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PROSPECTUS
PARAVANT COMPUTER SYSTEMS, INC.
4,830,000 SHARES OF COMMON STOCK
ISSUABLE UPON EXERCISE OF REDEEMABLE WARRANTS
300,000 SHARES OF COMMON STOCK
ISSUABLE UPON EXERCISE OF UNDERWRITER'S WARRANTS
420,000 REDEEMABLE WARRANTS
ISSUABLE UPON EXERCISE OF UNDERWRITER'S WARRANTS
AND
420,000 SHARES OF COMMON STOCK
ISSUABLE UPON EXERCISE OF REDEEMABLE WARRANTS
UNDERLYING UNDERWRITER'S WARRANTS
This Prospectus relates to the issuance of (i) up to 4,830,000 shares of
common stock, par value $.015 per share (the 'Common Stock'), of Paravant
Computer Systems, Inc. (the 'Company,' 'Paravant' or 'PCS') issuable upon the
exercise of redeemable warrants, each warrant to purchase one share of Common
Stock (each, a 'Warrant'), issued in connection with the Company's June 1996
initial public offering of securities (the 'IPO') and (ii) up to (a) 300,000
shares of Common Stock issuable upon the exercise of warrants (the
'Underwriter's Warrants') held by Duke & Co., Inc. (the 'Underwriter') and
certain of its transferees, which Underwriter's Warrants were originally issued
to the Underwriter in connection with the IPO and/or (b) 420,000 Warrants
issuable upon the exercise of the Underwriter's Warrants, and up to 420,000
shares of Common Stock issuable upon the exercise of the 420,000 Warrants
underlying the Underwriter's Warrants.
Each Warrant entitles the registered holder thereof to purchase one share
of Common Stock at a price of $2.00, subject to adjustment in certain
circumstances, for a period of five years commencing November 30, 1997. The
Warrants are redeemable by the Company at any time commencing November 30, 1997
upon notice of not less than 30 days, at a price of $.0167 per Warrant, provided
that the closing bid quotation of the Common Stock on the Nasdaq National Market
('Nasdaq') has exceeded $2.83 per share (subject to adjustment) for a period of
30 consecutive trading days during the period in which the Warrants are
exercisable. The holders of Warrants will have the right to exercise their
Warrants until the close of business on the date fixed for redemption. The
Underwriter's Warrants entitle the holders thereof to purchase, in the
aggregate, up to 300,000 shares of Common Stock at an exercise price of $2.00
per share and up to 420,000 Warrants at an exercise price of $.04 per Warrant.
The Underwriter's Warrants are exercisable during the four-year period
commencing June 3, 1997. Only holders of Warrants and/or Underwriter's Warrants
residing in states where the issuance of the Common Stock underlying such
Warrants and/or Underwriter's Warrants, as the case may be, has been registered
or qualified, or is exempt from registration or qualification, under the
securities laws of such states may exercise such securities. See 'Description of
Securities.'
Concurrently with this offering, the Company has registered, on behalf of
the Underwriter and its transferees (collectively, the 'Selling
Securityholders'), pursuant to a prospectus (the 'Selling Securityholder
Prospectus') included within the Registration Statement of which this Prospectus
forms a part, the offer and sale by the Selling Securityholders of (i) up to
300,000 shares of Common Stock issuable to the Selling Securityholders upon the
exercise of the Underwriter's Warrants, (ii) up to 420,000 Warrants issuable to
the Selling Securityholders upon exercise of the Underwriter's Warrants and
(iii) up to 420,000 shares of Common Stock issuable to the Selling
Securityholders upon exercise of the Warrants underlying the Underwriter's
Warrants (collectively, the 'Selling Securityholder Securities'). The Company
will not receive any of the proceeds from the sale by the Selling
Securityholders of any of such securities. See 'Concurrent Registration of
Securities.'
The Common Stock and Warrants are traded on Nasdaq under the symbols 'PVAT'
and 'PVATW,' respectively. On November 7, 1997, the closing sale price of the
Common Stock and Warrants on Nasdaq was $4.625 and $2.75, respectively. See
'Certain Market Information.'
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THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK AND IMMEDIATE
SUBSTANTIAL DILUTION AND SHOULD NOT BE PURCHASED BY INVESTORS WHO CANNOT AFFORD
THE LOSS OF THEIR ENTIRE INVESTMENT. SEE 'RISK FACTORS' (COMMENCING ON PAGE 8)
AND 'DILUTION.'
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
------------------------
THE DATE OF THIS PROSPECTUS IS NOVEMBER 10, 1997
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AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement (the
'Registration Statement') under the Securities Act of 1933, as amended (the
'Securities Act'), with respect to the securities offered by this Prospectus.
This Prospectus, filed as part of such Registration Statement, does not contain
all of the information set forth in, or annexed as exhibits to, the Registration
Statement, certain portions of which have been omitted in accordance with the
rules and regulations of the Commission. For further information with respect to
the Company and this offering, reference is made to the Registration Statement
including the exhibits filed therewith. The Registration Statement may be
inspected and copies may be obtained from the Public Reference Section at the
Commission's principal office, 450 Fifth Street, N.W., Judiciary Plaza,
Washington, D.C. 20549, and at the New York Regional Office, 7 World Trade
Center, New York, New York 10048, upon payment of the fees prescribed by the
Commission. Statements contained in this Prospectus as to the contents of any
contract or other document are not necessarily complete and where the contract
or other document has been filed as an exhibit to the Registration Statement,
each such statement is qualified in all respects by such reference to the
applicable document filed with the Commission.
The Company is subject to the reporting requirements of the Securities
Exchange Act of 1934, as amended (the 'Exchange Act'), and in accordance
therewith is required to file reports, proxy statements and other information
with the Securities and Exchange Commission ('Commission'). Such reports, proxy
statements and other information can be inspected and copied at the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549; at its New York Regional Office, 7 World Trade Center, New York, New York
10048; and at its Chicago Regional Office, 500 West Madison Street, Chicago,
Illinois 60661-2511, and copies of such material can be obtained from the
Commission's Public Reference Section at prescribed rates. The Company furnishes
its shareholders with annual reports containing audited financial statements and
such other periodic reports as the Company deems appropriate or as may be
required by law.
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the more
detailed information and financial statements, including the notes thereto,
appearing elsewhere in this Prospectus. Each prospective investor is urged to
read this Prospectus in its entirety. Unless otherwise indicated, the
information set forth in this Prospectus gives effect to a three-for-one stock
split of the Company's common stock, par value $.045 per share ('Old Common
Stock'), which was effected on July 25, 1996 (the 'Stock Split'). Pursuant to
the Stock Split, each holder of record of Common Stock on July 22, 1996 received
two additional shares of Old Common Stock for each share held on such date. In
connection with the Stock Split, the Company amended its Articles of
Incorporation to decrease the par value of its common stock from $.045 per share
to $.015 per share, as a result of which each share of Old Common Stock was
converted into a share of common stock, par value $.015 per share ('Common
Stock'). In addition, in connection with the Stock Split, the Company elected to
effect a three-for-one split of the Warrants (the 'Warrant Split'), which
Warrants originally represented the right to purchase one share of Common Stock
at an exercise price of $6.00 per share. As a result of the Warrant Split,
effective July 25, 1996, each holder of a Warrant thereafter held, in lieu of
one Warrant to purchase one share of Common Stock at an exercise price of $6.00
per share, three Warrants, each to purchase one share of Common Stock at an
exercise price of $2.00 per share. Unless otherwise indicated, the information
set forth in this Prospectus gives effect to the Warrant Split.
THE COMPANY
Paravant Computer Systems, Inc. (the 'Company', 'Paravant' or 'PCS')
designs, manufactures and markets rugged, portable computers and communications
interfaces for outdoor usage. Sold to the military, government and commercial
markets, the Company's hand-held and laptop computers are specially designed and
fabricated to withstand rough operational conditions and the rigors of adverse
environments ranging from scorching, wind-swept deserts to hot, humid jungles to
frozen arctic regions. Accordingly, PCS's products are relatively impervious to
temperature extremes, humidity, fog and moisture, vibration or shocks, as well
as impurities such as sand, dirt, dust and gravel. The Company typically
furnishes both hardware and software elements of its computer/communication
systems to its customers. See 'The Company', 'Business -- Industry Background
and Products'.
The hand-held and laptop computers that the Company manufactures perform
tasks and functions of an extensive nature. In military applications, PCS's
computers operate weapon systems, provide radar displays, process incoming
information, communicate with other systems, train personnel in system's
utilization and diagnose and maintain equipment. In Raytheon's Hawk
Anti-Aircraft Missile System, for example, PCS's computers display radar
information indicating the location of potential targets, control the firing of
missiles and serve as communicators of information and orders. In the government
and commercial areas, the Company's products are used to collect, store,
download and process data obtained in the field. They are specifically utilized
in environmental studies and testing, land mapping and surveys, oil exploration,
governmental inspections, medical testing and support and construction projects.
The Company believes that it has several competitive advantages over other
companies selling similar products. Specifically, the Company believes that,
because it emphasizes ruggedization of its products from the selection and
design of components to assembly and encasement in sealed containers through the
extensive testing at various phases, it has achieved high levels of capability,
performance and reliability for its products. PCS also offers its customers
engineering services that modify its standard products for specialized
applications. Moreover, its capability of incorporating state-of-the-art
communications interfaces into its products allows computers to talk to one
another and provide end-users with solutions to important technical problems.
Finally, the Company specializes in miniaturizing electronic equipment, and,
consequently, is able to place more computing power or communications capability
into smaller and lighter configurations. See 'Risk Factors', generally and 'Risk
Factors -- Competition'.
Unlike PCS, PCS's competition typically does not design for ruggedization
from start to finish but rather purchases off-the-shelf computers or electronics
available in the commercial market and encases them in protective, air-breathing
boxes. These companies also generally neglect to provide customiza-
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tion services, furnish only limited communication capabilities for their
products, if at all, and do not go beyond the existing miniaturization found in
normal commercial computer applications. Naturally, given the higher levels of
performance, capability and reliability of PCS's computers, its products tend to
be substantially more expensive than those similar items offered by its
competitors. However, the Company generally does not manufacture the components
for its products. See 'Risk Factors -- Competition' and 'Business -- Supply and
Manufacturing'.
For the fiscal year ending September 30, 1996, approximately 96% of PCS's
total sales were made, directly or indirectly, to the military market in the
United States and abroad. The remaining 4% of its sales for such period were
made to the government and commercial markets. Approximately 97% of its total
sales for the same period were made by it directly to foreign customers while
additional sales of its products were made abroad by its U.S. customers.
In the military market, the Company's customers include the Armed Forces of
the U.S. government, foreign governments and major aerospace companies and prime
military contractors, such as Raytheon, Lockheed Martin, and Texas Instruments.
In regard to the government marketplace, PCS has sold its products to the U.S.
Environmental Protection Agency, the U.S. Forestry Service, state Departments of
Transportation and other government agencies. In the commercial market, the
Company's computers have been sold to public utilities, timber and logging
companies, surveyors, civil engineering firms and railroads. Such commercial
customers include, among others, the Canadian Pacific Railroad, Weyerhauser,
Westvaco and Geco Prakla.
Current trends in U.S. military procurement and budgeting policies appear
to be favorable to the Company. While the general trend in defense spending is
toward reductions of overall expenditures, the areas in which PCS operate are
either presently unaffected in any material way by such lower funding or are
benefiting from funding increases. In its attempt to economize, the U.S.
military tends to avoid expenditures on new large weapon systems and
special-function computers wherever possible. In contrast, much of the Company's
product emphasis is on upgrading and retro-fitting existing weapon systems in
order to increase their overall capabilities. In its product offerings, PCS also
stresses enhanced support for electronic warfare systems, diagnostics and
maintenance of military equipment as well as battlefield communications and data
processing. All of these areas are important to the U.S. military establishment
in its procurement policies and strategic plans. Finally, PCS's miniaturization
and customization capabilities, which make military electronic systems lighter
and more compact, lend themselves to greater application to military needs in
this age of rapid deployment of forces and equipment. Despite these factors, it
is uncertain whether continued downward trends in military spending may have
material adverse affects on the Company's future business. See 'The Company,'
'Risk Factors' and 'Business,' generally.
The Company is currently in the process of designing and developing a
portable computer to be sold to manufacturers of certain types of medical
devices. The computer would serve as a medical reprogramming device which would
be used to communicate with, and thereby reprogram, programmable pumps (e.g.,
pacemakers, defibrillators, drug pumps and electroneurostimulation implants)
which have been developed by such medical device manufacturers and surgically
implanted in patients. Although the Company believes that, based on the
reputation and experience it has developed in the military market, it will be
able to penetrate the medical market by targeting medical device manufacturers
who, like the Company's military customers, require expert electrical and
mechanical engineering capabilities, strict documentation control, adherence to
multiple specifications and configuration control management, there can be no
assurance of such or that any medical related computers will be developed by the
Company or, if developed, will meet with broad market acceptance.
The Company was incorporated under the laws of the State of Florida in June
1982. In June 1996, the Company consummated an initial public offering (the
'IPO') of Common Stock and Warrants.
The Company's principal executive offices are located at 1615A West Nasa
Boulevard, Melbourne, Florida 32901 and its telephone number is (407) 727-3672.
4
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RECENT DEVELOPMENTS
On October 15, 1997, the Company announced that it is currently negotiating
a proposed acquisition of a third party. However, there can be no assurance that
the acquisition will be consummated or, if consummated, as to the timing
thereof.
THE OFFERING
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Securities Offered........................ Up to (i) 4,830,000 shares of Common Stock reserved for issuance upon
exercise of Warrants issued to the public in the IPO, (ii)(a)
300,000 shares of Common Stock reserved for issuance upon exercise
of warrants (the 'Underwriter's Warrants') originally sold to Duke &
Co., Inc. (the 'Underwriter') in connection with the IPO, and/or (b)
420,000 Warrants reserved for issuance upon exercise of the
Underwriter's Warrants, and (iii) 420,000 shares of Common Stock
reserved for issuance upon exercise of the Warrants underlying the
Underwriter's Warrants. See 'Description of Securities.'
Common Stock Outstanding
Before the Offering(1)............... 7,993,652 shares
After the Offering(2)................ 13,543,652 shares
Warrants
Warrants Outstanding
Before the Offering(3).......... 4,830,000 Warrants
After the Offering(3)(4)........ 5,250,000 Warrants
Exercise terms....................... Exercisable for a period of five years commencing November 30, 1997,
each to purchase one share of Common Stock for $2.00, subject to
adjustment in certain circumstances. See 'Description of
Securities -- Redeemable Warrants.'
Expiration date...................... November 30, 2002.
Redemption........................... Redeemable by the Company at any time commencing on November 30, 1997,
upon notice of not less than 30 days, at a price of $.0167 per
Warrant, provided that the closing bid quotation of the Common Stock
on Nasdaq has exceeded $2.83 per share (subject to adjustment) for a
period of 30 consecutive trading days during the period in which the
Warrants are exercisable. The Warrants will be exercisable until the
close of business on the date fixed for redemption. See 'Description
of Securities -- Redeemable Warrants.'
Use of Proceeds........................... The net proceeds, if any, received by the Company upon exercise of the
Warrants, the Underwriter's Warrants and the Warrants underlying the
Underwriter's Warrants will be utilized for working capital and
general corporate purposes. The Company may also use a portion of
the proceeds of this offering to repay any indebtedness which may be
outstanding under the Company's secured line of credit arrangement
at the time such proceeds become available to the Company. In
addition, the Company may seek to acquire or invest in businesses
which the Company believes will enhance its business and prospects,
and may use a portion of the proceeds of this offering for one or
more such acquisitions in
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the event opportunities become available on terms acceptable to the
Company. While the Company from time to time evaluates potential
acquisitions of or investments in such businesses, there can be no
assurance that the Company will consummate any such acquisitions or
investments. The Company will not receive any of the proceeds from
sales by the Selling Securityholders pursuant to the Selling
Securityholder Prospectus of any of the Selling Securityholder
Securities to be issued to them upon exercise of the Underwriter's
Warrants or upon exercise of the Warrants underlying the
Underwriter's Warrants. See 'Use of Proceeds.'
Risk Factors.............................. The securities offered hereby are speculative and involve a high
degree of risk and immediate substantial dilution and should not be
purchased by investors who cannot afford the loss of their entire
investment. See 'Risk Factors' and 'Dilution.'
NASDAQ Symbols............................ Common Stock -- 'PVAT'. Warrants -- 'PVATW'.
