Item 1. Business - --------
The Company through its wholly owned subsidiaries designs, manufactures and markets rugged computer systems, advanced peripheral products, intelligent terminals, high performance workstations, TEMPEST computer systems (which suppress certain radiation to prevent external detectors from reading the data being transcribed) and telecommunications test equipment and transmission products. The Company operates in two distinct operating segments: an Electronic Systems segment and a Telecommunications segment. The Electronic Systems segment is comprised of all of the Company's defense, military and government-related businesses and the Telecommunications segment is focused on commercial communications opportunities.
The Electronic Systems segment provides rugged computer products specifically designed for deployment in harsh environments that require special attention to system configurations. This segment's customer base includes the U.S. and foreign armed services and intelligence agencies.
The Telecommunications segment provides transmission enhancement products and rugged, hand-held test equipment for analog, digital and fiber-optic communications and data-interchange networks. This segment's customer base includes the regional Bell operating companies and independent telephone companies.
The Company's strategy is to be a leading supplier of high quality, innovative products, systems and services to satisfy specialized customer requirements in niche information technology and telecommunications markets, especially in environments with harsh operating requirements.
Electronic Systems Segment
The Electronic Systems segment is comprised of three operating subsidiaries, as follows:
Codar Technology, Inc., located in Longmont, Colorado ("Codar");
NAI Technologies-Systems Division Corporation , based in Columbia, Maryland ("Systems"); and
Lynwood Scientific Developments Limited, based in Farnham, United Kingdom ("Lynwood").
Codar. Codar designs, manufactures, integrates and supports rugged computer systems and subsystems for the U.S. Department of Defense ("DoD") and its prime contractors and allies. These systems and subsystems are used in tactical, planning, communications and intelligence applications.
Codar currently competes primarily in the computer and peripheral product segment of the military market, with both militarized and ruggedized products. Additional business is targeted at engineering support service and system integration opportunities.
Codar's product line includes a range of commercial off-the-shelf ("COTS")-based rugged minicomputers, workstations, personal computers, industry-compatible, removable mass storage subsystems, high-resolution monitors and keyboards. These products incorporate technology from other companies. Codar also provides engineering services and system integration capabilities.
Codar's equipment is designed to allow flexibility in configuration of all essential components. In addition to complying with system functional specifications, Codar's products are engineered to be deployed in environments that require special attention to system configurations with limitations on size and power consumption, and restraint on electromagnetic emissions. Products are custom built to withstand shock, vibration, cold, heat, dust, sand, rain and altitude conditions.
Codar has developed and produced products for a large number of government programs and departments and more than 100 additional customers aggregating more than 200 different end-users. The products have met military requirements for use in a variety of applications in vehicles, shelters and fixed-site installations. Codar has designed, built, tested and sold equipment for airborne, ground/mobile and shipboard military environmental specifications and military requirements.
Codar is the prime contractor for the Rapid Anti-Ship Missile Integrated Defense System ("RAIDS"), which is a tactical decision aid system based on an open-architecture network of processors that enhances the missile defense effectiveness of ships and performs all system executive functions, including internal and external data sharing/communications, anti-ship missile defense system performance and operational status monitoring, designated target identification, track data association, limited threat evaluation and maintenance of the status of the anti-ship missile defense threat environment.
Codar provides a variety of ruggedized and electromagnetic interference ("EMI") compliant workstations, based on processors from other companies, as well as related peripherals, such as ruggedized/EMI color monitors, keyboards and mass storage units ("MSEU"). These products are used by the U.S. Army and Navy. The Codar Model 325M-S Rugged Lightweight SPARC'r' station has been selected by GTE Government Systems Corp. ("GTE") for use on the U.S. Army's Common Hardware/ Software Program known as CHS-2. Codar will supply computers with ruggedized color monitors and MSEUs over a five-year period as part of the basic CHS-2 program as well as engineering services in support of GTE and the U.S. Army.
Codar also offers ruggedized rackmount and portable personal computers utilizing the Intel 80486 or Pentium processors. These computers offer rugged portability in either a compact, modular "lunch box" design or a rackmount design. Completely sealed from the environment in their non-operating configuration, these computers are easily transported. In addition to shock and vibration, these units can operate over a wide range of temperature variations. Options include a detachable keyboard, color touch screen display and various memory options.
The focus of Codar's new products is the design, manufacture and integration of rugged computer systems and subsystems to support the upgrade of large platforms and programs, mobile or transportable systems and subsystems for command and control applications and the support of the "digitization" of the battlefield as exemplified by the U.S. Army's "Force 21" programs.
In an effort to maintain its technological capabilities, and be in a position to provide the latest technology to its customers, Codar works with its suppliers to permit it to accelerate new product introductions and help its customers have access to the latest COTS product technology. Codar also makes significant use of special teaming relationships with various large prime contractors such as GTE in the CHS-2 program. These relationships allow Codar to participate in larger programs than it could on its own.
In 1996, Codar updated its range of rugged rack-mounted computers with the introduction of the Genesis rugged multi-platform computer, which provides users with a rugged platform which supports Intel, DEC Alpha, Power PC and Sun processors.
Also in 1996, Codar announced the Explorer II, an enhancement of the Explorer I, offering full compatibility with the range of CHS-2 products.
Codar's range of display products was enhanced in 1996 with the introduction of the Codar Rugged Flat Panel Displays. This technology comprises a range of 12", 13" and 16" ruggedized displays for installation in vehicles, aircraft, ships and other harsh environments.
Systems Division. The Systems Division provides custom packaged, integrated computer systems and peripherals for field deployment in shelters, ships, land vehicles and a variety of other demanding environments. The division's technical expertise encompasses most major industry standard architectures including SPARC'r', Multibus, VME and PCI as well as most widely used operating systems. The Systems Division also has over 25 years experience in custom packaging and has engineered solutions that meet a broad range of unique specifications including size and weight constraints, low power consumption, shock and vibration, adverse temperature and humidity conditions, rack-mounting, TEMPEST and unattended operation with remote diagnostics. Application specialties include: Digital Signal Processing, Data Acquisition, Networking/Communications and Video Teleconferencing.
The Systems Division's diverse customer base includes the National Security Agency and other U.S. intelligence agencies, various U.S. military organizations, foreign governments and industrial customers. The division's products and services are sold domestically through its own sales force and internationally through the sales force of the Lynwood division. Because its products are typically based on COTS components, the Systems Division has established strategic alliances with such leading technology companies as Sun, Intel, Hewlett Packard, Motorola, Force Computer, Ross Technologies, Spectrum Signal Processing and many others. In order to supply products in a timely manner, Systems concentrates its efforts on the design, final assembly and test of its systems rather than providing a fully integrated vertical manufacturing capability.
Lynwood. Lynwood supplies rugged, environmentally and electrically screened personal computers and workstations based upon standard COTS technology, aimed at the military and government markets principally in Europe, Australia and Southeast Asia. Lynwood develops, manufactures, installs and supports complete computer systems for the Government and Defense markets. Lynwood adapts COTS systems for use in harsh and extreme environments. In addition to creating its own products, Lynwood also provides an international marketing and manufacturing capability for the Company. In some cases, Lynwood provides systems that are made up of its own products coupled with those of Codar or Systems.
Lynwood produces several personal computer and workstation products designed to be operated in harsh environments. For example, Lynwood has a completely compatible PC based upon a standard PC motherboard which operates in driving rain and at extremes of temperature, and which is completely sealed from dust and dirt. These products have been sold to armed services in Australia and the UK. Lynwood also develops secure TEMPEST screened workstation products which are designed to operate in areas of high security.
Lynwood principally works on discrete projects and delivers solutions to meet specific customer and project requirements. Lynwood's products include the Explorer II Sun workstation, the Genesis SR rackmount computer, MC50 for Airborne Applications and RP6200 range of multi-purpose rugged desktop and rackmount Pentium computers. In addition, Lynwood supplies a wide range of rugged flat panel displays for use within air, maritime and land mobile environments.
Lynwood has the capability to supply integrated systems and subsystems that meet specific rugged and environmental specifications. Lynwood's design and manufacturing capabilities are concentrated around the system integration and final assembly and test of these products. Lynwood strives to respond quickly with a cost effective product using the latest COTS technologies and employs the same technology relations and teaming programs as Codar and Systems to meet this end.
Telecommunications Segment
The Telecommunications segment currently consists of one operating company: Wilcom, Inc. ("Wilcom"), located in Laconia, New Hampshire. Wilcom designs and manufactures products for use in the telephone industry. The majority of Wilcom's sales are to the Regional Bell Operating Companies ("RBOCs").
The business of Wilcom is made up of two product lines; analog and digital telephone test equipment, for use with either fiber or copper cable, and telephone transmission enhancement products, which are used to enhance or improve the characteristics of voice, digital data and video over copper wire.
The test equipment product line is comprised of digital, fiber and analog test instrumentation used by domestic and international telephone companies. Current products include line testers, fiber identifiers, power meters and other such instruments.
Telephone transmission enhancement products, which represent the greater growth opportunity for the division, include two product lines that are differentiated by their use rather than their technologies. One of the product lines is referred to as line treatment equipment ("LTE") and is normally installed on telephone company property, while the other product line, the enhanced line power amplifier ("ELPA"'), is normally installed at the customer's premises (but can be installed on telephone company property).
Both the LTE and the ELPA are electronic modules, installed for the express purpose of improving voice quality, increasing data transmission speeds when using modems and increasing the ability of copper wire to be used for video transmission in special instances. The LTE has been designed for use with two and four wire telephone circuits and the ELPA has been designed for use with two wire circuits. Network upgrading has become important due to the many new competitive technological alternatives to copper wire such as radio, cellular telephone, satellite transmission, fiber cables and microwave which can send information and data from location to location. The proliferation of higher speed analog modems has made the need for better quality phone lines an important issue. Wilcom's products allow the telephone companies to provide additional services in voice, data and video transmission over their existing copper networks.
The ELPA product line has been extended by the introduction of a smaller, lighter, less expensive product called the Turbo Amp. The Turbo Amp has been designed to be self-powered from the telephone line and permit the improvement of line transmission quality by automatically adjusting the various electrical parameters that control signal transmission. The Turbo Amp also requires less skilled technicians for installation and can be configured and installed from a remote site, which can result in substantially reduced service calls and cost to the RBOCs. The Company has received patents on the Turbo Amp.
