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Registration No. 333-3837
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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POST-EFFECTIVE AMENDMENT NO. 1
TO
FORM S-1
TO
REGISTRATION STATEMENT
under
THE SECURITIES ACT OF 1933
NAI TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
New York 3575 11-1798773
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or Classification Code Number) Identification Number)
organization)
282 New York Avenue
Huntington, New York 11743
(516) 271-5685
(Address, including zip code, and telephone number, including area
code, of registrant's principal executive offices)
Richard A. Schneider
NAI Technologies, Inc.
282 New York Avenue
Huntington, New York 11743
(516) 271-5685
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copy to:
David F. Kroenlein, Esq.
Whitman Breed Abbott & Morgan
200 Park Avenue
New York, New York 10166
(212) 351-3000
Approximate date of commencement of proposed sale to the public: From time
to time after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. /X/
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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PROSPECTUS
12% Convertible Subordinated Promissory Notes Due 2001
3,847,237 Warrants to Purchase Common Stock
8,065,123 Shares of Common Stock
NAI TECHNOLOGIES, INC.
This Prospectus relates to the offering from time to time of up to (i)
$5,208,500 principal amount of 12% Convertible Subordinated Promissory Notes due
2001 (the "Notes") of NAI Technologies, Inc. (the "Company") by the holders
thereof (the "Noteholders"), (ii) 3,847,237 Warrants to Purchase Common Stock
(the "Warrants") of the Company by the holders thereof (the "Warrantholders")
and the exercise of the Warrants by subsequent holders thereof, and (iii) an
aggregate of 8,065,123 shares (the "Shares") of common stock, par value $.10 per
share (the "Common Stock"), of the Company by the holders thereof (the
"Shareholders"), consisting of (1) 2,604,250 shares of Common Stock which may be
issued upon the conversion of the Notes, (2) 3,847,237 shares of Common Stock
which may be issued upon the exercise of the Warrants, (3) 1,000,000 shares of
Common Stock (the "Holmes Shares") previously issued to Charles S. Holmes upon
the conversion of a Note in the aggregate unpaid principal amount of $2,000,000
held by him, (4) 250,000 shares of Common Stock of the Company previously issued
to The Bank of New York and Chemical Bank (the "Bank Lenders") pursuant to that
certain Amended and Restated Credit Agreement, dated as of April 12, 1995, as
amended to date (the "Credit Agreement"), by and between the Company and the
Bank Lenders, and (5) 363,636 shares of Common Stock of the Company previously
issued to Active Investors II Ltd. ("Active Investors") pursuant to that certain
Common Stock Purchase Agreement, dated as of November 3, 1994 (the "Stock
Purchase Agreement"), by and between the Company and Active. The Noteholders,
the Warrantholders, the Shareholders, the Bank Lenders and Active are sometimes
collectively referred to as the "Selling Securityholders." The Notes, the
Warrants and the Shares are sometimes collectively referred to as the
"Securities." The Company will not receive any of the proceeds from the sale of
the Securities by the Selling Securityholders. The Company is paying the
expenses of registration of the Securities.
The Notes are subordinated to all existing and future Senior Indebtedness
(as hereinafter defined) of the Company, including indebtedness under the Credit
Agreement. See "DESCRIPTION OF SECURITIES -- Subordination."
It is anticipated that sales of the Securities will be made in one of three
ways: (i) through broker-dealers, (ii) through agents or (iii) directly to one
or more purchasers. The period of distribution of the Securities may occur over
an extended period of time. See "PLAN OF DISTRIBUTION."
The Common Stock of the Company is traded on The Nasdaq Stock Market
("Nasdaq") under the symbol NATL. On May 23, 1997, the closing price of the
Common Stock on Nasdaq was $5.50 per share. The Warrants are listed on the
Nasdaq Small Cap Market under the symbol NATLW and the Notes are quoted on the
Yellow Sheets of the National Quotations Bureau under the symbol NAI TECH INC
12-2001. See "DESCRIPTION OF SECURITIES--Trading Information."
See "Risk Factors" beginning on page 8 for a discussion of certain factors
that should be considered in connection with an investment in the Securities.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION NOR HAS THE SECURITIES AND
EXCHANGE COMMISSION, OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
The date of this Prospectus is May __, 1997.
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AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information filed by the Company may be inspected and
copied at the public reference facilities maintained by the Commission at 450
Fifth Street, N.W., Room 1024, Washington, D.C. 20549, and at its New York
Regional Office, 7 World Trade Center, New York, New York 10048 and at its
Chicago Regional Office, Suite 1400, 500 West Madison Street, Chicago, Illinois
60661-2511. Copies of such material may also be obtained from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549, at prescribed rates. In addition, copies of such reports, proxy
statements and other information concerning the Company may also be inspected
and copied at the offices of The Nasdaq Stock Market at 1735 K Street, N.W.,
Washington, D.C. 20006-1506 on which the Common Stock is traded.
TABLE OF CONTENTS
Page
----
AVAILABLE INFORMATION...................................................... 2
TABLE OF CONTENTS.......................................................... 2
SPECIAL NOTE REGARDING FORWARD-LOOKING INFORMATION......................... 3
SUMMARY.................................................................... 4
RISK FACTORS............................................................... 8
USE OF PROCEEDS............................................................ 12
CAPITALIZATION............................................................. 13
DIVIDEND POLICY............................................................ 13
SELECTED FINANCIAL DATA.................................................... 14
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS........................... 15
THE COMPANY................................................................ 23
MANAGEMENT................................................................. 31
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT............. 37
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............................. 39
DESCRIPTION OF SECURITIES.................................................. 40
CERTAIN FEDERAL INCOME TAX CONSEQUENCES.................................... 46
SELLING SECURITYHOLDERS.................................................... 54
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PLAN OF DISTRIBUTION....................................................... 62
LEGAL MATTERS.............................................................. 63
EXPERTS.................................................................... 63
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES............ 64
SPECIAL NOTE REGARDING FORWARD-LOOKING INFORMATION
This document may contain forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. These statements are based on
current plans and expectations of NAI Technologies and involve risks and
uncertainties that could cause actual future activities and results of
operations to be materially different from those set forth in the forwardlooking
statements. Important factors that could cause actual results to differ include,
among others, changes in government purchasing policies and budget constraints,
competition, the continuity of booking trends, the absence of supply
interruptions, new products' market acceptance and warranty performance.
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SUMMARY
The following is a brief summary of certain information contained elsewhere
in this Prospectus. This summary is not intended to be complete and is qualified
in its entirety by the more detailed information appearing elsewhere in this
Prospectus and in the documents referred to herein, all of which should be
carefully reviewed. Capitalized terms used herein are defined on the pages of
this Prospectus referred to in the Glossary found on page 91.
The Company
NAI Technologies, Inc., through its wholly-owned subsidiaries (the
"Company"), designs, manufactures and markets rugged computer systems, advanced
peripheral products, intelligent terminals, high performance work stations,
TEMPEST computer systems (which suppress certain radiation to prevent external
detectors from reading the data being transcribed) and telecommunications test
equipment and transmission products.
The Company operates in two distinct operating segments: an Electronic
Systems segment and a Telecommunications segment. The Electronic Systems
segment, comprised of three subsidiaries, Codar Technology, Inc. ("Codar"), NAI
Technologies-Systems Division Corporation ("Systems"), and Lynwood Scientific
Developments Limited ("Lynwood"), and all of the Company's defense, military and
government-related businesses, provides rugged computer products specifically
designed for deployment in harsh environments that require special attention to
system configurations. This segment's customer base includes United States and
foreign armed services and intelligence agencies. The Telecommunications segment
consists of one company, Wilcom, Inc. ("Wilcom"), which provides transmission
enhancement products and rugged, hand-held test equipment for analog, digital
and fiber-optic communications and data-interchange networks. This segment has
developed and is marketing a product which enables telephone companies to
enhance the capacity of copper lines for improved voice and data transmission.
This segment's customer base includes the Regional Bell Operating Companies
("RBOCs") and independent telephone companies. The Company sells its products
directly to these customers and serves as a subcontractor to larger prime
contractors serving the same customer base.
The Company was incorporated in the State of New York in 1954. The
Company's principal executive office is located at 282 New York Avenue,
Huntington, New York 11743, and its telephone number is (516) 271-5685.
The Offering
Securities Offered $5,208,500 aggregate principal amount of Notes
3,847,237 Warrants to Purchase Common Stock
8,065,123 shares of Common Stock
See "DESCRIPTION OF SECURITIES."
Terms of the Notes:
Maturity Date January 15, 2001.
Interest Rate 12% per annum. In the event of a Chapter 11
or Chapter 7 bankruptcy case in which the Company
is the debtor, the Notes will bear interest from
the date
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of commencement of the case at a default rate per
annum equal to the lesser of 18% or the highest
such rate allowable by law.
Interest Payment Dates January 15, April 15, July 15 and October 15 of
each year, commencing April 15, 1996.
Conversion Each Note is convertible into shares of Common
Stock at the option of the holder, at any time in
whole or in part at a conversion price equal to
$2.00 per share, subject to adjustment in certain
events (the "Conversion Price"). The Conversion
Price and the number of shares of Common Stock to
be received upon conversion are subject to
adjustment upon the occurrence of certain events.
See "DESCRIPTION OF SECURITIES--The Notes."
The Company may at its option require the
conversion of the Notes, at any time prior to
maturity, provided that the closing bid price for
the Common Stock exceeds $6.00 per share for the
30 consecutive trading days prior to the giving of
notice of conversion. At May 23, 1997, the closing
bid price for the Common Stock was $5.50 per
share.
Prepayment The Notes are subject to prepayment, in whole and
not in part, at the option of the Company, at any
time after the third anniversary of the date of
issuance, without premium or penalty. Upon the
occurrence of a "change in control" of the
Company, each holder of the Notes will have the
right to require that the Company repurchase such
holder's Notes in whole and not in part, without
premium or penalty, at a purchase price in cash in
an amount equal to 100% of the principal amount
thereof, together with accrued and unpaid
interest, if any, to the date of purchase,
pursuant to an offer made in accordance with the
procedures described in the Notes.
Subordination; Sinking
Fund The indebtedness evidenced by the Notes is
subordinated to all existing and future Senior
Indebtedness (as hereinafter defined) of the
Company. The Notes do not provide for a sinking
fund.
Certain Covenants The Notes contain certain covenants
prohibiting the Company from: (i) creating any
liens on its assets, (ii) incurring or assuming
any indebtedness other than certain specific
indebtedness including the Senior Indebtedness and
all extensions, renewals and refundings thereof,
(iii) making any investments, (iv) paying
dividends on its capital stock, (v) disposing of
certain assets, (vi) engaging in certain
affiliated party transactions, and (vii) merging
or consolidating.
Events of Default "Events of Default" under the Notes include the
failure to pay principal when due or the failure
to pay interest for a period of 10 days after such
payment becomes due, the failure to pay other
indebtedness for borrowed money in
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excess of $500,000 when due or the acceleration of
such indebtedness, the failure to pay any judgment
in excess of $500,000 when due or stayed, and the
voluntary or involuntary bankruptcy of the
Company.
Terms of the Warrants:
Exercise and Terms Each Warrant entitles the holder to purchase 250
shares of Common Stock at any time and from time
to time on or before February 15, 2002, at an
exercise price equal to $2.50 per share of Common
Stock, subject to adjustment in certain events
(the "Exercise Price"). The Exercise Price
and the number of shares of Common Stock to be
received upon exercise are subject to adjustment
upon the occurrence of certain events. Warrants
will be exercisable, at any time and from time to
time, on or before 5:30 p.m., local time, on or
before February 15, 2002 (the "Expiration Date")
by delivery of an exercise notice duly completed
and tendering of the aggregate Exercise Price.
Each Warrant may be exercised in whole or in part
so long as any exercise in part would not involve
the issuance of fractional shares of Common Stock.
See "DESCRIPTION OF SECURITIES--The Warrants."
Terms of the Common Stock:
Terms Holders of shares of Common Stock are entitled to
one vote for each share of Common Stock held. The
holders of Common Stock are not entitled to
preemptive or subscription rights. Upon
liquidation, dissolution or winding up of the
Company, the holders of the Common Stock are
entitled to share ratably in all assets available
for distribution after payment in full of
creditors and after the preferential rights of
holders of shares of Preferred Stock then
outstanding, if any, have been satisfied. The
affirmative vote of the holders of 80% of all
Common Stock of the Company is required for the
adoption or authorization of certain extraordinary
matters. See "DESCRIPTION OF SECURITIES-- Common
Stock."
Trading The Common Stock is traded on Nasdaq under the
symbol NATL.
Offering Period From time to time after the date hereof.
Use of Proceeds The Company will not receive any proceeds from the
sale of the Securities by the Selling
Securityholders.
Risk Factors Reference is made to "RISK FACTORS" which contains
material information that should be considered in
connection with the Securities being offered
hereby.
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Summary Financial Data
The summary financial data set forth below for the fiscal years 1992
through 1996 are derived from the consolidated financial statements of the
Company which financial statements have been audited by KPMG Peat Marwick LLP,
independent certified public accountants, whose report on the Company's
consolidated financial statements for the three years ended December 31, 1996 is
included elsewhere in this Prospectus. The selected financial data for the three
months ended March 29, 1997 and March 30, 1996 have been derived from the
Company's unaudited consolidated financial statements included in the Company's
Quarterly Report on Form 10-Q for the fiscal quarter ended March 29, 1997. Such
unaudited consolidated financial statements in the opinion of the Company's
management reflect all adjustments (consisting of normal recurring adjustments)
necessary for a fair presentation of interim data.
<TABLE>
<CAPTION>
Year Ended December 31, Three Months Ended
------------------------- ---------------------
1996 1995 1994 1993 1992 March 29, March 30,
---- ---- ---- ---- ---- --------- ---------
(in thousands except share and per share data and 1997 1996
ratios) ---- ----
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations Data
Net sales $ 68,207 $ 60,008 $ 54,520 $ 81,024 $ 67,315 $ 13,062 $ 16,503
Operating earnings (loss)(1) 5,307 (8,875) (14,589) 8,960 8,407 1,017 250
Net earnings (loss)(1) 2,413 (11,619) (11,591) 5,455 5,051 379 (450)
Per share data:
Net earnings (loss)(2) 0.28 (1.57) (1.69) .80 .80 0.04 (0.06)
Cash dividends(3) -- -- -- -- -- -- --
Ratio of earnings to fixed charges 2.05 * * 11.55 13.88 2.04 0.49
Balance Sheet Data (at end of
period)
Working capital $ 14,241 $ 10,444 $ 16,665 $ 19,105 $ 17,094 $ 13,362 $ 15,695
Total assets at end of period 41,371 48,012 53,720 60,715 43,704 37,204 31,934
Long-term debt 12,224 15,573 13,990 10,797 7,158 10,622 20,568
Shareholders' equity 15,980 10,086 20,296 30,593 23,911 16,311 10,748
Average market price
per common share at
end of period $ 3-3/4 1-1/2 2-11/16 6-1/4 8-3/16 4-5/8 1-7/8
Weighted average common
shares outstanding(2) 8,570 7,382 6,580 6,843 6,309 10,199 7,459
</TABLE>
(1) Includes $7,321 in restructuring costs in 1994.
(2) Prior year per share data has been restated to reflect 4% stock dividends
declared in February 1992, 1993 and 1994 and a three-for-two stock split
declared in August 1993.
(3) There have been no cash dividends paid during the above five fiscal years.
* Earnings are inadequate to cover fixed charges. The coverage deficiency is
$15,983 for 1994 and $11,242 for 1995.
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RISK FACTORS
Before purchasing any of the Securities offered hereby, prospective
investors should consider, among other things, the following factors.
This Registration Statement on Form S-1, including Risk Factors and
Management's Discussion, contains "forward looking statements" within the
meaning of the federal securities laws, including; management's belief that the
Company will meet its obligations under current debt instruments, working
capital needs and anticipated capital expenditures therefore, the company's
expectations as to funding its operations over the next twelve months, and other
statements of expectations, beliefs, plans, and similar expressions concerning
matters that are not historical facts. These statements are subject to risks and
uncertainties that could cause actual results to differ materially from those
expressed in the statements.
Substantial and Continuing Losses. During 1994 and 1995, the Company has
experienced severe financial difficulties and has incurred substantial losses,
including net losses of approximately $11,619,000. The Company's cash flow from
operations during the four most recent fiscal quarters has been positive and the
Company reported net earnings of $2,413,000 for the year ended December 31,
1996.
Although the restructuring and expense reduction activities in 1994, 1995
and 1996 have reduced the expense structure of the Company, there can be no
assurance that the Company will be able to sustain its improvement in operating
results. Factors including general economic conditions, the ability of the
Company to book and fill orders, the level of competition and defense spending
in the sectors where the Company operates may affect the Company's future
earnings and profitability.
Dependence on U.S. Military. Approximately 14% of the Company's backlog of
orders totalling $30,200,000 at December 31, 1996 represented orders for
military and government sales. During the years ended December 31, 1995 and
1996, sales under contracts with the U.S. Government were approximately 38% and
30% of the Company's sales, respectively. Such orders are subject to termination
at the convenience of the U.S. Government with negotiated settlements in which
the Company seeks to recover its costs and a reasonable profit. There can be no
assurance that the Company will recover its costs or earn any profit on orders
terminated by the U.S. Government.
In recent years the Company has reduced its dependency on the U.S. defense
budget by expanding its non-military business operations. However, the Company
still expects a substantial portion of 1996 sales to be directly to the military
or through prime contractors to the military. With continuing discussions by
Congress on budget cuts, it is difficult to assess what the impact of budget
cuts, if any, will be on the Company. It appears that defense outlays will be
reduced from past levels. The Company is not aware of any programs in which it
participates that are specifically targeted for termination or curtailment other
than the Navy Standard Teleprinter ("NST") program, which had provided
significant revenues to the Company from 1990 to early 1994. The Company's
products are utilized in many different U.S. Government programs which reduces
the adverse impact of canceling a single specific program. However, reductions
in future U.S. defense spending levels could adversely impact the Company's
future sales volume.
Substantial Secured Indebtedness. During the first quarter of 1997 the
Company reduced outstanding bank debt by $1.6 million bringing the total amount
outstanding to 5.9 million at quarter end, substantially all of which is due to
the Company's primary lending institutions, The Bank of New York and Chemical
Bank (the "Bank Lenders"), pursuant to the Credit Agreement. All required term
loan payments for 1997 were made prior to December 31, 1996. Interest on
outstanding balance under the term loan is payable monthly at
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the prime rate plus 1 3/4% per annum. The remaining outstanding principal amount
of $5,025,000 is due and payable on January 15, 1999. In addition, at March 29,
1997, the Company had $5,208,500 principal amount of Notes outstanding. Interest
on the Notes is payable quarterly in arrears on January 15, April 15, July 15
and October 15 of each year, commencing April 15, 1996 at 12% per annum. The
Notes mature on January 15, 2001.
Estimated cash disbursements pertaining to principal and interest
requirements under the Credit Agreement, the Notes and otherwise over the next
three years can be summarized as follows:
1997 1998 1999
---- ---- ----
Principal on Credit Agreement $ -0- $2,475,000 $5,025,000
Principal on Notes -0- -0- -0-
Interest on Credit Agreement 750,000 650,000 21,000
Interest on Notes 625,000 625,000 625,000
Other interest 4,000 3,000 3,000
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$1,379,000 $3,753,000 $5,674,000
The Company estimates that its normal working capital requirements are
approximately 20% of its annual sales. Thus the Company estimates that for each
$1,000 in increased sales, the Company would require approximately $200 of
increased working capital. The nature of the Company's business does not require
extensive investment in capital assets. Over the last five years, the Company's
capital expenditures have approximated $1,000,000 per year.
As of March 29, 1997 approximately $5,900,000 of the Company's interest
bearing debt was subject to variable interest rates. Each 1% change in the prime
rate would result in a change in the interest due of approximately $59,000 per
annum before any future principal reduction.
The Company has substantial debt service obligations and has no
arrangements with respect to, or sources of, additional financing. Substantially
all of the Company's assets have been pledged to secure the indebtedness
outstanding under the Credit Agreement. It is not certain that the Company will
be able to achieve the revenue level necessary to return to profitability and
there can be no assurance that the Company will have sufficient cash flow in the
future to meet its obligations with respect to its indebtedness, including its
obligations with respect to the Notes. The Notes are unsecured and subordinate
in right of payment to all Senior Indebtedness (as defined in the Notes) of the
Company.
The Notes provide that the Senior Indebtedness can be increased by the Bank
Lenders in certain circumstances to protect its interest in the collateral
provided by the Company. The Notes also provide that if any Senior Indebtedness
is outstanding on the maturity date of the Notes, the Company cannot pay the
amounts due thereunder. Although the Credit Agreement provides that the Senior
Indebtedness is to paid in full on January 15, 1999, two years prior to the
maturity date of the Notes, there can be no assurance that the Company will in
fact be able to pay such indebtedness at such time.
Ranking of the Notes. The Notes are subordinated to all Senior Indebtedness
of the Company, including indebtedness under the Credit Agreement. Therefore, in
the event of bankruptcy, liquidation or reorganization of the Company, the
assets of the Company will be available to pay obligations on the Notes only
after all Senior Indebtedness has been paid in full, and there may not be
sufficient assets remaining to pay amounts due on the
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Notes. At March 29, 1997, the amount of outstanding Senior Indebtedness was
$5,900,000. In addition, the indebtedness under the Credit Agreement is secured
by liens on substantially all of the assets of the Company including the capital
stock of certain of its subsidiaries and is guaranteed by certain of the
Company's subsidiaries, which guarantees are secured by a lien on substantially
all of the assets of such subsidiaries. See "DESCRIPTION OF
NOTES--Subordination."
No Assurance of Company's Ability to Service Notes. The Company presently
intends to service the Notes out of its future cash flow from operations or
proceeds of future financings, if any. There can be no assurance that the
Company will generate sufficient cash flow in the future to pay the interest on
the Notes or on its other indebtedness or to pay the principal on the Notes or
that future financings, if necessary, will be available. See "DESCRIPTION OF
SECURITIES--The Notes."
Trade Debt. During 1995 and 1994, the Company's cash constraints strained
its relationships with vendors which adversely impacted the Company's ability to
meet its production targets on a timely and cost-effective basis. Although these
constraints where significantly eased during 1996 and the Company's standing
with all of its vendors has improved, there can be no assurance that the
Company's relationships with vendors will continue to improve or that such
vendors will continue to provide the Company with raw materials.
Industry Competition. The Company's business is highly competitive. Many
suppliers in the Company's markets are significantly larger than the Company in
total sales and assets, and many devote significantly more resources to the
development of new products than does the Company. There can be no assurance
that the Company will be able to compete successfully or that competitors will
not commercialize services or products that render the Company's services or
products obsolete or less marketable.
Foreign Operations. As of December 31, 1996, the total assets of the
Company were $41,371,000 of which $9,602,000 or approximately 23% were located
outside of the United States primarily in the United Kingdom. The Company's
foreign sales (which are comprised of export sales from the U.S. and foreign
revenues from Lynwood) in 1996 were $16,154,000 which accounted for
approximately 24% of the Company's total sales. Approximately 70% and 18% of the
Company's foreign sales are to customers in the United Kingdom and Australia,
respectively, and no other single country accounted for more than 5% of the
Company's foreign sales in any of the past three years. All of the Company's
sales to customers in the United Kingdom are payable in British currency.
Therefore, fluctuations in exchange rates between the U.S. dollar and the
British pound will impact on the Company's operating results. All export sales
from the U.S. are payable in U.S. dollars and, therefore, settlement amounts do
not fluctuate with changes in exchange rates. As a result of the political and
economic stability of the United Kingdom, the Company does not believe that
there is substantial risk from foreign operations. However, there can be no
assurance that this will continue to be the case.
Technological Change. The Company's technological base is characterized by
rapid change that frequently results in sudden product and equipment
obsolescence. The Company has reduced its expenditures on independent research
and development over the past few years and anticipates further reducing its
cost of independent research and development in 1997. While the Company expects
to continue to make expenditures in an effort to improve current and proposed
product designs and configurations of already technologically complex products,
there can be no assurance that its efforts will be successful or that
introduction of new products or technological developments by others will not
cause the Company's technology to become uneconomical or obsolete.
Limited Protection of Intellectual Property. The Company regards portions
of the hardware designs and operating software incorporated into its products as
proprietary and seeks to protect such proprietary information through its
reliance on patent, copyright, trademark and trade secret laws, non-disclosure
agreements with its employees and confidentiality provisions in licensing
arrangements with its customers. There is no assurance that such agreements will
be effective to protect the Company or that the proprietary information deemed
confidential by the Company will be adequately protected by the laws respecting
trade secrets. Consequently, it may be possible
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for unauthorized third parties to copy certain portions of the Company's
products or to "reverse engineer" or otherwise obtain the Company's proprietary
rights. Moreover, the laws of some foreign countries do not afford the same
protection provided by U.S. laws to the Company's proprietary rights.
