<PAGE>
<PAGE>
(CONFORMED COPY)
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- --- EXCHANGE ACT OF 1934
For the quarterly period ended June 27, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- --- EXCHANGE ACT OF 1934
For the transition period from _________________ to _______________
Commission File Number 0-3704
NAI TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
New York 11-1798773
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
282 New York Avenue, Huntington, NY 11743
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (516) 271-5685
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
______ ______
As of July 27, 1998, 9,179,567 shares of NAI Technologies, Inc.'s $.10 par value
Common Stock were outstanding.
Page 1 of 20 Pages
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NAI TECHNOLOGIES, INC.
INDEX
<TABLE>
<CAPTION>
PAGE
<S> <C>
Facing Sheet 1
Index 2
PART I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets - 3
June 27, 1998 and December 31, 1997
Consolidated Statements of Operations - 4
Three months ended June 27, 1998 and
June 28, 1997
Consolidated Statements of Operations - 5
Six months ended June 27, 1998 and
June 28, 1997
Consolidated Statements of Comprehensive Income - 6
Three months ended June 27, 1998 and
June 28, 1997
Consolidated Statements of Comprehensive Income - 7
Six months ended June 27, 1998 and
June 28, 1997
Consolidated Statements of Cash Flows - 8
Six months ended June 27, 1998 and
June 28, 1997
Other Financial Information 9-12
Item 2. Management's Discussion and Analysis of 13-18
Financial Condition and Results of Operations
PART II. Other Information
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 20
</TABLE>
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Page 3
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
NAI TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
June 27, Dec. 31,
1998 1997
(Audited)
- --------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 811 $ 572
Accounts receivable, net 11,742 11,379
Inventories, net 6,348 7,262
Deferred tax asset 147 148
Current assets of discontinued operations, net 1,515 1,968
Other current assets 785 497
- --------------------------------------------------------------------------------
Total current assets 21,348 21,826
- --------------------------------------------------------------------------------
Property, plant and equipment, net 738 873
Excess of cost over fair value of net assets acquired,net 7,851 8,135
Non current assets of discontinued operations 1,082 3,051
Other assets 1,156 1,330
- --------------------------------------------------------------------------------
Total assets $32,175 $35,215
================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 4,751 $ 7,122
Notes payable 657 571
Current installments of long-term debt 5,903 311
Accrued payroll and commissions 159 281
Other accrued expenses 2,881 2,014
Income taxes payable 940 597
- --------------------------------------------------------------------------------
Total current liabilities 15,291 10,896
- --------------------------------------------------------------------------------
Long-term debt 4,786 9,747
Other accrued expenses 762 783
Deferred income taxes 41 41
- --------------------------------------------------------------------------------
Total liabilities 20,880 21,467
- --------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY:
Capital Stock:
Preferred stock, no par value, 2,000,000
shares authorized and unissued - -
Common stock, $.10 par value, 25,000,000
shares authorized; shares issued: 9,157,927
in 1998 and 9,155,427 in 1997 916 916
Capital in excess of par value 19,463 19,457
Accumulated other comprehensive income 116 196
Accumulated deficit (9,200) (6,821)
- --------------------------------------------------------------------------------
Total shareholders' equity 11,295 13,748
- --------------------------------------------------------------------------------
Total liabilities and shareholders' equity $32,175 $35,215
================================================================================
</TABLE>
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Page 4
NAI TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(in thousands except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
For the Three Months Ended
--------------------------
June 27, June 28,
1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Net sales $11,903 $12,809
- --------------------------------------------------------------------------------
Cost of sales 8,912 9,553
- --------------------------------------------------------------------------------
Gross margin 2,991 3,256
- --------------------------------------------------------------------------------
Selling expense 759 752
General and administrative expense 1,036 990
Research and development 122 254
Other 142 135
- --------------------------------------------------------------------------------
Total expenses 2,059 2,131
- --------------------------------------------------------------------------------
Operating income 932 1,125
- --------------------------------------------------------------------------------
Non-operating income (expense):
Interest income 11 18
Amortization of deferred debt costs (82) (76)
Interest expense (378) (377)
- --------------------------------------------------------------------------------
(449) (435)
- --------------------------------------------------------------------------------
Earnings before income taxes 483 690
Provision for income taxes 205 224
- --------------------------------------------------------------------------------
Earnings from continuing operations 278 466
Discontinued operations
(Loss) earnings from operations of discontinued
Telecommunications Segment (139) 35
Loss on disposal of Telecommunications Segment
including provision of $192,000 for operating
losses during phase-out period (2,692) -
- --------------------------------------------------------------------------------
Net earnings (loss) $(2,553) $501
