-----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, PMXOYAO6KoFbso6hZEZdEbcJdSNSrpaLUjzQ7/QQfhCQjLd4Sj/u34qchA/E3f4m 3k+nRj4q+6dS+7/6onAujQ== 0000950117-98-001508.txt : 19980812 0000950117-98-001508.hdr.sgml : 19980812 ACCESSION NUMBER: 0000950117-98-001508 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980627 FILED AS OF DATE: 19980811 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-Q SEC ACT: SEC FILE NUMBER: 000-03704 FILM NUMBER: 98682667 BUSINESS ADDRESS: STREET 1: 282 NEW YORK AVE STREET 2: SUITE 412 CITY: HUNTINGTON STATE: NY ZIP: 11743 BUSINESS PHONE: 3037765674 MAIL ADDRESS: STREET 1: 282 NEW YORK AVE STREET 2: 1000 WOODBURY ROAD STE 412 CITY: NEW YORK STATE: NY ZIP: 11743 FORMER COMPANY: FORMER CONFORMED NAME: NORTH ATLANTIC INDUSTRIES INC DATE OF NAME CHANGE: 19920703 10-Q 1 NAI TECHNOLOGIES, INC. 10-Q (CONFORMED COPY) SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES - --- EXCHANGE ACT OF 1934 For the quarterly period ended June 27, 1998 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES - --- EXCHANGE ACT OF 1934 For the transition period from _________________ to _______________ Commission File Number 0-3704 NAI TECHNOLOGIES, INC. (Exact name of registrant as specified in its charter) New York 11-1798773 (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) 282 New York Avenue, Huntington, NY 11743 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (516) 271-5685 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ______ ______ As of July 27, 1998, 9,179,567 shares of NAI Technologies, Inc.'s $.10 par value Common Stock were outstanding. Page 1 of 20 Pages Page 2 NAI TECHNOLOGIES, INC. INDEX
PAGE Facing Sheet 1 Index 2 PART I. Financial Information Item 1. Financial Statements Consolidated Balance Sheets - 3 June 27, 1998 and December 31, 1997 Consolidated Statements of Operations - 4 Three months ended June 27, 1998 and June 28, 1997 Consolidated Statements of Operations - 5 Six months ended June 27, 1998 and June 28, 1997 Consolidated Statements of Comprehensive Income - 6 Three months ended June 27, 1998 and June 28, 1997 Consolidated Statements of Comprehensive Income - 7 Six months ended June 27, 1998 and June 28, 1997 Consolidated Statements of Cash Flows - 8 Six months ended June 27, 1998 and June 28, 1997 Other Financial Information 9-12 Item 2. Management's Discussion and Analysis of 13-18 Financial Condition and Results of Operations PART II. Other Information Item 5. Other Information 19 Item 6. Exhibits and Reports on Form 8-K 19 Signatures 20
Page 3 PART I - FINANCIAL INFORMATION Item 1. Financial Statements NAI TECHNOLOGIES, INC. AND SUBSIDIARIES Consolidated Balance Sheets (in thousands)
- -------------------------------------------------------------------------------- June 27, Dec. 31, 1998 1997 (Audited) - -------------------------------------------------------------------------------- ASSETS CURRENT ASSETS: Cash and cash equivalents $ 811 $ 572 Accounts receivable, net 11,742 11,379 Inventories, net 6,348 7,262 Deferred tax asset 147 148 Current assets of discontinued operations, net 1,515 1,968 Other current assets 785 497 - -------------------------------------------------------------------------------- Total current assets 21,348 21,826 - -------------------------------------------------------------------------------- Property, plant and equipment, net 738 873 Excess of cost over fair value of net assets acquired,net 7,851 8,135 Non current assets of discontinued operations 1,082 3,051 Other assets 1,156 1,330 - -------------------------------------------------------------------------------- Total assets $32,175 $35,215 ================================================================================ LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 4,751 $ 7,122 Notes payable 657 571 Current installments of long-term debt 5,903 311 Accrued payroll and commissions 159 281 Other accrued expenses 2,881 2,014 Income taxes payable 940 597 - -------------------------------------------------------------------------------- Total current liabilities 15,291 10,896 - -------------------------------------------------------------------------------- Long-term debt 4,786 9,747 Other accrued expenses 762 783 Deferred income taxes 41 41 - -------------------------------------------------------------------------------- Total liabilities 20,880 21,467 - -------------------------------------------------------------------------------- SHAREHOLDERS' EQUITY: Capital Stock: Preferred stock, no par value, 2,000,000 shares authorized and unissued - - Common stock, $.10 par value, 25,000,000 shares authorized; shares issued: 9,157,927 in 1998 and 9,155,427 in 1997 916 916 Capital in excess of par value 19,463 19,457 Accumulated other comprehensive income 116 196 Accumulated deficit (9,200) (6,821) - -------------------------------------------------------------------------------- Total shareholders' equity 11,295 13,748 - -------------------------------------------------------------------------------- Total liabilities and shareholders' equity $32,175 $35,215 ================================================================================
Page 4 NAI TECHNOLOGIES, INC. AND SUBSIDIARIES Consolidated Statements of Operations (in thousands except per share amounts) (Unaudited)
