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________________________________________________________________________________
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-KSB
[x] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1999
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 0-28114
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PARAVANT INC.
(EXACT NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
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FLORIDA 59-2209179
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
1615A WEST NASA BOULEVARD, MELBOURNE, FL 32901
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
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ISSUER'S TELEPHONE NUMBER, INCLUDING AREA CODE: (321) 727-3672
------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
------------------------
COMMON STOCK, $.015 PAR VALUE
(TITLE OF CLASS)
------------------------
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
Yes [x] No [ ]
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendments to this Form 10-KSB. [ ]
The issuer's revenues for its most recent fiscal year were $42,279,478.
The aggregate market value of voting stock held by non-affiliates of the
registrant on December 7, 1999 was approximately $32,181,638. On such date, the
closing price of the issuer's Common Stock was $2.53 per share. Solely for the
purposes of this calculation, shares beneficially owned by directors, executive
officers and stockholders of the issuer that beneficially own more than 10% of
the issuer's voting stock have been excluded, except such shares, if any, with
respect to which such directors and officers disclaim beneficial ownership. Such
exclusion should not be deemed a determination or admission by the issuer that
such individuals are, in fact, affiliates of the registrant.
The number of shares of the registrant's Common Stock, $.015 par value,
outstanding on December 7, 1999 was 17,550,129.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Company's Proxy Statement in connection with its Annual
Meeting scheduled to be held on March 23, 2000 are incorporated by reference in
Part III. The Company's Proxy Statement will be filed within 120 days after
September 30, 1999.
Transitional Small Business Disclosure Format (check one) Yes [ ] No [x]
________________________________________________________________________________
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PARAVANT INC.
ANNUAL REPORT ON FORM 10-KSB
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1999
TABLE OF CONTENTS
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PART I
Item 1. Description of Business...................................... 3
Item 2. Description of Property...................................... 14
Item 3. Legal Proceedings............................................ 14
PART II
Item 5. Market for Common Equity and Related Stockholder Matters..... 15
Item 6. Management's Discussion and Analysis of Financial Condition
and Results of Operation................................... 15
Item 7. Financial Statements......................................... 28
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure................................... 28
PART III
Item 9. Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the Exchange
Act........................................................ 29
Item 10. Executive Compensation....................................... 29
Item 11. Security Ownership of Certain Beneficial Owners and
Management................................................. 29
Item 12. Certain Relationships and Related Transactions............... 29
Item 13. Exhibits and Reports on Form 8-K............................. 29
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Paravant Inc. (the 'Company' or 'Paravant') serves the defense industry
with a range of electronic products engineered to meet applications within
aircraft support, fire control, communications and signal intelligence. Paravant
also offers software design and integration services and extensive customization
services to modify its standard products to the specific needs of end users. The
Company's products include signal processing computer systems, communications
controllers, rugged computers and custom designed helicopter subsystems. Its
products have a reputation for high-level performance and reliability in
difficult circumstances. The Company's products are sold to U.S. and foreign
military establishments, government prime contractors and medical equipment
manufacturers. The Company operates its business through its three wholly-owned
subsidiaries, Paravant Computer Systems, Inc., Engineering Development
Laboratories, Incorporated and STL of Ohio, Inc.
HISTORY
In early 1983, the Company commenced its business operations and offered
only engineering services for computer applications. In this initial period,
Paravant modified computer hardware and other equipment and developed special
software applications for its customers. It also served as a value-added
reseller for a Japanese manufacturer of portable computers.
In the mid 1980's, the Company began developing its first rugged computer
under a special grant from the U.S. Department of Defense Small Business
Innovative Research Program. By 1987, Paravant was producing its RHC-88
hand-held computer and selling it to the U.S. Army and to the electric utility
industry. Subsequently, the Company designed and produced other computer-related
products. During this time, the Company also began to design and build medical
devices for selected medical equipment manufacturers.
By late 1989, UES, Inc. ('UES'), under the control of Krishan K. Joshi
(currently the Company's Chairman), purchased a 51% equity interest in the
Company through its wholly owned subsidiary, UES Florida, Inc. Previously,
Paravant and UES had worked together on a joint development project. By mid
1990, four of its original five founders had left Paravant's employ and sold all
their equity interest in it. Of this group, only Richard P. McNeight, the
President of the Computer Systems subsidiary, remains. In the fall of 1991,
William R. Craven joined the Company and became its Vice President of Marketing.
The Company, which was incorporated in Florida in June 1982, consummated in
June 1996 an initial public offering (the 'IPO') of 1,150,000 shares (before
giving effect to the Stock Split (as defined below)) of Common Stock, par value
$.045 per share ('Common Stock'), and 1,610,000 redeemable warrants (before
giving effect to the Warrant Split (as defined below)), each to purchase one
share of Common Stock (the 'Warrants').
On July 25, 1996, the Company effected a three-for-one stock split (the
'Stock Split'). In connection with the Stock Split, the Company amended its
Articles of Incorporation to decrease the par value of the Common Stock from
$.045 per share to $.015 per share. Also in connection with the Stock Split,
each Warrant to purchase one share of Common Stock at an exercise price of $6.00
per share was converted into three Warrants, each to purchase one share of
Common Stock at an exercise price of $2.00 per share. The redemption price of
the Warrants was reduced to $.0167 per Warrant (the 'Warrant Split'). Unless
otherwise noted, all references to the Common Stock and the Warrants contained
herein are after giving effect to the Stock Split and the Warrant Split.
In 1996 with a portion of the proceeds from the IPO, the Company began to
focus on providing the medical market with a line of programmer products, which
are used to provide programming information to medical pumps, and related
devices, which have been surgically implanted into the human body. These
inserted devices perform a wide range of functions from monitoring of the heart
to providing medication and electric stimulation for pain management.
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OCTOBER 1998 ACQUISITION
Effective as of October 1, 1998, Paravant completed the acquisition
('EDL-STL Acquisition') of two related defense electronics companies,
Engineering Development Laboratories, Incorporated ('EDL') and the assets of
Signal Technology Laboratories, Inc., EDL's majority-owned subsidiary ('STL' and
together with EDL, 'EDL-STL') of Dayton, Ohio. STL is a designer and producer of
signal processing equipment used in the signal intelligence community to process
gathered signals. EDL provides the U.S. Department of Defense ('DoD') and allies
of the U.S. with upgrades to primarily rotary winged aircraft including multiple
control panels and flight controls, among other products. EDL engineers these
upgrades as required and provides complete installation services when requested.
See 'MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION -- EDL-STL ACQUISITION' for a more complete description of the
acquisition transactions.
INDUSTRY BACKGROUND -- MILITARY MARKET
Traditionally, the DoD has retained military contractors to develop
electronics and computer technology for specific missions that meet extensive
military specifications. This approach has often taken longer from development
through production, and tends to be much more expensive, than similar technology
available in the commercial sector. Unlike other scientific areas, the rapid
advances made in computer technology in the commercial market have often
exceeded and driven those developed specifically for the military. Consequently,
when the U.S. military has pursued the more costly and time-consuming
procurement procedures, its computers have still lagged behind the comparable
commercial technology in terms of capabilities.
Due to these factors, the DoD began in the mid 1980's to shift from its
dependence on electronics meeting full military specifications ('Mil-Spec') to
acquiring commercially available components that have been modified for
environmental and operational realities of the military applications in
question. While the U.S. military still procures products with Mil-Spec
components, this transition to more commercially oriented systems has resulted
in its realization of the desired benefits and savings.
Given the dismantling of the former Soviet Union and related budgetary
considerations, there has been a concerted effort on the part of U.S. Congress
from 1990 to 1998 to downsize the military, and U.S. military spending declined.
The Company believes that increases in spending on defense electronics will
occur during the next five years.
The downward trend in overall defense spending has been a positive
development for some sales to the U.S. military in recent years in three general
areas, for less than full Mil-Spec militarized computers in general and rugged
computers specifically, for the upgrading of older weapons and aircraft systems
that could not be replaced due to budget restraints and for the upgrading of
signal intelligence data collection systems intended to gather data in certain
countries which have experienced destabilization related to the break-up of the
former Soviet Union.
Management believes that as military budgets are increased over the next
five years, the Company will benefit as it has respositioned itself to take
advantage of the purchase of newer communications and command and control ('C3')
systems. These systems will be required as part of the Army's digitization
initiatives in which it seeks to upgrade the entire communications
infrastructure from the foxhole to the command centers. This new communications
infrastructure will enable broad bandwidth communications such as those required
for large data packets and for video signals. By focusing in this high growth
area for new product development and investment in prototypes as well as seeking
additional acquisition partners, management believes it will experience
continued growth as such systems are purchased and installed. In 1999 the
Company focused on and secured a contract for a key part of the digital
battlefield in the Global Broadcast Service ('GBS'). The Company provides the
GBS server and operator control unit to a division of Raytheon. Management hopes
that continued focus on this area will allow its position in the GBS program to
be broadened into other programs related to the Army digitization effort.
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INDUSTRY BACKGROUND -- SIGNAL INTELLIGENCE
In recent years, accurate and comprehensive information regarding foreign
affairs and developments has become increasingly important to the U.S.
Government. The reduction in U.S. military tactical forces overseas has
heightened the U.S. Government's need to quickly assess military risks,
particularly in areas of instability as they develop around the world. The
breakup of the Soviet Union and civil unrest in certain nations in Eastern
Europe, Africa, and South America indicate an increase in geographic areas that
might require monitoring. In addition, the U.S. Government requires information
regarding overseas activities to conduct drug interdiction operations.
As part of its efforts to obtain information, the U.S. Government gathers
and analyzes telecommunication signals emanating from foreign countries. In
recent years, the use of established telecommunication technologies has
increased throughout the world and new telecommunication technologies,
supplementing rather than replacing prior technologies, have been developed and
commercialized. These trends have led to a significant increase in the overall
volume of information communicated and an increase in the density of signals
transmitted throughout the radio frequency spectrum. This increase can be seen
in the proliferation of facsimile, cellular, and digital signal
telecommunications equipment and the global information network (World Wide Web)
in the last decade, resulting in a significant increase in the amount of
information being communicated. These trends have required the development of
signal reconnaissance equipment capable of collecting and processing an
increased volume of signals as well as new types of signals.
Traditionally, organizations within the U.S. Government have satisfied
their signal reconnaissance needs by first identifying their specific
requirements and then contracting with government contractors to provide
equipment. Contractors typically designed and built custom signal processing
systems optimized to satisfy the particular needs of various agencies.
Development of custom systems usually required many years of effort and involved
great expense. The time required to develop these systems often meant that when
a system was delivered, it did not address new telecommunications technologies
that had evolved during the development process. These factors, combined with
growing budgetary constraints, have caused many agencies to search for more
flexible and cost-effective signal reconnaissance solutions that can be deployed
promptly.
As former Soviet-affiliated states continue the change process from
centrally controlled economic and political systems toward locally controlled
systems over the next decade, the need to monitor those states, particularly
those with nuclear arsenals or the ability to disrupt world commerce, will
remain high. Management feels that Paravant, through its experience in the
digital signal processing arena will be able to continue to serve this vital
strategic need for intelligence.
INDUSTRY BACKGROUND -- MEDICAL
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.
Management has directed that its medical activities be focused into
opportunities to serve initiatives put in place by the U.S. Army to digitize the
delivery of medical services through telemedicine and related 'remote physician'
access programs. The Company will be working in this area during the coming
fiscal year in an effort to better leverage its skills in the marketing of
products to the military and its ability to serve the DoD.
PRODUCTS
The Company's products include a line of rugged, portable computers that
includes hand-held devices, laptops and portable systems used on desk tops and
in vehicles, digital signal processing equipment which is used to process
collected data files in signal intelligence and avionics related equipment.
