<PAGE>
<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. 1)
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.
(Name of Registrant as Specified In Its Charter)
----------------------------------------------------------------------------
(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:
Cash $ 8,700,000
Notes 4,800,000
Shares 7,900,000 (*)
-----------
$21,400,000
-----------
-----------
(*) 3,950,000 shares of the Registrant valued at $2 per share,
the Nasdaq reported closing price for April 24, 1998.
<PAGE>
<PAGE>
(4) Proposed maximum aggregate value of transaction: $21,400,000
(5) Total fee paid: $4,280
[X] 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:
----------------------------------------------------------------------
<PAGE>
<PAGE>
PARAVANT COMPUTER SYSTEMS, INC.
1615A West Nasa Boulevard
Melbourne, Florida 32901
NOTICE OF A SPECIAL MEETING OF SHAREHOLDERS
August 20, 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 August 20, 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 June 25, 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
July 23, 1998
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.
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<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...........................................9
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............................................................17
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.................................................................19
General..........................................................................19
Acquisition of the EDL Common Stock, the STL Purchased Assets and
the STL Shareholder Non-Competition Agreements..........................19
STL Shareholder Non-Competition Agreements.......................................20
Employment Agreements............................................................20
Cash Earn-Out....................................................................21
Representations and Warranties of the Parties....................................22
Additional Covenants of the Parties..............................................22
Indemnification Provisions.......................................................24
Liquidated Damages...............................................................24
Termination and Waiver...........................................................25
Conditions Precedent to the Obligation of the Parties to Consummate
the Acquisition........................................................25
</TABLE>
<PAGE>
<PAGE>
<TABLE>
<S> <C>
Conditions of the Closing............................................................25
Description of the Company....................................................................26
General..............................................................................26
Products.............................................................................27
Customization Services...............................................................27
Supply and Manufacturing.............................................................27
Warranty and Customer Service........................................................27
Marketing and Sales..................................................................28
Customers............................................................................28
Competition..........................................................................28
Research and Development.............................................................29
Intellectual Property................................................................29
Government Regulations and Contracts.................................................29
Employees............................................................................30
Property.............................................................................31
Legal Proceedings....................................................................31
Description of EDL and STL....................................................................31
EDL..................................................................................31
STL..................................................................................33
Exceptional Recent Earnings History of EDL and STL............................................35
FINANCIAL STATEMENTS...................................................................................36
Unaudited Pro Forma Consolidated Financial Statements.........................................36
Unaudited Pro Forma Consolidated Financial Information...............................37
Unaudited Pro Forma Consolidated Balance Sheet (March 31, 1998)......................38
Unaudited Pro Forma Consolidated Income Statement (Six Month Period ended
March 31, 1998)..................................................................39
Unaudited Pro Forma Consolidated Income Statement (September 30, 1997)...............40
Notes and Management's Assumptions to Unaudited Pro Forma Consolidated Financial
Statements.......................................................................41
Management's Discussion and Analysis of Operations...................................43
Paravant Computer Systems, Inc. Financial Statements for the Years Ended September 30, 1997
and 1996...................................................................................46
Independent Auditor's Report.........................................................47
Financial Statements:
Balance Sheets..............................................................48
Statements of Income........................................................49
Statements of Changes in Stockholders' Equity...............................50
Statements of Cash Flows....................................................51
Notes to Financial Statements........................................................52
Management's Discussion and Analysis of Operations...................................62
Paravant Computer Systems, Inc. Unaudited Condensed Financial Statements
for the Quarters Ended March 31, 1998 and 1997.............................................65
Financial Statements - (Unaudited):
Condensed Balance Sheet - March 31, 1998.............................................66
Condensed Statements of Operations for the three months ended
March 31, 1998 and 1997...........................................................67
Condensed Statements of Operations for the six months ended
March 31, 1998 and 1997...........................................................68
Condensed Statements of Cash Flows for the six months ended
March 31, 1998 and 1997...........................................................69
Notes to Condensed Financial Statements..............................................70
Management's Discussion and Analysis of Operations...................................72
Engineering Development Laboratories Inc. and Subsidiary Consolidated Financial
Statements for the Nine Month Period Ended October 4, 1997 and the Year Ended
December 28, 1998..........................................................................76
Independent Auditor's Report.........................................................77
Financial Statements:
Consolidated Balance Sheets..................................................78
Consolidated Statements of Income............................................79
Consolidated Statements of Changes in Stockholders' Equity...................80
Consolidated Statements of Cash Flows........................................81
Notes to Consolidated Financial Statements...........................................82
Management's Discussion and Analysis of Operations...................................92
Engineering Development Laboratories, Inc. and Subsidiary Unaudited Consolidated Condensed
Financial Statements for the Six Months Ended March 21, 1998 and March 22, 1997............94
Financial Statements - (Unaudited):
Condensed Consolidated Balance Sheet - March 21, 1998................................95
Condensed Consolidated Statements of Income for the six months
ended March 21, 1998 and March 22, 1997...........................................96
Condensed Consolidated Statements of Cash Flows for the six months
ended March 21, 1998 and March 22, 1997...........................................97
Notes to Condensed Consolidated Financial Statements.................................98
Management's Discussion and Analysis of Operations...................................99
ADDITIONAL INFORMATION.................................................................................101
Cautionary Statement concerning Forward-Looking Statements...........................101
Additional Information About the Company.............................................101
INFORMATION CONCERNING INDEPENDENT AUDITORS............................................................101
SHAREHOLDER PROPOSALS..................................................................................102
OTHER MATTERS..........................................................................................102
</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
August 20, 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 July 23, 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 June 25, 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
<PAGE>
<PAGE>
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 June 12, 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>
<S> <C> <C>
Percentage of
Amount and Nature of Outstanding Shares
Name and Address of Beneficial Owners(1) Beneficial Ownerships(2) Owned(3)
- ---------------------------------------- ------------------------ --------
Krishan K. Joshi(4)(5) 1,938,237 23.2%
Richard P. McNeight(5) 1,031,145 12.1%
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 2.7%
Kevin J. Bartczak(5) 45,000 *%
All officers and directors as a group (7 persons) (4)(5) 3,719,451 42.4%
</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 8,340,238 shares of Common Stock outstanding on June 12, 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 47.4%, to an
aggregate of 12,290,238 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 50%. See "Summary of the Acquisition - Parties to the
Transaction - EDL/STL Shareholders Who Will Become More Than 5%
Shareholders."
2
<PAGE>
<PAGE>
(4) Includes 1,448,775 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. 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.
Craven. 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 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
June 12, 1998 the shares under the voting control of Messrs. Joshi, McNeight and
Craven aggregated 3,081,049, or 36.9% 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
<PAGE>
<PAGE>
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 "FOR" APPROVAL OF THE NAME CHANGE.
YOUR PROXY WILL BE VOTED "FOR" 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
<PAGE>
<PAGE>
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 following table sets forth certain historical per share data of Paravant and
EDL and combined per share data on an unaudited pro forma basis after giving
effect to the Acquisition as a purchase transaction and assuming that 3,950,000
shares of Paravant Common Stock will be issued under the Acquisition for all the
EDL Common Stock outstanding. This data should be read in conjunction with the
separate historical financial statements of Paravant and separate historical
consolidated financial statements of EDL included herein. The unaudited pro
forma financial data is not necessarily indicative of the operating results that
would have been achieved had the transaction been in effect as of the beginning
of the period presented and should not be construed as representative of future
operations.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997 MARCH 31, 1998
------------------ --------------
PER SHARE PER SHARE
------------------ --------------
<S> <C> <C>
Historical - Paravant
Basic net income per share $ 0.14 $ 0.066
Diluted net income per share $ 0.09 $ 0.043
Book Value per share(1) $ 1.03 $ 1.126
Historical - EDL
Basic net income per share $ 9,188.46 $ 9,338.717
Diluted net income per share $ 9,188.46 $ 9,338.717
Book Value per share(1) $ 5,659.04 $11,715.317
Pro forma combined net income per share(2)
Basic pro forma net income per share $ 0.65 $ 0.522
Diluted pro forma net income per share $ 0.48 $ 0.403
Equivalent pro forma net income per EDL share(3) $ 3,832.37 $ 3,236.808
Pro forma combined book value per share(4)
Pro forma book value per Paravant share $ 3.78
Equivalent pro forma book value per EDL share(3) $ 30,329.01
</TABLE>
- ------------
(1) The historical book value per share is computed by dividing stockholders'
equity by the number of shares of common stock outstanding at the end of the
period.
(2) Basic net income per share is computed by dividing the pro forma net income
by the pro forma weighted average number of shares outstanding. Diluted net
income per share is computed by dividing the pro forma net income by the pro
forma weighted average number of shares outstanding and dilutive potential
shares outstanding. The pro forma weighted average number of shares
outstanding has been calculated as if the shares issued for the EDL
Acquisition (3,950,000) were issued and outstanding at the beginning of each
period presented.
(3) The equivalent EDL pro forma share amounts are calculated by multiplying the
combined pro forma per share amounts by the conversion Ratio of 8,028.46
shares of Paravant Common Stock for each share of EDL Common Stock.
(4) The pro forma book value per share data is computed by dividing pro forma
stockholders' equity by the pro forma number of shares of common stock
outstanding at the date indicated. The pro forma number of shares
outstanding was calculated as if the shares to be issued for the Acquisition
were outstanding at March 31, 1998.
5
<PAGE>
<PAGE>
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. See "The Acquisition - Description of the Company."
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.
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
Company's 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
6
<PAGE>
<PAGE>
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 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 8,340,238
shares which were outstanding on June 12, 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), 7.3%;
(ii) Mr. Lambertson, 882,166 shares, 7.2%; (iii) Mr. Stefanko, 882,166 shares,
7.3%; Mr. Stefanko, 882,166 shares, 7.2%; and (iv) Mr. Schooley, 652,750 shares
(including 1,000 shares owned prior to the Acquisition), 5.3%. 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 50% 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;
7
<PAGE>
<PAGE>
Promissory notes in the aggregate amount of $3,238,000; and
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
June 12, 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.
8
<PAGE>
<PAGE>
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 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 compensation expense 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 June 12, 1998............................... $2-31/32 $1-15/16
</TABLE>
9
<PAGE>
<PAGE>
- -------------------------
(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 June 12, 1998, as reported by the Company's transfer agent, shares
of Common Stock were held by 93 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 six months period ended
March 31, 1998, 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
10
<PAGE>
<PAGE>
effect on one or both of the acquired businesses and upon the
realization of the benefits anticipated from the Acquisition.
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 Employment Agreements are intended to provide
consistent management 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 47.4% of the
number of shares of Common Stock outstanding as of June 12, 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 50% 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 March 31, 1998 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 47.4% of
the number of shares outstanding as of June 12, 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
11
<PAGE>
<PAGE>
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 is not anticipated that such shares would be offered for sale
until at least 18 months after the Closing. As of June 12, 1998,
approximately 5,047,019 shares, or 60.5% 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
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 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.
12
<PAGE>
<PAGE>
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. 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
13
<PAGE>
<PAGE>
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"). As of
June 17, 1998 the parties further amended the Acquisition Agreement to change
the latest closing date for the Acquisition transaction until September 30,
1998. 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;
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;
14
<PAGE>
<PAGE>
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 "EDL/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. The Company selected RAS from among
a list of ten or more firms assimilated from recommendations of the Company's
independent financial services firm and from research undertaken by the
Company's executive officers. Based upon responses from among several of the
listed firms solicited by the Company, management selected RAS based upon its
experience in valuations through its own debt and/or equity public underwritings
and private placement offerings of its own clients, in providing valuations for
offerings in the capacity of a qualified independent underwriter for several
public underwriting offerings by another underwriter, and in the providing of
fairness opinions for merger transactions.
In arriving at its Common Stock Value Opinion, RAS reviewed 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; reviewed the 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"); reviewed the acquisition agreement
dated March 31, 1998 (the "Agreement"); reviewed all 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. In rendering its opinion, RAS
relied upon and assumed, without independent verification or investigation, the
accuracy and completeness of the foregoing information, as well as the accuracy
and completeness of all information provided to it by the Company and its
employees, representatives and agents.
Based upon its review and its analysis of the foregoing information and
based upon the average closing bid price of the Common Stock for the sixty day
period ending March 15, 1998, RAS expressed its opinion that the Common Stock to
be paid as a portion of the purchase price for the Acquisition, ascribing to it
a value in the range of 40% to 50% of such average closing bid price, has a
value of $1.40-1.76 per share, or approximately $1.58 per share. Such estimation
15
<PAGE>
<PAGE>
takes into consideration, amongst other material things, (i) its illiquid and
unregistered 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 the Agreement;
reviewed the EDL/STL financial statements; reviewed and analyzed transactions
and companies similar to the Acquisition; reviewed comparable company
acquisitions; the financial projections for EDL/STL (which were prepared by the
Company consistent with the EDL/STL financial statements); and reviewed
performance and valuations of small defense electronic companies that are
publicly held. In rendering its opinion, RAS relied upon and assumed, without
independent verification or investigation, the accuracy and completeness of the
foregoing information, as well as the accuracy and completeness of all
information provided to it by the Company and its employees, representatives and
agents.
RAS identified public companies that are similar in the type of business
and operation to EDL/STL (i.e., small defense electronic companies) ("comparable
companies") and calculated implied values from the harmonic mean averages of the
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). The harmonic mean gives equal investment weight to each of the
comparable companies. (For example, the harmonic mean of the comparable
companies' price/earnings ratios ("p/e") is calculated as their average of
earnings/price ratios ("e/p"). Price is in the denominator. Earnings are
expressed as so much money per dollar of investment and equal weight is given to
an equal investment in each company. The arithmetic mean of the comparable
companies' p/e's gives equal weight to each company's earnings and assumes that
the investments in the companies are in proportion to their p/e ratios. Greater
weight is given to higher p/e companies than to lower p/e companies.
In the course of its review, RAS relied upon and assumed, without
independent verification, the accuracy and completeness of the financial
information provided to them. In arriving at its opinion, RAS did not perform or
obtain any independent appraisal of the assets and business of EDL/STL. In
arriving at its conclusion, RAS relied most heavily on the comparison of EDL/STL
to its peer group of comparable companies. The peer group of comparable
companies were considered to be (small capitalization public companies primarily
engaged in the business of designing, developing and/or manufacturing military
electronic hardware and related products).
Based upon its foregoing review, 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
may be substantial and 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.
16
<PAGE>
<PAGE>
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. Pursuant to the conditional commitment, the rate of
interest would be determined at a rate equal to the Bank's prime rate, the
federal funds rate or the LIBOR rate plus a margin which ranges from 1.5% to
2% based on the debt to tangible net worth ratio at the beginning of the
applicable LIBOR rate contract period. The Company may elect among the rates
based upon conditions on the dates upon which funds are drawn. 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 Company anticipates obtaining the line of credit
immediately preceeding the closing of the transaction.
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.
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
17
<PAGE>
<PAGE>
(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.
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.
18
<PAGE>
<PAGE>
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 Agreement, including, among
others, the obligation to pay the Cash Earn-Out and to enter into the Employment
Agreements.
If the Acquisition proposal is approved by the shareholders of the Company,
the Closing of Acquisition transaction is expected to be consummated on August
31, 1998, but the parties may mutually agree to extend the closing date to not
later than September 30, 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.
19
<PAGE>
<PAGE>
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.
In an action to seek enforcement, a court having jurisdiction over the
matter may determine not to enforce, or to only partially enforce an STL
shareholder Non-Competition Agreement in accordance with its terms.
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.
20
<PAGE>
<PAGE>
In an action to seek enforcement, a court having jurisdiction over the
matter may determine not to enforce, or only partially enforce, the covenant not
to compete which is contained in the Employment Agreements.
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.
<TABLE>
<CAPTION>
Distribution of Pre-Tax Earnings
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Cash
Recipient
Period Period Period Period Period
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
- --------------------------------------------------------------------------------------------------
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.
21
<PAGE>
<PAGE>
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 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
22
<PAGE>
<PAGE>
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.
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.
23
<PAGE>
<PAGE>
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 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.
24
<PAGE>
<PAGE>
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.
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
25
<PAGE>
<PAGE>
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 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.
Description of the Company
General
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 products of the Company are
sold to U.S. and foreign military establishments, other governmental agencies
and commercial enterprises.
Products
The ruggedized, portable computers which the Company manufacturers are
"ruggedized" by the selection and mounting of certain components, the design,
configuration and fabrication of enclosures and electronics and the application
of special seals and coatings to withstand certain environmental and operational
hazards. The computers manufactured by the Company, which include two types of
hand-held processors and four types of laptops, are compatible with IBM PC's,
are designed with an open architecture configuration for flexibility, and are
available with standard serial and parallel communications capabilities to
transmit and receive electronic signals to and from other electronic systems.
The Company's software is based on MS-Windows or MS-DOS operating systems. The
computers may be assembled according to designs and with components and printed
circuit boards specified by the customer or as designed by the Company to the
customer's requirements.
Typical military applications of the Company's computers include aircraft
and shipboard diagnostic, testing and maintenance systems, controller and radar
displays for missile systems, performance recorders in training exercises,
mission loaders and verifiers of data and field command control systems. As of
September 30, 1997, a substantial portion of the Company's military business
covering its three primary applications, maintenance and support, training, and
battlefield communications, resulted from laptop computer contracts with
Raytheon Company (HAWK/AVENGER Air Defense Missile Systems, portable fire
controller), U.S. Navy (Phalanx Gun Integrated Maintenance System, diagnostics
and repair device), Raytheon-Texas Instruments (HARM Missile System, mission
loading and electronic diagnostics), and Lockheed Martin (F-16 Fighter and
Mission Loading, electronic diagnostics check).
26
<PAGE>
<PAGE>
Since the market introduction of the implantable pacemaker, medical
practitioners have increasingly turned to implantable devices for a wide range
of applications including drug delivery devices, electroneurostimulators,
defibrillators, and ventricular assist devices ("VADS"). Increasingly, such
implantable devices may be reprogrammed externally via a telemetry link, to
enable the physician to alter the drug delivery rate or dispensing of
medication. The devices used for this are commonly called Programmers and are
part of the medical support equipment market. It is believed that many
manufacturers of implantable devices would prefer to outsource the design and
production of these programmers, because the required skills and resources do
not necessarily align with the core competencies of the company -- the implant.
The Company has focused on the Programmer segment of the Medical Support
Equipment market, because the technical and operations needs of the market
appear to match the Company's strengths. These strengths include the ability to
design and manufacture highly specialized computing devices, meet tough design
requirements like EMI, strict adherence to specifications and regulations like
FDA, strong documentations and configuration control allowing the Company to
strictly control each component in the system and the system itself, high
reliability system performance and seamless field support.
The Company acts as a design and manufacturing subcontractor to the medical
device manufacturers, who typically prefer to do final assembly and test, and
assume liability for the product.
Customization Services
The Company provides its customers and end-users with engineering services
that modify or adjust its standard portable computers, related software and
communication interfaces to their specific needs and requirements. Substantial
portions of its product sales to the military involve varying degrees of
customization while each medical customer's product is a uniquely custom product
with some shared components. The range of engineering services furnished by the
Company includes special rugged packaging design, miniaturization of
electronics, development of ultra-low power systems and improvements in
communications capabilities.