- -------------------------------------------------------------------------------- For the Three Months Ended -------------------------- June 27, June 28, 1998 1997 - -------------------------------------------------------------------------------- Net sales $11,903 $12,809 - -------------------------------------------------------------------------------- Cost of sales 8,912 9,553 - -------------------------------------------------------------------------------- Gross margin 2,991 3,256 - -------------------------------------------------------------------------------- Selling expense 759 752 General and administrative expense 1,036 990 Research and development 122 254 Other 142 135 - -------------------------------------------------------------------------------- Total expenses 2,059 2,131 - -------------------------------------------------------------------------------- Operating income 932 1,125 - -------------------------------------------------------------------------------- Non-operating income (expense): Interest income 11 18 Amortization of deferred debt costs (82) (76) Interest expense (378) (377) - -------------------------------------------------------------------------------- (449) (435) - -------------------------------------------------------------------------------- Earnings before income taxes 483 690 Provision for income taxes 205 224 - -------------------------------------------------------------------------------- Earnings from continuing operations 278 466 Discontinued operations (Loss) earnings from operations of discontinued Telecommunications Segment (139) 35 Loss on disposal of Telecommunications Segment including provision of $192,000 for operating losses during phase-out period (2,692) - - -------------------------------------------------------------------------------- Net earnings (loss) $(2,553) $501 ================================================================================ Basic earnings (loss) per share From continuing operations $ 0.03 $ 0.05 From discontinued operations $(0.31) $ 0.01 ------- ------ Basic earnings (loss) per share $(0.28) $ 0.06 ======= ====== Diluted earnings (loss) per share From continuing operations $ 0.03 $ 0.04 From discontinued operations $(0.31) $ 0.01 ------- ------ Diluted earnings (loss) per share $(0.28) $ 0.05 ======= ====== Average shares outstanding - Basic EPS 9,157 9,074 ===== ===== Average shares outstanding - Diluted EPS 9,161 10,391 ===== ======
Page 5 NAI TECHNOLOGIES, INC. AND SUBSIDIARIES Consolidated Statements of Operations (in thousands except per share amounts) (Unaudited)
- ----------------------------------------------------------------------------- For the Six Months Ended ------------------------- June 27, June 28, 1998 1997 - ----------------------------------------------------------------------------- Net sales $24,723 $24,827 - ----------------------------------------------------------------------------- Cost of sales 18,698 18,252 - ----------------------------------------------------------------------------- Gross margin 6,025 6,575 - ----------------------------------------------------------------------------- Selling expense 1,512 1,587 General and administrative expense 2,159 1,940 Research and development 228 543 Other 310 246 - ----------------------------------------------------------------------------- Total expenses 4,209 4,316 - ----------------------------------------------------------------------------- Operating income 1,816 2,259 - ----------------------------------------------------------------------------- Non-operating income (expense): Interest income 18 32 Amortization of deferred debt costs (163) (180) Interest expense (742) (778) - ----------------------------------------------------------------------------- (887) (926) Earnings before income taxes 929 1,333 Provision for income taxes 371 371 - ----------------------------------------------------------------------------- Earnings from continuing operations 558 962 Discontinued operations Loss from operations of discontinued Telecommunications segment (245) (82) Loss on disposal of Telecommunications segment including provision of $192,000 for operating losses during phase-out period (2,692) - - ---------------------------------------------------------------------------- Net earnings (loss) $(2,379) $880 ============================================================================= Basic earnings (loss) per share From continuing operations $ 0.06 $ 0.11 From discontinued operations $(0.32) $(0.01) ------- ------- Basic earnings (loss) per share $(0.26) $ 0.10 ======= ====== Diluted earnings (loss) per share From continuing operations $ 0.06 $ 0.09 From discontinued operations $(0.32) $(0.00) ------- ------- Diluted earnings (loss) per share $(0.26) $ 0.09 ======= ====== Average shares outstanding - Basic EPS 9,156 9,052 ===== ===== Average shares outstanding - Diluted EPS 9,159 10,295 ===== ======
Page 6 NAI TECHNOLOGIES, INC. AND SUBSIDIARIES Consolidated Statements of Comprehensive Income (in thousands) (Unaudited)
- ------------------------------------------------------------------------------ For the Three Months Ended -------------------------- June 27, June 28, 1998 1997 - ------------------------------------------------------------------------------ Earnings from continuing operations $ 278 $ 466 - ------------------------------------------------------------------------------ Other comprehensive income, net of tax: Foreign currency translation adjustment (165) 57 - ------------------------------------------------------------------------------ Other comprehensive income (165) 57 - ------------------------------------------------------------------------------ Comprehensive income from continuing operations 113 523 Discontinued operations (Loss) earnings from operations of discontinued segment (139) 35 Loss on disposal of Wilcom, Inc. including provision of $192,000 for operating losses during phase-out period (2,692) - - ---------------------------------------------------------------------------- Comprehensive Income (loss) (2,718) 558 ==============================================================================