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The Company's computers are designed to meet and exceed certain military
specifications for operation in harsh environments and for insulation from
electromagnetic interference. The reliability and performance of its products in
extreme environmental and operational situations relate directly to Paravant's
fundamental electrical and mechanical designs, its specification and selection
of proper components, its manufacturing techniques and the extensive testing
that it employs at various phases. The computer systems are designed with an
open architecture configuration for maximum flexibility. The Company's software
is based on MS-Windows or MS-DOS operating systems, although the Company
provides other operating systems to meet customer needs.
Like many of its competitors, the Company's computers are available with
standard serial and parallel communications capabilities. These capabilities
allow Paravant's computers to transmit and receive electronic signals and
messages to and from other electronic systems. Its standard communications
interfaces may be made operational in military, governmental and commercial
applications. However, unlike certain of its competitors, the Company also
offers specialized communication interfaces for military applications that meet
certain military specifications. These interfaces link up all the electronic
devices in one system so that they can exchange critical information necessary
for the performance and mission of that system. In addition, Paravant has
developed a tactical communication interface that connects different electronics
systems operating on the battlefield with one another. Communication with these
various interfaces can be achieved electronically, by radio or other means.
In the military area, typical applications of the Company's computers
entail aircraft and shipboard diagnostic, testing and maintenance systems,
controller and radar displays for missile systems, performance recorders in
training exercises, mission loaders and verifiers of data and field command
control systems.
In the medical area, the Company's products are custom platforms, which
include medical power supplies, custom interfaces to support customer's
telemetry hardware and protocols, a display, and various forms of input devices.
The product case can be a laptop, desktop or hand held model, depending on the
customer need for portability and expansion. In all cases, the Paravant product
allows the medical practitioner to communicate with an inserted medical device
and adjust the function of an implanted device.
In the signal processing area, the Company designs and produces more than
thirty products, which it produces and sells to the military and intelligence
organizations of the U.S. Government. These products can generally be separated
into four signal processing categories: routing and switching; modification and
reformatting; conditioning; and enhancement.
Signal routing and switching systems are a major portion of the Company's
signal processing products. In modern signal processing systems it is often
required to reconfigure the processing chain to accommodate a different
architecture. The Company's products switch or route not just a single stream of
data, but that of sixteen bits of data and clock. As the requirements have
evolved, the Company has developed larger systems that perform this
switching/routing function at higher speeds and with more input and output
signals. New switches are in development to meet recognized future needs of the
U.S. Government.
With the development of faster and more powerful computers, dedicated
processing hardware is not always cost effective. To use these faster computers
it is often necessary to reformat the data to make it available to the computer
in the most efficient format for the computers to process. The Company has
developed instruments that reformat data and interface it to the more powerful
modern computers for efficient processing of the data.
The advent of modern digital signal processing technology, which involves
both specialized hardware and software, has had a major impact on signal
analysis. These devices and associated software have changed signal analysis
techniques. The Company produces several instruments that employ modern digital
signal processing techniques to enhance signal-to-noise ratios of desired
signals. These devices range from rather simple to very complex systems. The
Company works with other government contractors to develop these instruments.
The Company develops the software to control the developed instruments, but
generally depends on other contractors involved in the same program to develop
the operational software.
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By maintaining a close liaison with its customers, the Company is aware of
new requirements, and in response, new products are being developed. These new
developments range from modification of existing products, which the Company
works to continually upgrade for both performance and capability, to designing
new products. Most new product developments tend to involve higher speed clock
rates. Some developments are customer funded and others are supported by
internal research and development funds.
In the avionics area, the Company has unique knowledge in flight control
systems. The Company has and continues to develop innovative products which
enhance aircraft reliability and maintainability ('R & M upgrades') and/or
provide enhanced capabilities. Typical solutions are based upon a combination of
analog and digital designs with firmware controlled logic. These designs utilize
existing and mature off-the-shelf components and equipment. The two most
important aspects of this approach are low cost practical solutions and Quick
Reaction Capability ('QRC').
The Company's avionics products include an Altitude Hold and Hover
Stabilization ('AHHS') System which reduces pilot workload and increases safety
during low altitude and low speed aircraft operations by providing the pilot
with a variety of altitude hold and stabilized hover/low speed control modes.
Currently, the AHHS System is installed on over one hundred U.S. Air Force
('USAF') H-60's, including all Special Operations helicopters. Among other
items, the Company has developed and manufactured multiple control panels (NVIS
compatible), beacon rings, solid state control modules, transformers, aircraft
landing lights, mission commander color LCD monitor and videocassette recorders
('VCR'). The Company currently has a depot repair contract for both the AHHS
System and the VCR with the USAF.
In the avionics area, the Company plans to continue the software
development and integration activities for the H-60 helicoptor as a
subcontractor to major government prime contractors and in support of the Warner
Robins Air Logistics Center. The Company has been expanding its system
integration activities, which include: embedded software development; Windows
95/98 simulation/development support programs; aircraft modification design and
kit fabrication; and development of training and support systems to enhance
aircraft troubleshooting.
The Company worked as a subcontractor to a major government prime
contractor for the Interactive Defensive Avionics System -- Multi-Mission
Advanced Tactical Terminal ('IDAS/MATT') program for the MH-53J helicopter. The
Company currently has four employees in the field supporting this system.
Additionally, the balance of the fleet, thirteen systems, will receive an
alternate IDAS configuration, for which the Company will be a subcontractor. In
addition, the Company offers equipment, in conjunction with Lockheed Martin,
Sanders that is designed to provide electronic diagnostic capability for certain
advanced aircraft such as the F-16 Fighter Aircraft, B-2 Aircraft and F-117
Stealth Fighter.
CUSTOMIZATION
The Company provides its customers and end-users with engineering services
that modify or adjust its standard products to meet their specific needs and
requirements. Virtually all of the avionics-related business involves
customization for upgrades of older aircraft. 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 Paravant includes special
rugged packaging design, miniaturization of electronics, development of
ultra-low power systems and improvements in communications capabilities. There
are many examples of specific situations where Paravant has rendered such
services, and the following modifications of its products are representative
only:
The development of special communication interface modules and cards to
permit the computer to communicate with aircraft or a weapon system.
The addition of a fail-safe mechanical switch to a weapon firing system.
The development of a custom communications card to enable the computer to
communicate with a medical customer's telemetry package, specialized input
switches or customized printer options.
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It is very common for customers to need small changes to standard products.
In most cases, these changes can be accommodated by reprogramming certain ports
on the circuit board. This ability enhances the life of the product line.
In the early phase of a military program, Paravant is often called upon to
design, engineer and fabricate the prototype. Once this is successfully done, it
is generally in a better position to obtain the full production run for that
specific program. The Company also engages in system integration and post-sale
services to assist the customer in attaining operational status for the systems
or in correcting any problems.
Management believes that by providing engineering services, the Company
facilitates the marketing of Paravant's products and enables the Company to
increase its margins by offering higher value added services. Management
anticipates, due to governmental budgetary constraints and the anticipated
continuing desire of DoD customers to procure commercial 'off-the-shelf'
products, a continued reduction in the number of programs pursuant to which
customization services will be funded. While engineering services represent a
very low percentage of total sales, the Company believes these efforts still
lead to significant production contracts. Management believes that such
customization services are of significant value to Paravant's customers and,
accordingly, intends to continue to offer such services on a reduced or
no-charge basis, where offering such services will provide production orders.
The Company generally expenses the associated costs as they are incurred.
NEW PRODUCTS
The Company has new products in development targeted to certain of its
historical customer base. The products can generally be said to be faster than
existing products. The Company also has an ongoing effort to upgrade the
capability of its digital signal processing systems to simultaneously process
more signals input. This enhanced capability is then made part of the standard
equipment line. The Company expects that this will be available for shipment in
2000.
Paravant has a new system in development, which can be used either in
portable mode or can be mounted in military vehicles. The new product, the RNB
550, utilizes a new (to Paravant) case fabrication methodology that will allow
Paravant to reduce its recurring prices while bringing its rugged, reliable
performance to many applications that previously could not afford Paravant
solutions. The initial focus for this product in its vehicle configuration will
the Army's battlefield digitization initiative.
During fiscal 1999, new avionics related equipment was developed including
a Mission Commander Color LCD Monitor. The Company initiated development of the
Mission Commander Color LCD Monitor when Company personnel supporting the MH-53J
Helicopters noted the need for enhanced situational awareness for the military
personnel located in the rear of the helicopter. A prototype was developed by
the Company and was installed on a MH-53J AFSOC Helicopter. After the
installation, this Helicopter was transferred to an area in Europe to support
the armed forces in the Kosovo conflict. This MH-53J Helicopter was later used
during a mission to rescue a downed pilot in Yugoslavia. The monitor greatly
increased situational awareness during the mission and additional units were
ordered soon thereafter.
In the area of signal intelligence equipment, the Company works to develop
new products that will enhance business prospects for future years. The rapid
advancement of computer technology is one example. As the clock rates on
computer chips have increased, interface devices, which are among the Company's
products, have to be revised or redesigned to take advantage of higher speed
computers.
SUPPLY AND MANUFACTURING
The Company designs and engineers substantially all of its products,
purchases their components from third parties and then tests and assembles the
final products. As part of this process, Paravant has the ability to either
design or purchase the printed circuit boards depending on the customers
performance needs and price point. The Company can also fabricate prototypes for
testing.
For certain computer customers requiring 'configuration control' or the
ability to identify the precise lot number of every component for future problem
tracking, the Company then purchases all
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the necessary components for the board and provides them in kit form to
specialized board fabricators for both pilot and production runs.
The Company anticipates that it will continue to outsource board
fabrication. Given the rapid changes in computer technology, management believes
Paravant's resources are not best used in keeping abreast of the costly purchase
requirements for new production equipment necessary in the precise placement of
electronic components on boards. Outsourcing allows the Company's products to
receive the benefit of the latest technological developments in board production
at an acceptable cost.
Once the boards are completed, they are tested by the fabricator and, upon
satisfactory completion of such tests, are shipped to the Company. When
delivered, Paravant further tests the completed boards and other components and
then assembles the computers. Apart from the printed circuit boards, the
components that Paravant purchases from external sources include chassis, wire
harnesses, computer chips, keyboards, displays and cases.
The Company does not assemble its products on a continuous mass-production
basis. Instead, its products are usually assembled on a batch basis in which
products move irregularly from station to station. Tests are performed at
various stages of the process according to Paravant's standards or as requested
by specific customers. Further testing of products is generally accomplished at
the end of the assembly process. The Company's manufacture of products is
usually done pursuant to specific purchase orders.
Paravant utilizes modern equipment for the design, engineering, assembly
and testing of its products. In recent years, the Company has acquired
additional equipment to enhance its operating efficiency in such areas and to
increase its capacity in order to facilitate increased production, when and if
required, as well as to obtain better control of quality, inventory and order
processing.
Generally, Paravant is not a party to any formal written contract regarding
the deliveries of its hardware, supplies and components or their fabrication. It
usually purchases such items pursuant to written purchase orders of both
individual and blanket variety. Blanket purchase orders usually entail the
purchase of a larger amount of items at fixed prices for delivery and payment on
specific dates.
The Company's design, engineering and assembly facilities are located in
Melbourne, Florida and in Dayton, Ohio. These facilities comply with certain
U.S. military specifications necessary for the manufacture and assembly of
products supplied to it. In addition, on March 27, 1998, the Company's Melbourne
manufacturing and assembly facilities were certified as being in compliance with
the quality management and assurance standards of ISO-9001, an international
standard promulgated by the International Organization of Standardization, a
worldwide federation of standards bodies from approximately 100 countries. These
standards have been adopted by the European Economic Community as their
preferred quality standards and, to some degree, by the U. S. Department of
Defense and the U. S. Food and Drug Administration (the 'FDA'). The Company
believes that such certification will enable it to increase its marketing
opportunities in the domestic and international military markets for ruggedized
computers as well as in the medical market for the Company's programmers.
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 licenser,
run for a limited term and are subject to other terms, conditions and
restrictions.
