-----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, QPJX1OIavZgK1k9W5LBGPC0CSE+BvVF4fez3vsCPkNWiG3DgLE0cYeRe2EJCBlpI 4mzo2/heDR+8BMJGIj3uDQ== 0000950117-98-001988.txt : 19981111 0000950117-98-001988.hdr.sgml : 19981111 ACCESSION NUMBER: 0000950117-98-001988 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980926 FILED AS OF DATE: 19981110 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: 98743545 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 September 26, 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 October 27, 1998, 9,179,567 shares of NAI Technologies, Inc.'s $.10 par value Common Stock were outstanding. Page 1 of 22 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 September 26, 1998 and December 31, 1997 Consolidated Statements of Operations - 4 Three months ended September 26, 1998 and September 27, 1997 Consolidated Statements of Operations - 5 Nine months ended September 26, 1998 and September 27, 1997 Consolidated Statements of Comprehensive Income - 6 Three months ended September 26, 1998 and September 27, 1997 Consolidated Statements of Comprehensive Income - 7 Nine months ended September 26, 1998 and September 27, 1997 Consolidated Statements of Cash Flows - 8 Nine months ended September 26, 1998 and September 27, 1997 Other Financial Information 9-12 Item 2. Management's Discussion and Analysis of 13-19 Financial Condition and Results of Operations PART II. Other Information Item 5. Other Information 20 Item 6. Exhibits and Reports on Form 8-K 21 Signatures 22
Page 3 PART I - FINANCIAL INFORMATION Item 1. Financial Statements NAI TECHNOLOGIES, INC. AND SUBSIDIARIES Consolidated Balance Sheets (in thousands)
- ------------------------------------------------------------------------------------ Sep 26, Dec. 31, 1998 1997 (Audited) - ------------------------------------------------------------------------------------ ASSETS Current Assets: Cash and cash equivalents $ 2,013 $ 572 Accounts receivable, net 11,248 11,379 Inventories, net 6,496 7,262 Deferred tax asset 151 148 Current assets of discontinued operations, net 1,461 1,968 Other current assets 685 497 ---------------------------------------------------------------------------------- Total current assets 22,054 21,826 - ----------------------------------------------------------------------------------- Property, plant and equipment, net 673 873 Excess of cost over fair value of net assets acquired, net 7,709 8,135 Non current assets of discontinued operations 1,051 3,051 Other assets 1,098 1,330 - ------------------------------------------------------------------------------------ Total assets $32,585 $35,215 ==================================================================================== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Accounts payable $ 5,640 $ 7,122 Notes payable -0- 571 Current installments of long-term debt 6,500 311 Accrued payroll and commissions 70 281 Other accrued expenses 2,727 2,014 Income taxes payable 1,062 597 - ----------------------------------------------------------------------------------- Total current liabilities 15,999 10,896 - ----------------------------------------------------------------------------------- Long-term debt 4,782 9,747 Other accrued expenses 755 783 Deferred income taxes 41 41 - ----------------------------------------------------------------------------------- Total liabilities 21,577 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: 9,179,567 in 1998 and 9,155,427 in 1997 918 916 Capital in excess of par value 19,495 19,457 Accumulated other comprehensive income 316 196 Accumulated deficit (9,721) (6,821) - ----------------------------------------------------------------------------------- Total shareholders' equity 11,008 13,748 - ----------------------------------------------------------------------------------- Total liabilities and shareholders' equity $32,585 $35,215 ===================================================================================
See notes to consolidated financial statements Page 4 NAI TECHNOLOGIES, INC. AND SUBSIDIARIES Consolidated Statements of Operations (in thousands except per share amounts) (Unaudited)