Supply and Manufacturing
The Company designs and engineers substantially all its portable computers,
purchases their components from third parties and then tests and assembles the
final products. Generally, the Company is not a party to any formal written
contract regarding the deliveries of its hardware, supplies and components or
their fabrication. The Company relies on a few board fabricators of different
sizes and capabilities located within the same geographical area as its
headquarters. Certain components used in its computers are obtained from sole
sources, such as Distec, Xcel and HiTech. The Company has also licensed its
software from sole sources, including Microsoft, Phoenix Technology, Magnavox
and JFK Associates. The Company has entered into licensing arrangements for
certain hardware and software elements contained in, or used in conjunction
with, its computers. These agreements are usually non-exclusive, provide for
minimum fees and royalties related to sales to be paid by the Company to the
particular licensor, run for a limited term and are subject to other terms,
conditions and restrictions.
The Company's manufacture of computers is done pursuant to specific
purchase orders or for general inventory purposes. The Company's design,
engineering and assembly facilities are located in Melbourne, Florida. These
facilities comply with certain U.S. military specifications necessary for the
manufacture and assembly of products supplied to it. The Company's facility has
met the quality management and assurance standards of an international rating
organization (ISO-9001) as of March 27, 1998. Such qualification should improve
the Company's marketing opportunities in the international military markets for
rugged computers. However, there is no assurance that PCS will increase such
sales of its products abroad in the future even though such standards are met.
Warranty and Customer Service
The Company usually provides one-year warranties on its products covering
both parts and labor although extended warranties may be purchased by customers.
At its option, the Company repairs or replaces products that are defective
during the warranty period if the proper usage and preventive maintenance
procedures have been followed by its customers. Generally, all servicing is done
at the Company's plant, and it charges its customers a fee for those service
items that are not covered by warranty. Except for its extended warranties, it
does not offer its customers any formal written service contracts.
27
<PAGE>
<PAGE>
Marketing and Sales
The Company markets and sells its computer products through an internal
sales force of four individuals and several of its officers, approximately 20
manufacturers' representatives in the United States and approximately 20
distributors abroad. Its manufacturers' representatives cover approximately 28
states, including Washington, D.C., and its foreign distributors operate in
nearly 30 countries, including England, France, Japan, Australia and Germany.
The Company's relationship with its manufacturers' representatives is
generally governed by a written contract, terminable on 30 days' prior notice.
These contracts usually provide for exclusive territorial and product
representation.
Sales of the Company's products or services to foreign distributors are
also generally made pursuant to written contracts. Under such contracts, the
distributor is granted either an exclusive or non-exclusive territorial and
product representation as well as discounts based on the list price depending on
the type or amount of products sold. In some cases, there are minimum order
requirements. The term of these agreements generally run from 1 to 3 years but
are terminable on 60 days advance notice. The Company has a primary distributor
for Asia and another primary distributor for Europe.
The Company promotes its computer products through the dissemination of
product literature, attendance and exhibition at trade shows, conduct of
seminars and the distribution of news releases on special developments to trade
magazines and newsletters to an extensive customer list.
Customers
The Company sells its products, directly or indirectly, to the U.S. and
foreign military establishments, large aerospace and military contractors
supplying these establishments, government agencies regulating environmental,
geologic and forestry matters, certain state departments of transportation,
forest products companies, and medical device manufacturers.
The principal customers of the Company are U.S. Department of Defense
("DoD") contractors who are subject to federal budgetary constraints. For the
fiscal years ended September 30, 1997 and September 30, 1996, Raytheon's Missile
Systems Division accounted for 46% and 49% of the Company's total sales,
respectively. For those same periods, Lockheed Martin, and Harris, accounted for
36% and 21%, and 7% and 0% of the Company's total sales, respectively. The loss
of any of these customers could have a material adverse impact on the Company's
business.
Competition
The Company competes in the rugged portable computer business with a wide
variety of computer manufacturers and repackagers, many of which are larger,
better known, have more resources in finance, technology, manufacturing and
marketing, and are able to offer lower prices. The Company competes based on
customization capabilities, performance, delivery, quality and price.
The Company competes in its hand-held computer business with Litton Data
Systems, SAIC, Tadiran and Miltope in military applications; Husky Computer
Company in both military and non-military markets; and CMT, Micro Palm and DAP
in non-military applications. The Company competes in its laptop computer
business with SAIC, Miltope, Cyberchron and North American Industries (CODAR) in
the military and non-military areas. Certain large manufacturers of commercial
notebook computers such as Panasonic, Amrel and IBM have introduced commercial
notebooks that have been sealed and ruggedized to some extent. Management
believes that the Company's ability to increase market penetration in the
commercial sector will be limited substantially by the entry of such
manufacturers into the ruggedized computer market.
28
<PAGE>
<PAGE>
Certain military procurement policies require purchases of computers for
the military under Indefinite Delivery, Indefinite Quantity ("IDIQ") contracts
which encourage purchases of computers amounting to many hundreds of millions of
dollars. Such procurement policies clearly favor larger companies with greater
resources than those of the Company. Unless the Company can form strategic
alliances with larger military contractors or qualify for exceptions to IDIQ
arrangements, it may suffer adverse material consequences in competition for
military business. For the last five years, the Company has made military sales
of its computers because they fall into product categories not currently covered
by IDIQ requirements.
In the military and government markets, the Company will often be engaged,
directly or indirectly, in the process of seeking competitive bid or negotiated
contracts with government departments and agencies which are subject to specific
rules and regulations which are difficult for the company to meet. Occasionally
the Company is one of only a few companies whose products meet the required
specifications designated by such customers. Although, in most cases, the
Company tends to be the high priced bidder because of its generally more rugged
design criteria, use of expensive industrial or higher grade components and
customer specific product refinements, certain customers are willing to pay the
Company's higher price for applications in which harsh environmental and
operational conditions prevail. In those less demanding circumstances, the
Company's products are offered at a severe competitive disadvantage because the
applications do not justify its higher prices. Since the Company sells its
computer products into segments of the commercial market and has a history of
resale pricing, under DoD regulations such commercial pricing information may be
utilized to support the prices that it charges in the military marketplace.
Research and Development
The Company's business requires substantial ongoing research and
development to enhance its current products, and develop and introduce new
products that keep pace with technological developments in response to evolving
customer requirements. The Company's research and development activities
involve: (i) its sole activities; (ii) joint efforts between it and another
enterprise; and (iii) endeavors of third party contractors retained by it. A
substantial portion of its research and development is accomplished on an
in-house basis.
The Company has designed a new rugged notebook intended to fit between its
laptops and its hand-held computers in size, weight and price. As part of a
continuing effort to upgrade its products, the Company is also working to
develop high-speed processor boards for some of its older products. As part of
the development of the medical market, significant investment was made in the
development of the Medtronic medical reprogramming device which is designed to
allow many of the case parts to be used in other customers' programs.
Research and development expenditures during the fiscal years ended
September 30, 1997 and 1996 were $611,295 and $382,750, respectively, and
represented 4.6% and 3.7% of total sales, respectively. A substantial portion of
such expenditures for those fiscal years were applied to the development of the
rugged notebook, rugged laptops, and the development of a Pentium based main
board for the rugged laptop line.
Intellectual Property
Proprietary information and know-how are important to the Company's
commercial success. The Company holds no patents or copyrights but has trademark
protection for the Paravant name and logo. There can be no assurance that others
will not either develop independently the same or similar information or obtain
and use proprietary information of the Company. None of its employees has signed
a confidentiality agreement regarding its proprietary information nor have any
employees signed a non-competition agreement other than Messrs. McNeight and
Craven.
Government Regulations and Contracts
Due to the nature of the products designed, manufactured and sold by the
Company for military applications, it is subject to certain DoD regulations. In
addition, commercial enterprises engaged primarily in supplying equipment and
29
<PAGE>
<PAGE>
services, directly or indirectly, to the United States government are subject to
special risks. These risks include dependence on government appropriations,
termination without cause, contract renegotiations and competition for the
available DoD business. The Company has no material direct DoD contracts,
however, that are subject to renegotiation in the foreseeable future and is not
aware of any proceeding to terminate material DoD contracts in which it may be
indirectly involved. In addition, many of the Company's contracts provide for
the right to audit its cost records and are subject to regulations providing for
price reductions if inaccurate cost information was submitted by the Company.
Government contracts governing the Company's products are often subject to
termination, negotiation or modification in the event of changes in the
government's requirements or budgetary constraints. Products sold by the Company
for government applications are primarily sold to companies acting as
contractors or subcontractors and not directly to government entities.
Agreements with such contractors or subcontractors generally are not conditioned
upon completion of the contract by the prime contractor. To the extent that such
contracts are so conditioned, a failure of completion may have a material
adverse effect on the Company's business.
The contracts for sale of the Company's computers are generally
fixed-priced contracts, as to which the price is set in advance and generally
may not be varied. Such contracts require the Company to properly estimate its
costs and other factors prior to commitment in order to achieve profitability
and compliance. The Company's failure to do so may result in unreimbursable cost
overruns, late deliveries or other events of non-compliance.
Under certain circumstances, the Company is also subject to certain U.S.
State Department and U.S. Department of Commerce requirements involving prior
clearance of foreign sales. Such export control laws and regulations either ban
the sale of certain equipment to specified countries or require U.S.
manufacturers and others to obtain necessary federal government approvals and
licenses prior to export. As a part of this process, the Company generally
requires its foreign distributors to provide documents that indicate that the
equipment is not being transferred to, or used by, unauthorized parties abroad.
The Company and its agents are also governed by the restrictions of the
Foreign Corrupt Practices Act of 1977, as amended ("FCPA"), which prohibits the
promise or payments of any money, remuneration or other items of value to
foreign government officials, public office holder, political parties and others
with regard to the obtaining or preserving commercial contracts or orders. These
restrictions may hamper the Company in its marketing efforts abroad.
The Company's manufacturing operations are subject to various federal,
state and local laws, including those restricting or regulating the discharge of
materials into, or otherwise relating to the protection of, the environment. The
Company is not involved in any pending or threatened proceedings that would
require curtailment of, or otherwise restrict its operations because of such
regulations. Compliance with applicable environmental laws has not had a
material effect upon its capital expenditures, financial condition or results of
operations.
Management believes that although compliance with applicable federal laws
and regulations involves certain additional procedures by the Company that would
not otherwise be required, such compliance has not generally inhibited or
limited the Company's ability to enter into material contracts.
Employees
As of June 5, 1998, the Company had 88 employees, all of whom were full
time employees, including its officers, of whom 39 were engaged in manufacturing
and repair services, 8 in administration and financial control, 28 in
engineering and research and development, and 13 in marketing and sales. None of
its employees is covered by a collective bargaining agreement or is represented
by a labor union. The Company considers its relationship with its employees to
be satisfactory.
30
<PAGE>
<PAGE>
Property
The Company leases approximately 17,300 square feet of space located at
1615A West Nasa Blvd., Melbourne, Florida 32901. This space is utilized by the
Company as its principal corporate headquarters and manufacturing plant. The
lease term commenced on September 1, 1996 and expires December 31, 2001.
Legal Proceedings
In March 1996, the Company's former counsel, Cascone & Cole, rendered an
invoice to the Company in the amount of approximately $365,000 for legal fees
and expenses to which such counsel claimed to be entitled in connection with its
representation of the Company for both general corporate services and services
relating to the IPO. As the Company had made prior payments to such counsel of
$130,000, the net amount claimed to be due was approximately $235,000. The
Company has contested the invoice and accrued an estimate for the payment, if
any, of these fees. On March 27, 1996, Cascone & Cole filed an action in the
Supreme Court of the State of New York, County of New York, entitled Cascone &
Cole v. Paravant Computer Systems, Inc., Victor M. Wang, Duke & Company, Inc.,
Dean Petkanas and Eagle Group Incorporated (Index No. 96601634) against the
Company, the Underwriter and certain other defendants, alleging, among other
things, breach of contract, failure to pay attorneys fees, fraud, copyright
infringement and defamation by the Company in connection with the aforementioned
services, as well as claiming a finder's fee with respect to the Underwriter's
relationship with the Company. Plaintiff has filed an amended complaint
increasing its claim for legal services from approximately $365,000 to
approximately $415,000, claiming there is a balance due of $280,882 for legal
services. Plaintiff is also seeking punitive damages of $1 million and costs.
The Company has filed an answer denying the allegations made by plaintiff and
has asserted defenses and counterclaims against the plaintiff seeking, among
other things, recovery of amounts paid to plaintiff as well as punitive damages
and court costs.
On September 18, 1996, a former controller of the Company filed an action
in the Circuit Court of the State of Florida, Brevard County, entitled,
Christopher R. Exley v. Paravant Computer Systems, Inc., Richard P. McNeight,
William R. Craven, UES of Florida, Inc. and Krishan K. Joshi (Case No. 96-15091
CA), against the Company and certain of its officers, directors and principal
stockholders, alleging, among other things, retaliatory personnel actions by the
defendants. Plaintiff is seeking damages in the amount of approximately $1
million, plus punitive damages, fees and costs. Plaintiff alleges that he was
improperly terminated in December 1994 as a result of his refusal to account for
certain transactions in a specified manner. The Company has filed a motion to
dismiss the complaint.
The Company will vigorously defend itself in these matters. Management of
the Company believes that the ultimate resolution of these matters will not have
a material adverse effect on the Company.
The Company is not a party to or involved in any other pending legal
proceedings.
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
31
<PAGE>
<PAGE>
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, 875/525 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 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
32
<PAGE>
<PAGE>
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.
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 changing 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
33
<PAGE>
<PAGE>
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 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.
34
<PAGE>
<PAGE>
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 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."
35
<PAGE>
<PAGE>
FINANCIAL STATEMENTS
PARAVANT COMPUTER SYSTEMS, INC.
INDEX TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Unaudited Pro Forma Consolidated Financial Information.................... 37
Unaudited Pro Forma Consolidated Balance Sheet as of March 31, 1998....... 38
Unaudited Pro Forma Consolidated Income Statement for the Six Months Ended
March 31, 1998............................................................ 39
Unaudited Pro Forma Consolidated Income Statement for the Year Ended
September 30, 1997........................................................ 40
Notes and Management's Assumptions to Unaudited Pro Forma Consolidated
Financial Statements...................................................... 41
Management's Discussion and Analysis of Operations........................ 43
</TABLE>
36
<PAGE>
<PAGE>
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 consolidated financial information of EDL and
STL (EDL) and should be read in conjunction with the accompanying pro forma
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 March 31, 1998 and October 1, 1996, respectively.
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.
37
<PAGE>
<PAGE>
Paravant Computer Systems, Inc.
Unaudited Pro Forma Consolidated Balance Sheet
As of March 31, 1998
<TABLE>
<CAPTION>
Pro forma
Company EDL Pro forma March 31,
Assets historical historical adjustments 1998
- --------------------------------------------------------------------- --------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents $2,909,848 1,380,766 4,290,614
Accounts receivable 2,803,897 4,411,486 7,215,383
Costs and estimated earnings in excess
of billings on uncompleted contracts 0 7,932,081 7,932,081
Inventory 3,479,473 153,889 3,633,362
Prepaid expenses and other assets 110,156 58,005 168,161
Deferred income taxes 426,263 15,320 441,583
---------------- --------------- ---------------- ----------------
Total current assets 9,729,637 13,951,547 0 23,681,184
---------------- --------------- ---------------- ----------------
Prepaid expenses 268,588 0 268,588
Property and equipment, net 883,871 304,092 1,187,963
Goodwill 0 0 6,427,119 (d) 6,427,119
Intangible assets, net 50,625 0 5,867,250 (d) 5,917,875
Demonstration pool and custom molds 255,407 0 255,407
Other assets 578,369 88,492 (246,984)(b) 419,877
Investment in subsidiary 0 0 21,255,881 (a)(b)(c) 0
(21,255,881)(d)
---------------- --------------- ---------------- ----------------
Total assets $11,766,497 14,344,131 12,047,385 38,158,013
================ =============== ================ ================
Liabilities and Stockholders' Equity
- ------------------------------------------------------
Current liabilities:
Accounts payable $ 816,129 355,474 950,000 (b) 2,121,603
Accrued payroll and other liabilities 1,394,274 519,050 1,913,324
Current maturities of long-term debt 64,149 0 64,149
Current maturities of capital lease obligations 82,001 0 82,001
Billings in excess of costs and estimated
earnings on uncompleted contracts 0 1,048,631 1,048,631
Income taxes payable 285,524 3,352,400 633,897 (c) 4,271,821
---------------- --------------- ---------------- ----------------
Total current liabilities 2,642,077 5,275,555 1,583,897 9,501,529
---------------- --------------- ---------------- ----------------
Promissory notes 0 0 4,800,000 (a) 4,800,000
Notes payable to bank 0 0 8,700,000 (a) 8,700,000
Capital lease obligations, less current maturities 46,867 0 46,867
Deferred compensation 0 105,180 105,180
Deferred income taxes 78,820 1,884 80,704
---------------- --------------- ---------------- ----------------
Total Liabilities 2,767,764 5,382,619 15,083,897 23,234,280
---------------- --------------- ---------------- ----------------
Minority interest in equity of subsidiary 0 3,197,576 (3,197,576)(d) 0
---------------- --------------- ---------------- ----------------
Stockholders' Equity
Common stock 122,249 1,200 59,250 (a) 181,499
(1,200)(d)
Additional paid in capital 5,325,806 177,395 5,865,750 (a) 11,191,556
(177,395)(d)
Retained earnings 3,550,678 5,993,452 (5,993,452)(d) 3,550,678
Treasury stock 0 (408,111) 408,111 (d) 0
---------------- --------------- ---------------- ----------------
Total stockholders' equity 8,998,733 5,763,936 161,064 14,923,733
---------------- --------------- ---------------- ----------------
Total liabilities and stockholders' equity $11,766,497 14,344,131 12,047,385 38,158,013
================ =============== ================ ================
</TABLE>
38
<PAGE>
<PAGE>
Paravant Computer Systems, Inc.
