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SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[X] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Proxy Pursuant to Section 240.14a-11(c) or
Section 240.14a-12
Paravant Computer Systems, Inc.
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(Name of Registrant as Specified In Its Charter)
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(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required.
[X] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and
0-11.
(1) Title of each class of securities to which transaction applies:
Common Stock
(2) Aggregate number of securities to which transaction applies:
3,950,000 Shares
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which
the filing fee is calculated and state how it was determined):
Consideration for acquisition:
<TABLE>
<S> <C>
Cash $ 8,700,000
Notes 4,800,000
Shares 7,900,000 (*)
-----------
$21,400,000
===========
</TABLE>
(*) 3,950,000 shares of the Registrant valued at $2 per share,
the Nasdaq reported closing price for April 24, 1998.
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(4) Proposed maximum aggregate value of transaction: $21,400,000
(5) Total fee paid: $4,280
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting
fee was paid previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
------------------------------------------------------------------------
(3) Filing Party:
------------------------------------------------------------------------
(4) Date Filed:
------------------------------------------------------------------------
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PARAVANT COMPUTER SYSTEMS, INC.
1615A WEST NASA BOULEVARD
MELBOURNE, FLORIDA 32901
NOTICE OF A SPECIAL MEETING OF SHAREHOLDERS
JUNE 26, 1998
To the Shareholders:
NOTICE IS HEREBY GIVEN that a Special Meeting of Shareholders of Paravant
Computer Systems, Inc. (the "Company") will be held at the Melbourne Beach
Hilton Oceanfront Hotel, 3003 U.S. Highway A1A, Indialantic, Florida 32903, on
June 26, 1998 at 10:00 A.M. (local time) for the following purposes:
(1) To consider and vote upon approval and adoption of an amendment to the
articles of incorporation to change the name of the Company from Paravant
Computer Systems, Inc. to Paravant Inc.;
(2) To consider and vote upon approval of the acquisition by the Company of
all of the capital stock of Engineering Development Laboratories, Incorporated
("EDL") and substantially all of the business and assets of Signal Technology
Laboratories, Inc. ("STL") under the terms of the Acquisition Agreement dated
March 31, 1998 (the "Acquisition Agreement") between the Company, EDL, STL, and
the shareholders of EDL and STL; and
3. To transact such other business as may properly be brought before the
meeting or any adjournment thereof.
The Board of Directors has fixed April 30, 1998 as the record date for the
determination of the shareholders entitled to notice of and to vote at such
meeting or any adjournments or postponements thereof, and only shareholders of
record at the close of business on that date are entitled to notice of and to
vote at such meeting.
You are cordially invited to attend the meeting. Whether or not you plan to
attend, you are urged to complete, date and sign the enclosed proxy and return
it promptly. If you receive more than one form of proxy, it is an indication
that your shares are registered in more than one account, and each such proxy
must be completed and returned if you wish to vote all of your shares eligible
to be voted at the meeting.
By Order of the Board of Directors,
William R. Craven
Secretary
Melbourne, Florida
May ___, 1998
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YOUR VOTE IS IMPORTANT.
THE ATTACHED PROXY STATEMENT SHOULD BE READ CAREFULLY. SHAREHOLDERS ARE URGED TO
SIGN, DATE AND MAIL THE ENCLOSED PROXY IN THE ENCLOSED POSTAGE PAID ENVELOPE. NO
ADDITIONAL POSTAGE IS REQUIRED IF MAILED IN THE UNITED STATES. YOU MAY REVOKE
YOUR PROXY AT ANY TIME BEFORE IT IS VOTED BY GIVING WRITTEN NOTICE TO THE
COMPANY. IF YOU ATTEND THE ANNUAL MEETING, YOU MAY VOTE IN PERSON THOUGH YOU
HAVE PREVIOUSLY SENT IN YOUR PROXY.
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<PAGE>
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TABLE OF CONTENTS
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
PROXY STATEMENT FOR SPECIAL MEETING OF SHAREHOLDERS..........................................1
VOTING SECURITIES AND SECURITY OWNERSHIP.....................................................1
Record Date and Voting Securities.............................................1
Voting of Proxies.............................................................1
Solicitation of Proxies.......................................................2
Principal Shareholders of the Company.........................................2
Shareholder Agreements........................................................3
PROPOSAL 1: NAME CHANGE TO PARAVANT, INC.....................................................3
Reasons for the Proposal......................................................3
Approval by Shareholders......................................................4
Recommendation of the Company's Board of Directors............................4
PROPOSAL 2: APPROVAL OF THE ACQUISITION......................................................4
Reasons for the Proposal......................................................4
Approval by Shareholders......................................................5
Recommendation of the Company's Board of Directors............................5
Pro Forma Book Value and Earnings Per Share...................................5
Summary of the Acquisition...........................................................6
The Parties to the Transaction................................................6
How the Acquisition Will Be Completed.........................................7
Fairness Opinion..............................................................8
Financing the Acquisition.....................................................8
Federal Income Tax Consequences of the Acquisition............................8
Accounting Treatment of the Transaction.......................................8
Resales of Common Stock.......................................................9
Absence of Dissenters' Rights.................................................9
NASD Requirement for Shareholder Approval.....................................9
Markets and Prices for the Shares of the Parties and Related
Shareholder Matters...........................................................9
Risk Factors Applicable to the Acquisition..........................................10
The Acquisition.....................................................................12
Background...................................................................12
Reasons for the Acquisition..................................................14
Fairness Opinion.............................................................15
Acquisition Financing........................................................16
Promissory Notes.............................................................17
Resales of Common Stock......................................................17
Lock-up of Common Stock......................................................18
Interest of Certain Persons in the Acquisition...............................18
The Acquisition Agreement...........................................................18
General......................................................................18
Acquisition of the EDL Common Stock, the STL Purchased Assets and the STL
Shareholder Non-Competition Agreements.......................................19
STL Shareholder Non-Competition Agreements...................................19
Employment Agreements........................................................20
Cash Earn-Out................................................................20
Representations and Warranties of the Parties................................21
Additional Covenants of the Parties..........................................22
Indemnification Provisions...................................................23
Liquidated Damages...........................................................24
Termination and Waiver.......................................................24
Conditions Precedent to the Obligation of the Parties to Consummate the
Acquisition..................................................................25
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
Conditions of the Closing....................................................25
Description of EDL and STL..........................................................26
EDL..........................................................................26
STL..........................................................................27
Exceptional Recent Earnings History of EDL and STL..................................29
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION......................................31
Index to Financial Statements.......................................................32
Unaudited Pro Forma Consolidated Balance Sheet (December 31, 1997)..................33
Unaudited Pro Forma Consolidated Income Statement (December 31, 1997)...............35
Unaudited Pro Forma Consolidated Income Statement (September 30, 1997)............ 36
Notes and Management's Assumptions to Unaudited Pro Forma Consolidated Financial
Statements..........................................................................37
Notes and Management's Assumptions to Unaudited Pro Forma Consolidated
Financial Statements (continued).............................................38
ADDITIONAL INFORMATION......................................................................39
Cautionary Statement concerning Forward-Looking Statements...................39
Additional Information About the Company.....................................39
INFORMATION CONCERNING INDEPENDENT AUDITORS.................................................40
SHAREHOLDER PROPOSALS.......................................................................40
OTHER MATTERS...............................................................................41
</TABLE>
<PAGE>
<PAGE>
PARAVANT COMPUTER SYSTEMS, INC.
1615A WEST NASA BOULEVARD
MELBOURNE, FLORIDA 32901
P R O X Y S T A T E M E N T
FOR SPECIAL MEETING OF SHAREHOLDERS
JUNE 26, 1998
This Proxy Statement is being furnished to shareholders by the Board of
Directors of Paravant Computer Systems, Inc. (the "Company" or "PCS"), in
connection with the solicitation of the accompanying proxy (each a "Proxy" and
collectively, "Proxies") for use at the special meeting to be held at the time
and place shown in the attached Notice of Special Meeting of Shareholders and at
any adjournments or postponements thereof (the "Special Meeting"). This Proxy
Statement and the accompanying Proxy will first be sent or given to shareholders
on approximately May 19, 1998.
VOTING SECURITIES AND SECURITY OWNERSHIP
RECORD DATE AND VOTING SECURITIES
The record date for the determination of holders of common stock, par value
$0.015 per share, of the Company ("Common Stock") who are entitled to notice of
and to vote at the Special Meeting is April 30, 1998 (the "Record Date"). As of
the Record Date ___________ shares of Common Stock were outstanding. Holders of
record of Common Stock as of the Record Date will be entitled to one vote for
each share held on each matter to be acted upon. A majority of all shares of
Common Stock issued, outstanding and entitled to vote at the Special Meeting,
present in person or represented by proxy, shall constitute a quorum. For
purposes of determining the presence of a quorum for transacting business,
abstentions and broker "non-votes" (i.e., proxies from brokers or nominees
indicating that such persons have not received instructions from the beneficial
owners or other persons entitled to vote shares on a particular matter with
respect to which brokers or nominees do not have discretionary power) will be
treated as shares that are present but have not voted.
VOTING OF PROXIES
Shares represented by properly executed Proxies, if returned in time and
not revoked, will be voted in accordance with the directions contained therein.
If no direction is given in the Proxy, the shares represented thereby will be
voted: (i) for approval of the amendment to the articles of incorporation to
change the name of the Company to Paravant Inc. (the "name change"); (ii) for
approval of the acquisition under the terms of the Acquisition Agreement (the
"Acquisition"); and (iii) on any other matter that may properly be brought
before the Special Meeting in accordance with the judgment of the person or
persons voting such Proxies.
The execution of a Proxy will in no way affect a shareholders's right to
attend the Special Meeting and to vote in person. Any Proxy executed and
returned by a shareholder may be revoked at any time thereafter if written
notice of revocation is given to the Secretary of the Company prior to the vote
to be taken at the Special Meeting, or if the shareholder attends the Special
Meeting and votes by ballot, except as to any matter or matters upon which a
vote shall have been cast pursuant to the authority conferred by such Proxy
prior to such revocation. Any later dated Proxies will revoke Proxies submitted
earlier.
1
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SOLICITATION OF PROXIES
The cost of solicitation of the Proxies being solicited on behalf of the
Board of Directors will be borne by the Company. In addition to the use of the
mail, proxy solicitation may be made by telephone, telegraph and personal
interview by officers, directors and regular employees of the Company. The
Company will, upon request, reimburse brokerage houses and persons holding
Common Stock in the names of their nominees for their reasonable expenses in
sending soliciting material to their principals.
PRINCIPAL SHAREHOLDERS OF THE COMPANY
The following table sets forth, as of April 24, 1998, the beneficial
ownership of shares of Common Stock by (i) each person who is known to 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 who served as
the Company's Chief Executive Officer in its last fiscal year, the year ended
September 30, 1997, and each of the other four most highly compensated executive
officers of the Company who were serving as executive officers at the end of the
last fiscal year and (iii) all of the Company's officers and directors as a
group:
<TABLE>
<CAPTION>
PERCENTAGE OF
AMOUNT AND NATURE OF OUTSTANDING SHARES
NAME AND ADDRESS OF BENEFICIAL OWNERS(1) BENEFICIAL OWNERSHIPS(2) OWNED(3)
- --------------------------------------- ------------------------ -----------------
<S> <C> <C>
Krishan K. Joshi(4)(5) ....... 2,235,468 27.5%
Richard P. McNeight(5) ....... 1,031,145 11.9%
William R. Craven(5) ....... 511,984 6.0%
Michael F. Maguire(5) ....... 46,500 * %
John P. Singleton(5) ....... 69,000 * %
Lary J. Beaulieu(5) ....... 226,202 2.8%
Kevin J. Bartczak(5) ....... 45,000 * %
All officers and directors as a group (7 persons) (4)(5) 3,719,451 42.6%
</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 the beneficial owner of securities that can be acquired
by such person within 60 days from the date of this Proxy Statement 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 Proxy Statement 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 8,116,867 shares of Common Stock outstanding on April 24, 1998,
and with respect to each holder of options or warrants exercisable within
60 days, the shares represented by such options or warrants. If the
Acquisition is approved and consummated 3,950,000 additional shares of
Common Stock will be issued as consideration for the Acquisition which
would have the effect of increasing the outstanding shares by 48.7%, to an
aggregate of 12,066,867 shares, correspondingly reducing the percentage
ownership of the persons listed in the table, resulting in the ownership of
more than 5% of the then outstanding Common Stock by each of four
shareholders of the entities being acquired, and increasing the then total
ownership by the then officers and directors of the Company to
approximately 51%. See "Summary of the Acquisition - Parties to the
Transaction - EDL/STL Shareholders Who Will Become More Than 5%
Shareholders."
2
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(4) Includes 2,191,854 shares of Common Stock held by UES Florida, Inc. ("UES
Florida"), a wholly owned subsidiary of UES, Inc. ("UES"). 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 Stock Option Plan,
as amended (the "Incentive Plan"), covering 193,334 shares for Mr.
McNeight, 53,334 shares for Mr. Craven, 40,000 shares for Mr. Beaulieu and
45,000 shares for Mr. Bartczak, options for 188,050 shares of Common Stock
granted to Mr. McNeight and 5,032 shares of Common Stock granted to each of
Mr. Craven and Mr. Beaulieu under a nonqualified stock option plan which
plan has been terminated, options granted under the Nonemployee Directors'
Stock Option Plan (the "Directors' Plan") covering 22,500 shares for Mr.
Maguire and 15,000 shares for Mr. Singleton, other nonqualified special
stock options covering 8,000 shares for each of Messrs. Maguire and
Singleton granted on November 20, 1997, all of which options are currently
exercisable and warrants held by Mr. Singleton which are presently
exercisable for 25,000 shares. Excludes options granted under the Incentive
Plan covering 84,666 shares for Mr. McNeight, 59,666 shares for Mr. Craven,
38,000 shares for Mr. Beaulieu, 25,000 shares for Mr. Bartczak and 30,000
shares for other officers and directors, all of which options are not
exercisable within 60 days of the date of this Proxy Statement.
SHAREHOLDER AGREEMENTS
Each of Messrs. Joshi, McNeight and Craven have separately agreed with
Company to vote the shares of Common Stock as to which each of them has voting
control (which in the case of Mr. Joshi includes the shares held by UES Florida)
in favor of the Acquisition to be presented at the Special Meeting. Each of them
has also indicated to the Company his intention to vote in favor of the name
change proposal which is also to be considered at the Special Meeting. As of
April 24, 1998 the shares under the voting control of Messrs. Joshi, McNeight
and Craven aggregated 2,892,999, or 35.6% of the outstanding Common Stock.
PROPOSAL 1: NAME CHANGE TO PARAVANT INC.
The Board of Directors has approved, and recommends to the shareholders for
approval, an amendment to the articles of incorporation which would change the
corporate name of the Company from Paravant Computer Systems, Inc. to Paravant
Inc.
REASONS FOR THE PROPOSAL
Consistent with the long range plans of the Board of Directors to further
diversify the business activities of the Company in the defense, communications
and related electronics industry, the Board has recommended a change in the name
of the Company from Paravant Computer Systems, Inc. to Paravant Inc. in order to
present a corporate identity which is not limited solely to the Company's
present core business. Currently, the Company's core business consists of
design, manufacture, repair and sale of rugged and customized computer systems
and medical computer assemblies. The Board plans to diversify the Company's
business activities through expansion or acquisition. For example, if the
acquisition proposal which is to be acted upon at the Special Meeting is
approved and implemented, the Company will expand its activities by acquisition
to include design, modification and marketing of avionics equipment for military
use and design, modification and marketing of digital signal processing
equipment for government intelligence and related operations. The proposal for
the name change is not contingent upon approval of the acquisition proposal. It
is the intention of the Board to pursue the diversification of the Company's
business through acquisition or expansion whether or not the present proposal is
approved.
