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(Conformed copy)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Fiscal Year Ended December 31, 1997
OR
[ ] Transaction Report pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
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 February 25, 1998, 9,155,427 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 February 25,
1998) of NAI Technologies, Inc. held by non-affiliates was approximately $18
million.
Documents Incorporated by Reference: None.
Page 1 of 32
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NAI TECHNOLOGIES, INC.
1997 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
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Page
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PART I
Item 1. Business................................................................................3
Item 2. Properties..............................................................................10
Item 3. Legal Proceedings.......................................................................11
Item 4. Submission of Matters to a Vote of Security Holders.....................................11
PART II
Item 5. Market for Registrant's Common Stock
and Related Stockholder Matters.........................................................12
Item 6. Selected Financial Data.................................................................13
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.....................................................14
Item 8. Consolidated Financial Statements and Supplementary Data................................20
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.....................................................20
PART III
Item 10. Directors and Executive Officers of the Registrant......................................21
Item 11. Executive Compensation..................................................................23
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
</TABLE>
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PART I
ITEM 1.
BUSINESS
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 three distinct operating segments: a Rugged
Systems segment, a Systems Integration segment and a Telecommunications segment.
The Rugged 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 some commercial applications.
The Systems Integration segment provides custom packaged, integrated computer
systems and peripherals and sells primarily to the U.S. 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.
RUGGED SYSTEMS SEGMENT
The Rugged Systems segment is comprised of two operating subsidiaries as
follows:
Codar Technology, Inc., located in Longmont, Colorado ("Codar"); and
Lynwood Rugged Systems Limited, based in Farnham, United Kingdom
("Lynwood").
Codar. Codar is a leading supplier of rugged computer systems to the U. S.
Department of Defense (DOD), primarily through the major U. S. prime
contractors, as well as to various overseas defense establishments. Providing
rugged system solutions requires Codar to maintain the design, manufacturing and
integration capabilities "in house" so as to be able to respond to unique
customer requirements. These custom and semi-custom designs are deployed
throughout the full spectrum of defense platforms and applications.
Codar's technology/product lines are predominantly focused on high performance
computer workstations and displays using the latest commercial-off-the-shelf
(COTS) technologies. The computer processor technology incorporated into Codar
products ranges from Intel's Pentium/Pentium Pro to DEC's Alpha to Sun
Microsystems' UltraSPARC II. The high performance display products use the
latest in CRT and LCD flat panel technologies.
In order to address the defense market employing COTS electronics, Codar designs
into each product the basic capability to survive in the hostile environments
that normally exist in most defense related platforms. Codar's designs allow the
COTS electronics to survive in harsh environments that include temperature and
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humidity extremes, sand, dust, high shock and severe vibration. Because of their
frequent use in command, control, communication, computer and intelligence (C4I)
applications, all of Codar's systems are also designed to provide
Electromagnetic Interference (EMI) protection. Additional requirements for
specific applications are addressed through modification to existing designs or
through new designs. In 1997, Codar designed a sunlight readable flat panel
monitor to meet a U.S. submarine requirement that would allow it to operate
while temporarily submerged.
Codar has developed families of equipment to allow for the flexible development
of integrated solutions, an approach now being embraced by the leading
commercial computer manufacturers. An excellent example of this approach is
Codar's offerings under the US Army's Common Hardware/Software (CHS-2) program,
a contract which provides the basic hardware/software infrastructure for the
Force XXI "digitization of the battlefield" initiative. Codar provides eight
different pieces of rugged equipment, all qualified to one well-defined set of
specifications. The equipment includes three different rackmounted computer
chassis, a rackmounted mass memory expansion chassis, three different displays
(one CRT and two LCD flat panels) as well as a fully integrated portable
workstation with keyboard and display. Each computer and expansion chassis can
be populated with an approved "menu" of configurations and options. This wide
assortment of equipment allows the US Army users to select system configurations
that truly address their identified needs in the field.
Lynwood. Lynwood is a supplier of rugged commercial-off-the-shelf (COTS)
computer hardware products, systems and services to the defense market. Each
piece of commercial hardware is adapted, protected and presented in a rugged
form that enables it to meet individual customer requirements and/or specific
military tests and standards. Typically these standards relate to satisfactory
performance in extremes of temperature, humidity, altitude, vibration and shock,
together with environmental and electromagnetic criteria.
A specialist in the design, development and implementation of rugged COTS
hardware for land, sea and airborne forces, Lynwood is based in the UK and
actively represented in Europe, Scandinavia, Australia and Southeast Asia,
where it also provides a gateway to these markets for Codar and Systems.
In 1997 Lynwood established an Australian subsidiary, Lynwood Rugged Systems
Australia (RSA) in response to a growing demand for rugged equipment for
existing and new programs in the Region. During 1997 Lynwood RSA received two
significant orders, one for a maintenance contract in support of the Australian
Army Tactical Command Support System (AUSTACSS), which Lynwood has supplied
since 1995, and a second order, from a leading US defense company, for the
manufacture of Explorer II workstations.
During 1997 Lynwood continued to upgrade its capabilities by expanding the
Engineering Division's in-house environmental test facilities and by installing
secure facilities for the special testing of secure communication systems. These
investments extend Lynwood's ability to deliver rugged systems and to undertake
a comprehensive range of specialist services, including requirements analysis,
system design, prototyping and cabling, installation and commissioning of secure
and TEMPEST sites. A founding member of the UK Industrial TEMPEST Scheme,
Lynwood works to specified procedures and operates a quality system accredited
to ISO 9001.
Versatility and superior performance are the hallmarks of Lynwood's successful
rugged systems solutions, which are incorporated into many high profile defense
programs. Examples include the MC60/VME rugged computer system and FPR 16"
rugged flat panel display, which form the rugged hardware element of the RAF
Harrier Jet portable data preparation station. Lynwood is the rugged hardware
systems integrator for the British Army Attack Helicopter (Apache) ground
support system (GSS) and it also supplies the integrated rugged hardware
solution in support of the RAF Chinook Helicopter Fleet's generic
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health and usage monitoring system (GHUMS). Contract awards during 1997 have
solidified Lynwood's status as a primary supplier of rugged COTS systems to the
Swedish Army, which utilizes rugged multi-platform computers in different
configurations in related mobile tactical communications and information
systems, TS9000 and ATLE IS, respectively. The FPR 20" rugged flat panel is
utilized in the Royal Navy's Command Support System (CSS), and the rugged
hardware for the Royal Navy's Submarine Fleet's DCG Re-host tactical support
system was designed, developed, tested and installed within sixteen months under
contract to BAeSEMA. During 1997 the Directorate General of Information and
Communication Services (DGICS) of the Ministry of Defense established an
enabling agreement with Lynwood for services relating to a variety of specialist
secure communications systems across all MOD sectors and locations.
In response to market needs, several new products are in development for launch
in 1998. These include the EXPLORER NT rugged portable workstation, a new
variant of the Explorer II supporting Digital's Alpha and Intel's Pentium II
processors. The Explorer II is in service around the world, used in applications
ranging from army tactical command support systems to aircraft portable
maintenance aids. The GENESIS 300 rugged multi-platform computer, a variant of
the Genesis SR (short rack) will feature an integral 12" screen and keyboard.
Since its launch in 1997 the Genesis SR, which supports applications such as
mission planning, tactical communications, combat support and logistics support,
has been sold into programs in Europe, Scandinavia and the Far East. The OPUS 16
rugged flat panel with computer, a 16" flat panel display with single board
Intel computer housed in a rugged rackmount or portable enclosure, will join the
extensive FPR range of rugged flat panel colour displays. LYNWOOD's fixed,
rackmount or portable FPR panels, with 12", 13", 16" and 20" displays, currently
operate in a variety of land, airborne, surface vessel and submarine
environments.
SYSTEMS INTEGRATION SEGMENT
The Systems Integration segment currently consists of one operating company: NAI
Technologies-Systems Division Corporation, based in Columbia, Maryland ("Systems
Division"). The core business of the Systems Division is providing
custom-packaged integrated computer systems for deployment in land vehicles,
ships, shelters and other demanding environments including unique physical
packaging requirements such as compact size, low weight, specialized air flow
and rack mounting.
The Systems Division's products are also designed to withstand a wide variety of
adverse environmental conditions including high levels of shock and vibration,
temperature and humidity extremes, limitations on electromagnetic emissions and
operation at high altitudes. Also, because the systems are often deployed in
remote field sites, many of them are designed for unattended operation and all
are designed for fast, easy maintenance in the field.
The Systems Division markets directly to various U.S. Government agencies,
primarily in the intelligence community. The breadth of the division's technical
expertise combined with its systems support capabilities and its excellent track
record have earned the division "trusted supplier" status with these agencies.
In addition to its direct relationships with government customers, the division
also works in partnership with leading prime contractors such as Lockheed
Martin, General Telephone and Electronics and Booz-Allen. These partnerships
include a variety of contractual relationships ranging from subcontractor to
teammate depending on the nature of the work involved and the scope and term of
the contract.
The Systems Division's technical expertise includes "industry standard" computer
architectures such as ISA/EISA, PCI, Multibus, VME and S Bus. Software
experience includes DOS/Windows, Unix and Real-time operating systems. All of
the Systems Division's products are designed around commercial-off-the-shelf
components. Because of this, the division actively develops and maintains
partnerships with key
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technology vendors in the computer industry such as Intel Corporation, Sun
Microsystems, Motorola, Hewlett Packard, Ross Technologies and many others.
The Systems Division not only provides general-purpose computer systems for
deployment in unique environments, but also designs and integrates special
purpose systems configured specifically for a variety of target applications.
Among these application specialties are communications processing; data
acquisition, storage and forwarding; digital signal processing; client/server
systems and embedded processing. The division also provides specially packaged
monitors, keyboards, printers and peripheral subsystems that are used in
conjunction with its computer systems.