Unaudited Pro Forma Consolidated Income Statement
For the six month period ended March 31, 1998
<TABLE>
<CAPTION>
Pro forma
Company EDL Pro forma March 31,
historical historical adjustments 1998
----------------- ------------------ ----------------- -----------------
<S> <C> <C> <C> <C>
Contract revenues $7,648,353 21,613,907 29,262,260
Costs of contract revenues 4,003,313 9,245,642 13,248,955
----------------- ------------------ ----------------- -----------------
Gross profit 3,645,040 12,368,265 16,013,305
General and administrative expenses 2,883,933 2,032,063 581,222 (a) 5,497,218
----------------- ------------------ ----------------- -----------------
Income from operations 761,107 10,336,202 (581,222) 10,516,087
Other income, net 42,190 201,730 (561,750)(b) (317,830)
----------------- ------------------ ----------------- -----------------
Income before income taxes 803,297 10,537,932 (1,142,972) 10,198,257
Income taxes (274,969) (3,694,064) 217,302 (a) (3,946,890)
219,083 (b)
(414,242)(c)
----------------- ------------------ ----------------- -----------------
Net income 528,328 6,843,868 (1,120,829) 6,251,367
================= ================== ================= =================
Basic earnings per share $ 0.066 $ 0.522
================= =================
Diluted earnings per share $ 0.046 $ 0.403
================= =================
Weighted average number of common
shares outstanding 8,035,012 3,950,000 (d) 11,985,012
Plus incremental shares from assumed
conversion of options and warrants 3,520,639 0 3,520,639
----------------- ----------------- -----------------
Weighted average number of common
shares outstanding and dilutive
potential common shares
outstanding 11,555,651 3,950,000 (d) 15,505,651
================= ================= =================
</TABLE>
39
<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>
Contract revenues 13,209,541 28,525,537 41,735,078
Costs of contract revenues 6,774,076 12,083,661 18,857,737
----------------- ----------------- ----------------- -----------------
Gross profit 6,435,465 16,441,876 - 22,877,341
General and administrative expenses 4,629,122 3,387,000 1,162,444 (a) 9,178,566
----------------- ----------------- ----------------- -----------------
Income from operations 1,806,343 13,054,876 (1,162,444) 13,698,775
Other income, net (70,323) 90,187 (1,123,500)(b) (1,103,636)
----------------- ----------------- ----------------- -----------------
Income before income taxes 1,736,020 13,145,063 (2,285,944) 12,595,139
Income taxes (594,229) (4,442,620) 434,606 (a) (4,846,177)
438,165 (b)
(682,099)(c)
----------------- ----------------- ----------------- -----------------
Net income 1,141,791 8,702,443 (2,095,272) 7,748,962
================= ================= ================= =================
Basic earnings per share $ 0.143 $ 0.648
================= =================
Diluted earnings per share $ 0.093 $ 0.477
================= =================
Weighted average number of common
shares outstanding 7,990,872 3,950,000 (d) 11,940,872
Plus incremental shares from assumed
conversion of options and warrants 4,292,494 0 4,292,494
----------------- ----------------- -----------------
Weighted average number of common
shares outstanding and dilutive
potential common shares
outstanding 12,283,366 3,950,000 (d) 16,233,366
================= ================= =================
</TABLE>
40
<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 March 31, 1998 and the
pro forma consolidated income statements for the six months ended March
31, 1998 and for the year ended September 30, 1997 have been prepared to
reflect the pro forma effects 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 statements of EDL and STL (EDL) and should be
read in conjunction with the historical financial statements 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 March 31, 1998 and October 1, 1996,
respectively. 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 as of March 31,
1998, or October 1, 1996 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, liabilities assumed and costs incurred in connection
with the acquisition are recorded using the purchase method of
accounting. The amounts allocated to the assets acquired and liabilities
assumed are based on management's estimate of their fair values with the
excess of purchase price over fair value of net assets 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 made to arrive at
the pro forma consolidated balance sheet as of March 31, 1998 as if the
acquisition was consummated on such date.
(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.
(b) Represents accrual of $950,000 of estimated additional
transaction costs and amortization of $246,984 of transaction
costs incurred to date.
(c) Represents accrual of $633,897 built in gains tax resulting
from the distribution of STL shares to EDL shareholders.
(d) Represents allocation of purchase price to tangible assets
acquired, goodwill and non-competition agreements and the
elimination of Paravant's investment in EDL and the minority
interest in STL.
(Continued)
41
<PAGE>
<PAGE>
PARAVANT COMPUTER SYSTEMS, INC.
Notes and Management's Assumptions to Unaudited
Pro Forma Consolidated Financial Statements--(Continued)
(4) Adjustments to Pro Forma Consolidated Income Statements
The following describes the pro forma adjustments to the pro forma
consolidated income statement for the six months ended March 31, 1998 and
for the year ended September 30, 1997 as if the acquisition was
consummated as of October 1, 1996.
(a) Represents amortization of goodwill and intangible
non-competition agreements over a 15 year period and the related
income tax benefit of deductible amortization of goodwill and
non-competition agreements associated with STL only.
(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.
Interest expense on the promissory notes and line of credit has
been calculated using interest rates of 8.0% and 8.5%,
respectively.
(c) Represents additional income tax incurred as a result of EDL
changing from an S corporation to a C corporation.
(d) Represents issuance of 3,950,000 shares of common stock upon
consummation of the acquisition.
42
<PAGE>
<PAGE>
Management's Discussion and Analysis of
Operations
RESULTS OF OPERATIONS
Six Months ended March 31, 1998 - Pro Forma vs. Historical
The results of operations of the Company are significantly impacted by
the addition of the revenues and costs directly related to the results of
operations of EDL/STL. Furthermore, the Company will be impacted by the
assumption of additional costs related to the financing of this acquisition and
the related amortization of goodwill and intangible assets. The following
discussion and analysis primarily addresses those items which reflect the impact
of this acquisition beyond the simple combination of revenues, cost of goods
sold and expenses.
Pro forma other income (expense) for the six months ended March 31,
1998 would be ($714,177), a decrease of $756,367 over the historical other
income (expense) of $42,190. This decrease is due partly to the amortization of
goodwill over fifteen years with an expense of $581,222 incurred in the six
months ended March 31, 1998. An additional decrease is due to interest expense
of $376,875 incurred as a result of the anticipated increase in the Company's
revolving line of credit to $8,700,000 from $-0-, on an historical basis, and
the promissory notes payable of $4,800,000 to the previous stockholders of EDL
and STL. The remaining decrease is due to the other income of $201,730 brought
with EDL/STL upon consolidation. See LIQUIDITY AND CAPITAL RESOURCES for further
discussion of the increase in debt associated with the acquisition.
Pro forma income tax expense for the six months ended March 31, 1998
would be $4,018,991 an increase of $3,744,022 over the historical expense of
$274,969 for the six months ended March 31, 1998. This increase is due primarily
to the significant increase in income before income taxes provided by the
acquisition and consolidation of EDL/STL, which results in income tax expense of
$3,694,064. The remaining increase is due primarily to additional income tax
expense of approximately $414,242 incurred as a result of changing EDL from an
S-corporation to a C-corporation. This increase is offset by additional
deductions of $146,982 and $217,302 for interest expense and amortization
expense, respectively, as discussed above.
Pro forma income tax expense as a percentage of pro forma income
before income taxes is 38.7% compared to historical income tax expense, which is
34.2% of historical income before income taxes. The increase in income tax is
due to the increase in income and the effect of Ohio income tax vs. Florida
income tax and will remain at levels comparable to the combined federal and
state tax rates. The additional interest expense discussed in relation to other
income (expense) is related primarily to the increased debt incurred to complete
the acquisition and as the debt decreases the corresponding interest expense
will decrease.
43
<PAGE>
<PAGE>
Year ended September 30, 1997 - Pro Forma vs. Historical
The results of operations of the Company are significantly impacted by
the addition of the revenues and costs directly related to the results of
operations of EDL/STL. Furthermore, the Company will be impacted by the
assumption of additional costs related to the financing of this acquisition and
the related amortization of goodwill and intangible assets. The following
discussion and analysis primarily addresses those items which reflect the impact
of this acquisition beyond the simple combination of revenues, cost of goods
sold and expenses.
Pro forma other expense for the year ended September 30, 1997 would be
$1,896,330, an increase of $1,826,007 over the historical other expense of
$70,323. This increase is due partly to the amortization of goodwill over
fifteen years with an expense of $1,162,444 incurred in the year ended September
30, 1997. An additional increase is due to interest expense of $753,750 incurred
as a result of the anticipated increase in the Company's revolving line of
credit to $8,700,000 from $-0-, on an historical basis, and the promissory notes
payable of $4,800,000 to the previous stockholders of EDL and STL. These
increases are offset by the other income of $90,187 brought with EDL/STL upon
consolidation. See LIQUIDITY AND CAPITAL RESOURCES for further discussion of the
increase in debt associated with the acquisition.
Pro forma income tax expense for the year ended September 30, 1997
would be $4,990,379 an increase of $4,396,150 over the historical expense of
$594,229 for the year ended September 30, 1997. This increase is due primarily
to the significant increase in income before income taxes provided by the
acquisition and consolidation of EDL/ STL, which results in income tax expense
of $4,442,620. The remaining increase is due primarily to additional income tax
expense of approximately $682,099 incurred as a result of changing EDL from an
S-corporation to a C-corporation. This increase is offset by additional
deductions for interest expense of $293,963 and amortization expense of
$434,606, as discussed above.
Pro forma income tax expense as a percentage of pro forma income
before income taxes is 38.5% compared to historical income tax expense, which is
34.2% of historical income before income taxes. The increase in income tax
expense is due to the increase in income and the effect of Ohio income tax vs.
Florida income tax and will remain at levels comparable to the combined federal
and state tax rates. The additional interest expense discussed in relation to
other income (expense) is related primarily to the increased debt incurred to
complete the acquisition and as the debt decreases the corresponding interest
expense will decrease.
LIQUIDITY AND CAPITAL RESOURCES
The Company's historical financial position as of March 31, 1998 is
significantly impacted on a pro forma basis by the acquisition of EDL/STL. The
initial, non-contingent purchase price due at closing is $19,425,000 determined
as follows: 3,950,000 shares of common stock at $1.50 per share for a total of
$5,925,000, cash of $8,700,000, which is represented by notes payable to bank,
and promissory notes of $4,800,000. Additionally, the Company will have incurred
expenses associated with the acquisition of approximately $1,196,894 which are
disclosed as an increase to accounts payable of $950,000 and reclassification
from other assets to investment in subsidiary of $246,984. The remaining item,
which makes up the investment in subsidiary of $21,255,881, is income taxes
payable of $633,897 for the built-in gains on the investment in subsidiary which
are incurred as a result of EDL switching from a S-corporation status (tax
pass-through entity) back to a C-corporation status (taxable entity) within ten
years of changing their designation to an S-corporation.
To properly report the financial position as of March 31, 1998, on a
consolidated basis, an elimination adjustment is recorded which reduces the
investment in subsidiary to $-0- from $21,255,881 by eliminating the EDL common
stock of $1,200, additional paid in capital of $177,395, retained earnings of
$5,993,452, treasury stock of $408,111 and EDL's minority investment in
subsidiary (STL) of $3,197,576. Additionally, the portion of the investment
related to the non-competition agreements of $5,867,250 must be reclassified to
intangible net assets, and the remaining balance of $6,227,119 must be
reclassified to goodwill.
44
<PAGE>
<PAGE>
The primary effect on the Company's current and future liquidity and
capital resources is the additional debt incurred in completing this
transaction. The Company has received a conditional commitment from National
City Bank, Dayton, Ohio for floating rate financing which would increase the
Company's revolving line of credit to $14,000,000 with a maturity date of
December 31, 2000 convertible thereafter to five year term debt. The interest
rate on the line of credit is equal to the Bank's prime rate, the federal
funds rate or the LIBOR rate plus a margin which ranges from 1.5% to 2.0% based
on the debt to tangible net worth ratio at the beginning of the applicable LIBOR
rate contract period. The Company may elect among the rates based upon
conditions on the dates upon which funds are drawn. The line of credit would be
secured by a first security interest in accounts receivable, contract rights,
inventory, equipment and other security reasonably requested by the lender.
The Company plans to use $8,700,000 of this line of credit to complete the
acquisition.
The Company will also have promissory notes, payable to the stockholders
of the companies being acquired, in the aggregate amount of $4,800,000. Each of
these 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 and the principal amount of each such
note will be payable in 12 equal quarterly payments, together with the interest
thereon, with the first payment due on October 1, 1998. Subsequent quarterly
payments will be made through July 1, 2001, when the entire principal sum and
all accrued interest will be payable in full. Because of the increase in the
revolving line of credit, discussed above, and these promissory notes the
Company will incur additional interest expense for the life of these loans.
In addition to the non-contingent purchase price and the associated pro
forma adjustments to the consolidated financial statements discussed above, the
terms of the acquisition agreement include a 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
ended September 30, 1999 and ending with the fiscal year ended September 30,
2003 based upon the combined pre-tax earnings of EDL and STL Ohio to be
calculated from the operating results included in the financial statements of
the Company prepared in accordance with generally accepted accounting principals
and SEC Regulation S-X and subject to certain cost allocations between the
Company and EDL and STL of Ohio. The combined pre-tax earnings of EDL and STL
Ohio, to the extent, they are earned, will be distributed among the Company and
STL as shown in the following table:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
PERIOD PERIOD PERIOD PERIOD PERIOD
CASH CLOSING - 10/1/99- 10/1/00- 10/1/01- 10/1/02-
RECIPIENT 9/30/99 9/30/00 9/30/01 9/30/02 9/30/03
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Company Only 100% First $7.5 First $7.5 First $6.8 First $8
Million Million Million Million
- ------------------------------------------------------------------------------------------------------
STL None Next $2.5 Next $2.5 Next $1.7 Next $2
Only Million Million Million Million
- ------------------------------------------------------------------------------------------------------
Split None Then Split Then Split Then Split Then Split
Company & 40% 40% 50% 50%
STL 60% 60% 50% 50%
- ------------------------------------------------------------------------------------------------------
</TABLE>
45
<PAGE>
<PAGE>
PARAVANT COMPUTER SYSTEMS, INC.
FINANCIAL STATEMENTS
SEPTEMBER 30, 1997 AND 1996
WITH INDEPENDENT AUDITORS' REPORT THEREON
<TABLE>
<CAPTION>
PAGE
------------
<S> <C>
Independent Auditors' Report.......................................................................... 47
Financial Statements:
Balance Sheets................................................................................... 48
Statements of Income............................................................................. 49
Statements of Changes in Stockholders' Equity.................................................... 50
Statements of Cash Flows......................................................................... 51
Notes to Financial Statements......................................................................... 52
Management's Discussion and Analysis of Operations.................................................... 62
</TABLE>
46
<PAGE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors:
PARAVANT COMPUTER SYSTEMS, INC.:
We have audited the accompanying balance sheets of Paravant Computer
Systems, Inc. as of September 30, 1997 and 1996, and the related statements of
income, changes in stockholders' equity and cash flows for the years then ended.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Paravant Computer Systems,
Inc. as of September 30, 1997 and 1996, and the results of its operations and
its cash flows for the years then ended in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
Orlando, Florida
December 3, 1997
47
<PAGE>
<PAGE>
PARAVANT COMPUTER SYSTEMS, INC.
BALANCE SHEETS
SEPTEMBER 30, 1997 AND 1996
<TABLE>
<CAPTION>
ASSETS 1997 1996
----------- -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents..................................................... $ 1,612,627 $ 65,069
Accounts receivable, net (notes 6, 8 and 18).................................. 4,082,915 7,161,192
Employee receivables and advances............................................. 28,121 73,502
Inventory, net (notes 2, 6 and 8)............................................. 3,461,773 2,503,892
Prepaid expenses.............................................................. 97,585 141,191
Deferred income taxes (note 14)............................................... 426,263 139,727
----------- -----------
Total current assets..................................................... 9,709,284 10,084,573
----------- -----------
Property, plant and equipment, net (notes 3, 6, 8 and 9)........................... 914,439 517,515
Intangible assets, net (note 4).................................................... 64,875 89,125
Demonstration pool and custom molds, net (note 5).................................. 262,522 281,309
Other assets....................................................................... 318,980 16,136
----------- -----------
Total assets............................................................. $11,270,100 $10,988,658
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable to bank (note 6)................................................ $ -- $ 540,000
Other notes payable (note 7).................................................. -- 100,000
Current maturities of long-term debt (note 8)................................. 110,004 110,004
Current maturities of capital lease obligations (note 9)...................... 124,839 99,346
Accounts payable.............................................................. 595,367 1,043,731
Accrued commissions........................................................... 570,559 449,251
Accrued expenses.............................................................. 739,258 430,900
Accrued incentive compensation................................................ 262,286 140,000
Income taxes payable.......................................................... 498,955 334,993
----------- -----------
Total current liabilities................................................ 2,901,268 3,248,225
----------- -----------
Long-term debt, less current maturities (note 8)................................... 9,147 619,151
Capital lease obligations, less current maturities (note 9)........................ 71,352 67,781
Deferred income taxes, net (note 14)............................................... 78,820 7,657
----------- -----------
Total liabilities........................................................ 3,060,587 3,942,814
----------- -----------
Stockholders' equity:
Preferred stock, par value $.01 per share. Authorized 2,000,000 shares, none
issued....................................................................... -- --
Common stock, par value $.015 per share. Authorized 30,000,000 shares; issued
and outstanding 7,993,652 shares at September 30, 1997 and 7,956,038 shares
at September 30, 1996 (notes 10, 11 and 12).................................. 119,905 119,341
Additional paid-in capital.................................................... 5,067,258 5,045,944
Retained earnings............................................................. 3,022,350 1,880,559
----------- -----------
Total stockholders' equity............................................... 8,209,513 7,045,844
----------- -----------
Commitments and contingencies (notes 7, 9, 10 and 17)
Total liabilities and stockholders' equity............................... $11,270,100 $10,988,658
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to financial statements.
48
<PAGE>
<PAGE>
PARAVANT COMPUTER SYSTEMS, INC.
STATEMENTS OF INCOME
FOR THE YEARS ENDED SEPTEMBER 30, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Revenues (note 18)................................................................. $13,209,541 $10,495,063
Cost of revenues................................................................... 6,774,076 5,818,010
----------- -----------
Gross profit.................................................................. 6,435,465 4,677,053
Selling and administrative expense (note 13)....................................... 4,629,122 3,247,385
----------- -----------
Income from operations................................................... 1,806,343 1,429,668
Other income (expense):
Interest expense.............................................................. (101,262) (362,956)
Miscellaneous income.......................................................... 30,939 11,257
----------- -----------
Income before income taxes............................................... 1,736,020 1,077,969
Income tax expense (note 14)....................................................... 594,229 375,816
----------- -----------
Net income............................................................... $ 1,141,791 $ 702,153
----------- -----------
----------- -----------
Weighted average number of shares and common share equivalents outstanding......... 13,247,815 7,652,320
----------- -----------
----------- -----------
Earnings per share................................................................. $.10 $.10
---- ----
---- ----
</TABLE>
See accompanying notes to financial statements.
49
<PAGE>
<PAGE>
PARAVANT COMPUTER SYSTEMS, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 1997 AND 1996
<TABLE>
<CAPTION>
COMMON STOCK
-------------------- ADDITIONAL TOTAL
NUMBER PAR PAID-IN RETAINED STOCKHOLDERS'
OF SHARES VALUE CAPITAL EARNINGS EQUITY
--------- -------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Balances, September 30, 1995................................... 4,500,000 $ 67,500 $ 761,265 $1,178,406 $ 2,007,171
Issuance of common stock, net of offering costs................ 3,450,000 51,750 4,283,324 -- 4,335,074
Exercise of common stock options............................... 6,038 91 1,355 -- 1,446
Net income for the year ended September 30, 1996............... -- -- -- 702,153 702,153
--------- -------- ---------- ---------- -------------
Balances, September 30, 1996................................... 7,956,038 119,341 5,045,944 1,880,559 7,045,844
Exercise of common stock options............................... 37,614 564 21,314 -- 21,878
Net income for the year ended September 30, 1997............... -- -- -- 1,141,791 1,141,791
--------- -------- ---------- ---------- -------------
Balances, September 30, 1997................................... 7,993,652 $119,905 $5,067,258 $3,022,350 $ 8,209,513
--------- -------- ---------- ---------- -------------
--------- -------- ---------- ---------- -------------
</TABLE>
See accompanying notes to financial statements.