3
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The Board has selected and recommends to the shareholders approval of the
proposed name, Paravant Inc., based upon the Board's judgment that Paravant Inc.
will present an identity which retains the Company's established reputation for
quality and performance in its current core business while, at the same time,
not limiting its corporate identity to its present business. The trading symbols
for the Company's securities, "PVAT" for the Common Stock, and "PVATW" for the
Common Stock warrants would not be affected by the proposed change in the name
of the Company and the currently outstanding share certificates bearing the name
Paravant Computer Systems, Inc. would continue to represent shares of the
Company following the change in its name to Paravant Inc. If the proposal to
change the name of the Company is approved by the shareholders, the name change
will be implemented by filing a name change amendment to the Company's articles
of incorporation within thirty days after the Special Meeting.
APPROVAL BY SHAREHOLDERS
The affirmative vote of a majority of the shares of Common Stock
represented at the Special Meeting and entitled to vote thereon is required to
approve the amendment to the articles of incorporation to change the name of the
Company from Paravant Computer Systems, Inc. to Paravant Inc. Shares of Common
Stock that are designated to "abstain" and shares which are subject to broker
non-votes with respect to approval of the name change will not be considered as
votes cast with respect to approval of the name change.
RECOMMENDATION OF THE COMPANY'S BOARD OF DIRECTORS
THE BOARD OF DIRECTORS RECOMMENDS A VOTE AFOR' APPROVAL OF THE NAME CHANGE.
YOUR PROXY WILL BE VOTED AFOR' APPROVAL UNLESS YOU SPECIFY OTHERWISE.
PROPOSAL 2: APPROVAL OF THE ACQUISITION
The Board of Directors has approved, and recommends that the shareholders
approve, the acquisition (the "Acquisition") by the Company of all of the
capital stock (the "EDL Common Stock") of Engineering Development Laboratories,
Incorporated ("EDL") and substantially all of the business and operating assets
(the "STL Purchased Assets") of Signal Technology Laboratories, Inc. ("STL")
under the terms of the Acquisition Agreement dated as of March 31, 1998 (the
"Acquisition Agreement") between the Company, EDL, STL, and the shareholders of
EDL and STL, James E. Clifford, Edward W. Stefanko, C. David Lambertson, C.
Hyland Schooley, Leo S. Torresani and Peter Oberbeck (Messrs. Clifford,
Stefanko, Lambertson, Schooley and Torresani and Dr. Oberbeck, collectively, the
"EDL/STL Shareholders"). The acquisitions of the EDL Common Stock and STL
Purchased Assets will occur simultaneously at the closing under the Acquisition
Agreement (the "Closing") and neither of such acquisitions will occur without
the other.
Shareholders of the Company should read the information concerning the
Acquisition which is included in this Proxy Statement following the statement of
the recommendation of the Board of Directors before deciding how to vote on the
Acquisition proposal. See "Summary of the Acquisition," "Risk Factors Applicable
to the Acquisition," "The Acquisition," "The Acquisition Agreement,"
"Description of EDL and STL," "Unaudited Pro Forma Consolidated Financial
Information," and "Additional Information."
REASONS FOR THE PROPOSAL
The Board of Directors is committed to further diversify the business
activities of the Company in the defense, communications and related electronics
industry in the belief that such diversification can provide increased revenues
and profitability and reduce the Company's dependence on revenues generated
solely from its present customer base. The Board has further determined that any
such diversification is a logical expansion into a larger market which is
distinguishable from, but compatible with its existing defense related business.
After its review of the business and prospects of EDL and STL during the initial
negotiations, and subsequently during the Company's due diligence
4
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investigation, the Board unanimously approved the Acquisition. The Board
believes that the Acquisition will
result in a major expansion of the Company's customer base,
increase the Company's revenues and profits, diversify the business of the
Company and provide a basis for further related growth which will be in the best
interests of the Company and its shareholders.
APPROVAL BY SHAREHOLDERS
The affirmative vote of a majority of the shares of Common Stock
represented at the Special Meeting and entitled to vote thereon is required to
approve the Acquisition Agreement and the acquisitions provided for therein
(collectively, the "Acquisition"). Shares of Common Stock that are designated to
"abstain" and shares which are subject to broker non-votes with respect to
approval of the Acquisition will not be considered as votes cast with respect to
approval of the Acquisition.
RECOMMENDATION OF THE COMPANY'S BOARD OF DIRECTORS
THE BOARD OF DIRECTORS OF THE COMPANY HAS APPROVED THE ACQUISITION
AGREEMENT, AND THE ACQUISITION PROVIDED FOR THEREIN, BY THE UNANIMOUS WRITTEN
CONSENT OF ALL OF THE DIRECTORS AND HAS DETERMINED THAT THE TERMS OF THE
ACQUISITION AGREEMENT ARE FAIR TO, AND THAT THE ACQUISITION IS IN THE BEST
INTERESTS OF, THE COMPANY AND ITS SHAREHOLDERS.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" APPROVAL OF THE ACQUISITION.
YOUR PROXY WILL BE VOTED "FOR" APPROVAL UNLESS YOU SPECIFY OTHERWISE.
PRO FORMA BOOK VALUE AND EARNINGS PER SHARE
The Acquisition, on a pro forma basis, will dilute net tangible book value
per share and increase earnings per share. The historical net tangible book
value of the Company at December 31, 1997 was $8,151,123 or $1.02 per share. Net
tangible book value per share is determined by dividing the tangible net worth
of the Company, consisting of tangible assets (total assets exclusive of
capitalized offering costs and intangible assets) less total liabilities, by the
number of shares outstanding at December 31, 1997. The pro forma net tangible
book value per share at December 31, 1997 was $8,654,943 or $.73. The pro forma
net tangible book value per share is determined by dividing the tangible net
worth of the Company (assuming the acquisition occurred on October 1, 1996),
consisting of pro forma tangible assets (total assets exclusive of intangible
assets) less pro forma total liabilities, by the number of shares outstanding at
December 31, 1997 (assuming the 3,950,000 shares to be issued in the acquisition
were outstanding.) The impact of the acquisition on a pro forma basis will be
dilutive to the net tangible book value per share from $1.02 to $.72. The impact
of the acquisition will increase both basic and diluted earnings per share on a
pro forma basis. The pro forma impact of the acquisition on earnings per share
for the most recent year ended September 30, 1997 and the most recent interim
period ended December 31, 1997 are as follows:
<TABLE>
<CAPTION>
Historical Pro Forma
---------- ----------
<S> <C> <C>
Tangible Net Book Value per share at December 31, 1997 $1.020 $ .725
Earnings per share
Year ended September 30, 1997
Basic $ .100 $ .612
Diluted .100 .445
Quarter ended December 31, 1997
Basic $ .025 $ .297
Diluted .017 .224
</TABLE>
5
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SUMMARY OF THE ACQUISITION
THE PARTIES TO THE TRANSACTION
The Company. Paravant Computer Systems, Inc. will be the purchaser of the
EDL Common Stock and STL Purchased Assets under the terms of the Acquisition
Agreement. The Company is a Florida corporation, which is engaged in the
business of design, manufacture, repair and sale of ruggedized, portable
computers and communications interfaces utilized in outdoor and medical
settings, customized computer systems and medical computer assemblies. The
Company sells its products, directly or indirectly, to the U.S. and foreign
military establishments, large aerospace and military contractors, government
agencies regulating environmental, geologic and forestry matters, certain state
departments of transportation, forest products companies, and medical device
manufacturers. In the Acquisition, through its acquisition of the EDL Common
Stock, the Company will acquire EDL as a wholly owned subsidiary. After the
Acquisition EDL will be operated as a wholly owned subsidiary of the Company. On
January 30, 1998 the Company caused the incorporation of STL of Ohio, Inc. ("STL
Ohio"), as an Ohio corporation and a wholly owned subsidiary of the Company, for
the purpose of receiving the STL Purchased Assets in the Acquisition. In the
Acquisition the STL Purchased Assets will be acquired by STL Ohio. After the
Acquisition, STL Ohio will be operated as a wholly owned subsidiary of the
Company.
The principal executive offices of the Company are located at 1615A West
Nasa Boulevard, Melbourne, Florida 32901 and its telephone number is (407)
727-3672.
Additional information relating to the Company, including information with
respect to the Company's management, business, properties, legal proceedings and
Common Stock, is incorporated by reference into this Proxy Statement from the
Company's filings with the Securities and Exchange Commission ("SEC"). See
"Additional Information About the Company".
EDL. EDL is an Ohio corporation which is engaged in the business of design,
modification, and marketing avionics equipment for military use. EDL also owns
approximately 56% of the capital stock of STL. See "The Acquisition -
Description of EDL and STL."
EDL is a privately held corporation. The EDL Common Stock is owned by
Messrs. Clifford, Stefanko and Lambertson. Mr. Clifford is a former director of
the company. Under the terms of the Acquisition Agreement the EDL Common Stock
will be sold to the Company by Messrs. Clifford, Stefanko and Lambertson. The
principal executive offices of EDL are located at 4391 Dayton-Xenia Road,
Dayton, Ohio 45432 and its telephone number is (937) 429-7411.
STL. STL is an Ohio corporation which is engaged in the business of design,
modification, and marketing digital signal processing equipment for government
intelligence and related operations. See "The Acquisition - Description of EDL
and STL."
STL is a privately held corporation. EDL owns approximately 56% of the
capital stock of STL and the other shares are owned by Messrs. Schooley,
Torresani and Dr. Oberbeck. Under the terms of the Acquisition Agreement, the
STL Purchased Assets will be sold to the Company by STL and transferred to the
Companys subsidiary, STL Ohio. In accordance with the Acquisition Agreement,
and prior to the Acquisition, the shares of STL owned by EDL will be distributed
to the shareholders of EDL. The principal executive offices of STL are located
at 4393 Dayton-Xenia Road, Dayton, Ohio 45432 and its telephone number is (937)
429-7472.
The EDL/STL Shareholders. Each of the EDL/STL shareholders are parties to
the Acquisition Agreement. Under the terms of the Acquisition Agreement, upon
the Closing, the EDL/STL Shareholders will enter into the employment agreements
with the Company provided for in the Acquisition Agreement (the "Employment
Agreements"), Messrs. Schooley, Torresani and Dr. Oberbeck will also enter into
the separate long-term non-competition agreements with the
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Company provided for in the Acquisition Agreement (the "STL Shareholder
Non-Competition Agreements"), and Messrs. Clifford, Schooley and Stefanko will
be appointed to the Company's Board of Directors.
EDL/STL Shareholders Who Will Become Directors. The following paragraphs
set forth information with regard to Messrs. Clifford, Schooley and Stefanko,
who will be appointed as directors of the Company following the Closing under
the terms of the Acquisition Agreement.
Mr. Clifford, age 61, has served as President of EDL since 1989. From 1983
to 1989 he served as a vice president at Systems Research Laboratories. After 23
years of service specializing in Special Operations Forces, he retired from the
U.S. Air Force at the rank of Colonel in 1983. Mr. Clifford holds Bachelor's and
Master's of Science degrees in electrical engineering from Oklahoma State
University. He served as a director of the Company from 1995 until December,
1997. For the Acquisition, Mr. Clifford will receive 882,166 shares of Common
Stock. Mr. Clifford currently owns 13,500 shares of Common Stock.
Mr. Schooley, age 64, has served as President of STL since 1990. From 1962
to 1990 he served in various engineering and management capacities at Systems
Research Laboratories. Mr. Schooley holds a Bachelor of Science degree in
Electrical Engineering from the University of Missouri (Columbia). Mr. Schooley
will receive 651,750 shares of Common Stock for the Acquisition. Mr. Schooley
currently owns 1,000 shares of Common Stock.
Mr. Stefanko, age 57, has served as Executive Vice President, Secretary and
Treasurer of EDL since 1988. From 1990 to 1998 he served as Secretary and
Treasurer of STL. Mr. Stefanko holds a Bachelor of Science degree in Physics and
a Master of Business Administration from the University of Dayton. For the
Acquisition, Mr. Stefanko will receive 882,167 shares of Common Stock.
EDL/STL Shareholders Who Will Become More Than 5% Shareholders. As
consideration for the Acquisition the Company will issue an aggregate of
3,950,000 shares of Common Stock, 2,646,500 shares of which will be divided
equally among Messrs. Clifford, Stefanko and Lambertson as EDL Common Stock Sale
Consideration and 1,303,500 shares of which will be divided among Messrs.
Schooley and Torresani and Dr. Oberbeck, 1/2, 1/4 and 1/4, respectively, as STL
Shareholder Non-Competition Agreement Consideration. As a result of the issuance
of the 3,950,000 shares for the Acquisition, and assuming that the otherwise
outstanding shares of Common Stock as of that date was the same as the 8,116,867
shares which were outstanding on April 24, 1998, Messrs. Clifford, Lambertson,
Stefanko and Schooley would then each become holders of more than 5% of the then
outstanding Common Stock. Each of such persons would then hold the following
number of shares and percentage of total outstanding shares: (i) Mr. Clifford,
895,616 shares (including 13,500 shares owned prior to the Acquisition), 7.4%;
(ii) Mr. Lambertson, 882,166 shares, 7.3%; (iii) Mr. Stefanko, 882,166 shares,
7.3%; Mr. Stefanko, 882,166 shares, 7.3%; and (iv) Mr. Schooley, 652,750 shares
(including 1,000 shares owned prior to the Acquisition), 5.4%. Messrs. Clifford,
Stefanko and Schooley, the EDL/STL Shareholders who will be named as directors
of the Company as a result of the Acquisition would hold an aggregate of
2,430,533 shares, which together with the 3,719,451 shares held by the current
officers and directors of the Company would aggregate 6,149,984 shares, or
approximately 51% of the total then outstanding shares of the Company.
HOW THE ACQUISITION WILL BE COMPLETED
At the Closing, the following will take place:
Messrs. Clifford, Stefanko and Lambertson will deliver the EDL Common
Stock to the Company in exchange for the EDL Common Stock Sale
Consideration consisting of the following:
An aggregate of $4,650,000 in cash;
Promissory notes in the aggregate amount of $3,238,000; and
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An aggregate of 2,646,500 shares of Common Stock;
STL will deliver the STL Purchased Assets to the Company in exchange
for the STL Purchased Assets Consideration consisting of the
following:
The Assumption by the Company of the liabilities designated in the
Acquisition Agreement as the "Assumed Liabilities," which as of April
24, 1998 were estimated to be nominal in amount;
$1,700,000 in cash; and
The contingent future payment of the "Cash Earn-Out" as defined in the
Acquisition Agreement.
Messrs. Schooley and Torresani and Dr. Oberbeck will deliver the STL
Shareholder Non-Competition Agreements to the Company in exchange for
the STL Shareholder Non-Competition Agreement Consideration consisting
of the following:
An aggregate of $2,350,000 in cash;
Promissory notes in the aggregate amount of $1,562,000; and
An aggregate of 1,303,500 shares of Common Stock.
The Company and the EDL/STL Shareholders will enter into and deliver
the Employment Agreements.
FAIRNESS OPINION
In deciding to approve the Acquisition, the Company's Board of Directors
considered, among other things, opinions from RAS Securities Corp., members of
the National Association of Securities Dealers, Inc. (the "NASD") and the
American Stock Exchange, Inc. concerning the value of the Common Stock to be
issued as a portion of the consideration for the Acquisition and the fair market
value of the businesses and assets of EDL and STL to be acquired in the
Acquisition. See "The Acquisition - Fairness Opinion."
FINANCING THE ACQUISITION
The Company intends to finance the cash portion of the consideration to be
paid by it in the Acquisition. See "The Acquisition - Acquisition Financing."
The balance of the consideration to be paid by the Company for the
Acquisition will consist of promissory notes and Common Stock and the Cash
Earn-Out to be paid from the revenues of the Company.
FEDERAL INCOME TAX CONSEQUENCES OF THE ACQUISITION
The goodwill recorded by the Company for the acquisition of the STL
Purchase Assets is deductible over a fifteen year period. The goodwill recorded
by the Company for the acquisition of the EDL Common Stock is not deductible for
tax purposes. The cost of the STL Shareholder Non-Competition Agreements is
deductible over fifteen years.
