on more
favorable terms for the Company. While the Company reasonably believes that the
Bank Lenders will enter into a written amendment as described below based on the
receipt by the Company of a draft letter of intent from the Bank Lenders which
is subject to execution, the absence of the occurrence of an event of default
under the Existing Credit Agreement, the receipt of credit committee approval
and the preparation, execution and delivery of appropriate documents, no
assurance can be given that the Bank Lenders will do so. As contemplated, the
Revised Credit Agreement would provide for principal payments of $500,000 on
each of 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 on March 31,
1997 and ending on September 30, 1998, together with accrued and unpaid interest
through the applicable payment date. The remaining outstanding principal amount
of $7,975,000 would be due and payable on January 15, 1999. Borrowings permitted
under the Revised Credit Agreement would be irrevocably reduced with each
quarterly principal payment. The interest rate, bank fees, collateral,
non-financial covenants and events of default are not expected to be modified by
the Revised Credit Agreement.
On October 13, 1995, Mr. Holmes loaned the Company $1,000,000 at 12%
interest, and received a fee of 3% of such principal amount making the effective
rate of interest on such loan 12.7% (assuming that the loan is integrated with
the Investment Transaction and has a term of five years). Mr. Holmes loaned an
additional $1,000,000 to the Company on similar terms in December 1995. Such
amounts are due February 15, 1996. However, these investments will be integrated
with the Investment Transaction and Mr. Holmes will receive 2,000 Units in
exchange therefor.
The Holmes Alternative
In the event that the Investment Transaction is abandoned or is not
consummated on or before February 15, 1996, Mr. Holmes will be entitled, on or
before February 15, 1996 or such later date as may be mutually agreed between
the parties, to purchase, upon written notice to the Company, (i) an additional
$1,000,000 principal amount of the Company's Notes (the "Additional Note") and
(ii) warrants representing the right to purchase an additional 1,300,000 shares
of Common Stock (the "Additional Warrant" and, together with the Additional
Note, the "Additional Securities"), in each case, upon substantially the same
terms and conditions as the respective securities purchased by Mr. Holmes in the
Holmes Transaction. In the event that Mr. Holmes, or a designee of Mr. Holmes,
purchases all of the Additional Securities, the Company will, upon written
notice from Mr. Holmes, (i) promptly retain the services of an investment bank,
mutually selected by the Company
-11-
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<PAGE>
and Mr. Holmes, to advise the Company on the sale of certain assets or the stock
of one or more subsidiaries and offer such assets or stock for sale through such
investment bank and (ii) use its best efforts to promptly cause the resignation
of two then-current members of the Board of Directors of the Company and to
cause the vacancies resulting thereby to be filled by individuals designated by
Mr. Holmes. See "Approval of Issuance of Securities in Investment
Transaction--Commonwealth Placement Agreement."
Description of the Securities
The Securities will be issued pursuant to a Subscription Agreement, dated
as of January 15, 1996, between the Company and the Investors (the "Subscription
Agreement"). It is anticipated that each unit will consist of (i) $1,000
principal amount of the Notes and (ii) a detachable Warrant representing the
right to acquire 250 shares of Common Stock and will be offered at a Unit
purchase price of $1,000. The Company has agreed to register the Notes, the
Warrants and the underlying Common Stock with the Securities and Exchange
Commission. See "Approval of Issuance of Securities in Investment
Transaction--Registration Rights."
The Notes. The Notes will mature on January 15, 2001 and will bear interest
from the date of issuance at the rate per annum of 12%. Interest on the Notes
will be 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 will be 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.
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 Existing Credit Agreement and all extensions, renewals and
refunding of any of the foregoing up to the original amount (including the
Revised Credit Agreement). At November 25, 1995, the amount of Senior
Indebtedness outstanding was $15,225,000. There will be no sinking fund for the
Notes.
Conversion Rights. The Notes may be converted by the holders as to their
principal amount into Common Stock of the Company at any time at a conversion
price equal to $2.00 per share, subject to adjustment. The conversion price of
the Notes will be adjusted to $1.50 or $1.00, respectively, if the Company's
EBITDA falls below $6,000,000 or $4,750,000 in 1996. EBITDA will be calculated
by combining the Company's earnings before interest and taxes as reported in its
consolidated statements of operations for the relevant period and the Company's
depreciation and amortization as reported in its consolidated statements of cash
flows for the same period. Should the Company sell the stock or assets of any of
its subsidiaries in 1996, such amounts will be reduced by certain agreed
amounts, depending on the time of sale. The conversion price and the number of
shares of Common Stock to be received upon conversion are subject to adjustment
upon the occurrence of any of the following events: (i) the recapitalization of
the Company or reclassification of the securities to be received upon conversion
or any merger or consolidation of the Company into or with a corporation or
other business entity, or the sale or transfer of all or substantially all of
the Company's assets or any successor corporation's assets to any other
corporation or business entity, (ii) the subdivision or combination of the
shares of Common Stock to be received upon conversion, (iii) the payment of
dividends or other distributions in the form of the securities to be received
upon conversion, and (iv) the issuance of shares of Common Stock at less than
the conversion price. No adjustment of the conversion price is required to be
made until cumulative adjustments otherwise required to be made amount to 1% or
more of the conversion price
-12-
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<PAGE>
last adjusted. The Company may force conversion of the Notes if, during any
period prior to maturity, the closing price of the Common Stock exceeds $6.00
per share for 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 of the Company. The Note will contain certain
negative covenants prohibiting, among other things, the negative pledge of the
Company's assets not otherwise encumbered by its senior lenders, the creation or
incurrence of any liens on the Company's property or assets, the making of any
investments, the payment of dividends on the Company's capital stock, the
disposition of certain assets, certain affiliated party transactions and the
merger or consolidation of the Company. The foregoing covenants, while
advantageous to the holders of the Notes, could impede the ability of the
Company to enter into certain transactions that might be advantageous to the
Company.
Events of Default. "Events of Default" under the Notes include failure to
pay principal or interest, the failure to pay other indebtedness for borrowed
money in excess of $500,000 when due, or the acceleration of such indebtedness,
the failure to pay any judgment in excess of $500,000 when due or stayed, and
voluntary or involuntary bankruptcy of the Company.
If an Event of Default occurs and is continuing, then and in every such
case the holders of the Notes may declare the Notes then outstanding to be
immediately due and payable by a notice in writing to the Company, whereupon the
same will be immediately due and payable. A payment default will result in an
increased issuance to Investors of Warrants to purchase an amount of shares of
Common Stock and until the Notes are fully repaid, the right of the Investors to
elect a majority of the Company's Board of Directors. In the event of a Chapter
11 or Chapter 7 bankruptcy case involving the Company, the Notes will bear
interest from the date of commencement of the case at a default rate per annum
equal to the lesser of 18% or the highest such rate allowable by law.
The Warrants. The Warrants will represent the right to acquire specified
numbers of shares of Common Stock at an exercise price equal to $2.50 per share,
subject to adjustment (the "Exercise Price"). 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. EBITDA will be calculated by combining
the Company's earnings before interest and taxes as reported in its consolidated
statements of operations for the relevant period and the Company's depreciation
and amortization as reported in its consolidated statements of cash flows for
the same period. Should the Company sell the stock or assets of any of its
subsidiaries in 1996, such amounts will be reduced by certain agreed amounts,
depending on the time of sale. The Exercise Price and the number of shares of
Common Stock to be received upon exercise are subject to adjustment upon the
occurrence of any of the following events: (i) the recapitalization of the
Company or reclassification of the securities to be received upon conversion or
any merger or consolidation of the Company into or with a corporation or other
business entity, or the sale or transfer of all or substantially all of the
Company's assets or any successor corporation's assets to any other corporation
or business entity, (ii) the subdivision or combination of shares of Common
Stock to be received upon exercise, (iii) the payment of dividends or other
distributions in the form of the securities to be received upon exercise, and
(iv) the issuance of shares of Common Stock at less than the Exercise Price. No
adjustment of the Exercise Price is required to be made until cumulative
adjustments otherwise required to be made amount to 1% or more of the Exercise
Price last adjusted. Warrants will be exercisable, at any time and from time to
time, on or before 5:30 p.m., local time, on or before January 15, 2001 (the
"Expiration Date") by delivery of an Exercise Notice duly completed and
tendering of the aggregate Exercise Price.
-13-
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<PAGE>
Registration Rights
The Company has agreed to file a registration statement with the Securities
and Exchange Commission with respect to the Notes, the Warrants and the shares
of Common Stock issuable upon conversion or exercise of the Notes and the
Warrants (collectively, the "Registrable Securities") within the later of 90
days after the date of the closing of the Investment Transaction or March 31,
1996 and to use its best efforts to cause such registration statement to become
effective within 60 days thereafter and to keep such registration statement
effective for up to three years thereafter. In the event the registration
statement is not filed or declared effective and does not remain effective for
such required time periods, the interest rate borne by the Notes will be
increased by 1% per annum for each 90-day period (or portion thereof) that such
failure continues, with such rate to reach 18% if such registration is not
completed nine months after the closing of the Investment Transaction, provided
that the interest rate borne by the Notes will not be increased if the
Registrable Securities are otherwise freely-tradeable pursuant to Rule 144 or
otherwise. Rule 144 provides a safe harbor for sales of restricted securities
more than two years after the date of acquisition of such securities if such
sales comply with the volume and manner of sale limitations contained in the
rule. Upon the effectiveness or reeffectiveness of the registration statement,
the interest rate borne by the Notes will be reduced to the original interest
rate of the Notes.
The Company has also agreed to include the Registerable Securities in any
registration statement filed with the Securities and Exchange Commission with
respect to any future public offerings initiated by the Company or any other
selling shareholders (the "Piggy-Back Rights") and holders of a majority in
interest of Registerable Securities will have the right, which right may be
exercised no more than twice, to demand, at any time prior to December 31, 2005,
that the Company file a registration statement with the Securities and Exchange
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 a registration statement relating to the exercise of all Piggy-Back Rights
and the first exercise of the Demand Rights.
Board Representation
The Certificate of Incorporation of the Company currently provides for a
Board of Directors consisting of no less than three (3) nor more than seven (7)
directors with the number of directors within those limits fixed by the Board of
Directors from time to time. The Board of Directors has fixed the number of
directors at seven (7). Paragraph 7 of the Certificate of Incorporation further
provides that such number may be increased to nine (9) who shall be divided into
three classes serving three-year terms upon the occurrence of certain events
including the beneficial ownership by a single entity of twelve percent (12%) or
more of the outstanding shares of Common Stock entitled to vote in the election
of directors.
In connection with the Holmes Transaction, Charles S. Holmes was elected as
a director of the Company and is a party to an agreement with the Company with
respect to his nomination to the Board of Directors. See "Approval of Issuance
of Securities in Investment Transaction--Interest of Persons in Investment
Transaction." In addition, the Company has agreed, in connection with the
Investment Transaction, to use its best efforts to cause two then-current
members of the Board of Directors to resign and two other individuals acceptable
to the Company and who are designated by the Investors (including one designated
by Mr. Holmes) to be appointed to the Board of Directors to fill such vacancies.
Accordingly, two of the current directors of the Company will subsequently
resign if the Investment Transaction is completed. Messrs. Barre, May and
Rosenthal have voluntarily tendered their resignations to the Company,
recognizing the Company's obligations in connection with the Investment
Transaction, but the Board of Directors has yet to determine which two of the
three resignations it will accept. Such decision will be made when the Board is
advised of the names and backgrounds of the nominees for director proposed by
the investor group. Such determination will be made based on the backgrounds of
the directors who have tendered their resignations as compared with the
backgrounds of the nominees with the goal of achieving a Board of Directors with
a wide diversity of applicable
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skills and experience for the Company to draw on. It is expected that the
nominees designated by the Investors will be elected to the Board following the
initial closing of the Investment Transaction anticipated to occur on or prior
to February 15, 1996. Accordingly, two of the current directors of the Company
will serve only until such time. The remaining directors of the Company and the
two directors designated by the Investors will serve until the 1996 annual
meeting of shareholders anticipated to be held subsequent to July 1, 1996 and
before August 31, 1996 and until their respective successors are elected and
qualify or until their resignation, removal, disqualification or death as
provided in the Certificate of Incorporation and by-laws of the Company. The
Company did not offer to pay nor did the Company pay any remuneration for the
resignations.
Commonwealth Placement Agreement
Commonwealth, as placement agent, will receive a fee equal to 8% of the
gross proceeds of the Investment Transaction together with the reimbursement of
accountable expenses. After deducting the fees and expenses payable to the
Placement Agent and miscellaneous expenses payable by the Company in connection
with the Investment Transaction, the net proceeds to the Company are estimated
to be approximately $5,020,000 to $6,860,000. Until December 31, 2000,
Commonwealth has been granted a right of first refusal to act as the Company's
underwriter and placement agent with respect to future public and private
financings and serve as the Company's investment banker with respect to any
potential acquisition, merger, divestiture, strategic planning or other
activity, but only if the terms offered by Commonwealth are then comparable to
those being offered by other investment banking firms to similarly situated
companies. As a result, Commonwealth may be retained by the Company to implement
the Holmes Alternative. Commonwealth is entitled to receive Warrants to purchase
between 600,000 and 800,000 shares of Common Stock (based on the amount of Notes
sold) upon terms and conditions identical to those of the Warrants as an
advisory fee. If the Investment Transaction does not proceed including as a
result of the failure of the Company's shareholders to vote in favor of
Proposals 1 and 2, other than as a result of a breach by Commonwealth of its
obligations, the Company is obligated to pay Commonwealth a minimum fee of
$250,000, plus accountable expenses, such amount not to exceed $400,000 in the
aggregate.
Interest of Persons in Investment Transaction
Mr. Charles S. Holmes, a director, is the principal purchaser in the Holmes
Transaction and will be the principal purchaser in the Holmes Alternative. He
was elected as a member of the Board of Directors at the time of the
consummation of the Holmes Transaction. He received a fee of $30,000 and will
receive interest on the notes issued to him in connection with the Holmes
Transaction.
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<PAGE>
Dilution of Holders of Common Stock
The following is a brief summary of the dilutive effects of the Investment
Transaction, assuming the sale and conversion of a minimum of $6,000,000 and a
maximum of $8,000,000 of the Notes at $2.00 per share of Common Stock and
assuming exercise of all of the related Warrants at $2.50 per share of Common
Stock:
<TABLE>
<CAPTION>
Assuming
Current Adjustment
Common Upon Conversion for Failure
Stock Equity Upon of the Notes and to Meet
(including Conversion Exercise of the EBITDA
options) of the Notes Warrants Thresholds
------------ ------------- ----------------- -----------
<S> <C> <C> <C> <C>
Interests of current holders of
Common Stock...................Minimum 100% 67.1% 50.4% 40.4%
Maximum 100% 50.4% 40.4% 40.4%
</TABLE>
Pro Forma Balance Sheet upon Occurrence of the Investment Transaction
The following is a brief summary of the pro forma effects of the Investment
Transaction and the Revised Credit Agreement, assuming the sale of a minimum of
$6,000,000 and a maximum of $8,000,000 of Notes and related Warrants, on the
Company's consolidated balance sheet at September 30, 1995 and certain other
financial data at December 31, 1994.
Pro Forma Effect of Investment Transaction as at September 30, 1995
<TABLE>
<CAPTION>
(in thousands) Adjustments (1) Pro Forma As Adjusted(1)
--------------- ------------------------
Minimum Maximum Minimum Maximum
------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
ASSETS
Total Current Assets............................ $28,067 $5,020 $6,860 $33,087 $34,927
Total Assets.................................... 45,681 6,900 9,000 52,581 54,681
LIABILITIES
Total Current Liabilities....................... 30,823 (13,475) (13,475) 17,348 17,348
Total Long-Term Debt............................ 249 18,725 20,475 18,974 20,724
Total Debt...................................... 15,686 5,250 7,000 20,936 22,686
Book Value Per Share............................... $1.56 $.12 $.17 $1.78 $1.83
Stockholders' Equity............................... 11,643 1,650 2,000 13,293 13,643
Interest Expense................................... 1,197 653 870 1,850 2,067
Net Loss........................................... (9,195) 935 1,191 (10,130) (10,386)
Earnings Per Share................................. ($1.25) ($.13) ($.16) ($1.38) ($1.41)
</TABLE>
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(1) Adjusted for the closing of the Investment Transaction assuming the sale of
a minimum of $6,000,000 and a maximum of $8,000,000 of Notes and related
Warrants and advisory Warrants (having an assumed value of $.50 per Warrant
using, among several valuation methodologies, the Black Scholes model
(assuming a warrant term of five years, a risk-free rate of return
representing the interest rate on long-term U.S. Treasury securities with
maturity dates corresponding to the warrant term, a stock price volatility
factor calculated using the daily stock prices for the Common Stock for the
previous one-year period and a dividend yield of 0%) and NASD valuation
formulae) and the implementation of the Revised Credit Agreement.
The Company does not believe that there will be a material change in the
assumed value of the Warrants.
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Pro Forma Effect of Investment Transaction as at December 31, 1994
<TABLE>
<CAPTION>
(in thousands) Adjustments (1) Pro Forma As Adjusted(1)
--------------- ------------------------
Minimum Maximum Minimum Maximum
------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Book Value Per Share.................................... $2.83 $.23 $.28 $3.06 $3.11
Interest Expense........................................ (1,477) 870 1,160 2,347 2,637
Net Loss................................................ (11,591) 1,246 1,588 (12,837) (13,179)
Earnings Per Share..................................... ($1.69) ($.18) ($.23) ($1.87) ($1.92)
</TABLE>
- --------------------
(1) Adjusted for the closing of the Investment Transaction assuming the sale of
a minimum of $6,000,000 and a maximum of $8,000,000 of Notes and related
Warrants and advisory Warrants (having an assumed value of $.50 per Warrant
using, among several valuation methodologies, the Black Scholes model
(assuming a warrant term of five years, a risk-free rate of return
representing the interest rate on long-term U.S. Treasury securities with
maturity dates corresponding to the warrant term, a stock price volatility
factor calculated using the daily stock prices for the Common Stock for the
previous one-year period and a dividend yield of 0%) and NASD valuation
formulae) and the implementation of the Revised Credit Agreement.
The Company does not believe that there will be a material change in the
assumed value of the Warrants.
Market for the Common Stock and Related Stockholder Matters
The Common Stock trades in The Nasdaq Stock Market under the symbol NATL.
The table below sets forth for the periods indicated the high and low sale
prices for the Common Stock as adjusted for stock dividends and stock splits as
compiled from published sources.
<TABLE>
<CAPTION>
Period High Low
------ ---- ---
<S> <C> <C> <C>
1995 First Quarter $ 3 $ 1 7/8
Second Quarter 3 1/2 2 1/8
Third Quarter 3 1/4 1 1/4
Fourth Quarter 2 3/8 1 1/8
1994 First Quarter 7 5 3/16
Second Quarter 5 7/8 3 5/8
Third Quarter 4 7/8 2 7/8
Fourth Quarter 4 1/8 2 3/16
</TABLE>
There have been no cash dividends declared or paid on the Common Stock
during the past two years. The Existing 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.
As of December 15, 1995, the approximate number of record holders of the
Common Stock as determined from the records of the transfer agent, American
Stock Transfer and Trust Company, was 700. Street names are included
collectively as a single holder of record. Management estimates that the Company
has approximately 2,000 additional shareholders holding stock in street names.
-17-
<PAGE>
<PAGE>
Directors' Votes
Each of the Directors of the Company have agreed to vote or cause to be
voted shares of Common Stock which they own or control or to use their best
efforts to cause the shares of Common Stock (aggregating 652,551 shares or 8.7%
of the shares of Common Stock outstanding) to be voted in favor of the
Investment Transaction.
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE "FOR" THE
PROPOSAL TO APPROVE THE INVESTMENT TRANSACTION.