</TABLE>
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(1) Based on the number of shares outstanding as of November 7, 1997. Does not
include (i) 1,201,884 shares of Common Stock reserved for issuance upon
exercise of stock options granted under the Company's Incentive Stock Option
Plan (the 'Incentive Plan'); (ii) 497,000 shares of Common Stock reserved
for issuance upon exercise of options available for future grant under the
Incentive Plan; (iii) 30,000 shares of Common Stock reserved for issuance
upon exercise of options granted under the Company's Nonemployee Directors'
Stock Option Plan (the 'Directors' Plan'); (iv) 15,000 shares of Common
Stock reserved for issuance upon exercise of options available for future
grant under the Directors' Plan; (v) 257,833 shares of Common Stock reserved
for issuance upon exercise of options granted under a non-qualified stock
option plan previously maintained by the Company, which has been cancelled;
(vi) 480,000 shares of Common Stock issuable upon exercise of warrants (the
'Bridge Warrants') issued in connection with the Company's August 1995
bridge financing (the '1995 Bridge Financing'); (vii) 300,000 shares of
Common Stock reserved for issuance upon exercise of the Underwriter's
Warrants; (viii) 420,000 shares of Common Stock reserved for issuance upon
exercise of the Warrants underlying the Underwriter's Warrants; and (ix)
4,830,000 shares of Common Stock reserved for issuance upon exercise of
Warrants issued to the public in the IPO.
(2) Assumes (i) the exercise of all 4,830,000 Warrants issued to the public in
the IPO and (ii) the exercise of Underwriter's Warrants to purchase 300,000
shares of Common Stock and 420,000 Warrants and (iii) the exercise of all
420,000 Warrants received upon exercise of the Underwriter's Warrants,
although there can be no assurance that any of the foregoing will be
exercised. Does not include any of the shares of Common Stock referred to in
clauses (i) through (vi) of Note 1 above.
(3) Does not include the 480,000 Bridge Warrants issued in connection with the
1995 Bridge Financing.
(4) Assumes the exercise of Underwriter's Warrants to purchase 420,000 Warrants
but not of the 420,000 Warrants issuable upon exercise of the Underwriter's
Warrants or of any of the 4,830,000 Warrants issued to the public in the
IPO. There can be no assurance that any of the Underwriter's Warrants will
be exercised.
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SUMMARY FINANCIAL INFORMATION
The summary financial information set forth below is derived from the
historical financial statements of the Company included elsewhere in this
Prospectus. Such information should be read in conjunction with such financial
statements, including the notes thereto.
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NINE MONTHS ENDED YEAR ENDED
JUNE 30, (2) SEPTEMBER 30,
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1997 1996 1996 1995
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(UNAUDITED)
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Statement of earnings data:
Revenues........................................... $8,196,533 $3,682,110 $10,495,063 $8,652,553
Net Income (loss).................................. $ 351,675 $ (784,938) $ 702,153 $ 581,415
Earnings (loss) per share(1)....................... $.04 $(.16) $.10 $.13
Weighted average number of shares outstanding(1)... 12,806,956 4,883,333 7,652,320 4,500,000
Balance sheet data:
Working capital.................................... $6,236,526 $4,865,900 $ 6,836,348 $1,850,408
Total assets....................................... $9,571,805 $8,232,586 $10,988,658 $9,449,715
Total liabilities.................................. $2,154,054 $2,676,608 $ 3,942,814 $7,442,544
Total stockholders' equity......................... $7,417,751 $5,555,978 $ 7,045,844 $2,007,171
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(1) The weighted average number of shares outstanding has been determined
assuming shares and options issued subsequent to September 30, 1995 were
outstanding for all periods presented, including periods in which the effect
is anti-dilutive.
(2) Typically, a substantial portion of the Company's revenue is generated in
the Company's fourth quarter in accordance with U.S. government annual
budgeting and spending patterns. See 'Risk Factors -- Seasonality, Cost
Overruns and Long Sales Cycle' and 'Management's Discussion and Analysis or
Plan of Operation.'
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RISK FACTORS
An investment in the securities offered hereby is speculative in nature,
involves a high degree of risk and should only be made by investors who can
afford the loss of their entire investment. Prospective investors should give
careful attention to these risk factors, as well as to the other information
described elsewhere in this Prospectus, including the financial statements and
notes thereto, in evaluating the Company, its business and management before
making a decision to purchase the Common Stock and Warrants. In addition to the
risks discussed below, businesses, including the Company's, are often subject to
risks not foreseen, anticipated or appreciated by its management.
This Prospectus contains certain 'forward-looking statements' within the
meaning of Section 27A of the Securities Act and Section 21E of the Exchange
Act. All statements other than statements of historical information provided
herein are forward-looking statements and may contain information about
financial results, economic conditions, trends and known uncertainties. Actual
results could differ materially from those projected in the forward-looking
statements as a result of the risk factors set forth below and elsewhere in this
Prospectus, 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.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which reflect management's analysis, judgment, belief or expectation
only as of the date hereof. The Company undertakes no obligation to publicly
revise these forward-looking statements to reflect events or circumstances that
arise after the date hereof. In addition to the disclosure contained herein,
readers should carefully review any disclosure of risks and uncertainties
contained in other documents the Company files or has filed from time to time
with the Securities and Exchange Commission pursuant to the Exchange Act.
SUBSTANTIAL DEPENDENCE UPON MILITARY SALES
The majority of PCS's sales have historically been to the United States
military, foreign military or military suppliers. The Company's future success,
if any, is highly dependent on the continued purchase by the military of its
portable computers or equipment manufactured by others which contain its
devices. For the fiscal years ending September 30, 1996 and 1995 and for the
nine months ended June 30, 1997 and 1996, direct and indirect sales of the
Company's products to the U.S. Department of Defense and foreign governments
represented approximately 96%, 96%, 96% and 97%, respectively, of its sales.
Attempts to reduce military expenditures have commenced for a multitude of
reasons, including budget deficit reduction and a perceived easing of global
tensions.
For the past four years, the uncertain defense budget situation has caused
delays in contract awards and reduced funding for various military programs.
Management expects that these downward trends will continue through 1999.
Notwithstanding the foregoing, most of PCS's product sales to the U.S. military
have either been unaffected by such reductions in military spending or have
benefitted from increases in such funding. Management believes that this has
occurred because its products are often used for upgrades or retrofits of
existing military devices, electronic warfare systems, portable diagnostic and
maintenance equipment, lighter systems for rapid deployment and digitalization
of the battlefield. However, although to date the Company has generally not been
adversely affected by delays in contract awards or reductions in spending, there
can be no assurance that any future delays or reductions will not have a
material adverse effect on the Company's business. See 'Business -- Industry
Background' and 'Customers'.
Recent announcements from the U.S. Congress and Defense Department indicate
that overall defense spending may stabilize or increase modestly; however, it is
extremely difficult to predict the amount or pattern of such spending.
Management believes that in the foreseeable future military spending on new
weapon systems will continue to be restricted to research and development of
military hardware already under development and to limited production of such
systems. During this period, the Company anticipates that the U.S. military will
still emphasize the upgrading, repair and extended use of older systems.
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One example of the U.S. military's deferring expenditures on new weapon
systems involves its handling of the F-16 and F-22 fighter planes. Instead of
replacing F-16's with the newer F-22's, the military has, in its economizing
efforts, sought to continue the F-16's in service for longer periods. As a
consequence, PCS's sales of its portable computers to Lockheed as part of that
company's upgraded electronic maintenance systems for F-16's has actually
increased recently. Should the U.S. military alter this policy and seek
full-scale production of the F-22 planes, sales of the Company's computers for
such maintenance system will, in all likelihood decrease. See
'Business -- Industry Background and Products'.
UNCERTAINTY OF ISO-9001 CERTIFICATION
The Company is currently endeavoring to upgrade its own manufacturing and
assembly facilities and procedures to meet the quality management and assurance
standards of ISO-9001, propounded by an international rating agency. These
standards have been adopted by the European Economic Community as their
preferred quality standards and, to some degree, by the U.S. Department of
Defense. As far as its compliance with ISO-9001 is concerned, the Company
envisages a five-step process: (i) training and selection of a steering
committee; (ii) review of existing quality procedures and developing better
procedures and statements of general goals; (iii) preparation of specific
written quality procedures; (iv) implementation and testing of such procedures;
and (v) formal audit by an ISO-9001 certified auditor to determine if the
Company's new or modified procedures are sufficient and official issuance of
ISO-9001 certification. Each phase of this five-step process takes approximately
six months. PCS has completed the first three stages and is currently involved
in meeting its goals for phase four. It is estimated that within twelve months
the Company should obtain ISO-9001 certification, although there can be no
assurance of such. Any failure or significant delay on the part of the Company
in complying with such standards could materially and adversely affect its
direct and indirect sales to the U.S. military as well as to certain foreign
customers and prevent its expansion in such markets. See 'Business -- Supply and
Manufacturing'.
GOVERNMENT REGULATION AND CONTRACTS
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
Department of Defense ('DoD') business. PCS has no material 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. See 'Risk
Factor -- Competition' and 'Business -- Government Regulation and Contracts' and
'Competition'.
DEPENDENCE ON MAJOR CUSTOMERS
The Company's business is substantially dependent on a relatively small
number of customers and DoD programs. In the fiscal years ended September 30,
1996 and September 30, 1995, Raytheon Company (49% and 47%, respectively),
Lockheed Martin Corporation (21% and 25%, respectively), STN Atlas Electronics
(15% and 13%, respectively) and Texas Instruments (10% and 1%, respectively)
accounted for an aggregate of 95% and 86%, respectively, of PCS's total sales.
The loss of Raytheon or Lockheed Martin as a customer could have a material
adverse effect on PCS's results of operations or financial condition. 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. See 'Business -- Customers'.
As of June 30, 1997, the Company's backlog was $9,099,394, 87% of which was
represented by large orders from three customers: Lockheed Martin Corporation
(59%), Raytheon Company (23%) and
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Harris Corp. (8%). The remaining 13% of such backlog represented orders from
approximately ten other customers. The loss or diminution of orders from any
large customer or group of customers could have a substantial adverse effect on
PCS's business and prospects. See 'Business -- Backlog'.
TECHNOLOGICAL OBSOLESCENCE OR FAILURE AND UNCERTAIN MARKET ACCEPTABILITY
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. Nevertheless, while
the Company is under pressure to introduce new products which embody recent
technology, the Company is under less pressure than computer companies serving
either commercial markets or commercial applications within the military. The
Company's military customers buy the Company's products for use in rugged
tactical applications and place a high premium on low risk in terms of
performance and complete configuration control (i.e., once a specific product
configuration is selected, military customers often do not want the product to
change in order to ensure absolute software compatibility as well as to ensure
that spare parts and trained personnel will be able to consistently and reliably
support the products in the field for years). Typically, the Company will trail
the commercial market in terms of technology and the Company's experience to
date is that this is usually acceptable to the risk-averse engineering community
which the Company serves. The customer is afforded the opportunity to purchase
'proven' technology. Many older customers continue to buy the old product
configurations and even new customers sometimes adopt the older design products.
However, most new customers start buying the Company's most recently introduced
products but will then want to buy the identical product configuration over an
extended period of time. Likewise, in the medical market, the Company believes
that, while it may be under pressure to introduce new products which incorporate
recent technology, the Company's medical customers will seek to purchase
'proven' technology and will not wish to experience changes in the products
selected. Accordingly, while the Company is under continuing pressure to design
new products, it is not under the same degree of intense pressure as companies
in the commercial market to offer the latest technologies well ahead of its
competitors. There can be no assurance, however, that in the future the
Company's failure to anticipate or respond adequately to technological
developments and changing customer requirements or the occurrence of significant
delays in new product development or introduction or the technological failures
of its products or the systems in which they are incorporated, would not result
in a material loss of anticipated future revenues and seriously impair PCS's
competitiveness.
In addition, PCS may misgauge market needs and introduce products that fail
to gain the necessary market acceptance due to a variety of factors, including
pricing. Hence, it is also uncertain whether new products or enhancements of
existing products can be successfully marketed and sold by the Company. See
'Business -- New Products, Marketing and Sales and Research and Development
Activities'.
RISKS OF FOREIGN SALES
For the nine months ended June 30, 1997 and 1996 and the fiscal years ended
September 30, 1996 and 1995, the Company derived approximately 1%, 16%, 18% and
20% of its total sales, respectively, from foreign markets. PCS expects that
foreign sales will continue to represent a significant portion of its future
revenue. Foreign sales are subject to numerous risks, including political and
economic instability in foreign markets, restrictive trade policies of foreign
governments, inconsistent product regulation by foreign agencies or governments,
currency valuation variations, exchange control problems, the imposition of
product tariffs and the burdens of complying with a wide variety of
international and U.S. export laws and differing regulatory requirements. To
date, the Company's foreign sales have been transacted in U.S. dollars and
payments have generally been supported by letters of credit. To the extent,
however, that any future foreign sales are transacted in a foreign currency or
not supported by letters of credit, PCS would also be subject to possible losses
due to foreign currency fluctuations and difficulties associated with collection
of accounts receivable abroad. See 'Business -- Marketing and Sales' and
' -- Government Regulations and Contracts'.
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SEASONALITY, COST OVERRUNS AND LONG SALES CYCLE
Because so much of its sales are related to the U.S. military and
government procurement, the Company's business is greatly influenced by the
timing of such purchases. Many U.S. military and government purchasing decisions
tend to be effectuated in the last portion of the Federal government's fiscal
year. As a consequence, a gradual increase of the Company's sales develops
during its first three quarters, but most sales actually occur in its fourth
quarter ending September 30th each year to correspond with such government
purchase decisions. This unevenness in sales generation and development can
exert significant pressure on management's capabilities and the Company's
resources. At times, PCS has experienced strains on, and shortages of, working
capital resulting from such seasonality.
For the most part, the Company enters into the equivalent of fixed price
contracts with its customers for the sales of its computer products and
engineering services. In the event that PCS has not properly estimated the costs
in advance of such sales or undergoes unforeseen difficulties in developing or
producing the products or services, its costs may exceed the prices previously
agreed upon or may be so great as to narrow significantly its expected
profit-margins. Although the Company has not historically experienced cost
overruns, such cost overruns may in the future have a material adverse impact on
the Company's business and its profitability.
On the military side of its business, the Company often experiences a
lengthy sales cycle that, from beginning to end, may run for as many as five (5)
years in some cases. There are generally a number of crucial points in this
cycle, including the identification of a product need in a military program, the
retention of the prime contractor, retention of subcontractors for each element,
assembly of elements for prototype systems, testing of such systems, funding for
production runs of the systems and execution of the production contracts for the
prime contractor and the sub-contractors. Not only does this cycle take a long
time, but it is also susceptible to failure at each crucial point.
In addition, the Company will also experience a lengthy sales cycle with
respect to its medical-related computer products, primarily due to the length of
time required to obtain approval of such products from the Food and Drug
Administration (the 'FDA'). In developing reprogramming devices for its medical
customers, the Company must first design each particular reprogrammer based on
the unique specifications of the particular customer with respect to its
programmable medical device. Once the reprogrammer has been tested and approved
by the customer, the customer must thereafter submit the complete programmable
device, including the Company's reprogrammer, for FDA approval, which can take
from three to eighteen months. Any delays in obtaining FDA approval for any such
devices, whether resulting from the portion of the device relating to the
Company's reprogramming computer or from the portion of the device developed by
the customer, could have a material adverse effect on the Company's business and
operations.
Consequently, the Company can and does invest heavily in time, money and
manpower to obtain subcontracts for military production runs on its products and
will invest heavily in time, money and manpower to design and implement its
medical computer products. In the final analysis, such investments may yield no
business at all or may take so long to develop that PCS's resources are strained
or other more profitable opportunities are missed. See 'Business -- Industry
Background, Marketing and Sales' and ' -- Government Regulations and Contracts'.
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 will not be
the lowest-priced bidder.
Because a large portion of PCS's business is military-related, a
procurement procedure for militarized computers -- i.e., Indefinite Delivery,
Indefinite Quantity ('IDIQ') contracts -- could have a material adverse impact
on the Company. IDIQ represents large bulk purchasing of commercial and
militarized computers. With only a small portion of computers purchased being
militarized, these large
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umbrella contracts offer the U.S. government the lowest prices, but usually each
reaches hundreds of millions of dollars. As a result, only large companies can
afford to bid on these contracts, and smaller companies, like PCS, can be easily
locked out of the process unless they have formed strategic alliances with a
larger successful company or other means to avoid the impact of IDIQ's are
found. Fortunately, for the last five (5) years, the Company has made military
sales of its computers because they fall into product categories not currently
covered by IDIQ requirements. See 'Business -- Government Regulation and
Contracts and Competition'.
In the medical market, the Company believes that many medical device
manufacturers either design and produce their own medical support devices such
as reprogrammers or hire a design consultant to design such devices and contract
with a third party to manufacture the devices. Although the Company believes
that it will compete based on its ability to offer a full design and production
service to medical device manufacturers, there can be no assurance of such, or
that the Company will be able to compete successfully with other computer
manufacturers who provide similar design and production services to medical
device manufacturers.
DEPENDENCE UPON KEY PERSONNEL AND ATTRACTION OF QUALIFIED PERSONNEL
The Company is highly dependent on the services of Richard P. McNeight, its
President and Chief Operating Officer, and William R. Craven, its Vice President
of Marketing. The Company has entered into an employment contract with each of
them effective through December 31, 1999. The Company has also obtained
'key-man' term insurance in the amount of $1,500,000 on the lives of each of
them. The loss of their services to the Company could materially and adversely
affect its business and operations. See 'Management'.