ACCOUNTING TREATMENT OF THE TRANSACTION
The Acquisition will be accounted for using the purchase method under
generally accepted accounting principles for accounting and financial reporting
purposes. The amounts allocated to the assets acquired are based on
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management's estimate of their fair values with the excess of purchase price
over fair value allocated to goodwill. The value of the Common Stock issued in
connection with the Acquisition will be based on a separate valuation of the
shares taking into consideration the effect of price fluctuations, quantities of
shares traded and issuance costs. Additional goodwill may be recorded by the
Company for the Cash Earn-Out for the fiscal years ended September 30, 2000 to
September 30, 2003 contingent upon the achievement of specified pre-tax
earnings. Goodwill will be amortized over a fifteen year period.
RESALES OF COMMON STOCK
All of the shares of Common Stock to be issued in the Acquisition will be
considered "restricted securities" under federal securities laws and will be
subject to the "lock-up" provision of the Acquisition Agreement. Consequently,
the transferability of such shares by their holders will be limited following
the Closing. See "The Acquisition-Resales of Common Stock" and "The Acquisition
- - Lock-Up of Shares."
ABSENCE OF DISSENTERS' RIGHTS
The Company is incorporated in the State of Florida, and accordingly, is
governed by the provisions of the Florida Business Corporation Act (the "FBCA").
Shareholders of the Company are not entitled to dissenters' rights to dissent
from and obtain payment of the fair value of their shares under the FBCA with
respect to the Acquisition.
NASD REQUIREMENT FOR SHAREHOLDER APPROVAL
The By-Laws of the NASD require that the Company obtain the approval of its
shareholders in connection with a transaction, other than a public offering,
involving the sale or issuance by the Company of Common Stock (or securities
convertible into, or exercisable for, Common Stock) equal to twenty percent or
more of the Common Stock, or twenty percent or more of the voting power of the
Company's securities, which were outstanding before the issuance of the Common
Stock in the Acquisition. As a result, even though the Acquisition is not
required to be approved by the shareholders of the Company under the terms of
the FBCA, such shareholder approval is required under the terms of the By-Laws
of the NASD to which the Company is subject.
MARKETS AND PRICES FOR THE SHARES OF THE PARTIES AND RELATED SHAREHOLDER MATTERS
The shares of Common Stock commenced trading on the Nasdaq Stock Market
National Market under the symbol "PVAT" on June 3, 1996. The range of high and
low reported closing sales prices for the Common Stock as reported by Nasdaq
(reflecting inter dealer prices, without retail mark-up, markdown or commission
and not necessarily representing actual transactions) since the commencement of
trading were as follows:
<TABLE>
<CAPTION>
High Low
---- -------
<S> <C> <C>
June 3, 1996 to June 30, 1996(1).............................$5-3/8 $1-7/8
July 1, 1996 to September 30, 1996(1)........................$6-3/8 $4-5/8
October 1, 1996 to December 31, 1996.........................$8 $4-15/16
January 1, 1997 to March 31, 1997............................$7-3/8 $5
April 1, 1997 to June 30, 1997...............................$7 $3
July 1, 1997 to September 30, 1997...........................$6-5/8 $3
October 1, 1997 to December 31, 1997........................ $5-3/32 $3-3/8
January 1, 1998 to March 31, 1998......... .................$4 $2-11/16
April 1, 1998 to April 23, 1998..............................$2-31/32 $1-15/16
</TABLE>
- ------------------
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(1) On July 25, 1996, the Company effected the Stock Split. Following the Stock
Split, each holder of record of Common Stock on July 22, 1996 received two
additional shares of Common Stock for each share held on such date. In
connection with the Stock Split, each outstanding Warrant to purchase one
share of Common Stock at an exercise price of $6.00 per share was converted
into three Warrants, each to purchase one share of Common Stock at an
exercise price of $2.00 per share. All share prices listed above are after
giving effect to the Stock Split.
On March 30, 1998, the last trading day prior to the public announcement of
the Acquisition, the sale prices for the Common Stock as reported by Nasdaq
ranged from a high of $3 per share to a low of $2-11/16 per share.
On April 24, 1998, as reported by the Company's transfer agent, shares of
Common Stock were held by 91 record holders, including several holders who are
nominees for an undetermined number of beneficial owners. Based upon past
requests by nominee holders for materials to be forwarded to beneficial owners,
the Company estimates that there are more than 1,200 beneficial owners of Common
Stock.
The Company has not paid any dividends on its shares of Common Stock and
intends to follow a policy of retaining any earnings to finance the development
and growth of its business. Accordingly, it does not anticipate the payment of
cash dividends in the foreseeable future. However, the payment of dividends, if
any, rests within the discretion of the Board of Directors and will depend upon,
among other things, the Company's earnings, its capital requirements and its
overall financial condition.
EDL and STL are each privately held corporations and there is no public
trading in the shares of either of such corporations.
RISK FACTORS APPLICABLE TO THE ACQUISITION
Each shareholder of the Company should carefully consider and evaluate the
following factors, among others, before voting on the Acquisition proposal.
Exceptional Earnings of EDL and STL. During recent periods, including
the periods consisting of the fiscal year ended September 30, 1997 and
the interim fiscal quarter ended December 31, 1997, the revenues and
earnings of EDL and STL were materially higher than those of earlier
periods. Management of the Company has attempted to realistically and
fairly evaluate results of operations for these recent periods in
relation to those of prior periods and reasonable expectations for
periods following the Closing in determining to pursue the Acquisition
and in determining the consideration to be paid for the Acquisition.
Management's evaluation of the results of recent periods may not have
been adequately discounted with the result that the Acquisition could
be less favorable to the Company and its shareholders than anticipated
by management when formulating its recommendation for approval.
Ability to Transition Business of STL. After the Closing, it is the
intention of the parties to refer and transition customers and
business of STL to STL Ohio. A major part of such business may not be
transferable from STL without the consent of the other contracting
party. There is no assurance that such consent will be granted.
Dependence Upon Acquired Management. The continuing successful
operation of the businesses to be acquired in the Acquisition is
largely dependent upon the retention of the EDL/STL Shareholders and
other key management personnel of EDL and STL as employees of EDL and
STL Ohio following the Closing. Because the businesses being acquired
represent a diversification of the Company's business functionally and
geographically, the loss from a key management position of one or more
of the EDL/STL Shareholders or of any other key management personnel
from EDL or STL Ohio could have an adverse effect on one or both of
the acquired businesses and upon the realization of the benefits
anticipated from the Acquisition.
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Integration of Operations: Management of Growth. In determining that the
Acquisition is in the best interests of the Company, the Company's Board of
Directors has assumed the continuation of the business of EDL, after it
becomes a subsidiary of the Company, and the continuation of the business
of STL after it is transferred to STL Ohio, and that such business can be
assimilated into the operations of the Company with relative ease. Under
the terms of the Employment Agreements to be entered into at the Closing,
the Company will employ the EDL/STL Shareholders to continue their
management of the acquired operations in a largely autonomous manner and
with minimal direct oversight by the Company's Board of Directors and
executive officers. The Cash Earn-Out provisions of the Employment
Agreements are intended to provide a major incentive to the EDL/STL
Shareholders to maximize the profitability of the acquired operations,
however, the difficulties of assimilation may be increased by the necessity
of coordinating geographically separated organizations, integrating
personnel with disparate business backgrounds and combining different
corporate cultures. The process of combining the acquired businesses may
cause an interruption of, or a loss of momentum in, the Company's business,
which could have an adverse effect on the revenues and operating results of
the combined Company. There is no assurance that the combined entity will
be able to retain all of its key management and other operating personnel
or that the combined entity will realize any of the other anticipated
benefits of the Acquisition.
Dilution; Voting Control. The Company will issue an aggregate of 3,950,000
shares of Common Stock as consideration for the Acquisition which would
represent approximately 48.7% of the number of shares of Common Stock
outstanding as of April 24, 1998. Accordingly, the Acquisition will have
the effect of substantially reducing the percentage voting interest in the
Company prior to the Acquisition. The substantial ownership of Common Stock
by the EDL/STL Shareholders, as a group, after the Acquisition will provide
them with the ability to exercise substantial influence in the election of
directors and other matters submitted for approval by the Company's
shareholders. Following the Acquisition, the ownership of Common Stock by
the EDL/STL Shareholders who will become directors together with the
present officers and directors of the Company and their affiliates will
then represent approximately 51% of the outstanding shares of the Company.
Such concentrations of ownership of the Common Stock may make it difficult
or impossible for other shareholders of the Company to successfully
advocate or oppose matters which may be submitted for shareholder action.
Such ownership may also have the effect of delaying, deterring or
preventing a change in control of the Company without the consent of such
major shareholders. In addition, sales of Common Stock by such major
shareholders could result in a change in control of the Company.
Pro Forma Effect on Book Value and Earnings Per Share. On a pro forma
basis, the Acquisition will have a dilutive effect on book value per share
of the Company as of December 31, 1997 while increasing earnings per share.
See "Pro Forma Book Value and Earnings Per Share." The extent of dilution
or enhancement to the Company's shareholders with respect to future book
value and earnings per share will depend on the actual results achieved by
the Company following the Acquisition as compared with the results that
could have been achieved by the Company on a stand-alone basis over the
same period in the absence of the Acquisition transactions. There is no
assurance as to such future results, and, accordingly, as to whether the
Acquisition will ultimately be dilutive or accretive to the Company's
future book value per share or earnings per share.
Resales of Common Stock and Market Volatility. The Company will issue and
deliver an aggregate of 3,950,000 shares of Common Stock as consideration
for the Acquisition. Such additional shares would represent, in the
aggregate, approximately 49% of the number of shares outstanding as of
April 24, 1998. The shares to be issued in the Acquisition will be
considered "restricted securities" under applicable securities laws,
thereby limiting the resale of such shares into the public market. All of
such shares will, however, become eligible for sale in the public market in
accordance with SEC Rule 144 or 145 ("Rule 144 or 145") one year following
the Closing with certain volume and manner of sale limitations continuing
for only one year thereafter (except as to shares held by persons deemed to
be affiliates of the Company). In addition, the Company has agreed o file a
registration to register the shares with the SEC within twelve months after
the Closing. Because such shares are also restricted by the lock-up
provisions of the Acquisition Agreement, it
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is not anticipated that such shares would be offered for sale until at
least 18 months after the Closing. As of April 24, 1998, approximately
4,980,698 shares, or 61.4% of the outstanding shares of Common Stock, is
held by nonaffiliates of the Company. Trading in the Common Stock has
historically been limited, and there can be no assurance that a more active
trading market for the Common Stock will develop or be sustained. Because
of the limited trading liquidity in the Common Stock, the market price of
the Common Stock has been vulnerable to significant fluctuations in
response to very limited market trading in such shares. The market price of
the Common Stock will remain subject to significant fluctuations in
response to such factors as well as in response to operating results and
other factors affecting the stock market generally. The stock market in
recent years has experienced price and volume fluctuations that often have
been unrelated or disproportionate to the operating performance of the
issuers. These fluctuations, as well as general economic and market
conditions, may adversely affect the market price of the Common Stock in
the future.
Government Regulation and Contracts. Commercial enterprises engaged
primarily in supplying equipment and services, directly or indirectly, to
the United States government (including the Company, EDL and STL) 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. In the opinion of the
respective managements of the Company, EDL and STL, none of their
respective entities has a material amount of its business as DoD contracts
that are subject to renegotiation in the foreseeable future and none of
them is aware of any proceeding to terminate material DoD contracts in
which their respective entities may be indirectly involved. Some of the
Company's contracts provide for the right to audit its cost records and are
subject to regulations providing for price reductions.
Continuing Dependence Upon a Limited Customer Base; Competition. The
Acquisition is expected to result in a diversification of the Company's
business and a major expansion of its customer base. The respective
businesses of EDL and STL are distinguishable from the Company's existing
defense-related business, however, because the respective businesses of EDL
and STL are also concentrated primarily in military and government-related
business, the business of the Company after the Acquisition, although more
diversified with an expanded customer base will continue to be subject to
the risks related to such business and the competition for such business
from other sources. See "the Acquisition - description of EDL and STL."
THE ACQUISITION
BACKGROUND
The Company was incorporated as a Florida corporation on June 25, 1982. In
early 1983 the Company commenced business operations offering only engineering
services for computer applications, modifying computer hardware and other
equipment and developing 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 designing and developing its
first rugged computer under a special contract from the U.S. Department of
Defense Small Business Innovative Research Program. Subsequently, it designed,
developed and produced other computer related products.
Currently, the Company is a manufacturer of ruggedized, portable computers
and communications interfaces utilized in outdoor and medical settings. The
Company 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. The products of the Company
are sold to U.S. and foreign military establishments, other government agencies
and commercial enterprises.
In order to increase the Company's access to capital markets and enhance
opportunities for further growth, the Company undertook and completed an initial
public offering of Common Stock in June, 1996. In connection with its
determination to undertake the public offering, the Board of Directors
determined to pursue, as a long-range goal, further expansion and
diversification of the Company's business in the defense, communications and
related electronics
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industry. The Board concluded that such diversification would most likely be
achieved through the Company's acquisition of one or more established
businesses. Any such businesses should be engaged in activities which would be
distinguishable from, but compatible with, the existing business of the Company
and should represent a logical expansion of the Company's business. It was also
the intention of the Board that a significant portion of the acquisition price
for any such acquisition should consist of Common Stock and that incentives be
provided to retain the proven management personnel of any such business.
During the second quarter of 1997, Krishan K. Joshi, Chairman of the Board
of Directors of the Company, and Mr. Clifford, who at that time was a member of
the Board of Directors of the Company, began to explore the mutual opportunities
that might result from the acquisition by the Company of EDL. Mr. Clifford was,
and is, a member of the Board of Directors, executive officer, and major
shareholder of EDL. Mr. Clifford serves as President of EDL and is the owner of
1/3 of the EDL Common Stock. Because of his association with Mr. Clifford as a
director of the Company and his long personal and business friendship with Mr.
Clifford, Mr. Joshi was generally knowledgeable about the business of EDL.
Similarly, the other members of the Board of Directors of the Company, because
of their association with Mr. Clifford as a director of the Company, had some
knowledge concerning the business of EDL. In addition to his position as
Chairman of the Board and Chief Executive Officer of the Company, Mr. Joshi's
principal occupation is Chairman of the Board and Chief Executive Officer of
UES, Inc., an Ohio corporation ("UES"). Mr. Joshi maintains his office in the
principal executive offices of UES which are located at 4401 Dayton-Xenia Road,
Dayton, Ohio 45432. Mr. Clifford maintains his office in the principal executive
offices of EDL, which are also located in the same building.
After initial discussions between Messrs. Joshi and Clifford, and between
other members of the Board of the Company and Mr. Clifford, the Board concluded
that the possible acquisition of EDL might be consistent with the
diversification and expansion goals of the Board and that possible acquisition
should be pursued further. STL is a majority owned subsidiary of EDL, which owns
approximately 56% of the STL capital stock. During subsequent discussions
Messrs. Joshi and Clifford suggested that consideration also be given to the
acquisition of minority interest in STL, which is owned by Messrs. Schooley and
Torresani and Dr. Oberbeck. The principal executive offices of STL are located
in the same building as those of EDL and UES and Messrs. Joshi and Clifford were
well acquainted with the management and operations of STL. After initial
discussions between Mr. Joshi, Mr. Clifford and Messrs. Schooley and Torresani
and Dr. Oberbeck, Mr. Joshi recommended, and the Company's Board of Directors
agreed, to pursue the possible acquisition of the businesses of both EDL and
STL.
On November 20, 1997 the Company's Board of Directors adopted a resolution
authorizing negotiations with EDL, STL and all of the EDL/STL Shareholders for
the purpose of pursuing the terms of a letter of intent providing for the
acquisition by the Company, after completion a satisfactory due diligence
investigation by the parties. Mr. Clifford, as a director of the Company,
abstained from the vote taken by the Company's Board of Directors. Following the
November 20, 1997 meeting of the Company's Board, Mr. Joshi and the other
executive officers of the Company devoted a substantial amount of time and
effort in conducting an initial due diligence investigation of EDL and STL and
in the formulation of an initial acquisition proposal. During this period, the
Company and EDL and STL mutually exchanged preliminary due diligence
information. In order to assure a candid consideration of the merits of the
proposed acquisitions, and to avoid any possible conflict with Mr. Clifford's
duties as a member of the Company's Board in connection with the Board's
consideration of the proposed acquisitions, Mr. Clifford resigned as a director
of the Company on December 30, 1997.