Restrictions on Dividends. The Company is prohibited from paying cash
dividends on its Common Stock by certain debt covenants contained in its Credit
Agreement.
Anti-takeover Restrictions. At the 1996 Annual Meeting of Shareholders held
in August 1996, the Company's shareholders approved a proposal to classify the
Board into two classes containing three and four directors each. The
classification of the Company's Board of Directors could have the effect of
discouraging attempts by a person or group to take control of the Company. See
"DESCRIPTION OF SECURITIES -- Common Stock -- Other Provisions."
-11-
<PAGE>
<PAGE>
The Company's Board of Directors may issue Preferred Stock of the Company,
without shareholder approval, in series and with such designations, relative
rights and preferences as the Board of Directors may determine. Any shares of
Preferred Stock issued in the future will rank prior to the Common Stock with
respect to dividend rights and rights upon liquidation and could have rights
which would dilute the voting power of the Common Stock. The Board of Directors,
without shareholder approval, can issue Preferred Stock with voting and
conversion rights which could adversely affect the voting power of the holders
of the Common Stock. Such issuances may also have the effect of discouraging
attempts by a person or group to take control of the Company.
In addition, the Company's Board of Directors has the ability to issue
shares of Common Stock which would dilute the voting power and equity of the
holders of outstanding Common Stock.
Effect of Outstanding Warrants, Options and Notes. The Company has
outstanding at the present time (a) Warrants to purchase up to a maximum of
3,847,237 shares of Common Stock at an exercise price of $2.50 per share, (b)
additional warrants to purchase up to a maximum of 300,000 shares of Common
Stock at an exercise price of $3.00 per share (the "Additional Warrants"), (c)
Notes convertible into a maximum of 2,604,250 shares of Common Stock at a
conversion price of $2.00 per share, and (d) options to purchase 750,055 shares
of Common Stock in the aggregate under the Company's 1991 Stock Option Plan and
1993 Stock Option Plan for Directors at exercise prices ranging from $1.875 to
$8.33 as of March 29, 1997 and 30,000 to Directors at an exercise price of $2.50
as of such date. The terms on which the Company may obtain additional financing
during the respective periods of the outstanding Warrants, Additional Warrants,
options and Notes may be adversely affected by the existence of such Warrants,
Additional Warrants, options and Notes. The holders of the Warrants, Additional
Warrants, options and Notes may exercise or convert them at a time when the
Company might be able to obtain additional capital through a new offering of
securities on terms more favorable than those provided by the Warrants,
Additional Warrants, options and Notes.
Taxable Income in Excess of Cash Received. For federal income tax purposes,
the purchase price of each Note and Warrant was allocated between the Notes and
the Warrants in accordance with their relative fair market values. The amount
allocable to the Notes was less than the principal amount of the Notes. There
can be no assurance that the Internal Revenue Service will agree with the
aforesaid allocation. The excess of the amount payable upon maturity of the
Notes over the amount of the purchase price allocated to the Notes for federal
income tax purposes will be treated as "Original Issue Discount," as such term
is defined by the Internal Revenue Code of 1986, as amended. Generally,
investors must report the Original Issue Discount in their gross incomes over
the period of time their Notes are held. Investors are urged to consult with
their own tax advisors in connection with the foregoing. See "CERTAIN FEDERAL
INCOME TAX CONSEQUENCES."
USE OF PROCEEDS
The Company will not receive any proceeds from the sale of the Securities
by the Selling Securityholders.
-12-
<PAGE>
<PAGE>
CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Company at March 29, 1997. This material should be read in conjunction with the
separate consolidated financial statements of the Company included elsewhere in
this Prospectus.
March 29, 1997
-------------------------------
Actual
(Unaudited) (In thousands)
Short-term debt........ $ 166
Long-term debt......... 10,622
Shareholders' equity
Preferred Stock, no par
value, 2,000,000 shares
authorized and unissued ---
Common Stock, $0.10 par
value, 25,000,000 shares
authorized; 9,058,687 shares
issued................ 906
Capital in excess of par value 19,303
Foreign currency translation
adjustment............ 175
Retained deficit....... (4,073)
Total shareholders' equity 16,311
-------
Total capitalization.. $27,099
=======
DIVIDEND POLICY
The Company did not declare or pay any cash dividends on its Common Stock
in any of the past five fiscal years. The Company is restricted from paying cash
dividends on its Common Stock by certain debt covenants contained in the Credit
Agreement, but is permitted to effect stock splits and declare and pay dividends
payable solely in shares of any class of its capital stock.
-13-
<PAGE>
<PAGE>
SELECTED FINANCIAL DATA
The selected data presented below for each of the years in the five-year
period ended December 31, 1996 are derived from the consolidated financial
statements of the Company which financial statements have been audited by KPMG
Peat Marwick LLP, independent certified public accountants. The selected
financial data for the three months ended March 29, 1997 and March 30, 1996 have
been derived from the Company's unaudited consolidated financial statements
included in the Company's Quarterly Report on Form 10-Q for the fiscal quarter
ended March 29, 1997. Such unaudited consolidated financial statements in the
opinion of the Company's management reflect all adjustments (consisting of
normal recurring adjustments) necessary for a fair presentation of interim data.
The consolidated financial statements as of December 31, 1996 and 1995 and for
each of the three years in the period ended December 31, 1996, and the
independent auditors' report thereon, and the unaudited consolidated financial
statements as of March 29, 1997 and March 30, 1996 are included elsewhere in
this Prospectus.
<TABLE>
<CAPTION>
Fiscal Year Three Months Ended
----------------------------------------------------- ----------------------
1996 1995 1994 1993 1992 March 29, March 30,
---- ---- ---- ---- ---- --------- ---------
1997 1996
---- ----
(unaudited)
(in thousands except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales $ 68,207 $ 60,008 $ 54,520 $ 81,024 $ 67,315 $ 13,062 $ 16,503
Operating earnings (loss)(1) 5,307 (8,875) (14,589) 8,960 8,407 1,017 250
Net earnings (loss)(1) 2,413 (11,619) (11,591) 5,455 5,051 379 (450)
Per share data:
Net earnings (loss)(3) 0.28 (1.57) (1.69) 0.80 0.80 0.04 (0.06)
Cash dividends(2) -- -- -- -- -- -- --
Total assets at end of period 41,371 48,012 53,720 60,715 43,704 37,204 31,934
Long-term debt
(excluding current portion) 12,224 15,573 13,990 10,797 7,158 10,622 20,568
Working capital 14,241 10,044 16,665 19,105 17,094 13,362 15,695
Shareholders' equity 15,980 10,086 20,296 30,593 23,911 16,311 10,748
Average market price per
common share at end
of period(3) $ 3 3/4 $ 1 1/2 $2 11/16 $ 6 1/4 $8 3/16 $ 4 5/8 $1 7/8
Weighted average common shares(3) 8,570 7,382 6,580 6,843 6,309 10,199 7,459
</TABLE>
- ------------------------
(1) Includes $7,321 in restructuring costs in 1994.
(2) There have been no cash dividends in the above five fiscal years.
(3) Prior year share data has been restated to reflect 4% stock dividends
declared in February 1992, 1993 and 1994 and a three-for-two stock split
paid in August 1993.
-14-
<PAGE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
First Quarter 1997 Compared with First Quarter
1996
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 quarter of 1997 were
$13.1 million, a 21% decline when compared with $16.5 million for the same
period in 1996.
The following chart provides the sales breakdown by subsidiary:
<TABLE>
<CAPTION>
In thousands of dollars 1997 1996 % Change
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
Electronic Systems Segment
Codar Technology, Inc. $ 3,933 $ 8,191 (52%)
NAI Systems Division 4,381 3,079 42%
Lynwood Scientific Dev. Ltd. 4,060 3,220 26%
Inter-company (356) (109)
--------------------------------
Total Electronic Systems Segment 12,018 14,381 (16%)
Telecommunications Segment
Wilcom, Inc. 1,044 2,122 (51%)
--------------------------------
Total Telecommunications Segment 1,044 2,122 (51%)
--------------------------------
TOTAL $13,062 $16,503 (21%)
--------------------------------
--------------------------------
</TABLE>
Sales in the Electronic Systems segment (net of intercompany eliminations)
decreased 16% to $12.0 million from $14.4 million for the same period in 1996.
Sales increases of 42% at NAI Systems Division and 26% at Lynwood were more
than offset by a 52% sales decline at Codar. The sales decline at Codar is
attributable to several factors most notably a decline in the Company's rate of
booking new orders. Codar considers the bookings decline to be temporary and
attributes it to delays in anticipated awards as well as the usual delays
inherent when a Company is rebuilding its internal sales and marketing
resources. The quarter on quarter sales increases at Systems Division and
Lynwood are representative of the increased levels of business at both
companies.
In recent years the Company has reduced its dependency on the United States
defense budget by expanding its non-military business operations. However, the
Company still expects approximately 45% of 1997 sales to be directly to the
military or through prime contractors to the military. The Company is not aware
of any programs in which it participates that are specifically targeted for
termination or curtailment. The Company's products are utilized on many
different U.S. Government programs, which reduces the adverse impact of
canceling a single specific program. However, changes in future U.S. defense
spending levels could impact the Company's future sales volume.
Sales in the Telecommunications segment decreased 51% to $1.0 million as
compared to $2.1 million for the same period in 1996. The decrease in sales was
attributable to reduced orders as well as delays in the introduction of the
Company's enhanced TurboAmp product line. The new TurboAmp products are
expected to be available in June 1997. The Company is exploring all avenues to
increase its business level and has recently added additional sales resources.
-15-
<PAGE>
<PAGE>
The gross margin percentage for the first quarter 1997 was 28.0%, well above the
19.8% in the comparable quarter of 1996. The following chart provides the gross
margin percentage by subsidiary.
<TABLE>
<CAPTION>
1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Codar Technology, Inc. 15.9% 8.9%
NAI Systems Division 27.6% 20.7%
Lynwood Scientific Development Ltd. 36.8% 34.0%
Wilcom, Inc. 31.6% 31.7%
</TABLE>
The improved margins at Codar are attributable to significant cost reduction
efforts at the Company, as well as an emphasis in competing for higher margin
work. 1996's first quarter was also adversely impacted by several contracts for
which the Company had previously recorded losses and for which no margin was
earned, despite recorded sales.
The higher gross margin percentage at NAI Systems Division is attributable to
increased shipping volumes and a more favorable mix of development, production
and mature product sales.
Selling expense for the first quarter of 1997 was $1.0 million as compared with
$1.1 million for the same period in 1996. The 9% decrease is attributable to
reduced sales and the Company's ongoing cost reduction programs.
General and administrative expenses for the first quarter 1997 were $1.1
million as compared with $1.4 million in same period of 1996. Most of the
decline is attributable to head count reductions initiated in 1996 at Codar.
Company-sponsored research and development expenditures for the first quarter
of 1997 were $0.42 million as compared with $0.37 million for the same period
in 1996, an increase of 16%. The Company expects that the level of the first
quarter 1997 internal research and development expenditures will be relatively
constant for the remainder of 1997.
For the first quarter of 1997, the Company had operating income of $1.0 million
as compared with operating income of $0.3 million for the same period in 1996.
Interest expense and amortization of deferred debt costs, net of interest
income, was $0.5 million for the first quarter of 1997 as compared with $0.6
million for the same period in 1996.
The Company accrued an income tax expense of $0.147 million, which equates to
an effective tax rate of 28%. The entire tax expense pertains to the Company's
Lynwood subsidiary located in the U.K. Lynwood's earnings are taxed in the U.K.
and, while the Company has a U.S. net operating loss carry-forward, it is
required to pay taxes in the U.K. The Company is unable to recognize the future
tax benefit associated with its U.S. operating loss carry-forwards due to
uncertainties as to whether or not a future benefit will be realized.
For the first quarter of 1997 the Company recorded net earnings of $0.379
million as compared with a net loss of $0.450 million in the first quarter of
1996. Net earnings per share was $0.04 per share as compared with $(0.06) per
share for the same period in 1996, based on a weighted average of 10.2 million
and 7.5 million shares outstanding, respectively.
-16-
<PAGE>
<PAGE>
1996 Compared with 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 1996 were $68.2 million, a 14% increase
when compared with $60.0 million for the same period in 1995.
The following chart provides the sales breakdown by segment and subsidiary for
1996 and 1995.
In thousands of dollars 1996 1995 % Change
- --------------------------------------------------------------------------------
Electronic Systems Segment
Codar Technology, Inc. $32,727 $27,553 19%
NAI Systems Division 14,330 13,504 6%
Lynwood Scientific Dev. Ltd. 14,621 11,587 26%
Inter-company (547) (831) --
------------------------------------
Total Electronic Systems Segment 61,131 51,813 18%
Telecommunications Segment
Wilcom, Inc. 7,076 8,195 (14%)
------------------------------------
Total Telecommunications Segment 7,076 8,195 (14%)
------------------------------------
TOTAL $68,207 $60,008 14%
====================================
Sales in the Electronic Systems segment (net of inter-company elimination's)
increased 18% to $61.1 million from $51.8 million in 1995. Each of the NAI
subsidiaries recorded sales increases in 1996 as compared to 1995. Lynwood and
Codar recorded the largest increases. Codar's 1995 revenues were adversely
impacted by production problems on certain contracts. The increased sales at
Lynwood and NAI Systems Division were representative of the increased levels of
business at both companies.
In recent years the Company has reduced its dependency on the United States
defense budget by expanding its non-military business operations. However, the
Company still expects approximately 40% of 1997 sales to be directly to the
military or through prime contractors to the military compared to 44% in 1996.
The Company is not aware of any programs in which it participates that are
specifically targeted for termination or curtailment. The Company's products are
utilized on many different U.S. Government programs which reduces the adverse
impact of canceling a single specific program. However, changes in future U.S.
defense spending levels could impact the Company's future sales volume.
Sales in the Telecommunications segment decreased 14% to $7.1 million as
compared to $8.2 million in 1995. The decrease in sales is attributable to
reduced line treatment revenues.
-17-
<PAGE>
<PAGE>
The gross margin percentage for 1996 was 22.7% as compared with 8.2% for 1995.
The following chart provides the gross margin percentage by subsidiary.
1996 1995
- -------------------------------------------------------------------------
Codar Technology, Inc. 14.4% (7.7%)
NAI Systems Division 20.9% 17.4%
Lynwood Scientific Dev. Ltd. 34.0% 32.9%
Wilcom, Inc. 38.0% 23.0%
The margin improvement at Codar is attributable to increased shipping volumes
and cost reduction efforts initiated in late 1995 and early 1996. Codar's
operating performance in both years was adversely impacted by several large
contracts for which the gross margins were zero or negative. These contracts
were substantially completed during the third quarter of 1996. Codar's 1995
gross margins were adversely impacted by the recording of a $1,400,000 provision
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 and a $1,100,000 provision for inventory obsolescence.
The recording of a $900,000 provision for inventory obsolescence adversely
impacted the Systems Division's 1995 gross margin.
Cost reduction efforts completed in the fourth quarter of 1995 and a favorable
mix of high margin product revenues favorably impacted Wilcom's 1996 gross
margin.
Selling expense for 1996 was $4.2 million as compared with $5.0 million for the
same period in 1995. The 16% decrease was realized, despite an increase in sales
of 14%, due to the Company's efforts to reduce operating expenses.
General and administrative expenses for 1996 were $5.2 million as compared with
$6.5 million in 1995. Decreased corporate office expense as well as cost cutting
moves taken in the fourth quarter of 1995 account for the decline.
Company-sponsored research and development expenditures for 1996 were $1.6
million as compared with $1.8 million for 1995.
The Company had operating earnings of $5.3 million in 1996 as compared with an
operating loss of $8.9 million in 1995. 1996 operating earnings were favorably
impacted by the recognition of a gain of approximately $1.5 million from the
sale of the Systems Integration Division to Tracor Aerospace Inc. in June 1996.
Interest expense and amortization of deferred debt costs, net of interest
income, was $2.5 million in 1996 as compared with $2.4 million in 1995.
The entire tax expense pertains to the Company's Lynwood subsidiary located in
the U.K. Lynwood's earnings are taxed in the U.K. and, while the Company has a
U.S. net operating loss carry-forward, Lynwood is required to pay taxes in the
U.K. The Company is unable to recognize the full tax benefit associated with its
U.S. net operating loss carry-forward due to uncertainties as to whether or not
a future benefit will be realized. When the Company returns to sustained
profitability, the benefits of such a tax loss carry-forward will be recognized.
The Company recorded a net profit of $2.4 million as compared with a net loss of
$11.6 million in 1995. Earnings per share were $0.28 as compared with a loss of
$1.57 per share in 1995, based on a weighted average of 8.6 million and 7.4
million shares outstanding, respectively.
-18-
<PAGE>
<PAGE>
1995 Compared with 1994
Net sales in 1995 were $60.0 million, a 10% increase when compared with $54.5
million for the same period in 1994. The increase occurred in the Electronic
Systems segment. Year to year changes in the Company's sales levels are
predominantly due to changes in shipping volume or product mix rather than
changing sales prices.
The following chart provides the sales breakdown by segment and subsidiary for
1995 and 1994.
In thousands of dollars 1995 1994 % Change
Electronic Systems Segment
Codar Technology, Inc. $27,553 $20,229 36%
NAI Systems Division 13,504 4,417 206%
Lynwood Scientific Dev. Ltd. 11,587 11,116 4%
Military Products -- 11,366 (100%)
Intercompany (831) (798) --
--------------------------------
Total Electronic Systems Segment 51,813 46,330 12%
Telecommunications Segment
Wilcom, Inc. 8,195 8,190 (0%)
--------------------------------
Total Telecommunications Segment 8,195 8,190 (0%)
--------------------------------
TOTAL $60,008 $54,520 10%
================================
Sales in the Electronic Systems segment (net of inter-company eliminations)
increased 12% to $51.8 million from $46.3 million in 1994. The sales increase
was primarily attributable to increased sales from NAI's Systems Division and
Codar offset by the sales reduction due to the closing of the military products
division, which was consolidated into Codar in September 1994.
The Company expects a significant amount of 1996 sales to be directly to the
military or through prime contractors to the military.
Sales in the Telecommunications segment remained flat at $8.2 million in 1995
and 1994. A small increase in line treatment products due to deliveries of
Wilcom's new Enhanced Line Powered Amplifier products was offset by a decline in
test equipment as a result of lower orders from the regional Bell operating
companies and foreign telecommunications companies.
The consolidated gross margin for 1995 was 8.2%, as compared to 18.8% in 1994.
The 1995 gross margin was adversely affected by a $6.6 million charge to
operations and an unfavorable mix of high and low margin product deliveries. The
$6.6 million charge to operations was attributable to cost growth on certain
long term contracts due to engineering design changes, provisions for slow
moving, excess and obsolete inventory. The Company believes that it has
recognized the entire adverse impact of cost overruns on those contracts for
which the expected final costs exceed the contract value.
Selling expense for 1995 was $5.0 million, as compared with $7.5 million in
1994. This decrease is attributable to the saving associated with the
consolidation of the military products division in the third quarter of 1994 and
cost cutting measures implemented at all of the Company's divisions in 1995.
-19-
<PAGE>
<PAGE>
General and administrative expenses for 1995 were $6.5 million, as compared to
$6.3 million in 1994. This increase is primarily attributable to the Company
moving its corporate headquarters from Woodbury, New York to Longmont, Colorado
in December 1995 and additional administrative expense at Codar as a result of
increased management resources. These cost increases were partially offset by
cost cutting measures implemented at the Company's other divisions and the
savings associated with the consolidation of the military products division in
the third quarter of 1994.
Company-sponsored research and development expenditures for 1995 were $1.8
million, as compared to $3.2 million in 1994. This decrease is attributable to
savings associated with the previously mentioned consolidation and the change in
mix between Company-sponsored research and development and customer-funded
research and development. The Electronic Systems segment is focusing on its
system integration business. Although systems integration work by its nature
requires significant engineering content, such costs must be classified as
contract costs and charged to cost of sales as opposed to Company-sponsored
research and development (IR&D).
The Company recorded an operating loss of $8.9 million in 1995, as compared with
an operating loss of $14.6 million in 1994. The operating loss in 1995 was
primarily due to the $6.6 million charge previously noted. The 1994 operating
loss included a $7.3 million restructuring expense.
Interest expense, net of interest income, was $2.4 million in 1995, as compared
to $1.4 million in 1994. The 1995 figures also included a $0.9 million charge
for debt restructuring expense related to the April 7, 1995 agreement reached
with the Company's two lending institutions.
The effective income tax expense rate was below the combined statutory federal
and state rates in 1995. The Company was unable to recognize a tax benefit for
its loss in 1995 due to uncertainties as to whether or not a future benefit
would be realized. Any earnings in 1996 will not be taxed at the statutory rate.
The small tax provision is associated with the operations of Lynwood, the
Company's United Kingdom subsidiary.
The Company recorded a net loss of $11.6 million in 1995, substantially the same
as the net loss recorded in 1994. Loss per share for 1995 was ($1.57), as
compared with a ($1.69) in 1994, based on a weighted average of 7.4 million and
6.9 million shares outstanding, respectively.
Liquidity and Capital Resources
On February 15, 1996 the Company entered into an amendment to its credit
agreement with its bank lenders which amended and extended the payment
provisions contained therein and reset certain financial covenants on more
favorable terms for the Company. The revised credit agreement provides for
quarterly principal payments of $500,000, beginning on March 31, 1996 and
payments of $750,000 beginning on March 31, 1997 and paid through December 31,
1998. The remaining principal balance is due on January 15, 1999. Interest is
payable monthly at the rate of 1 3/4% above prime. The loan covenants require
that the Company maintain certain minimum levels of net worth, current ratio and
quick ratio. There are also limits on capital expenditures and the payment of
cash dividends. The Company believes that it can comply with such loan covenants
during the term of the credit agreement.
On February 15, 1996, February 23, 1996, February 29, 1996 and May 2, 1996, the
Company issued an aggregate of $8,342,000 of 12% Convertible Subordinated
Promissory Notes due January 15, 2001 (the "Notes") and warrants to purchase an
aggregate of 2,085,500 shares of the Company's Common Stock (the "Warrants").
The Notes are convertible by the holders into shares of Common Stock at a price
equal to $2.00 per share, subject to adjustment if the Company fails to meet
certain earnings thresholds and in
-20-
<PAGE>
<PAGE>
certain other events. Interest on the Notes is payable quarterly in arrears on
January 15, April 15, July 15 and October 15 of each year, commencing April 15,
1996. The Notes mature on January 15, 2001. The Notes may be prepaid by the
Company without premium or penalty at any time after January 15, 1999. The Notes
are unsecured obligations of the Company and contain certain restrictions on the
Company including a negative pledge of the Company's assets not otherwise
encumbered by the holders of the senior indebtedness.
In addition to the Warrants issued with the Notes, the Company issued an
aggregate of 2,034,200 Warrants to the lead investor and the placement agent.
All Warrants entitle the holders thereof to purchase shares of Common Stock at
any time and from time to time on or before February 15, 2002 at an exercise
price equal to $2.50 per share of Common Stock, subject to adjustment in certain
events.
The Company received total proceeds (net of placement agency fees and expenses)
of $7,534,081 ($2,500,000 was received prior to December 31, 1995) from the sale
of the Notes and the Warrants upon completion of the offering.
Approximately $4.1 million was used to reduce the Company's accounts payable to
its vendors. The remainder of the funds were used to meet operating and working
capital needs. As a result of the sale of the Notes and the debt restructuring,
the Company made payments of $7,675,000 in principal in 1996, and is required to
expend approximately $2,475,000 in 1998. All required term loan payments for
1997 were made prior to December 31, 1996. On January 15, 1999 the Company is
required to make a balloon payment of $5,025,000. Interest on outstanding
balances under the term loan is payable monthly.
The Company intends to pay interest on the Notes, interest and principal under
the credit agreement and operating expenses for the next three years. The
Company believes that it will have adequate resources to meet its obligations
when the balloon payment of $5,025,000 is due.
On May 9, 1996, the Company entered into an agreement with Charles S. Holmes, a
member of the Company's Board of Directors, that in consideration of his
converting the Note held by him in the aggregate unpaid principal amount of
$2,000,000 into 1,000,000 shares of Common Stock the Company would immediately
grant him warrants to purchase 300,000 shares of Common Stock at any time and
from time to time on or before February 15, 2002 at an exercise price of $3.00
per share, subject to adjustment in certain events. Such warrants were valued at
$0.50 per warrant and were fully expensed in 1996.
During 1996 an additional $1,115,000 of Notes were converted in accordance with
the terms thereof into 557,500 shares of common stock, thereby bringing the
total conversions for the year to $3,115,000 and reducing the aggregate
principal amount of Notes outstanding to $5,227,000 from the originally issued
$8,342,000.