In recent years, as PCS's business has improved and Messrs. McNeight and
Craven have assumed more management responsibilities, Krishan K. Joshi, PCS's
Chairman and Chief Executive Officer, has spent considerably less of his time
managing the Company's affairs. Management believes that his diminished role has
not had, nor will it have in the future, any adverse effects on the Company's
operations or financial condition. At present, PCS has no plans to appoint a
full-time Chief Executive Officer in the near future.
Competition for qualified employees is intense, and the loss of any such
person or the inability to locate, attract, retain and motivate qualified
personnel required for the expansion of PCS's activities could materially and
adversely affect its business and operations. There can be no assurance that it
will be successful in this regard or, if successful, that the services of such
personnel can be secured on terms deemed favorable to it. See
'Business -- Employees'.
RELIANCE ON SUB-CONTRACTORS AND SUPPLIERS
The Company subcontracts the fabrication of its computer boards to a few
third party manufacturers. It purchases the metal cases, hard disk drives,
brackets, window panels and the keyboards for its portable computers from sole
sources such as Distec, Xcel, Rhinehart and HiTech. PCS also licenses its
software from sole sources, including MicroSoft, Phoenix Technology, Magnavox
and JFK Associates. Many of its other components are furnished by outside
suppliers. Except for its software suppliers, it does not have written
agreements with any of these subcontractors or suppliers. This reliance on a few
subcontractors, sole sources and other suppliers can, and has, resulted in some
delays in deliveries as well as several quality control and production problems.
Moreover, the discontinuation of a necessary component by a subcontractor or
supplier can also be a significant negative development for the Company. In
addition, interference, suspension or termination of such fabrication or supply
sources will cause greater delays due to the difficulties and time required to
find suitable replacements or substitute sources and may have a material adverse
impact on the Company's business. See 'Management's Discussion and Analysis or
Plan of Operation' and 'Business -- Supply and Manufacturing'.
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POSSIBLE PRODUCT LIABILITY
The risk that the Company's products may malfunction and cause a loss of or
error in data, loss of man hours, damage to, or destruction of, equipment or
delays is significant. Consequently, PCS, as a manufacturer of such computers,
may be subject to claims if such malfunctions or breakdowns occur. The Company
is not aware of any past or present claims against it. While PCS presently
maintains product liability insurance of $1,000,000, it cannot be certain that
such coverage will be adequate to satisfy future claims, if any.
In connection with any products developed by the Company for sale in the
medical market, the Company currently anticipates that the Company's contracts
with its medical device customers will include provisions requiring such
customers to indemnify the Company or provide insurance for any claims brought
against the Company as a result of any malfunctions in the programmable devices
sold by such customers. There can be no assurance that any such indemnification
or insurance will be obtained or, if obtained, will be adequate to satisfy
future claims, if any.
POSSIBLE NEED FOR ADDITIONAL FINANCING
The Company anticipates that the proceeds of this offering, together with
the Company's existing working capital and anticipated cash flow from the
Company's operations, will be sufficient to satisfy the Company's cash
requirements for at least twelve months. In the event the Company's plans change
(due to unanticipated expenses or difficulties or otherwise), or if the proceeds
of this offering and projected cash flow otherwise prove insufficient to fund
operations, the Company could be required to seek additional financing sooner
than currently anticipated. Except for the Company's current bank loans, the
Company has no current arrangements with respect to, or sources of, additional
financing. Accordingly, there can be no assurance that additional financing will
be available to the Company when needed, on commercially reasonable terms, or at
all. The Company's inability to obtain such additional financing could have a
material adverse effect on the Company's long-term liquidity and on the proposed
business expansion plans of the Company. See 'Use of Proceeds' and 'Management's
Discussion and Analysis or Plan of Operation'.
MANAGEMENT'S BROAD DISCRETION IN USE OF PROCEEDS
The proceeds to the Company from the exercise of the Warrants, the
Underwriter's Warrants and the Warrants underlying the Underwriter's Warrants,
net of expenses of this offering (other than solicitation fees, if any, to be
paid to the Underwriter in connection with the exercise of Warrants), will be
approximately $10,986,800 assuming that all such Warrants, Underwriter's
Warrants and Warrants included therein are exercised. There can be no assurance
as to the number of Warrants, if any, or Underwriter's Warrants or Warrants
included therein, if any, which will be exercised. The Company has been advised
by the holders of the Underwriter's Warrants that they currently intend to
exercise all of the Underwriter's Warrants, thereby resulting in proceeds to the
Company (before deducting expenses) of $616,800, although there can be no
assurance of such exercise. Management anticipates that the proceeds of this
offering, if any, will be allocated to working capital and general corporate
purposes. Accordingly, the Company's management will have broad discretion as to
the application of such proceeds. The Company may also use a portion of the
proceeds of this offering to repay any indebtedness which may be outstanding
under the Company's secured line of credit arrangement at the time such proceeds
become available to the Company. In addition, the Company may seek to acquire or
invest in businesses which the Company believes will enhance its business and
prospects, and may use a portion of the proceeds of this offering for one or
more such acquisitions in the event opportunities become available on terms
acceptable to the Company. While the Company from time to time evaluates
potential acquisitions of or investments in such businesses, there can be no
assurance that the Company will consummate any such acquisitions or investments.
The Company will not receive any of the proceeds from sales by the Selling
Securityholders of any of the securities to be issued to them upon exercise of
the Underwriter's Warrants or upon exercise of the Warrants underlying the
Underwriter's Warrants. See 'Use of Proceeds' and 'Warrant Solicitation.'
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CONCENTRATION OF OWNERSHIP
As of the date of this Prospectus, Krishan K. Joshi, the Company's
Chairman, Richard P. McNeight, the Company's President, and William R. Craven,
the Company's Vice President of Marketing, beneficially own approximately 28.0%,
12.3% and 6.4%, respectively, of the outstanding shares of Common Stock of the
Company (assuming no exercise of the Warrants, the Underwriter's Warrants or the
Warrants underlying the Underwriter's Warrants or of options or warrants held by
persons other than Messrs. Joshi, McNeight and Craven). Although such
stockholders do not hold, in the aggregate, a majority of the voting securities
of the Company, their significant beneficial holdings enable them to exercise
substantial influence over the Company. See 'Principal Shareholders'.
NO ASSURANCE AS TO PROTECTION OF INTELLECTUAL PROPERTY; DEPENDENCE ON
INTELLECTUAL PROPERTY
The Company has no patent or copyright protection on its products. Its
ability to compete effectively with other companies will depend, in part, on its
ability to maintain the proprietary nature of its technologies. PCS intends to
rely substantially on unpatented proprietary information and know-how, and there
can be no assurance that others will not develop such information and know-how
independently or otherwise obtain access to its technology. Also, it is not
certain that the Company's proprietary technology will not infringe patents or
other rights owned by others, and that as a result it may not be in a position
to license such technology at a reasonable cost. See 'Business -- Intellectual
Property'.
NO DIVIDENDS
The Company has never paid any cash dividends on its Common Stock and does
not anticipate paying any such dividends in the foreseeable future. See
'Dividend Policy' and 'Description of Securities'.
QUALIFICATION AND MAINTENANCE REQUIREMENTS FOR NASDAQ LISTING; MARKET VOLATILITY
The stock market has, from time to time, experienced significant price and
volume fluctuations that may be unrelated to the operating performance of any
particular company. In addition, the market prices of the securities of many
publicly-traded companies in the computer and defense industries have in the
past been, and can in the future be expected to be, especially volatile. Various
factors and events, including future announcements of new product and service
offerings by the Company or its competitors, and economic and other external
factors, as well as fluctuations in the Company's financial results, could have
a significant impact on the market prices of the Company's securities.
The Common Stock and Warrants are quoted on the Nasdaq National Market. The
Commission has approved rules imposing criteria for listing of securities on the
Nasdaq National Market, including standards for maintenance of such listing. In
order to qualify for initial quotation of securities on the Nasdaq National
Market, a company, among other things, must have at least $4,000,000 in net
tangible assets, $3,000,000 in market value of the public float and a minimum
bid price of $5.00 per share. For continued listing, a company must have, among
other things, either (i) $4,000,000 in net tangible assets, a public float of at
least 750,000 shares with a market value of at least $5,000,000 and a minimum
bid price of $1.00 per share or, alternatively, (ii) a market capitalization of
$50,000,000 or total assets and total revenues of $50,000,000 each, a public
float of at least 1,100,000 shares with a market value of at least $15,000,000
and a minimum bid price of $5.00. If the Company is unable to satisfy the Nasdaq
National Market's maintenance criteria in the future, its securities may be
delisted from the Nasdaq National Market. In such event, the Company would seek
to list its securities on the Nasdaq Small Capitalization Market. However, if it
was unsuccessful, trading, if any, in the Company's securities would thereafter
be conducted in the over-the-counter market in the so-called 'pink sheets' or
the NASD's 'Electronic Bulletin Board'. As a consequence of such delisting, an
investor would likely find it more difficult to dispose of, or to obtain
quotations as to, the price of the Company's securities.
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PENNY STOCK REGULATION
In the event that the Company is unable to satisfy the maintenance
requirements for the Nasdaq National Market and its Common Stock falls below the
minimum bid price of $5.00 per share for the initial quotation, the Company
would seek to list its securities on the Nasdaq Small Capitalization Market. If
it was unsuccessful, trading would be conducted on the 'pink sheets' or the
NASD's 'Electronic Bulletin Board'. In the absence of the Common Stock being
quoted on Nasdaq, or the Company's having $2,000,000 in stockholders' equity,
trading in the Common Stock would be covered by Rule 15g-9 promulgated under the
Exchange Act, for non-Nasdaq and non-exchange listed securities. Under such
rule, broker-dealers who recommend such securities to persons other than
established customers and accredited investors must make a special written
suitability determination for the purchaser and receive the purchaser's written
agreement to a transaction prior to sale. Securities are exempt from this rule
if the market price is at least $5.00 per share.
The Commission adopted regulations that generally define a penny stock to
be any equity security that has a market price of less than $5.00 per share,
subject to certain exceptions. Such exceptions include an equity security listed
on Nasdaq and an equity security issued by an issuer that has (i) net tangible
assets of at least $2,000,000, if such issuer has been in continuous operation
for three years, (ii) net tangible assets of at least $5,000,000, if such issuer
has been in continuous operation for less than three years or (iii) average
revenue of at least $6,000,000 for the preceding three years. Unless an
exception is available, the regulations require the delivery, prior to any
transaction involving a penny stock, of a disclosure schedule explaining the
penny stock market and the risks associated therewith.
If the Company's securities were to become subject to the regulations
applicable to penny stocks, the market liquidity for the securities would be
severely affected, limiting the ability of broker-dealers to sell the securities
and the ability of the purchasers in this offering to sell their securities in
the secondary market. There is no assurance that trading in the Company's
securities will not be subject to these or other regulations that would
adversely affect the market for such securities.
POSSIBLE ISSUANCES OF PREFERRED STOCK
Shares of Preferred Stock of the Company may be issued by the Board of
Directors, without stockholder approval, on such terms as the Board may
determine. The rights of the holders of Common Stock will be subject to, and may
be adversely affected by, the rights of the holders of any Preferred Stock that
may be issued in the future. In connection with the IPO, the Company agreed with
the Underwriter that, for a period of two years commencing May 30, 1996, the
issuance of Common Stock or any warrants, options or other rights to purchase
Common Stock is subject to the Underwriter's prior consent, which may not be
unreasonably withheld. Accordingly, such restriction limits the ability of the
Company to issue shares of Preferred Stock which are, by their terms,
convertible into or exchangeable for shares of Common Stock. The Underwriter has
informed the Company that the primary factor that it will consider in approving
additional sales of securities by the Company will be the price at which the
securities will be sold since the Underwriter's concern is to prevent issuances
of securities at below fair market value which it believes would be harmful to
the public investors. Although the ability to issue Preferred Stock may provide
flexibility in connection with possible acquisitions and other corporate
purposes, such issuance may make it more difficult for a third party to acquire,
or may discourage a third party from acquiring, a majority of the voting stock
of the Company. This result could prevent an increase in the market price of
PCS's Common Stock or cause a decline in such price. PCS has no current plans to
issue any shares of its Preferred Stock. See 'Description of
Securities -- Preferred Stock'.
OUTSTANDING OPTIONS, WARRANTS, UNDERWRITER'S WARRANTS AND BRIDGE WARRANTS
As of September 30, 1997, the Company had outstanding options to purchase
an aggregate of 1,215,884 shares of Common Stock at exercise prices ranging from
$0.245 to $5.125. The Company also had outstanding Warrants, Underwriter's
Warrants and Bridge Warrants to purchase an aggregate of 4,830,000, 300,000 and
480,000 shares of Common Stock at exercise prices of $2.00, $2.00 and $2.00,
respectively. Exercise of any of the foregoing options or warrants will have a
dilutive effect on the
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Company's shareholders. Furthermore, the terms upon which the Company may be
able to obtain additional equity financing may be adversely effected, since the
holders of the options and warrants can be expected to exercise them, if at all,
at a time when the Company would, in all likelihood, be able to obtain any
needed capital on terms more favorable to the Company than those provided in the
options and warrants. See 'Dilution' and 'Management -- Incentive Stock Option
Plan' and ' -- Nonemployee Directors' Stock Option Plan.'
INABILITY TO EXERCISE WARRANTS
The Company intends to qualify the sale of the securities offered hereby in
a limited number of states. Although certain exemptions in the securities laws
of certain states might permit Warrants to be transferred to purchasers in
states other than those in which the Warrants were initially qualified, the
Company will be prevented from issuing Common Stock in such other states upon
the exercise of the Warrants unless an exemption from qualification is available
or unless the issuance of Common Stock upon exercise of the Warrants is
qualified. Although the Company has agreed to use reasonable efforts to obtain
appropriate approvals or registrations under state securities laws with respect
to such Common Stock, the Company may not be able to obtain qualification of the
issuance of such Common Stock in all of the states in which the ultimate
purchasers of the Warrants reside. In such a case, the Warrants held will expire
and have no value if such Warrants cannot be sold. Accordingly, the market for
the Warrants may be limited because of these restrictions. Further, a current
prospectus covering the Common Stock issuable upon exercise of the Warrants must
be in effect before the Company may accept Warrant exercises. There can be no
assurance the Company will be able to have a prospectus in effect when this
Prospectus is no longer current, notwithstanding the Company's commitment to use
its reasonable best efforts to do so. See 'Description of
Securities -- Redeemable Warrants.'
POTENTIAL ADVERSE EFFECT OF REDEMPTION OF WARRANTS
The Warrants may be redeemed by the Company at any time commencing on
November 30, 1997, upon notice of not less than 30 days, at a price of $.0167
per Warrant, provided the closing bid quotation of the Common Stock on Nasdaq
has exceeded $2.83 per share (subject to adjustment) for a period of 30
consecutive trading days during the period in which the Warrants are
exercisable. Redemption of the Warrants could force the holders to exercise the
Warrants and pay the exercise price at a time when it may be disadvantageous for
the holders to do so, to sell the Warrants at the then-current market price when
they might otherwise wish to hold the Warrants, or to accept the redemption
price, which is likely to be substantially less than the market value of the
Warrants at the time of redemption. See 'Certain Market Information' and
'Description of Securities -- Redeemable Warrants.'
EXERCISE PRICE ARBITRARILY DETERMINED
The exercise price and other terms of the Warrants were determined by
negotiation between the Company and the Underwriter and are not necessarily
related to the Company's assets, book value or financial condition, and may not
be indicative of the actual value of the Company.
VOLATILITY OF STOCK AND WARRANT PRICES
The Company's Common Stock and Warrants have experienced substantial price
fluctuations since the IPO in June 1996. In addition, the stock market has
experienced significant price and volume fluctuations that have affected the
market prices of equity securities of many companies and that often have been
unrelated to the operating performance of such companies. These broad market
fluctuations may adversely affect the market price of the Company's Common Stock
and Warrants. In the past, following periods of volatility in the market price
of a company's securities, securities class action litigation has often been
instituted against such a company. Such litigation could result in substantial
costs and a diversion of management's attention and resources, which would have
a material adverse effect on the Company's business, operating results and
financial condition.
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POSSIBLE CONTINGENT LIABILITY
In connection with the 1995 Bridge Financing involving certain private
investors which preceded the IPO, the Company may be deemed to have incurred a
technical violation of Section 5 of the Securities Act of 1933, as amended.
Accordingly, there may be a contingent liability associated with such matter.
However, management believes that there was no such violation, and the
possibility of such related liability is remote. See 'Description of
Securities -- Bridge Financing' and Footnote 8 to Financial Statements. See also
'Business -- Legal Proceedings' for information relating to a lawsuit filed
against the Company by its former counsel.
SHARES ELIGIBLE FOR FUTURE SALE
Sales of a substantial number of shares of Common Stock in the public
market following this offering could adversely affect the market price of such
shares. Upon the consummation of this offering, the Company will have 13,543,652
shares of Common Stock outstanding (assuming no exercise of outstanding options
or warrants other than the Warrants, the Underwriter's Warrants and the Warrants
underlying the Underwriter's Warrants), of which 9,000,000 shares will be freely
tradeable without restriction or further registration under the Securities Act.