- ----------------------------------------------------------------------------------- For the Three Months Ended ----------------------------- Sep 26, Sep 27, 1998 1997 - ----------------------------------------------------------------------------------- Net sales $10,021 $11,831 - ----------------------------------------------------------------------------------- Cost of sales 7,584 11,718 - ----------------------------------------------------------------------------------- Gross margin 2,437 113 - ----------------------------------------------------------------------------------- Selling expense 857 717 General and administrative expense 1,200 1,285 Research and development 178 177 Other 164 173 - ----------------------------------------------------------------------------------- Total expenses 2,399 2,352 - ----------------------------------------------------------------------------------- Operating income (loss) 38 (2,239) - ----------------------------------------------------------------------------------- Non-operating income (expense): Interest income 10 15 Amortization of deferred debt costs (55) (80) Interest expense (371) (371) - ----------------------------------------------------------------------------------- (416) (436) - ----------------------------------------------------------------------------------- Loss before income taxes (378) (2,675) Provision for income taxes 143 133 - ----------------------------------------------------------------------------------- Loss from continuing operations (521) (2,808) Discontinued operations (Loss) from operations of discontinued Telecommunications Segment -- (601) - ----------------------------------------------------------------------------------- Net loss $ (521) $(3,409) =================================================================================== Basic loss per share From continuing operations $(0.06) $ (0.31) From discontinued operations $ -- $ (0.07) ------- ------- Basic loss per share $(0.06) $ (0.37) ======= ======= Diluted loss per share From continuing operations $(0.06) $ (0.31) From discontinued operations $ -- $ (0.07) ------- ------- Diluted loss per share $(0.06) $ (0.37) ======= ======= Average shares outstanding - Basic EPS 9,174 9,133 ===== ===== Average shares outstanding - Diluted EPS 9,174 9,133 ===== =====
See notes to consolidated financial statements Page 5 NAI TECHNOLOGIES, INC. AND SUBSIDIARIES Consolidated Statements of Operations (in thousands except per share amounts) (Unaudited)
- ----------------------------------------------------------------------------------- For the Nine Months Ended ------------------------- Sep 26, Sep 27, 1998 1997 - ----------------------------------------------------------------------------------- Net sales $34,744 $36,658 - ----------------------------------------------------------------------------------- Cost of sales 26,282 29,970 - ----------------------------------------------------------------------------------- Gross margin 8,462 6,688 - ----------------------------------------------------------------------------------- Selling expense 2,369 2,304 General and administrative expense 3,359 3,225 Research and development 406 720 Other 474 419 - ----------------------------------------------------------------------------------- Total expenses 6,608 6,668 - ----------------------------------------------------------------------------------- Operating income 1,854 20 - ----------------------------------------------------------------------------------- Non-operating income (expense): Interest income 28 47 Amortization of deferred debt costs (218) (260) Interest expense (1,113) (1,149) - ----------------------------------------------------------------------------------- (1,303) (1,362) - ----------------------------------------------------------------------------------- Earnings (loss) before income taxes 551 (1,342) Provision for income taxes 514 504 - ----------------------------------------------------------------------------------- Earnings (loss) from continuing operations 37 (1,846) Discontinued operations Loss from operations of discontinued Telecommunications segment (245) (683) Loss on disposal of Telecommunications segment including provision of $192,000 for operating losses during phase-out period (2,692) -- - ------------------------------------------------------------------------------- Net loss $(2,900) $(2,529) ==================================================================================- Basic earnings (loss) per share From continuing operations $ 0.00 $ (0.20) From discontinued operations $ (0.32) $ (0.08) -------- ------- Basic loss per share $ (0.32) $ (0.28) ======== ======== Diluted earnings (loss) per share From continuing operations $ 0.00 $ (0.20) From discontinued operations $ (0.32) $ (0.08) ------- ------- Diluted loss per share $ (0.32) $ (0.28) ======= ======= Average shares outstanding - Basic EPS 9,162 9,079 ===== ======= Average shares outstanding - Diluted EPS 9,164 9,079 ===== =======
See notes to consolidated financial statements Page 6 NAI TECHNOLOGIES, INC. AND SUBSIDIARIES Consolidated Statements of Comprehensive Income (in thousands) (Unaudited)