================================================================================
Basic earnings (loss) per share
From continuing operations $ 0.03 $ 0.05
From discontinued operations $(0.31) $ 0.01
------- ------
Basic earnings (loss) per share $(0.28) $ 0.06
======= ======
Diluted earnings (loss) per share
From continuing operations $ 0.03 $ 0.04
From discontinued operations $(0.31) $ 0.01
------- ------
Diluted earnings (loss) per share $(0.28) $ 0.05
======= ======
Average shares outstanding - Basic EPS 9,157 9,074
===== =====
Average shares outstanding - Diluted EPS 9,161 10,391
===== ======
</TABLE>
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Page 5
NAI TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(in thousands except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
For the Six Months Ended
-------------------------
June 27, June 28,
1998 1997
- -----------------------------------------------------------------------------
<S> <C> <C>
Net sales $24,723 $24,827
- -----------------------------------------------------------------------------
Cost of sales 18,698 18,252
- -----------------------------------------------------------------------------
Gross margin 6,025 6,575
- -----------------------------------------------------------------------------
Selling expense 1,512 1,587
General and administrative expense 2,159 1,940
Research and development 228 543
Other 310 246
- -----------------------------------------------------------------------------
Total expenses 4,209 4,316
- -----------------------------------------------------------------------------
Operating income 1,816 2,259
- -----------------------------------------------------------------------------
Non-operating income (expense):
Interest income 18 32
Amortization of deferred debt costs (163) (180)
Interest expense (742) (778)
- -----------------------------------------------------------------------------
(887) (926)
Earnings before income taxes 929 1,333
Provision for income taxes 371 371
- -----------------------------------------------------------------------------
Earnings from continuing operations 558 962
Discontinued operations
Loss from operations of discontinued
Telecommunications segment (245) (82)
Loss on disposal of Telecommunications segment
including provision of $192,000 for operating
losses during phase-out period (2,692) -
- ----------------------------------------------------------------------------
Net earnings (loss) $(2,379) $880
=============================================================================
Basic earnings (loss) per share
From continuing operations $ 0.06 $ 0.11
From discontinued operations $(0.32) $(0.01)
------- -------
Basic earnings (loss) per share $(0.26) $ 0.10
======= ======
Diluted earnings (loss) per share
From continuing operations $ 0.06 $ 0.09
From discontinued operations $(0.32) $(0.00)
------- -------
Diluted earnings (loss) per share $(0.26) $ 0.09
======= ======
Average shares outstanding - Basic EPS 9,156 9,052
===== =====
Average shares outstanding - Diluted EPS 9,159 10,295
===== ======
</TABLE>
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Page 6
NAI TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
For the Three Months Ended
--------------------------
June 27, June 28,
1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C>
Earnings from continuing operations $ 278 $ 466
- ------------------------------------------------------------------------------
Other comprehensive income, net of tax:
Foreign currency translation adjustment (165) 57
- ------------------------------------------------------------------------------
Other comprehensive income (165) 57
- ------------------------------------------------------------------------------
Comprehensive income from continuing operations 113 523
Discontinued operations
(Loss) earnings from operations of discontinued segment (139) 35
Loss on disposal of Wilcom, Inc. including provision of
$192,000 for operating losses during phase-out period (2,692) -
- ----------------------------------------------------------------------------
Comprehensive Income (loss) (2,718) 558
==============================================================================
</TABLE>
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Page 7
NAI TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
For the Six months Ended
--------------------------
June 27, June 28,
1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C>
Earnings from continuing operations $ 558 $ 962
- ------------------------------------------------------------------------------
Other comprehensive income, net of tax:
Foreign currency translation adjustment (80) (81)
- ------------------------------------------------------------------------------
Other comprehensive income (80) (81)
- ------------------------------------------------------------------------------
Comprehensive income from continuing operations 478 881
Discontinued operations
Loss from operations of discontinued segment (245) (82)
Loss on disposal of Wilcom, Inc. including provision of
$192,000 for operating losses during phase-out period (2,692) -
- ------------------------------------------------------------------------------
Comprehensive Income (loss) (2,459) 799
==============================================================================
</TABLE>
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Page 8
NAI TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
For the Six Months Ended
-------------------------
June 27, June 28,
1998 1997
--------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings from continuing operations $ 558 $ 962
Adjustments to reconcile net earnings
to cash provided by operating activities:
Discontinued operations (515) 189
Depreciation and amortization 726 977
Gain on disposal of property, plant and equipment - (7)
Provision for inventory obsolescence 60 164
Change in operating assets and liabilities,
excluding effects from acquisitions, dispositions
and foreign currency adjustments:
Accounts receivable (363) 1,671
Inventories 854 (210)
