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(Conformed copy)
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Fiscal Year Ended
December 31, 1996
Commission File Number 0-3704
NAI TECHNOLOGIES, INC.
A New York Corporation IRS Employer I.D. No. 11-1798773
282 New York Avenue, Huntington, New York 11743
Telephone No. (516) 271-5685
Securities Registered Pursuant to Section 12 (b) of the Act: None
Securities Registered Pursuant to Section 12 (g) of the Act:
Common Stock, Par Value $0.10 Per Share
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO ____
----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. (X)
As of March 11, 1997, 9,032,437 shares of common stock were outstanding. The
aggregate market value of the shares of common stock (based on the average bid
and asked price of these shares on The Nasdaq Stock Market as of March 11, 1997)
of NAI Technologies, Inc. held by non-affiliates was approximately $40 million.
Documents Incorporated by Reference: None.
Page 1 of 37
Exhibit index on Page 33
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NAI TECHNOLOGIES, INC.
1996 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
Page
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PART I
Item 1. Business ......................................................... 3
Item 2. Properties ....................................................... 10
Item 3. Legal Proceedings ................................................ 10
Item 4. Submission of Matters to a Vote of Security Holders .............. 10
PART II
Item 5. Market for Registrant's Common Stock
and Related Stockholder Matters .................................. 11
Item 6. Selected Financial Data .......................................... 12
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations .............................. 13
Item 8. Consolidated Financial Statements and Supplementary Data. ........ 19
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure .............................. 19
PART III
Item 10. Directors and Executive Officers of the Registrant ............... 20
Item 11. Executive Compensation ........................................... 22
Item 12. Security Ownership of Certain Beneficial Owners and Management ... 26
Item 13. Certain Relationships and Related Transactions ................... 28
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K. ..................................................... 29
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PART I
Item 1.
Business
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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.
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Codar's equipment is designed to allow flexibility in configuration of all
essential components. In addition to complying with system functional
specifications, Codar's products are engineered to be deployed in environments
that require special attention to system configurations with limitations on size
and power consumption, and restraint on electromagnetic emissions. Products are
custom built to withstand shock, vibration, cold, heat, dust, sand, rain and
altitude conditions.
Codar has developed and produced products for a large number of government
programs and departments and more than 100 additional customers aggregating more
than 200 different end-users. The products have met military requirements for
use in a variety of applications in vehicles, shelters and fixed-site
installations. Codar has designed, built, tested and sold equipment for
airborne, ground/mobile and shipboard military environmental specifications and
military requirements.
Codar is the prime contractor for 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.
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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.
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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
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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.
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Foreign sales for the past three years have been as follows:
Approximate
Total Percent of
Foreign Sales Company Sales
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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.
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Patents and Trademarks
The Company owns patents and trademarks and seeks patent protection for its
products in cases where the Company believes the technology involved is
sufficiently innovative to warrant such protection. The Company seeks trademark
protection for its products in cases where the Company believes for marketing
reasons such protection is warranted. The Company seeks to protect its
proprietary information through its reliance on patent, copyright, trademark and
trade secret laws, non-disclosure agreements with its employees and
confidentiality provisions in licensing arrangements with its customers. There
is no assurance that such agreements will be effective to protect the Company or
that the proprietary information deemed confidential by the Company will be
adequately protected by the law respecting trade secrets. Consequently, it may
be possible for unauthorized third parties to copy certain portions of the
Company's products or to "reverse engineer" or otherwise obtain the Company's
proprietary rights. Moreover, the laws of some foreign countries do not afford
the same protection provided by U.S. laws to the Company's proprietary rights.
Government Regulation
The Company is subject to the Federal acquisition regulations governing the
issuance of government contracts, Federal Trade Commission regulations governing
its advertising and trade practices, Department of Commerce regulations as well
as Department of State Defense Trade Control regulations with respect to goods
it imports and exports, and the Truth in Negotiations Act, which provides for
the examination by the U.S. Government of cost records to determine whether
accurate pricing information was disclosed in connection with government
contracts. To date, such government regulations have not had a material adverse
effect on the Company's business. The Company in the normal course of business
is subject to Department of Defense audits with respect to its government
contracts, some of which may result in pricing adjustments.
The Company's manufacturing operations are subject to various federal, state and
local laws that regulate the discharge of materials into the environment, or
otherwise relating to the protection of the environment. To date, compliance
with such government regulations has not had a material adverse effect on the
Company's business.
Manufacturing and Supplies
Production of the Company's products requires assembly and testing of
components, printed circuit boards and other purchased parts. Quality control,
testing and inspection are performed at various steps throughout the
manufacturing process.
The Company purchases certain materials and components used in its systems and
equipment from independent suppliers. These materials and components are not
normally purchased under long-term contracts. The Company purchases
minicomputers, workstations, personal computers, mass storage subsystems, high
resolution monitors and keyboards under OEM agreements. The Company believes
that most of the items its purchases may be obtained from a variety of suppliers
and it normally obtains alternative sources for major items, although the
Company is sometimes dependent on a single supplier or a few suppliers for some
items.
During 1995 and 1994, the Company's cash constraints strained its relationships
with vendors, which adversely impacted the Company's ability to meet its
production targets on a timely and cost-effective basis. These constraints were
significantly eased during 1996 and the Company now believes it is in good
standing with all of its vendors.
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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.
Item 2.
Properties
The Company's facilities, which are believed to be adequate to meet the
Company's foreseeable needs, are shown in the table that follows:
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Facilities
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Approximate
Floor Area Expiration
Division or Subsidiary Location (in Sq. Ft.) Date
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<S> <C> <C> <C>
Electronic Systems Segment
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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
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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.
Item 3.
Legal Proceedings
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None.
Item 4.
Submission of Matters to a Vote of Security Holders
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None.
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PART II
Item 5.
Market for Registrant's Common Stock and Related Stockholder Matters
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The Company's Common Stock trades on The Nasdaq Stock Market under the symbol
NATL. The table below sets forth for the periods indicated the high and low sale
prices for the Common Stock as adjusted for stock dividends and stock splits as
compiled from published sources.
Period High Low
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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
There have been no cash dividends declared or paid on the Common Stock in the
above two years. The Company's existing credit agreement restricts cash
dividends. A 4% stock dividend on the Common Stock was paid to shareholders of
record on February 25, 1994.
As of December 31, 1996, there were approximately 650 record holders of Common
Stock as determined from the records of the transfer agent, American Stock
Transfer & Trust Company. Street names are included collectively as a single
holder of record. Management estimates that the Company has approximately 2,500
additional shareholders holding stock in street names.
The Warrants
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The Company has issued and outstanding warrants (the "Warrants") to purchase
4,119,700 shares of Common Stock of the Company at an exercise price of $2.50
per share, subject to adjustment, on or prior to February 15, 2002. The Warrants
trade on the Nasdaq SmallCap Market under the symbol NATLW. As of December 31,
1996, there were approximately 60 record holders of Warrants as determined from
the records of the warrant agent, American Stock Transfer & Trust Company.
The Notes
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The Company has issued and outstanding 12% Convertible Subordinated Promissory
Notes due January 15, 2001, in the aggregate principal amount of $5,227,000 (the
"Notes") at December 31, 1996. The Notes are convertible into shares of Common
Stock at a conversion price of $2.00 per share, subject to adjustment. The Notes
are quoted on the Yellow Sheets of the National Quotations Bureau under the
symbol NAI TECH INC 12-2001. As of December 31, 1996, there were approximately
40 record holders of the Notes as determined from the records of the trustee,
First Trust National Association.
The Notes and Warrants were issued by the Company in a private placement of the
Notes and Warrants on February 15, 1996, February 23, 1996, February 29, 1996
and May 2, 1996. On August 26, 1996 the Company filed with the Commission an
effective Registration Statement registering the sale of $6,342,000 of the
Notes, 4,119,700 of the Warrants and 8,904,336 shares of the Company's Common
Stock.
