-----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, TWj6sa36f1ri+6lIw/kbD01bCuPjZual3eL/Km74Qy7QM+4GxCwQgDLDkWKAvs8I AOuY8H5VnQt+VgBLQNsE6A== 0000950117-98-000440.txt : 19980302 0000950117-98-000440.hdr.sgml : 19980302 ACCESSION NUMBER: 0000950117-98-000440 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980227 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: SEC FILE NUMBER: 000-03704 FILM NUMBER: 98551185 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, INC. 10-K405 (Conformed copy) UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Fiscal Year Ended December 31, 1997 OR [ ] Transaction Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Commission File Number 0-3704 NAI TECHNOLOGIES, INC. A New York Corporation IRS Employer I.D. No. 11-1798773 282 New York Avenue, Huntington, New York 11743 Telephone No. (516) 271-5685 Securities Registered Pursuant to Section 12(b) of the Act: None Securities Registered Pursuant to Section 12(g) of the Act: Common Stock, Par Value $0.10 Per Share Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. (X) As of February 25, 1998, 9,155,427 shares of common stock were outstanding. The aggregate market value of the shares of common stock (based on the average bid and asked price of these shares on The Nasdaq Stock Market as of February 25, 1998) of NAI Technologies, Inc. held by non-affiliates was approximately $18 million. Documents Incorporated by Reference: None. Page 1 of 32 NAI TECHNOLOGIES, INC. 1997 FORM 10-K ANNUAL REPORT TABLE OF CONTENTS
Page ---- PART I Item 1. Business................................................................................3 Item 2. Properties..............................................................................10 Item 3. Legal Proceedings.......................................................................11 Item 4. Submission of Matters to a Vote of Security Holders.....................................11 PART II Item 5. Market for Registrant's Common Stock and Related Stockholder Matters.........................................................12 Item 6. Selected Financial Data.................................................................13 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.....................................................14 Item 8. Consolidated Financial Statements and Supplementary Data................................20 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.....................................................20 PART III Item 10. Directors and Executive Officers of the Registrant......................................21 Item 11. Executive Compensation..................................................................23 Item 12. Security Ownership of Certain Beneficial Owners and Management.........................26 Item 13. Certain Relationships and Related Transactions..........................................28 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.............................................................................29
-2- PART I ITEM 1. BUSINESS The Company through its wholly owned subsidiaries designs, manufactures and markets rugged computer systems, advanced peripheral products, intelligent terminals, high performance workstations, TEMPEST computer systems (which suppress certain radiation to prevent external detectors from reading the data being transcribed) and telecommunications test equipment and transmission products. The Company operates in three distinct operating segments: a Rugged Systems segment, a Systems Integration segment and a Telecommunications segment. The Rugged Systems segment provides rugged computer products specifically designed for deployment in harsh environments that require special attention to system configurations. This segment's customer base includes the U.S. and foreign armed services and some commercial applications. The Systems Integration segment provides custom packaged, integrated computer systems and peripherals and sells primarily to the U.S. intelligence agencies. The Telecommunications segment provides transmission enhancement products and rugged, hand-held test equipment for analog, digital and fiber-optic communications and data-interchange networks. This segment's customer base includes the regional Bell operating companies and independent telephone companies. The Company's strategy is to be a leading supplier of high quality, innovative products, systems and services to satisfy specialized customer requirements in niche information technology and telecommunications markets, especially in environments with harsh operating requirements. RUGGED SYSTEMS SEGMENT The Rugged Systems segment is comprised of two operating subsidiaries as follows: Codar Technology, Inc., located in Longmont, Colorado ("Codar"); and Lynwood Rugged Systems Limited, based in Farnham, United Kingdom ("Lynwood"). Codar. Codar is a leading supplier of rugged computer systems to the U. S. Department of Defense (DOD), primarily through the major U. S. prime contractors, as well as to various overseas defense establishments. Providing rugged system solutions requires Codar to maintain the design, manufacturing and integration capabilities "in house" so as to be able to respond to unique customer requirements. These custom and semi-custom designs are deployed throughout the full spectrum of defense platforms and applications. Codar's technology/product lines are predominantly focused on high performance computer workstations and displays using the latest commercial-off-the-shelf (COTS) technologies. The computer processor technology incorporated into Codar products ranges from Intel's Pentium/Pentium Pro to DEC's Alpha to Sun Microsystems' UltraSPARC II. The high performance display products use the latest in CRT and LCD flat panel technologies. In order to address the defense market employing COTS electronics, Codar designs into each product the basic capability to survive in the hostile environments that normally exist in most defense related platforms. Codar's designs allow the COTS electronics to survive in harsh environments that include temperature and -3- humidity extremes, sand, dust, high shock and severe vibration. Because of their frequent use in command, control, communication, computer and intelligence (C4I) applications, all of Codar's systems are also designed to provide Electromagnetic Interference (EMI) protection. Additional requirements for specific applications are addressed through modification to existing designs or through new designs. In 1997, Codar designed a sunlight readable flat panel monitor to meet a U.S. submarine requirement that would allow it to operate while temporarily submerged. Codar has developed families of equipment to allow for the flexible development of integrated solutions, an approach now being embraced by the leading commercial computer manufacturers. An excellent example of this approach is Codar's offerings under the US Army's Common Hardware/Software (CHS-2) program, a contract which provides the basic hardware/software infrastructure for the Force XXI "digitization of the battlefield" initiative. Codar provides eight different pieces of rugged equipment, all qualified to one well-defined set of specifications. The equipment includes three different rackmounted computer chassis, a rackmounted mass memory expansion chassis, three different displays (one CRT and two LCD flat panels) as well as a fully integrated portable workstation with keyboard and display. Each computer and expansion chassis can be populated with an approved "menu" of configurations and options. This wide assortment of equipment allows the US Army users to select system configurations that truly address their identified needs in the field. Lynwood. Lynwood is a supplier of rugged commercial-off-the-shelf (COTS) computer hardware products, systems and services to the defense market. Each piece of commercial hardware is adapted, protected and presented in a rugged form that enables it to meet individual customer requirements and/or specific military tests and standards. Typically these standards relate to satisfactory performance in extremes of temperature, humidity, altitude, vibration and shock, together with environmental and electromagnetic criteria. A specialist in the design, development and implementation of rugged COTS hardware for land, sea and airborne forces, Lynwood is based in the UK and actively represented in Europe, Scandinavia, Australia and Southeast Asia, where it also provides a gateway to these markets for Codar and Systems. In 1997 Lynwood established an Australian subsidiary, Lynwood Rugged Systems Australia (RSA) in response to a growing demand for rugged equipment for existing and new programs in the Region. During 1997 Lynwood RSA received two significant orders, one for a maintenance contract in support of the Australian Army Tactical Command Support System (AUSTACSS), which Lynwood has supplied since 1995, and a second order, from a leading US defense company, for the manufacture of Explorer II workstations. During 1997 Lynwood continued to upgrade its capabilities by expanding the Engineering Division's in-house environmental test facilities and by installing secure facilities for the special testing of secure communication systems. These investments extend Lynwood's ability to deliver rugged systems and to undertake a comprehensive range of specialist services, including requirements analysis, system design, prototyping and cabling, installation and commissioning of secure and TEMPEST sites. A founding member of the UK Industrial TEMPEST Scheme, Lynwood works to specified procedures and operates a quality system accredited to ISO 9001. Versatility and superior performance are the hallmarks of Lynwood's successful rugged systems solutions, which are incorporated into many high profile defense programs. Examples include the MC60/VME rugged computer system and FPR 16" rugged flat panel display, which form the rugged hardware element of the RAF Harrier Jet portable data preparation station. Lynwood is the rugged hardware systems integrator for the British Army Attack Helicopter (Apache) ground support system (GSS) and it also supplies the integrated rugged hardware solution in support of the RAF Chinook Helicopter Fleet's generic -4- health and usage monitoring system (GHUMS). Contract awards during 1997 have solidified Lynwood's status as a primary supplier of rugged COTS systems to the Swedish Army, which utilizes rugged multi-platform computers in different configurations in related mobile tactical communications and information systems, TS9000 and ATLE IS, respectively. The FPR 20" rugged flat panel is utilized in the Royal Navy's Command Support System (CSS), and the rugged hardware for the Royal Navy's Submarine Fleet's DCG Re-host tactical support system was designed, developed, tested and installed within sixteen months under contract to BAeSEMA. During 1997 the Directorate General of Information and Communication Services (DGICS) of the Ministry of Defense established an enabling agreement with Lynwood for services relating to a variety of specialist secure communications systems across all MOD sectors and locations. In response to market needs, several new products are in development for launch in 1998. These include the EXPLORER NT rugged portable workstation, a new variant of the Explorer II supporting Digital's Alpha and Intel's Pentium II processors. The Explorer II is in service around the world, used in applications ranging from army tactical command support systems to aircraft portable maintenance aids. The GENESIS 300 rugged multi-platform computer, a variant of the Genesis SR (short rack) will feature an integral 12" screen and keyboard. Since its launch in 1997 the Genesis SR, which supports applications such as mission planning, tactical communications, combat support and logistics support, has been sold into programs in Europe, Scandinavia and the Far East. The OPUS 16 rugged flat panel with computer, a 16" flat panel display with single board Intel computer housed in a rugged rackmount or portable enclosure, will join the extensive FPR range of rugged flat panel colour displays. LYNWOOD's fixed, rackmount or portable FPR panels, with 12", 13", 16" and 20" displays, currently operate in a variety of land, airborne, surface vessel and submarine environments. SYSTEMS INTEGRATION SEGMENT The Systems Integration segment currently consists of one operating company: NAI Technologies-Systems Division Corporation, based in Columbia, Maryland ("Systems Division"). The core business of the Systems Division is providing custom-packaged integrated computer systems for deployment in land vehicles, ships, shelters and other demanding environments including unique physical packaging requirements such as compact size, low weight, specialized air flow and rack mounting. The Systems Division's products are also designed to withstand a wide variety of adverse environmental conditions including high levels of shock and vibration, temperature and humidity extremes, limitations on electromagnetic emissions and operation at high altitudes. Also, because the systems are often deployed in remote field sites, many of them are designed for unattended operation and all are designed for fast, easy maintenance in the field. The Systems Division markets directly to various U.S. Government agencies, primarily in the intelligence community. The breadth of the division's technical expertise combined with its systems support capabilities and its excellent track record have earned the division "trusted supplier" status with these agencies. In addition to its direct relationships with government customers, the division also works in partnership with leading prime contractors such as Lockheed Martin, General Telephone and Electronics and Booz-Allen. These partnerships include a variety of contractual relationships ranging from subcontractor to teammate depending on the nature of the work involved and the scope and term of the contract. The Systems Division's technical expertise includes "industry standard" computer architectures such as ISA/EISA, PCI, Multibus, VME and S Bus. Software experience includes DOS/Windows, Unix and Real-time operating systems. All of the Systems Division's products are designed around commercial-off-the-shelf components. Because of this, the division actively develops and maintains partnerships with key -5- technology vendors in the computer industry such as Intel Corporation, Sun Microsystems, Motorola, Hewlett Packard, Ross Technologies and many others. The Systems Division not only provides general-purpose computer systems for deployment in unique environments, but also designs and integrates special purpose systems configured specifically for a variety of target applications. Among these application specialties are communications processing; data acquisition, storage and forwarding; digital signal processing; client/server systems and embedded processing. The division also provides specially packaged monitors, keyboards, printers and peripheral subsystems that are used in conjunction with its computer systems. As a result of budget pressures and downsizing, many government agencies have begun to outsource some of the support services that had previously been performed in-house. The Systems Division, as a trusted supplier with an installed base of several thousand systems, has been well positioned to provide these services. In addition to the deployable computer platforms that represent its core business, the division now also provides support services such as configuration management, testing, sparing, maintenance and life cycle support. TELECOMMUNICATIONS SEGMENT The Telecommunications segment currently consists of one operating company: Wilcom, Inc. ("Wilcom"), located in Laconia, New Hampshire. Wilcom designs, manufactures and markets products for use in the worldwide telephone industry. The majority of Wilcom's business comes from the Regional Bell Operating companies and the larger independent