- ----------------------------------------------------------------------------------- For the Three Months Ended -------------------------- Sep 26, Sep 27, 1998 1997 - ----------------------------------------------------------------------------------- Loss from continuing operations $ (521) $(2,808) - ----------------------------------------------------------------------------------- Other comprehensive income, net of tax: Foreign currency translation adjustment 200 (130) - ----------------------------------------------------------------------------------- Other comprehensive income (loss) 200 (130) - ----------------------------------------------------------------------------------- Comprehensive loss from continuing operations (321) (2,938) - ----------------------------------------------------------------------------------- Discontinued operations Loss from operations of discontinued segment -- (601) - ----------------------------------------------------------------------------------- Comprehensive loss $ (321) $(3,539) ===================================================================================
See notes to consolidated financial statements Page 7 NAI TECHNOLOGIES, INC. AND SUBSIDIARIES Consolidated Statements of Comprehensive Income (in thousands) (Unaudited)
For the Nine months Ended ------------------------- Sep 26, Sep 27, 1998 1997 Earnings (loss) from continuing operations $ 37 $(1,846) - --------------------------------------------------------------------------------------- Other comprehensive income, net of tax: Foreign currency translation adjustment 120 (211) - --------------------------------------------------------------------------------------- Other comprehensive income (loss) 120 (211) - --------------------------------------------------------------------------------------- Comprehensive income (loss) from continuing operations 157 $(2,057) Discontinued operations Loss from operations of discontinued segment (245) (683) Loss on disposal of Wilcom, Inc. including provision of $192,000 for operating losses during phase-out period (2,692) - - --------------------------------------------------------------------------------------- Comprehensive loss $(2,780) $(2,740) =======================================================================================
See notes to consolidated financial statements Page 8 NAI TECHNOLOGIES, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (in thousands) (Unaudited)
For the Nine Months Ended ------------------------- Sep 26, Sep 27, 1998 1997 ------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings (loss) from continuing operations $ 37 $(1,846) Adjustments to reconcile net earnings to cash provided by operating activities: Discontinued operations (430) (39) Depreciation and amortization 1,081 1,452 Gain on disposal of property, plant and equipment -- (6) Provision for inventory obsolescence 90 2,585 Change in operating assets and liabilities, excluding effects from acquisitions, dispositions and foreign currency adjustments: Accounts receivable 131 2,352 Inventories 676 88 Accounts payable and other accrued expenses (1,008) (4,348) Income taxes 462 539 Other, net (180) (25) - --------------------------------------------------------------------------------------- Net cash flow provided by operating activities 859 752 - --------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property, plant and equipment (131) (241) Proceeds from sale of property, plant and equipment -- 22 - --------------------------------------------------------------------------------------- Net cash used in investing activities (131) (219) - --------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Issuance of notes payable 1,048 1,189 Payment of notes payable (1,619) (1,121) Payment of debt (1,236) (2,323) Proceeds from borrowings under revolving credit agreement 2,400 -- Proceeds from exercise of stock options and stock purchase plan 10 180 - --------------------------------------------------------------------------------------- Net cash provided by (used in) financing activities 603 (2,075) - --------------------------------------------------------------------------------------- Effect of foreign currency exchange rates on cash 110 (195) - --------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents 1,441 (1,737) Cash and cash equivalents at beginning of year 572 2,693 - --------------------------------------------------------------------------------------- Cash and cash equivalents at end of period $ 2,013 $ 956 ======================================================================================= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: CASH PAID FOR: Interest $ 1,090 $ 1,101 Income taxes $ 68 $ 14 Conversion of 12% Notes into common stock $ 30 $ 73 =======================================================================================
See notes to consolidated financial statements Page 9 NOTES TO CONSOLIDATED 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 nine months ended September 26, 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:
- -------------------------------------------------------------------------------- Sep 26, Dec. 31, 1998 1997 (Audited) - -------------------------------------------------------------------------------- (In thousands of dollars) Raw materials and components $6,659 $ 7,528 Work-in-process 1,741 2,687 Finished goods 584 386 Allowance for obsolescence (2,488) (2,820) Unliquidated progress payments -- (519) - -------------------------------------------------------------------------------- Invenories, net $6,496 $ 7,262 ================================================================================
Page 10 SIGNIFICANT EVENTS - ------------------ On August 26, 1998 NAI entered into a definitive merger agreement (the "Merger Agreement") with DRS Technologies, Inc. for a wholly owned subsidiary of DRS to merge with and into NAI (the "Merger"). Under the 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-trading day 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. All of the Company's unexercised stock options and warrants outstanding at the time of the merger will be assumed by DRS with the number of DRS shares issued on exercise based on the same exchange ratio as the common stock. The average daily closing price of DRS Common Stock for the 60-day trading period ending October 30, 1998 was $9.24. The closing of the Merger 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 U.S. Securities and Exchange Commission, approval by the respective shareholders of NAI and DRS, the sale of NAI's subsidiary, Wilcom, Inc.(Wilcom), the conversion of at least 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 provides 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. On September 21, 1998 NAI entered into a stock purchase agreement with a Corporation (the "Wilcom Purchasers") controlled by a director, Charles S. Holmes, which provides for the sale of the outstanding stock of Wilcom to the Wilcom Purchasers contemporaneously with the Merger. The Wilcom Purchasers 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. The second quarter 1998 results included a provision of $2,692,000 which was the estimated loss on disposal including an estimate of future operating losses to be incurred prior to the actual disposal of Wilcom of $192,000. There has been no change in the above estimates as of October 31, 1998. Page 11 NAI Technologies, Inc. and Subsidiaries Information by industry segment
As of or Three Months Ended Sep 26, Sep 27, 1998 1997 ------------------------- Sales to unaffiliated customers: Rugged Systems $ 8,810 $ 7,236 System Integration 1,211 4,595 ------------------------- Total $10,021 $11,831 ========================= Intersegment sales: Rugged Systems $ 91 $ 32 System Integration 6 0 ------------------------- Total $ 97 $ 32 ========================= Total sales Rugged Systems $ 8,901 $ 7,268 System Integration 1,217 4,595 Eliminations (97) (32) ------------------------- Total $10,021 $11,831 ========================= Operating Earnings(loss): Rugged Systems $ 892 $(2,263) System Integration (258) 544 ------------------------- Subtotal 634 (1,719) Corporate expenses & other (596) (520) ------------------------- Total operating earnings (loss) 38 (2,239) Net interest expense & other (416) (436) ------------------------- Loss before income taxes from continuing operations $ (378) $(2,675) ========================= Identifiable Assets: Rugged Systems $23,693 $19,828 System Integration 3,592 4,539 ------------------------- Subtotal 27,285 24,367 Corporate and other 5,300 7,992 ------------------------- Total $32,585 $32,359 =========================
Page 12 NAI Technologies, Inc. and Subsidiaries Information by industry segment
As of or Nine Months Ended ------------------------- Sep 26, Sep 27, 1998 1997 ------------------------- Sales to unaffiliated customers: Rugged Systems $27,864 $23,799 System Integration 6,880 12,859 ------------------------- Total $34,744 $36,658 ========================= Intersegment sales: Rugged Systems $ 272 $ 456 System Integration 651 108 ------------------------- Total $ 923 $ 564 ========================= Total sales Rugged Systems $28,136 $24,255 System Integration 7,531 12,967 Eliminations (923) (564) ------------------------- Total $34,744 $36,658 ========================= Operating Earnings (loss): Rugged Systems $ 2,826 $ (786) System Integration 614 2,072 ------------------------- Subtotal 3,440 1,286 Corporate expenses & other (1,586) (1,266) ------------------------- Total operating earnings 1,854 20 Net interest expense & other (1,303) (1,362) ------------------------- Earnings (loss) before income taxes from continuing operations $ 551 $(1,342) =========================