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Item 6.
Selected Financial Data
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(in thousands except per share data)
1996 1995 1994 1993 1992
Net sales $68,207 $60,008 $54,520 $81,024 $67,315
Operating earnings (loss)(1) 5,307 (8,875) (14,589) 8,960 8,407
Net earnings (loss) (1) 2,413 (11,619) (11,591) 5,455 5,051
Per share data:
Net earnings (loss)(3) 0.28 (1.57) (1.69) 0.80 0.80
Cash dividends(2) -- -- -- -- --
Total assets at year end 41,371 48,012 53,720 60,715 43,704
Long-term debt 12,224 15,573 13,990 10,797 7,158
Working capital 14,241 10,044 16,665 19,105 17,094
Shareholders' equity 15,980 10,086 20,296 30,593 23,911
Average market price per
common share at year end(3) $3 3/4 $1 1/2 $2 11/16 $6 1/4 $8 3/16
Average common shares(3) 8,570 7,382 6,580 6,843 6,309
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(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.
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Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
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Operations
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Results of Operations
---------------------
1996 Compared with 1995
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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
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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.
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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.
-14-
<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.
-15-
<PAGE>
<PAGE>
General and administrative expenses for 1995 were $6.5 million, as compared to
$6.3 million in 1994. This increase is primarily attributable to the Company
moving its corporate headquarters from Woodbury, New York to Longmont, Colorado
in December 1995 and additional administrative expense at Codar as a result of
increased management resources. These cost increases were partially offset by
cost cutting measures implemented at the Company's other divisions and the
savings associated with the consolidation of the military products division in
the third quarter of 1994.
Company-sponsored research and development expenditures for 1995 were $1.8
million, as compared to $3.2 million in 1994. This decrease is attributable to
savings associated with the previously mentioned consolidation and the change in
mix between Company-sponsored research and development and customer-funded
research and development. The Electronic Systems segment is focusing on its
system integration business. Although systems integration work by its nature
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
-16-
<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 $2.7 million at December 31, 1996, as compared
to $2.6 million at December 31, 1995. Cash used by operating activities amounted
to $1.6 million in 1996, as compared to cash provided by operating activities of
$0.1 million in 1995.
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.
-17-
<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.
-18-
<PAGE>
<PAGE>
Item 8.
Consolidated Financial Statements and Supplementary Data
- --------------------------------------------------------
The following consolidated financial statements of the registrant are submitted
herewith at the end of this document beginning on Page F-1:
Independent Auditors' Report.
Consolidated balance sheets at December 31, 1996 and 1995.
Consolidated statements of operations for the years ended December 31, 1996,
1995 and 1994.
Consolidated statements of shareholders' equity for the years ended December 31,
1996, 1995 and 1994.
Consolidated statements of cash flows for the years ended December 31, 1996,
1995 and 1994.
Notes to consolidated financial statements.
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial
- -------------------------------------------------------------------------
Disclosure
- ----------
None.
-19-
<PAGE>
<PAGE>
PART III
Item 10.
Directors and Executive Officers of the Registrant
- --------------------------------------------------
Directors of the Company
- ------------------------
The members of the Board of Directors of the Company as of March 11, 1997,
together with certain information furnished to the Company by each such person
as of such date, are set forth below.
Years Served
Name and Age as a Director Biographical Summary
- ------------ ------------- --------------------
Robert A. Carlson(1), 64 9 Mr. Carlson is Chairman and Chief
Executive Officer of the Company.
From December 1987 until December
1989, he was President and Chief
Operating Officer of the Company.
From December 1989 to October 1995,
he was President and Chief
Executive Officer of the Company.
Richard A. Schneider, 44 4 Mr. Schneider is 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.
Stephen A. Barre(2),(3), 56 7 Mr. Barre is Chairman and Chief
Executive Officer of Servo
Corporation of America, a
communications and defect detection
company.
C. Shelton James(1),(3), 55 7 Mr. James is Chairman of the Board
and Chief Executive Officer of
Elcotel, Inc., a public
communications company. He also is
President and a director of
Fundamental Management Corporation,
an investment management company
which is the general partner of
limited partnerships which are
substantial investors in the
Company, and he is on the board of
directors of Harris Computer
Systems, Inc., a company engaged in
the manufacture of real time
computers, SK Technologies, a
company engaged in development and
marketing of point-of-sale
software, and CPSI, Inc., a company
engaged in high performance
computing.
-20-
<PAGE>
<PAGE>
Edward L. Hennessy, Jr.(2), 68 1 year Mr. Hennessy is the retired
Chairman and Chief Executive
Officer of Allied Signal, Inc., a
world-wide technology company. He
also is 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(1),(2), 51 1 year A director of the Company since
October 3, 1995, Mr. Holmes is
President and sole stockholder of
Asset Management Associates of New
York, Inc., a New York-based firm
specializing in acquisitions of
manufacturing businesses. Mr.
Holmes founded and was a partner in
Asset Management Associates, a
predecessor partnership of Asset
Management, from 1978 to 1991. He
has served since its formation in
1992 as Vice Chairman of the Board
of Directors of Chart Industries
Inc., which specializes in the
design, manufacture and sale of
industrial process equipment used
in the hydrocarbon and industrial
gas industries for low-temperature
and cryogenic applications, and
manufactures other industrial
equipment such as stainless steel
tubing, structural pipe supports
and high vacuum systems.
Dennis McCarthy(3), 50 1 year Mr. 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.
- ------------------------
1) Member of the Executive Committee
2) Member of the Compensation Committee
3) Member of the Audit Committee
-21-
<PAGE>
<PAGE>
Executive Officers of the Company
- ---------------------------------
The current executive officers of the Company are as follows:
Robert A. Carlson, 64, is the Chairman and Chief Executive Officer of the
Company. From December 1987 until December 1989, he was President and Chief
Operating Officer of the Company. From December 1989 until October 1995, he was
President and Chief Executive Officer of the Company.
Richard A. Schneider, 44, is the Executive Vice President, Treasurer and
Secretary of the Company. From October 1988 until December 1992, he served as
Vice President-Finance and Treasurer of the Company. He was elected Secretary of
the Company in January 1990.
Item 11.
Executive Compensation
- ----------------------
The following table sets forth all plan and non-plan compensation awarded to,
earned by or paid to the Company's Chief Executive Officer and each of the
executive officers of the Company other than the Chief Executive Officer whose
total annual salary and bonus exceeded $100,000 (collectively, the "Named
Executives") for each of the Company's last three fiscal years.
<TABLE>
<CAPTION>
Long Term Compensation
----------------------
Annual Compensation Awards Payouts
------------------- ------ -------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Securities
Other Annual Restricted Underlying All Other
Name and Principal Fiscal Compensation Stock Options/ LTIP Compensation
Position Year Salary ($) Bonus ($) ($) (1) Award(s)($) SARs(#) Payouts ($)
-------- ---- ---------- --------- ------- ----------- ------- ------- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Robert A. Carlson - 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 $0 of matching contributions made
by the Company under the profit sharing portion of such plan for the
benefit of Mr. Schneider for each of the years 1994, 1995 and 1996,
respectively.
-22-
<PAGE>
<PAGE>
(4) Options to acquire shares of Common Stock that were granted in fiscal year
1994. At the same time, options for Mr. Carlson (102,951 shares) and Mr.
Schneider (54,996 shares) were canceled.
(5) Options to acquire shares of Common Stock that were granted in fiscal year
1995. At the same time, options for Mr. Carlson (214,485 shares) and Mr.
Schneider (95,327 shares) were canceled.
Stock Options
- -------------
The table below summarizes the options granted to the Named Executives in 1996
and their potential realizable values.
