-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QQB/t78Cy451Nl8SfpKaEkWj6sgNz7A5E+0BQVqI3rjBTLawCLqdtgLR787sOh5P ATdYXrw/A9FUKZ+O7mj+oQ== 0000950117-97-000401.txt : 19970314 0000950117-97-000401.hdr.sgml : 19970314 ACCESSION NUMBER: 0000950117-97-000401 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970313 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: NAI TECHNOLOGIES INC CENTRAL INDEX KEY: 0000072575 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER TERMINALS [3575] IRS NUMBER: 111798773 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-03704 FILM NUMBER: 97556262 BUSINESS ADDRESS: STREET 1: 282 NEW YORK AVE CITY: HUNTINGTON STATE: NY ZIP: 11743 BUSINESS PHONE: 3037765674 MAIL ADDRESS: STREET 1: 282 NEW YORK AVE CITY: NEW YORK STATE: NY ZIP: 11743 FORMER COMPANY: FORMER CONFORMED NAME: NORTH ATLANTIC INDUSTRIES INC DATE OF NAME CHANGE: 19920703 10-K405 1 NAI TECHNOLOGIES FORM 10-K405 (Conformed copy) SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Fiscal Year Ended December 31, 1996 Commission File Number 0-3704 NAI TECHNOLOGIES, INC. A New York Corporation IRS Employer I.D. No. 11-1798773 282 New York Avenue, Huntington, New York 11743 Telephone No. (516) 271-5685 Securities Registered Pursuant to Section 12 (b) of the Act: None Securities Registered Pursuant to Section 12 (g) of the Act: Common Stock, Par Value $0.10 Per Share Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO ____ ---- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. (X) As of March 11, 1997, 9,032,437 shares of common stock were outstanding. The aggregate market value of the shares of common stock (based on the average bid and asked price of these shares on The Nasdaq Stock Market as of March 11, 1997) of NAI Technologies, Inc. held by non-affiliates was approximately $40 million. Documents Incorporated by Reference: None. Page 1 of 37 Exhibit index on Page 33 NAI TECHNOLOGIES, INC. 1996 FORM 10-K ANNUAL REPORT TABLE OF CONTENTS Page ---- PART I Item 1. Business ......................................................... 3 Item 2. Properties ....................................................... 10 Item 3. Legal Proceedings ................................................ 10 Item 4. Submission of Matters to a Vote of Security Holders .............. 10 PART II Item 5. Market for Registrant's Common Stock and Related Stockholder Matters .................................. 11 Item 6. Selected Financial Data .......................................... 12 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations .............................. 13 Item 8. Consolidated Financial Statements and Supplementary Data. ........ 19 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure .............................. 19 PART III Item 10. Directors and Executive Officers of the Registrant ............... 20 Item 11. Executive Compensation ........................................... 22 Item 12. Security Ownership of Certain Beneficial Owners and Management ... 26 Item 13. Certain Relationships and Related Transactions ................... 28 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. ..................................................... 29 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 two distinct operating segments: an Electronic Systems segment and a Telecommunications segment. The Electronic Systems segment is comprised of all of the Company's defense, military and government-related businesses and the Telecommunications segment is focused on commercial communications opportunities. The Electronic Systems segment provides rugged computer products specifically designed for deployment in harsh environments that require special attention to system configurations. This segment's customer base includes the U.S. and foreign armed services and intelligence agencies. The Telecommunications segment provides transmission enhancement products and rugged, hand-held test equipment for analog, digital and fiber-optic communications and data-interchange networks. This segment's customer base includes the regional Bell operating companies and independent telephone companies. The Company's strategy is to be a leading supplier of high quality, innovative products, systems and services to satisfy specialized customer requirements in niche information technology and telecommunications markets, especially in environments with harsh operating requirements. Electronic Systems Segment The Electronic Systems segment is comprised of three operating subsidiaries, as follows: Codar Technology, Inc., located in Longmont, Colorado ("Codar"); NAI Technologies-Systems Division Corporation , based in Columbia, Maryland ("Systems"); and Lynwood Scientific Developments Limited, based in Farnham, United Kingdom ("Lynwood"). Codar. Codar designs, manufactures, integrates and supports rugged computer systems and subsystems for the U.S. Department of Defense ("DoD") and its prime contractors and allies. These systems and subsystems are used in tactical, planning, communications and intelligence applications. Codar currently competes primarily in the computer and peripheral product segment of the military market, with both militarized and ruggedized products. Additional business is targeted at engineering support service and system integration opportunities. Codar's product line includes a range of commercial off-the-shelf ("COTS")-based rugged minicomputers, workstations, personal computers, industry-compatible, removable mass storage subsystems, high-resolution monitors and keyboards. These products incorporate technology from other companies. Codar also provides engineering services and system integration capabilities. -3- Codar's equipment is designed to allow flexibility in configuration of all essential components. In addition to complying with system functional specifications, Codar's products are engineered to be deployed in environments that require special attention to system configurations with limitations on size and power consumption, and restraint on electromagnetic emissions. Products are custom built to withstand shock, vibration, cold, heat, dust, sand, rain and altitude conditions. Codar has developed and produced products for a large number of government programs and departments and more than 100 additional customers aggregating more than 200 different end-users. The products have met military requirements for use in a variety of applications in vehicles, shelters and fixed-site installations. Codar has designed, built, tested and sold equipment for airborne, ground/mobile and shipboard military environmental specifications and military requirements. Codar is the prime contractor for the Rapid Anti-Ship Missile Integrated Defense System ("RAIDS"), which is a tactical decision aid system based on an open-architecture network of processors that enhances the missile defense effectiveness of ships and performs all system executive functions, including internal and external data sharing/communications, anti-ship missile defense system performance and operational status monitoring, designated target identification, track data association, limited threat evaluation and maintenance of the status of the anti-ship missile defense threat environment. Codar provides a variety of ruggedized and electromagnetic interference ("EMI") compliant workstations, based on processors from other companies, as well as related peripherals, such as ruggedized/EMI color monitors, keyboards and mass storage units ("MSEU"). These products are used by the U.S. Army and Navy. The Codar Model 325M-S Rugged Lightweight SPARC'r' station has been selected by GTE Government Systems Corp. ("GTE") for use on the U.S. Army's Common Hardware/ Software Program known as CHS-2. Codar will supply computers with ruggedized color monitors and MSEUs over a five-year period as part of the basic CHS-2 program as well as engineering services in support of GTE and the U.S. Army. Codar also offers ruggedized rackmount and portable personal computers utilizing the Intel 80486 or Pentium processors. These computers offer rugged portability in either a compact, modular "lunch box" design or a rackmount design. Completely sealed from the environment in their non-operating configuration, these computers are easily transported. In addition to shock and vibration, these units can operate over a wide range of temperature variations. Options include a detachable keyboard, color touch screen display and various memory options. The focus of Codar's new products is the design, manufacture and integration of rugged computer systems and subsystems to support the upgrade of large platforms and programs, mobile or transportable systems and subsystems for command and control applications and the support of the "digitization" of the battlefield as exemplified by the U.S. Army's "Force 21" programs. In an effort to maintain its technological capabilities, and be in a position to provide the latest technology to its customers, Codar works with its suppliers to permit it to accelerate new product introductions and help its customers have access to the latest COTS product technology. Codar also makes significant use of special teaming relationships with various large prime contractors such as GTE in the CHS-2 program. These relationships allow Codar to participate in larger programs than it could on its own. In 1996, Codar updated its range of rugged rack-mounted computers with the introduction of the Genesis rugged multi-platform computer, which provides users with a rugged platform which supports Intel, DEC Alpha, Power PC and Sun processors. -4- Also in 1996, Codar announced the Explorer II, an enhancement of the Explorer I, offering full compatibility with the range of CHS-2 products. Codar's range of display products was enhanced in 1996 with the introduction of the Codar Rugged Flat Panel Displays. This technology comprises a range of 12", 13" and 16" ruggedized displays for installation in vehicles, aircraft, ships and other harsh environments. Systems Division. The Systems Division provides custom packaged, integrated computer systems and peripherals for field deployment in shelters, ships, land vehicles and a variety of other demanding environments. The division's technical expertise encompasses most major industry standard architectures including SPARC'r', Multibus, VME and PCI as well as most widely used operating systems. The Systems Division also has over 25 years experience in custom packaging and has engineered solutions that meet a broad range of unique specifications including size and weight constraints, low power consumption, shock and vibration, adverse temperature and humidity conditions, rack-mounting, TEMPEST and unattended operation with remote diagnostics. Application specialties include: Digital Signal Processing, Data Acquisition, Networking/Communications and Video Teleconferencing. The Systems Division's diverse customer base includes the National Security Agency and other U.S. intelligence agencies, various U.S. military organizations, foreign governments and industrial customers. The division's products and services are sold domestically through its own sales force and internationally through the sales force of the Lynwood division. Because its products are typically based on COTS components, the Systems Division has established strategic alliances with such leading technology companies as Sun, Intel, Hewlett Packard, Motorola, Force Computer, Ross Technologies, Spectrum Signal Processing and many others. In order to supply products in a timely manner, Systems concentrates its efforts on the design, final assembly and test of its systems rather than providing a fully integrated vertical manufacturing capability. Lynwood. Lynwood supplies rugged, environmentally and electrically screened personal computers and workstations based upon standard COTS technology, aimed at the military and government markets principally in Europe, Australia and Southeast Asia. Lynwood develops, manufactures, installs and supports complete computer systems for the Government and Defense markets. Lynwood adapts COTS systems for use in harsh and extreme environments. In addition to creating its own products, Lynwood also provides an international marketing and manufacturing capability for the Company. In some cases, Lynwood provides systems that are made up of its own products coupled with those of Codar or Systems. Lynwood produces several personal computer and workstation products designed to be operated in harsh environments. For example, Lynwood has a completely compatible PC based upon a standard PC motherboard which operates in driving rain and at extremes of temperature, and which is completely sealed from dust and dirt. These products have been sold to armed services in Australia and the UK. Lynwood also develops secure TEMPEST screened workstation products which are designed to operate in areas of high security. Lynwood principally works on discrete projects and delivers solutions to meet specific customer and project requirements. Lynwood's products include the Explorer II Sun workstation, the Genesis SR rackmount computer, MC50 for Airborne Applications and RP6200 range of multi-purpose rugged desktop and rackmount Pentium computers. In addition, Lynwood supplies a wide range of rugged flat panel displays for use within air, maritime and land mobile environments. -5- Lynwood has the capability to supply integrated systems and subsystems that meet specific rugged and environmental specifications. Lynwood's design and manufacturing capabilities are concentrated around the system integration and final assembly and test of these products. Lynwood strives to respond quickly with a cost effective product using the latest COTS technologies and employs the same technology relations and teaming programs as Codar and Systems to meet this end. Telecommunications Segment The Telecommunications segment currently consists of one operating company: Wilcom, Inc. ("Wilcom"), located in Laconia, New Hampshire. Wilcom designs and manufactures products for use in the telephone industry. The majority of Wilcom's sales are to the Regional Bell Operating Companies ("RBOCs"). The business of Wilcom is made up of two product lines; analog and digital telephone test equipment, for use with either fiber or copper cable, and telephone transmission enhancement products, which are used to enhance or improve the characteristics of voice, digital data and video over copper wire. The test equipment product line is comprised of digital, fiber and analog test instrumentation used by domestic and international telephone companies. Current products include line testers, fiber identifiers, power meters and other such instruments. Telephone transmission enhancement products, which represent the greater growth opportunity for the division, include two product lines that are differentiated by their use rather than their technologies. One of the product lines is referred to as line treatment equipment ("LTE") and is normally installed on telephone company property, while the other product line, the enhanced line power amplifier ("ELPA"'), is normally installed at the customer's premises (but can be installed on telephone company property). Both the LTE and the ELPA are electronic modules, installed for the express purpose of improving voice quality, increasing data transmission speeds when using modems and increasing the ability of copper wire to be used for video transmission in special instances. The LTE has been designed for use with two and four wire telephone circuits and the ELPA has been designed for use with two wire circuits. Network upgrading has become important due to the many new competitive technological alternatives to copper wire such as radio, cellular telephone, satellite transmission, fiber cables and microwave which can send information and data from location to location. The proliferation of higher speed analog modems has made the need for better quality phone lines an important issue. Wilcom's products allow the telephone companies to provide additional services in voice, data and video transmission over their existing copper networks. The ELPA product line has been extended by the introduction of a smaller, lighter, less expensive product called the Turbo Amp. The Turbo Amp has been designed to be self-powered from the telephone line and permit the improvement of line transmission quality by automatically adjusting the various electrical parameters that control signal transmission. The Turbo Amp also requires less skilled technicians for installation and can be configured and installed from a remote site, which can result in substantially reduced service calls and cost to the RBOCs. The Company has received patents on the Turbo Amp. Marketing and Service -6- The Company sells its products directly to customers and serves as a subcontractor to larger prime contractors serving the same customer base. The Company's products are marketed to customers through sales personnel, manufacturers' representatives and distributors. The Company maintains sales offices and sales support in Columbia, Maryland; Westlake Village, California; Longmont, Colorado; Laconia, New Hampshire; Australia; England; and Israel. The Company provides maintenance and field service for its products through its customer service departments located at each of its manufacturing facilities and at certain customer sites. Field service for printers is also performed by some distributors. Most overseas service is performed by the Company's representatives in Australia, Denmark, England, France, Germany and Israel. Customers During 1996 and 1995, sales under contracts with the U.S. Government were approximately 30% and 38%, respectively, of the Company's net sales. The U.S. Government and one other customer individually accounted for more than 10% of the Company's sales in 1996 or 1995. The Company's sales are affected by the U.S. defense budget. With continuing discussions on budget cuts, it is difficult to assess what the impact of budget cuts, if any, will be on the Company. It appears that defense outlays will be reduced from past levels. The Company is unaware of any targeted cuts specifically affecting its products. The Company's products are utilized on many different programs. However, changed U.S. Government spending levels could impact the Company's future sales levels. No single U.S. Government contract accounted for greater than 10% of the Company's sales in 1996 or 1995. The U.S. Government accounted for 34% and one other customer accounted for 16% of the Electronic Systems segment's 1996 sales. Two separate customers accounted for 26% and 18%, respectively, of the Telecommunications segment's 1996 sales. Foreign Sales Foreign sales in 1996 and 1995 accounted for approximately 24% and 21%, respectively, of total sales. Such sales, which exclude products sold to the U.S. Government and resold by the U.S. Government for foreign military use, are made primarily to customers in Australia, Canada, Hong Kong, India, Indonesia, Israel, Japan, the United Kingdom and Western Europe. The Company's foreign sales are comprised of export sales from the U.S. and foreign revenues from Lynwood. All export sales from the U.S. are payable in U.S. dollars and, therefore, settlement amounts do not fluctuate with changes in exchange rates. All of Lynwood's sales are payable in British currency. Fluctuations in exchange rates between the U.S. dollar and the British pound will impact on the Company's operating results. No single country, with the exception of the United Kingdom (70% in 1996 and 86% in 1995) and Australia (18% in 1996 and less than 5% in 1995), accounted for more than 5% of the Company's foreign sales in any of the past two years. -7- Foreign sales for the past three years have been as follows: Approximate Total Percent of Foreign Sales Company Sales ------------- ------------- 1996 ............................. $16,154,000 24% 1995 ............................. 12,679,000 21% 1994 ............................. 