Paravant receives its basic operating software system MS-DOS with various
Window versions from Microsoft, Inc. pursuant to such licensing arrangements. It
also obtains from Phoenix Technologies, Inc. its BIOS (Basic Input/Output
System) pursuant to a separate license agreement. Under either arrangement, the
Company may modify such software and occasionally alters the BIOS for special
situations. The termination, suspension or curtailment of these or other
licensing arrangements to which the Company is a party may have a material
adverse impact on its business and operations.
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WARRANTY AND CUSTOMER SERVICE
For both computer products and signal intelligence equipment, the Company
usually provides either 90-day or one-year warranties on all its products
covering both parts and labor, although extended warranties may be purchased by
customers. In regard to the avionics related equipment, there is generally no
warranty unless it is separately purchased. At its option, Paravant repairs or
replaces products that are defective during the warranty period if the proper
usage and preventive maintenance procedures have been followed by its customers.
Repairs that are necessitated by misuse of such products or are required beyond
the warranty period are not covered by its normal warranty.
In cases of defective products, the customer typically returns them to
Paravant's facility. Its service personnel then replace or repair the defective
items and ship them back to the customer. Generally, all servicing is done at
the Company's plant, and it charges its customers a fee for those service items
that are not covered by warranty. Except for its extended warranties, it does
not offer its customers any formal written service contracts.
Some personnel in its customer service area and from engineering often
answer technical questions from customers and offer solutions to their specific
applications problems. In certain instances, other personnel receive and process
orders for product demonstrations, disseminate pricing information and accept
purchase orders for computers.
MARKETING AND SALES
The Company markets and sells its computer products through an internal
sales force and several of its officers, six manufacturers' representatives in
the U.S. and approximately 20 distributors abroad. Its foreign distributors
operate in nearly 30 countries, including England, France, Japan, Australia and
Germany. However, sales to foreign customers for the years ended September 30,
1999 and 1998, were only 1% and 5% of total sales, respectively.
Sales of the Company's products or services to foreign distributors are
generally made pursuant to written contracts. Under such contracts, the
distributor is granted either an exclusive or non-exclusive territorial and
product representation as well as discounts based on the list price ranging from
15% to 35%, depending on the type or amount of products sold. In some cases,
there are minimum order requirements. Due to the custom nature of Paravant's
products, its foreign distributors generally do not keep its computers in their
inventory until specific orders are obtained. The term of these agreements
generally run from 1 to 3 years but are terminable on 60 days advance notice.
Payment is due in U.S. dollars within 30 days after delivery. These contracts
are subject to other terms and conditions. The Company has a primary distributor
for Asia and another primary distributor for Europe. No one international
distributor accounts for more than 5% of its total sales in any period referred
to above.
The Company promotes its computer products through the dissemination of
product literature, attendance and exhibition at trade shows, conduct of
seminars and the distribution of news releases on special developments to trade
magazines and newsletters to an extensive customer list. Paravant does little
advertising in trade periodicals. Management believes that, to date, most of the
Company's sales leads have been generated by trade shows and word-of-mouth
referrals. The Company intends to expand its sales and marketing efforts in all
of its markets as follows: (i) increase its presence at trade shows with larger
booths and more extensive exhibits; (ii) increase the number of trade shows in
which Company personnel attend and products are presented; (iii) hold additional
seminars at military bases and other prime locations; (iv) hire additional sales
personnel and consultants to gather leads and promote sales; (v) expand sales
and marketing activities in the medical markets; (vi) invest in research and
development in order to increase its product offering; and (vii) increase its
presence on the Internet web page.
The Company has entered into a cooperative marketing agreement with ITT
Industries' Aerospace/Communications Division ('ITT A/CD') in connection with
international sales of ITT's SINCGARS secure radio system. In selling the
SINCGARS radio to foreign countries, ITT will demonstrate to its customers a
selection of Paravant computers and display products as part of a fully
configured system. Depending on customer preferences, the Paravant systems may
be sold directly by Paravant or through ITT A/CD, or the customer may opt to use
other computers. Paravant's computers
10
<PAGE>
are well suited to the task of interoperation with ITT's SINCGARS radios because
Paravant's computers are low emitters of EMI (electro-magnetic interference)
which can cause radio interference and can reduce the operating range of a radio
network. While management believes that the marketing arrangement with ITT may
be important in the future, it is not currently material to the operations of
the Company.
In the military market, the sales cycle for the Company's products usually
entails a number of complicated steps and can take from one year to five years.
Sales to the military and government markets are greatly influenced by special
budgetary and spending factors pertinent to these organizations.
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, and medical device
manufacturers. The principal customers of the Company are the U.S. Government
and DoD contractors, which are subject to federal budgetary constraints. For the
fiscal year ended September 30, 1999, a U.S. Government intelligence agency
accounted for 41% of the Company's total sales. For the fiscal years ended
September 30, 1999 and 1998, Raytheon's Missile Systems Division accounted for
8% and 51% of the Company's total sales, respectively. For those same periods,
Lockheed Martin, the U.S. Air Force and the U. S. Navy, accounted for 14% and
22%, 11% and 0%, and 1% and 11% of the Company's total sales, respectively. The
loss of any of these customers could have a material adverse impact on
Paravant's business.
In recent years, there have been a number of consolidations of various
prime contractors serving the defense industry. To date, the Company has not
been adversely affected by any such consolidations and the Company does not
anticipate that consolidations of contractors will negatively impact the
Company, although there can be no assurance of such.
COMPETITION
The military electronics products market is highly competitive and the
Company expects that competition will increase in the future. Some of the
Company's current and potential competitors have significantly greater
technical, manufacturing, financial, and marketing resources than the Company.
Substantial competition could have a material adverse effect on the Company's
results of operations.
With respect to its computer/controller business, the Company encounters
competition from Litton Data Systems, Phoenix, CDC (division of General
Dynamics) and Miltope in military applications along with Dolch, Allied Signal,
Cyberchron and DRS (formerly NAI-CODAR). 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, other than the medical market, will be limited
substantially by the entry of such manufacturers into the ruggedized computer
market. However, Paravant makes extensive modifications and refinements of its
computers for its customers pursuant to their specifications and special needs.
Consequently, Paravant's products often function at a higher level of
performance and reliability than its competitors. In the medical systems
business, the Company encounters competition from customers' in-house
engineering and a variety of medical systems integrators, including a special
products division of IBM.
In the avionics equipment business, the primary competition is with a wide
variety of sources ranging from the largest aerospace corporations such as
Lockheed Martin and Sikorsky Aircraft such as Lockheed Martin and Sikorsky
Aircraft, to small 8-A companies. The Company's ability to win competitive
procurements is based upon a low cost, creative solution.
In the digital signal processing business, the Company's current
competitors include the former E Systems Division of Raytheon and a specialty
division of TRW.
The competition for competitively bid contracts differs from the
competition for sole source contracts. Companies competing for competitive bid
contracts prepare bids and proposals in response to
11
<PAGE>
either a commercial or government request and typically compete on price.
Potential suppliers compete informally for sole source contracts through R&D
investment and marketing efforts.
Companies competing for sole source contracts attempt to identify the
customer's requirements early and invest in solutions so that they can
demonstrate a distinguishing expertise or technology promptly after the customer
has identified a requirement. The principal factors of competition for sole
source contracts include investment in R&D; the ability to respond to customer
needs promptly; and product price relative to performance, quality and customer
support. The Company believes that it competes favorably on each of these
factors.
BACKLOG
As of September 30, 1999, the Company's backlog was approximately $13.9
million, as compared with backlog of $9.9 million as of September 30, 1998. The
backlog as of September 30, 1998 does not include any backlog for the two
subsidiaries purchased in the EDL-STL Acquisition. Five customers account for
approximately 21%, 20%, 20%, 13% and 12% of the backlog as of September 30,
1999. As of December 7, 1999, the Company's backlog was approximately $7.8
million, and the Company currently expects to manufacture and deliver all of the
products in backlog within the next 12 months. In addition to the firm fixed
price purchase orders, the Company has $10.6 million in unfunded, deliverables
from an Indefinite Delivery, Indefinite Quantity ('IDIQ') contract. This
additional $10.6 million of products in backlog should be completed over the
next 48 months. As of December 4, 1998, the Company's backlog was approximately
$21.7 million. This decrease in backlog between December 1998 and December 1999
may result in reduced revenues and net income for the fiscal year ending
September 30, 2000.
Substantially all the Company's backlog figures are based on purchase
orders executed by the customer. All orders are subject to cancellation.
However, in that event, Paravant is generally entitled to reimbursement of its
cost and negotiated profits, provided that such contract would have been
profitable.
RESEARCH AND DEVELOPMENT
The markets served by the Company are characterized by rapid technological
advances, changes in customer requirements and frequent new product
introductions and enhancements. Paravant's business requires ongoing research
and development efforts. Its future success will depend in large measure on its
ability to enhance its current products, and develop and introduce new products
that keep pace with technological developments in response to evolving customer
requirements. The Company's research and development activities are primarily
accomplished on an in-house basis, sometimes supplemented by third party
subcontractors and consultants.
Research and development expenses during the fiscal years ended September
30, 1999 and 1998 were $1,324,940 and $657,607, respectively, and represented
3.1% and 4.2% of total sales, respectively. However, these amounts do not
include funded research and development of approximately $1,352,000, which is
included in the cost of sales of certain products to certain customers. This
allows Paravant to invest in new developments for specific customers, and these
additional expenditures enable Paravant to meet specific customer demands.
INTELLECTUAL PROPERTY
Proprietary information and know-how are important to the Company's
commercial success. Paravant 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. However, the majority of
Paravant employees have signed confidentiality agreements regarding Paravant's
proprietary information, but no employees have signed non-competition agreements
other than Messrs. McNeight, Craven, Zimmerman, Stefanko, Clifford, Schooley,
Torresani, Oberbeck and Lambertson.
12
<PAGE>
Management believes that its products do not infringe the proprietary
rights of third parties. There can be no assurance, however, that third parties
will not assert infringement claims against it in the future or be successful in
asserting such claims.
GOVERNMENT REGULATIONS AND CONTRACTS
Due to the nature of the products designed, manufactured and sold by
Paravant for military applications, it is subject to certain DoD regulations. In
addition, commercial enterprises engaged primarily in supplying equipment and
services, directly or indirectly, to the U.S. 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. Paravant 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 Paravant.
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 Paravant
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' business. Currently, it does not have any
contracts so conditioned. See ' -- COMPETITION.'
The contracts for sale of the Company's products 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, Paravant 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.
Paravant'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.
13
<PAGE>
EMPLOYEES
As of November 30, 1999, the Company had 152 full time employees including
its officers, of whom 52 were engaged in manufacturing and repair services, 29
in administration and financial control, 56 in engineering and research and
development, and 15 in marketing and sales.
None of its employees is covered by a collective bargaining agreement or is
represented by a labor union. Paravant considers its relationship with its
employees to be satisfactory.
The Company places significant reliance upon its senior corporate
executives and subsidiary executives. The loss of one or more of these
individuals could have a material adverse impact on the Company. To address
these concerns, the Company has prepared a preliminary management succession
plan. It is expected that this plan will be finalized during Fiscal 2000. The
Company will continue to update the plan as circumstances require.
The design and manufacture of the Company's equipment requires substantial
technical capabilities in many disparate disciplines from mechanics and computer
science to electronics and mathematics. While management believes that the
capability and experience of its technical employees compares favorably with
other similar manufacturers, there can be no assurance that it can retain
existing employees or attract and hire the highly capable technical employees
necessary in the future on terms deemed favorable to it, if at all.
ITEM 2. DESCRIPTION OF PROPERTY
The Company has a lease relating to approximately 17,300 square feet of
space located at 1615A W. Nasa Blvd., Suite E, Melbourne, Florida 32901. This
space is utilized by the Company as its principal corporate headquarters and
manufacturing plant. The lease for this space expires December 31, 2001, and
provides for rent payments of $118,260 annually. This amount includes the
Company's proportionate cost of utilities, repairs, cleaning, taxes and
insurance.