Page 7 NAI TECHNOLOGIES, INC. AND SUBSIDIARIES Consolidated Statements of Comprehensive Income (in thousands) (Unaudited)
- ------------------------------------------------------------------------------ For the Six months Ended -------------------------- June 27, June 28, 1998 1997 - ------------------------------------------------------------------------------ Earnings from continuing operations $ 558 $ 962 - ------------------------------------------------------------------------------ Other comprehensive income, net of tax: Foreign currency translation adjustment (80) (81) - ------------------------------------------------------------------------------ Other comprehensive income (80) (81) - ------------------------------------------------------------------------------ Comprehensive income from continuing operations 478 881 Discontinued operations Loss from operations of discontinued segment (245) (82) Loss on disposal of Wilcom, Inc. including provision of $192,000 for operating losses during phase-out period (2,692) - - ------------------------------------------------------------------------------ Comprehensive Income (loss) (2,459) 799 ==============================================================================
Page 8 NAI TECHNOLOGIES, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (in thousands) (Unaudited)
- ----------------------------------------------------------------------------- For the Six Months Ended ------------------------- June 27, June 28, 1998 1997 -------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings from continuing operations $ 558 $ 962 Adjustments to reconcile net earnings to cash provided by operating activities: Discontinued operations (515) 189 Depreciation and amortization 726 977 Gain on disposal of property, plant and equipment - (7) Provision for inventory obsolescence 60 164 Change in operating assets and liabilities, excluding effects from acquisitions, dispositions and foreign currency adjustments: Accounts receivable (363) 1,671 Inventories 854 (210) Accounts payable and other accrued expenses (1,647) (3,468) Income taxes 344 443 Other, net (277) (119) - ----------------------------------------------------------------------------- Net cash flow provided by operating activities (260) 602 - ---------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property, plant and equipment (79) (307) Proceeds from sale of property, plant and equipment - 19 - ----------------------------------------------------------------------------- Net cash used in investing activities (79) (288) - ----------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Issuance of notes payable 1,021 69 Payment of notes payable (935) (69) Payment of debt (1,233) (1,973) Proceeds from borrowings under revolving credit agreement 1,800 - Proceeds from exercise of stock options and stock purchase plan 6 126 - ---------------------------------------------------------------------------- Net cash provided by (used in) financing activities 659 (1,847) - ----------------------------------------------------------------------------- Effect of foreign currency exchange rates on cash (81) (72) - ----------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents 239 (1,605) Cash and cash equivalents at beginning of year 572 2,693 - ---------------------------------------------------------------------------- Cash and cash equivalents at end of period $ 811 $1,088 ============================================================================ SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for: Interest $ 745 $ 728 Income taxes $ 13 $ 8 Conversion of 12% Notes into common stock $ - $ 30 ============================================================================
Page 9 NOTES TO FINANCIAL STATEMENTS UNAUDITED FINANCIAL STATEMENTS The accompanying unaudited consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC") and, in the opinion of management, include all adjustments (consisting of normal recurring accruals) necessary for a fair presentation of financial position, results of operations and cash flows for the interim periods. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the rules and regulations of the SEC. The Company believes that the disclosures contained herein are adequate to make the information presented not misleading. The consolidated statements of operations for the six months ended June 27, 1998 are not necessarily indicative of the results to be expected for the full year. These unaudited financial statements should be read in conjunction with the audited financial statements and accompanying notes included in the Company's 1997 Annual Report on Form 10-K for the year ended December 31, 1997. INVENTORIES Inventories are summarized by major classification as follows:
- ----------------------------------------------------------------------------- June 27, Dec. 31, 1998 1997 (Audited) - ----------------------------------------------------------------------------- (In thousands of dollars) Raw materials and components $6,822 $ 7,528 Work-in-process 1,569 2,687 Finished goods 628 386 Allowance for obsolescence (2,671) (2,820) Unliquidated progress payments -- (519) - ----------------------------------------------------------------------------- Inventories, net $6,348 $ 7,262 ============================================================================
