<PAGE>
<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10 QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: December 31, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period ______ to ______
Commission file number: 0-28114
PARAVANT INC.
(Exact Name of Small Business Issuer as Specified in Its Charter)
<TABLE>
<S> <C>
Florida 59-2209179
(State or Other Jurisdiction of (I.R.S. Employer Identification Number)
Incorporation or Organization)
</TABLE>
1615A West Nasa Boulevard
Melbourne. Florida 32901
(Address of Principal Executive Offices)
407-727-3672
(Issuer's Telephone Number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days [X] Yes [ ] No
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
At February 10, 1998, there were outstanding
12,299,881 shares of Common Stock, $.015 par value per share.
Transitional Small Business Disclosure Format (check one): [ ] Yes [X] No
<PAGE>
<PAGE>
PARAVANT INC. AND SUBSIDIARIES
INDEX
<TABLE>
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited):
Condensed Consolidated Balance Sheet - December 31, 1998 ................ 3
Condensed Consolidated Statements of Operations for the three
months ended December 31, 1998 and 1997 ................................. 5
Condensed Consolidated Statements of Cash Flows for the three months
ended December 31, 1998 and 1997......................................... 6
Notes to Condensed Consolidated Financial Statements..................... 8
Item 2. Management's Discussion and Analysis of Operations...............13
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.................................18
SIGNATURES...............................................................18
Index to Exhibits Filed with Form 10-QSB dated February 16, 1998..........19
</TABLE>
Page 2
<PAGE>
<PAGE>
PARAVANT INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheet
December 31, 1998
<TABLE>
<CAPTION>
ASSETS
------
(Unaudited)
<S> <C>
Current assets:
Cash and cash equivalents $ 225,307
Accounts receivable, net 3,570,078
Employee receivables and advances 33,091
Costs and estimated earnings in excess of billings on
uncompleted contracts 5,009,043
Inventory, net 3,945,638
Prepaid expenses 86,836
Deferred income taxes 482,620
-----------
Total current assets 13,352,613
Property, plant and equipment, net 1,524,132
Intangible assets, net 5,753,934
Demonstration pool and custom molds, net 760,225
Employee note receivable 215,685
Other assets 763,149
Goodwill, net 12,238,951
------------
Total assets $ 34,608,689
============
</TABLE>
See accompanying notes to condensed consolidated financial statements
Page 3
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
(Unaudited)
<S> <C>
Current liabilities:
Current maturities of notes payable to related parties $ 1,200,000
Current maturities of capital lease obligations 38,686
Accounts payable 1,539,716
Due to related party 69,741
Accrued commissions 438,170
Accrued expenses 935,826
Accrued incentive compensation 307,134
Income taxes payable 677,301
------------
Total current liabilities 5,206,574
Revolving line of credit 8,455,984
Notes payable to related parties, net of current maturities 3,600,000
Capital lease obligations, less current maturities 27,071
Deferred compensation 109,911
Deferred income taxes, net 163,102
------------
Total liabilities 17,562,642
------------
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 12,299,881
shares 184,497
Additional paid-in capital 11,446,031
Retained earnings 5,415,519
------------
Total stockholders' equity 17,046,047
------------
Commitments and contingencies (note 8)
Total liabilities and stockholders' equity $ 34,608,689
============
</TABLE>
Page 4
<PAGE>
<PAGE>
PARAVANT INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
For the three months ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
---- ----
(Unaudited)
<S> <C> <C>
Revenues $ 8,482,293 3,597,965
Cost of revenues 3,445,702 1,975,269
------------ ------------
Gross profit 5,036,591 1,622,696
Selling and administrative expense 3,305,536 1,346,220
------------ ------------
Income from operations 1,731,055 276,476
Other income (expense):
Interest expense (246,944) (6,363)
Miscellaneous 58,984 27,886
------------ ------------
Income before income taxes 1,543,095 297,999
Income tax expense (609,523) (100,840)
------------ ------------
Net income $ 933,572 197,159
============ ============
Basic earnings per share $ 0.076 0.025
============ ============
Diluted earnings per share $ 0.074 0.017
============ ============
Weighted average number of common shares outstanding 12,252,837 7,995,865
============ ============
Weighted average number of common shares and dilutive
potential common shares outstanding 12,563,376 11,862,288
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
Page 5
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<PAGE>
PARAVANT INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
For the three months ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
---- ----
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 933,572 197,159
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 646,626 107,113
Writedown on leasehold improvements -- 11,311
Deferred income taxes (43,965) --