telephone companies around the world. The product line is focused on two market segments; test instrumentation for testing analog, optical and digital transmission systems over fiber and copper cable, and telephone transmission products which are used primarily to enhance and improve the quality and/or speed of voice, video and digital data transmission over copper cables. The test equipment product line has historically been focused on the analog and digital technology but in recent year's fiber optics has been the fastest growing segment. Wilcom continues to expand the fiber optic product line with a focus on rugged portable hand-held products offering reliability and ease of use. The 1997 additions included the FM8515C High Power optical meter, the FS8514 Dual Wavelength optical source and the F6230SC Visual Fault locator. Wilcom also introduced a range of application specific fiber optic Test Kits for optical loss testing and optical fault locating. In addition, Wilcom plans to announce a new line of intelligent fiber optic products starting in 1998. Wilcom's telephone transmission enhancement products which includes the analog line treatment equipment ("LTE") and the enhanced line powered amplifier ("ELPA") continues to be in demand for the expressed purpose of improving voice quality, increasing data transmission speeds when using dial-up analog modems, and under certain conditions, enhancing the utilization of copper wire lines for broadband signal transmission applications. The proliferation of high-speed analog modems has made the need for better quality phone lines an important issue in the increasingly competitive communications industry. Wilcom's products provide the telephone companies with the opportunity to offer additional services in voice, data and video transmissions over their existing copper networks until broadband digital systems become more readily available. -6- MARKETING AND SERVICE The Company sells its products directly to customers and through distributors and serves as a subcontractor to larger prime contractors serving the same customer base. The Company's products are marketed to customers through sales personnel, manufacturers' representatives and distributors. The Company maintains sales offices and sales support in Columbia, Maryland; Westlake Village, California; Longmont, Colorado; Laconia, New Hampshire; Australia; England; and Israel. The Company provides maintenance and field service for its products through its customer service departments located at each of its manufacturing facilities and at certain customer sites. Some distributors also perform field service for printers. The Company's representatives in Australia, Denmark, England, France, Germany and Israel perform most overseas service. CUSTOMERS During 1997 and 1996, sales under contracts with the U.S. Government were approximately 25% and 30%, respectively, of the Company's net sales. The U.S. Government and one other customer each accounted for more than 10% of the Company's sales in 1997 and 1996. The Company's sales are affected by the U.S. defense budget. With continuing discussions on budget cuts, it is difficult to assess what the impact of budget cuts, if any, will be on the Company. It appears that defense outlays will be reduced from past levels. The Company is unaware of any targeted cuts specifically affecting programs using its products. The Company's products are utilized on many different programs. However, changed U.S. Government spending levels could impact the Company's future sales levels. No single U.S. Government contract accounted for greater than 10% of the Company's sales in 1997 or 1996. -7- FOREIGN SALES Foreign sales in 1997 and 1996 accounted for approximately 33% and 24%, respectively, of total sales. Such sales, which exclude products sold to the U.S. Government and resold by the U.S. Government for foreign military use, are made primarily to customers in Australia, Canada, Hong Kong, Israel, the United Kingdom, Norway and Western Europe. The Company's foreign sales are comprised of export sales from the U.S. and foreign revenues from Lynwood. All export sales from the U.S. are payable in U.S. dollars and, therefore, settlement amounts do not fluctuate with changes in exchange rates. All of Lynwood's sales are payable in British currency. Fluctuations in exchange rates between the U.S. dollar and the British pound will impact the Company's operating results. No single country, with the exception of the United Kingdom (47% in 1997 and 70% in 1996) , Australia (10% in 1997 and 18% in 1996), and Norway (28% in 1997 and less than 5% in 1996) accounted for more than 5% of the Company's foreign sales in any of the past two years. Foreign sales for the past three years have been as follows: APPROXIMATE TOTAL PERCENT OF FOREIGN SALES COMPANY SALES ------------- ------------- 1997...............................$17,230,000 33% 1996...............................$16,154,000 24% 1995...............................$12,679,000 21% BACKLOG The Company's backlog of orders was $26.9 million at December 31, 1997. Of this amount, 14% represents orders for U.S. military sales. Such orders are subject to termination at the convenience of the U.S. Government with negotiated settlements in which the Company seeks to recover its costs and a reasonable profit. Certain other orders, when subject to cancellation or return, are handled with a restocking charge or by negotiated settlement. While the Company's backlog is not subject to seasonal factors, it does fluctuate due to timing of orders. The Company expects to produce and ship approximately 48% of its current backlog of orders before the end of 1998. COMPETITION The Company's business is highly competitive. Many suppliers in the Company's markets are significantly larger than the Company in terms of total sales and assets, and many devote significantly more resources to the development of new products than does the Company. The Company searches for certain market niches where it has expertise and can compete successfully. Competition for the Company's products is based principally on reliability, performance, price and diversity of the products offered. -8- RESEARCH AND DEVELOPMENT The Company's technological base is characterized by rapid change. As a result, maintenance and expansion of the Company's businesses are partially dependent upon the success of the Company's programs to develop new products and upgrade existing products. The Company's engineering resources have been devoted to the development of new products in every major category of its business. During the years 1997, 1996 and 1995, the Company's total engineering expenditures were $3,332,000, $3,929,000 and $7,264,000, respectively. Due to the extensive use of COTS-based equipment in the Company's products, the Company's cost of independent research in pursuit of new products and improvements to existing products has declined during the years 1997, 1996 and 1995 to approximately $1,517,000, $1,639,000 and $1,807,000, respectively. Customer-funded engineering included in cost of sales or inventory, as a contract cost was $1,815,000 in 1997, $2,290,000 in 1996 and $5,457,000 in 1995. PATENTS AND TRADEMARKS The Company owns patents and trademarks and seeks patent protection for its products in cases where the Company believes the technology involved is sufficiently innovative to warrant such protection. The Company seeks trademark protection for its products in cases where the Company believes for marketing reasons such protection is warranted. The Company seeks to protect its proprietary information through its reliance on patent, copyright, trademark and trade secret laws, non-disclosure agreements with its employees and confidentiality provisions in licensing arrangements with its customers. There is no assurance that such agreements will be effective to protect the Company or that the proprietary information deemed confidential by the Company will be adequately protected by the law respecting trade secrets. Consequently, it may be possible for unauthorized third parties to copy certain portions of the Company's products or to "reverse engineer" or otherwise obtain the Company's proprietary rights. Moreover, the laws of some foreign countries do not afford the same protection provided by U.S. laws to the Company's proprietary rights. GOVERNMENT REGULATION The Company is subject to the Federal acquisition regulations governing the issuance of government contracts, Federal Trade Commission regulations governing its advertising and trade practices, Department of Commerce regulations as well as Department of State Defense Trade Control regulations with respect to goods it imports and exports, and the Truth in Negotiations Act, which provides for the examination by the U.S. Government of cost records to determine whether accurate pricing information was disclosed in connection with government contracts. To date, such government regulations have not had a material adverse effect on the Company's business. The Company in the normal course of business is subject to Department of Defense audits with respect to its government contracts, some of which may result in pricing adjustments. The Company's manufacturing operations are subject to various federal, state and local laws that regulate the discharge of materials into the environment, or otherwise relating to the protection of the environment. To date, compliance with such government regulations has not had a material adverse effect on the Company's business. -9- MANUFACTURING AND SUPPLIERS Production of the Company's products requires assembly and testing of components, printed circuit boards and other purchased parts. Quality control, testing and inspection are performed at various steps throughout the manufacturing process. The Company purchases certain materials and components used in its systems and equipment from independent suppliers. These materials and components are not normally purchased under long-term contracts. The Company purchases minicomputers, workstations, personal computers, mass storage subsystems, high-resolution monitors and keyboards under OEM agreements. The Company believes that most of the items it purchases may be obtained from a variety of suppliers and it normally obtains alternative sources for major items. The Company is dependent on a single supplier or a few suppliers for some items from time to time. The Company believes it is in good standing with all of its vendors. EMPLOYEES At December 31, 1997, the Company had approximately 194 employees. The Company has never experienced a work stoppage and a union represents none of its employees. The Company believes its relationship with its employees is good. ITEM 2. PROPERTIES The Company's facilities, which are believed to be adequate to meet the Company's foreseeable needs, are set forth in the following table:
FACILITIES APPROXIMATE FLOOR AREA EXPIRATION DIVISION OR SUBSIDIARY LOCATION (IN SQ. FT.) DATE - ---------------------- -------- ------------ ---------- Rugged Systems Segment - ---------------------- Codar Longmont, Colorado 42,000 (leased) November 1, 1999 Systems Columbia, Maryland 25,000 (leased) November 30, 2001 Lynwood Farnham, England 26,000 (leased) December 25, 2014 Systems Integration Segment - --------------------------- Systems Columbia, Maryland 25,000 (leased) November 30, 2001 Telecommunications Segment - -------------------------- Wilcom Laconia, New Hampshire 52,000 (owned) --
The Company also leases several small sales offices. The Company's corporate office located in Huntington, New York is leased on a short-term basis. The Company pays approximately $1,072,000 per annum for the rental of all its facilities. -10- ITEM 3. LEGAL PROCEEDINGS None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. -11- PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS The Company's Common Stock trades on The Nasdaq Stock Market under the symbol NATL. The table below sets forth for the periods indicated the high and low sale prices for the Common Stock as adjusted for stock dividends and stock splits as compiled from published sources. Period High Low ------ ---- --- 1997 First Quarter $5.19 $3.50 Second Quarter 5.56 4.50 Third Quarter 5.50 3.25 Fourth Quarter 3.63 1.75 1996 First Quarter $2.25 $1.50 Second Quarter 3.88 2.06 Third Quarter 3.88 3.19 Fourth Quarter 3.94 2.75 There have been no cash dividends declared or paid on the Common Stock in 1997 and 1996. The Company's existing credit agreement restricts cash dividends. As of December 31, 1997, there were approximately 600 record holders of Common Stock, as determined from the records of the transfer agent, American Stock Transfer & Trust Company. Street names are included collectively as a single holder of record. Management estimates that the Company has approximately 2,000 additional shareholders holding stock in street names. THE WARRANTS The Company has issued and outstanding warrants (the "Warrants") to purchase 4,112,700 shares of Common Stock of the Company at an exercise price of $2.50 per share, subject to adjustment, exercisable on or prior to February 15, 2002. The Warrants trade on the Nasdaq SmallCap Market under the symbol NATLW. As of December 31, 1997, there were approximately 40 record holders of Warrants as determined from the records of the warrant agent, American Stock Transfer & Trust Company. THE NOTES The Company has issued and outstanding 12% Convertible Subordinated Promissory Notes due January 15, 2001, in the aggregate principal amount of $5,122,500 (the "Notes") at December 31, 1997. The Notes are convertible into shares of Common Stock at a conversion price of $2.00 per share, subject to adjustment. The Notes are quoted on the Yellow Sheets of the National Quotations Bureau under the symbol NAI TECH INC 12-2001. As of December 31, 1997, there were approximately 27 record holders of the Notes as determined from the records of the trustee, First Trust National Association. The Notes and Warrants were issued by the Company in a private placement of the Notes and Warrants on February 15, 1996, February 23, 1996, February 29, 1996 and May 2, 1996. On August 26, 1996 the Company filed with the Commission an effective Registration Statement registering the sale of $6,342,000 of the Notes, 4,119,700 of the Warrants and 8,904,336 shares of the Company's Common Stock. -12- ITEM 6. SELECTED FINANCIAL DATA
(in thousands except per share data) 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- Net sales $51,864 $68,207 $60,008 $54,520 $81,024 Operating earnings (loss) (1) (31) 5,307 (8,875) (14,589) 8,960 Net earnings (loss) (1) (2,369) 2,413 (11,619) (11,591) 5,455 Per share data: Basic earnings (loss) (3) (0.26) 0.29 (1.57) (1.69) 0.82 Diluted earnings (loss) (3) (0.26) 0.29 (1.57) (1.69) 0.80 Cash dividends (2) -- -- -- -- -- Total assets at year end 35,681 41,371 48,012 53,720 60,715 Long-term debt 9,747 12,224 15,573 13,990 10,797 Working capital 10,930 14,241 10,044 16,665 19,105 Shareholders' equity 13,748 15,980 10,086 20,296 30,593 Average market price per common share at year end (3) $1.88 $3.75 $1.50 $2.69 $ 6.25 Average common shares outstanding(3) Basic 9,099 8,268 7,382 6,580 6,640 Diluted 9,099 8,466 7,382 6,580 6,857
- ------------------------ (1) Includes $7,321 in restructuring costs in 1994. (2) There have been no cash dividends in the above five fiscal years. (3) Data has been restated to reflect 4% stock dividends declared in February 1993 and 1994 and a three-for-two stock split paid in August 1993. -13- ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations 1997 Compared with 1996 The nature of the Company's business is such that year to year changes in sales levels are predominantly due to changes in shipping volume or product mix rather than changing sales prices. Net sales in 1997 were $51.9 million, a 24% decline when compared with $68.2 million for the same period in 1996. The following chart provides the sales breakdown by segment and subsidiary for 1997 and 1996.