Page 13 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations - --------------------- On August 26, 1998 NAI entered into a definitive merger agreement (the "Merger Agreement") with DRS Technologies, Inc. for a wholly owned subsidiary of DRS to merge with and into NAI (the "Merger"). Under the 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-trading day 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. All of the Company's unexercised stock options and warrants outstanding at the time of the merger will be assumed by DRS with the number of DRS shares issued on exercise based on the same exchange ratio as the common stock. The average daily closing price of DRS Common Stock for the 60-day trading period ending October 30, 1998 was $9.24. The closing of the Merger 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 U.S. Securities and Exchange Commission, approval by the respective shareholders of NAI and DRS, the sale of NAI's subsidiary, Wilcom, Inc.(Wilcom), the conversion of at least 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 provides 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. On September 21, 1998 NAI entered into a stock purchase agreement with a Corporation (the "Wilcom Purchasers") controlled by a director, Charles S. Holmes, which provides for the sale of the outstanding stock of Wilcom to the Wilcom Purchasers contemporaneously with the Merger. The Wilcom Purchasers 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. The second quarter 1998 results included a provision of $2,692,000 which was the estimated loss on disposal including an estimate of future operating losses to be incurred prior to the actual disposal of Wilcom of $192,000. There has been no change in the above estimates as October 31, 1998. Third Quarter 1998 Compared with Third 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 third quarter of 1998 were $10.0 million, a 15% decrease when compared with $11.8 million for the same period in 1997. Page 14 The following chart provides the sales breakdown by subsidiary:
In thousands of dollars 1998 1997 % Change - ------------------------------------------------------------------------------- Rugged Systems Segment Codar Technology, Inc. $3,832 $ 2,743 40% Lynwood Rugged Systems Ltd. 5,069 4,525 12% Inter-company (91) (32) -------------------------- Total Rugged Systems Segment 8,810 7,236 22% Systems Integration Segment NAI Systems Division 1,217 4,595 (74%) Inter-company (6) - -------------------------- Total Systems Integration Segment 1,211 4,595 (74%) TOTAL $10,021 $11,831 (15%) ===========================
Sales in the Rugged Systems Segment (net of intercompany eliminations) increased 22% to $8.8 million from $7.2 million for the same period in 1997. The increased sales were attributable to a 12% sales increase at Lynwood and a 40% sales increase at Codar. The sales increase at Lynwood was attributable to strong bookings and increased export sales from the United Kingdom. Codar's sales increase was attributable to higher sales on the CHS II contract in the third quarter of 1998 as compared to the third 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 74% to $1.2 million from 4.6 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 fiscal 1998 budget as a result of priority modifications by the Agency. Although delayed, the Company believes the anticipated orders will be forthcoming now that the U.S. Government fiscal 1999 Budget is approved. 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 35% 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 third quarter 1998 was 24.3%, as compared with 1.0% in the comparable quarter of 1997. The following chart provides the gross margin percentage by subsidiary.
1998 1997 - ------------------------------------------------------------------------ Codar Technology, Inc. 23.6% (75.9)% NAI Systems Division 10.8% 18.4% Lynwood Rugged Systems Ltd. 27.6% 29.8%
Page 15 The improved margins at Codar are attributable to continued cost reduction efforts at the Company, an ongoing emphasis to compete for higher margin work and better cost absorption of fixed costs as a result of the increased sales. Codar's 1997 margin was adversely impacted by a $3.0 million charge substantially related to an inventory write-down which resulted from lower than expected sales along with the final withdrawal from electronic printer products and the addition of certain more advanced Codar products on the CHS II program. The lower gross margin percentage at NAI Systems Division is primarily attributable to decreased shipping volumes and consequent under absorption of fixed overhead expenses. Lynwood's margins were lower due to a less favorable product mix and higher engineering expenditures in cost of sales due to the change in mix between developmental and mature product contract awards. Selling expense for the third quarter of 1998 was $0.9 million as compared to 0.7 million in the same period in 1997. This increase is