13,828,000 25% Backlog The Company's backlog of orders was $30.2 million at December 31, 1996. Of this amount, 14% represents orders for U.S. military sales. Such orders are subject to termination at the convenience of the U.S. Government with negotiated settlements in which the Company seeks to recover its costs and a reasonable profit. Certain other orders, when subject to cancellation or return, are handled with a restocking charge or by negotiated settlement. While the Company's backlog is not subject to seasonal factors, it does fluctuate due to timing of orders from the U.S. Government. The Company expects to produce and ship approximately 60% of its current backlog of orders before the end of 1997. Competition The Company's business is highly competitive. Many suppliers in the Company's markets are significantly larger than the Company in terms of total sales and assets, and many devote significantly more resources to the development of new products than does the Company. The Company searches for certain market niches where it has expertise and can compete successfully. Competition for the Company's products is based principally on reliability, performance, price and diversity of the products offered. Research and Development The Company's technological base is characterized by rapid change. As a result, maintenance and expansion of the Company's business are partially dependent upon the success of the Company's programs to develop new products and upgrade existing products. The Company's engineering resources have been devoted to the development of new products in every major category of its business. During the years 1996, 1995 and 1994, the Company's total engineering expenditures were $3,929,000, $7,264,000 and $9,335,000, respectively. Due to the extensive use of COTS-based equipment in the Company's products, the Company's cost of independent research in pursuit of new products and improvements to existing products has declined during the years 1996, 1995 and 1994 to approximately $1,639,000, $1,807,000 and $3,214,000, respectively. Customer-funded engineering included in cost of sales or inventory, as a contract cost was $2,290,000 in 1996, $5,457,000 in 1995 and $6,121,000 in 1994. -8- Patents and Trademarks The Company owns patents and trademarks and seeks patent protection for its products in cases where the Company believes the technology involved is sufficiently innovative to warrant such protection. The Company seeks trademark protection for its products in cases where the Company believes for marketing reasons such protection is warranted. The Company seeks to protect its proprietary information through its reliance on patent, copyright, trademark and trade secret laws, non-disclosure agreements with its employees and confidentiality provisions in licensing arrangements with its customers. There is no assurance that such agreements will be effective to protect the Company or that the proprietary information deemed confidential by the Company will be adequately protected by the law respecting trade secrets. Consequently, it may be possible for unauthorized third parties to copy certain portions of the Company's products or to "reverse engineer" or otherwise obtain the Company's proprietary rights. Moreover, the laws of some foreign countries do not afford the same protection provided by U.S. laws to the Company's proprietary rights. Government Regulation The Company is subject to the Federal acquisition regulations governing the issuance of government contracts, Federal Trade Commission regulations governing its advertising and trade practices, Department of Commerce regulations as well as Department of State Defense Trade Control regulations with respect to goods it imports and exports, and the Truth in Negotiations Act, which provides for the examination by the U.S. Government of cost records to determine whether accurate pricing information was disclosed in connection with government contracts. To date, such government regulations have not had a material adverse effect on the Company's business. The Company in the normal course of business is subject to Department of Defense audits with respect to its government contracts, some of which may result in pricing adjustments. The Company's manufacturing operations are subject to various federal, state and local laws that regulate the discharge of materials into the environment, or otherwise relating to the protection of the environment. To date, compliance with such government regulations has not had a material adverse effect on the Company's business. Manufacturing and Supplies Production of the Company's products requires assembly and testing of components, printed circuit boards and other purchased parts. Quality control, testing and inspection are performed at various steps throughout the manufacturing process. The Company purchases certain materials and components used in its systems and equipment from independent suppliers. These materials and components are not normally purchased under long-term contracts. The Company purchases minicomputers, workstations, personal computers, mass storage subsystems, high resolution monitors and keyboards under OEM agreements. The Company believes that most of the items its purchases may be obtained from a variety of suppliers and it normally obtains alternative sources for major items, although the Company is sometimes dependent on a single supplier or a few suppliers for some items. During 1995 and 1994, the Company's cash constraints strained its relationships with vendors, which adversely impacted the Company's ability to meet its production targets on a timely and cost-effective basis. These constraints were significantly eased during 1996 and the Company now believes it is in good standing with all of its vendors. -9- Employees At December 31, 1996, the Company had approximately 290 employees. The Company has never experienced a work stoppage and none of its employees is represented by a union. The Company believes its relationship with its employees is good. In January 1997, the Company reduced its work force by approximately 40 additional employees. Item 2. Properties The Company's facilities, which are believed to be adequate to meet the Company's foreseeable needs, are shown in the table that follows:
Facilities ---------- Approximate Floor Area Expiration Division or Subsidiary Location (in Sq. Ft.) Date - ---------------------- -------- ------------ ---- Electronic Systems Segment - -------------------------- Codar Longmont, Colorado 52,000 (leased) November 1, 1999 Systems Columbia, Maryland 25,000 (leased) November 30, 2001 Lynwood Farnham, England 26,000 (leased) December 25, 2014 Telecommunications Segment - -------------------------- Wilcom Laconia, New Hampshire 52,000 (owned) --
The Company also leases several small sales offices. The Company's corporate office is in short-term leased executive offices located in Huntington, New York. The Company pays approximately $1,198,000 per annum for the rental of all its facilities. Item 3. Legal Proceedings - ----------------- None. Item 4. Submission of Matters to a Vote of Security Holders - --------------------------------------------------- None. -10- 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 ------ ---- --- 1996 First Quarter $3 $1 7/8 Second Quarter 3 7/8 2 Third Quarter 4 3 1/8 Fourth Quarter 4 2 3/4 1995 First Quarter $3 $1 7/8 Second Quarter 3 1/2 2 1/8 Third Quarter 3 1/4 1 1/4 Fourth Quarter 2 3/8 1 1/8 There have been no cash dividends declared or paid on the Common Stock in the above two years. The Company's existing credit agreement restricts cash dividends. A 4% stock dividend on the Common Stock was paid to shareholders of record on February 25, 1994. As of December 31, 1996, there were approximately 650 record holders of Common Stock as determined from the records of the transfer agent, American Stock Transfer & Trust Company. Street names are included collectively as a single holder of record. Management estimates that the Company has approximately 2,500 additional shareholders holding stock in street names. The Warrants - ------------ The Company has issued and outstanding warrants (the "Warrants") to purchase 4,119,700 shares of Common Stock of the Company at an exercise price of $2.50 per share, subject to adjustment, on or prior to February 15, 2002. The Warrants trade on the Nasdaq SmallCap Market under the symbol NATLW. As of December 31, 1996, there were approximately 60 record holders of Warrants as determined from the records of the warrant agent, American Stock Transfer & Trust Company. The Notes - --------- The Company has issued and outstanding 12% Convertible Subordinated Promissory Notes due January 15, 2001, in the aggregate principal amount of $5,227,000 (the "Notes") at December 31, 1996. The Notes are convertible into shares of Common Stock at a conversion price of $2.00 per share, subject to adjustment. The Notes are quoted on the Yellow Sheets of the National Quotations Bureau under the symbol NAI TECH INC 12-2001. As of December 31, 1996, there were approximately 40 record holders of the Notes as determined from the records of the trustee, First Trust National Association. The Notes and Warrants were issued by the Company in a private placement of the Notes and Warrants on February 15, 1996, February 23, 1996, February 29, 1996 and May 2, 1996. On August 26, 1996 the Company filed with the Commission an effective Registration Statement registering the sale of $6,342,000 of the Notes, 4,119,700 of the Warrants and 8,904,336 shares of the Company's Common Stock. -11- Item 6. Selected Financial Data - ----------------------- (in thousands except per share data) 1996 1995 1994 1993 1992 Net sales $68,207 $60,008 $54,520 $81,024 $67,315 Operating earnings (loss)(1) 5,307 (8,875) (14,589) 8,960 8,407 Net earnings (loss) (1) 2,413 (11,619) (11,591) 5,455 5,051 Per share data: Net earnings (loss)(3) 0.28 (1.57) (1.69) 0.80 0.80 Cash dividends(2) -- -- -- -- -- Total assets at year end 41,371 48,012 53,720 60,715 43,704 Long-term debt 12,224 15,573 13,990 10,797 7,158 Working capital 14,241 10,044 16,665 19,105 17,094 Shareholders' equity 15,980 10,086 20,296 30,593 23,911 Average market price per common share at year end(3) $3 3/4 $1 1/2 $2 11/16 $6 1/4 $8 3/16 Average common shares(3) 8,570 7,382 6,580 6,843 6,309 - ------------------------ (1) Includes $7,321 in restructuring costs in 1994. (2) There have been no cash dividends in the above five fiscal years. (3) Prior year share data has been restated to reflect 4% stock dividends declared in February 1992, 1993 and 1994 and a three-for-two stock split paid in August 1993. -12- Item 7. Management's Discussion and Analysis of Financial Condition and Results of - -------------------------------------------------------------------------- Operations - ---------- Results of Operations --------------------- 1996 Compared with 1995 - ----------------------- The nature of the Company's business is such that year to year changes in sales levels are predominantly due to changes in shipping volume or product mix rather than changing sales prices. Net sales in 1996 were $68.2 million, a 14% increase when compared with $60.0 million for the same period in 1995. The following chart provides the sales breakdown by segment and subsidiary for 1996 and 1995. In thousands of dollars 1996 1995 % Change - -------------------------------------------------------------------------------- Electronic Systems Segment Codar Technology, Inc. $32,727 $27,553 19% NAI Systems Division 14,330 13,504 6% Lynwood Scientific Dev. Ltd. 14,621 11,587 26% Inter-company (547) (831) -- ------------------------------------ Total Electronic Systems Segment 61,131 51,813 18% Telecommunications Segment Wilcom, Inc. 7,076 8,195 (14%) ------------------------------------ Total Telecommunications Segment 7,076 8,195 (14%) ------------------------------------ TOTAL $68,207 $60,008 14% ==================================== Sales in the Electronic Systems segment (net of inter-company elimination's) increased 18% to $61.1 million from $51.8 million in 1995. Each of the NAI subsidiaries recorded sales increases in 1996 as compared to 1995. Lynwood and Codar recorded the largest increases. Codar's 1995 revenues were adversely impacted by production problems on certain contracts. The increased sales at Lynwood and NAI Systems Division were representative of the increased levels of business at both companies. In recent years the Company has reduced its dependency on the United States defense budget by expanding its non-military business operations. However, the Company still expects approximately 40% of 1997 sales to be directly to the military or through prime contractors to the military compared to 44% in 1996. The Company is not aware of any programs in which it participates that are specifically targeted for termination or curtailment. The Company's products are utilized on many different U.S. Government programs which reduces the adverse impact of canceling a single specific program. However, changes in future U.S. defense spending levels could impact the Company's future sales volume. Sales in the Telecommunications segment decreased 14% to $7.1 million as compared to $8.2 million in 1995. The decrease in sales is attributable to reduced line treatment revenues. -13- The gross margin percentage for 1996 was 22.7% as compared with 8.2% for 1995. The following chart provides the gross margin percentage by subsidiary. 1996 1995 - ------------------------------------------------------------------------- Codar Technology, Inc. 14.4% (7.7%) NAI Systems Division 20.9% 17.4% Lynwood Scientific Dev. Ltd. 34.0% 32.9% Wilcom, Inc. 38.0% 23.0% The margin improvement at Codar is attributable to increased shipping volumes and cost reduction efforts initiated in late 1995 and early 1996. Codar's operating performance in both years was adversely impacted by several large contracts for which the gross margins were zero or negative. These contracts were substantially completed during the third quarter of 1996. Codar's 1995 gross margins were adversely impacted by the recording of a $1,400,000 provision attributable to cost growth on certain long-term contracts due to engineering design changes, greater than anticipated labor and material costs and under-absorbed overhead and a $1,100,000 provision for inventory obsolescence. The recording of a $900,000 provision for inventory obsolescence adversely impacted the Systems Division's 1995 gross margin. Cost reduction efforts completed in the fourth quarter of 1995 and a favorable mix of high margin product revenues favorably impacted Wilcom's 1996 gross margin. Selling expense for 1996 was $4.2 million as compared with $5.0 million for the same period in 1995. The 16% decrease was realized, despite an increase in sales of 14%, due to the Company's efforts to reduce operating expenses. General and administrative expenses for 1996 were $5.2 million as compared with $6.5 million in 1995. Decreased corporate office expense as well as cost cutting moves taken in the fourth quarter of 1995 account for the decline. Company-sponsored research and development expenditures for 1996 were $1.6 million as compared with $1.8 million for 1995. The Company had operating earnings of $5.3 million in 1996 as compared with an operating loss of $8.9 million in 1995. 1996 operating earnings were favorably impacted by the recognition of a gain of approximately $1.5 million from the sale of the Systems Integration Division to Tracor Aerospace Inc. in June 1996. Interest expense and amortization of deferred debt costs, net of interest income, was $2.5 million in 1996 as compared with $2.4 million in 1995. The entire tax expense pertains to the Company's Lynwood subsidiary located in the U.K. Lynwood's earnings are taxed in the U.K. and, while the Company has a U.S. net operating loss carry-forward, Lynwood is required to pay taxes in the U.K. The Company is unable to recognize the full tax benefit associated with its U.S. net operating loss carry-forward due to uncertainties as to whether or not a future benefit will be realized. When the Company returns to sustained profitability, the benefits of such a tax loss carry-forward will be recognized. The Company recorded a net profit of $2.4 million as compared with a net loss of $11.6 million in 1995. Earnings per share were $0.28 as compared with a loss of $1.57 per share in 1995, based on a weighted average of 8.6 million and 7.4 million shares outstanding, respectively. -14- 1995 Compared with 1994 Net sales in 1995 were $60.0 million, a 10% increase when compared with $54.5 million for the same period in 1994. The increase occurred in the Electronic Systems segment. Year to year changes in the Company's sales levels are predominantly due to changes in shipping volume or product mix rather than changing sales prices. The following chart provides the sales breakdown by segment and subsidiary for 1995 and 1994. In thousands of dollars 1995 1994 % Change Electronic Systems Segment Codar Technology, Inc. $27,553 $20,229 36% NAI Systems Division 13,504 4,417 206% Lynwood Scientific Dev. Ltd. 11,587 11,116 4% Military Products -- 11,366 (100%) Intercompany (831) (798) -- -------------------------------- Total Electronic Systems Segment 51,813 46,330 12% Telecommunications Segment Wilcom, Inc. 8,195 8,190 (0%) -------------------------------- Total Telecommunications Segment 8,195 8,190 (0%) -------------------------------- TOTAL $60,008 $54,520 10% ================================ Sales in the Electronic Systems segment (net of inter-company eliminations) increased 12% to $51.8 million from $46.3 million in 1994. The sales increase was primarily attributable to increased sales from NAI's Systems Division and Codar offset by the sales reduction due to the closing of the military products division, which was consolidated into Codar in September 1994. The Company expects a significant amount of 1996 sales to be directly to the military or through prime contractors to the military. Sales in the Telecommunications segment remained flat at $8.2 million in 1995 and 1994. A small increase in line treatment products due to deliveries of Wilcom's new Enhanced Line Powered Amplifier products was offset by a decline in test equipment as a result of lower orders from the regional Bell operating companies and foreign telecommunications companies. The consolidated gross margin for 1995 was 8.2%, as compared to 18.8% in 1994. The 1995 gross margin was adversely affected by a $6.6 million charge to operations and an unfavorable mix of high and low margin product deliveries. The $6.6 million charge to operations was attributable to cost growth on certain long term contracts due to engineering design changes, provisions for slow moving, excess and obsolete inventory. The Company believes that it has recognized the entire adverse impact of cost overruns on those contracts for which the expected final costs exceed the contract value. Selling expense for 1995 was $5.0 million, as compared with $7.5 million in 1994. This decrease is attributable to the saving associated with the consolidation of the military products division in the third quarter of 1994 and cost cutting measures implemented at all of the Company's divisions in 1995. -15- General and administrative expenses for 1995 were $6.5 million, as compared to $6.3 million in 1994. This increase is primarily attributable to the Company moving its corporate headquarters from Woodbury, New York to Longmont, Colorado in December 1995 and additional administrative expense at Codar as a result of increased management resources. These cost increases were partially offset by cost cutting measures implemented at the Company's other divisions and the savings associated with the consolidation of the military products division in the third quarter of 1994. Company-sponsored research and development expenditures for 1995 were $1.8 million, as compared to $3.2 million in 1994. This decrease is attributable to savings associated with the previously mentioned consolidation and the change in mix between Company-sponsored research and development and customer-funded research and development. The Electronic Systems segment is focusing on its system integration business. Although systems integration work by its nature requires significant engineering content, such costs must be classified as contract costs and charged to cost of sales as opposed to Company-sponsored research and development (IR&D). The Company recorded an operating loss of $8.9 million in 1995, as compared with an operating loss of $14.6 million in 1994. The operating loss in 1995 was primarily due to the $6.6 million charge previously noted. The 1994 operating loss included a $7.3 million restructuring expense. Interest expense, net of interest income, was $2.4 million in 1995, as compared to $1.4 million in 1994. The 1995 figures also included a $0.9 million charge for debt restructuring expense related to the April 7, 1995 agreement reached with the Company's two lending institutions. The effective income tax expense rate was below the combined statutory federal and state rates in 1995. The Company was unable to recognize a tax benefit for its loss in 1995 due to uncertainties as to whether or not a future benefit would be realized. Any earnings in 1996 will not be taxed at the statutory rate. The small tax provision is associated with the operations of Lynwood, the Company's United Kingdom subsidiary. The Company recorded a net loss of $11.6 million in 1995, substantially the same as the net loss recorded in 1994. Loss per share for 1995 was ($1.57), as compared with a ($1.69) in 1994, based on a weighted average of 7.4 million and 6.9 million shares outstanding, respectively. Liquidity and Capital Resources - ------------------------------- On February 15, 1996 the Company entered into an amendment to its credit agreement with its bank lenders which amended and extended the payment provisions contained therein and reset certain financial covenants on more favorable terms for the Company. The revised credit agreement provides for quarterly principal payments of $500,000, beginning on March 31, 1996 and payments of $750,000 beginning on March 31, 1997 and paid through December 31, 1998. The remaining principal balance is due on January 15, 1999. Interest is payable monthly at the rate of 1 3/4% above prime. The loan covenants require that the Company maintain certain minimum levels of net worth, current ratio and quick ratio. There are also limits on capital expenditures and the payment of cash dividends. The Company believes that it can comply with such loan covenants during the term of the credit agreement. On February 15, 1996, February 23, 1996, February 29, 1996 and May 2, 1996, the Company issued an aggregate of $8,342,000 of 12% Convertible Subordinated Promissory Notes due January 15, 2001 (the "Notes") and warrants to purchase an aggregate of 2,085,500 shares of the Company's Common Stock (the "Warrants"). The Notes are convertible by the holders into shares of Common Stock at a price equal to $2.00 per share, subject to adjustment if the Company fails to meet certain earnings thresholds and in -16- certain other events. Interest on the Notes is payable quarterly in arrears on January 15, April 15, July 15 and October 15 of each year, commencing April 15, 1996. The Notes mature on January 15, 2001. The Notes may be prepaid by the Company without premium or penalty at any time after January 15, 1999. The Notes are unsecured obligations of the Company and contain certain restrictions on the Company including a negative pledge of the Company's assets not otherwise encumbered by the holders of the senior indebtedness. In addition to the Warrants issued with the Notes, the Company issued an aggregate of 2,034,200 Warrants to the lead investor and the placement agent. All Warrants entitle the holders thereof to purchase shares of Common Stock at any time and from time to time on or before February 15, 2002 at an exercise price equal to $2.50 per share of Common Stock, subject to adjustment in certain events. The