All of the remaining 4,543,652 shares of Common Stock outstanding are
'restricted securities,' as that term is defined under Rule 144 promulgated
under the Securities Act, and in the future may only be sold pursuant to a
registration statement under the Securities Act, in compliance with the
exemption provisions of Rule 144 (including, without limitation, certain volume
limitations and holding period requirements thereof) or pursuant to another
exemption under the Securities Act. In addition, directors, officers and
securityholders of the Company beneficially owning approximately 56% of the
7,993,652 shares of Common Stock outstanding as of the date of this Prospectus
have agreed not to dispose of their shares, subject to certain exceptions, for a
period of eighteen months commencing May 30, 1996, without the prior written
consent of the Underwriter. The Company has been advised by the Underwriter that
it has not entered into any agreements or understandings with such individuals
regarding an early release of the eighteen-month restriction; however, the
Underwriter's general policy is to look at the market conditions with respect to
the particular securities and to look at each request on an individual basis.
The Underwriter has indicated to the Company that the market conditions it
generally focuses on are the volume of trading in the securities and the price
of the securities and that the Underwriter would grant a release only if it
believed that such release would not interfere with an orderly market in the
Company's securities.
USE OF PROCEEDS
The proceeds received by the Company upon exercise of the Warrants, the
Underwriter's Warrants and the Warrants underlying the Underwriter's Warrants,
net of expenses of the offering (other than solicitation fees, if any, to be
paid to the Underwriter in connection with the exercise of Warrants), will be
$10,986,800, assuming that all of such Warrants, Underwriter's Warrants and
Warrants included therein are exercised. There can be no assurance as to the
number of Warrants, if any, or Underwriter's Warrants or Warrants included
therein, if any, which will be exercised. However, the Company has been advised
by the holders of the Underwriter's Warrants that they currently intend to
exercise all of the Underwriter's Warrants, thereby resulting in proceeds to the
Company (before deducting expenses) of $616,800, although there can be no
assurance of such exercise. Management anticipates that the net proceeds of this
offering, if any, will be allocated to working capital and general corporate
purposes and will be applied, to the extent necessary, to the Company's current
operations. The Company may also use a portion of the proceeds of this offering
to repay any indebtedness which may be outstanding under the Company's secured
line of credit arrangement at the time such proceeds become available to the
Company. In addition, the Company may seek to acquire or invest in businesses
which the Company believes will enhance its business and prospects, and may use
a portion of the proceeds of this offering for one or more such acquisitions in
the event opportunities become available on terms acceptable to the Company.
While the Company from time to time evaluates potential acquisitions of or
investments in such businesses, there can be no assurance that the Company will
consummate any such acquisitions or investments. The Company will not receive
any of the proceeds from sales by the Selling
17
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<PAGE>
Securityholders of any of the securities to be issued to them upon exercise of
the Underwriter's Warrants or upon exercise of the Warrants underlying the
Underwriter's Warrants.
CERTAIN 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 13, 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(1) LOW(1)
------- ------
<S> <C> <C>
Fiscal Year 1996
June 3, 1996 to June 30, 1996...................................... $ 5 3/8 $1 7/8
Fourth Quarter..................................................... $ 6 3/8 $4 5/8
Fiscal Year 1997
First Quarter...................................................... $ 8 $4 15/16
Second Quarter..................................................... $ 7 3/4 $5
Third Quarter...................................................... $ 7 5/8 $2 7/8
Fourth Quarter..................................................... $ 4 3/4 $2 7/8
</TABLE>
- ------------
(1) All share prices with respect to dates prior to the Stock Split have been
adjusted to give 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.
On November 7, 1997, as reported by the Company's transfer agent, shares of
Common Stock were held by 75 persons, based on the number of record holders,
including several holders who are nominees for an undetermined number of
beneficial owners.
18
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<PAGE>
DILUTION
The difference between the exercise price of the Warrants and the adjusted
net tangible book value per share of Common Stock after this offering, assuming
exercise for cash of all Warrants, Underwriter's Warrants and Warrants
underlying the Underwriter's Warrants, constitutes the dilution to investors in
this offering. Net tangible book value per share on any given date is determined
by dividing the net tangible book value (total tangible assets less total
liabilities) of the Company on such date by the number of shares of Common Stock
outstanding on such date.
At June 30, 1997, the net tangible book value of the Company was
$7,345,001, or $.92 per share of Common Stock. After giving effect to the sale
by the Company of (i) 4,830,000 shares of Common Stock upon the exercise of
outstanding Warrants, (ii) 300,000 shares of Common Stock upon the exercise of
the Underwriter's Warrants and (iii) 420,000 shares of Common Stock upon the
exercise of the Warrants underlying the Underwriter's Warrants, and the receipt
of the net proceeds therefrom, the net tangible book value at June 30, 1997
would have been $18,331,801, or $1.35 per share of Common Stock, representing an
immediate increase in net tangible book value of $.43 per share to existing
shareholders and an immediate dilution of $.65 (32%) per share to those who
exercise Warrants. The following table illustrates the foregoing information
with respect to dilution on a per share basis:
<TABLE>
<S> <C> <C>
Public offering price per share of Common Stock upon exercise of Warrants and
Underwriter's Warrants................................................................ $2.00
Net tangible book value per share before offering.................................. $.92
Increase per share attributable to investors in this offering(1)................... .43
Adjusted net tangible book value after offering......................................... $1.35
-----
Dilution to investors in this offering.................................................. $ .65
-----
-----
</TABLE>
- ------------
(1) Assumes no exercise of any outstanding options or warrants other than the
Warrants, the Underwriter's Warrants and the Warrants underlying the
Underwriter's Warrants.
19
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<PAGE>
CAPITALIZATION
The following table sets forth, as of June 30, 1997, the capitalization of
the Company (i) on a historical basis and (ii) as adjusted to give retroactive
effect to the issuance and sale of the securities offered hereby and the
anticipated application of the estimated net proceeds therefrom. This
information should be read in conjunction with the Company's financial
statements and related notes appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
JUNE 30, 1997
----------------------------
ACTUAL AS ADJUSTED(1)
---------- --------------
(UNAUDITED)
<S> <C> <C>
Indebtedness:
Short-Term Debt, including current portion of long-term debt and capital lease
obligation................................................................... $ 304,537 $ 304,537
Long-Term Debt and capital lease obligation................................... 133,003 133,003
Stockholders' Equity:
Preferred Stock, par value $.01 per share; 2,000,000 shares authorized; none
issued....................................................................... -- --
Common Stock, par value $.015 per share; 30,000,000 shares authorized;
7,993,652 shares issued and outstanding at June 30, 1997; 13,543,652 shares
issued and outstanding as adjusted for this Offering(2)...................... 119,449 202,699
Capital in Excess of Par Value................................................ 5,066,068 15,969,618
Retained Earnings............................................................. 2,232,234 2,232,234
---------- --------------
Total Stockholders' Equity............................................... 7,417,751 18,404,551
---------- --------------
Total Capitalization..................................................... $7,855,291 $ 18,842,091
---------- --------------
---------- --------------
</TABLE>
- ------------
(1) Gives effect to the sale of (i) 4,830,000 shares of Common Stock upon the
exercise of outstanding Warrants, (ii) 300,000 shares of Common Stock and
420,000 Warrants upon the exercise of the Underwriter's Warrants and (iii)
420,000 shares of Common Stock upon the exercise of the Warrants underlying
the Underwriter's Warrants, resulting in net proceeds to the Company of
$10,986,800 (after deducting expenses of the offering other than
solicitation fees, if any, to be paid to the Underwriter in connection with
the exercise of Warrants). See 'Warrant Solicitation.'
(2) Does not include (i) 1,201,884 shares of Common Stock reserved for issuance
upon exercise of stock options granted under the Incentive Plan; (ii)
497,000 shares of Common Stock reserved for issuance upon exercise of
options available for future grant under the Incentive Plan; (iii) 30,000
shares of Common Stock reserved for issuance upon exercise of stock options
granted under the Directors' Plan; (iv) 15,000 shares of Common Stock
reserved for issuance upon exercise of stock options available for future
grant under the Directors' Plan; (v) 257,833 shares of Common Stock reserved
for issuance upon exercise of options granted under a non-qualified stock
option plan previously maintained by the Company, which has been cancelled;
and (vi) 480,000 shares of Common Stock reserved for issuance upon exercise
of the Bridge Warrants.
20
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<PAGE>
SELECTED FINANCIAL DATA
The following table summarizes certain selected financial data which should
be read in conjunction with the Company's financial statements and related notes
thereto and with Management's Discussion and Analysis or Plan of Operation,
which are included elsewhere in this Prospectus. The data as of and for the
years ended September 30, 1996 and 1995 has been derived from the Company's
financial statements which have been audited by KPMG Peat Marwick LLP,
independent accountants. The data as of and for the nine months ended June 30,
1997 and 1996 has been derived from the Company's unaudited interim financial
statements. In the opinion of management, such interim financial data reflects
all adjustments necessary for a fair presentation of financial position, results
of operations and cash flows. Operating results for the nine-month period ended
June 30, 1997 are not necessarily indicative of the results that may be attained
for the entire fiscal year.
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED
JUNE 30, SEPTEMBER 30,
------------------------ -------------------------
1997 1996 1996 1995
---------- ---------- ----------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Statement of earnings data:
Revenues........................................... $8,196,533 $3,682,110 $10,495,063 $8,652,553
Cost of revenues................................... 4,377,275 2,253,864 5,818,010 4,680,661
Gross profit.................................. 3,819,258 1,428,246 4,677,053 3,971,892
Selling and administrative expense................. 3,216,759 2,315,082 3,247,385 2,668,320
Income (loss) from operations................. 602,499 (886,836) 1,429,668 1,303,572
Other income (expense):
Interest expense.............................. (83,245) (329,225) (362,956) (392,589)
Miscellaneous income (expense)................ 23,120 (32,646) 11,257 (50,711)
---------- ---------- ----------- ----------
Income (loss) before income taxes........ 542,374 (1,248,707) 1,077,969 860,272
Income tax expense (benefit).................. (190,699) 463,769 375,816 278,857
---------- ---------- ----------- ----------
Net income (loss)........................ $ 351,675 $ (784,938) $ 702,153 $ 581,415
---------- ---------- ----------- ----------
---------- ---------- ----------- ----------
Earnings (loss) per share............................... $.04 $(.16) $0.10 $0.13
---- ----- ----- -----
---- ----- ----- -----
Balance sheet data:
Cash and cash equivalents.......................... $ 424,742 $ 76,722 $ 65,069 $ 211,426
Working capital.................................... 6,236,526 4,865,900 6,836,348 1,850,408
Total assets....................................... 9,571,805 8,232,586 10,988,658 9,449,715
Long-term obligations, less current portion........ 133,003 681,809 686,932 806,388
Total stockholders' equity......................... $7,417,751 $5,555,978 $ 7,045,844 $2,007,171
</TABLE>
21
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<PAGE>
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 included elsewhere in this Prospectus
and the related notes thereto.
RESULTS OF OPERATIONS
NINE-MONTH PERIOD ENDED JUNE 30, 1997 COMPARED TO THE NINE-MONTH PERIOD ENDED
JUNE 30, 1996
Revenues for the nine months ended June 30, 1997 were $8,196,533, an
increase of $4,514,423 or 123% over the nine months ended June 30, 1996 revenues
of $3,682,110. This increase is primarily due to the Company's strong backlog
($9,099,394 at June 30, 1997) and continued full scale production deliveries to
Raytheon in support of the U.S. Marine Corps HAWK/AVENGER Air Defense missile
system upgrade and additional requirements of Lockheed Martin's Enhanced
Diagnostic Aid ('EDNA') systems for use by U.S. Air Force on F-16 Fighter
Aircraft.
Gross profit was $3,819,258 for the nine months ended June 30, 1997, or 47%
of sales, compared to $1,428,246 or 39% of sales in the nine months ended June
30, 1996, a total increase of $2,391,012 or 167%. This increase in gross
profitability results primarily from the increased revenues discussed above.
Selling and administrative expenses of $3,216,759 in the nine months ended
June 30, 1997 increased by $901,667 or 39% from the nine months ended June 30,
1996 expenses of $2,315,082. As a percentage of sales, selling and
administrative expenses were 39% and 63% in the nine months ended June 30, 1997
and 1996, respectively. The increased selling and administrative costs are due
primarily related to increased sales commissions directly attributable to the
increased sales discussed earlier herein, increased professional fees and
increased expenditures for research and development.
Income from operations improved to $602,499 for the nine months ended June
30, 1997 from a loss of $(886,836) in the nine months ended June 30, 1996, an
improvement of $1,489,335. As a percentage of sales, income from operations
improved to 7% in the nine months ended June 30, 1997 from a loss of (24%) in
the nine months ended June 30, 1996. The improvement in income/(loss) from
operations overall resulted primarily from increased revenues and gross profits,
offset in part by increased selling and administrative expenses as discussed
above.
Interest expense for the nine months ended June 30, 1997 was reduced by
$245,980, or 75%, to $83,245 compared to $329,225 in the nine months ended June
30, 1996. As a percentage of sales, interest expense decreased to 1% in the nine
months ended June 30, 1997 from 9% in the nine months ended June 30, 1996. This
decrease is due to a significant decline in outstanding credit balances made
possible by the proceeds of the Company's IPO in June 1996.
As a result, the Company's net income improved by 141% to $351,675 in the
nine months ended June 30, 1997 when compared to a net loss of $(784,938) in
1996, an increase of 1,136,613 in total. Net income as a percentage of sales was
4% in the nine months ended June 30, 1997 and net loss as a percentage of sales
was (21%) in the nine months ended June 30, 1996. The improvement in net income
overall resulted primarily from increased revenue and gross profits and reduced
interest expense, offset in part by increased selling and administrative
expenses as discussed above.
FISCAL YEAR 1996 COMPARED TO FISCAL YEAR 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.
22
<PAGE>
<PAGE>
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 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 or 30 or 60 day LIBOR rates
plus 2.70%. All borrowings are collateralized by accounts receivable, inventory
and equipment. As of June 30, 1997, there were no amounts 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 June 30, 1997.
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 June 30, 1997, there was approximately $146,652 outstanding
under this arrangement with the Bank. The Company also has capital lease
obligations of $248,545 at June 30, 1997. These capital lease obligations bear
interest rates of 1.25% to 1.50% over the prime rate and are expected to be
satisfied within three years.
On April 22, 1997, the Company prepaid a note payable to the Bank in an
aggregate principal amount of $500,000. Such note bore interest at the prime
rate, and was scheduled to be due and payable in March 1998.
In August 1995, the Company borrowed $400,000 pursuant to bridge notes
('Bridge Notes') from a group of private investors at an annual interest rate of
6%. In addition, the Company sold to the same investors the Bridge Warrants to
purchase 480,000 shares of Common Stock, exercisable until June 3, 2001 at an
exercise price of $2.00 per share. The Bridge Notes, which bear interest at 6%,
had an outstanding principal balance of $50,000 at June 30, 1997.
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
23
<PAGE>
<PAGE>
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 from those of its other
customers as a whole.
The Company's operating cash flow was $2,103,467 for the nine months ended
June 30, 1997. The improvement in the Company's operating cash flow resulted
primarily from improved net income as more fully described herein for the nine
months ended June 30, 1997 and improved working capital as more fully presented
in the Condensed Statements of Cash Flows for the same period. Negative cash
flows for the years ended September 30, 1996 and 1995, $(1,426,090) and
$(298,577), respectively, 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 annual revenues from $4,621,527 in fiscal 1993 to $10,495,063 in
fiscal 1996, an increase of almost 127%. In addition, the Company invested
$347,805 in the nine months ended June 30, 1997, $127,352 in fiscal 1996 and
$60,350 in fiscal 1995 to acquire manufacturing equipment also in support of
these expanded operating levels.
Due to the Company's orders related to the U.S. Department of Defense
procurements, the operations of the Company have been cyclical and have
historically resulted in a significant increase in deliveries and revenues in
the fourth quarter of its fiscal year ending on September 30. Due to the
Company's strong backlog and increased revenues, this cycle is less significant
in the first nine months of the current fiscal year, resulting in a significant
improvement in cash provided from operations, as discussed earlier herein, and
less significant changes in inventory levels than the prior period.
As of the date hereof, 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, the Company's major customer, Raytheon,
has traditionally averaged approximately 80 to 100 days in satisfaction of
outstanding accounts receivable balances. This situation is improving through
negotiation with Raytheon, and management believes that average outstanding
balances will be reduced in the future to more traditional levels approximating
45 days, although there can be no assurance of such. The Company's total
outstanding account receivable balance of $3,536,841 at June 30, 1997 has been
subsequently reduced by approximately $1,695,000 in cash collections as of
August 25, 1997. 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 June 30, 1997 are likely
to be uncollectible.