APPROVAL OF INCREASE IN NUMBER OF COMMON SHARES AUTHORIZED
The Board of Directors is submitting for shareholder approval a proposal to
amend the Certificate of Incorporation to increase the number of authorized
shares of Common Stock from 10,000,000 to 25,000,000. The full text of such
amendment is set forth in its entirety in Appendix 3 hereto. The principal
reason for recommending the amendment of the Certificate of Incorporation
increasing the authorized shares of Common Stock is to accommodate the potential
conversion to Common Stock of up to $8,000,000 of Notes and exercise of certain
related Warrants to be issued as part of the Investment Transaction. Presently,
the total number of authorized but unissued shares is inadequate to satisfy the
possible conversion of the Notes to and exercise of the Warrants for Common
Stock as required by the Investment Transaction.
As of the Record Date, a total of 233,095 shares of Common Stock were
authorized but not issued or reserved for issuance. As of that date, a total of
7,459,437 shares of Common Stock were issued and outstanding and a total of
2,307,468 shares of Common Stock were reserved or otherwise committed for
possible issuance by the Company to the holders of various warrants and to
employees pursuant to various benefit plans of the Company.
The Notes will be convertible into 3,000,000 to 4,000,000 shares of Common
Stock (5,000,000 to 8,000,000 shares if certain conditions are not met), and
holders of the Warrants will acquire the right to purchase 1,500,000 to
2,000,000 shares of Common Stock (3,333,334 to 2,500,000 if certain conditions
are not met) upon exercise thereof.
The maturity date on the Existing Credit Agreement is February 15, 1996,
with a remaining outstanding principal amount of $15,225,000. Under the
Company's present financial condition, the available resources of the Company
would be insufficient to meet this obligation. Amendment of the Existing Credit
Agreement, which includes as an unconditional prerequisite the private placement
of $6,000,000 of subordinated indebtedness, will extend the maturity of the
amounts outstanding under the Existing Credit Agreement to January 15, 1999. The
proposal to increase the Company's authorized Common Stock is thus intended to
insure that the Company has sufficient Common Stock to meet the foregoing
obligations and to provide approximately 8,878,000 to 10,578,000 additional
authorized shares that could be issued in connection with exercises of stock
options, possible future stock splits, stock dividends and mergers and
acquisitions and to raise additional capital, which could include public
offerings or private placements of Common Stock.
While the Board of Directors believes it important that the Company have
the flexibility that would be provided by having available additional authorized
Common Stock, the Company does not now have any commitments, arrangements or
understandings which would require the issuance of such additional shares of
Common Stock other than the shares reserved for issuance pursuant to the
Investment Transaction. The availability of additional authorized shares of
Common Stock would simply permit the Board of Directors to respond in a timely
manner to future opportunities and business needs of the Company as they may
arise and
-18-
<PAGE>
<PAGE>
would avoid the possible necessity and expense of a special meeting of
shareholders to increase the authorized Common Stock.
If the authorized shares of Common Stock are increased as proposed, the
authorized shares of Common Stock would be available for issuance from time to
time upon such terms and for such purposes as the Board of Directors may deem
advisable without further action by the shareholders of the Company except as
may be required by law or the rules of any stock exchange on which the Common
Stock may be listed at a time or under circumstances as may decrease or increase
the book value per share of Common Stock presently issued and outstanding,
depending upon whether the consideration paid for such newly issued shares is
less or more than the book value per share prior to such issuance. The issuance
of additional shares could dilute the voting power and equity of the holders of
outstanding Common Stock and may have the effect of discouraging attempts by a
person or group to take control of the Company.
The Company has authority to issue 2,000,000 shares of Preferred Stock,
par value $.10 per share. The Preferred Stock may be issued in series. The Board
of Directors of the Company is expressly 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 Common Stock, who shall
be entitled to one vote for each share of Common Stock held of record by them.
If the proposal to amend the Certificate of Incorporation is not approved,
the Board of Directors intends to issue a class of Preferred Stock of the
Company with full voting rights in the same class as Common Stock and cumulative
preferred dividend rights although no party has committed to buy or place these
securities.
The affirmative vote of the holders of a majority of the outstanding shares
of Common Stock is required to approve the proposal to amend the Company's
Certificate of Incorporation to increase the authorized shares of Common Stock
from 10,000,000 to 25,000,000. Holders of Common Stock are entitled to one vote
per share. There are no cumulative voting rights and no preemptive rights.
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE "FOR" THE PROPOSAL
TO APPROVE THE AMENDMENT TO THE COMPANY'S CERTIFICATE OF INCORPORATION TO
INCREASE THE AUTHORIZED SHARES OF COMMON STOCK.
-19-
<PAGE>
<PAGE>
PRINCIPAL AND MANAGEMENT SHAREHOLDINGS
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 December 15, 1995. The information in the table below is
based upon information furnished to the Company by such persons and statements
filed with the Securities and Exchange Commission.
<TABLE>
<CAPTION>
Number of Shares of Percent of
Common Company
Name and Address of Beneficial Owner Stock Beneficially Owned(1) Common Stock
- ------------------------------------ --------------------------- ------------
<S> <C> <C>
Lindner Fund, Inc.
7711 Carondelet Avenue
Box 16900
St. Louis, MO 63105(2). . . . . . . . . . . . . . 405,600 5.43%
Fundamental Management Corporation
201 South Biscayne Boulevard
Suite 1450
Miami, FL 33131(3). . . . . . . . . . . . . . . . 415,429 5.57%
C.L. King & Associates, Inc.
Nine Elk Street
Albany, NY 12207(4) . . . . . . . . . . . . . . . 451,451 6.05%
Pioneering Management Corporation
60 State Street
Boston, MA 02114(5) . . . . . . . . . . . . . . . 451,500 6.05%
</TABLE>
- --------
(1) To the knowledge of the Company, beneficial owners named in the above table
have sole voting power with respect to the shares listed opposite their
names.
(2) These shares are reportedly owned by Lindner Fund, Inc., an investment
company registered under Section 8 of the Investment Company Act of 1940,
of which Ryback Management Corporation is the investment company adviser
registered under Section 203 of the Investment Advisers Act of 1940.
(3) 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 and shares voting and dispositive power
with the other seven executive officers and directors over the shares of
Common Stock owned by it as general partner.
(4) These shares are reportedly owned by C.L. King & Associates, Inc. in its
capacity as a registered broker dealer, registered under Section 15 of the
Securities Exchange Act of 1934, as amended.
(5) These shares are reportedly owned by a passive investor. Pioneering
Management Corporation is the investment company adviser of such investor
and is registered under Section 203 of the Investment Advisers Act of 1940.
-20-
<PAGE>
<PAGE>
Shares of Common Stock beneficially owned as of December 15, 1995 by each
director, nominee for director and executive officer of the Company and by all
directors and executive officers of the Company as a group are set forth in the
following table. This table is based upon information furnished to the Company
by such persons and statements filed with the Securities and Exchange
Commission.
<TABLE>
<CAPTION>
Beneficial Ownership of Shares(1)
---------------------------------
Number of Shares of Percent of
Common Stock Company
Name Beneficially Owned(2) Common Stock(3)
- ---------------------------------------- --------------------- ---------------
<S> <C> <C>
Robert A. Carlson ....................... 100,467 1.30%
Stephen Barre ........................... 17,654 *
C. Shelton James(4)...................... 14,793 *
Charles S. Holmes(5)..................... 0 *
John M. May............................. 47,489 *
Robert D. Rosenthal ..................... 69,700 *
Richard A. Schneider .................... 16,812 *
All directors and officers
as a group (7 persons) ................ 266,915 5.43%
</TABLE>
- --------
* Less than 1%
(1) Directors and executive officers have sole voting power and sole investment
power with respect to the shares listed opposite their names.
(2) Excludes options exercisable within 60 days of December 15, 1995 for such
persons as follows: Mr. Carlson, 0; Mr. Barre, 3,120; Mr. James, 7,401; Mr.
Holmes, 0; Mr. May, 3,120; Mr. Rosenthal, 3,120; Mr. Schneider, 0; and all
directors and officers as a group, 16,761.
(3) The percentages of Common Stock outstanding are based on 7,459,437 shares
outstanding on December 15, 1995.
(4) Excludes 415,429 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.
(5) Excludes Notes convertible into 500,000 shares of Common Stock and Warrants
exercisable for 850,000 shares of Common Stock upon consummation of the
Investment Transaction owned by Mr. Holmes on December 15, 1995.
-21-
<PAGE>
<PAGE>
RATIFICATION OF THE SELECTION OF INDEPENDENT AUDITORS
The Board of Directors has selected KPMG Peat Marwick, Jericho, New York,
as the Company's independent auditors for the year ended December 31, 1995.
In accordance with the by-laws of the Company, the Board of Directors is
submitting its selection of KPMG Peat Marwick to the shareholders for
ratification and approval. If the selection is not ratified and approved,
the Board of Directors will reconsider its choice. KPMG Peat Marwick, an
international firm of certified public accountants, has been retained as
auditors by the Company each year since 1981. A representative of KPMG Peat
Marwick is expected to be present at the Special Meeting to make a statement,
should the representative desire to do so, and to answer appropriate questions
from shareholders.
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE "FOR" RATIFICATION
AND APPROVAL OF THE SELECTION OF KPMG PEAT MARWICK AS THE COMPANY'S INDEPENDENT
AUDITORS FOR THE YEAR ENDED DECEMBER 31, 1995.
SHAREHOLDER PROPOSALS FOR 1996 ANNUAL MEETING
Shareholder proposals for inclusion in the proxy materials and
consideration at the 1996 Annual Meeting of Shareholders, if any, must be
received by the Company on or before April 30, 1996 in order to be included in
the proxy material of the Company for that meeting.
By Order of the Board of Directors,
Richard A. Schneider,
Secretary
Dated: January 5, 1996
PLEASE COMPLETE, DATE AND SIGN THE ENCLOSED PROXY AND RETURN IT PROMPTLY IN
THE ENCLOSED ENVELOPE.
A copy of the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1994 filed with the Securities and Exchange Commission may be
obtained without charge (except for exhibits to such annual report, which will
be furnished upon payment of the Company's reasonable expenses in furnishing
such exhibits) by any such person solicited hereunder by writing to: Richard A.
Schneider, Secretary, NAI Technologies, Inc., 2405 Trade Centre Avenue,
Longmont, Colorado 80503. A copy of such report, without exhibits, is also
attached hereto as Appendix 1.
-22-
<PAGE>
<PAGE>
Appendix 1
(COMPOSITE COPY)
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Fiscal Year Ended
December 31, 1994
Commission File Number 0-3704
NAI TECHNOLOGIES, INC.
A New York Corporation IRS Employer I.D. No. 11-1798773
1000 Woodbury Road, Woodbury, New York 11797-2530
Telephone No. (516) 364-4433
Securities Registered Pursuant to Section 12 (g) of the Act:
Common Stock, Par Value $0.10 Per Share
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
YES X NO
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. (X)
As of March 7, 1995, 7,195,567 common shares were outstanding and the aggregate
market value of the common shares (based on the average bid and asked price of
these shares on the NASDAQ Stock Market as of March 7, 1995) of NAI
Technologies, Inc. held by non-affiliates was approximately $18 million.
Documents Incorporated by Reference: Proxy Statement for 1995 Annual Meeting of
Shareholders to be held on April 26, 1995 is incorporated by reference in Part
III of this Annual Report on Form 10-K.
-1-
<PAGE>
<PAGE>
NAI TECHNOLOGIES, INC.
1994 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
Page
----
PART I
Item 1. Business............................................. 3
Item 2. Properties........................................... 11
Item 3. Legal Proceedings.................................... 11
Item 4. Submission of Matters to a Vote of Security Holders.. 12
PART II
Item 5. Market for Registrant's Common Stock and Related
Stockholder Matters.................................. 13
Item 6. Selected Financial Data.............................. 14
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................. 15-21
Item 8. Consolidated Financial Statements and Supplementary
Data................................................. 22
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.................. 22
PART III
Item 10. Directors and Executive Officers of the Registrant... 23
Item 11. Executive Compensation............................... 25
Item 12. Security Ownership of Certain Beneficial Owners and
Management........................................... 30
Item 13. Certain Relationships and Related Transactions....... 32
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K.......................................... 32
<PAGE>
<PAGE>
PART I.
Item 1.
Business
NAI Technologies, Inc. (NAI; the Company) was incorporated in 1954 and operated
in its traditional business of manufacturing electronic instrument test
equipment for the first 25 years of its existence. In the mid-1970's the Company
increased its penetration into the military market and won an initial award for
what came to be known as the USH contract and in 1983 the Company was successful
in winning a development contract for what later became the NST contract. The
USH and NST contracts provided significant streams of revenue to the Company
during their duration which lasted into 1993. In 1990 management began the
implementation of a long-range strategy to enhance the growth of the Company by
both internal and external means. The cornerstone of the strategy was to grow
the Company's U.S. military business by increasing its internal sales and
engineering resources while at the same time reducing the Company's dependence
on the U.S. military by increasing the Company's commercial and foreign customer
base.
The initial implementation step in this strategy was the acquisition in November
1990 of the Systems Division specializing in the integration of various
manufacturers' computer software and hardware to address specific customer
needs, primarily to the U.S. Government agencies.
In 1992, the Company completed two acquisitions and sold its Electronic
Instruments product line: in May 1992, certain assets of KMS Advanced Products,
Inc., a manufacturer of rugged computers and peripherals; in August 1992, the
business and assets of Wilcom, Inc., a manufacturer of test equipment and line
treatment products sold to the telecommunications market; in September 1992, the
Company sold its Electronic Instruments product line at approximately book
value.
In 1993, the Company completed two additional acquisitions: in January 1993, the
common stock of Lynwood Scientific Developments Ltd., which is located in the
United Kingdom, and which designs and manufactures intelligent terminals,
terminal emulators, TEMPEST computer products and high performance workstations
for commercial and government markets principally in the U.K; in October 1993,
the common stock of Codar Technology, Inc., which is located in Longmont,
Colorado, and which specializes in the design and manufacture of militarized and
"ruggedized" computer systems and monitors, and other peripherals.
On April 8, 1994 the Company announced the restructuring of its Military Systems
Group. The major component of the restructuring plan was the consolidation of
operations into one location at Codar Technology, Inc. located in Longmont,
Colorado. The goal of the restructuring was and continues to be to reduce costs
and increase operating efficiencies. In conjunction with this decision, the
Company announced that it was closing its Hauppauge-based Military Products
Division by September 30, 1994, and that most of the work force reductions would
be completed in early July. The work force reductions and the closing of the
facility were completed on schedule. Management's discussion and analysis of
financial condition and results of operations provides additional information
regarding the impact of the restructuring on 1994 operations and anticipated
impact on 1995.
-1-
<PAGE>
<PAGE>
The Company reports its operations in two distinct operating segments: the
Electronic Systems segment and the Telecommunications segment.
The Electronic Systems segment is comprised of three operating companies: Codar
Technology, Inc. (located in Longmont, Colorado), the Systems Division (based in
Columbia, Maryland) and Lynwood Scientific Developments Ltd. (based in Farnham,
United Kingdom).
The Electronic Systems segment segregates its sales into three categories:
systems integration, service and component sales. Systems integration sales are
characterized by the process of selecting and connecting the proper hardware
(NAI built and others) and software to accomplish a specific purpose. Service
sales are usually performed at the customer site and involve installation,
training and/or diagnostic testing. Component sales require less customer
application interface and consist primarily of hardware.
The Telecommunications segment currently consists of one operating company:
Wilcom, Inc. (located in Laconia, New Hampshire).
Sales within the Telecommunications segment are classified into two categories:
test equipment and line treatment. Test equipment is used primarily by the
telephone companies and interchange carriers for testing digital and analog
transmissions in both copper and fibre circuits. Line treatment products are
used to improve sound quality, extend the range of telephone line circuits, and
to provide an additional means for the telephone companies to generate revenue.
Company Products
Electronic Systems Segment
The U.S. computer market can be divided into three levels - commercial,
ruggedized and MIL-SPEC.
Prior to the late 1980's, there were no dedicated manufacturers of ruggedized
computer hardware. At that time, most available markets were served by either
purely commercial products or full MIL-SPEC equipment. While commercial products
were intolerant of harsh environments, full MIL-SPEC equipment designed for
specific applications was very expensive and lagged several years behind the
available commercial technology.
Due to the need to operate under harsh environmental conditions yet constrained
by cost and the desire to maintain technological leadership, the concept of
ruggedized equipment evolved.
The advantage presented by the adaptation of commercial hardware for rugged
environments was quickly accepted by end-users. Cost advantages over full MIL-
SPEC equipment, superior reliability over pure commercial products, time to
market of current technology and the relative ease of upgrading were factors
that have contributed to the rapid expansion of ruggedized systems worldwide.
The Electronic Systems segment serves three unique markets today: Department of
Defense and other Government agencies, industrial and international. Each market
sector has unique competitive requirements and significant opportunities for
growth.
-2-
<PAGE>
<PAGE>
The purchase price for rugged products is currently approximately 1.2 times the
cost of standard commercial products. The availability and affordability of
repackaged rugged hardware provide a wide variety of end-users with the ability
to purchase highly reliable rugged products. As the premium for ruggedized
computers over commercial computers continues to decline, new industrial
customers are entering the market. Examples include the United Parcel Service,
railroads, police enforcement and off-shore oil drilling operations.
The Electronic Systems segment offers its customers the ability to buy
ruggedized versions of state of the art commercial off-the-shelf (cots) computer
technology at prices far below MIL-SPEC equipment. Price-performance trade-offs
are becoming a primary determinant in many decisions between competing options.
The Company designs and manufactures a variety of personal computers, monitors,
terminals, X-terminals, workstations/servers, data storage devices,
networks/communications, printers, keyboards, removable hard drives and computer
peripheral equipment. All of the equipment can be customized to meet specified
customer requirements. The Company's strength is that it can offer a customer a
complete solution in a timely and cost efficient manner.
In 1994, the Company began selling several new products in the RISC-based
workstation, PC product line, and peripheral product line.
The Explorer, which is a portable, high performance workstation, is based on the
latest Sun Microsystems' SPARC RISC technology. The system also includes an
advanced twelve-inch active matrix color display and removable memory, all
packaged in a lightweight field deployable system. This unique package is
designed to meet severe environments and is currently being used in several
major programs, in both the U.S. and foreign military markets.
The Company also announced a product family of workstations, which is based on
Digital Equipment Corporation's Alpha XP technology. These workstations also
include high resolution, ruggedized monitors, designed by the Company and
marketed to the U.S. armed forces.
In the PC product line, the Company introduced a new lightweight, rack-mount
system, based on the Intel Pentium processor. The system was specifically
designed as a flight line mission computer system, interfacing with several
avionic platforms.
In the peripheral product line, the Company introduced a mass storage
environment unit. This MSEU has the capability to configure multimedia
technology, such as optical disk, hard disk, and digital audio tape, utilizing a
common buss structure.
The Company also introduced a stand alone, flat panel display, utilizing active
matrix LCD technology with an integrated microprocessor. This flat panel display
has touch screen control, an integrated power supply, and rugged design to meet
harsh environments.
In 1993, the Company was awarded the Tower Restoration Vehicle (TRV) contract
with the U.S. Air Force. The initial award was for $17.6 million and is expected
to have an ultimate value of approximately $25 million before its completion in
1997. The TRV (AN/MSN-7) provides highly mobile, quick-response air traffic
control tower capabilities to meet critical mission requirements worldwide. This
-3-
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<PAGE>
capability is essential when air operations are initiated at an undeveloped site
or when an air base's primary tower is inoperable. The initial award is for the
production of nineteen TRV systems consisting of military utility vehicles
outfitted with unique pop-up shelters and power generators. The shelters are
configured with an extensive communication suite and air traffic control
operations support equipment which will be "ruggedized" to support the Air
Force's various mission requirements. The Company will also provide extensive
test and evaluation, documentation and support capabilities for this program.