50
<PAGE>
<PAGE>
PARAVANT COMPUTER SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income..................................................................... $ 1,141,791 $ 702,153
Adjustments to reconcile net income to net cash provided by (used in) operating
activities:
Depreciation and amortization............................................. 348,233 266,714
Deferred income taxes..................................................... (215,373) 29,059
Increase (decrease) in cash caused by changes in:
Accounts receivable.................................................. 3,078,277 (1,866,086)
Employee receivables and advances.................................... 45,381 (7,795)
Inventory............................................................ (957,881) (92,058)
Costs and estimated earnings in excess of billings on uncompleted
contracts......................................................... -- 322,071
Prepaid expenses..................................................... 43,606 (89,750)
Other assets......................................................... (302,844) 9,194
Accounts payable..................................................... (448,364) (290,900)
Amounts due to affiliate............................................. -- (87,294)
Accrued commissions.................................................. 121,308 (64,989)
Accrued expenses..................................................... 308,358 (413,737)
Accrued incentive compensation....................................... 122,286 140,000
Income taxes payable................................................. 163,962 17,328
----------- -----------
Net cash provided by (used in) operating activities............. 3,448,740 (1,426,090)
----------- -----------
Cash flows from investing activities:
Acquisitions of property, plant and equipment.................................. (443,066) (127,352)
Acquisitions of intangible assets and demonstration pool and custom molds...... (67,826) (254,979)
----------- -----------
Net cash used in investing activities........................... (510,892) (382,331)
----------- -----------
Cash flows from financing activities:
Net repayments on notes payable to bank........................................ (540,000) (2,420,000)
Repayments on other notes payable.............................................. (100,000) (300,000)
Repayments on long-term debt................................................... (610,004) (110,004)
Repayments on capital lease obligations........................................ (162,164) (102,264)
Proceeds from sale of common stock............................................. 21,878 5,103,161
Payment of offering costs...................................................... -- (508,829)
----------- -----------
Net cash provided by (used in) financing activities............. (1,390,290) 1,662,064
----------- -----------
Net increase (decrease) in cash and cash equivalents............ 1,547,558 (146,357)
Cash and cash equivalents at beginning of year...................................... 65,069 211,426
----------- -----------
Cash and cash equivalents at end of year............................................ $ 1,612,627 $ 65,069
----------- -----------
----------- -----------
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest.................................................................. $ 103,270 $ 385,748
----------- -----------
----------- -----------
Income taxes.............................................................. $ 644,106 $ 358,488
----------- -----------
----------- -----------
Supplemental disclosure of noncash investing and financing activities:
The Company entered into capital lease agreements for office equipment totaling
$191,228 and $124,473 for the years ended September 30, 1997 and 1996,
respectively.
</TABLE>
See accompanying notes to financial statements.
51
<PAGE>
<PAGE>
PARAVANT COMPUTER SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1997 AND 1996
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) BUSINESS
Paravant Computer Systems, Inc., (the 'Company') is engaged in the design,
development, production and sales of computer and communication systems,
specializing in rugged, hand-held and laptop computer products. The principal
customers of the Company are United States Department of Defense contractors who
are subject to federal budgetary implications. The work is performed under
general fixed price purchase orders and on a general production basis.
(B) CASH AND CASH EQUIVALENTS
Cash and cash equivalents include all highly liquid debt instruments
purchased with a maturity of three months or less.
(C) ACCOUNTS RECEIVABLE
Management has provided an allowance for doubtful accounts receivable in
the amount of $141,497 and $12,353 as of September 30, 1997 and 1996,
respectively.
(D) INVENTORY
Inventory is stated at the lower of cost or market using the weighted
average cost method. The Company provides an obsolescence reserve for inventory
as it becomes unusable or obsolete.
(E) DEPRECIATION AND AMORTIZATION
The cost of property, plant and equipment is depreciated over the estimated
useful lives of the related assets ranging from 5 to 7 years using the
straight-line method. Intangible assets include exclusive rights to a printed
circuit board and certain software and are being amortized over the estimated
useful lives of the technology of five to ten years using the straight-line
method. Demonstration pool assets are being amortized over their estimated
useful lives of three years using the straight-line method. The Company also has
custom molds which are amortized over their estimated useful lives of ten years
using the straight-line method.
(F) REVENUE AND COST RECOGNITION
The Company recognizes revenues on product sales when the customer accepts
title, which typically occurs upon shipment. At September 30, 1997 and 1996, the
Company had product sales of $1,241,111 and $4,144,207, respectively, for which
title had been transferred to a customer although physical product remained on
Company premises at the convenience of the customer. The Company allows
customers to return products under warranty for up to one year for repair and
accrues a reserve for future warranty costs at the time of product sales. The
warranty reserve was $75,000 and $54,505 as of September 30, 1997 and 1996,
respectively.
(G) INCOME TAXES
The Company accounts for income taxes using the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
52
<PAGE>
<PAGE>
PARAVANT COMPUTER SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1997 AND 1996
(H) STOCK OPTION PLAN
Prior to October 1, 1996, the Company accounted for its stock option plan
in accordance with the provisions of Accounting Principles Board ('APB') Opinion
No. 25, 'Accounting for Stock Issued to Employees', and related interpretations.
As such, compensation expense would be recorded on the date of grant only if the
current market price of the underlying stock exceeded the exercise price. On
October 1, 1996, the Company adopted Statement of Financial Accounting Standards
(SFAS) No. 123, 'Accounting for Stock-Based Compensation', which permits
entities to recognize as expense over the vesting period the fair value of all
stock-based awards on the date of grant. Alternatively, SFAS No. 123 also allows
entities to continue to apply the provisions of APB Opinion No. 25 and provide
pro forma net income and pro forma earnings per share disclosures for employee
stock option grants made in the first fiscal year beginning after December 15,
1994 and future years as if the fair-value-based method defined in SFAS No. 123
had been applied. The Company has elected to continue to apply the provisions of
APB Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No.
123.
(I) EARNINGS PER SHARE
Earnings per share have been computed by dividing adjusted net income by
the weighted average number of common shares and share equivalents outstanding.
The adjustment to net income assumes the investment of excess proceeds received
from the assumed exercise of common stock equivalents, net of related income
taxes, using the modified treasury stock method. Common equivalent shares
included in the computation represent shares issueable upon assumed exercise of
stock options and warrants. Common stock authorized, issued and outstanding as
of September 30, 1997 and 1996 reflects the effects of a 3-for-1 common stock
split authorized on July 25, 1996 by the Board of Directors.
Fully diluted earnings per common share amounts did not differ from amounts
computed under the primary computation for the years ended September 30, 1997
and 1996.
(J) USE OF ESTIMATES
The presentation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(K) FUTURE APPLICATION OF ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, 'Earnings Per Share.' SFAS No. 128 supersedes APB Opinion No. 15, 'Earnings
Per Share,' and specifies the computation, presentation, and disclosure
requirements for earnings per share ('EPS') for entities with publicly held
common stock or potential common stock. SFAS No. 128 was issued to simplify the
computation of EPS. It requires dual presentation of basic and diluted EPS on
the face of the statements of operations for all entities with complex capital
structures and requires a reconciliation of the numerator and denominator of the
basic EPS computation to the numerator and denominator of the diluted EPS
computation.
SFAS No. 128 is effective for financial statements for both interim and
annual periods ending after December 15, 1997. Earlier application is not
permitted. After adoption, all prior period EPS data presented shall be restated
to conform to SFAS No. 128.
53
<PAGE>
<PAGE>
PARAVANT COMPUTER SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1997 AND 1996
(2) INVENTORY
The following is a summary of inventory at September 30, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Raw materials........................................... $2,149,401 $1,835,286
Work in process......................................... 1,490,621 474,940
Finished goods.......................................... 263,516 269,243
---------- ----------
3,903,538 2,579,469
Reserve for obsolete inventory.......................... (441,765) (75,577)
---------- ----------
$3,461,773 $2,503,892
---------- ----------
---------- ----------
</TABLE>
(3) PROPERTY, PLANT AND EQUIPMENT
The following is a summary of property, plant and equipment at September
30, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Office equipment........................................ $1,305,028 $ 930,332
Factory equipment....................................... 271,403 209,833
Leasehold improvements.................................. 199,945 14,307
---------- ----------
Total cost.................................... 1,776,376 1,154,472
Less accumulated depreciation........................... (861,937) (636,957)
---------- ----------
$ 914,439 $ 517,515
---------- ----------
---------- ----------
</TABLE>
Depreciation and amortization expense on these assets amounted to $237,370
and $196,757 for the years ended September 30, 1997 and 1996, respectively.
(4) INTANGIBLE ASSETS
These assets consist of exclusive rights to a printed circuit board and
certain software. Cost and accumulated amortization of these assets at September
30, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Cost...................................................... $ 272,500 $ 267,500
Accumulated amortization.................................. (207,625) (178,375)
--------- ---------
$ 64,875 $ 89,125
--------- ---------
--------- ---------
</TABLE>
Total amortization expense on these assets was $29,250 and $28,500 for the
years ended September 30, 1997 and 1996, respectively.
(5) DEMONSTRATION POOL AND CUSTOM MOLDS
These assets consist of equipment held in the demonstration pool and custom
molds. Cost and accumulated amortization of these assets at September 30, 1997
and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Cost...................................................... $ 762,549 $ 699,723
Accumulated amortization.................................. (500,027) (418,414)
--------- ---------
$ 262,522 $ 281,309
--------- ---------
--------- ---------
</TABLE>
Total amortization expense on these assets was $81,613 and $41,457 for the
years ended September 30, 1997 and 1996, respectively.
54
<PAGE>
<PAGE>
PARAVANT COMPUTER SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1997 AND 1996
(6) NOTES PAYABLE TO BANK
The Company has a line of credit with a bank totaling $4,000,000 which is
due on demand and, at September 30, 1997, bears interest at the prime rate for
secured borrowings under prescribed levels or the 30 or 60 day LIBOR rates plus
2.70% and the prime rate plus .50% for other borrowings. Secured borrowings are
collateralized by accounts receivable, inventory and equipment. The amount
outstanding under these credit agreements at September 30, 1997 and 1996 was
$-0- and $540,000, respectively. The credit agreements do not contain any
material financial covenants.
(7) OTHER NOTES PAYABLE
In August 1995, the Company issued subordinated, convertible promissory
notes payable ('Notes') in the principal amount of $400,000. The Notes also had
480,000 warrants attached for $.003 per warrant exercisable at $2.00 per share.
A portion of these notes totaling approximately $98,000 were manditorily
convertible into 120,000 shares of the Company's common stock at a conversion
price of $.82 in the event the Company completed a public offering of its common
stock prior to January 1, 1996. The Company did not complete the public offering
prior to January 1, 1996 and the conversion feature expired. The Notes, which
bore interest at 6%, had an outstanding balance of $-0- and $100,000 at
September 30, 1997 and 1996, respectively.
In regard to the above financing, the Company may be deemed to have
incurred a technical violation of a provision of the Securities Act of 1933, as
amended. Accordingly, there may be a contingent liability associated with such
matter. The maximum amount of such liability is estimated at the amount of
converted debt in such financing of $98,000. However, management believes that
there was no such violation and the possibility of such related liability is
remote.
(8) LONG-TERM DEBT
The following is a summary of long-term debt at September 30, 1997 and
1996:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Note payable to bank bearing an initial interest rate of 7.25%;
interest rate adjusted monthly to 1.50% above the prime rate;
interest and principal due in sixty monthly installments including
principal of $9,167 per payment; final payment due October of
1998; secured by accounts receivable, inventory and equipment..... $ 119,151 $ 229,155
Note payable to bank bearing interest at the prime rate; interest
due monthly, principal balance due March 31, 1998; secured by
accounts receivable, inventory and equipment...................... -- 500,000
Less current maturities............................................. (110,004) (110,004)
--------- ---------
Long-term debt, less current maturities........................ $ 9,147 $ 619,151
--------- ---------
--------- ---------
</TABLE>
Scheduled principal payments for future periods are as follows:
<TABLE>
<CAPTION>
YEAR ENDING SEPTEMBER 30,
- -------------------------
<S> <C>
1998.......................................................... $110,004
1999.......................................................... 9,147
--------
$119,151
--------
--------
</TABLE>
The carrying amount of the Company's long-term debt approximates its fair
value because the debt bears interest at borrowing rates currently available to
the Company for bank loans with similar terms and maturities.
55
<PAGE>
<PAGE>
PARAVANT COMPUTER SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1997 AND 1996
(9) LEASES
The Company is obligated under various capital leases for office equipment
and building improvements. At September 30, 1997 and 1996, respectively,
property, plant and equipment included net capital lease assets of $293,096
and $197,423.
The Company also has several noncancellable operating leases. Under these
arrangements, the Company leases its current office facilities at a rate of
$9,176 per month. In addition, the Company leases a residential unit from a
related partnership under a month-to-month lease at a rate of $1,000 per month.
The Company also leases automobiles and equipment with lease terms into June of
1999. Rent expense under operating lease agreements totaled $185,306 and
$151,924 for the years ended September 30, 1997 and 1996, respectively.
The following is a schedule by years of future minimum lease payments under
capital and operating leases together with the present value of the net minimum
lease payments as of September 30, 1997:
<TABLE>
<CAPTION>
CAPITAL OPERATING
YEAR ENDING SEPTEMBER 30, LEASES LEASES
- ------------------------ --------- ---------
<S> <C> <C>
1998................................................................. $ 137,340 $ 137,960
1999................................................................. 60,229 126,619
2000................................................................. 14,675 116,946
2001................................................................. -- 110,117
2002................................................................. -- 27,529
--------- ---------
Total minimum lease payments............................... 212,244 $ 519,171
---------
---------
Less amounts representing interest................................... (16,053)
---------
Present value of net minimum lease payments................ 196,191
Less current maturities.............................................. (124,839)
---------
Capital lease obligations............................................ $ 71,352
---------
---------
</TABLE>
The carrying value of the Company's capital lease obligations approximates
its fair value because the leases bear interest at borrowing rates currently
available to the Company for leases with similar terms and maturities.
(10) STOCKHOLDERS' EQUITY
Common stock authorized, issued and outstanding as of September 30, 1997
and 1996 reflects the effects of a 3-for-1 common stock split effected on July
25, 1996 by the Board of Directors.
The Company entered into an agreement with an underwriter in connection
with its initial public offering ('IPO') which was consummated in June 1996. The
agreement provides for monthly consulting fees for the underwriter of $3,500 per
month. The agreement also provides a 5.00% fee of the cost of an acquisition to
be paid to the underwriter on any merger or acquisition for a period extending
two years subsequent to the IPO date.
(11) STOCK OPTIONS
Common stock options and related exercise prices have been adjusted below,
where applicable, to reflect the effects of the aforementioned 3-for-1 common
stock split effected on July 25, 1996.
On December 22, 1993, the Company granted options under a nonqualified
stock option plan ('nonqualified plan') to employees to purchase 74,799 shares
of the Company's common stock at an exercise price of $.24 per share. The terms
of these options provide that the options may be exercised during a period
beginning December 22, 1994 and ending six years from the date the options were
granted. The Company terminated the nonqualified plan on November 22, 1994.
56
<PAGE>
<PAGE>
PARAVANT COMPUTER SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1997 AND 1996
On November 22, 1994, the Company granted options to a key officer to
purchase 182,977 shares of the Company's common stock at an exercise price of
$.72 per share. The terms of these options provide that the options are
exercisable through November 22, 2004.
On November 22, 1994, the Company reserved 900,000 shares of common stock
for its qualified incentive stock option plan ('qualified plan'). On March 14,
1996 the Company increased the options reserved under the qualified plan from
900,000 to 1,455,000. The terms of these options provide that the options are
exercisable at 33% per year and expire ten years after the date of grant. The
qualified plan is administered by the Company's Board of Directors or a
committee thereof. The qualified plan gives broad powers to the Board of
Directors to administer and interpret the Plan, including the authority to
select the individuals to be granted options and to prescribe the particular
form and conditions of each option granted. All options are granted at an
exercise price equal to the fair market value or 110 percent of the fair market
value of the Company's common stock on the date of the grant. Awards may be
granted pursuant to the qualified plan through November 22, 2004. The qualified
plan may be terminated earlier by the Board of Directors at its sole discretion.
On March 14, 1996, the Company reserved 45,000 shares under a plan to
benefit the nonemployee directors under terms similar to the qualified plan
('directors nonqualified plan'). The terms of these options provide that the
options are exercisable on the date of grant and expire ten years after the date
of grant. The directors nonqualified plan provides that each nonemployee
director be granted options to purchase 7,500 shares at the fair market value on
the date of the director's election to the Board.
At September 30, 1997, there were 519,357 and 15,000 additional shares
available for grant under the qualified plan and directors nonqualified plan,
respectively. Using the Black Scholes option-pricing model, the per share
weighted-average fair value of stock options granted during 1997 where exercise
price equals the market price of the stock on the grant date was $4.85. The per
share weighted-average fair value of stock options granted during 1996 where
exercise price equals the market price of the stock on the grant date or
exercise price is greater than the market price of the stock on the grant date
was $1.30 and $1.21 respectively.
The following weighted average assumptions were used:
<TABLE>
<CAPTION>
1997 1996
---------- ---------
<S> <C> <C>
Exercise price equal to market price on grant date
Expected risk-free interest rate............................. 6.13% 5.58%
Expected life................................................ 8.0 years 8.0 years
Expected volatility.......................................... 122.72% 113.38%
Expected dividend yield...................................... 0.00% 0.00%
Exercise price greater than market price on grant date
Expected risk-free interest rate............................. -- 5.58%
Expected life................................................ -- 8.0 years
Expected volatility.......................................... -- 113.38%
Expected dividend yield...................................... -- 0.00%
</TABLE>
The Company applies APB Opinion No. 25 in accounting for its option plans
and, accordingly, no compensation cost has been recognized for its stock options
in the financial statements for stock options granted. Had the Company
determined compensation cost based on the fair value at the grant date for its
stock options under SFAS No. 123, the Company's net income and earnings per
share would have been reduced to the pro forma amounts indicated below:
57
<PAGE>
<PAGE>
PARAVANT COMPUTER SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
---------- --------
<S> <C> <C> <C>
Net income As reported........................................... $1,141,791 $702,153
Pro forma............................................. $ 629,758 $571,507
Earnings per share As reported........................................... $ 0.10 $ 0.10
Pro forma............................................. 0.06 0.09
</TABLE>
Pro forma net income reflects only options granted in 1997 and 1996.
Therefore, the full impact of calculating compensation cost for stock options
under SFAS No. 123 is not reflected in the pro forma net income amounts
presented above because compensation cost is reflected over the options' vesting
period of 3 years and compensation cost for options granted prior to October 1,
1995 is not considered.
Stock option activity during the periods indicated is as follows:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED- AVERAGE
SHARES EXERCISE PRICE
--------- ----------------
<S> <C> <C>
Outstanding at September 30, 1995........................................ 639,777 $ .68
Granted............................................................. 381,000 1.45
Exercised........................................................... (6,038) .31
Forfeited........................................................... (14,763) .78
---------
Outstanding at September 30, 1996........................................ 999,976 .98
Granted............................................................. 223,000 5.18
Exercised........................................................... (37,614) .60
Forfeited........................................................... (15,608) 3.16
---------
Outstanding at September 30, 1997........................................ 1,169,754 1.76
---------
---------
</TABLE>
At September 30, 1997, the range of exercise prices and weighted-average
remaining contractual life of outstanding options was $.24 to $.72 for 467,504
shares; $.72 to $.79 for 120,000 shares; and $1.33 to $6.00 for 582,250 shares
at 5.17 years, 7.15 years and 8.54 years, respectively.
At September 30, 1997 and 1996, the number of options exercisable was
597,754 and 365,628, respectively, and the weighted-average exercise price of
those options was $.97 and $.65, respectively.