Company received total proceeds (net of placement agency fees and expenses) of $7,534,081 ($2,500,000 was received prior to December 31, 1995) from the sale of the Notes and the Warrants upon completion of the offering. Approximately $4.1 million was used to reduce the Company's accounts payable to its vendors. The remainder of the funds were used to meet operating and working capital needs. As a result of the sale of the Notes and the debt restructuring, the Company made payments of $7,675,000 in principal in 1996, and is required to expend approximately $2,475,000 in 1998. All required term loan payments for 1997 were made prior to December 31, 1996. On January 15, 1999 the Company is required to make a balloon payment of $5,025,000. Interest on outstanding balances under the term loan is payable monthly. The Company intends to pay interest on the Notes, interest and principal under the credit agreement and operating expenses for the next three years. The Company believes that it will have adequate resources to meet its obligations when the balloon payment of $5,025,000 is due. On May 9, 1996, the Company entered into an agreement with Charles S. Holmes, a member of the Company's Board of Directors, that in consideration of his converting the Note held by him in the aggregate unpaid principal amount of $2,000,000 into 1,000,000 shares of Common Stock the Company would immediately grant him warrants to purchase 300,000 shares of Common Stock at any time and from time to time on or before February 15, 2002 at an exercise price of $3.00 per share, subject to adjustment in certain events. Such warrants were valued at $0.50 per warrant and were fully expensed in 1996. During 1996 an additional $1,115,000 of Notes were converted in accordance with the terms thereof into 557,500 shares of common stock, thereby bringing the total conversions for the year to $3,115,000 and reducing the aggregate principal amount of Notes outstanding to $5,227,000 from the originally issued $8,342,000. Cash and cash equivalents totaled $2.7 million at December 31, 1996, as compared to $2.6 million at December 31, 1995. Cash used by operating activities amounted to $1.6 million in 1996, as compared to cash provided by operating activities of $0.1 million in 1995. A significant factor in the Company's improved cash flow performance in 1996 has been the leveling of shipments during each month. In the past years the Company's shipments were heavily weighted towards the end of each month and the last month of each quarter. This improvement in shipping performance has enabled the Company to reduce its inventory and accounts receivable balances. The increase in non-current assets from the beginning of the year is attributable to the deferred debt costs incurred as a result of the sale of the Notes in February 1996. -17- Inflation - --------- The Company's financial statements are prepared in accordance with historical accounting systems, and therefore, do not reflect the effect of inflation. The impact of changing prices on the financial statements is not considered to be significant. Backlog - ------- The backlog of unfulfilled orders at December 31, 1996 stood at $30.2 million, compared to $47.8 million at December 31, 1995. Approximately $12.0 million of the December 31, 1995 backlog related to the Systems Integration business that was sold in 1996. Approximately 60% of the 1996 year end backlog is scheduled for delivery over the next twelve months. -18- Item 8. Consolidated Financial Statements and Supplementary Data - -------------------------------------------------------- The following consolidated financial statements of the registrant are submitted herewith at the end of this document beginning on Page F-1: Independent Auditors' Report. Consolidated balance sheets at December 31, 1996 and 1995. Consolidated statements of operations for the years ended December 31, 1996, 1995 and 1994. Consolidated statements of shareholders' equity for the years ended December 31, 1996, 1995 and 1994. Consolidated statements of cash flows for the years ended December 31, 1996, 1995 and 1994. Notes to consolidated financial statements. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial - ------------------------------------------------------------------------- Disclosure - ---------- None. -19- PART III Item 10. Directors and Executive Officers of the Registrant - -------------------------------------------------- Directors of the Company - ------------------------ The members of the Board of Directors of the Company as of March 11, 1997, together with certain information furnished to the Company by each such person as of such date, are set forth below. Years Served Name and Age as a Director Biographical Summary - ------------ ------------- -------------------- Robert A. Carlson(1), 64 9 Mr. Carlson is Chairman and Chief Executive Officer of the Company. From December 1987 until December 1989, he was President and Chief Operating Officer of the Company. From December 1989 to October 1995, he was President and Chief Executive Officer of the Company. Richard A. Schneider, 44 4 Mr. Schneider is Executive Vice President, Treasurer, Chief Financial Officer and Secretary of the Company. He was elected a director of the Company on February 11, 1993. From October 1988 until December 1992, he served as Vice President-Finance and Treasurer of the Company. He was elected Secretary of the Company in January 1990. Stephen A. Barre(2),(3), 56 7 Mr. Barre is Chairman and Chief Executive Officer of Servo Corporation of America, a communications and defect detection company. C. Shelton James(1),(3), 55 7 Mr. James is Chairman of the Board and Chief Executive Officer of Elcotel, Inc., a public communications company. He also is President and a director of Fundamental Management Corporation, an investment management company which is the general partner of limited partnerships which are substantial investors in the Company, and he is on the board of directors of Harris Computer Systems, Inc., a company engaged in the manufacture of real time computers, SK Technologies, a company engaged in development and marketing of point-of-sale software, and CPSI, Inc., a company engaged in high performance computing. -20- Edward L. Hennessy, Jr.(2), 68 1 year Mr. Hennessy is the retired Chairman and Chief Executive Officer of Allied Signal, Inc., a world-wide technology company. He also is a director of The Bank of New York, a New York State commercial banking company, Lockheed Martin Corp., a designer, manufacturer, integrator and operator of systems and products in leading edge technologies, National Association of Manufacturers, Wackenhut Corporation, an international provider of security-related services and privatized correctional and detention facility management and design services, Walden Real Estate Investment Trust, a self-managed fully integrated REIT focused on middle income multi-family properties, and Fundamental Management Corporation. A designee of Fundamental Management Corporation, he was elected a director of the Company on March 6, 1996. Charles S. Holmes(1),(2), 51 1 year A director of the Company since October 3, 1995, Mr. Holmes is President and sole stockholder of Asset Management Associates of New York, Inc., a New York-based firm specializing in acquisitions of manufacturing businesses. Mr. Holmes founded and was a partner in Asset Management Associates, a predecessor partnership of Asset Management, from 1978 to 1991. He has served since its formation in 1992 as Vice Chairman of the Board of Directors of Chart Industries Inc., which specializes in the design, manufacture and sale of industrial process equipment used in the hydrocarbon and industrial gas industries for low-temperature and cryogenic applications, and manufactures other industrial equipment such as stainless steel tubing, structural pipe supports and high vacuum systems. Dennis McCarthy(3), 50 1 year Mr. McCarthy, a designee of Mr. Holmes, was elected a director of the Company on March 6, 1996. He has been employed by Asset Management Associates of New York, Inc., a New York-based firm specializing in acquisitions of manufacturing businesses, since 1988. - ------------------------ 1) Member of the Executive Committee 2) Member of the Compensation Committee 3) Member of the Audit Committee -21- Executive Officers of the Company - --------------------------------- The current executive officers of the Company are as follows: Robert A. Carlson, 64, is the Chairman and Chief Executive Officer of the Company. From December 1987 until December 1989, he was President and Chief Operating Officer of the Company. From December 1989 until October 1995, he was President and Chief Executive Officer of the Company. Richard A. Schneider, 44, is the Executive Vice President, Treasurer and Secretary of the Company. From October 1988 until December 1992, he served as Vice President-Finance and Treasurer of the Company. He was elected Secretary of the Company in January 1990. Item 11. Executive Compensation - ---------------------- The following table sets forth all plan and non-plan compensation awarded to, earned by or paid to the Company's Chief Executive Officer and each of the executive officers of the Company other than the Chief Executive Officer whose total annual salary and bonus exceeded $100,000 (collectively, the "Named Executives") for each of the Company's last three fiscal years.
Long Term Compensation ---------------------- Annual Compensation Awards Payouts ------------------- ------ ------- (a) (b) (c) (d) (e) (f) (g) (h) (i) Securities Other Annual Restricted Underlying All Other Name and Principal Fiscal Compensation Stock Options/ LTIP Compensation Position Year Salary ($) Bonus ($) ($) (1) Award(s)($) SARs(#) Payouts ($) -------- ---- ---------- --------- ------- ----------- ------- ------- --- Robert A. Carlson - 1996 $196,000 $176,000 -- -- -- -- $58,295 (2) President and Chief 1995 263,000 -- -- -- 250,000 (5) -- 59,071 (2) Executive Officer 1994 275,000 -- -- -- 138,983 (4) -- 66,324 (2) Richard A. Schneider - 1996 124,000 96,000 -- -- -- -- 7,454 (3) Executive Vice President, 1995 152,000 8,500 -- -- 125,000 (5) -- 7,630 (3) Treasurer and Secretary 1994 149,000 -- -- -- 94,389 (4) -- 12,426 (3)
- ------------------------ (1) The aggregate amount of all perquisites and other personal benefits paid to any Named Executive is not greater than either $50,000 or 10% of the total of the annual salary and bonus reported for such Named Executive. (2) Includes $59,022, $59,071 and $58,295 of life insurance premiums paid on term life and split dollar policies by the Company on behalf of Mr. Carlson in each of the years 1994, 1995 and 1996, respectively, as well as $7,302, $0 and $0 of matching contributions made by the Company under the 401(k) deferred compensation plan and $0, $0 and $0 of matching contributions made by the Company under the profit sharing portion of such plan for the benefit of Mr. Carlson for each of the years 1994, 1995 and 1996, respectively. (3) Includes $7,603, $7,630 and $7,454 of life insurance premiums paid on term life and split dollar policies by the Company on behalf of Mr. Schneider in each of the years 1994, 1995 and 1996, respectively, as well as $4,823, $0 and $0 of matching contributions made by the Company under the 401(k) deferred compensation plan and $0, $0 and $0 of matching contributions made by the Company under the profit sharing portion of such plan for the benefit of Mr. Schneider for each of the years 1994, 1995 and 1996, respectively. -22- (4) Options to acquire shares of Common Stock that were granted in fiscal year 1994. At the same time, options for Mr. Carlson (102,951 shares) and Mr. Schneider (54,996 shares) were canceled. (5) Options to acquire shares of Common Stock that were granted in fiscal year 1995. At the same time, options for Mr. Carlson (214,485 shares) and Mr. Schneider (95,327 shares) were canceled. Stock Options - ------------- The table below summarizes the options granted to the Named Executives in 1996 and their potential realizable values. Option/SAR Grants in 1996 -------------------------
Potential Realizable Value of Assumed Annual Rates of Stock Price Appreciation Individual Grants for Option Term 1 ----------------- ----------------- (a) (b) (c) (d) (e) (f) (g) Number of % of Total Securities Options/SARs Underlying Granted to Options/SARs Employees in Exercise or Base Name Granted (#) Fiscal Year Price ($/Sh) Expiration Date 5%($) 10%($) - ---- ----------- ----------- ------------ --------------- ----- ------ Robert A. Carlson -0- N/A N/A N/A N/A N/A President and Chief Executive Officer Richard A. Schneider -0- N/A N/A N/A N/A N/A Executive Vice President Treasurer and Secretary
________________________ The table below summarizes the exercise of stock options during 1996 for the Named Executives. Aggregated Option/SAR Exercises in 1996 and FY-End Option/SAR Values --------------------------------------------------------------------
(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) - ---- -------- ----------- ------------- ---------------- Robert A. Carlson - -0- $0 125,000/125,000 $156,250/$156,250 President and Chief Executive Officer Richard A. Schneider - -0- $0 62,500/62,500 $78,125/$78,125 Executive Vice President Treasurer and Secretary
- ------------------------ (1) Market price at December 31, 1996 minus exercise price times the number of shares underlying the unexercised options. -23- Supplemental Retirement Plan - ---------------------------- The Company terminated its non-qualified Supplemental Retirement Plan (the "SERP") on December 19, 1996. On August 7, 1996, the Company and Mr. Schneider agreed on the termination of Mr. Schneider's status as an eligible participant under the SERP and the redemption of his interest in the SERP by the Company at a redemption price of $150,000, which represented a discount of approximately 60% from the actuarial equivalent lump sum value of his accrued benefit under the SERP as of February 29, 1996. On December 19, 1996, the Company and Mr. Carlson agreed on the termination of Mr. Carlson's status as an eligible participant under the SERP and the redemption of Mr. Carlson's interest in the SERP by the Company at a redemption price of $800,000, payable quarterly in four equal installments of $200,000 beginning on February 17, 1997. It is estimated that Messrs. Carlson and Schneider, who have 12 and 8 years of credited service, respectively, would have received each year at normal retirement age annual amounts under the SERP of $131,296 and $65,103, respectively. Employment and Change in Control Agreements - ------------------------------------------- The Company entered into an Employment Agreement with Robert A. Carlson as of January 1, 1997. Pursuant to the employment agreement with Mr. Carlson, the term of his employment commenced on January 1, 1997 and will continue until December 31, 1997 unless extended by Mr. Carlson for a period of one year on or within 30 days prior to each of January 1, 1998 and January 1, 1999 (each an "Extension Date"). Mr. Carlson will be paid salary at a rate of $260,000 per annum which represents a 25% increase in salary from the prior year's level. Assuming that the Company attains certain annual targets, the Company will also pay Mr. Carlson an annual bonus equal to 50% of his salary. The employment agreement with Mr. Carlson also provides that the Company will pay Mr. Carlson $50,000 on each January 15, 1998 and January 15, 1999 if Mr. Carlson continues to serve as Chairman of the Company on each such Extension Date, and an additional $50,000 if Mr. Carlson continues to service as Chief Executive Officer of the Company on each such Extension Date (collectively referred to as the "Executive Bonus"). Mr. Carlson will be eligible to participate in all employee benefit programs. The employment agreement with Mr. Carlson also provides that in the event the Company decides to terminate Mr. Carlson's employment without cause he is entitled to a payment of a pro rata share of unused vacation for the full year plus a pro rata share of his bonus under the Company Bonus Plan, if the Board in its sole discretion so determines, plus a severance payment of the Executive Bonus on the dates he would otherwise be entitled to receive the Executive Bonus. In the event the Company decides to terminate Mr. Carlson's employment without cause prior to November 31, 1997 he is entitled to either his salary for the remainder of the term under the agreement or one year's salary, whichever is greater. If the Company decides to terminated Mr. Carlson's employment for cause, the Company will provide 20 days written notice, and reason for the termination. Mr. Carlson will have those 20 days to effect a cure to the Company's satisfaction. The Company entered into an Employment Agreement with Richard A. Schneider on October 16, 1995 which was amended as of August 8, 1996 and January 2, 1997. Pursuant to the employment agreement with Mr. Schneider, the term of his employment commenced on October 16, 1995 and will continue until October 16, 1997. Mr. Schneider will be paid salary at a rate of $180,000 per annum which represents a 25% increase in salary from the prior year's level. Assuming the Company attains certain annual targets, the Company will also pay Mr. Schneider an annual bonus equal to 40% of his salary. Mr. Schneider will be eligible to participate in all employee benefit programs, and in 1995 was granted options to purchase 125,000 shares of Common Stock at a per share exercise price of $2.50 (such options to replace 100,000 previously issued options which were canceled). The employment agreement with Mr. Schneider also provides that in the event the Company terminates Mr. Schneider's employment without -24- cause, Mr. Schneider will be entitled to a severance payment of either his salary for the remainder of the term under the agreement or one year's salary, whichever is greater, and a severance payment of a pro rata share of unused vacation for the full year plus a pro rata share of his bonus under the Company Bonus Plan, if the Board in its sole discretion so determines. If the Company decides to terminate Mr. Schneider's employment for cause, the Company has agreed to provide 20 days written notice, and reason for the termination. Mr. Schneider will have those 20 days to effect a cure to the Company's satisfaction. -25- Director Compensation - --------------------- During 1996, each director who was not also an officer of the Company was paid an annual retainer of $15,000, plus $2,500 for each committee that a director serves on, plus a uniform fee of $1,000 for each Board and committee meeting attended in person. During 1996, directors who were also officers of the Company received no remuneration for attendance at Board and committee meetings. Compensation Committee Interlocks and Insider Participation - ----------------------------------------------------------- During the fiscal year ended December 31, 1996, the members of the Compensation Committee were Charles S. Holmes (Chairman), Stephen A. Barre and Edward Hennessy, Jr. During fiscal year 1996 and formerly, none of such persons was an officer of the Company or any of its subsidiaries or had any relationship with the Company other than serving as a director of the Company. In addition, during the fiscal year ended December 31, 1996, no executive officer of the Company served as a director or member of the compensation committee of another entity, one of whose executive officers served as a director or on the Compensation Committee of the Company. Item 12. Security Ownership of Certain Beneficial Owners and Management - -------------------------------------------------------------- The following table sets forth information concerning persons or groups who are known by the Company to be the beneficial owners of more than 5% of the Common Stock as of March 11, 1997. The information in the table below is based upon information furnished to the Company by such persons and statements filed with the Securities and Exchange Commission. Number of Shares of Common Stock Percent of Name and Address of Beneficial Owner Beneficially Owned(1) Common Stock - ------------------------------------ --------------------- ------------ Charles S. Holmes P.O. Box 2850 Southampton, NY 11969(2) 3,212,000 29.0% Pioneering Management Corporation 60 State Street Boston, MA 02114(3) 579,000 6.4% Fundamental Management Corporation 4000 Hollywood Boulevard Suite 610N Hollywood, FL 33021(4) 1,150,636 11.8% - ------------------------ 1) To the knowledge of the Company, beneficial owners named in the above table have sole voting power with respect to the shares listed opposite their names. 2) Mr. Holmes is a director of the Company. These shares are comprised of 1,000,000 shares of Common Stock, 1,700,000 shares underlying certain Warrants exercisable at $2.50 per share and 300,000 shares underlying certain Warrants exercisable at $3.00 per share, owned by Mr. Holmes; and 175,000 shares of Common Stock and 37,000 shares underlying Warrants exercisable at $2.50 per share owned by a friend of Mr. Holmes. The ownership percentage is calculated as if such Warrants and Notes had been converted as of March 11, 1997. -26- 3) These shares are reportedly owned by a passive investor. Pioneering Management Corporation is the investment company advisor of such investor and is registered under Section 203 of the Investment Advisers Act of 1940. 