In addition, the Company has a lease relating to approximately 27,033
square feet of space located at 4391 Dayton Xenia Road, Dayton, Ohio 45432. This
space is utilized by the Company as the manufacturing plant for its aircraft
support and signal processing subsidiaries. This lease provides for rent
payments of $296,364 for the fiscal year ended September 30, 2000, $320,340 for
the fiscal year ended September 30, 2001, $345,072 for the fiscal year ended
September 30, 2002, $351,924 for the fiscal year ended September 30, 2003, and
$358,908 for the fiscal year ended September 30, 2004. The office space
associated with this lease is owned by Beavercreek Enterprises, an affiliated
company, which is majority owned by Paravant's Chairman and CEO.
Management believes that its current facilities will meet its operational
needs for the near future. In the event that additional facilities are needed to
accommodate the continued growth in revenues and market share, it is readily
available in the immediate vicinity of the current locations.
ITEM 3. LEGAL PROCEEDINGS
On September 18, 1996, a former controller of Paravant 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 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 will continue to vigorously defend itself in this matter.
Management of the Company believes that the ultimate resolution of this matter
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.
14
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) Market Information.
The shares of Common Stock of the Company commenced trading on the Nasdaq
Stock Market National Market under the symbol 'PVAT' on June 3, 1996. The range
of high and low reported closing sales prices for the Common Stock as reported
by Nasdaq for the last two years of trading were as follows:
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
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 30, 1998.............................. $2 31/32 $1 5/8
July 1, 1998 to September 30, 1998.......................... $3 $1 3/16
October 1, 1998 to December 31, 1998........................ $2 15/32 $1 1/8
January 1, 1999 to March 31, 1999........................... $2 5/8 $1 3/4
April 1, 1999 to June 30, 1999.............................. $3 5/8 $2 1/64
July 1, 1999 to September 30, 1999.......................... $4 11/32 $2 5/16
October 1, 1999 to December 7, 1999......................... $2 7/8 $2 7/32
</TABLE>
The prices set forth above reflect inter dealer prices, without retail
mark-up, markdown or commission and may not necessarily represent actual
transactions.
(b) Holders.
On December 7, 1999, as reported by the Company's transfer agent, shares of
Common Stock were held by 206 persons, based on the number of record holders,
including several holders who are nominees for an undetermined number of
beneficial owners.
(c) Dividends.
The Company has not paid any dividends on its shares of Common Stock and
intends to follow a policy of retaining any earnings to finance the development
and growth of its business. Accordingly, it does not anticipate the payment of
cash dividends in the near 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, its
overall financial condition and possible restrictions on the payment of
dividends included in the Company's credit agreement utilized for the Company's
acquisition of EDL-STL. See 'MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION -- LIQUIDITY AND CAPITAL RESOURCES.'
(d) Recent Sales of Unregistered Securities
In connection with the EDL-STL Acquisition, the Company issued a total of
3,950,000 shares of common stock to the former shareholders of EDL, effective
October 1, 1998, in an exempt transaction in reliance upon Section 4(2) under
the Securities Act of 1933. See 'MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION -- EDL-STL ACQUISITION.'
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
OVERVIEW
Paravant Inc. is engaged in the design, development, production and sale of
military electronic hardware. The products include computer and communication
systems, specializing in rugged, hand-held and laptop computer products with
primarily military applications, airborne and avionics systems for the U.S. DoD
and allies of the U.S. and electronic signal conditioning and analysis systems
for foreign and domestic intelligence agencies. In addition, the Company has
expanded into the medical market and now provides a line of Programmers that are
used to provide programming information to medical pumps and related devices.
The principal customers of the Company are U.S. Government agencies,
governments of U.S. allies 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.
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<PAGE>
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, and medical device
manufacturers. The principal customers of the Company are the U.S. Government
and DoD contractors, which are subject to federal budgetary constraints. For the
fiscal year ended September 30, 1999 a U.S. Government intelligence agency
accounted for 41% of the Company's total sales. For the fiscal years ended
September 30, 1999 and 1998, Raytheon's Missile Systems Division accounted for
8% and 51% of the Company's total sales, respectively. For those same periods,
Lockheed Martin, the U.S. Air Force and the U. S. Navy, accounted for 14% and
22%, 11% and 0%, and 1% and 11% of the Company's total sales, respectively. The
loss of any of these customers could have a material adverse impact on
Paravant's business.
The Company's revenues are primarily generated from sales of its products
and services to two agencies of the U.S. Government and two DoD contractors. The
two agencies accounted for 41% and 11%, respectively, and the two contractors
accounted for 14% and 8%, respectively, of revenues for fiscal 1999. For fiscal
1998, the two agencies were not a source of revenues as they are primarily
customers of the acquired subsidiaries. For fiscal 1998, the two contractors
accounted for 22% and 51%, respectively, of revenues.
The Company's revenues are almost entirely derived from fixed price
contracts, which provide that the Company perform a contract for a fixed price
and assume the risk of any cost overruns. Less than 1% of the Company's revenues
are derived from cost plus reimbursement contracts, which provide that the
Company receive the direct and indirect costs of performance plus a negotiated
profit.
Under fixed price contracts, unexpected increases in the cost-to-develop or
manufacture a product, whether due to inaccurate estimates in the bidding
process, unanticipated increases in material costs, inefficiencies or other
factors, are borne by the Company, and could have a material adverse effect on
the Company's results of operations.
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 charged to
operations in the period that such losses are determined.
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, 1999 VS. SEPTEMBER 30, 1998
Revenues for fiscal 1999 were $42,279,478, an increase of $26,771,751 or
173% over 1998 revenues of $15,507,727. This increase is primarily due to the
addition of revenues from acquired operations (See Note 2 of Consolidated
Financial Statements). The increase provided by the acquisition is offset in
part by a reduction of approximately $2 million in the computer systems
business, which is due primarily to timing of contracts, as well as changes in
the composition of the current backlog.
Gross profit was $21,438,863 in 1999, or 51% of revenues, compared to
$7,900,853 or 51% in 1998, a total increase of $13,538,010 or 171%. This
increase in gross profitability results primarily from the increased revenues
contributed by the acquired subsidiaries, which account for $16,229,290 of gross
profits. The increase provided by these subsidiaries is offset by a decrease in
the computer systems gross profit of approximately $2.2 million, which is due
primarily to the decrease in computer systems revenues as discussed above and
the lower gross profits realized in products sales to the medical industry for
the current year.
Selling and administrative expense of $11,201,837 in 1999, increased by
$5,402,987 or 93% from 1998 expense of $5,798,850. As a percentage of revenues,
selling and administrative expense was 26%
16
<PAGE>
and 37% in 1999 and 1998, respectively. The increased selling and administrative
expenses are due primarily to the addition of the acquired subsidiaries, which
represent $2,281,213 of the total increase. The remaining increase is due
primarily to amortization of goodwill and intangible assets.
Income from operations grew to $10,237,026 for 1999 from $2,102,003 in
1998, an improvement of $8,135,023 or 387%. As a percentage of revenues, income
from operations increased to 24% in 1999 from 14% in 1998. The improvement to
income from operations overall resulted primarily from increased revenues and
gross profits associated with the acquired subsidiaries, offset in part by a
decrease in computer systems business and increased selling and administrative
expenses as discussed above.
Interest expense for 1999 was increased by $757,122 to $777,076 compared to
$19,954 in 1998. As a percentage of revenues, interest expense increased to 2%
in 1999 from less than 1% in 1998. This increase is due to an increase in
outstanding credit balances required to purchase and finance the acquired
operations.
The Company's net income improved by 303% to $5,885,642 in 1999 when
compared to $1,459,597 in 1998, an increase of $4,426,045 in total. Net income
as a percentage of revenues was 14% in 1999 compared to 9% in 1998. The
improvement in net income overall resulted primarily from increased revenues and
gross profits, offset in part by increased selling and administrative expense.
QUARTERLY RESULTS
The following table sets forth certain unaudited quarterly financial data
for the eight quarters ending September 30, 1999. In the opinion of the
Company's management, the unaudited information set forth below has been
prepared on the same basis as the audited information and includes all
adjustments necessary to present fairly the information set forth herein. The
first three quarters of fiscal year 1999 reflect a reclassification between
selling and administrative expenses and cost of revenues, which was not
reflected in the unaudited income statements filed with the Form 10-QSB's during
that period. Management has determined that this reclassification was necessary
to properly reflect gross profit. There were no changes to revenues, income from
operations, net income or earnings per share. The operating results for any
quarter are not indicative of results for any future period. All data is in
thousands except per common share data.
17
<PAGE>
<TABLE>
<CAPTION>
FISCAL YEAR 1999
------------------------------------
Q1 Q2 Q3 Q4
-- -- -- --
<S> <C> <C> <C> <C>
Revenues................................................. $8,482 12,298 9,959 11,541
Cost of revenues......................................... 4,108 5,624 4,587 6,522
------ ------- ------- -------
Gross Profit................................... 4,374 6,674 5,372 5,019
Sales and marketing...................................... 511 514 615 656
Research, development & engineering...................... 635 779 628 494
General and administrative............................... 1,011 1,245 941 1,204
Amortization of goodwill & intangible assets............. 486 493 494 496
------ ------- ------- -------
Total selling & administrative expense.............. 2,643 3,031 2,678 2,850
------ ------- ------- -------
Income from operations......................... 1,731 3,643 2,694 2,169
Other income (expense):
Interest expense.................................... (247) (240) (203) (87)
Miscellaneous....................................... 59 16 60 84
------ ------- ------- -------
Income before income taxes..................... 1,543 3,419 2,551 2,166
Income tax expense....................................... 610 1,350 1,007 826
------ ------- ------- -------
Net income..................................... $ 933 $ 2,069 $ 1,544 $ 1,340
------ ------- ------- -------
------ ------- ------- -------
Net income per common share:
Basic............................................... $0.08 $0.17 $0.11 $0.08
Diluted............................................. 0.07 0.16 0.11 0.07
Weighted average shares outstanding:
Basic............................................... 12,253 12,300 13,837 17,470
Diluted............................................. 12,563 13,319 14,384 18,059
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR 1998
------------------------------------
Q1 Q2 Q3 Q4
-- -- -- --
<S> <C> <C> <C> <C>
Revenues................................................. $3,598 $ 4,050 $ 4,170 $ 3,689
Cost of revenues......................................... 1,975 2,028 2,079 1,525
------ ------- ------- -------
Gross Profit................................... 1,623 2,022 2,091 2,164
Sales and marketing...................................... 566 598 533 548
Research, development & engineering...................... 324 412 665 303
General and administrative............................... 435 507 447 334
Amortization of goodwill & intangible assets............. 21 21 33 51
------ ------- ------- -------
Total selling & administrative expense.............. 1,346 1,538 1,678 1,236
------ ------- ------- -------
Income from operations......................... 277 484 413 928
Other income (expense):
Interest expense.................................... (6) (5) (4) (4)
Miscellaneous....................................... 28 26 23 51
------ ------- ------- -------
Income before income taxes..................... 299 505 432 975
Income tax expense....................................... 101 174 148 327
------ ------- ------- -------
Net income..................................... $ 198 $ 331 $ 284 $ 648
------ ------- ------- -------
------ ------- ------- -------
Net income per common share:
Basic............................................... $0.03 $0.04 $0.03 $0.08
Diluted............................................. 0.02 0.03 0.03 0.07
Weighted average shares outstanding:
Basic............................................... 7,996 8,075 8,282 8,343
Diluted............................................. 11,862 11,261 11,410 8,581
</TABLE>
The Company has at times experienced fluctuations in its quarterly results
due to both seasonal and non-seasonal factors inherent in its business. These
have included costs associated with uneven flows of incoming material, the level
of research and development spending during any given quarter, fee recognition
on development contracts in the early phases of contract performance where the
financial
18
<PAGE>
risk is not entirely known until the contract is further along in the
development cycle, the U.S. Government and the timing of contract awards.