As a result of budget pressures and downsizing, many government agencies have
begun to outsource some of the support services that had previously been
performed in-house. The Systems Division, as a trusted supplier with an
installed base of several thousand systems, has been well positioned to provide
these services. In addition to the deployable computer platforms that represent
its core business, the division now also provides support services such as
configuration management, testing, sparing, maintenance and life cycle support.
TELECOMMUNICATIONS SEGMENT
The Telecommunications segment currently consists of one operating company:
Wilcom, Inc. ("Wilcom"), located in Laconia, New Hampshire. Wilcom designs,
manufactures and markets products for use in the worldwide telephone industry.
The majority of Wilcom's business comes from the Regional Bell Operating
companies and the larger independent telephone companies around the world.
The product line is focused on two market segments; test instrumentation for
testing analog, optical and digital transmission systems over fiber and copper
cable, and telephone transmission products which are used primarily to enhance
and improve the quality and/or speed of voice, video and digital data
transmission over copper cables.
The test equipment product line has historically been focused on the analog and
digital technology but in recent year's fiber optics has been the fastest
growing segment. Wilcom continues to expand the fiber optic product line with a
focus on rugged portable hand-held products offering reliability and ease of
use. The 1997 additions included the FM8515C High Power optical meter, the
FS8514 Dual Wavelength optical source and the F6230SC Visual Fault locator.
Wilcom also introduced a range of application specific fiber optic Test Kits for
optical loss testing and optical fault locating. In addition, Wilcom plans to
announce a new line of intelligent fiber optic products starting in 1998.
Wilcom's telephone transmission enhancement products which includes the analog
line treatment equipment ("LTE") and the enhanced line powered amplifier
("ELPA") continues to be in demand for the expressed purpose of improving voice
quality, increasing data transmission speeds when using dial-up analog modems,
and under certain conditions, enhancing the utilization of copper wire lines for
broadband signal transmission applications. The proliferation of high-speed
analog modems has made the need for better quality phone lines an important
issue in the increasingly competitive communications industry. Wilcom's products
provide the telephone companies with the opportunity to offer additional
services in voice, data and video transmissions over their existing copper
networks until broadband digital systems become more readily available.
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MARKETING AND SERVICE
The Company sells its products directly to customers and through distributors
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. Some distributors also perform field service for
printers. The Company's representatives in Australia, Denmark, England, France,
Germany and Israel perform most overseas service.
CUSTOMERS
During 1997 and 1996, sales under contracts with the U.S. Government were
approximately 25% and 30%, respectively, of the Company's net sales. The U.S.
Government and one other customer each accounted for more than 10% of the
Company's sales in 1997 and 1996. 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 programs using 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 1997 or 1996.
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FOREIGN SALES
Foreign sales in 1997 and 1996 accounted for approximately 33% and 24%,
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, Israel, the
United Kingdom, Norway 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 the Company's operating results. No single country, with the
exception of the United Kingdom (47% in 1997 and 70% in 1996) , Australia (10%
in 1997 and 18% in 1996), and Norway (28% in 1997 and less than 5% in 1996)
accounted for more than 5% of the Company's foreign sales in any of the past two
years.
Foreign sales for the past three years have been as follows:
APPROXIMATE
TOTAL PERCENT OF
FOREIGN SALES COMPANY SALES
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1997...............................$17,230,000 33%
1996...............................$16,154,000 24%
1995...............................$12,679,000 21%
BACKLOG
The Company's backlog of orders was $26.9 million at December 31, 1997. 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. The Company expects to produce and ship
approximately 48% of its current backlog of orders before the end of 1998.
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.
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RESEARCH AND DEVELOPMENT
The Company's technological base is characterized by rapid change. As a result,
maintenance and expansion of the Company's businesses 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 1997, 1996 and 1995, the Company's total engineering
expenditures were $3,332,000, $3,929,000 and $7,264,000, 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 1997, 1996 and
1995 to approximately $1,517,000, $1,639,000 and $1,807,000, respectively.
Customer-funded engineering included in cost of sales or inventory, as a
contract cost was $1,815,000 in 1997, $2,290,000 in 1996 and $5,457,000 in 1995.
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.
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MANUFACTURING AND SUPPLIERS
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 it purchases may be obtained from a variety of
suppliers and it normally obtains alternative sources for major items. The
Company is dependent on a single supplier or a few suppliers for some items from
time to time. The Company believes it is in good standing with all of its
vendors.
EMPLOYEES
At December 31, 1997, the Company had approximately 194 employees. The Company
has never experienced a work stoppage and a union represents none of its
employees. The Company believes its relationship with its employees is good.
ITEM 2.
PROPERTIES
The Company's facilities, which are believed to be adequate to meet the
Company's foreseeable needs, are set forth in the following table:
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FACILITIES
APPROXIMATE
FLOOR AREA EXPIRATION
DIVISION OR SUBSIDIARY LOCATION (IN SQ. FT.) DATE
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Rugged Systems Segment
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Codar Longmont, Colorado 42,000 (leased) November 1, 1999
Systems Columbia, Maryland 25,000 (leased) November 30, 2001
Lynwood Farnham, England 26,000 (leased) December 25, 2014
Systems Integration Segment
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Systems Columbia, Maryland 25,000 (leased) November 30, 2001
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 located in Huntington, New York is leased on a short-term basis. The
Company pays approximately $1,072,000 per annum for the rental of all its
facilities.
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ITEM 3.
LEGAL PROCEEDINGS
None.
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5.
MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock trades on The Nasdaq Stock Market under the symbol
NATL. The table below sets forth for the periods indicated the high and low sale
prices for the Common Stock as adjusted for stock dividends and stock splits as
compiled from published sources.
Period High Low
------ ---- ---
1997 First Quarter $5.19 $3.50
Second Quarter 5.56 4.50
Third Quarter 5.50 3.25
Fourth Quarter 3.63 1.75
1996 First Quarter $2.25 $1.50
Second Quarter 3.88 2.06
Third Quarter 3.88 3.19
Fourth Quarter 3.94 2.75
There have been no cash dividends declared or paid on the Common Stock in 1997
and 1996. The Company's existing credit agreement restricts cash dividends.
As of December 31, 1997, there were approximately 600 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 2,000
additional shareholders holding stock in street names.
THE WARRANTS
The Company has issued and outstanding warrants (the "Warrants") to purchase
4,112,700 shares of Common Stock of the Company at an exercise price of $2.50
per share, subject to adjustment, exercisable on or prior to February 15, 2002.
The Warrants trade on the Nasdaq SmallCap Market under the symbol NATLW. As of
December 31, 1997, there were approximately 40 record holders of Warrants as
determined from the records of the warrant agent, American Stock Transfer &
Trust Company.
THE NOTES
The Company has issued and outstanding 12% Convertible Subordinated Promissory
Notes due January 15, 2001, in the aggregate principal amount of $5,122,500 (the
"Notes") at December 31, 1997. 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, 1997, there were approximately
27 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
<TABLE>
<CAPTION>
(in thousands except per share data)
1997 1996 1995 1994 1993
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Net sales $51,864 $68,207 $60,008 $54,520 $81,024
Operating earnings (loss) (1) (31) 5,307 (8,875) (14,589) 8,960
Net earnings (loss) (1) (2,369) 2,413 (11,619) (11,591) 5,455
Per share data:
Basic earnings (loss) (3) (0.26) 0.29 (1.57) (1.69) 0.82
Diluted earnings (loss) (3) (0.26) 0.29 (1.57) (1.69) 0.80
Cash dividends (2) -- -- -- -- --
Total assets at year end 35,681 41,371 48,012 53,720 60,715
Long-term debt 9,747 12,224 15,573 13,990 10,797
Working capital 10,930 14,241 10,044 16,665 19,105
Shareholders' equity 13,748 15,980 10,086 20,296 30,593
Average market price per
common share at year end (3) $1.88 $3.75 $1.50 $2.69 $ 6.25
Average common shares outstanding(3)
Basic 9,099 8,268 7,382 6,580 6,640
Diluted 9,099 8,466 7,382 6,580 6,857
</TABLE>
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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) Data has been restated to reflect 4% stock dividends declared in February
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 OPERATIONS
Results of Operations
1997 Compared with 1996
The nature of the Company's business is such that year to year changes in sales
levels are predominantly due to changes in shipping volume or product mix rather
than changing sales prices. Net sales in 1997 were $51.9 million, a 24% decline
when compared with $68.2 million for the same period in 1996.
The following chart provides the sales breakdown by segment and subsidiary for
1997 and 1996.
<TABLE>
<CAPTION>
In thousands of dollars 1997 1996 % Change
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RUGGED SYSTEMS SEGMENT
Codar Technology, Inc. $14,579 $32,727 (55%)
Lynwood Rugged Systems Ltd. 16,845 14,621 15%
Inter-company (520) (434) --
-----------------------------------------
Total Rugged Systems Segment 30,904 46,914 (34%)
SYSTEMS INTEGRATION SEGMENT
NAI Systems Division 17,217 14,330 20%
Inter-company (363) (113) --
---------------------------------------
Total Systems Integration Segment 16,854 14,217 19%
TELECOMMUNICATIONS SEGMENT
Wilcom, Inc. 4,106 7,076 (42%)
----------------------------------------
TOTAL $51,864 $68,207 (24%)
========================================
</TABLE>
Sales in the Rugged Systems segment (net of inter-company eliminations) declined
34% to $30.9 million from $46.9 million in 1996. A 15% increase in shipments at
Lynwood was more than offset by a 55% revenue decline at Codar.