Page 10 SIGNIFICANT EVENTS NAI is continuing its negotiations with DRS Technologies, Inc. to finalize and enter into a definitive merger agreement for a wholly owned subsidiary of DRS to merge with and into NAI. Under the current proposed terms, NAI shareholders will receive 0.23 of a share of DRS common stock for each outstanding share of NAI common stock held, subject to adjustment if the average daily closing stock price of DRS Common Stock is less than $12 over a 60-day trading period ending two days prior to the closing date. In such event, NAI shareholders will receive 0.25 of a share of DRS common stock for each share of NAI common stock. The parties are working towards the signing of a definitive merger agreement within a few weeks, with the completion of the merger in the fourth quarter of 1998. The closing is subject to certain conditions, including regulatory approval under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, an effective registration statement to be filed with the Securities and Exchange Commission, approval by the respective shareholders of NAI and DRS, the sale of NAI's subsidiary, Wilcom, Inc., the conversion of 90% of the outstanding principal amount of NAI's 12% Convertible Subordinated Promissory Notes into shares of common stock and certain other conditions. The Merger Agreement will provide for the payment of a termination fee by NAI in the amount of $1.5 million in the event that NAI enters into a definitive agreement with a third party to acquire NAI. On July 7, 1998 the NAI Board of Directors passed a resolution to discontinue the operations comprising its telecommunications segment which consists of one subsidiary, Wilcom Inc. It is anticipated that the net assets of Wilcom Inc. will be sold to a director, Charles Holmes, contemporaneously with the Company's merger with DRS Inc., which is expected to close in September or October 1998. Mr. Holmes will pay $150,000 plus tender 1,700,000 NAI warrants with an exercise price of $2.50 per share and 300,000 NAI warrants with an exercise price of $3.00 per share. The operating results for Wilcom are accounted for as discontinued operations, and accordingly, its operations are segregated in the accompanying financial statements. Net sales, operating costs and expenses for all prior reporting periods have been reclassified for amounts associated with Wilcom Inc. The second quarter 1998 results include a provision of $2,692,000 which is the estimated loss on disposal including an estimate of future losses to be incurred prior to the actual disposal of Wilcom of $192,000. Page 11 NAI Technologies, Inc. and Subsidiaries Information by industry segment
As of or Three Months Ended Jun 27, Jun 28, 1998 1997 --------------------- Sales to unaffiliated customers: Rugged Systems $9,487 $8,823 System Integration 2,416 3,986 --------------------- Total $11,903 $12,809 ===================== Intersegment sales: Rugged Systems $149 $171 System Integration 289 5 --------------------- Total $438 $176 ===================== Total sales Rugged Systems $9,636 $8,994 System Integration 2,705 3,991 Eliminations (438) (176) --------------------- Total $11,903 $12,809 ===================== Operating Earnings: Rugged Systems $985 $711 System Integration 419 805 --------------------- Subtotal 1,404 1,516 Corporate expenses & other (472) (391) --------------------- Total operating earnings 932 1,125 Net interest expense & other (449) (435) --------------------- Earnings before income taxes from continuing operations $483 $690 ===================== Identifiable Assets: Rugged Systems $23,188 $24,696 System Integration 4,247 3,721 --------------------- Subtotal 27,435 28,417 Corporate and other 4,740 8,477 --------------------- Total $32,175 $36,894 =====================
Page 12 NAI Technologies, Inc. and Subsidiaries Information by industry segment
As of or Six Months Ended ------------------------- Jun 27, Jun 28, 1998 1997 --------------------- Sales to unaffiliated customers: Rugged Systems $19,054 $16,563 System Integration 5,669 8,264 --------------------- Total $24,723 $24,827 ===================== Intersegment sales: Rugged Systems $181 $424 System Integration 645 108 --------------------- Total $826 $532 ===================== Total sales Rugged Systems $19,235 $16,987 System Integration 6,314 8,372 Eliminations (826) (532) --------------------- Total $24,723 $24,827 ===================== Operating Earnings: Rugged Systems $1,934 $1,477 System Integration 872 1,528 --------------------- Subtotal 2,806 3,005 Corporate expenses & other (990) (746) --------------------- Total operating earnings 1,816 2,259 Net interest expense & other (887) (926) --------------------- Earnings before income taxes from continuing operations $929 $1,333 ===================== Identifiable Assets: Rugged Systems $23,188 $24,696 System Integration 4,247 3,721 --------------------- Subtotal 27,435 28,417 Corporate and other 4,740 8,477 --------------------- Total $32,175 $36,894 =====================