Management expects these fluctuations to continue into the future.
LIQUIDITY AND CAPITAL RESOURCES
On April 12, 1999, the Company called for redemption of its redeemable
Common Stock purchase warrants issued in connection with its initial public
offering in June 1996. On April 23, 1999, the Company called for redemption of
its redeemable Common Stock purchase warrants issued in connection with its
August 1995 private placement offering. The redemption date for these warrants
was June 8, 1999, and the redemption price was $0.0167 per warrant; the exercise
price was $2.00 per share of Common Stock. Prior to the redemption date, a total
of 5,125,937 warrants were exercised, resulting in net proceeds to the Company
of $10,218,653 and increasing the number of shares of Common Stock outstanding
to 17,544,208 as of September 30, 1999. The Company used the net proceeds it
received from the exercise of the warrants (1) to reduce the indebtedness owed
to the former shareholders of EDL and STL (including Messrs. Stefanko, Clifford
and Schooley, directors of the Company) under promissory notes issued to them in
connection with the October 1998 acquisition of EDL and STL as required by the
acquisition agreement, and (2) to repay indebtedness to National City Bank ('the
Bank') under the revolving line of credit described below. The remainder of the
net proceeds from the exercise of the warrants are being used for general
corporate purposes, including working capital requirements. The Company may also
use a portion of these proceeds to fund growth through acquisition; however, no
agreements for any acquisitions exist at this time.
The Company has floating rate financing with the Bank in an amount up to
$14 million 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 receivable, 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 September 30, 1999, there
were no borrowings 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 $2,462,500, as of September
30, 1999. These notes bear interest at 8%, are payable in quarterly payments
which began April 1, 1999 and mature on January 1, 2002. These notes are
subordinate to the rights of the Bank.
The Company also has capital lease obligations of $119,538 at September 30,
1999. These capital lease obligations bear interest rates of 1.25% to 1.50% over
the prime rate and are expected to be satisfied within two years.
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 $1,690,746 and $2,049,678 for 1999
and 1998, respectively. The reduction in the Company's operating cash flow
results primarily from increases in accounts receivable, contracts in progress
and inventory, offset by an increase in accounts payable.
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Net cash used by investing activities during 1999 was $9,408,530 compared
with $2,249,602 in 1998. Investing activities in 1999 include $9,046,376
expended for the EDL-STL Acquisition. Capital expenditures for 1999 and 1998
were $682,841 and $732,068, respectively. Capital expenditures during 1999 were
primarily for office equipment and furniture used in our expanded facilities.
As of September 30, 1999, 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 $9,168,343 at September 30, 1999 has been subsequently
reduced by approximately $7,642,000 in cash collections. The Company has
provided a reserve for certain older balances of $79,495. This reserve is
believed to be more than sufficient to address any uncollectible balances
outstanding as of September 30, 1999.
On June 3, 1998, the Company entered into a loan agreement with an officer
and director of the Company. The note receivable of $215,684 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.
As of September 30, 1999 and 1998, the Company's backlog was approximately
$13.9 million and $9.9 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. 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 currently expects to manufacture and deliver all of
the products in backlog within the next 12 months. In addition to the firm fixed
price purchase orders, the Company has $10.6 million in unfunded, deliverables
from an IDIQ contract. This additional $10.6 million of products in backlog will
be completed over the next 48 months.
Although the backlog as of September 30, 1999 shows an increase over the
backlog as of September 30, 1998, the prior year backlog does not include any
purchase orders for the two subsidiaries purchased in the EDL-STL Acquisition,
effective October 1, 1998. As previously noted, the backlog as of December 4,
1998 was approximately $21.7 million compared to the Company's current backlog
of approximately $7.8 million. SEE 'BUSINESS -- BACKLOG.' This decrease in
backlog may result in reduced revenues and net income for the fiscal year ending
September 30, 2000.
On November 2, 1999, the Board of Directors authorized the Company to
repurchase up to 1,000,000 of its outstanding shares of Common Stock within the
twelve month period following such date for a maximum purchase price, including
commissions, not to exceed $3,500,000 in the aggregate. Through December 7,
1999, the Company repurchased 19,273 shares of its Common Stock for a total cost
of $53,675 at an average purchase price of $2.625 per share.
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 will 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
under the revolving line of credit, as 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.
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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 analyzed 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 material to its business, the
Company has reviewed and tested such systems. The Company will not 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 readiness
requirements, and 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
and again in 1999 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.
Outside Services: 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. However, the Company has
surveyed its significant customers as to whether the customers' computer
driven payment or purchasing processes are year 2000 compliant and they
have indicated they have adequate plans in place to mitigate any
anticipated difficulties. 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 revenues and cash
flow could be materially affected. However, the Company has a plan in
place, through the contracts department, to mitigate the potential effects
of customers' year 2000 issues.
Costs: Management has determined that the costs to implement this plan
have been less than $100,000 and the Company does not anticipate any
material additional costs to be incurred.
Contingency Plan: The Company is in the final stages of developing
contingency plans for the Company's significant information technology and
non-information technology systems which include developing plans to deal
with the possibility that some suppliers or vendors might fail to provide
goods and services on a timely basis as a result of year 2000 problems.
These contingency plans include the identification and/or preparation of
back-up systems, suppliers and vendors.
Paravant has completed its year 2000 effort as of September 30, 1999 in
accordance with its plan.
EDL-STL ACQUISITION
On October 8, 1998 the Company consummated the EDL-STL Acquisition
effective October 1, 1998, of all of the outstanding capital 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 Inc. ('STL of Ohio'). EDL and STL were engaged in the business of
designing, developing and producing equipment to meet U.S. and foreign
government requirements. EDL, whose
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primary customers include the U.S. Air Force, U.S. Navy, large government prime
contractors and allied military forces, specializes in designing, developing and
producing avionics equipment used to modify their airborne platforms. STL, whose
customers included several U.S. government agencies and government prime
contractors, designed and produced 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 an aggregate 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 additional
consideration, increasing the amount of goodwill, which will be amortized over
the remaining life of this asset. The cash portion of the consideration paid by
the Company in connection with the Acquisition was financed under the revolving
line of credit, as previously discussed.
In connection with the Acquisition, the Board of Directors increased the
size of the Board to eight members and 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 of Ohio and James E. Clifford, Executive Vice
President and Chief Operating Officer of STL of Ohio.
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
Acquisition 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 related electronics industry, the Board 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.
CAUTIONARY STATEMENT
This Annual Report on Form 10-KSB contains certain forward-looking
statements that involve a number of risks and uncertainties. Such
forward-looking statements are within the meaning of that term in Section 27A of
the Securities Act of 1933, as amended and Section 21E of the Securities Act of
1934, as amended. Factors that could cause actual results to differ materially
from those projected in such forward-looking statements include the following:
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. The words 'believe,' 'estimate,' 'expect,' 'intend,' 'anticipate,'
'will,' 'could,' 'may,' and similar expressions and variations thereof identify
certain of such forward-looking statements, which speak only as of the dates on
which they were made. The Company undertakes no obligation to publicly update or
revise any forward-looking statements, whether as a result of new information,
future events, or otherwise. Readers are cautioned that any such forward-looking
statements are not guarantees of future performance and involve risks and
uncertainties, and that actual results may differ materially from those
indicated in the forward-looking statements as a result of various factors.
Readers are cautioned not to place undue reliance on these forward-looking
statements.
SUMMARY OF BUSINESS CONSIDERATIONS AND CERTAIN FACTORS THAT MAY AFFECT FUTURE
RESULTS OF OPERATIONS AND/OR STOCK PRICE
Our future operating results and stock price may be subject to volatility,
particularly on a quarterly basis, due to the following (references to 'we,'
'us' or 'our' in this subsection refer to Paravant):
Our success depends upon military and signal intelligence community
expenditures: Most of our historical sales have been to the U.S. military,
foreign allied militaries, military suppliers or the signal
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intelligence community. Our future success depends on the military's continued
purchase of our portable computers or equipment manufactured by others which
contain our devices and the signal intelligence community's continued purchase
of our digital processing equipment. Many governments have attempted to reduce
military expenditures for a number of reasons, including budget deficit
reduction and a perceived easing of global tensions. For the past several years,
the uncertain defense budget situation has caused delays in contract awards and
reduced funding for various military programs. We expect that these downward
trends will continue for the foreseeable future. Although to date we have
generally not been adversely affected by delays in contract awards or reductions
in spending, any future delays or reductions may have a material adverse effect
on our business.
Recent announcements from the U.S. Congress and DoD indicate that overall
defense spending may stabilize or increase modestly; however, we cannot predict
the amount or pattern of this spending. We believe that in the foreseeable
future military spending on new weapon systems will continue to be restricted to
research and development of military hardware already under development and to
limited production of those systems. During this period, we anticipate that the
U.S. military will still emphasize the upgrading, repair and extended use of
older systems. Should the U.S. military alter this policy and seek full-scale
production of new systems, sales of our products may decrease.
We must comply with regulatory operational standards to expand our sales:
Our manufacturing and assembly facility and procedures in Melbourne have been
certified as compliant with the quality and assurance standards of ISO-9001, an
international standard promulgated by the International Organization for
Standardization, a worldwide federation of standards bodies from approximately
100 countries. The European Economic Community has adopted this standard as its
preferred quality standard, as has, to some degree, the Department of Defense
and the FDA. The FDA has also approved us as a contract manufacturer for
manufacturers of specific medical products. Our Dayton, Ohio facilities are not
so certified, nor do we intend to have those facilities become ISO-certified at
this time. If we fail to maintain compliance with these standards, we may be
unable to expand our presence in the domestic and international military markets
for ruggedized computers, which could have a material adverse effect on our
direct and indirect sales to the U.S. military as well as to foreign customers.
Further, if we fail to maintain FDA approval, our sales in the medical market
and our ability to expand into this market could be materially and adversely
affected.
We are subject to government regulation and risks related to the terms of
government contracts: As a supplier of U.S. Government agencies, we must comply
with numerous regulations, including regulations governing security and
contracting practices. Failure to comply with these regulations could disqualify
us as a supplier of these agencies, which would have a material adverse affect
on our future results of operations and financial condition.
A significant portion of our revenues are derived from fixed-price
contracts. Under fixed-price contracts, unexpected increases in the cost to
develop or manufacture a product, whether due to inaccurate estimates in the
bidding process, unanticipated increases in material costs, inefficiencies or
other factors, are borne by us. We have experienced cost overruns in the past
that have resulted in losses on certain contracts. There can be no assurance
that we will not experience cost overruns in the future or that such overruns
will not have a material adverse effect on our future results of operations and
financial condition.
As a supplier of equipment and services, directly or indirectly, to the
U.S. government, we are subject to risks of dependence on government
appropriations, termination of contracts without cause, contract renegotiation,
and competition for the available DoD business. While we believe we do not have
a material amount of our business subject to contracts with the DoD allowing
renegotiation, we could become subject to these terms in the future. In
addition, many of our government contracts provide the DoD the right to audit
our cost records and are subject to regulations providing for price reductions
if we submit inaccurate cost information. In addition, almost all of our
contracts contain termination clauses which permit contract termination upon our
default or for the convenience of the other contracting party. In either case,
termination could adversely affect our operating results. Although we have not
experienced any material contract terminations to date, there can be no
assurance that such terminations will not occur in the future.
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A significant amount of our revenues comes from a few customers: Our
business substantially depends on a relatively small number of customers and DoD
programs. In recent fiscal years, a U.S. Government intelligence agency,
Raytheon's Missile Systems Division and Lockheed Martin have accounted for
a significant portion of our total sales. In addition, as of September 30, 1999,
our backlog was approximately $13.9 million, consisting of firm fixed price
purchase orders, 86% of which was represented by large orders from 5 customers.