In thousands of dollars 1997 1996 % Change - ----------------------------------------------------------------------------------------------------- RUGGED SYSTEMS SEGMENT Codar Technology, Inc. $14,579 $32,727 (55%) Lynwood Rugged Systems Ltd. 16,845 14,621 15% Inter-company (520) (434) -- ----------------------------------------- Total Rugged Systems Segment 30,904 46,914 (34%) SYSTEMS INTEGRATION SEGMENT NAI Systems Division 17,217 14,330 20% Inter-company (363) (113) -- --------------------------------------- Total Systems Integration Segment 16,854 14,217 19% TELECOMMUNICATIONS SEGMENT Wilcom, Inc. 4,106 7,076 (42%) ---------------------------------------- TOTAL $51,864 $68,207 (24%) ========================================
Sales in the Rugged Systems segment (net of inter-company eliminations) declined 34% to $30.9 million from $46.9 million in 1996. A 15% increase in shipments at Lynwood was more than offset by a 55% revenue decline at Codar. The sales decline at Codar is attributable to several factors, most notably a decline in booking additional orders for the CHS 2 product line and rugged work station products. Codar has reduced its ongoing operating expenses throughout 1997 in order to mitigate the potential adverse impact of continuing lower sales. Although Codar believes the bookings decline to be temporary, Codar will continue to report less than optimum financial results until the bookings rate increases. Codar does not anticipate reaching the sales level achieved in 1996 for several years. The 1996 sales level was favorably impacted by delays in shipments from prior years. The sales increase at Lynwood is attributable to increased exports to foreign markets particularly in Australia and Scandinavia. Sales in the Systems Integration segment (net of inter-company eliminations) increased 19% to $16.9 million from $14.2 million in 1996. The Systems Division reported its third consecutive year to year sales increase. In 1997 the Systems Division was awarded several IDIQ (indefinite delivery - indefinite quantity) contracts that have the potential to provide significant business to the Company in 1998 and thereafter. However, the nature of IDIQ contracts is such that there can be no assurance of future business. -14- In recent years the Company has reduced its dependency on the United States defense budget by expanding its non-military business operations. However, the Company still expects approximately 25% of 1998 sales to be directly to the U.S. military or through prime contractors to the U.S. military compared to 27% in 1997. The Company is not aware of any programs in which it participates that are specifically targeted for termination or curtailment. The Company's products are utilized on many different U.S. Government programs, which reduces the adverse impact of cancellation of any single specific program. However, changes in future U.S. defense spending levels could impact the Company's future sales volume. Sales in the Telecommunications segment decreased 42% to $4.1 million as compared to $7.1 million in 1996. The decrease in sales is attributable to the rapid decline in sales of the MFT analog line treatment products. It is unlikely in the foreseeable future that internal sales growth will enable Wilcom to achieve a sales level commensurate with that achieved in 1996. Consequently, the Company is adjusting its expenses in line with its expected sales volume so as to enhance the prospects for future profitability. The gross margin percentage for 1997 was 20.2% as compared with 22.7% for 1996. The following chart provides the gross margin percentage by subsidiary. 1997 1996 - --------------------------------------------------------------------- Codar Technology, Inc. (1.1%) 14.4% Lynwood Rugged Systems Ltd. 33.4% 34.0% NAI Systems Division 23.0% 20.9% Wilcom, Inc. 26.0% 38.0% Codar's gross margin was adversely impacted by a $2.0 million charge related to an inventory write-down that was necessitated by lower than expected revenues at Codar, the final withdrawal from electronic printer products and the anticipated decline in sales of certain of Codar's products on the CHS 2 program due to the replacement of those products with new more advanced Codar products. The Systems Division's gross margins improved in 1997 because the Company received favorable pricing on certain key components that were purchased during the year. It is not likely that the favorable pricing will occur in 1998 and therefore the gross margin percentage in 1998 is expected to be somewhat lower than the level achieved in 1997. Wilcom's gross margins declined as a result of low shipping volumes and thus poor absorption of fixed overhead costs. It is unlikely that Wilcom will return to pre-1997 gross margin levels due to the fact that line treatment revenues are not expected to reach previous levels. Selling expense for 1997 was $3.9 million as compared with $4.2 million for the same period in 1996. The 7% decrease was mostly attributable to the decline in sales. General and administrative expenses for 1997 were $4.5 million as compared with $5.2 million in 1996. The decline is the result of the Company's intention to reduce its expenses to an amount more commensurate with its current revenue level. Company-sponsored research and development expenditures for 1997 were $1.5 million as compared with $1.6 million for 1996. The Company reported an operating loss of $0.03 million in 1997 as compared with operating earnings of $5.3 million in 1996. 1996 operating earnings were favorably impacted by the recognition of a gain of -15- approximately $1.5 million from the sale of Codar's Systems Integration Division to Tracor Aerospace Inc. in June 1996. Operating earnings for 1997 were adversely impacted by a $3.0 million charge substantially related to an inventory write-down at Codar. Interest expense and amortization of deferred debt costs, net of interest income, was $1.8 million in 1997 as compared with $2.5 million in 1996. The decrease is attributable to lower borrowings as well as a rate reduction. The income tax expense pertains to the Company's Lynwood subsidiary located in the U.K. Lynwood's earnings are taxed in the U.K. and, while the Company has a U.S. net operating loss carryforward, Lynwood is required to pay income taxes in the U.K. The Company is unable to recognize the full tax benefit associated with its U.S. net operating loss carryforward due to uncertainties as to whether or not a future benefit will be realized. When the Company returns to sustained profitability, the benefits of such a tax loss carryforward will be recognized. The Company recorded a net loss of $2.4 million as compared with a net profit of $2.4 million in 1996. The basic loss per share was $0.26 as compared with earnings of $0.29 per basic share in 1996, based on a weighted average of 9.1 million and 8.3 million shares outstanding, respectively. 1996 Compared with 1995 The following chart provides the sales breakdown by segment and subsidiary for 1996 and 1995.
In thousands of dollars 1996 1995 % Change - ----------------------------------------------------------------------------------------------------- RUGGED SYSTEMS SEGMENT Codar Technology, Inc. $32,727 $27,553 19% Lynwood Rugged Systems Ltd. 14,621 11,587 26% Inter-company (434) (249) -- ---------------------------------------- Total Rugged Systems Segment 46,914 38,891 21% SYSTEMS INTEGRATION SEGMENT NAI Systems Division 14,330 13,504 6% Inter-company (113) (582) -- --------------------------------------- Total Systems Integration Segment 14,217 12,922 10% TELECOMMUNICATIONS SEGMENT Wilcom, Inc. 7,076 8,195 (14%) --------------------------------------- TOTAL $68,207 $60,008 14% =======================================
Sales in the Rugged Systems segment (net of inter-company eliminations) increased 21% to $46.9 million from $38.9 million in 1995. Each of the NAI subsidiaries recorded sales increases in 1996 as compared to 1995. Codar's 1995 revenues were adversely impacted by production problems on certain contracts. The increased sales at Lynwood is representative of the increased level of business at this subsidiary. Sales in the Systems Integration segment (net of inter-company eliminations) increased 10% to $14.2 million from $12.9 million in 1995. -16- In recent years the Company has reduced its dependency on the United States defense budget by expanding its non-military business operations. Sales in the Telecommunications segment decreased 14% to $7.1 million as compared to $8.2 million in 1995. The decrease in sales is attributable to reduced line treatment revenues. The gross margin percentage for 1996 was 22.7% as compared with 8.2% for 1995. The following chart provides the gross margin percentage by subsidiary. 1996 1995 - ------------------------------------------------------------------------ Codar Technology, Inc. 14.4% (7.7%) Lynwood Rugged Systems Ltd. 34.0% 32.9% NAI Systems Division 20.9% 17.4% Wilcom, Inc. 38.0% 23.0% The margin improvement at Codar is attributable to increased shipping volumes and cost reduction efforts initiated in late 1995 and early 1996. Codar's operating performance in both years was adversely impacted by several large contracts for which the gross margins were zero or negative. These contracts were substantially completed during the third quarter of 1996. Codar's 1995 gross margins were adversely impacted by the recording of a $1,400,000 provision attributable to cost growth on certain long-term contracts due to engineering design changes, greater than anticipated labor and material costs and under-absorbed overhead and a $1,100,000 provision for inventory obsolescence. The recording of a $900,000 provision for inventory obsolescence adversely impacted the Systems Division's 1995 gross margin. Cost reduction efforts completed in the fourth quarter of 1995 and a favorable mix of high margin product revenues favorably impacted Wilcom's 1996 gross margin. Selling expense for 1996 was $4.2 million as compared with $5.0 million for the same period in 1995. The 16% decrease was realized, despite an increase in sales of 14%, due to the Company's efforts to reduce operating expenses. General and administrative expenses for 1996 were $5.2 million as compared with $6.5 million in 1995. Decreased corporate office expense as well as cost cutting moves taken in the fourth quarter of 1995 account for the decline. Company-sponsored research and development expenditures for 1996 were $1.6 million as compared with $1.8 million for 1995. The Company had operating earnings of $5.3 million in 1996 as compared with an operating loss of $8.9 million in 1995. 1996 operating earnings were favorably impacted by the recognition of a gain of approximately $1.5 million from the sale of the Systems Integration Division to Tracor Aerospace Inc. in June 1996. Interest expense and amortization of deferred debt costs, net of interest income, was $2.5 million in 1996 as compared with $2.4 million in 1995. The entire tax expense pertains to the Company's Lynwood subsidiary located in the U.K. Lynwood's earnings are taxed in the U.K. and, while the Company has a U.S. net operating loss carryforward, Lynwood is required to pay taxes in the U.K. The Company is unable to recognize the full tax benefit associated with its U.S. net operating loss carry-forward due to uncertainties as to whether or not a future -17- benefit will be realized. When the Company returns to sustained profitability, the benefits of such a tax loss carryforward will be recognized. The Company recorded a net profit of $2.4 million as compared with a net loss of $11.6 million in 1995. Basic earnings per share were $0.29 as compared with a loss of $1.57 per basic share in 1995, based on a weighted average of 8.3 million and 7.4 million shares outstanding, respectively. Liquidity and Capital Resources Cash and cash equivalents totaled $0.6 million at December 31, 1997, as compared to $2.7 million at December 31, 1996. The Company continues to apply all excess cash to reducing its outstanding balances under its bank lines of credit. Cash provided by operating activities amounted to $0.1 million in 1997, as compared to cash used by operating activities of $1.6 million in 1996. The Company reduced its outstanding borrowings under its secured revolving credit agreement in 1997 by $2.2 million, reducing the total amount outstanding to $5.3 million at year-end. The Company has made payments totaling $2.7 million in excess of contractual requirements and has the right to re-borrow such amount if needed. During 1998, the Company will lose the right to re-borrow such amounts at the rate of $0.75 million per quarter and if no additional payments are made, the Company will be required to repay $0.3 million on December 31, 1998. The remaining amount outstanding is due and payable on January 15, 1999. In order to meet its payment obligations in 1999 the Company intends to refinance all or a substantial portion of the amount due and payable, either through borrowing or other capital sources. The Company does not believe that it will have adequate cash flow from operations to do so. It is the Company's intentions to pursue all available options in order that it meet its obligations. Beginning in the first quarter of 1998, the entire amount outstanding under the secured revolving credit agreement will be classified as a current liability. As a result, several of the balance sheet financial ratios such as the "current ratio" and the "quick ratio" will be adversely impacted. The Company has reviewed its operating forecast in relation to its financial debt covenants. Although certain of the forecasted financial ratios will be close to the required thresholds, the Company believes it will be able to meet all required debt covenants during 1998. Inflation The Company's financial statements are prepared in accordance with historical accounting systems, and therefore, do not reflect the effect of inflation. The impact of changing prices on the financial statements is not considered to be significant. Backlog The backlog of unfulfilled orders at December 31, 1997 was $26.9 million, compared to $30.2 million at December 31, 1996. Approximately 48% of the 1997 year-end backlog is scheduled for delivery over the next twelve months. Year 2000 NAI is currently in the process of evaluating its computer software and databases to determine whether or not modifications will be required to prevent problems related to the year 2000. These problems, which have been widely reported in the media, could cause malfunctions in certain software and databases with respect to dates on or after January 1, 2000, unless corrected. At this time, the Company does not believe -18- that it has a significant problem in this regard. The cost, if any, to become year 2000 compliant is not expected to be material. Forward Looking Information This Annual Report on Form 10-K may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on current plans and expectations of the Company and involve risks and uncertainties that could cause actual future activities and results of operations to be materially different from those set forth in the forward-looking statements. Important factors that could cause actual results to differ include, among others, changes in government purchasing policies and budget constraints, competition, the continuity of booking trends, the absence of supply interruptions, new products' market acceptance, warranty performance, the successful and timely integration of research and other risks detailed from time to time in the Company's filings and annual report. -19- ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The following consolidated financial statements of the registrant are submitted herewith at the end of this document beginning on Page F-1: Independent Auditors' Report. Consolidated balance sheets at December 31, 1997 and 1996. Consolidated statements of operations for the years ended December 31, 1997, 1996 and 1995. Consolidated statements of shareholders' equity for the years ended December 31, 1997, 1996 and 1995. Consolidated statements of cash flows for the years ended December 31, 1997, 1996 and 1995. Notes to consolidated financial statements. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. -20- PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Directors of the Company The members of the Board of Directors of the Company as of February 25, 1998, together with certain information furnished to the Company by each such person as of such date, are set forth below.
Years Served Name and Age as a Director Biographical Summary - ------------ ------------- -------------------- Robert A. Carlson(1) 65 10 Mr. Carlson is Chairman and Chief Executive Officer of the Company. From December 1987 until December 1989, he was President and Chief Operating Officer of the Company. From December 1989 to October 1995, he was President and Chief Executive Officer of the Company. Richard A. Schneider, 45 5 Mr. Schneider is Executive Vice President, Treasurer, Chief Financial Officer and Secretary of the Company. He was elected a director of the Company on February 11, 1993. From October 1988 until December 1992, he served as Vice President-Finance and Treasurer of the Company. He was elected Secretary of the Company in January 1990. Stephen A. Barre(2)(3) 57 8 Mr. Barre is Chairman and Chief Executive Officer of Servo Corporation of America, a communications and defect detection company. C. Shelton James(1)(3) 58 8 Mr. James is Chairman of the Board of Elcotel, Inc., a public communications company. He also is President and a director of Fundamental Management Corporation, an investment management company which is the general partner of limited partnerships which are substantial investors in the Company, and he is on the board of directors of Concurrent Computer Systems, Inc., a company engaged in the manufacture of real time computers, SK Technologies, a company engaged in development and marketing of point-of-sale software, CPSI, Inc., a company engaged in high performance computing, Cyberguard Corporation, a company involved in internet security, and Group Land Systems, Inc., a company involved in long distance telephone services.
-21- Edward L. Hennessy, Jr.(2) 69 2 Mr. Hennessy is the retired Chairman and Chief Executive Officer of Allied Signal, Inc., a worldwide technology company. Mr. Hennessy serves as the Treasurer of March of Dimes and he also serves as a trustee of the Stevens Institute of Technology. He also is a director of The Bank of New York, a New York State commercial banking company, Lockheed Martin Corp., a designer, manufacturer integrator and operator of systems and products in leading edge technologies, National Association of Manufacturers, Wackenhut Corporation, an international provider of security-related services and privatized correctional and detention facility management and design services, and Fundamental Management Corporation. A designee of Fundamental Management Corporation, he was elected a director of the Company on March 6, 1996. Charles S. Holmes(1)(2) 53 2 A director of the Company since October 3, 1995, Mr. Holmes is President and sole stockholder of Asset Management Associates of New York, Inc., a New York-based firm specializing in acquisitions of manufacturing businesses. Mr. Holmes founded and was a partner in Asset Management Associates, a predecessor partnership of Asset Management, from 1978 to 1991. He has served since May 1997 as Chairman of the Board of Directors of Empire of Carolina, Inc., which specializes in the design, manufacture and sale of toys. Dennis McCarthy(3) 51 2 Mr. McCarthy, a designee of Mr. Holmes, was elected a director of the Company on March 6, 1996. He has been employed by Asset Management Associates of New York, Inc., a New York-based firm specializing in acquisitions of manufacturing businesses, since 1988.