Page 13 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations On July 7, 1998 the NAI Board of Directors passed a resolution to discontinue the operations comprising its telecommunications segment which consists of one subsidiary, Wilcom Inc. It is anticipated that the net assets of Wilcom Inc. will be sold to a director, Charles Holmes, contemporaneously with the Company's merger with DRS Inc., which is expected to close in September or October 1998. Mr. Holmes will pay $150,000 plus tender 1,700,000 NAI warrants with an exercise price of $2.50 per share and 300,000 NAI warrants with an exercise price of $3.00 per share. The operating results for Wilcom are accounted for as discontinued operations, and accordingly, its operations are segregated in the accompanying financial statements. Net sales, operating costs and expenses for all prior-reporting periods have been reclassified for amounts associated with Wilcom Inc. The second quarter 1998 results include a provision of $2,692,000 which is the estimated loss on disposal including an estimate of future losses to be incurred prior to the actual disposal of Wilcom of $192,000. Second Quarter 1998 Compared with Second Quarter 1997 The nature of the Company's business is such that year to year changes in sales levels are predominantly due to changes in shipping volume or product mix rather than changing sales prices. Net sales for the second quarter of 1998 were $11.9 million, a 7% decrease when compared with $12.9 million for the same period in 1997. The following chart provides the sales breakdown by subsidiary:
In thousands of dollars 1998 1997 % Change - ----------------------------------------------------------------------------- RUGGED SYSTEMS SEGMENT Codar Technology, Inc. $3,725 $ 4,301 (13%) Lynwood Rugged Systems Ltd. 5,911 4,693 26% Inter-company (149) (171) ----------------------------------- Total Rugged Systems Segment 9,487 8,823 8% SYSTEMS INTEGRATION SEGMENT NAI Systems Division 2,705 3,991 (32%) Inter-company (289) (5) ----------------------------------- Total Systems Integration Segment 2,416 3,986 (39%) TOTAL $11,903 $12,809 (7%) ====================================
Sales in the Rugged Systems segment (net of intercompany eliminations) increased 8% to $9.5 million from $8.8 million for the same period in 1997. The increased sales were attributable to a 26% sales increase at Lynwood offset by a 13% sales decrease at Codar. The sales increase at Lynwood was attributable to strong bookings and increased export sales from the United Kingdom. Codar's sales decrease was attributable to lower sales on the CHS II contract in the second quarter of 1998 as compared to the second quarter of 1997. The CHS II contract is an IDIQ (indefinite delivery indefinite quantity) and revenue will vary in each quarter. Sales in the Systems Integration segment (net of intercompany eliminations) decreased 39% to $2.4 million from 4.0 million for the same period in 1997. The decrease in sales at the Systems division is attributable to a delay in Page 14 anticipated orders from the National Security Agency. The delay in orders is believed to be due to changes in the Agency's budget as a result of priority modifications by the Agency. Although delayed the company believes the anticipated orders will be forthcoming. However, there can be no assurance that such orders will be received. In recent years the Company has reduced its dependency on the United States defense budget by expanding its non-military and export business operations. However, the Company still expects approximately 25% of 1998 sales to be directly to the U.S. military or through prime contractors to the U.S. military. The Company is not aware of any programs in which it participates that are specifically targeted for termination or curtailment. The Company's products are utilized on many different U.S. Government programs, which reduces the adverse impact of the cancellation of a single specific program. However, changes in future U.S. defense spending levels could impact the Company's future sales volume. The gross margin percentage for the second quarter 1998 was 25.1%, as compared with 25.4% in the comparable quarter of 1997. The following chart provides the gross margin percentage by subsidiary.
1998 1997 - ------------------------------------------------------------------------- Codar Technology, Inc. 18.6% 11.9% NAI Systems Division 28.2% 29.2% Lynwood Rugged Systems Ltd. 26.0% 33.6%
The improved margins at Codar are attributable to continued cost reduction efforts at the Company, as well as an emphasis to compete for higher margin work. The lower gross margin percentage at NAI Systems Division is attributable to decreased shipping volumes and a less favorable product mix. Lynwood's margins were lower due to an unfavorable product mix and higher engineering expenditures in cost of sales due to the change in mix between Company-sponsored research and development (which are charged to R&D) vs. an increase in customer funded engineering (which are charged to cost of sales). Selling expense for the second quarter of 1998 was $0.8 million essentially unchanged from the comparable 1997 amount. General and administrative expenses, which were unchanged from the $1.0 million in the second quarter of 1997, would have declined 13% if not for the $0.17 million in merger expenses that were recorded in the second quarter. Company-sponsored research and development expenditures for the second quarter of 1998 were $0.1 million as compared with $0.3 million for the same period in 1997, which represents a decrease of 52%. The decrease is attributable to a change in the mix between Company-sponsored research and development and customer funded engineering. The Company expects that the level of the second quarter 1998 internal research and development expenditures will increase for the remainder of 1998. For the second quarter of 1998, the Company reported operating income