Mr. Clifford has continued to serve as a director and President of EDL and
was directly involved in the formulation of EDL's negotiations with the Company
toward the development of the initial and subsequent letters of intent and EDL's
agreement to the terms of the Acquisition Agreement. Mr. Clifford, as an EDL/STL
Shareholder, is also a party to the Acquisition Agreement and, as such, will be
entitled to his pro rata share of the consideration to be paid for the
Acquisition, and will enter into an Employment Agreement with the Company upon
consummation of the Acquisition transaction. After his resignation as a director
of the Company, Mr. Clifford's negotiations directly with the Company concerning
the proposed acquisitions were comparable to those of the other EDL/STL
Shareholders. Edward W.
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Stefanko, a director, Executive Vice President, and a shareholder of EDL, served
as the principal negotiator for EDL, STL and the EDL/STL Shareholders in the
negotiations with the Company concerning the Acquisition.
On September 19, 1997, the Board of Directors of the Company approved and
agreed to the terms of a non-binding letter of intent providing for the drafting
of a definitive acquisition agreement for the acquisition of EDL and STL. During
the period from September 19, 1997 until January 23, 1998 several drafts of
acquisition agreements were proposed by the parties and negotiations between the
Company and EDL and STL continued. An amended letter of intent was signed by the
Company and the representative of EDL and STL on January 23, 1998. A further
amended letter of intent was signed on February 13, 1998. Following telephone
conference meetings of the Board members and the executive officers of the
Company, during which the executive officers provided the directors with
information concerning the negotiations and discussions, due diligence and other
information with respect to the determination of management's recommendation for
approval, the Company's Board of Directors, in a unanimous action by written
consent, approved the acquisition agreement which was executed by the parties on
March 31, 1998. On March 31, 1998 the Company issued a press release announcing
the proposed Acquisition. On April 23, 1998 the parties amended and restated the
acquisition agreement as the Acquisition Agreement dated as of March 31, 1998
(the "Acquisition Agreement"). The parties have continued to exchange
information and coordinate activities to prepare for the Company's Special
Meeting of shareholders and for the anticipated consummation of the Acquisition.
After approximately September 1, 1997, the Company was assisted by outside
legal counsel in its negotiations with EDL, STL and the EDL/STL Shareholders,
and in the formulation and drafting of the letters of intent and the Acquisition
Agreement. The Board of Directors also engaged the services of RAS Securities
Corp. to conduct a financial analysis of the proposed acquisitions and to render
an opinion as to the fairness of the terms of the proposed acquisition to the
Company and its shareholders from a financial point of view.
During the period from September 19, 1997 through the signing of the
Acquisition Agreement, EDL and STL were represented in negotiations with the
Company by the direct involvement of their respective executive officers and the
EDL/STL Shareholders. As noted above, Mr. Clifford was instrumental in the
initial consideration of the proposal and Mr. Stefanko subsequently served as
the principal negotiator for EDL and STL and their respective shareholders. EDL
and STL have been assisted by outside legal counsel throughout the negotiations.
REASONS FOR THE ACQUISITION
The Board of Directors and executive officers of the Company believe that
the terms of the Acquisition are fair to, and in the best interests of, the
Company and the shareholders of the Company. In reaching its determination to
approve the Acquisition, the Board identified and analyzed the following factors
and potential benefits, among others, relating to the Acquisition:
alternatives for growth in the defense and related electronics industry,
including internal development, which the Board viewed as less advantageous
due to the current full commitment of the Company's management to current
business activities, concentration of the Company's management experience
in the Company's current business activities, the Company's limited
development resources and the uncertainty of the success of such
development efforts, none of which appeared to present the opportunity that
the acquisition of EDL and STL presented;
the strategic value of diversifying the business activities of the Company
by adding the military avionics business of EDL and the digital signal
processing business of STL;
the expectation that the businesses of EDL and STL will be compatible with,
and complementary to, the Company's computer related business and that the
Acquisition may be viewed favorably by investors as a logical expansion and
diversification of the Company's business;
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information concerning the Company's, EDL's and STL's respective prospects,
financial performance, financial condition, assets and operations;
the financial terms of the Acquisition and its possible effect on future
earnings;
the opinion of RAS Securities Corp. that the value of the EDL Common Stock,
STL Purchased Assets, and the STL Shareholder Non-Competition Agreements is
in excess of the value of the cash, promissory notes and Common Stock to be
paid by the Company as consideration for the Acquisition; and
a review with the Company's outside legal counsel of the terms of the
Acquisition Agreement.
Following its deliberations concerning such factors, the Company's Board
concluded that the Acquisition may increase the long-term prospects of the
Company for continued growth, may increase stockholder value, and is in the best
interests of the Company and its shareholders financially and strategically.
The Company's Board also considered a variety of potentially negative
factors in its deliberations concerning the Acquisition, including (i) the
recognition that the revenues and profits of EDL and STL in recent periods are
probably in excess of those that may be expected after the Acquisition (ii) the
possible dilutive effect of the issuance of the Common Stock in the Acquisition;
(iii) the additional debt of the Acquisition Financing to be incurred by the
Company to carry out the Acquisition; (iv) the transaction costs and costs of
integrating the businesses to be acquired in the Acquisition; (v) the risk that,
despite the obtaining of the Employment Agreements, key personnel of EDL and/or
STL may not be retained by the Company causing an adverse effect on the
continuing business operation acquired in the Acquisition; (vi) the risk that
key business contracts or relationships of STL may not be transferred to STL
Ohio in connection with the Acquisition reducing the realization of the value
sought to be obtained by the Acquisition; and (vii) the risk that other benefits
sought to be obtained by the Acquisition might not be obtained.
Given the variety of factors, both positive and negative, considered by the
Company's Board, the Board did not quantify or otherwise assign relative weights
to the specific factors considered. In addition, individual members of the
Company's Board may have given different weights to the various factors
considered. The Board of Directors was unanimous in its approval of the
Acquisition under the terms of the Acquisition Agreement.
FAIRNESS OPINION
RAS Securities Corp. ("RAS") was requested by the Company to render its
opinion (the "Common Stock Value Opinion") as to the value and fairness (from a
financial point of view) of the Common Stock which will be issued as a portion
of the consideration to be paid by the Company in the Acquisition for the
acquisition of the EDL Common Stock, the STL Purchased Assets, and the STL
Shareholder Non-Competition Agreements under the terms of the Acquisition
Agreement. The Company also requested the opinion (the AEDL/STL Value Opinion`)
of RAS as to the value and fairness (from a financial point of view) of the
proposed acquisition of the EDL Common Stock, the STL Purchased Assets, and the
STL Shareholder Non-Competition Agreements.
In arriving at its Common Stock Value Opinion, RAS reviewed (relied upon,
and assumed, without independent investigation or verification) the Company's
Form 10-KSB for the fiscal year ended September 30, 1997 and the Company's Form
10-QSB for the quarter ended December 31, 1997; preliminary unaudited financial
statements of EDL/STL for the year ended December 31, 1997 and unaudited
financial statements of EDL/STL for the year ended December 28, 1996 (the
"EDL/STL financial statements"); the acquisition agreement dated March 31, 1998
(the "Agreement"); the trading activity and the market maker activity for the
Common Stock for the period from June 3, 1996 through March 15, 1998; and
reviewed and analyzed companies and trading activity and transactions similar to
the Acquisition ("comparable company acquisition"). Based upon its review and
its analysis of the information reviewed RAS expressed its opinion that the
Common Stock to be paid as a portion of the purchase price for the Acquisition
has a value of $1.40-1.76 per share, taking into consideration, amongst other
material things, (i) its illiquid and unregistered
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state; (ii) the relatively thin volume in the Common Stock compared to the
3,950,000 shares to be issued for the Acquisition; (iii) the few large and
consistent market-makers in the shares; and (iv) the restrictive nature of the
shares in that none of the 3,950,000 shares will be free trading prior to the
end of the eighteen month "lock-up."
In arriving at its EDL/STL Value Opinion, RAS reviewed (relied upon, and
assumed, without independent investigation or verification) the Agreement; the
EDL/STL financial statements; comparable company acquisitions; the financial
projections for EDL/STL; and performance and valuations of small defense
electronic companies that are publicly held. After calculating implied values
from the harmonic mean averages of comparable companies using the market
capitalization approach (i.e., the market value of the equity, plus long and
short term debt, less cash and cash equivalents), RAS expressed its opinion that
as of the date of and immediately following the closing of the Acquisition
(assuming such closing takes place in July of 1998) the "fair market value" of
the business and assets of EDL/STL as a going concern is substantially in excess
of the consideration, before the Cash Earn-Out (which may be substantial, see
"The Acquisition Agreement - Cash Earn-Out"), to be paid by the Company for the
Acquisition.
Based upon the Common Stock Value Opinion of $1.40-1.76 per share, the
aggregate value of the 3,950,000 shares of Common Stock to be issued for the
Acquisition would be $5,530,000-6,952,000 and resulting aggregate value of the
Common Stock together with the $8,700,000 in cash and $4,800,000 in promissory
notes, the total Acquisition consideration to paid by the Company at the Closing
would be $19,030,000-20,452,000. Given the conclusion in the EDL/STL Value
Opinion that the value of the business and assets of EDL/STL to be acquired is
substantially in excess of the consideration, before the Cash Earn-Out (which
would be paid from the EDL/STL earnings), to be paid by the Company, the Board
of Directors of the Company has concluded that the Acquisition will be fair to
the Company and its shareholders from a financial point of view. The opinions of
RAS are directed to fairness, from a financial point of view, of the terms of
the Acquisition to the Company and do not constitute a recommendation of the
Acquisition over other courses of action that may be available to the Company or
constitute a recommendation as to how any shareholder should vote with respect
to approval of the Acquisition transaction.
RAS is a member of NASD and the American Stock Exchange and has its
principal office at 50 Broadway, New York, New York 10004. RAS was selected to
render the subject opinions by the Board of Directors of the Company after
considering a number of similarly qualified firms. The amount of consideration
to be paid for the Acquisition was determined by the Company.
ACQUISITION FINANCING
The Company intends to finance the cash portion of the consideration to be
paid by the Company at the Closing. The Company has received a conditional
commitment from National City Bank, Dayton, Ohio for floating rate financing in
an amount up to $14,000,000 (the "Acquisition Financing") under a revolving line
of credit with a maturity date of December 31, 2000 convertible thereafter to
five year term debt. The Acquisition Financing would be secured by a first
security interest in accounts, contract rights, inventory, equipment and other
security reasonably requested by the lender. It is anticipated that the loan
agreement applicable to the Acquisition Financing will include various loan
covenants and restrictions of a customary nature. Such covenants and
restrictions, while the Acquisition Financing is outstanding, under certain
circumstances, may limit the ability of the Company to pay cash dividends,
undertake additional acquisitions, make certain changes in the Company's
management, or otherwise limit obligations undertaken by, or operations of, the
Company.
The ability of the Company to close the Acquisition transaction is
dependent upon the Company's obtaining the Acquisition Financing or other
financing in a comparable amount from another source. Under the terms of the
Acquisition Agreement, the availability of the Acquisition Financing is not a
condition to the Company's obligation to close the Acquisition transaction.
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PROMISSORY NOTES
A portion of the Acquisition consideration will consist of promissory notes
in the aggregate amount of $4,800,000. Each of the notes will be a subordinated
note which is subordinate and junior to any indebtedness of the Company to
National City Bank, Dayton, Ohio. Each of the notes will bear interest at 8% per
annum based upon a 365 day year and the principal amount of each such note will
be payable in 12 equal quarterly payments, together with the interest thereon,
with the first such quarterly payment to be due on October 1, 1998 and
subsequent quarterly payments will be payable on January 1, 1999, April 1, 1999
and July 1, 1999 and on each October 1, January 1, April 1, July 1 and October 1
thereafter until July 1, 2001, when the entire principal sum and all accrued
interest will be due and payable in full. The notes may be prepaid at any time
without penalty. Each of the notes also provides a right of set-off to the
Company against the payee for amounts due the Company from the payee as damages
under the Acquisition Agreement or of a covenant not to compete between the
payee and the Company.
RESALES OF COMMON STOCK
All of the shares of Common Stock to be issued in connection with the
Acquisition will be deemed to be "restricted securities" as that term is defined
in Rule 144. As a consequence, such shares may not be sold, pledged or otherwise
transferred by the holders thereof except in transactions permitted by the
resale provisions of Rules 144 and 145 or as otherwise permitted under the
federal Securities Act of 1933, as amended (the "1933 Act"). Resales of Common
Stock will also be restricted by the further restrictions on transferability
included in the "lock-up" provision of the Acquisition Agreement referred to in
the following section of this Proxy Statement. See "Risk Factors Applicable to
Acquisition Resales of Common Stock and Market Volatility."
In general, under Rules 144 and 145, during the first year following the
closing of the Acquisition, any person receiving shares of Common Stock in the
Acquisition would be able to sell or otherwise transfer such shares only
pursuant to an effective registration statement under the 1933 Act or in
compliance with an exemption from the registration requirements of the 1933 Act.
During the second year following the receipt of such shares, such person would
be entitled to sell such shares only through unsolicited "brokers' transactions"
or in transactions directly with a "market maker" as such terms are defined in
Rule 144. Additionally, the number of shares to be sold by such person (together
with certain related persons) within any three-month period for the purposes of
Rules 144 and 145 could not exceed the greater of one percent of the outstanding
shares of Common Stock or the average weekly trading volume of such stock during
the four calendar weeks preceding such sale. The Rules 144 and 145 will remain
available, however, if the Company remains current with its informational
filings with the SEC under the Securities Exchange Act of 1934, as amended (the
"1934 Act"). Two years after the closing of the Acquisition a person who
received Common Stock in the Acquisition would be able to sell such Common Stock
without such manner of sale or volume limitations, provided that the Company was
then current with its 1934 Act informational filings and such person had not
been an "affiliate" as defined in Rule 144, for at least three months prior to
such sale. Persons who may be deemed to be affiliates of the Company generally
include individuals or entities that control, are controlled by, or under common
control with, the Company, and may include certain officers and directors of the
Company as well as principal shareholders of the Company.
In order to help assure compliance with Rules 144 and 145 and the 1933 Act,
a provision of the Acquisition Agreement, to which each of the persons who will
receive shares of Common Stock in the Acquisition is a party, includes the
agreement of such persons to be bound by the transfer restrictions which are
applicable to the shares as restricted securities, to also be bound by the
lock-up, and to accept share certificates representing such shares bearing
transfer restriction legends providing notice of such transfer restrictions.
Under the terms of the Acquisition Agreement, the Company has agreed to
file a registration statement to register the Common Stock issued for the
Acquisition within 12 months of the Closing, and in no event later than the
release of the "lock-up" of the shares.
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LOCK-UP OF COMMON STOCK
Under the terms of the Acquisition Agreement, the shares of Common Stock
which are issued in the Acquisition may not be sold, transferred, hypothecated
or pledged by the holder thereof for a period of eighteen months following the
closing of the Acquisition unless such "lock-up" period is terminated by reason
of the occurrence of a "Fundamental Event" as defined in the Acquisition
Agreement. A Fundamental Event is generally defined to include certain
transactions in which control of the Company might be transferred, more than
twenty percent of the Company's interest in EDL or STL Ohio might be disposed of
by the Company, or either UES or Mr. Joshi disposes of more than a specified
number of shares of Common Stock.