Option/SAR Grants in 1996
-------------------------
<TABLE>
<CAPTION>
Potential Realizable Value of
Assumed Annual
Rates of Stock Price
Appreciation
Individual Grants for Option Term 1
----------------- -----------------
(a) (b) (c) (d) (e) (f) (g)
Number of % of Total
Securities Options/SARs
Underlying Granted to
Options/SARs Employees in Exercise or Base
Name Granted (#) Fiscal Year Price ($/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.
-23-
<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.
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
-24-
<PAGE>
<PAGE>
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.
-25-
<PAGE>
<PAGE>
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.
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.
Item 12.
Security Ownership of Certain Beneficial Owners and Management
- --------------------------------------------------------------
The following table sets forth information concerning persons or groups who are
known by the Company to be the beneficial owners of more than 5% of the Common
Stock as of March 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.
-26-
<PAGE>
<PAGE>
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.
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.
-27-
<PAGE>
<PAGE>
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.
Item 13.
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.
-28-
<PAGE>
<PAGE>
PART IV
Item 14.
Exhibits, Financial Statement Schedules and Reports on Form 8-K
- ---------------------------------------------------------------
(a) Financial Statements and Financial Statement Schedules
------------------------------------------------------
The consolidated financial statements and schedules listed in the
accompanying index to financial statements are filed as part of this Annual
Report on Form 10-K.
(b) Reports on Form 8-K
None.
(c) Exhibits
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 the 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 to the Company's Report on Form 8-K dated February
15, 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 the
Commission as Exhibit 3(ii) to the Company's Quarterly Report
on Form 10-Q for the quarterly period ended September 28,
1996).
4(i) Form of 12% Convertible Subordinated Promissory Note, due
January 15, 2001, of the Registrant (filed with the
Commission as Exhibit 1 to the Company's Report on Form 8-K
dated February 15, 1996).
4(ii) Form of Warrant to Purchase Common Stock of the Registrant,
on or before February 15, 2002 (filed with the Commission as
Exhibit 2 to the Company's Report on Form 8-K dated February
15, 1996).
4(iii) Registration Rights Agreement, dated as of February 13, 1996,
between the Registrant and the Investors (filed with the
Commission as Exhibit 4 to the Company's Report on Form 8-K
dated February 15, 1996).
4(iv) Indenture, dated as of July 15, 1996, between NAI
Technologies, Inc. and First Trust National Association, as
Trustee (filed with the 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 the Commission as
-29-
<PAGE>
<PAGE>
Exhibit 4(ii) to the Company's Quarterly Report on Form 10-Q
for the quarterly period ended September 28, 1996).
10(i) Placement Agency Agreement, dated as of December 15, 1995,
between Commonwealth Associates and the Registrant (filed
with the Commission as Exhibit 5 to the Company's Report on
Form 8-K dated February 15, 1996).
10(ii) Fourth Amendment to Amended and Restated Credit Agreement,
dated as of January 5, 1996, among the Registrant, Chemical
Bank, a New York banking corporation, ("Chemical"), The Bank
of New York, a New York banking corporation ("BNY"), and each
of the other financial institutions which from time to time
becomes a party thereto (together with Chemical and BNY, the
"Banks"), BNY, as administrative agent (the "Administrative
Agent"), and Chemical as collateral agent (the "Collateral
Agent") (filed with the Commission as Exhibit 6 to the
Company's Report on Form 8-K dated February 15, 1996).
10(iii) Fifth Amendment, dated as of February 13, 1996, to Amended
and Restated Credit Agreement, dated as of April 12, 1995, as
previously amended, among the Registrant, the Banks, the
Administrative Agent and the Collateral Agent (filed with the
Commission as Exhibit 7 to the Company's Report on Form 8-K
dated February 15, 1996).
10(iv) Amendment No. 1 to Registration Rights Agreement, dated as of
February 13, 1996 (the "Registration Rights Amendment"), to
that certain Registration Rights Agreement, dated as of April
12, 1995, as amended, between the Registrant, BNY and
Chemical (filed with the Commission as Exhibit 8 to the
Company's Report on Form 8-K dated February 15, 1996).
10(v) Letter Agreement, dated May 9, 1996, between Charles S.
Holmes and the Company (filed with the Commission as Exhibit
1 to the Company's Report on Form 8-K dated May 9, 1996).
10(vi) Amendment No. 1 to Employment Agreement, entered into as of
August 8, 1996, between NAI Technologies, Inc. and Richard A.
Schneider (filed with the Commission as Exhibit 10(i) to the
Company's Quarterly Report on Form 10-Q for the quarterly
period ended September 28, 1996).
10(vii) Settlement Agreement and Release, entered into as of August
8, 1996, between NAI Technologies, Inc. and Richard A.
Schneider (filed with the Commission as Exhibit 10(ii) to the
Company's Quarterly Report on Form 10-Q for the quarterly
period ended September 28, 1996).
10(viii) 1996 Stock Option Plan (filed with the Commission as Exhibit
10(iii) to the Company's Quarterly Report on Form 10-Q for
the quarterly period ended September 28, 1996).
10(ix) 1993 Stock Option Plan for Directors, as amended (filed with
the Commission as Exhibit 10(iv) to the Company's Quarterly
Report on Form 10-Q for the quarterly period ended September
28, 1996).
10(x) Employment Agreement, entered into as of January 1, 1997,
between NAI Technologies, Inc. and Robert A. Carlson.
-30-
<PAGE>
<PAGE>
10(xi) Amendment No. 2 to Employment Agreement, entered into as of
January 2, 1997, between NAI Technologies, Inc. and Richard
A. Schneider.
10(xii) Settlement Agreement and Release, entered into as of December
19, 1996, between NAI Technologies, Inc. and Robert A.
Carlson.
11 Statement re: Computation of Per Share Earnings.
17(i) Resignation letter of Robert D. Rosenthal, dated December 13,
1995, resigning from the Board of Directors of the Registrant
(filed with the Commission as Exhibit 9 to the Company's
Report on Form 8-K dated February 15, 1996).
17(ii) Resignation letter of John M. May, dated February 13, 1996,
resigning from the Board of Directors of the Registrant
(filed with the Commission as Exhibit 10 to the Company's
Report on Form 8-K dated February 15, 1996).
21 List of Subsidiaries.
23 Accountants' Consent.
27 Financial Data Schedules (Edgar filing only).
99(i) Press Release, dated February 15, 1996, describing the
closing of the Investment Transaction and the Amendment
(filed with the Commission as Exhibit 11 to the Company's
Report on Form 8-K dated February 15, 1996).
99(ii) Pro Forma Consolidated Balance Sheets as of April 27, 1996 of
NAI Technologies, Inc. and Subsidiaries (filed with the
Commission as Exhibit 2 to the Company's Report on Form 8-K
dated May 9, 1996).
(d) Not applicable.
-31-
<PAGE>
<PAGE>
S I G N A T U R E S
-------------------
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
NAI TECHNOLOGIES, INC.
/s/ Richard A. Schneider
By:____________________________
Richard A. Schneider
Date: March 11, 1997 Executive Vice President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the date indicated.
Signature Title Date
- --------- ----- ----
/s/ Robert A. Carlson
_____________________________ Chairman, Chief Executive March 11, 1997
Robert A. Carlson Officer and Director
(Chief Executive Officer)
/s/ Stephen Barre
_____________________________ Director March 11, 1997
Stephen Barre
/s/ Edward L. Hennessy, Jr.
_____________________________ Director March 11, 1997
Edward L. Hennessy, Jr.