(12) WARRANTS
In connection with the Company's IPO of common stock in June of 1996, the
Company issued 4,830,000 warrants exercisable for a period of five years
commencing November 30, 1997 at an exercise price of $2.00 per share, subject to
adjustment in certain circumstances. The Company, at its option during the
exercise period of the warrants, may redeem the warrants, after November 30,
1997, upon notice of not less than 30 days, at a price of $.0167 per warrant
provided that the last sale price of the Company's common stock on the Nasdaq
National Market has exceeded $2.83 per share (subject to adjustment) for a
period of 30 consecutive trading days. As of September 30, 1997, no warrants
have been exercised. In addition, in connection with the IPO, the Company issued
warrants to the underwriter to purchase up to 300,000 shares of common stock at
$2.00 per share and up to 420,000 warrants at $.04 per warrant. The
underwriter's warrants are exercisable during the four-year period commencing
June 3, 1997.
(13) RESEARCH AND DEVELOPMENT
Research and development costs are expensed when incurred and are included
in selling and administrative expense. The amounts charged to expense were
$611,295 and $382,750 for the years ended September 30, 1997 and 1996,
respectively.
58
<PAGE>
<PAGE>
PARAVANT COMPUTER SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1997 AND 1996
(14) INCOME TAXES
The components of income tax expense (benefit) for the years ended
September 30, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
-------- --------- --------
<S> <C> <C> <C>
1997:
Federal............................................ $683,579 $(184,143) $499,436
State.............................................. 126,023 (31,230) 94,793
-------- --------- --------
$809,602 $(215,373) $594,229
-------- --------- --------
-------- --------- --------
1996:
Federal............................................ $292,008 $ 26,620 $318,628
State.............................................. 54,749 2,439 57,188
-------- --------- --------
$346,757 $ 29,059 $375,816
-------- --------- --------
-------- --------- --------
</TABLE>
Following is a reconciliation of the expected income tax expense computed
by applying the U.S. federal income tax rate of 34% to income before income
taxes and the actual income tax provision for the years ended September 30, 1997
and 1996:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Computed 'expected' tax expense....................................... $590,247 $366,509
Increase (decrease) in income taxes resulting from:
State income taxes, net of federal income tax benefit............ 52,358 36,134
Nondeductible meals and entertainment expense.................... 7,200 6,270
Research and experimentation credit.............................. (31,951) (12,372)
Other, net....................................................... (23,625) (20,725)
-------- --------
$594,229 $375,816
-------- --------
-------- --------
</TABLE>
Deferred income taxes as of September 30, 1997 and 1996 reflect the impact
of 'temporary differences' between amounts of assets and liabilities for
financial statement purposes and such amounts as measured by tax laws. The
temporary differences give rise to deferred tax assets and liabilities which are
summarized below as of September 30, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
--------- --------
<S> <C> <C>
Gross deferred tax liabilities:
Capitalized costs............................................... $ (36,392) --
Accumulated depreciation........................................ (81,342) $(46,426)
--------- --------
Total gross deferred tax liabilities....................... (117,734) (46,426)
--------- --------
Gross deferred tax assets:
Inventory....................................................... 255,166 61,972
Accounts receivable............................................. 53,245 --
Warranty expense................................................ 28,223 20,510
Accrued vacation and sick leave................................. 54,996 45,956
Accrued incentive compensation.................................. 26,341 11,289
Deferred revenue................................................ 8,292 --
Net operating loss carryforwards................................ -- 1,554
Research credits................................................ 38,914 37,215
--------- --------
Total gross deferred tax assets............................ 465,177 178,496
--------- --------
Total net deferred tax assets.............................. $ 347,443 $132,070
--------- --------
--------- --------
</TABLE>
A valuation allowance for deferred tax assets is provided when it is more
likely than not that some portion or all of the deferred tax assets will not be
realized. Realization is dependent upon the
59
<PAGE>
<PAGE>
PARAVANT COMPUTER SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1997 AND 1996
generation of future taxable income or the reversal of deferred tax liabilities
during the periods in which those temporary differences become deductible.
Management considers the scheduled reversal of deferred tax liabilities,
projected future taxable income and tax planning strategies in making this
assessment. As of September 30, 1997 and 1996, no valuation allowance has been
recognized in the accompanying financial statements for the deferred tax assets
because the Company believes that sufficient projected future taxable income
will be generated to fully utilize the benefits of these deductible amounts.
(15) RETIREMENT PLAN
The Company has a defined contribution retirement plan covering
substantially all employees who have completed 1,000 hours of service.
Retirement expense incurred was $53,597 and $19,098 for the years ended
September 30, 1997 and 1996, respectively.
(16) RELATED PARTY TRANSACTIONS
In March 1996, prior to the 3-for-1 common stock split authorized on July
25, 1996 by the Board of Directors, certain stockholders of the Company sold an
aggregate of 308,581 shares of common stock to private investors at a purchase
price of $4 per share. A portion of the proceeds from these sales totaling
$802,294 was advanced to the Company in April 1996 pursuant to promissory notes
having an interest rate of 6% per annum. Such amounts, plus accrued interest
thereon, were due and payable on the earlier of April 15, 1997 or the date which
is ten days after the consummation of the Company's IPO. All amounts borrowed by
the Company under these promissory notes were repaid prior to September 30,
1996.
(17) CONTINGENCIES
In March 1996, the Company's former counsel rendered an invoice to the
Company totaling approximately $365,000 for legal fees and expenses representing
both general corporate services as well as services relating to the Company's
IPO. The Company contested the invoice and accrued an estimate for the
settlement, if any, of these fees. In March 1996, the Company's former counsel
filed an action against the Company, its current underwriter and certain other
defendants, alleging, among other things, breach of contract, failure to pay
attorneys fees, fraud, copyright infringement and defamation by the Company in
connection with the aforementioned services as well as claiming a finder's fee
with respect to the underwriter's relationship with the Company. In September
1997, the plaintiff filed an amended complaint increasing his claim for legal
services from approximately $365,000 to approximately $415,000. The plaintiff is
also seeking punitive damages of $1,000,000 from the Company. The Company filed
an answer denying the claims asserted by plaintiff and has asserted defenses and
counterclaims against the plaintiff seeking recovery of amounts paid to the
plaintiff, punitive damages and court costs.
In September 1996, a former Company employee filed an action against the
Company and certain other defendants alleging retaliatory personnel actions
instituted by the defendants against the plaintiff. The Plaintiff is seeking
from the defendants an amount of $950,000 plus interest, related costs and
attorneys fees. The Company has filed a motion to dismiss the plaintiff's
amended complaint and intends to vigorously defend this lawsuit.
Management, after consultation with counsel, is of the opinion that the
ultimate resolution of these matters will not have a material adverse effect on
future operations of the Company. Management has not accrued any liability
relating to the tortious portion of these lawsuits as it believes the Company
will prevail. In the event a court finds in favor of the plaintiffs, additional
costs will be incurred.
60
<PAGE>
<PAGE>
PARAVANT COMPUTER SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1997 AND 1996
(18) CONCENTRATION OF CREDIT RISK
The Company has a high concentration of sales to a few customers who
accounted for 89% and 95% of revenue for the years ended September 30, 1997 and
1996, respectively. A summary of sales and accounts receivable to the customers
that exceed 10% of sales or accounts receivable for the years ended September
30, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
--------------------- ---------------------
SALES % TOTAL SALES % TOTAL
---------- ------- ---------- -------
<S> <C> <C> <C> <C>
Customer A............................................. $6,094,617 46% $5,094,104 49%
Customer B............................................. 4,684,013 36 2,255,433 21
Customer C............................................. 871,468 7 -- --
Customer D............................................. -- -- 1,609,725 15
Customer E............................................. -- -- 1,079,408 10
</TABLE>
<TABLE>
<CAPTION>
ACCOUNTS ACCOUNTS
RECEIVABLE % TOTAL RECEIVABLE % TOTAL
---------- ------- ---------- -------
<S> <C> <C> <C> <C>
Customer A............................................. $1,556,040 37% $4,982,408 70%
Customer B............................................. 1,663,296 39 1,009,630 14
Customer C............................................. 657,596 16 -- --
Customer D............................................. -- -- 906,966 13
</TABLE>
(19) FOURTH QUARTER RESULTS
Adjustments were made to increase inventory during the fourth quarter of
the years ended September 30, 1997 and 1996 in the amounts of $195,975 and
$433,000, respectively, before related income taxes. These adjustments were made
to adjust perpetual records to physical counts. The Company was not able to
determine the amount of the adjustments that related to the fourth quarter or
the prior quarters.
In addition, another adjustment was made in the fourth quarter of the year
ended September 30, 1996 to record accrued incentive compensation in the amount
of $140,000 before related taxes. The accrued compensation was discretionary and
was substantially related to fourth quarter sales.
(20) SUBSEQUENT EVENT
On November 20, 1997, the Company granted options under its qualified plan
to employees to purchase 226,000 shares of the Company's common stock at an
exercise price of $4.25 per share which was the market price of the shares at
the date of issuance.
On November 20, 1997, the Company granted special options to the three
nonemployee directors (1997 special option plan) exercisable for ten years from
the date of issuance for the purchase of an aggregate of up to 24,000 shares at
an exercise price of $4.25 per share, the market price of the shares at the date
of issuance. Although not granted under the existing directors' nonqualified
plan, the 1997 special option plan is subject to terms substantially similar to
those applicable to options granted under the directors' nonqualified plan. The
1997 special options are evidenced by stock option agreements between the
Company and the subject directors.
In October of 1997, the Company announced that it entered into negotiations
related to an acquisition. The terms of the acquisition, including price and
acquisition date, have not yet been determined.
61
<PAGE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
The following discussion and analysis of the Company's results of
operations, liquidity and financial condition should be read in conjunction with
the Financial Statements of the Company and related notes thereto.
RESULTS OF OPERATIONS
FISCAL YEAR ENDED SEPTEMBER 30, 1997 VS. SEPTEMBER 30, 1996
Revenues for fiscal 1997 were $13,209,541, an increase of $2,714,478 or 26%
over 1996 revenues of $10,495,063. This increase is primarily due to Paravant's
strong backlog ($15,242,745 at September 30, 1997) and continued full scale
production deliveries to Raytheon in support of the U.S. Marine Corps
HAWK/AVENGER Air Defense missile system upgrade and additional requirements of
Lockheed Martin's Enhanced Diagnostic Aid ('EDNA') systems for use by the U.S.
Air Force on F-16 Fighter Aircraft and the F-117A Stealth Fighter.
Gross profit was $6,435,465 in 1997, or 49% of sales, compared to
$4,677,053 or 45% in 1996, a total increase of $1,758,412 or 38%. This increase
in gross profitability results primarily from the increased revenues discussed
above.
Selling and administrative expenses of $4,629,122 in 1997, increased by
$1,381,737 or 43% from 1996 expenses of $3,247,385. As a percentage of sales,
selling and administrative expenses were 35% and 31% in 1997and 1996,
respectively. The increased selling and administrative costs are due primarily
to increased employee benefit expenditures, increased professional fees and
increased expenditures for Research and Development.
Income from operations grew to $1,806,343 for 1997 from $1,429,668 in 1996,
an improvement of $376,675 or 26%. As a percentage of sales, income from
operations remained unchanged at 14% in 1997 and 1996. The improvement in income
from operations overall, resulted primarily from increased revenues and gross
profits, offset in part by increased selling and administrative expenses as
discussed above.
Interest expense for 1997 was reduced by $261,694 or 72% to $101,262
compared to $362,956 in 1996. As a percentage of sales, interest expense
decreased to 1% in 1997 from 3% in 1996. This decrease is due to a significant
decline in outstanding credit balances made possible by the proceeds of the
Company's initial public offering of securities in June 1996.
As a result, the Company's net income improved by 63% to $1,141,791 in 1997
when compared to $702,153 in 1996, an increase of $439,638 in total. Net income
as a percentage of sales were 9% in 1997 and 7% in 1996. The improvement in net
income overall, resulted primarily from increased revenue, gross profits and
reduced interest expense, offset in part by increased selling and administrative
expenses as discussed above.
LIQUIDITY AND CAPITAL RESOURCES
In June 1996, the Company completed its IPO, resulting in aggregate net
proceeds of $4,594,332 to the Company after deducting certain commissions,
expenses and offering costs. The Company used a portion of the net proceeds of
the IPO to repay certain loans referred to below in the aggregate principal
amount of $1,102,294, and paid approximately $88,000 of the net proceeds of the
IPO to reimburse UES, Inc., an affiliate of the Company which is controlled by
Krishan K. Joshi, the Company's Chairman ('UES'), for certain health insurance
and other expenses paid on the Company's behalf. Substantially all of the
remaining balance of the net proceeds of the IPO were utilized to reduce
indebtedness then outstanding under the Company's revolving credit arrangement
with National City
62
<PAGE>
<PAGE>
Bank in Dayton, Ohio described below, resulting in increased availability under
the credit arrangement for working capital needs and general corporate purposes.
The Company has a secured revolving credit arrangement with National City
Bank in Dayton, Ohio (the 'Bank') for a credit line of up to $4,000,000 that is
due on demand and bears interest at the prime rate, or 30 or 60 day LIBOR rates
plus 2.70%. All borrowings are collateralized by accounts receivable, inventory
and equipment. As of September 30, 1997, there were no borrowings outstanding
under this arrangement. The Company intends to maintain this arrangement with
the Bank for the foreseeable future, although there can be no assurance that the
Bank will not in the future demand repayment of any amounts then outstanding
under its loan arrangement. The Company also has a secured term loan provided by
the Bank bearing interest at a rate adjusted monthly to prime plus 1.5% at
September 30, 1997. Monthly principal payments of $9,167 are due through October
1998. All borrowings thereunder are secured by a lien on accounts receivable,
inventory and equipment. As of September 30, 1997, there was $119,151
outstanding under this arrangement with the Bank. The Company also has capital
lease obligations of $196,191 at September 30, 1997. These capital lease
obligations bear interest rates of 1.25% to 1.50% over the prime rate and are
expected to be satisfied within 3 years.
On April 22, 1997, the Company retired a note payable to the Bank in an
aggregate principal amount of $500,000, bearing interest at the prime rate,
which note was due and payable in March 1998.
In August 1995, the Company borrowed $400,000 pursuant to bridge notes
('Notes') from a group of private investors at an annual interest rate of 6%. In
addition, the Company sold to the same investors warrants to purchase 480,000
shares of Common Stock, exercisable until June 3, 2001 at an exercise price of
$2.00 per share. The Notes were paid in full on August 8, 1997.
In connection with certain sales of shares of Common stock in March 1996 by
UES Florida, Inc. (a subsidiary of UES), Richard P. McNeight, the President and
Chief Operating Officer of the Company, William R. Craven, the Vice President of
Marketing of the Company, and another shareholder, loaned to the Company in
April 1996, for working capital purposes, the sums of $646,294; $78,000; $26,000
and $52,000, respectively, or an aggregate of $802,294 of the proceeds realized
from such sales, at an interest rate of 6% per annum. Such loans, plus accrued
interest thereon in an aggregate amount of $8,681, were repaid in June 1996 in
accordance with their terms from a portion of the net proceeds of the IPO.
The Company has, and continues to have, a dependence upon a few major
customers for a significant portion of its revenues. This dependence for
revenues has not been responsible for any unusual fluctuations in operating
results in the past, and management does not believe this concentration will
generate fluctuations in operating results in the future. However, the potential
impact of losing a major customer without securing offsetting and equivalent
orders could result in a significant negative impact to the operating results of
the Company. The gross margin contributions of the Company's major customers are
not generally different than those from its other customers as a whole.
The Company's operating cash flow was $3,448,740 for 1997. The improvement
in the Company's operating cash flow results primarily from improved net income
as more fully described in Management's Discussion and Analysis of Operations
for the fiscal year ended September 30, 1997 and improved working capital as
more fully presented in the Condensed Statements of Cash Flows for the same
period. Negative cash flows for the years ended September 30, 1996 and 1995,
$(1,426,090) and $(298,577), respectively, were primarily associated with
general increases in inventory levels and temporary increases associated with
accounts receivable, all in support of the Company's rapid increase in
operations reflected by the growth in annual revenues from $4,621,527 in fiscal
1993 to $10,495,063 in fiscal 1996, an increase of almost 127%. In addition, the
Company invested $443,066 in fiscal 1997, $127,352 in fiscal 1996 and $60,350 in
fiscal 1995 to acquire manufacturing equipment and complete leasehold
improvements, also in support of these expanded operating levels.
Due to the Company's orders related to U.S. Department of Defense
procurements, the operations of the Company have been cyclical and generally
result in a significant increase in deliveries and revenues in the fourth
quarter of its fiscal year ending on September 30. Due to the Company's strong
backlog and increased revenues, this cycle is less significant in the current
fiscal year, resulting in a significant improvement in cash provided from
operations, as discussed earlier herein and less significant
63
<PAGE>
<PAGE>
changes in inventory levels than the prior period. This change is evidenced by a
decrease in fourth quarter revenues to 38% from 65% of total revenues for the
years ended September 30, 1997 and 1996, respectively.
As of September 30, 1997, management believes inventory balances are not in
excess of requirements for deliveries and normal minimum stocking levels.
Generally, accounts receivable at the end of each quarter are collected
within the following quarter. However, the Company's major customer, Raytheon,
has traditionally averaged approximately 80 to 100 days in satisfaction of
outstanding accounts receivable balances. This situation is improving through
negotiation with Raytheon, and Management believes that average outstanding
balances will be reduced to more traditional levels approximating 45 days, in
the future although there can be no assurance of such. The Company's total
outstanding accounts receivable balance of $4,082,915 at September 30, 1997 has
been subsequently reduced by approximately $3,180,358 in cash collections. In
1997, the Company provided a reserve for certain older balances of $141,497.
This reserve is believed to be more than sufficient to address any uncollectible
balances outstanding as of September 30, 1997.
As of September 30, 1997 and 1996, the Company's backlog was $15,242,745
and $14,617,253, respectively, consisting of firm fixed price purchase orders.
All of these purchase orders are expected to generate profits within the
Company's historical levels. The Company believes that the completion of the
orders comprising its backlog, and any new orders which may be accepted by the
Company in the future, should not result in additional liquidity pressures that
cannot be addressed in a manner consistent with the Company's past practices.
The Company presently expects to manufacture and deliver $9,724,270 of the
products in backlog within the next 12 months. The remaining $5,518,475 of
products in backlog will be completed over the next 4 years.
The Company anticipates, based on its currently proposed plans and
assumptions relating to its operations, that the proceeds of the IPO and ongoing
stock offerings, together with the Company's existing working capital and
anticipated cash flows from the Company's operations, will be sufficient to
satisfy the Company's cash requirements for at least twelve months. As the
Company continues to grow, additional bank borrowings, other debt placements and
equity offerings may be considered, in part or in combination, as the situation
warrants. In addition, in the event the Company's plans change or its
assumptions change or prove to be inaccurate, or if projected cash flow
otherwise proves insufficient to fund operations, the Company might need to seek
other sources of financing to conduct its operations. There can be no assurance
that any such other sources of financing would be available when needed, on
commercially reasonable terms, or at all.
The Company has conducted a comprehensive review of its computer systems to
identify any systems that could be affected by the 'Year 2000' issue. The Year
2000 problem is the result of computer programs being written using two digits
rather than four to define the applicable year. Any programs that have
time-sensitive software may recognize a date using '00' as the year 1900 rather
than the year 2000. This could result in a major systems failure or
miscalculations. The Company has determined the Year 2000 problem will not pose
any operational problems for the Company's computer systems or result in any
material expense for the Company, as all programs currently being used have
already been modified or converted.
