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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1996
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO .
COMMISSION FILE NUMBER: 0-28114
PARAVANT COMPUTER SYSTEMS, INC.
(EXACT NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
FLORIDA 59-2209179
(State of incorporation) (I.R.S. Employer Identification No.)
1615A WEST NASA BOULEVARD, MELBOURNE, FL 32901
(Address of principal executive offices) (Zip Code)
ISSUER'S TELEPHONE NUMBER, INCLUDING AREA CODE: (407) 727-3672
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Stock, $.015 par value
(Title of Class)
Redeemable Warrants to Purchase Common Stock
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendments to this Form 10-KSB. [X]
The issuer's revenues for its most recent fiscal year were $10,495,063.
The aggregate market value of voting stock held by non-affiliates of the
registrant on December 23, 1996 was approximately $28,703,587. On such date, the
closing price of the issuer's common stock was $5.875 per share. Solely for the
purposes of this calculation, shares beneficially owned by directors, executive
officers and stockholders of the issuer that beneficially own more than 10% of
the issuer's voting stock have been excluded, except such shares, if any, with
respect to which such directors and officers disclaim beneficial ownership. Such
exclusion should not be deemed a determination or admission by the issuer that
such individuals are, in fact, affiliates of the registrant.
The number of shares of the registrant's Common Stock, $.015 par value,
outstanding on December 23, 1996 was 7,959,886.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Company's Proxy Statement in connection with its Annual Meeting
scheduled to be held on February 27, 1997 are incorporated by reference in Part
III. The Company's Proxy Statement will be filed within 120 days after September
30, 1996.
Transitional Small Business Disclosure Format (check one) Yes [ ] No [ X ]
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PARAVANT COMPUTER SYSTEMS, INC.
Annual Report on Form 10-KSB
For the Fiscal Year Ended September 30, 1996
Table of Contents
<TABLE>
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Page
PART I
<S> <C> <C>
Item 1. Description of Business............................................................................ 3
Item 2. Description of Property............................................................................ 18
Item 3. Legal Proceedings.................................................................................. 18
Item 4. Submission of Matters to a Vote of Security Holders................................................ 19
PART II
Item 5. Market for Common Equity and Related Stockholder Matters........................................... 20
Item 6. Management's Discussion and Analysis or Plan of Operation.......................................... 21
Item 7. Financial Statements............................................................................... 24
Item 8. Changes in and Disagreements with
Accountants on Accounting and Financial Disclosure................................................. 24
PART III
Item 9. Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the Exchange Act......................................... 25
Item 10. Executive Compensation............................................................................. 25
Item 11. Security Ownership of Certain Beneficial Owners and Management..................................... 25
Item 12. Certain Relationships and Related Transactions..................................................... 25
Item 13. Exhibits and Reports on Form 8-K................................................................... 26
</TABLE>
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Paravant Computer Systems, Inc. (the "Company", "Paravant" or
"PCS") is a manufacturer of ruggedized, portable computers and communications
interfaces utilized in outdoor settings. Paravant also offers extensive
customization services to modify its standard products to the specific needs of
end-users. The Company's laptop and hand-held processors are designed and built
to function in adverse environments under harsh weather, climate and operational
conditions. Insulated from temperature extremes, flying debris, shock,
vibration, moisture and humidity, its products have a reputation for high-level
performance and reliability in difficult circumstances. The Company's products
are sold to U.S. and foreign military establishments, other government agencies
and commercial enterprises.
HISTORY
In early 1983, the Company commenced its business operations
and offered only engineering services for computer applications. In this initial
period, PCS modified computer hardware and other equipment and developed special
software applications for its customers. It also served as a value-added
reseller for a Japanese manufacturer of portable computers.
In the mid 1980's, the Company began developing its first
rugged computer under a special grant from the U.S. Department of Defense Small
Business Innovative Research Program. By 1987, PCS was producing its RHC-88
hand-held computer and selling it to the U.S. Army and the electric utility
industry. Subsequently, the Company designed and produced other computer-related
products.
By late 1989, UES, Inc., under the control of Krishan K. Joshi
(presently the Company's Chairman), purchased a 51% equity interest in the
Company through its wholly owned subsidiary, UES Florida, Inc. Previously, PCS
and UES had worked together on a joint development project. By mid 1990, four of
its original five founders had left PCS's employ and sold all their equity
interest in it. Of this group, only Richard P. McNeight, its President, remains.
For a while after the acquisition of control of PCS, UES and Mr. Joshi played an
active and substantial role in its day-to-day management and operations. In the
Fall of 1991, William R. Craven joined the Company and became its Vice President
of Marketing. Since that time, UES and Mr. Joshi have devoted much less time and
effort to the management of the Company's affairs.
The Company, which was incorporated under the laws of the
State of Florida in June 1982, consummated in June 1996 an initial public
offering (the "IPO") of 1,150,000 shares (before giving effect to the Stock
Split (as defined below)) of common stock, par value $.045 per share ("Common
Stock"), and 1,610,000 redeemable warrants (before giving effect to the Warrant
Split (as defined below)), each to purchase one share of Common Stock (the
"Warrants").
On July 25, 1996, the Company effected a three-for-one stock
split (the "Stock Split"). In connection with the Stock Split, the Company
amended its Articles of Incorporation to decrease the
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par value of the Common Stock from $.045 per share to $.015 per share. Also in
connection with the Stock Split, each Warrant to purchase one share of Common
Stock at an exercise price of $6.00 per share was converted into three Warrants,
each to purchase one share of Common Stock at an exercise price of $2.00 per
share, and the redemption price of the Warrants was reduced to $.0167 per
Warrant (the "Warrant Split"). Unless otherwise noted, all references to the
Common Stock and the Warrants contained herein are after giving effect to the
Stock Split and the Warrant Split.
INDUSTRY BACKGROUND -- MILITARY MARKET
Traditionally, the U.S. Department of Defense ("DoD") has
retained military contractors to develop computer technology for specific
missions that meet extensive military specifications. This approach has often
taken longer from development through production, and tends to be much more
expensive, than similar technology available in the commercial sector. Unlike
other scientific areas, the rapid advances made in computer technology in the
commercial market have often exceeded and driven those developed specifically
for the military. Consequently, when the U.S. military has pursued the more
costly and time-consuming procurement procedures, its computers have still
lagged behind the comparable commercial technology in terms of capabilities.
Due to these factors, the DoD began in the mid 1980's to shift
from its over-dependence on computers meeting full military specifications
("Mil-Spec") to acquiring commercially available computers that have been
modified for environmental and operational realities of the military
applications in question. While the U.S. military still procures Mil-Spec
computers, this transition to the more commercially oriented systems has
resulted in its realization of the desired benefits and savings.
Given the dismantling of the former Soviet Union and related
budgetary considerations, there has been a concerted effort on the part of U.S.
Congress since 1990 to downsize the military. Over the same time frame, U.S.
military spending has gradually declined. The Company believes that further
decreases of overall spending, but slight increases in spending on defense
electronics, will occur during the remaining portion of this decade.
The downward trend in overall defense spending has been a
positive development for sales to the U.S. military in recent years of less than
full Mil-Spec militarized computers in general and rugged computers
specifically. This is the case because such computers have produced cost savings
and certain operational benefits in meeting the military's need for computing
capabilities. In one sense, they have proven less expensive and, in some cases,
better than the full Mil-Spec computers. In another sense, they have extended
the longevity of older weapons and related systems while enhancing their
technological capabilities. In this manner, they have played a role in
facilitating the upgrading or retrofitting of existing weapons. Moreover, they
have caused the dissemination and utilization of computer technology throughout
the military structure, especially at the lower echelons. This has resulted in
greater tactical usage of such technology in the battlefield context.
Despite such benefits, certain negative implications in regard
to the market prospects for rugged computers may arise in the longer run as a
consequence of less overall military spending. In any event, lower military
spending may eventually serve as a constraint on the growth of sales of such
computers.
Only a portion of militarized computers consist of ruggedized
versions. "Ruggedization" or "rugged" or "ruggedized computers" are terms used
to describe computers that are built to withstand
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certain environmental and operational hazards with which standard commercial
computers functioning indoors would not typically have to contend. The
ruggedization of the computer is an attempt to protect or insulate it fully from
such hazards or at least minimize their adverse impact so that it functions to
accomplish the task at hand or complete the mission. From a strictly
environmental point of view, these hazards are usually weather-related or
climatic in nature and can encompass temperature extremes ranging from -30 to
+145 degrees Fahrenheit, as well as severe moisture and humidity conditions and
the infiltration by flying or wind-borne debris, such as sand, dust or other
particles. These adverse conditions occur outdoors, particularly in deserts,
jungles, arctic regions or at sea.
In the operational area, the hazards involve strong vibrations
and shocks that result from rapid ascents and descents, rough handling,
transportation and explosions as well as electric interference or internal
thermal conditions. In the former situations, the signals emitted by other
electronic equipment may interfere with and distort the proper functioning of
computers. Also, as more and more computing power is inserted into small spaces
and containers, the heat generated by the computer itself may cause the
processor to malfunction or fail. These operational hazards are, in all
likelihood, greater in outdoor military settings than in normal outdoor
applications.
Computers are ruggedized by the selection and mounting of
certain components, the design, configuration and fabrication of enclosures and
electronics and the application of special seals and coatings. Computer
components generally fall within three broad categories: Mil-Spec, industrial
and commercial. Mil-Spec components are at the far end of the continuum when it
comes to the degree of ruggedization. This category fulfills the highest
requirements for withstanding adverse factors. Mil-Spec and industrial parts for
computers tend to be of higher quality and composed of better materials than
commercial components. They are usually made on production lines using different
approaches than their commercial counterparts.
Consequently, components made for Mil-Spec and industrial
usage tend to be much more expensive than comparable commercial ones due to the
raw materials and methods employed in their manufacture. Mil-Spec components are
even more costly than similar industrial parts. In addition, because the
production runs in Mil-Spec and industrial applications rarely reach the volume
levels of commercial production, there are no or few economies of scale and
related cost reductions that are achievable.
Commercial components are lower in price initially and tend to
cost even less over time due to economies of scale and production efficiencies.
Such components, however, offer little protection from the adverse effects of
harsh environmental or operational conditions. Cost and pricing differences
between commercial and industrial/Mil-Spec items for both electric and
mechanical components are substantial and industrial and Mil-Spec products may
cost from three to ten times more than commercial ones.
For most of its requirements, the U.S. Military takes the
position that Mil-Spec standards for computers are too expensive and excessive
for the degree of protection actually needed. Accordingly, if the equipment can
survive and operate satisfactorily under the same conditions that humans can, it
will usually be appropriate for its mission. Mil-Spec items are being gradually
phased out of military procurement programs.
The use of the newer surface mount technology ("SMT") to
attach components to the computer boards enhances its durability and ruggedness
over the older mounting technology. In SMT,
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the components are glued to the board by means of a chemical adhesion process
and are then soldered instead of being inserted into holes in the board and
soldered. SMT is a more precise manufacturing technique and offers better
insulation against vibration and shock. See "-- SUPPLY AND MANUFACTURING".
Parts' selections, board design and proper case and sealing
materials can reduce the ill-effects of electronic-magnetic interference ("EMI")
from other equipment and internal thermal generation. The design and fabrication
of the computer encasement and keyboard with tougher materials, full closure and
special sealants also protect it against moisture, humidity, particles and
temperature extremes.
Typically, the companies that market and sell ruggedized
computers are repackagers having little or no input in the design of their
electronics and the selection and mounting of components on printed circuit
boards. They usually purchase the computer boards and sub-assemblies in an "as
is" condition from commercial manufacturers. The major contribution of the
repackagers to the protection of the computer is a tougher box in which the
computer is housed. Because it is usually air-breathing in nature, even this
stronger covering fails to shield the computer from the penetration of rain,
snow, fog, dust or other particles. In contrast, the Company uses
industrial-type or highly selected commercial components for most of its
computers rather than strictly ordinary commercial ones as do many of its
competitors. This selection allows it to provide better quality and more rugged
parts but at cheaper prices than full Mil-Spec which tend to be much more
costly. The Company also applies SMT to the fabrication of most of its computer
boards. In addition, PCS designs such boards, the computer's outer case,
keyboards, sub-assemblies and other elements in order to maximize the ruggedness
of its products, to furnish customization of electronics and software and to
give the customer greater control over configuration and components. To address
price concerns by some customers, the Company has introduced a new rugged
notebook line of products, which combine Paravant's rugged outer case design and
expertise in sealing the unit with off-the-shelf commercial electronics products
provided by a third-party supplier.
Militarized computers, including rugged computers, are
available in many different types, sizes and configurations. They may also
bridge or overlap product categories in certain instances. One category of
militarized computer is a dedicated system computer. This type of processor is
typically installed and integrated into specific command and control systems,
weapons or other equipment. Rack-mounted computers are an example of this type
of computer. They are usually an integral part of such equipment, are not easily
detached from it and weigh in excess of 30 lbs. The equipment sits in large
racks with specified dimensions and can be installed within trailers or
vehicles.
Another category involves transportable computers that are not
fixed in place and may be deployed in different applications. Typically, they
are stand-alone units and are characterized by desktop computers and
workstations. These computers weigh between 30 and 60 lbs. and require external
power sources.
A third category of militarized computer is the portable
computer, which includes laptops and hand-helds, as well as the newer notebooks.
Often carried and used in the field, these computers are self-contained units
that may be employed in conjunction with other systems or on a stand-alone
basis. They usually operate on battery-power but may, in certain cases, be
plugged into an external power source. Such computers usually weigh less than 20
lbs.
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A substantial portion of the market for militarized computers,
including rugged computers, covers the first two categories, namely -- dedicated
systems and transportable computers. The market for portables in the military
area is considerably smaller than either of the first two categories and only a
portion of that market is ruggedized.
In addition, many of the companies that sell portable
computers also market computers from more than one category as well as standard
computer peripherals such as printers, mass storage devices, communication
terminals and displays.
PRODUCTS
The Company currently offers its customers a line of rugged,
portable computers that includes two types of hand-held processors and four
types of laptops. In terms of performance, PCS's portables have the computing
power of, and are compatible with, IBM PC's and are designed with an open
architecture configuration for maximum flexibility. All its portable computers
possess substantial memory capabilities for their size. The Company's software
is based on MS-Windows or MS-DOS operating systems.
Most of the Company's portable computers are battery-powered,
contain back-up power packs and have a longevity of 8 to 16 hours for its
hand-held and 3 to 12 hours for its laptops. However, its computers are also
designed to be plugged into either AC (alternating current) or DC (direct
current), external power sources in vehicles or other systems.
All PCS's computers have expansion capabilities with slots for
additional expansion boards and/or PCMCIA cards (credit card sized memory and
interface cards) and, for most of its laptops, optional removable hard drive
and/or floppy discs are also available. The monitor or display aspects of the
Company's computers offer high-resolution, monochrome LCD (Liquid Crystal
Devices) selected specifically for sunlight visibility and wide temperature
ranges. The standard display also features, as optional, a white back-light or
secure back-light for use in low ambient light. In laptops, color displays are
offered if desired.
Like other elements of its computers, the Company's keyboards
are arranged for operational ease in hostile environments and under adverse
conditions. In its hand-held computers, the keyboard has tactile feedback keys
and alpha-numeric keypads designed with wide spacing for glove-hand use by non-
typists. As far as its laptops are concerned, the keyboards are either of the
membrane variety or standard, full-travel keyboards, both featuring the regular
QWERTY key arrangement, generally used by typists, word processors and computer
users. Each laptop has a sealed mouse that serves as a pointer to move the
cursor and select functions. Although such a standard keyboard has been
ruggedized to be relatively water and dust-proof, the membrane type offers even
greater impermeability. It may be drenched or hosed with water and still
function adequately. As an option, membrane keypads are also available with
back-lights for use in darkness or low-light circumstances.
In size, PCS's hand-held models are 9.4" and 10" by about 6.5"
with thicknesses varying from 1.5" to 2.6"; they weigh either 2.7 lbs. or 4.5
lbs. In contrast, its laptop range in size from 14" to 17" by 7.5" to 10.5" with
thicknesses varying from 3" to 7.25". Weights of its laptop run from 12 lbs. to
23 lbs.
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The Company's computers are designed to meet and exceed
certain military specifications for operation in harsh environments and for
insulation from EMI. The reliability and performance of its products in extreme
environmental and operational situations relate directly to PCS's fundamental
electrical and mechanical designs, its specification and selection of proper
components, its manufacturing techniques and the extensive testing that it
employs at various phases.
Like many of its competitors, the Company's computers are
available with standard serial and parallel communications capabilities. These
capabilities allow PCS's computers to transmit and receive electronic signals
and messages to and from other electronic systems. Its standard communications
interfaces may be made operational in military, governmental and commercial
applications. However, unlike certain of its competitors, the Company also
offers specialized communication interfaces for military applications that meet
certain military specifications. These interfaces link up all the electronic
devices in one system so that they can exchange critical information necessary
for the performance and mission of that system. In addition, PCS has developed a
tactical communication interface that connects different electronics systems
operating on the battlefield with one another. Communication with these various
interfaces can be achieved electronically, by radio or other means.
In the military area, typical applications of the Company's
computers entail aircraft and shipboard diagnostic, testing and maintenance
systems, controller and radar displays for missile systems, performance
recorders in training exercises, mission loaders and verifiers of data and field
command control systems.
As of September 30, 1996, the following table represents a
substantial portion of the Company's current military business covering its
three primary applications (Maintenance & Support, Training, and Battlefield
Communications), the identity of its customer, the type of computer involved and
the application concerned:
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TYPE OF
DESCRIPTION OF PROGRAM NAME OF CUSTOMER COMPUTER APPLICATION
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HAWK/AVENGER Air Defense Raytheon Laptop Portable Fire Controller
Missile Systems
LANTIRN Low Altitude Navigation Lockheed Martin Hand-held Maintenance Data Recording
System Device
HARM Missile System Texas Instrument Laptop Mission Loading and
Electronic Diagnostics
F-16 Fighter Lockheed Martin Laptop Electronic Diagnostics Check
and Mission Loading
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In September 1996, PCS was awarded a contract by Raytheon
Company under which PCS will provide enhanced remote terminal units used as part
of an air defense command and control system which Raytheon supplies to the U.S.
Army Missile Command in Huntsville, Alabama. Deliveries of the units began in
the fourth quarter of fiscal 1996 and are expected to continue throughout 1997
and into 1998. Also in October 1996, PCS was awarded a contract to provide
Sanders, a Lockheed Martin company, with hardware elements for Enhanced
Diagnostic Aid ("EDNA") systems for use by the U.S.
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Air Force on F-16 fighter aircraft. Deliveries are expected to begin in April
1997 and are expected to continue through 1998. The contract is a continuation
of a program started three years ago with Lockheed Fort Worth under which EDNA
systems were shipped to the U.S. Air Force for both the F-16 and B-2 aircraft
programs and for selected military programs. The EDNA system is used by Air
Force maintenance personnel on the flightline to quickly diagnose the condition
of various sub-systems on the aircraft and to program certain electronic
devices. The compact EDNA system can replace a large number of support boxes on
the flightline and is considerably less expensive to purchase and faster to use
than current systems employed by the Air Force.
In the government and commercial areas, PCS's products
collect, store, process and communicate data generally and are used specifically
in such applications as state highway department surveying, timber and logging
operations, environmental and forestry studies and testing.
CUSTOMIZATION
The Company provides its customers and end-users with
engineering services that modify or adjust its standard portable computers,
related software and communication interfaces to their specific needs and
requirements. A substantial portion of its product sales to the military involve
varying degrees of customization while only a small portion of computers sold to
its non-military government and commercial customers require such engineering
modifications.
The range of engineering services furnished by PCS includes
special rugged packaging design, miniaturization of electronics, development of
ultra-low power systems and improvements in communications capabilities. There
are many examples of specific situations where PCS has rendered such services,
and the following modifications of its products are representative only:
-- The development of special communication interface
modules and cards to permit the computer to
communicate with aircraft or a weapon system.
-- The design of special connectors to computers to
allow the use of the customer's existing cable set-up
contained in other equipment.
-- The expansion of environmental testing capabilities
so that computers may be made impervious to certain
chemicals or wider temperature ranges in accordance
with program requirements.
-- The addition of a fail-safe mechanical switch to a
weapon firing system.
-- The installation of application software package for
special data collection and processing.
In the early phase of a military program, PCS is often called
upon to design, engineer and fabricate the prototype. Once this is successfully
done, it is generally in a better position to obtain the full production run for
that specific program. The Company also engages in system integration and
post-sale services to assist the customer in attaining operational status for
the systems or in correcting any problems.
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Management believes that by providing engineering services,
the Company facilitates the marketing of PCS's products especially since certain
of its competitors typically do not offer any customization of the electronics.
In the fiscal years ended September 30, 1996 and 1995, revenue from engineering
services represented approximately 5% and 11% of the Company's total sales,
respectively. Management anticipates, due to governmental budgetary constraints
and the anticipated continuing desire of DoD customers to procure commercial
"off-the-shelf" products, a continued reduction in the number of programs
pursuant to which customization services will be funded. Nevertheless,
management believes that such customization services are of significant value to
Paravant's customers and, accordingly, intends to continue to offer such
services on a reduced or no-charge basis.
NEW PRODUCTS
Because of its expertise in miniaturization and its efforts to
incorporate more computing power into smaller, completely sealed enclosures, the
Company has continually experimented with heat reduction methods. As a result of
these efforts, PCS has developed and successfully tested a solid-state,
miniaturized electronic chiller or heat pump, which has been incorporated as a
significant component in the Company's product offering. This device will more
efficiently lower temperatures and absorb heat generated by the electronic
components of PCS's computers. Accordingly, this development should allow the
placement of more powerful, higher temperature microprocessors in its sealed
containers.
The Company has, until recently, only sold portable computers
and communications interfaces; it has not provided a broad range of standard
computer peripherals. In September 1996, the Company secured a contract to
supply its first rack-mounted computers to Harris RF of Rochester, New York. The
contract requires that Paravant provide a new type of rack-mounted computer,
which is a fully-sealed air-cooled computer incorporating many of Paravant's
electronics designs, for use by a foreign army in a desert environment. By
offering rack-mounted products, the Company believes it may expand its market
opportunities beyond those relating to solely to ruggedized portable computers,
although there can be no assurance of such.
The Company also completed development of a ruggedized
notebook in 1996 that, in terms of size, weight and capabilities, fits between
its current hand-held and laptop products. This notebook computer is now
available for sale, primarily to military and government customers.
SUPPLY AND MANUFACTURING
The Company designs and engineers substantially all its
portable computers, purchases their components from third parties and then tests
and assembles the final products. As part of this process, PCS specifically
designs for its computers (other than for the Company's notebook, as to which
commercial electronics boards from other manufacturers are utilized), the
electronics or printed circuit board, which is the most important, sophisticated
and complex element thereof. At times, the board can be composed of as many as
twelve layers. The Company also fabricates the prototype of such board, tests
it, purchases all the necessary components for the board and then provides them
in kit form to specialized board fabricators for both pilot and production runs.
This approach to outsourcing differs from that followed by
most other rugged computer manufacturers which, the Company believes, operate on
a turn-key basis with their board fabricators, who handle the design, testing
and purchase of all components themselves and then furnish the manufacturer with
the completed boards. In contrast, the Company's approach to board fabrication
allows it to
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maintain better control of the quality and delivery of such boards, especially
because it is designing the boards and selecting the parts. In addition, its own
personnel serve as on-site inspectors at the plants of the board fabricators.