4) These shares are reportedly owned by various limited partnerships, of which Fundamental Management Corporation is the general partner. C. Shelton James, a director of the Company, is the President and a director of Fundamental Management Corporation. These shares are composed of 400,636 shares of Common Stock, 250,000 shares underlying certain Warrants exercisable at $2.50 per share and 500,000 shares underlying $1,000,000 of Notes convertible into shares at $2.00 per share. Excludes 14,793 shares of Common Stock owned by Mr. James as to which shares Fundamental Management Corporation disclaims beneficial ownership. The ownership percentage is calculated as if such Warrants and Notes had been converted as of March 11, 1997 by Fundamental Management Corporation. Shares of Common Stock beneficially owned as of March 11, 1997 by each director and executive officer of the Company and by all directors and executive officers of the Company as a group are set forth in the following table. This table is based upon information furnished to the Company by such persons and statements filed with the Securities and Exchange Commission. Beneficial Ownership of Shares(1) Number of Shares of Common Stock Percent of Name Beneficially Owned(2) Common Stock(3) - ---- ------------------- ------------- Robert A. Carlson 100,467 1.11% Stephen A. Barre 17,654 -- Edward L. Hennessy, Jr. -0- -- Charles S. Holmes(4) 1,000,000 11.08% C. Shelton James(5) 14,793 -- Dennis McCarthy -0- -- Richard A. Schneider 16,812 -- All directors and officers as a group (7 persons) 1,149,726 12.74% - ------------------------ - -- = Less than 1% 1) Directors and executive officers have sole voting power and sole investment power with respect to the shares listed opposite their names. 2) Excludes options exercisable within 60 days of March 11, 1997 for such persons as follows: Mr. Carlson, 125,000, Mr. Barre, 3,120; Mr. Hennessy, -0-; Mr. Holmes, -0-; Mr. James, 7,401; Mr. McCarthy, -0-; Mr. Schneider, 62,500; and all directors and officers as a group, 198,021. 3) The percentages of Common Stock outstanding are based on 9,032,437 shares outstanding on March 11, 1997. -27- 4) Excludes Warrants to purchase 2,000,000 shares of Common Stock owned by Mr. Holmes and 175,000 shares of Common Stock and Warrants to purchase 37,000 shares of Common Stock owned by a friend of Mr. Holmes. 5) Excludes 400,636 shares of Common Stock, Warrants to purchase 250,000 shares of Common Stock and Notes convertible into 500,000 shares of Common Stock owned by various limited partnerships of which Fundamental Management Corporation, an investment company of which Mr. James is President and a director, as to which shares Mr. James shares voting and dispositive power. Item 13. Certain Relationships and Related Transactions - ---------------------------------------------- Charles S. Holmes, a director of the Company, purchased $2,000,000 principal amount of Notes and Warrants (the "Units") to purchase 500,000 shares of Common Stock issued pursuant to the private placement (the "Investment Transaction") of the Units by the Company in exchange for the 12% Subordinated Promissory Notes of the Company held by him in the aggregate principal amount of $2,000,000. Mr. Holmes also received an additional 1,200,000 Warrants for past advisory services in connection with the Investment Transaction and the engagement of Commonwealth Associates as the Company's placement agent. Pursuant to an agreement between Mr. Holmes and the Company on May 9, 1996, which provided for the immediate grant to Mr. Holmes of warrants to purchase 300,000 shares of Common Stock at any time and from time to time on or before February 15, 2002 at an exercise price of $3.00 per share, subject to adjustment in certain events, Mr. Holmes converted the Notes held by him in the aggregate principal amount of $2,000,000 into one million shares of Common Stock which he currently owns. C. Shelton James, a director of the Company, is the president and a director of Active Investors II, Ltd. ("Active Investors"), a company which, together with certain affiliated limited partnerships, currently owns shares of Common Stock of the Company. In connection with the Investment Transaction, Active Investors purchased 900 Units from the Company in exchange for 12% Subordinated Promissory Notes of the Company held by him in the aggregate principal amount of $900,000. On May 2, 1996 Active Investors purchased additional Notes in the aggregate principal amount of $100,000 and Warrants to purchase 25,000 shares of Common Stock. In connection with the Investment Transaction, the Company agreed to use its best efforts to cause the resignation of two then-current members of the Board of Directors and cause to be elected as directors two individuals acceptable to the Company and who are designed by the investors, including one designated solely by Mr. Holmes and one designated solely by Active Investors. Dennis McCarthy was designated to serve in such capacity by Mr. Holmes, while Edward L. Hennessy, Jr. was designated to serve in such capacity by Active Investors, and each became a director of the Company on March 6, 1996. -28- PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K - --------------------------------------------------------------- (a) Financial Statements and Financial Statement Schedules ------------------------------------------------------ The consolidated financial statements and schedules listed in the accompanying index to financial statements are filed as part of this Annual Report on Form 10-K. (b) Reports on Form 8-K None. (c) Exhibits 3(i) Restated Certificate of Incorporation of NAI Technologies, Inc. filed with the Secretary of State of the State of New York on August 19, 1991 (filed with the Commission as Exhibit 3(i) to the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 28, 1996). 3(ii) Certificate of Amendment to the Certificate of Incorporation of the Registrant, as filed with the New York Secretary of State on February 2, 1996 (filed with the Commission as Exhibit 3 to the Company's Report on Form 8-K dated February 15, 1996). 3(iii) Certificate of Amendment of the Certificate of Incorporation of NAI Technologies, Inc. filed with the Secretary of State of the State of New York on August 7, 1996 (filed with the Commission as Exhibit 3(ii) to the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 28, 1996). 4(i) Form of 12% Convertible Subordinated Promissory Note, due January 15, 2001, of the Registrant (filed with the Commission as Exhibit 1 to the Company's Report on Form 8-K dated February 15, 1996). 4(ii) Form of Warrant to Purchase Common Stock of the Registrant, on or before February 15, 2002 (filed with the Commission as Exhibit 2 to the Company's Report on Form 8-K dated February 15, 1996). 4(iii) Registration Rights Agreement, dated as of February 13, 1996, between the Registrant and the Investors (filed with the Commission as Exhibit 4 to the Company's Report on Form 8-K dated February 15, 1996). 4(iv) Indenture, dated as of July 15, 1996, between NAI Technologies, Inc. and First Trust National Association, as Trustee (filed with the Commission as Exhibit 4(i) to the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 28, 1996). 4(v) Warrant Agreement, dated as of August 26, 1996, between NAI Technologies, Inc. and American Stock Transfer & Trust Company (filed with the Commission as -29- 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- 10(xi) Amendment No. 2 to Employment Agreement, entered into as of January 2, 1997, between NAI Technologies, Inc. and Richard A. Schneider. 10(xii) Settlement Agreement and Release, entered into as of December 19, 1996, between NAI Technologies, Inc. and Robert A. Carlson. 11 Statement re: Computation of Per Share Earnings. 17(i) Resignation letter of Robert D. Rosenthal, dated December 13, 1995, resigning from the Board of Directors of the Registrant (filed with the Commission as Exhibit 9 to the Company's Report on Form 8-K dated February 15, 1996). 17(ii) Resignation letter of John M. May, dated February 13, 1996, resigning from the Board of Directors of the Registrant (filed with the Commission as Exhibit 10 to the Company's Report on Form 8-K dated February 15, 1996). 21 List of Subsidiaries. 23 Accountants' Consent. 27 Financial Data Schedules (Edgar filing only). 99(i) Press Release, dated February 15, 1996, describing the closing of the Investment Transaction and the Amendment (filed with the Commission as Exhibit 11 to the Company's Report on Form 8-K dated February 15, 1996). 99(ii) Pro Forma Consolidated Balance Sheets as of April 27, 1996 of NAI Technologies, Inc. and Subsidiaries (filed with the Commission as Exhibit 2 to the Company's Report on Form 8-K dated May 9, 1996). (d) Not applicable. -31- S I G N A T U R E S ------------------- Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. NAI TECHNOLOGIES, INC. /s/ Richard A. Schneider By:____________________________ Richard A. Schneider Date: March 11, 1997 Executive Vice President Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated. Signature Title Date - --------- ----- ---- /s/ Robert A. Carlson _____________________________ Chairman, Chief Executive March 11, 1997 Robert A. Carlson Officer and Director (Chief Executive Officer) /s/ Stephen Barre _____________________________ Director March 11, 1997 Stephen Barre /s/ Edward L. Hennessy, Jr. _____________________________ Director March 11, 1997 Edward L. Hennessy, Jr. /s/ Charles S. Holmes _____________________________ Director March 11, 1997 Charles S. Holmes /s/ C. Shelton James _____________________________ Director March 11, 1997 C. Shelton James /s/ Dennis McCarthy _____________________________ Director March 11, 1997 Dennis McCarthy /s/ Richard A. Schneider _____________________________ Executive Vice President, March 11, 1997 Richard A. Schneider Chief Financial Officer, Treasurer, Secretary and Director (Chief Financial and Accounting Officer) -32- STATEMENT OF DIFFERENCES The registered trademark symbol shall be expressed as ................. 'r' The British pound sterling sign shall be expressed as.................. 'L' 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, 1996 and 1995 F-3 Consolidated Statements of Operations - Years ended F-4 December 31, 1996, 1995 and 1994 Consolidated Statements of Shareholders' Equity - F-5 Years ended December 31, 1996, 1995 and 1994 Consolidated Statements of Cash Flows - Years ended F-6 December 31, 1996, 1995 and 1994 Notes to Consolidated Financial Statements F-7 Independent Auditors' Report F-29 Consolidated Financial Statement Schedules: II - Valuation and Qualifying Accounts F-30
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 INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders NAI Technologies, Inc. We have audited the accompanying consolidated balance sheets of NAI Technologies, Inc. and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of NAI Technologies, Inc. and subsidiaries as of December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1996, in conformity with generally accepted accounting principles. KPMG PEAT MARWICK LLP Boulder, Colorado February 7, 1997 F-2 NAI TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
December 31, (in thousands, except share amounts) 1996 1995 - ---------------------------------------------------------------------------------- ASSETS Current Assets: Cash and cash equivalents $ 2,727 $ 2,605 Accounts receivable, net 12,693 13,735 Inventories, net 10,270 11,995 Deferred tax asset 173 384 Other current assets 597 813 - ---------------------------------------------------------------------------------- Total current assets 26,460 29,532 - ---------------------------------------------------------------------------------- Property, plant and equipment, net 3,523 5,351 Excess of cost over fair value of net assets acquired, net 9,707 10,339 Notes receivable -- 1,190 Other assets 1,681 1,600 - ---------------------------------------------------------------------------------- Total assets $ 41,371 $ 48,012 - ---------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Accounts payable $ 6,907 $ 9,797 Current installments of long-term debt 158 2,177 Accrued payroll and commissions 680 768 Other accrued expenses 3,894 6,376 Income taxes payable 580 370 - ---------------------------------------------------------------------------------- Total current liabilities 12,219 19,488 - ---------------------------------------------------------------------------------- Long-term debt 12,224 15,573 Other accrued expenses 912 2,481 Deferred income taxes 36 384 - ---------------------------------------------------------------------------------- Total liabilities 25,391 37,926 - ---------------------------------------------------------------------------------- Commitments and contingent liabilities - ---------------------------------------------------------------------------------- Shareholders' Equity: Capital Stock: Preferred stock, no par value, 2,000,000 shares authorized and unissued -- -- Common stock, $.10 par value, 25,000,000 shares authorized; shares issued: 9,016,937 in 1996 and 7,459,437 in 1995 902 746 Capital in excess of par value 19,217 16,162 Foreign currency translation adjustment 313 43 Retained earnings (4,452) (6,865) - ---------------------------------------------------------------------------------- Total shareholders' equity 15,980 10,086 - ---------------------------------------------------------------------------------- Total liabilities and shareholders' equity $ 41,371 $ 48,012 - ---------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------
The accompanying notes to consolidated financial statements are an integral part of these statements. F-3 NAI TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31, (in thousands except per share amounts) 1996 1995 1994 - ------------------------------------------------------------------------------ Net sales $ 68,207 $ 60,008 $ 54,520 - ------------------------------------------------------------------------------ Cost of sales 52,712 55,100 44,254 - ------------------------------------------------------------------------------ Gross margin 15,495 4,908 10,266 - ------------------------------------------------------------------------------ Selling expenses 4,192 4,971 7,490 General and administrative expenses 5,242 6,517 6,313 Research and development costs 1,639 1,807 3,214 Restructuring expenses -- -- 7,321 Other (income) expense (885) 488 517 - ------------------------------------------------------------------------------ Total expenses, net 10,188 13,783 24,855 - ------------------------------------------------------------------------------ Operating earnings (loss) 5,307 (8,875) (14,589) - ------------------------------------------------------------------------------ Non-operating income (expense): Other 15 -- -- Amortization of deferred debt costs (456) (895) -- Interest income 152 195 83 Interest expense (2,209) (1,667) (1,477) - ------------------------------------------------------------------------------ (2,498) (2,367) (1,394) - ------------------------------------------------------------------------------ Earnings (loss) before income taxes 2,809 (11,242) (15,983) Income tax expense (benefit) 396 377 (4,392) - ------------------------------------------------------------------------------ Net earnings (loss) $ 2,413 ($11,619) ($11,591) - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ Earnings (loss) per common share $ 0.28 ($ 1.57) ($ 1.69) - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------
The accompanying notes to consolidated financial statements are an integral part of these statements. F-4 NAI TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE THREE YEARS ENDED DECEMBER 31, 1996
Capital Total Common in excess Note Translation Retained shareholders' (in thousands) stock of par receivable adjustment earnings equity - ----------------------------------------------------------------------------------------------------------------------------------- Balance January 1, 1994 $ 651 $ 12,096 ($ 12) ($ 54) $ 17,912 $ 30,593 Net (loss) -- -- -- -- (11,591) (11,591) 4% common stock dividend 26 1,541 -- -- (1,567) -- Foreign currency translation adjustment -- -- -- 161 -- 161 Sale of common stock 36 964 -- -- -- 1,000 Tax benefit from exercise of employee stock options -- 23 -- -- -- 23 Exercise of employee stock options and purchases under stock purchase plan 4 106 -- -- -- 110 ------------------------------------------------------------------------------ Balance December 31, 1994 717 14,730 (12) 107 4,754 20,296 Net (loss) -- -- -- -- (11,619) (11,619) Foreign currency translation adjustment -- -- -- (64) -- (64) Common stock issued in debt restructuring 25 475 -- -- -- 500 Issuance of stock warrants in connection -- 913 -- -- -- 913 with debt offering Exercise of employee stock options and purchases under stock purchase plan 4 56 -- -- -- 60 ------------------------------------------------------------------------------ Balance December 31, 1995 746 16,174 (12) 43 (6,865) 10,086 Net earnings -- -- -- -- 2,413 2,413 Foreign currency translation adjustment -- -- -- 270 -- 270 Issuance of stock warrants in connection -- 1,060 -- -- -- 1,060 with debt offering Payment of note receivable -- -- 12 -- -- 12 Conversion of convertible debt, net of issuance costs 156 1,983 -- -- -- 2,139 ------------------------------------------------------------------------------ Balance December 31, 1996 $ 902 $ 19,217 $ -0- $313 ($ 4,452) $ 15,980 ------------------------------------------------------------------------------ ------------------------------------------------------------------------------
The accompanying notes to consolidated financial statements are an integral part of these statements. F-5 NAI TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, (in thousands) 1996 1995 1994 - --------------------------------------------------------------------------------------------------------------- Cash Flows from Operating Activities: Net earnings (loss) $ 2,413 ($11,619) ($11,591) Adjustments to reconcile net earnings (loss) to cash (used in) provided by operating activities: Depreciation and amortization 2,548 2,979 2,435 Loss (gain) on disposal of property, plant and equipment (1,492) 1 2,298 Provision for inventory obsolescence 88 2,248 2,031 Loss on sale of notes receivable 89 -- -- Tax benefit from exercise of employee stock options -- -- 23 Changes in operating assets and liabilities, excluding effects from acquisitions, dispositions and foreign currency adjustments: Accounts receivable 648 (1,227) 2,534 Inventories 1,543 (191) 879 Accounts payable and other accrued expenses (6,965) 3,545 4,215 Income taxes 73 4,328 (2,775) Other, net (594) 57 (82) - --------------------------------------------------------------------------------------------------------------- Net cash (used in) provided by operating activities (1,649) 121 (33) - --------------------------------------------------------------------------------------------------------------- Cash Flows from Investing Activities: Contingent payment on purchase of KMS Advanced Products -- (103) (189) Purchase of property, plant and equipment (566) (886) (935) Proceeds from sale of division, property, plant and equipment 2,990 443 1,053 - --------------------------------------------------------------------------------------------------------------- Net cash (used in) provided by investing activities 2,424 (546) (71) - --------------------------------------------------------------------------------------------------------------- Cash Flows from Financing Activities: Issuances of notes payable 590 6 8,636 Issuances of 12% convertible notes 5,842 2,500 -- Payments of notes payable (590) (133) (5,283) Payments for debt restructuring -- (345) -- Payments of long-term debt (7,856) (656) (4,777) Receipts on notes receivable 1,113 -- 223 Proceeds from exercise of stock options and stock purchase plan -- 60 110 Proceeds from sale of common stock -- -- 1,000 - --------------------------------------------------------------------------------------------------------------- Net cash (used in) provided by financing activities (901) 1,432 (91) - --------------------------------------------------------------------------------------------------------------- Effect of foreign currency exchange rates on cash 248 (60) 136 - --------------------------------------------------------------------------------------------------------------- Net (decrease) increase in cash and cash equivalents 122 947 (59) Cash and cash equivalents at beginning of year 2,605 1,658 1,717 - --------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of year $ 2,727 $ 2,605 $ 1,658 - --------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------- Supplemental disclosure of cash flow information: Cash paid for (received): Interest $ 2,238 $ 1,506 $ 1,462 Income taxes 398 (4,697) (773) Non-cash investing and financing activities: Common stock issued in debt restructuring -- 500 -- Notes receivable from sale of property, plant and equipment -- 1,190 -- Conversion of 12% notes into common stock 2,139 -- -- - --------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------