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, 'Earnings Per Share,' SFAS No. 128 supersedes APB Opinion No. 15, 'Earnings
Per Share,' and specifies the computation, presentation, and disclosure
requirements for earnings per share ('EPS') for entities with publicly held
common stock or potential common stock. SFAS No. 128 was issued to simplify the
computation of EPS. It requires dual presentation of basic and diluted EPS on
the face of the statements of operations for all entities with complex capital
structures and requires a reconciliation of the numerator and denominator of the
basic EPS computation to the numerator and denominator of the diluted EPS
computation.
SFAS No. 128 is effective for financial statements for both interim and
annual periods ending after December 15, 1997. Earlier application is not
permitted. After adoption, all prior period EPS data presented shall be restated
to conform to SFAS No. 128.
64
<PAGE>
<PAGE>
PARAVANT COMPUTER SYSTEMS, INC.
Unaudited Condensed Financial Statements
for the Quarters Ended
March 31, 1998 and 1997
<TABLE>
<CAPTION>
PAGE
<S> <C>
Condensed Balance Sheet - March 31, 1998 ................................... 66
Condensed Statements of Operations for the three months ended March 31,
1998 and 1997 .............................................................. 67
Condensed Statements of Operations for the six months ended March 31,
1998 and 1997 .............................................................. 68
Condensed Statements of Cash Flows for the six months
ended March 31, 1998 and 1997 .............................................. 69
Notes to Condensed Financial Statements .................................... 70
Management's Discussion and Analysis of Operations ......................... 72
</TABLE>
65
<PAGE>
<PAGE>
PARAVANT COMPUTER SYSTEMS, INC.
Condensed Balance Sheet
March 31, 1998
Assets
<TABLE>
<CAPTION>
(Unaudited)
<S> <C>
Current assets:
Cash and cash equivalents $ 2,909,848
Accounts receivable, net 2,803,897
Employee receivables and advances 16,950
Inventory, net (note 2) 3,479,473
Prepaid expenses 93,206
Deferred income taxes 426,263
-----------
Total current assets 9,729,637
Prepaid expenses 268,588
Property, plant and equipment, net 883,871
Intangible assets, net 50,625
Demonstration pool and custom molds, net 255,407
Other assets 578,369
-----------
Total assets $11,766,497
===========
Liabilities and Stockholders' Equity
Current liabilities:
Current maturities of long-term debt $ 64,149
Current maturities of capital lease obligations 82,001
Accounts payable 816,129
Accrued commissions 550,714
Accrued expenses 721,674
Accrued incentive compensation 121,886
Income taxes payable 285,524
-----------
Total current liabilities 2,642,077
Capital lease obligations, less current maturities 46,867
Deferred income taxes, net 78,820
-----------
Total liabilities 2,767,764
-----------
Stockholders' equity:
Preferred stock, par value $.01 per share. Authorized 2,000,000 shares,
none issued --
Common stock, par value $.015 per share. Authorized 30,000,000 shares,
issued and outstanding 8,149,938 shares 122,249
Additional paid-in capital 5,325,806
Retained earnings 3,550,678
-----------
Total stockholders' equity 8,998,733
-----------
Commitments (note 4)
Total liabilities and stockholders' equity $11,766,497
===========
</TABLE>
See accompanying notes to condensed financial statements
66
<PAGE>
<PAGE>
PARAVANT COMPUTER SYSTEMS, INC.
Condensed Statements of Operations
For the three months ended March 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
---- ----
(Unaudited)
<S> <C> <C>
Revenues $ 4,050,388 3,196,218
Cost of revenues 2,028,044 1,665,762
------------ ------------
Gross profit 2,022,344 1,530,456
Selling and administrative expense 1,537,713 1,169,938
------------ ------------
Income from operations 484,631 360,518
Other income (expense):
Interest expense (5,098) (21,080)
Miscellaneous 25,765 18,121
------------ ------------
Income before income taxes 505,298 357,559
Income tax expense (174,129) (124,651)
------------ ------------
Net income $ 331,169 232,908
============ ============
Basic earnings per share $ .041 .030
============ ============
Diluted earnings per share $ .029 .024
============ ============
Weighted average number of common shares outstanding 8,035,012 7,968,375
============ ============
Weighted average number of common shares and dilutive
potential common shares outstanding 11,555,651 12,752,652
============ ============
See accompanying notes to condensed financial statements.
</TABLE>
67
<PAGE>
<PAGE>
PARAVANT COMPUTER SYSTEMS, INC.
Condensed Statements of Operations
For the six months ended March 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
---- ----
(Unaudited)
<S> <C> <C>
Revenues $ 7,648,353 5,127,310
Cost of revenues 4,003,313 2,719,889
------------ ------------
Gross profit 3,645,040 2,407,421
Selling and administrative expense 2,883,933 2,167,921
------------ ------------
Income from operations 761,107 239,500
Other income (expense):
Interest expense (11,461) (65,293)
Miscellaneous 53,651 18,223
------------ ------------
Income before income taxes 803,297 192,430
Income tax expense (274,969) (67,081)
------------ ------------
Net income $ 528,328 125,349
============ ============
Basic earnings per share $ .066 .016
============ ============
Diluted earnings per share $ .046 .010
============ ============
Weighted average number of common shares outstanding 8,035,012 7,968,375
============ ============
Weighted average number of common shares and dilutive
potential common shares outstanding 11,555,651 12,752,652
============ ============
</TABLE>
See accompanying notes to condensed financial statements.
68
<PAGE>
<PAGE>
PARAVANT COMPUTER SYSTEMS, INC.
Condensed Statements of Cash Flows
For the six months ended March 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
---- ----
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 528,328 125,349
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 225,539 224,898
Writedown on leasehold improvements 11,311 --
Deferred income taxes -- (27,320)
Increase (decrease) in cash caused by changes in:
Accounts receivable 1,279,018 2,118,717
Employee receivables and advances 11,171 60,052
Inventory (17,700) (1,048,398)
Prepaid expenses 4,379 21,314
Other assets (527,977) (20,228)
Accounts payable 220,762 (264,903)
Accrued commissions (19,845) (132,141)
Accrued expenses (17,584) 68,746
Accrued incentive compensation (140,400) (48,512)
Income taxes payable (213,431) (267,912)
------------ ------------
Net cash provided by operating activities 1,343,571 809,662
------------ ------------
Cash flows fiom investing activities:
Acquisitions of property, plant and equipment (164,432) (281,109)
Acquisitions of demonstration pool and custom molds (20,485) (101,904)
Acquisitions of rights -- (5,000)
------------ ------------
Net cash used in investing activities (184,917) (388,013)
------------ ------------
Cash flows from financing activities:
Net repayments on notes
payable to bank -- (240,000)
Repayments on other notes payable -- (50,000)
Repayments on long-term debt (55,002) (55,002)
Repayments on capital lease obligations (67,323) (91,143)
Proceeds from issuance of common stock 24,520 14,113
Proceeds from issuance of warrants 236,372 --
------------ ------------
Net cash provided by (used in) financing
activities 138,567 (422,032)
------------ ------------
Net increase (decrease) in cash and cash
equivalents 1,297,221 (383)
Cash and cash equivalents at beginning of the period 1,612,627 65,069
------------ ------------
Cash and cash equivalents at end of the period $ 2,909,848 64,686
============ ============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 11,873 65,495
============ ============
Income taxes $ 488,400 315,000
============ ============
</TABLE>
69
<PAGE>
<PAGE>
PARAVANT COMPUTER SYSTEMS, INC
Notes to Condensed Financial Statements
March 31, 1998 and 1997
(1) Basis of Presentation
The accompanying unaudited condensed financial statements of Paravant
Computer Systems, Inc. (the "Company"), have been prepared in accordance
with the instructions and requirements of Regulation S-B and, therefore,
do not include all information and footnotes necessary for a fair
presentation of financial position, results of operations and cash flows
in conformity with generally accepted accounting principles. In the
opinion of management, such financial statements, reflect all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
statement of financial position, results of operations and cash flows for
the interim periods presented. Operating results for the interim periods
are not necessarily indicative of the results that may be expected for the
full fiscal years.
These condensed financial statements and footnotes should be read in
conjunction with the Company's audited financial statements for the fiscal
years ending September 30, 1997 and 1996 included in the Company's Annual
Report on Form 10-KSB as filed with the Securities and Exchange
Commission. The accounting principles used in preparing these condensed
financial statements are the same as those described in such statements.
(2) Inventory
The following is a summary of inventory at March 31, 1998:
<TABLE>
<S> <C>
Raw materials $ 2,789,162
Work in progress 1,045,832
Finished goods 86,244
-----------
3,921,238
Reserve for obsolete inventory (441,765)
-----------
$ 3,479,473
===========
</TABLE>
(Continued)
70
<PAGE>
<PAGE>
-2
PARAVANT COMPUTER SYSTEMS, INC.
Notes to Condensed Financial Statements
(3) Basic and Diluted Earnings Per Share
On October 1, 1997, the Company adopted the provisions of Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings per Share". SFAS
No. 128 superseded APB Opinion No. 15, "Earnings Per Share", and specifies
the computation, presentation, and disclosure requirements for earnings
per share for entities with publicly held common stock or potential common
stock. It also requires that prior period earnings per share be restated
to conform to the requirements of SFAS No. 128.
Basic earnings per share for the three and six months ended March 31, 1998
and 1997 have been computed by dividing net income by the weighted average
number of common shares outstanding. Diluted earnings per share for the
three and six months ended March 31, 1998 and 1997 have been computed by
dividing net income by the weighted average number of common shares and
dilutive potential common shares outstanding.
(4) Commitment
On March 31, 1998, the Company entered into an acquisition agreement to
purchase the common stock of Engineering Development Laboratories,
Incorporated (EDL) and substantially all of the business and operating
assets of Signal Technology Laboratories, Inc. (STL). Under the terms of
the agreement, the Company would pay approximately $8.5 million in cash,
8%, three year notes aggregating $4.8 million, 3,950,000 shares of the
Company's common stock and a cash earn-out payable over five years based
on EDL/STL's future profits. The agreement is subject to the approval of
the Company's shareholders and certain other conditions.
71
<PAGE>
<PAGE>
Management's Discussion and Analysis of Operations
RESULTS OF OPERATIONS
Three Months ended March 31, 1998 vs. March 31, 1997
Revenues for the quarter ended March 31, 1998 were $4,050,388, an increase
of $854,170 or 27% over the quarter ended March 31, 1997 revenues of $3,196,218.
This increase is primarily due to Paravant's strong backlog ($10,107,826 at
March 31, 1998) and continued full scale production deliveries to Raytheon in
support of the U.S. Marine Corps AVENGER Air Defense missile system upgrade and
additional requirements of Lockheed Martin's Enhanced Diagnostic Aid ("EDNA")
systems for use by the U.S. Air Force on F-16 Fighter Aircraft and the F-117A
Stealth Fighter.
Gross profit was $2,022,344 for the quarter ended March 31, 1998 or 50% of
sales, compared to $1,530,456 or 48% of sales in the quarter ended March 31,
1997, a total increase of $491,888 or 32%. This increase in gross profitability
results primarily from the increased revenues discussed above.
Selling and administrative expenses of $1,537,713 in the quarter ended
March 31, 1998, increased by $367,775 or 31% from the quarter ended March 31,
1997 expenses of $1,169,938. As a percentage of sales, selling and
administrative expenses were 38% and 37% in the quarters ended March 31, 1998
and 1997, respectively. The increased selling and administrative expenses are
due primarily to increased sales commissions directly attributable to the
increased sales discussed earlier herein and on-going research and development
projects.
Income from operations was $484,631 for the quarter ended March 31, 1998
compared to $360,518 in the quarter ended March 31, 1997, an improvement of
$124,113. As a percentage of sales, income from operations improved to 12% in
the quarter ended March 31, 1998 from 11% in the quarter ended March 31, 1997.
The improvement to income from operations overall resulted primarily from
increased revenues and gross profits, offset in part by increased selling and
administrative expenses as discussed above.
Interest expense for the quarter ended March 31, 1998 was reduced by
$15,982 or 76% to $5,098 compared to $21,080 in the quarter ended March 31,
1997. As a percentage of sales, interest expense decreased to 0.1% in the
quarter ended March 31, 1998 from .7% in the quarter ended March 31, 1997. This
decrease is due to a continued decline in outstanding credit balances made
possible by continued growth in revenues and gross profits, offset in part by
increased selling and administrative expenses as discussed above.
As a result, the Company's net income improved by 42% to $331,169 in the
quarter ended March 31, 1998 compared to $232,908 in 1997. Net income as a
percentage of sales was 8% in the quarter ended March 31, 1998 compared to 7% in
the quarter ended March 31, 1997. The improvement in net income overall,
resulted primarily from increased revenues and gross profits, offset in part by
increased selling and administrative expenses as discussed above.
72
<PAGE>
<PAGE>
Six Months ended March 31, 1998 vs. March 31, 1997
Revenues for the six months ended March 31, 1998 were $7,648,353, an
increase of $2,521,043 or 49% over the six months ended March 31, 1997 revenues
of $5,127,310. This increase is primarily due to Paravant's strong backlog
($10,107,826 at March 31, 1998) and continued full scale production deliveries
to Raytheon in support of the U.S. Marine Corps AVENGER Air Defense missile
system upgrade and additional requirements of Lockheed Martin's Enhanced
Diagnostic Aid ("EDNA") systems for use by the U.S. Air Force on F-16 Fighter
Aircraft and the F-117A Stealth Fighter.
Gross profit was $3,645,040 for the six months ended March 31, 1998 or 48%
of sales, compared to $2,407,421 or 47% in the six months ended March 31, 1997,
a total increase of $1,237,619 or 51%. This increase in gross profitability
results primarily from the increased revenues discussed above.
Selling and administrative expenses of $2,883,933 in the six months ended
March 31, 1998, increased by $716,012 or 33% from the six months ended March 31,
1997 expenses of $2,167,921. As a percentage of sales, selling and
administrative expenses were 38% and 42% in the six months ended March 31, 1998
and 1997, respectively. The increased selling and administrative expenses are
due primarily to increased sales commissions directly attributable to the
increased sales discussed earlier herein and on-going research and development
projects.
Income from operations was $761,107 for the six months ended March 31,
1998 compared to $239,500 in the six months ended March 31, 1997, an improvement
of $521,607. As a percentage of sales, income from operations improved to 10% in
the six months ended March 31, 1998 from 5% in the six months ended March 31,
1997. The improvement to income from operations overall resulted primarily from
increased revenues and gross profits, offset in part by increased selling and
administrative expenses as discussed above.
Interest expense for the six months ended March 31, 1998 was reduced by
$53,832 or 82% to $11,461 compared to $65,293 in the six months ended March 31,
1997. As a percentage of sales, interest expense decreased to 0.1% in the six
months ended March 31, 1998 from 1% in the six months ended March 31, 1997. This
decrease is due to a significant decline in outstanding credit balances made
possible by continued growth in revenues and gross profits, offset in part by
increased selling and administrative expenses as discussed above.
As a result, the Company's net income improved by 321% to $528,328 in the
six months ended March 31, 1998 compared to $125,349 in 1997. Net income as a
percentage of sales was 7% in the six months ended March 31, 1998 compared to 2%
in the six months ended March 31, 1997. The improvement in net income overall,
resulted primarily from increased revenues and gross profits, offset in part by
increased selling and administrative expenses as discussed above.
73
<PAGE>
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
In June 1996, the Company completed its IPO, resulting in aggregate net
proceeds of $4,594,332 to the Company after deducting certain commissions,
expenses and offering costs. The Company used a portion of the net proceeds of
the IPO to repay certain loans referred to below in the aggregate principal
amount of $1,102,294, and paid approximately $88,000 of the net proceeds of the
IPO to reimburse UES, Inc., an affiliate of the Company which is controlled by
Krishan K. Joshi, the Company's Chairman ("UES"), for certain health insurance
and other expenses paid on the Company's behalf. Substantially all of the
remaining balance of the net proceeds of the IPO were utilized to reduce
indebtedness then outstanding under the Company's revolving credit arrangement
with National City Bank in Dayton, Ohio described below, resulting in increased
availability under the credit arrangement for working capital needs and general
corporate purposes.
The Company has a secured revolving credit arrangement with National City
Bank in Dayton, Ohio (the "Bank") for a credit line of up to $4,000,000 that is
due on demand and bears interest at the prime rate for secured borrowings and
prime rate plus 0.5% for undersecured borrowings. All borrowings are
collateralized by accounts receivable, inventory and equipment. Such arrangement
is subject to a borrowing base formula involving certain accounts receivable,
inventory and equipment. As of March 31, 1998, there were no borrowings
outstanding under this arrangement. The Company intends to maintain this
arrangement with the Bank for the foreseeable future, although there can be no
assurance that the Bank will not in the future demand repayment of any amounts
then outstanding under its loan arrangement. The Company also has a secured term
loan provided by the Bank bearing interest at a rate adjusted monthly to prime
plus 1.5% at March 31, 1998. Monthly principal payments of $9,167 are due
through October 1998. All borrowings thereunder are secured by a lien on
accounts receivable, inventory and equipment. As of March 31, 1998, there was
$64,149 outstanding under this arrangement with the Bank. The Company also has
capital lease obligations of $128,868 at March 31, 1998. These capital lease
obligations bear interest rates of 1.25% to 1.50% over the prime rate and are
expected to be satisfied within 3 years.
On April 22, 1997, the Company retired a note payable to the Bank in an
aggregate principal amount of $500,000, bearing interest at the prime rate,
which note was due and payable in March 1998.
In August 1995, the Company borrowed $400,000 pursuant to bridge notes
("Notes") from a group of private investors at an annual interest rate of 6%. In
addition, the Company sold to the same investors warrants to purchase 480,000
shares of Common Stock, exercisable until June 3, 2001 at an exercise price of
$2.00 per share. The Notes were paid in full on August 8, 1997.
The Company has, and continues to have, a dependence upon a few major
customers for a significant portion of its revenues. This dependence for
revenues has not been responsible for any unusual fluctuations in operating
results in the past, and management does not believe this concentration will
generate fluctuations in operating results in the future. However, the potential
impact of losing a major customer without securing offsetting and equivalent
orders could result in a significant negative impact to the operating results of
the Company. The gross margin contributions of the Company's major customers are
not generally different than those from its other customers as a whole.
74
<PAGE>
<PAGE>
The Company's operating cash flow was $1,343,571 and $809,662 for the six
months ended March 31, 1998 and 1997, respectively, $3,448,740 for fiscal 1997,
and negative $(1,426,090) in fiscal 1996. The improvement in the Company's
operating cash flow results primarily from improved net income as discussed
above and improved working capital as more fully presented in the Condensed
Statements of Cash Flows for the six months ended March 31, 1998. Negative cash
flow for the year ended September 30, 1996 was primarily associated with general
increases in inventory levels and temporary increases associated with accounts
receivable, all in support of the Company's rapid increase in operations
reflected by the growth in annual revenues from $4,621,527 in fiscal 1993 to
$13,209,541 in fiscal 1997, an increase of almost 186%.
Due to the Company's orders related to U.S. Department of Defense
procurements, the operations of the Company have been cyclical and generally
result in a significant increase in deliveries and revenues in the fourth
quarter of its fiscal year ending on September 30. Due to the Company's strong
backlog and increased revenues, this cycle is less significant in the current
and prior quarters, resulting in a significant improvement in cash provided from
operations, as discussed earlier herein and less significant changes in
inventory levels than the prior period. This change is evidenced by an increase
in both first and second quarter revenues and operating cash flows.