Each of the fabricators employed by PCS applies surface mount technology in the
fabrication of its printed circuit boards.
The Company anticipates that it will continue to outsource
board fabrication. Given the rapid changes in computer technology, PCS is not
capable of keeping abreast of the costly purchase requirements for new
production equipment necessary in the precise placement of electronic components
on boards. Outsourcing allows the Company's products to receive the benefit of
the latest technological development at an acceptable cost. Once the boards are
completed, they are tested by the fabricator and, upon satisfactory completion
of such tests, are shipped to the Company. When delivered, PCS further tests the
completed boards and other components and then assembles the computers. Apart
from the printed circuit boards, the components that PCS purchases from external
sources include chassis, wire harnesses, computer chips, keyboards, displays and
metal cases.
With its new ruggedized notebook, the Company has selected the
commercial electronics boards of one manufacturer. Certain components will be
attached to the boards in a more secure fashion and some wiring connectors will
be replaced to improve shock and vibration performance. The electronics will be
packaged in a sealed container designed by the Company and, where required, a
solid state miniaturized heat pump will be installed to enhance the operating
range of the commercial electronics.
The Company does not assemble its products on a continuous
mass-production basis. Instead, its computers are usually assembled on a batch
basis in which products move irregularly from station to station. Tests are
performed at various stages of the process according to PCS's standards or as
requested by specific customers. Further testing of products is generally
accomplished at the end of the assembly process. The Company's manufacture of
computers is done pursuant to specific purchase orders or for general inventory
purposes.
PCS utilizes modern equipment for the design, engineering,
assembly and testing of its products. The Company has utilized a portion of the
funds from the IPO in June 1996 to acquire additional equipment to enhance its
operating efficiency in such areas and to increase its capacity in order to
facilitate increased production, when and if required, as well as to obtain
better control of quality, inventory and order processing.
Generally, PCS is not a party to any formal written contract
regarding the deliveries of its hardware, supplies and components or their
fabrication. It usually purchases such items pursuant to written purchase orders
of both individual and blanket variety. Blanket purchase orders usually entail
the purchase of a larger amount of items at fixed prices for delivery and
payment on specific dates.
Except as set forth above, the Company relies on a few board
fabricators of different sizes and capabilities located within the same
geographical area as its headquarters. Certain components used in its computers
are obtained from sole sources, such as Distec, Xcel and HiTech. PCS has also
licensed its software from sole sources, including Microsoft, Phoenix
Technology, Magnavox and JFK Associates. PCS has occasionally experienced delays
in deliveries of components and may experience similar problems in the future.
In an attempt to minimize such problems, the Company has developed and keeps an
inventory of parts that are generally more difficult to obtain. However, any
interruption, suspension or termination of component deliveries from PCS's
suppliers could have a material adverse effect on its business.
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Although management believes that in nearly every case
alternate sources of supply can be located, inevitably a certain amount of time
would be required to find substitutes. During any such interruption in supplies,
the Company may have to curtail the production and sale of its computers for an
indefinite period.
The Company's design, engineering and assembly facilities are
located in Melbourne, Florida. These facilities comply with certain U.S.
military specifications necessary for the manufacture and assembly of products
supplied to it. PCS is seeking to qualify its facility in order to meet the
quality management and assurance standards of an international rating
organization (ISO-9001) within the next eighteen months. Some measures, such as
the installation of a new business computer system, have been taken by the
Company to qualify under such standards. However, meeting these criteria involve
a long complicated process of new planning, documentation and other factors.
Such qualification should improve the Company's marketing opportunities in the
international military markets for rugged computers. However, there is no
assurance that PCS can achieve such standards or that it will match or increase
such sales of its products abroad in the future even if such standards are met.
The Company has entered into licensing arrangements for
certain hardware and software elements contained in, or used in conjunction
with, its computers. These agreements are usually non-exclusive, provide for
minimum fees and royalties related to sales to be paid by the Company to the
particular licensor, run for a limited term and are subject to other terms,
conditions and restrictions.
PCS receives its basic operating software system MS-DOS with
various Window versions from Microsoft, Inc. pursuant to such licensing
arrangements. It also obtains from Phoenix Technologies, Inc. its BIOS (Basic
Input/Output System) pursuant to a separate license agreement. Under either
arrangement, the Company may modify such software and occasionally alters the
BIOS for special situations. The termination, suspension or curtailment of these
or other licensing arrangements to which the Company is a party may have a
material adverse impact on its business and operations.
WARRANTY AND CUSTOMER SERVICE
The Company usually provides one-year warranties on all its
products covering both parts and labor although extended warranties may be
purchased by customers. At its option, PCS repairs or replaces products that are
defective during the warranty period if the proper usage and preventive
maintenance procedures have been followed by its customers. Repairs that are
necessitated by misuse of such products or are required beyond the warranty
period are not covered by its normal warranty.
In cases of defective products, the customer typically returns
them to PCS's facility. Its service personnel then replace or repair the
defective items and ship them back to the customer. Generally, all servicing is
done at the Company's plant, and it charges its customers a fee for those
service items that are not covered by warranty. Except for its extended
warranties, it does not offer its customers any formal written service
contracts.
Some personnel in its customer service area often answer
technical questions from customers and offer solutions to their specific
applications problems. In certain instances, other personnel receive and process
orders for product demonstrations, disseminate pricing information and accept
purchase orders for computers.
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MARKETING AND SALES
The Company markets and sells its computer products through an
internal sales force of four individuals and several of its officers,
approximately 33 manufacturers' representatives in the United States and
approximately 25 distributors abroad. Its manufacturers' representatives cover
approximately 39 states, including Washington, D.C., and its foreign
distributors operate in nearly 37 countries, including England, France, Japan,
Australia and Germany.
PCS's relationship with its manufacturers' representatives are
generally governed by a written contract, terminable on 30 days' prior notice.
These contracts usually provide for exclusive territorial and product
representation and commissions of 8% of the net invoice price on standard
products. In some cases, the commission will decline from 8% to 4% on standard
products as sales rise above certain dollar levels. Commissions on non-standard
products and custom engineering are usually subject to negotiation between the
parties in accordance with the terms of the contract. However, they tend to
range from 6% to 8% in practice. The Company lowered the commissions of its
manufacturers' representatives on standard products from 10% to a flat 8% in
October 1994. The Company's manufacturers' representative contracts are subject
to certain other terms and conditions.
PCS's manufacturers' representatives and distributors do not
purchase for their own account, but merely sell such computer products on PCS's
behalf. Forty manufacturers' representatives and distributors accounted for an
aggregate of approximately 36% of the Company's 1996 annual sales. The loss of
certain of such representatives may have a material negative effect on PCS's
business.
Sales of the Company's products or services to foreign
distributors are also generally made pursuant to written contracts. Under such
contracts, the distributor is granted either an exclusive or non-exclusive
territorial and product representation as well as discounts based on the list
price ranging from 20% to 35%, depending on the type or amount of products sold.
In some cases, there are minimum order requirements. Due to the custom nature of
PCS's products, its foreign distributors generally do not keep its computers in
their inventory until specific orders are obtained. The term of these agreements
generally run from 1 to 3 years but are terminable on 60 days' advance notice.
Payment is due in U.S. dollars within 30 days after delivery. These contracts
are subject to other terms and conditions. The Company has a primary distributor
for Asia and another primary distributor for Europe. No one international
distributor accounts for more than 5% of its total sales in any period referred
to above.
The Company promotes its computer products through the
dissemination of product literature, attendance and exhibition at trade shows,
conduct of seminars and the distribution of news releases on special
developments to trade magazines and newsletters to an extensive customer list.
PCS does little advertising in trade periodicals. Management believes that, to
date, most of the Company's sales leads have been generated by trade shows and
word-of-mouth referrals. The Company intends to expand its sales and marketing
efforts in all of its markets as follows: (i) increase its presence at trade
shows with larger booths and more extensive exhibits; (ii) increase the number
of trade shows in which Company personnel attend and products are presented;
(iii) hold additional seminars at military bases and other prime locations; (iv)
hire additional sales personnel and consultants to gather leads and promote
sales; (v) expand sales and marketing activities in the medical markets; and
(vi) invest in research and development in order to increase its product
offering.
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The Company has entered into a joint marketing arrangement
with IDP of Gaithersburg, Maryland ("IDP") with respect to the manufacture and
distribution of the new ruggedized notebook in the military marketplace. This
arrangement allows PCS to increase its market exposure under the sponsorship of
a better-known name in the defense industry. In turn, IDP utilizes Company's
products and its expertise in ruggedizing computers. While management believes
that the marketing arrangement with IDP may be important in the future, it is
not presently material to the operations of the Company.
In the military market, the sales cycle for the Company's
products usually entails a number of complicated steps and can take from one
year to five years. The sales cycle in the non- military government and
commercial markets is generally not as complex or time consuming, but still may
take as long as two years. Sales to the military and government markets are
greatly influenced by special budgetary and spending factors pertinent to these
organizations and are usually seasonal in nature.
CUSTOMERS
The Company sells its products, directly or indirectly, to the
U.S. and foreign military establishments, large aerospace and military
contractors supplying these establishments, government agencies regulating
environmental, geologic and forestry matters, certain state departments of
transportation, forest products companies, surveying and engineering concerns.
The principal customers of the Company are DoD contractors who
are subject to federal budgetary constraints. For the fiscal years ended
September 30, 1996 and September 30, 1995, Raytheon's Missile Systems Division
accounted for 49% and 47% of the Company's total sales, respectively. For those
same periods, Lockheed Martin, STN Atlas Electronics and Texas Instruments
accounted for 21% and 25%, 15% and 13%, and 10% and 1%, respectively. The loss
of any of these customers could have a material adverse impact on PCS's
business.
In recent years, there have been a number of consolidations of
various prime contractors serving the defense industry. To date, the Company has
not been adversely affected by any such consolidations and the Company does not
anticipate that consolidations of contractors will negatively impact the
Company, although there can be no assurance of such.
COMPETITION
The Company competes in the rugged portable computer business
with a wide variety of computer manufacturers and repackagers, many of which are
larger, better known and have more resources in finance, technology,
manufacturing and marketing. PCS competes on the basis of customization
capabilities, price, performance, delivery and quality. In many situations, the
Company is the highest-priced bidder by a wide margin.
With respect to its hand-held business, the Company encounters
competition from Litton Data Systems, SAIC, Tadiran and Miltope in military
applications; Husky Computer Company in both military and non-military markets;
and CMT, Micro Palm and DAP in non-military applications. As far as its laptops
are concerned, PCS faces competition from SAIC, Miltope, Cyberchron and North
American Industries (CODAR) in the military and non-military areas. Certain
large manufacturers of commercial notebook computers such as Panasonic, Amrel
and IBM have introduced commercial notebooks that have been sealed and
ruggedized to some extent and are presently offering such products at prices
ranging from approximately one-third to one-half of the Company's more rugged
versions.
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Management believes that the Company's ability to increase market penetration in
the commercial sector will be limited substantially by the entry of such
manufacturers into the ruggedized computer market.
Certain military procurement policies requiring purchases of
computers for the military under Indefinite Delivery, Indefinite Quantity
("IDIQ") contracts could result in seriously restricting the Company's efforts
to sell its computers to the U.S. military. These IDIQ contracts encourage big
purchases of such computers amounting to many hundreds of millions of dollars.
Such procurement policies clearly favor large companies with resources of that
magnitude. Unless PCS can form strategic alliances with larger military
contractors having large resources or qualify for certain exceptions to IDIQ
arrangements, it may suffer adverse material consequences in its continuing
quest for military business. For the last five years, the Company has made
military sales of its computers because they fall into product categories not
currently covered by IDIQ requirements.
In the military and government markets, the Company will often
be engaged, directly or indirectly, in the process of seeking competitive bid or
negotiated contracts with government departments and agencies. These government
contracts are subject to specific rules and regulations with which PCS may have
difficulty complying. However, PCS is occasionally one of only a few companies
whose products meet the required specifications designated by such customers.
In most cases, PCS tends to be the high priced bidder. The
reasons for this situation are numerous. The Company designs its computers on an
overall basis to assure their ruggedness and use in the worst circumstances.
Accordingly, it generally employs more expensive components than its
competitors. These generally more expensive components consist of industrial or
higher-level commercial type instead of ordinary commercially available parts.
The Company's computers are enclosed in sealed containers. Moreover, PCS makes
extensive modifications and refinements of its computers for its customers
pursuant to their specifications and special needs. As a consequence, PCS's
products generally function at a higher level of performance and reliability
than its competitors.
For those applications in which harsh environmental and
operational conditions prevail, customers are sometimes willing to pay higher
prices, especially where few, if any, other companies offer similar devices. In
those less demanding circumstances, the Company's products sell at a severe
competitive disadvantage and often are not purchased because the applications do
not justify its higher prices. Since PCS sells its computer products into
segments of the commercial market and has a history of resale pricing, under DoD
regulations such commercial pricing information may be utilized to support the
prices that it charges in the military marketplace.
BACKLOG
As of September 30, 1996, the Company's backlog was
$14,617,253, as compared with backlog of $1,606,505 as of September 30, 1995.
Three customers accounted for approximately 46%, 46% and 3% of such backlog as
of September 30, 1996. As of December 15, 1996, the Company's backlog was
approximately $13,950,000, and the Company presently expects to manufacture and
deliver most of the products in backlog within the next 12 months.
Substantially all the Company's backlog figures are based on
purchase orders executed by the customer. All orders are subject to
cancellation. However, in that event, PCS is generally entitled to reimbursement
of its cost and negotiated profits, provided that such contract would have been
profitable.
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RESEARCH AND DEVELOPMENT
The markets served by the Company are characterized by
rapid technological advances, changes in customer requirements and frequent new
product introductions and enhancements. PCS's business requires substantial
ongoing research and development efforts and expenditures, and its future
success will depend in large measure on its ability to enhance its current
products and develop and introduce new products that keep pace with
technological developments in response to evolving customer requirements. The
Company's research and development activities involves: (i) its sole
activities; (ii) joint efforts between it and another enterprise; and (iii)
endeavors of third party contractors retained by it. A substantial portion of
its research and development is accomplished on an in-house basis.
The Company has designed a new rugged notebook. This product
is intended to fit between its laptops and its hand-held computers in size,
weight and price. Weighing approximately 15 lbs., it will have a full-size
display and same type of keyboard as a laptop, a Pentium processor and PC card
expansion capabilities. Management believes that there is a market for this kind
of ruggedized computer in the military area. The Company expects to continue to
expend a portion of the net proceeds of the IPO in June 1996 on the expansion
and enhancement of its rugged notebook product line. As part of a continuing
effort to upgrade its products, the Company is also working to develop high
speed processor boards for some of its older products. See "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS".
Research and development expenditures during the fiscal years
ended September 30, 1996 and 1995 were $382,750 and $480,951, respectively, and
represented 3.7% and 5.6% of total sales, respectively. A substantial portion of
such expenditures for those fiscal years were applied to the development of the
rugged notebook, the RLT 410, an Intel 80486 based ruggedized laptop, the RLT
410 Model D, a larger laptop capable of accepting both full-size ISA and PC/104
miniaturized expansion boards, and the early development of a Pentium based main
board for the RLT product line.
INTELLECTUAL PROPERTY
Proprietary information and know-how are important to the
Company's commercial success. PCS holds no patents or copyrights but has
trademark protection for the Paravant name and logo. There can be no assurance
that others will not either develop independently the same or similar
information or obtain and use proprietary information of the Company. In
addition, none of its employees have signed confidentiality agreements regarding
its proprietary information nor have any employees signed any non-competition
agreements other than Messrs. McNeight and Craven.
Management believes that its products do not infringe the
proprietary rights of third parties. There can be no assurance, however, that
third parties will not assert infringement claims against it in the future or be
successful in asserting such claims.
GOVERNMENT REGULATIONS AND CONTRACTS
Due to the nature of the products designed, manufactured and
sold by PCS for military applications, it is subject to certain DoD regulations.
In addition, commercial enterprises engaged primarily in supplying equipment and
services, directly or indirectly, to the United States government are subject to
special risks such as dependence on government appropriations, termination
without cause, contract renegotiation and competition for the available DoD
business. PCS has no material direct DoD contracts, however, that are subject to
renegotiation in the foreseeable future and is not aware of any proceeding to
terminate material DoD contracts in which it may be indirectly involved. In
addition, many of the Company's contracts provide for the right to audit its
cost records and are subject to regulations providing for price reductions if
inaccurate cost information was submitted by PCS.
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Government contracts governing the Company's products are
often subject to termination, negotiation or modification in the event of
changes in the government's requirements or budgetary constraints. Products sold
by PCS for government applications are primarily sold to companies acting as
contractors or subcontractors and not directly to government entities.
Agreements with such contractors or subcontractors generally are not conditioned
upon completion of the contract by the prime contractor. To the extent that such
contracts are so conditioned, a failure of completion may have a material
adverse effect on the Company's business. Currently, it does not have any
contracts so conditioned. See "-- COMPETITION".
The contracts for sale of the Company's computers are
generally fixed-priced contracts, as to which the price is set in advance and
generally may not be varied. Such contracts require the Company to properly
estimate its costs and other factors prior to commitment in order to achieve
profitability and compliance. The Company's failure to do so may result in
unreimbursable cost overruns, late deliveries or other events of non-compliance.
Under certain circumstances, PCS is also subject to certain
U.S. State Department and U.S. Department of Commerce requirements involving
prior clearance of foreign sales. Such export control laws and regulations
either ban the sale of certain equipment to specified countries or require U.S.
manufacturers and others to obtain necessary federal government approvals and
licenses prior to export. As a part of this process, the Company generally
requires its foreign distributors to provide documents which indicate that the
equipment is not being transferred to, or used by, unauthorized parties abroad.
The Company and its agents are also governed by the
restrictions of the Foreign Corrupt Practices Act of 1977, as amended ("FCPA"),
which prohibits the promise or payments of any money, remuneration or other
items of value to foreign government officials, public office holder, political
parties and others with regard to the obtaining or preserving commercial
contracts or orders. These restrictions may hamper the Company in its marketing
efforts abroad.
PCS's manufacturing operations are subject to various federal,
state and local laws, including those restricting or regulating the discharge of
materials into, or otherwise relating to the protection of, the environment. The
Company is not involved in any pending or threatened proceedings which would
require curtailment of, or otherwise restrict its operations because of such
regulations, and compliance with applicable environmental laws has not had a
material effect upon its capital expenditures, financial condition or results of
operations.
Management believes that although compliance with applicable
federal laws and regulations involves certain additional procedures by the
Company that would not otherwise be required, such compliance has not generally
inhibited or limited the Company's ability to enter into material contracts.
EMPLOYEES
As of December 15, 1996, the Company had 64 full time
employees including its officers, of whom 24 were engaged in manufacturing and
repair services, 8 in administration and financial control, 21 in engineering
and research and development, and 11 in marketing and sales.
None of its employees are covered by a collective bargaining
agreement or are represented by a labor union. PCS considers its relationship
with its employees to be satisfactory.
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The design and manufacture of the Company's equipment requires
substantial technical capabilities in many disparate disciplines from mechanics
and computer science to electronics and mathematics. While management believes
that the capability and experience of its technical employees compares favorably
with other similar manufacturers, there can be no assurance that it can retain
existing employees or attract and hire the highly capable technical employees
necessary in the future on terms deemed favorable to it, if at all.
ITEM 2. DESCRIPTION OF PROPERTY
On September 1, 1996, the Company entered into a lease
relating to approximately 17,300 square feet of space located at 1615 W. Nasa
Blvd., Suite E, Melbourne, Florida 32901. This space is to be utilized by the
Company as its principal corporate headquarters and manufacturing plant. The
lease for this space expires December 31, 2001, and provides for a monthly rent
payments of $1,500 per month through February 1997, and then $3,000 per month
through August 1997, increasing to $9,855 per month in September 1997. These
amounts include the Company's proportionate cost of utilities, repairs,
cleaning, taxes and insurance. The Company anticipates that its occupancy at the
new facility will commence in late December 1996.
The Company's former principal executive offices are located
at 780 South Apollo Boulevard, Atrium One, Melbourne, FL 32901. The lease on
this space will terminate effective in September 30, 1997 and provides for a
fixed annual rent of $140,658 for 1996 and $148,376 (subject to reduction in the
event the landlord obtains a new tenant) for 1997, payable in equal monthly
installments. These amounts include the Company's proportionate cost of
utilities, repairs, cleaning, taxes and insurance.
Management believes that its new facility will meet its
operational needs for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
In March 1996, the Company's former counsel, Cascone & Cole,
rendered an invoice to the Company in the amount of approximately $365,000 for
legal fees and expenses to which such counsel claimed to be entitled in
connection with its representation of the Company for both general corporate
services and services relating to the IPO. As the Company had made prior
payments to such counsel of $130,000, the net amount claimed to be due was
approximately $235,000. The Company has contested the invoice and accrued an
estimate for the settlement, if any, of these fees. On March 27, 1996, Cascone &
Cole filed an action in the Supreme Court of the State of New York, County of
New York, entitled Cascone & Cole v. Paravant Computer Systems, Inc., Victor M.
Wang, Duke & Company, Inc., Dean Petkanas and Eagle Group Incorporated (Index
No. 96601634) against the Company, the Underwriter and certain other defendants,
alleging, among other things, breach of contract, failure to pay attorneys fees,
fraud, copyright infringement and defamation by the Company in connection with
the aforementioned services, as well as claiming a finder's fee with respect to
the Underwriter's relationship with the Company. Plaintiff is seeking damages in
the amount of approximately $28 million from the Company. Plaintiff has filed a
motion to increase its claims for legal services from approximately $365,000 to
approximately $415,000, claiming there is a balance due of $280,882 for legal
services. The Company has filed an answer denying the allegations made by
plaintiff and has asserted defenses and
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counterclaims against the plaintiff seeking, among other things, recovery of
amounts paid to plaintiff as well as punitive damages and court costs.
On September 18, 1996, a former controller of PCS filed an
action in the Circuit Court of the State of Florida, Brevard County, entitled,
Christopher R. Exley v. Paravant Computer Systems, Inc., Richard P. McNeight,
William R. Craven, UES of Florida, Inc. and Krishan K. Joshi (Case No. 96-15091
CA), against the Company and certain of its officers, directors and principal
stockholders, alleging, among other things, retaliatory personnel actions by the
defendants. Plaintiff is seeking damages in the amount of approximately $1
million, plus punitive damages, fees and costs. Plaintiff alleges that he was
improperly terminated in December 1994 as a result of his refusal to account for
certain transactions in a specified manner. The Company has filed a motion to
dismiss the complaint.
The Company will vigorously defend itself in these matters.
Management of the Company believes that the ultimate resolution of these matters
will not have a material adverse effect on the Company.
The Company is not a party to or involved in any other pending
legal proceedings.
The Company did not submit any matters to the vote of
securityholders during the fourth quarter of the fiscal year ended September 30,
1996.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company did not submit any matters to the vote of
securityholders during the fourth quarter of the fiscal year ended September 30,
1996.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
A. Market Information.
The shares of Common Stock of the Company commenced trading on
the Nasdaq Stock Market National Market under the symbol "PVAT" on June 3, 1996.
The range of high and low reported closing sales prices for the Common Stock as
reported by Nasdaq since the commencement of trading were as follows:
<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C>
June 3, 1996 to June 30, 1996(1) $5 3/8 $1 7/8
July 1, 1996 to September 30, 1996(1) $6 3/8 $4 5/8
October 1, 1996 to December 15, 1996 $8 $4 15/16
</TABLE>
- ---------------
(1) On July 25, 1996, the Company effected the Stock Split. Pursuant to the
Stock Split, each holder of record of Common Stock on July 22, 1996
received two additional shares of Common Stock for each share held on
such date. In connection with the Stock Split, each outstanding Warrant
to purchase one share of Common Stock at an exercise price of $6.00 per
share was converted into three Warrants, each to purchase one share of
Common Stock at an exercise price of $2.00 per share. All share prices
listed above are after giving effect to the Stock Split.