In addition to complying with system functional specifications, the segment's
products are engineered to be deployed in environments that require special
attention to system packaging with limitations on size, power consumption,
shock, vibration and restraint on electromagnetic emissions. One example of this
is the Communications/Terminal Concentrator designed for the U.S. Navy. The
customer required an embedded shipboard communications controller and terminal
concentrator that met stringent environmental and packaging requirements. The
Company designed and delivered a small ISA rackmount system engineered to exceed
the Navy's standards for shock, vibration and temperature. The system's high
reliability and cost effectiveness has resulted in the successful deployment of
hundreds of systems over the past several years.
The Company's peripheral product line offers two customized printers: the 7300
thermal printer and 8240 dot matrix printer. The thermal printer has several
innovative features, including the capability of printing on plain paper in a
thermal transfer mode as well as directly on specially treated thermal paper.
Plug-in auto sensing AC, DC and battery power modules enhance flexibility, while
600 line per minute speed and 300 line per inch resolution provide both high
speed and superior print quality.
The lightweight battery operated 8240 impact dot matrix printer, which is now
offered in several different versions and weighs just over eight pounds, is part
of a product family that comprises AC, DC, TEMPEST and non-TEMPEST versions.
Development was completed in 1993 and full production began in 1994.
The Company offers a complete line of rugged microcomputers which are IBM
compatible and built to withstand severe shock, vibration, cold, heat, dust,
sand, rain and altitude. The entire line of microcomputers is designed based on
the Intel microprocessors. Unlike full MIL-SPEC or specially designed computers,
these can be upgraded to keep pace with changes in microcomputer technology and
can be configured to meet individual user needs. Similar to the microcomputer,
the rugged color monitors are engineered to ensure performance and reliability
while withstanding severe shock and operate over wide temperature and humidity
ranges.
Other products currently being sold include the 4100, a rugged color display
computer, and the RPC-5000, a rugged portable computer. The 4100 is the next
generation of rack mounted computer utilizing color panel screens while
maintaining the same features as the standard rugged computer. The KMS-4100
rugged color display features a VGA compatible flat panel display for
applications requiring full-color graphics. The RPC-5000 offers true rugged
portability with its compact, modular "lunch box" design and a basic
configuration weight of less than two pounds. This unique modular design allows
the computer to be expanded with additional disk drives, expansion cards or
power options. Expansion modules can be customized to satisfy unique customer
requirements.
-4-
<PAGE>
<PAGE>
Through its wholly owned subsidiary, NAI Technologies, Inc.-Systems Division,
the Electronic Systems segment is focused on the integration and sale of
computer systems based on VME, multibus, ISA/EISA, SPARC and Intel 386, 486 and
pentium platforms which are customized to meet "rugged" and "TEMPEST"
requirements of Department of Defense applications. In addition, the Company
offers TEMPEST versions of dot matrix and laser computer printers. These
products are required to meet certain specifications with respect to the
emanation of electromagnetic signals which could otherwise compromise the
security of the data being handled by the printer. NAI's TEMPEST printers are
designed for use with minicomputers and microcomputer systems such as desktop
computers, multi-workstation office systems and other small computer systems.
The Company's printers are designed primarily for business applications and use
either impact or non-impact printer techniques. The printers typically produce
graphics such as charts and bar codes, as well as alphanumeric characters.
In February 1995, the Systems Division announced that it had been awarded
several new contracts which in the aggregate totalled $9.8 million. The largest
contract which exceeds $6 million is for the delivery in 1995 of customized,
integrated computer systems based on the SPARC 20 architecture.
The Company typically purchases printers from major OEM printer manufacturers
such as Hewlett-Packard and modifies them to meet TEMPEST requirements. The
Company then resells the TEMPEST products to agencies of the U.S. Government and
systems integrators. Since NAI is itself a printer manufacturer, the Company has
an advantage over many of its competitors which do not manufacture printers. The
Company's experience with printer technology, particularly its successful
development of the Navy Standard Teleprinters and its own dot matrix printer,
allows NAI to TEMPEST new printer models quickly and efficiently.
Telecommunications
In 1992, the Company acquired the business and assets of Wilcom, Inc., and
continues to operate it as a wholly owned subsidiary under the Wilcom name.
Wilcom has two distinct product lines: telecommunications test equipment used
primarily by the telephone companies and interchange carriers to test digital
and analog transmissions on both copper and fiber circuits and telephone voice
frequency signaling and line conditioning products used to improve the sound
quality or extend the range of a telephone line.
Wilcom's digital test equipment products include several offerings from the T1
level (1.544 MBPS) through the DS3 level (45 MBPS). The most technically
sophisticated of Wilcom's digital test products is the D400 channel access test
set. The D400 test set can access a single channel from a T1 or DS3 circuit and
analyze among other things, bit error rates, signaling, and field data link
protocol. Wilcom's other major digital products include a hand held, receive
only, T1 test set for monitoring certain performance characteristics of a single
T1 circuit, and an inexpensive device that identifies a T1 circuit from a
multiple configuration of circuits which may be carrying either a digital (T1)
or analog signal.
Wilcom manufactures several fiber optic test equipment products along with fiber
talk sets which are used for voice communications over fiber optic systems
during the installation and maintenance of fiber optic lines. Wilcom's fiber
optic test equipment products fall into three categories: optical sources; power
meters;
-5-
<PAGE>
<PAGE>
and fiber identifiers. Optical sources utilize either lasers or light emitting
diodes which generate a pulse of light that is carried over an optical fiber.
Optical power meters are attached to the end of an optical fiber to measure the
power level of an optical pulse being transmitted on an optical fiber. Fiber
identifiers are used along the optical fiber to indicate the presence of light
without breaking the transmission path, which allows a technician to identify
operative fibers without inadvertent service disruptions.
The market for analog test equipment is mature and, as a result, the majority of
analog test equipment sales are for replacement of old equipment. Wilcom has a
large base of analog test equipment products in the field and has a major share
of this market. Analog test equipment products offered include those to test
grounding, signaling and noise characteristics of an analog circuit.
The line treatment product offering includes a wide variety of voice frequency
telephone line treatment products commonly referred to as "plug-ins". These
products are generally used in voice frequency transmission applications to
improve the sound quality or extend the range of a telephone line. Most notable
of these products is the VFR-7416 voice frequency repeater, which automatically
adapts to the transmission characteristics of a particular telephone circuit
(such as line impedance) which significantly reduces installation set-up time.
Another product, signaling plug-ins, extends the distance over which control
information (required to set up, switch and disconnect a telephone call) can
effectively be transmitted.
The vast majority of homes and businesses in the U.S. today still rely on 1950's
technology, namely, copper wire. Copper wire extends from the central offices of
the Regional Bell Operating Companies (RBOCs) to homes and businesses. These
local loops are barely adequate for the lightning fast technological
advancements of modem manufacturers. During 1994 Wilcom introduced several new
products to its line of enhanced line powered amplifiers. This line of patented
products is designed to be used both by the phone companies and by the
individual user to increase line quality in both voice and high speed data
transmission applications. In February 1995, the Company announced its first
significant order for this product line when it received a contract from one of
the RBOC's for the delivery of its model MB21-K1. The total value of the
contract is in excess of $2,000,000 and will be fully delivered in 1995.
Marketing and Service
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; Arlington, Virginia; Westlake
Village, California; Dallas, Texas; Longmont, Colorado; Laconia, New Hampshire;
London, England; Israel and Australia.
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 the United Kingdom, France, Germany, Denmark, Israel and
Australia.
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<PAGE>
Customers
During 1994, sales under contracts with the United States Government were
approximately 40% 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 1994, 1993
or 1992.
Foreign sales in 1994 accounted for approximately 25% of total sales. Such
sales, which exclude products sold to the United States Government and resold by
the United States Government for foreign military use, are made primarily to
customers in United Kingdom, Canada, Western Europe, Japan, Hong Kong, Israel
and India. See "Foreign Sales" for further information.
Backlog
The Company's backlog of orders was $53.8 million at February 16, 1995 compared
to $31.3 million at March 1, 1994. Of these amounts, 64% and 84%, respectively,
represent orders for military sales. Such orders are subject to termination at
the convenience of the U.S. Government with negotiated settlements. 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 United States Government. Not all of
the backlog is expected to be shipped during 1995. The Company expects to
produce and ship approximately 72% of its current backlog of orders during 1995.
The nature of the Company's business has changed such that customer procurement
and delivery cycles have been shortened when compared with the Company's past
business base. As a result, the backlog is less significant as an indicator of
future business.
Competition and Other Factors
The Company is a small factor in the markets in which it competes. Many
suppliers in the market 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. The Company continually searches for certain
market niches where it has expertise and can compete successfully. Competition
for the Company's products is based principally on reliability, performance,
price and diversity of the products offered.
Research and Development
The Company's technological base is characterized by rapid change. As a result,
maintenance and expansion of the Company's business are highly 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 1994, 1993 and 1992 the Company's cost of independent research
in pursuit of new products and improvements to existing products, was
approximately $3,214,000, $5,020,000 and $3,661,000, respectively. Customer-
funded engineering included either in cost of sales or inventory as a contract
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<PAGE>
cost was $6,121,000 in 1994 compared to $2,424,000 in 1993 and $2,477,000 in
1992.
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 believes that most of
the items it purchases are obtainable 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.
Defense Environment
The Company's sales are affected by the United States 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.
Foreign Sales
The Company's foreign sales are comprised of export sales from the U.S. and
foreign revenues from Lynwood Scientific Developments Ltd. Sales are made
principally to customers in the United Kingdom, Canada, Western Europe, Japan,
Hong Kong, Indonesia, Israel and Australia. All export sales 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, accounted for more than 5% of the Company's
foreign sales in any of the years noted below.
Foreign sales for the past three years have been as follows:
Approximate
Total Percent of
Foreign Sales Company Sales
------------- -------------
1994 $13,828,000 25%
1993 17,363,000 21%
1992 6,400,000 10%
Employees
At December 31, 1994, the Company had approximately 393 employees. The Company
has never experienced a work stoppage and none of its employees are represented
by a union. The Company believes its relationship with its employees is good.
-8-
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<PAGE>
Item 2.
Properties
The Company's facilities, which are believed to be adequate to meet the
Company's foreseeable needs, are shown in the table that follows:
Facilities
<TABLE>
<CAPTION>
Approximate
Floor Area
Division or Subsidiary Location (in Sq. Ft.)
- ---------------------- -------- ------------
<S> <C> <C>
Electronic Systems Segment
Military Products Division Hauppauge, New York* 66,000 (owned)
Codar Technology, Inc. Longmont, Colorado 80,000 (leased)
Systems Division Columbia, Maryland 25,000 (leased)
Lynwood Scientific
Developments Ltd. Farnham, England 26,000 (leased)
Telecommunications Segment
Wilcom, Inc. Laconia, New Hampshire 52,000 (owned)
</TABLE>
The Company also leases several small sales offices.
*Currently under contract to be sold.
Item 3.
Legal Proceedings
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 NAI
Technologies, Inc. ("NAI"). TDA commenced its action, entitled TDA Trading Corp.
v. Carlson, et. al., by filing a complaint (the "Complaint") with the Court.
TDA's Complaint principally alleges that the defendants knowingly and/or
recklessly misrepresented to the public that they expected NAI'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 NAI's fourth quarter 1993 sales of its Navy
Standard Teleprinter ("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 NAI common stock
were damaged because, it is alleged, at the time of purchase the price of NAI
common stock had been artificially inflated. Additionally, the Complaint asserts
that at the time that these adverse business developments allegedly became known
to defendants and prior to their dissemination to the public, defendants
Carlson, Schneider and other directors of NAI allegedly sold shares of NAI stock
owned by
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<PAGE>
them personally at price levels described above 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 NAI 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.
NAI 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. NAI
has advised its directors' and officers' liability insurance carrier of the
claims asserted against it and defendants Carlson and Schneider.
Item 4.
Submission of Matters to a Vote of Security Holders
None.
-10-
<PAGE>
<PAGE>
PART II
Item 5.
Market for Registrant's Common Stock and Related Stockholder Matters
The Company's common stock trades on the NASDAQ Stock Market under the symbol
NATL. The table below sets forth for the periods indicated the high and low sale
prices for the common stock as adjusted for stock dividends and stock splits as
compiled from published sources.
<TABLE>
<CAPTION>
Period High Low
------ ---- ---
<S> <C> <C> <C>
1994 First Quarter $ 7 $5 3/16
Second Quarter 5 7/8 3 5/8
Third Quarter 4 7/8 2 7/8
Fourth Quarter 4 1/8 2 3/16
1993 First Quarter 10 13/16 8 3/16
Second Quarter 9 1/8 7 11/16
Third Quarter 11 1/8 8 5/8
Fourth Quarter 10 13/16 6
</TABLE>
There have been no cash dividends declared or paid on the common stock in the
above two years. The Company's term loan agreement restricts cash dividends to
the lesser of 20% of prior year net earnings or $2 million. 4% stock dividends
on the common stock were paid to shareholders of record on February 26, 1993 and
February 25, 1994. A three for two stock split was declared for shareholders of
record on August 16, 1993.
The following table sets forth, as of December 31, 1994, the approximate number
of record holders of the Company's securities as determined from the records of
the transfer agent, American Stock Transfer and Trust Company:
Title of Class Number of Record Holders
-------------- ------------------------
Common Stock, par value
$.10 per share 700
Street names are included collectively as a single holder of record. Management
estimates that the Company has approximately 2,000 additional shareholders
holding stock in street names.
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<PAGE>
Item 6.
Selected Financial Data
<TABLE>
<CAPTION>
(in thousands except per share data)
1994 1993 1992 1991 1990
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net Sales $ 54,520 $81,024 $67,315 $59,412 $ 42,057
Operating earnings (loss) (1) $(14,589) $ 8,960 $ 8,407 $ 6,308 $ 4,471
Net earnings (loss) (1) $(11,591) $ 5,455 $ 5,051 $ 3,900 $ 3,089
Per share data:
Net earnings (loss) (3) $( 1.69) $ 0.80 $ 0.80 $ 0.63 $ 0.51
Cash dividends (2) $ - $ - $ - $ - $ -
Total assets at year end $ 53,720 $60,715 $43,704 $33,817 $ 32,964
Long-term debt $ 13,990 $10,797 $ 7,158 $ 5,017 $ 1,817
Working capital $ 16,665 $19,105 $17,094 $14,134 $ 7,364
Shareholders' equity $ 20,296 $30,593 $23,911 $18,897 $ 14,946
Average market price per
common share at year end (3) $2 11/16 $ 6 1/4 $8 3/16 $4 9/16 $2 15/16
Average common shares (3) 6,580 6,843 6,309 6,222 6,020
================================================================================
</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.
-12-
<PAGE>
<PAGE>
Item 7.
Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
1994 Compared with 1993
On April 8, 1994 the Company announced the restructuring of its Military Systems
Group. The major component of the restructuring plan was the consolidation of
operations into one location (Codar Technology, Inc.) located in Longmont,
Colorado. The goal of the restructuring was and continues to be to reduce costs
and increase operating efficiencies. In conjunction with this decision, the
Company announced that it was closing its Hauppauge-based Military Products
division by September 30, 1994, and that most of the work force reductions would
be completed in early July. The work force reductions and the closing of the
facility were completed on schedule, but at year-end the combined operation was
performing at lower than anticipated revenue levels.
The Hauppauge facility consisted of two buildings totalling approximately 86,000
square feet. On October 5, 1994 the smaller facility totalling 20,000 square
feet was sold for approximately net book value. The larger facility totalling
66,000 square feet is currently under contract to be sold. Most of the Company's
components business, particularly the USH and the NST products, were
manufactured at this location. The decision to close the Hauppauge facility was
brought about by the Navy's decision to significantly reduce future purchases of
NST and USH units. Without a guarantee of future business, the Company decided
it was not cost efficient to maintain multiple manufacturing sites and work
forces. Therefore, the Company approached the Navy in April to give it the
opportunity to make one final purchase prior to the shut-down of the production
capability. The Company subsequently received a small order for additional USH
and NST-I units.
At the beginning of 1994 the Military Products division employed approximately
190 people. The implementation of the restructuring plan began in April 1994. It
is anticipated that Codar will add approximately 70 jobs after the business
transition is completed, thus creating a net reduction of approximately 120
employees. Through December 31, 1994 Codar had added 54 employees.
During the first quarter of 1994 the Company recorded a $7.3 million
restructuring charge of which $3.1 million related to a non-cash write-off of
inventory and anticipated losses on the disposal of assets. The remaining $4.2
million primarily consists of employee severance costs, lease termination costs,
and idle facility costs. $3.3 million out of the $4.2 million was disbursed
during 1994. The Company anticipates that it will receive approximately $2.3
million over the next two years from the sale of the Hauppauge real estate. The
proceeds will be used to reduce the Company's term debt.
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<PAGE>
<PAGE>
The following table lists the major elements of the restructuring charge which
has been budgeted and the amount remaining as of December 31, 1994:
<TABLE>
<CAPTION>
Budget
Description Amount Balance
----------- ------ -------
<S> <C> <C>
Employee severance expense $2,731,000 $ 448,000
Idle facility costs subsequent to plant closing 590,000 248,000
Lease termination costs 370,000 205,000
Contractual obligations 110,000 -
Other 400,000 -
---------- ----------
Total charges requiring cash outlays 4,201,000 901,000
Loss on disposition of assets 2,000,000 80,000
Inventory writedown 1,120,000 -
---------- ----------
Total non-cash charges 3,120,000 80,000
---------- ----------
Total restructuring expense $7,321,000 $ 981,000
========== ==========
</TABLE>
The transition of the Military Systems Group to Colorado placed strains on the
existing management information systems at Codar. During the second half of 1994
the Codar subsidiary reported sales at a level substantially below earlier
expectations. The sales shortfall was principally attributable to parts
shortages and increased product complexity, the adverse impact of which will
continue for at least the first half of 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 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.
The following chart provides the sales breakdown by product line:
<TABLE>
<CAPTION>
In thousands of dollars 1994 1993 % Change
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Electronic Systems Segment
Systems $16,587 $15,870 5%
Component 19,006 50,662 (62%)
Service 10,737 4,670 130%
---------------------------------
Total Electronic Systems Segment 46,330 71,202 (35%)
Telecommunications Segment
Line treatment 5,391 5,895 (9%)
Test equipment 2,799 3,927 (29%)
---------------------------------
Total Telecommunications Segment 8,190 9,822 (17%)
---------------------------------
TOTAL $54,520 $81,024 (33%)
=================================
</TABLE>
Sales in the Electronic Systems segment (net of intercompany eliminations)
decreased 35% to $46.3 million from $71.2 million in 1993. The sales decrease
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<PAGE>
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 is
primarily attributable to the inclusion of revenue from the Codar Division which
was acquired in October 1993.
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 a substantial portion of 1995 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 other than the previously discussed NST program. The
Company's products are utilized on many different U.S. Government programs which
reduces the adverse impact of cancelling 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 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
Company believes this decline is temporary and that order activity will increase
in 1995 as several new products nearing their completion of the development and
test phases become available. The Company has received favorable reviews on
several new line treatment products and in February 1995 it received its first
order in the amount of $2.0 million for a new line treatment product.
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.
Lower margins are expected to continue at least during the first half of 1995 as
the Company continues its consolidation and repositioning efforts.
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 Technology 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. In 1995 the general administrative
expenses should be lower, as the full annual impact of the consolidation cost
savings will be realized.
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
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<PAGE>
between Company-sponsored research and development and customer-funded research
and development. A key component to the Electronic Systems' segment strategy is
to focus on system integration business. Although systems integration work by
its nature will require significant engineering content, such costs must be
classified as contract costs and charged to cost of sales as opposed to Company-
sponsored research and development (IR&D). It is anticipated that discretionary
R&D expenditures will be curtailed in 1995 as the Company attempts to conserve
cash.
The Company had an operating loss of $14.6 million in 1994 as compared with
operating earnings of $9.0 million in 1993. The operating loss is 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 is 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 Technology.
The effective income tax recovery rate is 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. Any earnings realized in
1995 will not be taxed at the statutory rate.