If we experience a loss or diminution of orders from any of these customers,
our results of operations or financial condition could be materially and
adversely affected. Also, in recent years prime contractors serving the defense
industry have undergone consolidation. The reduction in the number of defense
contractors could negatively impact on our business.
Our quarterly results fluctuate significantly: We have experienced
significant fluctuations in operating results from quarter to quarter and
expects that it will continue to experience such fluctuations in the future.
These fluctuations are caused by, among other factors, conditions inherent in
government contracting and our business, such as the timing of cost and expense
recognition for contracts and the U.S. Government contracting and budget cycles.
Fluctuations in quarterly results, shortfalls in revenues or earnings from
levels forecast by securities analysts, changes in estimates by analysts,
competition, or announcements of extraordinary events such as acquisitions or
litigation may cause the price of our Common Stock to fluctuate substantially.
The completion of our backlog may not be profitable and could adversely
effect our liquidity: The purchase orders included in our backlog may not
generate profits within historical levels. In addition, the completion of the
orders constituting our backlog, and any new orders which may be accepted by us,
could result in additional liquidity pressures that cannot be addressed in a
manner consistent with our past practices. If we fail to obtain additional
purchase orders before completion of our backlog, our liquidity, results of
operations and financial condition could be materially and adversely affected.
We must develop new products and enhance current products to keep up with
rapid technological change: Rapid technological advances, changes in customer
requirements, and frequent new product introductions and enhancements
characterize our markets. Our business requires substantial ongoing research and
development efforts and expenditures, and our future success will depend in
large measure on our ability to enhance our current products and develop and
introduce new products that keep pace with technological developments in
response to evolving customer requirements. In addition, we may misgauge market
needs and introduce products that fail to gain the necessary market acceptance
due to a variety of factors, including pricing. There can be no assurance that
we will be able to anticipate or respond adequately to technological
developments and changing customer requirements, or that new products introduced
by others will not render our products or technologies noncompetitive or
obsolete.
Our sales cycle is lengthy: On the military side of our business, we often
experience a lengthy sales cycle that, from beginning to end, may run for as
long as five years. There are generally a number of crucial points in this
cycle, including:
identifying a product need in a military program;
retaining the prime contractor;
retaining the subcontractors for each element;
assembling the elements for prototype systems;
testing of the systems;
funding for production runs of the systems; and
executing the production contracts for the prime contractor and the
sub-contractors.
Not only does this cycle take a long time, but it is also susceptible to
failure at each crucial point.
In addition, we will also experience a lengthy sales cycle with respect to
our medical-related computer products, primarily due to the length of time
required to obtain approval of these products from the FDA. In developing
programmers for implantable medical device manufacturers, we must first design
each particular programmer based on the unique specifications of the particular
manufacturer with respect to its implantable medical device. Once the programmer
has been tested and approved by the manufacturer, the manufacturer must
thereafter submit the complete implantable device, including
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our programmer, for FDA approval, which can take from three to eighteen months.
Any delays in obtaining FDA approval for any of these devices, whether resulting
from the portion of the device relating to our programmer or from the portion of
the device developed by the manufacturer of the implantable device, could have a
material adverse effect on our business and operations.
Consequently, we invest heavily in time, money and manpower to obtain
subcontracts for military production runs on our products and to design and
implement our medical computer products. Delays in our sales cycle could
materially and adversely affect our results of operations and financial
condition. Further, our investments may yield no business at all or may take so
long to develop that our resources are strained or other more profitable
opportunities are missed.
Our markets are highly competitive: The rugged portable computer and signal
intelligence markets are highly competitive and we expect that competition will
increase in the future. Some of our current and potential competitors have
significantly greater technical, manufacturing, financial and marketing
resources than us. We compete in the rugged portable computer business with a
wide variety of computer manufacturers and repackagers. We compete in the
avionics business with original aircraft manufacturers such as Sikorsky and in
the signal intelligence business with the former E Systems Division of Raytheon
and a specialty division of TRW. In the medical systems business, we compete
with medical systems integrators and the in-house engineering groups of our
customers. We compete on the basis of customization capabilities, price,
performance, delivery and quality. In many situations, we are the highest-priced
bidder by a large margin. For computer applications in harsh environmental and
operational conditions prevail, customers are sometimes willing to pay our
higher prices. However, in less demanding conditions, our computer products are
at a competitive disadvantage and our sales are adversely affected. Substantial
competition in any area of our business could have a material adverse effect on
our future results of operations and financial condition.
We rely on a few sub-contractors and suppliers for key components: Although
we procure most of our parts and components from multiple sources or believe
that these components are readily available from numerous other sources, certain
components are available only from sole sources or from a limited number of
sources. A number of our products contain critical components like our computer
boards and the electronic circuitboards for our digital signal processing
equipment. We subcontract the fabrication of our computer boards to a few third
party manufacturers and the fabrication of our electronic circuitboards for our
digital signal processing equipment to Catalina Research. We purchase the metal
cases, hard disk drives, brackets, window panels and the keyboards for our
portable computers from sole sources such as Distec, Xcel and HiTech. We also
license our software from sole sources, including MicroSoft, Phoenix Technology,
Magnavox and JFK Associates. Outside suppliers furnish many of the other
components we use. Except for our software suppliers, we do not have written
agreements with any of these subcontractors or suppliers. This reliance on a few
subcontractors, sole sources and other suppliers may result in delays in
deliveries and may result in quality control and production problems. During any
interruption in supplies, we may have to curtail the production and sale of our
computers for an indefinite period. Accordingly, any interruption, suspension or
termination of component deliveries from our suppliers could have a material
adverse effect on our business.
Protection of our intellectual property is limited: We have no patent or
copyright protection for our products. Our ability to compete effectively with
other companies depends on our ability to maintain the proprietary nature of our
technologies. We intend to rely substantially on unpatented proprietary
information and know-how. Others may develop this information and know-how
independently or otherwise obtain access to our technology, which could have a
material adverse effect on our business.
In addition, although we do not believe that any of our technologies
infringes on the rights of others, we may face these claims in the future.
Infringement claims could result in substantial costs and diversion of our
resources. A claimant could obtain equitable relief preventing us from selling
the allegedly infringing product. In such a case, we could attempt to obtain a
license from the claimant covering the intellectual property, but the terms of
that license may not be acceptable.
Product defects could result in liability: Our products may malfunction and
cause a loss of or error in data, loss of man hours, damage to, or destruction
of, equipment, or delays. Consequently, we may be subject to claims if
malfunctions or breakdowns occur. While we maintain product liability insurance,
our coverage may not be adequate to satisfy future claims. Our sales contracts
for medical products
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require our customers to indemnify us from or provide insurance for any claims
brought against us as a result of any malfunctions in the programmable devices
sold by our customers. These rights may not be adequate to satisfy future
claims. Further, we may not be able to secure these provisions in future sales
contracts. Liability for product malfunctions or breakdowns in excess of our
insurance coverage could have a material adverse effect on our financial
condition and results of operations.
We may need additional financing: While we anticipate that our existing
working capital and anticipated cash flow from operations will be sufficient to
satisfy our cash requirements for at least twelve months, if our plans change or
existing working capital and projected cash flow are insufficient to fund
operations, we could be required to seek additional financing. Except for our
current line of credit, we have no current arrangements with respect to, or
sources of, additional financing. Accordingly, additional financing may not be
available to us when needed on acceptable terms, or at all. If we fail to obtain
additional financing, our long-term liquidity and our expansion plans could be
materially and adversely affected.
Risks associated with our acquisition strategy: We evaluate, on an ongoing
basis, potential acquisitions of, or investments in, businesses that complement
or expand our existing operations. We cannot assure that any future acquisitions
will be successful or improve our operating results. In addition, our ability to
complete acquisitions will depend on the availability of both suitable target
businesses and acceptable financing. Any future acquisitions may result in a
dilutive issuance of additional equity securities, the incurrence of additional
debt or increased working capital requirements. Any acquisition may also result
in earnings dilution, the amortization of goodwill and other intangible assets,
or other charges to operations, any of which could have a material adverse
effect on our business, financial condition or results of operations. Future
acquisitions may divert management's attention from our operations and entail
difficulties assimilating the operations, products, services and personnel of
any acquired company. Although we attempt to evaluate the risks inherent in any
particular acquisition, we may not properly ascertain or assess all significant
risks before consummating any acquisition.
Year 2000 compliance issues could adversely affect our business: We
recognize that Year 2000 issues could result in system failures or
miscalculations, resulting in disruptions of operations. We have engaged in an
evaluation of the year 2000 readiness of our information technology and
non-information technology systems. We believe that the worst-case year 2000
scenario for our products would require users to enter time and date information
after 0100 hours on January 1 and reboot the products. Although our customer
base changes from year to year, we have surveyed our primary customers regarding
their year 2000 readiness. If our customers have Year 2000 compliance problems,
we could face delays in receiving payments, adversely affecting our sales and
cash flow. Our contracts department has developed a contingency plan to mitigate
the potential effect of our customers' year 2000 problems.
Our directors and officers can exercise control through their ownership of
common stock: As of September 30, 1999, our directors and executive officers
beneficially owned approximately 30.0% of our Common Stock. With the additional
holdings of key employees, insiders beneficially owned approximately 40.6% of
our Common Stock. Although they do not hold, in the aggregate, a majority of our
common stock, their ownership enables them to substantially control the election
of directors and the results of any other matters submitted to a vote of
stockholders.
Our stock price and liquidity could be adversely affected if we fail to
meet the requirements of the Nasdaq National Market System: Our Common Stock is
quoted on the Nasdaq National Market System. To remain listed, we must have,
among other things, either
$4,000,000 in net tangible assets, a public float of at least 750,000
shares with a market value of at least $5,000,000 and a minimum bid price
of $1.00 per share; or, alternatively,
a market capitalization of $50,000,000 or total assets and total revenues
of $50,000,000 each, a public float of at least 1,100,000 shares with a
market value of at least $15,000,000 and a minimum bid price of $5.00.
If we fail to satisfy the Nasdaq National Market's maintenance criteria in
the future, our common stock could be delisted. We would then seek to list its
securities on the Nasdaq SmallCap Market. However, if we were unsuccessful,
trading in our Common Stock would thereafter be conducted in the
26
<PAGE>
over-the-counter market in the so-called 'pink sheets' or the NASD's Electronic
Bulletin Board. A delisting would make it more difficult to dispose of or to
obtain quotations as to the price of our Common Stock.
The issuance of preferred stock could adversely affect our stock price: Our
board may issue shares of Preferred Stock, without stockholder approval, on such
terms as it may determine. The rights of the holders of Common Stock will be
subject to, and may be adversely affected by, the rights of the holders of any
Preferred Stock that may be issued in the future. If we issue Preferred Stock, a
third party may find it more difficult to acquire, or may be discouraged from
acquiring, a majority of our Common Stock, even if our stockholders believe that
such an acquisition would be in their interests. This could prevent an increase
or cause a decline in the price of our Common Stock
Our stock price may continue to be volatile: The price of our common stock
has fluctuated substantially since our IPO in June 1996 and may continue to do
so. In addition, the stock market has experienced significant price and volume
fluctuations that have affected the market prices of equity securities of many
companies and that often have been unrelated or disproportionately related to
the operating performance of these companies. These broad market fluctuations
may adversely affect the price of our Common Stock. Following periods of
volatility in stock prices, some companies have faced securities class action
litigation. If we were to face this type of litigation, which often results in
substantial costs and a diversion of management's attention and resources, our
business, operating results and financial condition could be materially and
adversely affected. In addition, there can be no assurance that an active
trading market will be sustained for our Common Stock.