Increase (decrease) in cash caused by changes in:
Accounts receivable 905,905 1,269,016
Employee receivables and advances 16,163 19,621
Contracts in progress (3,621,998) --
Inventory (568,919) (101,562)
Prepaid expenses (8,161) (5,634)
Other assets 280,751 (360,231)
Accounts payable 1,043,756 343,042
Amounts due to related party (152,906) --
Accrued commissions (85,865) (25,306)
Accrued expenses (344,106) (64,820)
Accrued incentive compensation (47,672) --
Deferred compensation 109,911 --
Income taxes payable (45,009) (262,560)
----------- -----------
Net cash provided by (used in) operating activities (981,917) 1,127,149
----------- -----------
Cash flows from investing activities:
Payments for purchase business combination, net of cash acquired (8,713,817) --
Acquisitions of property, plant and equipment (165,318) (52,062)
Acquisitions of demonstration pool and custom molds -- (19,327)
Proceeds from collection of note receivable 750,000 --
----------- -----------
Net cash used in investing activities (8,129,135) (71,389)
----------- -----------
</TABLE>
(Continued)
Page 6
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<PAGE>
PARAVANT INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows, (Continued)
<TABLE>
<CAPTION>
1998 1997
---- ----
(Unaudited)
<S> <C> <C>
Cash flows from financing activities:
Repayments on previous line of credit (225,000) --
Net proceeds on revolving line of credit 8,455,984 --
Repayments on long-term debt (9,147) (27,501)
Repayments on capital lease obligations (24,985) (34,561)
Proceeds from issuance of common stock 1,719 2,201
Payments for retirement of underwriters' warrants (50,000) --
----------- -----------
Net cash provided by (used in) financing activities 8,148,571 (59,861)
----------- -----------
Net increase (decrease) in cash and cash equivalents (962,481) 995,899
Cash and cash equivalents at beginning of the period 1,187,788 1,612,627
----------- -----------
Cash and cash equivalents at end of the period $ 225,307 2,608,526
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 158,572 2,708
=========== ===========
Income taxes $ 460,491 363,400
=========== ===========
Supplemental disclosure of noncash investing and financing activities:
The Company entered into notes payable agreements with related
parties totaling $4,800,000 and issued common stock totaling
$5,925,000 in connection with the purchase business combination
during the three months ended December 31, 1998.
</TABLE>
See accompanying notes to condensed consolidated financial statements.
Page 7
<PAGE>
<PAGE>
PARAVANT INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
Paravant Inc. and Subsidiaries (the "Company"), have been prepared in accordance
with the instructions and requirements of Form 10-QSB and 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
fiscal year ending September 30, 1998 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 consolidated financial statements
are the same as those described in such statements, except as discussed below.
(b) REPORTING ENTITY
The accompanying unaudited condensed consolidated financial statements of
the Company include the financial statements of its wholly-owned
subsidiaries, Engineering Development Laboratories, Incorporated ("EDL") and STL
of Ohio, Inc. ("STL of Ohio"). Intercompany transactions and accounts have been
eliminated upon consolidation.
(c) BUSINESS
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 with primarily military applications. The Company has expanded
into the medical market and now provides a line of programmers, which are used
to provide programming information to medical pumps and related devices. In
addition, the Company designs, develops and produces military electronic
hardware, primarily related to airborne and avionics systems for the United
States Department of Defense and designs, develops and produces hardware,
primarily related to electronic signal conditioning and analysis, for foreign
and domestic intelligence agencies.
Page 8
<PAGE>
<PAGE>
PARAVANT INC. AND SUBSIDIARIES
NOTES TO CONDENSED FINANCIAL STATEMENTS - (CONTINUED)
The principal customers of the Company are United States Government
agencies and contractors who are subject to federal budgetary implications. The
work is performed under general fixed price purchase orders and on a general
production basis.
(d) REVENUE AND COST RECOGNITION
The Company recognizes revenues on product sales for military computers and
medical programmers when the customer accepts title, which typically occurs upon
shipment. Contracts to design, develop and manufacture complex aerospace and
electronic equipment to a buyer's specification or to provide services related
to the performance of such contracts are accounted for using the percentage-
of-completion method of accounting. 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 charges to operations in the period
that such losses are determined.
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 that are expected to be realized
upon final settlement. In management's opinion, adjustments resulting from any
DCAA audit for the period since acquisition will not have a material adverse
effect on the consolidated financial position or the results of operations.