The Company had a net 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.
1993 Compared with 1992
Sales for 1993 were $81.0 million, a 20% increase when compared with sales of
$67.3 million in 1992. 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.
Sales in the Electronic Systems segment (net of intercompany eliminations)
increased 15% to $71.2 million from $61.8 million in 1992. The increase in sales
was primarily attributable to the inclusion of revenue from the Company's recent
acquisitions, Lynwood Scientific Developments, Ltd. and Codar Technology, Inc.
Sales from these two new companies along with a modest increase in systems
integration sales more than offset the impact of the sale of the Electronics
Instrument product line in September 1992 and lower component sales. The
decrease in component revenue was principally due to a decline in shipments of
the Company's two traditional products, the USH and the NST. Both products have
been a significant portion of the Company's sales over the past four years but
the contracts for both are near completion. In 1993, NST and USH sales accounted
for 37% of total revenue compared to 58% in 1992.
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<PAGE>
<PAGE>
Although the Company's acquisitions have allowed it to reduce its dependency on
the United States defense budget, the Company still expects approximately 50% of
1994 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 other than the
previously discussed USH and NST programs. The Company's products are utilized
on many different U.S. Government programs. However, changed U.S. defense
spending levels could impact the Company's future sales volume.
Sales in the Telecommunications segment were $9.8 million in 1993 vs. $5.5
million in 1992. This increase is due to the inclusion of a full twelve months
of operations of Wilcom in 1993 as compared with five months in 1992. Sales in
the Telecommunications segment were adversely affected by lower orders in the
fourth quarter of 1993, due to cost cutting measures announced by several of the
regional Bell operating companies.
The gross margin percentage in 1993 increased to 33.9% from 32.4% in 1992. The
increase in gross margin was primarily attributable to a favorable mix of high
and low margin product deliveries as well as continued improvements in operating
efficiencies. The Company continually strives to reduce its costs and increase
its operating efficiencies. It is probable that the Company will not be able to
sustain this gross margin percentage in 1994 due to the completion of the NST
and USH contracts which historically had a higher gross margin percentage than
the other products the Company manufactures.
Selling expenses for 1993 were $7.4 million as compared with $5.8 million for
1992. This increase is attributable to the recent acquisitions and the opening
of an international sales office in late 1992, partially offset by the selling
expenses eliminated as a result of the sale of the Electronics Instrument
product line in September 1992.
General and administrative expenses for 1993 were $5.8 million as compared with
$3.8 million in 1992. This increase is primarily attributable to the recent
acquisitions and increased personnel and related costs associated with the
strengthening of the internal management organization.
Company sponsored research and development expenditures for 1993 were $5.0
million as compared with $3.7 million in 1992. This increase is primarily
attributable to the recent acquisitions and reflects the Company's intention to
continue to expand its business base internally as well as through acquisitions.
Operating earnings for 1993 increased 7% to $9.0 million as compared with $8.4
million in 1992. The increase in operating earnings was a result of increased
sales volume and improved margins offset by increases in selling, general and
administrative expense, research and development expense and amortization of
excess of cost over fair value of net assets acquired.
Interest expense, net of interest income, increased by $0.3 million to $0.7
million in 1993. The increase in net interest expense is attributable to
increased debt and reduced short term investments due to the recent
acquisitions.
The effective income tax rate for 1993 was slightly lower than the statutory
rate due to a favorable income tax settlement. The 1992 effective rate
approximated the combined statutory federal and state rates.
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<PAGE>
<PAGE>
Net earnings for the year 1993 were $5.5 million, an 8% increase compared with
$5.1 million in 1992. Included in net earnings was approximately $0.4 million
and $0.1 million for amortization of the excess of cost over the fair value of
net assets acquired for 1993 and 1992, respectively. Earnings per share in 1993
were $0.80, the same as in 1992, based on a weighted average of 6.8 million and
6.3 million shares outstanding, respectively. The 1992 and 1993 earnings per
share and shares outstanding figures have been adjusted to reflect the
distribution of a 4% stock dividend on March 26, 1993 to shareholders of record
on February 26, 1993, three for two stock split effected on September 17, 1993
for shareholders of record on August 16, 1993 and a 4% stock dividend on March
24, 1994 to shareholders of record on February 25, 1994.
Liquidity and Capital Resources
The Company reported a net loss of $11.6 million in 1994, and incurred a
negative cash flow of $0.03 million from operations. Company operations have
historically provided a positive cash flow. However, the Company is currently
experiencing financial difficulties. At December 31, 1994, the Company was in
violation of certain covenants of its term loan agreements. Such violations were
subsequently waived by the applicable lending institutions.
At December 1, 1994 the Company's long-term secured debt totaled $16.3 million
of which current installments were $2.2 million. This compares to $14.9 million
at December 31, 1993 of which current installments were $4.2 million. The
Company's long-term borrowings, secured by plant and equipment, bear interest at
rates ranging from 70% of prime (8.5% at December 31, 1994) to 12.43%. With the
acquisition of Lynwood, the Company assumed a 5 year business term loan in the
amount of $0.3 million, with interest at 2% above the U.K. base rate (6.25% at
December 31, 1994).
On April 7, 1995 the Company entered into a revolving credit agreement with its
two existing primary lending institutions. Under the terms of the new agreement,
the existing term debt and lines of credit were converted into a revolving
credit arrangement in exchange for a cash payment of $100,000 and the issuance
of 250,000 shares of the Company's common stock. The new agreement requires
quarterly payments, commencing in September 1995, of $875,000. The agreement,
unless extended, expires on January 15, 1996 at which time the remaining
principal balance of $13,425,000 is due. The agreement allows for an extended
maturity date to April 15, 1996 under certain conditions.
The repayment of the amount due will be dependent upon the Company's ability to
either obtain alternate financing or to restructure the remaining balance due.
The Company is considering several alternatives to achieve this, including the
sale of common or preferred stock, issuance of convertible debt, a business
combination, the sale of all or a portion of the Company and establishment of a
borrowing relationship with other lending institutions. The Company has engaged
Needham & Company, Inc. as its investment advisor to assist in this process. The
ability of the Company to accomplish this at favorable terms will be somewhat
dependent upon the Company's operating results in 1995. The restructuring
actions taken in 1994 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.
At the present time, the Company is a net user of cash. The Company is taking
action to minimize its cash outlays by deferring or eliminating discretionary
-18-
<PAGE>
<PAGE>
expenses and capital asset purchases. In addition, the Company is working with
several consultants who are assisting in the correction of shipment problems
that currently exist at the Military Systems Group. The Company must increase
its shipment rate to an acceptable level within the near future, or obtain
additional financing, in order to meet its cash flow requirements during 1995.
Cash and cash equivalents totaled $1.7 million at December 31, 1994 and 1993.
Cash used in operating activities amounted to $0.03 million as compared to $1.1
million in 1994 and 1993, respectively. In January 1995, the Company received an
initial tax refund of $4.0 million.
Cash of $0.07 million was used in investing activities during 1994. The major
components were comprised of $0.09 million for the purchase of property, plant
and equipment and $1.1 million in proceeds from the sale of assets. Management
expects total 1995 capital expenditures to be slightly higher than the 1994
expenditures. However, as previously indicated, the Company expects to receive
approximately $2.3 million from the sale of real estate over the next two years,
which will be applied against existing debt under the revolving credit
agreement.
During 1994, the Company made debt payments of $4.8 million and payments of
notes payable of $5.3 million and received proceeds from issuances of notes
payable of $8.6 million.
Inflation
The Company's financial statements are prepared in accordance with traditional
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.
-19-
<PAGE>
<PAGE>
Item 8.
Consolidated Financial Statements and Supplementary Data
The following consolidated financial statements of the registrant are submitted
herewith at the end of this document beginning on Page __:
Independent Auditors' Report.
Consolidated balance sheets at December 31, 1994 and 1993.
Consolidated statements of operations for the years ended December 31, 1994,
1993 and 1992.
Consolidated statements of shareholders' equity for the years ended December 31,
1994, 1993 and 1992.
Consolidated statements of cash flows for the years ended December 31, 1994,
1993 and 1992.
Notes to consolidated financial statements.
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure
None.
-20-
<PAGE>
<PAGE>
PART III
Item 10.
Directors and Executive Officers of the Registrant
Directors of the Company
The current members of the Board of Directors of the Company, together with
certain information furnished to the Company by each such person, are set forth
below.
<TABLE>
<CAPTION>
Years Served
Name and Age as a Director Biographical Summary
- ------------ ------------- --------------------
<S> <C> <C>
Robert A. Carlson, 62 8 Mr. Carlson is President and
Chief Executive Officer of the
Company. From December 1987
until December 1989, he was
President and Chief Operating
Officer of the Company.
Richard A. Schneider, 42 3 Mr. Schneider is Executive Vice
President, Treasurer and
Secretary of the Company. He
was elected a director of the
Company on February 11, 1993.
From October 1988 until December
1992, he served as Vice
President - Finance, Treasurer
and Secretary of the Company.
Stephen A. Barre, 56 6 Mr. Barre is Chairman and Chief
Executive Officer of Servo
Corporation of America, a
communications and defect
detection company.
C. Shelton James, 55 6 Mr. James is Chairman of the
Board and Chief Executive
Officer of Elcotel Inc., a
public communications company.
He also is President and a
director of Fundamental
Management Corporation, an
investment management company,
and is on the board of directors
of Harris Computer Systems Inc.,
SK Technologies and CPSI Inc.
</TABLE>
-21-
<PAGE>
<PAGE>
<TABLE>
<S> <C> <C>
Walter Lipkin, 69 42 Mr. Lipkin is retired. He was a
co-founder of the Company and
served as a Vice President or
Senior Vice President and
Treasurer from 1954 through
1989.
John M. May, 67 16 Mr. May is an independent
consultant. From 1975 to 1987,
he was Vice President and
Director of Tower, Perrin, Inc.,
a management consulting firm.
He is also a director of Olsten
Corporation, a provider of
temporary employee and health
care services.
Robert D. Rosenthal, 45 10 Mr. Rosenthal is President,
Chief Executive Officer and a
Director of First Long Island
Investors, Inc., a diversified
investment and financial
services company. He also is
Co-Chairman and Co-Chief
Executive Officer of the New
York Islanders, a franchise in
the National Hockey League.
</TABLE>
Executive Officers of the Company
The current executive officers of the Company are as follows:
Robert A. Carlson, 62, is the President and Chief Executive Officer of the
Company. From December 1987 until December 1989, he was President and Chief
Operating Officer of the Company.
Richard A. Schneider, 42, is the Executive Vice President, Treasurer and
Secretary of the Company. From October 1988 until December 1992, he served as
Vice President - Finance, Treasurer and Secretary of the Company.
Section 16 Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), requires officers, directors and beneficial owners of more than 10% of
the Company's Common Stock to file reports of ownership and changes in their
ownership of the equity securities of the Company with the Securities and
Exchange Commission. Based solely on a review of the reports and representations
furnished to the Company during the last fiscal year by such persons, the
Company believes that each of these persons is in compliance with all applicable
filing requirements. Under Sections 16(b) of the Exchange Act, such persons also
are required to disgorge to the Company any profit realized by any purchase and
sale, or any sale and purchase, of equity securities of the Company within any
period of less than six months. Pursuant thereto, Mr. Schneider was required to
disgorge profits totalling $5,980 based on the sale of 1,000 shares and the
purchase of 1,000 shares of the Company's Common Stock one day short of the
-22-
<PAGE>
<PAGE>
required six month waiting period in fiscal 1994.
Item 11.
Executive Compensation
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 $100,000 for each of the Company's last
three fiscal years (collectively, the "Named Executives").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term Compensation
----------------------------------------
Annual Compensation Awards Payouts
--------------------------------------- ------------------------ -------------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Securities
Other Annual Restricted Underlying LTIP All Other
Name and Principal Fiscal Compensation Stock Options/ Payouts Compensation
Position Year Salary ($) Bonus ($) ($)(1) Award(s)($) SARs (#) ($) ($)
- -------------------- ------ ---------- --------- -------------- ----------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Robert A. Carlson - 1994 $275,000 -- -- -- 138,983(5) -- $66,324(2)
President and Chief 1993 260,000 $ 68,790 -- -- 64,347 -- 69,652(2)
Executive Officer 1992 226,000 113,300 -- -- 122,919 -- 64,539(2)
Richard A. Schneider - 1994 149,000 -- -- -- 94,389(5) -- 12,426(3)
Executive Vice President, 1993 138,000 27,380 -- -- 23,442 -- 13,993(3)
Treasurer and Secretary 1992 118,000 36,970 -- -- 30,147 -- 14,622(3)
Frank Tortorelli - 1994 144,895 -- -- -- 75,136(5) -- 5,298(4)
President, Military 1993 n/a -- -- -- -- -- --
Systems Group (6) 1992 n/a -- -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
</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 $51,266, $59,122 and $59,022 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 1992, 1993 and 1994, respectively, as well as $8,273,
$7,909 and $7,302 of matching contributions made by the Company under the
401(k) deferred compensation plan and $5,000, $2,621 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 1992, 1993 and
1994, respectively.
(3) Includes $6,781, $7,637 and $7,603 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 1992, 1993 and 1994, respectively, as well as $4,341,
$4,166 and $4,823 of matching contributions made by the Company under the
401(k) deferred compensation plan and $3,500, $2,190 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 1992, 1993 and
1994, respectively.
(4) Includes $818 of life insurance premiums paid on a term life policy by the
Company on behalf of Mr. Tortorelli in 1994, as well as $4,480 of matching
contributions made by the Company under the 401(k) deferred compensation
plan and $0 of contributions made by the Company under the profit sharing
portion of such plan for the benefit of Mr. Tortorelli for 1994.
(5) Options to acquire shares of the Company Common Stock that were granted in
fiscal year 1994. At the same time, options for Mr. Carlson (102,951), Mr.
Schneider (54,996) and Mr. Tortorelli (39,336) were canceled.
(6) Mr. Tortorelli became an executive officer of the Company in fiscal 1994.
-23-
<PAGE>
<PAGE>
Stock Options
The table below summarizes the options granted to the Named Executives in 1994
and their potential realizable values.
OPTION/SAR GRANTS IN 1994
<TABLE>
<CAPTION>
Potential
Realizable Value at
Assumed Annual
Rates of Stock Price
Appreciation
Individual Grants for Option Term(1)
- -------------------------------------------------------------------------------------------------------- --------------------------
(a) (b) (c) (d) (e) (f) (g)
Number of % of Total
Securities Options/SARs
Underlying Granted to
Options/SARs Employees in Exercise or Base
Name Granted (#) Fiscal Year Price ($/Sh) Expiration Date 5%($) 10% ($)
- ----------------------- ----------- ----------- ---------------- --------------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Robert A. Carlson - 36,032 7% $6.25 10 years $141,627 $358,911
President and Chief 102,951(2) 21% $5.25 5 years $149,330 $329,979
Executive Officer
Richard A. Schneider - 39,393 8% $4.74 10 years $117,431 $297,587
Executive Vice President 54,996(2) 11% $5.25 5 years $ 79,772 $176,273
Treasurer and Secretary
Frank Tortorelli - 35,800 7% $5.25 10 years $118,201 $299,542
President, Military 39,336(2) 8% $5.25 5 years $ 57,057 $126,080
Systems Group
</TABLE>
(1) Option price compounded annually at 5% and 10% over the ten year term minus
the exercise price times the number of shares subject to the option.
(2) Such options were granted on May 26, 1994 in connection with the
cancellation of options granted for the same number of shares at earlier
dates. Such options become exercisable at a rate of 25% per year on the
anniversary date of the grant. All such options expire after the fifth
anniversary of the date of grant.
-24-
<PAGE>
<PAGE>
The table below summarizes the exercise of stock options during 1994 for the
Named Executives
AGGREGATED OPTION/SAR EXERCISES IN 1994
AND FY-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
(a) (b) (c) (d) (e)
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options/SARs Options/SARs
at FY-End (#) at FY-End ($)
Shares
Acquired on Value Exercisable/ Exercisable/
Name Exercise (#) Realized ($) Unexercisable Unexercisable(1)
- -------------------- ------------ ------------ ------------- ----------------
<S> <C> <C> <C> <C>
Robert A. Carlson -
President and Chief
Executive Officer 10,140 $34,223 47,579/166,906 $336/$0
Richard A. Schneider -
Executive Vice
President, Treasurer
and Secretary -0- $0 7,768/87,559 $86/$0
Frank Tortorelli -
President, Military
Systems Group -0- $0 4,056/58,392 $0/$0
</TABLE>
- -----------------
(1) Market price at December 31, 1994 minus exercise price times the number of
shares underlying the unexercised options.
-25-
<PAGE>
<PAGE>
Pension Plan and Supplemental Retirement Plan
Certain Company employees including the Named Executives are covered by the
Company's non-contributory Employees Pension Plan (the "Pension Plan").
Effective January 4, 1994, current accruals were frozen under the Pension Plan.
The Company also has a non-qualified Supplemental Retirement Plan in effect
which covers certain Company employees including the Named Executives other than
Mr. Tortorelli.
Typical retirement benefits as in effect on December 31, 1994 are shown in the
table below:
ESTIMATED ANNUAL NORMAL RETIREMENT PENSION AND
SUPPLEMENTAL BENEFITS FOR VARIOUS COMBINATIONS OF
SPECIFIED COMPENSATION AND YEARS OF CREDITED SERVICE
<TABLE>
<CAPTION>
Years of Credited Service at Retirement
---------------------------------------------------------------------------------------------
Remuneration 10 15 20 25 30 35
- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
$ 50,000 $ 4,610 $ 6,915 $ 9,220 $ 8,125 $ 13,830 $ 13,830
75,000 7,485 11,228 14,970 14,888 22,455 22,455
100,000 10,360 15,540 20,720 22,075 31,080 31,080
125,000 13,235 19,853 26,470 29,263 39,705 39,705
150,000 16,110 24,165 32,220 36,450 48,330 48,330
175,000 18,985 28,478 37,970 43,638 56,955 56,955
200,000 21,860 32,790 43,720 50,825 65,580 65,580
225,000 24,735 37,103 49,470 58,013 74,205 74,205
250,000 25,982 38,972 51,963 59,122 77,945 77,945
300,000 25,982 38,972 51,963 59,122 77,945 77,945
400,000 25,982 38,972 51,963 59,122 77,945 77,945
</TABLE>
The benefits shown in the table above have been computed on an actuarial basis
and are not subject to any deduction for social security or other offset
amounts. The compensation covered by the Pension Plan includes the amounts shown
in columns(c), (d) and (e) of the Summary Compensation Table.
It is estimated that Messrs. Carlson, Schneider and Tortorelli, who have ten,
six and three years of credited service, respectively, will receive each year at
normal retirement age the following total aggregate annual amounts under the
Pension Plan and the non-qualified Supplemental Retirement Plan: $160,213,
$66,818 and $3,124, respectively.
Termination of Employment and Change in Control Agreements
The Company has entered into Executive Termination Agreements with Messrs.
Carlson, Schneider, Tortorelli and four other employees, which provide for
severance benefits in the event employment terminates within one year following
a change in control of the Company unless termination is on account of death, or
for cause. The agreements are renewable annually at the option of the Company.
The agreements provide severance benefits which include an amount equal to two
times annual base salary for Messrs. Carlson, Schneider and Tortorelli (the
number of years or portions thereof until Mr. Carlson's sixty-fifth birthday
times annual base salary for Mr. Carlson) and one times annual base salary for
the four other employees.
-26-
<PAGE>
<PAGE>
Director Compensation
During 1994, 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, each director who is not also
an officer of the Company will be paid an annual retainer of $9,000 plus a
uniform fee of $1,000 for each Board and committee meeting attended in person.
During 1994, directors who were also officers of the Company received no
remuneration for attendance at Board and committee meetings. No such
compensation is contemplated to be paid during 1995 either.