The prices set forth above reflect inter dealer prices, without retail
mark-up, mark-down or commission and may not necessarily represent actual
transactions.
B. Holders.
On December 23, 1996, as reported by the Company's transfer
agent, shares of Common Stock were held by 47 persons, based on the number of
record holders, including several holders who are nominees for an undetermined
number of beneficial owners.
C. Dividends.
The Company has not paid any dividends on its shares of Common
Stock and intends to follow a policy of retaining any earnings to finance the
development and growth of its business. Accordingly, it does not anticipate the
payment of cash dividends in the foreseeable future. However, the payment of
dividends, if any, rests within the discretion of the Board of Directors and
will depend upon, among other things, the Company's earnings, its capital
requirements and its overall financial condition.
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion and analysis of the Company's results
of operations, liquidity and financial condition should be read in conjunction
with the Financial Statements of the Company and related notes thereto.
RESULTS OF OPERATIONS
Fiscal Year ended September 30, 1996 vs. September 30, 1995
Revenues for fiscal 1996 were $10,495,063, an increase of
$1,842,510 or 21% over 1995 sales of $8,652,553. This increase is primarily due
to Paravant's full scale production deliveries to Raytheon in support of the
U.S. Marine Corps HAWK/AVENGER Air Defense Missile Systems upgrade and expanded
requirements of Texas Instruments under the Harm Missile Systems program.
Gross profit was $4,677,053 in 1996, or 45% of sales, compared
to $3,971,892 or 46% in 1995, a total increase of $705,161 or 18%.
Selling and administrative expenses of $3,247,385 in 1996
increased by $579,065 or 22% from 1995 expenses of $2,668,320. As a percentage
of sales, selling and administrative expenses remained unchanged at 31% in 1995
and 1994. The increased selling and administrative costs are attributable
primarily to increased salaries, professional fees and sales commissions of
approximately $198,000, $196,000 and $142,000, respectively.
Income from operations grew to $1,429,668 in 1996 from
$1,303,572 in 1995, an increase of $126,096 or 10%. As a percentage of sales,
income from operations declined to 14% in 1996 from 15% in 1995. The increase in
income from operations overall benefited primarily from increased sales volume
and gross profits, offset in part by increased selling and administrative
expenses as discussed above.
Expenses for interest were reduced by $29,633 or 8% to
$362,956 compared to $392,589 in 1995. As a percentage of sales, interest
expense decreased to 4% in 1996 from 5% in 1995. This decrease is due to a
significant decline in outstanding credit balances made possible by the
application of the proceeds of the Company's IPO in June 1996.
As a result, the Company's net income grew by 21% to $702,153
in 1996 when compared to $581,415 in 1995. Net income as a percentage of sales
was 7% in 1996 and 1995.
LIQUIDITY AND CAPITAL RESOURCES
In June 1996, the Company completed its IPO, resulting in
aggregate net proceeds of $4,594,332 to the Company after deducting certain
commissions, expenses and offering costs. The Company used a portion of the net
proceeds of the IPO to repay certain loans referred to below in the aggregate
principal amount of $1,102,294, and paid approximately $88,000 of the net
proceeds of the IPO to reimburse UES, Inc., an affiliate of the Company which is
controlled by Krishan K. Joshi, the Company's Chairman ("UES"), for certain
health insurance and other expenses paid on the Company's behalf. Substantially
all of the remaining balance of the net proceeds of the IPO were utilized to
reduce indebtedness then outstanding under the Company's revolving credit
arrangement with National City Bank
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in Dayton, Ohio described below, resulting in increased availability under the
credit arrangement for working capital needs and general corporate purposes.
The Company has a secured revolving credit arrangement with
National City Bank in Dayton, Ohio (the "Bank") for a credit line of up to
$4,000,000 that is due on demand and bears interest at the prime rate for
secured borrowings and prime rate plus 0.5% for undersecured borrowings. All
borrowings are collateralized by accounts receivable, inventory and equipment.
Such arrangement is subject to a borrowing base formula involving certain
accounts receivable, inventory and equipment. As of September 30, 1996, an
aggregate of $540,000 was outstanding under this arrangement. The Company
intends to maintain this arrangement with the Bank for the foreseeable future,
although there can be no assurance that the Bank will not in the future demand
repayment of any amounts then outstanding under its loan arrangement. The
Company also has a secured term loan provided by the Bank bearing interest at a
rate adjusted monthly to prime plus 1.5% at September 30, 1996. Monthly
principal payments of $9,167 are due through October 1998. All borrowings
thereunder are secured by a lien on accounts receivable, inventory and
equipment. As of September 30, 1996, there was approximately $339,159
outstanding under this arrangement with the Bank. The Company also has capital
lease obligations, including interest, of approximately $186,539 at September
30, 1996. These capital lease obligations bear interest rates of 1.25% to 1.50%
over the prime rate and are expected to be satisfied within 3 years. The Company
also has a note payable to the Bank in an aggregate principal amount of
$500,000, bearing interest at the prime rate, which note is due and payable in
March 1998.
In August 1995, the Company borrowed $400,000 pursuant to
bridge notes ("Notes") from a group of private investors at an annual interest
rate of 6%. In addition, the Company sold to the same investors warrants to
purchase 480,000 shares of Common Stock, exercisable until June 3, 2001 at an
exercise price of $2.00 per share. The Notes, which bear interest at 6%, have an
outstanding balance of $100,000 at September 30, 1996, which is expected to be
satisfied by December 31, 1996.
In connection with certain sales of shares of Common stock in
March 1996 by UES Florida, Inc. (a subsidiary of UES), Richard P. McNeight, the
President and Chief Operating Officer of the Company, William R. Craven, the
Vice President of Marketing of the Company, and another shareholder, such
shareholders loaned to the Company in April 1996, for working capital purposes,
the sums of $646,294; $78,000; $26,000 and $52,000, respectively, or an
aggregate of $802,294 of the proceeds realized from such sales, at an interest
rate of 6% per annum. Such loans, plus accrued interest thereon in an aggregate
amount of $8,681, were repaid in June 1996 in accordance with their terms from a
portion of the net proceeds of the IPO.
The Company has, and continues to have, a dependence upon a
few major customers for a significant portion of its revenues. This dependence
for revenues has not been responsible for any unusual fluctuations in operating
results in the past, and management does not believe this concentration will
generate fluctuations in operating results in the future. However, the potential
impact of losing a major customer without securing offsetting and equivalent
orders could result in a significant negative impact to the operating results of
the Company. The gross margin contributions of the Company's major customers are
not generally different than those from its other customers as a whole.
The Company's operating cash flow was negative $(1,426,090)
for fiscal 1996. The Company's operating cash flow was negative $(298,577) in
fiscal 1995 and negative $(562,740) in fiscal 1994. These cash outflows were
primarily associated with general increases in inventory levels and temporary
increases associated with accounts receivable, all in support of the Company's
rapid increase in operations reflected by the growth in revenues from $4,621,527
in fiscal 1993 to $10,495,063 in fiscal
22
<PAGE>
<PAGE>
1996, an increase of almost 127%. In addition, the Company invested $127,352 in
fiscal 1996, $60,350 in fiscal 1995 and $99,547 in fiscal 1994 to acquire
manufacturing equipment also in support of these expanded operating levels.
Due to the Company's orders related to DoD procurements, the
operations of the Company have been cyclical and generally result in a
significant increase in deliveries and revenues in the fourth quarter of its
fiscal year ending on September 30. Accordingly, a significant increase in
inventory occurs late in the third quarter and continues through the fourth
quarter of each fiscal year. This increase in inventory is followed by a
corresponding increase in accounts receivable. Inventory and accounts receivable
levels then return to lower levels in the first and second quarter of the next
fiscal year.
Revenues in the fourth quarter of each fiscal year are
significantly higher than the first three quarters. Inventory balances are
greatest in the third quarter in support of the significantly increased
deliveries related to the Company's fourth quarter higher revenues level due to
the lead-time requirements necessary to procure, manufacture, and assemble the
components for fourth quarter deliveries. This uneven cycle results in severe
liquidity pressures during the periods of increased inventory and accounts
receivable balances which management of the Company has attempted to address
with equity funding provided by the IPO. As of September 30, 1996, management
believes inventory balances are not in excess of requirements for deliveries and
normal minimum stocking levels.
Generally, accounts receivable at the end of each quarter are
collected within the following quarter. However, it may be the case that the
collection of accounts receivable are delayed due to the delayed finalization of
a prime contractor's contract with the Government, which results in an extended
collection period for the Company. Notwithstanding this condition, the Company
has not been required to write off any significant bad debt in the past, and
management does not believe that any significant accounts receivable at
September 30, 1996 are likely to be uncollectible.
As of September 30, 1996 and 1995, the Company's backlog was
$14,617,253 and $1,606,505, respectively, consisting of firm fixed price
purchase orders. All of these purchase orders are expected to generate profits
within the Company's historical levels and the Company believes that the
completion of the orders comprising its backlog, and any new orders which may be
accepted by the Company in the future, should not result in additional liquidity
pressures which cannot be addressed in a manner consistent with the Company's
past practices. As of December 15, 1996, the Company's backlog was approximately
$13,950,000, and the Company presently expects to manufacture and deliver most
of the products in backlog within the next 12 months.
The Company anticipates, based on its currently proposed plans
and assumptions relating to its operations, that the proceeds of the IPO, which
was consummated in June 1996, together with estimated working capital from
operations and other sources of funds, will be adequate to sustain operations
for at least a 24-month period after the IPO, and anticipates that such proceeds
will be expended over the first 18 months following the IPO. As the Company
continues to grow, additional bank borrowings, other debt placements and equity
offerings may be considered, in part or in combination, as the situation
warrants. In addition, in the event the Company's plans change or its
assumptions change or prove to be inaccurate, or if projected cash flow
otherwise proves insufficient to fund operations, the Company might need to seek
other sources of financing to conduct its operations. There can be no assurance
that any such other sources of financing would be available when needed, on
commercially reasonable terms, or at all.
23
<PAGE>
<PAGE>
CAUTIONARY STATEMENT
This Annual Report of Form 10-KSB contains certain
forward-looking statements. Actual results could differ materially from those
projected in the forward-looking statements as a result of various factors,
including but not limited to the budgetary and appropriations policies of the
Company's governmental customers, the competitive environment for the Company's
products and services, the timing of new orders and the degree of market
penetration of the Company's new products.
ITEM 7. FINANCIAL STATEMENTS
The financial statements of the Company are set forth in a
separate section of this Annual Report on Form 10-KSB. See "Item 13. Exhibits
and Reports on Form 8-K" and the Financial Statements commencing on page F-1
of this Annual Report on Form 10-KSB.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
24
<PAGE>
<PAGE>
PART III
Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
See the section captioned "Election of Directors" included in the
Company's Proxy Statement in connection with its Annual Meeting scheduled to be
held on February 27, 1997, which section is incorporated herein by reference.
ITEM 10. EXECUTIVE COMPENSATION
See the section captioned "Executive Compensation" included in the
Company's Proxy Statement in connection with its Annual Meeting scheduled to be
held on February 27, 1997, which section is incorporated herein by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(a) Security Ownership of Certain Beneficial Owners
See the section captioned "Principal Shareholders of the Company"
included in the Company's Proxy Statement in connection with its Annual Meeting
scheduled to be held on February 27, 1997, which section is incorporated herein
by reference.
(b) Security Ownership of Directors and Officers
See the section captioned "Principal Shareholders of the Company"
included in the Company's Proxy Statement in connection with its Annual Meeting
scheduled to be held on February 27, 1997, which section is incorporated herein
by reference.
(c) Changes in Control
The Company knows of no contractual arrangements which may, at a
subsequent date, result in a change of control of the Company.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See the section captioned "Certain Transactions" included in the
Company's Proxy Statement in connection with its Annual Meeting scheduled to be
held on February 27, 1997, which section is incorporated herein by reference.
25
<PAGE>
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(1) See the financial statements of the Company and the report thereon
included in Item 7 of Part II of this Annual Report on Form 10-KSB.
(2) The following exhibits are being filed as part of this Annual
Report on Form 10-KSB.
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
<S> <C>
3.1 Articles of Incorporation of the Registrant, as amended (incorporated by reference to
Exhibit 3.1 to the Registrant's Quarterly Report on Form 10-QSB for the quarterly
period ended June 30, 1996).
3.2 Amended and Restated By-laws of the Registrant, as amended (incorporated by
reference to Exhibit 3.2 to the Registrant's Quarterly Report on Form 10-QSB for the
quarterly period ended June 30, 1996).
4.1 Specimen Common Stock Certificate of Registrant (incorporated by reference to
Exhibit 4.1 to Amendment No. 4 to the Registrant's Registration Statement on Form
SB-2 (Registration No. 33-91426), as filed with the Securities and Exchange
Commission on May 16, 1996 ("Amendment No. 4")).
4.2 Specimen Warrant of Registrant (incorporated by reference to Exhibit 4.2 to
Amendment No. 4).
4.3 Warrant Agreement between Registrant, Duke & Co., Inc. and Warrant Agent
(incorporated by reference to Exhibit 4.1 to the Registrant's Quarterly Report on Form
10-QSB for the quarterly period ended June 30, 1996).
4.4 Form of Lock-Up Agreement (incorporated by reference to Exhibit 4.4 to Amendment
No. 3 to the Registrant's Registration Statement on Form SB-2 (Registration No. 33-
91426), as filed with the Securities and Exchange Commission on March 20, 1996
("Amendment No. 3")).
4.5 Underwriter's Warrant issued to Duke & Co., Inc. (incorporated by reference to
Exhibit 4.2 to the Registrant's Quarterly Report on Form 10-QSB for the quarterly
period ended June 30, 1996).
10.1 Employment Agreement between the Registrant and Richard P.
McNeight (incorporated by reference to Exhibit 10.1 to the
Registrant's Registration Statement on Form SB-2 (Registration
No. 33-91426), as filed with the Securities and Exchange
Commission on April 21, 1995) ("Registration Statement on Form
SB-2")).
10.2 Employment Agreement between the Registrant and William R. Craven (incorporated
by reference to Exhibit 10.2 to the Registration Statement on Form SB-2).
10.3 Incentive Stock Option Plan and form of Stock Option Agreement
(incorporated by reference to Exhibit 10.3 to the Registration
Statement on Form SB-2).
</TABLE>
26
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
<S> <C>
10.3A Amendment No. 1 to the Incentive Stock Option Plan (incorporated by reference to
Exhibit 10.3A to Amendment No. 3).
10.4 Original Office Lease and Amendment between the Registrant and Atrium Professional
Centre (incorporated by reference to Exhibit 10.4 to the Registration Statement on
Form SB-2).
10.5 Form of Registrant's Manufacturer's Representative Agreement
(incorporated by reference to Exhibit 10.5 to the Registration
Statement on Form SB-2).
10.6 Form of Registrant's Distributor's Agreement (incorporated by reference to
Exhibit 10.6 to the Registration Statement on Form SB-2).
10.7 Amended Licensing Agreement between the Registrant and
MicroSoft Corporation (incorporated by reference to Exhibit
10.7 to the Registration Statement on Form SB-2).
10.8 Licensing Agreement between the Registrant and Phoenix Technologies, Ltd.
(incorporated by reference to Exhibit 10.8 to the Registration Statement on Form
SB-2).
10.9 Joint Development Agreement between the Registrant and MES, Inc. (incorporated by
reference to Exhibit 10.9 to the Registration Statement on Form SB-2).
10.10 Joint Marketing Agreement between the Registrant and Texas Instrument Corporation
(incorporated by reference to Exhibit 10.10 to the Registration Statement on Form
SB-2).
10.11 Joint Marketing Agreement between the Registrant and Raytheon Company
(incorporated by reference to Exhibit 10.11 to the Registration Statement on Form
SB-2).
10.12 Licensing Agreement between Registrant and Grid Systems
Corporation (incorporated by reference to Exhibit 10.12 to the
Registration Statement on Form SB-2).
10.13 Forms of (revised) Subscription Agreement and Subordinated Convertible Promissory
Note (incorporated by reference to Exhibit 10.13 to Amendment No. 2 to the
Registrant's Registration Statement on Form SB-2 (Registration No. 33-91426), as
filed with the Securities and Exchange Commission on October 4, 1995)).
10.14 Nonemployee Directors' Stock Option Plan (incorporated by reference to
Exhibit 10.14 to Amendment No. 3).
10.15 Employment Agreement between the Registrant and Kevin J. Bartczak (incorporated
by reference to Exhibit 10.15 to Amendment No. 3).
10.16 Letter agreements between the Registrant and National City Bank (incorporated by
reference to Exhibit 10.16 to Amendment No. 3).
10.17 Commercial demand note by Registrant in favor of National City Bank (incorporated
by reference to Exhibit 10.17 to Amendment No. 3).
</TABLE>
27
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
<S> <C>
10.18 Security agreement (accounts receivable) by Registrant in favor of National City Bank
(incorporated by reference to Exhibit 10.18 to Amendment No. 3).
10.19 Security agreement (equipment) by Registrant in favor of National City Bank
(incorporated by reference to Exhibit 10.19 to Amendment No. 3).
10.20 Form of promissory note of Registrant issued in connection with stockholder loans
made in April 1996 (incorporated by reference to Exhibit 10.20 to Amendment
No. 4).
10.20A Form of Common Stock Purchase Agreement for purchase of shares by selling
security holders (incorporated by reference to Exhibit 10.20A to Amendment No. 5 to
Registrant's Registration Statement on Form SB-2 (Registration No. 33-91426), as
filed with the Securities and Exchange Commission on May 29, 1996 ("Amendment
No. 5")).
10.21 Option Agreements dated as of December 16, 1991 between UES Florida, Inc. and
each of Krishan K. Joshi, Richard P. McNeight and William R. Craven (incorporated
by reference to Exhibit 10.21 to Amendment No. 4).
10.22 Option Agreement dated as of November 23, 1994 with Richard P. McNeight.
(incorporated by reference to Exhibit 10.22 to Amendment No. 4).
10.23 Warrant Agent Agreement and Warrant relating to August 1995 bridge financing
(incorporated by reference to Exhibit 10.1 to the Registrant's Quarterly Report on
Form 10-QSB for the quarterly period ended June 30, 1996.).
10.24 Promissory Note dated February 19, 1993 by Richard P. McNeight (incorporated by
reference to Exhibit 10.24 to Amendment No. 5).
10.25 Underwriting Agreement between Registrant and Duke & Co., Inc. (incorporated by
reference to Exhibit 1 to the Registrant's Quarterly Report on Form 10-QSB for the
quarterly period ended June 30, 1996).
10.26 Financial Advisory and Investment Banking Agreement (incorporated by reference to
Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-QSB for the quarterly
period ended June 30, 1996).
10.28 Lease Agreement dated September 1, 1996 between Registrant and California
Microwave, Inc. and related agreement dated November 15, 1996 with Symetrics
Industries Inc.
10.29 Commercial Note of Registrant dated November 20, 1996 in favor of National City
Bank of Dayton.
10.30 Security Agreement (All Personal Property and Fixtures) dated November 20, 1996 by
Registrant in favor of National City Bank of Dayton.
27 Financial Data Schedule.
</TABLE>
28
<PAGE>
<PAGE>
(b) Reports on Form 8-K
The Company did not file any Reports on Form 8-K during the
fourth quarter of the fiscal year ended September 30, 1996.
29
<PAGE>
<PAGE>
SIGNATURES
In accordance with 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.
<TABLE>
<CAPTION>
NAME TITLE DATE
<S> <C> <C>
/s/ Krishan K. Joshi Chairman, Chief Executive December 23, 1996
- ------------------------ Officer and Director
Krishan K. Joshi (Principal Executive Officer)
/s/ Richard P. McNeight President and Director December 23, 1996
- ------------------------
Richard P. McNeight
/s/ William R. Craven Vice President, Director and December 23, 1996
- ------------------------ Secretary
William R. Craven
/s/ Kevin Bartczak Treasurer, Vice President and December 23, 1996
- ------------------------ Chief Financial Officer
Kevin Bartczak (Principal Financial Officer
and Principal Accounting
Officer)
/s/ James E. Clifford Director December 23, 1996
- ------------------------
James E. Clifford
/s/ Michael Maguire Director December 23, 1996
- ------------------------
Michael Maguire
</TABLE>
30
<PAGE>
<PAGE>
PARAVANT COMPUTER SYSTEMS, INC.
Financial Statements
September 30, 1996 and 1995
With Independent Auditors' Report Thereon
<PAGE>
<PAGE>
PARAVANT COMPUTER SYSTEMS, INC.
Table of Contents
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Independent Auditors' Report F-2
Financial Statements:
Balance Sheets F-3 - F-4
Statements of Income F-5
Statements of Changes in Stockholders' Equity F-6
Statements of Cash Flows F-7 - F-8
Notes to Financial Statements F-9 - F-23
</TABLE>
F-1
<PAGE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
--------------------------
Board of Directors:
Paravant Computer Systems, Inc.:
We have audited the accompanying balance sheets of Paravant Computer Systems,
Inc. as of September 30, 1996 and 1995, and the related statements of income,
changes in stockholders' equity and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these 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 audits 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 financial statements referred to above present fairly, in
all material respects, the financial position of Paravant Computer Systems, Inc.
as of September 30, 1996 and 1995, and the results of its operations and its
cash flows for the years then ended in conformity with generally accepted
accounting principles.
KPMG PEAT MARWICK LLP
November 22, 1996
F-2
<PAGE>
<PAGE>
PARAVANT COMPUTER SYSTEMS, INC.
Balance Sheets
September 30, 1996 and 1995
<TABLE>
<CAPTION>
ASSETS 1996 1995
----- ---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 65,069 211,426
Accounts receivable, net (notes 7, 9 and 18) 7,161,192 5,295,106
Employee receivables and advances 73,502 65,707
Costs and estimated earnings in excess of billings on
uncompleted contracts (note 6) - 322,071
Inventory (notes 2, 7 and 9) 2,503,892 2,411,834
Prepaid expenses 141,191 51,441
Deferred income taxes (note 14) 139,727 128,979
--------- --------
Total current assets 10,084,573 8,486,564
--------- --------
Property, plant and equipment, net (notes 3, 7 and 9) 517,515 462,447
Intangible assets, net (note 4) 89,125 117,625
Demonstration pool and custom mold, net (note 5) 281,309 67,787
Capitalized offering costs - 257,812
Other assets 16,136 25,330
Deferred income taxes (note 14) - 32,150
--------- --------
Total assets $10,988,658 9,449,715
========== =========
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY 1996 1995
------------------------------- ---- ----
<S> <C> <C>
Current liabilities:
Notes payable to bank (note 7) $ 540,000 2,960,000
Other notes payable (note 8) 100,000 400,000
Current maturities of long-term debt (note 9) 110,004 110,004
Current maturities of capital lease obligations (note 10) 99,346 67,685
Accounts payable 1,043,731 1,334,631
Amounts due to affiliate - 87,294
Accrued commissions 449,251 514,240
Accrued expenses 430,900 844,637
Accrued incentive compensation 140,000 -
Income taxes payable 334,993 317,665
--------- --------
Total current liabilities 3,248,225 6,636,156
Long-term debt, less current maturities (note 9) 619,151 729,155
Capital lease obligations, less current maturities (note 10) 67,781 77,233
Deferred income taxes (note 14) 7,657 -
--------- --------
Total liabilities 3,942,814 7,442,544
--------- --------
Stockholders' equity:
Preferred stock, par value $.01 per share. Authorized
2,000,000 shares, none issued - -
Common stock, par value $.015 per share. Authorized
30,000,000 shares; issued and outstanding 7,956,038
shares at September 30, 1996 and 4,500,000 shares at
September 30, 1995 (notes 11 and 12) 118,943 67,500
Additional paid-in capital 5,046,342 761,265
Retained earnings 1,880,559 1,178,406
Commitments and contingencies (notes 10 and 17)
--------- --------
Total stockholders' equity 7,045,844 2,007,171
--------- --------
$10,988,658 9,449,715
========== =========
</TABLE>
F-4
<PAGE>
<PAGE>
PARAVANT COMPUTER SYSTEMS, INC.