As of June 30, 1997 and 1996, the Company's backlog was $9,099,394 and
$4,507,747, 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. The
Company presently expects to manufacture and deliver most of the products in
backlog within the next twelve months.
The Company anticipates that the proceeds of this offering, together with
the Company's existing working capital and anticipated cash flow from the
Company's operations, will be sufficient to satisfy the Company's cash
requirements for at least twelve months. In the event the Company's plans change
(due to unanticipated expenses or difficulties or otherwise), or if the proceeds
of this offering and projected cash flow otherwise prove insufficient to fund
operations, the Company could be required to seek additional third-party sources
of financing sooner than currently anticipated. Except for the Company's current
arrangements with the Bank, the Company has no current arrangements with respect
to, or sources of, additional financing. Accordingly, there can be no assurance
that additional public or private third-party financing will be available to the
Company when needed, on commercially reasonable terms, or at all. In addition,
given the trading history of the Company's Common Stock since the IPO, there can
be no assurance that the Company would be able to raise additional cash through
the Warrants or other public and/or private offerings of its Common Stock. The
Company's inability to obtain such additional financing could have a material
adverse effect on the Company's long-term liquidity and on the proposed business
expansion plans of the Company.
24
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<PAGE>
BUSINESS
GENERAL
The Company 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, 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. ('UES Florida'). 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 was incorporated under the laws of the State of Florida in June
1982. In June 1996, the Company consummated the IPO, pursuant to which it issued
to the public 3,450,000 shares of Common Stock and 4,830,000 Warrants.
INDUSTRY BACKGROUND -- MILITARY MARKET
Traditionally, the U.S. Department of Defense 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
25
<PAGE>
<PAGE>
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 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.
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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, 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.
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.
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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
General. The Company currently offers its customers a line of rugged,
portable computers that includes two types of hand-held processors, four types
of laptops and a rackmount system. In terms of performance, PCS's portable
computers 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.
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 government and commercial areas, PCS's products collect, store,
process and communicate data generally and are used specifically in such
applications as environmental studies and testing, land
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mapping and surveys, oil exploration, governmental inspections, medical testing
and support and construction projects.
Military Applications. 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:
<TABLE>
<CAPTION>
TYPE OF
DESCRIPTION OF PROGRAM NAME OF CUSTOMER COMPUTER APPLICATION
- --------------------------------- ---------------- ---------- ---------------------------------
<S> <C> <C> <C>
HAWK/AVENGER Air Defense Missile
Systems........................ Raytheon Laptop Portable Fire Controller
LANTIRN Low Altitude Navigation
System......................... Lockheed Martin Hand-held Maintenance Data Recording Device
HARM Missile System.............. Texas Instrument Laptop Mission Loading and Electronic
Diagnostics
F-16 Fighter and Mission
Loading........................ Lockheed Martin Laptop Electronic Diagnostics Check
</TABLE>
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. Air Force on F-16 fighter aircraft.
Deliveries began 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.
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 and medical markets involve varying
degrees of customization while only a small portion of computers sold to its
non-military government and non-medical 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.
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-- 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.
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. In
connection with this contract, Paravant has developed 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 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 the Company's
current hand-held and laptop products. This notebook computer is now available
for sale, primarily to military and government customers.
The Company is currently in the process of designing and developing a
portable computer to be sold to manufacturers of certain types of medical
devices. The computer would serve as a medical reprogramming device which would
be used to communicate with, and thereby reprogram, programmable pumps (e.g.,
pacemakers, defibrillators, drug pumps and electroneurostimulation implants)
which have been developed by such medical device manufacturers and surgically
implanted in patients. Although the Company believes that, based on the
reputation and experience it has developed in the military market, it will be
able to penetrate the medical market by targeting medical device manufacturers
who, like the Company's military customers, require expert electrical and
mechanical engineering capabilities, strict documentation control, adherence to
multiple specifications and configuration control management, there can be no
assurance of such or that any medicalrelated computers will be developed by the
Company or, if developed, will meet with broad market acceptance.
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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 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, Rhinehart 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
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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.
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. The Company's facilities have also been registered with the U.S. Food and
Drug Administration to produce certain non-intrusive medical devices. 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 twelve 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 involves 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.
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
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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'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. The Company has also
recently developed a site on the World Wide Web which can be accessed by
potential customers. The Web site lists the Company's products and provides
specifications with respect thereto. 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.
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,
surveying and engineering concerns and medical device manufacturers.
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
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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, Phoenix Technologies, 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 Litton Data Systems, Miltope,
Cyberchron and NAI Technologies (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. 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
34
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<PAGE>
pricing, under DoD regulations such commercial pricing information may be
utilized to support the prices that it charges in the military marketplace.
In the medical market, the Company believes that many medical device
manufacturers either design and produce their own medical support devices such
as reprogrammers or hire a design consultant to design such devices and contract
with a third party to manufacture the devices. Although the Company believes
that it will compete based on its ability to offer a full design and production
service to medical device manufacturers, there can be no assurance of such, or
that the Company will be able to compete successfully with other computer
manufacturers who provide similar design and production services to medical
device manufacturers.
BACKLOG
As of June 30, 1997, the Company's backlog was $9,099,394, as compared with
backlog of $14,617,253 as of September 30, 1996. Three customers accounted for
approximately 59%, 23% and 8% of such backlog as of June 30, 1997. 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.
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 involve: (i) activities conducted by the
Company; (ii) joint efforts between the Company and another enterprise; and
(iii) endeavors of third party contractors retained by the Company. 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 pounds, 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 funds 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 or Plan of Operation.' 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 the
Company's employees have signed confidentiality agreements regarding its
proprietary information nor have any employees other than Messrs. McNeight and
Craven signed any non-competition agreements.
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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.
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, the Company 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.
In connection with the development and future manufacture of its medical
products, the Company is and will be subject to various regulations, including
regulations promulgated by the Food and Drug Administration. Such FDA
regulations relate to, among other things, the quality of the components
included within the Company's products, as well as standards governing
manufacturing procedures, workmanship, materials, and the condition of the
Company's facilities. In addition, in the event any medical products developed
by the Company in the future are sold outside of the United States, the Company
may also become subject to foreign regulations promulgated by foreign medical
regulatory bodies.
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
36
<PAGE>
<PAGE>
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, and will not in the future inhibit or limit, the Company's ability to
enter into material contracts in either the miliary market or the medical
market.
EMPLOYEES
As of June 30, 1997, the Company had 71 full time employees including its
officers, of whom 29 were engaged in manufacturing and repair services, 9 in
administration and financial control, 22 in engineering and research and
development, and 11 in marketing and sales.
None of the Company's 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.
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.
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 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.
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PROPERTY
On September 1, 1996, the Company entered into a lease relating to
approximately 17,300 square feet of space located at 1615a West Nasa Boulevard,
Suite E, Melbourne, Florida 32901. This space is utilized by the Company as its
principal corporate headquarters and manufacturing plant. The lease for this
space expires December 31, 2001, and provides for monthly rental payments of
$1,500 per month through February 1997, increasing to $3,000 per month through
August 1997 and, thereafter, to $9,855 per month through December 2001. These
amounts include the Company's proportionate cost of utilities, repairs,
cleaning, taxes and insurance. The Company commenced operations at this new
facility in late December 1996.
Management believes that its new facility will meet its operational needs
for the foreseeable future.
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MANAGEMENT
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------------------- --- ------------------------------------------------------------------
<S> <C> <C>
Krishan K. Joshi....................... 61 Chairman of the Board, Chief Executive Officer and Director
Richard P. McNeight.................... 47 President, Chief Operating Officer and Director
William R. Craven...................... 49 Vice President of Marketing, Secretary and Director
Kevin J. Bartczak...................... 44 Vice President, Treasurer and Chief Financial Officer
Lary J. Beaulieu....................... 50 Vice President of Engineering
James E. Clifford...................... 60 Director
Michael F. Maguire..................... 71 Director
</TABLE>
Krishan K. Joshi. From 1976 to date, Mr. Joshi has served as founder,
chairman and president of UES, a technology development company. Following the
acquisition of a controlling interest in the Company by UES in December of 1989,
he became Chairman, Chief Executive Officer and President of the Company.
However, in April 1994, he resigned as President of the Company and continues to
serve as Chairman and Chief Executive Officer. Mr. Joshi spends less than 20% of
his time on Company affairs. He has also been Chairman of Astro Industries,
Inc., a manufacturer and distributor of aerospace wire and cable products, since
August 1980. He holds a Bachelor of Science degree in Mathematics and Physics
from Punjab University in India; a Bachelors degree in Aeronautical and
Astronautical Engineering from Ohio State University and Master of Science
degree in Engineering from the University of Dayton, Ohio; and has engaged in
Doctoral studies in Mechanical Engineering at the University of Cincinnati.
Richard P. McNeight. From 1984 until June 1994, Mr. McNeight served as a
Vice President and General Manager of the Company. He was appointed President of
the Company in June 1994. From 1982 to 1984, he was employed by Siemen's
Corporation as a senior member of its systems engineering staff. From 1972 to
1982, he worked for ITT's North Telecommunications Division in several positions
as a software engineering director and manager and engineer. Mr. McNeight holds
a Bachelors degree in Applied Science/Engineering from the University of
Wisconsin and a Masters degree in Computer Information/Control Engineering from
the University of Michigan.
William R. Craven. Mr. Craven joined the Company in September 1991 as a
Vice President in charge of Marketing and has served in that capacity
continually to the present. From 1990 to 1991, he was employed as a Vice
President of Marketing for Telxon Corp., a manufacturer of hand-held computers
and software systems. From 1982 to 1990, he served as a Vice President of Mead
Corp., a manufacturer of paper products and provider of electronic services, in
a variety of positions, including marketing, product development and joint
ventures. For three years during that period, he acted as President of Seiko
Mead Company, a Japanese-American joint venture established to manufacture color
computer printers and copiers. He was employed as a Director of Marketing by
Gentech Industries, a manufacturer of packaging materials and systems, from 1979
to 1982. He also served as Sales and Product Managers for Champion
International, a manufacturer of paper products, from 1971 until 1979. Mr.
Craven holds a Bachelor of Science degree in Physics and Mathematics from
Birmingham Southern College.
Kevin J. Bartczak. Mr. Bartczak joined the Company as an officer in
February, 1995. From 1993 to 1995, he served as Chief Financial Officer,
Secretary and Director of Opto Mechanik, Inc. ('OMI'), a manufacturer of
electro-optical fire control and assemblies for weapons systems. On October 14,
1994, OMI filed for protection under Chapter 11 of the U.S. Bankruptcy Code and
was subsequently liquidated. Mr. Bartczak was employed from 1987 to 1993 as a
division controller of Harsco Corporation, a manufacturer of heavy equipment and
land combat systems. From 1984 to 1987, he was also employed as a division
controller of General Defense Corporation, a manufacturer and developer of
ammunition, radar guidance and weapon systems. Mr. Bartczak served from 1981 to
1984 as a division controller and manager of corporate accounting of Elkem Metal
Company, a producer of metal alloys. From 1979 to 1981, he functioned as senior
accountant for the Cyclops Corporation, a producer of specialty steel,
industrial and residential building products and consumer electronics. As a
certified public accountant, he worked as an audit supervisor for Arthur Young &
Co. from 1975 to 1979.
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Mr. Bartczak holds a Bachelor of Science degree in Business Management from
Indiana University of Pennsylvania.
Lary J. Beaulieu. Since 1988, Mr. Beaulieu has been employed continually by
the Company in several capacities, including Director of Engineering, Chief
Engineer and Vice President of Engineering. From 1982 to 1988, he served as
Manager of Inspection and Service Products, Engineering Manager and New Product
Design Manager for Schlumberger Technologies, a manufacturer of
service/inspection products. He worked in several engineering positions from
1972 through 1981 for ITT's North Telecommunications Division. Mr. Beaulieu
holds Bachelor and Masters of Science degrees in electrical engineering from
Tufts University.
James E. Clifford. From 1989 to date, Mr. Clifford has served as President
and Director of Engineering Development Laboratories, Inc., a manufacturer of
aircraft avionics and flight control electronics. From 1983 to 1989, Mr.
Clifford served as President of Signal Technology Laboratories, Inc. ('STL'), a
manufacturer and developer of militarized electronic defense systems, and
continues to serve as a director of STL. Mr. Clifford served as an officer in
the U.S. Air Force for 23 years, attaining the rank of Colonel specializing in
air lift and aircraft acquisition programs. Mr. Clifford holds Bachelors and
Masters of Science degrees in Electrical Engineering from Oklahoma State
University.
Michael F. Maguire. Since 1986, Mr. Maguire has been employed as President
of Maguire Investment Management, Inc., a consulting firm founded by him. From
1973 through 1986, he was an officer of Harris Corp., a computer manufacturer,
attaining the position of senior vice president. From 1962 to 1973, Mr. Maguire
served in various capacities with Perken Elmer, a manufacturer of analytical
instruments and life-science systems, including as an engineering manager, vice
president, general manager and group vice president. From 1950 to 1962, he held
various engineering design and management positions with General Electric, Pratt
& Whitney, and Sperry Rand companies. He is currently a director of Harris
Computer Systems Corp., Concurrent Computer Systems Corp. and Cyberguard Corp.
Mr. Maguire also previously served as a director of OMI. In 1950, he received a
Bachelor of Science degree in electrical engineering from Rensselear Polytechnic
Institute and in 1955 a Masters of Science degree from the University of
Connecticut.
Officers are appointed by the Board of Directors and hold office until
their successors are chosen and qualify, subject to earlier removal by the Board
of Directors. All directors hold office for a term of one year until the next
annual meeting of shareholders and the election and qualification of their
successors. Each director who is not an employee of the Company is paid $500 for
each meeting of the Board of Directors attended by such director. The Company
also reimburses each such director for all reasonable expenses incurred by him
in attending meetings. In addition, non-employee directors of the Company are
eligible to participate in the Company's Directors' Plan. See ' -- Executive
Compensation -- Nonemployee Directors' Stock Option Plan.'
The Company has agreed, for a period of three years commencing June 3,
1996, to engage a designee of the Underwriter as a non-voting advisor to the
Company's Board of Directors or, at the Underwriter's request, to nominate and
use its best efforts to elect a reasonably acceptable designee of the
Underwriter as a director of the Company. The Underwriter has not yet exercised
its right to designate such a person.
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<PAGE>
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth certain information regarding the
compensation in each of the last three fiscal years of the person who served as
the Company's Chief Executive Officer during the fiscal year ended September 30,
1997, and the three other highest paid executive officers who were serving as
officers at September 30, 1997 (collectively, the 'Named Executive Officers').
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
---------------------------------------------
ANNUAL COMPENSATION AWARDS
-------------------------------------- ----------------------------- PAYOUTS
OTHER RESTRICTED SECURITIES -------------
FISCAL ANNUAL STOCK UNDERLYING LTIP
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) COMPENSATION($) AWARD(S)($) OPTIONS/SARs(#) PAYOUTS(1)($)
- ------------------------------ ------ --------- -------- --------------- ----------- --------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Krishan K. Joshi(2) .......... 1997 52,000 -0- -0- -0- -0- -0-
Chairman and Chief Executive 1996 52,000 -0- -0- -0- -0- -0-
Officer 1995 45,200 -0- -0- -0- -0- -0-
Richard P. McNeight(3) ....... 1997 161,193 (4) -0- -0- 40,000 4,117
President and Chief 1996 139,500 18,000 -0- -0- 90,000 1,665
Operating Officer 1995 124,241 -0- -0- -0- 120,000 -0-
William R. Craven ............ 1997 122,396 (4) -0- -0- 25,000 2,764
Vice President of Marketing 1996 118,038 14,000 -0- -0- 45,000 1,369
1995 106,616 -0- -0- -0- 15,000 -0-
Lary J. Beaulieu(5) .......... 1997 100,243 (4) -0- -0- 15,000 3,082
Vice President of 1996 97,490 10,000 -0- -0- 30,000 1,205
Engineering 1995 98,560 -0- -0- -0- 15,000 -0-
<CAPTION>
ALL OTHER
NAME AND PRINCIPAL POSITION COMPENSATION($)
- ------------------------------ ---------------
<S> <C>
Krishan K. Joshi(2) .......... -0-
Chairman and Chief Executive -0-
Officer -0-
Richard P. McNeight(3) ....... -0-
President and Chief -0-
Operating Officer -0-
William R. Craven ............ -0-
Vice President of Marketing -0-
-0-
Lary J. Beaulieu(5) .......... -0-
Vice President of -0-
Engineering -0-
</TABLE>
- ------------
(1) Represents Company matching funds for 401(k) Profit Sharing Plan.
(2) Reflects compensation for Mr. Joshi's part-time work for the Company.
(3) Excludes personal use of Company automobile and computer equipment estimated
at $5,000 per year.
(4) Bonus amounts to be paid to executive officers for fiscal 1997 have not yet
been determined by the Company.
(5) Excludes for fiscal 1997 personal use of Company automobile and computer
equipment estimated at $3,500.