attributable to higher selling expense at Lynwood, due to higher sales volumes. General and administrative expense for the third quarter of 1998 was 1.2 million as compared to 1.3 million in 1997. Included in the 1998 general and administrative expense is approximately $0.3 million related to merger expenses associated with the proposed DRS transaction described earlier in this document. Company-sponsored research and development expenditures for the third quarter of 1997 and 1998 were relatively unchanged at $0.2 million for both periods. The company expects that internal research and development expenditures will remain relatively constant for the remainder of 1998. For the third quarter of 1998, the Company reported operating income of $0.04 million as compared with an operating loss of $2.2 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 third quarters of 1998 and 1997. For the third quarter 1998, the Company accrued an income tax expense of $0.14 million as compared with an income tax expense of $0.13 million in 1997. The entire tax expense for 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 third quarter of 1998 the Company recorded a loss from continuing operations of $0.5 million as compared with a loss from continuing operations of $2.8 million in the third quarter of 1997. The loss from discontinued operations were $0.0 million and $0.6 million in the third quarter 1998 and 1997 respectfully. Net loss for the third quarter was $0.5 million as compared to a net loss of $3.4 million in the third quarter of 1997. The basic loss per share from continuing operations was $(0.06) per share as compared with a loss of $(0.31) per share for the same period in 1997, based on a weighted average of 9.2 million and 9.1 million shares outstanding, respectively. The basic loss per share from discontinued operations was $0.00 per share as compared with $(0.07) per share for the same period in 1997, based on a weighted average of 9.2 million and 9.1 million shares outstanding, respectively. The basic loss per share was $(0.06) per share as compared with $(0.37) per share for the same period in 1997, based on a weighted average of 9.2 million and 9.1 million shares outstanding, respectively. The diluted loss per share from continuing operations was $(0.06) per share as compared with a loss of $(0.31) per share for the same period in 1997, based on a weighted average of 9.2 million and 9.1 million shares outstanding, respectively. The diluted loss per share from discontinued operations was $0.00 per share as Page 16 compared with $(0.07) per share for the same period in 1997, based on a weighted average of 9.2 million and 9.1 million shares outstanding, respectively. The diluted loss per share was $(0.06) per share as compared with $(0.37) per share for the same period in 1997, based on a weighted average of 9.2 million and 9.1 million shares outstanding, respectively. Nine months 1998 Compared with Nine 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 nine months of 1998 were $34.7 million, a 5% decrease when compared with $36.7 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. $11,875 $10,977 8% Lynwood Rugged Systems Ltd. 16,261 13,278 22% Inter-company (272) (456) ---------------------------- Total Rugged Systems Segment 27,864 23,799 17% Systems Integration Segment NAI Systems Division 7,531 12,967 (42%) Inter-company (651) (108) ---------------------------- Total Systems Integration Segment 6,880 12,859 (46%) TOTAL $34,744 $36,658 (5%) ============================
Sales in the Rugged Systems Segment (net of intercompany eliminations) increased 17% to $27.9 million from $23.8 million for the same period in 1997. The increased sales were attributable to a 22% sales increase at Lynwood and a 8% sales increase at Codar. The sales increase at Lynwood was attributable to strong bookings and increased export sales from the United Kingdom. Codar's sales increase was attributable to higher sales on the CHS II contract in the first nine months of 1998 as compared to the first nine months 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 46% to $6.9 million from 12.9 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 fiscal 1998 budget as a result of priority modifications by the Agency. Although delayed, the Company believes the anticipated orders will be forthcoming now that the U.S. Government fiscal 1999 budget is approved. 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 35% 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. Page 17 However, changes in future U.S. defense spending levels could impact the Company's future sales volume. The gross margin percentage for the nine months 1998 was 24.4%, as compared with 18.2% in the comparable quarter of 1997. The following chart provides the gross margin percentage by subsidiary.