We must retain qualified employees and our key executives: Our ability to
execute our business plan is contingent upon successfully attracting and
retaining qualified employees. While we have not experienced any significant
difficulties in attracting and retaining sufficient personnel, there can be no
assurance that we will continue to be successful in this area. Failure to do so
could have a material adverse effect on our future results of operations and
financial condition.
We are highly dependent on the services of our key executives. The loss of
the services of any of these executive officers could materially and adversely
affect our business and operations. To address these concerns, we have entered
into employment contracts with each of them, other than Mr. Joshi. Each
employment agreement has terms expiring more than twelve months from September
30, 1999. In addition, we have prepared a preliminary management succession
plan. It is expected that this plan will be finalized during fiscal 2000. We
will continue to update this plan as circumstances require.
Foreign sales entail unique risks: We derived approximately 1% and 5% of
our total sales from foreign markets for the fiscal years ended September 30,
1999 and 1998. We expect that foreign sales may represent a greater portion of
our revenues in the future. In addition, foreign sales of our products by both
Raytheon and Lockheed Martin represent an important percentage of their sales
opportunities. The following risks associated with foreign sales could
materially and adversely affect our business:
political and economic instability;
restrictive trade policies of foreign governments;
inconsistent product regulation by foreign agencies or governments;
currency valuation variations;
exchange control problems;
imposition of product tariffs; and
burdens of complying with a wide variety of international and U.S. export
laws and differing regulatory requirements.
To date, we have transacted our foreign sales in U.S. dollars, and payments
have generally been supported by letters of credit. If any future foreign sales
are transacted in a foreign currency or not supported by letters of credit, we
could face losses due to foreign currency fluctuations and difficulties
associated with collection of accounts receivable abroad. In the event any of
these risks occur, there could be a material adverse effect on our business,
financial condition or results of operations.
27
<PAGE>
We have not paid and do not anticipate paying any dividends: We have not
paid any dividends on our common stock and intend to follow a policy of
retaining any earnings to finance the development and growth of our business.
Accordingly, we do not anticipate the payment of cash dividends in the
foreseeable future. However, the payment of dividends rests within the
discretion of the board and will depend upon, among other things, our earnings,
capital requirements, overall financial condition and any restrictions appearing
in our current loan agreements.
ITEM 7. FINANCIAL STATEMENTS
The financial statements of the Company filed with this Report are set
forth in a separate section commencing on page F-1.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
28
<PAGE>
PART III
ITEM 9.DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT
See the section captioned 'Election of Directors' included in the Company's
Proxy Statement in connection with its Annual Meeting scheduled to be held on
March 23, 2000, which section is incorporated herein by reference.
ITEM 10. EXECUTIVE COMPENSATION
See the section captioned 'Executive Compensation' included in the
Company's Proxy Statement in connection with its Annual Meeting scheduled to be
held on March 23, 2000, which section is incorporated herein by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
See the sections captioned 'Principal Shareholders of the Company' and
'Compliance with Section 16(a) of the Securities Exchange Act' included in the
Company's Proxy Statement in connection with its Annual Meeting scheduled to be
held on March 23, 2000, which section is incorporated herein by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See the section captioned 'Certain Transactions' included in the Company's
Proxy Statement in connection with its Annual Meeting scheduled to be held on
March 23, 2000, which section is incorporated herein by reference.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The following exhibits are filed as part of this Annual Report on
Form 10-KSB.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------ -----------------------
<S> <C>
2.1 -- 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 (incorporated by reference to Exhibit 2.1 to the Registrant's Current Report
on Form 8-K dated October 8, 1998).
3(i) -- Amended and Restated Articles of Incorporation as filed with the Florida Department of
State on December 8, 1998 (incorporated by reference to Exhibit 3(i) to the Registrant's
Annual Report on Form 10-KSB for the fiscal year ended September 30, 1998).
3(ii) -- Amended and Restated By-laws (incorporated by reference to exhibit 4.2 of Form 10-QSB of
the quarterly period ended June 30, 1999).
4.1A -- Specimen Common Stock Certificate as amended November 1, 1998 (incorporated by reference
to Exhibit 4.1A to the Registrant's Annual Report on Form 10-KSB for the fiscal year ended
September 30, 1998).
10.3B -- Incentive Stock Option Plan, as amended June 4, 1999 (incorporated by reference to Exhibit
10.3B to the Registrant's Quarterly Report on Form 10-QSB for the period ended June 30,
1999).
10.32 -- Agreements Granting Special Stock Option between the Registrant and John P. Singleton
dated as of June 18, 1998 (incorporated by reference to Exhibit 10.32 to the Registrant's
Quarterly Report on Form 10-QSB for the quarterly period ended June 30, 1998).
10.33 -- Agreements clarifying Prior Grant of Stock options between the Registrant and Michael F.
Maguire dated as of June 18, 1998 (incorporated by reference to Exhibit 10.33 to the
Registrant's Quarterly Report on Form 10-QSB for the quarterly period ended June 30, 1998).
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------ -----------------------
<S> <C>
10.34 -- Promissory Note to Registrant from Richard P. McNeight
dated June 3, 1998 (incorporated by reference to Exhibit
10.34 to the Registrant's Quarterly Report on Form 10-QSB
for the quarterly period ended June 30, 1998).
10.35 -- Promissory Note to Registrant from UES, Inc. dated July
2, 1998 (incorporated by reference to Exhibit 10.35 to the
Registrant's Quarterly Report on Form 10-QSB for the
quarterly period ended June 30, 1998). The note is
personally guaranteed by Krishan K. Joshi.
10.36 -- Credit Agreement by Registrant with National City Bank
(incorporated by reference to Exhibit 10.36 to the
Registrant's Annual Report on Form 10-KSB for the fiscal
year ended September 30, 1998).
10.37 -- Commercial Note by Registrant with National City Bank
(incorporated by reference to Exhibit 10.37 to the
Registrant's Annual Report on Form 10-KSB for the fiscal
year ended September 30, 1998).
10.38 -- Employment Agreement between Paravant Computer Systems,
Inc. and Edward W. Stefanko dated October 1, 1998
(incorporated by reference to Exhibit 10.38 to the
Registrant's Annual Report on Form 10-KSB for the fiscal
year ended September 30, 1998).
10.39 -- Employment Agreement between Paravant Computer Systems,
Inc. and C. Hyland Schooley dated October 1, 1998
(incorporated by reference to Exhibit 10.39 to the
Registrant's Annual Report on Form 10-KSB for the fiscal
year ended September 30, 1998).
10.40 -- Employment Agreement between Paravant Computer Systems,
Inc. and James E. Clifford dated October 1, 1998
(incorporated by reference to Exhibit 10.40 to the
Registrant's Annual Report on Form 10-KSB for the fiscal
year ended September 30, 1998).
10.41 -- Non-Competition Agreement between Paravant Computer
Systems, Inc. and C. Hyland Schooley dated October 1, 1998
(incorporated by reference to Exhibit 10.41 to the
Registrant's Annual Report on Form 10-KSB for the fiscal
year ended September 30, 1998).
10.42 -- Subordinated Note from Paravant Computer Systems, Inc. to
Edward W. Stefanko dated October 1, 1998 (incorporated by
reference to Exhibit 10.42 to the Registrant's Annual
Report on Form 10-KSB for the fiscal year ended
September 30, 1998).
10.43 -- Subordinated Note from Paravant Computer Systems, Inc. to
Hyland Schooley dated October 1, 1998 (incorporated by
reference to Exhibit 10.43 to the Registrant's Annual
Report on Form 10-KSB for the fiscal year ended
September 30, 1998).
10.44 -- Subordinated Note from Paravant Computer Systems, Inc. to
James E. Clifford dated October 1, 1998 (incorporated by
reference to Exhibit 10.44 to the Registrant's Annual
Report on Form 10-KSB for the fiscal year ended
September 30, 1998).
10.45 -- Lease Agreement between Engineering Development
Laboratories, Incorporated and UES, Incorporated, dated
November 26, 1996 (as amended) (incorporated by reference
to Exhibit 10.45 to the Registrant's Annual Report on
Form 10-KSB for the fiscal year ended September 30, 1998).
10.46 -- Lease Agreement between Signal Technology Laboratories,
Inc. and UES, Incorporated dated August 1, 1996 (as
amended through October 1, 1997) (incorporated by
reference to Exhibit 10.46 to the Registrant's Annual
Report on Form 10-KSB for the fiscal year ended
September 30, 1998).
10.47 -- Mutual Commitment to Build and to Lease between
Engineering Development Laboratories, Incorporated, UES,
Inc. and Beavercreek Enterprises dated June 5, 1998
(incorporated by reference to Exhibit 10.47 to the
Registrant's Annual Report on Form 10-KSB for the fiscal
year ended September 30, 1998).
10.48 -- Mutual Commitment to Build and to Lease between Signal
Technology Laboratories, Inc., UES, Inc. and Beavercreek
Enterprises dated June 5, 1998 (incorporated by reference
to Exhibit 10.48 to the Registrant's Annual Report on
Form 10-KSB for the fiscal year ended September 30, 1998).
</TABLE>
30
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------ -----------------------
<S> <C>
10.49 -- Non-employee Director's Stock Option Plan, as amended
March 11, 1999 (incorporated by reference to Exhibit 10.45
to the Registrant's Quarterly Report on Form 10-QSB for
the period ended March 31, 1999).
10.50 -- Settlement Agreement and Release among Paravant Inc.,
Signal Technology Laboratories, Inc. and shareholders of
Signal Technology Laboratories, Inc. (incorporated by
reference to Exhibit 10.46 to the Registrant's Quarterly
Report on Form 10-QSB for the period ended March 31,
1999).
10.51 -- Employment Agreement between Paravant Inc. and Richard P.
McNeight (incorporated by reference to Exhibit 10.47 to
the Registrant's Quarterly Report on Form 10-QSB for the
period ended June 30, 1999).
10.52 -- Employment Agreement between Paravant Inc. and Kevin J.
Bartczak (incorporated by reference to Exhibit 10.48 to
the Registrant's Quarterly Report on Form 10-QSB for the
period ended June 30, 1999).
10.53 -- Employment Agreement between Paravant Computer Systems,
Inc. and William R. Craven (incorporated by reference to
Exhibit 10.49 to the Registrant's Quarterly Report on
Form 10-QSB for the period ended June 30, 1999).
10.54 -- Agreements Granting Special Stock Option between the
Registrant and John P. Singleton dated as of December 15,
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).
21 -- Subsidiaries of Paravant Inc.
23.1 -- Independent Auditors' Consent.
27 -- Financial Data Schedule.
</TABLE>
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the registrant during the quarter
ended September 30, 1999.
31
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
PARAVANT INC.
By: /s/ KRISHAN K. JOSHI
...................................
KRISHAN K. JOSHI,
CHAIRMAN OF THE BOARD, PRESIDENT
AND CHIEF EXECUTIVE OFFICER
December 14, 1999
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the Registrant and in the capacities and on
the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
--------- -------- ----
<S> <C> <C>
/s/ KRISHAN K. JOSHI Chairman, President, Chief Executive December 14, 1999
......................................... Officer and Director (Principal
KRISHAN K. JOSHI Executive Officer)
/s/ RICHARD P. MCNEIGHT President, Paravant Computer December 14, 1999
......................................... Systems, Inc., and Director
RICHARD P. MCNEIGHT
/s/ WILLIAM R. CRAVEN Vice President, Director and December 14, 1999
......................................... Secretary
WILLIAM R. CRAVEN
/s/ KEVIN J. BARTCZAK Vice President, Chief Financial December 14, 1999
......................................... Officer, Treasurer (Principal
KEVIN J. BARTCZAK Financial Officer and Principal
Accounting Officer)
/s/ JAMES E. CLIFFORD Vice President, Mergers and December 14, 1999
......................................... Acquisitions and Director
JAMES E. CLIFFORD
/s/ MICHAEL F. MAGUIRE Director December 14, 1999
.........................................