OPTION/SAR GRANTS DURING FISCAL YEAR 1997
The following table provides information related to options granted to the
Named Executive Officers during the fiscal year ended September 30, 1997. No
stock appreciation rights were issued by the Company during fiscal 1997.
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF TOTAL
SECURITIES OPTIONS/SARS
UNDERLYING GRANTED TO EXERCISE OR
OPTIONS/SARs EMPLOYEES IN BASE PRICE EXPIRATION
NAME GRANTED(#)(1) FISCAL YEAR ($/SH)(1) DATE
- ------------------------------------------------------- ------------ ---------------- ----------- ----------
<S> <C> <C> <C> <C>
Krishan K. Joshi,
Chairman and Chief Executive Officer................. -- -- -- --
Richard P. McNeight,
President and Chief Operating Officer................ 40,000 19.0% 5.125 11/29/06
William R. Craven,
Vice President of Marketing.......................... 25,000 12.0% 5.125 11/29/06
Lary J. Beaulieu,
Vice President of Engineering........................ 15,000 7.0% 5.125 11/29/06
</TABLE>
- ------------
(1) All share numbers and exercise prices have been adjusted to give effect to
the Stock Split. The right to exercise the options is vested over a
three-year period from the date of grant on November 29, 1996, with
one-third of the options subject to grant to become vested (and consequently
exercisable) on each of the first three anniversaries of the date of grant.
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<PAGE>
AGGREGATED OPTION/SAR EXERCISES DURING FISCAL YEAR 1997 AND FISCAL YEAR END
OPTION/SAR VALUES
The following table provides information related to options exercised by
the Named Executive Officers during the fiscal year ended September 30, 1997 and
the number and value of options and stock appreciation rights held at fiscal
year end which are currently exercisable. No options or stock appreciation
rights were exercised during the fiscal year ended September 30, 1997.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED
SHARES OPTIONS/SARs AT FY-END(1)
ACQUIRED ON VALUE -----------------------------------------------------
NAME EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE
- -------------------------- ----------- ----------- ------------------------- -------------------------
<S> <C> <C> <C> <C>
Krishan K. Joshi, Chairman
and Chief Executive
Officer................. -- -- 445,848 -0-
Richard P. McNeight,
President and Chief
Operating Officer....... -- -- 446,667 140,000
William R. Craven, Vice
President of
Marketing............... -- -- 327,262 60,000
Lary J. Beaulieu,
Vice President of
Engineering............. -- -- 25,031 40,000
<CAPTION>
VALUE OF UNEXERCISED
IN-THE-MONEY
OPTIONS/SARs AT FY-END($)(2)
-----------------------------------------------------------
NAME EXERCISABLE UNEXERCISABLE
- -------------------------- ---------------------------- ----------------------------
<S> <C> <C>
Krishan K. Joshi, Chairman
and Chief Executive
Officer................. $1,939,885 $ -0-
Richard P. McNeight,
President and Chief
Operating Officer....... 1,293,269 330,530
William R. Craven, Vice
President of
Marketing............... 1,400,004 113,918
Lary J. Beaulieu,
Vice President of
Engineering............. 90,918 82,251
</TABLE>
- ------------
(1) All share numbers have been adjusted to give effect to the Stock Split.
(2) The values of Unexercised-In-the-Money Options/SARs represents the aggregate
amount of the excess of $4.50, the closing sales price for a share of Common
Stock (as adjusted to give effect to the Stock Split) on September 30, 1997,
over the relevant exercise price of all 'in-the-money' options held on such
date.
INCENTIVE STOCK OPTION PLAN
Under the Company's Incentive Plan, options to purchase a maximum of
1,455,000 shares of its Common Stock may be granted to officers, directors and
other key employees of the Company. Options granted under the Incentive Plan are
intended to qualify as incentive stock options as defined in the Internal
Revenue Code of 1986, as amended (the 'Code').
The Incentive Plan is administered by the Board of Directors and the Stock
Option Committee, which determines which persons are to receive options, the
number of options granted and the exercise prices thereof. In the event an
optionee voluntarily terminates his employment with the Company, the optionee
generally has the right to exercise his accrued options within five days of such
termination. If an optionee's employment is involuntarily terminated, other than
because of death, he has the right to exercise his accrued option within thirty
days of such termination. Upon death, the optionee's estate or heirs have one
year to exercise said optionee's accrued options. The maximum term of any option
is generally ten years, and the option price per share may not be less than the
fair market value of the Company's shares at the date the option is granted.
However, options granted to persons owning more than 10% of the Company's voting
shares may not have a term in excess of five years, and the option price per
share may not be less than 110% of fair market value. The Company may redeem any
accrued but unexercised option held by an optionee by paying him the difference
between the option exercise price and the then fair market value.
If the aggregate fair market value of the shares of Common Stock
(determined at the time the option is granted) with respect to which incentive
stock options are exercisable for the first time by such optionee during any
calendar year (under all such plans) exceeds $100,000, then only the first
$100,000 of such shares so purchased will be treated as incentive options and
any excess over $100,000 so purchased shall be treated as options which are not
incentive stock options. This rule shall be applied by
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<PAGE>
taking options into account in the order or sequence in which they are granted.
Options must be granted within ten years from the effective date of the
Incentive Plan.
Options granted under the Incentive Plan are not transferable other than by
will or by the laws of descent and distribution. Options granted under the
Incentive Plan are protected by anti-dilution provisions increasing the number
of shares issuable thereunder and reducing the exercise price of such option,
under certain conditions. The Incentive Plan will terminate on December 22, 2004
or on such earlier date as the Board of Directors may determine. Any option
outstanding at the termination date will remain outstanding until it expires or
is exercised in full, whichever occurs first. As of November 8, 1997, options to
acquire an aggregate of 958,000 shares of the Company's Common Stock at exercise
prices ranging from $0.72 per share to $5.125 per share had been granted under
the Incentive Plan to key employees and directors (including options to purchase
120,000 shares of Common Stock at an exercise price of $0.79 per share, 90,000
shares of Common Stock at an exercise price of $1.47 per share, and 40,000
shares of Common Stock at an exercise price of $5.00 per share, granted to Mr.
McNeight; options to purchase 15,000 shares of Common Stock at an exercise price
of $0.72 per share, 45,000 shares of Common Stock at an exercise price of $1.33
per share and 25,000 shares of Common Stock at an exercise price of $5.00 per
share, granted to Mr. Craven; and options to purchase 15,000 shares of Common
Stock at an exercise price of $0.72 per share, 30,000 shares of Common Stock at
an exercise price of $1.33 per share and 15,000 shares of Common Stock at an
exercise price of $5.00 per share, granted to Mr. Beaulieu). In the case of
options granted under the Incentive Plan to employees, such options vest and are
exercisable at a rate no greater than 33 1/3% each continuous year in which the
employee is employed on a full time basis by the Company.
NONEMPLOYEE DIRECTORS' STOCK OPTION PLAN
In order to attract and retain the services of non-employee members of the
Board of Directors and to provide them with increased motivation and incentive
to exert their best efforts on behalf of the Company by enlarging their personal
stake in the Company, the Company has adopted the Directors' Plan, pursuant to
which stock options covering an aggregate of 45,000 shares of the Company's
Common Stock may be granted to such non-employee directors.
Pursuant to the Directors' Plan, each member of the Board of Directors of
the Company who is not an employee of the Company (or a subsidiary) (a
'Non-employee Director') and who is elected or re-elected as a director of the
Company by the shareholders at any annual meeting of shareholders will receive,
as of the date of each such election or re-election, options to purchase 7,500
shares of the Company's Common Stock. In addition, each Non-employee Director
will receive options to purchase 7,500 shares of Common Stock upon his initial
election or appointment as director. All options granted under the Directors'
Plan are to be non-incentive options. Messrs. Clifford and Maguire, the current
Non-employee Directors, were each granted in May 1996 non-incentive options to
purchase 7,500 shares of Common Stock at an exercise price of $1.67 per share
and in February 1997 non-incentive options to purchase 7,500 shares of Common
Stock at an exercise price of $6.00 per share.
401(k) PROFIT SHARING PLAN
The Company's 401(k) Profit Sharing Plan (the 'PSP') is qualified under
Sections 401(a) and 401(k) of the Code. The effective date of the PSP is January
1, 1990. This plan is administered under a Trust and two of the Company's
directors are currently serving as its trustees. All employees of the Company
who are 21 years or older, including its executive officers, are eligible to
participate in this plan after three months of employment.
Under the PSP, participating employees have the right to elect that their
contributions to this plan be made from deductions from the compensation owed to
them by the Company in an amount up to 15% of their compensation per annum, not
to exceed $9,500 in each of 1996 and 1997. In addition, the Company, in its
discretion, may make contributions to this plan of up to 1% of the participant's
annual compensation. Participating employees are entitled to full distribution
of their share of the Company's contribution under this plan upon their death or
total disability or when they reach retirement age (i.e., 65 years of age). If a
participating employee's employment is terminated earlier, such employee's share
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of the Company's contributions will depend upon the employee's number of years
of employment with the Company. All employees are entitled to receive 25%, 50%,
75%, and 100%, respectively, of the Company's contributions upon completion of
2, 3, 4, and 5 years of employment, respectively.
All participating employees have the right to receive 100% of their own
contributions to the PSP upon any termination of employment. Apart from the
Company's and employees' contributions, they may receive investment earnings
relating to the funds in their account under this plan.
DESCRIPTION OF EMPLOYMENT AGREEMENTS, SEVERANCE ARRANGEMENTS AND CHANGE OF
CONTROL ARRANGEMENTS
The Company has entered into an employment agreement with each of Richard
P. McNeight, President and Chief Operating Officer of the Company, William R.
Craven, Vice President of Marketing of the Company, Kevin J. Bartczak, Vice
President, Chief Financial Officer and Treasurer of the Company, and Lary J.
Beaulieu, Vice President of Engineering of the Company. Each of such agreements
became effective September 15, 1997 and continues through December 31, 1999.
The Company's agreement with Mr. McNeight provides for payment to Mr.
McNeight of an annual base salary during the term of such agreement of $157,300,
together with unspecified bonuses to be determined by the Board of Directors.
The agreement further provides that, in the event that, during the term of his
employment, (i) Mr. McNeight shall die or become disabled, the Company shall pay
to him or his estate, as the case may be, an amount (either in a lump sum or in
twelve equal installments) equal to twelve months of compensation or (ii) Mr.
McNeight's employment is terminated by the Company without cause, he shall be
entitled to receive severance of two years' compensation and twelve months of
benefits. The agreement also contains a two-year non-competition covenant
covering the rugged computer business that commences upon termination of Mr.
McNeight's employment, provided that such covenant shall become void in the
event he is terminated by the Company without cause or due to a change of
control of the Company, except that, notwithstanding the foregoing, the covenant
shall remain in effect for so long as the Company is paying severance to Mr.
McNeight pursuant to the terms of the agreement.
The Company's employment agreements with William R. Craven, Kevin J.
Bartczak and Lary J. Beaulieu provide for annual base salaries of $133,100,
$100,000 and $100,010, respectively, and unspecified bonuses to be determined by
the Board of Directors, as well as a one-year non-competition covenant covering
the rugged computer business that commences upon termination of each such
employee's employment with the Company. Each of the agreements further provides
that, in the event that, during the term of his employment, (i) the employee
shall die or become disabled, the Company shall pay to him or his estate, as the
case may be, an amount (either in a lump sum or in six equal installments) equal
to six months of compensation or (ii) the employee's employment is terminated by
the Company without cause, he shall be entitled to receive severance of one
year's compensation and six months of benefits.
The employment agreements with Messrs. McNeight, Craven, Bartczak and
Beaulieu also provide that, in the event of a change of control of the Company
which results in (i) the surviving entity's controlling 33% or more of the
voting stock of the Company and (ii) a change in the composition of 50% or more
of the Board of Directors, the employee may not be terminated without cause
during the remainder of the term of such employee's employment agreement.
ELIMINATION OF LIABILITY OF DIRECTORS AND OFFICERS
The Company's Certificate of Incorporation, as amended, eliminates the
liability of a director of the Company for monetary damages for breach of duty
as a director, subject to certain exceptions. In addition, the Certificate of
Incorporation, as amended, provides for the Company to indemnify, under certain
conditions, directors and officers of the Company against all expenses,
liabilities and losses reasonably incurred by such persons in connection
therewith. The foregoing provisions may reduce the likelihood of derivative
litigation against directors and may discourage or deter shareholders or
management from suing directors for breaches of their duty of care, even though
such an action, if successful, might otherwise benefit the Company and its
shareholders.
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PRINCIPAL SHAREHOLDERS
The following table sets forth, as of the date of the Prospectus, the
beneficial ownership of shares of Common Stock by (i) each person who is known
by the Company to own more than 5% of the outstanding shares of Common Stock,
(ii) each director of the Company and each executive officer of the Company
listed in the Summary Compensation Table and (iii) all of the Company's officers
and directors as a group:
<TABLE>
<CAPTION>
PERCENTAGE OF
AMOUNT AND NATURE OF OUTSTANDING
NAME AND ADDRESS OF BENEFICIAL OWNER(1) BENEFICIAL OWNERSHIP(2) SHARES OWNED(3)
- ------------------------------------------------------------- ----------------------- ---------------
<S> <C> <C>
Krishan K. Joshi(4)(5)....................................... 2,235,468 28.0%
Richard P. McNeight(5)....................................... 1,031,143 12.3%
William R. Craven(5)......................................... 511,982 6.4%
James E. Clifford(5)......................................... 21,000 *
Michael F. Maguire(5)........................................ 21,000 *
Lary J. Beaulieu(5).......................................... 226,201 2.8%
All officers and directors as a group (7 persons)(4)(5)...... 4,091,794 47.8%
</TABLE>
- ------------
* Less than 1%
(1) The address of each such person is c/o Paravant Computer Systems, Inc.,
1615A West Nasa Blvd., Melbourne, Florida 32901.
(2) A person is deemed to be the beneficial owner of securities that can be
acquired by such person within 60 days from the date of this Prospectus upon
the exercise of options or warrants. Each beneficial owner's percentage
ownership is determined by assuming that options or warrants that are held
by such person (but not those held by any other person) and which are
exercisable within 60 days from the date of this Prospectus have been
exercised. Unless otherwise noted, the Company believes that all persons
named in the table have sole voting and investment power with respect to all
shares of Common Stock beneficially owned by them.
(3) Based on 7,993,652 shares of Common Stock outstanding on the date of this
Prospectus.
(4) Includes 2,191,854 shares of Common Stock held by UES Florida. Mr. Joshi,
Chairman and Chief Executive Officer of the Company, is the Chairman and a
director of UES, of which he owns 58% of the shares of its common stock and
which, as a result, he controls. With respect to the 2,191,854 shares held
by UES Florida, 445,848 of such shares are subject to an option granted by
UES Florida to Mr. Joshi. Both UES and UES Florida have offices at 4402
Dayton-Xenia Road, Dayton, OH 45432.
(5) Includes options obtained from UES Florida covering 148,617 shares for Mr.
McNeight, 297,231 shares for Mr. Craven and 445,848 shares for Mr. Joshi.
Includes options granted under the Company's Incentive Plan covering 193,333
shares for Mr. McNeight, 53,333 shares for Mr. Craven, 6,000 shares for each
of Messrs. Clifford and Maguire, 40,000 shares for Mr. Beaulieu and 45,000
shares for other officers and directors, options for 188,049 shares of
Common Stock granted to Mr. McNeight and 5,031 shares of Common Stock
granted to each of Mr. Craven and Mr. Beaulieu under a non-qualified stock
option plan which plan has been terminated and options granted under the
Directors' Plan covering 15,000 shares for each of Messrs. Clifford and
Maguire, all of which options are currently exercisable. Excludes options
granted under the Incentive Plan covering 56,667 shares for Mr. McNeight,
31,667 shares for Mr. Craven, 20,000 shares for Mr. Beaulieu and 15,000
shares for other officers and directors, all of which options are not
exercisable within 60 days of the date of this Prospectus.
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CERTAIN TRANSACTIONS
Under the Company's $4,000,000 line of credit with National City Bank in
Dayton, Ohio, Krishan K. Joshi, the Company's Chairman, and UES, a company
controlled by Mr. Joshi which presently indirectly owns approximately 27.5% of
the Company's outstanding Common Stock, each guaranteed all amounts outstanding
under such line of credit. Similar guarantees involving Mr. Joshi and UES were
required for earlier loan arrangements between the Company and such bank. Upon
completion of the IPO, such guarantees were terminated. Mr. Joshi and UES may be
deemed to have benefitted from the elimination of such guarantees.
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.
Beaver Creek Enterprises, an Ohio partnership among certain UES employees,
including Mr. Joshi, owns a three bedroom residential condominium in Melbourne,
Florida, consisting of approximately 1,450 square feet. The partnership rents
this apartment to the Company at $1,000 per month ($750 per month until July 1,
1996), which includes its apportioned real estate taxes, pursuant to a month to
month lease arrangement. For the fiscal years ended September 30, 1996 and 1995,
the Company paid such partnership $9,750 and $9,000, respectively, for the use
of such condominium. This apartment is used to house the Company's executives,
including Messrs. Craven and Joshi, when they are visiting the Company's
headquarters, as well as select customers.