Compensation Committee Interlocks and Insider Participation
During the fiscal year ended December 31, 1994, the members of the Compensation
Committee were John M. May (Chairman), Walter Lipkin and Robert D. Rosenthal.
During fiscal year 1994 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, 1994,
no executive officer of the Company served as a director or a 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.
-27-
<PAGE>
<PAGE>
Item 12.
Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth information concerning persons or groups who are
known by the Company to be the beneficial owners of more than 5% of the Company
Common Stock as of March 7, 1995. The information in the table below is based
upon information furnished to the Company by such persons and statements filed
with the Securities and Exchange Commission.
<TABLE>
<CAPTION>
Number of Shares of
Company Common Stock Percent of Company
Name and Address of Beneficial Owner Beneficially Owned(1) Common Stock
- ------------------------------------ --------------------- -------------------
<S> <C> <C>
Lindner Fund Inc.
7711 Carondelet Avenue
Box 16900
St. Louis, MO 63105(2).................................. 405,600 5.65%
C.L. King & Associates
Nine Elk Street
Albany, NY 12207(3)..................................... 451,451 6.29%
Pioneer Management Corporation
60 State Street
Boston, MA 02114(4)..................................... 451,500 6.29%
Fundamental Management Corporation
201 South Biscayne Boulevard
Suite 1450
Miami, FL 33131(5)...................................... 385,636 5.38%
</TABLE>
- ------------------
(1) To the knowledge of the Company, beneficial owners named in the above table
have sole voting power with respect to the shares listed opposite their
names.
(2) These shares are reportedly owned by Lindner Fund Inc., an investment
company registered under the Investment Company Act of 1940, of which
Ryback Management Corporation is the investment company adviser registered
under Section 203 of the Investment Advisers Act of 1940.
(3) These shares are reportedly owned by a passive investor. C.L. King &
Associates the investment company adviser of such investor and is
registered under Section 203 of the Investment Advisers Act of 1940.
(4) These shares are reportedly owned by a passive investor. Pioneer Management
Corporation is the investment company adviser of such investor and is
registered under Section 203 of the Investment Advisers Act of 1940.
(5) These shares are reportedly owned of record by several limited partnerships
formed under the laws of the State of Florida for the purpose of investing
in securities of public company issuers, of which Fundamental Management
Corporation is the sole managing general partner. C. Shelton James, a
director of the Company, is the President of Fundamental Management
Corporation. Excludes 14,793 shares of Company Common Stock owned by Mr.
James as to which shares Fundamental Management corporation disclaims
beneficial ownership.
-28-
<PAGE>
<PAGE>
Shares of Company Common Stock beneficially owned as of March 7, 1995 by each
director, nominee for director and executive officer of the Company and by all
directors and executive officers of the Company as a group are set forth in the
following table. This table is based upon information furnished to the Company
by such persons and statements filed with the Securities and Exchange
Commission.
<TABLE>
<CAPTION>
Beneficial Ownership of Shares(1)
---------------------------------
Number of Shares of
Company Common Stock Percent of Company
Name Beneficially Owned(2) Common Stock(3)
- ------------------------ --------------------- ------------------
<S> <C> <C>
Robert A. Carlson 100,467 1.40%
Stephen Barre 17,654 -
C. Shelton James(4) 14,793 -
Walter Lipkin 123,846 1.72%
John M. May 47,489 1.08%
Robert D. Rosenthal 69,700 -
Richard A. Schneider 16,812 -
Frank Tortorelli -0- -
All directors and officers
as a group (8 persons) 390,761 5.43%
</TABLE>
- ---------------------
- - Less than 1%
(1) Directors and executive officers have sole voting power and sole investment
power with respect to the shares listed opposite their names.
(2) Excludes options exercisable within 60 days of March 7, 1995 for such
persons as follows: Mr. Carlson, 68,327; Mr. Barre, 3,120; Mr. James,
7,401; Mr. Lipkin, 3,120; Mr. May, 3,120; Mr. Rosenthal, 3,120; Mr.
Schneider, 9,833; Mr. Tortorelli, 6,084; and all directors and officers as
a group, 104,125.
(3) The percentages of Company Common Stock outstanding are based on 7,195,567
shares outstanding on March 7, 1995.
(4) Excludes 385,636 shares of Company Common Stock owned of record by several
limited partnerships of which Fundamental Management Corporation, an
investment company of which Mr. James is President, is the sole managing
general partner, as to which shares Mr. James shares voting and dispositive
power.
-29-
<PAGE>
<PAGE>
PART IV
Item 13.
Certain Relationships and Related Transactions
None.
Item 14.
Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Financial Statements, supplementary data and financial statement
schedules
The consolidated financial statements and schedules listed in the
accompanying index to financial statements are filed as part of this
Annual Report on Form 10-K.
(b) Reports on Form 8-K
None
(c) Exhibits (not included)
10 Revolving Credit Agreement
22 List of Subsidiaries
23 Accountants' Consent
-30-
<PAGE>
<PAGE>
S I G N A T U R E S
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
NAI TECHNOLOGIES, INC.
BY:/s/ Richard A. Schneider
-------------------------
Richard A. Schneider
DATE: April 13, 1995 Executive Vice President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the date indicated.
Signature Title Date
- --------- ----- ----
/s/ Robert A. Carlson President, Chief Executive April 13, 1995
- --------------------------- Officer and Director
(Robert A. Carlson) (Chief Executive Officer)
/s/ Stephen Barre Director April 13, 1995
- ---------------------------
(Stephen Barre)
/s/ C. Shelton James Director April 13, 1995
- ---------------------------
(C. Shelton James)
/s/ Walter Lipkin Director April 13, 1995
- ---------------------------
(Walter Lipkin)
/s/ John M. May Director April 13, 1995
- ---------------------------
(John M. May)
/s/ Robert Rosenthal Director April 13, 1995
- ---------------------------
(Robert Rosenthal)
/s/ Richard A. Schneider Executive Vice President, April 13, 1995
- --------------------------- CFO, Treasurer,
(Richard A. Schneider) Secretary and Director
(Chief Financial and
Accounting Officer)
-31-
<PAGE>
<PAGE>
NAI TECHNOLOGIES, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
Page
----
Independent Auditors' Report F-2
Consolidated Balance Sheets at December 31, 1994 and F-3
1993
Consolidated Statements of Operations - Years ended F-4
December 31, 1994, 1993 and 1992
Consolidated Statements of Shareholders' Equity - F-5
Years ended December 31, 1994, 1993 and 1992
Consolidated Statements of Cash Flows - Years ended F-6
December 31, 1994, 1993 and 1992
Notes to Consolidated Financial Statements F-7
Consolidated Financial Statement Schedules:
II - Valuation and Qualifying Accounts F-30
Schedules not listed above have been omitted either because they are not
applicable or the required information is shown in the consolidated financial
statements or notes thereto.
F-1
<PAGE>
<PAGE>
KPMG Peat Marwick
Certified Public Accountants
One Jericho Plaza
Jericho, NY 11753
Independent Auditors' Report
The Stockholders and
Board of Directors
NAI Technologies, Inc.
We have audited the accompanying consolidated financial statements of NAI
Technologies, Inc. (formerly North Atlantic Industries, Inc.) and subsidiaries
as listed in the accompanying index. In connection with our audit of the
consolidated financial statements, we have also audited the financial statement
schedule as listed in the accompanying index. These consolidated financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement schedule based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the 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, 1994 and 1993, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1994 in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
As discussed in Note 10 to the accompanying consolidated financial statements,
the Company was not in compliance with its bank debt covenants at December 31,
1994. Accordingly, on April 12, 1995, the Company entered into a new secured
revolving credit agreement with its lenders. The new secured revolving credit
agreement expires in early 1996 at which time the Company will be required to
repay all outstanding amounts due. The Company is considering several
alternatives to meet this requirement, including the sale of common or preferred
stock, issuance of convertible debt, a business combination, the sale of all or
a portion of the Company or borrowing from other institutions.
As discussed in Note 1 to the consolidated financial statements, the Company
changed its method of accounting for income taxes in 1993 to adopt the
provisions of Financial Accounting Standards Board's Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes."
KPMG PEAT MARWICK LLP
April 13, 1995
Jericho, New York
F-2
<PAGE>
<PAGE>
NAI TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31,
(in thousands) 1994 1993
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 1,658 $ 1,717
Accounts receivable, net 12,508 15,042
Income taxes receivable 4,732 862
Inventories, net 14,052 16,962
Deferred tax asset 378 962
Other current assets 871 945
- -----------------------------------------------------------------------------------------------------------------------------------
Total current assets 34,199 36,490
- -----------------------------------------------------------------------------------------------------------------------------------
Property, plant and equipment, net 7,657 11,864
Excess of cost over fair value of net assets acquired, net 10,865 11,295
Other assets 999 1,066
- -----------------------------------------------------------------------------------------------------------------------------------
Total assets $ 53,720 $ 60,715
===================================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Notes payable $ 127 $ 2,774
Current installments of long-term debt 2,179 4,149
Accounts payable 7,484 4,684
Accrued payroll and commissions 535 1,056
Other accrued expenses 6,435 4,703
Income taxes payable 774 19
- -----------------------------------------------------------------------------------------------------------------------------------
Total current liabilities 17,534 17,385
- -----------------------------------------------------------------------------------------------------------------------------------
Notes payable 6,000 --
Long-term debt 7,990 10,797
Other accrued expenses 1,522 1,318
Deferred income taxes 378 622
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities 33,424 30,122
- -----------------------------------------------------------------------------------------------------------------------------------
Commitments and contingent liabilities
- -----------------------------------------------------------------------------------------------------------------------------------
Shareholders' Equity:
Capital Stock:
Preferred stock, no par value, 2,000,000 -- --
share authorized and unissued
Common stock, $.10 par value, 10,000,000
shares authorized; shares issued: 7,174,592
in 1994 and 6,770,654 (as adjusted) in 1993 717 651
Capital in excess of par value 14,718 12,084
Foreign currency translation adjustment 107 (54)
Retained Earnings 4,754 17,912
- -----------------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 20,296 30,593
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 53,720 $ 60,715
===================================================================================================================================
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-3
<PAGE>
<PAGE>
NAI TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Years ended December 31,
(in thousands except per share amounts) 1994 1993 1992
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $54,520 $81,024 $67,315
- -------------------------------------------------------------------------------------------------------------------
Cost of sales 44,254 53,526 45,492
- -------------------------------------------------------------------------------------------------------------------
Gross Margin 10,266 27,498 21,823
- -------------------------------------------------------------------------------------------------------------------
Selling expense 7,490 7,351 5,820
General and administrative expense 6,313 5,794 3,834
Research and development 3,214 5,020 3,661
Restructuring expense 7,321 -- --
Other 517 373 101
- -------------------------------------------------------------------------------------------------------------------
Total expenses 24,855 18,538 13,416
- -------------------------------------------------------------------------------------------------------------------
Operating earnings (loss) (14,589) 8,960 8,407
- -------------------------------------------------------------------------------------------------------------------
Non-operating income (expense)
Interest income 83 121 183
Interest expense (1,477) (786) (619)
- -------------------------------------------------------------------------------------------------------------------
(1,394) (665) (436)
- -------------------------------------------------------------------------------------------------------------------
Earnings (loss) before income taxes (15,983) 8,295 7,971
(Recovery of) provision for income taxes (4,392) 2,840 2,920
- -------------------------------------------------------------------------------------------------------------------
Net earnings (loss) ($11,591) $5,455 $5,051
===================================================================================================================
Earnings (loss) per common share ($1.69) $0.80 $0.80
===================================================================================================================
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-4
<PAGE>
<PAGE>
NAI TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
For the three years ended December 31, 1994
<TABLE>
<CAPTION>
Capital Total
Common in excess Deferred Note Translation Retained shareholders'
(in thousands) stock of par compensation receivable adjustment earnings equity
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance December 31, 1991 $ 354 $ 7,724 ($ 27) -- -- $ 10,846 $ 18,897
Net earnings -- -- -- -- -- 5,051 5,051
Common stock acquired and retired (3) (300) -- -- -- -- (303)
Forfeiture of non-qualified stock options -- (37) 37 -- -- -- --
4% common stock dividend 14 1,158 -- -- -- (1,172) --
Amortization of deferred compensation for
grants of stock options -- -- (10) -- -- -- (10)
Exercise of employee stock options, net of
shares tendered 19 283 -- (26) -- -- 276
--------------------------------------------------------------------------
Balance December 31, 1992 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 -- -- -- -- --
Three for two common stock split 214 (214) -- -- -- (2,268) --
Exercise of common stock warrants 8 (8) -- -- -- -- --
Foreign currency translation adjustment -- -- -- -- (54) -- (54)
Common stock issued in connection with
the acquisition of Lynwood 20 1,100 -- -- -- -- 1,120
Tax benefit from exercise of employee stock
options -- 220 -- -- -- -- 220
Exercise of employee stock options and
stock purchase plan, net of shares
tendered 11 254 -- 14 -- -- 279
--------------------------------------------------------------------------
Balance December 31, 1993 651 12,096 -- (12) (54) 17,912 30,593
Net earnings (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
stock purchase plan 4 106 -- -- -- -- 110
--------------------------------------------------------------------------
Balance December 31, 1994 $ 717 $ 14,730 $-- ($ 12) $ 107 $ 4,754 $ 20,296
==========================================================================
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-5
<PAGE>
<PAGE>
NAI TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Years ended December 31,
(in thousands) 1994 1993 1992
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net earnings (loss) ($11,591) $ 5,455 $ 5,051
Adjustments to reconcile net earnings (loss) to cash (used in) provided by
operating activities:
Depreciation and amortization 2,435 2,508 1,667
Loss on disposal of property, plant, & equipment 2,298 -- --
Tax benefit from exercise of employee stock options 23 220 --
Changes in assets and liabilities, excluding effects from acquisitions and
foreign currency adjustments:
Accounts receivable 2,534 (1,374) 1,883
Inventories 2,910 (2,125) 2,005
Accounts payable and other accrued expenses 4,215 (4,885) 331
Income taxes payable (2,775) (1,199) (373)
Other, net (82) 336 (61)
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash flow (used in) provided by operating activities (33) (1,064) 10,503
- -----------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities:
Payment for purchase of KMS Advanced Products -- -- (1,709)
Contingent payment on purchase of KMS Advanced Products (189) (227) (115)
Payment for purchase of Lynwood, net of cash acquired -- (3,986) --
Payment for purchase of Codar, net of cash acquired -- (4,592) --
Payment for purchase of Wilcom -- -- (6,210)
Purchase of property, plant and equipment (935) (1,484) (1,928)
Proceeds from sale of property, plant and equipment 1,053 70 26
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (71) (10,219) (9,936)
- -----------------------------------------------------------------------------------------------------------------------------------
Cash Flows form Financing Activities:
Issuances of notes payable 8,636 250 --
Payments of notes payable (5,283) -- --
Proceeds from long-term borrowings -- 7,500 5,000
Payments of long-term debt (4,777) (2,748) (2,228)
Receipts on notes receivable 223 433 44
Proceeds from exercise of stock options and stock purchase plan 110 265 276
Proceeds from sale of common stock 1,000 -- --
Purchase and retirement of common stock -- (338) (303)
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by financing activities (91) 5,362 2,789
- -----------------------------------------------------------------------------------------------------------------------------------
Effect of foreign currency exchange rates on cash 136 (35) --
- -----------------------------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents (59) (5,956) 3,356
Cash and cash equivalents at beginning of year 1,717 7,673 4,317
- -----------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 1,658 $ 1,717 $ 7,673
===================================================================================================================================
Supplemental disclosure of cash flow information:
Cash paid for (refunded):
Interest $ 1,462 $ 771 $ 622
Income taxes ($ 773) $ 3,859 $ 3,292
Non-cash investing and financing activities:
Note receivable from sale of inventory and machinery and equipment -- -- $ 686
Common stock issued in Lynwood acquisition -- $ 1,120 --
Notes payable issued in Codar acquisition -- $ 2,524 --
===================================================================================================================================
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-6
<PAGE>
<PAGE>
NAI TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1994, 1993 and 1992
1. SUMMARY OF ACCOUNTING POLICIES
Principles of Consolidation: 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.
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 them to the
1994 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, but not in
excess of net realizable value.
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 estimated useful lives
of the assets: equipment and furniture and fixtures, generally -- 3 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
F-7
<PAGE>
<PAGE>
by determining whether the amortization of the goodwill balance over its
remaining life can be recovered through projected undiscounted future
results. Accumulated amortization was approximately $1,100,000 and
$480,000 at December 31, 1994 and 1993, respectively. The amortization
expense associated with these amounts is included in other operating
expense in the consolidated statements of earnings and amounted to
$620,000, $359,000 and $91,000 in 1994, 1993 and 1992, 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. The Company previously accounted for income taxes
in conformity with SFAS No. 96. The adoption of this statement did not
have a material effect on the Company's 1993 financial statements and
prior years' financial statements were not restated.
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. On March 27, 1992 the Company issued
234,067 shares (as adjusted for stock dividends and stock split) of
common stock in connection with a 4% stock dividend to shareholders of
record on February 28, 1992. 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, $2,268,000 and $1,172,000,
respectively, from retained earnings to common stock and capital in
excess of par value.
Stock Split: On September 17, 1993 the Company issued 2,219,621 shares
(as adjusted for stock dividend) of common stock in connection with a
three for two stock split payable in the form of a 50% stock dividend to
shareholders of record on August 16, 1993. The stock split was accounted
for by transferring approximately $214,000 from additional paid in
capital to common stock. All references to earnings per share, stock
option plan data
F-8
<PAGE>
<PAGE>
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 6,850,000,
6,843,000 and 6,309,000 average shares outstanding (including common
stock equivalents) for 1994, 1993 and 1992, respectively.
2. ACQUISITIONS
On October 14, 1993, the Company acquired Codar Technology, Inc. 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 on a straight line basis 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 on a straight line
basis over 20 years.
On August 7, 1992, the Company acquired certain assets and assumed
certain liabilities and obligations of the Wilcom Division of Superior
TeleTec Transmission Products, Inc. for approximately $6.0 million in
cash and assumed liabilities of approximately $1.0 million. Additional
costs incurred pursuant to the transaction resulted in a total
acquisition cost of approximately $8.0 million. The acquisition cost was
funded by existing cash balances and $5.0 million of additional
borrowings under the Company's long-term credit agreement with its two
principal banks. The excess of cost over fair value of net assets
acquired, amounting to approximately $1.3 million, is being amortized on
a straight line basis over 20 years.
On May 6, 1992, the Company acquired certain assets of KMS Advanced
Products, Inc., a wholly owned subsidiary of KMS Industries, Inc., for
approximately $1.7 million in cash and assumed liabilities of
approximately $0.4 million. Additional costs pursuant to the transaction
resulted in a total acquisition cost of approximately $2.5 million. The
Company may also be required to pay an additional $1 million based on
the cumulative net
F-9
<PAGE>
<PAGE>
sales of the purchased business through May 1995. Through December 1994
the Company has paid approximately $0.5 million, based on sales through
September 1994. The purchase price was paid from the Company's cash
balances. The excess of cost over fair value of net assets acquired,
amounting to approximately $0.8 million, is being amortized on a
straight line basis 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 four acquisitions occurred on January 1, 1992 and
reflect the historical operations of the purchased businesses adjusted
for increased interest expense as a result of borrowings, reduced
interest income as a result of cash utilization and increased
depreciation and amortization net of applicable income taxes resulting
from the acquisitions.
<TABLE>
<CAPTION>
(in thousands, except per share data) 1993 1992
-----------------------------------------------------------------------
<S> <C> <C>
Net sales $92,870 $110,661
Net earnings $ 3,894 $ 4,922
Earnings per share $ 0.57 $ 0.74
=======================================================================
</TABLE>
The pro-forma results of operations are not necessarily indicative of
the actual results of operations that would have occurred had the
purchases been made at the beginning of the period, or of results which
may occur in the future.