Marketing and Service
The Company sells its products directly to customers and serves as a subcontractor to larger prime contractors serving the same customer base. The Company's products are marketed to customers through sales personnel, manufacturers' representatives and distributors. The Company maintains sales offices and sales support in Columbia, Maryland; Westlake Village, California; Longmont, Colorado; Laconia, New Hampshire; Australia; England; and Israel.
The Company provides maintenance and field service for its products through its customer service departments located at each of its manufacturing facilities and at certain customer sites. Field service for printers is also performed by some distributors. Most overseas service is performed by the Company's representatives in Australia, Denmark, England, France, Germany and Israel.
Customers
During 1996 and 1995, sales under contracts with the U.S. Government were approximately 30% and 38%, respectively, of the Company's net sales. The U.S. Government and one other customer individually accounted for more than 10% of the Company's sales in 1996 or 1995. The Company's sales are affected by the U.S. defense budget. With continuing discussions on budget cuts, it is difficult to assess what the impact of budget cuts, if any, will be on the Company. It appears that defense outlays will be reduced from past levels. The Company is unaware of any targeted cuts specifically affecting its products. The Company's products are utilized on many different programs. However, changed U.S. Government spending levels could impact the Company's future sales levels. No single U.S. Government contract accounted for greater than 10% of the Company's sales in 1996 or 1995.
The U.S. Government accounted for 34% and one other customer accounted for 16% of the Electronic Systems segment's 1996 sales. Two separate customers accounted for 26% and 18%, respectively, of the Telecommunications segment's 1996 sales.
Foreign Sales
Foreign sales in 1996 and 1995 accounted for approximately 24% and 21%, respectively, of total sales. Such sales, which exclude products sold to the U.S. Government and resold by the U.S. Government for foreign military use, are made primarily to customers in Australia, Canada, Hong Kong, India, Indonesia, Israel, Japan, the United Kingdom and Western Europe.
The Company's foreign sales are comprised of export sales from the U.S. and foreign revenues from Lynwood. All export sales from the U.S. are payable in U.S. dollars and, therefore, settlement amounts do not fluctuate with changes in exchange rates. All of Lynwood's sales are payable in British currency. Fluctuations in exchange rates between the U.S. dollar and the British pound will impact on the Company's operating results. No single country, with the exception of the United Kingdom (70% in 1996 and 86% in 1995) and Australia (18% in 1996 and less than 5% in 1995), accounted for more than 5% of the Company's foreign sales in any of the past two years.
Foreign sales for the past three years have been as follows:
Approximate Total Percent of Foreign Sales Company Sales ------------- -------------
1996 ............................. $16,154,000 24% 1995 ............................. 12,679,000 21% 1994 ............................. 13,828,000 25%
Backlog
The Company's backlog of orders was $30.2 million at December 31, 1996. Of this amount, 14% represents orders for U.S. military sales. Such orders are subject to termination at the convenience of the U.S. Government with negotiated settlements in which the Company seeks to recover its costs and a reasonable profit. Certain other orders, when subject to cancellation or return, are handled with a restocking charge or by negotiated settlement.
While the Company's backlog is not subject to seasonal factors, it does fluctuate due to timing of orders from the U.S. Government. The Company expects to produce and ship approximately 60% of its current backlog of orders before the end of 1997.
Competition
The Company's business is highly competitive. Many suppliers in the Company's markets are significantly larger than the Company in terms of total sales and assets, and many devote significantly more resources to the development of new products than does the Company. The Company searches for certain market niches where it has expertise and can compete successfully. Competition for the Company's products is based principally on reliability, performance, price and diversity of the products offered.
Research and Development
The Company's technological base is characterized by rapid change. As a result, maintenance and expansion of the Company's business are partially dependent upon the success of the Company's programs to develop new products and upgrade existing products. The Company's engineering resources have been devoted to the development of new products in every major category of its business.
During the years 1996, 1995 and 1994, the Company's total engineering expenditures were $3,929,000, $7,264,000 and $9,335,000, respectively. Due to the extensive use of COTS-based equipment in the Company's products, the Company's cost of independent research in pursuit of new products and improvements to existing products has declined during the years 1996, 1995 and 1994 to approximately $1,639,000, $1,807,000 and $3,214,000, respectively. Customer-funded engineering included in cost of sales or inventory, as a contract cost was $2,290,000 in 1996, $5,457,000 in 1995 and $6,121,000 in 1994.
Patents and Trademarks
The Company owns patents and trademarks and seeks patent protection for its products in cases where the Company believes the technology involved is sufficiently innovative to warrant such protection. The Company seeks trademark protection for its products in cases where the Company believes for marketing reasons such protection is warranted. The Company seeks to protect its proprietary information through its reliance on patent, copyright, trademark and trade secret laws, non-disclosure agreements with its employees and confidentiality provisions in licensing arrangements with its customers. There is no assurance that such agreements will be effective to protect the Company or that the proprietary information deemed confidential by the Company will be adequately protected by the law respecting trade secrets. Consequently, it may be possible for unauthorized third parties to copy certain portions of the Company's products or to "reverse engineer" or otherwise obtain the Company's proprietary rights. Moreover, the laws of some foreign countries do not afford the same protection provided by U.S. laws to the Company's proprietary rights.
Government Regulation
The Company is subject to the Federal acquisition regulations governing the issuance of government contracts, Federal Trade Commission regulations governing its advertising and trade practices, Department of Commerce regulations as well as Department of State Defense Trade Control regulations with respect to goods it imports and exports, and the Truth in Negotiations Act, which provides for the examination by the U.S. Government of cost records to determine whether accurate pricing information was disclosed in connection with government contracts. To date, such government regulations have not had a material adverse effect on the Company's business. The Company in the normal course of business is subject to Department of Defense audits with respect to its government contracts, some of which may result in pricing adjustments.
The Company's manufacturing operations are subject to various federal, state and local laws that regulate the discharge of materials into the environment, or otherwise relating to the protection of the environment. To date, compliance with such government regulations has not had a material adverse effect on the Company's business.
Manufacturing and Supplies
Production of the Company's products requires assembly and testing of components, printed circuit boards and other purchased parts. Quality control, testing and inspection are performed at various steps throughout the manufacturing process.
The Company purchases certain materials and components used in its systems and equipment from independent suppliers. These materials and components are not normally purchased under long-term contracts. The Company purchases minicomputers, workstations, personal computers, mass storage subsystems, high resolution monitors and keyboards under OEM agreements. The Company believes that most of the items its purchases may be obtained from a variety of suppliers and it normally obtains alternative sources for major items, although the Company is sometimes dependent on a single supplier or a few suppliers for some items.
During 1995 and 1994, the Company's cash constraints strained its relationships with vendors, which adversely impacted the Company's ability to meet its production targets on a timely and cost-effective basis. These constraints were significantly eased during 1996 and the Company now believes it is in good standing with all of its vendors.
Employees
At December 31, 1996, the Company had approximately 290 employees. The Company has never experienced a work stoppage and none of its employees is represented by a union. The Company believes its relationship with its employees is good. In January 1997, the Company reduced its work force by approximately 40 additional employees.
Item 2.
Item 2. Properties
The Company's facilities, which are believed to be adequate to meet the Company's foreseeable needs, are shown in the table that follows:
The Company also leases several small sales offices. The Company's corporate office is in short-term leased executive offices located in Huntington, New York. The Company pays approximately $1,198,000 per annum for the rental of all its facilities.
Item 3.
Item 3. Legal Proceedings - -----------------
None.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders - ---------------------------------------------------
None.
PART II
Item 5.
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters - --------------------------------------------------------------------
The Company's Common Stock trades on The Nasdaq Stock Market under the symbol NATL. The table below sets forth for the periods indicated the high and low sale prices for the Common Stock as adjusted for stock dividends and stock splits as compiled from published sources.
Period High Low ------ ---- ---
1996 First Quarter $3 $1 7/8 Second Quarter 3 7/8 2 Third Quarter 4 3 1/8 Fourth Quarter 4 2 3/4
1995 First Quarter $3 $1 7/8 Second Quarter 3 1/2 2 1/8 Third Quarter 3 1/4 1 1/4 Fourth Quarter 2 3/8 1 1/8
There have been no cash dividends declared or paid on the Common Stock in the above two years. The Company's existing credit agreement restricts cash dividends. A 4% stock dividend on the Common Stock was paid to shareholders of record on February 25, 1994.
As of December 31, 1996, there were approximately 650 record holders of Common Stock as determined from the records of the transfer agent, American Stock Transfer & Trust Company. Street names are included collectively as a single holder of record. Management estimates that the Company has approximately 2,500 additional shareholders holding stock in street names.
The Warrants - ------------
The Company has issued and outstanding warrants (the "Warrants") to purchase 4,119,700 shares of Common Stock of the Company at an exercise price of $2.50 per share, subject to adjustment, on or prior to February 15, 2002. The Warrants trade on the Nasdaq SmallCap Market under the symbol NATLW. As of December 31, 1996, there were approximately 60 record holders of Warrants as determined from the records of the warrant agent, American Stock Transfer & Trust Company.
The Notes - ---------
The Company has issued and outstanding 12% Convertible Subordinated Promissory Notes due January 15, 2001, in the aggregate principal amount of $5,227,000 (the "Notes") at December 31, 1996. The Notes are convertible into shares of Common Stock at a conversion price of $2.00 per share, subject to adjustment. The Notes are quoted on the Yellow Sheets of the National Quotations Bureau under the symbol NAI TECH INC 12-2001. As of December 31, 1996, there were approximately 40 record holders of the Notes as determined from the records of the trustee, First Trust National Association.
The Notes and Warrants were issued by the Company in a private placement of the Notes and Warrants on February 15, 1996, February 23, 1996, February 29, 1996 and May 2, 1996. On August 26, 1996 the Company filed with the Commission an effective Registration Statement registering the sale of $6,342,000 of the Notes, 4,119,700 of the Warrants and 8,904,336 shares of the Company's Common Stock.
Item 6.
Item 6. Selected Financial Data - -----------------------
(in thousands except per share data)
1996 1995 1994 1993 1992
Net sales $68,207 $60,008 $54,520 $81,024 $67,315 Operating earnings (loss)(1) 5,307 (8,875) (14,589) 8,960 8,407 Net earnings (loss) (1) 2,413 (11,619) (11,591) 5,455 5,051 Per share data:
Net earnings (loss)(3) 0.28 (1.57) (1.69) 0.80 0.80 Cash dividends(2) -- -- -- -- -- Total assets at year end 41,371 48,012 53,720 60,715 43,704 Long-term debt 12,224 15,573 13,990 10,797 7,158 Working capital 14,241 10,044 16,665 19,105 17,094 Shareholders' equity 15,980 10,086 20,296 30,593 23,911 Average market price per common share at year end(3) $3 3/4 $1 1/2 $2 11/16 $6 1/4 $8 3/16
Average common shares(3) 8,570 7,382 6,580 6,843 6,309 - ------------------------
(1) Includes $7,321 in restructuring costs in 1994.