Statements of Income
For the years ended September 30, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Revenues (note 18) $10,495,063 8,652,553
Cost of revenues 5,818,010 4,680,661
--------- --------
Gross profit 4,677,053 3,971,892
Selling and administrative expense 3,247,385 2,668,320
--------- --------
Income from operations 1,429,668 1,303,572
Other income (expense):
Interest expense (362,956) (392,589)
Miscellaneous income (expense) 11,257 (50,711)
--------- --------
Income before income taxes 1,077,969 860,272
Income tax expense (note 14) 375,816 278,857
--------- --------
Net income $ 702,153 581,415
========= =========
Weighted average number of shares outstanding 7,652,320 4,500,000
========= =========
Earnings per share $ .10 .13
========= =========
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
<PAGE>
PARAVANT COMPUTER SYSTEMS, INC.
Statements of Changes in Stockholders' Equity
For the years ended September 30, 1996 and 1995
<TABLE>
<CAPTION>
COMMON STOCK TREASURY STOCK
--------------------- ADDITIONAL -------------------- TOTAL
NUMBER PAR PAID-IN RETAINED NUMBER STOCKHOLDERS'
OF SHARES VALUE CAPITAL EARNINGS OF SHARES COST EQUITY
------- ----- ------ -------- -------- ---- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, September 30, 1994 4,737,667 $ 71,065 796,498 596,991 79,234 (38,798) 1,425,756
Retirement of treasury stock (237,667) (3,565) (35,233) - (79,234) 38,798 -
Net income for the year
ended September 30, 1995 - - - 581,415 - - 581,415
--------- ------- ------- -------- ------- ------ --------
Balances, September 30, 1995 4,500,000 67,500 761,265 1,178,406 - - 2,007,171
Issuance of common stock,
net of offering costs 3,450,000 51,352 4,283,722 - - - 4,335,074
Exercise of common stock
options 6,038 91 1,355 - - - 1,446
Net income for the year
ended September 30, 1996 - - - 702,153 - - 702,153
--------- ------- -------- -------- ------- ------ --------
Balances, September 30, 1996 7,956,038 $118,943 5,046,342 1,880,559 - - 7,045,844
========= ======= ========= ========= ======= ====== =========
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
<PAGE>
PARAVANT COMPUTER SYSTEMS, INC.
Statements of Cash Flows
For the years ended September 30, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 702,153 581,415
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization 266,714 220,005
Deferred income taxes 29,059 (36,819)
Increase (decrease) in cash caused by changes in:
Accounts receivable (1,866,086) (1,907,770)
Employee receivables and advances (7,795) (31,086)
Inventory (92,058) (195,965)
Costs and estimated earnings in excess of billings on
uncompleted contracts 322,071 (95,394)
Prepaid expenses (89,750) 31,126
Other assets 9,194 (12,861)
Accounts payable (290,900) 370,003
Amounts due to affiliate (87,294) 87,294
Accrued commissions (64,989) 266,947
Accrued expenses (413,737) 302,949
Accrued incentive compensation 140,000 -
Income taxes payable 17,328 121,579
-------- ---------
Net cash used in operating activities (1,426,090) (298,577)
-------- ---------
Cash flows from investing activities:
Acquisitions of property, plant and equipment (127,352) (60,350)
Acquisitions of demonstration pool and custom mold (254,979) (16,556)
-------- ---------
Net cash used in investing activities (382,331) (76,906)
-------- ---------
(Continued)
</TABLE>
F-7
<PAGE>
<PAGE>
2
PARAVANT COMPUTER SYSTEMS, INC.
Statements of Cash Flows, Continued
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Cash flows from financing activities:
Net proceeds from (repayments on) notes payable to bank (2,420,000) 562,000
Proceeds from other notes payable - 400,000
Repayments on other notes payable (300,000) -
Repayments on long-term debt (110,004) (110,004)
Repayments on capital lease obligations (102,264) (62,081)
Proceeds from sale of common stock 5,103,161 -
Payment of offering costs (508,829) (207,812)
-------- ---------
Net cash provided by financing activities 1,662,064 582,103
-------- ---------
Net increase (decrease) in cash and cash
equivalents (146,357) 206,620
Cash and cash equivalents at beginning of year 211,426 4,806
-------- ---------
Cash and cash equivalents at end of year $ 65,069 211,426
======== =========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 385,748 365,918
======== =========
Income taxes $ 358,488 182,469
======== =========
Supplemental disclosure of noncash investing and financing activities:
The Company entered into capital lease agreements
for office equipment totaling $124,473 and $62,450
for the years ended September 30, 1996 and 1995,
respectively.
</TABLE>
See accompanying notes to financial statements.
F-8
<PAGE>
<PAGE>
PARAVANT COMPUTER SYSTEMS, INC.
Notes to Financial Statements
September 30, 1996 and 1995
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) BUSINESS
Paravant Computer Systems, Inc., (the "Company") is engaged in the
design, development, production and sales of computer and
communication systems, specializing in rugged, hand-held and laptop
computer products. The principal customers of the Company are United
States Department of Defense contractors who are subject to Federal
budgetary implications. The work is performed under general purchase
orders, fixed-price contracts and on a general production basis.
(b) CASH AND CASH EQUIVALENTS
Cash and cash equivalents include all highly liquid debt instruments
purchased with a maturity of three months or less.
(c) ACCOUNTS RECEIVABLE
Management has provided an allowance for doubtful accounts receivable
in the amount of $12,353 and $31,600 as of September 30, 1996 and
1995, respectively.
(d) INVENTORY
Inventory is stated at the lower of cost or market using the weighted
average cost method. The Company provides an obsolescence reserve for
inventory as it becomes unusable or obsolete.
(e) DEPRECIATION AND AMORTIZATION
The cost of property, plant and equipment is depreciated over the
estimated useful lives of the related assets ranging from 5 to 7
years using the straight-line method. Intangible assets include
exclusive rights to a printed circuit board and certain software and
are being amortized over the estimated useful lives of the technology
of five to ten years. The Company also has a custom mold which is
amortized on a units-of-production basis.
(Continued)
F-9
<PAGE>
<PAGE>
PARAVANT COMPUTER SYSTEMS, INC.
Notes to Financial Statements
(f) REVENUE AND COST RECOGNITION
The Company recognizes revenues on product sales when the customer
accepts title, which typically occurs upon shipment. At September 30,
1996 and 1995, the Company had product sales of $4,144,207 and
$2,744,124, respectively, for which title had been transferred to a
customer although physical product remained on Company premises at
the convenience of the customer. The Company allows customers to
return products under warranty for up to one year for repair and
accrues a reserve for future warranty costs at the time of product
sales. The warranty reserve was $54,505 and $99,804 as of September
30, 1996 and 1995, respectively.
Revenues from fixed-price contracts for engineering services are
recognized on the percentage-of-completion method, measured by the
percentage of total costs incurred to date to total estimated costs
for each contract. This method is used because management considers
total expended costs to be the best available measure of progress on
these contracts. Any losses on fixed-price contracts are accrued at
such time as those losses become determinable. The aggregate of costs
and estimated earnings on uncompleted contracts in excess of related
billings is shown as a current asset, and the aggregate of billings
on uncompleted contracts in excess of related costs and estimated
earnings is shown as a current liability, in the accompanying balance
sheets.
(g) INCOME TAXES
The Company accounts for income taxes using the asset and liability
method. Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss and tax
credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income
in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
(Continued)
F-10
<PAGE>
<PAGE>
PARAVANT COMPUTER SYSTEMS, INC.
Notes to Financial Statements
(h) EARNINGS PER SHARE
Earnings per share have been computed by dividing net income by the
weighted average number of common shares outstanding. The weighted
average number of shares outstanding has been determined assuming
shares and options issued subsequent to September 30, 1996, if any,
were outstanding for the periods presented. When dilutive, stock
options are included as share equivalents using the treasury stock
method. Common stock authorized, issued and outstanding as of
September 30, 1996 and 1995 reflects the effects of a 4.472-for-1
reverse common stock split and a 3-for-1 common stock split
authorized on April 12, 1995 and July 25, 1996, respectively, by the
Board of Directors.
Common equivalent shares included in the computation represent shares
issueable upon assumed exercise of stock options and warrants. Fully
diluted earnings per common share amounts did not differ from amounts
computed under the primary computation for the years ended September
30, 1996 and 1995.
(i) USE OF ESTIMATES IN FINANCIAL STATEMENT PRESENTATION
The presentation 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.
(j) FUTURE APPLICATION OF ACCOUNTING STANDARDS
In October 1995, the Financial Accounting Standards Board issued SFAS
123, "Accounting for Stock-Based Compensation," effective for
financial statements with fiscal years beginning after December 15,
1995. Among other provisions, SFAS 123 establishes a new, alternative
method, based on fair values, for accounting for stock-based
compensation arrangements with employees. In addition, if an entity
does not adopt the new, alternative method, the statement requires
disclosure in the footnotes of proforma net income and earnings per
share as if the fair value method had been adopted. For the fiscal
year ending September 30, 1997 and interim periods, the Company has
determined that it will not apply the new method of accounting to
employee stock options, but will provide the related footnote
disclosures.
(Continued)
F-11
<PAGE>
<PAGE>
PARAVANT COMPUTER SYSTEMS, INC.
Notes to Financial Statements
(2) INVENTORY
The following is a summary of inventory at September 30, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Raw materials $1,835,286 1,369,675
Work in process 474,940 930,677
Finished goods 269,243 262,042
-------- --------
2,579,469 2,562,394
Reserve for obsolete inventory (75,577) (150,560)
-------- --------
$2,503,892 2,411,834
========= =========
</TABLE>
General and administrative costs amounted to $3,270,311 and $2,715,097 for
the years ended September 30, 1996 and 1995, respectively. Of these
amounts, general and administrative costs capitalized in inventory were
$22,926 and $46,777 as of September 30, 1996 and 1995, respectively.
(3) PROPERTY, PLANT AND EQUIPMENT
The following is a summary of property, plant and equipment at September
30, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Office equipment $ 930,332 715,425
Factory equipment 209,833 198,516
Leasehold improvements 14,307 14,267
-------- --------
Total cost 1,154,472 928,208
Less accumulated depreciation (636,957) (465,761)
-------- --------
$ 517,515 462,447
========= ========
</TABLE>
Depreciation and amortization expense on these assets amounted to $196,757
and $89,111 for the years ended September 30, 1996 and 1995, respectively.
(Continued)
F-12
<PAGE>
<PAGE>
PARAVANT COMPUTER SYSTEMS, INC.
Notes to Financial Statements
(4) INTANGIBLE ASSETS
These assets consist of exclusive rights to a printed circuit board and
certain software. Cost and accumulated amortization of these assets at
September 30, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Cost $ 267,500 267,500
Accumulated amortization (178,375) (149,875)
------- -------
$ 89,125 117,625
======= =======
</TABLE>
Total amortization expense on these assets was $28,500 for each of the
years ended September 30, 1996 and 1995.
(5) DEMONSTRATION POOL AND CUSTOM MOLD
These assets consist of equipment held in the demonstration pool and a
custom mold. Cost and accumulated amortization of these assets at
September 30, 1996 and 1995, are as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Cost $ 699,723 449,343
Accumulated amortization (418,414) (381,556)
------- -------
$ 281,309 67,787
======= =======
</TABLE>
Total amortization expense on these assets was $41,457 and $102,394 for
the years ended September 30, 1996 and 1995, respectively.
(Continued)
F-13
<PAGE>
<PAGE>
PARAVANT COMPUTER SYSTEMS, INC.
Notes to Financial Statements
(6) UNCOMPLETED CONTRACTS
The status of contracts which were incomplete at September 30, 1996 and
1995 was as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Costs and estimated earnings incurred on
uncompleted contracts $ - 2,664,923
Billings on uncompleted contracts - (2,342,852)
----- ---------
Net $ - 322,071
===== =========
</TABLE>
These balances are included under the caption costs and estimated earnings
in excess of billings on uncompleted contracts in the accompanying balance
sheets.
(7) NOTES PAYABLE TO BANK
The Company has a line of credit with a bank totaling $4,000,000
($3,000,000 in 1995) which is due on demand and, at September 30, 1996,
bears interest at the prime rate plus .50% for secured borrowings under
prescribed levels and the prime rate plus 1.00% for other borrowings.
Secured borrowings are collateralized by accounts receivable, inventory
and equipment. The amount outstanding under these credit agreements at
September 30, 1996 and 1995 was $540,000 and $2,960,000, respectively. The
credit agreements do not contain any material financial covenants.
Subsequent to September 30, 1996, the Company renegotiated the interest
rate on this agreement to the prime rate for secured borrowings under
prescribed levels and the prime rate plus .50% for other borrowings.
(8) OTHER NOTES PAYABLE
In August 1995, the Company issued subordinated, convertible promissory
notes payable ("Notes") in the principal amount of $400,000. The Notes
also had warrants attached for $.003 per warrant exercisable at $2.00 per
share. A portion of these notes totaling approximately $98,000 were
manditorily convertible into 120,000 shares of the Company's common stock
at a conversion price of $.82 in the event the Company completed a public
offering of its common stock prior to January 1, 1996. The Company did not
complete the public offering prior to January 1, 1996 and the conversion
feature expired. The Notes, which bear interest at 6%, have an outstanding
balance of $100,000 at September 30, 1996, which is expected to be
satisfied by December 31, 1996.
(Continued)
F-14
<PAGE>
<PAGE>
PARAVANT COMPUTER SYSTEMS, INC.
Notes to Financial Statements
In regard to the above financing, the Company may be deemed to have
incurred a technical violation of a provision of the Securities Act of
1933, as amended. Accordingly, there may be a contingent liability
associated with such matter. The maximum amount of such liability is
estimated at the amount of converted debt in such financing of $98,000.
However, management believes that there was no such violation and the
possibility of such related liability is remote.
(9) LONG-TERM DEBT
The following is a summary of long-term debt at September 30, 1996 and
1995:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Note payable to bank bearing an initial interest rate of 7.25%; interest
rate adjusted monthly to 1.50% above the prime rate; interest and
principal due in sixty monthly installments including principal of
$9,167 per payment; final payment due October of 1998; secured by
accounts receivable, inventory and equipment $ 229,155 339,159
Note payable to bank bearing interest at the prime rate plus .50%;
interest due monthly, principal balance due March 31, 1998; secured by
accounts receivable, inventory and equipment, subsequent to September
30, 1996, the Company renegotiated the interest rate on this
note to the prime rate 500,000 500,000
Less current maturities (110,004) (110,004)
------- -------
Long-term debt, less current maturities $ 619,151 729,155
======= =======
</TABLE>
Scheduled principal payments for future periods are as follows:
<TABLE>
<CAPTION>
YEAR ENDING SEPTEMBER 30,
------------------------
<S> <C>
1997 $110,004
1998 610,004
1999 9,147
-------
$729,155
=======
</TABLE>
(Continued)
F-15
<PAGE>
<PAGE>
PARAVANT COMPUTER SYSTEMS, INC.
Notes to Financial Statements
The carrying amount of the Company's long-term debt approximates fair
value because the debt bears interest at borrowing rates currently
available to the Company for bank loans with similar terms and maturities.
(10) LEASES
The Company is obligated under various capital leases for equipment. At
September 30, 1996 and 1995, respectively, property, plant and equipment
included net capital lease assets of $197,423 and $72,950.
The Company also has several noncancellable operating leases. Under these
arrangements, the Company leases its current office facilities at a rate
of $12,365 per month. The Company's future office facilities will be
leased at a rate of $9,176 per month. In addition, the Company leases a
residential unit from a related partnership under a month-to-month lease
at a rate of $1,000 per month. The Company also leases automobiles and
equipment with lease terms into June of 1999. Rent expense under operating
lease agreements totaled $151,924 and $143,795 for the years ended
September 30, 1996 and 1995, respectively.
The following is a schedule by years of future minimum lease payments
under capital and operating leases together with the present value of the
net minimum lease payments as of September 30, 1996:
<TABLE>
<CAPTION>
CAPITAL OPERATING
YEAR ENDING SEPTEMBER 30, LEASES LEASES
------------------------ ----- -----
<S> <C> <C>
1997 $113,394 128,974
1998 65,696 123,272
1999 7,449 115,081
2000 - 113,427
2001 - 110,117
------- -------
Total minimum lease payments 186,539 590,871
=======
Less amounts representing interest 19,412
-------
Present value of net minimum
lease payments 167,127
Less current maturities 99,346
-------
Capital lease obligations $ 67,781
=======
</TABLE>
(Continued)
F-16
<PAGE>
<PAGE>
PARAVANT COMPUTER SYSTEMS, INC.
Notes to Financial Statements
(11) STOCKHOLDERS' EQUITY
Common stock authorized, issued and outstanding as of September 30, 1996
and 1995 reflects the effects of a 4.472-for-1 reverse common stock split
effected on April 12, 1995 by the Board of Directors and a 3-for-1 common
stock split effected on July 25, 1996 by the Board of Directors.
The Company entered into an agreement with an underwriter in connection
with its initial public offering ("IPO") which was consummated in June
1996. The agreement provides for monthly consulting fees for the
underwriter of $3,500 per month. The agreement also provides a 5.00% fee
to be paid to the underwriter on any merger and acquisition for a period
extending two years subsequent to the IPO date.
(12) STOCK OPTIONS AND WARRANTS
Common stock options and warrants and related exercise prices have been
adjusted, where applicable, to reflect the effects of the aforementioned
4.472-for-1 reverse common stock split and the 3-for-1 common stock split
effected on April 12, 1995 and July 25, 1996, respectively.
On December 22, 1993, the Company granted options under a nonqualified
stock option plan ("nonqualified plan") to employees to purchase 74,799
shares of the Company's common stock at an exercise price of $.012 per
share. The terms of these options provide that the options may be
exercised during a period beginning December 22, 1994 and ending six years
from the date the options were granted. The Company terminated the
nonqualified plan on November 22, 1994. During the fiscal year ended
September 30, 1996, the Company issued 6,038 common shares to various
employees under the nonqualified plan.
On November 22, 1994, the Company granted options to a key officer to
purchase 182,977 shares of the Company's common stock at an exercise price
of $.72 per share. The terms of these options provide that the options are
exercisable through November 22, 2004. The exercise price of these options
approximated the estimated market value of the shares on the issuance
date.
On November 22, 1994, the Company reserved 900,000 shares of common stock
for its qualified incentive stock option plan ("qualified plan"). On March
14, 1996 the Company increased the options reserved under the qualified
plan from 900,000 to 1,455,000. It also reserved 45,000 shares under a
plan to benefit the nonemployee directors under terms similar to the
qualified plan. On November 22, 1994 and March 2, 1995, the Company
granted options to employees to purchase 345,000 and 45,000 shares,
respectively, of the Company's common stock at exercise prices ranging
from $.72 to $.79 per share which approximated the estimated market value
of the shares on that date. The terms of these options provide that the
options may be exercised beginning one year after date of grant for a
period of nine years.
(Continued)
F-17
<PAGE>
<PAGE>
PARAVANT COMPUTER SYSTEMS, INC.
Notes to Financial Statements
On November 16, 1995, the Company granted options to selected employees to
purchase 360,000 shares of the Company's common stock at exercise prices
ranging from $1.33 to $1.47 per share, which approximated the market price
of the shares at the date of issuance.
On August 9, 1996, the Company granted options to an employee to purchase
6,000 shares of the Company's common stock at an exercise price of $5.94
per share, which approximated the market price of the shares at the date
of issuance.
In connection with the Company's IPO of common stock in June of 1996, the
Company issued 4,830,000 warrants exercisable for a period of five years
commencing November 30, 1997 at an exercise price of $2.00 per share,
subject to adjustment in certain circumstances. The Company, at its option
during the exercise period of the warrants, may redeem the warrants, after
November 30, 1997, upon notice of not less than 30 days, at a price of
$.0167 per warrant provided that the last sale price of the Company's
common stock on the Nasdaq National Market has exceeded $2.83 per share
(subject to adjustment) for a period of 30 consecutive trading days. As of
September 30, 1996, no warrants have been exercised.
(13) RESEARCH AND DEVELOPMENT
Research and development costs are expensed when incurred and are included
in selling and administrative expense. The amounts charged to expense were
$382,750 and $480,951 for the years ended September 30, 1996 and 1995,
respectively.
(Continued)
F-18
<PAGE>
<PAGE>
PARAVANT COMPUTER SYSTEMS, INC.
Notes to Financial Statements
(14) INCOME TAXES
The components of income tax expense for the years ended September 30, 1996 and
1995 are as follows:
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
-------- --------- ------
<S> <C> <C> <C>
1996:
Federal $292,008 26,620 318,628
State 54,749 2,439 57,188
------- ------ -------
$346,757 29,059 375,816
======= ====== =======
1995:
Federal 266,225 (38,119) 228,106
State 49,451 1,300 50,751
------- ------ -------
$315,676 (36,819) 278,857
======= ====== =======
</TABLE>
Following is a reconciliation of the expected income tax expense computed
by applying the U.S. federal income tax rate of 34% to income before
income taxes and the actual income tax provision for the years ended
September 30, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Computed "expected" tax expense $366,509 292,492
Increase (decrease) in income taxes resulting from:
State income taxes, net of federal income tax benefit 36,134 31,897
Nondeductible meals and entertainment expense 6,270 5,645
Research and experimentation credit (12,372) (14,698)
Change in valuation allowance - (15,000)
Other, net (20,725) (21,479)
------- -------
$375,816 278,857
======= =======
(Continued)
</TABLE>
F-19
<PAGE>
<PAGE>
PARAVANT COMPUTER SYSTEMS, INC.
Notes to Financial Statements
Deferred income taxes as of September 30, 1996 and 1995 reflect the impact
of "temporary differences" between amounts of assets and liabilities for
financial statement purposes and such amounts as measured by tax laws. The
temporary differences give rise to deferred tax assets and liabilities
which are summarized below as of September 30, 1996 and 1995.
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Gross deferred tax liabilities:
Accumulated depreciation $(46,426) (32,271)
------- -------
Gross deferred tax assets:
Inventory 61,972 61,927
Warranty expense 20,510 37,556
Accrued vacation 45,956 29,496
Accrued incentive compensation 11,289 -
Net operating loss carryforwards 1,554 14,834
Research credits 37,215 49,587
------- -------
Total gross deferred tax assets 178,496 193,400
------- -------
Total net deferred tax assets $132,070 161,129
======= =======
</TABLE>
A valuation allowance for deferred tax assets is provided when it is more
likely than not that some portion or all of the deferred tax assets will
not be realized. Realization is dependent upon the generation of future
taxable income. As of September 30, 1996 and 1995, no valuation allowance
has been recognized in the accompanying financial statements for the
deferred tax assets because the Company believes that sufficient taxable
income will be generated in future years to fully utilize such amounts.