1998 1997 - ------------------------------------------------------------------- Codar Technology, Inc. 19.9% (8.6%) NAI Systems Division 23.0% 24.8% Lynwood Rugged Systems Ltd. 26.9% 33.3%
The improved margins at Codar are attributable to better cost absorption associated with the higher sales, continued cost reduction efforts at the Company, as well as an emphasis to compete for higher margin work. Codar's 1997 margin was adversely impacted by a $3.0 million charge substantially related to an inventory write-down which resulted from lower than expected sales along with the final withdrawal from electronic printer products and the addition of certain more advanced Codar products on the CHS II program. The lower gross margin percentage at NAI Systems Division is primarily attributable to decreased shipping volumes and the consequent under absorption of fixed overhead expenses. Lynwood's margins were lower due to an unfavorable product mix and higher engineering expenditures associated with recent new contract awards. Margins at Lynwood should improve as these contracts evolve into mature production work. Selling expense for the nine months of 1998 was $2.4 million as compared to 2.3 million for the same period in 1997. General and administrative expenses for the nine months 1998 were $3.4 million as compared to $3.2 million in the same period in 1997. This increase is primarily attributable to merger related expenses of $0.47 million associated with the proposed DRS transaction described earlier in this document. Company-sponsored research and development expenditures for the nine months of 1998 were $0.4 million as compared with $0.7 million for the same period in 1997, which represents a decrease of 44%. The decrease is attributable to a change in the mix between Company-sponsored research and development and customer funded engineering. For the nine months of 1998, the Company reported operating income of $1.9 million as compared with operating income of $0.02 million for the same period in 1997. Interest expense and amortization of deferred debt costs, net of interest income, was $1.3 million and $1.4 million for the nine months of 1998 and nine months of 1997, respectfully. For the nine months of 1998 and 1997, the Company recorded income tax expense of $0.5 million. 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 nine months of 1998 the Company recorded earnings from continuing operations of $0.04 million as compared with a loss from continuing operations of $1.8 million in the nine months of 1997. Loss from discontinued operations were $2.9 million in the nine months 1998 as compared with a loss from discontinued operations of $0.7 million in the nine months of 1997. Net loss for the nine months of 1998 was $2.9 million as compared to a net loss of $2.5 million in the nine months of 1997. Basic earnings per share from continuing Page 18 operations was $0.00 per share as compared with a loss from continuing operations of $(0.20) per share for the same period in 1997, based on a weighted average of 9.2 million and 9.1 million shares outstanding, respectively. The basic loss per share from discontinued operations was $(0.32) per share as compared with $(0.08) per share for the same period in 1997, based on a weighted average of 9.2 million and 9.1 million shares outstanding, respectively. The basic loss per share was $(0.32) per share as compared with a loss of $(0.28) 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 $0.00 per share as compared with a loss from continuing operations of $(0.20) per share for the same period in 1997, based on a weighted average of 9.2 million and 9.1 million shares outstanding, respectively. The diluted loss per share from discontinued operations was $(0.32) per share as compared with $(0.08) per share for the same period in 1997, based on a weighted average of 9.2 million and 9.1 million shares outstanding, respectively. The diluted loss per share was $(0.32) per share as compared with a loss of $(0.28) per share for the same period in 1997, based on a weighted average of 9.2 million and 9.1 million shares outstanding, respectively. Liquidity and Capital Resources Cash and cash equivalents totaled $2.0 million at September 26, 1998, as compared to $0.6 million at December 31, 1997. Cash provided by operating activities amounted to $0.9 million in the first nine months of 1998, as compared to $0.8 million in the comparable period of 1997. During the first nine months, accounts receivable decreased by $0.1 million, inventory decreased by $0.7 million, and accounts payable and other accrued expenses decreased by $1.0 from December 31, 1997 respectfully. During the nine months ended September 26, 1998, the Company had borrowings of long term debt and notes payable of $3.4 million, and had payments of long term debt and notes payable of $2.9 million. Net borrowings of $0.5 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 plan its shipments to minimize its need to borrow but is sometimes unable to do so due to specific customer requirements. At September 26, 1998 the Company's outstanding borrowing under its secured revolving credit agreement was $6.5 million. The Company will be required to repay $750 thousand on December 31, 1998. The remaining amount outstanding is due and payable on January 15, 1999. The Merger agreement provides for the repayment of this outstanding balance at the consecration of the Merger. If the merger does not occur The Company intends to refinance all or a substantial portion of the amount due and payable, either through borrowings or other capital sources and pursue all available options in order that it meet its