(2) There have been no cash dividends in the above five fiscal years.
(3) Prior year share data has been restated to reflect 4% stock dividends declared in February 1992, 1993 and 1994 and a three-for-two stock split paid in August 1993.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of - -------------------------------------------------------------------------- Operations - ----------
Results of Operations ---------------------
1996 Compared with 1995 - -----------------------
The nature of the Company's business is such that year to year changes in sales levels are predominantly due to changes in shipping volume or product mix rather than changing sales prices. Net sales in 1996 were $68.2 million, a 14% increase when compared with $60.0 million for the same period in 1995.
The following chart provides the sales breakdown by segment and subsidiary for 1996 and 1995.
In thousands of dollars 1996 1995 % Change - -------------------------------------------------------------------------------- Electronic Systems Segment Codar Technology, Inc. $32,727 $27,553 19% NAI Systems Division 14,330 13,504 6% Lynwood Scientific Dev. Ltd. 14,621 11,587 26% Inter-company (547) (831) -- ------------------------------------ Total Electronic Systems Segment 61,131 51,813 18%
Telecommunications Segment Wilcom, Inc. 7,076 8,195 (14%) ------------------------------------
Total Telecommunications Segment 7,076 8,195 (14%) ------------------------------------
TOTAL $68,207 $60,008 14% ====================================
Sales in the Electronic Systems segment (net of inter-company elimination's) increased 18% to $61.1 million from $51.8 million in 1995. Each of the NAI subsidiaries recorded sales increases in 1996 as compared to 1995. Lynwood and Codar recorded the largest increases. Codar's 1995 revenues were adversely impacted by production problems on certain contracts. The increased sales at Lynwood and NAI Systems Division were representative of the increased levels of business at both companies.
In recent years the Company has reduced its dependency on the United States defense budget by expanding its non-military business operations. However, the Company still expects approximately 40% of 1997 sales to be directly to the military or through prime contractors to the military compared to 44% in 1996. The Company is not aware of any programs in which it participates that are specifically targeted for termination or curtailment. The Company's products are utilized on many different U.S. Government programs which reduces the adverse impact of canceling a single specific program. However, changes in future U.S. defense spending levels could impact the Company's future sales volume.
Sales in the Telecommunications segment decreased 14% to $7.1 million as compared to $8.2 million in 1995. The decrease in sales is attributable to reduced line treatment revenues.
The gross margin percentage for 1996 was 22.7% as compared with 8.2% for 1995. The following chart provides the gross margin percentage by subsidiary.
1996 1995 - ------------------------------------------------------------------------- Codar Technology, Inc. 14.4% (7.7%) NAI Systems Division 20.9% 17.4% Lynwood Scientific Dev. Ltd. 34.0% 32.9% Wilcom, Inc. 38.0% 23.0%
The margin improvement at Codar is attributable to increased shipping volumes and cost reduction efforts initiated in late 1995 and early 1996. Codar's operating performance in both years was adversely impacted by several large contracts for which the gross margins were zero or negative. These contracts were substantially completed during the third quarter of 1996. Codar's 1995 gross margins were adversely impacted by the recording of a $1,400,000 provision attributable to cost growth on certain long-term contracts due to engineering design changes, greater than anticipated labor and material costs and under-absorbed overhead and a $1,100,000 provision for inventory obsolescence. The recording of a $900,000 provision for inventory obsolescence adversely impacted the Systems Division's 1995 gross margin.
Cost reduction efforts completed in the fourth quarter of 1995 and a favorable mix of high margin product revenues favorably impacted Wilcom's 1996 gross margin.
Selling expense for 1996 was $4.2 million as compared with $5.0 million for the same period in 1995. The 16% decrease was realized, despite an increase in sales of 14%, due to the Company's efforts to reduce operating expenses.
General and administrative expenses for 1996 were $5.2 million as compared with $6.5 million in 1995. Decreased corporate office expense as well as cost cutting moves taken in the fourth quarter of 1995 account for the decline.
Company-sponsored research and development expenditures for 1996 were $1.6 million as compared with $1.8 million for 1995.
The Company had operating earnings of $5.3 million in 1996 as compared with an operating loss of $8.9 million in 1995. 1996 operating earnings were favorably impacted by the recognition of a gain of approximately $1.5 million from the sale of the Systems Integration Division to Tracor Aerospace Inc. in June 1996.
Interest expense and amortization of deferred debt costs, net of interest income, was $2.5 million in 1996 as compared with $2.4 million in 1995.
The entire tax expense pertains to the Company's Lynwood subsidiary located in the U.K. Lynwood's earnings are taxed in the U.K. and, while the Company has a U.S. net operating loss carry-forward, Lynwood is required to pay taxes in the U.K. The Company is unable to recognize the full tax benefit associated with its U.S. net operating loss carry-forward due to uncertainties as to whether or not a future benefit will be realized. When the Company returns to sustained profitability, the benefits of such a tax loss carry-forward will be recognized.
The Company recorded a net profit of $2.4 million as compared with a net loss of $11.6 million in 1995. Earnings per share were $0.28 as compared with a loss of $1.57 per share in 1995, based on a weighted average of 8.6 million and 7.4 million shares outstanding, respectively.
1995 Compared with 1994
Net sales in 1995 were $60.0 million, a 10% increase when compared with $54.5 million for the same period in 1994. The increase occurred in the Electronic Systems segment. Year to year changes in the Company's sales levels are predominantly due to changes in shipping volume or product mix rather than changing sales prices.
The following chart provides the sales breakdown by segment and subsidiary for 1995 and 1994.
In thousands of dollars 1995 1994 % Change
Electronic Systems Segment
Codar Technology, Inc. $27,553 $20,229 36% NAI Systems Division 13,504 4,417 206% Lynwood Scientific Dev. Ltd. 11,587 11,116 4% Military Products -- 11,366 (100%) Intercompany (831) (798) -- -------------------------------- Total Electronic Systems Segment 51,813 46,330 12%
Telecommunications Segment Wilcom, Inc. 8,195 8,190 (0%) --------------------------------
Total Telecommunications Segment 8,195 8,190 (0%) --------------------------------
TOTAL $60,008 $54,520 10% ================================
Sales in the Electronic Systems segment (net of inter-company eliminations) increased 12% to $51.8 million from $46.3 million in 1994. The sales increase was primarily attributable to increased sales from NAI's Systems Division and Codar offset by the sales reduction due to the closing of the military products division, which was consolidated into Codar in September 1994.
The Company expects a significant amount of 1996 sales to be directly to the military or through prime contractors to the military.
Sales in the Telecommunications segment remained flat at $8.2 million in 1995 and 1994. A small increase in line treatment products due to deliveries of Wilcom's new Enhanced Line Powered Amplifier products was offset by a decline in test equipment as a result of lower orders from the regional Bell operating companies and foreign telecommunications companies.
The consolidated gross margin for 1995 was 8.2%, as compared to 18.8% in 1994. The 1995 gross margin was adversely affected by a $6.6 million charge to operations and an unfavorable mix of high and low margin product deliveries. The $6.6 million charge to operations was attributable to cost growth on certain long term contracts due to engineering design changes, provisions for slow moving, excess and obsolete inventory. The Company believes that it has recognized the entire adverse impact of cost overruns on those contracts for which the expected final costs exceed the contract value.
Selling expense for 1995 was $5.0 million, as compared with $7.5 million in 1994. This decrease is attributable to the saving associated with the consolidation of the military products division in the third quarter of 1994 and cost cutting measures implemented at all of the Company's divisions in 1995.
General and administrative expenses for 1995 were $6.5 million, as compared to $6.3 million in 1994. This increase is primarily attributable to the Company moving its corporate headquarters from Woodbury, New York to Longmont, Colorado in December 1995 and additional administrative expense at Codar as a result of increased management resources. These cost increases were partially offset by cost cutting measures implemented at the Company's other divisions and the savings associated with the consolidation of the military products division in the third quarter of 1994.
Company-sponsored research and development expenditures for 1995 were $1.8 million, as compared to $3.2 million in 1994. This decrease is attributable to savings associated with the previously mentioned consolidation and the change in mix between Company-sponsored research and development and customer-funded research and development. The Electronic Systems segment is focusing on its system integration business. Although systems integration work by its nature requires significant engineering content, such costs must be classified as contract costs and charged to cost of sales as opposed to Company-sponsored research and development (IR&D).
The Company recorded an operating loss of $8.9 million in 1995, as compared with an operating loss of $14.6 million in 1994. The operating loss in 1995 was primarily due to the $6.6 million charge previously noted. The 1994 operating loss included a $7.3 million restructuring expense.
Interest expense, net of interest income, was $2.4 million in 1995, as compared to $1.4 million in 1994. The 1995 figures also included a $0.9 million charge for debt restructuring expense related to the April 7, 1995 agreement reached with the Company's two lending institutions.
The effective income tax expense rate was below the combined statutory federal and state rates in 1995. The Company was unable to recognize a tax benefit for its loss in 1995 due to uncertainties as to whether or not a future benefit would be realized. Any earnings in 1996 will not be taxed at the statutory rate. The small tax provision is associated with the operations of Lynwood, the Company's United Kingdom subsidiary.
The Company recorded a net loss of $11.6 million in 1995, substantially the same as the net loss recorded in 1994. Loss per share for 1995 was ($1.57), as compared with a ($1.69) in 1994, based on a weighted average of 7.4 million and 6.9 million shares outstanding, respectively.
Liquidity and Capital Resources - -------------------------------
On February 15, 1996 the Company entered into an amendment to its credit agreement with its bank lenders which amended and extended the payment provisions contained therein and reset certain financial covenants on more favorable terms for the Company. The revised credit agreement provides for quarterly principal payments of $500,000, beginning on March 31, 1996 and payments of $750,000 beginning on March 31, 1997 and paid through December 31, 1998. The remaining principal balance is due on January 15, 1999. Interest is payable monthly at the rate of 1 3/4% above prime. The loan covenants require that the Company maintain certain minimum levels of net worth, current ratio and quick ratio. There are also limits on capital expenditures and the payment of cash dividends. The Company believes that it can comply with such loan covenants during the term of the credit agreement.