The sales decline at Codar is attributable to several factors, most notably a
decline in booking additional orders for the CHS 2 product line and rugged work
station products. Codar has reduced its ongoing operating expenses throughout
1997 in order to mitigate the potential adverse impact of continuing lower
sales. Although Codar believes the bookings decline to be temporary, Codar will
continue to report less than optimum financial results until the bookings rate
increases. Codar does not anticipate reaching the sales level achieved in 1996
for several years. The 1996 sales level was favorably impacted by delays in
shipments from prior years.
The sales increase at Lynwood is attributable to increased exports to foreign
markets particularly in Australia and Scandinavia.
Sales in the Systems Integration segment (net of inter-company eliminations)
increased 19% to $16.9 million from $14.2 million in 1996. The Systems Division
reported its third consecutive year to year sales increase. In 1997 the Systems
Division was awarded several IDIQ (indefinite delivery - indefinite quantity)
contracts that have the potential to provide significant business to the Company
in 1998 and thereafter. However, the nature of IDIQ contracts is such that there
can be no assurance of future business.
-14-
<PAGE>
<PAGE>
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 25% of 1998 sales to be directly to the U.S.
military or through prime contractors to the U.S. military compared to 27% in
1997. 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 cancellation of any 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 42% to $4.1 million as
compared to $7.1 million in 1996. The decrease in sales is attributable to the
rapid decline in sales of the MFT analog line treatment products. It is unlikely
in the foreseeable future that internal sales growth will enable Wilcom to
achieve a sales level commensurate with that achieved in 1996. Consequently, the
Company is adjusting its expenses in line with its expected sales volume so as
to enhance the prospects for future profitability.
The gross margin percentage for 1997 was 20.2% as compared with 22.7% for 1996.
The following chart provides the gross margin percentage by subsidiary.
1997 1996
- ---------------------------------------------------------------------
Codar Technology, Inc. (1.1%) 14.4%
Lynwood Rugged Systems Ltd. 33.4% 34.0%
NAI Systems Division 23.0% 20.9%
Wilcom, Inc. 26.0% 38.0%
Codar's gross margin was adversely impacted by a $2.0 million charge
related to an inventory write-down that was necessitated by lower than
expected revenues at Codar, the final withdrawal from electronic printer
products and the anticipated decline in sales of certain of Codar's products on
the CHS 2 program due to the replacement of those products with new more
advanced Codar products.
The Systems Division's gross margins improved in 1997 because the Company
received favorable pricing on certain key components that were purchased during
the year. It is not likely that the favorable pricing will occur in 1998 and
therefore the gross margin percentage in 1998 is expected to be somewhat lower
than the level achieved in 1997.
Wilcom's gross margins declined as a result of low shipping volumes and thus
poor absorption of fixed overhead costs. It is unlikely that Wilcom will return
to pre-1997 gross margin levels due to the fact that line treatment revenues are
not expected to reach previous levels.
Selling expense for 1997 was $3.9 million as compared with $4.2 million for the
same period in 1996. The 7% decrease was mostly attributable to the decline in
sales.
General and administrative expenses for 1997 were $4.5 million as compared with
$5.2 million in 1996. The decline is the result of the Company's intention to
reduce its expenses to an amount more commensurate with its current revenue
level.
Company-sponsored research and development expenditures for 1997 were $1.5
million as compared with $1.6 million for 1996.
The Company reported an operating loss of $0.03 million in 1997 as compared with
operating earnings of $5.3 million in 1996. 1996 operating earnings were
favorably impacted by the recognition of a gain of
-15-
<PAGE>
<PAGE>
approximately $1.5 million from the sale of Codar's Systems Integration Division
to Tracor Aerospace Inc. in June 1996. Operating earnings for 1997 were
adversely impacted by a $3.0 million charge substantially related to an
inventory write-down at Codar.
Interest expense and amortization of deferred debt costs, net of interest
income, was $1.8 million in 1997 as compared with $2.5 million in 1996. The
decrease is attributable to lower borrowings as well as a rate reduction.
The income 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 carryforward, Lynwood is required to pay income taxes in
the U.K. The Company is unable to recognize the full tax benefit associated with
its U.S. net operating loss carryforward 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 carryforward will be recognized.
The Company recorded a net loss of $2.4 million as compared with a net profit of
$2.4 million in 1996. The basic loss per share was $0.26 as compared with
earnings of $0.29 per basic share in 1996, based on a weighted average of 9.1
million and 8.3 million shares outstanding, respectively.
1996 Compared with 1995
The following chart provides the sales breakdown by segment and subsidiary for
1996 and 1995.
<TABLE>
<CAPTION>
In thousands of dollars 1996 1995 % Change
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
RUGGED SYSTEMS SEGMENT
Codar Technology, Inc. $32,727 $27,553 19%
Lynwood Rugged Systems Ltd. 14,621 11,587 26%
Inter-company (434) (249) --
----------------------------------------
Total Rugged Systems Segment 46,914 38,891 21%
SYSTEMS INTEGRATION SEGMENT
NAI Systems Division 14,330 13,504 6%
Inter-company (113) (582) --
---------------------------------------
Total Systems Integration Segment 14,217 12,922 10%
TELECOMMUNICATIONS SEGMENT
Wilcom, Inc. 7,076 8,195 (14%)
---------------------------------------
TOTAL $68,207 $60,008 14%
=======================================
</TABLE>
Sales in the Rugged Systems segment (net of inter-company eliminations)
increased 21% to $46.9 million from $38.9 million in 1995. Each of the NAI
subsidiaries recorded sales increases in 1996 as compared to 1995. Codar's 1995
revenues were adversely impacted by production problems on certain contracts.
The increased sales at Lynwood is representative of the increased level of
business at this subsidiary.
Sales in the Systems Integration segment (net of inter-company eliminations)
increased 10% to $14.2 million from $12.9 million in 1995.
-16-
<PAGE>
<PAGE>
In recent years the Company has reduced its dependency on the United States
defense budget by expanding its non-military business operations.
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.
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%)
Lynwood Rugged Systems Ltd. 34.0% 32.9%
NAI Systems Division 20.9% 17.4%
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 carryforward, 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
-17-
<PAGE>
<PAGE>
benefit will be realized. When the Company returns to sustained profitability,
the benefits of such a tax loss carryforward 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. Basic earnings per share were $0.29 as compared with a
loss of $1.57 per basic share in 1995, based on a weighted average of 8.3
million and 7.4 million shares outstanding, respectively.
Liquidity and Capital Resources
Cash and cash equivalents totaled $0.6 million at December 31, 1997, as compared
to $2.7 million at December 31, 1996. The Company continues to apply all excess
cash to reducing its outstanding balances under its bank lines of credit. Cash
provided by operating activities amounted to $0.1 million in 1997, as compared
to cash used by operating activities of $1.6 million in 1996.
The Company reduced its outstanding borrowings under its secured revolving
credit agreement in 1997 by $2.2 million, reducing the total amount outstanding
to $5.3 million at year-end. The Company has made payments totaling $2.7 million
in excess of contractual requirements and has the right to re-borrow such amount
if needed. During 1998, the Company will lose the right to re-borrow such
amounts at the rate of $0.75 million per quarter and if no additional payments
are made, the Company will be required to repay $0.3 million on December 31,
1998. The remaining amount outstanding is due and payable on January 15, 1999.
In order to meet its payment obligations in 1999 the Company intends to
refinance all or a substantial portion of the amount due and payable, either
through borrowing or other capital sources. The Company does not believe that it
will have adequate cash flow from operations to do so. It is the Company's
intentions to pursue all available options in order that it meet its
obligations. Beginning in the first quarter of 1998, the entire amount
outstanding under the secured revolving credit agreement will be classified as a
current liability. As a result, several of the balance sheet financial ratios
such as the "current ratio" and the "quick ratio" will be adversely impacted.
The Company has reviewed its operating forecast in relation to its financial
debt covenants. Although certain of the forecasted financial ratios will be
close to the required thresholds, the Company believes it will be able to meet
all required debt covenants during 1998.
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, 1997 was $26.9 million,
compared to $30.2 million at December 31, 1996. Approximately 48% of the 1997
year-end backlog is scheduled for delivery over the next twelve months.
Year 2000
NAI is currently in the process of evaluating its computer software and
databases to determine whether or not modifications will be required to prevent
problems related to the year 2000. These problems, which have been widely
reported in the media, could cause malfunctions in certain software and
databases with respect to dates on or after January 1, 2000, unless corrected.
At this time, the Company does not believe
-18-
<PAGE>
<PAGE>
that it has a significant problem in this regard. The cost, if any, to become
year 2000 compliant is not expected to be material.
Forward Looking Information
This Annual Report on Form 10-K may contain forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995. These
statements are based on current plans and expectations of the Company and
involve risks and uncertainties that could cause actual future activities
and results of operations to be materially different from those set forth in
the forward-looking statements. Important factors that could cause actual
results to differ include, among others, changes in government purchasing
policies and budget constraints, competition, the continuity of booking
trends, the absence of supply interruptions, new products' market acceptance,
warranty performance, the successful and timely integration of research and
other risks detailed from time to time in the Company's filings and annual
report.
-19-
<PAGE>
<PAGE>
ITEM 8.
CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following consolidated financial statements of the registrant are submitted
herewith at the end of this document beginning on Page F-1:
Independent Auditors' Report.
Consolidated balance sheets at December 31, 1997 and 1996.
Consolidated statements of operations for the years ended December 31, 1997,
1996 and 1995.
Consolidated statements of shareholders' equity for the years ended December 31,
1997, 1996 and 1995.
Consolidated statements of cash flows for the years ended December 31, 1997,
1996 and 1995.
Notes to consolidated financial statements.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
-20-
<PAGE>
<PAGE>
PART III
ITEM 10.
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors of the Company
The members of the Board of Directors of the Company as of February 25, 1998,
together with certain information furnished to the Company by each such person
as of such date, are set forth below.