of $0.9 million as compared with operating income of $1.1 million for the same period in 1997. Interest expense and amortization of deferred debt costs, net of interest income, was $0.4 million for the second quarter of 1998 and second quarter 1997, respectfully. The Company accrued an income tax expense of $0.20 million as compared with $0.22 million in 1997, which equates to effective income tax rates of 42% and 32%, respectively. The entire tax expense in both periods pertains to the Company's Lynwood subsidiary located in the U.K. Lynwood's earnings are taxed in the U.K. and, while the Company has a U.S. net operating loss carry-forward, it is required to pay taxes in the U.K. The Company is unable to Page 15 recognize the future tax benefit associated with its U.S. operating loss carry-forwards due to uncertainties as to whether or not a future benefit will be realized. For the second quarter of 1998 the Company recorded earnings from continuing operations of $0.28 million as compared with $0.47 million in the second quarter of 1997. Loss from discontinued operations were $2.83 million in the second quarter 1998 as compared with earnings from discontinued operations of $0.04 million in the second quarter of 1997. Net loss for the second quarter was $2.55 million as compared to net earnings of $0.50 million in the second quarter of 1997. Basic earnings per share from continuing operations was $0.03 per share as compared with $0.05 per share for the same period in 1997, based on a weighted average of 9.2 million and 9.1 million shares outstanding, respectively. Basic loss per share from discontinued operations was $(0.31) per share as compared with $0.00 per share for the same period in 1997, based on a weighted average of 9.2 million and 9.1 million shares outstanding, respectively. Basic loss per share was $(0.28) per share as compared with earnings of $0.06 per share for the same period in 1997, based on a weighted average of 9.2 million and 9.1 million shares outstanding, respectively. Diluted earnings per share from continuing operations was $0.03 per share as compared with $0.04 per share for the same period in 1997, based on a weighted average of 9.2 million and 10.4 million shares outstanding, respectively. Diluted loss per share from discontinued operations was $(0.31) per share as compared with $0.00 per share for the same period in 1997, based on a weighted average of 9.2 million and 10.4 million shares outstanding, respectively. Diluted loss per share was $(0.28) per share as compared with earnings of $0.06 per share for the same period in 1997, based on a weighted average of 9.2 million and 10.4 million shares outstanding, respectively. Six months 1998 Compared with Six months 1997 The nature of the Company's business is such that year to year changes in sales levels are predominantly due to changes in shipping volume or product mix rather than changing sales prices. Net sales for the six months of 1998 were $24.7 million, essentially unchanged when compared with $24.8 million for the same period in 1997. The following chart provides the sales breakdown by subsidiary:
In thousands of dollars 1998 1997 % Change - ----------------------------------------------------------------------------- RUGGED SYSTEMS SEGMENT Codar Technology, Inc. $8,043 $ 8,234 (2%) Lynwood Rugged Systems Ltd. 11,192 8,753 28% Inter-company (181) (424) ----------------------------------- Total Rugged Systems Segment 19,054 16,563 15% SYSTEMS INTEGRATION SEGMENT NAI Systems Division 6,314 8,372 (25%) Inter-company (645) (108) ----------------------------------- Total Systems Integration Segment 5,669 8,264 (31%) TOTAL $24,723 $24,827 (0%) ====================================
Sales in the Rugged Systems segment (net of intercompany eliminations) increased 15% to $19.0 million from $16.6 million for the same period in 1997. The increased sales were attributable to a 28% sales increase at Lynwood offset by a 2% sales decrease at Codar. The sales increase at Lynwood was attributable to strong bookings and increased export sales from the United Kingdom. Page 16 Sales in the Systems Integration segment (net of intercompany eliminations) decreased 25% to $5.7 million from 8.3 million for the same period in 1997. The decrease in sales at the Systems division is attributable to a delay in anticipated orders from the National Security Agency. The delay in orders is believed to be due to changes in the Agency's budget as a result of priority modifications by the Agency. Although delayed the company believes the anticipated orders will be forthcoming. However, there can be no assurance that such orders will be received. In recent years the Company has reduced its dependency on the United States defense budget by expanding its non-military and export business operations. However, the Company still expects approximately 25% of 1998 sales to be directly to the U.S. military or through prime contractors to the U.S. military. The Company is not aware of any programs in which it participates that are specifically targeted for termination or curtailment. The Company's products are utilized on many different U.S. Government programs, which reduces the adverse impact of the cancellation of a single specific program. However, changes in future U.S. defense spending levels could impact the Company's future sales volume. The gross margin percentage for the six months 1998 was 24.3%, as compared with 26.5% in the comparable quarter of 1997. The following chart provides the gross margin percentage by subsidiary.