On February 15, 1996, February 23, 1996, February 29, 1996 and May 2, 1996, the Company issued an aggregate of $8,342,000 of 12% Convertible Subordinated Promissory Notes due January 15, 2001 (the "Notes") and warrants to purchase an aggregate of 2,085,500 shares of the Company's Common Stock (the "Warrants"). The Notes are convertible by the holders into shares of Common Stock at a price equal to $2.00 per share, subject to adjustment if the Company fails to meet certain earnings thresholds and in
certain other events. Interest on the Notes is payable quarterly in arrears on January 15, April 15, July 15 and October 15 of each year, commencing April 15, 1996. The Notes mature on January 15, 2001. The Notes may be prepaid by the Company without premium or penalty at any time after January 15, 1999. The Notes are unsecured obligations of the Company and contain certain restrictions on the Company including a negative pledge of the Company's assets not otherwise encumbered by the holders of the senior indebtedness.
In addition to the Warrants issued with the Notes, the Company issued an aggregate of 2,034,200 Warrants to the lead investor and the placement agent. All Warrants entitle the holders thereof to purchase shares of Common Stock at any time and from time to time on or before February 15, 2002 at an exercise price equal to $2.50 per share of Common Stock, subject to adjustment in certain events.
The Company received total proceeds (net of placement agency fees and expenses) of $7,534,081 ($2,500,000 was received prior to December 31, 1995) from the sale of the Notes and the Warrants upon completion of the offering.
Approximately $4.1 million was used to reduce the Company's accounts payable to its vendors. The remainder of the funds were used to meet operating and working capital needs. As a result of the sale of the Notes and the debt restructuring, the Company made payments of $7,675,000 in principal in 1996, and is required to expend approximately $2,475,000 in 1998. All required term loan payments for 1997 were made prior to December 31, 1996. On January 15, 1999 the Company is required to make a balloon payment of $5,025,000. Interest on outstanding balances under the term loan is payable monthly.
The Company intends to pay interest on the Notes, interest and principal under the credit agreement and operating expenses for the next three years. The Company believes that it will have adequate resources to meet its obligations when the balloon payment of $5,025,000 is due.
On May 9, 1996, the Company entered into an agreement with Charles S. Holmes, a member of the Company's Board of Directors, that in consideration of his converting the Note held by him in the aggregate unpaid principal amount of $2,000,000 into 1,000,000 shares of Common Stock the Company would immediately grant him warrants to purchase 300,000 shares of Common Stock at any time and from time to time on or before February 15, 2002 at an exercise price of $3.00 per share, subject to adjustment in certain events. Such warrants were valued at $0.50 per warrant and were fully expensed in 1996.
During 1996 an additional $1,115,000 of Notes were converted in accordance with the terms thereof into 557,500 shares of common stock, thereby bringing the total conversions for the year to $3,115,000 and reducing the aggregate principal amount of Notes outstanding to $5,227,000 from the originally issued $8,342,000.
Cash and cash equivalents totaled $2.7 million at December 31, 1996, as compared to $2.6 million at December 31, 1995. Cash used by operating activities amounted to $1.6 million in 1996, as compared to cash provided by operating activities of $0.1 million in 1995.
A significant factor in the Company's improved cash flow performance in 1996 has been the leveling of shipments during each month. In the past years the Company's shipments were heavily weighted towards the end of each month and the last month of each quarter. This improvement in shipping performance has enabled the Company to reduce its inventory and accounts receivable balances.
The increase in non-current assets from the beginning of the year is attributable to the deferred debt costs incurred as a result of the sale of the Notes in February 1996.
Inflation - ---------
The Company's financial statements are prepared in accordance with historical accounting systems, and therefore, do not reflect the effect of inflation. The impact of changing prices on the financial statements is not considered to be significant.
Backlog - -------
The backlog of unfulfilled orders at December 31, 1996 stood at $30.2 million, compared to $47.8 million at December 31, 1995. Approximately $12.0 million of the December 31, 1995 backlog related to the Systems Integration business that was sold in 1996. Approximately 60% of the 1996 year end backlog is scheduled for delivery over the next twelve months.
Item 8.
Item 8. Consolidated Financial Statements and Supplementary Data - --------------------------------------------------------
The following consolidated financial statements of the registrant are submitted herewith at the end of this document beginning on Page:
Independent Auditors' Report.
Consolidated balance sheets at December 31, 1996 and 1995.
Consolidated statements of operations for the years ended December 31, 1996, 1995 and 1994.
Consolidated statements of shareholders' equity for the years ended December 31, 1996, 1995 and 1994.
Consolidated statements of cash flows for the years ended December 31, 1996, 1995 and 1994.
Notes to consolidated financial statements.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial - ------------------------------------------------------------------------- Disclosure - ----------
None.
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant - --------------------------------------------------
Directors of the Company - ------------------------
The members of the Board of Directors of the Company as of March 11, 1997, together with certain information furnished to the Company by each such person as of such date, are set forth below.
Years Served Name and Age as a Director Biographical Summary - ------------ ------------- --------------------
Robert A. Carlson(1), 64 9 Mr. Carlson is Chairman and Chief Executive Officer of the Company. From December 1987 until December 1989, he was President and Chief Operating Officer of the Company. From December 1989 to October 1995, he was President and Chief Executive Officer of the Company.
Richard A. Schneider, 44 4 Mr. Schneider is Executive Vice President, Treasurer, Chief Financial Officer and Secretary of the Company. He was elected a director of the Company on February 11, 1993. From October 1988 until December 1992, he served as Vice President-Finance and Treasurer of the Company. He was elected Secretary of the Company in January 1990.
Stephen A. Barre(2),(3), 56 7 Mr. Barre is Chairman and Chief Executive Officer of Servo Corporation of America, a communications and defect detection company.
C. Shelton James(1),(3), 55 7 Mr. James is Chairman of the Board and Chief Executive Officer of Elcotel, Inc., a public communications company. He also is President and a director of Fundamental Management Corporation, an investment management company which is the general partner of limited partnerships which are substantial investors in the Company, and he is on the board of directors of Harris Computer Systems, Inc., a company engaged in the manufacture of real time computers, SK Technologies, a company engaged in development and marketing of point-of-sale software, and CPSI, Inc., a company engaged in high performance computing.
Edward L. Hennessy, Jr.(2), 68 1 year Mr. Hennessy is the retired Chairman and Chief Executive Officer of Allied Signal, Inc., a world-wide technology company. He also is a director of The Bank of New York, a New York State commercial banking company, Lockheed Martin Corp., a designer, manufacturer, integrator and operator of systems and products in leading edge technologies, National Association of Manufacturers, Wackenhut Corporation, an international provider of security-related services and privatized correctional and detention facility management and design services, Walden Real Estate Investment Trust, a self-managed fully integrated REIT focused on middle income multi-family properties, and Fundamental Management Corporation. A designee of Fundamental Management Corporation, he was elected a director of the Company on March 6, 1996.
Charles S. Holmes(1),(2), 51 1 year A director of the Company since October 3, 1995, Mr. Holmes is President and sole stockholder of Asset Management Associates of New York, Inc., a New York-based firm specializing in acquisitions of manufacturing businesses. Mr. Holmes founded and was a partner in Asset Management Associates, a predecessor partnership of Asset Management, from 1978 to 1991. He has served since its formation in 1992 as Vice Chairman of the Board of Directors of Chart Industries Inc., which specializes in the design, manufacture and sale of industrial process equipment used in the hydrocarbon and industrial gas industries for low-temperature and cryogenic applications, and manufactures other industrial equipment such as stainless steel tubing, structural pipe supports and high vacuum systems.
Dennis McCarthy(3), 50 1 year Mr. McCarthy, a designee of Mr. Holmes, was elected a director of the Company on March 6, 1996. He has been employed by Asset Management Associates of New York, Inc., a New York-based firm specializing in acquisitions of manufacturing businesses, since 1988.
- ------------------------
1) Member of the Executive Committee 2) Member of the Compensation Committee 3) Member of the Audit Committee
Executive Officers of the Company - ---------------------------------
The current executive officers of the Company are as follows:
Robert A. Carlson, 64, is the Chairman and Chief Executive Officer of the Company. From December 1987 until December 1989, he was President and Chief Operating Officer of the Company. From December 1989 until October 1995, he was President and Chief Executive Officer of the Company.
Richard A. Schneider, 44, is the Executive Vice President, Treasurer and Secretary of the Company. From October 1988 until December 1992, he served as Vice President-Finance and Treasurer of the Company. He was elected Secretary of the Company in January 1990.
Item 11.
Item 11. Executive Compensation - ----------------------
The following table sets forth all plan and non-plan compensation awarded to, earned by or paid to the Company's Chief Executive Officer and each of the executive officers of the Company other than the Chief Executive Officer whose total annual salary and bonus exceeded $100,000 (collectively, the "Named Executives") for each of the Company's last three fiscal years.
- ------------------------
(1) The aggregate amount of all perquisites and other personal benefits paid to any Named Executive is not greater than either $50,000 or 10% of the total of the annual salary and bonus reported for such Named Executive.
(2) Includes $59,022, $59,071 and $58,295 of life insurance premiums paid on term life and split dollar policies by the Company on behalf of Mr. Carlson in each of the years 1994, 1995 and 1996, respectively, as well as $7,302, $0 and $0 of matching contributions made by the Company under the 401(k) deferred compensation plan and $0, $0 and $0 of matching contributions made by the Company under the profit sharing portion of such plan for the benefit of Mr. Carlson for each of the years 1994, 1995 and 1996, respectively.
(3) Includes $7,603, $7,630 and $7,454 of life insurance premiums paid on term life and split dollar policies by the Company on behalf of Mr. Schneider in each of the years 1994, 1995 and 1996, respectively, as well as $4,823, $0 and $0 of matching contributions made by the Company under the 401(k) deferred compensation plan and $0, $0 and $0 of matching contributions made by the Company under the profit sharing portion of such plan for the benefit of Mr. Schneider for each of the years 1994, 1995 and 1996, respectively.
(4) Options to acquire shares of Common Stock that were granted in fiscal year 1994. At the same time, options for Mr. Carlson (102,951 shares) and Mr. Schneider (54,996 shares) were canceled.