/s/ Charles S. Holmes
_____________________________ Director March 11, 1997
Charles S. Holmes
/s/ C. Shelton James
_____________________________ Director March 11, 1997
C. Shelton James
/s/ Dennis McCarthy
_____________________________ Director March 11, 1997
Dennis McCarthy
/s/ Richard A. Schneider
_____________________________ Executive Vice President, March 11, 1997
Richard A. Schneider Chief Financial Officer,
Treasurer, Secretary and
Director (Chief Financial and
Accounting Officer)
-32-
STATEMENT OF DIFFERENCES
The registered trademark symbol shall be expressed as ................. 'r'
The British pound sterling sign shall be expressed as.................. 'L'
<PAGE>
<PAGE>
NAI TECHNOLOGIES, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report F-2
Consolidated Balance Sheets at December 31, 1996 and 1995 F-3
Consolidated Statements of Operations - Years ended F-4
December 31, 1996, 1995 and 1994
Consolidated Statements of Shareholders' Equity - F-5
Years ended December 31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows - Years ended F-6
December 31, 1996, 1995 and 1994
Notes to Consolidated Financial Statements F-7
Independent Auditors' Report F-29
Consolidated Financial Statement Schedules:
II - Valuation and Qualifying Accounts F-30
</TABLE>
Schedules not listed above have been omitted either because they are not
applicable or the required information is shown in the consolidated financial
statements or notes thereto.
F-1
<PAGE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
and Stockholders
NAI Technologies, Inc.
We have audited the accompanying consolidated balance sheets of NAI
Technologies, Inc. and subsidiaries as of December 31, 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
F-2
<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.
F-3
<PAGE>
<PAGE>
NAI TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years ended December 31,
(in thousands except per share amounts) 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.
F-4
<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.
F-5
<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.
F-6
<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.
F-7
<PAGE>
<PAGE>
Property, Plant and Equipment: Property, plant and equipment are recorded at
historical cost. Depreciation and amortization have been computed using the
straight-line method over the following estimated useful lives of the assets:
equipment and furniture and fixtures, generally -- 2 to 10 years, and buildings
- -- 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.
F-8
<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.
F-9
<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>
F-10
<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>
F-11
<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.
F-12
<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.
F-13
<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.
F-14
<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.
F-15
<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.
F-16
<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:
F-17
<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.
F-18
<PAGE>
<PAGE>
Employee Stock Option Plans
The following is a summary of activity related to all stock option plans:
<TABLE>
<CAPTION>
Number Weighted average
of option price
shares per share
------ ---------
<S> <C> <C>
Outstanding at January 1, 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.
F-19
<PAGE>
<PAGE>
Employee Stock Purchase Plan
Under the 1992 Employee Stock Purchase Plan, which commenced July 1, 1992,
employees may subscribe to purchase shares of common stock at the lesser of 85%
of the market price on the first day of the purchase period or the date
purchased one year later. Payment for the shares is made through payroll
deductions of up to 5% of annual base pay over a one year period. A total of
113,177 shares has been reserved for issuance under the Employee Stock Purchase
Plan and as of December 31, 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>
F-20
<PAGE>
<PAGE>
13. EMPLOYEE BENEFIT PLANS
Pension Plan
Until December 1995, when the plan was terminated and all assets were
distributed, the Company had a noncontributory defined benefit pension
plan covering all eligible employees. The plan provided for normal
retirement at age 65, or at least age 62 with 30 years of service, and
optional early retirement.
In December 1993, the Board of Directors approved an amendment to the
pension plan which resulted in the freezing of all future benefits under
the plan as of January 3, 1994.
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
----------------------------------------------------------------------------------
----------------------------------------------------------------------------------
The unfunded accrued supplementary costs are included in other accrued
expenses-noncurrent in 1995.
</TABLE>
F-21
<PAGE>
<PAGE>
F-22
<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.
F-23
<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>
F-24
<PAGE>
<PAGE>
15. INFORMATION BY BUSINESS SEGMENT
The Company's operations are classified into two business segments:
Electronic Systems and Telecommunications. The Electronic Systems
segment includes Codar Technology, Inc. based in Longmont, Colorado, NAI
Technologies--Systems Division Corporation in Columbia, Maryland, and
Lynwood Scientific Developments Limited in Farnham, England.
Codar Technology designs, manufactures, integrates and supports rugged
computer systems, advanced computer peripherals and memory systems for
military and commercial use. Systems provides custom packaged,
integrated computer systems for deployment in shelters, ships, land
vehicles and other demanding environments. Lynwood supplies rugged,
environmentally and electrically screened personal computers and
workstations based upon standard commercial off the shelf technology,
targeted to the military and government markets principally in
Europe. 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.
F-25
<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>
F-26
<PAGE>
<PAGE>
16. COMMITMENTS AND CONTINGENCIES
The Company and its subsidiaries lease office and manufacturing
facilities, automobiles, computers and other equipment under various
non-cancelable operating leases.
Future minimum rental commitments for leases with non-cancelable terms
in excess of one year are as follows:
<TABLE>
<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.
F-27
<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.
F-28
<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
F-29
<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>
F-30
<PAGE>
<PAGE>
NAI TECHNOLOGIES, INC. AND SUBSIDIARIES
INDEX TO 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 the 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 to the Company's
Report on Form 8-K dated February 15, 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 the Commission as Exhibit 3(ii)
to the Company's Quarterly Report on Form 10-Q for the quarterly
period ended September 28, 1996).
4(i) Form of 12% Convertible Subordinated Promissory Note, due January 15,
2001, of the Registrant (filed with the Commission as Exhibit 1 to the
Company's Report on Form 8-K dated February 15, 1996).
4(ii) Form of Warrant to Purchase Common Stock of the Registrant, on or
before February 15, 2002 (filed with the Commission as Exhibit 2 to
the Company's Report on Form 8-K dated February 15, 1996).
4(iii) Registration Rights Agreement, dated as of February 13, 1996, between
the Registrant and the Investors (filed with the Commission as Exhibit
4 to the Company's Report on Form 8-K dated February 15, 1996).
4(iv) Indenture, dated as of July 15, 1996, between NAI Technologies, Inc.
and First Trust National Association, as Trustee (filed with the
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 the Commission as Exhibit 4(ii) to the Company's Quarterly Report
on Form 10-Q for the quarterly period ended September 28, 1996).
10(i) Placement Agency Agreement, dated as of December 15, 1995, between
Commonwealth Associates and the Registrant (filed with the Commission
as Exhibit 5 to the Company's Report on Form 8-K dated February 15,
1996).
10(ii) Fourth Amendment to Amended and Restated Credit Agreement, dated as of
January 5, 1996, among the Registrant, Chemical Bank, a New York
banking corporation, ("Chemical"), The Bank of New York, a New York
banking corporation ("BNY"), and each of the other financial
institutions which from time to time becomes a party thereto (together
with Chemical and BNY, the "Banks"), BNY, as administrative agent (the
"Administrative Agent"), and Chemical as
</TABLE>
-33-
<PAGE>
<PAGE>
<TABLE>
<S> <C> <C>
collateral agent (the "Collateral Agent") (filed with the Commission
as Exhibit 6 to the Company's Report on Form 8-K dated February 15,
1996).
10(iii) Fifth Amendment, dated as of February 13, 1996, to Amended and
Restated Credit Agreement, dated as of April 12, 1995, as previously
amended, among the Registrant, the Banks, the Administrative Agent and
the Collateral Agent (filed with the Commission as Exhibit 7 to the
Company's Report on Form 8-K dated February 15, 1996).
10(iv) Amendment No. 1 to Registration Rights Agreement, dated as of February
13, 1996 (the "Registration Rights Amendment"), to that certain
Registration Rights Agreement, dated as of April 12, 1995, as amended,
between the Registrant, BNY and Chemical (filed with the Commission as
Exhibit 8 to the Company's Report on Form 8-K dated February 15,
1996).