3. NATURE OF ORGANIZATION
NAI Technologies is a diversified international electronics company with
strengths in both advanced computer system design and
telecommunications. It is a leading provider of rugged computers,
peripherals and integrated systems for military, government and
commercial applications. In addition, NAI Technologies holds a strong
market position in transmission enhancement products and rugged,
hand-held test equipment for analog, digital and fiber-optic
communications and data-interchange networks. The Company's diverse
customer base includes commercial markets requiring rugged, mobile
computer and communications systems, U.S. and foreign armed services,
intelligence agencies, the regional Bell operating companies and major
worldwide independent telephone companies. Net sales to the U.S.
Government for the years ended December 31, 1994, 1993 and 1992 were
$21,819,000, $41,559,000 and $44,615,000, 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.
F-10
<PAGE>
<PAGE>
4. ACCOUNTS RECEIVABLE
Accounts receivable at December 31 consisted of the following:
<TABLE>
<CAPTION>
(in thousands) 1994 1993
-----------------------------------------------------------------------
<S> <C> <C>
Amounts receivable from United States Government
Amounts billed $ 4,008 $ 4,700
Unbilled contract receivables 1,629 971
-----------------------------------------------------------------------
5,637 5,671
Amounts receivable from others
Amounts billed 6,728 8,959
Unbilled contract receivables 276 584
-----------------------------------------------------------------------
7,004 9,543
-----------------------------------------------------------------------
12,641 15,214
Allowance for doubtful accounts (133) (172)
-----------------------------------------------------------------------
$ 12,508 $ 15,042
=======================================================================
</TABLE>
Unbilled contract receivables represent revenue earned but not yet
billed to customers at year end. The Company expects that substantially
all such amounts will be billed and collected within one year. The
Company has one contract which, under its terms, will result in a
maximum unbilled receivable of approximately $1,400,000 in late 1996 or
early 1997. This amount is expected to be fully collected in 1997 as the
Company begins to make deliveries under this contract.
5. INVENTORIES
Inventories at December 31, summarized by major classification, were as
follows:
<TABLE>
<CAPTION>
(in thousands) 1994 1993
-----------------------------------------------------------------------
<S> <C> <C>
Raw materials and components $ 9,698 $ 9,206
Work-in-process 3,849 5,691
Finished goods 662 2,065
Unliquidated Progress Payments (157) --
-----------------------------------------------------------------------
$14,052 $16,962
=======================================================================
</TABLE>
F-11
<PAGE>
<PAGE>
6. OTHER CURRENT ASSETS
Other current assets at December 31 consisted of the following:
<TABLE>
<CAPTION>
(in thousands) 1994 1993
-----------------------------------------------------------------------
<S> <C> <C>
Prepaid insurance $ 482 $ 351
Notes receivable - 178
Other prepaid expenses 389 416
-----------------------------------------------------------------------
$ 871 $ 945
=======================================================================
</TABLE>
7. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at December 31 consisted of the following:
<TABLE>
<CAPTION>
(in thousands) 1994 1993
-----------------------------------------------------------------------
<S> <C> <C>
Land $ 1,612 $ 1,813
Buildings 3,302 6,209
Machinery and equipment 8,185 10,431
Furniture and fixtures 635 1,693
Leasehold improvements 279 390
-----------------------------------------------------------------------
14,013 20,536
Less accumulated depreciation and
amortization (6,356) ( 8,672)
-----------------------------------------------------------------------
$ 7,657 $11,864
=======================================================================
</TABLE>
F-12
<PAGE>
<PAGE>
8. 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 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 pertain to inventory write-offs related mostly 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, 1994 there was a remaining liability of $981,000,
comprised principally of remaining employee severance ($448,000) which
is being paid weekly, idle facility expense ($248,000) and lease
termination costs ($205,000).
9. OTHER ACCRUED EXPENSES - CURRENT
Other accrued expenses - current at December 31, 1994, consisted of the
following:
<TABLE>
<CAPTION>
(in thousands) 1994 1993
-----------------------------------------------------------------------
<S> <C> <C>
Employee benefits $1,599 $1,664
Restructuring 981 --
Insurance payable 305 197
Purchase liabilities 682 942
Warranty 348 520
Deferred revenue 763 288
Other $1,757 1,092
------------------------------------------------------------------------
$6,435 $4,703
========================================================================
</TABLE>
F-13
<PAGE>
<PAGE>
10. DEBT
Long term debt at December 31 consisted of the following:
<TABLE>
<CAPTION>
(in thousands) 1994 1993
-----------------------------------------------------------------------
<S> <C> <C>
Industrial Development Bond, payable in
monthly principal installments
of $4,775 through February 1999 with
interest at 70% of prime (8.5% at
December 31, 1994) $ 234 $ 291
Secured term loan, payable in
quarterly installments of $875
with interest at prime plus 1/2% 9,175 13,375
Midland Bank PLC, secured 5 year
business term loan, monthly principal
installments of 'L'7,257 (approximately
$11,000) through July 1995 with
interest at 2% above the U.K. base rate
(6.25% at December 31, 1994) 80 204
Notes payable (generally secured by
specified machinery and equipment)
with interest at rates ranging from
8.875% to 12.43% 680 1,076
----------------------------------------------------------------------
10,169 14,946
Less current installments 2,179 4,149
-----------------------------------------------------------------------
$ 7,990 $10,797
=======================================================================
</TABLE>
Aggregate principal payments for the five years subsequent to December
31, 1994 are as follows:
<TABLE>
<S> <C>
1995 $ 2,179,000
1996 13,662,000
1997 215,000
1998 107,000
1999 6,000
-----------
$16,169,000
===========
</TABLE>
F-14
<PAGE>
<PAGE>
At December 31, 1994, the Company was not in compliance with certain
covenants under its secured term loan agreement. Such violations were
subsequently waived by the Company's lenders.
During 1994, the Company had secured lines of credit with its two
principal lending institutions amounting to $6,000,000 which bear
interest at the prime rate (8.5% at December 31, 1994). At December 31,
1994 borrowing under these lines amounted to $6,000,000 and are
classified as long-term notes payable in the accompanying balance sheet.
There were no borrowings under these lines in 1993 and 1992. The maximum
month-end amount outstanding under these lines during the year ended
December 31, 1994 was $6,000,000. The average short-term borrowings for
1994 was $4,275,000 at a weighted average interest rate of 7.59%. The
amounts due on the lines of credit were made part of the revolving loan
agreement mentioned above.
On April 12, 1995 the Company entered into a secured revolving credit
agreement with its lenders which replaced its then existing agreements.
Under the terms of the new agreement, the existing term debt and lines
of credit which totaled $15,175,000 were converted into a revolving
credit line in exchange for a cash payment of $100,000 and the issuance
of 250,000 shares of common stock (valued at approximately $478,000).
The agreement expires on January 15, 1996 at which time the Company can
extend the maturity to April 15, 1996, if certain conditions are met, or
repay all outstanding amounts due. Such payment is expected to
approximate $13,425,000 ($12,500,000 at April 15, 1996) at that time.
The repayment of the amount due will be dependent upon the Company's
ability to either obtain alternate financing or to restructure the
remaining balance due. The Company is considering several alternates to
achieve this, including the sale of common or preferred stock, issuance
of convertible debt, a business combination, the sale of all or a
portion of the Company and establishment of a borrowing arrangement with
new lending institutions. The ability of the Company to accomplish this
at favorable terms will be somewhat dependent upon the Company's results
of operations in 1995. The term loan agreement requires that the Company
maintain certain minimum levels of tangible net worth, current ratio and
quick ratio. It also limits capital expenditures and prohibits the
payment of cash dividends.
The Company's U.K. subsidiary has a credit facility (sterling overdraft)
with a U.K. bank. The credit facility amounts to 'L'600,000
(approximately $938,000) and bears interest at 2 1/4% above the U.K.
base rate (6 1/4% at December 31, 1994). This facility is renewable in
April 1995. The maximum month end borrowings under the credit facility
during the years ended December 31, 1994 and 1993 were 'L'355,000
and 'L'653,000 (approximately $555,000 and $966,000, respectively).
The average short term borrowings for the years ended December 31, 1994
and 1993 were 'L'89,000 and 'L'254,000 (approximately $139,000
and $376,000, respectively). The weighted average interest rate during
the years ended December 31, 1994 and 1993 was 7.23% and 8.52%,
respectively.
F-15
<PAGE>
<PAGE>
11. OTHER ACCRUED EXPENSES - NON-CURRENT
Other Accrued Expenses - non-current at December 31 consisted of the
following:
<TABLE>
<CAPTION>
(in thousands) 1994 1993
------------------------------------------------------------------------
<S> <C> <C>
Supplemental retirement plan $ 899 $ 706
Deferred compensation 623 612
------------------------------------------------------------------------
$1,522 $1,318
========================================================================
</TABLE>
The supplemental retirement plan is described in Note 14.
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 1995 payment to each of the former officers will
be approximately $40,000.
12. INCOME TAXES
The Company and its domestic subsidiaries file a consolidated Federal
income tax return. The provision for income taxes consisted of the
following items:
<TABLE>
<CAPTION>
(in thousands) 1994 1993 1992
-----------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $(4,286) $ 2,407 $ 2,486
State -- 362 510
Foreign (446) 181 --
-----------------------------------------------------------------------
(4,732) 2,950 2,996
-----------------------------------------------------------------------
Deferred:
Federal 360 (110) (76)
State -- -- --
Foreign (20) -- --
-----------------------------------------------------------------------
340 (110) (76)
-----------------------------------------------------------------------
Total income tax
expense $(4,392) $ 2,840 $ 2,920
=======================================================================
</TABLE>
F-16
<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,
1994 and 1993 are as follows:
<TABLE>
<CAPTION>
(in thousands) 1994 1993
-----------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
AMT credit carry forward $ 545 $ --
Restructure 333 --
Inventories 356 591
Supplemental retirement 268 172
Accrued vacation 127 275
Deferred compensation 236 232
Other 114 (308)
Valuation allowance (1,601) --
-----------------------------------------------------------------------
378 962
========================================================================
Deferred tax liabilities:
Plant and equipment (372) (514)
Other (6) (108)
-----------------------------------------------------------------------
(378) (622)
-----------------------------------------------------------------------
$ -- $ 340
========================================================================
</TABLE>
The Company has recorded a valuation allowance to reflect the estimated
amount of deferred tax assets which will not be realized unless the
Company is profitable in the future.
F-17
<PAGE>
<PAGE>
The sources of the deferred tax provision and the related tax effect for
the years ended December 31, 1994, 1993 and 1992 are as follows:
<TABLE>
<CAPTION>
(in thousands) 1994 1993 1992
-----------------------------------------------------------------------
<S> <C> <C> <C>
AMT credit carry forward $ (545) $ -- $ --
Accelerated depreciation for
tax purposes (142) (77) (68)
DISC income recognized for
tax purposes -- -- (49)
Decrease (increase) in inventory
reserves 235 (8) 168
Deferred compensation (4) 2 84
Supplemental retirement (96) (79) (54)
Accrued restructure costs (333) -- --
Accrued vacation 148 (11) (96)
Other (524) 63 (61)
Valuation allowance 1,601 -- --
-----------------------------------------------------------------------
$ 340 $ (110) $ (76)
=======================================================================
</TABLE>
A reconciliation of the provision for income taxes computed at the
Federal statutory rate to the reported provision for income taxes is as
follows:
<TABLE>
<CAPTION>
(in thousands) 1994 1993 1992
-----------------------------------------------------------------------
<S> <C> <C> <C>
Expected provision $(5,434) $ 2,820 $ 2,710
Increases (decreases) resulting from:
Adjustment to prior years' income
taxes (665) (264) --
State income taxes, net of
Federal benefit -- 239 337
Tax benefit from exercise
of stock options -- -- (487)
Non-deductible expenses 167 143 93
Other (61) (98) 267
Valuation allowance 1,601 -- --
----------------------------------------------------------------------
Total income taxes $(4,392) $ 2,840 $ 2,920
======================================================================
</TABLE>
At December 31, 1994 the retained earnings of the Company's foreign
subsidiary were negative. No United States income tax impact pertaining
to the foreign subsidiary has been reflected in the Company's financial
statements.
F-18
<PAGE>
<PAGE>
13. 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. In addition there are 111,768 outstanding
options under the Company's 1982 Non-Qualified Stock Option Plan which
terminated in July 1992. Subsequent to July 1992, no further grants
could be made under such plan.
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 1994, all payments were made in cash. In 1993
and 1992, 38,345 and 65,978 shares, respectively, were received as
payment for the exercise price of options. In 1993 and 1992, 36,288 and
53,497 shares, respectively, were withheld from employee stock option
exercises to cover required income tax withholdings. Such shares, with a
fair market value of $338,000 and $303,000, respectively, were retired
by the Company.
F-19
<PAGE>
<PAGE>
The following is a summary of activity related to all stock option
plans:
<TABLE>
<CAPTION>
Number Weighted average
of option price
shares per share
------ ---------
<S> <C> <C>
Outstanding at December 31, 1991 708,856 $2.09
Granted 313,978 5.40
Exercised (400,643) 1.88
Expired/cancelled ( 38,850) 2.29
--------------------------------------------------------------
Outstanding at December 31, 1992 583,341 4.01
Granted 237,130 8.63
Exercised (168,227) 3.02
Expired/cancelled ( 34,293) 4.63
--------------------------------------------------------------
Outstanding at December 31, 1993 617,951 6.20
Granted 498,998 5.28
Exercised ( 30,472) 2.62
Expired/cancelled (424,126) 7.60
--------------------------------------------------------------
Outstanding at December 31, 1994 662,351 $4.77
==============================================================
</TABLE>
At December 31, 1994, 179,358 options were exercisable and 885,216
shares were reserved for issuance under all stock option plans.
At December 31, 1994, there were 40,560 warrants outstanding which are
exercisable at $8.55 per share. The warrants expire January 13, 1996.
F-20
<PAGE>
<PAGE>
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 127,047 shares has been reserved for
issuance under the Employee Stock Purchase Plan and as of December 31,
1994, 35,193 shares have been issued pursuant to the plan. A summary of
employee stock purchase transactions follows:
<TABLE>
<CAPTION>
Number of Price
Shares Range
--------- -----
<S> <C> <C>
December 31, 1991 -- --
Subscriptions 35,263 $4.45
Purchases -- --
Cancellations (4,640) 4.45
-----------------------------------------------------------------
December 31, 1992 30,623 $4.45
Subscriptions 27,253 7.02
Purchases (25,365) 4.45
Cancellations (8,971) 4.45-7.02
-----------------------------------------------------------------
December 31, 1993 23,540 $7.02
Subscriptions 31,410 3.13
Purchases (9,828) 3.13
Cancellations (22,202) 3.13-7.02
-----------------------------------------------------------------
December 31, 1994 22,920 $3.13
=================================================================
</TABLE>
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).
At December 31, 1994 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.
F-21
<PAGE>
<PAGE>
14. EMPLOYEE BENEFIT PLANS
Pension Plan
The Company has a noncontributory defined benefit pension plan covering
all eligible employees. The plan provides 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. Beginning in 1994, future pension expense is expected
to be minimal.
The Company's funding policy is to make annual contributions to the
extent such contributions are actuarially determined and tax deductible.
Pension expense (income) for 1994, 1993 and 1992 was $(5,000), $367,000
and $382,000, respectively.
The following table sets forth the funded status of the Company's
defined benefit pension plan at December 31, 1994, 1993 and 1992:
<TABLE>
<CAPTION>
(in thousands) 1994 1993 1992
-------------------------------------------------------------------------
<S> <C> <C> <C>
Accumulated benefit obligation,
including vested benefits of
$2,473, $3,493 and $2,143 $(2,473) $(3,715) $(2,267)
=========================================================================
Projected benefit obligation (2,473) (3,715) (4,054)
Plan assets at fair value 2,515 3,727 3,614
-------------------------------------------------------------------------
Plan assets greater (less) than
projected benefit obligation 42 12 (440)
Unrecognized transition asset -- -- 255
Unrecognized net (gain) loss (24) -- 203
-------------------------------------------------------------------------
Prepaid pension asset $ 18 $ 12 $ 18
=========================================================================
Net pension expense is comprised
of the following:
Service cost $ 9 $ 373 $ 363
Interest cost 208 270 291
Return on assets 35 (175) (136)
Net amortization and deferral (257) (101) (136)
-------------------------------------------------------------------------
Net pension expense $ (5) $ 367 $ 382
=========================================================================
</TABLE>
Prepaid pension costs are included in other non-current assets. The
actuarial computations assume a discount rate on benefit obligations of
7.25% in 1994, 6% in 1993 and 8% in 1992. The expected long-term rate of
return on plan assets was 6% in 1994 and 9% in 1993 and 1992. Pension
Plan assets are primarily invested in short and intermediate term cash
investments, corporate bonds and common and preferred stock. The assumed
rate of compensation increase was 6% for 1992 and is not applicable
thereafter.
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 $281,000, $232,000 and $159,000
in 1994, 1993 and 1992, 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. Such
benefits will be paid from the Company's assets and not from retirement
plan assets.
F-22
<PAGE>
<PAGE>
The following table sets forth the funded status and cost components of
the Company's supplemental retirement plan at December 31, 1994, 1993
and 1992:
<TABLE>
<CAPTION>
(In thousands) 1994 1993 1992
-----------------------------------------------------------------------
<S> <C> <C> <C>
Accumulated benefit obligation (no
benefits are vested at December 31,
1994, 1993 or 1992) $ (899) $ (706) $(376)
=======================================================================
Projected benefit obligation for service
rendered to date (1,224) (1,047) (669)
Plan assets at fair value -- -- --
-----------------------------------------------------------------------
Projected benefit obligation in excess
of plan assets (1,224) (1,047) (669)
Unrecognized prior service cost 360 388 269
Unrecognized net loss 77 153 125
Adjustment required to recognize
minimum liability (112) (200) (101)
-----------------------------------------------------------------------
Unfunded accrued supplementary costs $(899) $(706) $(376)
=======================================================================
Net pension expense is comprised
of the following:
Service cost $ 156 $ 134 $ 94
Interest cost 84 63 43
Net amortization and deferral 41 35 22
-----------------------------------------------------------------------
Net pension expense $ 281 $ 232 $ 159
=======================================================================
</TABLE>
The unfunded accrued supplementary costs are included in other long-term
accrued expenses.
F-23
<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 1992 and 1993, it was the Company's policy 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, 1993 and 1992
contributions under the plan amounted to $365,143, $386,000 and
$341,000, respectively.
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
1994. For the years 1993 and 1992, the Company provided $128,000 and
$240,000, respectively, for a profit sharing contribution.
15. INFORMATION BY GEOGRAPHIC AREA
Information about the Company's foreign operations and export sales is
provided in the following table. Export revenue is foreign revenue
produced by identifiable assets located in the United States while
foreign revenue is generated by identifiable assets located in foreign
countries.
In order to achieve an appropriate sharing of operating results between
the Company's subsidiaries, transfers between geographic areas are
accounted for on the basis of a mark-up of manufacturing costs.
Operating earnings are total sales less operating expenses. In computing
operating earnings, none of the following items has been added or
deducted: general corporate expenses, interest income, interest expense
and income taxes.
Identifiable assets are those assets of the Company that are identified
with the operations in each geographic area. Corporate assets consisted
primarily of cash and cash equivalents, property, plant and equipment
and notes receivable.