The accompanying notes to consolidated financial statements are an integral part of these statements. F-6 NAI TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994 1. SUMMARY OF ACCOUNTING POLICIES Description of Business: NAI Technologies designs, manufactures and markets rugged computer systems, advanced peripheral products, high performance workstations, TEMPEST computer systems and telecommunications test equipment and transmission products, and integrated systems for defense, military, government-related and commercial businesses. The Company's customer base includes commercial markets requiring rugged, mobile computer and communications systems, U.S. and foreign armed services and intelligence agencies, and the regional Bell operating companies and independent telephone companies. Net sales to the U.S. Government for the years ended December 31, 1996, 1995 and 1994 were $20,619,000, $22,665,000 and $21,819,000, respectively. Basis of Presentation: The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant inter-company transactions and balances have been eliminated in consolidation. Management Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Foreign Currency Translation: The financial statements and transactions of the Company's foreign subsidiary are maintained in its functional currency. For consolidation purposes, assets and liabilities of the Company's U.K. subsidiary have been translated at rates of exchange at the end of the period. Revenues and expenses have been translated at the weighted average rates of exchange in effect during each period. Translation gains and losses are accumulated as a separate component of shareholders' equity. Gains and losses resulting from transactions denominated in a currency other than the entity's functional currency are included in other operating expense in the consolidated statements of operations. There were no significant gains or losses from foreign currency transactions in the years presented. Financial Statement Reclassification: Certain reclassifications have been made to prior years' financial statements to conform to the 1996 presentation. Cash equivalents: The Company classifies investments that are readily convertible into cash, and have original maturities of three months or less, as cash equivalents. Inventories: Inventories are valued at the lower of cost or market on a first-in, first-out (FIFO) basis. Work in process is stated at total costs incurred, reduced by estimated costs of units delivered, not in excess of net realizable value. The Company's business is characterized by rapid change that frequently results in product obsolescence. The Company continually reviews its on-hand quantities and compares such to current business levels and future expectations regarding usage. Adjustments to the carrying values of inventory are made when considered necessary. F-7 Property, Plant and Equipment: Property, plant and equipment are recorded at historical cost. Depreciation and amortization have been computed using the straight-line method over the following estimated useful lives of the assets: equipment and furniture and fixtures, generally -- 2 to 10 years, and buildings - -- 30 years. Leasehold improvements are amortized over the shorter of the estimated useful life of the improvements or the lease term. Excess of Cost over Fair Value of Net Assets Acquired: The excess of cost over fair value of net assets acquired (goodwill) is being amortized on a straight line basis over a period of twenty years. The Company reviews the significant assumptions that underlie the twenty-year amortization period on a quarterly basis and will shorten the amortization period if considered necessary. The Company assesses the recoverability of this intangible asset by determining whether the amortization of the goodwill balance over its remaining life can be recovered through projected undiscounted future results. Accumulated amortization was approximately $2,362,000 and $1,730,000 at December 31, 1996 and 1995, respectively. The amortization expense associated with these amounts is included in other operating expense in the consolidated statements of operations and amounted to $632,000, $630,000 and $620,000 in 1996, 1995 and 1994, respectively. Long-lived assets: In fiscal 1996, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be disposed of." SFAS No. 121 requires that long-lived assets and certain identifiable intangibles to be held and used or disposed of by an entity be reviewed for impairment whenever events or changes in circumstances indicated that the carrying amount of an asset may not be recoverable. During 1996, the Company adopted this statement and determined that no impairment loss need be recognized for applicable assets of continuing operations. Revenue Recognition: Sales are recorded when title passes (either at shipment or customer acceptance). In some limited cases, a sale may be recorded upon the completion of a specific contractual task such as the issuance of a test report. Cost of goods sold is based upon average estimated cost per unit. Sales and profits on cost reimbursable contracts are recognized as costs are incurred. Sales and estimated profits under long-term contracts are recorded under the percentage of completion method of accounting using the cost to cost method. Costs include direct engineering and manufacturing costs, applicable overhead costs and special tooling and test equipment. All selling, general and administrative expenses are charged to operations as incurred. Warranty expense is accrued based upon the historical relationship between sales and warranty claims. Estimated losses are provided for in full when identified. Income Taxes: Income taxes are determined based on the use of the asset and liability approach for financial accounting and reporting of income taxes in accordance with statement of Financial Accounting Standards (SFAS) No. 109, "Accounting For Income Taxes." Under this method, deferred tax assets and liabilities are recognized based on the temporary differences between the carrying amounts of assets and liabilities for financial statement purposes and income tax purposes using enacted rates expected to be in effect when such amounts are realized or settled. Earnings (Loss) Per Share: Earnings (loss) per share is computed based upon the weighted average number of common shares and common share equivalents outstanding. Common share equivalents consist of dilutive common stock options, common stock subscribed to under the Employee Stock Purchase Plan and common stock warrants, net of assumed buy-back. The computation of fully diluted earnings (loss) per share does not materially differ from that presented in the consolidated statements of operations. Earnings (loss) per share amounts are based on 8,570,000, 7,382,000 and 6,850,000 average shares outstanding (including common stock equivalents) for 1996, 1995 and 1994, respectively. F-8 2. ACCOUNTS RECEIVABLE Accounts receivable at December 31 consisted of the following:
(in thousands) 1996 1995 ----------------------------------------------------------------------------- Amounts receivable from United States Government: Amounts billed $ 3,891 $ 3,764 Unbilled contract receivables 47 2,004 ----------------------------------------------------------------------------- 3,938 5,768 Amounts receivable from others: Amounts billed 8,564 7,729 Unbilled contract receivables 449 380 ----------------------------------------------------------------------------- 9,013 8,109 ----------------------------------------------------------------------------- 12,951 13,877 Allowance for doubtful accounts (258) (142) ----------------------------------------------------------------------------- $12,693 $13,735 ----------------------------------------------------------------------------- -----------------------------------------------------------------------------
Unbilled contract receivables represent revenue earned but not yet billed to customers at year end. The Company expects that substantially all of these amounts will be billed and collected within one year. F-9 3. INVENTORIES Inventories at December 31, summarized by major classification, were as follows:
(in thousands) 1996 1995 ------------------------------------------------------ Raw materials and components $ 8,567 $ 11,695 Work-in-process 3,010 4,121 Finished goods 1,204 477 Allowance for obsolescence (2,403) (3,536) Unliquidated progress payments (108) (762) ------------------------------------------------------ $ 10,270 $ 11,995 ------------------------------------------------------ ------------------------------------------------------
4. OTHER CURRENT ASSETS Other current assets at December 31 consisted of the following:
(in thousands) 1996 1995 ------------------------------------------------------ Prepaid insurance $ 249 $ 219 Other prepaid expenses 348 594 ------------------------------------------------------ $ 597 $ 813 ------------------------------------------------------ ------------------------------------------------------
5. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment at December 31 consisted of the following:
(in thousands) 1996 1995 ---------------------------------------------------------------------- Land $ 300 $ 1,306 Buildings 1,900 1,900 Machinery and equipment 7,807 8,829 Furniture and fixtures 681 679 Leasehold improvements 404 317 ---------------------------------------------------------------------- 11,092 13,031 Less accumulated depreciation and amortization (7,569) (7,680) ---------------------------------------------------------------------- $ 3,523 $ 5,351 ---------------------------------------------------------------------- ----------------------------------------------------------------------
F-10 6. RESTRUCTURING On April 8, 1994 the Company announced that as part of its transition from the design and manufacture of computer peripherals toward both producing and integrating computer systems, it would close its Hauppauge, New York based Military Products Division and transfer the division's operations to its Codar facility in Longmont, Colorado. As a direct result of the above, the Company recorded a $9,500,000 charge in 1994, of which $7,300,000 was classified as a restructuring charge and $2,200,000 was charged to cost of sales. The major components of the $7,300,000 restructuring charge relate to employee expense ($2,731,000), disposition of assets ($2,000,000), inventory write downs on discontinued products ($1,120,000), idle facility costs ($590,000) and lease termination costs ($370,000). The major components of the $2,200,000 charge to cost of sales pertain to inventory write-offs related primarily to excess start-up costs associated with the NST-II production. The transfer of operations to Colorado was substantially completed by the fourth quarter of 1994. 7. OTHER ACCRUED EXPENSES - CURRENT Other accrued expenses - current at December 31, 1996, consisted of the following:
(in thousands) 1996 1995 ------------------------------------------------------------------- Supplemental retirement $ 800 $ -- Customer advances -- 1,143 Employee benefits 949 756 Restructuring 39 153 Insurance payable 164 168 Purchase liabilities 257 453 Warranty 688 658 Deferred revenue 296 589 Contract losses 58 583 Taxes, other than income 115 365 Interest 134 162 Moving expense -- 513 Other 394 833 ------------------------------------------------------------------- $3,894 $6,376 ------------------------------------------------------------------- -------------------------------------------------------------------
F-11 8. DEBT Long term debt at December 31 consisted of the following:
(in thousands) 1996 1995 --------------------------------------------------------------------------------------------------- Secured revolving credit with quarterly step-downs of $750,000 and interest at prime plus 1 3/4% (10% at December 31, 1996) $ 7,500 $ 15,175 Notes payable, generally secured by specified machinery and equipment, with interest at rates ranging from 8.875% to 11.25% 206 388 12% Convertible Subordinated Promissory Notes due January 15, 2001 5,227 2,500 --------------------------------------------------------------------------------------------------- 12,933 18,063 Original issue discount on 12% Notes (551) (313) Less current installments (158) (2,177) --------------------------------------------------------------------------------------------------- $ 12,224 $ 15,573 --------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------
Aggregate principal payments for the five years subsequent to December 31, 1996 are as follows (in thousands): 1997 $ 158 1998 2,523 1999 5,025 2000 -- 2001 5,227 ------- $12,933 ------- -------
Effective February 15, 1996 the Company entered into an amendment to its credit agreement with its bank lenders which amended and extended the payment provisions contained therein and reset certain financial covenants on more favorable terms for the Company. The revised credit agreement provides for quarterly principal payments of $500,000, beginning on March 31, 1996, and payments of $750,000 beginning on March 31, 1997 and paid through December 31, 1998. The remaining principal balance is due on January 15, 1999. Interest is payable monthly at the rate of 1 3/4% above prime. The loan covenants require that the Company maintain certain minimum levels of net worth, current ratio and quick ratio. They also limit capital expenditures and the payment of cash dividends. As of December 31, 1996 the Company had made prepayments of $3,525,000. Accordingly, no payments are due in 1997. In November and December 1995, the Company borrowed an aggregate of $2,500,000 and agreed that the loans would be converted into convertible debt in conjunction with the anticipated sale of 12% Convertible Subordinated Promissory Notes. Such loans were recorded as Convertible Subordinated Promissory Notes as of December 31, 1995 in the Company's financial statements. On February 15, 1996, February 23, 1996, February 29, 1996 and May 2, 1996, the Company issued an aggregate of $8,342,000 of 12% Convertible Subordinated Promissory Notes due January 15, 2001 and warrants to purchase an aggregate of 2,085,500 shares of the Company's Common Stock. The Notes are convertible by the holders into shares of Common Stock at a conversion price equal to $2.00 per share. F-12 Interest on the Notes is payable quarterly in arrears on January 15, April 15, July 15 and October 15 of each year, commencing April 15, 1996. The Notes mature on January 15, 2001. The Notes may be prepaid by the Company without premium or penalty at any time after January 15, 1999. The Notes are unsecured obligations of the Company and contain certain restrictions on the Company a negative pledge of the Company's assets not otherwise encumbered by the holders of the senior indebtedness. As of December 31, 1996, $3,115,000 of such Notes had been converted into Common Stock. In addition to the Warrants noted above, the Company issued 2,034,200 Warrants to the lead investor and placement agent. All Warrants entitle the holders thereof to purchase shares of Common Stock at any time and from time to time on or before February 15, 2002, at an exercise price equal to $2.50 per share of Common Stock. The Warrants are detachable and separately transferable. The Warrants were valued at $0.50 each. Such value was derived based upon an evaluation by an independent third party and included a review of both current and historical stock price data, the lack of liquidity afforded to the Warrants, the results of various quantitative methodologies, the Company's financial position and historical and projected cash flows. The Warrants issued in conjunction with the Notes are recorded as original issued discount on the Company's balance sheet. The Warrants issued to the lead investor and the placement agent are recorded as deferred debt costs and is included in other assets in the accompanying consolidated balance sheet. On May 9, 1996, the Company entered into an agreement with Charles S. Holmes, a member of the Company's Board of Directors, that in consideration of his converting the Note in the aggregate unpaid principal amount of $2,000,000 held by him into 1,000,000 shares of Common stock, the Company would immediately issue warrants to purchase 300,000 shares of Common Stock at any time and from time to time on or before February 15, 2002 at an exercise price of $3.00 per share. The warrants were valued at $0.50 per warrant and the Company recorded a charge to operations of $150,000 in 1996. The Company's U.K. subsidiary has a credit facility (sterling overdraft) with a U.K. bank. The credit facility amounts to 'L'600,000 (approximately $1,028,000) and bears interest at 2 1/4 % above the U.K. base rate (6% at December 31, 1996). This facility is renewable in March 1997. The maximum month end borrowings under the credit facility during the years ended December 31, 1996 and 1995 were 'L'346,000 and 'L'84,000 (approximately $543,000 and $130,000, respectively). The average short term borrowings for the years ended December 31, 1995 and 1994 were 'L'29,000 and 'L'19,000 (approximately $50,000 and $30,000, respectively). The weighted average interest rate during the years ended December 31, 1996 and 1995 was 8.23% and 8.88%, respectively. F-13 9. OTHER ACCRUED EXPENSES - NON-CURRENT Other Accrued Expenses - non-current at December 31 consisted of the following:
(in thousands) 1996 1995 -------------------------------------------------------- Supplemental retirement plan $ -- $1,235 Other 439 748 Deferred compensation 473 498 -------------------------------------------------------- $912 $2,481 -------------------------------------------------------- --------------------------------------------------------
The supplemental retirement plan is described in Note 13. In 1981, the Company entered into agreements with two former officers which provide for the payments to each of $25,000 per year, adjusted for the cumulative effects of inflation from inception of the agreement, over a period of 15 years. Such deferred compensation payments commenced on January 1, 1990. The 1997 payment to each of the former officers will be approximately $42,000. 10. OTHER (INCOME) EXPENSE Other (Income) Expense for the years ended December 31, 1996, 1995 and 1994 are as follows:
(in thousands) 1996 1995 1994 ----------------------------------------------------------------- Gain on sale of division(1) ($1,510) $ -- $ -- Amortization of goodwill 632 629 620 Other (7) (141) (103) ----------------------------------------------------------------- ($ 885) $ 488 $ 517 ----------------------------------------------------------------- -----------------------------------------------------------------
(1) In June 1996, the Company sold the assets of its Systems Integration division, which operated within the Codar Technology subsidiary. F-14 11. INCOME TAXES The Company and its domestic subsidiaries file a consolidated Federal income tax return. The provision for income taxes consisted of the following items:
(in thousands) 1996 1995 1994 -------------------------------------------------------------------------------- Current: Federal $ -- $ -- ($4,286) State -- -- -- Foreign 533 377 (446) -------------------------------------------------------------------------------- 533 377 (4,732) -------------------------------------------------------------------------------- Deferred: Federal -- -- 360 State -- -- -- Foreign (137) -- (20) -------------------------------------------------------------------------------- (137) -- 340 -------------------------------------------------------------------------------- Total income tax expense (benefit) $ 396 $377 ($4,392) -------------------------------------------------------------------------------- --------------------------------------------------------------------------------
The tax effects of temporary differences that gave rise to significant portions of the net deferred tax asset and (liability) at December 31, 1996, and 1995 are as follows:
(in thousands) 1996 1995 ------------------------------------------------------------------------- Deferred tax assets current: Net operating loss carry forward $ 3,389 $ 3,335 AMT credit carry forward 514 319 Inventories 401 1,422 Supplemental retirement 204 317 Accrued vacation 81 146 Deferred compensation 186 195 Other 392 276 Plant and equipment 109 -- Valuation allowance (5,103) (5,626) ------------------------------------------------------------------------- $ 173 $ 384 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Deferred tax liabilities non-current: Plant and equipment $ -- ($ 384) Other (36) -- ------------------------------------------------------------------------- (36) (384) ------------------------------------------------------------------------- $ 137 $ -- ------------------------------------------------------------------------- -------------------------------------------------------------------------
The Company has recorded a valuation allowance to reflect the estimated amount of deferred tax assets which may not be realized through the realization of future taxable income. F-15 The sources of the deferred tax provision and the related tax effect for the years ended December 31, 1996, 1995 and 1994 are as follows:
(in thousands) 1996 1995 1994 - -------------------------------------------------------------------------------- Net operating loss carry forward $ (54) ($3,335) $ -- AMT credit carry forward (196) 227 (545) Accelerated depreciation for tax purposes (493) 12 (142) Decrease (increase) in inventory reserves 1,021 (1,066) 235 Deferred compensation 9 41 (4) Supplemental retirement 113 (50) (96) Accrued restructure costs 52 282 (333) Accrued vacation 65 (19) 148 Other (131) (117) (524) Valuation allowance (523) 4,025 1,601 - -------------------------------------------------------------------------------- ($ 137) $ -- $ 340 - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
A reconciliation of the provision for income taxes computed at the Federal statutory rate to the actual provision for income taxes is as follows:
(in thousands) 1996 1995 1994 - -------------------------------------------------------------------------------- Expected tax expense (benefit) $ 955 ($3,822) ($5,434) Increases (decreases) resulting from: Adjustment of prior years' income taxes -- (350) (665) Non-deductible expenses 214 278 167 Other (250) 246 (61) Change in valuation allowance (523) 4,025 1,601 - -------------------------------------------------------------------------------- Actual income tax expense (benefit) $ 396 $ 377 ($4,392) - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