Cash and cash equivalents totaled $1.9 million at March 29, 1997, as compared
to $2.7 million at December 31, 1996. Cash provided by operating activities
amounted to $0.9 million in the first quarter of 1997, as compared to cash used
by operating activities of $3.7 million in the comparable period of 1996. The
1996 period saw a large outflow of funds to the Company's vendors which had
been delayed pending completion of the Company's sale of 12% Convertible Notes.
During the first quarter of 1997, the Company reduced outstanding bank debt by
$1.6 million bringing the total amount outstanding to $5.9 million at quarter
end. The Company has made payments totaling $4.4 million in excess of
requirements and has the right to borrow such amount back if needed.
During the first quarter of 1997, $18,500 of 12% Convertible notes were
converted into 9,250 shares. There still remains $5,208,500 of notes
outstanding as of March 29, 1997.
The Company believes that it has adequate cash and borrowing capabilities in
place to fund future working capital needs.
A significant factor in the Company's improved cash flow performance in 1996 has
been the leveling of shipments during each month. In the past years the
Company's shipments were heavily weighted towards the end of each month and the
last month of each quarter. This improvement in shipping performance has enabled
the Company to reduce its inventory and accounts receivable balances.
The increase in non-current assets from the beginning of the year is
attributable to the deferred debt costs incurred as a result of the sale of the
Notes in February 1996.
-21-
<PAGE>
<PAGE>
Inflation
The Company's financial statements are prepared in accordance with historical
accounting systems, and therefore, do not reflect the effect of inflation. The
impact of changing prices on the financial statements is not considered to be
significant.
Backlog
The backlog of unfulfilled orders at December 31, 1996 stood at $30.2 million,
compared to $47.8 million at December 31, 1995. Approximately $12.0 million of
the December 31, 1995 backlog related to the Systems Integration business that
was sold in 1996. Approximately 60% of the 1996 year end backlog is scheduled
for delivery over the next twelve months.
-22-
<PAGE>
<PAGE>
THE COMPANY
The Company through its wholly owned subsidiaries designs, manufactures and
markets rugged computer systems, advanced peripheral products, intelligent
terminals, high performance workstations, TEMPEST computer systems (which
suppress certain radiation to prevent external detectors from reading the data
being transcribed) and telecommunications test equipment and transmission
products. The Company operates in two distinct operating segments: an Electronic
Systems segment and a Telecommunications segment. The Electronic Systems segment
is comprised of all of the Company's defense, military and government-related
businesses and the Telecommunications segment is focused on commercial
communications opportunities.
The Electronic Systems segment provides rugged computer products specifically
designed for deployment in harsh environments that require special attention to
system configurations. This segment's customer base includes the U.S. and
foreign armed services and intelligence agencies.
The Telecommunications segment provides transmission enhancement products and
rugged, hand-held test equipment for analog, digital and fiber-optic
communications and data-interchange networks. This segment's customer base
includes the regional Bell operating companies and independent telephone
companies.
The Company's strategy is to be a leading supplier of high quality, innovative
products, systems and services to satisfy specialized customer requirements in
niche information technology and telecommunications markets, especially in
environments with harsh operating requirements.
Electronic Systems Segment
The Electronic Systems segment is comprised of three operating subsidiaries, as
follows:
Codar Technology, Inc., located in Longmont, Colorado ("Codar");
NAI Technologies-Systems Division Corporation , based in Columbia,
Maryland ("Systems"); and
Lynwood Scientific Developments Limited, based in Farnham, United
Kingdom ("Lynwood").
Codar. Codar designs, manufactures, integrates and supports rugged computer
systems and subsystems for the U.S. Department of Defense ("DoD") and its prime
contractors and allies. These systems and subsystems are used in tactical,
planning, communications and intelligence applications.
Codar currently competes primarily in the computer and peripheral product
segment of the military market, with both militarized and ruggedized products.
Additional business is targeted at engineering support service and system
integration opportunities.
Codar's product line includes a range of commercial off-the-shelf ("COTS")-based
rugged minicomputers, workstations, personal computers, industry-compatible,
removable mass storage subsystems, high-resolution monitors and keyboards. These
products incorporate technology from other companies. Codar also provides
engineering services and system integration capabilities.
-23-
<PAGE>
<PAGE>
Codar's equipment is designed to allow flexibility in configuration of all
essential components. In addition to complying with system functional
specifications, Codar's products are engineered to be deployed in environments
that require special attention to system configurations with limitations on size
and power consumption, and restraint on electromagnetic emissions. Products are
custom built to withstand shock, vibration, cold, heat, dust, sand, rain and
altitude conditions.
Codar has developed and produced products for a large number of government
programs and departments and more than 100 additional customers aggregating more
than 200 different end-users. The products have met military requirements for
use in a variety of applications in vehicles, shelters and fixed-site
installations. Codar has designed, built, tested and sold equipment for
airborne, ground/mobile and shipboard military environmental specifications and
military requirements.
Codar is the prime contractor for the Rapid Anti-Ship Missile Integrated Defense
System ("RAIDS"), which is a tactical decision aid system based on an
open-architecture network of processors that enhances the missile defense
effectiveness of ships and performs all system executive functions, including
internal and external data sharing/communications, anti-ship missile defense
system performance and operational status monitoring, designated target
identification, track data association, limited threat evaluation and
maintenance of the status of the anti-ship missile defense threat environment.
Codar provides a variety of ruggedized and electromagnetic interference ("EMI")
compliant workstations, based on processors from other companies, as well as
related peripherals, such as ruggedized/EMI color monitors, keyboards and mass
storage units ("MSEU"). These products are used by the U.S. Army and Navy. The
Codar Model 325M-S Rugged Lightweight SPARC'r' station has been selected by GTE
Government Systems Corp. ("GTE") for use on the U.S. Army's Common Hardware/
Software Program known as CHS-2. Codar will supply computers with ruggedized
color monitors and MSEUs over a five-year period as part of the basic CHS-2
program as well as engineering services in support of GTE and the U.S. Army.
Codar also offers ruggedized rackmount and portable personal computers utilizing
the Intel 80486 or Pentium processors. These computers offer rugged portability
in either a compact, modular "lunch box" design or a rackmount design.
Completely sealed from the environment in their non-operating configuration,
these computers are easily transported. In addition to shock and vibration,
these units can operate over a wide range of temperature variations. Options
include a detachable keyboard, color touch screen display and various memory
options.
The focus of Codar's new products is the design, manufacture and integration of
rugged computer systems and subsystems to support the upgrade of large platforms
and programs, mobile or transportable systems and subsystems for command and
control applications and the support of the "digitization" of the battlefield as
exemplified by the U.S. Army's "Force 21" programs.
In an effort to maintain its technological capabilities, and be in a position to
provide the latest technology to its customers, Codar works with its suppliers
to permit it to accelerate new product introductions and help its customers have
access to the latest COTS product technology. Codar also makes significant use
of special teaming relationships with various large prime contractors such as
GTE in the CHS-2 program. These relationships allow Codar to participate in
larger programs than it could on its own.
In 1996, Codar updated its range of rugged rack-mounted computers with the
introduction of the Genesis rugged multi-platform computer, which provides users
with a rugged platform which supports Intel, DEC Alpha, Power PC and Sun
processors.
-24-
<PAGE>
<PAGE>
Also in 1996, Codar announced the Explorer II, an enhancement of the Explorer I,
offering full compatibility with the range of CHS-2 products.
Codar's range of display products was enhanced in 1996 with the introduction of
the Codar Rugged Flat Panel Displays. This technology comprises a range of 12",
13" and 16" ruggedized displays for installation in vehicles, aircraft, ships
and other harsh environments.
Systems Division. The Systems Division provides custom packaged, integrated
computer systems and peripherals for field deployment in shelters, ships, land
vehicles and a variety of other demanding environments. The division's technical
expertise encompasses most major industry standard architectures including
SPARC'r', Multibus, VME and PCI as well as most widely used operating systems.
The Systems Division also has over 25 years experience in custom packaging and
has engineered solutions that meet a broad range of unique specifications
including size and weight constraints, low power consumption, shock and
vibration, adverse temperature and humidity conditions, rack-mounting, TEMPEST
and unattended operation with remote diagnostics. Application specialties
include: Digital Signal Processing, Data Acquisition, Networking/Communications
and Video Teleconferencing.
The Systems Division's diverse customer base includes the National Security
Agency and other U.S. intelligence agencies, various U.S. military
organizations, foreign governments and industrial customers. The division's
products and services are sold domestically through its own sales force and
internationally through the sales force of the Lynwood division. Because its
products are typically based on COTS components, the Systems Division has
established strategic alliances with such leading technology companies as Sun,
Intel, Hewlett Packard, Motorola, Force Computer, Ross Technologies, Spectrum
Signal Processing and many others. In order to supply products in a timely
manner, Systems concentrates its efforts on the design, final assembly and test
of its systems rather than providing a fully integrated vertical manufacturing
capability.
Lynwood. Lynwood supplies rugged, environmentally and electrically screened
personal computers and workstations based upon standard COTS technology, aimed
at the military and government markets principally in Europe, Australia and
Southeast Asia. Lynwood develops, manufactures, installs and supports complete
computer systems for the Government and Defense markets. Lynwood adapts COTS
systems for use in harsh and extreme environments. In addition to creating its
own products, Lynwood also provides an international marketing and manufacturing
capability for the Company. In some cases, Lynwood provides systems that are
made up of its own products coupled with those of Codar or Systems.
Lynwood produces several personal computer and workstation products designed to
be operated in harsh environments. For example, Lynwood has a completely
compatible PC based upon a standard PC motherboard which operates in driving
rain and at extremes of temperature, and which is completely sealed from dust
and dirt. These products have been sold to armed services in Australia and the
UK. Lynwood also develops secure TEMPEST screened workstation products which are
designed to operate in areas of high security.
Lynwood principally works on discrete projects and delivers solutions to meet
specific customer and project requirements. Lynwood's products include the
Explorer II Sun workstation, the Genesis SR rackmount computer, MC50 for
Airborne Applications and RP6200 range of multi-purpose rugged desktop and
rackmount Pentium computers. In addition, Lynwood supplies a wide range of
rugged flat panel displays for use within air, maritime and land mobile
environments.
-25-
<PAGE>
<PAGE>
Lynwood has the capability to supply integrated systems and subsystems that meet
specific rugged and environmental specifications. Lynwood's design and
manufacturing capabilities are concentrated around the system integration and
final assembly and test of these products. Lynwood strives to respond quickly
with a cost effective product using the latest COTS technologies and employs the
same technology relations and teaming programs as Codar and Systems to meet this
end.
Telecommunications Segment
The Telecommunications segment currently consists of one operating company:
Wilcom, Inc. ("Wilcom"), located in Laconia, New Hampshire. Wilcom designs and
manufactures products for use in the telephone industry. The majority of
Wilcom's sales are to the Regional Bell Operating Companies ("RBOCs").
The business of Wilcom is made up of two product lines; analog and digital
telephone test equipment, for use with either fiber or copper cable, and
telephone transmission enhancement products, which are used to enhance or
improve the characteristics of voice, digital data and video over copper wire.
The test equipment product line is comprised of digital, fiber and analog test
instrumentation used by domestic and international telephone companies. Current
products include line testers, fiber identifiers, power meters and other such
instruments.
Telephone transmission enhancement products, which represent the greater growth
opportunity for the division, include two product lines that are differentiated
by their use rather than their technologies. One of the product lines is
referred to as line treatment equipment ("LTE") and is normally installed on
telephone company property, while the other product line, the enhanced line
power amplifier ("ELPA"'), is normally installed at the customer's premises (but
can be installed on telephone company property).
Both the LTE and the ELPA are electronic modules, installed for the express
purpose of improving voice quality, increasing data transmission speeds when
using modems and increasing the ability of copper wire to be used for video
transmission in special instances. The LTE has been designed for use with two
and four wire telephone circuits and the ELPA has been designed for use with two
wire circuits. Network upgrading has become important due to the many new
competitive technological alternatives to copper wire such as radio, cellular
telephone, satellite transmission, fiber cables and microwave which can send
information and data from location to location. The proliferation of higher
speed analog modems has made the need for better quality phone lines an
important issue. Wilcom's products allow the telephone companies to provide
additional services in voice, data and video transmission over their existing
copper networks.
The ELPA product line has been extended by the introduction of a smaller,
lighter, less expensive product called the Turbo Amp. The Turbo Amp has been
designed to be self-powered from the telephone line and permit the improvement
of line transmission quality by automatically adjusting the various electrical
parameters that control signal transmission. The Turbo Amp also requires less
skilled technicians for installation and can be configured and installed from a
remote site, which can result in substantially reduced service calls and cost to
the RBOCs. The Company has received patents on the Turbo Amp.
Marketing and Service
-26-
<PAGE>
<PAGE>
The Company sells its products directly to customers and serves as a
subcontractor to larger prime contractors serving the same customer base. The
Company's products are marketed to customers through sales personnel,
manufacturers' representatives and distributors. The Company maintains sales
offices and sales support in Columbia, Maryland; Westlake Village, California;
Longmont, Colorado; Laconia, New Hampshire; Australia; England; and Israel.
The Company provides maintenance and field service for its products through its
customer service departments located at each of its manufacturing facilities and
at certain customer sites. Field service for printers is also performed by some
distributors. Most overseas service is performed by the Company's
representatives in Australia, Denmark, England, France, Germany and Israel.
Customers
During 1996 and 1995, sales under contracts with the U.S. Government were
approximately 30% and 38%, respectively, of the Company's net sales. The U.S.
Government and one other customer individually accounted for more than 10% of
the Company's sales in 1996 or 1995. The Company's sales are affected by the
U.S. defense budget. With continuing discussions on budget cuts, it is difficult
to assess what the impact of budget cuts, if any, will be on the Company. It
appears that defense outlays will be reduced from past levels. The Company is
unaware of any targeted cuts specifically affecting its products. The Company's
products are utilized on many different programs. However, changed U.S.
Government spending levels could impact the Company's future sales levels. No
single U.S. Government contract accounted for greater than 10% of the Company's
sales in 1996 or 1995.
The U.S. Government accounted for 34% and one other customer accounted for 16%
of the Electronic Systems segment's 1996 sales. Two separate customers accounted
for 26% and 18%, respectively, of the Telecommunications segment's 1996 sales.
Foreign Sales
Foreign sales in 1996 and 1995 accounted for approximately 24% and 21%,
respectively, of total sales. Such sales, which exclude products sold to the
U.S. Government and resold by the U.S. Government for foreign military use, are
made primarily to customers in Australia, Canada, Hong Kong, India, Indonesia,
Israel, Japan, the United Kingdom and Western Europe.
The Company's foreign sales are comprised of export sales from the U.S. and
foreign revenues from Lynwood. All export sales from the U.S. are payable in
U.S. dollars and, therefore, settlement amounts do not fluctuate with changes in
exchange rates. All of Lynwood's sales are payable in British currency.
Fluctuations in exchange rates between the U.S. dollar and the British pound
will impact on the Company's operating results. No single country, with the
exception of the United Kingdom (70% in 1996 and 86% in 1995) and Australia (18%
in 1996 and less than 5% in 1995), accounted for more than 5% of the Company's
foreign sales in any of the past two years.
-27-
<PAGE>
<PAGE>
Foreign sales for the past three years have been as follows:
Approximate
Total Percent of
Foreign Sales Company Sales
------------- -------------
1996 ............................. $16,154,000 24%
1995 ............................. 12,679,000 21%
1994 ............................. 13,828,000 25%
Backlog
The Company's backlog of orders was $30.2 million at December 31, 1996. Of this
amount, 14% represents orders for U.S. military sales. Such orders are subject
to termination at the convenience of the U.S. Government with negotiated
settlements in which the Company seeks to recover its costs and a reasonable
profit. Certain other orders, when subject to cancellation or return, are
handled with a restocking charge or by negotiated settlement.
While the Company's backlog is not subject to seasonal factors, it does
fluctuate due to timing of orders from the U.S. Government. The Company expects
to produce and ship approximately 60% of its current backlog of orders before
the end of 1997.
Competition
The Company's business is highly competitive. Many suppliers in the Company's
markets are significantly larger than the Company in terms of total sales and
assets, and many devote significantly more resources to the development of new
products than does the Company. The Company searches for certain market niches
where it has expertise and can compete successfully. Competition for the
Company's products is based principally on reliability, performance, price and
diversity of the products offered.
Research and Development
The Company's technological base is characterized by rapid change. As a result,
maintenance and expansion of the Company's business are partially dependent upon
the success of the Company's programs to develop new products and upgrade
existing products. The Company's engineering resources have been devoted to the
development of new products in every major category of its business.
During the years 1996, 1995 and 1994, the Company's total engineering
expenditures were $3,929,000, $7,264,000 and $9,335,000, respectively. Due to
the extensive use of COTS-based equipment in the Company's products, the
Company's cost of independent research in pursuit of new products and
improvements to existing products has declined during the years 1996, 1995 and
1994 to approximately $1,639,000, $1,807,000 and $3,214,000, respectively.
Customer-funded engineering included in cost of sales or inventory, as a
contract cost was $2,290,000 in 1996, $5,457,000 in 1995 and $6,121,000
in 1994.
-28-
<PAGE>
<PAGE>
Patents and Trademarks
The Company owns patents and trademarks and seeks patent protection for its
products in cases where the Company believes the technology involved is
sufficiently innovative to warrant such protection. The Company seeks trademark
protection for its products in cases where the Company believes for marketing
reasons such protection is warranted. The Company seeks to protect its
proprietary information through its reliance on patent, copyright, trademark and
trade secret laws, non-disclosure agreements with its employees and
confidentiality provisions in licensing arrangements with its customers. There
is no assurance that such agreements will be effective to protect the Company or
that the proprietary information deemed confidential by the Company will be
adequately protected by the law respecting trade secrets. Consequently, it may
be possible for unauthorized third parties to copy certain portions of the
Company's products or to "reverse engineer" or otherwise obtain the Company's
proprietary rights. Moreover, the laws of some foreign countries do not afford
the same protection provided by U.S. laws to the Company's proprietary rights.
Government Regulation
The Company is subject to the Federal acquisition regulations governing the
issuance of government contracts, Federal Trade Commission regulations governing
its advertising and trade practices, Department of Commerce regulations as well
as Department of State Defense Trade Control regulations with respect to goods
it imports and exports, and the Truth in Negotiations Act, which provides for
the examination by the U.S. Government of cost records to determine whether
accurate pricing information was disclosed in connection with government
contracts. To date, such government regulations have not had a material adverse
effect on the Company's business. The Company in the normal course of business
is subject to Department of Defense audits with respect to its government
contracts, some of which may result in pricing adjustments.
The Company's manufacturing operations are subject to various federal, state and
local laws that regulate the discharge of materials into the environment, or
otherwise relating to the protection of the environment. To date, compliance
with such government regulations has not had a material adverse effect on the
Company's business.
Manufacturing and Supplies
Production of the Company's products requires assembly and testing of
components, printed circuit boards and other purchased parts. Quality control,
testing and inspection are performed at various steps throughout the
manufacturing process.
The Company purchases certain materials and components used in its systems and
equipment from independent suppliers. These materials and components are not
normally purchased under long-term contracts. The Company purchases
minicomputers, workstations, personal computers, mass storage subsystems, high
resolution monitors and keyboards under OEM agreements. The Company believes
that most of the items its purchases may be obtained from a variety of suppliers
and it normally obtains alternative sources for major items, although the
Company is sometimes dependent on a single supplier or a few suppliers for some
items.
During 1995 and 1994, the Company's cash constraints strained its relationships
with vendors, which adversely impacted the Company's ability to meet its
production targets on a timely and cost-effective basis. These constraints were
significantly eased during 1996 and the Company now believes it is in good
standing with all of its vendors.
-29-
<PAGE>
<PAGE>
Employees
At December 31, 1996, the Company had approximately 290 employees. The Company
has never experienced a work stoppage and none of its employees is represented
by a union. The Company believes its relationship with its employees is good. In
January 1997, the Company reduced its work force by approximately 40 additional
employees.
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:
<TABLE>
<CAPTION>
Facilities
----------
Approximate
Floor Area Expiration
Division or Subsidiary Location (in Sq. Ft.) Date
- ---------------------- -------- ------------ ----
<S> <C> <C> <C>
Electronic Systems Segment
- --------------------------
Codar Longmont, Colorado 52,000 (leased) November 1, 1999
Systems Columbia, Maryland 25,000 (leased) November 30, 2001
Lynwood Farnham, England 26,000 (leased) December 25, 2014
Telecommunications Segment
- --------------------------
Wilcom Laconia, New Hampshire 52,000 (owned) --
</TABLE>
The Company also leases several small sales offices. The Company's corporate
office is in short-term leased executive offices located in Huntington, New
York. The Company pays approximately $1,198,000 per annum for the rental of all
its facilities.
-30-
<PAGE>
<PAGE>
MANAGEMENT
Directors and Executive Officers
The names and ages of the directors and executive officers of the Company,
and their positions with the Company, are as follows:
Name Age Position
- ---- --- --------
Robert A. Carlson 64 Class I Director, Chairman and Chief Executive
Officer
Richard A. Schneider 44 Class II Director, Executive Vice President,
Treasurer, Chief Financial Officer and
Secretary
Stephen A. Barre 56 Class II Director
Edward L. Hennessy, Jr. 68 Class II Director
Charles S. Holmes 55 Class I Director
C. Shelton James 55 Class I Director
Dennis McCarthy 50 Class II Director
The principal occupations for the past five years (and, in some instances,
for prior years) of each of the directors, executive officers and key employees
of the Company are as follows:
Robert A. Carlson is a Director and the Chairman and Chief Executive
Officer of the Company. Mr. Carlson has been an officer of the Company since
1987. Until October 1995, he served as President and Chief Executive Officer
while, until December 1989, he served as President and Chief Operating Officer
of the Company. Prior to joining the Company, Mr. Carlson served as President
and Chief Executive Officer of Millicom Inc., a cellular telephone company, from
1984 through 1985 as well as a director of Racal/Millicom, a United Kingdom
company. From 1977 through 1983, Mr. Carlson served as a Division President of
Simmonds Precision Products, Inc., a military electronic company.
Richard A. Schneider is a Director and the Executive Vice President,
Treasurer, Chief Financial Officer and Secretary of the Company. He was elected
a Director of the Company on February 11, 1993. From October 1988 until December
1992, he served as Vice President - Finance and Treasurer of the Company. He was
elected Secretary of the Company in January 1990. Prior to joining the Company,
from November 1981 to 1988, Mr. Schneider was employed by EDO Corporation, an
electronics company which designs and manufactures advanced electronic and
specialized equipment for military, marine and aviation markets, in a number of
positions, the most recent of which was Controller. Mr. Schneider is a certified
public accountant.
Stephen A. Barre, a Director of the Company since 1989, has been for more
than the past five years the Chairman and Chief Executive Officer of Servo
Corporation of America, a communications and defect detection company.
-31-
<PAGE>
<PAGE>
Edward L. Hennessy, Jr., a Director of the Company since March 6, 1996, Mr.
Hennessy is the retired Chairman and Chief Executive Officer of Allied Signal,
Inc. a worldwide technology company. He is also a director of The Bank of New
York, a New York state commercial banking company, Lockheed Martin Corp., a
designer, manufacturer, integrator and operator of systems and products in
leading edge technologies, National Association of Manufacturers, Wackenhut
Corporation, an international provider of security-related services and
privatized correctional and detention facility management and design services,
Walden Real Estate Investment Trust, a self-managed fully integrated REIT
focused on middle income multi-family properties, and Fundamental Management
Corporation. A designee of Fundamental Management Corporation, he was elected
a Director of the Company on March 6, 1996.
Charles S. Holmes, a Director of the Company since October 3, 1995, is the
President and sole stockholder of Asset Management Associates of New York, Inc.
("Asset Management"), a New York-based firm specializing in acquisitions of
manufacturing businesses. Mr. Holmes founded and was a partner in Asset
Management Associates, a predecessor partnership of Asset Management, from 1978
to 1991. He has served since its formation in 1992 as Vice Chairman of the Board
of Directors of Chart Industries Inc., which specializes in the design,
manufacture and sale of industrial process equipment used in the hydrocarbon and
industrial gas industries for low-temperature and cryogenic applications, and
manufactures other industrial equipment such as stainless steel tubing,
structural pipe supports and high vacuum systems.
C. Shelton James, a Director of the Company since 1989, has been for more
than the past five years the Chairman of the Board and Chief Executive Officer
of Elcotel Inc., a public communications company. He also is President and a
director of Fundamental Management Corporation, an investment management
company which is the general partner of limited partnerships which are
substantial investors in the Company, and he is on the Board of Directors of
Harris Computer Systems Inc., a company engaged in the manufacture of electronic
computers, SK Technologies, a company engaged in development and marketing of
point of sale and data communication software and market computer hardware,
and CPSI Inc., a company engaged in high performance computing.
Dennis McCarthy, a designee of Mr. Holmes, was elected a Director of the
Company on March 6, 1996. He has been employed by Asset Management Associates of
New York, Inc., a New York-based firm specializing in acquisitions of
manufacturing businesses, since 1988.