10(v) Letter Agreement, dated May 9, 1996, between Charles S. Holmes and the
Company (filed with the Commission as Exhibit 1 to the Company's
Report on Form 8-K dated May 9, 1996).
10(vi) Amendment No. 1 to Employment Agreement, entered into as of August 8,
1996, between NAI Technologies, Inc. and Richard A. Schneider (filed
with the Commission as Exhibit 10(I) to the Company's Quarterly Report
on Form 10-Q for the quarterly period ended September 28, 1996).
10(vii) Settlement Agreement and Release, entered into as of August 8, 1996,
between NAI Technologies, Inc. and Richard A. Schneider (filed with the
Commission as Exhibit 10(ii) to the Company's Quarterly Report on Form
10-Q for the quarterly period ended September 28, 1996).
10(viii) 1996 Stock Option Plan (filed with the Commission as Exhibit 10(iii)
to the Company's Quarterly Report on Form 10-Q for the quarterly
period ended September 28, 1996).
10(ix) 1993 Stock Option Plan for Directors, as amended (filed with the
Commission as Exhibit 10(iv) to the Company's Quarterly Report on Form
10-Q for the quarterly period ended September 28, 1996).
10(x) Employment Agreement, entered into as of January 1, 1997, between NAI
Technologies, Inc. and Robert A. Carlson.
10(xi) Amendment No. 2 to Employment Agreement, entered into as of January 2,
1997, between NAI Technologies, Inc. and Richard A. Schneider.
10(xii) Settlement Agreement and Release, entered into as of December 19,
1996, between NAI Technologies, Inc. and Robert A. Carlson.
11 Statement re: Computation of Per Share Earnings.
17(i) Resignation letter of Robert D. Rosenthal, dated December 13, 1995,
resigning from the Board of Directors of the Registrant (filed with
the Commission as Exhibit 9 to the Company's Report on Form 8-K dated
February 15, 1996).
17(ii) Resignation letter of John M. May, dated February 13, 1996, resigning
from the Board of Directors of the Registrant (filed with the
Commission as Exhibit 10 to the Company's Report on Form 8-K dated
February 15, 1996).
21 List of Subsidiaries.
23 Independent Auditors' Consent.
27 Financial Data Schedules (Edgar filing only).
99(i) Press Release, dated February 15, 1996, describing the closing of the
Investment Transaction and the Amendment (filed with the Commission as
Exhibit 11 to the Company's Report on Form 8-K dated February 15,
1996).
99(ii) Pro Forma Consolidated Balance Sheets as of April 27, 1996 of NAI
Technologies, Inc. and Subsidiaries (filed with the Commission as
Exhibit 2 to the Company's Report on Form 8-K dated May 9, 1996).
</TABLE>
-34-
<PAGE>
<PAGE>
Exhibit 10(x)
EMPLOYMENT AGREEMENT
This Employment Agreement, entered into as of the 1st day of January,
1997 by and between NAI Technologies, Inc., a New York corporation (the
"Company"), and Robert A. Carlson (the "Executive").
1. Termination of Prior Agreement. Upon the effectiveness of this
Agreement, the prior agreement entered into by and between the Executive and the
Company, dated as of October 16, 1995, shall be terminated in all respects and
be superseded by this Agreement.
2. Employment and Duties.
2.1. Duties. Upon the terms and conditions herein set forth, the
Company employs the Executive, and the Executive hereby agrees to serve as
Chairman and Chief Executive Officer, effective January 1, 1997 (the "Effective
Date"). The Executive shall devote his best efforts to such duties with the
Company as the Board of Directors may direct.
2.2. Term. The term of the Executive's employment under this
Agreement (the "Term") shall commence on the Effective Date and shall continue
until December 31, 1997, unless extended by the Executive. On or within 30 days
prior to each of January 1, 1998 and January 1, 1999, the Executive may extend
the Term for a one year period (each an "Executive Extension"). Nothing in this
Section 2.2, however, shall limit the right of the Company or the Executive to
terminate the Executive's employment hereunder on the terms and conditions set
forth in Section 4.
3. Compensation and Other Benefits. Subject to the provisions of this
Agreement, the Company shall pay and provide the following compensation and
other benefits for services rendered during the Term:
3.1. Salary. During the Term, the Executive shall be paid salary
at a rate of $260,000 per annum ("Salary"), payable in substantially equal
installments (not less frequently than monthly) in accordance with the Company's
regular payroll practices.
3.2. Incentive Compensation. In addition to Salary the Company
shall pay to Executive bonuses as follows:
<PAGE>
<PAGE>
(a) $50,000 on each of January 15, 1998 and January 15,
1999, on the occurrence of an Executive Extension if the Executive
agrees to continue in his role as Chairman of the Company (the "Chairman
Bonus") until December 31, 1998 and December 31, 1999, respectively;
(b) $50,000 on each of January 15, 1998 and January 15,
1999, on the occurrence of the Executive Extension if the Executive
agrees to continue his employment as Chief Executive Officer of the
Company (the "CEO Bonus" and, together with the Chairman Bonus, the
"Bonus")until December 31, 1998 and December 31, 1999, respectively; and
(c) subject to attaining the targets set forth annually by
the Board of Directors, an annual bonus equal to fifty percent (50%) of
Salary in a lump sum not later than March 31 of the year following the
applicable year. This Bonus shall be paid in accordance with the terms
of the Company's short-term incentive bonus program (the "Company Bonus
Plan").
3.3. Additional Benefits. At all times during the Term, Executive
shall be eligible and participate in all employee benefit programs or plans now
or hereafter provided for by the Company for its executive officers in
accordance with the provisions, terms and any limitations thereof, including,
without limitation, life insurance, health, disability and other fringe benefit
plans.
3.4. Vacation. Executive shall be entitled to four (4) weeks of
paid vacation for each twelve-month period of employment during the Term.
3.5. Automobile Allowance. The Company shall provide Executive
with the use of a Company car and shall pay or reimburse Executive for all
reasonable expenses incurred in connection with such car for repairs, fuel,
maintenance and insurance, in accordance with the Company's automobile use
policy as established by the Board of Directors from time to time.
3.6. Acknowledgement. Executive acknowledges that he is entitled
to no other compensation or benefits other than those provided for in paragraphs
3.1 through 3.6 above, including, but not limited to, any compensation or
benefits Executive has received or is receiving pursuant to any prior contract
or other agreement between him and the Company.
-2-
<PAGE>
<PAGE>
4. Termination of Employment.
4.1. Cause. "Cause" shall mean fraud, conflict of interest,
willful malfeasance or willful misfeasance in office.
4.2. Good Reason. "Good Reason" shall mean:
(a) without the express prior written consent of the
Executive, a material diminution or limitation of the Executive's
position, duties or responsibilities with the Company from those in
existence on the Effective Date (or, if greater, the highest
permanent-assignment level in effect thereafter) or the assignment to
the Executive of duties inconsistent with the position, duties,
responsibilities or status of the Executive as of the Effective Date
(or, if greater, the highest permanent-assignment level in effect
thereafter); or
(b) any failure by the Company to pay, or any reduction by
the Company of, the base Salary of the Executive as in effect on the
Effective Date or as the same may be increased from time to time
thereafter; or
(c) the failure of the Company to provide the Executive with
the opportunity to participate, on terms no less favorable than those
existing on the Effective Date, in any incentive benefit, bonus or
compensation, insurance, pension or other employee benefit plan of the
Company in effect on the Effective Date (or plans and benefits which
are, in the aggregate, no less favorable to the Executive than those the
Executive enjoyed on the Effective Date) unless such failure results
from the Company's termination or amendment of any such plan in response
to a change in applicable statute or regulation, including any
termination or amendment resulting from a materially adverse alteration
of the tax treatment of any such plan to the Company or to plan
participants; provided, however, that Good Reason shall not include any
reduction in such benefit by the Company on a Company-wide basis.