No provision has been recorded for U.S. income taxes applicable to undistributed earnings of foreign subsidiaries that are indefinitely reinvested in foreign operations. F-16 12. SHAREHOLDERS' EQUITY The Company has three stock option plans - the 1991 Stock Option Plan, the 1993 Stock Option Plan for Directors, and the 1996 Stock Option Plan - which together cover 1,233,731 shares of common stock which may be issued pursuant to the plans to key employees and directors. The 1991 Stock Option Plan covers 677,731 shares. Options under the 1991 Stock Option Plan are non-qualified stock options and are granted at the option price fixed by the Compensation Committee of the Board of Directors but in no event may the option price be less than the fair market value of a share of common stock on the date of grant. Options under the 1991 Stock Option Plan have such term as is fixed by the Compensation Committee but no option may be exercised during the first year after its date of grant or after the expiration of ten years from its date of grant. The 1993 Stock Option Plan for Directors covers 156,000 shares. Options under the Directors' Plan are non-qualified stock options and are granted in increments of 5,000 shares upon each non-employee director's election or re-election to the Board of Directors. The option price is equal to the fair market value of a share of common stock on the date of grant. Options are granted for a term of ten years and become exercisable eleven months after their date of grant. In no event may an option be exercised after the expiration of the term of such option. The 1996 Stock Option Plan covers 400,000 shares. Options under the 1996 Stock Option Plan are non-qualified stock options and are granted at the option price fixed by the Compensation Committee of the Board of Directors but in no event may the option price be less than the fair market value of a share of common stock on the date of grant. Options under the 1996 Stock Option Plan have such term as is fixed by the Compensation Committee but no option may be exercised during the first year after its date of grant or after the expiration of five years from its date of grant. Full payment of the exercise price under all stock option plans may be made in cash or in shares of common stock valued at the fair market value thereof on the date of exercise. The Company's policy is that such shares must have been acquired by the optionee at least six months prior to the exercise date. No options were exercised in 1996. In 1995 and 1994, all payments were made in cash. In 1996, the Company adopted the disclosure-only alternative of SFAS no. 123, Accounting for Stock Based Compensation. The weighted-average fair value per option at the date of grant for options granted during 1996 and 1995 was $0.74 and $0.61, respectively. The weighted-average fair value per purchase right under the Employee Stock Purchase Plan was $0.74 for 1996 subscriptions. There were no subscriptions in 1995. The fair value was estimated using the Black-Scholes options pricing model and the following weighted-average assumptions: F-17
1996 1995 - -------------------------------------------------------------------------------- Expected dividend yield 0% 0% Expected volatility 30% 30% Risk-free interest rate 5% 5% Expected term until exercise (years) 3 3 - --------------------------------------------------------------------------------
Pro forma net income and earnings per share reflecting compensation cost for the fair value of stock options awarded in 1996 and 1995 were as follows:
(thousands of dollars, except per share data) 1996 1995 - -------------------------------------------------------------------------------- Net income: As reported $ 2,413 ($ 11,619) Pro forma $ 2,315 ($ 11,671) Earnings per share: As reported $ 0.28 ($ 1.57) Pro forma $ 0.27 ($ 1.58) Fully diluted earnings per share: As reported N/A N/A Pro forma N/A N/A - --------------------------------------------------------------------------------
The pro forma effects on net income and earnings per share for 1996 and 1995 may not be representative of the pro forma effects in future years because they include compensation cost calculated on a straight-line basis over the vesting periods of the grants and do not take into consideration pro forma compensation cost for options granted prior to 1995. F-18 Employee Stock Option Plans The following is a summary of activity related to all stock option plans:
Number Weighted average of option price shares per share ------ --------- Outstanding at January 1, 1994 617,951 $ 6.20 Granted 498,998 $ 5.28 Exercised (30,472) $ 2.62 Expired/canceled (424,126) $ 7.60 - ----------------------------------------------------------------------------------- Outstanding at December 31, 1994 662,351 $ 4.77 Granted 515,000 $ 2.43 Exercised (37,962) $ 1.93 Expired/canceled (486,656) $ 4.81 - ----------------------------------------------------------------------------------- Outstanding at December 31, 1995 652,733 $ 3.06 Granted 330,400 $ 2.69 Expired/canceled (256,239) $ 2.22 - ----------------------------------------------------------------------------------- Outstanding at December 31, 1996 726,894 $ 2.63 - ----------------------------------------------------------------------------------- - -----------------------------------------------------------------------------------
At December 31, 1996, 206,172 options were exercisable and 1,223,731 shares were reserved for issuance under all stock option plans. Warrants At December 31, 1996, there were 4,119,700 warrants outstanding exercisable at $2.50 per share and 300,000 warrants outstanding exercisable at $3.00 per share. All warrants expire February 15, 2002. F-19 Employee Stock Purchase Plan Under the 1992 Employee Stock Purchase Plan, which commenced July 1, 1992, employees may subscribe to purchase shares of common stock at the lesser of 85% of the market price on the first day of the purchase period or the date purchased one year later. Payment for the shares is made through payroll deductions of up to 5% of annual base pay over a one year period. A total of 113,177 shares has been reserved for issuance under the Employee Stock Purchase Plan and as of December 31, 1996, 49,063 shares have been issued pursuant to the plan. The following is a summary of employee stock purchase plan activity:
Number of Price Shares Range ------ ----- Outstanding at January 1, 1994 23,540 $ 7.02 Subscriptions 31,410 3.13 Purchases (9,828) 3.13 Cancellations (22,202) 3.13-7.02 --------------------------------------------------------------------------------- Outstanding at December 31, 1994 22,920 $ 3.13 Purchases (13,870) 3.13 Cancellations (9,050) 3.13 --------------------------------------------------------------------------------- Outstanding at December 31, 1995 -- $ -- Subscriptions 19,780 $ 2.76 Cancellations (1,000) $ 2.76 --------------------------------------------------------------------------------- Outstanding at December 31, 1996 18,780 $ 2.76 --------------------------------------------------------------------------------- ---------------------------------------------------------------------------------
F-20 13. EMPLOYEE BENEFIT PLANS Pension Plan Until December 1995, when the plan was terminated and all assets were distributed, the Company had a noncontributory defined benefit pension plan covering all eligible employees. The plan provided for normal retirement at age 65, or at least age 62 with 30 years of service, and optional early retirement. In December 1993, the Board of Directors approved an amendment to the pension plan which resulted in the freezing of all future benefits under the plan as of January 3, 1994. The Company's funding policy was to make annual contributions to the extent such contributions were actuarially determined and tax deductible. Pension expense (income) for 1995 and 1994 was $3,000 and ($5,000), respectively. Supplemental Retirement Plan The NAI Technologies Supplemental Retirement Plan, a non-qualified, un-funded pension plan was terminated in 1996. The expense related to this plan amounted to $146,000 and $281,000 in 1995 and 1994, respectively. In 1995, the actuarial computations assumed a discount rate of 6.75% on benefit obligations. In 1994 the assumed discount rate on benefit obligations was 7.25%. The assumed compensation increase was 5% for all years. Such benefits will be paid from the Company's assets and not from retirement plan assets. The following table sets forth the funded status and cost components of the Company's supplemental retirement plan at December 31, 1995 and 1994:
(In thousands) 1995 1994 ---------------------------------------------------------------------------------- Accumulated benefit obligation including vested benefits of $1,215 in 1995 and $-0- in 1994 $ 1,221 ($ 899) ---------------------------------------------------------------------------------- ---------------------------------------------------------------------------------- Projected benefit obligation for service rendered to date (1,442) (1,224) Plan assets at fair value -- -- ---------------------------------------------------------------------------------- Projected benefit obligation in excess of plan assets (1,442) (1,224) Unrecognized prior service cost 332 360 Unrecognized net loss (gain) 178 77 Adjustment required to recognize minimum liability (289) (112) ---------------------------------------------------------------------------------- Unfunded accrued supplementary costs ($1,221) ($ 899) ---------------------------------------------------------------------------------- ---------------------------------------------------------------------------------- Net pension expense is comprised of the following: Service cost $ 25 $ 156 Interest cost 93 84 Net amortization and deferral 28 41 ---------------------------------------------------------------------------------- Net pension expense $ 146 $ 281 ---------------------------------------------------------------------------------- ---------------------------------------------------------------------------------- The unfunded accrued supplementary costs are included in other accrued expenses-noncurrent in 1995.
F-21 F-22 Retirement Savings Plan The Company has a voluntary Retirement Savings Plan for all eligible employees which provides for basic employee contributions (up to 15% of compensation). Plan participants may invest in a combination of equity, fixed income and money market funds. The Company's 1994 contribution under the plan totaled $365,143. Effective August 20, 1994, the Board of Directors suspended the matching provisions. No contributions were made in 1996 or 1995. Beginning in January 1997, the Company re-instituted a matching provision of 100% of the first 1% of each employee's contribution. The plan also provides for a discretionary profit sharing contribution as determined by the Board of Directors, which may be contributed to each of the participant's individual accounts. The Company made no such contribution for 1996, 1995 or 1994. 14. INFORMATION BY GEOGRAPHIC AREA Information about the Company's foreign operations and export sales is provided in the following table. Export revenue is foreign revenue produced by identifiable assets located in the United States while foreign revenue is generated by identifiable assets located in foreign countries. In order to achieve an appropriate sharing of operating results between the Company's subsidiaries, transfers between geographic areas are accounted for on the basis of a mark-up of manufacturing costs. Operating earnings are total sales less operating expenses. In computing operating earnings, none of the following items has been added or deducted: general corporate expenses, interest income, interest expense and income taxes. Identifiable assets are those assets of the Company that are identified with the operations in each geographic area. Corporate assets consisted primarily of cash and cash equivalents. F-23 NAI TECHNOLOGIES, INC. AND SUBSIDIARIES INFORMATION BY GEOGRAPHIC AREA
As of or Years ending December 31, (in thousands) 1996 1995 1994 - -------------------------------------------------------------------------------------- SALES TO UNAFFILIATED CUSTOMERS: United States $ 52,053 $ 47,329 $ 40,692 Export 1,581 1,786 2,723 United Kingdom 14,573 10,893 11,105 -------------------------------- Total $ 68,207 $ 60,008 $ 54,520 -------------------------------- -------------------------------- TRANSFERS BETWEEN GEOGRAPHIC AREAS: United States $ 547 $ 831 $ 787 Europe -- -- 11 -------------------------------- Total $ 547 $ 831 $ 798 -------------------------------- -------------------------------- TOTAL SALES: United States $ 52,600 $ 48,160 $ 41,479 Export 1,581 1,786 2,723 United Kingdom 14,573 10,893 11,116 Eliminations (547) (831) (798) -------------------------------- Total $ 68,207 $ 60,008 $ 54,520 -------------------------------- -------------------------------- OPERATING EARNINGS (LOSS): United States $ 4,869 ($ 6,232) ($11,068) Europe 2,070 1,226 (1,232) -------------------------------- Subtotal 6,939 (5,006) (12,300) Corporate expenses and other (1,632) (3,869) (2,289) -------------------------------- Total operating earnings (loss) 5,307 (8,875) (14,589) Net interest expense & other (2,498) (2,367) (1,394) -------------------------------- Earnings (loss) before income taxes $ 2,809 ($11,242) ($15,983) -------------------------------- -------------------------------- IDENTIFIABLE ASSETS: United States $ 28,294 $ 34,103 $ 33,795 Europe 9,602 8,283 8,761 -------------------------------- Subtotal 37,896 42,386 42,556 Corporate and other 3,475 5,626 11,164 -------------------------------- Total $ 41,371 $ 48,012 $ 53,720 -------------------------------- --------------------------------
F-24 15. INFORMATION BY BUSINESS SEGMENT The Company's operations are classified into two business segments: Electronic Systems and Telecommunications. The Electronic Systems segment includes Codar Technology, Inc. based in Longmont, Colorado, NAI Technologies--Systems Division Corporation in Columbia, Maryland, and Lynwood Scientific Developments Limited in Farnham, England. Codar Technology designs, manufactures, integrates and supports rugged computer systems, advanced computer peripherals and memory systems for military and commercial use. Systems provides custom packaged, integrated computer systems for deployment in shelters, ships, land vehicles and other demanding environments. Lynwood supplies rugged, environmentally and electrically screened personal computers and workstations based upon standard commercial off the shelf technology, targeted to the military and government markets principally in Europe. The U.S. Government accounted for $20,619,000 or 34% and one other customer accounted for 16% of the Electronic Systems segment's 1996 sales. No other customer accounted for greater than 10% of the Segment's sales. The Telecommunications segment currently consists of Wilcom, Inc. in Laconia, New Hampshire. Wilcom designs and manufactures products for use in the telephone industry. Wilcom's customer base includes the regional Bell operating companies and independent telephone companies. Two such customers accounted for 26% and 18%, respectively, of the Telecommunications segment's 1996 sales. Inter-segment sales are accounted for on the basis of a mark-up of manufacturing costs. Operating earnings are total sales less operating expenses. In computing operating earnings, none of the following items has been added or deducted: general corporate expenses, interest income, interest expense and income taxes. Identifiable assets by segment are those assets of the Company that are used in the Company's operations in each segment. Corporate assets consist primarily of cash and cash equivalents. F-25 NAI TECHNOLOGIES, INC. AND SUBSIDIARIES INFORMATION BY INDUSTRIAL SEGMENT
As of or Years ending December 31, (in thousands) 1996 1995 1994 - ------------------------------------------------------------------------------------- SALES TO UNAFFILIATED CUSTOMERS: Electronic Systems $ 61,131 $ 51,813 $ 46,330 Telecommunications 7,076 8,195 8,190 -------------------------------- Total $ 68,207 $ 60,008 $ 54,520 -------------------------------- -------------------------------- INTERSEGMENT SALES: Electronic Systems $ 547 $ 831 $ 798 -------------------------------- -------------------------------- TOTAL SALES: Electronic Systems $ 61,678 $ 52,644 $ 47,128 Telecommunications 7,076 8,195 8,190 Eliminations (547) (831) (798) -------------------------------- Total $ 68,207 $ 60,008 $ 54,520 -------------------------------- -------------------------------- OPERATING EARNINGS (LOSS): Electronic Systems $ 6,245 ($ 4,273) ($11,788) Telecommunications 694 (733) (512) -------------------------------- Subtotal 6,939 (5,006) (12,300) Corporate expenses and other (1,632) (3,869) (2,289) -------------------------------- Total operating earnings (loss) 5,307 (8,875) (14,589) Net interest expense & other (2,498) (2,367) (1,394) -------------------------------- Earnings (loss) before income taxes $ 2,809 ($11,242) ($15,983) -------------------------------- -------------------------------- IDENTIFIABLE ASSETS: Electronic Systems $ 31,584 $ 35,577 $ 35,529 Telecommunications 6,312 6,809 7,027 -------------------------------- Subtotal 37,896 42,386 42,556 Corporate and other 3,475 5,626 11,164 -------------------------------- Total $ 41,371 $ 48,012 $ 53,720 -------------------------------- -------------------------------- CAPITAL EXPENDITURES: Electronic Systems $ 412 $ 746 $ 716 Telecommunications 150 120 114 -------------------------------- Subtotal 562 866 830 Corporate and other 4 20 105 -------------------------------- Total $ 566 $ 886 $ 935 -------------------------------- -------------------------------- DEPRECIATION: Electronic Systems $ 1,560 $ 1,680 $ 2,078 Telecommunications 362 359 320 -------------------------------- Subtotal 1,922 2,039 2,398 Corporate and other 626 940 37 -------------------------------- Total $ 2,548 $ 2,979 $ 2,435 -------------------------------- --------------------------------
F-26 16. COMMITMENTS AND CONTINGENCIES The Company and its subsidiaries lease office and manufacturing facilities, automobiles, computers and other equipment under various non-cancelable operating leases. Future minimum rental commitments for leases with non-cancelable terms in excess of one year are as follows:
(in thousands) Amount --------------------------------------- 1997 $1,407 1998 1,310 1999 1,134 2000 684 2001 647 2002 and thereafter 4,496 ------ Total minimum lease payments $9,678 ------ ------
With the acquisition of Lynwood, the Company assumed a 25 year operating lease for office and manufacturing facilities. Annual future minimum lease payments through the year 2014, which are included in the above table, amount to approximately $346,000 per year. Rental expense amounted to $1,570,000, $1,725,000 and $1,170,000 in 1996, 1995 and 1994, respectively. There was no sublease income in these periods. Most leases provide for additional payments of real estate taxes, insurance and other operating expenses applicable to the property, generally over a base period level. Total rental expense includes such base period expenses and the additional expense payments as part of the minimum lease payments. The Company and its subsidiaries are subject to certain legal actions, which arise, in the normal course of business. It is management's belief that these actions will not have a material effect on the Company's consolidated financial position. F-27 17. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) The following table sets forth quarterly financial information for 1996 and 1995:
Loss (in thousands, Net Gross Net (loss) per except per share data) sales margin income share ----------------------------------------------------------------------------- 1996 First Quarter $ 16,503 $ 3,265 ($ 450) ($.06) Second Quarter 17,354 3,550 815 .10 Third Quarter 17,271 3,801 964 .11 Fourth Quarter 17,079 4,879 1,084 .12 -------------------------------------------------------------------------- Total $ 68,207 $ 15,495 $ 2,413 $ .28 -------------------------------------------------------------------------- -------------------------------------------------------------------------- 1995 First Quarter $ 12,687 $ 2,518 ($ 1,094) ($.15) Second Quarter 14,084 (1,827)(1) (5,805) (.78) Third Quarter 15,887 1,790 (2,296) (.31) Fourth Quarter 17,350 2,427 (2,424) (.33) -------------------------------------------------------------------------- Total $ 60,008 $ 4,908 ($11,619) ($1.57) -------------------------------------------------------------------------- --------------------------------------------------------------------------
(1) The Company recorded a charge to cost of sales in the amount of $2,700,000 for increased provisions for slow moving, excess and obsolete inventory and $2,000,000 for anticipated cost growth on certain long term contracts. F-28 INDEPENDENT AUDITORS' REPORT ON CONSOLIDATED FINANCIAL STATEMENT SCHEDULE Board of Directors and Shareholders NAI Technologies, Inc.: Under date of February 7, 1997, we reported on the consolidated balance sheets of NAI Technologies, Inc. and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1996, as contained in the Company's annual report on Form 10-K for the year 1996. In connection with our audits of the aforementioned consolidated financial statements, we have also audited the related consolidated financial statement Schedule II (Valuation and Qualifying Accounts). This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement schedule based on our audits. In our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. KPMG Peat Marwick LLP Boulder, Colorado February 7, 1997 F-29
Schedule II NAI TECHNOLOGIES, INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS (in thousands of dollars) - ----------------------------------------------------------------------------------------------------------------------- Column A Column B Column C Column D Column E - ----------------------------------------------------------------------------------------------------------------------- Additions ------------------------------- (1) (2) Balance at Charged to Charged to Balance Beginning Costs Other Accounts Deductions at End Description of Period and Expenses Describe Describe of Period - ----------------------------------------------------------------------------------------------------------------------- Allowance deducted from asset to which it applies Allowance for doubtful accounts: Year ended December 31, 1996 $ 142 $ 88 $ 5 (C) ($ 23)(A) $ 258 Year ended December 31, 1995 133 205 0 196 (A) 142 Year ended December 31, 1994 172 11 0 50 (A) 133 Allowance for inventory obsolescence reserve: Year ended December 31, 1996 $3,536 88 897(D) 2,118(B) 2,403 Year ended December 31, 1995 2,250 2,248 23(E) 985(B) 3,536 Year ended December 31, 1994 4,018 2,031 7(E) 3,806(B) 2,250
- ------------------------ 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.