In December 1991, Messrs. McNeight, Craven and Joshi were granted options
covering 148,617 shares, 297,231 shares and 445,848 shares, respectively, of the
Company's Common Stock held by UES Florida, a subsidiary of UES and an affiliate
of the Company, each at an adjusted exercise price of $.15 per share. In
November 1993, Mr. McNeight was granted options to purchase 5,032 shares of the
Company's Common Stock at an adjusted exercise price of $0.24 per share under a
non-qualified stock option plan previously maintained by the Company, which has
since been terminated, and, in November 1994, Mr. McNeight was granted options
under such plan to purchase 183,018 shares of the Company's Common Stock at an
adjusted exercise price of $3.20 per share. The exercise prices of the foregoing
options granted in 1991, 1993 and 1994 approximated the estimated market value
of the shares of Common Stock on the date of grant.
The Company had a payable to UES of $0 and $87,294 at September 30, 1996
and 1995, respectively, for reimbursement of accrued health insurance costs paid
by UES.
In March 1996, UES Florida and Messrs. McNeight and Craven and another
shareholder sold an aggregate of 925,743 shares of Common Stock to private
investors at a purchase price of $1.33 per share ('March 1996 Stock Purchase').
(Of the shares sold, UES Florida and Messrs. McNeight and Craven sold 745,743,
90,000, and 30,000 shares, respectively.) In connection with these transactions,
UES Florida, Messrs. McNeight and Craven and such other shareholder 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
amounts, plus accrued interest thereon, were repaid following the consummation
of the IPO with a portion of the IPO proceeds. At or following the time of the
March 1996 Stock Purchase, the private investors purchased an additional 155,322
shares from two other stockholders of the Company. In order to induce the
investors to purchase shares of Common Stock of the Company and thereby provide
UES Florida, Messrs. McNeight and Craven and the other shareholder lender with
funds which they loaned to the Company, the Company granted to the investors
certain 'piggyback' registration rights to have their Common Stock registered
under the Securities Act. Accordingly, all 1,081,065 shares of Common Stock
acquired by the private investors were included in the registration statement
relating to the IPO.
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DESCRIPTION OF SECURITIES
GENERAL
As of the date of this Prospectus, the authorized capital stock of the
Company consists of 30,000,000 shares of Common Stock, par value $.015 per
share, of which 7,993,652 shares are outstanding, and 2,000,000 shares of
preferred stock, par value $.01 per share ('Preferred Stock'), none of which
shares are outstanding. The following description of the securities of the
Company and certain provisions of the Company's Certificate of Incorporation and
By-Laws, each as amended, is a summary and is qualified in its entirety by the
provisions of the Certificate of Incorporation and By-Laws as currently in
effect. As of November 7, 1997, the Company's Common Stock was held of record by
75 shareholders.
COMMON STOCK
Holders of Common Stock possess exclusive voting power for the election of
directors and for all other purposes and are entitled to one vote for each share
held of record. The Certificate of Incorporation, as amended, does not provide
for preemptive rights or for cumulative voting for the election of directors.
Holders of Common Stock will be entitled to receive ratably such dividends, if
any, as may be declared from time to time by the Board of Directors out of funds
legally available therefor, and will be entitled to receive, pro rata, all
assets of the Company available for distribution to such holders upon
liquidation. Holders of Common Stock have no preemptive, subscription or
redemption rights. All outstanding shares of Common Stock are, and the Common
Stock offered hereby, upon issuance and sale, will be, fully paid and
nonassessable.
PREFERRED STOCK
The Company is authorized to issue 2,000,000 shares of Preferred Stock from
time to time in one or more series, which may rank senior to the Common Stock
with respect to payment of dividends and in the event of the liquidation,
dissolution or winding up of the Company. The Board of Directors has the power,
without stockholder approval, to issue shares of one or more series of Preferred
Stock, at any time, for such consideration and with such relative rights,
privileges, preferences and other terms as the Board may determine (including,
but not limited to, terms relating to dividend rates, redemption rates,
liquidation preferences and voting, sinking fund and conversion or other
rights). The rights and terms relating to any new series of Preferred Stock
could adversely affect the voting power or other rights of the holders of the
Common Stock or could be utilized, under certain circumstances, as a method of
discouraging, delaying or preventing a change in control of the Company.
The Company has no plans to issue or sell shares of Preferred Stock in the
foreseeable future. For a period of two years commencing May 30, 1996, the
issuance of Common Stock or any warrants, options or other rights to purchase
Common Stock is subject to the prior consent of the Underwriter, which may not
be unreasonably withheld. Accordingly, such restriction could limit the ability
of the Company to issue shares of Preferred Stock which are, by their terms,
convertible into or exchangeable for Common Stock.
REDEEMABLE WARRANTS
Each Warrant entitles the registered holder thereof (the 'Warrant Holders')
to purchase one share of Common Stock at a price of $2.00, subject to adjustment
in certain circumstances, for a period of five years commencing on November 30,
1997 until 5:00 p.m., Eastern Time, on November 30, 2002.
The Warrants are redeemable by the Company at any time commencing on
November 30, 1997, upon notice of not less than 30 days, at a price of $.0167
per Warrant, provided that the closing bid quotation of the Common Stock on
Nasdaq or last sale price if quoted on a national securities exchange has
exceeded $2.83 per share (subject to adjustment) for a period of 30 consecutive
trading days during the period in which the Warrants are exercisable. The
Warrant Holders shall have the right to exercise their Warrants until the close
of business on the date fixed for redemption. The Warrants have been
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issued (and any Warrants issued upon exercise of the Underwriter's Warrants will
be issued) in registered form under a warrant agreement by and among the
Company, Continental Stock Transfer & Trust Company, as warrant agent, and the
Underwriter (the 'Warrant Agreement'). The exercise price and number of shares
of Common Stock or other securities issuable on exercise of the Warrants are
subject to adjustment in certain circumstances, including in the event of a
stock dividend, recapitalization, reorganization, merger or consolidation of the
Company. In addition, the Warrants are subject to adjustment for issuances of
Common Stock at prices below the market price of a share of Common Stock on
Nasdaq. Reference is made to the Warrant Agreement (which has been filed as an
exhibit to the Registration Statement of which this Prospectus forms a part) for
a complete description of the terms and conditions therein (the description
herein contained being qualified in its entirety by reference thereto).
The Warrants may be exercised upon surrender of the Warrant certificate on
or prior to the expiration date at the offices of the warrant agent, with the
exercise form on the reverse side of the Warrant certificate completed and
executed as indicated, accompanied by full payment of the exercise price (by
certified check or bank draft payable to the Company) to the warrant agent for
the number of Warrants being exercised. The Warrant Holders do not have the
rights or privileges of holders of Common Stock.
No Warrant will be exercisable unless at the time of exercise the Company
has filed a current registration statement with the Commission covering the
shares of Common Stock issuable upon exercise of such Warrant and such shares
have been registered or qualified or deemed to be exempt from registration or
qualification under the securities laws of the state of residence of the holder
of such Warrant. The Company will use its reasonable best efforts to have all
such shares so registered or qualified on or before the exercise date and to
maintain a current prospectus relating thereto until the expiration of the
Warrants, subject to the terms of the Warrant Agreement. While it is the
Company's intention to do so, there can be no assurance that it will be able to
do so.
No fractional shares will be issued upon exercise of the Warrants. However,
if a Warrant Holder exercises all Warrants then owned of record by him, the
Company will pay to such Warrant Holder, in lieu of the issuance of any
fractional share which is otherwise issuable, an amount in cash based on the
market value of the Common Stock on the last trading day prior to the exercise
date.
BRIDGE WARRANTS
In connection with the 1995 Bridge Financing, the Company borrowed $400,000
pursuant to the Bridge Notes from a group of private investors at an annual
interest rate of 6%. As of the date hereof, the Bridge Notes had an outstanding
principal balance of $50,000. In addition, as part of the 1995 Bridge Financing,
the Company sold to the same investors the Bridge Warrants to purchase 480,000
shares of Common Stock. Each Bridge Warrant represents the right to purchase one
share of Common Stock at an exercise price of $2.00 per share at any time until
June 3, 2001. After the expiration of such exercise period, the Bridge Warrants
will be void and of no value.
The Bridge Warrants are subject to earlier redemption as follows: if the
average of the closing bid prices of the Common Stock (if the Common Stock is
then traded in the over-the-counter market) or the average of the closing prices
of the Common Stock (if the Common Stock is then traded on a national securities
exchange or the Nasdaq National Market or Small Cap Market) exceeds $2.00 for
any consecutive 20 trading days, then upon at least 30 days' prior written
notice, given within 60 days of the period, the Company will be able to call all
(but not less than all) of the Bridge Warrants for redemption at a price of
$.0167 per Bridge Warrant.
The Bridge Warrants contain provisions that protect the holders thereof
against dilution by adjustment of the exercise price and number of shares
issuable upon exercise on the occurrence of certain events. The Company is not
to be required to issue fractional shares. In lieu of the issuance of such
fractional shares, the Company will pay cash to such holders of the warrants. In
computing the cash payable to such holders, a share of Common Stock will be
valued at its price immediately prior to the close of business on the expiration
date. The holder of a Bridge Warrant will not possess any rights
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as a stockholder of the Company unless he exercises his Bridge Warrant. See
'Risk Factors -- Possible Contingent Liability.'
DIVIDENDS
The Company has not declared or paid a cash dividend on its Common Stock
since its inception. The payment by the Company of dividends, if any, is within
the discretion of the Board of Directors and will depend on the Company's
earnings, if any, its capital requirements and financial condition, as well as
other relevant factors. The Board of Directors does not intend to declare any
dividends in the foreseeable future, but instead intends to retain earnings, if
any, for use in the Company's business operations.
REGISTRATION RIGHTS
In connection with the IPO, the Company granted to the Underwriter certain
demand and piggyback registration rights with respect to the Underwriter's
Warrants, the 300,000 shares of Common Stock and 420,000 Warrants issuable upon
exercise of the Underwriter's Warrants and the 420,000 shares of Common Stock
issuable upon the exercise of the Warrants included in the Underwriter's
Warrants. All 720,000 shares of Common Stock and 420,000 Warrants underlying the
Underwriter's Warrants have been included in the Registration Statement of which
this Prospectus forms a part.
NASDAQ LISTING
The Common Stock and Warrants are listed on Nasdaq. In order to continue to
be listed on Nasdaq, however, the Company must maintain $2,000,000 in total
assets, a $200,000 market value of the public float and $1,000,000 in total
capital and surplus. In addition, for continued listing, a company must have,
among other things, either (i) $4,000,000 in net tangible assets, a public float
of at least 750,000 shares with a market value of at least $5,000,000 and a
minimum bid price of $1.00 per share or, alternatively, (ii) a market
capitalization of $50,000,000 or total assets and total revenues of $50,000,000
each, a public float of at least 1,100,000 shares with a market value of at
least $15,000,000 and a minimum bid price of $5.00. The failure to meet these
maintenance criteria in the future may result in the delisting of the Company's
securities from Nasdaq. In such event, trading, if any, in the Units, Common
Stock and Warrants would thereafter be conducted in the over-the-counter markets
through the so-called 'pink sheets' or the NASD's 'Electronic Bulletin Board.'
Consequently, the liquidity of the Company's securities could be impaired, not
only in the number of securities which could be bought and sold, but also
through delays in the timing of transactions, difficulty in obtaining accurate
quotations as to the market value of the securities and reductions in the
security analysts' and the news media's coverage of the Company. Delisting of
the Company's securities may result in lower prices for the Company's securities
than might otherwise prevail.
TRANSFER AGENT AND REGISTRAR
The Company's Transfer Agent and Registrar is Continental Stock Transfer &
Trust Company, 2 Broadway, New York, New York 10004.
REPORTS TO SHAREHOLDERS
The Company has registered the Common Stock and Warrants under the
provisions of Sections 12(b) and 12(g) of the Exchange Act. Such registration
requires the Company to comply with periodic reporting, proxy solicitation and
certain other requirements of the Exchange Act.
SHARES ELIGIBLE FOR FUTURE SALE
Upon the consummation of this offering, the Company will have 13,543,652
shares of Common Stock outstanding (assuming no exercise of any outstanding
options or warrants other than the Warrants, the Underwriter's Warrants and the
Warrants underlying the Underwriter's Warrants), of which 9,000,000 shares of
Common Stock will be freely tradeable without restriction or further
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registration under the Securities Act, except for any shares purchased by an
affiliate of the Company (in general, a person who has a control relationship
with the Company), which shares will be subject to the resale limitations of
Rule 144 under the Securities Act. All of the remaining 4,543,652 shares of
Common Stock are deemed to be 'restricted securities,' as that term is defined
under Rule 144 promulgated under the Securities Act, in that such shares were
issued and sold by the Company in private transactions not involving a public
offering and in the future may only be sold pursuant to a registration statement
under the Securities Act, in compliance with the exemption provisions of Rule
144, or pursuant to another exemption under the Securities Act.
In general, under Rule 144 as currently in effect, subject to the
satisfaction of certain other conditions, a person, including an affiliate of
the Company (or persons whose shares are aggregated), who has owned restricted
shares of Common Stock beneficially for at least one year is entitled to sell,
within any three-month period, a number of shares that does not exceed the
greater of 1% of the total number of outstanding shares of the same class or, if
the shares of Common Stock are quoted on Nasdaq, the average weekly trading
volume during the four calendar weeks preceding the sale. A person who has not
been an affiliate of the Company for at least the three months immediately
preceding the sale and who has beneficially owned shares of Common Stock for at
least two years is entitled to sell such shares under Rule 144 without regard to
any of the limitations described above.
Under Rule 701 of the Securities Act, persons who purchase shares upon
exercise of options granted prior to the date of the IPO are entitled to sell
such shares after the 90th day following the date of the IPO in reliance on Rule
144, without having to comply with the holding period requirements of Rule 144
and, in the case of non-affiliates, without having to comply with the public
information, volume limitations or notice provisions of Rule 144.
All of the Company's officers and directors and certain stockholders of the
Company have agreed not to sell or otherwise dispose of their shares of Common
Stock (an aggregate of 4,495,279 shares) for a period of eighteen months
commencing May 30, 1996 (other than pursuant to private transfers) without the
prior written consent of the Underwriter.
WARRANT SOLICITATION
The Company has agreed, in connection with the exercise of the Warrants
pursuant to solicitation, to pay to the Underwriter a warrant solicitation fee
of 2.5% of the exercise price for each Warrant exercised; provided, however,
that the Underwriter will not be entitled to receive such compensation in
Warrant exercise transactions in which (i) the market price of Common Stock at
the time of exercise is lower than the exercise price of the Warrants; (ii) the
Warrants are held in any discretionary account; (iii) disclosure of compensation
arrangements is not made in documents provided to holders of the Warrants at the
time of exercise; (iv) the exercise of Warrants is unsolicited by the
Underwriter; or (v) the solicitation of exercise of the Warrants was in
violation of Regulation M promulgated under the Exchange Act.
CONCURRENT REGISTRATION OF SECURITIES
Concurrently with this offering, the Company is registering under the
Securities Act, pursuant to a Selling Securityholder Prospectus included within
the Registration Statement of which this Prospectus forms a part, the sale by
the Selling Securityholders of the Selling Securityholder Securities, including
(i) up to 300,000 shares of Common Stock issuable to the Selling Securityholders
upon exercise of the Underwriter's Warrants and (ii) up to 420,000 Warrants
issuable to the Selling Securityholders upon exercise of the Underwriter's
Warrants and, in the event any or all of such Warrants are exercised, up to
420,000 shares of Common Stock underlying such Warrants. The Company will not
receive any of the proceeds from the sale by the Selling Securityholders of the
Selling Securityholder Securities. It is anticipated that such securities will
be offered and sold by the Selling Securityholders, or by pledgees, donees,
transferees or other successors in interest thereof, from time to time in
transactions (which may include block transactions) on Nasdaq, in the
over-the-counter market or otherwise, in private sales or in negotiated
transactions, through the writing of options, or a combination of such methods
of sale, at fixed prices which may be changed, at market prices prevailing at
the time of sale, at prices related to such market prices, or at negotiated
prices.
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LEGAL MATTERS
The legality of the securities offered hereby will be passed upon for the
Company by Zimet, Haines, Friedman & Kaplan, New York, New York.
EXPERTS
The financial statements of the Company at September 30, 1996 and 1995
appearing in this Prospectus and in the Registration Statement of which this
Prospectus forms a part have been included herein and in the Registration
Statement in reliance upon the report of KPMG Peat Marwick LLP, independent
certified public accountants, and upon the authority of said firm as experts in
accounting and auditing.
In October 1994, the Board of Directors of the Company retained KPMG Peat
Marwick LLP as the Company's independent auditors following the termination of
Hoyman, Dobson & Company, P.A., the Company's former accountants. There were no
disagreements with such firm on any matter of accounting principles or
practices, financial statement disclosure or auditing scope or procedure, and
such firm's report on the Company's financial statements did not contain any
adverse opinion or disclaimer, or qualification as to uncertainty, audit scope
or accounting principles.