4.3. Notice of Good Reason.
Unless the Executive provides written notification of his
intention to resign within twenty (20) business days after the Executive knows
or has reason to know of the
-3-
<PAGE>
<PAGE>
occurrence of any such event constituting Good Reason, the Executive shall be
deemed to have consented thereto and such event shall no longer constitute Good
Reason for purposes of this Agreement. If the Executive provides such written
notice to the Company, the Company shall have twenty (20) business days from the
date of receipt of such notice to effect a cure of the event described therein
and, upon cure thereof by the Company to the reasonable satisfaction of the
Executive, such event shall no longer constitute Good Reason for purposes of
this Agreement.
4.4.Termination For Cause; Resignation Without Good Reason.
(a) Rights on Termination. If, prior to the expiration of the
Term, the Executive's employment is terminated by the Company for Cause
or the Executive resigns from this employment without Good Reason, the
Executive shall be entitled to payment of his Salary accrued through the
date of such termination or resignation, plus any accrued but unpaid
vacation benefits. Except as may be provided by law or expressly
provided under the term of any plan or arrangement applicable to the
Executive, the Executive shall have no right under this Agreement or
otherwise to receive any other compensation or benefits, or to
participate in any other plan, arrangement or benefit, with respect to
future periods after such termination or resignation of Effective.
(b) Notice of Termination for Cause. Termination of the
Executive's employment for Cause shall be communicated by delivery to
the Executive of a copy of a resolution duly adopted by the Board
finding that in the good faith opinion of the Board an event
constituting Cause for termination in accordance with Section 4.1 has
occurred and specifying the particulars thereof (a "Notice of
Termination"). In the event of termination for Cause as a consequence of
the events described in Section 4.1 or any other event described in
Section 4.1 that the Board determines in good faith is not susceptible
of cure, the effective date of termination shall be the date of the
Notice of Termination or such later date as may be specified in such
notice. In the event the Executive's employment is terminated for Cause
(unless the Board has determined in good faith that the relevant event
giving rise to Cause is not susceptible of cure), the Executive shall
have twenty (20) business days from the date of receipt of such Notice
of Termination to effect a cure of the event described therein and, upon
cure thereof by the Executive to the reasonable satisfaction of the
Board, such event shall no longer constitute
-4-
<PAGE>
<PAGE>
Cause for purposes of this Agreement. The effective date of
termination for Cause that has been subject to a cure period as
described in the immediately preceding sentence which did not result in
a cure to the reasonable satisfaction of the Board shall be the date
immediately succeeding the last date of the twenty (20) business day
cure period.
(c) Notice of Resignation Without Good Reason.
The date of resignation by the Executive without Good Reason
shall be the date specified in a written notice of resignation from the
Executive to the Company. The Executive shall provide at least sixty
(60) days' advance written notice of resignation.
4.5. Notice of Termination Without Cause.
The date of termination of employment without Cause shall be the
date specified in a written notice of termination to the Executive, provided
that the Company shall provide at least twenty (20) business days' written
notice of such termination.
4.6. Notice of Resignation for Good Reason.
The date of resignation for Good Reason shall be the date
specified in a written notice of resignation from the Executive to the Company,
provided, however, that no such written notice shall be effective unless the
twenty (20) business day cure period specified in Section 4.3 has expired
without the Company having corrected, to the reasonable satisfaction of the
Executive, the event or events.
4.7.Termination Without Cause; Resignation For Good Reason.
(a) Severance Amount. If, prior to the expiration of the Term,
the Executive's employment is terminated by the Company without Cause,
or the Executive resigns from his employment for Good Reason, the
Company shall pay to the Executive his Salary accrued up to and
including the effective date of such termination or resignation, plus a
pro rata share of unused vacation for the full year, plus a pro rata
bonus under the Company Bonus Plan, if the Board in its sole discretion
so determines, all in a lump sum. In addition, the Company shall pay the
Executive (i) on the dates set forth in Section 3.2(a) and (b), the
Bonus and if such termination should occur prior to December 31, 1997
(ii) in a lump sum, a severance payment equal to the greater of (A) his
salary, at the
-5-
<PAGE>
<PAGE>
rate in effect at time of such termination or resignation, for the
remainder of the Term and (B) one year's salary, at the rate in effect
at the time of such termination or resignation (the "Severance Amount").
(b) Other Benefits. In the event of the Executive's termination
without Cause or his resignation for Good Reason, the Executive shall
continue to participate on the same terms and conditions as in effect
immediately prior to such termination or resignation in each pension,
life insurance, health, disability and other fringe benefit plan or
program provided to the Executive pursuant to Sections 3.3 and 3.5 at
the time of such termination or resignation until the earlier of (A) six
(6) months following the date of such termination or resignation or, if
the Executive is required to elect such benefits immediately following
such termination or resignation, twelve (12) months following the date
of such termination or resignation and (B) such time as the Executive is
eligible to be covered by a comparable program of a subsequent employer.
The Executive agrees to notify the Company promptly if he becomes
eligible to participate in any pension or other benefit plans, programs
or arrangements of another employer. Notwithstanding anything contained
herein to the contrary, the Company shall have no obligation to continue
to maintain any plan or program solely as a result of the provisions of
this Agreement nor provide any level of benefits if applicable law
either prevents the Executive from participating in any such plan or
program or would cause the Company to suffer any loss of tax benefits as
a consequence of the Executive's continued participation during the
Term.
(c) Automobile: If the Company has provided the Executive with
the use of an automobile on a continuous basis prior to the termination
without Cause or resignation for Good Reason, the Executive shall be
given the option to purchase such automobile on the terms outlined in
the Company policy with respect thereto at the value in effect two years
after the date of the termination without Cause or resignation for Good
Reason.
4.8. Termination Due to Death or Disability.
(a) In the event of the Executive's disability, as hereinafter
defined, or death, the Company shall be entitled to terminate his
employment. If the
-6-
<PAGE>
<PAGE>
Executive's employment shall terminate due to disability or death, any
Salary earned by the Executive up to the date of such termination and
any pro rata bonus to that date shall be paid to the Executive or his
estate, as appropriate. In addition, the Bonus due to the Executive
shall be paid on the dates set forth in Section 3.2 to the Executive or
his estate, as appropriate.
(b) As used herein, the term "disability" shall mean physical or
mental disability as a result of which the Executive is unable to
perform his duties hereunder on substantially a full-time basis for any
period of four (4) consecutive months. Any dispute as to whether or not
the Executive is so disabled shall be resolved by a physician,
reasonably acceptable to the Executive and the Board, whose
determination shall be final and binding upon both the Executive and the
Company.
5. Nondisclosure of Confidential Information. The Executive shall be
bound by the confidentiality policy of the Company. The Executive shall not,
except as may be necessary in the discharge of duties with the Company or as may
be required by applicable law or regulations, disclose any confidential
information, knowledge or data obtained by the Executive prior to the date of
this Agreement or during the Executive's employment concerning the Company or
the business of the Company so long as such information is not publicly
available.
6. Arbitration. Any controversy or claim arising out of or relating to
this Agreement or the breach of this Agreement that cannot be resolved by the
Executive and the Company shall, at the instance of either the Executive or the
Company, be submitted to arbitration in accordance with New York law and the
procedures of the American Arbitration Association, with all hearings to be
conducted in New York, New York. The determination of the arbitrator shall be
conclusive and binding on the Company and the Executive and judgment may be
entered on the arbitrator's award in any court having jurisdiction.
7. Legal Expenses. The Company shall pay all reasonable costs and
expenses, including attorneys' fees and disbursements, of the Company and, at
least monthly, the Executive in connection with any legal proceedings (in the
case of the Executive any legal proceedings brought or maintained in good faith)
(including, but not limited to, arbitration), whether or not instituted by the
Company or the Executive, relating to the interpretation or enforcement of any
provision of this Agreement.