Directors are elected by the shareholders at annual meetings for two year
terms and serve until the next annual meeting of shareholders for the year in
which their term expires or until their successors are duly elected and
qualified. Officers are elected to serve, subject to the discretion of the
Board of Directors, until their successors are elected.
-32-
<PAGE>
<PAGE>
Executive Compensation
The following table sets forth all plan and non-plan compensation awarded to,
earned by or paid to the Company's Chief Executive Officer and each of the
executive officers of the Company other than the Chief Executive Officer whose
total annual salary and bonus exceeded $100,000 (collectively, the "Named
Executives") for each of the Company's last three fiscal years.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term Compensation
----------------------
Annual Compensation Awards Payouts
------------------- ------ -------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Securities
Other Annual Restricted Underlying All Other
Name and Principal Fiscal Compensation Stock Options/ LTIP Compensation
Position Year Salary ($) Bonus ($) ($) (1) Award(s)($) SARs(#) Payouts ($)
-------- ---- ---------- --------- ------- ----------- ------- ------- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Robert A. Carlson - 1996 $196,000 $176,000 -- -- -- -- $58,295 (2)
President and Chief 1995 263,000 -- -- -- 250,000 (5) -- 59,071 (2)
Executive Officer 1994 275,000 -- -- -- 138,983 (4) -- 66,324 (2)
Richard A. Schneider - 1996 124,000 96,000 -- -- -- -- 7,454 (3)
Executive Vice President, 1995 152,000 8,500 -- -- 125,000 (5) -- 7,630 (3)
Treasurer and Secretary 1994 149,000 -- -- -- 94,389 (4) -- 12,426 (3)
</TABLE>
- --------------------------------------------------------------------------------
(1) The aggregate amount of all perquisites and other personal benefits paid to
any Named Executive is not greater than either $50,000 or 10% of the total
of the annual salary and bonus reported for such Named Executive.
(2) Includes $59,022, $59,071 and $58,295 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 1994, 1995 and 1996, respectively, as well as $7,302,
$0 and $0 of matching contributions made by the Company under the 401(k)
deferred compensation plan and $0, $0 and $0 of matching contributions made
by the Company under the profit sharing portion of such plan for the
benefit of Mr. Carlson for each of the years 1994, 1995 and 1996,
respectively.
(3) Includes $7,603, $7,630 and $7,454 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 1994, 1995 and 1996, respectively, as well as $4,823, $0
and $0 of matching contributions made by the Company under the 401(k)
deferred compensation plan and $0, $0 and $0 of matching contributions made
by the Company under the profit sharing portion of such plan for the
benefit of Mr. Schneider for each of the years 1994, 1995 and 1996,
respectively.
-33-
<PAGE>
<PAGE>
(4) Options to acquire shares of Common Stock that were granted in fiscal year
1994. At the same time, options for Mr. Carlson (102,951 shares) and Mr.
Schneider (54,996 shares) were canceled.
(5) Options to acquire shares of Common Stock that were granted in fiscal year
1995. At the same time, options for Mr. Carlson (214,485 shares) and Mr.
Schneider (95,327 shares) were canceled.
Stock Options
- -------------
The table below summarizes the options granted to the Named Executives in 1996
and their potential realizable values.
Option/SAR Grants in 1996
-------------------------
<TABLE>
<CAPTION>
Potential Realizable Value of
Assumed Annual
Rates of Stock Price
Appreciation
Individual Grants for Option Term 1
- -------------------------------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e) (f) (g)
Number of % of Total
Securities Options/SARs
Underlying Granted to
Options/SARs Employees in Exercise or Base
Name Granted (#) Fiscal Year Price ($/Sh) Expiration Date 5%($) 10%($)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Robert A. Carlson
-0- N/A N/A N/A N/A N/A
President and
Chief Executive Officer
Richard A. Schneider -0- N/A N/A N/A N/A N/A
Executive Vice President
Treasurer and Secretary
</TABLE>
________________________
The table below summarizes the exercise of stock options during 1996 for the
Named Executives.
Aggregated Option/SAR Exercises in 1996 and FY-End Option/SAR Values
--------------------------------------------------------------------
<TABLE>
<CAPTION>
(a) (b) (c) (d) (e)
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options/SARs Options/SARs
at FY-End (#) at FY-End ($)
Shares
Acquired on Value Exercisable/ Exercisable/
Name Exercise Realized($) Unexercisable Unexercisable(1)
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Robert A. Carlson - -0- $0 125,000/125,000 $156,250/$156,250
President and Chief
Executive Officer
Richard A. Schneider - -0- $0 62,500/62,500 $78,125/$78,125
Executive Vice President
Treasurer and Secretary
</TABLE>
- ------------------------
(1) Market price at December 31, 1996 minus exercise price times the number of
shares underlying the unexercised options.
-34-
<PAGE>
<PAGE>
Supplemental Retirement Plan
The Company terminated its non-qualified Supplemental Retirement Plan (the
"SERP") on December 19, 1996. On August 7, 1996, the Company and Mr. Schneider
agreed on the termination of Mr. Schneider's status as an eligible participant
under the SERP and the redemption of his interest in the SERP by the Company at
a redemption price of $150,000, which represented a discount of approximately
60% from the actuarial equivalent lump sum value of his accrued benefit under
the SERP as of February 29, 1996. On December 19, 1996, the Company and Mr.
Carlson agreed on the termination of Mr. Carlson's status as an eligible
participant under the SERP and the redemption of Mr. Carlson's interest in the
SERP by the Company at a redemption price of $800,000, payable quarterly in four
equal installments of $200,000 beginning on February 17, 1997. It is estimated
that Messrs. Carlson and Schneider, who have 12 and 8 years of credited service,
respectively, would have received each year at normal retirement age annual
amounts under the SERP of $131,296 and $65,103, respectively.
Compensation Committee Interlocks and Insider Participation
During the fiscal year ended December 31, 1996, the members of the Compensation
Committee were Charles S. Holmes (Chairman), Stephen A. Barre and Edward
Hennessy, Jr. During fiscal year 1996 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. In addition, during
the fiscal year ended December 31, 1996, no executive officer of the Company
served as a director or member of the compensation committee of another entity,
one of whose executive officers served as a director or on the Compensation
Committee of the Company.
Employment and Change in Control Agreements
The Company entered into an Employment Agreement with Robert A. Carlson as of
January 1, 1997. Pursuant to the employment agreement with Mr. Carlson, the term
of his employment commenced on January 1, 1997 and will continue until December
31, 1997 unless extended by Mr. Carlson for a period of one year on or within 30
days prior to each of January 1, 1998 and January 1, 1999 (each an "Extension
Date"). Mr. Carlson will be paid salary at a rate of $260,000 per annum which
represents a 25% increase in salary from the prior year's level. Assuming that
the Company attains certain annual targets, the Company will also pay Mr.
Carlson an annual bonus equal to 50% of his salary. The employment agreement
with Mr. Carlson also provides that the Company will pay Mr. Carlson $50,000 on
each January 15, 1998 and January 15, 1999 if Mr. Carlson continues to serve as
Chairman of the Company on each such Extension Date, and an additional $50,000
if Mr. Carlson continues to service as Chief Executive Officer of the Company on
each such Extension Date (collectively referred to as the "Executive Bonus").
Mr. Carlson will be eligible to participate in all employee benefit programs.
The employment agreement with Mr. Carlson also provides that in the event the
Company decides to terminate Mr. Carlson's employment without cause he is
entitled to a payment of a pro rata share of unused vacation for the full year
plus a pro rata share of his bonus under the Company Bonus Plan, if the Board in
its sole discretion so determines, plus a severance payment of the Executive
Bonus on the dates he would otherwise be entitled to receive the Executive
Bonus. In the event the Company decides to terminate Mr. Carlson's employment
without cause prior to November 31, 1997 he is entitled to either his salary for
the remainder of the term under the agreement or one year's salary, whichever is
greater. If the Company decides to terminated Mr. Carlson's employment for
cause, the Company will provide 20 days written notice, and reason for the
termination. Mr. Carlson will have those 20 days to effect a cure to the
Company's satisfaction.
The Company entered into an Employment Agreement with Richard A. Schneider on
October 16, 1995 which was amended as of August 8, 1996 and January 2, 1997.
Pursuant to the employment agreement with Mr. Schneider, the term of his
employment commenced on October 16, 1995 and will continue until October 16,
1997. Mr. Schneider will be paid salary at a rate of $180,000 per annum which
represents a 25% increase in salary from the prior year's level. Assuming the
Company attains certain annual targets, the Company will also pay Mr. Schneider
an annual bonus equal to 40% of his salary. Mr. Schneider will be eligible to
participate in all employee benefit programs, and in 1995 was granted options to
purchase 125,000 shares of Common Stock at a per share exercise price of $2.50
(such options to replace 100,000 previously issued options which were canceled).
The employment agreement with Mr. Schneider also provides that in the event the
Company terminates Mr. Schneider's employment without
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cause, Mr. Schneider will be entitled to a severance payment of either his
salary for the remainder of the term under the agreement or one year's salary,
whichever is greater, and a severance payment of a pro rata share of unused
vacation for the full year plus a pro rata share of his bonus under the Company
Bonus Plan, if the Board in its sole discretion so determines. If the Company
decides to terminate Mr. Schneider's employment for cause, the Company has
agreed to provide 20 days written notice, and reason for the termination. Mr.
Schneider will have those 20 days to effect a cure to the Company's
satisfaction.
Director Compensation
During 1996, each director who was not also an officer of the Company was paid
an annual retainer of $15,000, plus $2,500 for each committee that a director
serves on, plus a uniform fee of $1,000 for each Board and committee meeting
attended in person. During 1996, directors who were also officers of the Company
received no remuneration for attendance at Board and committee meetings.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information concerning persons or groups who are
known by the Company to be the beneficial owners of more than 5% of the Common
Stock as of March 11, 1997. 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.
Number of Shares of
Common Stock Percent of
Name and Address of Beneficial Owner Beneficially Owned(1) Common Stock
- ------------------------------------ --------------------- ------------
Charles S. Holmes
P.O. Box 2850
Southampton, NY 11969(2) 3,212,000 29.0%
Pioneering Management Corporation
60 State Street
Boston, MA 02114(3) 579,000 6.4%
Fundamental Management Corporation
4000 Hollywood Boulevard
Suite 610N
Hollywood, FL 33021(4) 1,150,636 11.8%
- ------------------------
1) To the knowledge of the Company, beneficial owners named in the above table
have sole voting power with respect to the shares listed opposite their
names.
2) Mr. Holmes is a director of the Company. These shares are comprised of
1,000,000 shares of Common Stock, 1,700,000 shares underlying certain
Warrants exercisable at $2.50 per share and 300,000 shares underlying
certain Warrants exercisable at $3.00 per share, owned by Mr. Holmes; and
175,000 shares of Common Stock and 37,000 shares underlying Warrants
exercisable at $2.50 per share owned by a friend of Mr. Holmes.
The ownership percentage is calculated as if such Warrants and Notes had
been converted as of March 11, 1997.
3) These shares are reportedly owned by a passive investor. Pioneering
Management Corporation is the investment company advisor of such investor
and is registered under Section 203 of the Investment Advisers Act of 1940.
4) These shares are reportedly owned by various limited partnerships, of which
Fundamental Management Corporation is the general partner. C. Shelton
James, a director of the Company, is the President and a director of
Fundamental Management Corporation. These shares are composed of 400,636
shares of Common Stock, 250,000 shares underlying certain Warrants
exercisable at $2.50 per share and 500,000 shares underlying $1,000,000 of
Notes convertible into shares at $2.00 per share. Excludes 14,793 shares of
Common Stock owned by Mr. James as to which shares Fundamental Management
Corporation disclaims beneficial ownership. The ownership percentage is
calculated as if such Warrants and Notes had been converted as of March 11,
1997 by Fundamental Management Corporation.
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Shares of Common Stock beneficially owned as of March 11, 1997 by each director
and executive officer of the Company and by all directors and executive officers
of the Company as a group are set forth in the following table. This table is
based upon information furnished to the Company by such persons and statements
filed with the Securities and Exchange Commission.
Beneficial Ownership of Shares(1)
Number of Shares of
Common Stock Percent of
Name Beneficially Owned(2) Common Stock(3)
- ---- ------------------- -------------
Robert A. Carlson 100,467 1.11%
Stephen A. Barre 17,654 --
Edward L. Hennessy, Jr. -0- --
Charles S. Holmes(4) 1,000,000 11.08%
C. Shelton James(5) 14,793 --
Dennis McCarthy -0- --
Richard A. Schneider 16,812 --
All directors and officers as a group
(7 persons) 1,149,726 12.74%
- ------------------------
- -- = 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 11, 1997 for such
persons as follows: Mr. Carlson, 125,000, Mr. Barre, 3,120; Mr. Hennessy,
-0-; Mr. Holmes, -0-; Mr. James, 7,401; Mr. McCarthy, -0-; Mr. Schneider,
62,500; and all directors and officers as a group, 198,021.
3) The percentages of Common Stock outstanding are based on 9,032,437 shares
outstanding on March 11, 1997.
4) Excludes Warrants to purchase 2,000,000 shares of Common Stock owned by Mr.
Holmes and 175,000 shares of Common Stock and Warrants to purchase 37,000
shares of Common Stock owned by a friend of Mr. Holmes.
5) Excludes 400,636 shares of Common Stock, Warrants to purchase 250,000 shares
of Common Stock and Notes convertible into 500,000 shares of Common Stock
owned by various limited partnerships of which Fundamental Management
Corporation, an investment company of which Mr. James is President and a
director, as to which shares Mr. James shares voting and dispositive power.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Charles S. Holmes, a director of the Company, purchased $2,000,000 principal
amount of Notes and Warrants (the "Units") to purchase 500,000 shares of Common
Stock issued pursuant to the private placement (the "Investment Transaction") of
the Units by the Company in exchange for the 12% Subordinated Promissory Notes
of the Company held by him in the aggregate principal amount of $2,000,000. Mr.
Holmes also received an additional 1,200,000 Warrants for past advisory services
in connection with the Investment Transaction and the engagement of Commonwealth
Associates as the Company's placement agent. Pursuant to an agreement between
Mr. Holmes and the Company on May 9, 1996, which provided for the immediate
grant to Mr. Holmes of warrants to purchase 300,000 shares of Common Stock at
any time and from time to time on or before February 15, 2002 at an exercise
price of $3.00 per share, subject to adjustment in certain events, Mr. Holmes
converted the Notes held by him in the aggregate principal amount of $2,000,000
into one million shares of Common Stock which he currently owns.
C. Shelton James, a director of the Company, is the president and a director of
Active Investors II, Ltd. ("Active Investors"), a company which, together with
certain affiliated limited partnerships, currently owns shares of Common Stock
of the Company. In connection with the Investment Transaction, Active Investors
purchased 900 Units from the Company in exchange for 12% Subordinated Promissory
Notes of the Company held by him in the aggregate principal amount of $900,000.
On May 2, 1996 Active Investors purchased additional Notes in the aggregate
principal amount of $100,000 and Warrants to purchase 25,000 shares of Common
Stock.
In connection with the Investment Transaction, the Company agreed to use its
best efforts to cause the resignation of two then-current members of the Board
of Directors and cause to be elected as directors two individuals acceptable to
the Company and who are designed by the investors, including one designated
solely by Mr. Holmes and one designated solely by Active Investors. Dennis
McCarthy was designated to serve in such capacity by Mr. Holmes, while Edward L.
Hennessy, Jr. was designated to serve in such capacity by Active Investors, and
each became a director of the Company on March 6, 1996.
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DESCRIPTION OF SECURITIES
The Notes
The Notes mature on January 15, 2001 and bear interest from the date of
issuance at the rate per annum of 12%. Interest on the Notes is payable
quarterly in arrears on January 15, April 15, July 15 and October 15 of each
year commencing April 15, 1996. In the event of a Chapter 11 or Chapter 7
bankruptcy case in which the Company is the debtor, the Notes will bear interest
from the date of commencement of the case at a default rate per annum equal to
the lesser of 18% or the highest such rate allowable by law. The Notes are
subject to prepayment, in whole and not in part, at the option of the Company,
at any time after the third anniversary of the date of issuance, without premium
or penalty. Upon the occurrence of a "change in control" of the Company, each
holder of the Notes will have the right to require that the Company repurchase
such holder's Notes in whole and not in part, without premium or penalty, at a
purchase price in cash in an amount equal to 100% of the principal amount
thereof, together with accrued and unpaid interest, if any, to the date of
purchase, pursuant to an offer made in accordance with the procedures described
in the Notes. The Notes are governed by an Indenture (the "Indenture") dated as
of July 15, 1996 between the Company and First Trust National Association, as
trustee (the "Trustee"). The holders of a majority in principal amount of the
Notes then outstanding by notice in writing to the Company and the Trustee or
any successor trustee may (i) remove the Trustee and (ii) within one year after
a successor trustee appointed by the Company has taken office, appoint a
successor trustee to replace the successor trustee appointed by the Company. The
Notes and the Indenture may not be amended in any material respect for the
purposes of adding any provision to, or changing in any manner or eliminating
any of the provisions of, the Notes or the Indenture without the consent of the
holders of at least 50% in aggregate principal amount of outstanding Notes. The
Notes and the Indenture may not be amended, for the purposes of (i) changing the
maturity of the principal, or any installment of interest, (ii) changing the
currency in which the Notes are payable, (iii) reducing the principal amount or
the interest rate, and (iv) reduce the percentage of the principal amount of the
outstanding Notes required for any amendment or waiver of the provisions of the
Note and the Indenture, without the consent of the holder of each outstanding
Note.
Subordination. The indebtedness evidenced by the Notes, including any
interest thereon, is subordinate and subject in right of payment to the prior
payment when due in full of all Senior Indebtedness. Senior Indebtedness is
defined in the Note to include, unless the terms respecting the particular
indebtedness or obligation otherwise provide, the principal of, premium, if any,
and any interest on, all liabilities of the Company, direct or contingent,
joint, several or independent, now or hereafter existing, due or to become due,
whether created directly or acquired by assignment or otherwise, under or in
respect of the Credit Agreement and all extensions, renewals and refunding of
any of the foregoing up to the original amount. The Company has made payments
totaling $4.4 million in excess of requirements and has the right to borrow
such amount back if needed. At March 29, 1997, the amount of Senior Indebtedness
outstanding was $5,900,000 which was outstanding pursuant to the Credit
Agreement which provides for quarterly principal payments of $750,000 on the
last day of each quarter, commencing March 31, 1997 and ending on December 31,
1998, together with accrued and unpaid interest through the applicable payment
date at the prime rate plus 1 3/4% per annum. The remaining outstanding
principal amount of $5,025,000 is due and payable on January 15, 1999. Upon the
acceleration of any Senior Indebtedness or upon the maturity of the entire
principal amount of any Senior Indebtedness by lapse of time, acceleration or
otherwise, all such Senior Indebtedness
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which has been so accelerated or matured shall first indefeasibly be paid in
full before any payment is made by the Company or any person acting on behalf
of the Company on account of any obligations evidenced by the Notes. There is
no sinking fund for the Notes.
The Notes will be senior to any indebtedness of the Company's subsidiaries.
At March 29, 1997, there was no such indebtedness.
Conversion Rights. The Notes may be converted by the holders as to their
principal amount into Common Stock of the Company at any time at a conversion
price equal to $2.00 per share, subject to adjustment. The conversion price and
the number of shares of Common Stock to be received upon conversion are subject
to adjustment upon the occurrence of any of the following events: (i) the
recapitalization of the Company or reclassification of the securities to be
received upon conversion or any merger or consolidation of the Company into or
with a corporation or other business entity, or the sale or transfer of all or
substantially all of the Company's assets or any successor corporation's assets
to any other corporation or business entity, (ii) the subdivision or combination
of the shares of Common Stock to be received upon conversion, (iii) the payment
of dividends or other distributions in the form of the securities to be received
upon conversion, and (iv) the issuance of shares of Common Stock at less than
the conversion price. No adjustment of the conversion price is required to be
made until cumulative adjustments otherwise required to be made amount to 1% or
more of the conversion price last adjusted. The Company may force conversion of
the Notes if, at any time prior to maturity, the closing bid price for the
Common Stock exceeds $6.00 per share for thirty (30) consecutive trading days
prior to the giving of notice of conversion. Fractional shares will not be
issued upon conversion, but cash adjustment will be paid in lieu thereof.
Interest will accrue on the Notes through the date of conversion. No payment or
adjustment will be made for dividends on securities issued upon conversion.
Restrictive Covenants. The Notes contain certain negative covenants
prohibiting, among other things, the negative pledge of the Company's assets not
otherwise encumbered by its senior lenders.
Events of Default. "Events of Default" under the Notes include failure to
pay principal when due or the failure to pay interest for a period of 10 days
after such payment becomes due, the failure to pay other indebtedness for
borrowed money in excess of $500,000 when due, or the acceleration of such
indebtedness, the failure to pay any judgment in excess of $500,000 when due or
stayed, and voluntary or involuntary bankruptcy of the Company. In the event
that the Company defaults in making any payment of principal required to be made
by the Notes, the Company shall pay interest on such defaulted amount at a rate
of 18%.
If an Event of Default occurs and is continuing, then and in every such
case the Trustee by notice in writing to the Company, or the holders of at least
25% in principal amount of the Notes then outstanding by notice in writing to
the Company and the Trustee, may declare the Notes then outstanding to be
immediately due and payable, whereupon the same will be immediately due and
payable. The holders of a majority in principal amount of the Notes then
outstanding by written notice to the Trustee may rescind an acceleration if all
existing Events of Default have been cured or waived except for nonpayment of
accelerated amounts. A payment default will
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result in the issuance to each Noteholder of a pro rata share of additional
warrants to purchase an aggregate of 2,000,000 shares of Common Stock and
until the Notes are fully repaid, the right of the Noteholders to elect a
majority of the Company's Board of Directors. In the event of a Chapter 11
or Chapter 7 bankruptcy case in which the Company is the debtor, the Notes
will bear interest from the date of commencement of the case at a default
rate per annum equal to the lesser of 18% or the highest such rate allowable
by law. The holders of at least a majority in principal amount of the Notes
then outstanding may waive an existing Event of Default and its consequences;
provided that it is not an Event of Default that is continuing or an Event
of Default in the payment of principal or interest on the Notes.
Remedies. The holders of a majority in principal amount of the Notes then
outstanding may direct the time, method and place of conducting any proceeding
for any remedy available to the Trustee under the Indenture. A Noteholder may
pursue a remedy with respect to the Indenture or the Notes only if (i) the
Noteholder gives to the Trustee notice of a continuing Event of Default, (ii)
the holders of at least 25% in principal amount of the Notes then outstanding
make a written request to the Trustee to pursue the remedy, (iii) such
Noteholder or Noteholders offer to the Trustee indemnity satisfactory to the
Trustee against any loss, liability or expense, (iv) the Trustee does not comply
with the request within 60 days after receipt of the request and the offer of
indemnity, and (v) during such 60-day period, the holders of a majority in
principal amount of the Notes then outstanding do not give the Trustee a
direction inconsistent with the request.
The Warrants
Each Warrant entitles the holder thereof to purchase specified numbers of
shares of Common Stock at an exercise price equal to $2.50 per share, subject to
adjustment. The Exercise Price and the number of shares of Common Stock
to be received upon exercise are subject to adjustment upon the occurrence of
any of the following events: (i) the recapitalization of the Company or
reclassification of the securities to be received upon conversion or any merger
or consolidation of the Company into or with a corporation or other business
entity, or the sale or transfer of all or substantially all of the Company's
assets or any successor corporation's assets to any other corporation or
business entity, (ii) the subdivision or combination of shares of Common Stock
to be received upon exercise, (iii) the payment of dividends or other
distributions in the form of the securities to be received upon exercise, and
(iv) the issuance of shares of Common Stock at less than the Exercise Price.
No adjustment of the Exercise Price is required to be made until cumulative
adjustments otherwise required to be made amount to 1% or more of the Exercise
Price last adjusted. Warrants will be exercisable, at any time and from time to
time, on or before 5:30 p.m., local time, on or before February 15, 2002 (the
"Expiration Date") by delivery of an Exercise Notice duly completed and
tendering of the aggregate Exercise Price. Each Warrant may be exercised in
whole or in part so long as any exercise in part would not involve the
issuance of fractional shares of Common Stock.
Discussion of the Notes and Warrants in this Prospectus is qualified
entirely by reference to the forms of the Note and Warrant filed by the Company
with the Commission.
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Common Stock
The Company is authorized to issue 25,000,000 shares of Common Stock, par
value $.10 per share. As of March 29, 1997, 9,069,437 shares of Common Stock
were outstanding.
Voting Rights. Holders of shares of Common Stock are entitled to one vote
for each share of Common Stock held. Under New York law, the affirmative vote of
the holders of a majority of the outstanding shares of Common Stock is required
to approve, among other matters, an amendment of the certificate of
incorporation if the rights or preferences of such holders would be subordinated
or otherwise adversely affected thereby.