<TABLE>
<CAPTION>
Years Served
Name and Age as a Director Biographical Summary
- ------------ ------------- --------------------
<S> <C> <C>
Robert A. Carlson(1) 65 10 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, 45 5 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) 57 8 Mr. Barre is Chairman and Chief Executive
Officer of Servo Corporation of America, a
communications and defect detection company.
C. Shelton James(1)(3) 58 8 Mr. James is Chairman of the Board 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 Concurrent
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, CPSI, Inc., a company engaged in high
performance computing, Cyberguard Corporation,
a company involved in internet security, and
Group Land Systems, Inc., a company involved
in long distance telephone services.
</TABLE>
-21-
<PAGE>
<PAGE>
<TABLE>
<S> <C> <C>
Edward L. Hennessy, Jr.(2) 69 2 Mr. Hennessy is the retired Chairman and
Chief Executive Officer of Allied Signal,
Inc., a worldwide technology company. Mr.
Hennessy serves as the Treasurer of March of
Dimes and he also serves as a trustee of the
Stevens Institute of Technology. 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, 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) 53 2 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 May 1997 as Chairman of the
Board of Directors of Empire of Carolina,
Inc., which specializes in the design,
manufacture and sale of toys.
Dennis McCarthy(3) 51 2 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.
</TABLE>
(1) Member of the Executive Committee
(2) Member of the Compensation Committee
(3) Member of the Audit Committee
-22-
<PAGE>
<PAGE>
Executive Officers of the Company
The current executive officers of the Company are as follows:
Robert A. Carlson, 65, 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, 45, 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 $100,000 (collectively, the "Named
Executives") for each of the Company's last three fiscal years.
<TABLE>
<CAPTION>
Long Term Compensation
------------------------------------------
Annual Compensation Awards Payouts
----------------------------------------------------------------------------------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Securities
Name and Other Annual Restricted Underlying All Other
Principal Fiscal Compensation Stock Options/ LTIP Compensation
Position Year Salary($) Bonus ($) ($) Award(s)($) SARs (#) Payouts ($)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Robert A. 1997 $286,000 -- $800,000(1) -- -- -- $14,783(3)
Carlson -
President 1996 196,000 $176,000 -- -- -- -- 58,295(3)
and Chief
Executive 1995 263,000 -- -- -- 250,000(5) -- 59,071(3)
Officer
Richard A. 1997 180,000 100,000(2) -- 25,000 -- 2,275(4)
Schneider -
Executive 1996 124,000 96,000 50,000(2) -- -- -- 7,454(4)
Vice
President,
Treasurer
and Secretary 1995 152,000 8,500 -- -- 125,000(5) -- 7,630(4)
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
- ------------------------
(1) On December 19, 1996, the Company and Mr. Carlson agreed on the
termination of Mr. Carlson's status as an eligible participant under the
Supplemental Retirement Plan and the redemption of Mr. Carlson's interest
in the SERP by the Company at a redemption price of $800,000. Such amount
was paid during 1997. It is estimated that Mr. Carlson, who had 12 years
of credited service at the time of the agreement, would have been entitled
to receive $131,296 each year commencing at normal retirement age.
(2) On August 7, 1996, the Company and Mr. Schneider agreed on the termination
of Mr. Schneider's status as an eligible participant under the
Supplemental Retirement Plan and the redemption of Mr. Schneider's
interest in the SERP by the Company at a redemption price of $150,000.
Such amount was paid during 1996 and 1997. It is estimated that Mr.
Schneider, who had 8 years of credited service at the time of the
agreement, would have been entitled to receive $65,103 each year
commencing at normal retirement age.
(3) Includes $59,071, $58,295 and $13,155 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 1995, 1996 and 1997, respectively, as well as
$0, $0 and $1,628 of matching contributions made by the Company under the
-23-
<PAGE>
<PAGE>
401(k) deferred compensation plan and $0, $0 and $0 of contributions made
by the Company under the profit sharing portion of such plan for the
benefit of Mr. Carlson for each of the years 1995, 1996 and 1997,
respectively.
(4) Includes $7,630, $7,454 and $632 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 1995, 1996 and 1997, respectively, as well as $0, $0
and $1,643 of matching contributions made by the Company under the 401(k)
deferred compensation plan and $0, $0 and $0 of contributions made by the
Company under the profit sharing portion of such plan for the benefit of
Mr. Schneider for each of the years 1995, 1996 and 1997, respectively.
(5) Options to acquire shares of Common Stock that were granted in fiscal year
1995. At the same time, options for Mr. Carlson (214,485 shares) and Mr.
Schneider (95,327 shares) were canceled.
Stock Options
The table below summarizes the options granted to the Named Executives in 1997
and their potential realizable values.
Option/SAR Grants in 1997
<TABLE>
<CAPTION>
Potential Realizable Value of
Assumed Annual
Rates of Stock Price
Appreciation
Individual Grants for Option Term(1)
- ------------------------------------------------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e) (f) (g)
Number of % of Total
Securities Options/SARs
Underlying Granted to
Options/SARs Employees in Exercise or Base
Name Granted (2) Fiscal Year Price ($/Sh) Expiration Date 5%($) 10%($)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Robert A. -0- N/A N/A N/A N/A N/A
Carlson
President and
Chief
Executive
Officer
Richard A. 25,000 19% $1.88 5 Years $12,985 $28,694
Schneider
Executive
Vice President
Treasurer and
Secretary
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Option price compounded annually at 5% and 10% over the five-year term
minus the exercise price times the number of shares subject to the option.
(2) Such options were granted on December 23, 1997 and are exercisable at a
rate of 50% per year on the first two anniversary dates of the grant. All
such options expire after the fifth anniversary of the date of grant.
-24-
<PAGE>
<PAGE>
The table below summarizes the exercise of stock options during 1997 for the
Named Executives.
Aggregated Option/SAR Exercises in 1997 and FY-End Option/SAR Values
<TABLE>
<CAPTION>
(a) (b) (c) (d) (e)
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options/SARs Options/SARs
at FY-End at FY-End ($)
Shares
Acquired on Value Exercisable/ Exercisable/
Name Exercise Realized ($) Unexercisable Unexercisable (1)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Robert A. -0- $ 0 250,000/0 $0/$0
Carlson -
President and
Chief
Executive
Officer
Richard A. 25,000 $ 70,250 100,000/25,000 $0/$0
Schneider -
Executive Vice
President
Treasurer and
Secretary
</TABLE>
- ------------------------
(1) Market price at December 31, 1997 minus exercise price times the number of
shares underlying the unexercised options.
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 $286,000 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. If the Company decides to terminate Mr. Carlson's employment for cause,
the Company will provide 20 days written notice, and reason for the termination.
Mr. Carlson will have those 20 days to effect a cure to the Company's
satisfaction.
In January 1998, Mr. Carlson notified the Company of his intention to extend the
contract for an additional year.
-25-
<PAGE>
<PAGE>
Director Compensation
During 1997, 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 1997, 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, 1997, the members of the Compensation
Committee were Charles S. Holmes (Chairman), Stephen A. Barre and Edward
Hennessy, Jr. During fiscal year 1997 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, 1997, 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 February 25, 1998. The information in the table below is based upon
information furnished to the Company by such persons and statements filed with
the Securities and Exchange Commission.
<TABLE>
<CAPTION>
NUMBER OF SHARES OF
COMMON STOCK PERCENT OF
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIALLY OWNED(1) COMMON STOCK
- ------------------------------------ --------------------- ------------
<S> <C> <C>
Charles S. Holmes
P.O. Box 2850
Southampton, NY 11969 (2) 3,431,000 29.6%
Pioneering Management Corporation
60 State Street
Boston, MA 02114 (3) 850,000 9.3%
Fundamental Management Corporation
4000 Hollywood Boulevard
Suite 610N
Hollywood, FL 33021 (4) 1,079,336 11.0%
</TABLE>
- ------------------------
(1) To the knowledge of the Company, beneficial owners named in the above table
have sole voting power with respect to the shares listed opposite their
names.
(2) Mr. Holmes is a director of the Company. These shares are comprised of
1,000,000 shares of Common Stock, 5,000 stock options exercisable at $3.44
per share, 1,750,000 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 219,000 shares of Common Stock
and 157,000 shares underlying Warrants exercisable at $2.50 per share owned
by an irrevocable trust for
-26-
<PAGE>
<PAGE>
the benefit of a child. The ownership percentage is calculated as if such
Stock Options, Warrants and Notes had been converted as of February 25,
1998.
(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, 178,700 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 February
25, 1998 by Fundamental Management Corporation.
Shares of Common Stock beneficially owned as of February 25, 1998 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)
<TABLE>
<CAPTION>
NUMBER OF SHARES OF
COMMON STOCK PERCENT OF
NAME BENEFICIALLY OWNED (2) COMMON STOCK (3)
- ---- ------------------- ------------
<S> <C> <C>
Robert A. Carlson 100,467 1.1%
Stephen A. Barre 17,654 --
Edward L. Hennessy, Jr. -0- --
Charles S. Holmes (4) 1,000,000 10.9%
C. Shelton James (5) 14,793 --
Dennis McCarthy -0- --
Richard A. Schneider 30,042 --
All directors and officers as a group
(7 persons) 1,163,136 12.7%
</TABLE>
- ------------------------
- -- = Less than 1%
(1) Directors and executive officers have sole voting power and sole investment
power with respect to the shares listed opposite their names.
(2) Excludes options exercisable within 60 days of February 25, 1998 for such
persons as follows: Mr. Carlson, 250,000, Mr. Barre, 13,120; Mr. Hennessy,
10,000; Mr. Holmes, 5,000; Mr. James, 12,401; Mr. McCarthy, 10,000; Mr.
Schneider, 100,000; and all directors and officers as a group, 400,521.
-27-
<PAGE>
<PAGE>
(3) The percentages of Common Stock outstanding are based on 9,155,427 shares
outstanding on March 11, 1998.