obligations. As of September 26, 1998 the Company was in violation of certain of its debt covenants and has received waivers from its banks as well as a waiver to defer until maturity a principal payment of $750 thousand which was otherwise due on September 30, 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. Page 19 Year 2000 The Company's Year 2000 Project (the "Project") is proceeding on schedule. The Project is addressing the issue of computer programs and embedded computer chips being unable to distinguish between the year 1900 and the year 2000. The Project is divided into three major sections: IT Systems, (Infrastructure and Applications Software are sometimes collectively referred to as "IT Systems"), External Agents (third-party suppliers and customers), and Product Issues (Year 2000 issues inherent in products sold by the Company). The IT Systems section consists of hardware and systems software. This section is on schedule, and the Company estimates that approximately 95 percent of the activities related to the section had been completed at September 26, 1998. All IT Systems activities are expected to be completed by December 31, 1998. The External Agents section includes the process of identifying and prioritizing critical suppliers and customers at the direct interface level, and communicating with them about their plans and progress in addressing the Year 2000 problem. Detailed evaluations of the most critical third parties have not yet been initiated but will commence before December 31, 1998 and should be completed by mid-1999. These evaluations will be followed by the development of contingency plans, if considered necessary. The Product Issues section includes the process of identifying any products sold by the Company which may not be year 2000 compliant, determining a corrective course of action and disseminating relevant information to customers. Detailed evaluations have recently begun, are approximately 15% complete and scheduled for completion by mid-1999. The total cost associated with required modifications to become Year 2000 compliant is not expected to be material to the Company's financial position. The failure to correct a material Year 2000 problem could result in an interruption in, or a failure of, certain normal business activities or operations. Such failures could materially and adversely affect the Company's results of operations, liquidity and financial condition. Due to the general uncertainty inherent in the Year 2000 problem, resulting in part from the uncertainty of the Year 2000 readiness of third-party suppliers and customers, the Company is unable to determine at this time whether the consequences of Year 2000 failures will have a material impact on the company's results of operations, liquidity or financial condition. The Year 2000 Project is expected to significantly reduce the company's level of uncertainty about the Year 2000 problem. The Company believes that, with the completion of the Project as scheduled, the possibility of significant interruptions of normal operations should be reduced. 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, Inc. 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 20 PART II. OTHER INFORMATION Item 5. Other Information On August 26, 1998 NAI entered into a definitive merger agreement (the "Merger Agreement") with DRS Technologies, Inc. for a wholly owned subsidiary of DRS to merge with and into NAI (the "Merger"). Under the 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-trading day 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. All of the Company's unexercised stock options and warrants outstanding at the time of the merger will be assumed by DRS with the number of DRS shares issued on exercise based on the same exchange ratio as the common stock. The average daily closing price of DRS Common Stock for the 60-day trading period ending October 30, 1998 was $9.24. The closing of the Merger 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 U.S. Securities and Exchange Commission, approval by the respective shareholders of NAI and DRS, the sale of NAI's subsidiary, Wilcom, Inc. (Wilcom), the conversion of at least 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 provides 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. Page 21 Item 6. Exhibits Exhibits 11 - Statement re: Computation of Per Share Earnings 27 - Financial Data Schedule (Edgar Filing only) Page 22 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 November 10, 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 Sep 26, Sep 27, 1998 1997 - ----------------------------------------------------------------------------------------------------- Net Income (loss) ($521) ($3,409) Average shares of common stock outstanding during the period 9,174 9,133 ------------- ------------- Basic Earnings per share ($0.06) ($0.37) ============= ============= Net Income (loss) (521) (3,409) 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 (521) (3,409) ============= ============= Average shares of common stock outstanding during the period 9,174 9,133 Incremental shares from assumed exercise of stock options, stock warrants & employee stock purchase plan 0 0 Dilution from Convertible Debt 0 0 Total shares used to calculate diluted EPS 9,174 9,133 ------------- ------------- Diluted earnings per share ($0.06) ($0.37) ============= =============
EX-27 3 EXHIBIT 27
5 1,000 9-MOS DEC-31-1998 SEP-26-1998 2,013 0 11,248 0 6,496 22,054 8,114 (7,441) 32,585 15,999 5,085 918 0 0 10,090 32,585 34,744 34,744 26,282 32,890 0 0 1,113 551 514 37 (2,937) 0 0 (2,900) (0.32) (0.32)
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