Dividends. If all cumulative dividends shall have been paid as declared or
set apart for payment upon shares of Preferred Stock then outstanding, if any,
holders of shares of Common Stock are entitled to receive such dividends as may
be declared by the Company's Board of Directors out of funds legally available
for such purpose. The Credit Agreement prohibits the payment of cash dividends,
but permits stock splits and dividends payable solely in shares of any class of
its capital stock. See "Trading Information" below.
Liquidation Rights. Upon liquidation, dissolution or winding up of the
Company, the holders of the Common Stock are entitled to share ratably in all
assets available for distribution after payment in full of creditors and after
the preferential rights of holders of shares of Preferred Stock then
outstanding, if any, have been satisfied.
Other Provisions. The holders of Common Stock are not entitled to
preemptive or subscription rights. The affirmative vote of the holders of 80% of
all Common Stock of the Company shall be required for the adoption or
authorization of (i) a business combination (as defined in the Certificate of
Incorporation) with any other entity (as defined in the Certificate of
Incorporation) if, as of the record date for the determination of shareholders
entitled to notice thereof and to vote thereon, such other entity is the
beneficial owner, directly or indirectly, of more than 10% of the outstanding
shares of Common Stock, or (ii) a proposed dissolution of the Company or a
proposed amendment of the Certificate of Incorporation of the Company which
would either change the entitlement of the holders of shares of Common Stock of
the Corporation to vote in the election of directors or would authorize the
Company to issue either shares of capital stock (other than shares of its Common
Stock) or bonds, debentures or other obligations, which, if issued, would or
could be entitled to vote in the election of directors if, as of the record
date for the determination of shareholders entitled to notice of and to vote
on such proposed dissolution or such proposed amendment, any other entity
(as defined in the Certificate of Incorporation) is the beneficial owner,
directly or indirectly, of more than 10% of the outstanding shares of Common
Stock; provided that such 80% voting requirement shall not be applicable to
the adoption or authorization of a business combination if certain
circumstances, detailed in the Certificate of Incorporation, exist. This
provision may have the effect of discouraging attempts by a person or group
to take control of the Company. See "RISK FACTORS -- Anti-takeover
Restrictions."
All issued and outstanding shares of Common Stock are, and the Common Stock
reserved for issuance upon conversion of the Notes and exercise of the Warrants
will be, when issued, fully-paid and non-assessable.
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Preferred Stock
The Company is authorized to issue 2,000,000 shares of preferred stock, no
par value (the "Preferred Stock"), none of which are currently outstanding. The
Board of Directors of the Corporation is authorized to establish and designate
series of Preferred Stock and to fix from time to time before issuance the
number, designation, relative rights, preferences and limitations (including,
without limitation, participating, voting, optional or other special rights), of
the shares of any series of Preferred Stock. Except to the extent, if any, that
holders of issued and outstanding shares of preferred Stock are entitled to
vote, the entire voting power for the election of directors and for all other
purposes shall be vested exclusively in the holders of the Common Stock.
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Trading Information
The Common Stock trades on The Nasdaq Stock Market under the symbol NATL.
The table below sets forth for the periods indicated the high and low sale
prices for the Common Stock as adjusted for stock dividends and stock splits as
compiled from published sources.
Period High Low
------ ---- ---
1997
First Quarter 5 3/8 3 3/8
1996
First Quarter $ 3 $ 1 7/8
Second Quarter $ 3 7/8 $ 2
Third Quarter 4 3 1/8
Fourth Quarter 4 2 3/4
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
As of March 11, 1997, the approximate number of record holders of the
Common Stock as determined from the records of the transfer agent, American
Stock Transfer & Trust Company, was 650. Street names are included collectively
as a single holder of record. Management estimates that the Company has
approximately 2,000 additional shareholders holding stock in street names.
The Warrants trade on the Nasdaq Small Cap Market under the symbol NATLW.
As of May 18, 1997, there were approximately 33 record holders of Warrants
as determined from the records of the warrant agent, American Stock Transfer &
Trust Company.
The Notes are quoted on the Yellow Sheets of the National Quotations
Bureau under the symbol NAI TECH INC 12-2001. As of May 18, 1997 there were
approximately 40 record holders of Notes as determined from the records
of the trustee, First Trust National Association.
There have been no cash dividends declared or paid on the Common Stock
during the past five years. The Credit Agreement prohibits the payment of cash
dividends. A 4% stock dividend on the Common Stock was paid to shareholders of
record on February 25, 1994.
Transfer Agent
The Transfer Agent and Registrar for the Common Stock is American Stock
Transfer & Trust Company, 40 Wall Street, New York, New York. The Company acts
as its own transfer agent with respect to the Notes and Warrants.
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CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following summary describes the material United States federal income
tax considerations applicable to the purchase, ownership and disposition of the
Notes and the Warrants, and of the Common Stock received upon conversion of the
Notes or exercise of the Warrants. This summary is limited solely to investors
who acquire securities pursuant to this Prospectus and who own the Notes and the
Warrants, and any Common Stock received on conversion of the Notes or exercise
of the Warrants, as capital assets within the meaning of Section 1221 of the
Internal Revenue Code of 1986, as amended (the "Code"). This summary is based
upon the provisions of the Code and the regulations, administrative rulings and
judicial decisions now in effect, all of which are subject to change (possibly
with retroactive effect) or different interpretations. There can be no assurance
that the Internal Revenue Service (the "Service") will take a similar view as to
any of the tax consequences described below. No ruling has been or will be
requested from the Service on any tax matters relating to the purchase or the
ownership or disposition of the Securities.
This summary does not purport to deal with all aspects of United States
federal income taxation that may be relevant to a particular holder or to
certain types of holders subject to special treatment under the federal income
tax laws (for example, S corporations, banks, dealers in securities, life
insurance companies, tax exempt organizations and foreign taxpayers) or to
investors who acquired their interest in the securities covered by this
Prospectus pursuant to the exercise of employee stock options or otherwise as
compensation. In addition, the following summary does not consider the potential
effect of any applicable foreign, state, local or other tax laws, or estate or
gift tax considerations. This discussion is not intended as tax advice to the
purchasers of the Securities.
The Service announced in 1994 that it is studying the federal income tax
treatment of debt instruments which can be repaid in stock of an issuer and
that, in appropriate circumstances, such debt instruments may be recharacterized
as equity for federal income tax purposes. The Company believes that the Notes
should be characterized as debt for federal income tax purposes, and the
following discussion assumes such treatment. However, because the Company can
require conversion of the Notes in certain circumstances, there can be no
assurance that the Service will not challenge this position.
Investors are advised to consult their own tax advisors with respect to the
consequences to them of the purchase, ownership and disposition of the
securities offered hereby.
Allocation of Issue Price of Units Among the Notes and the Warrants; Initial
Adjusted Basis
As stated above, the Notes and the Warrants were issued together as
"investment units" in the Private Placement. Under applicable Treasury
Regulations, the original issue price for such an investment unit must be
allocated between the Notes and the Warrants based upon their relative fair
market values. Thus, the original issue price of each Note is equal the issue
price of an overall Unit less the amount allocable to the Warrant.
The Company has allocated $875 of the issue price of each Unit to each
$1,000 principal amount of the Notes and $125 of such amount to each Warrant to
purchase 250 shares of Common Stock (at $.50 each). The Company's allocation
reflects its judgment as to the relative fair market values of those instruments
at the time of issuance, but is not binding on the Service.
-46-
<PAGE>
<PAGE>
The Company's allocation of the issue price of the Units is binding on
holders of the instruments, unless a holder discloses the use of a different
allocation on its federal income tax return for the year that includes the
acquisition date of the Note and/or Warrant. Holders considering the use of an
issue price allocation different from that used by the Company should consult
their tax advisors as to the consequences thereof.
Each Note is legended to indicate the issue date of such Note and the
portion of the issue price of the Unit which, in the Company's opinion, is
properly allocable to the Note.
An investor who acquires a Note or a Warrant from a Selling Securityholder
will receive an initial tax basis in such security equal to his cost therefor.
Taxation of Interest
Each holder of a Note will be required to report, as ordinary income,
stated interest on the Note in accordance with such holder's tax accounting
method. For example, accrual method holders will report the interest on the
Notes as it accrues, and cash method holders will report such interest when it
is received or unconditionally made available for receipt.
Original Issue Discount on the Notes
For federal income tax purposes, when a debt instrument is issued at a
discount, the amount of such discount ("original issue discount" or "OID") is
treated as interest income, and the holder of such instrument must include such
OID in his income for the period during which the OID accrues even though no
cash attributable to such OID income will be received until maturity, redemption
or other disposition of the debt instrument.
The amount of OID, if any, on a debt instrument is the difference between
its "issue price" and its "stated redemption price at maturity" (subject,
generally, to a statutory de minimis exception). The portion of any such OID
that is to be accrued (and included in income) with respect to a debt instrument
with a maturity of more than one year generally will be determined for each
accrual period during the term of such debt instrument under the constant yield
method, applied by multiplying the adjusted issue price of the debt instrument
at the beginning of the accrual period by its yield to maturity, and subtracting
from that product the amount of any interest payments made during that accrual
period that are based on a single fixed rate and are payable unconditionally in
cash or in property (other than debt instruments of the issuer) at intervals of
one year or less during the entire term of the debt instrument ("Qualified
Stated Interest"). The resulting amount is allocated ratably to each day in the
accrual period, and the amount includible in a holder's income (whether on the
cash or accrual method of accounting) with respect to the debt instrument is the
sum of the resulting daily portions of OID for each day of the taxable year on
which the holder held the debt instrument.
The adjusted issue price of a debt instrument at the beginning of any
accrual period is equal to its original issue price increased by all previously
accrued OID and reduced by the amount of all previous payments made on such debt
instrument other than payments of Qualified Stated Interest. Generally, the tax
basis of a debt instrument in the hands of the holder will be increased and
decreased, respectively, by the same amounts.
Because of the required allocation of a portion of the issue price for the
Units to the Warrants (see discussion above), the stated redemption price at
maturity for the Notes exceeded their issue price
-47-
<PAGE>
<PAGE>
(after giving effect to such allocation). Accordingly, the Notes were issued
with OID equal to this excess. The Company believes the amount of OID per each
$1,000 principal amount of the Notes is $125.
A purchaser of Notes from a Selling Securityholder will generally be
required to include in his gross income in advance of the receipt of cash
representing that income the sum of the daily portions of OID on his Notes for
each day during each taxable year or portion thereof on which he holds such
Notes in the same manner as the Selling Securityholder. (These amounts are in
addition to the actual interest payments on the Notes.) An investor that
acquires Notes from a Selling Securityholder for an amount that exceeds their
adjusted issue price at the time of such acquisition will, however, be
considered to have purchased such Notes at an acquisition premium. The amount of
OID which any such investor is required to include in income with respect to
such Notes for any taxable year will be reduced by the portion of such
acquisition premium properly allocable to such year.
The Company will furnish annually to record holders of the Notes and to the
Service information with respect to the OID, if any, accruing during the
calendar year (as well as interest paid during that year). Because this
information will be based upon the adjusted issue price of the Notes, investors
who purchase the Notes from the Selling Securityholders for an amount in excess
of the adjusted issue price at the time of such acquisition will be required to
determine for themselves (based upon the rules described above) the amount of
OID, if any, they are required to report. Moreover, as stated above, the Service
may not agree with the original issue price allocated by the Company to the
Notes.
On December 16, 1994 the Service issued proposed regulations governing the
inclusion in income of OID for certain contingent payment debt instruments,
which regulations were adopted in final form on June 11, 1996 (the "Contingent
Payment Regulations"). The Contingent Payment Regulations are effective only for
debt instruments issued on or after August 31, 1996, and accordingly do not
apply to the Notes. The Service could, however, assert that the inclusion of a
default rate of interest applicable upon the occurrence of a bankruptcy of the
Company, and the right of the Company to prepay the Notes prior to their
scheduled maturity, give rise to contingent payments within the meaning of the
Contingent Payment Regulations. If the Service were successful in such an
assertion, the resulting OID analysis could differ from that set forth herein.
Market Discount
The income which an investor who acquires a Note from a Selling
Securityholder must recognize may also be affected by the market discount
provisions of the Code. Debt instruments such as the Notes which bear OID are
considered to have been purchased at a market discount if, subsequent to their
original issuance, they are purchased at a price below their adjusted issue
price.
Under the market discount rules, if such an investor purchases a Note at a
market discount in excess of a statutorily-defined de minimis amount and
thereafter recognizes gain upon a disposition or retirement of the Note, then
the lesser of the gain so recognized or the portion of the market discount that
accrued while the Note was held by such investor generally will be treated as
ordinary income at the time of the disposition. Moreover, any such market
discount on a Note may be taxable to such an investor at the time of certain
otherwise non-taxable transactions (e.g., gifts). In addition, a holder of a
market discount Note may be required to defer a portion of any interest expense
that otherwise may be deductible on any indebtedness incurred or maintained to
purchase or carry such Note until the holder disposes of the Note in a taxable
transaction.
-48-
<PAGE>
<PAGE>
Neither the rule treating accrued market discount as ordinary income on
disposition nor the rule deferring interest deductions applies if the holder of
the market-discount Note elects to include the accrued market discount in
income currently. This election to include market discount in income currently,
once made, applies to all market discount obligations acquired during or after
the first taxable year to which the election applies and may not be revoked
without the consent of the Service.
Conversion of Notes into Common Stock
In general, no gain or loss will be recognized for federal income tax
purposes upon a conversion of the Notes into shares of Common Stock. However,
cash paid in lieu of a fractional share of Common Stock will result in taxable
gain (or loss), which will be capital gain (or loss), to the extent that the
amount of such cash exceeds (or is exceeded by) the portion of the adjusted
basis of the Note allocable to such fractional share. The adjusted basis of
shares of Common Stock received on conversion will equal the adjusted basis of
the Note converted, reduced by the portion of adjusted basis allocated to any
fractional share of Common Stock exchanged for cash. The holding period of an
investor in the Common Stock received on conversion will include the period
during which the converted Notes were held.
Exercise of Warrants
No gain or loss will be recognized upon the exercise of a Warrant (except
to the extent, if any, of cash received in lieu of fractional shares). The
holder's tax basis in the Common Stock acquired on such exercise will be the sum
of his tax basis in the Warrants exercised and the cash paid upon exercise. The
holding period for the Common Stock acquired on such exercise will begin on the
date of exercise of the Warrant and will not include the period during which the
Warrant was held.
Upon expiration of an unexercised Warrant, a holder will generally
recognize a loss equal to such holder's adjusted tax basis in the Warrant. If
the Common Stock issuable upon exercise of the Warrant would have been a capital
asset of the holder if acquired by the holder, such loss will be a capital loss.
Adjustment of Conversion Price
The conversion ratio of the Notes and the Warrants is subject to adjustment
under certain circumstances. Section 305 of the Code and the Treasury
Regulations issued thereunder may treat the holders of the Notes and of the
Warrants as having received a constructive distribution, resulting in ordinary
income (subject to a possible dividend-received deduction in the case of
corporate holders) to the extent of the Company's current and/or accumulated
earnings and profits, if, and to the extent that, certain adjustments in the
conversion ratio increase the proportionate interest of a holder of Notes
or Warrants in the fully diluted Common Stock, whether or not such holder
ever exercises its conversion privilege. In addition, if there is not a
full adjustment to the conversion ratio of the Notes or the Warrants to
reflect a stock dividend or other event increasing the proportionate interest
of the holders of outstanding Common Stock in the assets or earnings and
profits of the Company, then such increase in the proportionate interest of
the holders of the Common Stock could be treated as a distribution to such
holders of Common Stock, taxable as ordinary income (subject to a possible
dividends-received deduction in the case of corporate holders) to the extent of
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<PAGE>
<PAGE>
the Company's current and/or accumulated earnings and profits. The Company
intends that all adjustments to the conversion ratio of the Notes and
the Warrants will be designed to protect the Warrant and Noteholders against
a dilution of their proportionate interest in the assets or earnings and profits
of the Company. Accordingly, it is not anticipated that either the holders of
the Notes or the Warrants or the holders of Common Stock would be deemed to
receive any such taxable dividend distribution under Section 305 of the Code.
Dividends on Common Stock
Distributions on the shares of Common Stock into which Notes have been
converted or which were received on the exercise of the Warrants will be taxable
as dividends (i.e., as ordinary income) to the extent of the Company's current
and/or accumulated earnings and profits. To the extent that the amount of any
such distribution exceeds the Company's current and accumulated earnings and
profits for a taxable year, the distribution will first be treated as a tax-free
return of capital, causing a reduction in the adjusted basis of the Common Stock
(thereby increasing the amount of gain, or decreasing the amount of loss, to be
recognized by the investor on a subsequent disposition of the Common Stock), and
the balance in excess of adjusted basis will be taxed as if it were capital gain
recognized on a sale or exchange of such stock.
Subject to certain holding period and taxable income requirements imposed
by the Code, a distribution to a corporate shareholder that is treated as a
dividend may qualify for the 70% (or, in certain cases, 80%) dividends-received
deduction available under the Code. However, to the extent that the corporate
shareholder incurs indebtedness that is directly attributable to an investment
in the stock on which the dividend is paid, all or a portion of the
dividends-received deduction may be disallowed. In addition, dividend income
that is not subject to the regular federal income tax as a consequence of the
dividends-received deduction may be subject to the federal alternative minimum
tax. Finally, the tax basis of stock held by a corporate shareholder may be
reduced (but not below zero) by the non-taxed portion of any "extraordinary
dividend" (as defined in Section 1059 of the Code) that is received with respect
to such stock. To the extent a corporate holder's tax basis would have been
reduced below zero but for the foregoing limitation, such holder must increase
the amount of gain recognized on the ultimate sale or exchange of such stock for
the taxable year in which such sale or exchange occurs.
Disposition of Notes and Common Stock
Subject to the discussion above under "Conversion of Notes into Common
Stock," each holder of Notes generally will recognize gain or loss upon the
sale, exchange, redemption, retirement or other disposition of the Notes
measured by the difference (if any) between (i) the amount of cash and the fair
market value of any property received (except to the extent that such cash or
other property is attributable to the payment of accrued interest not previously
included in income, which amount will be taxable as ordinary income) and (ii)
the holder's adjusted tax basis in the Notes. Subject to certain special rules
under Section 302 of the Code in the case of redemptions (whereunder the total
proceeds received by a seller of Common Stock may be treated as a dividend) and
to the discussion of Section 1059 of the Code under "Dividends on Common Stock,"
above, in cases of significant "extraordinary dividends," each holder of Common
Stock received upon a conversion of the Notes or an exercise of the Warrants, in
general, will recognize gain or loss upon the sale, exchange, redemption or
other disposition of the Common Stock in an amount determined similarly to the
calculation described in the preceding sentence for the Notes. Any gain or loss
recognized on the sale, exchange, redemption, retirement or other disposition of
a Note or Common Stock held as a capital asset will be capital gain or loss
(except as discussed under "Market Discount" above). Such capital gain or loss
will be long-
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<PAGE>
term capital gain or loss if the Note or the Common Stock has been held for more
than one year at the time of the sale or exchange, and otherwise will be a
short-term capital gain or loss.
Effect on Holders of Sale of Warrants
The sale of a Warrant other than to the Company will result in the
recognition of capital gain or loss to the holder if the Warrant is held as a
capital asset and the Common Stock issuable upon exercise would have been a
capital asset if acquired. The gain or loss will be measured by the difference
between the amount realized and the holder's basis in the Warrant, and will be
long-term or short-term capital gain or loss depending on whether the Warrant
has been held for more than one year. If the Warrants are sold to the Company,
the Service may contend that the repurchase of Warrants by the Company is a
relinquishment of the holder's contractual rights and not a sale or exchange of
property. If the Service were to prevail on this argument, gain or loss on the
repurchase of Warrants would be ordinary income or loss even if the Warrants
were held as capital assets.
Back-Up Withholding
A holder of Common Stock or Notes may be subject to "back-up withholding"
at a rate of 31% with respect to certain "reportable payments," which generally
include interest and dividend payments. These back-up withholding rules apply if
such holder, among other things, (i) fails to furnish a social security number
or other taxpayer identification number ("TIN") certified under penalties of
perjury within a reasonable time after the request therefor, (ii) furnishes an
incorrect TIN, (iii) fails to report properly interest or dividends, or (iv)
under certain circumstances, fails to provide a certified statement, signed
under penalties of perjury, that the TIN furnished is the correct number and
that such holder is not subject to back-up withholding. Any amount withheld from
a payment to an investor under the back-up withholding rules is creditable
against such investor's federal income tax liability, provided the required
information is furnished to the Service. Back-up withholding will not apply,
however, with respect to payments made to certain holders of Common Stock and
Notes, including corporations, tax-exempt organizations and certain foreign
persons, provided their exemption from back-up withholding is properly
established.
The Company will report to the holders of Common Stock and Notes and to the
Service the amount of any "reportable payments" for each calendar year and the
amount of tax withheld, if any, with respect to payments on such securities.
Consequences to the Company
The Company is generally required to deduct the OID, if any, on the Notes
as it is included in income by the holder, except that the deductions taken by
the Company will be determined without regard to any reduction in the amount of
OID included in the income of any investor who acquires Notes at an acquisition
premium (discussed above). The Company should not recognize income if it redeems
or acquires the Notes from holders for a price equal to the principal amount of
the Notes less unamortized OID or upon conversion of the Notes. If the Company
acquires, or is considered to have acquired, Notes for a lesser price, the
Company may be required to recognize income or may be entitled to elect to
postpone recognizing such income by reducing its tax basis in other assets.
Alternatively, if the Company acquires the Notes for a greater price, the
Company may be entitled to a deduction equal to such excess.
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<PAGE>
The Company should not recognize any gain or loss on the conversion by
Charles S. Holmes of his Notes as described above under "Certain Relationships
and Related Transactions" or on the issuance by the Company of the Additional
Warrants in connection with such conversion.
Section 382
As of December 31, 1996, the Company had net operating losses ("NOLs")
available for carryforward for federal income tax purposes equal to
approximately $10 million.
Under Section 382 of the Code, a corporation's ability to utilize NOLs (as
well as certain unrealized "built-in losses") to offset its income following an
"ownership change" (as described below) is generally limited on an annual basis
to an amount of income equal to the product of the fair market value of such
corporation's outstanding stock immediately before the ownership change and the
"long-term tax-exempt rate."
An ownership change occurs under Section 382 if the percentage of stock of
the loss corporation owned actually or constructively by one or more 5-percent
shareholders increases by more than 50 percentage points relative to the lowest
percentage of stock of the loss corporation owned by those 5-percent
shareholders at any time during a statutory "testing period" (generally the
three-year period ending on the testing date). A "5-percent shareholder" is one
who owns at least 5 percent of the stock of the loss corporation (not including
certain nonvoting, nonparticipating preferred stock), and all stock owned by
shareholders who are not 5-percent shareholders (hereinafter referred to as
public shareholders) is generally treated as being owned by one 5-percent
shareholder. In addition, under Section 382 and the regulations promulgated
thereunder, public shareholders of a loss corporation may be segregated into two
or more separate groups, each of which is treated as a separate 5-percent
shareholder. Public shareholders who receive stock from a loss corporation as a
result of certain types of transactions will be segregated and treated
separately from the public shareholders who owned stock of the loss corporation
prior to the transaction.
Certain provisions under the Treasury Regulations treat options to acquire
stock of a loss corporation such as the Company as currently exercised for
purposes of determining whether an ownership change subject to Section 382 has
occurred. Among other requirements, such provisions require generally that a
principal purpose of the issuance, transfer or structuring of the option is to
avoid or ameliorate the impact of an ownership change of the loss corporation.
The Company believes that such principal purpose does not exist, and therefor it
would not appear that the issuance of the Notes and the Warrants would result in
a deemed exercise of all related conversion and purchase rights under these
provisions. It is not possible to predict with accuracy the timing and potential
effect under Section 382 of any future actual exercise of conversion rights
under the Notes or purchase rights under the Warrants. It is possible that the
actual exercise of such rights could result in an ownership change under Section
382. If such an ownership change were to result, the Company's prospective
ability to utilize its NOLs would be limited as described above.
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<PAGE>
Pending Legislation
On April 16, 1997, President Clinton released a set of legislative
proposals as a part of his plan to balance the federal budget. These proposals
include, among other things, proposals to (i) modify certain of the
extraordinary dividend rules of Section 1059 of the Code, (ii) deny a deduction
for interest and OID for certain long-term debt as well as for certain debt
which is mandatorily convertible into the issuer's stock or is so convertible
at the issuer's option, (iii) defer the deduction for OID on convertible debt
until actual payment (which would exclude conversion) of the debt, and (iv)
reduce the 70-percent dividends-received deduction to 50 percent. The Company
cannot predict with any degree of certainty which, if any, of the president's
proposals will ultimately become law or, if enacted into law, what the effective
dates of such provisions would be. Investors should consider the potential
effect of the President's proposals in making their investment decision.