(e) 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.
(f) 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 the exclusive rights to a
printed circuit board and certain software and non-compete agreements
negotiated during the acquisition of Signal Technology Laboratories, Inc.
("STL"), and are being amortized over the estimated useful lives of the
technology of 5 to 10 years and the estimated lives of the non-compete
agreements of 8-1/2 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. Goodwill, representing the excess of cost over the net tangible and
identifiable intangible assets of the Company's wholly-owned subsidiaries, is
stated at cost and is being amortized over the estimated future periods to be
benefited of 10 years using the straight-line method. When events and
circumstances so indicate, all long-term assets, including goodwill, are
assessed for recoverability based upon cash flow forecasts. An impairment loss
would be recorded in the period such determination is made based on the fair
value of the related business.
(g) 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 requires the disclosure of Basic and Diluted Earnings per Share.
Page 9
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PARAVANT INC. AND SUBSIDIARIES
NOTES TO CONDENSED FINANCIAL STATEMENTS - (CONTINUED)
Basic earnings per share for the three months ended December 31, 1998 and
1997 has been computed by dividing net income by the weighted average number of
common shares outstanding. Diluted earnings per share for the three months ended
December 31, 1998 and 1997 has been computed by dividing net income by the
weighted average number of common shares and dilutive potential common shares
outstanding.
A reconciliation of the weighted average number of shares outstanding used
in the computation of basic and diluted earnings per share is as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Basic:
Weighted average number of common
shares outstanding 12,252,837 7,995,865
========== ==========
Diluted:
Weighted average number of common
shares outstanding 12,252,837 7,995,865
Dilutive stock options 310,539 722,847
Dilutive warrants -- 3,143,576
---------- ----------
12,563,376 11,862,288
========== ==========
</TABLE>
Options and warrants to purchase 6,774,285 and 628,750 shares of common
stock were excluded from the calculation of diluted earnings per share for
the three months ended December 31, 1998 and 1997, respectively, because their
exercise prices exceeded the average market price of common shares for the
period.
(2) ACQUISITION
On October 8, 1998 the Company consummated a purchase business combination
(the "Acquisition"), effective October 1, 1998, of all of the outstanding common
stock of EDL and substantially all of the assets of STL, EDL's majority-owned
subsidiary. Pursuant to the Acquisition Agreement the Company paid consideration
consisting of (i) $8.7 million in cash, (ii) three-year $4.8 million notes
bearing interest at the rate of 8% and (iii) 3,950,000 shares of Common Stock.
In connection with the Acquisition a contingent cash earn-out will be payable by
the Company under specified circumstances over a period of up to five years
based on future profits of the acquired operation. The earn-out will be recorded
as a current expense in the year it is earned. The cash portion of the
consideration paid by the Company in connection with the Acquisition was
financed using floating rate financing obtained through National City Bank in
Dayton, Ohio (the "Bank") in an amount up to $14,000,000 under a revolving line
of credit with a maturity date of December 31, 2001, convertible thereafter to
five year term debt. (See Note 6)
The following unaudited pro forma financial information presents the
combined results of operations of the Company, EDL and STL as if the acquisition
had occurred as of October 1, 1998 and 1997, after giving effect to certain
adjustments, including amortization of goodwill, additional depreciation
expense, increased interest expense on debt related to the acquisition, and
related income tax effects. The pro forma financial information does not
necessarily reflect the results of operations that would have occurred had the
Company, EDL and STL constituted a single entity during such periods.