(5) Options to acquire shares of Common Stock that were granted in fiscal year 1995. At the same time, options for Mr. Carlson (214,485 shares) and Mr. Schneider (95,327 shares) were canceled.
Stock Options - -------------
The table below summarizes the options granted to the Named Executives in 1996 and their potential realizable values.
Option/SAR Grants in 1996 -------------------------
________________________
The table below summarizes the exercise of stock options during 1996 for the Named Executives.
Aggregated Option/SAR Exercises in 1996 and FY-End Option/SAR Values --------------------------------------------------------------------
- ------------------------
(1) Market price at December 31, 1996 minus exercise price times the number of shares underlying the unexercised options.
Supplemental Retirement Plan - ----------------------------
The Company terminated its non-qualified Supplemental Retirement Plan (the "SERP") on December 19, 1996. On August 7, 1996, the Company and Mr. Schneider agreed on the termination of Mr. Schneider's status as an eligible participant under the SERP and the redemption of his interest in the SERP by the Company at a redemption price of $150,000, which represented a discount of approximately 60% from the actuarial equivalent lump sum value of his accrued benefit under the SERP as of February 29, 1996. On December 19, 1996, the Company and Mr. Carlson agreed on the termination of Mr. Carlson's status as an eligible participant under the SERP and the redemption of Mr. Carlson's interest in the SERP by the Company at a redemption price of $800,000, payable quarterly in four equal installments of $200,000 beginning on February 17, 1997. It is estimated that Messrs. Carlson and Schneider, who have 12 and 8 years of credited service, respectively, would have received each year at normal retirement age annual amounts under the SERP of $131,296 and $65,103, respectively.
Employment and Change in Control Agreements - -------------------------------------------
The Company entered into an Employment Agreement with Robert A. Carlson as of January 1, 1997. Pursuant to the employment agreement with Mr. Carlson, the term of his employment commenced on January 1, 1997 and will continue until December 31, 1997 unless extended by Mr. Carlson for a period of one year on or within 30 days prior to each of January 1, 1998 and January 1, 1999 (each an "Extension Date"). Mr. Carlson will be paid salary at a rate of $260,000 per annum which represents a 25% increase in salary from the prior year's level. Assuming that the Company attains certain annual targets, the Company will also pay Mr. Carlson an annual bonus equal to 50% of his salary. The employment agreement with Mr. Carlson also provides that the Company will pay Mr. Carlson $50,000 on each January 15, 1998 and January 15, 1999 if Mr. Carlson continues to serve as Chairman of the Company on each such Extension Date, and an additional $50,000 if Mr. Carlson continues to service as Chief Executive Officer of the Company on each such Extension Date (collectively referred to as the "Executive Bonus"). Mr. Carlson will be eligible to participate in all employee benefit programs. The employment agreement with Mr. Carlson also provides that in the event the Company decides to terminate Mr. Carlson's employment without cause he is entitled to a payment of a pro rata share of unused vacation for the full year plus a pro rata share of his bonus under the Company Bonus Plan, if the Board in its sole discretion so determines, plus a severance payment of the Executive Bonus on the dates he would otherwise be entitled to receive the Executive Bonus. In the event the Company decides to terminate Mr. Carlson's employment without cause prior to November 31, 1997 he is entitled to either his salary for the remainder of the term under the agreement or one year's salary, whichever is greater. If the Company decides to terminated Mr. Carlson's employment for cause, the Company will provide 20 days written notice, and reason for the termination. Mr. Carlson will have those 20 days to effect a cure to the Company's satisfaction.
The Company entered into an Employment Agreement with Richard A. Schneider on October 16, 1995 which was amended as of August 8, 1996 and January 2, 1997. Pursuant to the employment agreement with Mr. Schneider, the term of his employment commenced on October 16, 1995 and will continue until October 16, 1997. Mr. Schneider will be paid salary at a rate of $180,000 per annum which represents a 25% increase in salary from the prior year's level. Assuming the Company attains certain annual targets, the Company will also pay Mr. Schneider an annual bonus equal to 40% of his salary. Mr. Schneider will be eligible to participate in all employee benefit programs, and in 1995 was granted options to purchase 125,000 shares of Common Stock at a per share exercise price of $2.50 (such options to replace 100,000 previously issued options which were canceled). The employment agreement with Mr. Schneider also provides that in the event the Company terminates Mr. Schneider's employment without
cause, Mr. Schneider will be entitled to a severance payment of either his salary for the remainder of the term under the agreement or one year's salary, whichever is greater, and a severance payment of a pro rata share of unused vacation for the full year plus a pro rata share of his bonus under the Company Bonus Plan, if the Board in its sole discretion so determines. If the Company decides to terminate Mr. Schneider's employment for cause, the Company has agreed to provide 20 days written notice, and reason for the termination. Mr. Schneider will have those 20 days to effect a cure to the Company's satisfaction.
Director Compensation - ---------------------
During 1996, each director who was not also an officer of the Company was paid an annual retainer of $15,000, plus $2,500 for each committee that a director serves on, plus a uniform fee of $1,000 for each Board and committee meeting attended in person. During 1996, directors who were also officers of the Company received no remuneration for attendance at Board and committee meetings.
Compensation Committee Interlocks and Insider Participation - -----------------------------------------------------------
During the fiscal year ended December 31, 1996, the members of the Compensation Committee were Charles S. Holmes (Chairman), Stephen A. Barre and Edward Hennessy, Jr. During fiscal year 1996 and formerly, none of such persons was an officer of the Company or any of its subsidiaries or had any relationship with the Company other than serving as a director of the Company. In addition, during the fiscal year ended December 31, 1996, no executive officer of the Company served as a director or member of the compensation committee of another entity, one of whose executive officers served as a director or on the Compensation Committee of the Company.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management - --------------------------------------------------------------
The following table sets forth information concerning persons or groups who are known by the Company to be the beneficial owners of more than 5% of the Common Stock as of March 11, 1997. The information in the table below is based upon information furnished to the Company by such persons and statements filed with the Securities and Exchange Commission.
Number of Shares of Common Stock Percent of Name and Address of Beneficial Owner Beneficially Owned(1) Common Stock - ------------------------------------ --------------------- ------------
Charles S. Holmes P.O. Box 2850 Southampton, NY 11969(2) 3,212,000 29.0%
Pioneering Management Corporation 60 State Street Boston, MA 02114(3) 579,000 6.4%
Fundamental Management Corporation 4000 Hollywood Boulevard Suite 610N Hollywood, FL 33021(4) 1,150,636 11.8%
- ------------------------
1) To the knowledge of the Company, beneficial owners named in the above table have sole voting power with respect to the shares listed opposite their names.
2) Mr. Holmes is a director of the Company. These shares are comprised of 1,000,000 shares of Common Stock, 1,700,000 shares underlying certain Warrants exercisable at $2.50 per share and 300,000 shares underlying certain Warrants exercisable at $3.00 per share, owned by Mr. Holmes; and 175,000 shares of Common Stock and 37,000 shares underlying Warrants exercisable at $2.50 per share owned by a friend of Mr. Holmes. The ownership percentage is calculated as if such Warrants and Notes had been converted as of March 11, 1997.
3) These shares are reportedly owned by a passive investor. Pioneering Management Corporation is the investment company advisor of such investor and is registered under Section 203 of the Investment Advisers Act of 1940.
4) These shares are reportedly owned by various limited partnerships, of which Fundamental Management Corporation is the general partner. C. Shelton James, a director of the Company, is the President and a director of Fundamental Management Corporation. These shares are composed of 400,636 shares of Common Stock, 250,000 shares underlying certain Warrants exercisable at $2.50 per share and 500,000 shares underlying $1,000,000 of Notes convertible into shares at $2.00 per share. Excludes 14,793 shares of Common Stock owned by Mr. James as to which shares Fundamental Management Corporation disclaims beneficial ownership. The ownership percentage is calculated as if such Warrants and Notes had been converted as of March 11, 1997 by Fundamental Management Corporation.
Shares of Common Stock beneficially owned as of March 11, 1997 by each director and executive officer of the Company and by all directors and executive officers of the Company as a group are set forth in the following table. This table is based upon information furnished to the Company by such persons and statements filed with the Securities and Exchange Commission.
Beneficial Ownership of Shares(1)
Number of Shares of Common Stock Percent of Name Beneficially Owned(2) Common Stock(3) - ---- ------------------- -------------
Robert A. Carlson 100,467 1.11% Stephen A. Barre 17,654 -- Edward L. Hennessy, Jr. -0- -- Charles S. Holmes(4) 1,000,000 11.08% C. Shelton James(5) 14,793 -- Dennis McCarthy -0- -- Richard A. Schneider 16,812 -- All directors and officers as a group (7 persons) 1,149,726 12.74%
- ------------------------
- -- = Less than 1%
1) Directors and executive officers have sole voting power and sole investment power with respect to the shares listed opposite their names.
2) Excludes options exercisable within 60 days of March 11, 1997 for such persons as follows: Mr. Carlson, 125,000, Mr. Barre, 3,120; Mr. Hennessy, -0-; Mr. Holmes, -0-; Mr. James, 7,401; Mr. McCarthy, -0-; Mr. Schneider, 62,500; and all directors and officers as a group, 198,021.
3) The percentages of Common Stock outstanding are based on 9,032,437 shares outstanding on March 11, 1997.
4) Excludes Warrants to purchase 2,000,000 shares of Common Stock owned by Mr. Holmes and 175,000 shares of Common Stock and Warrants to purchase 37,000 shares of Common Stock owned by a friend of Mr. Holmes.
5) Excludes 400,636 shares of Common Stock, Warrants to purchase 250,000 shares of Common Stock and Notes convertible into 500,000 shares of Common Stock owned by various limited partnerships of which Fundamental Management Corporation, an investment company of which Mr. James is President and a director, as to which shares Mr. James shares voting and dispositive power.
Item 13.
Item 13. Certain Relationships and Related Transactions - ----------------------------------------------
Charles S. Holmes, a director of the Company, purchased $2,000,000 principal amount of Notes and Warrants (the "Units") to purchase 500,000 shares of Common Stock issued pursuant to the private placement (the "Investment Transaction") of the Units by the Company in exchange for the 12% Subordinated Promissory Notes of the Company held by him in the aggregate principal amount of $2,000,000. Mr. Holmes also received an additional 1,200,000 Warrants for past advisory services in connection with the Investment Transaction and the engagement of Commonwealth Associates as the Company's placement agent. Pursuant to an agreement between Mr. Holmes and the Company on May 9, 1996, which provided for the immediate grant to Mr. Holmes of warrants to purchase 300,000 shares of Common Stock at any time and from time to time on or before February 15, 2002 at an exercise price of $3.00 per share, subject to adjustment in certain events, Mr. Holmes converted the Notes held by him in the aggregate principal amount of $2,000,000 into one million shares of Common Stock which he currently owns.