INTEREST OF CERTAIN PERSONS IN THE ACQUISITION
Beaver Creek Enterprises, an Ohio partnership among certain UES employees,
including Mr. Joshi, owns the building located at 4391 Dayton-Xenia Road,
Dayton, Ohio 45432 which is leased to UES. The principal executive offices of
EDL and STL are located in this building and are rented under separate leases
with UES. The offices of EDL are rented pursuant to a lease dated November 26,
1996 between UES and EDL for a lease term beginning December 1, 1996 and ending
on November 30, 1999. On December 1, 1997 rental payments under the lease
increased from $9,780 per month to $10,000 per month. From December 1, 1998
through November 30, 1999 rental payments will be $10,225 per month. For the one
year period ended September 30, 1997, EDL made lease payments to the partnership
in the aggregate amount of $117,360. The offices of STL are rented pursuant to a
lease between UES and STL dated August 1, 1996, as amended through October 1,
1997. As amended, the lease provides for rental payments of $6,220 per month,
for a lease term which continues through July 31, 1999 and includes an option to
renew for an additional three year period with a maximum additional rental cost
of up to 3% for the three additional years. For the one year period ended
September 30, 1997, STL made lease payments to the partnership in the aggregate
amount of $54,450.
Mr. Clifford, a director, executive officer and shareholder of EDL, served
as a director of Company until his resignation on December 30, 1997. See "The
Acquisition - Background." Mr. Clifford is also a shareholder of EDL and a party
to the Acquisition Agreement. He will be entitled to consideration paid for the
Acquisition and will enter into an Employment Agreement in accordance with the
terms of the Acquisition Agreement.
Under the terms of the Acquisition Agreement, upon the Closing, the Board
of Directors of the Company shall increase the number of directors constituting
the Company's Board by three directors and shall appoint Messrs. Clifford,
Stefanko and Schooley as directors of the Company to fill the vacancies created
by such increase. Such appointed directors shall be appointed as directors of
the Company to serve until the 1999 annual meeting of the Company's
shareholders. The Board of Directors of the Company shall establish the number
of directors to constitute the Board of Directors to be elected at the 1999
annual meeting at eight directors and shall designate Messrs. Clifford, Stefanko
and Schooley as three of the management nominees for election as directors at
the 1999 annual meeting.
THE ACQUISITION AGREEMENT
GENERAL
The Acquisition Agreement (which includes as Exhibits, the Employment
Agreements and the STL Shareholder Non-Competition Agreements) is the legal
document that governs the Acquisition. The Acquisition Agreement provides for
the Acquisition by the Company of the EDL Common Stock, the Acquisition by the
Company (through its subsidiary STL Ohio) of the STL Purchased Assets and
delivery to the Company of the STL Shareholder Non-Competition Agreements, all
in exchange for the assumption by the Company of certain liabilities of STL (the
"Assumed Liabilities"), the delivery by the Company of the aggregate of
$8,700,000 in cash, the delivery by the Company of promissory notes in the
aggregate amount of $4,800,000, the issuance delivered by the Company of an
aggregate of 3,950,000 shares of Common Stock, and the undertaking by the
Company of the obligations in the Acquisition
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<PAGE>
Agreement, including, among others, the obligation to pay the Cash Earn-Out and
to enter into the Employment Agreements.
THE DESCRIPTION IN THIS SECTION OF THE ACQUISITION AGREEMENT IS QUALIFIED BY
REFERENCE TO THE FULL AGREEMENT WHICH HAS BEEN FILED AS AN EXHIBIT TO THE
COMPANY'S CURRENT REPORT ON FORM 8-K FILED WITH THE SEC ON APRIL 28, 1998. A
COPY OF SUCH REPORT MAY BE OBTAINED BY FOLLOWING THE INSTRUCTIONS PROVIDED IN
THIS PROXY STATEMENT UNDER THE HEADING "ADDITIONAL INFORMATION".
If the Acquisition proposal is approved by the shareholders of the Company,
the Closing of Acquisition transaction is expected to be consummated on July 1,
1998, but the parties may mutually agree to extend the closing date to not later
than July 31, 1998 or until not later than ninety days thereafter if required to
comply with the requirements of the Hart-Scott-Rodino Anti-Trust Improvements
Act.
ACQUISITION OF THE EDL COMMON STOCK, THE STL PURCHASED ASSETS AND THE STL
SHAREHOLDER NON-COMPETITION AGREEMENTS
The EDL Common Stock will be acquired by the Company at the Closing from
Messrs. Clifford, Stefanko and Lambertson., each of whom shall receive a 1/3
individual share of the EDL Common Stock Sale Consideration. The EDL Common
Stock Sale Consideration shall consist of $4,650,000 in cash, promissory notes
aggregating $3,238,000 and an aggregate of 2,646,500 shares of Common Stock.
The STL Purchased Assets shall include substantially all of the assets and
business of STL, including, but not limited to, fixed assets, inventory,
intellectual property and goodwill, and cash and accounts receivable up to an
aggregate amount of $850,000, and excluding cash in excess of the $850,000
aggregate agreed upon amount of cash and receivables, contract backlog, funded
deferred compensation and other income. The STL Purchased Assets will be
acquired from STL by the Company through its subsidiary STL Ohio (referred to in
the Acquisition Agreement as "NewSTL") in exchange for the Company's payment to
STL of the STL Purchased Assets Consideration. The STL Purchased Assets
Consideration shall consist of the assumption of the Assumed Liabilities (which
are expected to be nominal), the payment of $1,700,000 in cash, and the
obligation, after the Closing, to pay the Cash Earn-Out to the extent, if any,
that it is earned in accordance with the terms of the Acquisition Agreement. The
Cash Earn-Out, if any, will be paid by the Company to STL, which may assign its
right to receive the Cash Earn-Out to the shareholders of STL (which at the time
of the Closing will include all of the EDL/STL Shareholders). STL's right to
receive the Cash Earn- Out may be assigned to the shareholders of STL pro rata
in accordance with their share ownership of STL.
STL SHAREHOLDER NON-COMPETITION AGREEMENTS
At the Closing, the Company will enter into separate non-competition
agreements (the "STL Shareholder Non- Competition Agreements") with Messrs.
Schooley and Torresani and Dr. Oberbeck, each of whom was an individual
shareholder of STL as of the date of the Acquisition Agreement. The STL
Shareholder Non-Competition Agreements, in each case, preclude the agreeing
party from competing for a period of 15 years from the date of the Closing with
the Company or its subsidiaries throughout the United States of America or its
possessions or territories or elsewhere throughout the world in the Company's
business, EDL's business or the business of STL which was included in the STL
Purchased Assets.
The STL Shareholder Non-Competition Agreements will be delivered at the
Closing by Messrs. Schooley and Torresani and Dr. Oberbeck for the Company's
payment of the STL Shareholder Non-Competition Agreement Consideration. The STL
Shareholder Non-Competition Agreement Consideration shall consist of an
aggregate of $2,350,000 in cash, promissory notes in the aggregate amount of
$1,562,000 and an aggregate of 1,303,500 shares of Common Stock. The STL
Shareholder Non-Competition Agreement Consideration shall be paid in a 1/2
individual share to Mr. Schooley and 1/4 individual shares to each of Dr.
Oberbeck and Mr. Torresani.
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EMPLOYMENT AGREEMENTS
At the Closing, each of the EDL/STL Shareholders will enter into an
Employment Agreement with the Company. The terms of each such Employment
Agreement includes the agreement of the Company to employ such EDL/STL
Shareholder (the "Employee") for a period of forty-two months and the Employee
commits to be employed for a period ending no later than December 31, 2000. The
Employee is entitled to terminate his employment at any time if he recommends a
qualified replacement to perform his job responsibilities and the other EDL/STL
Shareholders who are then employees of the Company approve, and the Company
approves, such qualified replacement. If the Company's consent is unreasonably
withheld, no damages would be payable, however, the Employee would be entitled
to any Cash Earn-Out provided for in the Acquisition Agreement which should have
been paid as a performance bonus or additional compensation. If the Employee
terminates his employment prior to December 31, 2000 (other than by reason of
death or disability) without approval of the Company, he will forfeit his share
of the Cash Earn-Out for any Cash Earn-Out period ending after the date on which
he terminates his employment. Each of the Employment Agreements provides for the
employment of the Employee in the same, or a substantially similar, position to
that held by him in EDL or STL prior to the Acquisition except that Mr.
Clifford, who has served as President of EDL, will become Executive Vice
President, Secretary and Treasurer and Chief Operating Officer of STL Ohio and
Mr. Stefanko, who has served as Executive Vice President, Secretary and
Treasurer of EDL, will become President and Chief Executive Officer of EDL. The
salary rates and other compensation and benefits under the Employment Agreements
are substantially the same as those provided to the EDL/STL Shareholders prior
to the Acquisition. The salary rates payable under the Employment Agreements
range from $126,700 to $169,300 per year. Each of the Employment Agreements also
includes a covenant pursuant to which the Employee agrees that during the term
of employment and for a period of five years thereafter, he shall not (except on
behalf of the Company or a subsidiary of the Company while employed by the
Company or a subsidiary, or otherwise in accordance with the Company's written
consent) engage, directly or indirectly, in any business which competes in any
manner within the United States of America with Company's business of design,
manufacture, repair and sale of rugged and customized computer systems and
medical computer assemblies or in any other business of design, development,
manufacturing, sales or service engaged in or acquired by the Company or any
subsidiary of the Company as of the date of the Employment Agreement or in which
the Company employs the Employee during his employment under the Employment
Agreement.
CASH EARN-OUT
The Cash Earn-Out which may be paid as part of the STL Purchased Assets
Consideration will be determined for each of the Company's fiscal years
beginning with the fiscal year to be ended September 30, 1999 and ending with
the fiscal year ending September 30, 2003 based upon the combined pre-tax
earnings of EDL and STL Ohio to be calculated and distributed as provided in the
Acquisition Agreement. The combined pre-tax earnings of EDL and STL Ohio will be
calculated from the operating results of EDL and STL Ohio included in the
financial statements of the Company prepared in accordance with General Accepted
Accounting Principals ("GAAP") and SEC Regulation S-X ("Regulation S-X") and
subject to certain allocations of costs between the Company and EDL and STL Ohio
agreed upon by the parties.
Under the terms of the Acquisition Agreement, the combined pre-tax earnings
of EDL and STL Ohio, to the extent they are earned, will be distributed among
the Company and STL, or its assignees (in either case, referred to in the table
as "STL"), as shown in the table below.
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<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
Distribution of Pre-Tax Earnings
- ---------------------------------------------------------------------------------------------------
Cash Period Period Period Period Period
Recipient Closing- 10/1/99 - 10/1/00 - 10/1/01 - 10/1/02 -
9/30/99 9/30/00 9/30/01 9/30/02 9/30/03
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Company 100% First $7.5 First $7.5 First $6.8 First $8
Only Million Million Million Million
- ---------------------------------------------------------------------------------------------------
STL None Next $2.5 Next $2.5 Next $1.7 Next $2
Only Million Million Million Million
- ---------------------------------------------------------------------------------------------------
Split Then Split Then Split Then Split Then Split
Company None 40% 40% 50% 50%
STL 60% 60% 50% 50%
- ---------------------------------------------------------------------------------------------------
</TABLE>
The Cash Earn-Out shall be accelerated upon the happening of a "Fundamental
Event" as defined in the Acquisition Agreement. Generally, the events included
within the definition of a Fundamental Event involve a change of control of the
Company resulting from the sale or merger of the Company, a disposition by the
Company of more than twenty percent of either EDL or STL Ohio (based upon the
then fair market value thereof), or the sale by UES and/or Mr. Joshi of an
aggregate of more than 800,000 shares of Common Stock prior to January 1, 2000
(excluding sales by UES to Mr. Joshi or other executive officers of the Company
under presently outstanding options granted by UES to such persons). Upon the
happening of a Fundamental Event, the Cash Earn-Out shall be accelerated as if
the remaining Earn-Out Periods had been completed with pre-tax earnings for the
year in which such acceleration occurred to be calculated as the greater of the
actual pre-tax earnings to the date of acceleration or $10,000,000 paid
thereafter for each of the other remaining uncompleted Earn-Out Periods, the
Earn-Out shall be calculated as if such Earn-Out Period had been completed with
pre-tax earnings of $10,000,000. In addition, any shares of the Company which
are "locked-up" pursuant to the Lock-Up will be released from such lock-up as of
the date of such acceleration. With respect to the shares of Common Stock issued
as STL Purchased Assets Consideration or STL Shareholder Non-Competition
Agreement Consideration, the party or parties entitled thereto, have the option
prior to the Closing to elect to receive such Common Stock in its entirety at
the Closing or in installments.
Warrants for the purchase of Common Stock have been issued by the Company
and are presently outstanding. If any of such warrants are called by the Company
for redemption, cancellation, exercise or conversion, the Company, unless
prohibited under the terms of any applicable warrant agreement or credit
agreement, shall apply fifteen percent of the net proceeds, if any, received by
the Company (after deduction of any directly related expenses) as a lump sum
payment to reduce the principal amount of the promissory notes issued by the
Company in connection with the Acquisition.
REPRESENTATIONS AND WARRANTIES OF THE PARTIES
The Acquisition Agreement contains certain customary comprehensive
representations and warranties of EDL and its shareholders and of STL and its
shareholders. Such representations and warranties include representations and
warranties with respect to the corporate status, financial condition, business,
operations, and assets of each of the entities and certain other matters with
respect to the employees, employee benefit plans and employee relations of each
of them. The liability of the shareholders of each of EDL and STL for breaches
of representations and warranties given by them are subject, in each case, to
the proration among such shareholders and, the further limitation of a "basket"
of $66,667 below which, the case of each of EDL and STL, the parties giving such
representations and warranties will have no
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obligations for breaches thereof. With respect to any representational warranty
applicable to the STL Purchased Assets, indemnification shall also be limited to
damages for which a notice of claim shall have been delivered to the Company by
not later than one year after the closing of the Acquisition transaction and
shall not exceed an aggregate amount (exclusive of any amount payable under the
Liquidated Damages provisions of the Acquisition Agreement). With respect to all
claims for indemnification other than with respect to a representation of
warranty applicable to the STL Purchased Assets, indemnification shall be
limited to damages for which a notice of claim shall have been delivered to the
Company by not later than three years after the closing of the Acquisition
transaction and shall not exceed an aggregate amount (exclusive of any amounts
paid as STL Purchased Assets indemnification) of $1,500,000 and shall be
recoverable solely as a set off against amounts otherwise payable to the
indemnifying parties under the Cash Earn- Out or under the promissory notes
given as consideration for the Acquisition. With respect to any claim against
STL or any of the shareholders of STL or EDL for failure to perform an
obligation to consummate the closing of the Acquisition, the Liquidated Damages
provision referred to below shall be the sole and exclusive remedy available to
the Company.
The Acquisition Agreement also contains certain customary purchaser
representations and warranties of the Company with respect to the corporate
status, capitalization, financial condition, business, operation and assets of
the Company, reliability of the Company to the shareholders of EDL and STL and
to STL for damages resulting from breaches of representations, warranties and
agreements for the Company contained in the Acquisition Agreement is limited to
damages for which a notice of claim shall have been delivered to the Company by
not later than three years after the closing of the Acquisition transaction and
shall not exceed the aggregate amount of $3,000,000 for damages for which a
notice of claim shall have been delivered within one year from the closing of
the Acquisition transaction. Thereafter, for the balance of the period until
three years after the closing of the Acquisition transaction, such limitation
shall be reduced to an aggregate amount of $1,500,000 less any amount of damages
previously paid by the Company.
ADDITIONAL COVENANTS OF THE PARTIES
The Acquisition Agreement, in addition to the covenants and agreements
contained in the representations and warranties given by the parties referred to
in the preceding sections of this Proxy Statement, also includes covenants of
EDL, STL and the shareholders of EDL and STL to grant the Company access to the
books and records, personnel and properties of EDL and STL and to cooperate with
the Company in the preparation of financial statements, proxy materials and any
required regulatory filings which are necessary to implement the Acquisition.
These covenants also include a covenant to conduct the business of EDL and STL
only in the ordinary and usual course, to use best efforts to preserve each such
entity's business organization, staff and goodwill, to assure the continued
accuracy of the representations and warranties given, and to refrain from
negotiating with any party other than the Company for the possible acquisition
of such entity during the period of time from the signing of the Acquisition
Agreement until the Closing. During the same period, the Company also covenants
to grant to EDL and STL and the EDL/STL Shareholders access to the books,
records and property of the Company, to use its best efforts to assure that its
representations and warranties continue to be true, that it will cause the
incorporation of STL Ohio for the purpose of receiving the STL Purchased Assets
at the Closing, and to refrain from any changes in the capitalization of the
Company or the compensation of its officers and directors, except as agreed upon
by the parties.