Accounts payable and other accrued expenses (1,647) (3,468)
Income taxes 344 443
Other, net (277) (119)
- -----------------------------------------------------------------------------
Net cash flow provided by operating activities (260) 602
- ----------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (79) (307)
Proceeds from sale of property, plant and equipment - 19
- -----------------------------------------------------------------------------
Net cash used in investing activities (79) (288)
- -----------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of notes payable 1,021 69
Payment of notes payable (935) (69)
Payment of debt (1,233) (1,973)
Proceeds from borrowings under revolving
credit agreement 1,800 -
Proceeds from exercise of stock options
and stock purchase plan 6 126
- ----------------------------------------------------------------------------
Net cash provided by (used in) financing activities 659 (1,847)
- -----------------------------------------------------------------------------
Effect of foreign currency exchange rates on cash (81) (72)
- -----------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 239 (1,605)
Cash and cash equivalents at beginning of year 572 2,693
- ----------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 811 $1,088
============================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for:
Interest $ 745 $ 728
Income taxes $ 13 $ 8
Conversion of 12% Notes into common stock $ - $ 30
============================================================================
</TABLE>
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Page 9
NOTES TO FINANCIAL STATEMENTS
UNAUDITED FINANCIAL STATEMENTS
The accompanying unaudited consolidated financial statements have been prepared
by the Company pursuant to the rules and regulations of the Securities and
Exchange Commission ("SEC") and, in the opinion of management, include all
adjustments (consisting of normal recurring accruals) necessary for a fair
presentation of financial position, results of operations and cash flows for the
interim periods. Certain information and footnote disclosures normally included
in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to the rules and
regulations of the SEC. The Company believes that the disclosures contained
herein are adequate to make the information presented not misleading. The
consolidated statements of operations for the six months ended June 27, 1998 are
not necessarily indicative of the results to be expected for the full year.
These unaudited financial statements should be read in conjunction with the
audited financial statements and accompanying notes included in the Company's
1997 Annual Report on Form 10-K for the year ended December 31, 1997.
INVENTORIES
Inventories are summarized by major classification as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
June 27, Dec. 31,
1998 1997
(Audited)
- -----------------------------------------------------------------------------
<S> <C> <C>
(In thousands of dollars)
Raw materials and components $6,822 $ 7,528
Work-in-process 1,569 2,687
Finished goods 628 386
Allowance for obsolescence (2,671) (2,820)
Unliquidated progress payments -- (519)
- -----------------------------------------------------------------------------
Inventories, net $6,348 $ 7,262
============================================================================
</TABLE>
<PAGE>
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Page 10
SIGNIFICANT EVENTS
NAI is continuing its negotiations with DRS Technologies, Inc. to finalize and
enter into a definitive merger agreement for a wholly owned subsidiary of DRS
to merge with and into NAI.
Under the current proposed terms, NAI shareholders will receive 0.23 of a share
of DRS common stock for each outstanding share of NAI common stock held,
subject to adjustment if the average daily closing stock price of DRS Common
Stock is less than $12 over a 60-day trading period ending two days prior to
the closing date. In such event, NAI shareholders will receive 0.25 of a share
of DRS common stock for each share of NAI common stock. The parties are working
towards the signing of a definitive merger agreement within a few weeks, with
the completion of the merger in the fourth quarter of 1998.
The closing is subject to certain conditions, including regulatory approval
under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, an effective
registration statement to be filed with the Securities and Exchange Commission,
approval by the respective shareholders of NAI and DRS, the sale of NAI's
subsidiary, Wilcom, Inc., the conversion of 90% of the outstanding principal
amount of NAI's 12% Convertible Subordinated Promissory Notes into shares of
common stock and certain other conditions. The Merger Agreement will provide
for the payment of a termination fee by NAI in the amount of $1.5 million in
the event that NAI enters into a definitive agreement with a third party to
acquire NAI.
On July 7, 1998 the NAI Board of Directors passed a resolution to discontinue
the operations comprising its telecommunications segment which consists of one
subsidiary, Wilcom Inc. It is anticipated that the net assets of Wilcom Inc.
will be sold to a director, Charles Holmes, contemporaneously with the Company's
merger with DRS Inc., which is expected to close in September or October 1998.
Mr. Holmes will pay $150,000 plus tender 1,700,000 NAI warrants with an exercise
price of $2.50 per share and 300,000 NAI warrants with an exercise price of
$3.00 per share. The operating results for Wilcom are accounted for as
discontinued operations, and accordingly, its operations are segregated in the
accompanying financial statements. Net sales, operating costs and expenses for
all prior reporting periods have been reclassified for amounts associated with
Wilcom Inc. The second quarter 1998 results include a provision of $2,692,000
which is the estimated loss on disposal including an estimate of future losses
to be incurred prior to the actual disposal of Wilcom of $192,000.