THE FOREGOING SUMMARY IS NOT INTENDED AS TAX ADVICE TO THE PURCHASERS OF
THE SECURITIES. EACH PURCHASER IS URGED TO CONSULT WITH SUCH PURCHASER'S OWN TAX
ADVISOR WITH RESPECT TO THE TAX CONSEQUENCES OF THE INVESTMENT IN THE SECURITIES
TO SUCH PURCHASER'S OWN PARTICULAR TAX SITUATION, INCLUDING THE APPLICATION AND
EFFECT OF STATE AND LOCAL INCOME AND OTHER TAX LAWS.
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<PAGE>
SELLING SECURITYHOLDERS
All of the Securities being offered hereby are being offered on behalf of
the Selling Securityholders.
The Noteholders and the Warrantholders acquired the Notes and the Warrants
in conjunction with the Private Placement which was consummated on February 15,
1996, February 23, 1996 and February 29, 1996. The lead investor in the Private
Placement, Charles S. Holmes, serves as a director of the Company. See
"MANAGEMENT -- Directors and Executive Officers of the Company," "SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT" and "CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS." Commonwealth Associates served as the
Company's Placement Agent in connection with the private placement and received
its Warrants as partial compensation for such service.
The Bank Lenders acquired the shares of Common Stock owned by them on or
about April 12, 1996 pursuant to the Credit Agreement. The Bank Lenders
currently serve as the Company's primary bank lenders pursuant to the Credit
Agreement.
Active Investors acquired 363,636 shares of Common Stock on November 3,
1994 pursuant to the Stock Purchase Agreement. C. Shelton James, a director of
the Company, is the President and a director of Active Investors. Active
Investors and certain affiliated limited partnerships currently own shares of
Common Stock of the Company as well as Notes and Warrants. See "MANAGEMENT
- --Directors and Executive Officers of the Company," "SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT" and "CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS."
Mr. Holmes acquired the Holmes Shares upon conversion of the Notes of the
Company in the aggregate unpaid principal amount of $2,000,000 held by him into
1,000,000 shares of Common Stock of the Company. See "MANAGEMENT -- Directors
and Executive Officers of the Company," "SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT" and "CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS."
Except as otherwise noted, the Selling Securityholders have advised the
Company that they do not own any shares of Common Stock in addition to the
Shares.
The Selling Securityholders have indicated that they intend to sell all of
the Securities set forth opposite their names below. The number of Securities
which may actually be sold by the Selling Securityholders will be determined
from time to time by such Selling Securityholders and will depend on a number of
factors including the price of the Securities from time to time. The table below
sets forth information as of August 13, 1996 concerning the beneficial ownership
of the Securities by the Selling Securityholders. All information as to the
beneficial ownership has been furnished to the Company by the Selling
Securityholders.
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<PAGE>
<TABLE>
<CAPTION>
Name Amount of Warrants Shares Presently Percent of
and Address Notes Presently Owned Owned Class
- ----------- ----- --------------- ----- -----
<S> <C> <C> <C> <C>
Active Investors II, Ltd. $1,000,000 250,000 363,636 11.3
4000 Hollywood Boulevard
Suite 610 North
Miami, FL 33021
The Bank of New York 125,000 1.27
One Wall Street
New York, NY 10286
Chemical Bank 125,000 1.27
7600 Jericho Turnpike
Woodbury, New York 11797
Christopher P. Baker $ 50,000 0.28
4 Rollins Place
Boston, MA 02114
Hans C. Bodmer $ 55,000 18,750 0.51
Muehlestrasse 15
8803 Rueschlikon
Switzerland
Churchill Associates L.P. $ 125,000 31,250 1.02
by Churchill International, Inc.
G.P.
by James Pinto, President
1149 Windsong Trail
Richardson, TX 75081
William Forman $ 200,000 50,000 1.63
70 Timber Ridge Drive
Holbrook, NY 11741
Arthur Freilich $ 100,000 24,000 0.81
11 Radnor Road
Plainview, NY 11803
Sydney J. Goldstein $ 57,000 14,250 0.47
IRA Account
P.O. Box 24181
2741 Kersdale Road
Cleveland, OH 44124
</TABLE>
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<PAGE>
<PAGE>
<TABLE>
<CAPTION>
Name Amount of Warrants Shares Presently Percent of
and Address Notes Presently Owned Owned Class
- ----------- ----- --------------- ----- -----
<S> <C> <C> <C>
The Hart Family Trust $ 30,000 12,500 0.30
Andrew B. Hart and
Loni A. Hart, Trustees
12570 Skyline Blvd.
Oakland, CA 94619
Charles S. Holmes 1,700,000 1,000,000 25.07
117 Whites Lane
Southampton, NY 11968
Michael T. Jackson Trust $ 200,000 50,000 1.63
Michael T. Jackson, Trustee
71 Bellevue Avenue
Belvedere, CA 94920
MK'S OMO Contracting Inc. $ 25,000 6,250 0.21
Employees' Profit Sharing Trust
Sanford Kirschenbaum, Trustee
P.O. Box 847
East Brunswick, NJ 08816
Timothy Moran $ 25,000 0.27
33 Woodland Drive
Bayport, NY 11705
Orbis Pension Trustees Ltd. $1,000,000 250,000 7.64
David J. Lewis,
Investment Manager
1 Connaught Place
London W2 2DY
England
Claudia C. Rouhana $ 25,000 0.14
5 Prospect Lane
Sands Point, NY 11050
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Name Amount of Warrants Shares Presently Percent of
and Address Notes Presently Owned Owned Class
- ----------- ----- --------------- ----- -----
<S> <C> <C> <C>
William J. Rouhana, Jr. $ 25,000 0.14
5 Prospect Lane
Sands Point, NY 11050
S & A Enterprises, Inc. $ 55,000 13,750 0.45
Profit Sharing Fund
Sydney J. Goldstein, Trustee
P.O. Box 24181
2741 Kersdale Road
Cleveland, OH 44124
Leonard M. Schiller $ 25,000 5,500 0.20
1110 N. Lake Shore Drive
Apt. 9S
Chicago, IL 60611
Philip J. Schiller $ 25,000 8,500 0.23
1419 Waverly Road
Highland Park, IL 60035
William R. Schoen $ 25,000 6,250 0.21
5 Kenilworth Court
Novato, CA 94945
SJG Management, Inc. $ 100,000 25,000
Profit Sharing Fund
Sydney J. Goldstein, Trustee
P.O. Box 24181
2741 Kersdale Road
Cleveland, OH 44124
S.J. Warner Charitable $ 100,000 25,000 0.82
Remainder Unitrust
Stephen J. Warner, Trustee
1617 N. Flagler Dr.
Apt. 4A
West Palm Beach, FL 33407
Tel Com Partners L.P. $ 100,000 25,000 0.82
by James Pinto, G.P.
10369 Blue Arrow Ct.
Columbia, MD 21044-4123
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Name Amount of Warrants Shares Presently Percent of
and Address Notes Presently Owned Owned Class
- ----------- ----- --------------- ----- -----
<S> <C> <C> <C>
Winfield Capital Corp. $ 400,000 100,000 3.2
c/o Paul A. Perlin, CEO
237 Mamaroneck Avenue
White Plains, NY 10605
Michael S. Falk, IRA $ 25,000 6,250 0.21
One Beekman Place, Apt. 15A
New York, NY 10022
Robert O'Sullivan $ 8,000 8,850 0.19
215 East 95th Street, Apt. 33B
New York, NY 10128
E&M RP Trust $ 400,000 100,000 3.2
Edward H. Shea, Jr., Trustee
655 Brea Canyon Road
Walnut, CA 91789
Tahoe Partnership I $ 100,000 25,000 0.82
Peter O. Shea, Managing Partner
655 Brea Canyon Road
Walnut, CA 91789
Siam Partners II $ 100,000 25,000 0.82
Edmund H. Shea, Jr.,
Managing Partner
655 Brea Canyon Road
Walnut, CA 91789
Gerald B. Cramer $ 600,000 150,000 4.73
1330 Journeys End Road
Croton-on-Hudson, NY 10520
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Name Amount of Warrants Shares Presently Percent of
and Address Notes Presently Owned Owned Class
- ----------- ----- --------------- ----- -----
<S> <C> <C> <C>
Paul D. Goldenheim $ 10,000 2,500 0.08
4 Bald Hill Place
Wilton, CT 06897
David Morley $ 13,500 1,667 0.09
2 Longbeach
Corey Groville, Jersey
Channel Islands
Edward J. Rosenthal ISERP $ 100,000 25,000 0.82
707 Westchester Avenue
White Plains, NY 10604
Cameron Capital Ltd. $ 50,000 0.54
10 Cavendish Road
Hamilton HM 19
Bermuda
Keith Rosenbloom $ 15,000 76,350 0.92
Commonwealth Associates
733 Third Avenue
New York, NY 10017
Jo-Bar Enterprises, LLC $ 40,000 25,000 0.49
By Joel A. Stone, Managing
Member
8700 Bryn Mawr, 9th Floor
Chicago, IL 60062
Kent A. Rodriguez $ 25,000 6,250 0.21
7020 Lanham Lane
Edina, MN 55439
</TABLE>
-59-
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
Name Amount of Warrants Shares Presently Percent of
and Address Notes Presently Owned Owned Class
- ----------- ----- --------------- ----- -----
<S> <C> <C> <C>
Benjamin Rosenbloom $ 50,000 12,500 0.42
44 Coconut Road
Palm Beach Towers,
Apt. A321
Palm Beach, FL 33480
Commonwealth Associates 218,870 2.4
733 Third Avenue
New York, NY 10017
Ed Downe 50,000 0.54
c/o Commonwealth Associates
733 Third Avenue
New York, NY 10017
James Pinto 200,000 2.16
1149 Windsong Trail
Richardson, TX 75081
Michael S. Falk 190,000 2.05
c/o Commonwealth Associates
733 Third Avenue
New York, NY 10017
Beth Lipman 5,000 .06
c/o Commonwealth Associates
733 Third Avenue
New York, NY 10017
</TABLE>
-60-
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
Name Amount of Warrants Shares Presently Percent of
and Address Notes Presently Owned Owned Class
- ----------- ----- --------------- ----- -----
<S> <C> <C> <C>
Paul Sterios 8,000 0.09
c/o Commonwealth Associates
733 Third Avenue
New York, NY 10017
James L. Lynch 20,000 0.22
c/o Commonwealth Associates
733 Third Avenue
New York, NY 10017
</TABLE>
-61-
<PAGE>
<PAGE>
PLAN OF DISTRIBUTION
The Securities are being sold by the Selling Securityholders for their own
account; the Company will not receive any proceeds from the sales of the
Securities by the Selling Securityholders. The Selling Securityholders are not
restricted as to the price or prices at which they may sell the Securities. The
proceeds to the Selling Securityholders from the sale of the Securities will be
the purchase price of such Securities sold less the agents' or brokers'
discounts or commissions and other expenses of issuance and distribution not
borne by the Company. Further, the Selling Securityholders are not restricted as
to the number of Securities which may be sold at any one time.
The Selling Securityholders, or their pledgees, donees, transferees or
other successors, may sell the Securities in any of three ways: (i) through
broker-dealers; (ii) through agents or (iii) directly to one or more purchasers.
The distribution of the Securities may be effected from time to time in one or
more transactions (which may involve crosses or block transactions) (A) in the
over-the-counter market, (B) in transactions otherwise than in the
over-the-counter market or (C) through the writing of options on the Securities
(whether such options are listed on an options exchange or otherwise). Any of
such transactions may be effected at market prices prevailing at the time of
sale, at prices related to such prevailing market prices, at negotiated prices
or at fixed prices. The Selling Securityholders may effect such transactions by
selling Securities to or through broker-dealers, and such broker-dealers may
receive compensation in the form of discounts, concessions or commissions from
the Selling Securityholders and/or commissions from purchasers of Securities for
whom they may act as agent (which discounts, concessions or commissions as to a
particular broker-dealer might be in excess of those customary in the types of
transactions involved). There is no plan to offer such Securities through
underwriters or any existing arrangement between the Selling Securityholders and
any broker or dealer.
In connection with any sales, the Selling Securityholders and any
broker-dealer participating in such sales may be deemed to be underwriters
within the meaning of the Securities Act of 1933, as amended (the "Securities
Act"). Any commissions paid or any discounts or concessions allowed to any such
broker-dealers, and, if any such broker-dealers purchase shares as principal,
any profits received on the resale of such shares, may be deemed to be
underwriting discounts and commissions under the Securities Act. The Selling
Securityholders may indemnify any broker-dealer that participates in
transactions involving the sale of the Securities against certain liabilities,
including liabilities arising under the Securities Act.
The Selling Securityholders must comply with the requirements of the
Securities Act and the Exchange Act and the rules and regulations thereunder in
offers and sales of their Securities. In particular, the Selling Securityholders
may not: (i) pay commissions or finder's fees to anyone other than normal
brokers' commissions paid to their brokers who execute orders for sales; (ii)
bid for or purchase for their own account or the account of any affiliate or
induce others to bid for or purchase any of the Company's shares, including the
Securities, until the Securities have been sold; or (iii) make any bids for or
purchases of such shares, directly or indirectly, for the purpose of stabilizing
the price of the Common Stock. Additionally, the Selling Securityholders,
including brokers through whom their sales are made as well as dealers who
purchase the Securities being offered hereby for resale, must comply with the
Prospectus delivery requirements of the Securities Act during the term of this
offering.
-62-
<PAGE>
<PAGE>
LEGAL MATTERS
The legality of the Securities offered hereby will be passed upon for the
Company by Whitman Breed Abbott & Morgan, New York, New York.
EXPERTS
The consolidated financial statements and schedule of NAI Technologies,
Inc. and subsidiaries as of December 31, 1996 and 1995 and for each of the years
in the three year period ended December 31, 1996 have been included herein and
in the Registration Statement in reliance on the report of KPMG Peat Marwick
LLP, independent certified public accountants, appearing elsewhere herein upon
the authority of such firm as experts on accounting and auditing.
-63-
<PAGE>
<PAGE>
INDEX TO FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
Page
----
Independent Auditors' Report 65
Consolidated Balance Sheets at December 31, 1996 and 1995 66
Consolidated Statements of Operations - Years ended 67
December 31, 1996, 1995 and 1994
Consolidated Statements of Shareholders' Equity - 68
Years ended December 31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows - Years ended 69
December 31, 1996, 1995 and 1994
Notes to Consolidated Financial Statements 70
Consolidated Balance Sheets at
March 29, 1997 (unaudited) Consolidated and December 31, 1996 91
Consolidated Statements of Operations - (unaudited)
Three months ended March 29, 1997 and 92
March 30, 1996 Consolidated
Consolidated Statements of Cash Flows - (unaudited)
Three months ended March 29, 1997 and 93
March 30, 1996 Consolidated
Other Financial Information 94
Independent Auditors' Report 95
Consolidated Financial Statement Schedules:
II - Valuation and Qualifying Accounts 96
-64-
<PAGE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
and Stockholders
NAI Technologies, Inc.
We have audited the accompanying consolidated balance sheets of NAI
Technologies, Inc. and subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of operations, shareholders' equity, and cash
flows for each of the years in the three-year period ended December 31, 1996.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of NAI Technologies,
Inc. and subsidiaries as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1996, in conformity with generally accepted accounting
principles.
KPMG PEAT MARWICK LLP
Boulder, Colorado
February 7, 1997
-65-
<PAGE>
<PAGE>
NAI TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
(in thousands, except share amounts) 1996 1995
- ----------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 2,727 $ 2,605
Accounts receivable, net 12,693 13,735
Inventories, net 10,270 11,995
Deferred tax asset 173 384
Other current assets 597 813
- ----------------------------------------------------------------------------------
Total current assets 26,460 29,532
- ----------------------------------------------------------------------------------
Property, plant and equipment, net 3,523 5,351
Excess of cost over fair value of net assets acquired, net 9,707 10,339
Notes receivable -- 1,190
Other assets 1,681 1,600
- ----------------------------------------------------------------------------------
Total assets $ 41,371 $ 48,012
- ----------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 6,907 $ 9,797
Current installments of long-term debt 158 2,177
Accrued payroll and commissions 680 768
Other accrued expenses 3,894 6,376
Income taxes payable 580 370
- ----------------------------------------------------------------------------------
Total current liabilities 12,219 19,488
- ----------------------------------------------------------------------------------
Long-term debt 12,224 15,573
Other accrued expenses 912 2,481
Deferred income taxes 36 384
- ----------------------------------------------------------------------------------
Total liabilities 25,391 37,926
- ----------------------------------------------------------------------------------
Commitments and contingent liabilities
- ----------------------------------------------------------------------------------
Shareholders' Equity:
Capital Stock:
Preferred stock, no par value, 2,000,000
shares authorized and unissued -- --
Common stock, $.10 par value, 25,000,000
shares authorized; shares issued:
9,016,937 in 1996 and 7,459,437 in 1995 902 746
Capital in excess of par value 19,217 16,162
Foreign currency translation adjustment 313 43
Retained earnings (4,452) (6,865)
- ----------------------------------------------------------------------------------
Total shareholders' equity 15,980 10,086
- ----------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 41,371 $ 48,012
- ----------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
-66-
<PAGE>
<PAGE>
NAI TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years ended December 31,
(in thousands except per share amounts) 1996 1995 1994
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $ 68,207 $ 60,008 $ 54,520
- ------------------------------------------------------------------------------
Cost of sales 52,712 55,100 44,254
- ------------------------------------------------------------------------------
Gross margin 15,495 4,908 10,266
- ------------------------------------------------------------------------------
Selling expenses 4,192 4,971 7,490
General and administrative expenses 5,242 6,517 6,313
Research and development costs 1,639 1,807 3,214
Restructuring expenses -- -- 7,321
Other (income) expense (885) 488 517
- ------------------------------------------------------------------------------
Total expenses, net 10,188 13,783 24,855
- ------------------------------------------------------------------------------
Operating earnings (loss) 5,307 (8,875) (14,589)
- ------------------------------------------------------------------------------
Non-operating income (expense):
Other 15 -- --
Amortization of deferred debt costs (456) (895) --
Interest income 152 195 83
Interest expense (2,209) (1,667) (1,477)
- ------------------------------------------------------------------------------
(2,498) (2,367) (1,394)
- ------------------------------------------------------------------------------
Earnings (loss) before income taxes 2,809 (11,242) (15,983)
Income tax expense (benefit) 396 377 (4,392)
- ------------------------------------------------------------------------------
Net earnings (loss) $ 2,413 ($11,619) ($11,591)
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
Earnings (loss) per common share $ 0.28 ($ 1.57) ($ 1.69)
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
-67-
<PAGE>
<PAGE>
NAI TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE THREE YEARS ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
Capital Total
Common in excess Note Translation Retained shareholders'
(in thousands) stock of par receivable adjustment earnings equity
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance January 1, 1994 $ 651 $ 12,096 ($ 12) ($ 54) $ 17,912 $ 30,593
Net (loss) -- -- -- -- (11,591) (11,591)
4% common stock dividend 26 1,541 -- -- (1,567) --
Foreign currency translation adjustment -- -- -- 161 -- 161
Sale of common stock 36 964 -- -- -- 1,000
Tax benefit from exercise of employee
stock options -- 23 -- -- -- 23
Exercise of employee stock options and
purchases under stock purchase plan 4 106 -- -- -- 110
------------------------------------------------------------------------------
Balance December 31, 1994 717 14,730 (12) 107 4,754 20,296
Net (loss) -- -- -- -- (11,619) (11,619)
Foreign currency translation adjustment -- -- -- (64) -- (64)
Common stock issued in debt restructuring 25 475 -- -- -- 500
Issuance of stock warrants in connection -- 913 -- -- -- 913
with debt offering
Exercise of employee stock options and
purchases under stock purchase plan 4 56 -- -- -- 60
------------------------------------------------------------------------------
Balance December 31, 1995 746 16,174 (12) 43 (6,865) 10,086
Net earnings -- -- -- -- 2,413 2,413
Foreign currency translation adjustment -- -- -- 270 -- 270
Issuance of stock warrants in connection -- 1,060 -- -- -- 1,060
with debt offering
Payment of note receivable -- -- 12 -- -- 12
Conversion of convertible debt, net
of issuance costs 156 1,983 -- -- -- 2,139
------------------------------------------------------------------------------
Balance December 31, 1996 $ 902 $ 19,217 $ -0- $313 ($ 4,452) $ 15,980
------------------------------------------------------------------------------
------------------------------------------------------------------------------
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
-68-
<PAGE>
<PAGE>
NAI TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years ended December 31,
(in thousands) 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net earnings (loss) $ 2,413 ($11,619) ($11,591)
Adjustments to reconcile net earnings (loss) to cash (used in)
provided by operating activities:
Depreciation and amortization 2,548 2,979 2,435
Loss (gain) on disposal of property, plant and equipment (1,492) 1 2,298
Provision for inventory obsolescence 88 2,248 2,031
Loss on sale of notes receivable 89 -- --
Tax benefit from exercise of employee stock options -- -- 23
Changes in operating assets and liabilities, excluding effects from
acquisitions, dispositions and foreign currency adjustments:
Accounts receivable 648 (1,227) 2,534
Inventories 1,543 (191) 879
Accounts payable and other accrued expenses (6,965) 3,545 4,215
Income taxes 73 4,328 (2,775)
Other, net (594) 57 (82)
- ---------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by operating activities (1,649) 121 (33)
- ---------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities:
Contingent payment on purchase of KMS Advanced Products -- (103) (189)
Purchase of property, plant and equipment (566) (886) (935)
Proceeds from sale of division, property, plant and equipment 2,990 443 1,053
- ---------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by investing activities 2,424 (546) (71)
- ---------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities:
Issuances of notes payable 590 6 8,636
Issuances of 12% convertible notes 5,842 2,500 --
Payments of notes payable (590) (133) (5,283)
Payments for debt restructuring -- (345) --
Payments of long-term debt (7,856) (656) (4,777)
Receipts on notes receivable 1,113 -- 223
Proceeds from exercise of stock options and stock purchase plan -- 60 110
Proceeds from sale of common stock -- -- 1,000
- ---------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by financing activities (901) 1,432 (91)
- ---------------------------------------------------------------------------------------------------------------
Effect of foreign currency exchange rates on cash 248 (60) 136
- ---------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents 122 947 (59)
Cash and cash equivalents at beginning of year 2,605 1,658 1,717
- ---------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 2,727 $ 2,605 $ 1,658
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
Supplemental disclosure of cash flow information:
Cash paid for (received):
Interest $ 2,238 $ 1,506 $ 1,462
Income taxes 398 (4,697) (773)
Non-cash investing and financing activities:
Common stock issued in debt restructuring -- 500 --
Notes receivable from sale of property, plant and equipment -- 1,190 --
Conversion of 12% notes into common stock 2,139 -- --
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
-69-
<PAGE>
<PAGE>
NAI TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
1. SUMMARY OF ACCOUNTING POLICIES
Description of Business: NAI Technologies designs, manufactures and markets
rugged computer systems, advanced peripheral products, high performance
workstations, TEMPEST computer systems and telecommunications test equipment and
transmission products, and integrated systems for defense, military,
government-related and commercial businesses. The Company's customer base
includes commercial markets requiring rugged, mobile computer and communications
systems, U.S. and foreign armed services and intelligence agencies, and the
regional Bell operating companies and independent telephone companies. Net sales
to the U.S. Government for the years ended December 31, 1996, 1995 and 1994 were
$20,619,000, $22,665,000 and $21,819,000, respectively.
Basis of Presentation: The accompanying consolidated financial statements
include the accounts of the Company and its wholly-owned subsidiaries. All
significant inter-company transactions and balances have been eliminated in
consolidation.
Management Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Foreign Currency Translation: The financial statements and transactions of the
Company's foreign subsidiary are maintained in its functional currency. For
consolidation purposes, assets and liabilities of the Company's U.K. subsidiary
have been translated at rates of exchange at the end of the period. Revenues and
expenses have been translated at the weighted average rates of exchange in
effect during each period. Translation gains and losses are accumulated as a
separate component of shareholders' equity. Gains and losses resulting from
transactions denominated in a currency other than the entity's functional
currency are included in other operating expense in the consolidated statements
of operations. There were no significant gains or losses from foreign currency
transactions in the years presented.
Financial Statement Reclassification: Certain reclassifications have been made
to prior years' financial statements to conform to the 1996 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 costs
incurred, reduced by estimated costs of units delivered, not in excess of net
realizable value. The Company's business is characterized by rapid change that
frequently results in product obsolescence. The Company continually reviews its
on-hand quantities and compares such to current business levels and future
expectations regarding usage. Adjustments to the carrying values of inventory
are made when considered necessary.