-7-
<PAGE>
<PAGE>
8. Assignability. The respective rights and obligations of the Executive
and the Company under this Agreement shall inure to the benefit of and be
binding upon the heirs and legal representatives of the Executive and the
successors and assigns of the Company. The Executive's rights and obligations
under this Agreement may not be assigned or alienated and any attempt to do so
by the Executive shall be void. Any successor (whether direct or indirect, by
purchase, merger, consolidation or otherwise) to all or substantially all of the
business or assets of the Company, shall assume and agree to perform this
Agreement in the same manner and to the same extent that the Company would be
required to perform it if no such succession had taken place. The provisions of
this Section 8 shall continue to apply to each subsequent employer of the
Executive hereunder in the event of any subsequent merger, consolidation or
transfer of assets of such subsequent employer.
9. Severability. If any provision of this Agreement is deemed to be
invalid or unenforceable or is prohibited by the laws of the state or place
where it is to be performed, this Agreement shall be considered to be divisible
as to such provision and such provision shall be inoperative in such state or
place and shall not be part of the consideration moving from either of the
parties to the other. The remaining provisions of the Agreement, however, shall
be valid and binding and of like effect as though such provision were not
included.
10. Miscellaneous. This Agreement is to be construed and enforced in
accordance with the internal substantive laws of the State of New York,
irrespective of the principles of conflicts of law. The waiver of any breach of
this Agreement by any party shall not be construed as a waiver of any subsequent
breach by any party. This Agreement may not be changed orally, but only by an
agreement in writing signed by the parties to this Agreement.
-8-
<PAGE>
<PAGE>
IN WITNESS WHEREOF, the Company and the Executive have executed
this Agreement as of the day and year first above written.
NAI TECHNOLOGIES, INC. ROBERT A. CARLSON
By:/s/ Richard A. Schneider /s/ Robert A. Carlson
------------------------ ----------------------
Title:Executive Vice President
Treasurer and Secretary
-9-
<PAGE>
<PAGE>
Exhibit 10(xi)
AMENDMENT NO. 2 TO EMPLOYMENT AGREEMENT
This Amendment No. 2 to Employment Agreement, entered into as of the
2nd day of January, 1997 (this "Amendment"), by and between NAI Technologies,
Inc., a New York corporation (the "Company"), and Richard A. Schneider (the
"Executive").
The Company and the Executive have entered into an Employment
Agreement, dated as of October 16, 1995 (the "Employment Agreement") as amended
by Amendment No. 1 to the Employment Agreement, dated as of August 8, 1996, and
the Company and the Executive desire to amend the Employment Agreement.
A. Amendment of Section 3.1. Pursuant to Section 11 of the Employment
Agreement, Section 3.1 of the Employment Agreement shall be deleted in its
entirety, as of the date hereof, and replaced with the following language:
"3.1 Salary. During the Term, the executive shall be paid salary at
a rate of $180,000 per annum ("Salary"), payable in substantially equal
installments (not less frequently than monthly) in accordance with the Company's
regular payroll practices."
B. Amendment of Section 3.2. Pursuant to Section 11 of the Employment
Agreement, Section 3.2 of the Employment Agreement shall be deleted in its
entirety, as of the date hereof, and replaced with the following language:
"3.2. Incentive Compensation. In addition to Salary, and subject to
attaining the targets set forth annually by the Board of Directors, the Company
shall pay to Executive an annual bonus (the "Bonus") equal to forty percent
(40%) of Salary in a lump sum not later than March 31 of the year following the
applicable year. The Bonus shall be paid in accordance with the terms of the
Company's short-term incentive bonus program."
C. Effect of this Amendment. This constitutes the entire agreement of
the parties with respect to the subject matter hereof, and supersedes all prior
oral or written communications, memoranda, proposals, negotiations, discussions
and commitments with respect to the subject matter hereof. Except as otherwise
expressly provided herein, no other changes or modifications to the Employment
Agreement are intended or implied, and in all other respects the Employment
Agreement is hereby specifically ratified, restated and confirmed by all parties
hereto as of the effective date hereof. To the extent that any provision of
<PAGE>
<PAGE>
the Employment Agreement conflicts with any provision of this Amendment, the
provision of this Amendment shall control.
D. Assignability. The respective rights and obligations of the
Executive and the Company under this Amendment and the Employment Agreement
shall inure to the benefit of and be binding upon the heirs and legal
representatives of the Executive and the successors and assigns of the Company.
E. Miscellaneous. This Amendment is to be construed and enforced in
accordance with the internal substantive laws of the State of New York,
irrespective of the principles of conflicts of law. The waiver of any breach of
this Amendment by any party shall not be construed as a waiver of any subsequent
breach by any party. This Amendment may not be changed orally, but only by an
agreement in writing signed by the parties to this Amendment.
IN WITNESS WHEREOF, the Executive has executed this Amendment and
the Company has caused this Amendment to be executed by a duly authorized
officer and to become effective as of the day and year first above written.
NAI TECHNOLOGIES, INC.
By:/s/ Robert A. Carlson /s/ Richard A. Schneider
--------------------- ------------------------
Name: Robert A. Carlson Richard A. Schneider
Title: Chairman and Chief
Executive Officer
-2-
<PAGE>
<PAGE>
Exhibit 10(xii)
SETTLEMENT AGREEMENT AND RELEASE
This Settlement Agreement and Release (this "Agreement") is entered
into between NAI Technologies, Inc., a New York corporation (the "Company"), and
Robert A. Carlson, Chairman and Chief Executive Officer of the Company ("Mr.
Carlson").
WITNESSETH:
WHEREAS, Mr. Carlson is an "Eligible Employee" and a "Participant" in
the NAI Technologies, Inc. Supplemental Retirement Plan effective January 1,
1991 (the "SERP");
WHEREAS, the Company seeks to (1) terminate Mr. Carlson's designation
as an "Eligible Employee" and a "Participant" under the SERP and (2) redeem Mr.
Carlson's interest in the SERP for $800,000; and
WHEREAS, Mr. Carlson is willing to waive his right to any benefits
under the SERP in consideration of the payment to him of $800,000, payable at
the rate of $200,000 per quarter beginning on February 15, 1997.
NOW, THEREFORE, in consideration of the premises and the mutual
promises, covenants and agreements hereinafter contained, the parties, intending
to be legally bound hereby, agree as follows:
1. Payment. The Company will pay Mr. Carlson the amount of $800,000,
payable by check in four equal installments of $200,000 on each of the following
dates:
a) February 15, 1997;
b) May 15, 1997;
c) August 15, 1997; and
d) November 15, 1997.
2. Waiver and Release. Mr. Carlson hereby waives his right to any
benefit under the SERP and releases and discharges the Company and the
Administrator of the SERP (the "Administrator") and each of their officers,
directors, shareholders, employees, agents, representatives, attorneys,
affiliates, successors and assigns, if any, and each of them, from any and all
claims, controversies, suits, counterclaims, setoffs, debts, dues, sums of
money, judgments, damages, accounts, reckonings, obligations, liabilities,
demands, actions and causes of action of any nature whatsoever, at law or in
equity, known or unknown, realized or unrealized, past or
<PAGE>
<PAGE>
present, actual, potential or contingent, however arising from any events,
facts, circumstances or occasion, which Mr. Carlson or his heirs and legal
representatives now has, ever had or may have against the Company or the
Administrator relating to or arising out of the obligations of the Company to
Mr. Carlson under the SERP.