F-24
<PAGE>
<PAGE>
NAI TECHNOLOGIES, INC. AND SUBSIDIARIES
INFORMATION BY GEOGRAPHIC AREA
<TABLE>
<CAPTION>
Years ended December 31,
(in thousands) 1994 1993 1992
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SALES TO UNAFFILIATED CUSTOMERS:
United States $ 40,692 $ 63,661 $ 60,915
Export 2,723 4,637 6,400
Europe 11,105 12,726 --
---------------------------------------
Total 54,520 81,024 67,315
TRANSFERS BETWEEN GEOGRAPHIC AREAS:
United States 787 1,011 2,802
Europe 11 9 --
---------------------------------------
Total 798 1,020 2,802
TOTAL SALES:
United States 41,479 64,672 63,717
Export 2,723 4,637 6,400
Europe 11,116 12,735 --
Eliminations (798) (1,020) (2,802)
---------------------------------------
Total $ 54,520 $ 81,024 $ 67,315
- ------------------------------------------------------------------------------------------------------------------
OPERATING EARNINGS (LOSS):
United States ($11,068) $ 10,617 $ 10,482
Europe (1,232) 798 --
---------------------------------------
Subtotal (12,300) 11,415 10,482
Corporate expenses & other (2,289) (2,455) (2,075)
---------------------------------------
Total operating earnings (loss) (14,589) 8,960 8,407
Net interest expense (1,394) (665) (436)
---------------------------------------
Earnings (loss) before income taxes ($15,983) $ 8,295 $ 7,971
- -----------------------------------------------------------------------------------------------------------------
IDENTIFIABLE ASSETS:
United States $ 33,795 $ 48,226 $ 35,855
Europe 8,761 8,038 --
---------------------------------------
Subtotal 42,556 56,264 35,855
Corporate & other* 11,164 4,451 7,849
---------------------------------------
Total $ 53,720 $ 60,715 $ 43,704
</TABLE>
* The increase in corporate assets is attributable to land and facility
from a closed division which is currently listed for sale and a tax
refund receivable.
F-25
<PAGE>
<PAGE>
16. 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
Systems Division, Inc. in Columbia, Maryland, and Lynwood Scientific
Developments Limited in Farnham, England.
Codar Technology designs and manufactures rugged computers, computer
peripherals and memory systems for military and commercial use. NAI
Systems Division specializes in the integration of various
manufacturers' computer software and hardware to address specific
customer needs. Lynwood designs and manufactures intelligent terminals,
terminal emulators, TEMPEST computer products and high performance work
stations for commercial and government markets, primarily in the United
Kingdom.
The Telecommunications Segment currently consists of Wilcom, Inc. in
Laconia, New Hampshire. Wilcom designs and manufactures a full range of
analog, digital and fiber optic test and transmission enhancement
equipment for the worldwide telecommunications market.
In order to achieve an appropriate sharing of profits between the
segments, inter-segment sales between segments are accounted for on the
basis of a mark-up of manufacturing costs. Operating earnings are total
sales less operating expenses. In computing operating earnings, none of
the following items has been added or deducted: general corporate
expenses, interest income, interest expense and income taxes.
Identifiable assets by segment are those assets of the Company that are
used in the Company's operations in each segment. Corporate assets
consist primarily of cash and cash equivalents, property, plant and
equipment and notes receivable.
F-26
<PAGE>
<PAGE>
NAI TECHNOLOGIES, INC. AND SUBSIDIARIES
INFORMATION BY INDUSTRY SEGMENT
<TABLE>
<CAPTION>
Years ended December 31,
(in thousands) 1994 1993 1992
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SALES TO UNAFFILIATED CUSTOMERS:
Electronic Systems $46,330 $71,202 $61,829
Telecommunications 8,190 9,822 5,486
----------- ---------- ----------
Total 54,520 81,024 67,315
INTERSEGMENT SALES:
Electronic Systems 798 1,020 2,802
----------- ---------- ----------
Total 798 1,020 2,802
TOTAL SALES:
Electronic Systems 47,128 72,222 64,631
Telecommunications 8,190 9,822 5,486
Eliminations (798) (1,020) (2,802)
----------- ---------- ----------
Total $54,520 $81,024 $67,315
- -----------------------------------------------------------------------------------------------------------------------------------
OPERATING EARNINGS (LOSS):
Electronic Systems ($11,788) $10,655 $9,352
Telecommunications (512) 760 1,130
----------- ---------- ----------
Subtotal (12,300) 11,415 10,482
Corporate expenses & other (2,289) (2,455) (2,075)
----------- ---------- ----------
Total operating earnings (loss) (14,589) 8,960 8,407
Net interest expense (1,394) (665) (436)
----------- ---------- ----------
Earnings (loss) before income taxes ($15,983) $8,295 $7,971
- -----------------------------------------------------------------------------------------------------------------------------------
IDENTIFIABLE ASSETS:
Electronic Systems $35,529 $48,198 $26,658
Telecommunications 7,027 8,066 9,197
----------- ---------- ----------
Subtotal 42,556 56,264 35,855
Corporate & other* 11,164 4,451 7,849
----------- ---------- ----------
Total $53,720 $60,715 $43,704
- -----------------------------------------------------------------------------------------------------------------------------------
CAPITAL EXPENDITURES:
Electronic Systems $716 $1,326 $1,861
Telecommunications 114 146 27
----------- ---------- ----------
Subtotal 830 1,472 1,888
Corporate & other 105 12 40
----------- ---------- ----------
Total $935 $1,484 $1,928
- -----------------------------------------------------------------------------------------------------------------------------------
DEPRECIATION & AMORTIZATION:
Electronic Systems $2,078 $2,202 $2,575
Telecommunications 320 288 86
----------- ---------- ----------
Subtotal 2,398 2,490 1,661
Corporate & other 37 18 6
----------- ---------- ----------
Total $2,435 $2,508 $1,667
</TABLE>
* The increase in corporate assets is attributable to land and facility
from a closed division which is currently listed for sale and a tax
refund receivable.
F-27
<PAGE>
<PAGE>
17. COMMITMENTS AND CONTINGENCIES
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.
The Company and its subsidiaries lease office and manufacturing
facilities, automobiles, computers and other equipment under various
non-cancellable operating leases.
Future minimum rental commitments for leases with non-cancellable terms
in excess of one year are as follows:
<TABLE>
<CAPTION>
(in thousands) Amount
-------------------------------------------------------------
<S> <C>
1995 $1,763,000
1996 1,515,000
1997 1,134,000
1998 1,065,000
1999 941,000
2000 and thereafter 4,837,000
----------
Total minimum lease payments $11,255,000
===========
</TABLE>
With the acquisition of Lynwood, the Company assumed a 25 year operating
lease for office and manufacturing facilities. Annual future minimum
lease payments through the year 2014, which are included in the above
table, amount to approximately $316,000 per year.
Rental expense amounted to $1,170,000, $1,132,000 and $385,000 in 1994,
1993 and 1992, 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.
In June 1994, a class action lawsuit was filed in the United States
District Court for the Eastern District of New York against the Company
and certain of its officers and directors, alleging violations of the
Federal securities laws as a result of certain misrepresentations and
omissions of fact in public statements issued by the Company during the
second half of 1993, which allegedly had the effect of artificially
inflating the trading price of the Company's shares of stock. At the
present time the plaintiff is seeking unspecified damages. Management
believes this litigation is without merit and intends to defend such
action vigorously. Management also believes that a finding of ultimate
liability against the Company, if any, whether directly or as a result
of the indemnification of officers who are also defendants would not
have a materially adverse effect on its financial position.
F-28
<PAGE>
<PAGE>
18. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following table sets forth quarterly financial information for 1994
and 1993:
<TABLE>
<CAPTION>
Earnings
(in thousands, Net Gross Net per
except per share data) sales margin earnings share
-------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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)
====================================================================
1993
----
First Quarter $21,703 $ 7,078 $ 1,570 $ 0.23
Second Quarter 21,275 7,612 1,743 0.26
Third Quarter 19,670 6,986 1,450 0.21
Fourth Quarter 18,376 5,822 692 0.10
-------------------------------------------------------------------
Total $81,024 $27,498 $ 5,455 $ 0.80
===================================================================
</TABLE>
F-29
<PAGE>
<PAGE>
(in thousands of dollars) SCHEDULE II
NAI TECHNOLOGIES, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E
-----------------------------------------------------------------------------------------------------------------------------
Additions
------------------------------
(1) (2)
Balance at Charged Charged to Balance
Beginning to 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, 1994 $172 $11 $0 $50(A) $133
Year ended December 31, 1993 130 42 99 99(A) 172
Year ended December 31, 1992 128 61 0 59(A) 130
Allowance for inventory
obsolescence reserve:
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
Year ended December 31, 1992 1,375 934 2,506(D) 1,493(B) 3,322
</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 the Codar Technology Inc. - $563
Included in the purchase price of the Lynwood Scientific Dev.
Ltd. - $810.
Included in the purchase of the Tollgrade assets - $56.
Note D - Other - $3.
Included in the purchase price of the KMS division - $519.
Included in the purchase price of the Wilcom Inc. - $1,984.
F-30
<PAGE>
<PAGE>
Appendix 2
(COMPOSITE COPY)
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- --- EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1995
OR
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________________ to __________________
Commission File Number 0-3704
NAI TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
New York 11-1798773
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
1000 Woodbury Road, Woodbury, New York 11797-2530
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (516) 364-4433
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
As of October 25, 1995, 7,459,437 shares of NAI Technologies, Inc.'s $.10 par
value Common Stock were outstanding.
Exhibit Index on Page 14
<PAGE>
<PAGE>
NAI TECHNOLOGIES, INC.
INDEX
<TABLE>
<CAPTION>
PAGE
<S> <C>
Facing Sheet 1
Index 2
PART I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets - 3
September 30, 1995 and December 31, 1994
Consolidated Statements of Operations - 4
Three months ended September 30, 1995 and
October 1, 1994
Consolidated Statements of Operations - 5
Nine months ended September 30, 1995 and
October 1, 1994
Consolidated Statements of Cash Flows - 6
Nine months ended September 30, 1995 and
October 1, 1994
Other financial information 7
Item 2. Management's Discussion and Analysis of 8-13
Financial Condition and Results of Operations
PART II. Other Information 14
Signatures 16
Exhibits (not included) 17
</TABLE>
-2-
<PAGE>
<PAGE>
Page 3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
NAI TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Sept. 30, Dec. 31,
1995 1994
(Unaudited)
- --------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 1,436 $ 1,658
Accounts receivables, net 14,043 12,508
Income taxes receivable - 4,732
Inventories, net 10,983 14,052
Deferred tax asset 372 378
Other current assets 1,242 871
- --------------------------------------------------------------------------------
Total current assets 28,076 34,199
- --------------------------------------------------------------------------------
Property, plant and equipment, net 5,252 7,657
Excess of cost over fair value of assets acquired, net 10,497 10,865
Long-term notes receivable 1,190 -
Other assets 666 999
- --------------------------------------------------------------------------------
Total assets $45,681 $53,720
================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Notes payable $ - $ 127
Current installments of long-term debt 15,437 2,179
Accounts payable 9,489 7,484
Accrued payroll and commissions 369 535
Other accrued expenses 5,290 6,435
Income taxes payable 238 774
- --------------------------------------------------------------------------------
Total current liabilities 30,823 17,534
- --------------------------------------------------------------------------------
Notes payable - 6,000
Long-term debt 249 7,990
Other accrued expenses 2,588 1,522
Deferred income taxes 378 378
- --------------------------------------------------------------------------------
Total liabilities 34,038 33,424
- --------------------------------------------------------------------------------
Shareholders' Equity:
Capital Stock:
Preferred stock, no par value, 2,000,000
shares authorized and unissued - -
Common stock, $.10 par value, 10,000,000
shares authorized; shares issued: 7,459,437
in 1995 and 7,174,592 in 1994 746 717
Capital in excess of par value 15,249 14,718
Foreign currency translation adjustment 89 107
Retained earnings (4,441) 4,754
- --------------------------------------------------------------------------------
Total shareholders' equity 11,643 20,296
- --------------------------------------------------------------------------------
Total liabilities and shareholders' equity $45,681 $53,720
================================================================================
</TABLE>
-3-
<PAGE>
<PAGE>
Page 4
NAI TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(in thousands except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
For the Three Months Ended
-----------------------------
Sept. 30, Oct. 1,
1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C>
Net sales $15,887 $12,093
- --------------------------------------------------------------------------------
Cost of sales 14,097 9,427
- --------------------------------------------------------------------------------
Gross margin 1,790 2,666
- --------------------------------------------------------------------------------
Selling expense 1,269 1,644
General and administrative expense 1,413 1,200
Research and development 425 657
Other 170 55
- --------------------------------------------------------------------------------
Total expenses 3,277 3,556
- --------------------------------------------------------------------------------
Operating loss (1,487) (890)
- --------------------------------------------------------------------------------
Non-operating income (expense)
Deferred debt expense (300) -
Interest income 48 39
Interest expense (446) (397)
- --------------------------------------------------------------------------------
(698) (358)
Loss before income taxes (2,185) (1,248)
Provision for (recovery of) income taxes 111 (417)
- --------------------------------------------------------------------------------
Net loss $(2,296) $ (831)
================================================================================
Loss per common share $( 0.31) $ (0.12)
================================================================================
Average shares outstanding 7,459 6,808
================================================================================
</TABLE>
-4-
<PAGE>
<PAGE>
Page 5
NAI TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(in thousands except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
For the Nine Months Ended
----------------------------
Sept. 30, Oct. 1,
1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C>
Net sales $42,658 $42,518
- --------------------------------------------------------------------------------
Cost of sales 40,177 34,039
- --------------------------------------------------------------------------------
Gross margin 2,481 8,479
- --------------------------------------------------------------------------------
Selling expense 3,775 5,966
General and administrative expense 4,172 4,293
Research and development 1,451 2,673
Restructuring Expense - 7,321
Other 396 336
- --------------------------------------------------------------------------------
Total expenses 9,794 20,589
- --------------------------------------------------------------------------------
Operating loss (7,313) (12,110)
- --------------------------------------------------------------------------------
Non-operating income (expense)
Deferred debt expense (600) -
Interest income 136 62
Interest expense (1,197) (1,072)
- --------------------------------------------------------------------------------
(1,661) (1,010)
- --------------------------------------------------------------------------------
Loss before income taxes (8,974) (13,120)
Provision for (recovery of) income taxes 221 (4,575)
- --------------------------------------------------------------------------------
Net loss $(9,195) $(8,545)
================================================================================
Loss per common share $( 1.25) $( 1.26)
================================================================================
Average shares outstanding 7,356 6,794
================================================================================
</TABLE>
-5-
<PAGE>
<PAGE>
Page 6
NAI TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
For the Nine Months Ended
----------------------------
Sept. 30, Oct. 1,
1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net loss $(9,195) $(8,545)
Adjustments to reconcile net loss
to cash provided by operating activities:
Depreciation and amortization 2,190 1,865
(Gain) loss on disposal of property, plant & equipment (2) 2,298
Change in assets and liabilities, excluding effects from
acquisitions and foreign currency adjustments:
Accounts receivable (1,535) 2,465
Inventories 3,069 1,360
Accounts payable and other accrued expenses 1,859 3,128
Income taxes 4,202 (3,968)
Other, net 252 752
- --------------------------------------------------------------------------------
Net cash flow provided by (used in) operating activities 840 (645)
- --------------------------------------------------------------------------------
Cash Flows from Investing Activities:
Contingent payment on purchase of KMS Advanced Products (103) (149)
Purchase of property, plant and equipment (439) (804)
Proceeds from sale of property, plant and equipment 440 28
- --------------------------------------------------------------------------------
Net cash used in investing activities (102) (925)
- --------------------------------------------------------------------------------
Cash Flows from Financing Activities:
Issuances of notes payable 6 8,422
Payments of notes payable (133) (5,117)
Payments of long-term debt (533) (3,067)
Receipts of notes receivable - 223
Payments for debt restructuring (340) -
Proceeds from exercise of stock options
and stock purchase plan 60 108
- --------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (940) 569
- --------------------------------------------------------------------------------
Effect of foreign currency exchange rates on cash (20) 157
- --------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (222) (844)
Cash and cash equivalents at beginning of year 1,658 1,717
- --------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 1,436 $ 873
================================================================================
Supplemental disclosure of cash flow information:
Cash paid (refunded) for:
Interest $ 1,049 $ 1,057
Income taxes $(4,725) $ (606)
Non-cash investing and financing activities
Notes receivable from sale of property $ 1,190 -
Common stock issued in debt restructuring $ 500 -
================================================================================
</TABLE>
-6-
<PAGE>
<PAGE>
Page 7
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 nine months ended September 30,
1995 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 Annual Report on Form 10-K for the year ended December 31, 1994.
INVENTORIES
Inventories are summarized by major classification as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Sept. 30, Dec. 31,
1995 1994
(Unaudited)
- --------------------------------------------------------------------------------
(In thousands of dollars)
<S> <C> <C>
Raw materials and components $ 6,554 $ 9,698
Work-in-process 4,599 3,849
Finished goods 469 662
Unliquidated progress payments (639) (157)
- --------------------------------------------------------------------------------
Inventories, net $10,983 $14,052
================================================================================
</TABLE>
-7-
<PAGE>
<PAGE>
Page 8
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Third Quarter 1995 Compared with Third Quarter 1994
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 third quarter of 1995 were $15.9
million, a 31% increase when compared with $12.1 million for the same period in
1994.
The following chart provides the sales breakdown by product line for the third
quarter:
<TABLE>
<CAPTION>
In thousands of dollars 1995 1994 % Change
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Electronic Systems Segment
Systems $ 8,824 $ 4,172 112%
Component 3,105 4,027 (23%)
Service 1,411 2,180 (35%)
-------------------------------------
Total Electronic Systems Segment 13,340 10,379 29%
Telecommunications Segment
Line treatment 1,859 1,215 53%
Test equipment 672 499 35%
Data comm 16 - 100%
--------------------------------------
Total Telecommunications Segment 2,547 1,714 49%
-------------------------------------
TOTAL $15,887 $12,093 31%
======================================
</TABLE>
Sales in the Electronic Systems segment (net of intercompany eliminations)
increased 29% to $13.3 million from $10.4 million for the same period in 1994.
The sales increase was primarily attributable to higher systems integration
revenue, partially offset by lower component revenue and service revenue. The
increase in systems integration revenue was principally attributable to higher
systems integration revenue from NAI's Systems and Lynwood Divisions. The
decrease in service and component revenue is primarily attributable to the lower
revenue from Codar Technology and the closing of the Military Products Division
which was consolidated into Codar in September 1994.
The 1994 third quarter had approximately $1.7 million of revenue produced at the
Hauppauge facility which was subsequently closed in September 1994 when the
Military Products Division was consolidated into one location at Codar. The
merging of the two businesses has placed significant strain on Codar which has
resulted in delayed shipments, significant cost overruns on long-term contracts,
large losses and significant cash constraints.
Sales in the Telecommunications segment increased 49% to $2.5 million as
compared to $1.7 million for the same period in 1994. The increase in sales was
attributable to higher line treatment revenue which increased 53% due to initial
deliveries of Wilcom's new Enhanced Line Powered Amplifier products. The test
equipment revenue increased as a result of increased orders from the regional
Bell operating companies.
The consolidated gross margin percentage for the third quarter of 1995 was 11.3%
as compared with 22.0% for the same period in 1994. The gross margin percentage
was adversely affected by a $1.4 million charge to operations and an unfavorable
mix of high and low margin product deliveries. The $1.4
-8-
<PAGE>
<PAGE>
Page 9
million charge to operations was attributable to cost growth on certain
long-term contracts due to engineering design changes, greater than anticipated
labor and material costs and under absorbed overhead expense. Although margins
are expected to improve, low margins are expected to continue at least during
the fourth quarter of 1995 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.
Selling expense for the third quarter of 1995 was $1.3 million as compared with
$1.6 million for the same period in 1994. This decrease is attributable to
savings associated with the consolidation of the Military Products Division in
the third quarter of 1994.
General and administrative expenses for the third quarter of 1995 were $1.4
million as compared with $1.2 million for the same period in 1994. This increase
is primarily attributable to higher general and administrative expenses at Codar
as a result of increased management resources, partially offset by the savings
associated with the previously mentioned consolidation in 1994. The third
quarter of 1994 was favorably impacted by the reversal of two over-accruals
aggregating $300,000. The first reversal, in the amount of $200,000, pertained
to a charge established in 1991 when the Company entered into a "self-funding"
arrangement with its insurance carrier for employee medical insurance. The
Company adjusted its "reserve for claims in process" each year. In July 1993,
the Company returned to a conventional funding arrangement with a different
insurance carrier. Because it took up to 12 months for a claim in process to
actually be charged to the Company, the Company deemed it prudent to wait one
year before adjusting the reserve balance. The second reversal, in the amount of
$100,000, related to the Company's determination during the third quarter that
corporate management would not earn any bonus in 1994. The amounts accrued for
bonuses in the first two quarters of 1994 were reversed in the third quarter of
1994.