(1) Member of the Executive Committee (2) Member of the Compensation Committee (3) Member of the Audit Committee -22- Executive Officers of the Company The current executive officers of the Company are as follows: Robert A. Carlson, 65, is the Chairman and Chief Executive Officer of the Company. From December 1987 until December 1989, he was President and Chief Operating Officer of the Company. From December 1989 until October 1995, he was President and Chief Executive Officer of the Company. Richard A. Schneider, 45, is the Executive Vice President, Treasurer and Secretary of the Company. From October 1988 until December 1992, he served as Vice President - Finance and Treasurer of the Company. He was elected Secretary of the Company in January 1990. ITEM 11. EXECUTIVE COMPENSATION The following table sets forth all plan and non-plan compensation awarded to, earned by or paid to the Company's Chief Executive Officer and each of the executive officers of the Company other than the Chief Executive Officer whose total annual salary and bonus exceeded $100,000 (collectively, the "Named Executives") for each of the Company's last three fiscal years.
Long Term Compensation ------------------------------------------ Annual Compensation Awards Payouts ---------------------------------------------------------------------------------- (a) (b) (c) (d) (e) (f) (g) (h) (i) Securities Name and Other Annual Restricted Underlying All Other Principal Fiscal Compensation Stock Options/ LTIP Compensation Position Year Salary($) Bonus ($) ($) Award(s)($) SARs (#) Payouts ($) - ----------------------------------------------------------------------------------------------------------------------- Robert A. 1997 $286,000 -- $800,000(1) -- -- -- $14,783(3) Carlson - President 1996 196,000 $176,000 -- -- -- -- 58,295(3) and Chief Executive 1995 263,000 -- -- -- 250,000(5) -- 59,071(3) Officer Richard A. 1997 180,000 100,000(2) -- 25,000 -- 2,275(4) Schneider - Executive 1996 124,000 96,000 50,000(2) -- -- -- 7,454(4) Vice President, Treasurer and Secretary 1995 152,000 8,500 -- -- 125,000(5) -- 7,630(4) - ------------------------------------------------------------------------------------------------------------------------
- ------------------------ (1) On December 19, 1996, the Company and Mr. Carlson agreed on the termination of Mr. Carlson's status as an eligible participant under the Supplemental Retirement Plan and the redemption of Mr. Carlson's interest in the SERP by the Company at a redemption price of $800,000. Such amount was paid during 1997. It is estimated that Mr. Carlson, who had 12 years of credited service at the time of the agreement, would have been entitled to receive $131,296 each year commencing at normal retirement age. (2) On August 7, 1996, the Company and Mr. Schneider agreed on the termination of Mr. Schneider's status as an eligible participant under the Supplemental Retirement Plan and the redemption of Mr. Schneider's interest in the SERP by the Company at a redemption price of $150,000. Such amount was paid during 1996 and 1997. It is estimated that Mr. Schneider, who had 8 years of credited service at the time of the agreement, would have been entitled to receive $65,103 each year commencing at normal retirement age. (3) Includes $59,071, $58,295 and $13,155 of life insurance premiums paid on term life and split dollar policies by the Company on behalf of Mr. Carlson in each of the years 1995, 1996 and 1997, respectively, as well as $0, $0 and $1,628 of matching contributions made by the Company under the -23- 401(k) deferred compensation plan and $0, $0 and $0 of contributions made by the Company under the profit sharing portion of such plan for the benefit of Mr. Carlson for each of the years 1995, 1996 and 1997, respectively. (4) Includes $7,630, $7,454 and $632 of life insurance premiums paid on term life and split dollar policies by the Company on behalf of Mr. Schneider in each of the years 1995, 1996 and 1997, respectively, as well as $0, $0 and $1,643 of matching contributions made by the Company under the 401(k) deferred compensation plan and $0, $0 and $0 of contributions made by the Company under the profit sharing portion of such plan for the benefit of Mr. Schneider for each of the years 1995, 1996 and 1997, respectively. (5) Options to acquire shares of Common Stock that were granted in fiscal year 1995. At the same time, options for Mr. Carlson (214,485 shares) and Mr. Schneider (95,327 shares) were canceled. Stock Options The table below summarizes the options granted to the Named Executives in 1997 and their potential realizable values. Option/SAR Grants in 1997
Potential Realizable Value of Assumed Annual Rates of Stock Price Appreciation Individual Grants for Option Term(1) - ------------------------------------------------------------------------------------------------------------------------------------ (a) (b) (c) (d) (e) (f) (g) Number of % of Total Securities Options/SARs Underlying Granted to Options/SARs Employees in Exercise or Base Name Granted (2) Fiscal Year Price ($/Sh) Expiration Date 5%($) 10%($) - ------------------------------------------------------------------------------------------------------------------------------------ Robert A. -0- N/A N/A N/A N/A N/A Carlson President and Chief Executive Officer Richard A. 25,000 19% $1.88 5 Years $12,985 $28,694 Schneider Executive Vice President Treasurer and Secretary - ------------------------------------------------------------------------------------------------------------------------------------
(1) Option price compounded annually at 5% and 10% over the five-year term minus the exercise price times the number of shares subject to the option. (2) Such options were granted on December 23, 1997 and are exercisable at a rate of 50% per year on the first two anniversary dates of the grant. All such options expire after the fifth anniversary of the date of grant. -24- The table below summarizes the exercise of stock options during 1997 for the Named Executives. Aggregated Option/SAR Exercises in 1997 and FY-End Option/SAR Values
(a) (b) (c) (d) (e) Number of Securities Value of Underlying Unexercised Unexercised In-the-Money Options/SARs Options/SARs at FY-End at FY-End ($) Shares Acquired on Value Exercisable/ Exercisable/ Name Exercise Realized ($) Unexercisable Unexercisable (1) - ------------------------------------------------------------------------------------------------------------- Robert A. -0- $ 0 250,000/0 $0/$0 Carlson - President and Chief Executive Officer Richard A. 25,000 $ 70,250 100,000/25,000 $0/$0 Schneider - Executive Vice President Treasurer and Secretary
- ------------------------ (1) Market price at December 31, 1997 minus exercise price times the number of shares underlying the unexercised options. Employment and Change in Control Agreements The Company entered into an Employment Agreement with Robert A. Carlson as of January 1, 1997. Pursuant to the employment agreement with Mr. Carlson, the term of his employment commenced on January 1, 1997 and will continue until December 31, 1997 unless extended by Mr. Carlson for a period of one year on or within 30 days prior to each of January 1, 1998 and January 1, 1999 (each an "Extension Date"). Mr. Carlson will be paid salary at a rate of $286,000 per annum which represents a 25% increase in salary from the prior year's level. Assuming that the Company attains certain annual targets, the Company will also pay Mr. Carlson an annual bonus equal to 50% of his salary. The employment agreement with Mr. Carlson also provides that the Company will pay Mr. Carlson $50,000 on each January 15, 1998 and January 15, 1999 if Mr. Carlson continues to serve as Chairman of the Company on each such Extension Date, and an additional $50,000 if Mr. Carlson continues to service as Chief Executive Officer of the Company on each such Extension Date (collectively referred to as the "Executive Bonus"). Mr. Carlson will be eligible to participate in all employee benefit programs. The employment agreement with Mr. Carlson also provides that in the event the Company decides to terminate Mr. Carlson's employment without cause he is entitled to a payment of a pro rata share of unused vacation for the full year plus a pro rata share of his bonus under the Company Bonus Plan, if the Board in its sole discretion so determines, plus a severance payment of the Executive Bonus on the dates he would otherwise be entitled to receive the Executive Bonus. If the Company decides to terminate Mr. Carlson's employment for cause, the Company will provide 20 days written notice, and reason for the termination. Mr. Carlson will have those 20 days to effect a cure to the Company's satisfaction. In January 1998, Mr. Carlson notified the Company of his intention to extend the contract for an additional year. -25- Director Compensation During 1997, each director who was not also an officer of the Company was paid an annual retainer of $15,000, plus $2,500 for each committee that a director serves on, plus a uniform fee of $1,000 for each Board and committee meeting attended in person. During 1997, directors who were also officers of the Company received no remuneration for attendance at Board and committee meetings. Compensation Committee Interlocks and Insider Participation During the fiscal year ended December 31, 1997, the members of the Compensation Committee were Charles S. Holmes (Chairman), Stephen A. Barre and Edward Hennessy, Jr. During fiscal year 1997 and formerly, none of such persons was an officer of the Company or any of its subsidiaries or had any relationship with the Company other than serving as a director of the Company. In addition, during the fiscal year ended December 31, 1997, no executive officer of the Company served as a director or member of the compensation committee of another entity, one of whose executive officers served as a director or on the Compensation Committee of the Company. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth information concerning persons or groups who are known by the Company to be the beneficial owners of more than 5% of the Common Stock as of February 25, 1998. The information in the table below is based upon information furnished to the Company by such persons and statements filed with the Securities and Exchange Commission.
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) 3,431,000 29.6% Pioneering Management Corporation 60 State Street Boston, MA 02114 (3) 850,000 9.3% Fundamental Management Corporation 4000 Hollywood Boulevard Suite 610N Hollywood, FL 33021 (4) 1,079,336 11.0%
- ------------------------ (1) To the knowledge of the Company, beneficial owners named in the above table have sole voting power with respect to the shares listed opposite their names. (2) Mr. Holmes is a director of the Company. These shares are comprised of 1,000,000 shares of Common Stock, 5,000 stock options exercisable at $3.44 per share, 1,750,000 shares underlying certain Warrants exercisable at $2.50 per share and 300,000 shares underlying certain Warrants exercisable at $3.00 per share, owned by Mr. Holmes; and 219,000 shares of Common Stock and 157,000 shares underlying Warrants exercisable at $2.50 per share owned by an irrevocable trust for -26- the benefit of a child. The ownership percentage is calculated as if such Stock Options, Warrants and Notes had been converted as of February 25, 1998. (3) These shares are reportedly owned by a passive investor. Pioneering Management Corporation is the investment company advisor of such investor and is registered under Section 203 of the Investment Advisers Act of 1940. (4) These shares are reportedly owned by various limited partnerships, of which Fundamental Management Corporation is the general partner. C. Shelton James, a director of the Company, is the President and a director of Fundamental Management Corporation. These shares are composed of 400,636 shares of Common Stock, 178,700 shares underlying certain Warrants exercisable at $2.50 per share and 500,000 shares underlying $1,000,000 of Notes convertible into shares at $2.00 per share. Excludes 14,793 shares of Common Stock owned by Mr. James as to which shares Fundamental Management Corporation disclaims beneficial ownership. The ownership percentage is calculated as if such Warrants and Notes had been converted as of February 25, 1998 by Fundamental Management Corporation. Shares of Common Stock beneficially owned as of February 25, 1998 by each director and executive officer of the Company and by all directors and executive officers of the Company as a group are set forth in the following table. This table is based upon information furnished to the Company by such persons and statements filed with the Securities and Exchange Commission. BENEFICIAL OWNERSHIP OF SHARES (1)
NUMBER OF SHARES OF COMMON STOCK PERCENT OF NAME BENEFICIALLY OWNED (2) COMMON STOCK (3) - ---- ------------------- ------------ Robert A. Carlson 100,467 1.1% Stephen A. Barre 17,654 -- Edward L. Hennessy, Jr. -0- -- Charles S. Holmes (4) 1,000,000 10.9% C. Shelton James (5) 14,793 -- Dennis McCarthy -0- -- Richard A. Schneider 30,042 -- All directors and officers as a group (7 persons) 1,163,136 12.7%
- ------------------------ - -- = Less than 1% (1) Directors and executive officers have sole voting power and sole investment power with respect to the shares listed opposite their names. (2) Excludes options exercisable within 60 days of February 25, 1998 for such persons as follows: Mr. Carlson, 250,000, Mr. Barre, 13,120; Mr. Hennessy, 10,000; Mr. Holmes, 5,000; Mr. James, 12,401; Mr. McCarthy, 10,000; Mr. Schneider, 100,000; and all directors and officers as a group, 400,521. -27- (3) The percentages of Common Stock outstanding are based on 9,155,427 shares outstanding on March 11, 1998. (4) Excludes Warrants to purchase 2,050,000 shares of Common Stock owned by Mr. Holmes and 219,000 shares of Common Stock and Warrants to purchase 157,000 shares of Common Stock owned by an irrevocable trust for which Mr. Holmes disclaims beneficial ownership. (5) Excludes 400,636 shares of Common Stock, Warrants to purchase 178,700 shares of Common Stock and Notes convertible into 500,000 shares of Common Stock owned by various limited partnerships of which Fundamental Management Corporation, an investment company of which Mr. James is President and a director, as to which shares Mr. James shares voting and dispositive power. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Charles S. Holmes, a director of the Company, purchased $2,000,000 principal amount of Notes and Warrants (the "Units") to purchase 500,000 shares of Common Stock issued pursuant to the private placement (the "Investment Transaction") of the Units by the Company in exchange for the 12% Subordinated Promissory Notes of the Company held by him in the aggregate principal amount of $2,000,000. Mr. Holmes also received an additional 1,200,000 Warrants for past advisory services in connection with the Investment Transaction and the engagement of Commonwealth Associates as the Company's placement agent. Pursuant to an agreement between Mr. Holmes and the Company on May 9, 1996, which provided for the immediate grant to Mr. Holmes of warrants to purchase 300,000 shares of Common Stock exercisable at any time and from time to time on or before February 15, 2002 at an exercise price of $3.00 per share, subject to adjustment in certain events, Mr. Holmes converted the Notes held by him in the aggregate principal amount of $2,000,000 into one million shares of Common Stock which he currently owns. C. Shelton James, a director of the Company, is the president and a director of Active Investors II, Ltd. ("Active Investors"), a company which, together with certain affiliated limited partnerships, currently owns shares of Common Stock of the Company. In connection with the Investment Transaction, Active Investors purchased 900 Units from the Company in exchange for 12% Subordinated Promissory Notes of the Company held by him in the aggregate principal amount of $900,000. On May 2, 1996, Active Investors purchased additional Notes in the aggregate principal amount of $100,000 and Warrants to purchase 25,000 shares of Common Stock. In connection with the Investment Transaction, the Company agreed to use its best efforts to cause the resignation of two then-current members of the Board of Directors and cause to be elected as directors two individuals acceptable to the Company and who are designed by the investors, including one designated solely by Mr. Holmes and one designated solely by Active Investors. Dennis McCarthy was designated to serve in such capacity by Mr. Holmes, while Edward L. Hennessy, Jr. was designated to serve in such capacity by Active Investors, and each became a director of the Company on March 6, 1996. -28- PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) Financial Statements and Financial Statement Schedules The consolidated financial statements and schedules listed in the accompanying index to financial statements are filed as part of this Annual Report on Form 10-K. (b) Reports on Form 8-K None. (c) Exhibits 3(i) Restated Certificate of Incorporation of NAI Technologies, Inc. filed with the Secretary of State of the State of New York on August 19, 1991 (filed with the Commission as Exhibit 3(i) to the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 28, 1996). 