51
<PAGE>
<PAGE>
PARAVANT COMPUTER SYSTEMS, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Financial Statement at September 30, 1996 and for the Years Ended September 30, 1996 and 1995
Independent Auditor's Report........................................................................ F-2
Balance Sheet.................................................................................. F-3
Statements of Income........................................................................... F-4
Statements of Changes in Stockholders' Equity.................................................. F-5
Statements of Cash Flows....................................................................... F-6
Notes to Financial Statements.................................................................. F-7 - F-16
Financial Statement at June 30, 1997 and for the Three Months and Nine Months Ended June 30, 1997
and 1996 (Unaudited)
Condensed Balance Sheet -- June 30, 1997....................................................... F-17
Condensed Statements of Earnings for the Three Months Ended June 30, 1997 and 1996............. F-18
Condensed Statements of Earnings for the Nine Months Ended June 30, 1997 and 1996.............. F-19
Condensed Statements of Cash Flows for the Nine Months Ended June 30, 1997 and 1996............ F-20
Notes to Condensed Financial Statements........................................................ F-21 - F-22
</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>
1996 1995
----------- ----------
<S> <C> <C>
ASSETS
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
----------- ----------
----------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
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>
See accompanying notes to financial statements.
F-3
<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-4
<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 --------------------
NUMBER OF PAR PAID-IN RETAINED NUMBER OF
SHARES VALUE CAPITAL EARNINGS SHARES COST
--------- -------- ---------- ---------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Balances, September 30, 1994.................. 4,737,667 $ 71,065 $ 796,498 $ 596,991 79,234 $(38,798)
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 -- --
--------- -------- ---------- ---------- --------- --------
Balances, September 30, 1995.................. 4,500,000 67,500 761,265 1,178,406 -- --
Issuance of common stock, net of offering
costs....................................... 3,450,000 51,352 4,283,722 -- -- --
Exercise of common stock options.............. 6,038 91 1,355 -- -- --
Net income for the year ended September 30,
1996........................................ -- -- -- 702,153 -- --
--------- -------- ---------- ---------- --------- --------
Balances, September 30, 1996.................. 7,956,038 $118,943 $5,046,342 $1,880,559 -- $ --
--------- -------- ---------- ---------- --------- --------
--------- -------- ---------- ---------- --------- --------
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY
-------------
<S> <C>
Balances, September 30, 1994.................. $ 1,425,756
Retirement of treasury stock.................. --
Net income for the year ended September 30,
1995........................................ 581,415
-------------
Balances, September 30, 1995.................. 2,007,171
Issuance of common stock, net of offering
costs....................................... 4,335,074
Exercise of common stock options.............. 1,446
Net income for the year ended September 30,
1996........................................ 702,153
-------------
Balances, September 30, 1996.................. $ 7,045,844
-------------
-------------
</TABLE>
See accompanying notes to financial statements.
F-5
<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)
----------- -----------
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-6
<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.
(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.
F-7
<PAGE>
<PAGE>
PARAVANT COMPUTER SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1996 AND 1995
(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.
(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.
F-8
<PAGE>
<PAGE>
PARAVANT COMPUTER SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1996 AND 1995
(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.
(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:
F-9
<PAGE>
<PAGE>
PARAVANT COMPUTER SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1996 AND 1995
<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.
(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
480,000 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.
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.
F-10
<PAGE>
<PAGE>
PARAVANT COMPUTER SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1996 AND 1995
(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>
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:
F-11
<PAGE>
<PAGE>
PARAVANT COMPUTER SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1996 AND 1995
<TABLE>
<CAPTION>
YEAR ENDING CAPITAL OPERATING
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>
(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
F-12
<PAGE>
<PAGE>
PARAVANT COMPUTER SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1996 AND 1995
provide that the options may be exercised beginning one year after date of grant
for a period of nine years.
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. In addition, in connection with the IPO, the Company issued
underwriter's warrants to purchase up to 300,000 shares of common stock at $2.00
per share and up to 420,000 warrants at $.04 per warrant. The underwriter's
warrants are exercisable during the four-year period commencing June 3, 1997.
(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.
(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:
F-13
<PAGE>
<PAGE>
PARAVANT COMPUTER SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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
-------- --------
-------- --------
</TABLE>
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.
(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.
F-14
<PAGE>
<PAGE>
PARAVANT COMPUTER SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1996 AND 1995
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.
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:
F-15
<PAGE>
<PAGE>
PARAVANT COMPUTER SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1996 AND 1995
<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 -- --
<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>
(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-16
<PAGE>
<PAGE>
PARAVANT COMPUTER SYSTEMS, INC.
CONDENSED BALANCE SHEET
JUNE 30, 1997
(UNAUDITED)
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents...................................................................... $ 424,742
Accounts receivable, net....................................................................... 3,536,841
Employee receivables and advances.............................................................. 21,815
Inventory (note 2)............................................................................. 3,985,306
Prepaid expenses............................................................................... 114,169
Deferred income taxes.......................................................................... 167,047
----------
Total current assets...................................................................... 8,249,920
Property, plant and equipment, net.................................................................. 790,501
Intangible assets, net.............................................................................. 72,750
Demonstration pool and custom mold, net............................................................. 357,635
Other assets........................................................................................ 100,999
----------
$9,571,805
----------
----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Other note payable............................................................................. $ 50,000
Current maturities of long-term debt........................................................... 110,004
Current maturities of capital lease obligations................................................ 144,533
Accounts payable............................................................................... 613,468
Accrued commissions............................................................................ 339,616
Accrued expenses............................................................................... 573,913
Accrued incentive compensation................................................................. 136,488
Income taxes payable........................................................................... 45,372
----------
Total current liabilities................................................................. 2,013,394
Long-term debt, less current maturities............................................................. 36,648
Capital lease obligations, less current maturities.................................................. 96,355
Deferred income taxes............................................................................... 7,657
----------
Total liabilities......................................................................... 2,154,054
----------
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
7,993,652 shares.............................................................................. 119,449
Additional paid-in capital..................................................................... 5,066,068
Retained earnings.............................................................................. 2,232,234
----------
Total stockholders' equity................................................................ 7,417,751
----------
$9,571,805
----------
----------
</TABLE>
See accompanying notes to condensed financial statements.
F-17
<PAGE>
<PAGE>
PARAVANT COMPUTER SYSTEMS, INC.
CONDENSED STATEMENTS OF EARNINGS
FOR THE THREE MONTHS ENDED JUNE 30, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
----------- ----------
(UNAUDITED)
<S> <C> <C>
Revenues............................................................................. $ 3,069,223 $1,957,228
Cost of revenues..................................................................... 1,657,386 1,121,953
----------- ----------
Gross profit......................................................................... 1,411,837 835,275
Selling and administrative expense................................................... 1,048,838 906,425
----------- ----------
Income (loss) from operations........................................................ 362,999 (71,150)
Other income (expense):
Interest expense................................................................ (17,952) (107,023)
Miscellaneous................................................................... 4,897 (30,640)
----------- ----------
Income (loss) before income taxes.................................................... 349,944 (208,813)
Income tax benefit (expense)......................................................... (123,618) 72,701
----------- ----------
Net income (loss).................................................................... $ 226,326 $ (136,112)
----------- ----------
----------- ----------
Weighted average number of shares outstanding........................................ 12,806,956 4,883,333
----------- ----------
----------- ----------
Earnings (loss) per share............................................................ $.03 $(.03)
---- -----
---- -----
</TABLE>
See accompanying notes to condensed financial statements.
F-18
<PAGE>
<PAGE>
PARAVANT COMPUTER SYSTEMS, INC.
CONDENSED STATEMENTS OF EARNINGS
FOR THE THREE MONTHS ENDED JUNE 30, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
----------- -----------
(UNAUDITED)
<S> <C> <C>
Revenues............................................................................ $ 8,196,533 $ 3,682,110
Cost of revenues.................................................................... 4,377,275 2,253,864
----------- -----------
Gross profit........................................................................ 3,819,258 1,428,246
Selling and administrative expense.................................................. 3,216,759 2,315,082
----------- -----------
Income (loss) from operations....................................................... 602,499 (886,836)
Other income (expense):
Interest expense............................................................... (83,245) (329,225)
Miscellaneous.................................................................. 23,120 (32,646)
----------- -----------
Income (loss) before income taxes................................................... 542,374 (1,248,707)
Income tax benefit (expense)........................................................ (190,699) 463,769
----------- -----------
Net income (loss)................................................................... $ 351,675 $ (784,938)
----------- -----------
----------- -----------
Weighted average number of shares outstanding....................................... 12,806,956 4,883,333
----------- -----------
----------- -----------
Earnings (loss) per share........................................................... $.04 $(.16)
----- ------
----- ------
</TABLE>
See accompanying notes to condensed financial statements.
F-19
<PAGE>
<PAGE>
PARAVANT COMPUTER SYSTEMS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED JUNE 30, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
----------- -----------
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss).............................................................. $ 351,675 $ (784,938)
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:
Depreciation and amortization................................................ 332,347 165,671
Deferred income taxes........................................................ (27,320) (463,769)
Increase (decrease) in cash caused by change in:
Accounts receivable....................................................... 3,624,351 2,384,843
Employee receivables and advances......................................... 51,687 2,851
Inventory................................................................. (1,481,414) (1,438,312)
Costs and estimated earnings in excess of billings on uncompleted
contracts............................................................... -- 322,071
Prepaid expenses.......................................................... 27,022 12,685
Income taxes receivable................................................... -- (11,017)
Other assets.............................................................. (84,863) (6,172)
Accounts payable.......................................................... (430,263) (805,188)
Accrued commissions....................................................... (109,635) (169,951)
Accrued expenses.......................................................... 143,013 (132,622)
Accrued incentive compensation............................................ (3,512) --
Income taxes payable...................................................... (289,621) (317,665)
----------- -----------
Net cash provided by (used in) operating activities.................. 2,103,467 (1,241,513)
----------- -----------
Cash flows from investing activities:
Acquisitions of property, plant and equipment.................................. (347,805) (57,617)
Acquisitions of demonstration pool and custom mold............................. (117,725) (59,249)
Acquisition of rights.......................................................... (5,000) --
----------- -----------
Net cash used in investing activities................................ (470,530) (116,866)
----------- -----------
Cash flows from financing activities:
Repayments on long-term debt................................................... (582,503) (82,692)
Repayments on other note payable............................................... (50,000) (275,000)
Repayments of note payable to bank............................................. (540,000) (2,960,000)
Repayments on capital lease obligations........................................ (120,992) (50,189)
Proceeds from sale of common stock............................................. 20,231 4,591,556
----------- -----------
Net cash provided by (used in) financing activities.................. (1,273,264) 1,223,675
----------- -----------
Net increase (decrease) in cash and cash equivalents................. 359,673 (134,704)
Cash and cash equivalents at beginning of the period................................ 65,069 211,426
----------- -----------
Cash and cash equivalents at end of the period...................................... $ 424,742 $ 76,722
----------- -----------
----------- -----------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest.................................................................. $ 85,663 $ 329,225
----------- -----------
----------- -----------
Income taxes.............................................................. $ 460,327 $ 28,406
----------- -----------
----------- -----------
Supplemental disclosure of noncash investing and financing activities:
The Company entered into capital lease agreements for office equipment and
furniture totaling $194,753 and $27,371 during the nine months ended June 30,
1997 and 1996, respectively.
The Company converted $500,000 of its notes payable to bank to long-term debt
during the nine months ended June 30, 1996.
</TABLE>
See accompanying notes to condensed financial statements.
F-20
<PAGE>
<PAGE>
PARAVANT COMPUTER SYSTEMS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
JUNE 30, 1997 AND 1996
(1) BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements of Paravant
Computer Systems, Inc. (the 'Company' or 'Paravant') have been prepared in
accordance with the instructions and requirements of Regulation S-B and,
therefore, do not include all information and footnotes necessary for a fair
presentation of financial position, results of operations and cash flows in
conformity with generally accepted accounting principles. In the opinion of
management, such financial statements reflect all adjustments (consisting of
normal recurring accruals) considered necessary for a fair statement of
financial position, results of operations and cash flows for the interim periods
presented. Operating results for the interim periods are not necessarily
indicative of the results that may be expected for the full fiscal years.
These condensed financial statements and footnotes should be read in
conjunction with the Company's audited financial statements for the fiscal years
ending September 30, 1996 and 1995 included in the Company's Annual Report on
Form 10-KSB as filed with the Securities and Exchange Commission. The accounting
principles used in preparing these condensed financial statements are the same
as those described in such statements.
(2) INVENTORY
The following is a summary of inventory at June 30, 1997:
<TABLE>
<S> <C>
Raw materials................................................................... $2,618,244
Work in process................................................................. 1,188,130
Finished goods.................................................................. 254,509
----------
4,060,883
Reserve for obsolete inventory.................................................. (75,577)
----------
$3,985,306
----------
----------
</TABLE>
(3) NOTE PAYABLE TO BANK
In April 1997, the Company renegotiated the terms of its line of credit
arrangement with a bank. Under the new terms, all borrowings bear interest at
the bank's prime rate, or at the 30 or 60 day LIBOR plus 2.70%.
(4) STOCK OPTIONS
On November 29, 1996, the Company granted options under its incentive stock
option plan to employees to purchase 208,000 shares of the Company's common
stock at an exercise price of $5.125 per share, which was the market price of
the shares at the date of issuance.
On February 27, 1997, the Company granted options under its nonemployee
director stock option plan to purchase 15,000 shares of the Company's common
stock at an exercise price of $6.00 per share, which was the market price of the
shares at the date of issuance.
(5) EARNINGS (LOSS) PER SHARE
Earnings (loss) per share have been computed by dividing net income (loss)
by the weighted average number of common shares outstanding. The weighted
average number of shares outstanding have been determined assuming shares and
options issued subsequent to June 30, 1997 were outstanding for the periods
presented. When dilutive, stock options and warrants are included as common
share equivalents using the treasury stock method. Fully diluted earnings per
common share
F-21
<PAGE>
<PAGE>
PARAVANT COMPUTER SYSTEMS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1997 AND 1996
amounts did not differ from amounts computed under the primary computation for
the periods ended June 30, 1997 and 1996.
(6) FUTURE APPLICATION OF ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, 'Earnings Per Share'. Statement No.
128 supersedes APB Opinion No. 15, 'Earnings Per Share' and specifies the
computation, presentation and disclosure requirements for earnings per share
('EPS') for entities with publicly held common stock or potential common stock.
Statement 128 was issued to simplify the computation of EPS. It requires dual
presentation of basic and diluted EPS on the face of the income statement for
all entities with complex capital structures and requires a reconciliation of
the numerator and denominator of the basic EPS computation to the numerator and
denominator of the diluted EPS computation.
Statement 128 is effective for financial statements for both interim and
annual periods ending after December 15, 1997. Earlier application is not
permitted. After adoption, all prior EPS data presented shall be restated to
conform with Statement 128. The Company does not expect the adoption of
Statement 128 to have a material impact on the EPS data that has been presented.
F-22
<PAGE>
<PAGE>
__________________________________ __________________________________
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY
SECURITY OTHER THAN THE SECURITIES OFFERED BY THIS PROSPECTUS, OR AN OFFER TO
SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITY BY ANY PERSON IN ANY
JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, IMPLY THAT THE INFORMATION IN THIS PROSPECTUS IS CORRECT AS OF
ANY TIME SUBSEQUENT TO THE DATE OF THIS PROSPECTUS.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary............................. 3
Risk Factors................................... 8
Use of Proceeds................................ 17
Certain Market Information..................... 18
Dilution....................................... 19
Capitalization................................. 20
Selected Financial Data........................ 21
Management's Discussion and Analysis or Plan of
Operation.................................... 22
Business....................................... 25
Management..................................... 39
Principal Shareholders......................... 45
Certain Transactions........................... 46
Description of Securities...................... 47
Shares Eligible for Future Sale................ 49
Warrant Solicitation........................... 50
Concurrent Registration of Securities.......... 50
Legal Matters.................................. 51
Experts........................................ 51
Index to Financial Statements.................. F-1
</TABLE>
__________________________________ __________________________________
__________________________________ __________________________________
PARAVANT COMPUTER
SYSTEMS, INC.
4,830,000 SHARES OF COMMON STOCK
ISSUABLE UPON EXERCISE
OF REDEEMABLE WARRANTS
300,000 SHARES OF COMMON STOCK
ISSUABLE UPON EXERCISE
OF UNDERWRITER'S WARRANTS
420,000 REDEEMABLE WARRANTS
ISSUABLE UPON EXERCISE
OF UNDERWRITER'S WARRANTS
AND
420,000 SHARES OF COMMON STOCK
ISSUABLE UPON EXERCISE
OF REDEEMABLE WARRANTS
UNDERLYING UNDERWRITER'S WARRANTS
-------------------------
PROSPECTUS
-------------------------
NOVEMBER 10, 1997
__________________________________ __________________________________
<PAGE>