(4) Excludes Warrants to purchase 2,050,000 shares of Common Stock owned by Mr.
Holmes and 219,000 shares of Common Stock and Warrants to purchase 157,000
shares of Common Stock owned by an irrevocable trust for which Mr. Holmes
disclaims beneficial ownership.
(5) Excludes 400,636 shares of Common Stock, Warrants to purchase 178,700
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
exercisable 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
-29-
<PAGE>
<PAGE>
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 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.
10(xiii) Sixth Amendment, dated as of July 31, 1997 to Amended
and Restated Credit Agreement, dated as of April 12,
1995, as previously amended, amongst the Registrant,
the Banks, the Administrative Agent, and the
Collateral Agent.
10(xiv) Seventh Amendment, dated as of November 1997, to
Amended and Restated Credit Agreement, dated as of
April 12, 1995, as previously amended, amongst the
Registrant, the Banks, the Administrative Agent, and
the Collateral Agent.
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).
(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.
By: /s/ Richard A. Schneider
------------------------
Richard A. Schneider
Date: February 26, 1998 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.
<TABLE>
<CAPTION>
Signature Title Date
- ---------- ------ ----
<S> <C> <C>
/s/ Robert A. Carlson Chairman, Chief Executive February 26, 1998
- --------------------- Officer and Director
Robert A. Carlson (Chief Executive Officer)
/s/ Stephen Barre Director February 26, 1998
- -----------------
Stephen Barre
/s/ Edward L. Hennessy, Jr. Director February 26, 1998
- ---------------------------
Edward L. Hennessy, Jr.
/s/ Charles S. Holmes Director February 26, 1998
- ---------------------
Charles S. Holmes
/s/ C. Shelton James Director February 26, 1998
- --------------------
C. Shelton James
/s/ Dennis McCarthy Director February 26, 1998
- -------------------
Dennis McCarthy
/s/ Richard A Schneider Executive Vice President, February 26, 1998
- ----------------------- CFO, Treasurer, Secretary
Richard A Schneider and Director (Chief Financial
and Accounting Officer)
</TABLE>
-32-
<PAGE>
<PAGE>
NAI TECHNOLOGIES, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
Page
----
Independent Auditors' Report F-2
Consolidated Balance Sheets at December 31, 1997 and 1996 F-3
Consolidated Statements of Operations - Years ended F-4
December 31, 1997, 1996 and 1995
Consolidated Statements of Shareholders' Equity - F-5
Years ended December 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows - Years ended F-6
December 31, 1997, 1996 and 1995
Notes to Consolidated Financial Statements F-7
Consolidated Financial Statement Schedules:
II - Valuation and Qualifying Accounts F-29
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, 1997 and 1996, 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, 1997. In
connection with our audit of the consolidated financial statements, we have also
audited the financial statement schedule as listed in the accompanying index.
These consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of NAI Technologies,
Inc. and subsidiaries as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1997, in conformity with generally accepted accounting
principles. Also 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
Jericho, New York
February 9, 1998
F-2
<PAGE>
<PAGE>
NAI TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
(in thousands, except share amounts) 1997 1996
- ------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 585 $ 2,727
Accounts receivable, net 11,742 12,693
Inventories, net 9,320 10,270
Deferred tax asset 148 173
Other current assets 497 597
- ------------------------------------------------------------------------------------------
Total current assets 22,292 26,460
- ------------------------------------------------------------------------------------------
Property, plant and equipment, net 2,986 3,523
Excess of cost over fair value of net assets acquired, net 9,073 9,707
Other assets 1,330 1,681
- ------------------------------------------------------------------------------------------
Total assets $35,681 $41,371
==========================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 7,465 $ 6,907
Notes payable 571 --
Current installments of long-term debt 311 158
Accrued payroll and commissions 302 680
Other accrued expenses 2,116 3,894
Income taxes payable 597 580
- ------------------------------------------------------------------------------------------
Total current liabilities 11,362 12,219
- ------------------------------------------------------------------------------------------
Long-term debt 9,747 12,224
Other accrued expenses 783 912
Deferred income taxes 41 36
- ------------------------------------------------------------------------------------------
Total liabilities 21,933 25,391
- ------------------------------------------------------------------------------------------
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; 9,155,427 and
9,016,937 shares issued in 1997 and 1996 916 902
Capital in excess of par value 19,457 19,217
Foreign currency translation adjustment 196 313
Accumulated deficit (6,821) (4,452)
- ------------------------------------------------------------------------------------------
Total shareholders' equity 13,748 15,980
- ------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $35,681 $41,371
==========================================================================================
</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) 1997 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $51,864 $68,207 $60,008
Cost of sales 41,377 52,712 55,100
- ------------------------------------------------------------------------------
Gross margin 10,487 15,495 4,908
- ------------------------------------------------------------------------------
Selling expenses 3,894 4,192 4,971
General and administrative expenses 4,532 5,242 6,517
Research and development costs 1,517 1,639 1,807
Other (income) expense 575 (885) 488
- ------------------------------------------------------------------------------
Total expenses, net 10,518 10,188 13,783
- ------------------------------------------------------------------------------
Operating earnings (loss) (31) 5,307 (8,875)
- ------------------------------------------------------------------------------
Non-operating income (expense):
Other -- 15 --
Amortization of deferred debt costs (341) (456) (895)
Interest income 61 152 195
Interest expense (1,498) (2,209) (1,667)
- ------------------------------------------------------------------------------
(1,778) (2,498) (2,367)
- ------------------------------------------------------------------------------
Earnings (loss) before income taxes (1,809) 2,809 (11,242)
Income tax expense 560 396 377
- ------------------------------------------------------------------------------
Net (loss) earnings $(2,369) $2,413 ($11,619)
==============================================================================
Basic (loss) earnings per common share $ (0.26) $ 0.29 ($ 1.57)
==============================================================================
Diluted (loss) earnings per common share $ (0.26) $ 0.29 ($ 1.57)
==============================================================================
</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, 1997
<TABLE>
<CAPTION>
CAPITAL TOTAL
COMMON IN EXCESS NOTE TRANSLATION ACCUMULATED SHAREHOLDERS'
(IN THOUSANDS) STOCK OF PAR RECEIVABLE ADJUSTMENT DEFICIT EQUITY
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE JANUARY 1, 1995 $717 $14,730 ($12) $107 $ 4,754 $ 20,296
Net loss -- -- -- -- (11,619) (11,619)
Foreign currency translation adjustment -- -- -- (64) -- (64)
Common stock issued in debt restructuring 25 475 -- -- -- 500
Issuance of stock warrants in connection
with debt offering -- 913 -- -- -- 913
Exercise of employee stock options and
stock 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
with debt offering -- 1,060 -- -- -- 1,060
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 -- 313 (4,452) 15,980
Net loss -- -- -- -- (2,369) (2,369)
Foreign currency translation adjustment -- -- -- (117) -- (117)
Exercise of employee stock options, net and
stock purchases under stock purchase plan 8 155 -- -- -- 163
Exercise of stock warrants 1 17 -- -- -- 18
Conversion of convertible debt, net
of issuance costs 5 68 -- -- -- 73
----------------------------------------------------------------------------
BALANCE DECEMBER 31, 1997 $916 $19,457 $ -- $ 196 ($6,821) $13,748
============================================================================
</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) 1997 1996 1995
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) ($2,369) $ 2,413 ($11,619)
Adjustments to reconcile net earnings (loss) to cash (used in)
provided by operating activities:
Depreciation and amortization 2,161 2,548 2,979
(Gain) loss on disposal of property, plant and equipment (6) (1,492) 1
Provision for inventory obsolescence 2,651 88 2,248
Loss on sale of notes receivable -- 89 --
Changes in operating assets and liabilities, excluding
foreign currency adjustments:
Accounts receivable 951 648 (1,227)
Inventories (1,701) 1,543 (191)
Accounts payable and other accrued expenses (1,727) (6,965) 3,545
Income taxes 47 73 4,328
Other, net 87 (594) 57
- ------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 94 (1,649) 121
- ------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Contingent payment on purchase of KMS Advanced Products -- -- (103)
Purchase of property, plant and equipment (538) (566) (886)
Proceeds from sale of division, property, plant and equipment 24 2,990 443
- ------------------------------------------------------------------------------------------------------
Net cash (used in) provided by investing activities (514) 2,424 (546)
- ------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuances of notes payable 1,692 590 6
Issuances of 12% convertible notes -- 5,842 2,500
Payments of notes payable (1,121) (590) (133)
Payments for debt restructuring -- -- (345)
Payments of long-term debt (2,369) (7,856) (656)
Receipts on notes receivable -- 1,113 --
Proceeds from exercise of stock options and stock purchase plan 163 -- 60
Proceeds from exercise of stock warrants 18 -- --
- ------------------------------------------------------------------------------------------------------
Net cash (used in) provided by financing activities (1,617) (901) 1,432
- ------------------------------------------------------------------------------------------------------
Effect of foreign currency exchange rates on cash (105) 248 (60)
- ------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents (2,142) 122 947
Cash and cash equivalents at beginning of year 2,727 2,605 1,658
- ------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 585 $ 2,727 $ 2,605
======================================================================================================
Supplemental disclosure of cash flow information:
Cash paid for (received):
Interest $ 1,477 $ 2,238 $ 1,506
Income taxes 571 398 (4,697)
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 73 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, 1997, 1996 AND 1995
1. SUMMARY OF ACCOUNTING POLICIES
Description of Business: NAI Technologies, Inc. designs, manufactures
and markets rugged computer systems, advanced peripheral products, high
performance workstations, TEMPEST computer systems, 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, 1997, 1996 and 1995 were
$13,205,000, $20,619,000 and $22,665,000, respectively. Net sales to one
other customer accounted for 17% and 16% of the Company's sales in 1997
and 1996, 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 Company'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 1997
presentation.