3(ii) Certificate of Amendment to the Certificate of Incorporation of the Registrant, as filed with the New York Secretary of State on February 2, 1996 (filed with the Commission as Exhibit 3 to the Company's Report on Form 8-K dated February 15, 1996). 3(iii) Certificate of Amendment of the Certificate of Incorporation of NAI Technologies, Inc. filed with the Secretary of State of the State of New York on August 7, 1996 (filed with the Commission as Exhibit 3(ii) to the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 28, 1996). 4(i) Form of 12% Convertible Subordinated Promissory Note, due January 15, 2001, of the Registrant (filed with the Commission as Exhibit 1 to the Company's Report on Form 8-K dated February 15, 1996). 4(ii) Form of Warrant to Purchase Common Stock of the Registrant, on or before February 15, 2002 (filed with the Commission as Exhibit 2 to the Company's Report on Form 8-K dated February 15, 1996). 4(iii) Registration Rights Agreement, dated as of February 13, 1996, between the Registrant and the Investors (filed with the Commission as Exhibit 4 to the Company's Report on Form 8-K dated February 15, 1996). 4(iv) Indenture, dated as of July 15, 1996, between NAI Technologies, Inc. and First Trust National Association, as Trustee (filed with the Commission as Exhibit 4(i) to the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 28, 1996). 4(v) Warrant Agreement, dated as of August 26, 1996, between NAI Technologies, Inc. and American Stock Transfer & Trust Company (filed with the Commission -29- as Exhibit 4(ii) to the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 28, 1996). 10(i) Placement Agency Agreement, dated as of December 15, 1995, between Commonwealth Associates and the Registrant (filed with the Commission as Exhibit 5 to the Company's Report on Form 8-K dated February 15, 1996). 10(ii) Fourth Amendment to Amended and Restated Credit Agreement, dated as of January 5, 1996, among the Registrant, Chemical Bank, a New York banking corporation, ("Chemical"), The Bank of New York, a New York banking corporation ("BNY"), and each of the other financial institutions which from time to time becomes a party thereto (together with Chemical and BNY, the "Banks"), BNY, as administrative agent (the "Administrative Agent"), and Chemical as collateral agent (the "Collateral Agent") (filed with the Commission as Exhibit 6 to the Company's Report on Form 8-K dated February 15, 1996). 10(iii) Fifth Amendment, dated as of February 13, 1996, to Amended and Restated Credit Agreement, dated as of April 12, 1995, as previously amended, among the Registrant, the Banks, the Administrative Agent and the Collateral Agent (filed with the Commission as Exhibit 7 to the Company's Report on Form 8-K dated February 15, 1996). 10(iv) Amendment No. 1 to Registration Rights Agreement, dated as of February 13, 1996 (the "Registration Rights Amendment"), to that certain Registration Rights Agreement, dated as of April 12, 1995, as amended, between the Registrant, BNY and Chemical (filed with the Commission as Exhibit 8 to the Company's Report on Form 8-K dated February 15, 1996). 10(v) Letter Agreement, dated May 9, 1996, between Charles S. Holmes and the Company (filed with the Commission as Exhibit 1 to the Company's Report on Form 8-K dated May 9, 1996). 10(vi) Amendment No. 1 to Employment Agreement, entered into as of August 8, 1996, between NAI Technologies, Inc. and Richard A. Schneider (filed with the Commission as Exhibit 10(i) to the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 28, 1996). 10(vii) Settlement Agreement and Release, entered into as of August 8, 1996, between NAI Technologies, Inc. and Richard A. Schneider (filed with the Commission as Exhibit 10(ii) to the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 28, 1996). 10(viii) 1996 Stock Option Plan (filed with the Commission as Exhibit 10(iii) to the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 28, 1996). 10(ix) 1993 Stock Option Plan for Directors, as amended (filed with the Commission as Exhibit 10(iv) to the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 28, 1996). 10(x) Employment Agreement, entered into as of January 1, 1997, between NAI Technologies, Inc. and Robert A. Carlson. -30- 10(xi) Amendment No. 2 to Employment Agreement, entered into as of January 2, 1997, between NAI Technologies, Inc. and Richard A. Schneider. 10(xii) Settlement Agreement and Release, entered into as of December 19, 1996, between NAI Technologies, Inc. and Robert A. Carlson. 10(xiii) Sixth Amendment, dated as of July 31, 1997 to Amended and Restated Credit Agreement, dated as of April 12, 1995, as previously amended, amongst the Registrant, the Banks, the Administrative Agent, and the Collateral Agent. 10(xiv) Seventh Amendment, dated as of November 1997, to Amended and Restated Credit Agreement, dated as of April 12, 1995, as previously amended, amongst the Registrant, the Banks, the Administrative Agent, and the Collateral Agent. 11 Statement re: Computation of Per Share Earnings. 17(i) Resignation letter of Robert D. Rosenthal, dated December 13, 1995, resigning from the Board of Directors of the Registrant (filed with the Commission as Exhibit 9 to the Company's Report on Form 8-K dated February 15, 1996). 17(ii) Resignation letter of John M. May, dated February 13, 1996, resigning from the Board of Directors of the Registrant (filed with the Commission as Exhibit 10 to the Company's Report on Form 8-K dated February 15, 1996). 21 List of Subsidiaries. 23 Independent Auditors' Consent. 27 Financial Data Schedules (Edgar filing only). 99(i) Press Release, dated February 15, 1996, describing the closing of the Investment Transaction and the Amendment (filed with the Commission as Exhibit 11 to the Company's Report on Form 8-K dated February 15, 1996). 99(ii) Pro Forma Consolidated Balance Sheets as of April 27, 1996 of NAI Technologies, Inc. and Subsidiaries (filed with the Commission as Exhibit 2 to the Company's Report on Form 8-K dated May 9, 1996). (d) Not applicable. -31- S I G N A T U R E S Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. NAI TECHNOLOGIES, INC. By: /s/ Richard A. Schneider ------------------------ Richard A. Schneider Date: February 26, 1998 Executive Vice President Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.
Signature Title Date - ---------- ------ ---- /s/ Robert A. Carlson Chairman, Chief Executive February 26, 1998 - --------------------- Officer and Director Robert A. Carlson (Chief Executive Officer) /s/ Stephen Barre Director February 26, 1998 - ----------------- Stephen Barre /s/ Edward L. Hennessy, Jr. Director February 26, 1998 - --------------------------- Edward L. Hennessy, Jr. /s/ Charles S. Holmes Director February 26, 1998 - --------------------- Charles S. Holmes /s/ C. Shelton James Director February 26, 1998 - -------------------- C. Shelton James /s/ Dennis McCarthy Director February 26, 1998 - ------------------- Dennis McCarthy /s/ Richard A Schneider Executive Vice President, February 26, 1998 - ----------------------- CFO, Treasurer, Secretary Richard A Schneider and Director (Chief Financial and Accounting Officer)
-32- NAI TECHNOLOGIES, INC. AND SUBSIDIARIES INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES Page ---- Independent Auditors' Report F-2 Consolidated Balance Sheets at December 31, 1997 and 1996 F-3 Consolidated Statements of Operations - Years ended F-4 December 31, 1997, 1996 and 1995 Consolidated Statements of Shareholders' Equity - F-5 Years ended December 31, 1997, 1996 and 1995 Consolidated Statements of Cash Flows - Years ended F-6 December 31, 1997, 1996 and 1995 Notes to Consolidated Financial Statements F-7 Consolidated Financial Statement Schedules: II - Valuation and Qualifying Accounts F-29 Schedules not listed above have been omitted either because they are not applicable or the required information is shown in the consolidated financial statements or notes thereto. F-1 INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders NAI Technologies, Inc. We have audited the accompanying consolidated balance sheets of NAI Technologies, Inc. and subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1997. In connection with our audit of the consolidated financial statements, we have also audited the financial statement schedule as listed in the accompanying index. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of NAI Technologies, Inc. and subsidiaries as of December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1997, in conformity with generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. KPMG PEAT MARWICK LLP Jericho, New York February 9, 1998 F-2 NAI TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
December 31, (in thousands, except share amounts) 1997 1996 - ------------------------------------------------------------------------------------------ ASSETS CURRENT ASSETS: Cash and cash equivalents $ 585 $ 2,727 Accounts receivable, net 11,742 12,693 Inventories, net 9,320 10,270 Deferred tax asset 148 173 Other current assets 497 597 - ------------------------------------------------------------------------------------------ Total current assets 22,292 26,460 - ------------------------------------------------------------------------------------------ Property, plant and equipment, net 2,986 3,523 Excess of cost over fair value of net assets acquired, net 9,073 9,707 Other assets 1,330 1,681 - ------------------------------------------------------------------------------------------ Total assets $35,681 $41,371 ========================================================================================== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 7,465 $ 6,907 Notes payable 571 -- Current installments of long-term debt 311 158 Accrued payroll and commissions 302 680 Other accrued expenses 2,116 3,894 Income taxes payable 597 580 - ------------------------------------------------------------------------------------------ Total current liabilities 11,362 12,219 - ------------------------------------------------------------------------------------------ Long-term debt 9,747 12,224 Other accrued expenses 783 912 Deferred income taxes 41 36 - ------------------------------------------------------------------------------------------ Total liabilities 21,933 25,391 - ------------------------------------------------------------------------------------------ Commitments and contingent liabilities - ------------------------------------------------------------------------------------------ SHAREHOLDERS' EQUITY: Capital Stock: Preferred stock, no par value, 2,000,000 shares authorized and unissued -- -- Common stock, $.10 par value, 25,000,000 shares authorized; 9,155,427 and 9,016,937 shares issued in 1997 and 1996 916 902 Capital in excess of par value 19,457 19,217 Foreign currency translation adjustment 196 313 Accumulated deficit (6,821) (4,452) - ------------------------------------------------------------------------------------------ Total shareholders' equity 13,748 15,980 - ------------------------------------------------------------------------------------------ Total liabilities and shareholders' equity $35,681 $41,371 ==========================================================================================
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) 1997 1996 1995 - ------------------------------------------------------------------------------- Net sales $51,864 $68,207 $60,008 Cost of sales 41,377 52,712 55,100 - ------------------------------------------------------------------------------ Gross margin 10,487 15,495 4,908 - ------------------------------------------------------------------------------ Selling expenses 3,894 4,192 4,971 General and administrative expenses 4,532 5,242 6,517 Research and development costs 1,517 1,639 1,807 Other (income) expense 575 (885) 488 - ------------------------------------------------------------------------------ Total expenses, net 10,518 10,188 13,783 - ------------------------------------------------------------------------------ Operating earnings (loss) (31) 5,307 (8,875) - ------------------------------------------------------------------------------ Non-operating income (expense): Other -- 15 -- Amortization of deferred debt costs (341) (456) (895) Interest income 61 152 195 Interest expense (1,498) (2,209) (1,667) - ------------------------------------------------------------------------------ (1,778) (2,498) (2,367) - ------------------------------------------------------------------------------ Earnings (loss) before income taxes (1,809) 2,809 (11,242) Income tax expense 560 396 377 - ------------------------------------------------------------------------------ Net (loss) earnings $(2,369) $2,413 ($11,619) ============================================================================== Basic (loss) earnings per common share $ (0.26) $ 0.29 ($ 1.57) ============================================================================== Diluted (loss) earnings per common share $ (0.26) $ 0.29 ($ 1.57) ==============================================================================
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, 1997
CAPITAL TOTAL COMMON IN EXCESS NOTE TRANSLATION ACCUMULATED SHAREHOLDERS' (IN THOUSANDS) STOCK OF PAR RECEIVABLE ADJUSTMENT DEFICIT EQUITY - -------------------------------------------------------------------------------------------------------------------------------- BALANCE JANUARY 1, 1995 $717 $14,730 ($12) $107 $ 4,754 $ 20,296 Net loss -- -- -- -- (11,619) (11,619) Foreign currency translation adjustment -- -- -- (64) -- (64) Common stock issued in debt restructuring 25 475 -- -- -- 500 Issuance of stock warrants in connection with debt offering -- 913 -- -- -- 913 Exercise of employee stock options and stock purchases under stock purchase plan 4 56 -- -- -- 60 ---------------------------------------------------------------------------- BALANCE DECEMBER 31, 1995 746 16,174 (12) 43 (6,865) 10,086 Net earnings -- -- -- -- 2,413 2,413 Foreign currency translation adjustment -- -- -- 270 -- 270 Issuance of stock warrants in connection with debt offering -- 1,060 -- -- -- 1,060 Payment of note receivable -- -- 12 -- -- 12 Conversion of convertible debt, net of issuance costs 156 1,983 -- -- -- 2,139 ---------------------------------------------------------------------------- BALANCE DECEMBER 31, 1996 902 19,217 -- 313 (4,452) 15,980 Net loss -- -- -- -- (2,369) (2,369) Foreign currency translation adjustment -- -- -- (117) -- (117) Exercise of employee stock options, net and stock purchases under stock purchase plan 8 155 -- -- -- 163 Exercise of stock warrants 1 17 -- -- -- 18 Conversion of convertible debt, net of issuance costs 5 68 -- -- -- 73 ---------------------------------------------------------------------------- BALANCE DECEMBER 31, 1997 $916 $19,457 $ -- $ 196 ($6,821) $13,748 ============================================================================