C. Shelton James, a director of the Company, is the president and a director of Active Investors II, Ltd. ("Active Investors"), a company which, together with certain affiliated limited partnerships, currently owns shares of Common Stock of the Company. In connection with the Investment Transaction, Active Investors purchased 900 Units from the Company in exchange for 12% Subordinated Promissory Notes of the Company held by him in the aggregate principal amount of $900,000. On May 2, 1996 Active Investors purchased additional Notes in the aggregate principal amount of $100,000 and Warrants to purchase 25,000 shares of Common Stock.
In connection with the Investment Transaction, the Company agreed to use its best efforts to cause the resignation of two then-current members of the Board of Directors and cause to be elected as directors two individuals acceptable to the Company and who are designed by the investors, including one designated solely by Mr. Holmes and one designated solely by Active Investors. Dennis McCarthy was designated to serve in such capacity by Mr. Holmes, while Edward L. Hennessy, Jr. was designated to serve in such capacity by Active Investors, and each became a director of the Company on March 6, 1996.
PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K - ---------------------------------------------------------------
(a) Financial Statements and Financial Statement Schedules ------------------------------------------------------
The consolidated financial statements and schedules listed in the accompanying index to financial statements are filed as part of this Annual Report on Form 10-K.
(b) Reports on Form 8-K
None.
(c) Exhibits
3(i) Restated Certificate of Incorporation of NAI Technologies, Inc. filed with the Secretary of State of the State of New York on August 19, 1991 (filed with the Commission as Exhibit 3(i) to the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 28, 1996).
3(ii) Certificate of Amendment to the Certificate of Incorporation of the Registrant, as filed with the New York Secretary of State on February 2, 1996 (filed with the Commission as Exhibit 3 to the Company's Report on Form 8-K dated February 15, 1996).
3(iii) Certificate of Amendment of the Certificate of Incorporation of NAI Technologies, Inc. filed with the Secretary of State of the State of New York on August 7, 1996 (filed with the Commission as Exhibit 3(ii) to the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 28, 1996).
4(i) Form of 12% Convertible Subordinated Promissory Note, due January 15, 2001, of the Registrant (filed with the Commission as Exhibit 1 to the Company's Report on Form 8-K dated February 15, 1996).
4(ii) Form of Warrant to Purchase Common Stock of the Registrant, on or before February 15, 2002 (filed with the Commission as Exhibit 2 to the Company's Report on Form 8-K dated February 15, 1996).
4(iii) Registration Rights Agreement, dated as of February 13, 1996, between the Registrant and the Investors (filed with the Commission as Exhibit 4 to the Company's Report on Form 8-K dated February 15, 1996).
4(iv) Indenture, dated as of July 15, 1996, between NAI Technologies, Inc. and First Trust National Association, as Trustee (filed with the Commission as Exhibit 4(i) to the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 28, 1996).
4(v) Warrant Agreement, dated as of August 26, 1996, between NAI Technologies, Inc. and American Stock Transfer & Trust Company (filed with the Commission as
Exhibit 4(ii) to the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 28, 1996).
10(i) Placement Agency Agreement, dated as of December 15, 1995, between Commonwealth Associates and the Registrant (filed with the Commission as Exhibit 5 to the Company's Report on Form 8-K dated February 15, 1996).
10(ii) Fourth Amendment to Amended and Restated Credit Agreement, dated as of January 5, 1996, among the Registrant, Chemical Bank, a New York banking corporation, ("Chemical"), The Bank of New York, a New York banking corporation ("BNY"), and each of the other financial institutions which from time to time becomes a party thereto (together with Chemical and BNY, the "Banks"), BNY, as administrative agent (the "Administrative Agent"), and Chemical as collateral agent (the "Collateral Agent") (filed with the Commission as Exhibit 6 to the Company's Report on Form 8-K dated February 15, 1996).
10(iii) Fifth Amendment, dated as of February 13, 1996, to Amended and Restated Credit Agreement, dated as of April 12, 1995, as previously amended, among the Registrant, the Banks, the Administrative Agent and the Collateral Agent (filed with the Commission as Exhibit 7 to the Company's Report on Form 8-K dated February 15, 1996).
10(iv) Amendment No. 1 to Registration Rights Agreement, dated as of February 13, 1996 (the "Registration Rights Amendment"), to that certain Registration Rights Agreement, dated as of April 12, 1995, as amended, between the Registrant, BNY and Chemical (filed with the Commission as Exhibit 8 to the Company's Report on Form 8-K dated February 15, 1996).
10(v) Letter Agreement, dated May 9, 1996, between Charles S. Holmes and the Company (filed with the Commission as Exhibit 1 to the Company's Report on Form 8-K dated May 9, 1996).
10(vi) Amendment No. 1 to Employment Agreement, entered into as of August 8, 1996, between NAI Technologies, Inc. and Richard A. Schneider (filed with the Commission as Exhibit 10(i) to the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 28, 1996).
10(vii) Settlement Agreement and Release, entered into as of August 8, 1996, between NAI Technologies, Inc. and Richard A. Schneider (filed with the Commission as Exhibit 10(ii) to the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 28, 1996).
10(viii) 1996 Stock Option Plan (filed with the Commission as Exhibit 10(iii) to the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 28, 1996).
10(ix) 1993 Stock Option Plan for Directors, as amended (filed with the Commission as Exhibit 10(iv) to the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 28, 1996).
10(x) Employment Agreement, entered into as of January 1, 1997, between NAI Technologies, Inc. and Robert A. Carlson.
10(xi) Amendment No. 2 to Employment Agreement, entered into as of January 2, 1997, between NAI Technologies, Inc. and Richard A. Schneider.
10(xii) Settlement Agreement and Release, entered into as of December 19, 1996, between NAI Technologies, Inc. and Robert A. Carlson.
11 Statement re: Computation of Per Share Earnings.
17(i) Resignation letter of Robert D. Rosenthal, dated December 13, 1995, resigning from the Board of Directors of the Registrant (filed with the Commission as Exhibit 9 to the Company's Report on Form 8-K dated February 15, 1996).
17(ii) Resignation letter of John M. May, dated February 13, 1996, resigning from the Board of Directors of the Registrant (filed with the Commission as Exhibit 10 to the Company's Report on Form 8-K dated February 15, 1996).
21 List of Subsidiaries.
23 Accountants' Consent.
27 Financial Data Schedules (Edgar filing only).
99(i) Press Release, dated February 15, 1996, describing the closing of the Investment Transaction and the Amendment (filed with the Commission as Exhibit 11 to the Company's Report on Form 8-K dated February 15, 1996).
99(ii) Pro Forma Consolidated Balance Sheets as of April 27, 1996 of NAI Technologies, Inc. and Subsidiaries (filed with the Commission as Exhibit 2 to the Company's Report on Form 8-K dated May 9, 1996).
(d) Not applicable.
S I G N A T U R E S -------------------
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
NAI TECHNOLOGIES, INC.
/s/ Richard A. Schneider By:____________________________ Richard A. Schneider Date: March 11, 1997 Executive Vice President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.
Signature Title Date - --------- ----- ----
/s/ Robert A. Carlson _____________________________ Chairman, Chief Executive March 11, 1997 Robert A. Carlson Officer and Director (Chief Executive Officer)
/s/ Stephen Barre _____________________________ Director March 11, 1997 Stephen Barre
/s/ Edward L. Hennessy, Jr. _____________________________ Director March 11, 1997 Edward L. Hennessy, Jr.
/s/ Charles S. Holmes _____________________________ Director March 11, 1997 Charles S. Holmes
/s/ C. Shelton James _____________________________ Director March 11, 1997 C. Shelton James
/s/ Dennis McCarthy _____________________________ Director March 11, 1997 Dennis McCarthy
/s/ Richard A. Schneider _____________________________ Executive Vice President, March 11, 1997 Richard A. Schneider Chief Financial Officer, Treasurer, Secretary and Director (Chief Financial and Accounting Officer)
STATEMENT OF DIFFERENCES
The registered trademark symbol shall be expressed as ................. 'r' The British pound sterling sign shall be expressed as.................. 'L'
NAI TECHNOLOGIES, INC. AND SUBSIDIARIES
AND FINANCIAL STATEMENT SCHEDULES
Schedules not listed above have been omitted either because they are not applicable or the required information is shown in the consolidated financial statements or notes thereto.
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders NAI Technologies, Inc.
We have audited the accompanying consolidated balance sheets of NAI Technologies, Inc. and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of NAI Technologies, Inc. and subsidiaries as of December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1996, in conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Boulder, Colorado February 7, 1997
NAI TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
The accompanying notes to consolidated financial statements are an integral part of these statements.
NAI TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
The accompanying notes to consolidated financial statements are an integral part of these statements.
NAI TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE THREE YEARS ENDED DECEMBER 31, 1996
The accompanying notes to consolidated financial statements are an integral part of these statements.
NAI TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
The accompanying notes to consolidated financial statements are an integral part of these statements.
NAI TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994
1. SUMMARY OF ACCOUNTING POLICIES
Description of Business: NAI Technologies designs, manufactures and markets rugged computer systems, advanced peripheral products, high performance workstations, TEMPEST computer systems and telecommunications test equipment and transmission products, and integrated systems for defense, military, government-related and commercial businesses. The Company's customer base includes commercial markets requiring rugged, mobile computer and communications systems, U.S. and foreign armed services and intelligence agencies, and the regional Bell operating companies and independent telephone companies. Net sales to the U.S. Government for the years ended December 31, 1996, 1995 and 1994 were $20,619,000, $22,665,000 and $21,819,000, respectively.
Basis of Presentation: The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant inter-company transactions and balances have been eliminated in consolidation.
Management Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Foreign Currency Translation: The financial statements and transactions of the Company's foreign subsidiary are maintained in its functional currency. For consolidation purposes, assets and liabilities of the Company's U.K. subsidiary have been translated at rates of exchange at the end of the period. Revenues and expenses have been translated at the weighted average rates of exchange in effect during each period. Translation gains and losses are accumulated as a separate component of shareholders' equity. Gains and losses resulting from transactions denominated in a currency other than the entity's functional currency are included in other operating expense in the consolidated statements of operations. There were no significant gains or losses from foreign currency transactions in the years presented.