Cash Equivalents: The Company classifies investments that are readily
convertible into cash, and have maturities of three months or less at
the time of purchase, 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 quantities
on hand are not justified by anticipated future usage.
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 cash flows. Accumulated
amortization was approximately $2,995,000 and $2,362,000 at December 31,
1997 and 1996, respectively. The amortization expense associated with
these amounts is included in other operating expense in the consolidated
statements of operations and amounted to $633,000, $632,000 and $630,000
in 1997, 1996 and 1995, 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
indicate that the carrying amount of an asset may not be recoverable.
The Company assesses the recoverability of long lived assets by
determining whether the asset balance can be recovered through projected
undiscounted future cash flows. 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 costs. 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: Deferred tax assets and liabilities are recognized based
on the future tax consequences attributable to 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.
F-8
<PAGE>
<PAGE>
Earnings (Loss) Per Share: In 1997 the Company adopted Statement of
Financial Accounting Standards No. 128 (SFAS 128), "Earnings per Share,"
which requires the presentation of basic and diluted earnings per share.
Basic earnings (loss) per share is computed based upon the weighted
average number of common shares outstanding. Diluted earnings (loss) per
share is computed based upon the weighted average number of common
shares outstanding increased by dilutive common stock options and
warrants, common stock subscribed to under the Employee Stock Purchase
Plan and the effect of assuming the conversion of the outstanding 12%
convertible notes. Prior year earnings per share data has been restated
to apply the provisions of SFAS 128. The table below provides the
components of the per share computations.
<TABLE>
<CAPTION>
(in thousands except per share data) 1997 1996 1995
------------------------------------------------------------------------------------
<S> <C> <C> <C>
BASIC EPS COMPUTATION
Net (loss) earnings ($2,369) $2,413 ($11,619)
Weighted average common
shares outstanding 9,099 8,268 7,382
Basic (loss) earnings per share ($0.26) $ 0.29 ($ 1.57)
=================================================================================
DILUTED EPS COMPUTATION
Net (loss) earnings ($2,369) $2,413 ($11,619)
Adjusted (loss) earnings ($2,369) $2,413 ($11,619)
Weighted average common
shares outstanding 9,099 8,268 7,382
Stock options & warrants -- 198 --
12% convertible notes -- -- --
------------------------------------
Diluted common shares outstanding 9,099 8,466 7,382
Diluted (loss) earnings per share ($ 0.26) $ 0.29 ($ 1.57)
=================================================================================
</TABLE>
The assumed conversion of the outstanding 12% convertible notes was
excluded from the diluted earnings per share in 1997 and 1996 since they
were anti-dilutive.
Fair Value of Financial Instruments: Statement of Financial Accounting
Standards No. 107, "Disclosures About Fair Value of Financial
Instruments," requires disclosure of the fair value of certain financial
instruments. Cash and cash equivalents, accounts receivable, notes
payable, accounts payable and accrued expenses are reflected in the
financial statements at fair value because of the short-term maturity of
these instruments. The fair value and net book value of the Company's
12% convertible subordinated promissory notes at December 31, 1997 were
$4,483,000 and $4,722,000, respectively. The book value of the secured
revolving credit obligation on December 31, 1997 approximated fair value
since it has a prime based interest rate that is adjusted for market
rate fluctuations.
Accounting for Stock-Based Compensation: The Company records
compensation expense for employee stock options and warrants only if the
current market price of the underlying stock exceeds the exercise price
on the date of the grant. On January 1, 1996, the Company adopted
Financial Accounting Standard No. 123, "Accounting for Stock-Based
Compensation." The Company has elected not to implement the fair value
based accounting method for employee and directors' stock options but
has elected to disclose the pro forma net earnings and pro forma
earnings per share to account for employee stock option grants beginning
in 1995 as if such method had been used to account for such stock-based
compensation cost.
F-9
<PAGE>
<PAGE>
2. ACCOUNTS RECEIVABLE
Accounts receivable at December 31, consisted of the following:
<TABLE>
<CAPTION>
(in thousands) 1997 1996
--------------------------------------------------------------------------------------
<S> <C> <C>
Amounts receivable from United States Government:
Amounts billed $ 3,489 $ 3,891
Unbilled contract receivables 59 47
--------------------------------------------------------------------------------------
3,548 3,938
Amounts receivable from others:
Amounts billed 6,663 8,564
Unbilled contract receivables 1,629 449
--------------------------------------------------------------------------------------
8,292 9,013
--------------------------------------------------------------------------------------
11,840 12,951
Allowance for doubtful accounts (98) (258)
---------------------------------------------------------------------------------------
$11,742 $12,693
=======================================================================================
</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-10
<PAGE>
<PAGE>
3. INVENTORIES
Inventories at December 31, summarized by major classification,
were as follows:
<TABLE>
<CAPTION>
(in thousands) 1997 1996
-----------------------------------------------------------------------
<S> <C> <C>
Raw materials and components $ 9,360 $ 8,567
Work-in-process 3,086 3,010
Finished goods 1,426 1,204
Allowance for obsolescence (4,033) (2,403)
Unliquidated progress payments (519) (108)
-----------------------------------------------------------------------
$ 9,320 $10,270
=======================================================================
</TABLE>
4. OTHER CURRENT ASSETS
Other current assets at December 31, consisted of the following:
<TABLE>
<CAPTION>
(in thousands) 1997 1996
----------------------------------------------------------------------
<S> <C> <C>
Prepaid insurance $ 171 $ 249
Other prepaid expenses 326 348
----------------------------------------------------------------------
$ 497 $ 597
======================================================================
</TABLE>
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at December 31, consisted of
the following:
<TABLE>
<CAPTION>
(in thousands) 1997 1996
-----------------------------------------------------------------------
<S> <C> <C>
Land $ 300 $ 300
Buildings 1,900 1,900
Machinery and equipment 7,245 7,807
Furniture and fixtures 565 681
Leasehold improvements 516 404
-----------------------------------------------------------------------
10,526 11,092
Less accumulated depreciation and
amortization (7,540) (7,569)
-----------------------------------------------------------------------
$ 2,986 $ 3,523
=======================================================================
</TABLE>
F-11
<PAGE>
<PAGE>
6. OTHER ACCRUED EXPENSES--CURRENT
Other accrued expenses--current at December 31, consisted of the
following:
<TABLE>
<CAPTION>
(in thousands) 1997 1996
----------------------------------------------------------------------
<S> <C> <C>
Supplemental retirement $ -- $ 800
Employee benefits 462 949
Insurance payable 182 164
Purchase liabilities 129 257
Warranty 359 688
Deferred revenue 276 296
Contract losses 116 58
Taxes, other than income 50 115
Interest 153 134
Other 389 433
----------------------------------------------------------------------
$2,116 $3,894
======================================================================
</TABLE>
F-12
<PAGE>
<PAGE>
7. DEBT
Long term debt at December 31, consisted of the following:
<TABLE>
<CAPTION>
(in thousands) 1997 1996
-------------------------------------------------------------------------------------
<S> <C> <C>
Secured revolving credit with quarterly step-downs of
$750,000 and interest at prime plus 1%
(9.5% at December 31, 1997) $ 5,300 $ 7,500
Notes payable, generally secured by specified
machinery and equipment, with interest at 10% 36 206
12% Convertible Subordinated Promissory
Notes due January 15, 2001 5,123 5,227
--------------------------------------------------------------------------------------
10,459 12,933
Original issue discount on 12% Notes (401) (551)
Less current installments (311) (158)
--------------------------------------------------------------------------------------
$ 9,747 $12,224
======================================================================================
</TABLE>
Aggregate principal payments for the five years subsequent to December
31, 1997 are as follows (in thousands):
<TABLE>
<S> <C>
1998 $ 311
1999 5,025
2000 --
2001 5,123
2002 --
-------
$10,459
=======
</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. The Company intends to refinance all
or a substantial portion of the amount due and payable, either through
borrowing or other capital sources. Interest is payable monthly and was
amended in 1997 from a rate of 1 3/4% above prime to 1% 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, 1997
the Company had made prepayments of $2,725,000.
At various times from February 15, 1996 to 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. Interest on the Notes is
payable quarterly in arrears on January 15, April 15, July 15 and
October 15 of each year. The Notes mature on January 15, 2001.
The Notes may be prepaid by the Company without premium or
F-13
<PAGE>
<PAGE>
penalty at any time after January 15, 1999. The Notes are unsecured
obligations of the Company and contain certain restrictions on the
Company's assets not otherwise encumbered by the holders of the senior
indebtedness. As of December 31, 1997, $3,219,500 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 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 are 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 exercisable at any time on or before
February 15, 2002 at $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 $990,000) and bears interest at 1 3/4% above the U.K.
base rate (7 1/4% at December 31, 1997). This facility is renewable in
March 1998. The amounts outstanding under the credit facility at
December 31, 1997 and 1996 were $571,000 and $-0-, respectively. The
maximum month end borrowings under the credit facility during the years
ended December 31, 1997 and 1996 were 'L'673,000 and 'L'346,000
(approximately $1,120,000 and $543,000, respectively). The average short
term borrowings for the years ended December 31, 1997 and 1996 were
'L'140,000 and 'L'29,000 (approximately $231,000 and $50,000,
respectively). The weighted average interest rate during the years ended
December 31, 1997 and 1996 was 8.40% and 8.23%, respectively.
F-14
<PAGE>
<PAGE>
8. OTHER ACCRUED EXPENSES - NON-CURRENT
Other accrued expenses - non-current at December 31, consisted of the
following:
<TABLE>
<CAPTION>
(in thousands) 1997 1996
-----------------------------------------------------------------------
<S> <C> <C>
Deferred compensation $ 433 $ 473
Other 350 439
-----------------------------------------------------------------------
$ 783 $ 912
=======================================================================
</TABLE>
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 1998 payment to each of the former officers will
be approximately $43,000.