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) 1997 1996 1995 - ----------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings (loss) ($2,369) $ 2,413 ($11,619) Adjustments to reconcile net earnings (loss) to cash (used in) provided by operating activities: Depreciation and amortization 2,161 2,548 2,979 (Gain) loss on disposal of property, plant and equipment (6) (1,492) 1 Provision for inventory obsolescence 2,651 88 2,248 Loss on sale of notes receivable -- 89 -- Changes in operating assets and liabilities, excluding foreign currency adjustments: Accounts receivable 951 648 (1,227) Inventories (1,701) 1,543 (191) Accounts payable and other accrued expenses (1,727) (6,965) 3,545 Income taxes 47 73 4,328 Other, net 87 (594) 57 - ------------------------------------------------------------------------------------------------------ Net cash provided by (used in) operating activities 94 (1,649) 121 - ------------------------------------------------------------------------------------------------------ CASH FLOWS FROM INVESTING ACTIVITIES: Contingent payment on purchase of KMS Advanced Products -- -- (103) Purchase of property, plant and equipment (538) (566) (886) Proceeds from sale of division, property, plant and equipment 24 2,990 443 - ------------------------------------------------------------------------------------------------------ Net cash (used in) provided by investing activities (514) 2,424 (546) - ------------------------------------------------------------------------------------------------------ CASH FLOWS FROM FINANCING ACTIVITIES: Issuances of notes payable 1,692 590 6 Issuances of 12% convertible notes -- 5,842 2,500 Payments of notes payable (1,121) (590) (133) Payments for debt restructuring -- -- (345) Payments of long-term debt (2,369) (7,856) (656) Receipts on notes receivable -- 1,113 -- Proceeds from exercise of stock options and stock purchase plan 163 -- 60 Proceeds from exercise of stock warrants 18 -- -- - ------------------------------------------------------------------------------------------------------ Net cash (used in) provided by financing activities (1,617) (901) 1,432 - ------------------------------------------------------------------------------------------------------ Effect of foreign currency exchange rates on cash (105) 248 (60) - ------------------------------------------------------------------------------------------------------ Net (decrease) increase in cash and cash equivalents (2,142) 122 947 Cash and cash equivalents at beginning of year 2,727 2,605 1,658 - ------------------------------------------------------------------------------------------------------ Cash and cash equivalents at end of year $ 585 $ 2,727 $ 2,605 ====================================================================================================== Supplemental disclosure of cash flow information: Cash paid for (received): Interest $ 1,477 $ 2,238 $ 1,506 Income taxes 571 398 (4,697) Non-cash investing and financing activities: Common stock issued in debt restructuring -- -- 500 Notes receivable from sale of property, plant and equipment -- -- 1,190 Conversion of 12% notes into common stock 73 2,139 -- ========================================================================================================
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, 1997, 1996 AND 1995 1. SUMMARY OF ACCOUNTING POLICIES Description of Business: NAI Technologies, Inc. designs, manufactures and markets rugged computer systems, advanced peripheral products, high performance workstations, TEMPEST computer systems, telecommunications test equipment and transmission products, and integrated systems for defense, military, government-related and commercial businesses. The Company's customer base includes commercial markets requiring rugged, mobile computer and communications systems, U.S. and foreign armed services and intelligence agencies, and the regional Bell operating companies and independent telephone companies. Net sales to the U.S. Government for the years ended December 31, 1997, 1996 and 1995 were $13,205,000, $20,619,000 and $22,665,000, respectively. Net sales to one other customer accounted for 17% and 16% of the Company's sales in 1997 and 1996, respectively. Basis of Presentation: The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant inter-company transactions and balances have been eliminated in consolidation. Management Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Foreign Currency Translation: The financial statements and transactions of the Company's foreign subsidiary are maintained in its functional currency. For consolidation purposes, assets and liabilities of the Company's U.K. subsidiary have been translated at rates of exchange at the end of the period. Revenues and expenses have been translated at the weighted average rates of exchange in effect during each period. Translation gains and losses are accumulated as a separate component of shareholders' equity. Gains and losses resulting from transactions denominated in a currency other than the Company's functional currency are included in other operating expense in the consolidated statements of operations. There were no significant gains or losses from foreign currency transactions in the years presented. Financial Statement Reclassification: Certain reclassifications have been made to prior years' financial statements to conform to the 1997 presentation. Cash Equivalents: The Company classifies investments that are readily convertible into cash, and have maturities of three months or less at the time of purchase, as cash equivalents. Inventories: Inventories are valued at the lower of cost or market on a first-in, first-out (FIFO) basis. Work in process is stated at total costs incurred, reduced by estimated costs of units delivered, not in excess of net realizable value. The Company's business is characterized by rapid change that frequently results in product obsolescence. The Company continually reviews its on-hand quantities and compares such to current business levels and future expectations regarding usage. Adjustments to the carrying values of inventory are made when quantities on hand are not justified by anticipated future usage. F-7 Property, Plant and Equipment: Property, plant and equipment are recorded at historical cost. Depreciation and amortization have been computed using the straight-line method over the following estimated useful lives of the assets: equipment and furniture and fixtures, generally -- 2 to 10 years, and buildings -- 30 years. Leasehold improvements are amortized over the shorter of the estimated useful life of the improvements or the lease term. Excess of Cost over Fair Value of Net Assets Acquired: The excess of cost over fair value of net assets acquired (goodwill) is being amortized on a straight line basis over a period of twenty years. The Company reviews the significant assumptions that underlie the twenty-year amortization period on a quarterly basis and will shorten the amortization period if considered necessary. The Company assesses the recoverability of this intangible asset by determining whether the amortization of the goodwill balance over its remaining life can be recovered through projected undiscounted future cash flows. Accumulated amortization was approximately $2,995,000 and $2,362,000 at December 31, 1997 and 1996, respectively. The amortization expense associated with these amounts is included in other operating expense in the consolidated statements of operations and amounted to $633,000, $632,000 and $630,000 in 1997, 1996 and 1995, respectively. Long-lived assets: In fiscal 1996 the Company adopted Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be disposed of." SFAS No. 121 requires that long-lived assets and certain identifiable intangibles to be held and used or disposed of by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company assesses the recoverability of long lived assets by determining whether the asset balance can be recovered through projected undiscounted future cash flows. During 1996 the Company adopted this statement and determined that no impairment loss need be recognized for applicable assets of continuing operations. Revenue Recognition: Sales are recorded when title passes (either at shipment or customer acceptance). In some limited cases, a sale may be recorded upon the completion of a specific contractual task such as the issuance of a test report. Cost of goods sold is based upon average estimated cost per unit. Sales and profits on cost reimbursable contracts are recognized as costs are incurred. Sales and estimated profits under long-term contracts are recorded under the percentage of completion method of accounting using the cost to cost method. Costs include direct engineering and manufacturing costs, applicable overhead costs and special tooling and test equipment costs. All selling, general and administrative expenses are charged to operations as incurred. Warranty expense is accrued based upon the historical relationship between sales and warranty claims. Estimated losses are provided for in full when identified. Income Taxes: Deferred tax assets and liabilities are recognized based on the future tax consequences attributable to temporary differences between the carrying amounts of assets and liabilities for financial statement purposes and income tax purposes using enacted rates expected to be in effect when such amounts are realized or settled. F-8 Earnings (Loss) Per Share: In 1997 the Company adopted Statement of Financial Accounting Standards No. 128 (SFAS 128), "Earnings per Share," which requires the presentation of basic and diluted earnings per share. Basic earnings (loss) per share is computed based upon the weighted average number of common shares outstanding. Diluted earnings (loss) per share is computed based upon the weighted average number of common shares outstanding increased by dilutive common stock options and warrants, common stock subscribed to under the Employee Stock Purchase Plan and the effect of assuming the conversion of the outstanding 12% convertible notes. Prior year earnings per share data has been restated to apply the provisions of SFAS 128. The table below provides the components of the per share computations.
(in thousands except per share data) 1997 1996 1995 ------------------------------------------------------------------------------------ BASIC EPS COMPUTATION Net (loss) earnings ($2,369) $2,413 ($11,619) Weighted average common shares outstanding 9,099 8,268 7,382 Basic (loss) earnings per share ($0.26) $ 0.29 ($ 1.57) ================================================================================= DILUTED EPS COMPUTATION Net (loss) earnings ($2,369) $2,413 ($11,619) Adjusted (loss) earnings ($2,369) $2,413 ($11,619) Weighted average common shares outstanding 9,099 8,268 7,382 Stock options & warrants -- 198 -- 12% convertible notes -- -- -- ------------------------------------ Diluted common shares outstanding 9,099 8,466 7,382 Diluted (loss) earnings per share ($ 0.26) $ 0.29 ($ 1.57) =================================================================================
The assumed conversion of the outstanding 12% convertible notes was excluded from the diluted earnings per share in 1997 and 1996 since they were anti-dilutive. Fair Value of Financial Instruments: Statement of Financial Accounting Standards No. 107, "Disclosures About Fair Value of Financial Instruments," requires disclosure of the fair value of certain financial instruments. Cash and cash equivalents, accounts receivable, notes payable, accounts payable and accrued expenses are reflected in the financial statements at fair value because of the short-term maturity of these instruments. The fair value and net book value of the Company's 12% convertible subordinated promissory notes at December 31, 1997 were $4,483,000 and $4,722,000, respectively. The book value of the secured revolving credit obligation on December 31, 1997 approximated fair value since it has a prime based interest rate that is adjusted for market rate fluctuations. Accounting for Stock-Based Compensation: The Company records compensation expense for employee stock options and warrants only if the current market price of the underlying stock exceeds the exercise price on the date of the grant. On January 1, 1996, the Company adopted Financial Accounting Standard No. 123, "Accounting for Stock-Based Compensation." The Company has elected not to implement the fair value based accounting method for employee and directors' stock options but has elected to disclose the pro forma net earnings and pro forma earnings per share to account for employee stock option grants beginning in 1995 as if such method had been used to account for such stock-based compensation cost. F-9 2. ACCOUNTS RECEIVABLE Accounts receivable at December 31, consisted of the following:
(in thousands) 1997 1996 -------------------------------------------------------------------------------------- Amounts receivable from United States Government: Amounts billed $ 3,489 $ 3,891 Unbilled contract receivables 59 47 -------------------------------------------------------------------------------------- 3,548 3,938 Amounts receivable from others: Amounts billed 6,663 8,564 Unbilled contract receivables 1,629 449 -------------------------------------------------------------------------------------- 8,292 9,013 -------------------------------------------------------------------------------------- 11,840 12,951 Allowance for doubtful accounts (98) (258) --------------------------------------------------------------------------------------- $11,742 $12,693 =======================================================================================
Unbilled contract receivables represent revenue earned but not yet billed to customers at year-end. The Company expects that substantially all of these amounts will be billed and collected within one year. F-10 3. INVENTORIES Inventories at December 31, summarized by major classification, were as follows:
(in thousands) 1997 1996 ----------------------------------------------------------------------- Raw materials and components $ 9,360 $ 8,567 Work-in-process 3,086 3,010 Finished goods 1,426 1,204 Allowance for obsolescence (4,033) (2,403) Unliquidated progress payments (519) (108) ----------------------------------------------------------------------- $ 9,320 $10,270 =======================================================================
4. OTHER CURRENT ASSETS Other current assets at December 31, consisted of the following:
(in thousands) 1997 1996 ---------------------------------------------------------------------- Prepaid insurance $ 171 $ 249 Other prepaid expenses 326 348 ---------------------------------------------------------------------- $ 497 $ 597 ======================================================================
5. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment at December 31, consisted of the following:
(in thousands) 1997 1996 ----------------------------------------------------------------------- Land $ 300 $ 300 Buildings 1,900 1,900 Machinery and equipment 7,245 7,807 Furniture and fixtures 565 681 Leasehold improvements 516 404 ----------------------------------------------------------------------- 10,526 11,092 Less accumulated depreciation and amortization (7,540) (7,569) ----------------------------------------------------------------------- $ 2,986 $ 3,523 =======================================================================
F-11 6. OTHER ACCRUED EXPENSES--CURRENT Other accrued expenses--current at December 31, consisted of the following:
(in thousands) 1997 1996 ---------------------------------------------------------------------- Supplemental retirement $ -- $ 800 Employee benefits 462 949 Insurance payable 182 164 Purchase liabilities 129 257 Warranty 359 688 Deferred revenue 276 296 Contract losses 116 58 Taxes, other than income 50 115 Interest 153 134 Other 389 433 ---------------------------------------------------------------------- $2,116 $3,894 ======================================================================
F-12 7. DEBT Long term debt at December 31, consisted of the following:
(in thousands) 1997 1996 ------------------------------------------------------------------------------------- Secured revolving credit with quarterly step-downs of $750,000 and interest at prime plus 1% (9.5% at December 31, 1997) $ 5,300 $ 7,500 Notes payable, generally secured by specified machinery and equipment, with interest at 10% 36 206 12% Convertible Subordinated Promissory Notes due January 15, 2001 5,123 5,227 -------------------------------------------------------------------------------------- 10,459 12,933 Original issue discount on 12% Notes (401) (551) Less current installments (311) (158) -------------------------------------------------------------------------------------- $ 9,747 $12,224 ======================================================================================