Generally, accounts receivable at the end of each quarter are collected
within the following quarter. However, the Company's major customer, Raytheon,
has traditionally averaged approximately 80 to 100 days in satisfaction of
outstanding accounts receivable balances. This situation is improving through
negotiation with Raytheon, and Management believes that average outstanding
balances will be reduced to more traditional levels approximating 45 days, in
the future although there can be no assurance of such. The Company's total
outstanding accounts receivable balance of $2,803,897 at March 31, 1998 has been
subsequently reduced by approximately $976,800 in cash collections. We recently
have provided a reserve for certain older balances of $150,497. This reserve is
believed to be more than sufficient to address any uncollectible balances
outstanding as of March 31, 1998.
As of March 31, 1998 and 1997, the Company's backlog was $10,107,826 and
$11,046,871, respectively, consisting of firm fixed price purchase orders. All
of these purchase orders are expected to generate profits within the Company's
historical levels and the Company believes that the completion of the orders
comprising its backlog, and any new orders which may be accepted by the Company
in the future, should not result in additional liquidity pressures which cannot
be addressed in a manner consistent with the Company's past practices. The
Company presently expects to manufacture and deliver $4,608,463 of the products
in backlog within the next 12 months. The remaining $5,499,363 of products in
backlog will be completed over the next 36 months.
The Company anticipates, based on its currently proposed plans and
assumptions relating to its operations, that the proceeds of the IPO and ongoing
stock offerings, together with the Company's existing working capital and
anticipated cash flows from the Company's operations, will be sufficient to
satisfy the Company's cash requirements for at least twelve months. As the
Company continues to grow, additional bank borrowings, other debt placements and
equity offerings may be considered, in part or in combination, as the situation
warrants. In addition, in the event the Company's plans change or its
assumptions change or prove to be inaccurate, or if projected cash flow
otherwise proves insufficient to fund operations, the Company might need to seek
other sources of financing to conduct its operations. There can be no assurance
that any such other sources of financing would be available when needed, on
commercially reasonable terms, or at all.
On March 31, 1998 the Company signed a definitive agreement to acquire two
privately-held, affiliated companies, Engineering Development Laboratories,
Incorporated ("EDL"), in a stock sale, and Signal Technology Laboratories, Inc.
("STL"), in an asset sale, for approximately $8.5 million in cash, 8%,
three-year notes aggregating $4.8 million, 3,950,000 shares of the Company's
common stock and a cash earn-out payable over five years based on EDL-STL's
future profits. 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 which would increase the Company's revolving line of credit to
$14,000,000 with a maturity date of December 31, 2000 convertible thereafter to
five year term debt. The line of credit would be secured by a first security
interest in accounts, contract rights, inventory, equipment and other security
reasonably requested by the lender.
75
<PAGE>
<PAGE>
ENGINEERING DEVELOPMENT LABORATORIES, INC. AND SUBSIDIARY
Consolidated Financial Statements
for the Nine Months Ended October 4, 1997
and the Year Ended December 28, 1996
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report........................................... 77
Financial Statements:
Consolidated Balance Sheet......................................... 78
Consolidated Statements of Income.................................. 79
Consolidated Statements of Changes in Stockholders' Equity......... 80
Consolidated Statements of Cash Flows.............................. 81
Notes to Consolidated Financial Statements............................. 82
Management's Discussion and Analysis of Operations............. 92
</TABLE>
76
<PAGE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
----------------------------
Board of Directors
Engineering Development Laboratories, Inc.:
We have audited the accompanying consolidated balance sheet of Engineering
Development Laboratories, Inc. and subsidiary as of October 4, 1997, and the
consolidated statements of income, changes in stockholders' equity and cash
flows for the nine month period ended October 4, 1997 and for the year ended
December 28, 1996. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Engineering
Development Laboratories, Inc. and subsidiary at October 4, 1997 and the results
of their operations and their cash flows for the nine month period ended October
4, 1997 and the year ended December 28, 1996 in conformity with generally
accepted accounting principles.
KPMG Peat Marwick LLP
Orlando, Florida
May 22, 1998
77
<PAGE>
<PAGE>
ENGINEERING DEVELOPMENT LABORATORIES, INC. AND SUBSIDIARY
Consolidated Balance Sheet
October 4, 1997
<TABLE>
<CAPTION>
ASSETS
-----
<S> <C>
Current assets:
Cash and cash equivalents $ 609,475
Accounts receivable (notes 5 and 8) 2,628,722
Costs and estimated earnings in excess of billings on
uncompleted contracts (notes 2 and 5) 7,188,830
Inventory (note 5) 86,228
Prepaid expenses and other assets 25,806
Deferred income taxes (note 7) 15,320
-----------
Total current assets 10,554,381
Investments (note 3) 356,605
Property and equipment, net (notes 4 and 5) 249,299
Deferred income taxes, net (note 7) 29,807
Other assets 1,660
-------------
$ 11,191,752
=============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable $ 1,330,228
Accrued liabilities 276,617
Accrued incentive compensation 529,093
Billings in excess of costs and estimated earnings on
uncompleted contracts (note 2) 1,632,615
Income taxes payable 2,625,898
-------------
Total current liabilities 6,394,451
Deferred compensation (note 9) 344,696
-------------
Total liabilities 6,739,147
-------------
Minority interest in equity of subsidiary 1,668,357
-------------
Stockholders' equity (note 10):
Common stock, at stated value; 750 shares authorized, issued
and outstanding 1,200
Additional paid-in capital 177,395
Retained earnings 2,991,803
Net unrealized holding gains on investments available for sale 21,961
Treasury stock, 258 shares, at cost (408,111)
-------------
Total stockholders' equity 2,784,248
Commitments and contingencies (notes 5, 6 and 14)
-------------
$ 11,191,752
=============
</TABLE>
See accompanying notes to consolidated financial statements.
78
<PAGE>
<PAGE>
ENGINEERING DEVELOPMENT LABORATORIES, INC. AND SUBSIDIARY
Consolidated Statements of Income
For the nine month period ended October 4, 1997
and for the year ended December 28, 1996
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Contract revenues (note 8) $ 23,453,050 22,783,815
Cost of contract revenues 10,142,620 9,441,976
------------ ------------
Gross profit 13,310,430 13,341,839
General and administrative expenses 2,573,632 2,929,852
------------ ------------
Income from operations 10,736,798 10,411,987
Other income (expense) (44,777) 164,928
------------ ------------
Income before income taxes and minority interest 10,692,021 10,576,915
Income taxes (note 7) 3,742,778 3,508,765
------------ ------------
Income before minority interest 6,949,243 7,068,150
Minority interest in income of consolidated subsidiary (2,428,523) (2,582,102)
------------ ------------
Net income $ 4,520,720 4,486,048
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
79
<PAGE>
<PAGE>
ENGINEERING DEVELOPMENT LABORATORIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE NINE MONTH PERIOD ENDED OCTOBER 4, 1997 AND FOR THE YEAR ENDED
DECEMBER 28, 1996
<TABLE>
<CAPTION>
NET
UNREALIZED
COMMON STOCK ADDITIONAL HOLDING
---------------- PAID-IN RETAINED GAINS ON TREASURY
SHARES AMOUNT CAPITAL EARNINGS INVESTMENTS STOCK TOTAL
------ ------ ---------- ---------- ----------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at December 30, 1995 750 $1,200 177,395 3,043,535 32,046 (408,111) 2,846,065
Net income -- -- -- 4,486,048 -- -- 4,486,048
Distributions to stockholders -- -- -- (5,014,500) -- -- (5,014,500)
Unrealized holding losses on
investment securities
available for sale, net of
deferred income taxes -- -- -- -- (29,996) -- (29,996)
------ ------ ---------- ---------- ----------- --------- ----------
Balances at December 28, 1996 750 1,200 177,395 2,515,083 2,050 (408,111) 2,287,617
Net income -- -- -- 4,520,720 -- -- 4,520,720
Distributions to stockholders -- -- -- (4,044,000) -- -- (4,044,000)
Unrealized holding gains on
investment securities
available for sale, net of
deferred income taxes -- -- -- -- 19,911 -- 19,911
------ ------ ---------- ---------- ----------- --------- ----------
Balances at October 4, 1997 750 $1,200 177,395 2,991,803 21,961 (408,111) 2,784,248
====== ====== ========== ========== =========== ========= ==========
</TABLE>
See accompanying notes to consolidated financial statements.
80
<PAGE>
<PAGE>
ENGINEERING DEVELOPMENT LABORATORIES, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
For the nine month period ended October 4, 1997
and for the year ended December 28, 1996
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 4,520,720 4,486,048
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation 56,071 74,599
Minority interest in income of consolidated subsidiary 2,428,523 2,582,102
Deferred income taxes 76,149 88,100
Gains on investments -- (139,084)
Loss on disposal of property and equipment -- 21,711
Increase (decrease) in cash caused by changes in:
Accounts receivable (254,607) 1,854
Contracts in progress (2,990,174) (1,582,652)
Inventory (48,462) (37,766)
Prepaid expenses and other assets 20,748 (8,132)
Accounts payable 613,751 265,379
Accrued liabilities and incentive compensation 232,770 356,320
Income taxes payable 1,369,628 722,642
Deferred compensation 323,983 (524,688)
----------- -----------
Net cash provided by operating activities 6,349,100 6,306,433
----------- -----------
Cash flows from investing activities:
Proceeds from sales of investments -- 596,734
Purchases of investments (307,421) --
Purchases of property and equipment (125,574) (93,358)
Other, net -- 5,719
----------- -----------
Net cash provided by (used in) investing activities (432,995) 509,095
----------- -----------
Cash flows from financing activities:
Distributions to stockholders (4,044,000) (5,014,500)
Dividends paid relating to minority interests (2,400,000) (1,980,000)
----------- -----------
Net cash used in financing activities (6,444,000) (6,994,500)
----------- -----------
Net decrease in cash and cash equivalents (527,895) (178,972)
Cash and cash equivalents, beginning of period 1,137,370 1,316,342
----------- -----------
Cash and cash equivalents, end of period $ 609,475 1,137,370
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 1,941 2,618
=========== ===========
Income taxes $ 2,297,000 2,692,295
=========== ===========
</TABLE>
81
<PAGE>
<PAGE>
ENGINEERING DEVELOPMENT LABORATORIES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
October 4, 1997 and December 28, 1996
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) BUSINESS
Engineering Development Laboratories, Inc. ("EDL" or "Company")
designs, develops and produces military electronic hardware,
primarily related to airborne and avionics systems for the United
States Department of Defense.
Signal Technology Laboratories, Inc. ("STL"), a consolidated
subsidiary, designs, develops, and produces hardware, primarily
related to electronic signal conditioning and analysis, for foreign
and domestic intelligence agencies.
The principal customers of the Company are United States Government
agencies and contractors who are subject to federal budgetary
implications.
The Company's fiscal year ends on the Saturday nearest to December
31 using a 52-53 week year.
(b) PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the
accounts of EDL and its 56% owned subsidiary STL. Intercompany
transactions and balances have been eliminated in consolidation.
(c) CASH AND CASH EQUIVALENTS
For purposes of the statements of cash flows, all highly liquid
investments purchased with an original maturity of three months or
less are considered to be cash equivalents.
(d) REVENUE RECOGNITION
The Company uses the percentage-of-completion method of accounting
for fixed price contracts in progress. Accordingly, revenues are
recognized in the ratio that contract costs incurred are to
estimated total contract costs. Losses expected to be incurred on
contracts are charged to operations in the period such losses are
determined.
(Continued)
82
<PAGE>
<PAGE>
ENGINEERING DEVELOPMENT LABORATORIES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
Federal government contracts costs, including indirect expenses, are
subject to audit and adjustment by the Defense Contract Audit Agency
("DCAA"). Contract revenues have been recorded in amounts which are
expected to be realized upon final settlement. In management's
opinion, adjustments resulting from any DCAA audit for 1997 or years
prior to 1997 will not have a material adverse effect on the
Company's financial position or the results of its future
operations.
(e) INVENTORY
Inventory is stated at the lower of cost or market using the
first-in, first-out (FIFO) cost method.
(f) INVESTMENTS
The Company's investments are classified into one of three
categories which determines their carrying value. These categories
are as follows:
Held-to-maturity - securities which the Company has the
positive intent and ability to hold to maturity are carried
at amortized cost.
Trading - securities that are purchased and held for the
purpose of selling in the near term and generating profits
on short-term differences in price are carried at estimated
fair value and any unrealized gains and losses are
recognized in the consolidated statements of income.
Available-for-sale - all other securities not classified as
held-to-maturity or trading securities are carried at
estimated fair value and any unrealized holding gains and
losses are recorded as a net amount in a separate component
of equity, net of related deferred income taxes, until
realized.
As of October 4, 1997, the Company classified its investments as
available-for-sale.
(Continued)
83
<PAGE>
<PAGE>
ENGINEERING DEVELOPMENT LABORATORIES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(g) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and are depreciated over
the estimated useful lives of the assets using the straight-line
method.
(h) INCOME TAXES
EDL has elected treatment as a small business corporation under the
S-Corporation provisions of the Internal Revenue Code. No provision
for income taxes has been included in the accompanying balance sheet
for the operations of EDL since the S-Corporation earnings are
included in the individual income tax returns of the Company's
stockholders. However, STL is taxed as a Subchapter C corporation
and therefore accounts for income taxes using the asset and
liability method. Deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss and
tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income
in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
(i) USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
(Continued)
84
<PAGE>
<PAGE>
ENGINEERING DEVELOPMENT LABORATORIES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(2) COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
Contracts in progress and advance billings on such contracts consist of
the following as of October 4, 1997:
<TABLE>
<S> <C>
Costs incurred on uncompleted contracts $ 19,067,734
Estimated earnings thereon 13,474,007
------------
32,541,741
Billings to date (26,985,526)
------------
$ 5,556,215
============
The above amount is included in the accompanying consolidated balance
sheet under the following captions:
Costs and estimated earnings in excess of billings on
uncompleted contracts $ 7,188,830
Billings in excess of costs and estimated earnings on
uncompleted contracts (1,632,615)
-----------
$ 5,556,215
===========
</TABLE>
(3) INVESTMENTS
Investments at October 4, 1997 are as follows:
<TABLE>
<CAPTION>
UNREALIZED ESTIMATED
COST HOLDING GAINS FAIR VALUE
---- ------------- ----------
<S> <C> <C> <C>
Mutual funds $182,001 28,184 210,185
Money market funds 146,420 -- 146,420
-------- -------- --------
Total $328,421 28,184 356,605
======== ======== ========
</TABLE>
(Continued)
85
<PAGE>
<PAGE>
ENGINEERING DEVELOPMENT LABORATORIES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
The Company had net realized gains of approximately $130,000 for the year
ended December 28, 1996. The cost of investments sold was determined using
the average cost method. These investments are intended to fund the
Company's deferred compensation liability (note 9).
(4) PROPERTY AND EQUIPMENT
Property and equipment consists of the following at October 4, 1997:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIVES
----------
<S> <C> <C>
Laboratory equipment $ 55,479 5 years
Phase locked oscillator equipment 140,867 5 years
Test equipment 177,689 5 years
Demonstration equipment 42,876 3 years
Computer equipment 302,544 5 years
Office furniture and equipment 70,603 5-7 years
-------
Total property and equipment 790,058
Less accumulated depreciation (540,759)
-------
Net property and equipment $ 249,299
=======
</TABLE>
(5) LINE OF CREDIT
The Company has a secured $1,500,000 revolving line of credit available
with a bank. Unpaid balances bear interest at .25% above the bank's prime
rate. Collateral related to this line of credit includes accounts
receivable, inventory, equipment, furniture and fixtures and intangibles.
The agreement contains restrictive covenants and reporting requirements
which include net worth and debt to equity ratio minimums. As of October
4, 1997, there were no borrowings outstanding under this line of credit.
(Continued)
86
<PAGE>
<PAGE>
ENGINEERING DEVELOPMENT LABORATORIES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(6) LEASE OBLIGATIONS
The Company has operating leases for a building with terms of three years.
Total rent expense under operating leases was approximately $186,000 and
$169,000 for the nine month period ended October 4, 1997 and the year
ended December 28, 1996, respectively. Future minimum lease payments under
the operating leases are as follows:
YEAR ENDING DECEMBER 31,
-----------------------
1998 $ 193,065
1999 154,965
-------
$ 348,030
=======
(7) INCOME TAXES
Income tax expense for the nine month period ended October 4, 1997 and the
year ended December 28, 1996 consist of the following:
CURRENT DEFERRED TOTAL
------- -------- -------
1997:
Federal $2,815,482 58,382 2,873,864
State 851,147 17,767 868,914
---------- ---------- ----------
$3,666,629 76,149 3,742,778
========== ========== ==========
1996:
Federal 3,006,664 77,437 3,084,101
State 414,001 10,663 424,664
---------- ---------- ----------
$3,420,665 88,100 3,508,765
========== ========== ==========
(Continued)
87
<PAGE>
<PAGE>
ENGINEERING DEVELOPMENT LABORATORIES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
Following is a reconciliation of the expected income tax expense computed
by applying the U.S. federal income tax rate of 34% to income before
income taxes and minority interest and the actual income tax provision for
the nine month period ended October 4, 1997 and the year ended December
28, 1996:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Computed "expected" tax expense $ 3,635,287 3,596,151
Increase (decrease) in income taxes resulting from:
State income taxes, net of federal income tax benefit 573,483 280,278
S-Corporation earnings not subject to income taxes (486,158) (409,858)
Other, net 20,166 42,194
--------- ---------
$ 3,742,778 3,508,765
========= =========
</TABLE>
Deferred income taxes as of October 4, 1997 reflect the impact of
"temporary differences" between amounts of assets and liabilities for
financial statement purposes and such amounts as measured by tax laws. The
temporary differences give rise to deferred tax assets and liabilities
which are summarized below as of October 4, 1997:
<TABLE>
<S> <C>
Gross deferred tax assets:
Accrued vacation $ 15,320
Deferred compensation 54,812
------
Total gross deferred tax assets 70,132
------
Gross deferred tax liabilities:
Investments (6,224)
Accumulated depreciation (18,781)
------
Total gross deferred tax liabilities (25,005)
------
Total net deferred tax assets $ 45,127
======
</TABLE>
(Continued)
88
<PAGE>
<PAGE>
ENGINEERING DEVELOPMENT LABORATORIES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
A valuation allowance for deferred tax assets is provided when it is more
likely than not that some portion or all of the deferred tax assets will
not be realized. Realization is dependent upon the generation of future
taxable income or the reversal of deferred tax liabilities during the
periods in which those temporary differences become deductible. Management
considers the scheduled reversal of deferred tax liabilities, projected
future taxable income and tax planning strategies in making this
assessment. As of October 4, 1997, no valuation allowance has been
recognized in the accompanying financial statements for the deferred tax
assets because the Company believes that sufficient projected future
taxable income will be generated to fully utilize the benefits of these
deductible amounts.