Company-sponsored research and development expenditures for the third quarter of
1995 were $0.4 million as compared with $0.7 million for the same period 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. A key component to
the Electronic Systems segment's strategy is to focus on its systems 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).
For the third quarter of 1995 the Company had an operating loss of $1.5 million
as compared with a loss of $0.9 million for the same period in 1994. The
operating loss was primarily attributable to the $1.4 million charge previously
noted.
Interest expense, net of interest income, was $0.7 million in the third quarter
of 1995, as compared with $0.4 million in the comparable quarter of 1994. The
second quarter of 1995 also included a $0.3 million charge for debt
restructuring expense related to the April 7, 1995 agreement reached with the
Company's two lending institutions.
The Company was unable to recognize a tax benefit for its loss in the third
quarter of 1995 due to uncertainties as to whether or not a future benefit will
be realized. Any earnings in 1995 will not be taxed at the statutory rate. The
small tax provision is associated with Lynwood Scientific Developments Ltd., the
Company's U.K. subsidiary.
For the third quarter of 1995 the Company had a net loss of $2.3 million as
compared with a net loss of $0.8 million in the third quarter of 1994. Loss
-9-
<PAGE>
<PAGE>
Page 10
per share was $(0.31) as compared with $(0.12) for the same period in 1994,
based on a weighted average of 7.5 million and 6.8 million shares outstanding,
respectively.
First Nine Months 1995 Compared with First Nine Months 1994
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 nine months of 1995 were
$42.7 million, basically unchanged when compared with $42.5 million for the same
period in 1994.
The following chart provides the sales breakdown by product line for the first
nine months:
<TABLE>
<CAPTION>
In thousands of dollars 1995 1994 % Change
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Electronic Systems Segment
Systems $21,754 $14,035 55%
Component 9,714 13,658 (29%)
Service 5,123 8,807 (42%)
-------------------------------------
Total Electronic Systems Segment 36,591 36,500 0%
Telecommunications Segment
Line treatment 4,081 3,947 3%
Test equipment 1,948 2,071 (6%)
Data comm 38 - 100%
-------------------------------------
Total Telecommunications Segment 6,067 6,018 1%
-------------------------------------
TOTAL $42,658 $42,518 0%
=====================================
</TABLE>
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 higher systems integration
revenue from NAI's Systems Division. The decrease in service and component
revenue is primarily attributable to lower revenue from Codar Technology and the
closing of the Military Products Division which was consolidated into Codar in
September 1994.
The Company expects a significant amount of 1995 sales to be directly to the
military or through prime contractors to the military. For the first nine months
of 1995, approximately 42% of the Company's consolidated sales were directly to
the U.S. military or to prime contractors of the U.S. military. The Company does
not anticipate a material change in this percentage over the next three years.
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 cancelling 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 1% to $6.1 million as compared
to $6.0 million for the same period in 1994. The increase in sales was
attributable to higher line treatment revenue due to deliveries of Wilcom's new
Enhanced Line Powered Amplifier products. Test equipment revenue decreased due
to lower orders from the regional Bell operating companies and foreign
telecommunications companies primarily due to their cost cutting measures.
The consolidated gross margin percentage for the first nine months of 1995 was
5.8% as compared with 19.9% for the same period in 1994. The gross margin
-10-
<PAGE>
<PAGE>
Page 11
percentage was adversely affected by a $6.1 million charge to operations and an
unfavorable mix of high and low margin product deliveries. The $6.1 million
charge to operations was primarily attributable to cost growth on certain
long-term contracts due to engineering design changes and greater than
anticipated labor and material costs ($2,901,000); increased provisions for slow
moving and obsolete inventory ($2,650,000); and increased overhead expenses as
compared with budgeted bid rates ($336,000). Although the Company expects gross
margins to improve in the fourth quarter, they will still be below historical
levels 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. These contracts are expected to be substantially completed in
1995, although approximately $3.6 million of low margin revenue is expected to
be recorded during the first half of 1996.
Selling expense for the first nine months of 1995 was $3.8 million as compared
with $6.0 million for the same period in 1994. This decrease is attributable to
savings associated with the consolidation of the military products division in
the third quarter of 1994.
General and administrative expenses for the first nine months of 1995 were $4.2
million as compared with $4.3 million for the same period in 1994. This decrease
is primarily attributable to savings associated with the previously mentioned
consolidation in 1994, partially offset by higher general and administrative
expenses at the Codar subsidiary as a result of increased management resources.
Company-sponsored research and development expenditures for the first nine
months of 1995 were $1.5 million as compared with $2.7 million for the same
period 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.
A key component to the Electronic Systems segment's strategy is to focus on its
systems 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).
For the first nine months of 1995 the Company had an operating loss of $7.3
million as compared with a loss of $12.1 million for the same period in 1994.
The operating loss in 1995 was primarily due to the $6.1 million charge
previously noted and lower sales volume. The 1994 operating loss included a $7.3
million restructuring expense.
Interest expense, net of interest income, was $1.7 million in the first nine
months of 1995, as compared to $1.0 million for the same period in 1994. The
first nine months of 1995 also included a $0.6 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 is 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 the first nine months of 1995 due to
uncertainties as to whether or not a future benefit will be realized. Any
earnings in 1995 will not be taxed at the statutory rate.
For the first nine months of 1995 the Company had a net loss of $9.2 million as
compared with a net loss of $8.5 million in the first nine months of 1994. Loss
per share was $(1.25) as compared with $(1.26) for the same period in 1994,
based on a weighted average of 7.4 million and 6.8 million shares outstanding,
respectively. The 1994 loss per share includes a pre-tax restructuring charge of
$7.3 million.
Liquidity and Capital Resources
-11-
<PAGE>
<PAGE>
Page 12
Although the Company reported a net loss of $9.2 million in the first nine
months of 1995, it still generated a positive cash flow of $0.8 million from
operations due to the receipt in January of a Federal tax refund of $4.0 million
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 third quarter revenue level was up approximately 13% over the
second quarter revenue level, the lower than normal gross margins resulted in
continuing losses and the Company must continue to increase its shipment rate to
improve its operating margin. However, its ability to do so is constrained by a
shortage of working capital.
The restructuring actions taken in 1994 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. The Company must
increase its shipment rate to an acceptable level within the near future, or
obtain additional financing, in order to meet its cash flow requirements during
1995.
On April 7, 1995 the Company entered into an amended and restated credit
agreement with its two primary lending institutions. Under the terms of the new
agreement, the existing term debt and lines of credit were converted into a
revolving credit line in exchange for a cash payment of $100,000 and the
issuance of 250,000 shares of the Company's Common Stock. The new agreement
required quarterly principal payments, commencing in September 1995, of $875,000
with a balloon payment of $13,425,000 due on January 15, 1996. At July 1, 1995
the Company was in violation of certain debt covenants of this new agreement.
The defaults have been waived and the agreement has been amended to establish
new covenants. In addition, payment of a fee of $50,000 and the quarterly
principal payments which were scheduled to begin in September 1995 were deferred
and added to the balloon payment due on January 15, 1996. On October 13, 1995,
the Company received a limited waiver for certain financial covenant defaults.
The payment of the $15,175,000 principal obligation in January 1996 will be
dependent upon the Company's ability either to obtain alternate financing or to
restructure the remaining balance due. The Company is considering several
alternatives to achieve this, including the sale of common or preferred stock,
the issuance of convertible debt, a business combination, the sale of all or a
portion of the Company and the establishment of a borrowing relationship with
new lending institutions.
On October 16, 1995 the Company announced that a private investor had made a
subordinated loan to the Company of $1,000,000 due January 15, 1996. The loan is
exchangeable for the Company's 12% Convertible Subordinated Promissory Notes due
in 2000, convertible into 500,000 shares of Common Stock at a conversion rate of
$2.00 per share, and warrants representing the right to acquire 850,000 shares
of Common Stock at an exercise price of $2.50, subject to adjustment. Charles S.
Holmes, a representative of the Long Island based investor, became a director of
NAI. The Company is also discussing with other private investors the investment
of up to an additional $7 million in the 12% Convertible Subordinated Notes and
Warrants to purchase shares of Common Stock at $2.50 per share. Such discussions
are preliminary. If all transactions are consummated, following the exercise of
the warrants and the conversion of the notes, an aggregate of 8,000,000 shares
of Common Stock, or approximately 49.6% of the then outstanding fully diluted
Common Stock of the Company, will have been issued for an aggregate
consideration of $18,000,000. Approval of the Company's shareholders will be
required for the consummation of the transaction.
-12-
<PAGE>
<PAGE>
Page 13
The restructuring of the timing of repayment of the outstanding principal under
the Company's bank credit facilities is a condition to the consummation of the
proposed new investment. The Company anticipates that, if it is successful in
raising the additional funds, it will be able to restructure its credit
facilities to permit repayment over a longer period. Upon completion of the
proposed investment transaction, the restructuring of the credit facility and a
return to profitability in 1996, the Company expects that it will be able to
generate enough free cash flow to meet its operating and internal growth
requirements over the next three years.
At September 30, 1995 the Company's long-term secured debt totaled $15.7 million
of which current installments were $15.4 million. This compares to $16.2 million
at December 31, 1994 of which current installments were $2.2 million. The
Company's long-term borrowings, secured by plant and equipment, bear interest at
rates ranging from 70% of prime (8.75% at September 30, 1995) to 12.43%.
Cash and cash equivalents totaled $1.4 million at September 30, 1995 as compared
to $1.7 million at December 31, 1994. Cash provided by operating activities
amounted to $0.8 million in the first nine months of 1995 as compared to cash
used in operating activities of $0.6 million in the first nine months of 1994.
In January 1995, the Company received a Federal tax refund of $4.0 million.
For the first nine months of 1995 the Company used cash of $0.4 million for the
purchase of property, plant and equipment. In May 1995, the Company sold its
vacated manufacturing facility located in Hauppauge, NY, and received cash of
$0.4 million with a note for the balance payable in two years in the amount of
$1.2 million.
For the first nine months of 1995, the Company made debt principal payments of
$0.5 million and payments against notes payable of $0.1 million.
Inflation
The Company's financial statements are prepared in accordance with historical
accounting systems, and therefore do not reflect the effect of inflation. The
impact of changing prices on the financial statements is not considered to be
significant.
Backlog
The backlog of unfilled orders at September 30, 1995 stood at $49.2 million
compared to $39.3 million at October 1, 1994. Approximately 80% of the backlog
is scheduled for delivery over the next twelve months.
-13-
<PAGE>
<PAGE>
Page 14
PART II. OTHER INFORMATION
Item 5. Other Information
On October 16, 1995 the Company announced that a private investor
had made a subordinated loan to the Company of $1,000,000 due
January 15, 1996. The loan is exchangeable for the Company's 12%
Convertible Subordinated Promissory Notes due in 2000, convertible
into 500,000 shares of Common Stock at a conversion rate of $2.00
per share, and warrants representing the right to acquire 850,000
shares of Common Stock at an exercise price of $2.50, subject to
adjustment. Charles S. Holmes, a representative of the Long Island
based investor, has become a director of NAI. The Company is also
discussing with other private investors the investment of up to an
additional $7 million in 12% Convertible Subordinated Notes and
Warrants to purchase shares of Common Stock at $2.50 per share.
Such discussions are preliminary. If all transactions are
consummated, following the exercise of the warrants and the
conversion of the notes, an aggregate of 8,000,000 shares of
Common Stock, or approximately 49.6% of the then outstanding fully
diluted Common Stock of the Company, will have been issued for an
aggregate consideration of approximately $18,000,000. Approval of
the Company's shareholders and consent from the Company's banks
will be required for the consummation of the transaction.
The Company also announced the relocation of the executive and
administrative offices of the Company from Woodbury, New York to
Longmont, Colorado in December 1995.
The Company stated that the new loan will provide needed working
capital. The Company is currently required to repay the
outstanding principal amount of $15,225,000 under its bank credit
facilities on January 15, 1996. The restructuring of the timing of
repayment is a condition to the consummation of the proposed new
investment. The Company anticipates that, if it is successful in
raising the additional funds, it will be able to restructure its
credit facilities to permit repayment over a longer period.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
10.1 - Securities Purchase Agreement, dated as of October
13, 1995, by and between NAI Technologies, Inc.
and Charles S. Holmes.
10.2 - 12% Subordinated Promissory Note due 1996 of NAI
Technologies, Inc.
10.3 - Employment Agreement, dated as of October 16,
1995, between NAI Technologies, Inc. and Robert A.
Carlson.
10.4 - Employment Agreement, dated as of October 16,
1995, between NAI Technologies, Inc. and Richard
A. Schneider.
10.5 - First Amendment, dated as of August 14, 1995, to
the Amended and Restated Credit Agreement, dated
as of April 12, 1995, among NAI Technologies,
Inc., Chemical Bank and The Bank of New York.
-14-
<PAGE>
<PAGE>
Page 15
10.6 - Second Amendment, dated as of October 13, 1995, to
the Amended and Restated Credit Agreement, dated
as of April 12, 1995, among NAI Technologies,
Inc., Chemical Bank and The Bank of New York.
10.7 - Third Amendment, dated as of November 6, 1995, to
the Amended and Restated Credit Agreement, dated
as of April 12, 1995, among NAI Technologies,
Inc., Chemical Bank and The Bank of New York.
27 - Financial Data Schedule (Edgar Filing Only).
b) Reports on Form 8-K
None.
-15-
<PAGE>
<PAGE>
Page 16
S I G N A T U R E S
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NAI TECHNOLOGIES, INC.
(Registrant)
DATE November 6, 1995 By:\s\Richard A. Schneider
-------------------------- --------------------------
Richard A. Schneider
Executive Vice President
(On behalf of the registrant and as
Principal Financial Officer)
-16-
<PAGE>
<PAGE>
Appendix 3
CERTIFICATE OF AMENDMENT
of the
CERTIFICATE OF INCORPORATION
of
NAI Technologies, Inc.
(a New York corporation)
(Under Section 805 of the Business
Corporation Law of the State of New York)
====================
The undersigned, desiring to amend a certificate of incorporation under the
provisions of the Business Corporation Law of the State of New York (hereinafter
referred to as the "BCL"), hereby certifies as follows:
FIRST. The name of the corporation is NAI Technologies, Inc. (hereinafter
referred to as the "Corporation"). The name under which the Corporation was
originally formed is North Atlantic Industries, Inc.
SECOND. The original Certificate of Incorporation of the Corporation was
filed by the New York Department of State on July 15, 1954. The Restated
Certificate of Incorporation of the Corporation was filed with the New York
Department of State on August 13, 1991.
THIRD. Paragraph "3" of the Restated Certificate of Incorporation of the
Corporation, which sets forth the aggregate number and designations of shares of
stock which the Corporation shall have the authority to issue, is hereby
eliminated in its entirety and the following language is substituted in lieu
thereof which has the effect of increasing from ten million (10,000,000) to
twenty-five million (25,000,000) the number of shares of Common Stock the
Corporation shall have authority to issue:
"3. The aggregate number of shares of stock which the Corporation shall
have the authority to issue is twenty-seven million (27,000,000) shares, of
which twenty-five million (25,000,000) shares shall be designated Common
Stock, each such share having a par value of $.10, and of which two million
(2,000,000) shares shall be designated Preferred Stock, each such share
having a par value of $.10."
FOURTH. Paragraph "4" of the Restated Certificate of Incorporation of the
Corporation, which sets forth the terms and conditions under which the
Corporation may issue its Preferred Stock, is hereby restated in its entirety
without making any amendment to or change in the provisions thereof:
"4. The Preferred Stock may be issued in series. The Board of Directors of
the Corporation is hereby expressly 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 Common Stock, who shall be entitled to one
vote for each share of Common Stock held by them of record."
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FIFTH: The aforesaid amendment to Paragraph 3 of the Restated Certificate
of Incorporation of the Corporation have been authorized (1) by the unanimous
vote of the Board of Directors of the Corporation taken at a meeting of said
Board of Directors and (2) by the vote of the holders of a majority of all
outstanding shares of the Corporation entitled to vote thereon taken at a
meeting of said shareholders, respectively, all in accordance with Section
803(a) of the BCL.
IN WITNESS WHEREOF, the Corporation has caused this Certificate of
Amendment of Certificate of Incorporation to be signed and subscribed in its
name this ___ day of February, 1996, and the statements contained herein are
affirmed as true under the penalties of perjury.
NAI TECHNOLOGIES, INC.
By____________________________
Robert A. Carlson
President
By____________________________
Richard A. Schneider
Secretary
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APPENDIX 4
NAI TECHNOLOGIES, INC.
PROXY FOR THE SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD FEBRUARY 1, 1996
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Robert A. Carlson or John Helenek and each
of them, proxies of the undersigned, with full power of substitution, to vote
all Common Stock of NAI Technologies, Inc., a New York corporation (the
"Company"), the undersigned is entitled to vote at the Special Meeting of
Shareholders of the Company to be held at the Raintree Conference Center located
at 1850 Industrial Circle, Longmont, Colorado 80503, on Thursday, February 1,
1996 at 10:00 a.m. (local time), or any adjournment thereof, with all the powers
the undersigned would have if personally present on the following matters:
1. PROPOSAL TO RATIFY AND APPROVE THE ISSUANCE BY THE COMPANY OF CERTAIN
DEBT SECURITIES AND WARRANTS CONVERTIBLE OR EXERCISABLE INTO OR FOR
APPROXIMATELY 8,000,000 SHARES OF THE COMPANY'S COMMON STOCK TO
INVESTORS IN A PROPOSED PRIVATE PLACEMENT WHICH WILL RESULT IN THE
POTENTIAL ISSUANCE OF MORE THAN 20% OF THE COMPANY'S COMMON STOCK AND
MAY RESULT IN A CHANGE OF CONTROL OF THE COMPANY.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
2. PROPOSAL TO AMEND THE CERTIFICATE OF INCORPORATION TO INCREASE THE
NUMBER OF AUTHORIZED SHARES OF THE COMPANY'S COMMON STOCK FROM
10,000,000 TO 25,000,000.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
3. PROPOSAL TO RATIFY AND APPROVE THE SELECTION OF KPMG PEAT MARWICK AS
THE COMPANY'S INDEPENDENT AUDITORS FOR THE YEAR ENDED DECEMBER 31,
1995.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
4. IN THEIR DISCRETION, THE ABOVE-NAMED PROXIES ARE AUTHORIZED TO VOTE IN
ACCORDANCE WITH THEIR OWN JUDGMENT UPON SUCH OTHER BUSINESS AS MAY
PROPERLY COME BEFORE THE MEETING.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED HEREIN
BY THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS INDICATED, THIS PROXY WILL BE
VOTED "FOR" ITEMS 1, 2 AND 3 AND THE PROXIES WILL USE THEIR DISCRETION WITH
RESPECT TO ANY MATTERS REFERRED TO IN ITEM 4.
The undersigned hereby acknowledges receipt of a
copy of the accompanying Notice of Special Meeting
of Shareholders and Proxy Statement and hereby
revokes any Proxy or Proxies heretofore given. You
may strike out the persons named as proxies and
designate a person of your choice, and may send
this Proxy directly to such person.
DATED: , 1996
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Please complete, date and sign exactly as your
name appears hereon. When signing as attorney,
administrator, executor, guardian, trustee or
corporate official, please add your title. If
shares are held jointly, each holder should sign.
-2-
STATEMENT OF DIFFERENCES
The section symbol shall be expressed as..................... SS
The British pound sign shall be expressed as................. 'L'
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