At September 30, 1996, the Company has net operating loss carryforwards of
approximately $4,000 for federal and state income tax purposes, which are
available to offset future taxable income. These loss carryforwards expire
in various years from 1998 through 2010.
(15) RETIREMENT PLAN
The Company has a defined contribution retirement plan covering
substantially all employees. Retirement expense incurred was $19,098 and
$10,344 for the years ended September 30, 1996 and 1995, respectively.
(Continued)
F-20
<PAGE>
<PAGE>
PARAVANT COMPUTER SYSTEMS, INC.
Notes to Financial Statements
(16) RELATED PARTY TRANSACTIONS
The Company had a payable to an affiliate, Universal Energy Systems, Inc.
("UES"), of $-0- and $87,294 at September 30, 1996 and 1995, respectively,
for accrued health insurance costs paid by UES which is included in
amounts due to affiliate in the accompanying balance sheets.
In March 1996, prior to the 3-for-1 common stock split authorized on July
25, 1996 by the Board of Directors, certain stockholders of the Company
sold an aggregate of 308,581 shares of common stock to private investors
at a purchase price of $4 per share. A portion of the proceeds from these
sales totaling $802,294 was advanced to the Company in April 1996 pursuant
to promissory notes having an interest rate of 6% per annum. Such amounts,
plus accrued interest thereon, were due and payable on the earlier of
April 15, 1997 or the date which is ten days after the consummation of the
Company's initial public offering. All amounts borrowed by the Company
under these promissory notes were repaid prior to September 30, 1996.
At September 30, 1995 the Company was a guarantor of certain debt of UES.
The debt included a $1,250,000 line of credit with a bank that was due on
demand and bore interest at the prime rate. The amount outstanding under
the agreement at September 30, 1995 was $779,715. The debt also included a
commercial note payable to the same bank bearing an initial interest rate
of 8.75% adjusted monthly to 1.50% above the prime rate. Interest and
principal payments on this note were due in eighty-four monthly
installments including principal of $11,905 per payment with final payment
due in September 2001. The amount outstanding under the commercial note
payable at September 30, 1995 was $845,235. Prior to the completion of the
Company's IPO, the bank released the Company from its guarantee.
(17) CONTINGENCIES
In March 1996, the Company's former counsel rendered an invoice to the
Company totaling approximately $365,000 for legal fees and expenses
representing both general corporate services as well as services relating
to the Company's initial public offering. The Company contested the
invoice and accrued an estimate for the settlement, if any, of these fees.
In March 1996, the Company's former counsel filed an action against the
Company, its current underwriter and certain other defendants, alleging,
among other things, breach of contract, failure to pay attorneys fees,
fraud, copyright infringement and defamation by the Company in connection
with the aforementioned services as well as claiming a finder's fee with
respect to the underwriter's relationship with the Company. Plaintiff is
seeking damages of approximately $28,000,000 from the Company. The Company
filed an answer denying the claims asserted by plaintiff and has asserted
defenses and counterclaims against the plaintiff seeking recovery of
amounts paid to the plaintiff, plus punitive damages and court costs.
(Continued)
F-21
<PAGE>
<PAGE>
PARAVANT COMPUTER SYSTEMS, INC.
Notes to Financial Statements
In September 1996, a former Company employee filed an action against the
Company and certain other defendants alleging retaliatory personnel
actions instituted by the defendants against the plaintiff. Plaintiff is
seeking from the defendants an amount of $950,000 plus punitive damages,
interest, cost and attorneys fees. The Company has filed a motion to
dismiss the complaint and intends to vigorously defend this lawsuit.
Management, after consultation with counsel, is of the opinion that the
ultimate resolution of these matters will not have a material adverse
effect on future operations of the Company. Management has not accrued any
liability relating to the tortious portion of these lawsuits as it
believes the Company will prevail. In the event a court finds in favor of
the plaintiffs, additional costs will be incurred.
(18) CONCENTRATION OF CREDIT RISK
The Company has a high concentration of sales to four customers who
accounted for 95% and 85% of revenue for the years ended September 30,
1996 and 1995, respectively. A summary of sales and accounts receivable to
the customers that exceed 10% of sales or accounts receivable for the
years ended September 30, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
---------------------- --------------------
SALES % TOTAL SALES % TOTAL
---- ------- ---- -------
<S> <C> <C> <C> <C>
Customer A $5,094,104 49% $4,055,907 47%
Customer B 2,255,433 21 2,502,997 25
Customer C 1,609,725 15 1,109,825 13
Customer D 1,079,408 10 - -
</TABLE>
<TABLE>
<CAPTION>
ACCOUNTS ACCOUNTS
RECEIVABLE % TOTAL RECEIVABLE % TOTAL
--------- ------- --------- -------
<S> <C> <C> <C> <C>
Customer A $4,982,408 70% $2,912,231 55%
Customer B 1,009,630 14 1,079,567 20
Customer C 906,966 13 585,273 11
</TABLE>
(Continued)
F-22
<PAGE>
<PAGE>
PARAVANT COMPUTER SYSTEMS, INC.
Notes to Financial Statements
(19) FOURTH QUARTER RESULTS
Adjustments were made to increase inventory during the fourth quarter of
the years ended September 30, 1996 and 1995 in the amounts of $433,000 and
$125,293, respectively, before related income taxes. These adjustments
were made to adjust perpetual records to physical counts. The Company was
not able to determine the amount of the adjustments that related to the
fourth quarter or the prior quarters.
In addition, another adjustment was made in the fourth quarter of the year
ended September 30, 1996 to record accrued incentive compensation in the
amount of $140,000, before related taxes. The accrued compensation was
discretionary and was substantially related to fourth quarter sales.
F-23
<PAGE>
<PAGE>
LEASE AGREEMENT
THIS INDENTURE OF LEASE MADE THIS 1st DAY OF September, 1996 WITNESSETH:
That CALIFORNIA MICROWAVE, INC. First Party, (hereinafter called the
'Landlord'), does hereby demise and lease PARAVANT COMPUTER SYSTEMS, INC. Second
Party, (hereinafter called the 'Tenant'), the premises known and described as
approximately 17,314 square feet of space located in the building containing
approximately 40,000 square feet of space having a street address of 1615 W.
NASA BOULEVARD, SUITE E Melbourne, County of Brevard, State of Florida, located
on the real property as more particularly described in Exhibit A. Tenant may use
any legal alternative mailing address as deemed legal by the U. S. Postal
Service.
1. TERM. The term of this lease shall be 64 months beginning on the 1st day
of September, 1996, and terminating on the 31st day December, 2001, unless the
term hereby demised shall be sooner terminated as hereinafter provided.
2. RENT. In consideration of said demise, the Tenant agrees to pay to the
Landlord as rent for said premises as follows:
<TABLE>
<S> <C>
09/01/96 - 11/30/96 $0.00
12/01/96 - 02/28/97 $1,500.00 per month
03/01/97 - 08/31/97 $3,000.00 per month
09/01/97 - 12/31/01 $8,657.00 per month
</TABLE>
and $1,197.55 per month as an escrow payment for taxes and insurance beginning
September 1, 1997, as set forth below, plus 6% sales tax or such sales tax as
may be subsequently provided by Florida Law, and in addition thereto such sums
as may accrue as additional rent hereunder by virtue of the provisions of this
lease as hereinafter set forth, all payable in cash or its equivalent. All such
sums shall be due and payable in advance on the 1st day of each and every
calendar month during said term at the office of CALIFORNIA MICROWAVE, INC.,
555 Twin Dolphin Drive, Suite 650, Redwood City, CA 94065 or at such other place
as the Landlord from time to time in writing may designate. For purposes of this
lease, Tenant's pro rata share of building use and expenses will be calculated
at 43%.
3. ALTERATIONS. The Tenant agrees that Tenant will make no alterations in,
or additions or improvements to said premises without in each case the written
consent of Landlord first being had and obtained. Such consent shall not be
unreasonably withheld or delayed. Drawings and specifications of the proposed
alterations shall be submitted when Tenant requests the said approval. Tenant
agrees that Tenant will make all such alterations, additions, or improvements in
or to premises at the expense of Tenant. Tenant agrees that in making any such
alterations, additions, or improvements and in occupying and using said
premises, Tenant will comply with the Building Code and ordinance of the City,
and all the laws of the State in which said premises are located, pertaining to
such work and/or such use or occupancy; it being further agreed that any
additions, alterations, or improvements made by Tenant (except only movable
store and office furniture and fixtures) shall become and remain a part of the
building and be and remain the property of Landlord upon the termination of this
EXHIBIT 'A'
<PAGE>
<PAGE>
lease or the Tenant's occupancy of said premises; provided, however, that the
Landlord by giving written notice to Tenant at the time consenting to the making
of any such additions, alterations, or improvements may require Tenant to
restore said premises to the same condition they were in immediately before the
making of such additions, alterations, or improvements. The interest of the
Landlord shall not be subject to liens for improvements made by Tenant. Tenant
agrees that Tenant will save harmless Landlord from and against all expenses,
liens, claims, or damages to either property or person which may or might arise
by reason of the making of any such repairs, alterations, additions, or
improvements. Attached is a sketch of the improvements Paravant intends to
install immediately upon occupancy of the lease which California Microwave will
approve unless in violation of any of the terms above (Exhibit B).
4. SECURITY DEPOSIT. Intentionally deleted. See Paragraph 39.
5. LATE PAYMENT. Any payment of rent or escrow for taxes and insurance or
any other payment required hereunder which is received by Landlord more than
seven (7) days after the same is due shall incur a late payment penalty of five
percent (5%) of the payment due for any such late payment. The said penalty
shall be applied for each month that any payment remains unpaid. All payments to
the Landlord may be applied to any late payment penalties before being applied
to rent. Date of payment is agreed to be the date of postmark.
6. ESCROW. In addition to all other obligations set forth herein, Tenant
agrees to pay to Landlord to hold in escrow for the payment of taxes and
insurance 1/12th of the yearly premium for hazard insurance plus 1/12th of the
yearly taxes as estimated by Landlord. These amounts shall be paid at the same
time and in the same manner as rent provided herein above. Landlord shall apply
such fund to the payment of taxes and insurance, and if the amount held by
Landlord is not sufficient to pay taxes and insurance as they fall due, Tenant
shall pay to Landlord any amount necessary to make up the deficiency within ten
(10) days from written notice by Landlord. Landlord shall not be required to pay
any interest on the moneys so held. Landlord shall provide a complete accounting
of all escrow funds annually by November 30th. Landlord shall maintain and
tenant shall pay for fire and extended coverage insurance on the premises in not
less than ninety percent (90%) of the full replacement cost of the improvement.
Both parties acknowledge that the purchase of this insurance must be done by the
Landlord as multiple occupancies are involved. Tenant shall be entitled to
examine the policies of all of the occupants of his building to satisfy himself
that rates are kept competitive. If policies are found uncompetitive, Landlord
will accept the lowest bidding policy if it is 10 percent or greater less than
Landlord's policy. This policy must be from a similar reputable insurance
company with at least the same rating. Tenant shall only pay for that portion of
the building under lease according lo the fire rating assigned to his use.
7. TENANT'S INSURANCE. During the term of this lease, and any extension
thereof, Tenant shall, at its own cost and expense, maintain and provide general
liability insurance coverage for the benefit and protection of Tenant. Landlord
and Landlord's managing agent, as their interest may appear in an amount not
less than $2,000,000 combined single limit for personal injury, bodily injury
and property damage against liability of Tenant and its authorized
representatives arising out of or in connection with the Tenant's use or
occupancy of the leased premises or the common area Landlord and
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Landlord's managing agent shall be named as additional insured parties in all
such insurance policies, as their respective interest may appear. Such insurance
shall be with a company or companies reasonably acceptable to Landlord and
admitted to do business in the state in which the building is located. All such
insurance policies shall be maintained by Tenant in full force and effect and 30
days' written notice to Tenant prior to cancellation or material change shall be
provided to Landlord. Should Tenant fail to carry such insurance and furnish
Landlord with the required insurance certificates after notification from
Landlord to do so, Landlord shall have the right to obtain such insurance and
Tenant shall pay the cost thereof to Landlord upon demand.
8. SIGN. Paravant may install 22 foot long by 3 foot wide by 1 foot deep
lighted sign on the north face of the building occupied by Paravant at its own
expense to identify the tenancy. Paravant may also install a sign on the rear of
the building for deliveries. These signs are subject to any rule or regulation
governing the placement, size or type of signs placed by the local governments.
9. RENT INCREASES. Beginning September 1, 1998, the basic rent as set forth
in Paragraph 2 of this lease shall be increased by an amount equal to the
national annual consumer price index (CPI-U) as computed from each anniversary
date. The increase will be compounded so that each successive year the basic
rent is more than the basic rent for the previous year, and such increase shall
be capped at 5% in any year, but shall be cumulative from September 1, 1998.
Landlord will give 30 days notice in any increase under this clause including
the calculation.
10. WATER USE. Landlord agrees to provide water for Tenant. Landlord shall
apportion the water use on a per square footage basis and Tenant agrees to pay
initially the amount of $173.14 per month to reimburse Landlord for water use.
Landlord reserves the right to install and maintain a separate water meter.
11. USE. The Tenant agrees that said premises shall be used for the purpose
of office and manufacturing and no other purpose and shall be used and occupied
in a careful and proper manner, and that no waste will be committed or permitted
upon, or any damage be done to the said premises and Tenant agrees that the
Tenant will not conduct, nor permit to be conducted, on said premises any
business or commit or permit any act which is or may be contrary to, or in
violation of any law of the United States or Florida or any ordinances of the
City or other governmental jurisdiction in which said premises are located.
12. SUBLEASES. The Tenant agrees that the Tenant will not sublet said
premises or any part thereof without the consent in writing of the Landlord
first had obtained. Such consent will not be unreasonably withheld. The Landlord
agrees to allow Tenant, upon written request from Tenant, to assign this lease
to a parent company or a subsidiary company if the Tenant is involved in a
corporate restructure. Such assignment shall be permitted so long as the
assignee is of equal or superior credit strength in the sole discretion of the
Landlord.
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13. DEFAULT. The occurrence of any of the following shall constitute a
material default and breach of this Lease by Tenant:
(A) Any failure by Tenant to pay the rent or any other monetary sums
required to be paid hereunder (where such failure continues for ten (10) days
after written notice by Landlord to Tenant), and postmark shall be evidence of
payment. Landlord shall only be required to provide written notice to Tenant two
times per year. Further written notice is hereby waived;
(B) The abandonment or vacation of the premises by Tenant;
(C) A failure by Tenant to observe and perform any other provision of
this lease to be observed or performed by Tenant, where such failure continues
for twenty (20) days after written notice thereof by Landlord to Tenant;
provided, however, that if the nature of the default is such that the same
cannot reasonably be cured within said twenty (20) day period, Tenant shall not
be deemed to be in default if Tenant shall within such period commence such cure
and thereafter diligently prosecute the same to completion;
(D) The making by Tenant of any general assignment or general arrangement
for the benefit of creditors; the filing by or against Tenant of a petition to
have Tenant adjudged bankrupt or of a petition for reorganization or arrangement
under any law relating to bankruptcy (unless, in the case of a petition filed
against Tenant, the same is dismissed within sixty (60) days); the appointment
of a trustee or receiver to take possession of substantially all of Tenant's
assets located at the Premises or of Tenant's interest in this Lease, where
possession is not restored to Tenant within thirty (30) days; or the attachment,
execution or other judicial seizure of substantially all of Tenant's assets
located at the Premises or of Tenant's interest in this Lease, where such
seizure is not discharged within thirty (30) days.
14. DEFAULT REMEDIES. In the event of any such material default or breach
by Tenant, Landlord may, at any time thereafter without limiting Landlord in the
exercise of any rights or remedy at law or in equity which Landlord may have by
reason of such default or breach:
(A) Maintain this Lease in full force and effect and recover the rent
and other monetary charges as they become due, without terminating Tenant's
right to possession irrespective of whether Tenant shall have abandoned the
Premises. In the event Landlord elects not to terminate the Lease, Landlord
shall have the right to attempt to re-let the premises at such rent and upon
such conditions and for such a term and to do all acts necessary to maintain or
preserve the Premises as Landlord deems reasonable and necessary without being
deemed to have elected to terminate the Lease, including removal of all persons
and property from the Premises; such property may be removed and stored in a
public warehouse or elsewhere at the cost of and for the account of Tenant. In
the event any such re-letting occurs, this Lease shall terminate automatically
upon the new Tenant's taking possession of the Premises. Notwithstanding that
Landlord fails to elect to eliminate the Lease initially, Landlord at any time
during the term of this lease may elect terminate this Lease by virtue of such
previous default of Tenant.
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(B) Terminate Tenant's right to possession by any lawful means, in which
case this Lease shall terminate and Tenant shall immediately surrender
possession of the Premises to Landlord. In such event Landlord shall be entitled
to recover from Tenant all damages incurred by Landlord by reason of Tenant's
default including, without limitation thereto, the following: (i) the worth at
the time of award of any unpaid rent which had been earned at the time of such
termination; plus (ii) any other amount necessary to compensate Landlord for all
the detriment proximately caused by Tenant's failure to perform its obligations
under this lease or which in the ordinary course of events would be likely to
result therefrom plus (iii) at Landlord's election, such other amounts in
addition to or in lieu of the foregoing as may be permitted from time to time by
applicable State law. Upon any such re-entry Landlord shall have the right to
make any reasonable repairs, alterations or modifications to the Premises, which
Landlord at its sole discretion deems reasonable and necessary. As used in (i)
above, the 'worth at the time of award' is computed by allowing interest at the
rate of fifteen percent (15%) per annum from the date of default. As used in (i)
and (ii) the 'worth at the time of award' is computed by discounting such amount
at the discount rate of the U. S. Federal Reserve Bank of Atlanta, Georgia, at
the time of award plus one percent (1%). The term 'rent', as used in this
Paragraph 13, shall be deemed to be and to mean the rent to be paid pursuant to
Paragraph 2 and all other monetary sums required to be paid by Tenant pursuant
to the terms of the Lease.
15. PAYMENTS AT TERMINATION. No payments of money by the Tenant to the
Landlord after the termination of this lease, in any manner, or after the giving
of any notice (other than a demand for the payment of money) by the Landlord to
the Tenant shall reinstate, continue or extend the term of this lease or affect
any notice given to the Tenant prior to the payment of such money, it being
agreed that after the service of notice or the commencement of a suit or after
final judgment granting the Landlord possession of said Premises, the Landlord
may receive and collect any sums of rent due or any other sums of money due
under the terms of this lease, and the payment of such sums of money, whether as
rent or otherwise, shall not waive said notice or in any manner affect any
pending suit or any judgment theretofore obtained.
16. PERSONAL PROPERTY. All personal property of any kind or description
whatsoever in the demised premises shall be at the Tenant's sole risk, and the
Landlord shall not be liable for any damage done to or loss of such personal
property except as attributable to Landlord or Landlord's agents: or for damage
or loss suffered by the business or occupation of the Tenant arising from any
act or neglect of co-tenants or other occupants of the building or of their
employees or of other persons; or from bursting, overflowing or leaking of
water, sewer, or steam pipes, or from the heating or plumbing fixtures or from
electric wires or from gas, or odors or caused in any other manner whatsoever
except in the case of negligence or acts of the Landlord.
17. RIGHT TO EFFECTS. If the Tenant shall fail to remove all effects from
said premises upon the termination of this lease or any cause whatsoever, the
Landlord at the option of the Landlord, may remove the same in any manner that
the Landlord shall choose, and store the said effects without liability to the
Tenant for loss thereof, and the Tenant agrees to pay the Landlord on demand any
and all expenses incurred in said removal, including court costs and attorney
fees and storage charges on such effects for any length of time the same shall
be in the Landlord's possession or the Landlord
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at the option of the Landlord, without notice may sell said effects, or any of
the same, at private sale and without legal process, for such prices as the
Landlord may obtain and apply the proceeds of such sale upon any amounts due
under this lease from the Tenant to the Landlord and upon the expense incident
to the removal and sale of said effects, rendering the surplus, to the Tenant.
18. DAMAGE TO PREMISES. In the event of the partial destruction of the
Premises or the Building of which the Premises constitutes a part during the
term of the Lease, Landlord shall forthwith make such repairs provided such
repairs can be made within sixty (60) days under the laws and regulations of the
public authorities, but such partial destruction (including any destruction
necessary to make such repairs) shall in no event annul or void this Lease,
except that Tenant shall be entitled to a proportionate reduction in rent while
such repairs are being made, such reduction to be based upon the extent (if any)
to which the making of such repairs materially interferes with the business
carried on by Tenant in the Premises. If such repairs cannot be made within
sixty (60) days, Landlord may at his option make such repairs within a
reasonable time, in which event this Lease shall continue in full force and
effect, except that the rent shall be abated in accordance with the aforestated
procedure and provided that Landlord notifies Tenant of his intention to do so
within thirty (30) days after the partial destruction. In the event Landlord
does not so elect to make such repairs which cannot be made within sixty (60)
days, or such repairs cannot be made under such laws and regulations, or if
Landlord elects to make such repairs and such repairs cannot be completed within
120 days, then and in that event, this lease may be terminated at the option of
either party with thirty days prior written notice. Notwithstanding anything to
the contrary contained in this paragraph, Landlord shall not have any obligation
whatsoever to repair, reconstruct or restore the Premises when the damage
resulting from any casualty covered under this paragraph occurs during the last
twelve (12) months of the term of this Lease or any extension thereof. Except
for abatement of rent, if any, Tenant shall have no claim against Landlord for
any damage suffered by reason of any such damage, destruction, repair or
restoration, nor shall Tenant have the right to terminate this lease as the
result of any statutory provision now or hereafter in effect pertaining to the
damage and destruction of the Premises or the Building except as expressly
provided herein.
19. OUTSIDE ACTIVITIES. No work activity involving the use for which the
building is rented, or with respect to repair or servicing of automobiles,
trucks, or other equipment shall be performed outside the building or around the
premises at any time. Empty pallets or other debris left outside for more than
ten (10) days may be removed by the Landlord at Tenant's expense.
20. PROHIBITED PARKING. Without the Landlord's specific consent, no
automobiles, trucks, boats, or other equipment or vehicles may be parked around
the building for any more than five (5) days without being moved. No trash,
garbage or other items may be stored outside the buildings without the consent
of the Landlord, unless such trash is inside garbage containers.
21. CONDITION OF PREMISES. The Tenant has examined the premises herein
demised and said premises are known to the Tenant to be in good repair and
condition, and the Tenant hereby accepts the same in good condition and repair
except as herein otherwise specified and no representations as to the condition
or repair
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thereof have been made by the Landlord prior to or at the execution of this
lease that are not herein expressed or endorsed hereon:
(A) Landlord agrees to supply maintenance of the grounds, specifically
including but not limited to mowing of grass, watering grass, trimming shrubs
and picking up loose trash. Tenant agrees to pay the costs of this service as
additional rent on the date each rental payment is due. The cost is determined
on a square footage basis and with regard to the premises described hereinabove
is $303.00 per month, subject to annual adjustment based upon actual cost.
(B) Tenant agrees to contract for garbage and dumpster services and
Tenant agrees to pay for such services.
22. WAIVER. No waiver of any condition or covenant of this lease by either
party hereto shall be deemed to imply or constitute a further waiver by such
party or any other condition or covenant of said lease.