1998 1997 - ------------------------------------------------------------------------- Codar Technology, Inc. 18.1% 13.8% NAI Systems Division 25.4% 28.3% Lynwood Rugged Systems Ltd. 26.5% 35.1%
The improved margins at Codar are attributable to continued cost reduction efforts at the Company, as well as an emphasis to compete for higher margin work. The lower gross margin percentage at NAI Systems Division is attributable to decreased shipping volumes and a less favorable product mix. Lynwood's margins were lower due to an unfavorable product mix and higher engineering expenditures in cost of sales due to the change in mix between Company-sponsored research and development (which are charged to R&D) vs. an increase in customer funded engineering (which are charged to cost of sales). Selling expense for the six months of 1998 was $1.5 million as compared to 1.6 million for the same period in 1997. General and administrative expenses for the six months 1998 were $2.2 million as compared to $1.9 million in the same period in 1997. This increase is primarily attributable to merger expenses of $0.17 million, which were recorded in the first half of 1998. Company-sponsored research and development expenditures for the six months of 1998 were $0.2 million as compared with $0.5 million for the same period in 1997, which represents a decrease of 58%. The decrease is attributable to a change in the mix between Company-sponsored research and development and customer funded engineering. The Company expects that the level of the six months 1998 internal research and development expenditures will increase for the remainder of 1998. For the six months of 1998, the Company reported operating income of $1.8 million as compared with operating income of $2.3 million for the same period in 1997. Interest expense and amortization of deferred debt costs, net of interest income, was $0.9 million for the six months of 1998 and six months 1997, respectfully. The Company accrued an income tax expense of $0.37 million for the six months of 1998 and 1997 respectfully, which equates to effective income tax rates of Page 17 40% and 28%, respectively. The entire tax expense in both periods pertains to the Company's Lynwood subsidiary located in the U.K. Lynwood's earnings are taxed in the U.K. and, while the Company has a U.S. net operating loss carry-forward, it is required to pay taxes in the U.K. The Company is unable to recognize the future tax benefit associated with its U.S. operating loss carry-forwards due to uncertainties as to whether or not a future benefit will be realized. For the six months of 1998 the Company recorded earnings from continuing operations of $0.56 million as compared with $0.96 million in the six months of 1997. Loss from discontinued operations were $2.94 million in the six months 1998 as compared with a loss from discontinued operations of $0.08 million in the six months of 1997. Net loss for the six months was $2.38 million as compared to net earnings of $0.88 million in the six months of 1997. Basic earnings per share from continuing operations was $0.06 per share as compared with $0.11 per share for the same period in 1997, based on a weighted average of 9.2 million and 9.1 million shares outstanding, respectively. Basic loss per share from discontinued operations was $(0.32) per share as compared with $(0.01) per share for the same period in 1997, based on a weighted average of 9.2 million and 9.1 million shares outstanding, respectively. Basic loss per share was $(0.26) per share as compared with earnings of $0.10 per share for the same period in 1997, based on a weighted average of 9.2 million and 9.1 million shares outstanding, respectively. Diluted earnings per share from continuing operations was $0.06 per share as compared with $0.09 per share for the same period in 1997, based on a weighted average of 9.2 million and 10.3 million shares outstanding, respectively. Diluted loss per share from discontinued operations was $(0.32) per share as compared with $(0.01) per share for the same period in 1997, based on a weighted average of 9.2 million and 10.3 million shares outstanding, respectively. Diluted loss per share was $(0.26) per share as compared with earnings of $0.09 per share for the same period in 1997, based on a weighted average of 9.2 million and 10.3 million shares outstanding, respectively. Liquidity and Capital Resources Cash and cash equivalents totaled $0.8 million at June 27, 1998, as compared to $0.6 million at December 31, 1997. Cash provided by operating activities amounted to $0.3 million in the first six months of 1998, as compared to $0.4 million in the comparable period of 1997. During the first six months, accounts receivable increased by $0.4 million, inventory decreased by $0.9 million, and accounts payable and other accrued expenses decreased by $1.6 from December 31, 1997 respectfully. During the six months ended June 27, 1998, the Company had borrowings of long term debt and notes payable of $2.8 million, and had payments of long term debt and notes payable of $2.2 million. Net borrowings of $0.6 million were used for working capital purposes. Borrowings were required because the company recognized a significant amount of revenue in the last three weeks of each quarter which caused its cash disbursements to exceed cash receipts at various times during the reporting period. The Company is trying to level out shipments to maximize cash flow. At June 27, 1998 the Company's outstanding borrowing under its secured revolving credit agreement was $5.9 million. As of June 27, 1998,the Company has made payments totaling $1.375 million ($625 thousand on June 30, 1998) in excess of contractual requirements and has the right to re-borrow such amount if needed. During 1998, the Company will lose the right to re-borrow such amounts at the rate of $750 thousand per quarter. If no additional payments are made the Company will be required to repay $125 thousand on September 30, 1998 and $750 thousand on December 31, 1998. The remaining amount outstanding is due and payable on January 15, 1999. The Company does not believe that it will generate adequate cash flow from operations to pay the entire balance under its secured revolving credit agreement on January 15, 1999. The Company intends to refinance all or a substantial portion of the amount due and Page 18 