-70-
<PAGE>
<PAGE>
Property, Plant and Equipment: Property, plant and equipment are recorded at
historical cost. Depreciation and amortization have been computed using the
straight-line method over the following estimated useful lives of the assets:
equipment and furniture and fixtures, generally -- 2 to 10 years, and buildings
- -- 30 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 that underlie the twenty-year amortization period on a quarterly
basis and will shorten the amortization period if considered necessary. The
Company assesses the recoverability of this intangible asset by determining
whether the amortization of the goodwill balance over its remaining life can be
recovered through projected undiscounted future results. Accumulated
amortization was approximately $2,362,000 and $1,730,000 at December 31, 1996
and 1995, respectively. The amortization expense associated with these amounts
is included in other operating expense in the consolidated statements of
operations and amounted to $632,000, $630,000 and $620,000 in 1996, 1995 and
1994, respectively.
Long-lived assets: In fiscal 1996, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be disposed of." SFAS No. 121
requires that long-lived assets and certain identifiable intangibles to be held
and used or disposed of by an entity be reviewed for impairment whenever events
or changes in circumstances indicated that the carrying amount of an asset may
not be recoverable. During 1996, the Company adopted this statement and
determined that no impairment loss need be recognized for applicable assets of
continuing operations.
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: Income taxes are determined based on the use of the asset and
liability approach for financial accounting and reporting of income taxes in
accordance with statement of Financial Accounting Standards (SFAS) No. 109,
"Accounting For 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.
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 8,570,000, 7,382,000 and 6,850,000 average shares outstanding
(including common stock equivalents) for 1996, 1995 and 1994, respectively.
-71-
<PAGE>
<PAGE>
2. ACCOUNTS RECEIVABLE
Accounts receivable at December 31 consisted of the following:
<TABLE>
<CAPTION>
(in thousands) 1996 1995
-----------------------------------------------------------------------------
<S> <C> <C>
Amounts receivable from United States Government:
Amounts billed $ 3,891 $ 3,764
Unbilled contract receivables 47 2,004
-----------------------------------------------------------------------------
3,938 5,768
Amounts receivable from others:
Amounts billed 8,564 7,729
Unbilled contract receivables 449 380
-----------------------------------------------------------------------------
9,013 8,109
-----------------------------------------------------------------------------
12,951 13,877
Allowance for doubtful accounts (258) (142)
-----------------------------------------------------------------------------
$12,693 $13,735
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
</TABLE>
Unbilled contract receivables represent revenue earned but not yet
billed to customers at year end. The Company expects that substantially
all of these amounts will be billed and collected within one year.
-72-
<PAGE>
<PAGE>
3. INVENTORIES
Inventories at December 31, summarized by major classification, were as
follows:
<TABLE>
<CAPTION>
(in thousands) 1996 1995
------------------------------------------------------
<S> <C> <C>
Raw materials and components $ 8,567 $ 11,695
Work-in-process 3,010 4,121
Finished goods 1,204 477
Allowance for obsolescence (2,403) (3,536)
Unliquidated progress payments (108) (762)
------------------------------------------------------
$ 10,270 $ 11,995
------------------------------------------------------
------------------------------------------------------
</TABLE>
4. OTHER CURRENT ASSETS
Other current assets at December 31 consisted of the following:
<TABLE>
<CAPTION>
(in thousands) 1996 1995
------------------------------------------------------
<S> <C> <C>
Prepaid insurance $ 249 $ 219
Other prepaid expenses 348 594
------------------------------------------------------
$ 597 $ 813
------------------------------------------------------
------------------------------------------------------
</TABLE>
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at December 31 consisted of the following:
<TABLE>
<CAPTION>
(in thousands) 1996 1995
----------------------------------------------------------------------
<S> <C> <C>
Land $ 300 $ 1,306
Buildings 1,900 1,900
Machinery and equipment 7,807 8,829
Furniture and fixtures 681 679
Leasehold improvements 404 317
----------------------------------------------------------------------
11,092 13,031
Less accumulated depreciation and amortization (7,569) (7,680)
----------------------------------------------------------------------
$ 3,523 $ 5,351
----------------------------------------------------------------------
----------------------------------------------------------------------
</TABLE>
-73-
<PAGE>
<PAGE>
6. 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, the Company recorded a $9,500,000 charge in
1994, of which $7,300,000 was classified as a restructuring charge and
$2,200,000 was charged to cost of sales. The major components of the
$7,300,000 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
$2,200,000 charge to cost of sales pertain to inventory write-offs
related primarily to excess start-up costs associated with the NST-II
production. The transfer of operations to Colorado was substantially
completed by the fourth quarter of 1994.
7. OTHER ACCRUED EXPENSES - CURRENT
Other accrued expenses - current at December 31, 1996, consisted of the
following:
<TABLE>
<CAPTION>
(in thousands) 1996 1995
-------------------------------------------------------------------
<S> <C> <C>
Supplemental retirement $ 800 $ --
Customer advances -- 1,143
Employee benefits 949 756
Restructuring 39 153
Insurance payable 164 168
Purchase liabilities 257 453
Warranty 688 658
Deferred revenue 296 589
Contract losses 58 583
Taxes, other than income 115 365
Interest 134 162
Moving expense -- 513
Other 394 833
-------------------------------------------------------------------
$3,894 $6,376
-------------------------------------------------------------------
-------------------------------------------------------------------
</TABLE>
-74-
<PAGE>
<PAGE>
8. DEBT
Long term debt at December 31 consisted of the following:
<TABLE>
<CAPTION>
(in thousands) 1996 1995
---------------------------------------------------------------------------------------------------
<S> <C> <C>
Secured revolving credit with quarterly step-downs of
$750,000 and interest at prime plus 1 3/4%
(10% at December 31, 1996) $ 7,500 $ 15,175
Notes payable, generally secured by specified machinery and equipment, with
interest at rates ranging from 8.875% to 11.25% 206 388
12% Convertible Subordinated Promissory
Notes due January 15, 2001 5,227 2,500
---------------------------------------------------------------------------------------------------
12,933 18,063
Original issue discount on 12% Notes (551) (313)
Less current installments (158) (2,177)
---------------------------------------------------------------------------------------------------
$ 12,224 $ 15,573
---------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------
</TABLE>
Aggregate principal payments for the five years subsequent to December
31, 1996 are as follows (in thousands):
<TABLE>
<S> <C>
1997 $ 158
1998 2,523
1999 5,025
2000 --
2001 5,227
-------
$12,933
-------
-------
</TABLE>
Effective February 15, 1996 the Company entered into an amendment to its
credit agreement with its bank lenders which amended and extended the
payment provisions contained therein and reset certain financial
covenants on more favorable terms for the Company. The revised credit
agreement provides for quarterly principal payments of $500,000,
beginning on March 31, 1996, and payments of $750,000 beginning on March
31, 1997 and paid through December 31, 1998. The remaining principal
balance is due on January 15, 1999. Interest is payable monthly at the
rate of 1 3/4% above prime. The loan covenants require that the Company
maintain certain minimum levels of net worth, current ratio and quick
ratio. They also limit capital expenditures and the payment of cash
dividends. As of December 31, 1996 the Company had made prepayments of
$3,525,000. Accordingly, no payments are due in 1997.
In November and December 1995, the Company borrowed an aggregate of
$2,500,000 and agreed that the loans would be converted into convertible
debt in conjunction with the anticipated sale of 12% Convertible
Subordinated Promissory Notes. Such loans were recorded as Convertible
Subordinated Promissory Notes as of December 31, 1995 in the Company's
financial statements.
On February 15, 1996, February 23, 1996, February 29, 1996 and May 2,
1996, the Company issued an aggregate of $8,342,000 of 12% Convertible
Subordinated Promissory Notes due January 15, 2001 and warrants to
purchase an aggregate of 2,085,500 shares of the Company's Common Stock.
The Notes are convertible by the holders into shares of Common Stock at
a conversion price equal to $2.00 per share.
-75-
<PAGE>
<PAGE>
Interest on the Notes is payable quarterly in arrears on January 15, April 15,
July 15 and October 15 of each year, commencing April 15, 1996. The Notes mature
on January 15, 2001. The Notes may be prepaid by the Company without premium or
penalty at any time after January 15, 1999. The Notes are unsecured obligations
of the Company and contain certain restrictions on the Company a negative pledge
of the Company's assets not otherwise encumbered by the holders of the senior
indebtedness. As of December 31, 1996, $3,115,000 of such Notes had been
converted into Common Stock.
In addition to the Warrants noted above, the Company issued 2,034,200 Warrants
to the lead investor and placement agent. All Warrants entitle the holders
thereof to purchase shares of Common Stock at any time and from time to time on
or before February 15, 2002, at an exercise price equal to $2.50 per share of
Common Stock. The Warrants are detachable and separately transferable. The
Warrants were valued at $0.50 each. Such value was derived based upon an
evaluation by an independent third party and included a review of both current
and historical stock price data, the lack of liquidity afforded to the Warrants,
the results of various quantitative methodologies, the Company's financial
position and historical and projected cash flows. The Warrants issued in
conjunction with the Notes are recorded as original issued discount on the
Company's balance sheet. The Warrants issued to the lead investor and the
placement agent are recorded as deferred debt costs and is included in other
assets in the accompanying consolidated balance sheet.
On May 9, 1996, the Company entered into an agreement with Charles S. Holmes, a
member of the Company's Board of Directors, that in consideration of his
converting the Note in the aggregate unpaid principal amount of $2,000,000 held
by him into 1,000,000 shares of Common stock, the Company would immediately
issue warrants to purchase 300,000 shares of Common Stock at any time and from
time to time on or before February 15, 2002 at an exercise price of $3.00 per
share. The warrants were valued at $0.50 per warrant and the Company recorded a
charge to operations of $150,000 in 1996.
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
$1,028,000) and bears interest at 2 1/4 % above the U.K. base rate (6% at
December 31, 1996). This facility is renewable in March 1997. The maximum month
end borrowings under the credit facility during the years ended December 31,
1996 and 1995 were 'L'346,000 and 'L'84,000 (approximately $543,000 and
$130,000, respectively). The average short term borrowings for the years ended
December 31, 1995 and 1994 were 'L'29,000 and 'L'19,000 (approximately
$50,000 and $30,000, respectively). The weighted average interest rate during
the years ended December 31, 1996 and 1995 was 8.23% and 8.88%, respectively.
-76-
<PAGE>
<PAGE>
9. OTHER ACCRUED EXPENSES - NON-CURRENT
Other Accrued Expenses - non-current at December 31 consisted of the
following:
<TABLE>
<CAPTION>
(in thousands) 1996 1995
--------------------------------------------------------
<S> <C> <C>
Supplemental retirement plan $ -- $1,235
Other 439 748
Deferred compensation 473 498
--------------------------------------------------------
$912 $2,481
--------------------------------------------------------
--------------------------------------------------------
</TABLE>
The supplemental retirement plan is described in Note 13.
In 1981, the Company entered into agreements with two former officers
which provide for the payments to each of $25,000 per year, adjusted for
the cumulative effects of inflation from inception of the agreement,
over a period of 15 years. Such deferred compensation payments commenced
on January 1, 1990. The 1997 payment to each of the former officers will
be approximately $42,000.
10. OTHER (INCOME) EXPENSE
Other (Income) Expense for the years ended December 31, 1996, 1995 and
1994 are as follows:
<TABLE>
<CAPTION>
(in thousands) 1996 1995 1994
-----------------------------------------------------------------
<S> <C> <C> <C>
Gain on sale of division(1) ($1,510) $ -- $ --
Amortization of goodwill 632 629 620
Other (7) (141) (103)
-----------------------------------------------------------------
($ 885) $ 488 $ 517
-----------------------------------------------------------------
-----------------------------------------------------------------
</TABLE>
(1) In June 1996, the Company sold the assets of its Systems Integration
division, which operated within the Codar Technology subsidiary.
-77-
<PAGE>
<PAGE>
11. INCOME TAXES
The Company and its domestic subsidiaries file a consolidated Federal
income tax return. The provision for income taxes consisted of the
following items:
<TABLE>
<CAPTION>
(in thousands) 1996 1995 1994
--------------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $ -- $ -- ($4,286)
State -- -- --
Foreign 533 377 (446)
--------------------------------------------------------------------------------
533 377 (4,732)
--------------------------------------------------------------------------------
Deferred:
Federal -- -- 360
State -- -- --
Foreign (137) -- (20)
--------------------------------------------------------------------------------
(137) -- 340
--------------------------------------------------------------------------------
Total income tax expense (benefit) $ 396 $377 ($4,392)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
</TABLE>
The tax effects of temporary differences that gave rise to significant
portions of the net deferred tax asset and (liability) at December 31,
1996, and 1995 are as follows:
<TABLE>
<CAPTION>
(in thousands) 1996 1995
-------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets current:
Net operating loss carry forward $ 3,389 $ 3,335
AMT credit carry forward 514 319
Inventories 401 1,422
Supplemental retirement 204 317
Accrued vacation 81 146
Deferred compensation 186 195
Other 392 276
Plant and equipment 109 --
Valuation allowance (5,103) (5,626)
-------------------------------------------------------------------------
$ 173 $ 384
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Deferred tax liabilities non-current:
Plant and equipment $ -- ($ 384)
Other (36) --
-------------------------------------------------------------------------
(36) (384)
-------------------------------------------------------------------------
$ 137 $ --
-------------------------------------------------------------------------
-------------------------------------------------------------------------
</TABLE>
The Company has recorded a valuation allowance to reflect the estimated
amount of deferred tax assets which may not be realized through the
realization of future taxable income.
-78-
<PAGE>
<PAGE>
The sources of the deferred tax provision and the related tax effect for the
years ended December 31, 1996, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
(in thousands) 1996 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net operating loss carry forward $ (54) ($3,335) $ --
AMT credit carry forward (196) 227 (545)
Accelerated depreciation for
tax purposes (493) 12 (142)
Decrease (increase) in inventory
reserves 1,021 (1,066) 235
Deferred compensation 9 41 (4)
Supplemental retirement 113 (50) (96)
Accrued restructure costs 52 282 (333)
Accrued vacation 65 (19) 148
Other (131) (117) (524)
Valuation allowance (523) 4,025 1,601
- --------------------------------------------------------------------------------
($ 137) $ -- $ 340
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
A reconciliation of the provision for income taxes computed at the Federal
statutory rate to the actual provision for income taxes is as follows:
<TABLE>
<CAPTION>
(in thousands) 1996 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Expected tax expense (benefit) $ 955 ($3,822) ($5,434)
Increases (decreases) resulting from:
Adjustment of prior years' income taxes -- (350) (665)
Non-deductible expenses 214 278 167
Other (250) 246 (61)
Change in valuation allowance (523) 4,025 1,601
- --------------------------------------------------------------------------------
Actual income tax expense (benefit) $ 396 $ 377 ($4,392)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
No provision has been recorded for U.S. income taxes applicable to undistributed
earnings of foreign subsidiaries that are indefinitely reinvested in foreign
operations.
-79-
<PAGE>
<PAGE>
12. SHAREHOLDERS' EQUITY
The Company has three stock option plans - the 1991 Stock Option Plan, the 1993
Stock Option Plan for Directors, and the 1996 Stock Option Plan - which together
cover 1,233,731 shares of common stock which may be issued pursuant to the plans
to key employees and directors.
The 1991 Stock Option Plan covers 677,731 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 5,000 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.
The 1996 Stock Option Plan covers 400,000 shares. Options under the 1996 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 1996 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 five
years from its date of grant.
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. No
options were exercised in 1996. In 1995 and 1994, all payments were made in
cash.
In 1996, the Company adopted the disclosure-only alternative of SFAS no. 123,
Accounting for Stock Based Compensation. The weighted-average fair value per
option at the date of grant for options granted during 1996 and 1995 was $0.74
and $0.61, respectively. The weighted-average fair value per purchase right
under the Employee Stock Purchase Plan was $0.74 for 1996 subscriptions. There
were no subscriptions in 1995. The fair value was estimated using the
Black-Scholes options pricing model and the following weighted-average
assumptions:
-80-
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
Expected dividend yield 0% 0%
Expected volatility 30% 30%
Risk-free interest rate 5% 5%
Expected term until exercise (years) 3 3
- --------------------------------------------------------------------------------
</TABLE>
Pro forma net income and earnings per share reflecting compensation cost for the
fair value of stock options awarded in 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
(thousands of dollars, except per share data) 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
Net income:
As reported $ 2,413 ($ 11,619)
Pro forma $ 2,315 ($ 11,671)
Earnings per share:
As reported $ 0.28 ($ 1.57)
Pro forma $ 0.27 ($ 1.58)
Fully diluted earnings per share:
As reported N/A N/A
Pro forma N/A N/A
- --------------------------------------------------------------------------------
</TABLE>
The pro forma effects on net income and earnings per share for 1996 and 1995 may
not be representative of the pro forma effects in future years because they
include compensation cost calculated on a straight-line basis over the vesting
periods of the grants and do not take into consideration pro forma compensation
cost for options granted prior to 1995.
-81-
<PAGE>
<PAGE>
Employee Stock Option Plans
The following is a summary of activity related to all stock option plans:
<TABLE>
<CAPTION>
Number Weighted average
of option price
shares per share
------ ---------
<S> <C> <C>
Outstanding at January 1, 1994 617,951 $ 6.20
Granted 498,998 $ 5.28
Exercised (30,472) $ 2.62
Expired/canceled (424,126) $ 7.60
- -----------------------------------------------------------------------------------
Outstanding at December 31, 1994 662,351 $ 4.77
Granted 515,000 $ 2.43
Exercised (37,962) $ 1.93
Expired/canceled (486,656) $ 4.81
- -----------------------------------------------------------------------------------
Outstanding at December 31, 1995 652,733 $ 3.06
Granted 330,400 $ 2.69
Expired/canceled (256,239) $ 2.22
- -----------------------------------------------------------------------------------
Outstanding at December 31, 1996 726,894 $ 2.63
- -----------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------
</TABLE>
At December 31, 1996, 206,172 options were exercisable and 1,223,731 shares were
reserved for issuance under all stock option plans.
Warrants
At December 31, 1996, there were 4,119,700 warrants outstanding exercisable at
$2.50 per share and 300,000 warrants outstanding exercisable at $3.00 per share.
All warrants expire February 15, 2002.
-82-
<PAGE>
<PAGE>
EMPLOYEE STOCK PURCHASE PLAN
Under the 1992 Employee Stock Purchase Plan, which commenced July 1, 1992,
employees may subscribe to purchase shares of common stock at the lesser of 85%
of the market price on the first day of the purchase period or the date
purchased one year later. Payment for the shares is made through payroll
deductions of up to 5% of annual base pay over a one year period. A total of
113,177 shares has been reserved for issuance under the Employee Stock Purchase
Plan and as of December 31, 1996, 49,063 shares have been issued pursuant to the
plan. The following is a summary of employee stock purchase plan activity:
<TABLE>
<CAPTION>
NUMBER OF PRICE
SHARES RANGE
--------- -----
<S> <C> <C>
Outstanding at January 1, 1994............................................................... 23,540 $7.02
Subscriptions................................................................................ 31,410 3.13
Purchases.................................................................................... (9,828) 3.13
Cancellations................................................................................ (22,202) 3.13-7.02
- -----------------------------------------------------------------------------------------------------------------------
Outstanding at December 31, 1994............................................................. 22,920 $3.13
Purchases.................................................................................... (13,870) 3.13
Cancellations................................................................................ (9,050) 3.13
- -----------------------------------------------------------------------------------------------------------------------
Outstanding at December 31, 1995............................................................. -- --
Subscriptions................................................................................ 19,780 $2.76
Cancellations................................................................................ (1,000) $2.76
- -----------------------------------------------------------------------------------------------------------------------
Outstanding at December 31, 1996............................................................. 18,780 $2.76
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
-83-
<PAGE>
<PAGE>
13. EMPLOYEE BENEFIT PLANS
Pension Plan
Until December 1995, when the plan was terminated and all assets were
distributed, the Company had a noncontributory defined benefit pension
plan covering all eligible employees. The plan provided for normal
retirement at age 65, or at least age 62 with 30 years of service, and
optional early retirement.
In December 1993, the Board of Directors approved an amendment to the
pension plan which resulted in the freezing of all future benefits under
the plan as of January 3, 1994.
The Company's funding policy was to make annual contributions to the
extent such contributions were actuarially determined and tax
deductible. Pension expense (income) for 1995 and 1994 was $3,000 and
($5,000), respectively.
Supplemental Retirement Plan
The NAI Technologies Supplemental Retirement Plan, a non-qualified,
un-funded pension plan was terminated in 1996. The expense related to
this plan amounted to $146,000 and $281,000 in 1995 and 1994,
respectively. In 1995, the actuarial computations assumed a discount
rate of 6.75% on benefit obligations. In 1994 the assumed discount rate
on benefit obligations was 7.25%. The assumed compensation increase was
5% for all years. Such benefits will be paid from the Company's assets
and not from retirement plan assets.
The following table sets forth the funded status and cost components of
the Company's supplemental retirement plan at December 31, 1995 and
1994:
<TABLE>
<CAPTION>
(In thousands) 1995 1994
----------------------------------------------------------------------------------
<S> <C> <C>
Accumulated benefit obligation including vested benefits
of $1,215 in 1995 and $-0- in 1994 $ 1,221 ($ 899)
----------------------------------------------------------------------------------
----------------------------------------------------------------------------------
Projected benefit obligation for service
rendered to date (1,442) (1,224)
Plan assets at fair value -- --
----------------------------------------------------------------------------------
Projected benefit obligation in excess
of plan assets (1,442) (1,224)
Unrecognized prior service cost 332 360
Unrecognized net loss (gain) 178 77
Adjustment required to recognize
minimum liability (289) (112)
----------------------------------------------------------------------------------
Unfunded accrued supplementary costs ($1,221) ($ 899)
----------------------------------------------------------------------------------
----------------------------------------------------------------------------------
Net pension expense is comprised
of the following:
Service cost $ 25 $ 156
Interest cost 93 84
Net amortization and deferral 28 41
----------------------------------------------------------------------------------
Net pension expense $ 146 $ 281
----------------------------------------------------------------------------------
----------------------------------------------------------------------------------
</TABLE>
The unfunded accrued supplementary costs are included in other accrued
expenses-noncurrent in 1995.
-84-
<PAGE>
<PAGE>
Retirement Savings Plan
The Company has a voluntary Retirement Savings Plan for all eligible
employees which provides for basic employee contributions (up to 15% of
compensation). Plan participants may invest in a combination of equity,
fixed income and money market funds. The Company's 1994 contribution
under the plan totaled $365,143. Effective August 20, 1994, the Board of
Directors suspended the matching provisions. No contributions were made
in 1996 or 1995. Beginning in January 1997, the Company re-instituted a
matching provision of 100% of the first 1% of each employee's
contribution.
The plan also provides for a discretionary profit sharing contribution
as determined by the Board of Directors, which may be contributed to
each of the participant's individual accounts. The Company made no such
contribution for 1996, 1995 or 1994.
14. INFORMATION BY GEOGRAPHIC AREA
Information about the Company's foreign operations and export sales is
provided in the following table. Export revenue is foreign revenue
produced by identifiable assets located in the United States while
foreign revenue is generated by identifiable assets located in foreign
countries.
In order to achieve an appropriate sharing of operating results between
the Company's subsidiaries, transfers between geographic areas are
accounted for on the basis of a mark-up of manufacturing costs.
Operating earnings are total sales less operating expenses. In computing
operating earnings, none of the following items has been added or
deducted: general corporate expenses, interest income, interest expense
and income taxes.
Identifiable assets are those assets of the Company that are identified
with the operations in each geographic area. Corporate assets consisted
primarily of cash and cash equivalents.
-85-
<PAGE>
<PAGE>
NAI TECHNOLOGIES, INC. AND SUBSIDIARIES
INFORMATION BY GEOGRAPHIC AREA
<TABLE>
<CAPTION>
As of or
Years ending December 31,
(in thousands) 1996 1995 1994
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
SALES TO UNAFFILIATED CUSTOMERS:
United States $ 52,053 $ 47,329 $ 40,692
Export 1,581 1,786 2,723
United Kingdom 14,573 10,893 11,105
--------------------------------
Total $ 68,207 $ 60,008 $ 54,520
--------------------------------
--------------------------------
TRANSFERS BETWEEN GEOGRAPHIC AREAS:
United States $ 547 $ 831 $ 787
Europe -- -- 11
--------------------------------
Total $ 547 $ 831 $ 798
--------------------------------
--------------------------------
TOTAL SALES:
United States $ 52,600 $ 48,160 $ 41,479
Export 1,581 1,786 2,723
United Kingdom 14,573 10,893 11,116
Eliminations (547) (831) (798)
--------------------------------
Total $ 68,207 $ 60,008 $ 54,520
--------------------------------
--------------------------------
OPERATING EARNINGS (LOSS):
United States $ 4,869 ($ 6,232) ($11,068)
Europe 2,070 1,226 (1,232)
--------------------------------
Subtotal 6,939 (5,006) (12,300)
Corporate expenses and other (1,632) (3,869) (2,289)
--------------------------------
Total operating earnings (loss) 5,307 (8,875) (14,589)
Net interest expense & other (2,498) (2,367) (1,394)
--------------------------------
Earnings (loss) before income taxes $ 2,809 ($11,242) ($15,983)
--------------------------------
--------------------------------
IDENTIFIABLE ASSETS:
United States $ 28,294 $ 34,103 $ 33,795
Europe 9,602 8,283 8,761
--------------------------------
Subtotal 37,896 42,386 42,556
Corporate and other 3,475 5,626 11,164
--------------------------------
Total $ 41,371 $ 48,012 $ 53,720
--------------------------------
--------------------------------
</TABLE>
-86-
<PAGE>
<PAGE>
15. INFORMATION BY BUSINESS SEGMENT
The Company's operations are classified into two business segments:
Electronic Systems and Telecommunications. The Electronic Systems
segment includes Codar Technology, Inc. based in Longmont, Colorado, NAI
Technologies--Systems Division Corporation in Columbia, Maryland, and
Lynwood Scientific Developments Limited in Farnham, England.