<TABLE>
<CAPTION>
Three months ended December 31
------------------------------
1998 1997
---- ----
(unaudited)
<S> <C> <C>
Net revenues $8,482,293 $16,693,851
========== ===========
Net income $ 933,572 $ 3,717,208
========== ===========
Basic earnings per share $ 0.076 $ 0.310
========== ===========
</TABLE>
Page 10
<PAGE>
<PAGE>
PARAVANT INC. AND SUBSIDIARIES
NOTES TO CONDENSED FINANCIAL STATEMENTS - (CONTINUED)
(3) COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
Contracts in progress and advance billings on such contracts consist of the
following as of December 31, 1998:
<TABLE>
<S> <C>
Costs incurred on uncompleted contracts $3,016,015
Estimated earnings thereon 1,610,397
----------
4,626,412
Billings to date 382,631
----------
$5,009,043
==========
</TABLE>
The above amount is included in the accompanying condensed consolidated
balance sheet under the following captions:
<TABLE>
<S> <C>
Costs and estimated earnings in excess of billings
on uncompleted contracts $5,009,043
Billings in excess of costs and estimated earnings
on uncompleted contracts --
Reserve for losses on contracts in process --
---------
$5,009,043
==========
</TABLE>
(4) INVENTORY
The following is a summary of inventory at December 31, 1998:
<TABLE>
<S> <C>
Raw materials $ 3,366,424
Work in process 927,132
Finished goods 64,075
-------------
4,357,631
Reserve for obsolete inventory (411,993)
-------------
$ 3,945,638
=============
</TABLE>
(5) INTANGIBLE ASSETS
Intangible assets consist of exclusive rights to a printed circuit board
and certain software, as well as non-compete agreements obtained through the
Acquisition. Cost and accumulated amortization of these assets at December 31,
1998 are as follows:
<TABLE>
<S> <C>
Cost $ 6,169,750
Accumulated amortization (415,816)
-----------
$ 5,753,934
===========
</TABLE>
Page 11
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<PAGE>
PARAVANT INC. AND SUBSIDIARIES
NOTES TO CONDENSED FINANCIAL STATEMENTS - (CONTINUED)
(6) REVOLVING LINE OF CREDIT
The Company has floating rate financing with National City Bank in Dayton,
Ohio (the "Bank") in an amount up to $14,000,000 under a revolving line of
credit with a maturity date of December 31, 2001, convertible thereafter to five
year term debt. Pursuant to the loan agreement, the rate of interest is to be
determined at a rate equal to the Bank's prime rate, the federal funds or 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 line of credit is secured by a first security
interest in accounts, contract rights, inventory, equipment and other security
reasonably requested by the lender. As of December 31, 1998, borrowings
outstanding under this line of credit totaled $8,455,984.
(7) NOTES PAYABLE TO RELATED PARTIES
The following is a summary of long-term debt at December 31, 1998:
<TABLE>
<S> <C>
Notes payable to related parties bearing a fixed rate of interest of 8%;
interest and principal due in quarterly installments including
principal of $400,000, beginning April 1, 1999; final payment
due January 1, 2002. These notes are subordinate to the revolving
line of credit payable to Bank. $ 4,800,000
Less current maturities (1,200,000)
-----------
Notes payable to related parties, net of current maturities $ 3,600,000
===========
</TABLE>
(8) SUBSEQUENT EVENT
In connection with the Acquisition, the Company's subsidiary STL of Ohio
and STL agreed that STL would place firm fixed price subcontracts with STL
of Ohio to complete the backlog of STL's contracts existing at the time of
closing of the Acquisition. On January 28, 1999, the Company was notified by STL
that it is disputing the backlog value of such contracts and the allocation of
profits obtained upon fulfillment of such contracts. The disputed contract
value is approximately $1,074,000. Management believes that the likelihood
that the ultimate resolution of this matter will have a material adverse
impact to the Company is remote.
Page 12
<PAGE>
<PAGE>
PART I - FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
RESULTS OF OPERATIONS
Three Months ended December 31, 1998 vs. December 31, 1997
Revenues for the quarter ended December 31, 1998 were $8,482,293, an
increase of $4,884,328 or 136% over the quarter ended December 31, 1997 revenues
of $3,597,965. This increase is primarily due to the addition of revenues from
newly acquired operations which account for $6,518,781 of the 1998 revenues. The
increase provided by the acquisitions is offset by a reduction in the computer
systems business, which is due primarily to timing of contracts as well as
changes in the composition of the current backlog. For the fiscal year
production related to 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 will be comparable to sales last year, however, the majority of
deliveries are scheduled for the third and fourth quarters of fiscal 1999.
Production of the U.S. Marine Corps AVENGER Air Defense missile system upgrade
for Raytheon will be approximately half of the prior year's production and will
begin delivery in the second quarter of fiscal 1999. However, the decrease in
the AVENGER program will be more than offset by a significant increase in sales
of medical computers starting in the second quarter and continuing into the
next fiscal year.
Gross profit was $5,036,591 for the quarter ended December 31, 1998 or 59%
of sales, compared to $1,622,696 or 45% of sales in the quarter ended December
31, 1997, a total increase of $3,413,895 or 210%. This increase in gross
profitability results primarily from the increased revenues contributed by
the newly acquired subsidiaries, which account for $3,987,791 of gross profits.
The increase provided by these segments is offset by a decrease in the computer
systems gross profit which is due to the decrease in revenues.