payable, either through borrowings or other capital sources and pursue all available options in order that it meet its obligations. As of June 27, 1998 the Company was in violation of certain of its debt covenants and has received waivers from its banks. Inflation The Company's financial statements are prepared in accordance with historical accounting systems, and therefore do not reflect the effect of inflation. The impact of changing prices on the financial statements is not considered to be significant. Year 2000 NAI is currently in the process of evaluating its computer software and databases to determine whether or not modifications will be required to prevent problems related to the year 2000. These problems, which have been widely reported in the media, could cause malfunctions in certain software and databases with respect to dates on or after January 1, 2000, unless corrected. At this time, the Company does not believe that it has a significant problem in this regard. The cost, if any, to become year 2000 compliant is not expected to be material. This document may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on current plans and expectations of NAI Technologies and involve risks and uncertainties that could cause actual future activities and results of operations to be materially different from those set forth in the forward-looking statements. Important factors that could cause actual results to differ include, among others, changes in government purchasing policies and budget constraints, competition, the continuity of booking trends, the absence of supply interruptions, new products' market acceptance and warranty performance. Page 19 PART II. OTHER INFORMATION Item 5. Other Information NAI is continuing its negotiations with DRS Technologies, Inc. to finalize and enter into a definitive merger agreement for a wholly owned subsidiary of DRS to merge with and into NAI. Under the current proposed terms, NAI shareholders will receive 0.23 of a share of DRS common stock for each outstanding share of NAI common stock held, subject to adjustment if the average daily closing stock price of DRS Common Stock is less than $12 over a 60-day trading period ending two days prior to the closing date. In such event, NAI shareholders will receive 0.25 of a share of DRS common stock for each share of NAI common stock. The parties are working towards the signing of a definitive merger agreement within a few weeks, with the completion of the merger in the fourth quarter of 1998. The closing is subject to certain conditions, including regulatory approval under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, an effective registration statement to be filed with the Securities and Exchange Commission, approval by the respective shareholders of NAI and DRS, the sale of NAI's subsidiary, Wilcom, Inc., the conversion of 90% of the outstanding principal amount of NAI's 12% Convertible Subordinated Promissory Notes into shares of common stock and certain other conditions. The Merger Agreement will provide for the payment of a termination fee by NAI in the amount of $1.5 million in the event that NAI enters into a definitive agreement with a third party to acquire NAI. Item 6. Exhibits and Reports on Form 8-K a) Exhibits 11 - Statement re: Computation of Per Share Earnings 27 - Financial Data Schedule (Edgar Filing only) b) Reports on Form 8-K Registrant filed a Current Report on Form 8-K dated April 15, 1998 to report that it had signed a letter of intent with DRS Technologies, Inc. for NAI to merge with DRS. Page 20 S I G N A T U R E S Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. NAI TECHNOLOGIES, INC. (Registrant) DATE August 11, 1998 By:\s\Richard A. Schneider -------------- ---------------------------------------- Richard A. Schneider Executive Vice President (On behalf of the registrant and as Principal Financial Officer) EX-11 2 EXHIBIT 11 Exhibit 11 NAI TECHNOLOGIES, INC. AND SUBSIDIARIES (In thousands)
- ---------------------------------------------------------------------------------------- Three Months Ended Jun 27, Jun 28, 1998 1997 - ---------------------------------------------------------------------------------------- Net Income (loss) ($2,553) $ 501 Average shares of common stock outstanding during the period 9,157 9,074 --------- ---------- Basic earnings (loss) per share ($ 0.28) $ 0.06 ========== ========== Net Income (loss) (2,553) 501 Interest on Convertible Debt (Net of Taxes) 0 0 Amortization of OID (Net of Taxes) 0 0 Amortization of Deferred Debt Expense (Net of Taxes) 0 0 --------- ---------- Adjusted Net Income (2,553) 501 ========== ========== Average shares of common stock outstanding during the period 9,157 9,074 Incremental shares from assumed exercise of stock options, stock warrants & employee stock purchase plan 4 1,317 Dilution from Convertible Debt 0 0 Total shares used to calculate diluted EPS 9,161 10,391 --------- ---------- Diluted earnings (loss) per share ($ 0.28) $ 0.05 ========== ==========
Exhibit 11 NAI TECHNOLOGIES, INC. AND SUBSIDIARIES (In thousands)
- ----------------------------------------------------------------------------------------- Six Months Ended Jun 27, Jun 28, 1998 1997 - ----------------------------------------------------------------------------------------- Net Income (loss) ($2,379) $ 880 Average shares of common stock outstanding during the period 9,156 9,052 -------- -------- Basic earnings (loss) per share ($ 0.26) $ 0.10 ========= ======== Net Income (loss) (2,379) 880 Interest on Convertible Debt (Net of Taxes) 0 0 Amortization of OID (Net of Taxes) 0 0 Amortization of Deferred Debt Expense (Net of Taxes) 0 0 -------- -------- Adjusted Net Income (2,379) 880 ========= ======== Average shares of common stock outstanding during the period 9,156 9,052 Incremental shares from assumed exercise of stock options, stock warrants & employee stock purchase plan 3 1,243 Dilution from Convertible Debt 0 0 Total shares used to calculate diluted EPS 9,159 10,295 -------- -------- Diluted earnings (loss) per share ($ 0.26) $ 0.09 ========= ========
EX-27 3 EXHIBIT 27
5 1,000 6-MOS DEC-31-1998 JUN-27-1998 811 0 11,742 0 6,348 21,348 8,039 (7,301) 32,175 15,291 5,123 916 0 0 10,379 32,175 24,723 24,723 18,698 22,907 0 0 742 929 371 558 (2,937) 0 0 (2,379) (0.26) (0.26)
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