F-30 NAI TECHNOLOGIES, INC. AND SUBSIDIARIES INDEX TO EXHIBITS
Page ---- 3(i) Restated Certificate of Incorporation of NAI Technologies, Inc. filed with the Secretary of State of the State of New York on August 19, 1991 (filed with the Commission as Exhibit 3(i) to the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 28, 1996). 3(ii) Certificate of Amendment to the Certificate of Incorporation of the Registrant, as filed with the New York Secretary of State on February 2, 1996 (filed with the Commission as Exhibit 3 to the Company's Report on Form 8-K dated February 15, 1996). 3(iii) Certificate of Amendment of the Certificate of Incorporation of NAI Technologies, Inc. filed with the Secretary of State of the State of New York on August 7, 1996 (filed with the Commission as Exhibit 3(ii) to the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 28, 1996). 4(i) Form of 12% Convertible Subordinated Promissory Note, due January 15, 2001, of the Registrant (filed with the Commission as Exhibit 1 to the Company's Report on Form 8-K dated February 15, 1996). 4(ii) Form of Warrant to Purchase Common Stock of the Registrant, on or before February 15, 2002 (filed with the Commission as Exhibit 2 to the Company's Report on Form 8-K dated February 15, 1996). 4(iii) Registration Rights Agreement, dated as of February 13, 1996, between the Registrant and the Investors (filed with the Commission as Exhibit 4 to the Company's Report on Form 8-K dated February 15, 1996). 4(iv) Indenture, dated as of July 15, 1996, between NAI Technologies, Inc. and First Trust National Association, as Trustee (filed with the Commission as Exhibit 4(i) to the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 28, 1996). 4(v) Warrant Agreement, dated as of August 26, 1996, between NAI Technologies, Inc. and American Stock Transfer & Trust Company (filed with the Commission as Exhibit 4(ii) to the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 28, 1996). 10(i) Placement Agency Agreement, dated as of December 15, 1995, between Commonwealth Associates and the Registrant (filed with the Commission as Exhibit 5 to the Company's Report on Form 8-K dated February 15, 1996). 10(ii) Fourth Amendment to Amended and Restated Credit Agreement, dated as of January 5, 1996, among the Registrant, Chemical Bank, a New York banking corporation, ("Chemical"), The Bank of New York, a New York banking corporation ("BNY"), and each of the other financial institutions which from time to time becomes a party thereto (together with Chemical and BNY, the "Banks"), BNY, as administrative agent (the "Administrative Agent"), and Chemical as
-33- collateral agent (the "Collateral Agent") (filed with the Commission as Exhibit 6 to the Company's Report on Form 8-K dated February 15, 1996). 10(iii) Fifth Amendment, dated as of February 13, 1996, to Amended and Restated Credit Agreement, dated as of April 12, 1995, as previously amended, among the Registrant, the Banks, the Administrative Agent and the Collateral Agent (filed with the Commission as Exhibit 7 to the Company's Report on Form 8-K dated February 15, 1996). 10(iv) Amendment No. 1 to Registration Rights Agreement, dated as of February 13, 1996 (the "Registration Rights Amendment"), to that certain Registration Rights Agreement, dated as of April 12, 1995, as amended, between the Registrant, BNY and Chemical (filed with the Commission as Exhibit 8 to the Company's Report on Form 8-K dated February 15, 1996). 10(v) Letter Agreement, dated May 9, 1996, between Charles S. Holmes and the Company (filed with the Commission as Exhibit 1 to the Company's Report on Form 8-K dated May 9, 1996). 10(vi) Amendment No. 1 to Employment Agreement, entered into as of August 8, 1996, between NAI Technologies, Inc. and Richard A. Schneider (filed with the Commission as Exhibit 10(I) to the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 28, 1996). 10(vii) Settlement Agreement and Release, entered into as of August 8, 1996, between NAI Technologies, Inc. and Richard A. Schneider (filed with the Commission as Exhibit 10(ii) to the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 28, 1996). 10(viii) 1996 Stock Option Plan (filed with the Commission as Exhibit 10(iii) to the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 28, 1996). 10(ix) 1993 Stock Option Plan for Directors, as amended (filed with the Commission as Exhibit 10(iv) to the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 28, 1996). 10(x) Employment Agreement, entered into as of January 1, 1997, between NAI Technologies, Inc. and Robert A. Carlson. 10(xi) Amendment No. 2 to Employment Agreement, entered into as of January 2, 1997, between NAI Technologies, Inc. and Richard A. Schneider. 10(xii) Settlement Agreement and Release, entered into as of December 19, 1996, between NAI Technologies, Inc. and Robert A. Carlson. 11 Statement re: Computation of Per Share Earnings. 17(i) Resignation letter of Robert D. Rosenthal, dated December 13, 1995, resigning from the Board of Directors of the Registrant (filed with the Commission as Exhibit 9 to the Company's Report on Form 8-K dated February 15, 1996). 17(ii) Resignation letter of John M. May, dated February 13, 1996, resigning from the Board of Directors of the Registrant (filed with the Commission as Exhibit 10 to the Company's Report on Form 8-K dated February 15, 1996). 21 List of Subsidiaries. 23 Independent Auditors' Consent. 27 Financial Data Schedules (Edgar filing only). 99(i) Press Release, dated February 15, 1996, describing the closing of the Investment Transaction and the Amendment (filed with the Commission as Exhibit 11 to the Company's Report on Form 8-K dated February 15, 1996). 99(ii) Pro Forma Consolidated Balance Sheets as of April 27, 1996 of NAI Technologies, Inc. and Subsidiaries (filed with the Commission as Exhibit 2 to the Company's Report on Form 8-K dated May 9, 1996).
-34- EX-10 2 EXHIBIT 10(X) Exhibit 10(x) EMPLOYMENT AGREEMENT This Employment Agreement, entered into as of the 1st day of January, 1997 by and between NAI Technologies, Inc., a New York corporation (the "Company"), and Robert A. Carlson (the "Executive"). 1. Termination of Prior Agreement. Upon the effectiveness of this Agreement, the prior agreement entered into by and between the Executive and the Company, dated as of October 16, 1995, shall be terminated in all respects and be superseded by this Agreement. 2. Employment and Duties. 2.1. Duties. Upon the terms and conditions herein set forth, the Company employs the Executive, and the Executive hereby agrees to serve as Chairman and Chief Executive Officer, effective January 1, 1997 (the "Effective Date"). The Executive shall devote his best efforts to such duties with the Company as the Board of Directors may direct. 2.2. Term. The term of the Executive's employment under this Agreement (the "Term") shall commence on the Effective Date and shall continue until December 31, 1997, unless extended by the Executive. On or within 30 days prior to each of January 1, 1998 and January 1, 1999, the Executive may extend the Term for a one year period (each an "Executive Extension"). Nothing in this Section 2.2, however, shall limit the right of the Company or the Executive to terminate the Executive's employment hereunder on the terms and conditions set forth in Section 4. 3. Compensation and Other Benefits. Subject to the provisions of this Agreement, the Company shall pay and provide the following compensation and other benefits for services rendered during the Term: 3.1. Salary. During the Term, the Executive shall be paid salary at a rate of $260,000 per annum ("Salary"), payable in substantially equal installments (not less frequently than monthly) in accordance with the Company's regular payroll practices. 3.2. Incentive Compensation. In addition to Salary the Company shall pay to Executive bonuses as follows: (a) $50,000 on each of January 15, 1998 and January 15, 1999, on the occurrence of an Executive Extension if the Executive agrees to continue in his role as Chairman of the Company (the "Chairman Bonus") until December 31, 1998 and December 31, 1999, respectively; (b) $50,000 on each of January 15, 1998 and January 15, 1999, on the occurrence of the Executive Extension if the Executive agrees to continue his employment as Chief Executive Officer of the Company (the "CEO Bonus" and, together with the Chairman Bonus, the "Bonus")until December 31, 1998 and December 31, 1999, respectively; and (c) subject to attaining the targets set forth annually by the Board of Directors, an annual bonus equal to fifty percent (50%) of Salary in a lump sum not later than March 31 of the year following the applicable year. This Bonus shall be paid in accordance with the terms of the Company's short-term incentive bonus program (the "Company Bonus Plan"). 3.3. Additional Benefits. At all times during the Term, Executive shall be eligible and participate in all employee benefit programs or plans now or hereafter provided for by the Company for its executive officers in accordance with the provisions, terms and any limitations thereof, including, without limitation, life insurance, health, disability and other fringe benefit plans. 3.4. Vacation. Executive shall be entitled to four (4) weeks of paid vacation for each twelve-month period of employment during the Term. 3.5. Automobile Allowance. The Company shall provide Executive with the use of a Company car and shall pay or reimburse Executive for all reasonable expenses incurred in connection with such car for repairs, fuel, maintenance and insurance, in accordance with the Company's automobile use policy as established by the Board of Directors from time to time. 3.6. Acknowledgement. Executive acknowledges that he is entitled to no other compensation or benefits other than those provided for in paragraphs 3.1 through 3.6 above, including, but not limited to, any compensation or benefits Executive has received or is receiving pursuant to any prior contract or other agreement between him and the Company. -2- 4. Termination of Employment. 4.1. Cause. "Cause" shall mean fraud, conflict of interest, willful malfeasance or willful misfeasance in office. 4.2. Good Reason. "Good Reason" shall mean: (a) without the express prior written consent of the Executive, a material diminution or limitation of the Executive's position, duties or responsibilities with the Company from those in existence on the Effective Date (or, if greater, the highest permanent-assignment level in effect thereafter) or the assignment to the Executive of duties inconsistent with the position, duties, responsibilities or status of the Executive as of the Effective Date (or, if greater, the highest permanent-assignment level in effect thereafter); or (b) any failure by the Company to pay, or any reduction by the Company of, the base Salary of the Executive as in effect on the Effective Date or as the same may be increased from time to time thereafter; or (c) the failure of the Company to provide the Executive with the opportunity to participate, on terms no less favorable than those existing on the Effective Date, in any incentive benefit, bonus or compensation, insurance, pension or other employee benefit plan of the Company in effect on the Effective Date (or plans and benefits which are, in the aggregate, no less favorable to the Executive than those the Executive enjoyed on the Effective Date) unless such failure results from the Company's termination or amendment of any such plan in response to a change in applicable statute or regulation, including any termination or amendment resulting from a materially adverse alteration of the tax treatment of any such plan to the Company or to plan participants; provided, however, that Good Reason shall not include any reduction in such benefit by the Company on a Company-wide basis. 4.3. Notice of Good Reason. Unless the Executive provides written notification of his intention to resign within twenty (20) business days after the Executive knows or has reason to know of the -3- occurrence of any such event constituting Good Reason, the Executive shall be deemed to have consented thereto and such event shall no longer constitute Good Reason for purposes of this Agreement. If the Executive provides such written notice to the Company, the Company shall have twenty (20) business days from the date of receipt of such notice to effect a cure of the event described therein and, upon cure thereof by the Company to the reasonable satisfaction of the Executive, such event shall no longer constitute Good Reason for purposes of this Agreement. 4.4.Termination For Cause; Resignation Without Good Reason. (a) Rights on Termination. If, prior to the expiration of the Term, the Executive's employment is terminated by the Company for Cause or the Executive resigns from this employment without Good Reason, the Executive shall be entitled to payment of his Salary accrued through the date of such termination or resignation, plus any accrued but unpaid vacation benefits. Except as may be provided by law or expressly provided under the term of any plan or arrangement applicable to the Executive, the Executive shall have no right under this Agreement or otherwise to receive any other compensation or benefits, or to participate in any other plan, arrangement or benefit, with respect to future periods after such termination or resignation of Effective. (b) Notice of Termination for Cause. Termination of the Executive's employment for Cause shall be communicated by delivery to the Executive of a copy of a resolution duly adopted by the Board finding that in the good faith opinion of the Board an event constituting Cause for termination in accordance with Section 4.1 has occurred and specifying the particulars thereof (a "Notice of Termination"). In the event of termination for Cause as a consequence of the events described in Section 4.1 or any other event described in Section 4.1 that the Board determines in good faith is not susceptible of cure, the effective date of termination shall be the date of the Notice of Termination or such later date as may be specified in such notice. In the event the Executive's employment is terminated for Cause (unless the Board has determined in good faith that the relevant event giving rise to Cause is not susceptible of cure), the Executive shall have twenty (20) business days from the date of receipt of such Notice of Termination to effect a cure of the event described therein and, upon cure thereof by the Executive to the reasonable satisfaction of the Board, such event shall no longer constitute -4- Cause for purposes of this Agreement. The effective date of termination for Cause that has been subject to a cure period as described in the immediately preceding sentence which did not result in a cure to the reasonable satisfaction of the Board shall be the date immediately succeeding the last date of the twenty (20) business day cure period. (c) Notice of Resignation Without Good Reason. The date of resignation by the Executive without Good Reason shall be the date specified in a written notice of resignation from the Executive to the Company. The Executive shall provide at least sixty (60) days' advance written notice of resignation. 4.5. Notice of Termination Without Cause. The date of termination of employment without Cause shall be the date specified in a written notice of termination to the Executive, provided that the Company shall provide at least twenty (20) business days' written notice of such termination. 4.6. Notice of Resignation for Good Reason. The date of resignation for Good Reason shall be the date specified in a written notice of resignation from the Executive to the Company, provided, however, that no such written notice shall be effective unless the twenty (20) business day cure period specified in Section 4.3 has expired without the Company having corrected, to the reasonable satisfaction of the Executive, the event or events. 4.7.Termination Without Cause; Resignation For Good Reason. (a) Severance Amount. If, prior to the expiration of the Term, the Executive's employment is terminated by the Company without Cause, or the Executive resigns from his employment for Good Reason, the Company shall pay to the Executive his Salary accrued up to and including the effective date of such termination or resignation, plus a pro rata share of unused vacation for the full year, plus a pro rata bonus under the Company Bonus Plan, if the Board in its sole discretion so determines, all in a lump sum. In addition, the Company shall pay the Executive (i) on the dates set forth in Section 3.2(a) and (b), the Bonus and if such termination should occur prior to December 31, 1997 (ii) in a lump sum, a severance payment equal to the greater of (A) his salary, at the -5- rate in effect at time of such termination or resignation, for the remainder of the Term and (B) one year's salary, at the rate in effect at the time of such termination or resignation (the "Severance Amount"). (b) Other Benefits. In the event of the Executive's termination without Cause or his resignation for Good Reason, the Executive shall continue to participate on the same terms and conditions as in effect immediately prior to such termination or resignation in each pension, life insurance, health, disability and other fringe benefit plan or program provided to the Executive pursuant to Sections 3.3 and 3.5 at the time of such termination or resignation until the earlier of (A) six (6) months following the date of such termination or resignation or, if the Executive is required to elect such benefits immediately following such termination or resignation, twelve (12) months following the date of such termination or resignation and (B) such time as the Executive is eligible to be covered by a comparable program of a subsequent employer. The Executive agrees to notify the Company promptly if he becomes eligible to participate in any pension or other benefit plans, programs or arrangements of another employer. Notwithstanding anything contained herein to the contrary, the Company shall have no obligation to continue to maintain any plan or program solely as a result of the provisions of this Agreement nor provide any level of benefits if applicable law either prevents the Executive from participating in any such plan or program or would cause the Company to suffer any loss of tax benefits as a consequence of the Executive's continued participation during the Term. (c) Automobile: If the Company has provided the Executive with the use of an automobile on a continuous basis prior to the termination without Cause or resignation for Good Reason, the Executive shall be given the option to purchase such automobile on the terms outlined in the Company policy with respect thereto at the value in effect two years after the date of the termination without Cause or resignation for Good Reason. 