Selling and administrative expenses of $3,305,536 in the quarter ended
December 31, 1998, increased by $1,959,316 or 146% from the quarter ended
December 31, 1997 expenses of $1,346,220. As a percentage of revenues, selling
and administrative expenses were 40% and 37% in the quarters ended December 31,
1998 and 1997, respectively. The increased selling and administrative expenses
are due primarily to the addition of the newly acquired subsidiaries, which
represent $1,352,276 of the total increase. The remaining increase is due
primarily to amortization of goodwill and intangible assets.
Income from operations was $1,731,055 for the quarter ended December 31,
1998 compared to $276,476 in the quarter ended December 31, 1997, an improvement
of $1,454,579. As a percentage of sales, income from operations increased to 20%
in the quarter ended December 31, 1998 from 8% in the quarter ended December 31,
1997. The improvement to income from operations overall resulted primarily from
increased revenues and gross profits associated with the new subsidiaries,
offset in part by a decrease in computer systems business and increased selling
and administrative expenses as discussed above.
Interest expense for the quarter ended December 31, 1998 was increased by
$240,581 to $246,944 compared to $6,363 in the quarter ended December 31, 1997.
As a percentage of sales, interest expense increased to 3% in the quarter
ended December 31, 1998 from less than 0.1% in the quarter ended December 31,
1997. This increase is due to an increase in outstanding credit balances
required to finance the purchase business combination.
The Company's net income improved by 374% to $933,572 in the quarter ended
December 31, 1998 compared to $197,159 in 1997. Net income as a percentage of
sales was 11% and 5% in the quarters ended December 31, 1998 and 1997,
respectively. The improvement in net income overall, resulted primarily from
increased revenues and gross profits, offset in part by increased selling and
administrative expenses.
Page 13
<PAGE>
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company has floating rate financing with National City Bank in Dayton,
Ohio (the "Bank") in an amount up to $14,000,000 under a revolving line of
credit with a maturity date of December 31, 2001, convertible thereafter to five
year term debt. Pursuant to the loan agreement, the rate of interest is to be
determined at a rate equal to the Bank's prime rate, the federal funds or 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 line of credit is secured by a first security
interest in accounts, contract rights, inventory, equipment and other security
reasonably requested by the lender. The loan agreement includes various loan
covenants and restrictions of a customary nature which may, under certain
circumstances, 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. As of
December 31, 1998, there was $8,455,984 outstanding under this arrangement with
the Bank.
In addition, the Company has subordinated notes, payable to each of the
previous shareholders of EDL and STL, aggregating $4,800,000. These notes bear
interest at 8%, are payable in quarterly payments beginning April 1, 1999 and
mature on January 1, 2002. These notes are subordinate to the rights of National
City Bank.
The Company has 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 from
those from its other customers as a whole.
The Company's operating cash flow was $(981,917) and $1,127,149 for the
three months ended December 31, 1998 and 1997, respectively, and $2,049,678 for
fiscal 1998. The reduction in the Company's operating cash flow results
primarily from increases in contracts in progress, inventory and accounts
payable for the three months ended December 31, 1998.
Page 14
<PAGE>
<PAGE>
As of December 31, 1998, 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. The Company's total outstanding accounts
receivable balance of $3,570,078 at December 31, 1998 has been subsequently
reduced by approximately $2,367,000 in cash collections. We have provided a
reserve for certain older balances of $88,993. This reserve is believed to be
more than sufficient to address any uncollectible balances outstanding as of
December 31, 1998.
On June 3, 1998, the Company entered into a loan agreement with an officer
and director of the Company. The note receivable of $215,685 bears interest at
the rate of interest then applicable for borrowings by the Company under the
Company's then existing line of credit or other primary lending arrangement with
its primary lender, with interest payable annually, and matures on June 3, 2003.
On July 2, 1998, the company entered into a loan agreement with UES, Inc.
("UES"), an affiliate of the Company, which is controlled by the Company's
Chairman. The note receivable of $750,000 was due on December 31, 1998 and bore
interest at 7% payable monthly. The note was personally guaranteed by the
Company's Chairman. As of December 31, 1998, this note was paid in full.
As of December 31, 1998 and 1997, the Company's backlog was approximately
$26.6 million and $12.7 million, 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 approximately $25.3 million of the products in backlog within the next
12 months. The remaining $1.3 million of products in backlog will be completed
over the next 24 months.