<PAGE>
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Page 11
NAI Technologies, Inc. and Subsidiaries
Information by industry segment
<TABLE>
<CAPTION>
As of or Three Months Ended
Jun 27, Jun 28,
1998 1997
---------------------
<S> <C> <C>
Sales to unaffiliated
customers:
Rugged Systems $9,487 $8,823
System Integration 2,416 3,986
---------------------
Total $11,903 $12,809
=====================
Intersegment sales:
Rugged Systems $149 $171
System Integration 289 5
---------------------
Total $438 $176
=====================
Total sales
Rugged Systems $9,636 $8,994
System Integration 2,705 3,991
Eliminations (438) (176)
---------------------
Total $11,903 $12,809
=====================
Operating Earnings:
Rugged Systems $985 $711
System Integration 419 805
---------------------
Subtotal 1,404 1,516
Corporate expenses & other (472) (391)
---------------------
Total operating earnings 932 1,125
Net interest expense & other (449) (435)
---------------------
Earnings before income taxes
from continuing operations $483 $690
=====================
Identifiable Assets:
Rugged Systems $23,188 $24,696
System Integration 4,247 3,721
---------------------
Subtotal 27,435 28,417
Corporate and other 4,740 8,477
---------------------
Total $32,175 $36,894
=====================
</TABLE>
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Page 12
NAI Technologies, Inc. and Subsidiaries
Information by industry segment
<TABLE>
<CAPTION>
As of or Six Months Ended
-------------------------
Jun 27, Jun 28,
1998 1997
---------------------
<S> <C> <C>
Sales to unaffiliated customers:
Rugged Systems $19,054 $16,563
System Integration 5,669 8,264
---------------------
Total $24,723 $24,827
=====================
Intersegment sales:
Rugged Systems $181 $424
System Integration 645 108
---------------------
Total $826 $532
=====================
Total sales
Rugged Systems $19,235 $16,987
System Integration 6,314 8,372
Eliminations (826) (532)
---------------------
Total $24,723 $24,827
=====================
Operating Earnings:
Rugged Systems $1,934 $1,477
System Integration 872 1,528
---------------------
Subtotal 2,806 3,005
Corporate expenses & other (990) (746)
---------------------
Total operating earnings 1,816 2,259
Net interest expense & other (887) (926)
---------------------
Earnings before income taxes
from continuing operations $929 $1,333
=====================
Identifiable Assets:
Rugged Systems $23,188 $24,696
System Integration 4,247 3,721
---------------------
Subtotal 27,435 28,417
Corporate and other 4,740 8,477
---------------------
Total $32,175 $36,894
=====================
</TABLE>
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Page 13
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
On July 7, 1998 the NAI Board of Directors passed a resolution to discontinue
the operations comprising its telecommunications segment which consists of one
subsidiary, Wilcom Inc. It is anticipated that the net assets of Wilcom Inc.
will be sold to a director, Charles Holmes, contemporaneously with the Company's
merger with DRS Inc., which is expected to close in September or October 1998.
Mr. Holmes will pay $150,000 plus tender 1,700,000 NAI warrants with an exercise
price of $2.50 per share and 300,000 NAI warrants with an exercise price of
$3.00 per share. The operating results for Wilcom are accounted for as
discontinued operations, and accordingly, its operations are segregated in the
accompanying financial statements. Net sales, operating costs and expenses for
all prior-reporting periods have been reclassified for amounts associated with
Wilcom Inc. The second quarter 1998 results include a provision of $2,692,000
which is the estimated loss on disposal including an estimate of future losses
to be incurred prior to the actual disposal of Wilcom of $192,000.
Second Quarter 1998 Compared with Second Quarter 1997
The nature of the Company's business is such that year to year changes in sales
levels are predominantly due to changes in shipping volume or product mix rather
than changing sales prices. Net sales for the second quarter of 1998 were $11.9
million, a 7% decrease when compared with $12.9 million for the same period in
1997.
The following chart provides the sales breakdown by subsidiary:
<TABLE>
<CAPTION>
In thousands of dollars 1998 1997 % Change
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
RUGGED SYSTEMS SEGMENT
Codar Technology, Inc. $3,725 $ 4,301 (13%)
Lynwood Rugged Systems Ltd. 5,911 4,693 26%
Inter-company (149) (171)
-----------------------------------
Total Rugged Systems Segment 9,487 8,823 8%
SYSTEMS INTEGRATION SEGMENT
NAI Systems Division 2,705 3,991 (32%)
Inter-company (289) (5)
-----------------------------------
Total Systems Integration Segment 2,416 3,986 (39%)
TOTAL $11,903 $12,809 (7%)
====================================
</TABLE>
Sales in the Rugged Systems segment (net of intercompany eliminations) increased
8% to $9.5 million from $8.8 million for the same period in 1997. The increased
sales were attributable to a 26% sales increase at Lynwood offset by a 13% sales
decrease at Codar.