Financial Statement Reclassification: Certain reclassifications have been made to prior years' financial statements to conform to the 1996 presentation.
Cash equivalents: The Company classifies investments that are readily convertible into cash, and have original maturities of three months or less, as cash equivalents.
Inventories: Inventories are valued at the lower of cost or market on a first-in, first-out (FIFO) basis. Work in process is stated at total costs incurred, reduced by estimated costs of units delivered, not in excess of net realizable value. The Company's business is characterized by rapid change that frequently results in product obsolescence. The Company continually reviews its on-hand quantities and compares such to current business levels and future expectations regarding usage. Adjustments to the carrying values of inventory are made when considered necessary.
Property, Plant and Equipment: Property, plant and equipment are recorded at historical cost. Depreciation and amortization have been computed using the straight-line method over the following estimated useful lives of the assets: equipment and furniture and fixtures, generally -- 2 to 10 years, and buildings - -- 30 years. Leasehold improvements are amortized over the shorter of the estimated useful life of the improvements or the lease term.
Excess of Cost over Fair Value of Net Assets Acquired: The excess of cost over fair value of net assets acquired (goodwill) is being amortized on a straight line basis over a period of twenty years. The Company reviews the significant assumptions that underlie the twenty-year amortization period on a quarterly basis and will shorten the amortization period if considered necessary. The Company assesses the recoverability of this intangible asset by determining whether the amortization of the goodwill balance over its remaining life can be recovered through projected undiscounted future results. Accumulated amortization was approximately $2,362,000 and $1,730,000 at December 31, 1996 and 1995, respectively. The amortization expense associated with these amounts is included in other operating expense in the consolidated statements of operations and amounted to $632,000, $630,000 and $620,000 in 1996, 1995 and 1994, respectively.
Long-lived assets: In fiscal 1996, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be disposed of." SFAS No. 121 requires that long-lived assets and certain identifiable intangibles to be held and used or disposed of by an entity be reviewed for impairment whenever events or changes in circumstances indicated that the carrying amount of an asset may not be recoverable. During 1996, the Company adopted this statement and determined that no impairment loss need be recognized for applicable assets of continuing operations.
Revenue Recognition: Sales are recorded when title passes (either at shipment or customer acceptance). In some limited cases, a sale may be recorded upon the completion of a specific contractual task such as the issuance of a test report. Cost of goods sold is based upon average estimated cost per unit. Sales and profits on cost reimbursable contracts are recognized as costs are incurred. Sales and estimated profits under long-term contracts are recorded under the percentage of completion method of accounting using the cost to cost method. Costs include direct engineering and manufacturing costs, applicable overhead costs and special tooling and test equipment. All selling, general and administrative expenses are charged to operations as incurred. Warranty expense is accrued based upon the historical relationship between sales and warranty claims. Estimated losses are provided for in full when identified.
Income Taxes: Income taxes are determined based on the use of the asset and liability approach for financial accounting and reporting of income taxes in accordance with statement of Financial Accounting Standards (SFAS) No. 109, "Accounting For Income Taxes." Under this method, deferred tax assets and liabilities are recognized based on the temporary differences between the carrying amounts of assets and liabilities for financial statement purposes and income tax purposes using enacted rates expected to be in effect when such amounts are realized or settled.
Earnings (Loss) Per Share: Earnings (loss) per share is computed based upon the weighted average number of common shares and common share equivalents outstanding. Common share equivalents consist of dilutive common stock options, common stock subscribed to under the Employee Stock Purchase Plan and common stock warrants, net of assumed buy-back. The computation of fully diluted earnings (loss) per share does not materially differ from that presented in the consolidated statements of operations. Earnings (loss) per share amounts are based on 8,570,000, 7,382,000 and 6,850,000 average shares outstanding (including common stock equivalents) for 1996, 1995 and 1994, respectively.
2. ACCOUNTS RECEIVABLE
Accounts receivable at December 31 consisted of the following:
Unbilled contract receivables represent revenue earned but not yet billed to customers at year end. The Company expects that substantially all of these amounts will be billed and collected within one year.
3. INVENTORIES
Inventories at December 31, summarized by major classification, were as follows:
4. OTHER CURRENT ASSETS
Other current assets at December 31 consisted of the following:
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at December 31 consisted of the following:
6. RESTRUCTURING
On April 8, 1994 the Company announced that as part of its transition from the design and manufacture of computer peripherals toward both producing and integrating computer systems, it would close its Hauppauge, New York based Military Products Division and transfer the division's operations to its Codar facility in Longmont, Colorado. As a direct result of the above, the Company recorded a $9,500,000 charge in 1994, of which $7,300,000 was classified as a restructuring charge and $2,200,000 was charged to cost of sales. The major components of the $7,300,000 restructuring charge relate to employee expense ($2,731,000), disposition of assets ($2,000,000), inventory write downs on discontinued products ($1,120,000), idle facility costs ($590,000) and lease termination costs ($370,000). The major components of the $2,200,000 charge to cost of sales pertain to inventory write-offs related primarily to excess start-up costs associated with the NST-II production. The transfer of operations to Colorado was substantially completed by the fourth quarter of 1994.
7. OTHER ACCRUED EXPENSES - CURRENT
Other accrued expenses - current at December 31, 1996, consisted of the following:
8. DEBT
Long term debt at December 31 consisted of the following:
Aggregate principal payments for the five years subsequent to December 31, 1996 are as follows (in thousands):
Effective February 15, 1996 the Company entered into an amendment to its credit agreement with its bank lenders which amended and extended the payment provisions contained therein and reset certain financial covenants on more favorable terms for the Company. The revised credit agreement provides for quarterly principal payments of $500,000, beginning on March 31, 1996, and payments of $750,000 beginning on March 31, 1997 and paid through December 31, 1998. The remaining principal balance is due on January 15, 1999. Interest is payable monthly at the rate of 1 3/4% above prime. The loan covenants require that the Company maintain certain minimum levels of net worth, current ratio and quick ratio. They also limit capital expenditures and the payment of cash dividends. As of December 31, 1996 the Company had made prepayments of $3,525,000. Accordingly, no payments are due in 1997.
In November and December 1995, the Company borrowed an aggregate of $2,500,000 and agreed that the loans would be converted into convertible debt in conjunction with the anticipated sale of 12% Convertible Subordinated Promissory Notes. Such loans were recorded as Convertible Subordinated Promissory Notes as of December 31, 1995 in the Company's financial statements.
On February 15, 1996, February 23, 1996, February 29, 1996 and May 2, 1996, the Company issued an aggregate of $8,342,000 of 12% Convertible Subordinated Promissory Notes due January 15, 2001 and warrants to purchase an aggregate of 2,085,500 shares of the Company's Common Stock. The Notes are convertible by the holders into shares of Common Stock at a conversion price equal to $2.00 per share.
Interest on the Notes is payable quarterly in arrears on January 15, April 15, July 15 and October 15 of each year, commencing April 15, 1996. The Notes mature on January 15, 2001. The Notes may be prepaid by the Company without premium or penalty at any time after January 15, 1999. The Notes are unsecured obligations of the Company and contain certain restrictions on the Company a negative pledge of the Company's assets not otherwise encumbered by the holders of the senior indebtedness. As of December 31, 1996, $3,115,000 of such Notes had been converted into Common Stock.
In addition to the Warrants noted above, the Company issued 2,034,200 Warrants to the lead investor and placement agent. All Warrants entitle the holders thereof to purchase shares of Common Stock at any time and from time to time on or before February 15, 2002, at an exercise price equal to $2.50 per share of Common Stock. The Warrants are detachable and separately transferable. The Warrants were valued at $0.50 each. Such value was derived based upon an evaluation by an independent third party and included a review of both current and historical stock price data, the lack of liquidity afforded to the Warrants, the results of various quantitative methodologies, the Company's financial position and historical and projected cash flows. The Warrants issued in conjunction with the Notes are recorded as original issued discount on the Company's balance sheet. The Warrants issued to the lead investor and the placement agent are recorded as deferred debt costs and is included in other assets in the accompanying consolidated balance sheet.
On May 9, 1996, the Company entered into an agreement with Charles S. Holmes, a member of the Company's Board of Directors, that in consideration of his converting the Note in the aggregate unpaid principal amount of $2,000,000 held by him into 1,000,000 shares of Common stock, the Company would immediately issue warrants to purchase 300,000 shares of Common Stock at any time and from time to time on or before February 15, 2002 at an exercise price of $3.00 per share. The warrants were valued at $0.50 per warrant and the Company recorded a charge to operations of $150,000 in 1996.
The Company's U.K. subsidiary has a credit facility (sterling overdraft) with a U.K. bank. The credit facility amounts to 'L'600,000 (approximately $1,028,000) and bears interest at 2 1/4 % above the U.K. base rate (6% at December 31, 1996). This facility is renewable in March 1997. The maximum month end borrowings under the credit facility during the years ended December 31, 1996 and 1995 were 'L'346,000 and 'L'84,000 (approximately $543,000 and $130,000, respectively). The average short term borrowings for the years ended December 31, 1995 and 1994 were 'L'29,000 and 'L'19,000 (approximately $50,000 and $30,000, respectively). The weighted average interest rate during the years ended December 31, 1996 and 1995 was 8.23% and 8.88%, respectively.
9. OTHER ACCRUED EXPENSES - NON-CURRENT
Other Accrued Expenses - non-current at December 31 consisted of the following:
The supplemental retirement plan is described in Note 13.
In 1981, the Company entered into agreements with two former officers which provide for the payments to each of $25,000 per year, adjusted for the cumulative effects of inflation from inception of the agreement, over a period of 15 years. Such deferred compensation payments commenced on January 1, 1990. The 1997 payment to each of the former officers will be approximately $42,000.
10. OTHER (INCOME) EXPENSE
Other (Income) Expense for the years ended December 31, 1996, 1995 and 1994 are as follows:
(1) In June 1996, the Company sold the assets of its Systems Integration division, which operated within the Codar Technology subsidiary.
11. INCOME TAXES
The Company and its domestic subsidiaries file a consolidated Federal income tax return. The provision for income taxes consisted of the following items:
The tax effects of temporary differences that gave rise to significant portions of the net deferred tax asset and (liability) at December 31, 1996, and 1995 are as follows:
The Company has recorded a valuation allowance to reflect the estimated amount of deferred tax assets which may not be realized through the realization of future taxable income.