23. MAINTENANCE AND REPAIRS.
(A) The Tenant shall pay for all sewage disposal services, water, gas,
heat, electric current and other utilities furnished it or consumed by it, in or
upon the leased premises at rates set by local public utility as approved by
Public Authority having jurisdiction, and will keep the interior of the leased
premises and appurtenances in good order and repair, and in a clean, safe, and
healthy condition (excepting, however, all repairs made necessary by reason of
fire or other unavoidable casualty) at its own cost and expense. Landlord
warrants that water, sewer, and electric power are available at the subject
premises at the beginning of the Tenant's obligation to pay rent hereunder.
(B) All glass, both exterior and interior of said premises is at the
sole risk of Tenant and any glass broken during the term of this lease is to be
promptly replaced with glass of the same kind and quality at the expense of
Tenant.
(C) This lease is a net lease, and the parties hereto agree that all
costs, expenses, repairs, and maintenance of the premises are at Tenant's
expense except that Landlord, at its sole expense, shall keep the exterior
foundations and walls, down spouts, gutters, roof, and the underground plumbing
systems of the Premises, HVAC, electrical facilities underground or outside the
Premises in good order, condition and repair.
24. INDEMNITY.
(A) Indemnity. Tenant shall indemnify and hold harmless Landlord from
and against any and all claims arising from Tenant's use of the Premises or the
conduct of its business or from any activity work, or thing done, permitted or
suffered by Tenant in or about the Premises and shall further indemnify and hold
Landlord harmless from and against any and all claims arising from any breach or
default in the performance of any obligation on Tenant's part to be performed
under the terms of this Lease, or arising from any act or negligence of Tenant,
or any at its agents, contractors or employees, and from and against any and all
costs, reasonable attorney's fees,
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expenses and liabilities incurred in connection with such claim or any action or
proceeding brought thereon; and in case any action or proceeding be brought
against Landlord by reason of any such claim, Tenant upon notice from Landlord
shall defend the same at Tenant's expense by counsel reasonably satisfactory to
Landlord, provided however, that Tenant shall not be liable for damage or injury
occasioned by the negligent or intentional acts of Landlord and its designated
agents or employees unless covered by insurance Tenant is required to provide.
(B) Exemption of Landlord from Liability. Landlord shall not be liable
for injury or damage which may be sustained by the person, goods, wares,
merchandise or property of Tenant, its employees, invitees or customers, or any
other person in or about the Premises caused by or resulting from fire, steam,
electricity, gas, water or rain, which may leak or flow from or into any part of
the Premises, or from breakage, leakage, obstruction or other defects of the
pipes, sprinklers, wires, appliances, plumbing, air conditioning or lighting
fixtures of the same, whether the said damage or injury results from conditions
arising upon the Premises or upon other portions of the Building of which the
Premises are a part, or from other sources. Landlord shall not be liable for any
damages arising from any act or neglect of any other Tenant (if any) of such
building. Notwithstanding anything to the contrary Landlord shall be liable if
such damage or injury is caused by the gross negligence at the Landlord, its
agents, employees, contractors or subcontractors.
(C) In the event that Landlord should ever be made a party to any claim
for hazardous waste cleanup of the property subject to this lease or to any
litigation for claims by others based on hazardous substances on or in the
property, and the hazardous substance resulted from the actions or failure of
action by the Tenant, Tenant will hold the Landlord harmless from the costs of
such cleanup and the expenses and cost of such litigation and any resulting
awards or compromises.
25. LEASE SUBORDINATION. Tenant agrees to subordinate this lease to any
mortgage or blanket mortgage placed on the industrial park, provided only that
so long as Tenant faithfully discharges its obligations under the terms of this
lease: (1) Its tenancy will not be disturbed nor this lease affected by any
default under such mortgage; (2) The right of Tenant hereunder shall expressly
survive and shall not be cut off; and (3) This lease shall, in all respects,
continue in full force and effect, and holder of such mortgage shall provide
Tenant with written acknowledgment of such non-disturbance.
26. ENTRY BY LANDLORD. Landlord reserves and shall during normal business
hours have the right to enter the Premises to inspect the same, to submit said
Premises to prospective purchasers or tenants, to post notices of
non-responsibility and 'for lease' signs, and to alter, improve or repair the
Premises and any portion of the Building without abatement of rent, and may for
that purpose erect scaffolding and other necessary structures where reasonably
required by the character of the work to be performed, always providing the
entrance to the Premises shall not be blocked thereby, and further providing
that the business of Tenant shall not be interfered with unreasonably. All
Landlord work or repairs must be completed promptly. Tenant hereby waives any
claim to damages for any injury or inconvenience to or interference with
Tenant's business, any loss of occupancy or quiet enjoyment of the Premises, and
any other loss occasioned thereby. For each of the aforesaid purposes, Landlord
shall at all
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times have and retain a key with which to unlock all of the doors in, upon and
about the Premises, excluding Tenant's vaults and safes, and Landlord shall have
the right to use any and all means which Landlord may deem proper to open said
doors in an emergency in order to obtain entry to the Premises, and any entry to
the Premises obtained by Landlord by said means shall not be construed or deemed
to be a forcible or unlawful entry into, or a detainer of, the Premises or an
eviction of Tenant from the Premises or any portion thereof. Landlord
acknowledges that Tenant is a DOD classified facility and may at any time be
storing classified information and therefore shall enter the premises after
normal business hours on an emergency basis only.
27. ESTOPPEL CERTIFICATE
(A) Tenant shall at any time upon not less than ten (10) days' prior
written notice from Landlord execute, acknowledge and deliver to Landlord a
statement in writing (i) certifying that this Lease is unmodified and in full
force and effect (or, if modified, stating the nature of such modification and
certifying that this Lease, as so modified, is in full force and effect) and the
date to which the rent and other charges are paid in advance, if any, and (ii)
acknowledging that there are not, to Tenant's knowledge, any uncured defaults on
the part of Landlord hereunder, or specifying such defaults if any are claimed.
Any such statement may be conclusively relied upon by any prospective purchaser
or encumbrancer of the Premises.
(B) Tenant's failure to deliver such statement within such time shall be
conclusive upon Tenant (i) that this Lease is in full force and effect, without
modification except as may be represented by Landlord, (ii) that there are no
uncured defaults in Landlord's performance, and (iii) that not more than five
(5) month's rent has been paid in advance.
(C) If Landlord desires to finance or refinance said Premises, or any
part thereof, or any Building of the Premises may be a part, Tenant hereby
agrees to deliver to any lender designated by Landlord such financial statements
of Tenant as may be reasonably required by such lender. Such statements shall
include the past three years' financial statements of Tenant. All such financial
statements shall be received by Landlord in confidence and shall be used only
for the purposes herein set forth.
(D) In the event of a sale or conveyance by Landlord of Landlord's
interest in the Premises other than a transfer for security purposes only,
Landlord shall be relieved from and after the date specified in any such notice
of transfer of all obligations and liabilities accruing thereafter on the part
of the Landlord, provided that any funds in the hands of Landlord at the time of
transfer in which Tenant has an interest shall be delivered to the successor
Landlord. This Lease shall not be affected by any such sale, and Tenant agrees
to attorn to the purchaser or assignee provided ail Landlord's obligations
hereunder are assumed in writing by the transferee.
28. ENTIRE AGREEMENT. This instrument, along with any exhibits and
attachments hereto, constitutes the entire agreement between Landlord and Tenant
relative to the Premises and this Agreement and the exhibits and attachments may
be altered, amended or revoked only by an instrument in writing signed by both
Landlord and Tenant. Landlord and Tenant agree hereby that all prior or
contemporaneous oral agreements between and among themselves and their agents or
representatives
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relative to the leasing of the Premises are merged in or revoked by this
Agreement.
29. SEVERABILITY. If any term or provision of this Lease shall to any
extent be determined by a court of competent jurisdiction to be invalid or
unenforceable, the remainder of this Lease shall not be affected thereby, and
each term and provision of this Lease shall be valid and enforceable to the
fullest extent permitted by law.
30. COSTS OF SUIT.
(A) If Tenant or Landlord shall bring any action for any relief against
the other, declaratory or otherwise, rising out of this Lease, including any
suit by Landlord for the recovery of rent or possession of the Premises, the
losing party shall pay the successful party a reasonable sum of attorneys' fees,
including appellate attorneys' fees, which shall be deemed to have accrued on
the commencement of such action and shall be paid whether or not such action is
prosecuted to judgment.
(B) Should Landlord, or its agents or employees, without fault on
Landlord's part, be made a party to any litigation instituted by Tenant or by
any third party against Tenant, or by or against any person holding under or
using the Premises by license of Tenant, or for the foreclosure of any lien for
labor or material furnished to or for Tenant or any such other person or
otherwise arising out of or resulting from any act or transaction of Tenant or
of any such person, Tenant covenants to save and hold Landlord, its agents and
employees, harmless from any judgment rendered against Landlord, its agents and
employees, or the Premises or any part thereof, and all costs and expenses,
including reasonable attorneys' fees incurred by Landlord in or in connection
with such litigation.
31. HEATING AND AIR CONDITIONING MAINTENANCE. Tenant agrees to contract
with a licensed air conditioning contractor to maintain the heating and air
conditioning units and keep them in good working order.
The firm shall:
1) Regularly service the air conditioning unit(s) on the leased premises on the
following basis:
Every 90 days:
Change Filters
Adjust belts (if required)
Check for loose or worn bearings
Check for proper refrigerant charge
Every 6 months:
Lubricate indoor/outdoor fan motor bearings
Clean evaporator coils
Performance test
2) Perform emergency and extraordinary repairs on the air conditioning
unit(s).
3) Keep detailed record of all services performed on the leased premises
and prepare a yearly service report to be furnished to the Tenant and Landlord
of each calendar year.
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32. AGENCY DISCLOSURE. The Landlord, Cunningham, Ingram & Anderson, Inc.,
and Bruce Ingram, Licensed Real Estate Broker, Robert C. Stuhlmiller, Licensed
Real Estate Broker, and Henderson Southeast Corporation hereby acknowledge that,
prior to execution of this lease, notice has been given to the Tenant, that
Bruce Ingram, Broker, and Robert C. Stuhlmiller, Broker represent the Landlord
exclusively and shall receive their compensation from the Landlord.
(Signature/Initial)
RICHARD P. MCNEIGHT
__________________________________ ____________________________________
Landlord Tenant
33. RADON GAS -- Notice to Prospective Purchaser/Tenant. Radon is a
naturally occurring radioactive gas that when it has accumulated in a building
in sufficient quantities, may present health risks to persons who are exposed to
it over time. Levels of radon that exceed federal and state guidelines have been
found in buildings in Florida. Additional information regarding radon and radon
testing may be obtained from your county public health unit.
34. CONDITION OF THE PREMISES. The premises are leased in 'as-is' condition
except that the Landlord, at its expense, will do the following:
Restore the firewall separation which has two openings.
Split the existing electric service so that the 17,314 square feet has a
separate meter.
Landlord will remove all fixtures and leave space in broom clean condition
including the building surroundings.
Tenant may use the telephone closet to install its telephone system and
security system without charge.
Tenant may use the building vacuum system.
This is the limit of the Landlord's obligation for improvements. Landlord will
complete ail of the above improvements within 14 days of the signing of this
lease.
35. ADA-ELEVATOR. Tenant will cooperate with Landlord to comply with the
necessary modifications to mezzanine for regulatory compliance. In the event an
elevator is required, Landlord will pay for the installation and amortize such
cost (estimated $30,000 -- $35,000) with interest compounded at eight (8)
percent per annum over a 10-year period as additional rent to Tenant. At
termination of this lease, Tenant will have no further obligation to pay for ADA
Elevator.
36. FIRST RIGHT OF REFUSAL. Upon receipt of a bona fide lease offer via
letter of intent, Paravant will have two (2) working days to match same. This
right applies to all vacant space east of the original demised tenancy. This
right expires September 1, 1997. Thereafter, and for the term of the lease, upon
receipt of notice to vacate from a tenant not in default of their lease,
Paravant will be offered, and have five (5) working days to lease said space at
the then going fair market rental rate for similar space in the area.
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37. PARKING. Sixty-five (65) parking spaces will be available at large for
Paravant's exclusive use. Landlord will investigate the capability to increase
the number of spaces including the use of parallel spaces in circulation. There
will be four to six reserved spaces directly in front of Paravant's tenancy.
Additional spaces are available for use on a non-exclusive basis.
38. Landlord represents that building is in compliance with all laws,
rules, regulations and Code at lease inception.
39. ADVANCED RENT. $34,628.00 for advanced rent is due at lease signing.
This sum is to be applied to the balance of the net rental for the last four (4)
months of this lease, May through August, 2002.
IN WITNESS WHEREOF, Landlord and Tenant have executed this lease as of
the day and year 9/26/96.
Signed, sealed and
delivered in the presence of: CALIFORNIA MICROWAVE, INC.
JOAN M. ZEPZAUER [Signature]
__________________________________ BY:______________________________________
Witness as to Landlord Title: EVP & CFO
ETTY A. SAYLES
__________________________________
Witness as to Landlord
PARAVANT COMPUTER
SYSTEMS, INC
BY: RICHARD P. MCNEIGHT
__________________________________ ______________________________________
Witness as to Tenant Title: President
__________________________________
Witness as to Tenant
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ASSIGNMENT AND ASSUMPTION OF LEASE AGREEMENT
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This Agreement is made this 8 day of October, 1996, by and between
CALIFORNIA MICROWAVE, INC. (the successor by merger to SATELLITE TRANSMISSION
SYSTEMS, INC.) (hereinafter called 'Assignor') and SYMETRICS INDUSTRIES, INC.
(hereinafter called 'Assignee').
RECITALS:
A. Assignor entered into a Lease Agreement dated September 1, 1996 by and
between Assignor and Paravant Computer Systems, Inc. and also entered into a
month to month lease with AT&T (collectively, the 'Lease Agreements') for space
located at 1615 West Nasa Boulevard, Melbourne, Florida; and
B. Assignor desires to assign to Assignee all of its right, title and
interest in said Lease Agreements to Assignee upon the terms and conditions
herein set forth.
NOW, THEREFORE, in consideration of the mutual covenants herein contained,
it is agrees as follows:
1. Assignor does hereby assign to Assignee all of its right, title and
interest in the Lease Agreements to Assignee.
2. Assignee does hereby unconditionally and absolutely assume all of the
obligations of Assignor under the Lease Agreements.
3. This Assignment shall be in addition to, and not a limitation of, any
other liability or obligation which Assignee may have to Assignor or which
Assignor may have to Assignee.
4. This Agreement shall inure to the benefit of Assignor and Assignee
and their respective heirs, personal representatives, successors and assigns.
IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the
day and year first above written.
ASSIGNOR:
CALIFORNIA MICROWAVE, INC.
ETTY A. SAYLES By: [SIGNATURE]
................................... .................................
JOAN M. ZEPZAUER Its: CEO
................................... .................................
ASSIGNEE:
SYMETRICS INDUSTRIES, INC.
[SIGNATURE] By: DUDLEY E. GARNER, JR.
.................................... .................................
Dudley E. Garner, Jr.
.................................... Its President
EXHIBIT 'B'
-1-
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COMMERCIAL NOTE: TIME OR TERM SINGLE ADVANCE/PRIME (OHIO)
<TABLE>
<CAPTION>
Amount City, State Date FOR BANK USE ONLY
<S> <C> <C> <C>
500,000.00 Dayton, Ohio November 20, 1996 Obligor #6101893008
Tax I.D. #592209179
Obligation #
Office Corporate Banking Department
</TABLE>
FOR VALUE RECEIVED, Paravant Computer Systems Inc ('Borrower'), a(n)
Corporation whose mailing address is 780 S APOLLO BLVD STE 1 MELBOURNE FL
32901-1423, hereby promises to pay to the order of NATIONAL CITY BANK OF DAYTON
('Bank'), a national banking association having its banking office at 6 N MAIN
ST, DAYTON, OHIO 45412-2790, at Bank's banking office (or at such other place as
Bank may from time to time designate by written notice) in lawful money of the
United States of America, the principal sum of
Five Hundred Thousand and 00/100 DOLLARS
together with interest, all as provided below
1. Interest. The unpaid principal balance of this Note shall at all times bear
interest at a fluctuating rate equal to Zero percent (0.00%) per annum plus
Prime Rate, provided, that so long as any principal of or accrued interest on
this Note is overdue, all unpaid principal of this Note and all overdue interest
on that principal (but not interest on overdue interest) shall bear interest at
a fluctuating rate equal to two percent (2%) per annum above the rate that would
otherwise be applicable, but in no case less than two percent (2%) per annum
above the Prime Rate; provided further, that in no event shall any principal of
or interest on this Note bear interest at any time after Maturity at a lesser
rate than the rate applicable thereto immediately after Maturity.
2. Repayment. Subject to section 5, the interest on this Note shall be payable
in arrears on the 20th day of December, 1996, and on the 20th day of each Month
thereafter, at Maturity, and on demand thereafter, and the principal of this
Note shall be payable in one (1) payment on March 31st, 1998. Borrower shall
have the right to prepay the principal of this Note in whole or in part,
provided, that (a) each such prepayment shall be in the principal sum of One
Thousand dollars ($1,000.00) or any integral multiple thereof or an amount equal
to the then aggregate unpaid principal balance of this Note and (b) concurrently
with the prepayment of the entire unpaid principal balance of this Note,
Borrower shall prepay the accrued interest on the principal being prepaid. Each
prepayment of the principal of this Note may be made without premium or penalty.
3. Definitions. As used in this Note, except where the context clearly requires
otherwise, 'Affiliate' means, when used with reference to any Person (the
'subject'), a Person that is in control of, under the control of, or under
common control with, the subject, the term 'control' meaning the possession,
directly or indirectly, of the power to direct the management or policies of a
Person, whether through the ownership of voting securities, by contract, or
otherwise; 'Bank Debt' means, collectively, all Debt to Bank, whether incurred
directly to Bank or acquired by it by purchase, pledge, or otherwise, and
whether participated to or from Bank in whole or in part; 'Banking Day' means
any day (other than any Saturday, Sunday or legal holiday) on which Bank's
banking office is open to the public for carrying on substantially all of its
banking functions; 'Debt' means, collectively, all obligations of the Person or
Persons in question, including, without limitation, every such obligation
whether owing by one such Person alone or with one or more other Persons in a
joint, several, or joint and several capacity, whether now owing or hereafter
arising, owing absolutely or contingently, whether created by lease, loan,
overdraft, guaranty or payment, or other contract, or by quasi-contract, tort,
statute, other operation of law, or otherwise; 'Maturity' means the date
(whether occurring by lapse of time, acceleration, or otherwise) upon which the
last scheduled principal payment under this Note is due; 'Note' means this
promissory note (including, without limitation, each addendum, allonge, or
amendment, if any, hereto); 'Obligor' means any Person who, or any of whose
property, shall at the time in question be obligated in respect of all or any
part of the Bank Debt of Borrower and (in addition to Borrower) includes,
without limitation, co-makers, indorsers, guarantors, pledgors, hypothecators,
mortgagors, and any other Person who agrees, conditionally or otherwise, to make
any loan to, purchase from, or investment in, any other Obligor or otherwise
assure such other Obligors' creditors or any of them against loss; 'Person'
means an individual or entity of any kind, including, without limitation, any
association, company, cooperative, corporation, partnership, trust, governmental
body, or any other form or kind of entity; 'Prime Rate' means the fluctuating
rate per annum which is publicly announced from time to time by Bank as being
its so called 'prime rate' or 'base rate' thereafter in effect, with each change
in the Prime Rate automatically, immediately, and without notice changing the
Prime Rate thereafter applicable hereunder, it being acknowledged that the Prime
Rate is not necessarily the lowest rate of interest then available from Bank on
fluctuating-rate loans; 'Proceeds' means any assignment for the benefit of
creditors, any case in bankruptcy, any marshalling of any Obligor's assets for
the benefit of creditors, any moratorium on the payment of debts, or any
proceeding under any law relating to conservatorship, insolvency, liquidation,
receivership, trusteeship or any similar event, condition, or other thing;
'Related Writing' means this Note and any indenture, note, guaranty, assignment,
mortgage, security agreement, subordination agreement, notice, financial
statement, legal opinion, certificate, or other writing of any kind pursuant to
which all or any part of the Bank Debt of Borrower is issued, which evidences or
secures all or any part of the Bank Debt of Borrower, which governs the relative
rights and priorities of Bank and one or more other Persons to payments made by,
or the property of, any Obligor, which is delivered to Bank pursuant to another
such writing, or which is otherwise delivered to Bank by or on behalf of any
Person (or any employee, officer, auditor, counsel, or agent of any Person) in
respect of or in connection with all or any part of the Bank Debt of Borrower;
'Reporting Person' means each Obligor and each member of any 'Reporting Group'
as defined in any addendum to this Note; and the foregoing definitions shall be
applicable to the respective plurals of the foregoing defined terms.
4. Events of Default. It shall be an 'Event of Default' if (a) all or any part
of the Bank Debt of any Obligor shall not be paid in full promptly when due
(whether by lapse of time, acceleration, or otherwise); (b) any representation,
warranty, or other statement made by any Person (other than Bank) in any Related
Writing shall be untrue or incomplete when made; (c) any Person (other than
Bank) shall repudiate or shall fail or omit to perform or observe any agreement
contained in this Note or in any other Related Writing that is on that Person's
part to be complied with; (d) any indebtedness (other than any evidenced by this
Note) of any Obligor shall not be paid when due, or there shall occur any event,
condition, or other thing which gives (or which with the lapse of any applicable
grace period, the giving of notice, or both would give) any creditor the right
to accelerate or which automatically accelerates the maturity of any such
indebtedness; (e) Bank shall not receive (in addition to any information
described in any addendum to this Note) without expense to Bank, (i) forthwith
upon each request of Bank made upon Borrower therefor, (A) such information in
writing regarding each Reporting Person's financial condition, properties,
business operations, if any, and pension plans, if any, prepared, in the case of
financial information, in accordance with generally accepted accounting
principles consistently applied and otherwise in form and detail satisfactory to
Bank or (B) written permission, in form and substance satisfactory to Bank, from
each Reporting Person to inspect (or to have inspected by one or more Persons
selected by Bank) the properties and records of that Reporting Person and to
make copies and extracts from those records or (ii) prompt written notice
whenever Borrower (or any director, employee, officer, or agent of Borrower)
knows or has reason to know that any Event of Default has occurred; (f) any
judgment shall be entered against any Obligor in any judicial or administrative
tribunal or before any arbitrator or mediator; (g) any Obligor shall fail or
omit to comply with any applicable law, rule, regulation, or order in any
material respect; (h) any proceeds of the loan evidenced by this Note shall be
used for any purpose that is not in the ordinary course of Borrower's business;
(i) any property in which any Obligor now has or hereafter acquires any rights
or which now or hereafter secures any Bank Debt shall be or become encumbered by
any mortgage, security interest, or other lien, except any mortgage, security
interest, or other lien consented to by Bank; (j) any Obligor shall at any time
or over any period of time sell, lease, or otherwise dispose of all or any
material part of that Obligors' assets, except for inventory sold in the
ordinary course of business and other assets sold, leased, or otherwise disposed
of with the consent of Bank; (k) any Obligor shall cease to exist or shall be
dissolved, become legally incapacitated, or die; (l) any Proceeding shall be
commenced with respect to any Obligor; (m) there shall occur or commence to
exist any event, condition, or other thing that constitutes an 'Event of
Default' as defined in any addendum to this Note; (n) there shall occur any
event, condition, or other thing that has, or, in Bank's judgment, is likely to
have, a material adverse effect on the financial condition, properties, or
business operations of any Obligor or on Bank's ability to enforce or exercise
any agreement or right arising under, out of, or in connection with any Related
Writing; or (o) the holder of this Note shall, in good faith, believe that the
prospect of payment or performance of any obligation evidenced by this Note is
impaired.