The sales increase at Lynwood was attributable to strong bookings and increased
export sales from the United Kingdom. Codar's sales decrease was attributable to
lower sales on the CHS II contract in the second quarter of 1998 as compared to
the second quarter of 1997. The CHS II contract is an IDIQ (indefinite delivery
indefinite quantity) and revenue will vary in each quarter.
Sales in the Systems Integration segment (net of intercompany eliminations)
decreased 39% to $2.4 million from 4.0 million for the same period in 1997. The
decrease in sales at the Systems division is attributable to a delay in
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Page 14
anticipated orders from the National Security Agency. The delay in orders is
believed to be due to changes in the Agency's budget as a result of priority
modifications by the Agency. Although delayed the company believes the
anticipated orders will be forthcoming. However, there can be no assurance that
such orders will be received.
In recent years the Company has reduced its dependency on the United States
defense budget by expanding its non-military and export 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.
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 the cancellation of a single specific program. However, changes in
future U.S. defense spending levels could impact the Company's future sales
volume.
The gross margin percentage for the second quarter 1998 was 25.1%, as compared
with 25.4% in the comparable quarter of 1997. The following chart provides the
gross margin percentage by subsidiary.
<TABLE>
<CAPTION>
1998 1997
- -------------------------------------------------------------------------
<S> <C> <C>
Codar Technology, Inc. 18.6% 11.9%
NAI Systems Division 28.2% 29.2%
Lynwood Rugged Systems Ltd. 26.0% 33.6%
</TABLE>
The improved margins at Codar are attributable to continued cost reduction
efforts at the Company, as well as an emphasis to compete for higher margin
work.
The lower gross margin percentage at NAI Systems Division is attributable to
decreased shipping volumes and a less favorable product mix. Lynwood's margins
were lower due to an unfavorable product mix and higher engineering expenditures
in cost of sales due to the change in mix between Company-sponsored research and
development (which are charged to R&D) vs. an increase in customer funded
engineering (which are charged to cost of sales).
Selling expense for the second quarter of 1998 was $0.8 million essentially
unchanged from the comparable 1997 amount.
General and administrative expenses, which were unchanged from the $1.0 million
in the second quarter of 1997, would have declined 13% if not for the $0.17
million in merger expenses that were recorded in the second quarter.
Company-sponsored research and development expenditures for the second quarter
of 1998 were $0.1 million as compared with $0.3 million for the same period in
1997, which represents a decrease of 52%. The decrease is attributable to a
change in the mix between Company-sponsored research and development and
customer funded engineering. The Company expects that the level of the second
quarter 1998 internal research and development expenditures will increase for
the remainder of 1998.
For the second quarter of 1998, the Company reported operating income of $0.9
million as compared with operating income of $1.1 million for the same period in
1997.
Interest expense and amortization of deferred debt costs, net of interest
income, was $0.4 million for the second quarter of 1998 and second quarter 1997,
respectfully.
The Company accrued an income tax expense of $0.20 million as compared with
$0.22 million in 1997, which equates to effective income tax rates of 42% and
32%, respectively. The entire tax expense in both periods pertains to the
Company's Lynwood subsidiary located in the U.K. Lynwood's earnings are taxed in
the U.K. and, while the Company has a U.S. net operating loss carry-forward, it
is required to pay taxes in the U.K. The Company is unable to
<PAGE>
<PAGE>
Page 15
recognize the future tax benefit associated with its U.S. operating loss
carry-forwards due to uncertainties as to whether or not a future benefit will
be realized.
For the second quarter of 1998 the Company recorded earnings from continuing
operations of $0.28 million as compared with $0.47 million in the second quarter
of 1997. Loss from discontinued operations were $2.83 million in the second
quarter 1998 as compared with earnings from discontinued operations of $0.04
million in the second quarter of 1997. Net loss for the second quarter was $2.55
million as compared to net earnings of $0.50 million in the second quarter of
1997. Basic earnings per share from continuing operations was $0.03 per share as
compared with $0.05 per share for the same period in 1997, based on a weighted
average of 9.2 million and 9.1 million shares outstanding, respectively. Basic
loss per share from discontinued operations was $(0.31) per share as compared
with $0.00 per share for the same period in 1997, based on a weighted average of
9.2 million and 9.1 million shares outstanding, respectively. Basic loss per
share was $(0.28) per share as compared with earnings of $0.06 per share for the
same period in 1997, based on a weighted average of 9.2 million and 9.1 million
shares outstanding, respectively. Diluted earnings per share from continuing
operations was $0.03 per share as compared with $0.04 per share for the same
period in 1997, based on a weighted average of 9.2 million and 10.4 million
shares outstanding, respectively. Diluted loss per share from discontinued
operations was $(0.31) per share as compared with $0.00 per share for the same
period in 1997, based on a weighted average of 9.2 million and 10.4 million
shares outstanding, respectively. Diluted loss per share was $(0.28) per share
as compared with earnings of $0.06 per share for the same period in 1997, based
on a weighted average of 9.2 million and 10.4 million shares outstanding,
respectively.