The sources of the deferred tax provision and the related tax effect for the years ended December 31, 1996, 1995 and 1994 are as follows:
A reconciliation of the provision for income taxes computed at the Federal statutory rate to the actual provision for income taxes is as follows:
No provision has been recorded for U.S. income taxes applicable to undistributed earnings of foreign subsidiaries that are indefinitely reinvested in foreign operations.
12. SHAREHOLDERS' EQUITY
The Company has three stock option plans - the 1991 Stock Option Plan, the 1993 Stock Option Plan for Directors, and the 1996 Stock Option Plan - which together cover 1,233,731 shares of common stock which may be issued pursuant to the plans to key employees and directors.
The 1991 Stock Option Plan covers 677,731 shares. Options under the 1991 Stock Option Plan are non-qualified stock options and are granted at the option price fixed by the Compensation Committee of the Board of Directors but in no event may the option price be less than the fair market value of a share of common stock on the date of grant. Options under the 1991 Stock Option Plan have such term as is fixed by the Compensation Committee but no option may be exercised during the first year after its date of grant or after the expiration of ten years from its date of grant.
The 1993 Stock Option Plan for Directors covers 156,000 shares. Options under the Directors' Plan are non-qualified stock options and are granted in increments of 5,000 shares upon each non-employee director's election or re-election to the Board of Directors. The option price is equal to the fair market value of a share of common stock on the date of grant. Options are granted for a term of ten years and become exercisable eleven months after their date of grant. In no event may an option be exercised after the expiration of the term of such option.
The 1996 Stock Option Plan covers 400,000 shares. Options under the 1996 Stock Option Plan are non-qualified stock options and are granted at the option price fixed by the Compensation Committee of the Board of Directors but in no event may the option price be less than the fair market value of a share of common stock on the date of grant. Options under the 1996 Stock Option Plan have such term as is fixed by the Compensation Committee but no option may be exercised during the first year after its date of grant or after the expiration of five years from its date of grant.
Full payment of the exercise price under all stock option plans may be made in cash or in shares of common stock valued at the fair market value thereof on the date of exercise. The Company's policy is that such shares must have been acquired by the optionee at least six months prior to the exercise date. No options were exercised in 1996. In 1995 and 1994, all payments were made in cash.
In 1996, the Company adopted the disclosure-only alternative of SFAS no. 123, Accounting for Stock Based Compensation. The weighted-average fair value per option at the date of grant for options granted during 1996 and 1995 was $0.74 and $0.61, respectively. The weighted-average fair value per purchase right under the Employee Stock Purchase Plan was $0.74 for 1996 subscriptions. There were no subscriptions in 1995. The fair value was estimated using the Black-Scholes options pricing model and the following weighted-average assumptions:
Pro forma net income and earnings per share reflecting compensation cost for the fair value of stock options awarded in 1996 and 1995 were as follows:
The pro forma effects on net income and earnings per share for 1996 and 1995 may not be representative of the pro forma effects in future years because they include compensation cost calculated on a straight-line basis over the vesting periods of the grants and do not take into consideration pro forma compensation cost for options granted prior to 1995.
Employee Stock Option Plans
The following is a summary of activity related to all stock option plans:
At December 31, 1996, 206,172 options were exercisable and 1,223,731 shares were reserved for issuance under all stock option plans.
Warrants
At December 31, 1996, there were 4,119,700 warrants outstanding exercisable at $2.50 per share and 300,000 warrants outstanding exercisable at $3.00 per share. All warrants expire February 15, 2002.
Employee Stock Purchase Plan
Under the 1992 Employee Stock Purchase Plan, which commenced July 1, 1992, employees may subscribe to purchase shares of common stock at the lesser of 85% of the market price on the first day of the purchase period or the date purchased one year later. Payment for the shares is made through payroll deductions of up to 5% of annual base pay over a one year period. A total of 113,177 shares has been reserved for issuance under the Employee Stock Purchase Plan and as of December 31, 1996, 49,063 shares have been issued pursuant to the plan. The following is a summary of employee stock purchase plan activity:
13. EMPLOYEE BENEFIT PLANS
Pension Plan
Until December 1995, when the plan was terminated and all assets were distributed, the Company had a noncontributory defined benefit pension plan covering all eligible employees. The plan provided for normal retirement at age 65, or at least age 62 with 30 years of service, and optional early retirement.
In December 1993, the Board of Directors approved an amendment to the pension plan which resulted in the freezing of all future benefits under the plan as of January 3, 1994.
The Company's funding policy was to make annual contributions to the extent such contributions were actuarially determined and tax deductible. Pension expense (income) for 1995 and 1994 was $3,000 and ($5,000), respectively.
Supplemental Retirement Plan
The NAI Technologies Supplemental Retirement Plan, a non-qualified, un-funded pension plan was terminated in 1996. The expense related to this plan amounted to $146,000 and $281,000 in 1995 and 1994, respectively. In 1995, the actuarial computations assumed a discount rate of 6.75% on benefit obligations. In 1994 the assumed discount rate on benefit obligations was 7.25%. The assumed compensation increase was 5% for all years. Such benefits will be paid from the Company's assets and not from retirement plan assets.
The following table sets forth the funded status and cost components of the Company's supplemental retirement plan at December 31, 1995 and 1994:
Retirement Savings Plan
The Company has a voluntary Retirement Savings Plan for all eligible employees which provides for basic employee contributions (up to 15% of compensation). Plan participants may invest in a combination of equity, fixed income and money market funds. The Company's 1994 contribution under the plan totaled $365,143. Effective August 20, 1994, the Board of Directors suspended the matching provisions. No contributions were made in 1996 or 1995. Beginning in January 1997, the Company re-instituted a matching provision of 100% of the first 1% of each employee's contribution.
The plan also provides for a discretionary profit sharing contribution as determined by the Board of Directors, which may be contributed to each of the participant's individual accounts. The Company made no such contribution for 1996, 1995 or 1994.
14. INFORMATION BY GEOGRAPHIC AREA
Information about the Company's foreign operations and export sales is provided in the following table. Export revenue is foreign revenue produced by identifiable assets located in the United States while foreign revenue is generated by identifiable assets located in foreign countries.
In order to achieve an appropriate sharing of operating results between the Company's subsidiaries, transfers between geographic areas are accounted for on the basis of a mark-up of manufacturing costs. Operating earnings are total sales less operating expenses. In computing operating earnings, none of the following items has been added or deducted: general corporate expenses, interest income, interest expense and income taxes.
Identifiable assets are those assets of the Company that are identified with the operations in each geographic area. Corporate assets consisted primarily of cash and cash equivalents.
NAI TECHNOLOGIES, INC. AND SUBSIDIARIES INFORMATION BY GEOGRAPHIC AREA
15. INFORMATION BY BUSINESS SEGMENT
The Company's operations are classified into two business segments: Electronic Systems and Telecommunications. The Electronic Systems segment includes Codar Technology, Inc. based in Longmont, Colorado, NAI Technologies--Systems Division Corporation in Columbia, Maryland, and Lynwood Scientific Developments Limited in Farnham, England.
Codar Technology designs, manufactures, integrates and supports rugged computer systems, advanced computer peripherals and memory systems for military and commercial use. Systems provides custom packaged, integrated computer systems for deployment in shelters, ships, land vehicles and other demanding environments. Lynwood supplies rugged, environmentally and electrically screened personal computers and workstations based upon standard commercial off the shelf technology, targeted to the military and government markets principally in Europe. The U.S. Government accounted for $20,619,000 or 34% and one other customer accounted for 16% of the Electronic Systems segment's 1996 sales. No other customer accounted for greater than 10% of the Segment's sales.
The Telecommunications segment currently consists of Wilcom, Inc. in Laconia, New Hampshire. Wilcom designs and manufactures products for use in the telephone industry. Wilcom's customer base includes the regional Bell operating companies and independent telephone companies. Two such customers accounted for 26% and 18%, respectively, of the Telecommunications segment's 1996 sales.
Inter-segment sales are accounted for on the basis of a mark-up of manufacturing costs. Operating earnings are total sales less operating expenses. In computing operating earnings, none of the following items has been added or deducted: general corporate expenses, interest income, interest expense and income taxes.
Identifiable assets by segment are those assets of the Company that are used in the Company's operations in each segment. Corporate assets consist primarily of cash and cash equivalents.
NAI TECHNOLOGIES, INC. AND SUBSIDIARIES INFORMATION BY INDUSTRIAL SEGMENT
16. COMMITMENTS AND CONTINGENCIES
The Company and its subsidiaries lease office and manufacturing facilities, automobiles, computers and other equipment under various non-cancelable operating leases.
Future minimum rental commitments for leases with non-cancelable terms in excess of one year are as follows:
With the acquisition of Lynwood, the Company assumed a 25 year operating lease for office and manufacturing facilities. Annual future minimum lease payments through the year 2014, which are included in the above table, amount to approximately $346,000 per year.
Rental expense amounted to $1,570,000, $1,725,000 and $1,170,000 in 1996, 1995 and 1994, respectively. There was no sublease income in these periods.
Most leases provide for additional payments of real estate taxes, insurance and other operating expenses applicable to the property, generally over a base period level. Total rental expense includes such base period expenses and the additional expense payments as part of the minimum lease payments.
The Company and its subsidiaries are subject to certain legal actions, which arise, in the normal course of business. It is management's belief that these actions will not have a material effect on the Company's consolidated financial position.
17. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following table sets forth quarterly financial information for 1996 and 1995:
(1) The Company recorded a charge to cost of sales in the amount of $2,700,000 for increased provisions for slow moving, excess and obsolete inventory and $2,000,000 for anticipated cost growth on certain long term contracts.
INDEPENDENT AUDITORS' REPORT ON CONSOLIDATED FINANCIAL STATEMENT SCHEDULE
Board of Directors and Shareholders NAI Technologies, Inc.:
Under date of February 7, 1997, we reported on the consolidated balance sheets of NAI Technologies, Inc. and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1996, as contained in the Company's annual report on Form 10-K for the year 1996. In connection with our audits of the aforementioned consolidated financial statements, we have also audited the related consolidated financial statement Schedule II (Valuation and Qualifying Accounts). This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement schedule based on our audits.
In our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
KPMG Peat Marwick LLP
Boulder, Colorado February 7, 1997
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NAI TECHNOLOGIES, INC. AND SUBSIDIARIES
INDEX TO EXHIBITS