Aggregate principal payments for the five years subsequent to December 31, 1997 are as follows (in thousands): 1998 $ 311 1999 5,025 2000 -- 2001 5,123 2002 -- ------- $10,459 =======
Effective February 15, 1996 the Company entered into an amendment to its credit agreement with its bank lenders which amended and extended the payment provisions contained therein and reset certain financial covenants on more favorable terms for the Company. The revised credit agreement provides for quarterly principal payments of $500,000, beginning on March 31, 1996, and payments of $750,000 beginning on March 31, 1997 and paid through December 31, 1998. The remaining principal balance is due on January 15, 1999. The Company intends to refinance all or a substantial portion of the amount due and payable, either through borrowing or other capital sources. Interest is payable monthly and was amended in 1997 from a rate of 1 3/4% above prime to 1% above prime. The loan covenants require that the Company maintain certain minimum levels of net worth, current ratio and quick ratio. They also limit capital expenditures and the payment of cash dividends. As of December 31, 1997 the Company had made prepayments of $2,725,000. At various times from February 15, 1996 to May 2, 1996, the Company issued an aggregate of $8,342,000 of 12% convertible subordinated promissory notes due January 15, 2001 and warrants to purchase an aggregate of 2,085,500 shares of the Company's Common Stock. The Notes are convertible by the holders into shares of Common Stock at a conversion price equal to $2.00 per share. Interest on the Notes is payable quarterly in arrears on January 15, April 15, July 15 and October 15 of each year. The Notes mature on January 15, 2001. The Notes may be prepaid by the Company without premium or F-13 penalty at any time after January 15, 1999. The Notes are unsecured obligations of the Company and contain certain restrictions on the Company's assets not otherwise encumbered by the holders of the senior indebtedness. As of December 31, 1997, $3,219,500 of such Notes had been converted into Common Stock. In addition to the Warrants noted above, the Company issued 2,034,200 Warrants to the lead investor and placement agent. All Warrants entitle the holders thereof to purchase shares of Common Stock at any time on or before February 15, 2002, at an exercise price equal to $2.50 per share of Common Stock. The Warrants are detachable and separately transferable. The Warrants were valued at $0.50 each. Such value was derived based upon an evaluation by an independent third party and included a review of both current and historical stock price data, the lack of liquidity afforded to the Warrants, the results of various quantitative methodologies, the Company's financial position and historical and projected cash flows. The Warrants issued in conjunction with the Notes are recorded as original issued discount on the Company's balance sheet. The Warrants issued to the lead investor and the placement agent are recorded as deferred debt costs and are included in other assets in the accompanying consolidated balance sheet. On May 9, 1996, the Company entered into an agreement with Charles S. Holmes, a member of the Company's Board of Directors, that in consideration of his converting the Note in the aggregate unpaid principal amount of $2,000,000 held by him into 1,000,000 shares of Common Stock, the Company would immediately issue warrants to purchase 300,000 shares of Common Stock exercisable at any time on or before February 15, 2002 at $3.00 per share. The warrants were valued at $0.50 per warrant and the Company recorded a charge to operations of $150,000 in 1996. The Company's U.K. subsidiary has a credit facility (sterling overdraft) with a U.K. bank. The credit facility amounts to 'L'600,000 (approximately $990,000) and bears interest at 1 3/4% above the U.K. base rate (7 1/4% at December 31, 1997). This facility is renewable in March 1998. The amounts outstanding under the credit facility at December 31, 1997 and 1996 were $571,000 and $-0-, respectively. The maximum month end borrowings under the credit facility during the years ended December 31, 1997 and 1996 were 'L'673,000 and 'L'346,000 (approximately $1,120,000 and $543,000, respectively). The average short term borrowings for the years ended December 31, 1997 and 1996 were 'L'140,000 and 'L'29,000 (approximately $231,000 and $50,000, respectively). The weighted average interest rate during the years ended December 31, 1997 and 1996 was 8.40% and 8.23%, respectively. F-14 8. OTHER ACCRUED EXPENSES - NON-CURRENT Other accrued expenses - non-current at December 31, consisted of the following:
(in thousands) 1997 1996 ----------------------------------------------------------------------- Deferred compensation $ 433 $ 473 Other 350 439 ----------------------------------------------------------------------- $ 783 $ 912 =======================================================================
In 1981, the Company entered into agreements with two former officers which provide for the payments to each of $25,000 per year, adjusted for the cumulative effects of inflation from inception of the agreement, over a period of 15 years. Such deferred compensation payments commenced on January 1, 1990. The 1998 payment to each of the former officers will be approximately $43,000. 9. OTHER (INCOME) EXPENSE Other (income) expense for the years ended December 31, are as follows:
(in thousands) 1997 1996 1995 ----------------------------------------------------------------------- Gain on sale of division (1) $ -- ($1,510) $ -- Amortization of goodwill 633 632 629 Other (58) (7) (141) ----------------------------------------------------------------------- $ 575 ($ 885) $ 488 =======================================================================
(1) In June 1996, the Company sold the assets of its Systems Integration division which operated within the Codar Technology subsidiary. F-15 10. INCOME TAXES The Company and its domestic subsidiaries file a consolidated Federal income tax return. The (loss) income before provision for income taxes for the years ended December 31, 1997, 1996 and 1995 were ($1,809,000), $2,809,000 and ($11,242,000), respectively, comprised of domestic (loss) income of ($3,859,000), $1,641,000 and ($12,077,000), respectively and foreign income of $2,050,000, $1,168,000 and $835,000, respectively. The provision for income taxes consisted of the following items:
(in thousands) 1997 1996 1995 ------------------------------------------------------------------------ Current: Federal ($ 85) $ -- $ -- State -- -- -- Foreign 615 533 377 ----------------------------------------------------------------------- 530 533 377 ----------------------------------------------------------------------- Deferred: Federal -- -- -- State -- -- -- Foreign 30 (137) -- ----------------------------------------------------------------------- 30 (137) -- ----------------------------------------------------------------------- Total income tax expense $ 560 $ 396 $ 377 =======================================================================
The tax effects of temporary differences that gave rise to significant portions of the net deferred tax asset and (liability) at December 31, 1997, and 1996 are as follows:
(in thousands) 1997 1996 ----------------------------------------------------------------------- Deferred tax assets: Net operating loss carryforward $4,603 $3,389 AMT credit carryforward 514 514 Inventories 916 401 Supplemental retirement obligation -- 204 Accrued vacation 66 81 Deferred compensation 177 186 Other 208 392 Plant and equipment 333 109 Valuation allowance (6,669) (5,103) ----------------------------------------------------------------------- $ 148 $ 173 ----------------------------------------------------------------------- Deferred tax liabilities non-current: Other (41) (36) ----------------------------------------------------------------------- (41) (36) ----------------------------------------------------------------------- $ 107 $ 137 =======================================================================
The Company has recorded a valuation allowance to reflect the estimated amount of deferred tax assets that may not be realized through the realization of future taxable income. F-16 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) 1997 1996 1995 -------------------------------------------------------------------------------------- Expected tax expense (benefit) ($ 615) $ 955 ($3,822) Increases (decreases) resulting from: Adjustment of prior years' income taxes (344) -- (350) Non-deductible expenses 106 214 278 Other (153) (250) 246 Change in valuation allowance 1,566 (523) 4,025 -------------------------------------------------------------------------------------- Actual income tax expense $ 560 $ 396 $ 377 ======================================================================================
No provision has been recorded for U.S. income taxes applicable to undistributed earnings of foreign subsidiaries that are indefinitely reinvested in foreign operations. At December 31, 1997, the Company has U.S. net operating loss carryforwards of $13,549,000, expiring at various dates beginning in 2009 to 2012. F-17 11. SHAREHOLDERS' EQUITY The Company has three stock option plans -- the 1991 Stock Option Plan, the 1993 Stock Option Plan for Directors, and the 1996 Stock Option Plan. THE 1991 STOCK OPTION PLAN Options under the 1991 Stock Option Plan are non-qualified stock options and are granted at the option price fixed by the Compensation Committee of the Board of Directors but in no event may the option price be less than the fair market value of a share of common stock on the date of grant. Options under the 1991 Stock Option Plan have such term as is fixed by the Compensation Committee but no option may be exercised during the first year after its date of grant or after the expiration of ten years from its date of grant. THE 1993 STOCK OPTION PLAN FOR DIRECTORS Options under the Directors' Plan are non-qualified stock options and non-employee directors are automatically granted 5,000 options to purchase common shares upon the director's election or re-election to the Board of Directors. The option price is equal to the fair market value of a share of common stock on the date of grant. Options are granted for a term of ten years and become exercisable eleven months after their date of grant. In no event may an option be exercised after the expiration of the term of such option. THE 1996 STOCK OPTION PLAN Options under the 1996 Stock Option Plan are non-qualified stock options and are granted at the option price fixed by the Compensation Committee of the Board of Directors but in no event may the option price be less than the fair market value of a share of common stock on the date of grant. Options under the 1996 Stock Option Plan have such term as is fixed by the Compensation Committee but no option may be exercised during the first year after its date of grant or after the expiration of five years from its date of grant. Full payment of the exercise price under all stock option plans may be made in cash or in shares of common stock valued at the fair market value thereof on the date of exercise. The Company's policy is that the optionee must have acquired such shares at least six months prior to the exercise date. During 1997, 11,770 common shares were received as payment for the exercise of options. No options were exercised in 1996. In 1995 all payments were made in cash. In 1996, the Company adopted the disclosure-only alternative of SFAS No. 123, "Accounting for Stock Based Compensation." The weighted-average fair value per option at the date of grant for options granted during 1997, 1996 and 1995 was $1.48, $0.74 and $0.61, respectively. The weighted-average fair value per purchase right under the Employee Stock Purchase Plan was $1.05 and $0.74 respectively, for 1997 and 1996 subscriptions. There were no subscriptions in 1995. The fair value was estimated using the Black-Scholes option pricing model and the following weighted-average assumptions: F-18
1997 1996 1995 - ---------------------------------------------------------------------------------------------- Expected dividend yield 0% 0% 0% Expected stock volatility 20% 30% 30% Risk-free interest rate 5% 5% 5% Expected term until exercise (years) 3 3 3 ---------------------------------------------------------------------------------------
Pro forma net income and earnings per share reflecting compensation cost for the fair value of stock options awarded in 1997, 1996 and 1995 were as follows:
(thousands of dollars, expect per share data) 1997 1996 1995 ------------------------------------------------------------------------------------ Net income (loss): As reported ($2,369) $2,413 ($11,619) Pro forma ($2,542) $2,315 ($11,671) Basic (loss) earnings per share: As reported ($ 0.26) $ 0.29 ($ 1.57) Pro forma ($ 0.28) $ 0.28 ($ 1.58) Diluted (loss) earnings per share: As reported ($ 0.26) $ 0.29 ($ 1.57) Pro forma ($ 0.28) $ 0.27 ($ 1.58) ------------------------------------------------------------------------------------
The pro forma effects on net income and earnings per share for 1997, 1996 and 1995 may not be representative of the pro forma effects in future years because they include compensation cost calculated on a straight-line basis over the vesting periods of the grants and do not take into consideration pro forma compensation cost for options granted prior to 1995. F-19 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, 1995 662,351 $4.77 Granted 515,000 $2.43 Exercised (37,962) $1.93 Expired/canceled (486,656) $4.81 ------------------------------------------------------------------------- Outstanding at December 31, 1995 652,733 $3.06 Granted 330,400 $2.69 Expired/canceled (256,239) $2.22 ------------------------------------------------------------------------- Outstanding at December 31, 1996 726,894 $2.63 Granted 135,000 $3.56 Exercised (78,850) $2.45 Canceled (63,125) $2.80 ------------------------------------------------------------------------- Outstanding at December 31, 1997 719,919 $2.81 =========================================================================
Stock options outstanding at December 31, 1997 are summarized as follows:
Range of exercise Number Weighted average Weighted exercise price outstanding remaining life average price ------------------------------------------------------------------------- $1.88-$2.00 41,250 4.0 years $ 1.90 $2.50 509,675 3.1 years $ 2.50 $3.44-$3.75 130,000 5.2 years $ 3.58 $4.50-$8.33 38,994 6.2 years $ 5.32 ------------------------------------------------------------------------- $1.88-$8.33 719,919 4.0 years $ 2.81 =========================================================================
At December 31, 1997, 431,102 options were exercisable at a weighted average exercise price of $2.67 and 1,166,651 shares were reserved for issuance under all stock option plans. Warrants At December 31, 1997, there were 4,112,700 warrants outstanding exercisable at $2.50 per share and 300,000 warrants outstanding exercisable at $3.00 per share. All warrants expire February 15, 2002. F-20 Employee Stock Purchase Plan Under the 1992 Employee Stock Purchase Plan, which commenced July 1, 1992, employees may subscribe to purchase shares of common stock at the lesser of 85% of the market price on the first day of the purchase period or the date purchased one year later. Payment for the shares is made through payroll deductions of up to 5% of annual base pay over a one-year period. A total of 101,017 shares has been reserved for issuance under the Employee Stock Purchase Plan and as of December 31, 1997, 61,223 shares have been issued pursuant to the plan. The following table is a summary of shares subscribed under the Employee Stock Purchase Plan:
NUMBER OF PRICE SHARES RANGE ------ ------ Outstanding at January 1, 1995 22,920 $3.13 Purchases (13,870) $3.13 Cancellations (9,050) $3.13 ----------------------------------------------------------------------------------- Outstanding at December 31, 1995 -- $ -- Subscriptions 19,780 $2.76 Cancellations (1,000) $2.76 ----------------------------------------------------------------------------------- Outstanding at December 31, 1996 18,780 $2.76 Purchases (12,160) $2.76 Subscriptions 10,520 $4.36 Cancellations (12,410) $2.76-$4.36 ----------------------------------------------------------------------------------- Outstanding at December 31, 1997 4,730 $4.36 ===================================================================================
F-21 12. EMPLOYEE BENEFIT PLANS Retirement Savings Plan The Company has a voluntary Retirement Savings Plan for all eligible employees, which provides for basic employee contributions (up to 15% of compensation). Plan participants may invest in a combination of equity, fixed income and money market funds. Beginning in January 1997, the Company re-instituted a matching provision of 100% of the first 1% of each employee's compensation that is contributed. The Company's contribution in 1997 under the Plan was $51,000. There were no Company contributions made in 1996 or 1995. The plan also provides for a discretionary profit sharing contribution as determined by the Board of Directors, which may be contributed to each of the participant's individual accounts. The Company made no such contribution for 1997, 1996 or 1995. Supplemental Retirement Plan The NAI Technologies Supplemental Retirement Plan, a non-qualified, un-funded pension plan was terminated in 1996. The expense related to this plan amounted to $146,000 in 1995. In 1995, the actuarial computations assumed a discount rate of 6.75% on benefit obligation and an annual compensation increase of 5%. The following table sets forth the funded status and cost components of the Company's Supplemental Retirement Plan at December 31, 1995:
(in thousands) 1995 ------------------------------------------------------------------------------- Accumulated benefit obligation including vested benefits of $1,215 $1,221 =============================================================================== Projected benefit obligation for service rendered to date (1,442) Plan assets at fair value -- ------------------------------------------------------------------------------- Projected benefit obligation in excess of plan assets (1,442) Unrecognized prior service cost 332 Unrecognized net loss 178 Adjustment required to recognize minimum liability (289) -------------------------------------------------------------------------------- Unfunded accrued supplementary costs ($1,221) =============================================================================== Net pension expense is comprised of the following: Service cost $ 25 Interest cost 93 Net amortization and deferral 28 ------------------------------------------------------------------------------- Net pension expense $ 146 ===============================================================================
F-22 13. INFORMATION BY GEOGRAPHIC AREA Information about the Company's foreign operations and export sales is provided in the following table. Export revenue is foreign revenue produced by identifiable assets located in the United States while foreign revenue is generated by identifiable assets located in foreign countries. In order to achieve an appropriate sharing of operating results between the Company's subsidiaries, transfers between geographic areas are accounted for on the basis of a mark-up of manufacturing costs. Operating earnings are total sales less operating expenses. In computing operating earnings, none of the following items has been added or deducted: general corporate expenses, interest income, interest expense and income taxes. Identifiable assets are those assets of the Company that are identified with the operations in each geographic area. Corporate assets consisted primarily of cash and cash equivalents. F-23 NAI TECHNOLOGIES, INC. AND SUBSIDIARIES INFORMATION BY GEOGRAPHIC AREA
As of or Years ended December 31, (in thousands) 1997 1996 1995 ------------------------------------------------------------------------------------------ SALES TO UNAFFILIATED CUSTOMERS: United States $34,324 $52,053 $47,329 Export 1,814 1,581 1,786 United Kingdom 15,726 14,573 10,893 ------------------------------------ Total $51,864 $68,207 $60,008 ==================================== TRANSFERS BETWEEN GEOGRAPHIC AREAS: United States $ 812 $ 547 $ 831 United Kingdom 71 -- -- ------------------------------------ Total $ 883 $ 547 $ 831 ==================================== TOTAL SALES: United States $35,446 $52,600 $48,160 Export 1,453 1,581 1,786 United Kingdom 15,848 14,573 10,893 Eliminations (883) (547) (831) ------------------------------------- Total $51,864 $68,207 $60,008 ==================================== OPERATING EARNINGS (LOSS): United States $ (930) $ 4,869 ($ 6,232) United Kingdom 2,549 2,070 1,226 ------------------------------------ Subtotal 1,619 6,939 (5,006) Corporate expenses and other (1,650) (1,632) (3,869) ------------------------------------- Total operating earnings (loss) (31) 5,307 (8,875) Net interest expense & other (1,778) (2,498) (2,367) ------------------------------------- Earnings (loss) before income taxes ($ 1,809) $ 2,809 ($11,242) ===================================== IDENTIFIABLE ASSETS: United States $23,810 $28,294 $34,103 United Kingdom 10,055 9,602 8,283 ---------------------------------- Subtotal 33,865 37,896 42,386 Corporate and other 1,816 3,475 5,626 ------------------------------------ Total $35,681 $41,371 $48,012 ====================================
F-24 14. INFORMATION BY BUSINESS SEGMENT The Company's operations are classified into three business segments: Rugged Systems, Systems Integration and Telecommunications. The Rugged Systems segment includes Codar Technology, Inc. based in Longmont, Colorado, and Lynwood Rugged Systems Limited in Farnham, England. Codar Technology designs, manufactures, integrates and supports rugged computer systems, advanced computer peripherals and memory systems for military and commercial use. Lynwood supplies rugged, environmentally and electrically screened personal computers and workstations based upon standard commercial off the shelf technology, targeted to the military and government markets principally in Europe. One customer accounted for 25% of the Rugged Systems segment's 1997 sales. No other customer accounted for greater than 10% of the segment's sales. The Systems Integration segment consists of NAI Technologies--Systems Division Corporation ("Systems Division") in Columbia, Maryland. Systems Division provides custom packaged integrated computer systems for deployment in shelters, ships, land vehicles and other demanding environments. The U.S. Government accounted for 70% of the Systems Integration segment's 1997 sales and one other customer accounted for 22% of the segment's sales. The Telecommunications segment consists of Wilcom, Inc. in Laconia, New Hampshire. Wilcom designs and manufactures products for use in the telephone industry. Wilcom's customer base includes the regional Bell operating companies and independent telephone companies. One customer accounted for 20% of the Telecommunications segment's 1997 sales. All other customers individually comprised less than 10% of the segment's sales. Inter-segment sales are accounted for on the basis of a mark-up of manufacturing costs. Operating earnings are total sales less operating expenses. In computing operating earnings, none of the following items has been added or deducted: general corporate expenses, interest income, interest expense and income taxes. Identifiable assets by segment are those assets of the Company that are used in the Company's operations in each segment. Corporate assets consist primarily of cash and cash equivalents. F-25 NAI TECHNOLOGIES, INC. AND SUBSIDIARIES INFORMATION BY INDUSTRIAL SEGMENT
As of or Years ended December 31, (in thousands) 1997 1996 1995 - --------------------------------------------------------------------------------------------------- SALES TO UNAFFILIATED CUSTOMERS: Rugged Systems $30,904 $46,914 $38,891 Systems Integration 16,854 14,217 12,922 Telecommunications 4,106 7,076 8,195 ----------------------------------- Total $51,864 $68,207 $60,008 =================================== INTERSEGMENT SALES: Rugged Systems $ 520 434 249 Systems Integration 363 113 582 ----------------------------------- Total $ 883 $ 547 $ 831 =================================== TOTAL SALES: Rugged Systems $31,424 $47,348 $39,140 Systems Integration 17,217 14,330 13,504 Telecommunications 4,106 7,076 8,195 Eliminations (883) (547) (831) ----------------------------------- Total $51,864 $68,207 $60,008 =================================== OPERATING EARNINGS (LOSS): Rugged Systems $ (208) $ 4,927 ($ 4,856) Systems Integration 2,546 1,318 583 Telecommunications (719) 694 (733) ----------------------------------- Subtotal 1,619 6,939 (5,006) Corporate expenses and other (1,650) (1,632) (3,869) ----------------------------------- Total operating earnings (loss) (31) 5,307 (8,875) Net interest expense & other (1,778) (2,498) (2,367) ----------------------------------- Earnings (loss) before income taxes ($ 1,809) $ 2,809 ($11,242) =================================== IDENTIFIABLE ASSETS: Rugged Systems $21,351 $25,484 $31,282 Systems Integration 7,029 6,100 4,295 Telecommunications 5,485 6,312 6,809 ----------------------------------- Subtotal 33,865 37,896 42,386 Corporate and other 1,816 3,475 5,626 ----------------------------------- Total $35,681 $41,371 $48,012 =================================== CAPITAL EXPENDITURES: Rugged Systems $ 293 $ 398 $ 738 Systems Integration 171 14 7 Telecommunications 74 150 120 ----------------------------------- Subtotal 538 562 865 Corporate and other -- 4 21 ----------------------------------- Total $ 538 $ 566 $ 886 =================================== DEPRECIATION AND AMORTIZATION: Rugged Systems $ 1,262 $ 1,416 $ 1,461 Systems Integration 124 144 219 Telecommunications 280 362 359 ----------------------------------- Subtotal 1,666 1,922 2,039 Corporate and other 495 626 940 ----------------------------------- Total $ 2,161 $ 2,548 $ 2,979 ===================================
F-26 15. COMMITMENTS AND CONTINGENCIES The Company and its subsidiaries lease office and manufacturing facilities, automobiles, computers and other equipment under various non-cancelable operating leases. Future minimum rental commitments for leases with non-cancelable terms in excess of one year are as follows:
(in thousands) Amount ------------------------------------------- 1998 $1,329 1999 1,161 2000 708 2001 623 2002 346 Thereafter 4,001 ------- Total minimum lease payments $8,168 =======
With the acquisition of Lynwood, the Company assumed a 25-year operating lease for office and manufacturing facilities. Annual future minimum lease payments through the year 2014, which are included in the above table, amount to approximately $333,000 per year. Net rental expense amounted to $1,072,000, $1,570,000 and $1,725,000 in 1997, 1996 and 1995, respectively. In 1997, there was $44,000 of sub- lease income netted against the rental expense. Most leases provide for additional payments of real estate taxes, insurance and other operating expenses applicable to the property, generally over a base period level. Total rental expense includes such base period expenses and the additional expense payments as part of the minimum lease payments. The Company and its subsidiaries are subject to certain legal actions that arise in the normal course of business. It is management's belief that these actions will not have a material effect on the Company's consolidated financial position. F-27 16. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) The following table sets forth quarterly financial information for 1997 and 1996:
Basic Diluted (in thousands, Net Gross Net (loss) earnings(loss) earnings (loss) except per share data) sales margin income per share per share - -------------------------------------------------------------------------------------------------------- 1997 ---- First Quarter $13,062 $ 3,649 $ 379 $ 0.04 $ 0.04 Second Quarter 14,112 3,755 501 0.05 0.05 Third Quarter (1) 12,553 (9) (3,409) (0.37) (0.37) Fourth Quarter 12,137 3,092 160 0.02 0.02 ---------------------------------------------------------------------------------------------- Total $51,864 $10,487 ($ 2,369) ($ 0.26) ($ 0.26) ============================================================================================== 1996 First Quarter $16,503 $ 3,265 ($ 450) ($ 0.06) ($ 0.06) Second Quarter 17,354 3,550 815 0.10 0.10 Third Quarter 17,271 3,801 964 0.11 0.11 Fourth Quarter 17,079 4,879 1,084 0.12 0.12 ---------------------------------------------------------------------------------------------- Total $68,207 $15,495 $ 2,413 $ 0.29 $ 0.29 ==============================================================================================
(1) The Company recorded a $3.0 million charge substantially related to an inventory write-down at its Codar Technology Inc. subsidiary. F-28 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, 1997 $ 258 $ 83 ($ 2) (C) $ 241 (A) $ 98 Year ended December 31, 1996 142 88 5 (C) ( 23) (A) 258 Year ended December 31, 1995 133 205 -- 196 (A) 142 Allowance for inventory obsolescence reserve: Year ended December 31, 1997 2,403 2,651 ($ 9) (C) 1,012 (F) 4,033 Year ended December 31, 1996 3,536 88 897 (D) 2,118 (B) 2,403 Year ended December 31, 1995 2,250 2,248 23 (E) 985 (B) 3,536
- ------------------------ Note A - Uncollected receivables written off, net of recoveries. Note B - Obsolete inventories scrapped, net of recoveries. Note C - Foreign currency translation adjustment. Note D - Reclassification of 1995 provision for future inventory loss on work in process of $650,000. Gross-up of inventory reserve previously netted of $207,000. Foreign currency translation adjustment of $22,000. Reclassification from other inventory accounts of $18,000. Note E - Reclassification from other inventory accounts. Note F - Obsolete inventory scrapped, net of recoveries-$992,000. $120,000 write-down of inventory to net realizable value. F-29 EX-11 2 EXHIBIT 11 Exhibit 11 STATEMENTS RE: COMPUTATION OF EARNINGS PER SHARE
- --------------------------------------------------------------------------------------------------------------- Year Ended December 31, (in thousands) 1997 1996 - --------------------------------------------------------------------------------------------------------------- Net (loss) income ($ 2,369) $ 2,413 Average shares of common stock outstanding during the period 9,099 8,268 Basic earnings per share ($ 0.26) $ 0.29 =============================================================================================================== Net Income (loss) ($ 2,369) $ 2,413 Adjusted net (loss) income ($ 2,369) $ 2,413 Average shares of common stock outstanding during the period 9,099 8,268 Incremental shares from assumed exercise of stock options, stock warrants and employee stock purchase plan -- 198 - --------------------------------------------------------------------------------------------------------------- Average diluted shares outstanding during the period 9,099 8,466 Diluted earnings per share ($ 0.26) $ 0.29 ===============================================================================================================
The assumed conversion of the 12% subordinated convertible notes was excluded from diluted earnings per share in 1997 and 1996 since they were anti-dilutive. EX-21 3 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 Rugged United Kingdom Lynwood Systems Ltd. Codar Technology, Inc. Colorado Codar
EX-23 4 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 report dated February 9, 1998, relating to the consolidated balance sheets of NAI Technologies, Inc. and subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1997, and related financial statement schedule, which report appears in the December 31, 1997, annual report on Form 10-K of NAI Technologies, Inc. KPMG PEAT MARWICK LLP Jericho, New York February 26, 1998 EX-27 5 EXHIBIT 27
5 1,000 12-MOS DEC-31-1997 DEC-27-1997 585 0 11,742 0 9,320 22,292 10,526 (7,540) 35,681 11,362 5,123 916 0 0 12,832 35,681 51,864 51,864 41,377 51,895 0 0 1,498 (1,809) 560 (2,369) 0 0 0 (2,369) (0.26) (0.26)
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