With respect to action occurring after the Closing, the Acquisition
Agreement includes covenants of the EDL/STL Shareholders, and of STL as an
entity, to the effect that such parties will cooperate and use their reasonable
efforts to transition existing customers, consign work in progress and transfer
specified inventory, assist in the transfer of employees and the transfer of
assets and technology of STL to STL Ohio. Such covenants also relate to the
referral of new business to STL Ohio, the subcontracting to STL Ohio of the
existing business backlog of STL at an agreed upon discount and reimbursement
rate, the grant to STL of a limited license for the use of required intellectual
property to complete certain orders of STL (which are not transferrable), and a
covenant requiring the discontinuation, dissolution and liquidation of STL as
soon as practicable after the Closing.
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The covenants of the Company to be performed after the Closing include the
agreement to pay the Cash Earn-Out to the extent it may be earned under the
provisions of the Acquisition Agreement to file a registration statement to
register the Common Stock paid for the Acquisition within twelve months of the
Closing, to appoint Messrs. Clifford, Schooley and Stefanko as directors of the
Company to serve until the 1999 annual meeting of shareholders (and to designate
such persons as management nominees for election as directors at the 1999 annual
meeting), to provide health insurance coverage for the EDL/STL Shareholders
until such persons are eligible for Medicare (which coverage is to be of equal
value to the health insurance provided to such persons as employees of EDL or
STL prior to the Closing) and to authorize the operation of EDL and STL Ohio as
separate corporate entities with a prescribed autonomy and management until
completion of the last Earn-Out Period provided for in the Acquisition
Agreement.
Generally, the autonomy and management covenants given by the Company
provide that each of EDL and STL Ohio shall report to the Chief Executive
Officer of the Company (the "CEO") and the Company's Board of Directors (the
"BOD") and that it is not the intention of the parties that the CEO or BOD
become involved in the day to day management, nor create a review and approval
process for other than annual business plans of EDL and STL Ohio whereby either
EDL or STL Ohio cannot conduct business in a meaningful way. Consistent with
legal, regulatory, administrative and contractual requirements applicable to EDL
and STL Ohio, the CEO and BOD shall periodically review the business activities
and performance of EDL and STL Ohio. The Company shall make available to EDL and
STL Ohio, solely for the use of EDL and STL Ohio, an operating line of credit in
an aggregate total maximum amount of $1,500,000, meaning that EDL and STL Ohio
would share their liquidity positions as has been the past practice of EDL and
STL. In the event that EDL and STL Ohio do not maintain an acceptable annual
performance minimum of $7,000,000 of pre-tax earnings per year or fail to comply
with, or cause EDL or STL Ohio to fail to comply with, legal, regulatory,
administrative or contractual requirements applicable to EDL and STL Ohio, the
CEO and BOD may direct the management of EDL and STL Ohio to the extent required
so long as such deficiency in performance or non-compliance shall continue and
no provision of the autonomy and management covenants shall restrict the
authority of the BOD. Such covenants of the Company also shall permit EDL and
STL Ohio to retain the employee benefit plans which were available to their
respective employees prior to the Closing for a minimum of three years following
the Closing, preclude for a period of five years from the Closing of the moving
of the aggregate principal operations of EDL and STL Ohio to any location
outside a twenty mile radius from the incorporated limits of Dayton, Ohio
without the consent of a majority of the EDL/STL Shareholders, permit the
distribution of existing funding non-qualified executive deferred compensation
plans of EDL and STL and authorize the establishment of similar plans for EDL
and STL Ohio after the Closing at no less favorable terms or economic value. The
Company also covenants to employ (or cause STL Ohio to employ) the employees of
STL at the levels agreed upon in the Acquisition Agreement and to grant such
employee's credit for time worked at STL for purposes of vacation and other
"fringe benefits" as if such employees had been employed by the Company (or STL
Ohio) during such time.
INDEMNIFICATION PROVISIONS
Under the terms of the Acquisition Agreement, the EDL/STL Shareholders and
STL, as an entity (the "Company Indemnifying Parties"), have agreed to indemnify
the Company in each of its subsidiaries and each of its and their respective
directors, officers, employees, agents, successors and assigns against damages
imposed upon any of them by reason of any breach or representation, warranty,
covenant or agreement made by any of the Company Indemnifying Parties or in
connection with any liability of STL which is not among the Assumed Liabilities.
The representations and warranties and the covenants given by the Company
Indemnifying Parties and limitations with respect to such indemnification are
generally outlined above under "Representation and Warranties of the Parties."
The Liquidated Damages provisions referred in a following paragraph of this
section of the Proxy Statement also includes possible indemnification
obligations of the Company Indemnifying Parties.
Under the terms of the Acquisition Agreement, the Company has agreed to
indemnify the EDL/STL Shareholders and STL for damages imposed upon any of them
by reason of any breach or representation, warranty, covenant or agreement made
by the Company. The representations and warranties and the covenants given by
the Company and limitations with respect to such indemnification are generally
outlined above under "Representation and Warranties of
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the Parties". The Liquidated Damages provisions referred in a following
paragraph of this section of the Proxy Statement also includes the possible
indemnification obligations of the Company.
LIQUIDATED DAMAGES
If the EDL/STL Shareholders or the Company do not perform their respective
obligations to consummate the Acquisition as required by the Acquisition
Agreement, other than as a result of such party exercising its right to
terminate the Acquisition Agreement in accordance with the terms of the
Acquisition Agreement, such non-performing party or parties will be obligated to
pay the other party liquidated damages in the aggregate amount of $1,000,000.
The parties to the Acquisition Agreement mutually agreed that such liquidated
damages would be the sole and exclusive remedy for any such possible failure of
a party to perform its respective obligation to consummate the Acquisition
because (i) it was not possible on the date of the Acquisition Agreement to
ascertain the damages which would result from a failure to consummate the
Acquisition; and (ii) any such damages might reasonably be expected to be at
least $1,000,000 given the inability to predict the value on the intended
Closing date of either the consideration to be given by the Company for the
Acquisition or the value of EDL or of the STL Purchased Assets as of that date.
If the Acquisition is not consummated because one or more of the EDL/STL
Shareholders does not carry out his respective obligation to consummate the
closing as required by the Acquisition Agreement (other than because of reason
which is not within his reasonable control) then the $1,000,000 liquidated
damage amount together with reasonable collection fees, costs and expenses will
be payable, jointly and severally, by such non-performing EDL/STL Shareholder,
or EDL/STL Shareholders, to the Company.
If the Acquisition is not consummated because (i) the Company does not
carry out his respective obligation to consummate the Closing as required by the
Acquisition Agreement (other than because of reason which is not within its
reasonable control) or (ii) the Acquisition shall not have been approved by the
shareholders of the Company pursuant to a vote in which any of Mr. Joshi or
Richard P. McNeight, William R. Craven (each of whom is an executive officer,
director and shareholder of the Company) or UES, Inc. or any of its subsidiaries
(which, in each case, are affiliates of Mr. Joshi) shall not have voted all of
such person's or entity's shares for approval, the Company shall pay to the
EDL/STL Shareholders then the aggregate $1,000,000 liquidated damage amount
together with reasonable collection fees, costs and expenses. If payable by the
Company, the aggregate liquidated damages amount will by payable in equal 1/6th
individual shares to each of the EDL/STL Shareholders.
TERMINATION AND WAIVER
In accordance with its terms, the Acquisition Agreement may be terminated
any time prior to the Closing by mutual consent of all of the parties to the
Acquisition Agreement, solely by the Company if the conditions precedent to the
Company's obligation to consummate the Acquisition have not been fulfilled on or
prior to the required Closing date, or by EDL, STL and all of the EDL/STL
Shareholders if any of the conditions precedent to their obligation to
consummate the Acquisition transaction shall not have been fulfilled prior to
the required Closing date. In addition, either the Company or all of the EDL/STL
Shareholders may terminate the Acquisition Agreement if any legal action shall
have been instituted or threatened seeking to restrain or otherwise affect the
consummation of the Acquisition transaction which makes it inadvisable, in the
judgment of the Company or all of the EDL/STL Shareholders, to consummate the
Acquisition transaction.
Any condition to the performance of the Company, EDL, STL or the EDL/STL
Shareholders may be waived in writing at any time on or prior to the Closing by
the party entitled to the benefit of such condition.
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CONDITIONS PRECEDENT TO THE OBLIGATION OF THE PARTIES TO CONSUMMATE THE
ACQUISITION
The obligation of the Company to consummate the Acquisition transaction is
subject to the approval of the Acquisition by the Company's shareholders, the
truth and correctness of the representations, warranties and covenants of the
parties with respect to the value of certain of the STL assets, the net worth of
EDL, the amount of the EDL built-in gains tax, and of the other representations
and warranties, and the performance of the covenants of EDL, STL and the EDL/STL
Shareholders given by them in the Acquisition Agreement. The conditions
precedent to the obligation of the Company to close the Acquisition transaction
also include the absence of litigation against EDL, STL or the EDL/STL
Shareholders which might materially affect the right of the Company to own EDL
Common Stock or utilize the STL Purchase Assets, the obtaining by EDL or STL of
any third party consent required by the Acquisition Agreement, and the absence
of any material change in the business, assets, financial status or prospects of
either EDL or STL since December 31, 1997, except for such changes as are agreed
upon between the parties. The Company's obligation to close the transaction is
also subject to delivery at the Closing of the Employment Agreements and the STL
Shareholder Non-Competition Agreements required by the Acquisition Agreement and
the delivery of such other certificates and documents, including legal opinions,
as the Acquisition Agreement shall require or as the Company or its legal
counsel, may have reasonably requested.
The conditions precedent to the obligation of EDL, STL and the EDL/STL
Shareholders to consummate the Closing is subject to the continued accuracy of
the representations and warranties of the Company given in the Acquisition
Agreement, the performance and compliance by the Company in all material
respects with all of its covenants and agreements required by the Acquisition
Agreement, and the absence of litigation against the Company which might
materially affect the right of the EDL/STL Shareholders to own the Common Stock
to be issued in the Acquisition or which might have material adverse effect on
the assets, properties and business of the Company. Such conditions precedent
also require the Company to have obtained all consents, licenses and permits of
third parties necessary for the Company's performance of its obligations under
the Acquisition Agreement, that there shall have been no material adverse change
in the business, assets, financial status or prospects of the Company since
December 31, 1997, and the delivery at the Closing of the Employment Agreements
and such other certificates and documents, including legal opinions, as the
Acquisition Agreement shall require or as the Company or its legal counsel, may
have reasonably requested.
CONDITIONS OF THE CLOSING
The Closing shall be subject to the following conditions, in addition to
the other warranties and covenants contained in the Acquisition Agreement: (i)
at the Closing STL shall transfer to STL Ohio $850,000 in aggregate amount of
cash and valid receivables in addition to fixed assets, inventory and
intellectual property; (ii) in the event the fair market value of the tangible
assets included among the STL Purchased Assets combined with the net worth of
EDL at the Closing is less than $2,000,000, Mr. Clifford will transfer to the
Company such number of shares of Common Stock, at the agreed upon value of $3.50
per share, as shall be required to make up the difference between such Closing
value and $2,000,000 (in such event the Company shall grant Mr. Clifford the
right for a period of two years following the Closing to purchase at $3.50 per
share, the same number of shares as Mr. Clifford shall have transferred to the
purchaser to make up such difference); (iii) the maximum amount of indebtedness
of EDL at the Closing of which shall have been incurred by EDL for the purpose
of distributing to the EDL shareholders a portion of the EDL earnings which had
not been previously transferred to them shall not exceed $225,000; (iv) EDL's
accrued liability for built-in gains tax as a result of the distribution of the
STL shares to the shareholders of EDL for purposes of the calculation of the
EDL/STL Purchased Assets Closing value shall be $633,897 less any estimates paid
by EDL prior to the Closing for such tax; and (v) any increase in the built-in
gains tax to more than $633,897 will be reimbursed to EDL 50% by the Company and
50% by the EDL/STL Shareholders in accordance with their prorata ownership
interest in EDL and STL immediately prior to the Closing. The amount of any such
increase in the built-in gains tax to be born by parties other than the Company
shall be taken out of any Cash Earn-Out payable to them.
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DESCRIPTION OF EDL AND STL
EDL
General. EDL is a manufacturer of various miliary qualified avionics for
U.S. and friendly foreign airborne- applications and is a fully qualified source
for U.S. military avionics applications. EDL is currently operating under
MIL-1-45208A/MIL-Q-9858 with an ISO 9000 pending for hardware and software and
has U.S. Government oversight of all operations. Typical programs contain
non-recurring engineering for hardware and software subsystems as well as
associated aircraft kit installation design. The output of the first phase of
the typical program is design drawings and kits for trial installation and
kitproofing. The second phase of the typical program involves manufacture of
production kits, spare parts and maintenance and operating technical data. The
third phase is either design/delivery of field support equipment or service as
contractor depot support. In order to accomplish these tasks, EDL utilizes
computer aided design and drafting as well as a software development laboratory.
In general, the EDL approach to program performance consists of all design
by EDL engineers to full military standards/specifications with standards,
outsourcing of sheetmetal and machine parts fabrication, in-house board
stuffing/soldering of development and low rate production printed circuit cards
with outsourcing of high volume production boards for auto insertion and wave
flow. Final assembly and test is always maintained in house. EDL also generates
all technical data (drawings, technical orders and test documents) required by
the military. Further, EDL always strives to provide on site field support as
well as depot maintenance functions.
History. EDL commenced business operations in 1984. The initial focus of
EDL was high resolution and multisync displays. In early 1988, Edward Stefanko
and David Lambertson joined EDL as officers and major shareholders. At this
juncture the primary focus was shifted to avionics modernization predominately
for the U.S. Air Force Special Operations aircraft systems. The first major
programs consisted of redesign and production of flight control hardware and
design and production of night vision imaging modification kits for the MH-53 J
Pave Low aircraft systems.
In early 1989, Mr. Clifford came on board as President and a major
shareholder. In mid 1993 the high resolution/multisync display business was spun
off. This allowed total focus in the avionics modification/retrofit marketplace.
By late 1994 the shareholders consisted of Mr. Clifford, President; Mr.
Stefanko, Executive Vice President, Secretary and Treasurer; and Mr. Lambertson,
Senior Vice President Technology, all with an equal one-third ownership which
continues to the present.
Military Market Served. Since 1988 EDL has continuously focused on the USAF
Special Operations requirements. The three owners have a combined background and
experience of over 60 years in this area. Additionally, the Special Operations
Forces have enjoyed adequate funding levels in an otherwise reduced marketplace.
Their success in this market comes from extremely detailed knowledge of the
workings, interfaces and deficiencies in these platforms. Typically after they
implement a solution to a deficiency in a USAF Special Operations plat form they
are afforded further business opportunities on equivalent platforms in the U.S.
Navy, U.S. Army and USMC as well as foreign military aircraft.
Products. EDL is currently solicited for products and product support for
altitude hold/hover stabilization systems for the H60 aircraft, 875/825 line
VCR's for various rotary and fixed wing aircraft, IDAS/MATT hardware and kits
for the MH-53 aircraft, hover couplers, automatic flight control system control
panels, bladefold controls, refuel controls, caution/advisory panels, night
vision imaging system components and solid state control modules for the H53
aircraft. EDL also produces control display unit part task trainers.
Marketing. The key marketing of EDL is accomplished through a combination
of outstanding performance and demonstrated in depth technical knowledge of the
platforms they service. The marketing is technically oriented and
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conducted out of Dayton with a marketing presence in Warner Robins, Georgia, the
contracting origin for USAF Special Operations requirements.
Competition. The competition varies greatly depending upon the specific
program. On certain requirements EDL may find itself in competition with a large
prime such as Lockheed Martin or Sikorsky. On other programs EDL is a team
member or subcontractor with the same large primes. In general, a significant
percentage of EDL's work is sole source non-competitive.
The Acquisition of EDL. Under the terms of the Acquisition Agreement the
Company will acquire all of the EDL Common Stock. In connection with the
Acquisition, EDL will be converted from an "S corporation" to a "C corporation."