4.8. Termination Due to Death or Disability. (a) In the event of the Executive's disability, as hereinafter defined, or death, the Company shall be entitled to terminate his employment. If the -6- Executive's employment shall terminate due to disability or death, any Salary earned by the Executive up to the date of such termination and any pro rata bonus to that date shall be paid to the Executive or his estate, as appropriate. In addition, the Bonus due to the Executive shall be paid on the dates set forth in Section 3.2 to the Executive or his estate, as appropriate. (b) As used herein, the term "disability" shall mean physical or mental disability as a result of which the Executive is unable to perform his duties hereunder on substantially a full-time basis for any period of four (4) consecutive months. Any dispute as to whether or not the Executive is so disabled shall be resolved by a physician, reasonably acceptable to the Executive and the Board, whose determination shall be final and binding upon both the Executive and the Company. 5. Nondisclosure of Confidential Information. The Executive shall be bound by the confidentiality policy of the Company. The Executive shall not, except as may be necessary in the discharge of duties with the Company or as may be required by applicable law or regulations, disclose any confidential information, knowledge or data obtained by the Executive prior to the date of this Agreement or during the Executive's employment concerning the Company or the business of the Company so long as such information is not publicly available. 6. Arbitration. Any controversy or claim arising out of or relating to this Agreement or the breach of this Agreement that cannot be resolved by the Executive and the Company shall, at the instance of either the Executive or the Company, be submitted to arbitration in accordance with New York law and the procedures of the American Arbitration Association, with all hearings to be conducted in New York, New York. The determination of the arbitrator shall be conclusive and binding on the Company and the Executive and judgment may be entered on the arbitrator's award in any court having jurisdiction. 7. Legal Expenses. The Company shall pay all reasonable costs and expenses, including attorneys' fees and disbursements, of the Company and, at least monthly, the Executive in connection with any legal proceedings (in the case of the Executive any legal proceedings brought or maintained in good faith) (including, but not limited to, arbitration), whether or not instituted by the Company or the Executive, relating to the interpretation or enforcement of any provision of this Agreement. -7- 8. Assignability. The respective rights and obligations of the Executive and the Company under this Agreement shall inure to the benefit of and be binding upon the heirs and legal representatives of the Executive and the successors and assigns of the Company. The Executive's rights and obligations under this Agreement may not be assigned or alienated and any attempt to do so by the Executive shall be void. Any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business or assets of the Company, shall assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. The provisions of this Section 8 shall continue to apply to each subsequent employer of the Executive hereunder in the event of any subsequent merger, consolidation or transfer of assets of such subsequent employer. 9. Severability. If any provision of this Agreement is deemed to be invalid or unenforceable or is prohibited by the laws of the state or place where it is to be performed, this Agreement shall be considered to be divisible as to such provision and such provision shall be inoperative in such state or place and shall not be part of the consideration moving from either of the parties to the other. The remaining provisions of the Agreement, however, shall be valid and binding and of like effect as though such provision were not included. 10. Miscellaneous. This Agreement is to be construed and enforced in accordance with the internal substantive laws of the State of New York, irrespective of the principles of conflicts of law. The waiver of any breach of this Agreement by any party shall not be construed as a waiver of any subsequent breach by any party. This Agreement may not be changed orally, but only by an agreement in writing signed by the parties to this Agreement. -8- IN WITNESS WHEREOF, the Company and the Executive have executed this Agreement as of the day and year first above written. NAI TECHNOLOGIES, INC. ROBERT A. CARLSON By:/s/ Richard A. Schneider /s/ Robert A. Carlson ------------------------ ---------------------- Title:Executive Vice President Treasurer and Secretary -9- EX-10 3 EXHIBIT 10(XI) Exhibit 10(xi) AMENDMENT NO. 2 TO EMPLOYMENT AGREEMENT This Amendment No. 2 to Employment Agreement, entered into as of the 2nd day of January, 1997 (this "Amendment"), by and between NAI Technologies, Inc., a New York corporation (the "Company"), and Richard A. Schneider (the "Executive"). The Company and the Executive have entered into an Employment Agreement, dated as of October 16, 1995 (the "Employment Agreement") as amended by Amendment No. 1 to the Employment Agreement, dated as of August 8, 1996, and the Company and the Executive desire to amend the Employment Agreement. A. Amendment of Section 3.1. Pursuant to Section 11 of the Employment Agreement, Section 3.1 of the Employment Agreement shall be deleted in its entirety, as of the date hereof, and replaced with the following language: "3.1 Salary. During the Term, the executive shall be paid salary at a rate of $180,000 per annum ("Salary"), payable in substantially equal installments (not less frequently than monthly) in accordance with the Company's regular payroll practices." B. Amendment of Section 3.2. Pursuant to Section 11 of the Employment Agreement, Section 3.2 of the Employment Agreement shall be deleted in its entirety, as of the date hereof, and replaced with the following language: "3.2. Incentive Compensation. In addition to Salary, and subject to attaining the targets set forth annually by the Board of Directors, the Company shall pay to Executive an annual bonus (the "Bonus") equal to forty percent (40%) of Salary in a lump sum not later than March 31 of the year following the applicable year. The Bonus shall be paid in accordance with the terms of the Company's short-term incentive bonus program." C. Effect of this Amendment. This constitutes the entire agreement of the parties with respect to the subject matter hereof, and supersedes all prior oral or written communications, memoranda, proposals, negotiations, discussions and commitments with respect to the subject matter hereof. Except as otherwise expressly provided herein, no other changes or modifications to the Employment Agreement are intended or implied, and in all other respects the Employment Agreement is hereby specifically ratified, restated and confirmed by all parties hereto as of the effective date hereof. To the extent that any provision of the Employment Agreement conflicts with any provision of this Amendment, the provision of this Amendment shall control. D. Assignability. The respective rights and obligations of the Executive and the Company under this Amendment and the Employment Agreement shall inure to the benefit of and be binding upon the heirs and legal representatives of the Executive and the successors and assigns of the Company. E. Miscellaneous. This Amendment is to be construed and enforced in accordance with the internal substantive laws of the State of New York, irrespective of the principles of conflicts of law. The waiver of any breach of this Amendment by any party shall not be construed as a waiver of any subsequent breach by any party. This Amendment may not be changed orally, but only by an agreement in writing signed by the parties to this Amendment. IN WITNESS WHEREOF, the Executive has executed this Amendment and the Company has caused this Amendment to be executed by a duly authorized officer and to become effective as of the day and year first above written. NAI TECHNOLOGIES, INC. By:/s/ Robert A. Carlson /s/ Richard A. Schneider --------------------- ------------------------ Name: Robert A. Carlson Richard A. Schneider Title: Chairman and Chief Executive Officer -2- EX-10 4 EXHIBIT 10(XII) Exhibit 10(xii) SETTLEMENT AGREEMENT AND RELEASE This Settlement Agreement and Release (this "Agreement") is entered into between NAI Technologies, Inc., a New York corporation (the "Company"), and Robert A. Carlson, Chairman and Chief Executive Officer of the Company ("Mr. Carlson"). WITNESSETH: WHEREAS, Mr. Carlson is an "Eligible Employee" and a "Participant" in the NAI Technologies, Inc. Supplemental Retirement Plan effective January 1, 1991 (the "SERP"); WHEREAS, the Company seeks to (1) terminate Mr. Carlson's designation as an "Eligible Employee" and a "Participant" under the SERP and (2) redeem Mr. Carlson's interest in the SERP for $800,000; and WHEREAS, Mr. Carlson is willing to waive his right to any benefits under the SERP in consideration of the payment to him of $800,000, payable at the rate of $200,000 per quarter beginning on February 15, 1997. NOW, THEREFORE, in consideration of the premises and the mutual promises, covenants and agreements hereinafter contained, the parties, intending to be legally bound hereby, agree as follows: 1. Payment. The Company will pay Mr. Carlson the amount of $800,000, payable by check in four equal installments of $200,000 on each of the following dates: a) February 15, 1997; b) May 15, 1997; c) August 15, 1997; and d) November 15, 1997. 2. Waiver and Release. Mr. Carlson hereby waives his right to any benefit under the SERP and releases and discharges the Company and the Administrator of the SERP (the "Administrator") and each of their officers, directors, shareholders, employees, agents, representatives, attorneys, affiliates, successors and assigns, if any, and each of them, from any and all claims, controversies, suits, counterclaims, setoffs, debts, dues, sums of money, judgments, damages, accounts, reckonings, obligations, liabilities, demands, actions and causes of action of any nature whatsoever, at law or in equity, known or unknown, realized or unrealized, past or present, actual, potential or contingent, however arising from any events, facts, circumstances or occasion, which Mr. Carlson or his heirs and legal representatives now has, ever had or may have against the Company or the Administrator relating to or arising out of the obligations of the Company to Mr. Carlson under the SERP. 3. Representations and Warranties. The Company represents to Mr. Carlson that: (a) Corporate Existence and Power; Authorization. (1) The Company is a corporation duly incorporated, validly existing and in good standing under the laws of the jurisdiction of its incorporation and has all necessary corporate power and authority to execute and deliver this Agreement and (2) the execution and delivery by the Company of this Agreement and the performance by it of its obligations under this Agreement have been duly authorized by all necessary corporate action and do not and will not contravene, violate, result in a breach of or constitute a default under, its articles of incorporation or certificate of incorporation, as the case may be, or its bylaws. The Company further represents to Mr. Carlson and Mr. Carlson represents to the Company that: (b) Contravention. The execution and delivery by the representing party of this Agreement and the performance by it of its obligations under this Agreement do not and will not contravene, violate, result in a breach of or constitute a default under any law, rule, regulation, judgment, decision, ruling, order, award, injunction or other official action of governmental body or arbitrator (collectively, "Regulations") applicable to its business, properties or operations or any agreement, indenture or other instrument to which it is a party or that is applicable to its business, properties or operations. (c) Approvals. The representing party has obtained each authorization, consent, approval or waiver of, clearance by, notice of registration or filing with, or other similar action by or with any governmental body or other person that is required or advisable on the part of the representing party for the due execution and delivery by it of this Agreement and the performance by it of its obligations under this Agreement. (d) Litigation. There is no action, suit, investigation, complaint or other proceeding pending, or to its knowledge, threatened against the representing party or any other person in which injunctive or other equitable relief of any nature is sought to restrain, enjoin or prohibit the exercise by any party of its rights under this Agreement or the performance by any party of its obligations under this Agreement or in which money or other damages are sought based in whole or in part on the exercise by any party of its rights under this Agreement or -2- the performance by any party of its obligations under this Agreement. (e) Due Execution and Delivery; Binding Effect. This Agreement has been duly executed and delivered by the representing party and is the legal, valid and binding obligation of the representing party, enforceable against it in accordance with its terms. (f) No Assignment of Claims. The representing party has not sold, assigned or transferred to any other person any claim or rights that it has, had or might have concerning the released claims or the subject matter of this Agreement. (g) Knowing Execution. The representing party has read and reviewed this Agreement, understands this Agreement, has consulted with legal counsel concerning this Agreement and has executed this Agreement voluntarily and knowingly. 4. Miscellaneous. (a) Binding Effect. The provisions of this Agreement shall be binding upon and inure to the benefit of the heirs and legal representatives of Mr. Carlson and the successors and assigns of the Company. (b) Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original, with the same effect as if all signatures were on the same instrument. (c) Entire Agreement. This Agreement represents the entire understanding and agreement between the parties hereto and supersedes all prior negotiations, understandings and agreements with respect to the subject matter hereof. (d) Amendments, Etc. No amendment, modification, termination or waiver of any provision of this Agreement, and no consent to any departure by a party from any provision of this Agreement, shall be effective against any party adversely affected by such modification, termination, waiver or consent unless it shall be in writing and signed and delivered by such other party, and then it shall be effective only in the specific instance and for the specific purpose for which it is given. (e) Governing Law. This Agreement shall be governed by and construed in accordance with the substantive law of the State of New York, without regard to any law, rule or the legal principles of the State of New York concerning choice or conflicts of law. (f) Headings and References. Section headings in this Agreement are included for convenience of reference only and do not constitute a part of this Agreement for any other purpose. References to parties and sections in this Agreement are references to the parties to this Agreement or sections of this -3- Agreement, as the case may be, unless the context shall require otherwise. (g) Further Assurances. Each party shall at the request of the other party do and perform or cause to be done and performed all such further acts and furnish, execute and deliver such other instruments and documents as the requesting party shall reasonably require to consummate the transactions contemplated by this Agreement. IN WITNESS WHEREOF, the parties to this Agreement have duly executed this Agreement as of the 19th day of December, 1996. NAI TECHNOLOGIES, INC. By:/s/ Richard A. Schneider ------------------------- Name: Richard A. Schneider Title: Executive Vice President, Treasurer and Secretary /s/ Robert A. Carlson ---------------------------- ROBERT A. CARLSON -4- EX-11 5 EXHIBIT 11 Exhibit 11 STATEMENTS RE: COMPUTATION OF EARNINGS PER SHARE
- -------------------------------------------------------------------------------- Year Ended December 31, (in thousands) 1996 1995 - -------------------------------------------------------------------------------- Net Income (loss) $ 2,413 ($11,619) Average shares of common stock outstanding during the period 8,268 7,382 Incremental shares from assumed exercise of stock options, stock warrants & employee stock purchase plan (primary) 302 2 Total shares used to calculate PEPS* 8,507 7,382 ------ -------- Primary earnings per share $ 0.28 ($1.57) ====== ======== Net Income (loss) $2,413 ($11,619) Interest on Convertible Debt (net of taxes) 710 0 Amortization of OID (net of taxes) 118 0 Amortization of deferred debt expense (net of taxes) 456 0 ------ -------- Adjusted Net Income $3,697 ($11,619) ====== ======== Average shares of common stock outstanding during the period 8,268 7,382 Incremental shares from assumed exercise of stock options, stock warrants & employee stock purchase plan (fully diluted) 519 0 Dilution from Convertible Debt 2,613 0 Total shares used to calculate FDEPS* 11,400 7,382 ------ ----- Fully diluted earnings per share $0.32 ($1.57) ====== ======
* Per APB 15, when a net loss is reported, exercise or conversion is not to be assumed. -35- EX-21 6 EXHIBIT 21 Exhibit 21 LIST OF SUBSIDIARIES -------------------- The following are subsidiaries of the Company, respective jurisdictions of their incorporation and names (if any) under which they do business. The Company owns all of the voting securities of each subsidiary. Jurisdiction of Name Under Which Name Incorporation Subsidiary Does Business - ------------------------------------------------------------------------------- NAI Technologies-- New York NAI Systems Division Systems Division Corporation Wilcom, Inc. New York Wilcom, Inc. Lynwood Scientific United Kingdom Lynwood Developments Ltd. Codar Technology, Inc. Colorado Codar -36- EX-23 7 EXHIBIT 23 Exhibit 23 Independent Auditors' Consent ----------------------------- The Board of Directors NAI Technologies, Inc.: We consent to incorporation by reference in the registration statements (Nos. 33-46868, 33-57324, 33-66666, 33-66664, 333-3837 and 333-11993) on Form S-8 of NAI Technologies, Inc. of our reports dated February 7, 1997, relating to the consolidated balance sheets of NAI Technologies, Inc. and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1996, and related financial statement schedule, which reports appear in the December 31, 1996, annual report on Form 10-K of NAI Technologies, Inc. KPMG Peat Marwick LLP Boulder, Colorado March 12, 1997 -37- EX-27 8 EXHIBIT 27
5 1,000 12-MOS DEC-31-1996 DEC-31-1996 2,605 0 13,735 0 11,995 29,532 13,031 (7,680) 48,012 19,488 15,573 746 0 0 9,340 48,012 60,008 60,008 55,100 68,883 0 0 2,367 (11,242) 377 (11,619) 0 0 0 (11,619) (1.57) 0
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