The Company anticipates, based on its currently proposed plans and
assumptions relating to its operations, that the Company's existing working
capital and anticipated cash flows from the Company's operations, are expected
to be sufficient to satisfy the Company's cash requirements for at least twelve
months. As the Company continues to grow, additional bank borrowings, such as
the revolving line of credit, previously described, 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.
YEAR 2000 COMPLIANCE
The Company recognizes that year 2000 issues could result in system
failures or miscalculations causing disruptions of operations, including, among
others, a temporary inability to process transactions, send invoices or engage
in similar normal business activities.
Page 15
<PAGE>
<PAGE>
The Company has been engaged in an evaluation of its year 2000 readiness
concerning various aspects of its business. Specifically, the Company has
focused on its information technology and non-information technology systems. In
addition, the Company has analyzed its production processes and products. The
Company has also attempted to analyze year 2000 issues relating to third parties
with whom the Company has a business relationship. The current status of the
Company's efforts is as follows:
Information Technology Systems: The Company's accounting software provider
and operating system provider have advised the company that such software
is year 2000 compliant.
Non-Information Technology Systems: Although the Company does not believe
that non-information technology systems are significant to its business,
the Company has begun reviewing and testing such systems. The Company does
not believe that it will incur any material costs in connection with the
review and testing of such systems.
Products: The Company's products are date sensitive. Engineering has
already accomplished a review of Paravant products and has published a
list by product as to whether the product meets year 2000 requirements
or if not, what must be accomplished for the product to meet these
requirements. In these incidences, the worst case scenario is the product
operator would, after 0001 hours January 1, 2000, enter the time and date
into the product's set up and reboot the product. Therefore, the Company
does not believe it has any material exposure with regard to its products
as a result of the year 2000 issue.
Suppliers: Certain products purchased by the Company are obtained from a
limited group of suppliers. The Company surveyed such suppliers in 1998
regarding their year 2000 status. Absent widespread difficulties affecting
several major vendors, the Company does not anticipate that vendors' year
2000 Issues would have a material adverse effect on the Company, because
the Company believes alternative sources of supply are available for al1
required components.
The Company is not currently aware of the year 2000 readiness of certain
outside services companies. Any adverse effect caused by the failure of
these providers to be year 2000 compliant is not currently susceptible to
quantification.
Customers: Because the customer base is expected to change from year to
year, the Company is unable to predict the identity of most of its major
customers in the year 2000 and thereafter. Accordingly, the Company is
unable to make an inquiry as to whether the customers' computer driven
payment or purchasing processes are year 2000 compliant. A customer's year
2000 issues could cause a delay in receipt of purchase orders or in
payment. If year 2000 issues are widespread among the Company's customers,
the Company's sales and cash flow could be materially affected. However,
the Company has a plan in place, to mitigate the potential effects of
customers' year 2000 issues.
EDL-STL ACQUISITION
On October 8, 1998 the Company consummated the Acquisition, effective
October 1, 1998, of all of the outstanding common stock of EDL and substantially
all of the assets of STL, EDL's majority-owned subsidiary. The assets of STL
were transferred to the newly formed, wholly owned subsidiary, STL of Ohio,
Page 16
<PAGE>
<PAGE>
EDL and STL are engaged in the business of designing, developing and producing
equipment to meet U.S. and foreign government requirements. EDL, whose primary
customers include the U.S. Air Force, U.S. Navy and U.S. Marines and allied
military forces specializes in designing, developing and producing avionics
equipment used to modify the airborne platforms employed by Special Operations
forces. STL, whose customers include several U.S. government agencies and
government prime contractors, designs and produces digital signal processing
hardware, digital switch matrices for signal routing purposes, and other
products for signal enhancement and modification. Pursuant to the Acquisition
Agreement the Company paid consideration consisting of (i) $8.7 million in cash,
(ii) three-year $4.8 million notes bearing interest at the rate of 8% and (iii)
3,950,000 shares of Common Stock. In connection with the Acquisition a
contingent cash earn-out will be payable by the Company under specified
circumstances over a period of up to five years based on combined future profits
of the acquired operations. The earn-out will be recorded as a current expense
in the year it is earned. The cash portion of the consideration paid by the
Company, in connection with the Acquisition, was financed under the revolving
line of credit, previously discussed.
In connection with the Acquisition, the Board of Directors has increased
the size of the Board to eight members and has appointed as additional members
of the Board three former shareholders and directors of EDL and STL. These
directors include Edward W. Stefanko, President and Chief Executive officer of
EDL, C. Hyland Schooley, President of STL and James E. Clifford, Executive Vice
President and Chief Operating Officer of STL. Messrs. Stefanko, Schooley and
Clifford will continue to serve on the Company's Board of Directors until the
next annual meeting of the Company's shareholders and until their respective
successors are duly elected and qualified.