Six months 1998 Compared with Six months 1997
The nature of the Company's business is such that year to year changes in sales
levels are predominantly due to changes in shipping volume or product mix rather
than changing sales prices. Net sales for the six months of 1998 were $24.7
million, essentially unchanged when compared with $24.8 million for the same
period in 1997.
The following chart provides the sales breakdown by subsidiary:
<TABLE>
<CAPTION>
In thousands of dollars 1998 1997 % Change
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
RUGGED SYSTEMS SEGMENT
Codar Technology, Inc. $8,043 $ 8,234 (2%)
Lynwood Rugged Systems Ltd. 11,192 8,753 28%
Inter-company (181) (424)
-----------------------------------
Total Rugged Systems Segment 19,054 16,563 15%
SYSTEMS INTEGRATION SEGMENT
NAI Systems Division 6,314 8,372 (25%)
Inter-company (645) (108)
-----------------------------------
Total Systems Integration Segment 5,669 8,264 (31%)
TOTAL $24,723 $24,827 (0%)
====================================
</TABLE>
Sales in the Rugged Systems segment (net of intercompany eliminations) increased
15% to $19.0 million from $16.6 million for the same period in 1997. The
increased sales were attributable to a 28% sales increase at Lynwood offset by a
2% sales decrease at Codar.
The sales increase at Lynwood was attributable to strong bookings and increased
export sales from the United Kingdom.
<PAGE>
<PAGE>
Page 16
Sales in the Systems Integration segment (net of intercompany eliminations)
decreased 25% to $5.7 million from 8.3 million for the same period in 1997. The
decrease in sales at the Systems division is attributable to a delay in
anticipated orders from the National Security Agency. The delay in orders is
believed to be due to changes in the Agency's budget as a result of priority
modifications by the Agency. Although delayed the company believes the
anticipated orders will be forthcoming. However, there can be no assurance that
such orders will be received.
In recent years the Company has reduced its dependency on the United States
defense budget by expanding its non-military and export 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.
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 the cancellation of a single specific program. However, changes in
future U.S. defense spending levels could impact the Company's future sales
volume.
The gross margin percentage for the six months 1998 was 24.3%, as compared with
26.5% in the comparable quarter of 1997. The following chart provides the gross
margin percentage by subsidiary.
<TABLE>
<CAPTION>
1998 1997
- -------------------------------------------------------------------------
<S> <C> <C>
Codar Technology, Inc. 18.1% 13.8%
NAI Systems Division 25.4% 28.3%
Lynwood Rugged Systems Ltd. 26.5% 35.1%
</TABLE>
The improved margins at Codar are attributable to continued cost reduction
efforts at the Company, as well as an emphasis to compete for higher margin
work.
The lower gross margin percentage at NAI Systems Division is attributable to
decreased shipping volumes and a less favorable product mix. Lynwood's margins
were lower due to an unfavorable product mix and higher engineering expenditures
in cost of sales due to the change in mix between Company-sponsored research and
development (which are charged to R&D) vs. an increase in customer funded
engineering (which are charged to cost of sales).
Selling expense for the six months of 1998 was $1.5 million as compared to 1.6
million for the same period in 1997.
General and administrative expenses for the six months 1998 were $2.2 million as
compared to $1.9 million in the same period in 1997. This increase is primarily
attributable to merger expenses of $0.17 million, which were recorded in the
first half of 1998.
Company-sponsored research and development expenditures for the six months of
1998 were $0.2 million as compared with $0.5 million for the same period in
1997, which represents a decrease of 58%. The decrease is attributable to a
change in the mix between Company-sponsored research and development and
customer funded engineering. The Company expects that the level of the six
months 1998 internal research and development expenditures will increase for the
remainder of 1998.
For the six months of 1998, the Company reported operating income of $1.8
million as compared with operating income of $2.3 million for the same period in
1997.
Interest expense and amortization of deferred debt costs, net of interest
income, was $0.9 million for the six months of 1998 and six months 1997,
respectfully.