5. Effects of Default. If any Event of Default (other than the commencement of
any Proceeding with respect to Borrower) shall occur, then, and in each such
case, notwithstanding any provision or inference to the contrary, Bank shall
have the right in its discretion, by giving written notice to Borrower, to
declare this Note to be due, whereupon the entire unpaid principal balance of
this Note (if not already due) shall immediately become due and payable in full.
If any Proceeding shall be commenced with respect to Borrower, then,
notwithstanding any provision or inference to the contrary, automatically,
without presentment, protest, or notice of dishonor, all of which are waived by
all makers and all indorsers of this Note, now or hereafter existing, the entire
unpaid principal balance of this Note (if not already due) shall immediately
become due and payable in full.
<PAGE>
<PAGE>
6. Late Charges. If any principal of or interest on this Note is not paid within
ten (10) days after its due date, then, and in each such case, Bank shall have
the right to assess a late charge, payable by Borrower on demand, in an amount
equal to the greater of twenty dollars ($20.00) or five percent (5%) of the
amount not timely paid.
7. No Setoff. Borrower hereby waives any and all now existing or hereafter
arising rights to recoup or offset any obligation of Borrower under or in
connection with this Note or any Related Writing against any claim or right of
Borrower against Bank.
8. Indemnity: Administration and Enforcement. Borrower will reimburse Bank, on
Bank's demand from time to time, for any and all fees, costs, and expenses
(including, without limitation, the fees and disbursements of legal counsel)
incurred by Bank in administering this Note or in protecting, enforcing, or
attempting to protect or enforce its rights under this Note. If any amount
(other than any principal of this Note and any interest and late charges) owing
under this Note is not paid when due, then, and to each such case, Borrower
shall pay, on Bank's demand, interest on that amount from the due date thereof
until paid in full at a fluctuating rate equal to four percent (4%) per annum
plus the Prime Rate.
9. Waivers; Remedies; Application of Payments. Bank may from time to time in its
discretion grant waivers and consents in respect of this Note or any other
Related Writing or assent to amendments thereof, but no such waiver, consent, or
amendment shall be binding upon Bank unless set forth in a writing (which
writing shall be narrowly construed) signed by Bank. No course of dealing in
respect of, nor any omission or delay in the exercise of, any right, power, or
privilege by Bank shall operate as a waiver thereof, nor shall any single or
partial exercise thereof preclude any further or other exercise thereof or of
any other, as each such right, power, or privilege may be exercised either
independently or concurrently with others and as often and in such order as Bank
may deem expedient. Without limiting the generality of the foregoing, neither
Bank's acceptance of one or more late payments or charges nor Bank's acceptance
of interest on overdue amounts at the respective rates applicable thereto shall
constitute a waiver of any right of Bank. Each right, power, or privilege
specified or referred to in this Note is in addition to and not in limitation of
any other rights, powers, and privileges that Bank may otherwise have or acquire
by operation of law, by other contract, or otherwise. Bank shall be entitled to
equitable remedies with respect to each breach or anticipatory repudiation of
any provision of this Note, and Borrower hereby waives any defense which might
be asserted to bar any such equitable remedy. Bank shall have the right to apply
payments in respect of the indebtedness evidenced by this Note with such
allocation to the respective parts thereof and the respective due dates thereof
as Bank in its sole discretion may from time to time deem advisable.
10. Other Provisions. The provisions of this Note shall bind Borrower and
Borrower's successors and assigns and benefit Bank and its successors and
assigns, including each subsequent holder, if any, of this Note. Except for
Borrower and Bank and their respective successors and assigns, there are no
intended beneficiaries of this Note or the loan evidenced by this Note. The
provisions of sections 6 through 14, both inclusive, shall survive the payment
in full of the principal of and interest on this Note. The captions to the
sections and subsections of this Note are inserted for convenience only and
shall be ignored in interpreting the provisions thereof. Each reference to a
section includes a reference to all subsections thereof (i.e., those having the
same character or characters to the left of the decimal point) except where the
context clearly does not so permit. If any provision in this Note shall be or
become illegal or unenforceable in any case, then that provision shall be deemed
modified in that case so as to be legal and enforceable to the maximum extent
permitted by law while most nearly preserving its original intent, and in any
case the illegality or unenforceability of that provision shall affect neither
that provision in any other case nor any other provision. All fees, interest,
and premiums for any given period shall accrue on the first day thereof but not
on the last day thereof (unless the last day is the first day) and in each case
shall be computed on the basis of a 360-day year and the actual number of days
in the period. In no event shall interest accrue at a higher rate than the
maximum rate, if any, permitted by law. Bank shall have the right to furnish to
its Affiliates, and to such other Persons as Bank shall deem advisable for the
conduct of its business, information concerning the business, financial
condition, and property of Borrower, the amount of the Bank Debt of Borrower,
and the terms, conditions, and other provisions applicable to the respective
parts thereof. This Note shall be governed by the law (excluding conflict of
laws rules) of the jurisdiction in which Bank's banking office is located.
11. Integration. This Note and, to the extent consistent with this Note, the
other Related Writings, set forth the entire agreement of Borrower and Bank as
to the subject matter of this Note, and may not be contradicted by evidence of
any agreement or statement unless made in a writing (which writing shall be
narrowly construed) signed by Bank contemporaneously with or after the execution
and delivery of this Note. Without limiting the generality of the foregoing,
Borrower hereby acknowledges that Bank has not based, conditioned, or offered
to base or condition the credit hereby evidenced or any charges, fees, interest
rates, or premiums applicable thereto upon Borrower's agreement to obtain any
other credit, property, or service other than any loan, discount, deposit, or
trust service from Bank.
12. Notices and Other Communications. Each notice, demand, or other
communication, whether or not received, shall be deemed to have been given to
Borrower whenever Bank shall have mailed a writing to that effect by certified
or registered mail to Borrower's mailing address (or any other address of which
Borrower shall have given Bank notice after the execution and delivery of this
Note); however, no other method of giving actual notice to Borrower is hereby
precluded. Borrower hereby irrevocably accepts Borrower's appointment as each
Obligor's agent for the purpose of receiving any notice, demand, or other
communication to be given by Bank to each such Obligor pursuant to any Related
Writing. Bank shall be entitled to assume that any knowledge possessed by any
Obligor other than Borrower is possessed by Borrower. Each communication to be
given to Bank shall be in writing unless this Note expressly permits that
communication to be made orally, and in any case shall be given to Bank's
Corporate Banking Department at Bank's banking office (or any other address of
which Bank shall have given notice to Borrower after the execution and delivery
this Note). Borrower hereby assumes all risk arising out of or in connection
with each oral communication given by Borrower and each communication given or
attempted by Borrower in contravention of this section. Bank shall be entitled
to rely on each communication believed in good faith by Bank to be genuine.
13. Warrant of Attorney. Borrower hereby authorizes any attorney at law at any
time or times to appear in any state or federal court of record in the United
States of America after all or any part of the obligations evidenced by this
Note shall have become due, whether by lapse of time, acceleration, or
otherwise, and in each case to waive the issuance and service of process, to
present to the court this Note and any other writing (if any) evidencing the
obligation or obligations in question, to admit the due date thereof and the
nonpayment thereof when due, to confess judgment against Borrower in favor of
Bank for the full amount then appearing due, together with interest and costs of
suit, and thereupon to release all errors and waive all rights of appeal and any
stay of execution. The foregoing warrant of attorney shall survive any judgment,
it being understood that should any judgment against borrower be vacated for any
reason, Bank may nevertheless utilize the foregoing warrant of attorney in
thereafter obtaining one or more additional judgments against Borrower.
2
<PAGE>
<PAGE>
14. Jurisdiction and Venue; Waiver of Jury Trial. Any action, claim,
counterclaim, crossclaim, proceeding, or suit, whether at law or in equity,
whether sounding in tort, contract, or otherwise at any time arising under or in
connection with this Note or any other Related Writing, the administration,
enforcement, or negotiation of this Note or any other Related Writing, or the
performance of any obligation in respect of this Note or any other Related
Writing (each such action, claim, counterclaim, crossclaim, proceeding, or suit,
an ''Action'') may be brought in any federal or state court located in the city
in which Bank's banking office is located. Borrower hereby unconditionally
submits to the jurisdiction of any such court with respect to each such
Action and hereby waives any objection Borrower may now or hereafter have to
the venue of any such Action brought in any such court. Borrower HEREBY, AND
EACH HOLDER OF THIS Note, BY TAKING POSSESSION THEREOF, KNOWINGLY AND
VOLUNTARILY WAIVES JURY TRIAL IN RESPECT OF ANY Action.
Borrower: Paravant Computer Systems Inc
----------------------------------------------
By: RICHARD P. McNEIGHT
------------------------------------------
Printed Name: Richard P. McNeight
-------------------
Title: President
---------
(complete only if required) And By: KEVIN J. BARTCZAK
----------------------
Printed Name: Kevin J. Bartczak
-----------------
Title: Chief Financial Officer
-----------------------
WARNING -- BY SIGNING THIS PAPER YOU GIVE UP YOUR RIGHT TO NOTICE AND COURT
TRIAL. IF YOU DO NOT PAY ON TIME A COURT JUDGMENT MAY BE TAKEN AGAINST YOU
WITHOUT YOUR PRIOR KNOWLEDGE AND THE POWERS OF A COURT CAN BE USED TO COLLECT
FROM YOU REGARDLESS OF ANY CLAIMS YOU MAY HAVE AGAINST THE CREDITOR WHETHER FOR
RETURNED GOODS, FAULTY GOODS, FAILURE ON HIS PART TO COMPLY WITH THE AGREEMENT,
OR ANY OTHER CAUSE.
3
<PAGE>
<PAGE>
SECURITY AGREEMENT
ALL PERSONAL PROPERTY AND FIXTURES
BORROWER GRANTOR
This Agreement is executed and delivered at Dayton, Ohio as of this 20th day of
November, 1996 by Paravant Computer Systems, Inc ('Grantor'), whose mailing
address is 780 S Apollo Blvd Ste 1, Melbourne FL 32901-1423, to National City
Bank of Dayton ('Bank'), a national banking association having its banking
office at 6 N Main St, Dayton, Ohio 45412-2790.
1. Grant of Interest. To secure the prompt payment in full of the Subject Debt
as and when the respective parts thereof become due, whether by lapse of time,
by acceleration of maturity, or otherwise, Grantor hereby grants Bank a security
interest in the Collateral. As to Collateral not now in existence or in which
Grantor does not presently have any rights, Bank's security interest shall
automatically attach thereto immediately when the same comes into existence and
Grantor acquires any rights therein, in each case without the making or doing of
any further or other act or thing. 'Collateral' means, collectively, all
Inventory, all Accounts, all Chattel Paper, all Documents, all Equipment,
including, without limitation, any Equipment described in Exhibit A (the
'Supplemental Schedule'), if any, to this Agreement, all fixtures, including,
without limitation, any fixtures described in the Supplemental Schedule, if any,
all General Intangibles, all Instruments, all Receivables, and all
Uncertificated securities in which Grantor now has or hereafter acquires any
rights, and all replacements and substitutions therefor and additions and
accessions thereto, all property (except any consumer goods), tangible or
intangible, in which Grantor now has or hereafter acquires any rights and which
now or hereafter is in Bank's control (by document of title or otherwise) or
possession or is owed by Bank to Grantor, including, without limitation, the
cash collateral account described in subsection 6.5, replacements and
substitutions for, and all additions and accessions to, all or any part of the
property hereinbefore described, all Products of all or any part of the goods
hereinbefore described, and all Proceeds of all or any part of the property,
including, without limitation, Products, hereinbefore described.
2. Definitions. As used in this Agreement, except where the context clearly
requires otherwise, 'Account' means any right to payment for goods sold or
leased or for services rendered which is not evidenced by an Instrument or
Chattel Paper, whether or not it has been earned by performance, and includes,
without limitation, all rights to payment earned or unearned under a charter or
other contract involving the use or hire of a vessel and all rights incident to
the charter or contract; 'Account Debtor' means any Person who, or any of whose
property, shall at the time in question be obligated in respect of all or any
part of a Receivable or any part thereof and includes, without limitation,
co-makers, indorsers, guarantors, pledgors, hypothecators, mortgagors, and any
other Person who agrees, conditionally or otherwise, to make any loan to,
purchase from, or investment in, any other Account Debtor or otherwise assure
Grantor against loss on any Receivable in which Borrower now has or hereafter
acquires any rights; 'Affiliate' means, when used with reference to any Person
(the 'subject'), a Person that is in control of, under the control of, or under
common control with, the subject, the term 'control' meaning the possession,
directly or indirectly, of the power to direct the management or policies of a
Person, whether through the ownership of voting securities, by contract, or
otherwise; 'Agreement' means this Security Agreement (including, without
limitation, each amendment, if any, hereto) 'Bank Debt' means, collectively,
all Debt to Bank, whether incurred directly to Bank or acquired by it by
purchase, pledge, or otherwise, and whether participated to or from Bank in
whole or in part; 'Chattel Paper' means a writing or writings (other than a
charter or other contract involving the use or hire of a vessel) which evidence
both a monetary obligation and a security interest in or a lease of specific
goods, and, when a transaction is evidenced both by such a security agreement or
lease and by an Instrument or series of Instruments, the group of writings taken
together constitutes Chattel Paper; 'Debt' means, collectively, all obligations
of the Person or Persons in question, including, without limitation, every such
obligation whether owing by one such Person alone or with one or more other
Persons in a joint, several, or joint and several capacity, whether now owing or
hereafter arising, whether owing absolutely or contingently, whether created by
loan, overdraft, guaranty of payment, or other contract, or by quasi-contract,
tort, statute, other operation of law, or otherwise; 'Default' means (a) the
nonpayment of the Subject Debt or any part thereof when due or (b) the
occurrence or existence of any event, condition, or other thing (other than any
event, condition, or other thing which would constitute a 'Default' pursuant to
the next preceding clause (a)) which gives (or which with the lapse of any
applicable grace period, the giving of notice, or both would give)
Bank the right to accelerate or which automatically accelerates the maturity of
any of the Subject Debt; 'Document' means (a) a document that purports to be
issued by or addressed to a bailee and that purports to cover goods that are in
the bailee's possession that are either identified or fungible portions of an
identified mass, and includes a bill of lading, dock warrant, dock receipt,
warehouse receipt, or order for the delivery of goods, and any other document
that in the regular course of business or financing is treated as adequately
evidencing that the Person in possession of it is entitled to receive, hold, and
dispose of the document and the goods it covers or (b) a receipt issued by the
owner of goods including distilled spirits or agricultural commodities that are
stored under a statute requiring a bond against withdrawal or a license for the
issuance of receipts in the nature of a warehouse receipt; 'Equipment' means
goods that (a) are used or bought for use primarily in business, including,
without limitation, farming or a profession, or by a Person who is a non-profit
organization or a governmental subdivision or agency or (b) are not Inventory,
farm products, or consumer goods; 'General Intangible' means any personal
property, including things in action, other than goods, Accounts, Chattel Paper,
Documents, Instruments, and money; 'Instrument' means a negotiable instrument,
or a certificated security, or any other writing which evidences a right to the
payment of money and is not itself a security agreement or lease and is of a
type which is in the ordinary course of business transferred by delivery with
any necessary indorsement or assignment; 'Inventory' means goods that are held
by a person who holds them for sale or lease or to be furnished under contracts
<PAGE>
of service or if that Person has so furnished them, or if they are raw
materials, work in process, or materials used or consumed in a business, except
that Inventory does not include Equipment; 'Obligor' means any Person who, or
any of whose property, shall at the time in question be obligated in respect of
all or any part of the Bank Debt of Grantor and (in addition to Grantor)
includes, without limitation, co-makers, indorsers, guarantors, pledgors,
hypothecators, mortgagors, and any other Person who agrees, conditionally or
otherwise, to make any loan to, purchase from, or investment in, any other
Obligor or otherwise assure such other Obligor's creditors or any of them
against loss; 'Person' means an individual or entity of any kind, including,
without limitation, any association, company, cooperative, corporation,
partnership, trust, governmental body, or any other form or kind of entity;
'Prime Rate' means the fluctuating rate per annum which is publicly announced
from time to time by Bank as being its so-called 'prime rate' or 'base rate'
thereafter in effect, with each change in the Prime Rate automatically,
immediately, and without notice changing the Prime Rate thereafter applicable
hereunder, it being acknowledged that the Prime Rate is not necessarily the
lowest rate of interest then available from Bank on fluctuating-rate loans;
'Proceeds' means whatever is received or receivable upon sale, exchange,
collection, or other disposition of any property or Proceeds, whether directly
or indirectly, and includes, without limitation, the proceeds of any casualty,
liability, or title insurance relating to any such property and any goods or
other property returned after any such sale, exchange, collection, or other
disposition; 'Products' means property directly or indirectly resulting from
any manufacturing, processing, assembling, or commingling of any goods',
'Receivable' means any claim for or right to payment, however arising, whether
classified as an Account, a General Intangible, or otherwise, whether contingent
or fixed, whether or not evidenced by any writing, and, if so evidenced, whether
evidenced by Chattel Paper, one or more Instruments, or otherwise; 'Related
Writing' means this Agreement and any indenture, note, guaranty, assignment,
mortgage, security agreement, subordination agreement, notice, financial
statement, legal opinion, certificate, or other writing of any kind pursuant to
which all or any part of the Bank Debt of Grantor is issued, which evidences
or secures all or any part of the Bank Debt of Grantor, which governs the
relative rights and priorities of Bank and one or more other Persons to payments
made by, or the property of, any Obligor, which is delivered to Bank pursuant
to another such writing, or which is otherwise delivered to Bank by or on behalf
of any Person (or an employee, officer, auditor, counsel, or agent of any
Person) in respect of or in connection with all or any part of the Bank Debt
or Grantor; 'Subject Debt' means, collectively, all Bank Debt created or
incurred by Grantor; 'Uncertificated Security' means a share, participation, or
other interest in property or the enterprise of the issuer or an obligation of
the issuer which is (a) not represented by an instrument and the transfer of
which is registered upon books maintained for that purpose by or on behalf of
the issuer; (b) of a type commonly dealt in on securities exchanges or markets,
and (c) either one of a class or series or by its terms divisible into a class
or series of shares, participations, interests, or obligations; and the
foregoing definitions shall be applicable to the respective plurals of the
foregoing defined terms.
3. Representations and Warranties. Grantor represents and warrants to Bank as
follows:
3.1. Existence. Grantor is a corporation organized and in good
standing under Florida law.
3.2. Taxpayer Identification and Legal Name. Grantor's social security
or federal taxpayer identification number is 592209179. Except as set forth
in the Supplemental Schedule, if any, Grantor is not known among creditors
by, and does not use or do business under, any name other than the name of
Grantor first set forth above.
3.3. Authority. Each Person, if any, executing and delivering this
Agreement on behalf of Grantor or any other Person has been duly authorized
to do so, and this Agreement is valid and enforceable against Grantor in
accordance with its terms.
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3.4 Location of Chief Executive Office and Collateral. Grantor's chief executive
office is located at 780 South Apollo Blvd., Atrium One, Melbourne, Florida
32901
Grantor keeps all of Grantor's records relating to the Collateral at Grantor's
chief executive office. All goods in which Grantor has any rights are kept at
Grantor's chief executive office, at the other locations, if any, described in
the Supplemental Schedule, if any, to this Agreement, and, with respect to
certain goods, at such other locations to which Grantor is entitled to move
those goods pursuant to subsection 5.1.
3.5 Ownership. Grantor owns all of the Collateral described in the most recent
financial statements furnished by Grantor to Bank or in which Grantor has
thereafter acquired any rights absolutely free from any assignment, attachment,
lease, license, mortgage, security interest, or other lien, and free from any
other claim, right, or interest of any kind, except for any in favor of or
consented to by Bank. No assignment, financing statement, or other writing
(except any evidencing any lien or interest expressly permitted by this
Agreement) describing the Collateral or any part thereof is on file in any
public office.
General Provisions Applicable to All Collateral. The provisions of this section
4 shall apply with respect to all types of Collateral:
4.1 Further Assurance. Grantor will, at Grantor's expense, make and do all such
acts and things (including, without limitation, the delivery to Bank of any
Chattel Paper, Document, Instrument, or other writing of any kind the possession
of which perfects a security interest therein) as Bank may from time to time
require for the better evidencing, perfection, protection, or validation of, or
realization of the benefits of, its security interest. Without limiting the
generality of the foregoing, Grantor will, at Grantor's expense, upon each
request of Bank, (a) sign and file or permit Bank to file such financing
statements and other writings as Bank may from time to time require and in such
public offices as Bank may from time to time require, (b) comply with every
other requirement deemed necessary by Bank for the perfection of its security
interest, (c) execute and deliver such affidavits, assignments, financing
statements, indorsements of specific items of Collateral, mortgages, powers of
attorney, security agreements, and other writings, as Bank may from time to time
require, each in form and substance satisfactory to Bank, and (d) cause all
applicable certificates of title (in the case of any motor vehicle or other
chattels in which Bank has been granted a security interest pursuant to this
Agreement and which is subject to any certificate of title law) to be duly noted
with Bank's security interest and to be deposited with Bank. Without diminishing
or impairing any obligation of Grantor under this Agreement, a carbon,
photographic, or other reproduction of this Agreement shall be sufficient as a
financing statement.
4.2 Notice. Grantor will give Bank
(a) not less than seven (7) days' prior written notice of any change in
Grantor's name, in the location of its chief executive office or in the
location at which it keeps any records relating to the Collateral or any
part thereof, or of any other change in circumstances which affects or
may affect the continuing efficacy of any financing statement filed in
respect of Bank's security interest or the continuing status of Bank's
security interest as the first priority lien on the Collateral or any
part thereof.
(b) immediate written notice whenever any Person other than Grantor or
Bank claims any lien or other right or interest of any kind in any of the
Collateral, and
(c) immediate written notice whenever Grantor acquires rights in any
Collateral that is subject to (i) a treaty or statute of the United
States which provides for national or international registration or a
national or international certificate of title or which specifies a place
of filing different from that specified in the Uniform Commercial Code as
in effect on the date hereof in the jurisdiction in which Bank's banking
office is located or (ii) a certificate of title statute of another
jurisdiction under the law of which indication of a security interest is
required as a condition of perfection.
4.3 Records. Grantor will at all times keep accurate and complete records of the
Collateral. Bank (or one or more Persons selected by Bank) shall have the right
at all reasonable times to examine, inspect, and make extracts from Grantor's
books and records and to examine, appraise, and protect the Collateral.
4.4 Dispositions and Encumbrances. Grantor will not, without in each case
obtaining Bank's consent,
(a) sell or otherwise dispose of any Collateral or any interest therein,
except if and to the extent that the sale or other disposition is expressly
permitted by this Agreement or
(b) suffer or permit any Collateral (i) to be or become subject to any
assignment, lease, attachment, mortgage, security interest, or other lien, or
any other claim, right, or interest of any kind, except for any in favor of
or consented to by Bank or (ii) to be described in any mortgage, financing
statement, or other writing, except any evidencing any lien or interest
expressly permitted by this Agreement.
Special Provisions Applicable to Goods. The provisions of this section 5 shall
apply with respect to all goods in which Bank has been granted a security
interest pursuant to this Agreement.
