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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A1
Amendment No. 1
(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
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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
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As of October 25, 1995, 7,459,437 shares of NAI Technologies, Inc.'s $.10 par
value Common Stock were outstanding.
Page 1 of 9 Pages
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Explanatory Statement
This Form 10-Q/A1 is being filed by NAI Technologies, Inc., a
New York corporation (the "Company"), as an amendment to its Form 10-Q for the
quarterly period ended September 30, 1995 to make certain amendments to Item 2
thereof -- Mangement's Discussion and Analysis of Financial Condition and
Results of Operations.
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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%)
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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%
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Total Telecommunications Segment 2,547 1,714 49%
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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 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
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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 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.
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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%)
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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%
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Total Telecommunications Segment 6,067 6,018 1%
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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
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
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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
Companysponsored 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
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.
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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.
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.
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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.
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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 January 4, 1996 By:\s\Richard A. Schneider
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Richard A. Schneider
Executive Vice President
(On behalf of the registrant and as
Principal Financial Officer)
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