Deferred income taxes are included in the accompanying consolidated
balance sheet as follows:
<TABLE>
<S> <C>
Current assets $ 15,320
Net long-term assets 29,807
------
$ 45,127
======
</TABLE>
(8) CONCENTRATION OF CREDIT RISK
The Company has a high concentration of revenues from a few customers who
accounted for 71% and 67% of revenues for the nine month period ended
October 4, 1997 and the year ended December 28, 1996, respectively. A
summary of revenues from the customers exceeding 5% of revenues
for the nine month period ended October 4, 1997 and the year ended
December 28, 1996 is as follows:
<TABLE>
<CAPTION>
1997 1996
------------------------------ -------------------------
REVENUES % TOTAL REVENUES % TOTAL
----------- ------------ ------------ ---------
<S> <C> <C> <C> <C>
Customer A $ 6,783,589 29% $ 1,648,574 7%
Customer B 6,323,101 27% 6,206,108 27%
Customer C 2,248,928 10% - -
Customer D 1,118,246 5% 1,774,779 8%
Customer E - - 2,641,164 12%
Customer F - - 1,569,025 7%
Customer G - - 1,318,148 6%
</TABLE>
(Continued)
89
<PAGE>
<PAGE>
ENGINEERING DEVELOPMENT LABORATORIES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
A summary of accounts receivable exceeding 5% of
accounts receivable as of October 4, 1997 is as follows:
<TABLE>
<CAPTION>
ACCOUNTS RECEIVABLE % TOTAL
------------------- --------
<S> <C> <C>
Customer A $1,382,403 53%
Customer B 554,510 21%
Customer E 311,103 12%
Customer H 133,885 5%
</TABLE>
(9) BENEFIT PLANS
The Company has a defined contribution 401(k) plan that covers all
full-time employees 18 years or older. The Company currently matches
employee contributions on a 1 to 2 basis (50% match) up to 10% of
compensation. The Company provided matching contributions of approximately
$73,000 and $86,000 for the nine month period ended October 4, 1997 and
the year ended December 28, 1996, respectively.
The Company has also established deferred compensation plans for certain
employees. EDL has two plans whose provisions provide deferred
compensation equal to 50% of base salary for employee-owners and 12% to
30% of base salary for certain other employees. No employee contributions
are required for EDL plans. STL has a plan whereby the employees can
defer up to 10% of their base salary. The Company will then match any
deferrals on a 3 for 1 basis. The amount expensed by the Company was
approximately $289,000 and $354,000 for the nine month period ended
October 4, 1997 and the year ended December 28, 1996, respectively.
Amounts are payable upon retirement, termination of employment, death or
disability.
(10) STOCK REDEMPTION AGREEMENT
The Company has a stock redemption agreement with its stockholders whereby
if the stockholder desires to sell their stock the stock must first be
offered for sale to the Company. The agreement provides for a price based
upon book value as stated in the latest interim financial report. The
Company, however, may decide not to purchase the stock and the holder may
then offer it to any potential buyer.
(Continued)
90
<PAGE>
<PAGE>
ENGINEERING DEVELOPMENT LABORATORIES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(11) ROYALTY AGREEMENT
The Company is entitled to 5% of product sales made by the buyer of a
prior business of the Company through February, 1998, up to a maximum of
$250,000. During the nine month period ended October 4, 1997, the royalty
agreement was modified to defer royalty payments for a period of nine
months from April 1, 1997 through December 31, 1997. Royalties and
interest are payable to the Company on January 1, 1998 and no royalty
income for the nine month period ended October 4, 1997 has been accounted
for in the accompanying consolidated financial statements. Through October
4, 1997, total royalty income earned by the Company amounted to $168,560.
(12) PRODUCT WARRANTIES
The Company has warranted certain items in its contracts with the United
States Government. The Company believes it has sufficient residual
material available to provide any needed parts and an employee is
available on site to provide needed service. The Company has provided for
estimated future warranty costs as part of contract costs.
(13) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of the Company's receivables, current liabilities and
deferred compensation approximates their fair value because of the short
maturity of those instruments.
(14) SUBSEQUENT EVENTS
On March 31, 1998, the Company entered into an agreement to sell the
common stock of EDL and substantially all of the business and operating
assets of STL to Paravant Computer Systems, Inc. ("Paravant"). Under the
terms of the agreement, the shareholders of EDL/STL would receive
approximately $8.7 million in cash, an 8%, three year, $4.8 million note,
3,950,000 shares of Paravant's common stock and a cash earn-out payable
over five years based on EDL/STL's future profits. The agreement is
subject to the approval of Paravant's shareholders.
91
<PAGE>
<PAGE>
Management's Discussion and Analysis of Operations
RESULTS OF OPERATIONS
Nine Months ended October 4, 1997 vs. Fiscal year ended December 28, 1996
Revenues for nine months ended October 4, 1997 were $23,453,050, an increase of
$669,235 or 3% over revenues for the fiscal year ended December 28, 1996 of
$22,783,815. On an annualized basis the increase in revenues is projected to be
approximately 37%. This projected increase is primarily due to accelerated
delivery requirements by the government customer. These accelerated delivery
requirements are not anticipated to continue into the future.
Gross profit was $13,310,430 in the nine months ended October 4, 1997, or 57% of
revenues, compared to $13,341,839 or 59% of revenues for the fiscal year ended
December 28, 1996, a total decrease of $(31,409) or 0%. On an annualized basis
there is a projected increase of approximately 33%. Selling and administrative
expenses were 11% of revenues or $2,573,632 in the nine months ended October 4,
1997, versus expenses for the fiscal year ended December 28, 1996 of 13% of
revenues or $2,929,852, a decrease of $356,220 or 12%. However, on an annualized
basis the expenses are anticipated to increase by approximately 17%. The
projected increase in selling and administrative costs are due primarily to
increased expenditures required to meet the accelerated delivery requirements
discussed above.
Income from operations grew to $10,736,798 for the nine months ended October 4,
1997 compared to $10,411,987 for the fiscal year ended December 28, 1996, an
improvement of $324,811 or 3%. On an annualized basis, income from operations is
projected to increase by approximately 37%. As a percentage of revenues, income
from operations remained unchanged at 46% in 1997 and 1996. The projected
improvement in income from operations overall, results primarily from the
projected increase in revenues, as discussed above.
As a result, the Company's net income improved to $4,520,720 for the nine months
ended October 4, 1997 when compared to $4,486,048 for the fiscal year ended
December 28, 1996, an increase of $34,672 or .7%. On an annualized basis, the
increase in net income is projected to be approximately 34%. Net income, as a
percentage of revenues were 19% in 1997 and 1996. The improvement in net income
overall, resulted primarily from increased revenues, as discussed above.
LIQUIDITY AND CAPITAL RESOURCES
The Company has a secured revolving credit arrangement with Star Bank in Dayton,
Ohio (the "Bank") for a credit line of up to $1,500,000 that is renewed annually
and bears interest at the prime rate plus 0.25%.
The Company's have, and continue to have, a dependence on a few major customers
for a significant portion of its revenues. This dependence for revenues has not
been responsible for any unusual fluctuations in operating results in the past,
and management does not believe this concentration will generate fluctuations in
operating results in the future. However, the potential impact of losing a major
customer without securing offsetting and equivalent orders could result in a
significant negative impact to the operating results of the Company. The gross
margin contributions of the Company's major customers are not generally
different from those of its other customers as a whole.
The Company's operating cash flow was $6,349,100 and $6,306,433 for the nine
months ended October 4, 1997 and fiscal year ended December 28, 1996,
respectively.
92
<PAGE>
<PAGE>
Generally, accounts receivable at the end of the period are collected within the
following month. Management feels there is no need for a bad debt reserve.
As of October 4, 1997 and December 28, 1996, the Company's backlog was
$23,191,702 and $9,449,719, respectively, consisting of firm fixed price
purchase orders. All of these purchase orders are expected to generate profits
within the Company's historical levels and the Company believes that the
completion of the orders comprising its backlog, and any new orders which may be
accepted by the Company in the future, should not result in additional liquidity
pressures which cannot be addressed in a manner consistent with the Company's
past practices. The Company presently expects to manufacture and deliver all of
the products in the backlog at October 4, 1997 within the next twelve months.
On March 31, 1998, the Company entered into a definitive agreement to sell the
common stock of EDL and substantially all of the business and operating assets
of STL to Paravant Computer Systems, Inc. ("Paravant"). Under the terms of the
agreement, the shareholders of EDL/STL would receive approximately $8.7 million
in cash, 8%, three-year notes aggregating $4.8 million, 3,950,000 shares of
Paravant's common stock and a cash earn-out payable over five years based on
EDL-STL's future profits. The agreement is subject to the approval of Paravant's
shareholders.
93
<PAGE>
<PAGE>
ENGINEERING DEVELOPMENT LABORATORIES, INC. AND SUBSIDIARY
Unaudited Consolidated Condensed Financial Statements
for the Six Months Ended
March 21, 1998 and March 22, 1997
<TABLE>
<CAPTION>
PAGE
<S> <C>
Condensed Consolidated Balance Sheet - March 31, 1998 ...................... 95
Condensed Consolidated Statements of Income for the six months
ended March 21, 1998 and March 22, 1997 .................................... 96
Condensed Consolidated Statements of Cash Flows for the six months
ended March 21, 1998 and March 22, 1997 .................................... 97
Notes to Condensed Consolidated Financial Statements ....................... 98
Management's Discussion and Analysis of Operations ......................... 99
</TABLE>
94
<PAGE>
<PAGE>
ENGINEERING DEVELOPMENT LABORATORIES, INC. AND SUBSIDIARY
Condensed Consolidated Balance Sheet
<TABLE>
<CAPTION>
MARCH 21,
ASSETS 1998
------ -----
(UNAUDITED)
<S> <C>
Current assets:
Cash and cash equivalents $ 1,380,766
Accounts receivable 4,411,486
Costs and estimated earnings in excess of billings on
uncompleted contracts 7,932,081
Inventory 153,889
Prepaid expenses and other assets 58,005
Deferred income taxes 15,320
-----------
Total current assets 13,951,547
Property and equipment, net 304,092
Other assets 88,492
-----------
$14,344,131
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable $ 355,474
Accrued liabilities 519,050
Billings in excess of costs and estimated earnings on
uncompleted contracts 1,048,631
Income taxes payable 3,352,400
-----------
Total current liabilities 5,275,555
Deferred compensation 105,180
Deferred income taxes 1,884
-----------
Total liabilities 5,382,619
-----------
Minority interest in equity of subsidiary 3,197,576
-----------
Stockholders' equity:
Common stock, at stated value. 750 shares authorized,
issued and outstanding 1,200
Additional paid-in capital 177,395
Retained earnings 5,993,452
Treasury stock, 258 shares, at cost (408,111)
-----------
Total stockholders' equity 5,763,936
-----------
$14,344,131
===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
95
<PAGE>
<PAGE>
ENGINEERING DEVELOPMENT LABORATORIES, INC. AND SUBSIDIARY
Condensed Consolidated Statements of Income
<TABLE>
<CAPTION>
SIX MONTHS ENDED
------------------------------------
MARCH 21, MARCH 22,
1998 1997
---- ----
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Contract revenues $ 21,613,907 8,726,445
Cost of contract revenues 9,245,642 4,452,326
------------ ------------
Gross profit 12,368,265 4,274,119
General and administrative expenses 2,032,063 1,426,442
------------ ------------
Income from operations 10,336,202 2,847,677
Other income 201,730 181,500
------------ ------------
Income before income taxes and minority interest 10,537,932 3,029,177
Income taxes 3,694,064 810,809
------------ ------------
Income before minority interest 6,843,868 2,218,368
Minority interest in income of consolidated subsidiary (2,249,219) (773,778)
------------ ------------
Net income $ 4,594,649 1,444,590
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
96
<PAGE>
<PAGE>
ENGINEERING DEVELOPMENT LABORATORIES, INC. AND SUBSIDIARY
Condensed Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
SIX MONTHS ENDED
-------------------------------------
MARCH 21, MARCH 22,
1998 1997
---- ----
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 4,594,649 1,444,590
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 41,034 8,738
Minority interest in income of consolidated subsidiary 2,249,219 773,778
Deferred income taxes 37,914 (769,565)
Gains on investments (28,184) 2,049
Increase (decrease) in cash caused by changes in:
Accounts receivable (1,782,764) (93,739)
Contracts in progress (1,327,235) 2,212,272
Inventory (67,661) 20,546
Prepaid expenses and other assets (32,199) (7,930)
Accounts payable (974,754) (17,123)
Accrued liabilities (286,660) (113,525)
Income taxes payable 726,502 87,221
Deferred compensation (239,516) 100,075
----------- -----------
Net cash provided by operating activities 2,910,345 3,647,387
----------- -----------
Cash flows from investing activities:
Proceeds from sales of investments 356,605 780,703
Purchases of property and equipment (95,827) --
Proceeds from sale of property and equipment -- 32,996
Purchases of other assets (86,832) (12,506)
Sale of other assets -- 5,719
----------- -----------
Net cash provided by investing activities 173,946 806,912
----------- -----------
Cash flows from financing activities:
Distributions to stockholders (1,593,000) (2,545,500)
Dividends paid relating to minority interests (720,000) (1,741,000)
-------- ---------
Net cash used in financing activities (2,313,000) (4,286,500)
-------- ---------
Net increase in cash and cash equivalents 771,291 167,799
Cash and cash equivalents, beginning of period 609,475 65,646
-------- ---------
Cash and cash equivalents, end of period $ 1,380,766 233,445
======== =========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 19,315 149
======== =========
Income taxes $ 2,940,342 624,216
======== =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
97
<PAGE>
<PAGE>
ENGINEERING DEVELOPMENT LABORATORIES, INC. AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements
March 21, 1998 and March 22, 1997
(1) BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
Engineering Development Laboratories, Inc. ("EDL" or "Company") include
the accounts of EDL and its 56% owned subsidiary Signal Technology
Laboratories, Inc. ("STL"). The statements have been prepared in
accordance with instructions and requirements of Regulation S-B and,
therefore, do not include all information and footnotes necessary for a
fair presentation of financial position, results of operations and cash
flows in conformity with generally accepted accounting principles. In the
opinion of management, such financial statements, reflect all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
statement of financial position, results of operations and cash flows for
the interim periods presented. Operating results for the interim periods
are not necessarily indicative of the results that may be expected for the
full fiscal years.
These condensed consolidated financial statements and footnotes should be
read in conjunction with the Company's audited financial statements for
the nine month period ended October 4, 1997 and the fiscal year ended
December 28, 1996. The accounting principles used in preparing these
condensed consolidated financial statements are the same as those
described in such statements.
(2) SUBSEQUENT EVENT
On March 31, 1998, the Company entered into an agreement to sell the
common stock of EDL and substantially all of the business and operating
assets of STL to Paravant Computer Systems, Inc. ("Paravant"). Under the
terms of the agreement, the shareholders of EDL/STL would receive
approximately $8.7 million in cash, an 8% three year, $4.8 million note,
3,950,000 shares of Paravant's common stock and a cash earn-out payable
over five years based on EDL/STL's future profits. The agreement is
subject to the approval of Paravant's shareholders.
98
<PAGE>
<PAGE>
Management's Discussion and Analysis of Operations
RESULTS OF OPERATIONS
Six Months ended March 21, 1998 vs. March 22, 1997
Revenues for the six months ended March 21, 1998 were $21,613,907, an increase
of $12,887,462 or 148% over the six months ended March 22, 1997 revenues of
$8,726,445. This increase is primarily due to accelerated delivery requirements
by the government customer. These accelerated delivery requirements are not
anticipated to continue into the future.
Gross profit was $12,368,265 for the six months ended March 21, 1998 or 57% of
revenues, compared to $4,274,119 or 49% in the six months ended March 22, 1997,
a total increase of $8,094,146 or 189%. This increase in gross profitability
results primarily from the increased revenues discussed above. As volume has
increased, efficiencies in both production cycle time and fixed costs have been
attained.
Selling and administrative expenses of $2,032,063 in the six months ended March
21, 1998 increased by $605,621 or 42% from the six months ended March 22, 1997
expenses of $1,426,442. As a percentage of revenues, selling and administrative
expenses were 9% and 16% in the six months ended March 21, 1998 and March 22,
1997, respectively. As the volume has increased, efficiencies in selling and
administrative expenses as a percentage of revenues have been attained.
Income from operations was $10,336,202 for the six months ended March 21, 1998
compared to $2,847,677 in the six months ended March 22, 1997, an improvement of
$7,488,525. As a percentage of revenues, income from operations improved to 48%
in the six months ended March 21, 1998 from 33% in the six months ended March
22, 1997. The improvement to income from operations overall resulted primarily
from increased revenues and gross profits offset in part by increased selling
and administrative expenses as discussed above.
As a result, the Company's net income improved by 218% to $4,594,649 in the six
months ended March 21, 1998 compared to $1,444,590 in 1997. Net income as a
percentage of revenues was 21% in the six months ended March 21, 1998 compared
to 17% in the six months ended March 22, 1997. The improvement in net income
overall resulted primarily from increased revenues and gross profits, offset in
part by increased selling and administrative expenses as discussed above.
LIQUIDITY AND CAPITAL RESOURCES
The Company has a secured revolving credit arrangement with Star Bank in Dayton,
Ohio (the 'Bank') for a credit line of up to $1,500,000 that is renewed annually
and bears interest at the prime rate plus 0.25% for secured borrowings.
The Company's have, and continue to have, a dependence on a few major customers
for a significant portion of its revenues. This dependence for revenues has not
been
99
<PAGE>
<PAGE>
responsible for any unusual fluctuations in operating results in the past, and
management does not believe this concentration will generate fluctuations in
operating results in the future. However, the potential impact of losing a major
customer without securing offsetting and equivalent orders could result in a
significant negative impact to the operating results of the Company. The gross
margin contributions of the Company's major customers are not generally
different from those of its other customers as a whole.
The Company's operating cash flow was $2,910,345 and $3,647,387 for the six
months ended March 21, 1998 and March 22, 1997, respectively. The decrease in
the Company's operating cash flow for six months ended March 21, 1998 results
primarily from an increase in accounts receivable and unbilled receivables,
along with a decrease in accounts payable, offset in part by the increased net
income, more fully presented in the Condensed Statements of Cash Flows for the
six months ended March 21, 1998.
Generally, accounts receivable at the end of the period are collected within the
following month. Management feels no bad debt reserve is required.
As of March 21, 1998 and March 22, 1997, the Company's backlog was $8,419,233
and $14,443,376, respectively, consisting of firm fixed price purchase orders.
All of these purchase orders are expected to generate profits within the
Company's historical levels and the Company believes that the completion of the
orders comprising its backlog, and any new orders which may be accepted by the
Company in the future, should not result in additional liquidity pressures which
cannot be addressed in a manner consistent with the Company's past practices.
The Company presently expects to manufacture and deliver all of the products in
the backlog at March 21, 1998 within the next nine months.
On March 31, 1998, the Company entered into a definitive agreement to sell the
common stock of EDL and substantially all of the business and operating assets
of STL to Paravant Computer Systems, Inc. ('Paravant'). Under the terms of the
agreement, the shareholders of EDL/STL would receive approximately $8.7 million
in cash, 8%, three-year notes aggregating $4.8 million, 3,950,000 shares of
Paravant's common stock and a cash earn-out payable over five years based on
EDL-STL's future profits. The agreement is subject to the approval of Paravant's
shareholders.
100
<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," "The Acquisition Agreement - Description of the Company,"
"The Acquisition Agreement - Description of EDL and STL - Exceptional Recent
Earnings History of EDL and STL,"Financial Statements," 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.
SHAREHOLDERS SHOULD RELY ONLY ON THE INFORMATION CONTAINED 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 THIS PROXY STATEMENT. THIS PROXY STATEMENT IS DATED JULY 23,
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.
101
<PAGE>
<PAGE>
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.
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
July 23, 1998
102
<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--AUGUST 20, 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 August 20, 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.
103
<PAGE>