5.1 Movement and Attachment to Real Property. Grantor will not suffer or permit
any goods in which Bank has been granted a security interest pursuant to this
Agreement to be moved from Grantor's chief executive office or the locations, if
any, described in the Supplemental Schedule, if any, to this Agreement, as the
location of the goods in question on the date hereof, except if and to the
extent that the goods are either inventory being shipped to or from Grantor in
the ordinary course of business or are mobile goods which are of a type normally
used in more than one jurisdiction and are in fact so used by Grantor in the
ordinary course of business. Grantor will not under any circumstances suffer or
permit any goods in which Bank has been so granted a security interest to be or
become a fixture without Bank's consent.
5.2 Maintenance of Goods, Taxes and Preservation Costs. Grantor will maintain in
good condition all goods in which Bank has been granted a security interest
pursuant to this Agreement, and will pay promptly all assessments, levies,
taxes, and other charges pertaining thereto, and all repair, maintenance, and
preservation costs in respect thereof. If Grantor does not do so, the, and in
each such case, Bank shall have the right, at its option, to pay the same, and
Grantor will, on Bank's demand, reimburse Bank for all amounts Bank so pays.
5.3 Insurance. Grantor will at all times keep all goods in which Bank has been
granted as security interest under so-called 'cause of loss special form,
policies of insurance issued by such companies and in such amounts (but in no
case less than the greater of the full replacement value thereof or the amount
necessary to prevent the operation of any applicable coinsurance policy shall be
deemed to have been made without any representation or warranty of any kind,
Grantor hereby assuming the burden of ensuring that each such issuer and each
such amount is adequate for the protection of Grantor and all other Persons.
Grantor will cause each policy of insurance covering any goods in which Bank has
been granted a security interest pursuant to this Agreement to (a) require the
insurer to give Bank written notice not less than thirty (30) days prior to any
cancellation, expiration, modification, or non-renewal of the policy, (b) have
attached thereto (i) a lender's loss payable endorsement in favor of Bank,
entitling Bank to collect any and all proceeds payable under the policy and
providing in effect that the rights and interests of Bank thereunder are
independent of, and shall not be diminished or impaired by, any action,
inaction, or breach of condition on the part of Grantor and (ii) a waiver of
abrogation endorsement, and (c) be otherwise in form and substance satisfactory
to Bank. Grantor will seasonably pay all premiums for the foregoing policies of
insurance and will cause the issuer of each such policy to deliver an original
counterpart thereof directly to Bank. Grantor hereby assigns to Bank any
returned or unearned premiums due upon cancellation of any such insurance and
directs insurer to pay to Bank all amounts so due. All or any portion of amounts
received by Bank in payment of insurance losses or returned or unearned premiums
may, at Bank's option, be applied to the Subject Debt (with such allocation to
the respective parts thereof and the respective due dates thereof as Bank in its
sole discretion may from time to time deem advisable) or to the repair,
replacement, or restoration of the goods insured. Grantor hereby irrevocably
appoints Bank as Grantor's attorney-in-fact to adjust all insurance losses, to
sign all applications, receipts, releases, and other writings necessary to
collect any such loss and any returned or unearned premiums, to execute proofs
of loss, to make settlements, to indorse and collect any check or other item
payable to Grantor issued in connection therewith, and to apply the same to
payment of the Subject Debt as hereinbefore provided. If Grantor does not
maintain insurance pursuant to this subsection, then, and in each such case,
Bank shall have the right to obtain such insurance or obtain insurance covering
only Bank's interest, and, if Bank elects to do either, Grantor will, on Bank's
demand, reimburse Bank for all amounts Bank expends in doing so.
4 Acquisition and Disposition of Inventory. Grantor will not
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(a) sell or other wise dispose of any inventory, except that so long as no
Default exists, Grantor shall have the right, in the ordinary course of
business but not otherwise, to process and sell inventory for customary
prices, provided, that Grantor shall immediately deposit the proceeds of
each such sale to the cash collateral account, if any then exists, pursuant
to subsection 6.5, or, if none then exists, to the credit of Grantor's
general checking account with Bank or
(b) permit any goods in which Bank has been granted a security interest
pursuant to this Agreement to be evidenced by any warehouse receipt or other
document of title (other than any bill of lading or similar Document
covering inventory that has been sold in accordance with this section) or by
any lease, conditional sale agreement, or other Chattel Paper of any kind.
6. Special Provisions Applicable to Receivables. The provisions of this
section 6 shall apply with respect to all Receivables in which Bank has been
granted a security interest pursuant to this Agreement:
6.1 Notice: Government Receivables; Non-Accounts. Grantor will give
Bank immediate written notice whenever any Receivable (a) arises out of
a contract with or order from the United States of America or any
department, agency, instrumentality, or political subdivision thereof
or (b) does not take the form of an Account or is evidenced in whole or
in part by Chattel Paper or any instrument.
6.2 Collection of Receivables by Grantor. Subject to the provisions of
subsection 6.3. Grantor will collect the Receivables in the ordinary
course of business for the benefit of both Bank and Grantor at no cost
or expense to Bank. Until any Default shall have occurred and
thereafter unless and until Bank shall have advised Grantor to the
contrary, Grantor shall have the right in the ordinary course of
business, to grant such waivers and consents to, enter into such
compromises with, and otherwise deal with the Account Debtors in
respect of the Receivables as Grantor in good faith may from time to
time deem advisable.
6.3 Direct Payment to Bank or Lockbox. Bank shall have the right, (a)
in the event of any Default, to instruct the Account Debtors, at
Grantor's expense, to thereafter make their payments in respect of the
Receivables directly to Bank and (b) in any event, by giving prior
notice to Grantor, from time to time to require Grantor to instruct the
Account Debtors thereafter to mail their payments to a post office
lockbox which Bank shall maintain at Grantor's expense and to which
only Bank shall have access. Following Bank's exercise of either such
right, Grantor will not, without in each case first obtaining Bank's
consent, demand payment in respect of any Receivable, and if Grantor
shall at any time receive any payment in respect of any Receivable,
Grantor will in each case give Bank prompt notice thereof, hold the
amount so received in trust for the benefit of Bank, and promptly remit
the same to Bank in the very form in which received but with all
necessary endorsements and assignments to facilitate Bank's collection
thereof.
6.4 Authority of Account Debtors. Grantor irrevocably authorizes and
directs each Account Debtor to honor any demand by Bank that all
payments in respect of the Receivables thereafter be paid directly to
Bank. In each such case the Account Debtor may continue directing all
such payments to Bank until the Account Debtor shall have received
written notice from Bank either that the Subject Debt has been paid in
full or that Bank no longer claims a security interest in the
Receivables. No Account Debtor shall have any responsibility to inquire
into Bank's right to make any such demand or to follow Bank's
disposition of any moneys paid to Bank by the Account Debtor.
6.5 Deposits. All payments in respect in respect of the Receivables
shall, at Bank's option, be deposited either to a checking account
maintained by Grantor with Bank or to a cash collateral account which
shall bear no interest, over which Bank shall have sole dominion and
control, and from which only Bank may withdraw funds, whichever option
Bank shall from time to time elect by giving Grantor written notice
thereof. Bank shall have no responsibility to ascertain whether any
such payment is the correct amount owing. Each such deposit shall be
subject to Bank's general rules and regulations except to the extent,
if any, inconsistent with this Agreement.
6.6 Withdrawal and Application of Funds. Bank may from time to time
withdraw funds from the cash collateral account at will. Bank shall be
under no obligation to withdraw funds from the cash collateral account,
except that upon each request of Grantor, Bank shall, if no Default
then exists, withdraw all such funds that are then collected. All funds
so withdrawn shall be applied to the payment of the Subject Debt with
such allocation to the respective parts thereof and the respective due
dates thereof as Bank in its sole discretion may from time to time deem
advisable (except that so long as no Default exists, Bank shall not
apply any such withdrawal to any Subject Debt that is not then due
without first obtaining Grantor's consent). If any funds so withdrawn
and applied are recovered from Bank by any trustee in bankruptcy or any
other Person or are discovered not to have been collected and
collection thereof is denied to Bank, Bank shall have the right to
reverse any such application to the extent the funds are recovered from
or not collected by Bank. Bank in its discretion may from time to time
release to Grantor (or to Grantor's order) any or any of the funds then
held in the cash collateral account, but no such release or releases
shall commit Bank thereafter to make any further or other such
releases.
6.7 Vouchers, Receipts, and Indorsements. Bank shall have full power
and authority to executed and deliver such vouchers and receipts in
respect of the Receivables, such endorsements of checks, and such other
writings in respect of the foregoing as Bank may from time to time deem
advisable. In connection with the foregoing Bank shall have full power
and authority to sign Grantor's signature to all such vouchers,
receipts, endorsements, and other writings whenever Bank deems such
action advisable.
6.8 Verification of Receivables. Bank shall have the right, at any time
and from time to time, to arrange for verification of Receivables
directly with Account Debtors or by such other methods as Bank shall
deem advisable.
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7. Maintenance and Defense of General Intangibles. Subject in each case to
any security interest in favor of Bank and Bank's rights in respect thereof, and
further subject to section 6 governing Receivables, Grantor will, until any
Default shall have occurred and thereafter unless and until Bank shall have
advised Grantor to the contrary, without expense to Bank, maintain enforce, and
exercise Grantor's rights in all General Intangibles (except any which are of no
material value) and defend and protect those intangibles against dilution,
diminution in value, infringement, misappropriation, and unauthorized use.
8. Effects of Default. Bank shall at all time times have all of the rights
of secured party under the law of the jurisdiction in which Bank's banking
office is located and, in addition, if any Default shall occur or commence to
exist, then, and in each such case, the following provisions shall apply:
8.1 Possession of Goods and Records. Bank shall have the right to take
possession of all goods in which Bank has been granted a security
interest pursuant to this Agreement, or such part of those goods as
Bank may from time to time deem advisable, and Grantor will, on each
demand of Bank, assemble and make available to Bank at such place or
place as Bank may reasonable require such of those goods as Bank shall
designate. Grantor will, on Bank's demand, deliver to Bank all of
Grantor's books and records in respect of the Collateral.
8.2 Enforcement of Rights. Bank shall have the right in its sole
discretion to enforce payment of the Receivables by suit or otherwise,
and to maintain and enforce rights in respect of any general
Intangibles, but Bank shall have no duty to institute any suit or to
take any other action or, having started any suit or the taking of any
other action, to thereafter continue the same. In each case bank may
proceed with counsel of Bank's choosing.
8.3 Exercise of Rights. Bank shall have full power and right to
exercise any and all rights in respect of the Collateral as if Bank
were the sole beneficial owner thereof and may, without limitation,
grant such waivers and consents to, and enter into such compromises
with, the Account Debtors and other Persons, release (regardless of
whether Bank receives any consideration therefor) any security for or
any account Debtor or other Person liable on any Receivable, and grant
the Account Debtors and other Persons such other indulgences as Bank in
good faith may from time to time deem advisable.
8.4. Disposition. Bank shall have the right to sell or otherwise
dispose of the Collateral or any part thereof or any interest therein
at any time or from time to time. Bank shall give Grantor not less than
ten (10) days' prior notice of either the date after which any intended
private sale is to be made or the time and place of any intended public
sale, except that Bank need give no such notice in the case of
Collateral which Bank in good faith determines to be declining speedily
in value or which is customarily sold on a recognized market. Grantor
waives advertisement of any such sale and (except only to the extent
notice is specifically required by the next preceding sentence) waives
notice of any kind in respect of such sale. At any public sale Bank may
purchase the Collateral or any part thereof free from any right of
redemption, which right Grantor hereby waives. After deducting any and
all fees, costs, and expenses (including, without limitation, the fees
and disbursements of legal counsel) incurred in assembling, taking,
repairing, storing, and selling or otherwise disposing of the
Collateral or any part thereof or any interest therein, Bank shall have
the right to
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apply the net proceeds of sale to the Subject Debt with such allocation to the
respective parts thereon and the respective due dates thereof as Bank in its
sole discretion may from time to time deem advisable, and Grantor shall be
liable for any deficiency.
9. Power of Attorney. Grantor hereby irrevocably constitutes and appoints Bank,
through its employees and agents, with full power of substitution, as Grantor's
true and lawful attorney-in-fact, with full irrevocable power and authority in
the place of Grantor and in the name of Grantor or in Bank's own name, for the
purpose of carrying out the terms of this Agreement, to perform, at any time and
from time to time, each agreement contained in this Agreement that is on
Grantor's part to be complied with, and to take any and all actions and to
execute and deliver any and all writings which may be necessary or desirable to
give Bank the full benefit of this Agreement, in each case as Bank may from time
to time deem advisable, Grantor hereby agreeing that Bank shall owe no duty
whatever to Grantor to perform any such agreement, to take any such action, or
to execute or deliver any such writing, or, having done so any one or more
times, to thereafter continue doing so. Without limiting the generality of the
foregoing, Grantor hereby revocably authorizes Bank, at any time and from time
to time, to (a) fill in any blank space contained in this Agreement or any other
Related Writing, (b) to correct patent errors, to complete and correct the
description of Collateral, and to complete the date herein or therein, and (c)
to sign on Grantor's behalf and file, at Grantor's expense and without Grantor's
signature, such affidavits, assignments, financing statements, indorsements of
specific items of Collateral, mortgages, powers of attorney, security
agreements, and other writings as Bank may from time to time deem advisable for
the better evidencing, perfection, protection, or validation of, or realization
of the benefits of, the security interest granted pursuant to this Agreement.
10. Unconditional and Continuing Security Interest. Grantor's obligations under
this Agreement and the granting of a security interest to Bank pursuant to this
Agreement and unconditional and effective immediately, and (except for
obligations surviving indefinitely pursuant to section 16) those obligations and
the security interest so granted shall continue in full effect until the Subject
Debt shall have been paid in full and thereafter until Bank shall have delivered
to Grantor (or such other Person or Persons who Bank determines in good faith to
be entitled to the same) all Collateral (except any applied to the Subject Debt)
in Bank's possession and until each assignment, financing statement, or other
writing describing the Collateral or any part thereof and naming Bank (or its
successor or assigns, if any) as assignee or secured party, as the case may be,
shall have been released or terminated of record as to all of the Collateral
therein described, regardless of the lapse of time, regardless of the fact that
there may be a time or times when no Subject Debt is outstanding, regardless of
any act, omission, or course of dealing whatever on Bank's part, and regardless
of any other event, condition, or thing.
11. Grantor's Assent to Extensions, Releases, and Settlements. With respect to
the Collateral, Grantor assents to any extension or postponement at the time of
payment thereof or any other indulgence in connection therewith, to any
exchange, release, replacement, or substitution of Collateral, to any addition
or release of any Account Debtor, to any acceptance of any partial payment
thereon and to any adjustment, compromise, or settlement in respect thereof, all
in such manner and at such time or times as Bank shall deem advisable.
12. Bank's Duties Limited. Bank shall have no duty as to the collection or
protection of Collateral or any income therefrom, nor as to the preservation of
rights against prior parties, beyond the safe custody of any Collateral in
Bank's possession. Bank shall have no liability for its delivery of any property
to any Person or Persons who Bank determines in good faith to be entitled to the
same.
13. No Setoff. Grantor hereby waives any and all now existing or hereafter
arising rights to recoup or offset any obligation of Grantor under or in
connection with this Agreement or any Related Writing against any claim or right
of Grantor against Bank.
14. Indemnity: Administration, Enforcement, and Termination; Interest. Grantor
will reimburse Bank, on Bank's demand from time to time, for any and all fees,
costs, and expenses (including, without limitation, the fees and disbursements
of legal counsel) incurred by Bank in administering this Agreement and in
enforcing, exercising, or protecting its rights under this Agreement or under
applicable law, or in attempting to do any of the foregoing. Grantor agrees that
if and when Bank's security interest shall have terminated in accordance with
the provisions of this Agreement, Grantor will, on Bank's demand from time to
time, reimburse Bank for any and all fees, costs, and expenses (including,
without limitation, the fees and disbursements of legal counsel) incurred by
Bank in releasing or terminating each assignment, financing statement, or other
writing signed pursuant to this Agreement or in notifying Account Debtors of any
such release or termination. If any amount owning under this Agreement is not
paid when due, then, and in each such case, Grantor shall pay, on Bank's demand,
interest on that amount from the due date thereof until paid in full at a
fluctuating rate equal to four percent (4%) per annum plus the Prime Rate.
15. Waivers; Remedies; Application of Payments. Bank may from time to time in
its discretion grant waivers and consents in respect of this Agreement or any
other Related Writing or assent to amendments thereof, but no such waiver,
consent, or amendment shall be binding upon Bank business set forth in a writing
(which writing shall be narrowly construed) signed by Bank. No course of dealing
in respect of, nor any omission or delay in the exercise of, any right, power,
or privilege by Bank shall operate as a waiver thereof, nor shall any single or
partial exercise thereof preclude any other or other exercise thereof or of any
other, as each such right, power, or privilege may be exercised either
independently or concurrently with others and as often and in such order as Bank
may deem expedient. Each right, power, or privilege specified or referred to in
this Agreement is in addition to and not in limitation of any other rights,
powers, and privileges that Bank may otherwise have or acquire by operation of
law, by other contract, or otherwise. Bank shall be entitled to equitable
remedies with respect to each breach or anticipatory repudiation of any
provision of this Agreement, and Grantor hereby waives any defense which might
be asserted to bar any such equitable remedy. Bank shall have the right to apply
proceeds and payments in respect of the Subject Debt with such allocation to the
respective parts thereof and the respective due dates thereof as Bank its sole
discretion may from time to time deem advisable.
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16. Other Provisions. The provisions of this Agreement shall bind Grantor and
Grantor's executors, heirs, successors, and assigns and benefit Bank and its
successors and assigns. Except for Grantor and Bank and their respective
successors and assigns, there are no intended beneficiaries of this agreement,
provided, that Bank shall have the right, in its discretion, to designate, at
any time and from time to time, one or more Account Debtors as ended
beneficiaries of subsection 6.4. The provisions of sections 11 through 19, both
inclusive, shall survive the payment in full of the Subject Debt to termination
of the security interest granted pursuant to this Agreement. The several
captions to different sections and subsections of this agreement are inserted
for convenience only and shall be ignored in interpreting the provisions
thereof. Each reference to a section includes a reference to all subsections
thereof (i.e., those having the same character or characters to the left of the
decimal point), except where the context clearly does not so permit. If any
provision in this Agreement shall be or become illegal or unenforceable in
any case, then that provision shall be deemed defined in that case so as to
be legal and enforceable to the maximum extent permitted by law while most
nearly preserving its original intent, and in the case the illegality or
unenforceability of that provision shall affect neither that provision in any
other case nor any other provision. Interest for any end period shall accrue on
the first day thereof but not on the last day thereof (unless the last day is
the first day) and in each case shall be computed the basis of a 360-day year
and the actual number of days in the period. In no event shall interest
accrue at a higher rate than the maximum rate, if is permitted by law. Bank
shall have the right to furnish to its Affiliates, and to such other Persons
as Bank shall deem advisable for the conduct of its business, information
concerning the business, financial condition, and property of Grantor, the
amount of the Bank Debt of Grantor, and the terms, conditions, and other
provisions applicable to the respective parts thereof. This Agreement shall be
governed by the law (excluding conflict of laws ???s) of the jurisdiction in
which Bank's banking office is located.
17. Integration. This Agreement and, to the extent consistent with this
Agreement, the other Related Writings, set forth the entire agreement of Grantor
and Bank as to its subject matter, and may not be contradicted by evidence of
any agreement or statement unless made in a writing (which writing shall be
narrowly construed) signed by Bank contemporaneously with or after the execution
and delivery of this Agreement.
18. Notices and Other Communications. Each notice, demand, or other
communication, whether or not received, shall be deemed to have been given to
Grantor whenever Bank shall have mailed a writing to that effect by certified or
registered mail to Grantor at Grantor's mailing address (or any other address
of which Grantor shall have given Bank notice after the execution and delivery
of this Agreement); however, no other method of giving final notice to Grantor
is hereby precluded. Each communication to be given to Bank shall be in writing
and shall be given to Bank's Corporate Banking Department at Bank's banking
office (or any other address of which Bank shall have given notice to Grantor
after the execution and delivery this Agreement). Grantor hereby assumes all
risk arising out of or in connection with each communication given or attempted
by Grantor in contravention of this section. Bank shall be entitled to rely on
each communication believed in good faith by Bank to be genuine.
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19. Jurisdiction and Venue; Waiver of Jury Trial. Any action, claim,
counterclaim, crossclaim, proceeding, or suit, whether at law or in equity,
whether sounding in tort, contract, or otherwise at any time arising under or in
connection with this Agreement or any other Related Writing, the administration,
enforcement, or negotiation of this Agreement or any other Related Writing, or
the performance of any obligation in respect of this Agreement or any other
Related Writing (each such action, claim, counterclaim, crossclaim, proceeding,
or suit, an 'Action') may be brought in any federal or state court located in
the city in which Bank's banking office is located. Grantor hereby
unconditionally submits to the jurisdiction of any such court with respect to
each such Action and hereby waives any objection Grantor may now or hereafter
have to the venue of any such Action brought in any such court. Grantor HEREBY,
AND EACH HOLDER OF THE Subject Debt OR ANY PART THEREOF, KNOWINGLY AND
VOLUNTARILY WAIVES JURY TRIAL IN RESPECT OF ANY Action.
Grantor: Paravant Computer Systems Inc
______________________________________
By: RICHARD P. MCNEIGHT
___________________
Printed Name: Richard P. McNeight
___________________
Title: President
(complete only if required) And By KEVIN J. BARTCZAK
___________________
Printed Name: Kevin J. Bartczak
_________________
Title: Chief Financial Officer
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
BALANCE SHEETS AND STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY OF
PARAVANT COMPUTER SYSTEMS, INC. AS OF SEPTEMBER 30, 1996 AND THE RELATED
STATEMENTS OF INCOME AND CASH FLOWS FOR THE YEARS ENDED
SEPTEMBER 30, 1996 AND 1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> SEP-30-1996 SEP-30-1995
<PERIOD-START> OCT-01-1995 OCT-01-1994
<PERIOD-END> SEP-30-1996 SEP-30-1995
<CASH> 65,069 211,426
<SECURITIES> 0 0
<RECEIVABLES> 7,234,694 5,360,813
<ALLOWANCES> 0 0
<INVENTORY> 2,503,892 2,411,834
<CURRENT-ASSETS> 10,084,573 8,486,564
<PP&E> 1,154,472 928,208
<DEPRECIATION> 636,957 465,761
<TOTAL-ASSETS> 10,988,658 9,449,715
<CURRENT-LIABILITIES> 3,248,225 6,636,156
<BONDS> 619,151 729,155
<COMMON> 118,943 67,500
0 0
0 0
<OTHER-SE> 6,926,901 1,939,671
<TOTAL-LIABILITY-AND-EQUITY> 10,988,658 9,449,715
<SALES> 10,495,063 8,652,553
<TOTAL-REVENUES> 10,495,063 8,652,553
<CGS> 5,818,010 4,680,661
<TOTAL-COSTS> 5,818,010 4,680,661
<OTHER-EXPENSES> 3,247,385 2,668,320
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 362,956 392,589
<INCOME-PRETAX> 1,077,969 860,272
<INCOME-TAX> 375,816 278,857
<INCOME-CONTINUING> 702,153 581,415
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 702,153 581,415
<EPS-PRIMARY> 0.10 0.13
<EPS-DILUTED> 0.10 0.13
</TABLE>