After the Acquisition EDL will be owned and operated as a subsidiary of the
Company. It is anticipated that, as a subsidiary of the Company, the business of
EDL will continue largely unaffected by the Acquisition. Continuation of certain
of EDL's business relationships and certain of its contractual relationships,
however, may be subject to the receipt of third party consents because of the
change in ownership of EDL. Each of the EDL/STL Shareholders has agreed to use
reasonable efforts to assist any transition of business to EDL as a subsidiary
of the Company following the Acquisition. In addition, the Company has agreed to
authorize certain autonomy with respect to the operation of EDL after the
Acquisition. See "The Acquisition Agreement - Additional Covenants of the
Parties."
STL
General. STL is a designer and producer of many instruments and devices
used in governmental signal collection and analysis laboratories located in the
U.S. and foreign countries. Most instruments and devices are digital in nature
as opposed to analog and the signals which are input are digital rather than
analog. These digital signals are routed, enhanced, modified or conditioned by
the instruments. These products are sold to the U.S. Government, other U.S.
prime contractors, and to foreign countries within the guidelines established by
Munitions Control Board.
History. STL was established in April of 1990 by three principals, who had
worked together at another defense contractor (Systems Research Laboratories,
Inc.) The three individuals, Dr. Oberbeck and Messrs. Schooley and Torresani,
had many years of combined experience working within a very specific group of
U.S. Government and other prime contractors.
The three founders and their positions in STL are Mr. Schooley, President,
Dr. Oberbeck; Vice President Technology, and Mr. Torresani, Vice President,
Programs/Development.
The Company was incorporated under the laws of the State of Ohio in April
1990. A total of 1500 shares were authorized. The above three principals
retained a total of 600 shares. An additional 765 shares were retained by EDL
which had played a part in the establishment of STL. Thus, EDL has a 56%
ownership in STL. STL has since its inception remained a C corporation and has
had no change in ownership.
EDL provided office space, benefit plans, and accounting services for the
initial start-up phase. Mr. Stefanko filled the position of Executive Vice
President and Secretary/Treasurer of STL. Mr. Stefanko is Executive Vice
President of EDL.
Industry Background. The U.S. Government has long depended upon contractors
to supply needed hardware. The traditional approach was to issue a detailed set
of specifications and a statement of work. Qualified contractors then bid to
provide goods in accordance with these specifications and statement of work.
Following a typical long period of source selection, a winning contractor was
selected and awarded a contract. In the 1990's this process has undergone
significant changes mandated by Congress.
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The specific customers within the U.S. Government that STL serves often
have changing requirements that require quick response to either develop new
equipment or modify existing products in a short time period. STL has since its
inception been able to work successfully in this rather difficult environment.
To be responsive to new and sometimes requirements, requires close
cooperation with the government engineers and to be intimately familiar with the
required signal formats. By specializing in a specific government customer, STL
has met these requirements. Thus STL has developed a very high reputation for
delivering a product that works properly and was delivered on schedule.
Products. STL has designed and currently has more than 30 products on its
price list. These products can generally be separated into four categories;
routing, modification, conditioning and enhancement.
Signal routing and switching systems has been among the earliest of STL
products. In modern signal processing systems it is often required to
reconfigure the processing chain to accommodate a different architecture. This
does not involve switching a single stream of data but that of 16 bits of data
and clock. STL systems have been developed and are being produced that perform
this function.
As the requirements have changed STL, has developed larger systems that
perform this switching/routing function at higher speeds and with more inputs
and outputs. New switches are in development to meet known government future
needs.
With the development of faster and more powerful computers some dedicated
processing hardware is no longer cost effective. To use these faster computers
it is often required to reformat the data to make it available to the computer
in a specific format. The data formats are often not the most efficient for the
computers to process. STL has in many specialized cases, developed instruments
that reformat data and interface it to modern computers that in turn process the
data.
The advent of modern digital signal processing technology, which involves
both specialized hardware and software, has had major impacts on signal
analysis. These devices and associated software have changed signal analysis
techniques. STL produces several instruments that employ modern digital signal
processing techniques. These devices range from rather simple to very complex
systems that cost multiple hundreds of thousands of dollars.
STL works with other government contractors to develop these instruments.
STL develops the software to control the developed instruments but in general
depends on other contractors involved in the same program to develop the
operational software.
New Products. STL has by maintaining a close liaison with its customers
been kept aware of new requirements. As a result of this, new products are being
developed. These new developments range from modification of existing products
to total new developments. In general, most new developments involve higher
speed clock rates.
New developments are in response to anticipated needs. STL maintains close
relationships with the government engineers and other contractors. Some
developments are funded and others are supported by internal R&D funds.
Supply and Manufacturing. STL performs all electrical design of its
products. In some cases mechanical design of cabinets and chassis is outsourced.
All parts are procured by STL. Printed circuit board design is outsourced as is
production of the printed circuit boards. Chassis wiring is done in house, as is
all testing. Once the design is finalized, the PCB assembly is outsourced. All
final test is accomplished in-house.
Warranty and Customer Service. Normal warranty is 90 days after delivery on
STL products; this includes parts and labor. If STL should determine that there
is a fault due to production process this repair will be made without charge.
After 90 days a return of part is authorized and an evaluation fee is
established. If the cost of repair exceeds
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the evaluation fee, the customer is informed of the repair costs. Assuming the
customer accepts the repair cost, the item is repaired and the customer billed.
Marketing and Sales. STL does not use any outside sales force. Marketing is
performed and led by the Vice President of Program Development. In many
occasions assistance is provided by other executives and engineering staff. A
product price list is maintained that includes all of the standard products.
Delivery is adjusted to customer requirements and availability of product.
Brochures have been prepared for most of STL's products. These are used to
convey technical details to potential customers. STL does not exhibit at trade
shows or technical symposiums nor advertises in technical publications.
Response to customer delivery requirements and technical changes has been a
major factor in STL's success. It is anticipated that with the maintenance of
the current executive staff this responsiveness will be maintained.
Customers. STL sells directly to U.S. Government customers at several
different locations. Sales are also made to a number of other prime contractors,
both large and small that provide services and hardware to the U.S. Government.
Large prime contractors include Raytheon E-Systems, Lockheed Martin and TRW.
The consolidation within the defense industry has not had a negative impact
on the company's business. There has been a trend toward the government placing
orders directly with STL. Currently a BOA (Basic Ordering Agreement) is in place
that facilitates the placing of delivery orders. This agreement has four more
years to run, however, consent of the contracting parties may be required to
transfer this agreement to STL Ohio.
Competition. In general, the products that STL develops and produces are
used in a very specialized technical area. Consequently, the larger companies
have not been interested in competing for the core business. Where interest has
been shown by larger companies, STL has been able to deliver sooner and at a
lower price thus winning the business. Short delivery schedules have enhanced
STL's ability to win business.
In the past, STL has bid on a small number of competitive contracts. More
than half of these were won by STL. Now that a product line has been developed
and a rapport established with customers, competitive bids are less frequently
required.
From time to time there is competition from other small companies. This has
not caused a significant impact on STL's business. This is not to imply that in
the future there will not be an impact.
The Acquisition of the STL Purchased Assets. Under the terms of the
Acquisition Agreement the Company will acquire in STL Ohio, its subsidiary,
substantially all of the business and assets of STL as the STL Purchased Assets.
It is anticipated that STL Ohio will be able to continue the business of STL
largely unaffected by the Acquisition. Continuation of certain of STL's business
relationships and certain of its contractual relationships, however, may be
subject to the receipt of third party consents which may be required to permit
an assignment from STL to STL Ohio. Each of the EDL/STL Shareholders has agreed
to use reasonable efforts to assist any transition of business of STL to STL
Ohio, however, in some cases it may not be possible to obtain the required
consent with the result that some business of STL may not be directly
transferable to STL Ohio. The Company has agreed to authorize certain autonomy
with respect to the operation of STL Ohio after the Acquisition. See "The
Acquisition Agreement - Additional Covenants of the Parties."
EXCEPTIONAL RECENT EARNINGS HISTORY OF EDL AND STL
The earnings of EDL and STL have been exceptional during the periods
covered by the Unaudited Pro Forma Consolidated Financial Information included
in this Proxy Statement. The Company's Board of Directors, in its evaluation of
the Acquisition, attempted to view such performance in the historical context of
prior periods and to assume reasonable expectations for operations following the
Acquisition in its decision to approve, and recommend
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shareholder approval of, the Acquisition under the terms of the Acquisition
Agreement. Shareholders of the Company, before deciding how to vote on the
Acquisition proposal, should also recognize that the pro forma financial
information included in this Proxy Statement may not be fairly representative of
the actual results of operations following the Acquisition and that such actual
results of operation will likely be less favorable. See also "Risk Factors
Applicable to the Acquisition."
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UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
PARAVANT COMPUTER SYSTEMS, INC.
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The following unaudited pro forma consolidated financial information with
respect to the Company gives effect to the acquisition, and is based on
estimates and assumptions set forth below in the notes to such information which
include pro forma adjustments. This unaudited pro forma consolidated financial
information has been prepared utilizing the historical financial statements of
the Company and the historical financial information of EDL and STL (EDL) and
should be read in conjunction with the accompanying notes of the Company and
EDL. The pro forma consolidated financial information is based on the purchase
method of accounting for the acquisition. The pro forma consolidated balance
sheet and income statements assume that the acquisition occurred on October 1,
1996.
THIS UNAUDITED PRO FORMA FINANCIAL INFORMATION DOES NOT PURPORT TO BE INDICATIVE
OF THE RESULTS WHICH ACTUALLY WOULD HAVE OCCURRED HAD THE ACQUISITION BEEN
EFFECTED ON THE DATE INDICATED.
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PARAVANT COMPUTER SYSTEMS, INC.
INDEX TO FINANCIAL STATEMENTS
Unaudited Pro Forma Consolidated Financial Information
Unaudited Pro Forma Consolidated Balance Sheet as of December 31, 1997
Unaudited Pro Forma Consolidated Income Statement for the Quarter Ended December
31, 1997
Unaudited Pro Forma Consolidated Income Statement for the Year Ended September
30, 1997
Notes and Management's Assumptions to Unaudited Pro Forma Consolidated Financial
Statements
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PARAVANT COMPUTER SYSTEMS, INC.
Unaudited pro Forma Consolidated Balance Sheet
As of December 31, 1997
<TABLE>
<CAPTION>
Pro forma
Company EDL Pro forma December 31,
Assets historical historical adjustments 1997
-------- ---------- ---------- ----------- ----
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 2,608,526 $ (185,625) $ 0 $ 2,422,901
Accounts receivable, net 2,822,399 4,706,631 1,669,500 (e) 9,198,530
Costs and estimated earnings in
excess of billings on uncompleted
contracts 0 4,489,501 0 4,489,501
Contract costs incurred prior to
contract award 0 13,213 0 13,213
Inventory, net 3,563,335 386,066 0 3,949,401
Prepaid expenses 103,219 3,360 106,579
Deferred income taxes 426,263 15,320 0 441,583
---------------- --------------- ----------------- -----------------
Total current assets 9,523,742 9,428,466 1,669,500 20,621,708
---------------- --------------- ----------------- -----------------
Prepaid expenses 226,787 0 0 226,787
Property and equipment, net 869,002 269,064 0 1,138,066
Goodwill, net 0 0 9,110,325 (a) 9,110,325
Intangible assets, net 57,750 0 5,378,312 (a) 5,436,062
Demonstration pool and custom molds 268,049 0 0 268,049
Other assets 452,424 1,660 (200,000) (a) 254,084
---------------- --------------- ----------------- -----------------
Total assets $ 11,397,754 $ 9.699,190 $ 15,958,137 $ 37,055,081
================ =============== ================= =================
</TABLE>
See accompanying notes and management's assumptions to unaudited pro forma
consolidated financial statements.
33
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
Company EDL Pro forma December 31,
Liabilities and Stockholders' Equity historical historical adjustments 1997
---------- ---------- ----------- ----
<S> <C> <C> <C> <C>
Current liabilities:
Accounts payable $ 938,409 $ 1,499,468 $ 0 $ 2,437,877
Accrued payroll and related liabilities 545,253 267,368 0 812,621
Other accrued expenses 936,724 0 849,750 (a),(b) 1,786,474
Current maturities of long-term debt 91,650 0 0 91,650
Current maturities of capital lease
obligations 102,847 0 0 102,847
Notes payable to bank 0 1,064,654 0 1,064,654
Income taxes payable 236,395 1,433,198 931,651 (c) 2,601,244
----------------- --------------- --------------- --- ------------------
Total current liabilities $2,851,278 4,264,688 1,781,401 8,897,367
----------------- --------------- --------------- --- ------------------
Other notes payable 0 0 4,800,000 (a) 4,800,000
Capital lease obligations, less current
maturities 58,783 0 0 58,783
Deferred income taxes, net 78,820 18,781 0 97,601
Minority interest in equity of subsidiary 0 1,950,682 (1,950,682) (d) 0
----------------- --------------- --------------- --- ------------------
Total liabilities 2,988,881 6,234,151 4,630,719 13,853,751
----------------- --------------- --------------- --- ------------------
Stockholders' equity:
Common stock 120,041 1,200 58,050 (a) 179,291
Additional paid-in capital 5,069,323 177,395 5,688,355 (a) 10,935,073
Retained earnings 3,219,509 3,694,555 5,172,902 (a)-(d) 12,086,966
Treasury stock 0 (408,111) 408,111 (a) 0
----------------- --------------- --------------- --- ------------------
Total stockholders' equity 8,408,873 3,465,039 11,327,418 23,201,330
----------------- --------------- --------------- --- ------------------
Total liabilities and
stockholders' equity $ 11,397,754 $ 9.699,190 $ 15,958,137 $ 37,055,081
================= =============== =============== ==================
</TABLE>
34
<PAGE>
<PAGE>
PARAVANT COMPUTER SYSTEMS, INC.
Unaudited Pro Forma Consolidated Income Statement
For the quarter ended December 31, 1997
<TABLE>
<CAPTION>
Company EDL Pro forma December 31,
historical historical adjustments 1997
---------- ---------- ----------- ----
<S> <C> <C> <C> <C>
Revenues $ 3,597,965 $ 13,095,886 $ 0 $ 16,693,851
Cost of revenues 1,975,269 6,143,459 0 8,118,728
----------- ------------ ------------ ------------
Gross profit 1,622,696 6,952,427 0 8,575,123
General and administrative expenses 1,346,220 907,245 0 2,253,465
----------- ------------ ------------ ------------
Income from operations 276,476 6,045,182 0 6,321,658
Other income (expense) 21,523 90,000 (96,000) (b) (247,907)
(263,430) (a)
----------- ------------ ------------ -----------
Income before income taxes 297,999 6,135,182 (359,430) 6,073,751
Income tax expense 100,840 1,341,221 1,050,634 (c) 2,356,543
(75,578) (b)
(60,574) (a)
----------- ------------ ------------ ------------
Net income $ 197,159 $ 4,793,961 $ (1,273,912) $ 3,717,208
=========== ============ ============ ============
Basic earnings per share $ 0.025 $ 0.297
=========== ============
Diluted earnings per share $ 0.017 $ 0.224
=========== ============
Weighted average number of common
shares outstanding 7,995,865 3,950,000 11,945,865
=========== ========== ============
Weighted average number of common
shares outstanding and dilutive
potential common share outstanding 11,862,288 3,950,000 15,812,288
=========== ========== ============
</TABLE>
See accompanying notes and management's assumptions to unaudited pro forma
consolidated financial statements.
35
<PAGE>
<PAGE>
PARAVANT COMPUTER SYSTEMS, INC.