3. Representations and Warranties. The Company represents to Mr.
Carlson that:
(a) Corporate Existence and Power; Authorization. (1) The Company is a
corporation duly incorporated, validly existing and in good standing under the
laws of the jurisdiction of its incorporation and has all necessary corporate
power and authority to execute and deliver this Agreement and (2) the execution
and delivery by the Company of this Agreement and the performance by it of its
obligations under this Agreement have been duly authorized by all necessary
corporate action and do not and will not contravene, violate, result in a breach
of or constitute a default under, its articles of incorporation or certificate
of incorporation, as the case may be, or its bylaws.
The Company further represents to Mr. Carlson and Mr. Carlson
represents to the Company that:
(b) Contravention. The execution and delivery by the representing
party of this Agreement and the performance by it of its obligations under this
Agreement do not and will not contravene, violate, result in a breach of or
constitute a default under any law, rule, regulation, judgment, decision,
ruling, order, award, injunction or other official action of governmental body
or arbitrator (collectively, "Regulations") applicable to its business,
properties or operations or any agreement, indenture or other instrument to
which it is a party or that is applicable to its business, properties or
operations.
(c) Approvals. The representing party has obtained each authorization,
consent, approval or waiver of, clearance by, notice of registration or filing
with, or other similar action by or with any governmental body or other person
that is required or advisable on the part of the representing party for the due
execution and delivery by it of this Agreement and the performance by it of its
obligations under this Agreement.
(d) Litigation. There is no action, suit, investigation, complaint or
other proceeding pending, or to its knowledge, threatened against the
representing party or any other person in which injunctive or other equitable
relief of any nature is sought to restrain, enjoin or prohibit the exercise by
any party of its rights under this Agreement or the performance by any party of
its obligations under this Agreement or in which money or other damages are
sought based in whole or in part on the exercise by any party of its rights
under this Agreement or
-2-
<PAGE>
<PAGE>
the performance by any party of its obligations under this Agreement.
(e) Due Execution and Delivery; Binding Effect. This Agreement has
been duly executed and delivered by the representing party and is the legal,
valid and binding obligation of the representing party, enforceable against it
in accordance with its terms.
(f) No Assignment of Claims. The representing party has not sold,
assigned or transferred to any other person any claim or rights that it has, had
or might have concerning the released claims or the subject matter of this
Agreement.
(g) Knowing Execution. The representing party has read and reviewed
this Agreement, understands this Agreement, has consulted with legal counsel
concerning this Agreement and has executed this Agreement voluntarily and
knowingly.
4. Miscellaneous. (a) Binding Effect. The provisions of this Agreement
shall be binding upon and inure to the benefit of the heirs and legal
representatives of Mr. Carlson and the successors and assigns of the Company.
(b) Counterparts. This Agreement may be executed in counterparts, each
of which shall be deemed an original, with the same effect as if all signatures
were on the same instrument.
(c) Entire Agreement. This Agreement represents the entire
understanding and agreement between the parties hereto and supersedes all prior
negotiations, understandings and agreements with respect to the subject matter
hereof.
(d) Amendments, Etc. No amendment, modification, termination or waiver
of any provision of this Agreement, and no consent to any departure by a party
from any provision of this Agreement, shall be effective against any party
adversely affected by such modification, termination, waiver or consent unless
it shall be in writing and signed and delivered by such other party, and then it
shall be effective only in the specific instance and for the specific purpose
for which it is given.
(e) Governing Law. This Agreement shall be governed by and construed
in accordance with the substantive law of the State of New York, without regard
to any law, rule or the legal principles of the State of New York concerning
choice or conflicts of law.
(f) Headings and References. Section headings in this Agreement are
included for convenience of reference only and do not constitute a part of this
Agreement for any other purpose. References to parties and sections in this
Agreement are references to the parties to this Agreement or sections of this
-3-
<PAGE>
<PAGE>
Agreement, as the case may be, unless the context shall require otherwise.
(g) Further Assurances. Each party shall at the request of the other
party do and perform or cause to be done and performed all such further acts and
furnish, execute and deliver such other instruments and documents as the
requesting party shall reasonably require to consummate the transactions
contemplated by this Agreement.
IN WITNESS WHEREOF, the parties to this Agreement have duly executed
this Agreement as of the 19th day of December, 1996.
NAI TECHNOLOGIES, INC.
By:/s/ Richard A. Schneider
-------------------------
Name: Richard A. Schneider
Title: Executive Vice
President, Treasurer
and Secretary
/s/ Robert A. Carlson
----------------------------
ROBERT A. CARLSON
-4-
<PAGE>
<PAGE>
Exhibit 11
STATEMENTS RE: COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Year Ended December 31,
(in thousands) 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
Net Income (loss) $ 2,413 ($11,619)
Average shares of common stock outstanding
during the period 8,268 7,382
Incremental shares from assumed exercise of
stock options, stock warrants & employee stock
purchase plan (primary) 302 2
Total shares used to calculate PEPS* 8,507 7,382
------ --------
Primary earnings per share $ 0.28 ($1.57)
====== ========
Net Income (loss) $2,413 ($11,619)
Interest on Convertible Debt (net of taxes) 710 0
Amortization of OID (net of taxes) 118 0
Amortization of deferred debt expense (net of taxes) 456 0
------ --------
Adjusted Net Income $3,697 ($11,619)
====== ========
Average shares of common stock outstanding
during the period 8,268 7,382
Incremental shares from assumed exercise of stock
options, stock warrants & employee stock
purchase plan (fully diluted) 519 0
Dilution from Convertible Debt 2,613 0
Total shares used to calculate FDEPS* 11,400 7,382
------ -----
Fully diluted earnings per share $0.32 ($1.57)
====== ======
</TABLE>
* Per APB 15, when a net loss is reported, exercise or conversion is not to be
assumed.
-35-
<PAGE>
<PAGE>
Exhibit 21
LIST OF SUBSIDIARIES
--------------------
The following are subsidiaries of the Company, respective jurisdictions of their
incorporation and names (if any) under which they do business. The Company owns
all of the voting securities of each subsidiary.
Jurisdiction of Name Under Which
Name Incorporation Subsidiary Does Business
- -------------------------------------------------------------------------------
NAI Technologies-- New York NAI Systems Division
Systems Division Corporation
Wilcom, Inc. New York Wilcom, Inc.
Lynwood Scientific United Kingdom Lynwood
Developments Ltd.
Codar Technology, Inc. Colorado Codar
-36-
<PAGE>
<PAGE>
Exhibit 23
Independent Auditors' Consent
-----------------------------
The Board of Directors
NAI Technologies, Inc.:
We consent to incorporation by reference in the registration statements (Nos.
33-46868, 33-57324, 33-66666, 33-66664, 333-3837 and 333-11993) on Form S-8 of
NAI Technologies, Inc. of our reports dated February 7, 1997, relating to 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, and related financial statement
schedule, which reports appear in the December 31, 1996, annual report on
Form 10-K of NAI Technologies, Inc.
KPMG Peat Marwick LLP
Boulder, Colorado
March 12, 1997
-37-
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 2,605
<SECURITIES> 0
<RECEIVABLES> 13,735
<ALLOWANCES> 0
<INVENTORY> 11,995
<CURRENT-ASSETS> 29,532
<PP&E> 13,031
<DEPRECIATION> (7,680)
<TOTAL-ASSETS> 48,012
<CURRENT-LIABILITIES> 19,488
<BONDS> 15,573
<COMMON> 746
0
0
<OTHER-SE> 9,340
<TOTAL-LIABILITY-AND-EQUITY> 48,012
<SALES> 60,008
<TOTAL-REVENUES> 60,008
<CGS> 55,100
<TOTAL-COSTS> 68,883
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,367
<INCOME-PRETAX> (11,242)
<INCOME-TAX> 377
<INCOME-CONTINUING> (11,619)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (11,619)
<EPS-PRIMARY> (1.57)
<EPS-DILUTED> 0
</TABLE>