Mr. Clifford was a member of the Board of Directors from 1995 through
December 30, 1997. He resigned as a director to allow the negotiations for the
Acquisition to be conducted at arm's length. Although the negotiations began
prior to Mr. Clifford's resignation, he was excused from any discussion of the
deal by the Board.
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 electronics industries, the Board of Directors recommended a change in the
name of the Company from Paravant Computer Systems, Inc. to Paravant Inc. The
proposal to change the name of the Company was approved by the shareholders of
the Company on September 17, 1998 at a special meeting of the Company's
Shareholders. The name change was effective on November 1, 1998.
LEGAL PROCEEDING SETTLEMENT
In March 1996, the Company's former counsel, Cascone & Cole (the
"plaintiff"), rendered an invoice to the Company in the amount of approximately
$365,000 which was subsequently increased to approximately $415,000 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. On December 21, 1998, the parties agreed to a
settlement of this lawsuit in an amount of $200,000 cash approximating the
amount accrued on September 30, 1998, and the plaintiff delivered to the company
a general release of liability. The settlement became final following the filing
with the court of a stipulation of discontinuance with prejudice in January
1999.
SUBSEQUENT EVENT
In connection with the Acquisition, the Company's subsidiary STL of Ohio
and STL agreed that STL would place firm fixed price subcontracts with STL of
Ohio to complete the backlog of STL's contracts existing at the time of closing
of the Acquisition. On January 28, 1999, the Company was notified by STL that it
is disputing the backlog value of such contracts and the allocations of profits
obtained upon fulfillment of such contracts. The disputed contract value is
approximately $1,074,000. Management believes that the likelihood that the
ultimate resolution of this matter will have a material adverse impact to
the Company is remote.
CAUTIONARY STATEMENT
This Quarterly Report of Form 10-QSB contains certain forward-looking
statements. Actual results could differ materially from those projected in the
forward-looking statements as a result of various factors, including but not
limited to the budgetary and appropriations policies of the Company's
governmental customers, the competitive environment for the Company's products
and services, the timing of new orders and the degree of market penetration of
the Company's new products.
Page 17
<PAGE>
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Part II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8 K
(a) Exhibits
3(i) Amended and Restated Articles of Incorporation*
3(ii) Amended and Restated Bylaws**
10.36 Credit Agreement by Registrant with National City Bank*
10.37 Commercial Note by Registrant with National City Bank*
10.38 Employment Agreement between Paravant Computer Systems, Inc. and Edward
W. Stefanko dated October 1, 1998*
10.39 Employment Agreement between Paravant Computer Systems, Inc. and C. Hyland
Schooley dated October 1, 1998*
10.40 Employment Agreement between Paravant Computer Systems, Inc. and James
E. Clifford dated October 1, 1998*
10.41 Non-competition Agreement between Paravant Computer Systems, Inc. and
C. Hyland Schooley dated October 1, 1998*
10.42 Subordinated Note from Paravant Computer Systems, Inc. and Edward W.
Stefanko dated October 1, 1998*
10.43 Subordinated Note from Paravant Computer Systems, Inc. and C. Hyland
Schooley dated October 1, 1998*
10.44 Subordinated Note from Paravant Computer Systems, Inc. and James E.
Clifford dated October 1, 1998*
11 Statement re: computation of per share earnings (not required because the
relevant computation can be clearly determined from material contained in
the financial statements).
27 Financial Data Schedule
* Incorporated by reference from the Registrant's Annual Report on Form
10-KSB for the fiscal year ended September 30, 1998.
** Incorporated by reference from Exhibit 3.2 of the Registrant's Quarterly
Report on Form 10-QSB for the period ended June 30, 1996.
(b) Reports on Form 8-K:
Form 8-K, dated October 8, 1998, was filed on October 21, 1998 reporting
under Item 2 an acquisition agreement by and among Paravant Computer Systems,
Inc., Engineering Development Laboratories, Incorporated, Signal Technology
Laboratories, Inc., James E. Clifford, Edward W. Stefanko, C. David Lambertson,
C. Hyland Schooley, Peter Oberbeck and Leo S. Torresani.
Amendment Number 1 to Form 8-K, dated October 8, 1998, was filed on
December 22, 1998, amending Items 7(a) and 7(b) of its current report on Form
8-K filed with the Securities and Exchange Commission on October 23, 1998, to
supply certain financial statements and pro forma financial information that
were not available at the time of filing.