The Company accrued an income tax expense of $0.37 million for the six months of
1998 and 1997 respectfully, which equates to effective income tax rates of
<PAGE>
<PAGE>
Page 17
40% and 28%, respectively. The entire tax expense in both periods pertains to
the Company's Lynwood subsidiary located in the U.K. Lynwood's earnings are
taxed in the U.K. and, while the Company has a U.S. net operating loss
carry-forward, it is required to pay taxes in the U.K. The Company is unable to
recognize the future tax benefit associated with its U.S. operating loss
carry-forwards due to uncertainties as to whether or not a future benefit will
be realized.
For the six months of 1998 the Company recorded earnings from continuing
operations of $0.56 million as compared with $0.96 million in the six months of
1997. Loss from discontinued operations were $2.94 million in the six months
1998 as compared with a loss from discontinued operations of $0.08 million in
the six months of 1997. Net loss for the six months was $2.38 million as
compared to net earnings of $0.88 million in the six months of 1997. Basic
earnings per share from continuing operations was $0.06 per share as compared
with $0.11 per share for the same period in 1997, based on a weighted average of
9.2 million and 9.1 million shares outstanding, respectively. Basic loss per
share from discontinued operations was $(0.32) per share as compared with
$(0.01) per share for the same period in 1997, based on a weighted average of
9.2 million and 9.1 million shares outstanding, respectively. Basic loss per
share was $(0.26) per share as compared with earnings of $0.10 per share for the
same period in 1997, based on a weighted average of 9.2 million and 9.1 million
shares outstanding, respectively. Diluted earnings per share from continuing
operations was $0.06 per share as compared with $0.09 per share for the same
period in 1997, based on a weighted average of 9.2 million and 10.3 million
shares outstanding, respectively. Diluted loss per share from discontinued
operations was $(0.32) per share as compared with $(0.01) per share for the same
period in 1997, based on a weighted average of 9.2 million and 10.3 million
shares outstanding, respectively. Diluted loss per share was $(0.26) per share
as compared with earnings of $0.09 per share for the same period in 1997, based
on a weighted average of 9.2 million and 10.3 million shares outstanding,
respectively.
Liquidity and Capital Resources
Cash and cash equivalents totaled $0.8 million at June 27, 1998, as compared to
$0.6 million at December 31, 1997. Cash provided by operating activities
amounted to $0.3 million in the first six months of 1998, as compared to $0.4
million in the comparable period of 1997. During the first six months, accounts
receivable increased by $0.4 million, inventory decreased by $0.9 million, and
accounts payable and other accrued expenses decreased by $1.6 from December 31,
1997 respectfully.
During the six months ended June 27, 1998, the Company had borrowings of long
term debt and notes payable of $2.8 million, and had payments of long term debt
and notes payable of $2.2 million. Net borrowings of $0.6 million were used for
working capital purposes. Borrowings were required because the company
recognized a significant amount of revenue in the last three weeks of each
quarter which caused its cash disbursements to exceed cash receipts at various
times during the reporting period. The Company is trying to level out shipments
to maximize cash flow.
At June 27, 1998 the Company's outstanding borrowing under its secured revolving
credit agreement was $5.9 million. As of June 27, 1998,the Company has made
payments totaling $1.375 million ($625 thousand on June 30, 1998) 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 $750 thousand per quarter. If no additional payments are made the
Company will be required to repay $125 thousand on September 30, 1998 and $750
thousand on December 31, 1998. The remaining amount outstanding is due and
payable on January 15, 1999. The Company does not believe that it will generate
adequate cash flow from operations to pay the entire balance under its secured
revolving credit agreement on January 15, 1999. The Company intends to refinance
all or a substantial portion of the amount due and
<PAGE>
<PAGE>
Page 18
payable, either through borrowings or other capital sources and pursue all
available options in order that it meet its obligations. As of June 27, 1998 the
Company was in violation of certain of its debt covenants and has received
waivers from its banks.
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.
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 that it has a significant problem in
this regard. The cost, if any, to become year 2000 compliant is not expected to
be material.
This document may contain forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. These statements are based on
current plans and expectations of NAI Technologies and involve risks and
uncertainties that could cause actual future activities and results of
operations to be materially different from those set forth in the
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 and warranty
performance.
<PAGE>
<PAGE>
Page 19
PART II. OTHER INFORMATION
Item 5. Other Information
NAI is continuing its negotiations with DRS Technologies, Inc. to
finalize and enter into a definitive merger agreement for a wholly
owned subsidiary of DRS to merge with and into NAI.
Under the current proposed terms, NAI shareholders will receive
0.23 of a share of DRS common stock for each outstanding share of
NAI common stock held, subject to adjustment if the average daily
closing stock price of DRS Common Stock is less than $12 over a
60-day trading period ending two days prior to the closing date.