9. OTHER (INCOME) EXPENSE
Other (income) expense for the years ended December 31, are as follows:
<TABLE>
<CAPTION>
(in thousands) 1997 1996 1995
-----------------------------------------------------------------------
<S> <C> <C> <C>
Gain on sale of division (1) $ -- ($1,510) $ --
Amortization of goodwill 633 632 629
Other (58) (7) (141)
-----------------------------------------------------------------------
$ 575 ($ 885) $ 488
=======================================================================
</TABLE>
(1) In June 1996, the Company sold the assets of its Systems Integration
division which operated within the Codar Technology subsidiary.
F-15
<PAGE>
<PAGE>
10. INCOME TAXES
The Company and its domestic subsidiaries file a consolidated Federal
income tax return. The (loss) income before provision for income taxes
for the years ended December 31, 1997, 1996 and 1995 were ($1,809,000),
$2,809,000 and ($11,242,000), respectively, comprised of domestic (loss)
income of ($3,859,000), $1,641,000 and ($12,077,000), respectively and
foreign income of $2,050,000, $1,168,000 and $835,000, respectively. The
provision for income taxes consisted of the following items:
<TABLE>
<CAPTION>
(in thousands) 1997 1996 1995
------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal ($ 85) $ -- $ --
State -- -- --
Foreign 615 533 377
-----------------------------------------------------------------------
530 533 377
-----------------------------------------------------------------------
Deferred:
Federal -- -- --
State -- -- --
Foreign 30 (137) --
-----------------------------------------------------------------------
30 (137) --
-----------------------------------------------------------------------
Total income tax expense $ 560 $ 396 $ 377
=======================================================================
</TABLE>
The tax effects of temporary differences that gave rise to significant
portions of the net deferred tax asset and (liability) at December 31,
1997, and 1996 are as follows:
<TABLE>
<CAPTION>
(in thousands) 1997 1996
-----------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforward $4,603 $3,389
AMT credit carryforward 514 514
Inventories 916 401
Supplemental retirement obligation -- 204
Accrued vacation 66 81
Deferred compensation 177 186
Other 208 392
Plant and equipment 333 109
Valuation allowance (6,669) (5,103)
-----------------------------------------------------------------------
$ 148 $ 173
-----------------------------------------------------------------------
Deferred tax liabilities non-current:
Other (41) (36)
-----------------------------------------------------------------------
(41) (36)
-----------------------------------------------------------------------
$ 107 $ 137
=======================================================================
</TABLE>
The Company has recorded a valuation allowance to reflect the estimated
amount of deferred tax assets that may not be realized through the
realization of future taxable income.
F-16
<PAGE>
<PAGE>
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) 1997 1996 1995
--------------------------------------------------------------------------------------
<S> <C> <C> <C>
Expected tax expense (benefit) ($ 615) $ 955 ($3,822)
Increases (decreases) resulting from:
Adjustment of prior years' income taxes (344) -- (350)
Non-deductible expenses 106 214 278
Other (153) (250) 246
Change in valuation allowance 1,566 (523) 4,025
--------------------------------------------------------------------------------------
Actual income tax expense $ 560 $ 396 $ 377
======================================================================================
</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.
At December 31, 1997, the Company has U.S. net operating loss
carryforwards of $13,549,000, expiring at various dates beginning in
2009 to 2012.
F-17
<PAGE>
<PAGE>
11. 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.
THE 1991 STOCK OPTION PLAN
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
Options under the Directors' Plan are non-qualified stock options and
non-employee directors are automatically granted 5,000 options to
purchase common shares upon the 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
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 the
optionee must have acquired such shares at least six months prior to the
exercise date. During 1997, 11,770 common shares were received as
payment for the exercise of options. No options were exercised in 1996.
In 1995 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
1997, 1996 and 1995 was $1.48, $0.74 and $0.61, respectively. The
weighted-average fair value per purchase right under the Employee Stock
Purchase Plan was $1.05 and $0.74 respectively, for 1997 and 1996
subscriptions. There were no subscriptions in 1995. The fair value was
estimated using the Black-Scholes option pricing model and the following
weighted-average assumptions:
F-18
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
1997 1996 1995
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Expected dividend yield 0% 0% 0%
Expected stock volatility 20% 30% 30%
Risk-free interest rate 5% 5% 5%
Expected term until exercise (years) 3 3 3
---------------------------------------------------------------------------------------
</TABLE>
Pro forma net income and earnings per share reflecting compensation cost
for the fair value of stock options awarded in 1997, 1996 and 1995 were
as follows:
<TABLE>
<CAPTION>
(thousands of dollars, expect per share data) 1997 1996 1995
------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income (loss):
As reported ($2,369) $2,413 ($11,619)
Pro forma ($2,542) $2,315 ($11,671)
Basic (loss) earnings per share:
As reported ($ 0.26) $ 0.29 ($ 1.57)
Pro forma ($ 0.28) $ 0.28 ($ 1.58)
Diluted (loss) earnings per share:
As reported ($ 0.26) $ 0.29 ($ 1.57)
Pro forma ($ 0.28) $ 0.27 ($ 1.58)
------------------------------------------------------------------------------------
</TABLE>
The pro forma effects on net income and earnings per share for 1997,
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-19
<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, 1995 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
Granted 135,000 $3.56
Exercised (78,850) $2.45
Canceled (63,125) $2.80
-------------------------------------------------------------------------
Outstanding at December 31, 1997 719,919 $2.81
=========================================================================
</TABLE>
Stock options outstanding at December 31, 1997 are summarized as
follows:
<TABLE>
<CAPTION>
Range of
exercise Number Weighted average Weighted exercise
price outstanding remaining life average price
-------------------------------------------------------------------------
<S> <C> <C> <C>
$1.88-$2.00 41,250 4.0 years $ 1.90
$2.50 509,675 3.1 years $ 2.50
$3.44-$3.75 130,000 5.2 years $ 3.58
$4.50-$8.33 38,994 6.2 years $ 5.32
-------------------------------------------------------------------------
$1.88-$8.33 719,919 4.0 years $ 2.81
=========================================================================
</TABLE>
At December 31, 1997, 431,102 options were exercisable at a weighted
average exercise price of $2.67 and 1,166,651 shares were reserved for
issuance under all stock option plans.
Warrants
At December 31, 1997, there were 4,112,700 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-20
<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 101,017 shares has been reserved for
issuance under the Employee Stock Purchase Plan and as of December 31,
1997, 61,223 shares have been issued pursuant to the plan. The following
table is a summary of shares subscribed under the Employee Stock
Purchase Plan:
<TABLE>
<CAPTION>
NUMBER OF PRICE
SHARES RANGE
------ ------
<S> <C> <C>
Outstanding at January 1, 1995 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
Purchases (12,160) $2.76
Subscriptions 10,520 $4.36
Cancellations (12,410) $2.76-$4.36
-----------------------------------------------------------------------------------
Outstanding at December 31, 1997 4,730 $4.36
===================================================================================
</TABLE>
F-21
<PAGE>
<PAGE>
12. EMPLOYEE BENEFIT PLANS
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. Beginning in January 1997, the
Company re-instituted a matching provision of 100% of the first 1% of
each employee's compensation that is contributed. The Company's
contribution in 1997 under the Plan was $51,000. There were no Company
contributions made in 1996 or 1995.
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 1997, 1996 or 1995.
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 in 1995. In 1995, the actuarial
computations assumed a discount rate of 6.75% on benefit obligation and
an annual compensation increase of 5%.
The following table sets forth the funded status and cost components of
the Company's Supplemental Retirement Plan at December 31, 1995:
<TABLE>
<CAPTION>
(in thousands) 1995
-------------------------------------------------------------------------------
<S> <C>
Accumulated benefit obligation including vested benefits
of $1,215 $1,221
===============================================================================
Projected benefit obligation for service
rendered to date (1,442)
Plan assets at fair value --
-------------------------------------------------------------------------------
Projected benefit obligation in excess
of plan assets (1,442)
Unrecognized prior service cost 332
Unrecognized net loss 178
Adjustment required to recognize
minimum liability (289)
--------------------------------------------------------------------------------
Unfunded accrued supplementary costs ($1,221)
===============================================================================
Net pension expense is comprised of the following:
Service cost $ 25
Interest cost 93
Net amortization and deferral 28
-------------------------------------------------------------------------------
Net pension expense $ 146
===============================================================================
</TABLE>
F-22
<PAGE>
<PAGE>
13. 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 ended December 31,
(in thousands) 1997 1996 1995
------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SALES TO UNAFFILIATED CUSTOMERS:
United States $34,324 $52,053 $47,329
Export 1,814 1,581 1,786
United Kingdom 15,726 14,573 10,893
------------------------------------
Total $51,864 $68,207 $60,008
====================================
TRANSFERS BETWEEN GEOGRAPHIC AREAS:
United States $ 812 $ 547 $ 831
United Kingdom 71 -- --
------------------------------------
Total $ 883 $ 547 $ 831
====================================
TOTAL SALES:
United States $35,446 $52,600 $48,160
Export 1,453 1,581 1,786
United Kingdom 15,848 14,573 10,893
Eliminations (883) (547) (831)
-------------------------------------
Total $51,864 $68,207 $60,008
====================================
OPERATING EARNINGS (LOSS):
United States $ (930) $ 4,869 ($ 6,232)
United Kingdom 2,549 2,070 1,226
------------------------------------
Subtotal 1,619 6,939 (5,006)
Corporate expenses and other (1,650) (1,632) (3,869)
-------------------------------------
Total operating earnings (loss) (31) 5,307 (8,875)
Net interest expense & other (1,778) (2,498) (2,367)
-------------------------------------
Earnings (loss) before income taxes ($ 1,809) $ 2,809 ($11,242)
=====================================
IDENTIFIABLE ASSETS:
United States $23,810 $28,294 $34,103
United Kingdom 10,055 9,602 8,283
----------------------------------
Subtotal 33,865 37,896 42,386
Corporate and other 1,816 3,475 5,626
------------------------------------
Total $35,681 $41,371 $48,012
====================================
</TABLE>
F-24
<PAGE>
<PAGE>
14. INFORMATION BY BUSINESS SEGMENT
The Company's operations are classified into three business segments:
Rugged Systems, Systems Integration and Telecommunications. The Rugged
Systems segment includes Codar Technology, Inc. based in Longmont,
Colorado, and Lynwood Rugged Systems 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. 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. One customer accounted
for 25% of the Rugged Systems segment's 1997 sales. No other customer
accounted for greater than 10% of the segment's sales.