Codar Technology designs, manufactures, integrates and supports rugged
computer systems, advanced computer peripherals and memory systems for
military and commercial use. Systems provides custom packaged,
integrated computer systems for deployment in shelters, ships, land
vehicles and other demanding environments. Lynwood supplies rugged,
environmentally and electrically screened personal computers and
workstations based upon standard commercial off the shelf technology,
targeted to the military and government markets principally in
Europe. The U.S. Government accounted for $20,619,000 or 34% and one
other customer accounted for 16% of the Electronic Systems segment's
1996 sales. No other customer accounted for greater than 10% of the
Segment's sales.
The Telecommunications segment currently consists of Wilcom, Inc. in
Laconia, New Hampshire. Wilcom designs and manufactures products for use
in the telephone industry. Wilcom's customer base includes the regional
Bell operating companies and independent telephone companies. Two such
customers accounted for 26% and 18%, respectively, of the
Telecommunications segment's 1996 sales.
Inter-segment sales are accounted for on the basis of a mark-up of
manufacturing costs. Operating earnings are total sales less operating
expenses. In computing operating earnings, none of the following items
has been added or deducted: general corporate expenses, interest income,
interest expense and income taxes.
Identifiable assets by segment are those assets of the Company that are
used in the Company's operations in each segment. Corporate assets
consist primarily of cash and cash equivalents.
-87-
<PAGE>
<PAGE>
NAI TECHNOLOGIES, INC. AND SUBSIDIARIES
INFORMATION BY INDUSTRIAL SEGMENT
<TABLE>
<CAPTION>
As of or
Years ending December 31,
(in thousands) 1996 1995 1994
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
SALES TO UNAFFILIATED CUSTOMERS:
Electronic Systems $ 61,131 $ 51,813 $ 46,330
Telecommunications 7,076 8,195 8,190
--------------------------------
Total $ 68,207 $ 60,008 $ 54,520
--------------------------------
--------------------------------
INTERSEGMENT SALES:
Electronic Systems $ 547 $ 831 $ 798
--------------------------------
--------------------------------
TOTAL SALES:
Electronic Systems $ 61,678 $ 52,644 $ 47,128
Telecommunications 7,076 8,195 8,190
Eliminations (547) (831) (798)
--------------------------------
Total $ 68,207 $ 60,008 $ 54,520
--------------------------------
--------------------------------
OPERATING EARNINGS (LOSS):
Electronic Systems $ 6,245 ($ 4,273) ($11,788)
Telecommunications 694 (733) (512)
--------------------------------
Subtotal 6,939 (5,006) (12,300)
Corporate expenses and other (1,632) (3,869) (2,289)
--------------------------------
Total operating earnings (loss) 5,307 (8,875) (14,589)
Net interest expense & other (2,498) (2,367) (1,394)
--------------------------------
Earnings (loss) before income taxes $ 2,809 ($11,242) ($15,983)
--------------------------------
--------------------------------
IDENTIFIABLE ASSETS:
Electronic Systems $ 31,584 $ 35,577 $ 35,529
Telecommunications 6,312 6,809 7,027
--------------------------------
Subtotal 37,896 42,386 42,556
Corporate and other 3,475 5,626 11,164
--------------------------------
Total $ 41,371 $ 48,012 $ 53,720
--------------------------------
--------------------------------
CAPITAL EXPENDITURES:
Electronic Systems $ 412 $ 746 $ 716
Telecommunications 150 120 114
--------------------------------
Subtotal 562 866 830
Corporate and other 4 20 105
--------------------------------
Total $ 566 $ 886 $ 935
--------------------------------
--------------------------------
DEPRECIATION:
Electronic Systems $ 1,560 $ 1,680 $ 2,078
Telecommunications 362 359 320
--------------------------------
Subtotal 1,922 2,039 2,398
Corporate and other 626 940 37
--------------------------------
Total $ 2,548 $ 2,979 $ 2,435
--------------------------------
--------------------------------
</TABLE>
-88-
<PAGE>
<PAGE>
15. COMMITMENTS AND CONTINGENCIES
The Company and its subsidiaries lease office and manufacturing facilities,
automobiles, computers and other equipment under various non-cancelable
operating leases.
Future minumum rental commitments for leases with non-cancelable terms in
excess of one year are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS) AMOUNT
---------------------------------------- ------
<S> <C>
1997.................................... $1,407
1998.................................... 1,310
1999.................................... 1,134
2000.................................... 684
2001.................................... 647
2002 and thereafter..................... 4,496
------
Total minimum lease payments....... $9,678
------
------
</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 $346,000 per year.
Rental expense amounted to $1,570,000, $1,725,000 and $1,170,000 in 1996,
1995 and 1994, respectively. There was no sublease income in these periods.
Most leases provide for additional payments of real estate taxes, insurance
and other operating expenses applicable to the property, generally over a base
period level. Total rental expense includes such base period expenses and the
additional expense payments as part of the minimum lease payments.
The Company and its subsidiaries are subject to certain legal actions which
arise in the normal course of business. It is management's belief that these
actions will not have a material effect on the Company's consolidated financial
position.
-89-
<PAGE>
<PAGE>
17. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following table sets forth quarterly financial information for 1996
and 1995:
<TABLE>
<CAPTION>
Loss
(in thousands, Net Gross Net (loss) per
except per share data) sales margin income share
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1996
First Quarter $ 16,503 $ 3,265 ($ 450) ($.06)
Second Quarter 17,354 3,550 815 .10
Third Quarter 17,271 3,801 964 .11
Fourth Quarter 17,079 4,879 1,084 .12
--------------------------------------------------------------------------
Total $ 68,207 $ 15,495 $ 2,413 $ .28
--------------------------------------------------------------------------
--------------------------------------------------------------------------
1995
First Quarter $ 12,687 $ 2,518 ($ 1,094) ($.15)
Second Quarter 14,084 (1,827)(1) (5,805) (.78)
Third Quarter 15,887 1,790 (2,296) (.31)
Fourth Quarter 17,350 2,427 (2,424) (.33)
--------------------------------------------------------------------------
Total $ 60,008 $ 4,908 ($11,619) ($1.57)
--------------------------------------------------------------------------
--------------------------------------------------------------------------
</TABLE>
(1) The Company recorded a charge to cost of sales in the amount of
$2,700,000 for increased provisions for slow moving, excess and
obsolete inventory and $2,000,000 for anticipated cost growth on
certain long term contracts.
-90-
<PAGE>
<PAGE>
NAI TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
March 29, Dec. 31,
1997 1996
(Audited)
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 1,926 $2,727
Accounts receivable, net 10,037 12,693
Inventories, net 10,045 10,270
Deferred tax asset 166 173
Other current assets 553 597
- ------------------------------------------------------------------------------------------------
Total current assets 22,727 26,460
- ------------------------------------------------------------------------------------------------
Property, plant and equipment, net 3,362 3,523
Excess of cost over fair value of assets acquired, net 9,550 9,707
Other assets 1,565 1,681
- ------------------------------------------------------------------------------------------------
Total assets $37,204 $41,371
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 5,207 $ 6,907
Current installments of long-term debt 166 158
Accrued payroll and commissions 104 680
Other accrued expenses 3,170 3,894
Income taxes payable 718 580
- ------------------------------------------------------------------------------------------------
Total current liabilities 9,365 12,219
- ------------------------------------------------------------------------------------------------
Long-term debt 10,622 12,224
Other accrued expenses 870 912
Deferred income taxes 36 36
- ------------------------------------------------------------------------------------------------
Total liabilities 20,893 25,391
- ------------------------------------------------------------------------------------------------
Shareholders' Equity:
Capital Stock:
Preferred stock, no par value, 2,000,000
shares authorized and unissued - -
Common stock, $.10 par value, 25,000,000
shares authorized; shares issued: 9,058,687
in 1997 and 9,016,937 in 1996 906 902
Capital in excess of par value 19,303 19,217
Foreign currency translation adjustment 175 313
Retained earnings (4,073) (4,452)
- ------------------------------------------------------------------------------------------------
Total shareholders' equity 16,311 15,980
- ------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $37,204 $41,371
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
</TABLE>
-91-
<PAGE>
<PAGE>
NAI TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(in thousands except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
For the Three Months Ended
---------------------------
March 29, March 30,
1997 1996
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Net sales $13,062 $16,503
- ------------------------------------------------------------------------------------------------
Cost of sales 9,413 13,238
- ------------------------------------------------------------------------------------------------
Gross margin 3,649 3,265
- ------------------------------------------------------------------------------------------------
Selling expense 1,010 1,114
General and administrative expense 1,070 1,370
Research and development 424 367
Other 128 164
- ------------------------------------------------------------------------------------------------
Total expenses, net 2,632 3,015
- ------------------------------------------------------------------------------------------------
Operating income 1,017 250
- ------------------------------------------------------------------------------------------------
Non-operating income (expense):
Interest income 14 55
Amortization of deferred debt costs (104) (55)
Interest expense (401) (565)
- ------------------------------------------------------------------------------------------------
(491) (565)
- ------------------------------------------------------------------------------------------------
Earnings (loss) before income taxes 526 (315)
Provision for income taxes 147 135
- ------------------------------------------------------------------------------------------------
Net earnings (loss) $ 379 $ (450)
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
Earnings (loss) per common share $ 0.04 $ (0.06)
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
Average shares outstanding 10,199 7,459
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
</TABLE>
-92-
<PAGE>
<PAGE>
NAI TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
For the Three Months Ended
---------------------------
March 29, March 30,
1997 1996
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net earnings (loss) $ 379 $ (450)
Adjustments to reconcile net earnings (loss)
to cash provided by operating activities:
Depreciation and amortization 538 598
Gain on disposal of property, plant and equipment (7) -
Provision for inventory obsolescence 13 103
Loss on sale of notes receivable - 89
Change in operating assets and liabilities,
excluding effects from acquisitions, dispositions
and foreign currency adjustments:
Accounts receivable 2,656 1,598
Inventories 212 (1,325)
Accounts payable and other accrued expenses (3,042) (3,356)
Income taxes 145 125
Other, net 51 (1,076)
- ------------------------------------------------------------------------------------------------
Net cash flow provided by (used in) operating activities 945 (3,694)
- ------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities:
Purchase of property, plant and equipment (94) (245)
Proceeds from sale of property, plant and equipment 17 -
- ------------------------------------------------------------------------------------------------
Net cash used in investing activities (77) (245)
- ------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities:
Issuances of notes payable - 53
Issuance of 12% Convertible Notes - 5,742
Payments of notes payable - (53)
Payments of long-term debt (1,621) (57)
Receipts of notes receivable - 1,101
Proceeds from exercise of stock options
and stock purchase plan 78 -
- ------------------------------------------------------------------------------------------------
Net cash used in (provided by) financing activities (1,543) 6,786
- ------------------------------------------------------------------------------------------------
Effect of foreign currency exchange rates on cash (126) (27)
- ------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents (801) 2,820
Cash and cash equivalents at beginning of year 2,727 2,605
- ------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $1,926 $5,425
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
Supplemental disclosure of cash flow information:
Cash paid for (refunded):
Interest $ 347 $ 417
Income taxes $ - $ 3
Conversion of 12% Notes into common stock $ 12 $ -
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
</TABLE>
-93-
<PAGE>
<PAGE>
OTHER FINANCIAL INFORMATION
UNAUDITED FINANCIAL STATEMENTS
The accompanying unaudited consolidated financial statements have been prepared
by the Company pursuant to the rules and regulations of the Securities and
Exchange Commission ("SEC") and, in the opinion of management, include all
adjustments (consisting of normal recurring accruals) necessary for a fair
presentation of financial position, results of operations and cash flows for
the interim periods. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to the rules and
regulations of the SEC. The Company believes that the disclosures contained
herein are adequate to make the information presented not misleading. The
consolidated statements of operations for the three months ended March 29, 1997
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
1996 Annual Report on Form 10-K for the year ended December 31, 1996.
INVENTORIES
Inventories are summarized by major classification as follows:
- --------------------------------------------------------------------------------
March 29, Dec. 31,
1997 1996
(Audited)
- --------------------------------------------------------------------------------
(In thousands of dollars)
Raw materials and components $ 8,828 $ 8,567
Work-in-process 2,246 3,010
Finished goods 1,244 1,204
Allowance for obsolescence (2,273) (2,403)
Unliquidated progress payments -- (108)
- --------------------------------------------------------------------------------
Inventories, net $ 10,045 $ 10,270
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
-94-
<PAGE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
ON CONSOLIDATED FINANCIAL STATEMENT SCHEDULE
Board of Directors and Shareholders
NAI Technologies, Inc.:
Under date of February 7, 1997, we reported on the consolidated balance sheets
of NAI Technologies, Inc. and subsidiaries as of December 31, 1996 and 1995, and
the related consolidated statements of operations, shareholders' equity, and
cash flows for each of the years in the three-year period ended December 31,
1996, as contained in the Company's annual report on Form 10-K for the year
1996. In connection with our audits of the aforementioned consolidated financial
statements, we have also audited the related consolidated financial statement
Schedule II (Valuation and Qualifying Accounts). This financial statement
schedule is the responsibility of the Company's management. Our responsibility
is to express an opinion on this financial statement schedule based on our
audits.
In our opinion, the related financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
KPMG Peat Marwick LLP
Boulder, Colorado
February 7, 1997
-95-
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
Schedule II
NAI TECHNOLOGIES, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(in thousands of dollars)
- -----------------------------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E
- -----------------------------------------------------------------------------------------------------------------------
Additions
-------------------------------
(1) (2)
Balance at Charged to Charged to Balance
Beginning Costs Other Accounts Deductions at End
Description of Period and Expenses Describe Describe of Period
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Allowance deducted from
asset to which it applies
Allowance for doubtful accounts:
Year ended December 31, 1996 $ 142 $ 88 $ 5 (C) ($ 23)(A) $ 258
Year ended December 31, 1995 133 205 0 196 (A) 142
Year ended December 31, 1994 172 11 0 50 (A) 133
Allowance for inventory
obsolescence reserve:
Year ended December 31, 1996 $3,536 88 897(D) 2,118(B) 2,403
Year ended December 31, 1995 2,250 2,248 23(E) 985(B) 3,536
Year ended December 31, 1994 4,018 2,031 7(E) 3,806(B) 2,250
</TABLE>
- ------------------------
<TABLE>
<S> <C>
Note A - Uncollected receivables written off, net of recoveries.
Note B - Obsolete inventories scrapped, net of recoveries.
Note C - Foreign currency translation adjustment.
Note D - Reclassification of 1995 provision for future inventory loss on work in process of $650,000.
Gross-up of inventory reserve previously netted of $207,000.
Foreign currency translation adjustment of $22,000.
Reclassification from other inventory accounts of $18,000.
Note E - Reclassification from other inventory accounts.
</TABLE>
-96-
<PAGE>
<PAGE>
GLOSSARY
Definitions of the following terms can be found on the pages indicated.
Page
----
Active Investors .......................................................... 1
Additional Warrants ....................................................... 12
Asset Management .......................................................... 32
Bank Lenders .............................................................. 1
Bank Lenders .............................................................. 8
Carlson Employment Agreement .............................................. 35
Codar ..................................................................... 4
Code ...................................................................... 46
Commission ................................................................ 2
Common Stock .............................................................. 1
Company ................................................................... 1
Company ................................................................... 4
Conversion Price .......................................................... 5
Credit Agreement .......................................................... 1
Events of Default ......................................................... 5
Exchange Act .............................................................. 2
Exercise Price ............................................................ 6
Expiration Date ........................................................... 46
Expiration Date ........................................................... 42
Holmes Shares ............................................................. 1
Indenture.................................................................. 40
Investment Transaction .................................................... 39
Lynwood ................................................................... 4
Named Executives .......................................................... 33
Nasdaq .................................................................... 1
NOLs ...................................................................... 52
Noteholders ............................................................... 1
Notes ..................................................................... 1
NST ....................................................................... 8
OID ....................................................................... 47
original issue discount ................................................... 47
Preferred Stock ........................................................... 44
Proposed Regulations ...................................................... 48
Qualified Stated Interest ................................................. 47
RBOCs ..................................................................... 4
Schneider Employment Agreement ............................................ 35
Securities ................................................................ 1
Securities Act ............................................................ 62
Selling Securityholders ................................................... 1
Service ................................................................... 46
Shareholders .............................................................. 1
Shares .................................................................... 1
Stock Purchase Agreement .................................................. 1
Systems ................................................................... 4
TEMPEST ................................................................... 4
TIN ....................................................................... 51
Trustee ................................................................... 40
Units ..................................................................... 39
Warrantholders ............................................................ 1
Warrants .................................................................. 1
Wilcom .................................................................... 4
-97-
<PAGE>
<PAGE>
Part II
NAI TECHNOLOGIES, INC. AND SUBSIDIARIES
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
3(i) Restated Certificate of Incorporation of NAI Technologies, Inc. filed
with the Secretary of State of the State of New York on August 19,
1991 (filed with Commission as Exhibit 3(i) to the Company's Quarterly
Report on Form 10-Q for the quarterly period ended September 28,
1996).
3(ii) Certificate of Amendment to the Certificate of Incorporation of the
Registrant, as filed with the New York Secretary of State on February
2, 1996 (filed with the Commission as Exhibit 3(ii) to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended
September 28, 1996.
3(iii) Certificate of Amendment of the Certificate of Incorporation of NAI
Technologies, Inc. filed with the Secretary of State of the State of
New York on August 7, 1996 (filed with Commission as Exhibit 3(ii) to
the Company's Quarterly Report on Form 10-Q for the quarterly period
ended September 28, 1996).
4(iv) Indenture, dated as of July 15, 1996, between NAI Technologies, Inc.
and First Trust National Association, as Trustee (filed with
Commission as Exhibit 4(i) to the Company's Quarterly Report on Form
10-Q for the quarterly period ended September 28, 1996).
4(v) Warrant Agreement, dated as of August 26, 1996, between NAI
Technologies, Inc. and American Stock Transfer & Trust Company (filed
with Commission as Exhibit 4(ii) to the Company's Quarterly Report on
Form 10-Q for the quarterly period ended September 28, 1996).
</TABLE>
-98-
<PAGE>
<PAGE>
<TABLE>
<S> <C> <C>
10(i) Amendment No. 1 to Employment Agreement, entered into as of August 8,
1996, between NAI Technologies, Inc. and Richard A. Schneider (filed
with Commission as Exhibit 10(I) to the Company's Quarterly Report on
Form 10-Q for the quarterly period ended September 28, 1996).
10(ii) Settlement Agreement and Release, entered into as of August 8, 1996,
between NAI Technologies, Inc. and Richard A. Schneider (filed with
Commission as Exhibit 10(ii) to the Company's Quarterly Report on Form
10-Q for the quarterly period ended September 28, 1996).
10(iii) 1996 Stock Option Plan (filed with Commission as Exhibit 10(iii) to
the Company's Quarterly Report on Form 10-Q for the quarterly period
ended September 28, 1996).
10(iv) 1993 Stock Option Plan for Directors, as amended (filed with
Commission as Exhibit 10(iv) to the Company's Quarterly Report on Form
10-Q for the quarterly period ended September 28, 1996).
10(v) Employment Agreement, entered into as of January 1, 1997, between NAI
Technologies, Inc. and Robert A. Carlson (filed with the Commmission
as Exhibit 10(x) to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1996).
10(vi) Amendment No. 2 to Employment Agreement, entered into as of January 2,
1997, between NAI Technologies, Inc. and Richard A. Schneider. (filed
with the Commmission as Exhibit 10(xi) to the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 1996).
10(vii) Settlement Agreement and Release, entered into as of December 19,
1996, between NAI Technologies, Inc. and Robert A. Carlson. (filed
with the Commmission as Exhibit 10(xii) to the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 1996).
12 Computation of Per Share Earnings.
21 List of Subsidiaries (filed with the Commmission as Exhibit 21 to
the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1996).
23.1 Consent of KPMG Peat Marwick.
99(i) Form of Note Certificate (filed with the Commission as Exhibit 99(i)
to the Company's Quarterly Report on Form 10-Q for the quarterly
period ended September 28, 1996).
99(ii) Form of Warrant Certificate (filed with the Commission as
Exhibit 99(ii) to the Company's Quarterly Report on Form 10-Q for the
quarterly period ended September 28, 1996).
(b) Financial Statement Schedules
Schedule II-Valuation and Qualifying Accounts (included on page 96
of this Registration Statement).
</TABLE>
-99-
<PAGE>
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Company certifies that it has reasonable grounds to believe that it meets all of
the requirements for filing on Form S-1 and has duly caused this Post-Effective
Amendment to Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the Town of Huntington, State of New
York, on the 28th day of May, 1997.
NAI TECHNOLOGIES, INC.
By /s/ Robert A. Carlson
------------------------------
Robert A. Carlson
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Post-Effective Amendment to Registration Statement has been signed below by
the following persons, in the capacities indicated, on May 28, 1997.
By /s/ Robert A. Carlson
------------------------------
Robert A. Carlson
Chairman and Chief Executive Officer
and Director (principal executive officer)
By /s/ Richard A. Schneider
------------------------------
Richard A. Schneider
Executive Vice President, Treasurer,
Chief Financial Officer, Secretary
and Director (principal financial
and accounting officer)
By /s/ Stephen A. Barre*
------------------------------
Stephen A. Barre
Director
By /s/ C. Shelton James*
------------------------------
C. Shelton James
Director
By /s/ Charles S. Holmes*
------------------------------
Charles S. Holmes
Director
By
------------------------------
Edward L. Hennessy
Director
By /s/ Dennis McCarthy*
------------------------------
Dennis McCarthy
Director
- --------------------
* Richard A. Schneider, pursuant to a Power of Attorney executed by each of the
directors and officers noted above and filed with the Securities and Exchange
Commission, by signing his name hereto, does hereby sign and execute this
Post-Effective Amendment to Registration Statement on Form S-1 on behalf of
each of the persons noted above in the capacities indicated.
-100-
<PAGE>
<PAGE>
EXHIBIT 12
NAI TECHNOLOGIES, INC.
RATIO OF EARNINGS TO FIXED CHARGES
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
First Quarter Year Ended December 31,
------------------------------ -------------------------------------------------------
1995 1996 1997 1992 1993 1994 1995 1996
--------- -------- ------- -------- -------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Income (loss from continuing
operations ($ 1,094) ($ 450) 379 $ 5,051 $ 5,455 ($11,591) ($11,619) $ 2,413
Income taxes (benefit)............. 86 135 147 2,920 2,840 (4,392) 377 396
-------- -------- -------- -------- -------- -------- -------- --------
Income (loss) from continuing
operations before income taxes... (1,008) (315) 526 7,971 8,295 (15,983) (11,242) 2,809
-------- -------- -------- -------- -------- -------- -------- --------
Add fixed charges:
Interest expense................ 394 565 401 619 786 1,477 1,662 2,209
Deferred debt expense........... -- 55 104 -- -- -- 900 456
-------- -------- -------- -------- -------- -------- -------- --------
Total fixed charges................ 394 620 505 619 786 1,477 2,562 2,665
-------- -------- -------- -------- -------- -------- -------- --------
Total income (loss) and
fixed charges.................... ($ 614) $ 305 $ 1,031 $ 8,590 $ 9,081 ($14,506) ($ 8,680) $ 5,474
======== ======== ======== ======== ======== ======== ======== ========
Ratio ............................. * 0.49 2.04 13.88 11.55 * * 2.05
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
* Earnings are inadequate to cover fixed charges. The coverage deficiency is
$1,008 for the 1st quarter of 1995, $15,983 for 1994 and $11,242 in 1995.
<PAGE>
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
NAI Technologies, Inc.:
We consent to the use of our reports included herein and to the reference
to our firm under the headings "Summary Financial Data," "Selected Financial
Data" and "Experts" in the prospectus.
/s/ KPMG Peat Marwick LLP
- -------------------------
KPMG Peat Marwick LLP
Boulder, Colorado
May 27, 1997
<PAGE>