In such event, NAI shareholders will receive 0.25 of a share of DRS
common stock for each share of NAI common stock. The parties are
working towards the signing of a definitive merger agreement within
a few weeks, with the completion of the merger in the fourth quarter
of 1998.
The closing is subject to certain conditions, including regulatory
approval under the Hart-Scott-Rodino Antitrust Improvements Act of
1976, an effective registration statement to be filed with the
Securities and Exchange Commission, approval by the respective
shareholders of NAI and DRS, the sale of NAI's subsidiary, Wilcom,
Inc., the conversion of 90% of the outstanding principal amount of
NAI's 12% Convertible Subordinated Promissory Notes into shares of
common stock and certain other conditions. The Merger Agreement will
provide for the payment of a termination fee by NAI in the amount
of $1.5 million in the event that NAI enters into a definitive
agreement with a third party to acquire NAI.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
11 - Statement re: Computation of Per Share Earnings
27 - Financial Data Schedule (Edgar Filing only)
b) Reports on Form 8-K
Registrant filed a Current Report on Form 8-K dated April 15, 1998
to report that it had signed a letter of intent with DRS
Technologies, Inc. for NAI to merge with DRS.
<PAGE>
<PAGE>
Page 20
S I G N A T U R E S
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NAI TECHNOLOGIES, INC.
(Registrant)
DATE August 11, 1998 By:\s\Richard A. Schneider
-------------- ----------------------------------------
Richard A. Schneider
Executive Vice President
(On behalf of the registrant and as
Principal Financial Officer)
<PAGE>
<PAGE>
Exhibit 11
NAI TECHNOLOGIES, INC. AND SUBSIDIARIES
(In thousands)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
Three Months Ended
Jun 27, Jun 28,
1998 1997
- ----------------------------------------------------------------------------------------
<S> <C> <C>
Net Income (loss) ($2,553) $ 501
Average shares of common stock outstanding during the period 9,157 9,074
--------- ----------
Basic earnings (loss) per share ($ 0.28) $ 0.06
========== ==========
Net Income (loss) (2,553) 501
Interest on Convertible Debt (Net of Taxes) 0 0
Amortization of OID (Net of Taxes) 0 0
Amortization of Deferred Debt Expense (Net of Taxes) 0 0
--------- ----------
Adjusted Net Income (2,553) 501
========== ==========
Average shares of common stock outstanding during the period 9,157 9,074
Incremental shares from assumed exercise of stock options, stock
warrants & employee stock purchase plan 4 1,317
Dilution from Convertible Debt 0 0
Total shares used to calculate diluted EPS 9,161 10,391
--------- ----------
Diluted earnings (loss) per share ($ 0.28) $ 0.05
========== ==========
</TABLE>
<PAGE>
<PAGE>
Exhibit 11
NAI TECHNOLOGIES, INC. AND SUBSIDIARIES
(In thousands)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
Six Months Ended
Jun 27, Jun 28,
1998 1997
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Net Income (loss) ($2,379) $ 880
Average shares of common stock outstanding during the period 9,156 9,052
-------- --------
Basic earnings (loss) per share ($ 0.26) $ 0.10
========= ========
Net Income (loss) (2,379) 880
Interest on Convertible Debt (Net of Taxes) 0 0
Amortization of OID (Net of Taxes) 0 0
Amortization of Deferred Debt Expense (Net of Taxes) 0 0
-------- --------
Adjusted Net Income (2,379) 880
========= ========
Average shares of common stock outstanding during the period 9,156 9,052
Incremental shares from assumed exercise of stock options, stock
warrants & employee stock purchase plan 3 1,243
Dilution from Convertible Debt 0 0
Total shares used to calculate diluted EPS 9,159 10,295
-------- --------
Diluted earnings (loss) per share ($ 0.26) $ 0.09
========= ========
</TABLE>
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-27-1998
<CASH> 811
<SECURITIES> 0
<RECEIVABLES> 11,742
<ALLOWANCES> 0
<INVENTORY> 6,348
<CURRENT-ASSETS> 21,348
<PP&E> 8,039
<DEPRECIATION> (7,301)
<TOTAL-ASSETS> 32,175
<CURRENT-LIABILITIES> 15,291
<BONDS> 5,123
<COMMON> 916
0
0
<OTHER-SE> 10,379
<TOTAL-LIABILITY-AND-EQUITY> 32,175
<SALES> 24,723
<TOTAL-REVENUES> 24,723
<CGS> 18,698
<TOTAL-COSTS> 22,907
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 742
<INCOME-PRETAX> 929
<INCOME-TAX> 371
<INCOME-CONTINUING> 558
<DISCONTINUED> (2,937)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,379)
<EPS-PRIMARY> (0.26)
<EPS-DILUTED> (0.26)
</TABLE>