Amendment Number 2 to Form 8-K, dated October 8, 1998, was filed on
December 23, 1998, amending Item 7(a) of its current report on Form 8-K filed
with the Securities and Exchange Commission on October 23, 1998, as amended
December 22, 1998.
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934
the Registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
PARAVANT INC. AND SUBSIDIARIES
Date: February 16, 1999 By /s/ Kevin J. Bartczak
--------------------------------
Kevin J. Bartczak Vice
President, Treasurer and Chief
Financial Officer (as both a
duly authorized officer of
Registrant and as principal
financial officer of Registrant)
Page 18
<PAGE>
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Paravant Computer Systems, Inc.
Index to Exhibits filed with Form 10-QSB dated February 16, 1999
<TABLE>
<CAPTION>
Exhibit Description of Exhibit
------- ----------------------
<S> <C>
3(i) Amended and Restated Articles of Incorporation*
3(ii) Amended and Restated Bylaws**
10.36 Credit Agreement by Registrant with National City Bank*
10.37 Commercial Note by Registrant with National City Bank*
10.38 Employment Agreement between Paravant Computer Systems, Inc. and Edward
W. Stefanko dated October 1, 1998*
10.39 Employment Agreement between Paravant Computer Systems, Inc. and C. Hyland
Schooley dated October 1, 1998*
10.40 Employment Agreement between Paravant Computer Systems, Inc. and James
E. Clifford dated October 1, 1998*
10.41 Non-competition Agreement between Paravant Computer Systems, Inc. and
and C. Hyland Schooley dated October 1, 1998*
10.42 Subordinated Note from Paravant Computer Systems, Inc. and Edward W.
Stefanko dated October 1, 1998*
10.43 Subordinated Note from Paravant Computer Systems, Inc. and C. Hyland
Schooley dated October 1, 1998*
10.44 Subordinated Note from Paravant Computer Systems, Inc. and James E.
Clifford dated October 1, 1998*
27 Financial Data Schedule
* Incorporated by reference from the Registrant's Annual Report on Form 10-KSB
for the fiscal year ended September 30, 1998.
** Incorporated by reference from Exhibit 3.2 of the Registrant's Quarterly
Report on Form 10-QSB for the period ended June 30, 1996.
</TABLE>
Page 19
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY CONSOLIDATED FINANCIAL INFORMATION EXTRACTED FROM
THE BALANCE SHEETS AND STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY OF PARAVANT
INC. AND SUBSIDIARIES AS OF DECEMBER 31, 1998 AND THE RELATED STATEMENTS OF
OPERATIONS AND CASH FLOWS FOR THE THREE MONTHS ENDED DECEMBER 31, 1998 AND 1997
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<S> <C> <C>
<FISCAL-YEAR-END> SEP-30-1999 SEP-30-1998
<PERIOD-START> OCT-01-1998 OCT-01-1997
<PERIOD-END> DEC-31-1998 DEC-31-1997
<PERIOD-TYPE> 3-MOS 3-MOS
<CASH> 225,307 2,608,526
<SECURITIES> 0 0
<RECEIVABLES> 3,659,071 2,963,896
<ALLOWANCES> 88,993 141,497
<INVENTORY> 8,954,681 3,563,335
<CURRENT-ASSETS> 13,352,613 9,523,742
<PP&E> 2,709,755 1,828,439
<DEPRECIATION> 1,185,623 959,437
<TOTAL-ASSETS> 34,608,689 11,397,754
<CURRENT-LIABILITIES> 5,206,574 2,851,278
<BONDS> 0 0
<COMMON> 184,497 120,041
0 0
0 0
<OTHER-SE> 16,861,551 8,288,832
<TOTAL-LIABILITY-AND-EQUITY> 34,608,689 11,397,754
<SALES> 8,482,293 3,597,965
<TOTAL-REVENUES> 8,482,293 3,597,965
<CGS> 3,445,702 1,975,269
<TOTAL-COSTS> 3,445,702 1,975,269
<OTHER-EXPENSES> 3,305,536 1,346,220
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 246,944 0
<INCOME-PRETAX> 1,543,095 297,999
<INCOME-TAX> 609,522 100,840
<INCOME-CONTINUING> 933,572 197,159
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 933,572 197,159
<EPS-PRIMARY> 0.076 0.025
<EPS-DILUTED> 0.074 0.017
</TABLE>