The Systems Integration segment consists of NAI Technologies--Systems
Division Corporation ("Systems Division") in Columbia, Maryland. Systems
Division provides custom packaged integrated computer systems for
deployment in shelters, ships, land vehicles and other demanding
environments. The U.S. Government accounted for 70% of the Systems
Integration segment's 1997 sales and one other customer accounted for
22% of the segment's sales.
The Telecommunications segment 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. One customer
accounted for 20% of the Telecommunications segment's 1997 sales. All
other customers individually comprised less than 10% of the segment's
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 ended December 31,
(in thousands) 1997 1996 1995
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SALES TO UNAFFILIATED CUSTOMERS:
Rugged Systems $30,904 $46,914 $38,891
Systems Integration 16,854 14,217 12,922
Telecommunications 4,106 7,076 8,195
-----------------------------------
Total $51,864 $68,207 $60,008
===================================
INTERSEGMENT SALES:
Rugged Systems $ 520 434 249
Systems Integration 363 113 582
-----------------------------------
Total $ 883 $ 547 $ 831
===================================
TOTAL SALES:
Rugged Systems $31,424 $47,348 $39,140
Systems Integration 17,217 14,330 13,504
Telecommunications 4,106 7,076 8,195
Eliminations (883) (547) (831)
-----------------------------------
Total $51,864 $68,207 $60,008
===================================
OPERATING EARNINGS (LOSS):
Rugged Systems $ (208) $ 4,927 ($ 4,856)
Systems Integration 2,546 1,318 583
Telecommunications (719) 694 (733)
-----------------------------------
Subtotal 1,619 6,939 (5,006)
Corporate expenses and other (1,650) (1,632) (3,869)
-----------------------------------
Total operating earnings (loss) (31) 5,307 (8,875)
Net interest expense & other (1,778) (2,498) (2,367)
-----------------------------------
Earnings (loss) before income taxes ($ 1,809) $ 2,809 ($11,242)
===================================
IDENTIFIABLE ASSETS:
Rugged Systems $21,351 $25,484 $31,282
Systems Integration 7,029 6,100 4,295
Telecommunications 5,485 6,312 6,809
-----------------------------------
Subtotal 33,865 37,896 42,386
Corporate and other 1,816 3,475 5,626
-----------------------------------
Total $35,681 $41,371 $48,012
===================================
CAPITAL EXPENDITURES:
Rugged Systems $ 293 $ 398 $ 738
Systems Integration 171 14 7
Telecommunications 74 150 120
-----------------------------------
Subtotal 538 562 865
Corporate and other -- 4 21
-----------------------------------
Total $ 538 $ 566 $ 886
===================================
DEPRECIATION AND AMORTIZATION:
Rugged Systems $ 1,262 $ 1,416 $ 1,461
Systems Integration 124 144 219
Telecommunications 280 362 359
-----------------------------------
Subtotal 1,666 1,922 2,039
Corporate and other 495 626 940
-----------------------------------
Total $ 2,161 $ 2,548 $ 2,979
===================================
</TABLE>
F-26
<PAGE>
<PAGE>
15. COMMITMENTS AND CONTINGENCIES
The Company and its subsidiaries lease office and manufacturing
facilities, automobiles, computers and other equipment under various
non-cancelable operating leases.
Future minimum rental commitments for leases with non-cancelable terms
in excess of one year are as follows:
<TABLE>
<CAPTION>
(in thousands) Amount
-------------------------------------------
<S> <C>
1998 $1,329
1999 1,161
2000 708
2001 623
2002 346
Thereafter 4,001
-------
Total minimum lease payments $8,168
=======
</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 $333,000 per year.
Net rental expense amounted to $1,072,000, $1,570,000 and $1,725,000 in
1997, 1996 and 1995, respectively. In 1997, there was $44,000 of sub-
lease income netted against the rental expense.
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
that 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>
16. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following table sets forth quarterly financial information for 1997
and 1996:
<TABLE>
<CAPTION>
Basic Diluted
(in thousands, Net Gross Net (loss) earnings(loss) earnings (loss)
except per share data) sales margin income per share per share
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1997
----
First Quarter $13,062 $ 3,649 $ 379 $ 0.04 $ 0.04
Second Quarter 14,112 3,755 501 0.05 0.05
Third Quarter (1) 12,553 (9) (3,409) (0.37) (0.37)
Fourth Quarter 12,137 3,092 160 0.02 0.02
----------------------------------------------------------------------------------------------
Total $51,864 $10,487 ($ 2,369) ($ 0.26) ($ 0.26)
==============================================================================================
1996
First Quarter $16,503 $ 3,265 ($ 450) ($ 0.06) ($ 0.06)
Second Quarter 17,354 3,550 815 0.10 0.10
Third Quarter 17,271 3,801 964 0.11 0.11
Fourth Quarter 17,079 4,879 1,084 0.12 0.12
----------------------------------------------------------------------------------------------
Total $68,207 $15,495 $ 2,413 $ 0.29 $ 0.29
==============================================================================================
</TABLE>
(1) The Company recorded a $3.0 million charge substantially related to
an inventory write-down at its Codar Technology Inc. subsidiary.
F-28
<PAGE>
<PAGE>
Schedule II
NAI TECHNOLOGIES, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
(in thousands of dollars)
- -------------------------------- ------------ --------------------------------- ----------- ----------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- -------------------------------- ------------ --------------------------------- ----------- ----------
ADDITIONS
---------------------------------
(1) (2)
Balance at Charged to Charged to Balance
beginning costs other accounts Deductions at end
Description of period and expenses describe describe of period
- -------------------------------- ------------ ---------------- ---------------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Allowance deducted from
asset to which it applies
Allowance for doubtful accounts:
Year ended December 31, 1997 $ 258 $ 83 ($ 2) (C) $ 241 (A) $ 98
Year ended December 31, 1996 142 88 5 (C) ( 23) (A) 258
Year ended December 31, 1995 133 205 -- 196 (A) 142
Allowance for inventory
obsolescence reserve:
Year ended December 31, 1997 2,403 2,651 ($ 9) (C) 1,012 (F) 4,033
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
</TABLE>
- ------------------------
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.
Note F - Obsolete inventory scrapped, net of recoveries-$992,000.
$120,000 write-down of inventory to net realizable value.
F-29
<PAGE>
<PAGE>
Exhibit 11
STATEMENTS RE: COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Year Ended December 31,
(in thousands) 1997 1996
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net (loss) income ($ 2,369) $ 2,413
Average shares of common stock outstanding
during the period 9,099 8,268
Basic earnings per share ($ 0.26) $ 0.29
===============================================================================================================
Net Income (loss) ($ 2,369) $ 2,413
Adjusted net (loss) income ($ 2,369) $ 2,413
Average shares of common stock outstanding
during the period 9,099 8,268
Incremental shares from assumed exercise of stock options,
stock warrants and employee stock purchase plan -- 198
- ---------------------------------------------------------------------------------------------------------------
Average diluted shares outstanding during the period 9,099 8,466
Diluted earnings per share ($ 0.26) $ 0.29
===============================================================================================================
</TABLE>
The assumed conversion of the 12% subordinated convertible notes was excluded
from diluted earnings per share in 1997 and 1996 since they were anti-dilutive.
<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.
<TABLE>
<CAPTION>
JURISDICTION OF NAME UNDER WHICH
NAME INCORPORATION SUBSIDIARY DOES BUSINESS
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
NAI Technologies-- New York NAI Systems Division
Systems Division Corporation
Wilcom, Inc. New York Wilcom, Inc.
Lynwood Rugged United Kingdom Lynwood
Systems Ltd.
Codar Technology, Inc. Colorado Codar
<PAGE>
</TABLE>
<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 report dated February 9, 1998, relating to the
consolidated balance sheets of NAI Technologies, Inc. and subsidiaries as of
December 31, 1997 and 1996, 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, 1997, and related financial statement
schedule, which report appears in the December 31, 1997, annual report on Form
10-K of NAI Technologies, Inc.
KPMG PEAT MARWICK LLP
Jericho, New York
February 26, 1998
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-27-1997
<CASH> 585
<SECURITIES> 0
<RECEIVABLES> 11,742
<ALLOWANCES> 0
<INVENTORY> 9,320
<CURRENT-ASSETS> 22,292
<PP&E> 10,526
<DEPRECIATION> (7,540)
<TOTAL-ASSETS> 35,681
<CURRENT-LIABILITIES> 11,362
<BONDS> 5,123
<COMMON> 916
0
0
<OTHER-SE> 12,832
<TOTAL-LIABILITY-AND-EQUITY> 35,681
<SALES> 51,864
<TOTAL-REVENUES> 51,864
<CGS> 41,377
<TOTAL-COSTS> 51,895
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,498
<INCOME-PRETAX> (1,809)
<INCOME-TAX> 560
<INCOME-CONTINUING> (2,369)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,369)
<EPS-PRIMARY> (0.26)
<EPS-DILUTED> (0.26)
</TABLE>