Unaudited Pro Forma Consolidated Income Statement
For the year ended September 30, 1997
<TABLE>
<CAPTION>
Company EDL Pro forma September 30,
historical historical adjustments 1997
---------- ---------- ----------- ----
<S> <C> <C> <C> <C>
Revenues $13,209,541 $27,307,305 $ 0 $40,516,846
Cost of revenues 6,774,076 12,083,661 0 18,857,737
----------- ----------- ----------- -----------
Gross profit 6,435,465 15,223,644 0 21,659,109
General and administrative expenses 4,629,122 3,387,000 0 8,016,122
----------- ----------- ----------- -----------
Income from operations 1,806,343 11,836,644 0 13,642,987
Other income (expense) (70,323) 100,392 (753,750) (b) (1,777,400)
(1,053,719) (a)
----------- ----------- ----------- -----------
Income before income taxes 1,736,020 11,937,036 (1,807,469) 11,865,587
Income tax expense 594,229 3,947,963 705,977 (c) 4,559,361
(293,963) (b)
(394,845) (a)
----------- ----------- ----------- -----------
Net income $ 1,141,791 $ 7,989,073 $(1,824,638) $ 7,306,226
=========== =========== =========== ===========
Basic earnings per share $ 0.100 $ 0.612
=========== ===========
Diluted earnings per share $ 0.100 $ 0.445
=========== ===========
Weighted average number of common
shares outstanding 13,247,815 3,950,000 17,197,815
=========== ========== ===========
Weighted average number of common
shares outstanding and dilutive
potential common share outstanding 13,247,815 3,950,000 17,197,815
=========== ========== ===========
</TABLE>
See accompanying notes and management's assumptions to unaudited pro forma
consolidated financial statements.
36
<PAGE>
<PAGE>
PARAVANT COMPUTER SYSTEMS, INC.
Notes and Management's Assumptions to Unaudited
Pro Forma Consolidated Financial Statements
(1) BASIS OF PRESENTATION
The pro forma consolidated balance sheet as of December 31, 1997 and
the pro forma consolidated income statements for the quarter ended
December 31, 1997 and for the year ended September 30, 1997 have been
prepared to reflect the transactions of the acquisition as set forth in
this proxy statement. This unaudited pro forma financial information has
been prepared utilizing the historical financial statements of the
Company and the historical financial information of EDL and STL (EDL) and
should be read in conjunction with the selected historical financial data
and accompanying notes of the Company and EDL. The pro forma consolidated
balance sheet and pro forma consolidated income statements were prepared
as if the acquisition occurred on October 1, 1996. The pro forma
information is unaudited and is not necessarily indicative of the
consolidated operating results which would have occurred if the
acquisition had been consummated at the beginning of the period, nor does
it purport to represent the future financial position or results of
operations for future periods. In management's opinion, all adjustments
necessary to reflect the effects of the acquisition have been made.
(2) METHOD OF ACCOUNTING
Assets acquired and costs incurred in connection with the acquisition
are recorded using the purchase method of accounting. The amounts
allocated to the assets acquired are based on management's estimate of
their fair values with the excess of purchase price over fair value
allocated to goodwill.
All significant intercompany balances and transactions between the
Company and EDL have been eliminated in the pro forma consolidated
financial statements.
(3) ADJUSTMENTS TO PRO FORMA CONSOLIDATED BALANCE SHEET
The following describes the pro forma adjustments to the pro forma
consolidated balance sheet as of December 31, 1997 as if the acquisition
was consummated on such data.
(a) Represents issuance of 3,950,000 shares of Common Stock at the
estimated share price of $1.50, payment of $8,700,000 in cash and
issuance of $4,800,000 in promissory notes less estimated
transaction costs and the allocation of purchase price allocated to
tangible assets acquired and for non-compete agreements.
(b) Represents accrued interest on promissory notes issued and
draws on Company's line of credit to finance cash payments in
connection with the acquisition.
(c) Represents additional income taxes payable as a result of EDL
changing from an S corporation to a C corporation, net of benefit
for interest expense incurred.
(d) Represents elimination of minority interest in STL.
(e) Represents elimination of dividends paid to former shareholders
of EDL and STL amounts assumed to pay down line of credits.
37
<PAGE>
<PAGE>
PARAVANT COMPUTER SYSTEMS, INC.
Notes and Management's Assumptions to Unaudited
Pro Forma Consolidated Financial Statements
(4) ADJUSTMENTS TO PRO FORMA CONSOLIDATED INCOME STATEMENTS
The following describes the pro forma adjustments to the pro forma
consolidated income statement for the quarter ended December 31, 1997
and for the year ended September 30, 1997 as if the acquisition was
consummated as of October 1, 1996.
(a) Represents amortization over a 15 year period of the excess of the
purchase price over tangible assets to be recognized in connection with
the acquisition and amortization over a 15 year period of intangible
non-competition agreements.
(b) Represents interest expense incurred in connection with promissory
notes issued and additional draws on the Company's line of credit in
connection with financing the acquisition and the related income tax
benefit of deducting interest expense.
(c) Represents additional income tax incurred as a result of EDL changing
from an S corporation to a C corporation, net of the additional deduction
for interest expense incurred.
(d) Represents issuance of 3,950,000 shares of Common Stock upon
consummation of the acquisition.
38
<PAGE>
<PAGE>
ADDITIONAL INFORMATION
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
THIS PROXY STATEMENT CONTAINS FORWARD-LOOKING STATEMENTS THAT ARE SUBJECT
TO KNOWN AND UNKNOWN RISKS AND UNCERTAINTIES. FORWARD-LOOKING STATEMENTS INCLUDE
THE INFORMATION CONCERNING THE POSSIBLE OR ASSUMED FUTURE RESULTS OF OPERATIONS
OF THE COMPANY WHEN COMBINED WITH EDL AND STL SET FORTH UNDER THE CAPTION
"PROPOSAL 2: APPROVAL OF THE ACQUISITION" AND SUB CAPTIONS THEREUNDER INCLUDING,
BUT NOT LIMITED TO, "REASONS FOR THE PROPOSAL," "RECOMMENDATION OF THE COMPANY'S
BOARD OF DIRECTORS, "PRO FORMA BOOK VALUES AND EARNINGS PER SHARE," "SUMMARY OF
THE ACQUISITION - RISK FACTORS APPLICABLE TO THE ACQUISITION," THE ACQUISITION -
REASONS FOR THE ACQUISITION," "THE ACQUISITION - FAIRNESS OPINION," "THE
ACQUISITION AGREEMENT CASH EARN-OUT," "THE ACQUISITION AGREEMENT - LIQUIDATED
DAMAGES," AND "DESCRIPTION OF EDL AND STL EXCEPTIONAL RECENT EARNINGS HISTORY OF
EDL AND STL," AND THOSE PRECEDED BY, FOLLOWED BY, OR THAT INCLUDE THE WORDS
"BELIEVES", "EXPECTS", "ANTICIPATES", OR SIMILAR EXPRESSIONS. SUCH STATEMENTS
REFLECT THE CURRENT VIEWS OF THE COMPANY AND/OR EDL, STL AND/OR THE EDL/STL
SHAREHOLDERS WITH RESPECT TO FUTURE EVENTS. FOR THOSE STATEMENTS AS THEY RELATE
TO THE COMPANY ONLY, THE COMPANY CLAIMS THE PROTECTION OF THE SAFE HARBOR FOR
FORWARD- LOOKING STATEMENTS CONTAINED IN THE PRIVATE SECURITIES LITIGATION
REFORM ACT OF 1995, TO THE EXTENT PROVIDED BY APPLICABLE LAW. THIS SAFE HARBOR
DOES NOT APPLY TO FORWARD-LOOKING STATEMENTS OF EDL OR STL AS NEITHER OF SUCH
ENTITIES HAS EVER REGISTERED ITS SECURITIES WITH THE SEC. IT SHOULD BE
UNDERSTOOD THAT THE FACTORS SET FORTH BELOW, IN ADDITION TO THOSE SET FORTH
ELSEWHERE IN THIS PROXY STATEMENT AND IN THE DOCUMENTS INCORPORATED BY REFERENCE
HEREIN, COULD AFFECT THE FUTURE RESULTS OF THE COMPANY AND COULD CAUSE RESULTS
TO DIFFER MATERIALLY FROM THOSE EXPRESSED OR IMPLIED IN THE FORWARD-LOOKING
STATEMENTS IN THIS PROXY STATEMENT. THE COMPANY'S MANAGEMENT BELIEVES THAT THEIR
EXPECTATIONS OF FUTURE PERFORMANCE ARE BASED ON THE ASSUMPTION WHICH, TO THE
BEST OF THEIR KNOWLEDGE, ARE REASONABLE, HOWEVER, THERE CAN BE NO ASSURANCE THAT
ACTUAL RESULTS WILL NOT DIFFER MATERIALLY FROM SUCH EXPECTATIONS. THE FACTORS
WHICH COULD CAUSE ACTUAL RESULTS TO DIFFER FROM THESE EXPECTATIONS INCLUDE,
AMONG OTHERS, THOSE FACTORS REFERRED TO UNDER "RISK FACTORS" IN THIS PROXY
STATEMENT, AND OTHER FACTORS DESCRIBED IN THIS PROXY STATEMENT AND IN OTHER
DOCUMENTS FILED BY THE COMPANY WITH THE SEC.
ADDITIONAL INFORMATION ABOUT THE COMPANY
The Company files annual, quarterly and special reports, proxy statements
and other information with the SEC. You may read and copy any reports,
statements or other information that the Company files at the SEC's public
reference rooms in Washington, D.C., New York, New York and Chicago, Illinois.
Additional information concerning the SEC's public reference rooms may be
obtained by telephone from the SEC by calling 1-800-SEC-0330. The Company's SEC
filings are also available to the public from commercial document retrieval
services and at the Internet Website maintained by the SEC at
"http://www.sec.gov." Reports, proxy statements and other information should
also be available for inspection at the offices of the NASD.
In addition to the information set forth in the preceding sections of this
Proxy Statement, the information referred to below is incorporated by reference
into this Proxy Statement. This information which is incorporated by reference
is deemed to be a part of this Proxy Statement, except for any information
superceded by information contained directly in this Proxy Statement. The
documents set forth below which the Company has previously filed with the SEC
are incorporated by reference in this Proxy Statement. The following documents
which are incorporated by reference contain important information about the
Company and its management, business, properties, legal proceedings and Common
Stock.
<TABLE>
<CAPTION>
Company SEC Filings (the file No. 0-28114) Period
----------------------------------------- ------
<S> <C>
Annual report on Form 10-KSB Fiscal year ended September 30, 1997
Quarterly report on Form 10-QSB Quarter ended December 31, 1997
Current report on Form 8-K Dated March 31, 1998
</TABLE>
39
<PAGE>
<PAGE>
Additional documents which are filed by the Company with the SEC from the
date of this Proxy Statement to the date of the Special Meeting will also be
incorporated by reference into this Proxy Statement. Any statement in this Proxy
Statement or in a document incorporated or deemed to be incorporated by
reference in this Proxy Statement shall be deemed to be modified or superceded
for the purposes of this Proxy Statement to the extent that a statement
contained in this Proxy Statement or in any other subsequently filed document
which also is or is deemed to be incorporated by reference in this Proxy
Statement modifies or supersedes such statement. Any such statement so modified
or superseded shall not be deemed to constitute a part of this Proxy Statement,
except as so modified or superceded.
The Company has supplied all information contained or incorporated by
reference in this Proxy Statement relating to the Company. EDL and STL have, in
each case, supplied all such information relating to their respective
operations. The Company does not take any responsibility for the accuracy of the
information provided by EDL or STL.
The Company will provide, without charge, to each person to whom this
Proxy Statement is delivered, upon written or oral request of such person and by
first class mail or other equally prompt means within one business day of such
request, a copy of any and all information that has been incorporated by
reference in this Proxy Statement (excluding all exhibits other than those
specifically incorporated by reference as an exhibit in this Proxy Statement).
The shareholders of the Company may obtain documents incorporated by reference
in this Proxy Statement by requesting such documents in writing or by telephone
to:
Paravant Computer Systems, Inc.
Attention: Kevin J. Bartczak, Chief Financial Officer
1615A West Nasa Boulevard
Melbourne, Florida 32901
(407) 727-3672
Documents requested from the Company should be requested by not later than
June 15, 1998 to permit the delivery of such documents prior to the Special
Meeting.
SHAREHOLDERS SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR INCORPORATED
BY REFERENCE IN THIS PROXY STATEMENT TO VOTE ON THE PROPOSAL RELATING TO THE
ACQUISITION. THE COMPANY HAS NOT AUTHORIZED ANYONE TO PROVIDE INFORMATION THAT
IS DIFFERENT FROM THAT WHICH IS CONTAINED IN OR SPECIFICALLY INCORPORATED BY
REFERENCE IN THIS PROXY STATEMENT. THIS PROXY STATEMENT IS DATED MAY ___, 1998.
DO NOT ASSUME THAT THE INFORMATION CONTAINED IN THIS PROXY STATEMENT IS ACCURATE
AS OF ANY DATE OTHER THAN THAT DATE, AND NEITHER THE MAILING OF THIS PROXY
STATEMENT TO SHAREHOLDERS NOR THE ISSUANCE OF COMMON STOCK IN CONNECTION WITH
THE ACQUISITION SHALL CREATE ANY IMPLICATION TO THE CONTRARY.
INFORMATION CONCERNING INDEPENDENT AUDITORS
The Company has selected the firm of KPMG Peat Marwick LLP to serve as the
independent auditors for the Company for the current fiscal year ending
September 30, 1998. That firm served as the Company's independent auditors for
its fiscal year ended September 30, 1997. Representatives of KPMG Peat Marwick
LLP are expected to attend the Special Meeting and will have an opportunity to
make a statement if they desire to do so and will be available to respond to
appropriate questions.
SHAREHOLDER PROPOSALS
Shareholder proposals intended to be presented at the next annual meeting
of shareholders, to be held in 1999, must be received by the Company at 1615A
West Nasa Boulevard, Melbourne, Florida 32901, Attention: Secretary, by
September 30, 1998 to be included in the proxy statement and form of proxy
relating to that meeting.
40
<PAGE>
<PAGE>
OTHER MATTERS
The Board of Directors is aware of no other matters that are to be
presented to shareholders for formal action at the Special Meeting. If, however,
any other matters properly come before the Special Meeting or any adjournment
thereof, it is the intention of the persons named in the enclosed form of proxy
to vote such proxy in accordance with their judgment on such matters.
By Order of the Board of Directors,
William R. Craven
Secretary
Dated: Melbourne, Florida
May ___, 1998
41
<PAGE>
<PAGE>
APPENDIX 1
PROXY PARAVANT COMPUTER SYSTEMS, INC.
PROXY SOLICITED BY THE BOARD OF DIRECTORS OF PARAVANT COMPUTER SYSTEMS, INC.
FOR THE SPECIAL MEETING OF SHAREHOLDERS--JUNE 26, 1998
The undersigned hereby appoints Richard P. McNeight, William R. Craven and
Kevin J. Bartczak, and each of them, as Proxies, each with full power of
substitution and resubstitution, to represent and to vote, as designated below,
all shares of Common Stock of Paravant Computer Systems, Inc. (the "Company")
which the undersigned would be entitled to vote if personally present at the
Special Meeting of Shareholders of the Company to be held at the Melbourne Beach
Hilton Oceanfront Hotel, 3003 U.S. Highway A1A, Indialantic, Florida 32903 at
10:00 A.M. (local time) on June 26, 1998, and at any adjournment or postponement
thereof.
1. Approval of Name Change to Paravant Inc.:
[ ]FOR [ ]AGAINST [ ]ABSTAIN
2. Approval of Acquisition Agreement and related acquisitions:
[ ]FOR [ ]AGAINST [ ]ABSTAIN
3. In their discretion, the proxies are authorized to vote upon such other
business as may properly come before the annual meeting or any adjournment
or postponement thereof.
IF NO DIRECTION IS GIVEN, THIS PROXY WILL BE VOTED FOR PROPOSALS 1 AND 2.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR PROPOSALS 1 AND 2.
TO BE VALID, THIS PROXY MUST BE SIGNED AND DATED ON THE REVERSE SIDE.
Please sign exactly as name appears at
left. When shares are held by joint
tenants, both should sign. When signing
as attorney, executor, administrator,
trustee or guardian, please give your
full title as such. If a corporation,
please sign in full corporate name by
president or other authorized officer.
If a partnership, please sign in
partnership name by authorized person.
Date:___________________________________
________________________________________
Signature
________________________________________
Signature
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS.
<PAGE>