MICHAEL F. MAGUIRE
/s/ C. HYLAND SCHOOLEY President, STL of Ohio, Inc. and December 14, 1999
......................................... Director
C. HYLAND SCHOOLEY
/s/ JOHN P. SINGLETON Director December 14, 1999
.........................................
JOHN P. SINGLETON
</TABLE>
32
<PAGE>
PARAVANT INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999 AND 1998
(WITH INDEPENDENT AUDITORS' REPORT THEREON)
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report................................ F-2
Financial Statements:
Consolidated Balance Sheets............................ F-3
Consolidated Statements of Operations.................. F-4
Consolidated Statements of Changes in Stockholders'
Equity and Accumulated Other Comprehensive Income..... F-5
Consolidated Statements of Cash Flows.................. F-6
Notes to Consolidated Financial Statements.................. F-7 - F-20
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors:
PARAVANT INC. AND SUBSIDIARIES:
We have audited the accompanying consolidated balance sheets of Paravant
Inc. and Subsidiaries as of September 30, 1999 and 1998, and the related
consolidated statements of operations, changes in stockholders' equity and
accumulated other comprehensive income 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 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 Paravant
Inc. and Subsidiaries as of September 30, 1999 and 1998, and the results of
their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles.
/S/ KPMG LLP
Orlando, Florida
November 9, 1999
F-2
<PAGE>
PARAVANT INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
ASSETS ---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents.............................. $ 949,414 $ 1,187,788
Marketable securities.................................. 440,109 --
Accounts receivable, net............................... 9,168,343 4,181,193
Employee receivables and advances...................... 94,165 49,255
Note receivable........................................ -- 750,000
Costs and estimated earnings in excess of billings on
uncompleted contracts................................. 6,028,502 --
Inventory, net......................................... 4,616,490 3,160,572
Prepaid expenses....................................... 180,808 70,300
Deferred income taxes.................................. 1,290,905 482,620
----------- -----------
Total current assets.............................. 22,768,736 9,881,728
----------- -----------
Property, plant and equipment, net.......................... 1,647,489 1,239,179
Intangible assets, net...................................... 5,207,985 63,875
Demonstration pool and custom molds, net.................... 641,421 252,870
Employee note receivable.................................... 215,684 215,684
Other assets................................................ 884,552 1,042,240
Goodwill, net............................................... 11,606,946 --
----------- -----------
Total assets...................................... $42,972,813 $12,695,576
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable to bank................................... $ -- $ 9,147
Current maturities of notes payable to related
parties............................................... 985,000 --
Current maturities of capital lease obligations........ 64,270 63,670
Accounts payable....................................... 1,928,593 380,696
Billings in excess of costs and estimated earnings on
uncompleted contracts................................. 2,527,566 --
Reserve for future losses on uncompleted contracts..... 150,000 --
Accrued commissions.................................... 553,952 524,036
Accrued expenses....................................... 1,024,643 804,914
Accrued incentive compensation......................... 869,176 354,806
Income taxes payable................................... 484,117 88,414
----------- -----------
Total current liabilities......................... 8,587,317 2,225,683
----------- -----------
Notes payable to related parties, net of current
maturities................................................ 1,477,500 --
Capital lease obligations, net of current maturities........ 55,268 27,071
Deferred compensation....................................... 523,417 --
Deferred income taxes, net.................................. 127,324 207,067
----------- -----------
Total liabilities................................. 10,770,826 2,459,821
----------- -----------
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 17,581,193 and outstanding
17,544,208 shares at September 30, 1999 and issued and
outstanding 8,343,928 shares at September 30, 1998.... 263,718 125,159
Additional paid-in capital............................. 21,660,379 5,628,649
Unrealized gain on available-for-sale securities....... 10,797 --
Retained earnings...................................... 10,367,589 4,481,947
----------- -----------
32,302,483 10,235,755
Less treasury stock , at cost, 36,985 shares........... (100,496) --
----------- -----------
Total stockholders' equity........................ 32,201,987 10,235,755
----------- -----------
Commitments and contingencies
Total liabilities and stockholders' equity........ $42,972,813 $12,695,576
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
PARAVANT INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED SEPTEMBER 30, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Revenues.................................................... $42,279,478 $15,507,727
Cost of revenues............................................ 20,840,615 7,606,874
----------- -----------
Gross profit...................................... 21,438,863 7,900,853
Sales and marketing......................................... 2,296,097 2,245,321
Research, development & engineering......................... 2,536,530 1,703,960
General and administrative.................................. 4,400,561 1,723,062
Amortization of goodwill and intangible assets.............. 1,968,649 126,507
----------- -----------
Total selling and administrative expense............... 11,201,837 5,798,850
----------- -----------
Income from operations............................ 10,237,026 2,102,003
Other income (expense):
Interest expense....................................... (777,076) (19,954)
Interest income........................................ 60,416 110,062
Miscellaneous.......................................... 159,234 17,524
----------- -----------
Income before income taxes........................ 9,679,600 2,209,635
Income tax expense.......................................... 3,793,958 750,038
----------- -----------
Net income........................................ $ 5,885,642 $ 1,459,597
----------- -----------
----------- -----------
Basic earnings per share.................................... $.42 $.18
---- ----
---- ----
Diluted earnings per share.................................. $.41 $.14
---- ----
---- ----
Weighted average number of common shares outstanding........ 13,978,583 8,174,111
----------- -----------
----------- -----------
Weighted average number of common shares and dilutive
potential common shares outstanding....................... 14,392,252 10,451,408
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
PARAVANT INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
AND ACCUMULATED OTHER COMPREHENSIVE INCOME
YEARS ENDED SEPTEMBER 30, 1999 AND 1998
<TABLE>
<CAPTION>
COMMON STOCK ACCUMULATED
--------------------- ADDITIONAL OTHER TOTAL
NUMBER PAR PAID-IN RETAINED COMPREHENSIVE TREASURY STOCKHOLDERS'
OF SHARES VALUE CAPITAL EARNINGS INCOME STOCK EQUITY
--------- ----- ------- -------- ------ ----- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, September 30, 1997.... 7,993,652 $119,905 $ 5,067,258 $ 3,022,350 -- -- $ 8,209,513
Exercise of underwriters'
warrants for additional
redeemable warrants........... -- -- 14,881 -- -- -- 14,881
Exercise of warrants for
shares........................ 124,215 1,863 242,576 -- -- -- 244,439
Exercise of Common Stock
options....................... 226,061 3,391 158,285 -- -- -- 161,676
Tax benefit of exercise of
nonqualified stock options.... -- -- 549,091 -- -- -- 549,091
Registration costs related to
stock options and warrants.... -- -- (403,442) -- -- -- (403,442)
Net income...................... -- -- -- 1,459,597 -- -- 1,459,597
---------- -------- ----------- ----------- ------- --------- -----------
Balances, September 30, 1998.... 8,343,928 $125,159 $ 5,628,649 $ 4,481,947 $-- $ -- $10,235,755
Issuance of Common Stock for
acquisition................... 3,950,000 59,250 5,865,750 -- -- -- 5,925,000
Exercise of warrants............ 5,125,937 76,889 10,141,764 -- -- -- 10,218,653
Exercise of Common Stock
options....................... 161,328 2,420 122,447 -- -- -- 124,867
Receipt of treasury stock in
cashless exercise of Common
Stock options................. (36,985) -- -- -- -- (100,496) (100,496)
Retirement of underwriter's
warrants...................... -- -- (50,000) -- -- -- (50,000)
Registration costs related to
stock options and warrants.... -- -- (47,662) -- -- -- (47,662)
Warrant redemption.............. -- -- (569) -- -- -- (569)
Comprehensive income:
Net income.................. -- -- -- 5,885,642 -- -- 5,885,642
Unrealized gain on
securities, net of tax.... -- -- -- -- 10,797 -- 10,797
-----------
Total comprehensive income...... -- -- -- -- -- -- 5,896,439
---------- -------- ----------- ----------- ------- --------- -----------
Balances, September 30, 1999.... 17,544,208 $263,718 $21,660,379 $10,367,589 $10,797 $(100,496) $32,201,987
---------- -------- ----------- ----------- ------- --------- -----------
---------- -------- ----------- ----------- ------- --------- -----------
Disclosure of reclassification
amount:
Unrealized holding gains
arising during period..... $ 10,797
Less: Reclassification
adjustment for gains
included in net income.... --
----------
Net unrealized gains on
securities................ $ 10,797
----------
----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
PARAVANT INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income.............................................. $ 5,885,642 $ 1,459,597
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization...................... 2,795,970 444,995
Deferred income taxes.............................. (888,028) 71,890
Increase (decrease) in cash caused by changes in:
Accounts receivable............................ (4,762,778) (98,278)
Employee receivables and advances.............. (44,910) (21,134)
Contracts in progress.......................... (1,893,473) --
Inventory...................................... (1,239,772) 301,201
Prepaid expenses............................... (102,133) 27,285
Other assets................................... 159,348 (171,410)
Accounts payable............................... 1,432,633 (214,671)
Accrued commissions............................ 29,916 (46,523)
Accrued expenses............................... (481,262) 65,656
Accrued incentive compensation................. 514,370 92,520
Deferred compensation.......................... 523,417 --
Income taxes payable........................... (238,194) 138,550
------------ -----------
Net cash provided by operating
activities................................ 1,690,746 2,049,678
------------ -----------
Cash flows from investing activities:
Payments for acquired subsidiaries, net of cash
acquired............................................... (9,046,377) --
Advances on notes receivable............................ -- (965,684)
Acquisitions of property, plant and equipment........... (683,930) (628,778)
Acquisitions of demonstration pool and custom molds..... (43,911) (103,290)
Purchase of marketable securities....................... (488,670) --
Proceeds from sale of marketable securities............. 59,358 --
Payment of EDL acquisition costs........................ -- (551,850)
Proceeds from collection of note receivable............. 750,000 --
------------ -----------
Net cash used in investing activities..... (9,408,530) (2,249,602)
------------ -----------
Cash flows from financing activities:
Repayments on previous line of credit................... (225,000) --
Repayments on notes payable to related parties.......... (2,346,647) (110,004)
Net repayments on capital lease obligations............. (97,062) (132,465)
Proceeds from exercise of Common Stock options.......... 27,697 161,676
Proceeds from exercise of warrants...................... 10,218,653 259,320
Payments for redemption of warrants..................... (569) --
Stock registration fees................................. (47,662) (403,442)
Payment for retirement of underwriters' warrants........ (50,000) --
------------ -----------
Net cash provided by (used in) financing
activities................................ 7,479,410 (224,915)
------------ -----------
Net decrease in cash and cash
equivalents............................... (238,374) (424,839)
Cash and cash equivalents at beginning of year.............. 1,187,788 1,612,627
------------ -----------
Cash and cash equivalents at end of the period.............. $ 949,414 $ 1,187,788
------------ -----------
------------ -----------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest........................................... $ 806,143 $ 19,704
------------ -----------
------------ -----------
Income taxes....................................... $ 3,400,255 $ 539,598
------------ -----------
------------ -----------
Supplemental disclosure of noncash investing and financing
activities:
The Company entered into capital lease agreements for
factory and office equipment........................... $ 125,859 $ 27,015
------------ -----------
------------ -----------
The Company had a fair value adjustment to
securities-available-for-sale.......................... $ 10,797 $ --
------------ -----------
------------ -----------
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 year ended
September 30, 1999.
Supplemental disclosure of noncash financing activities:
The Company had a tax benefit from the exercise of
nonqualified stock options............................. $ -- $ 549,091
------------ -----------
------------ -----------
The Company issued stock through a cashless exercise of
stock options and received treasury stock.............. $ 97,170 $ --
------------ -----------
------------ -----------
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
PARAVANT INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1999 AND 1998
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) REPORTING ENTITY
The accompanying consolidated financial statements of Paravant Inc. (the
'Company' or 'Paravant') 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.
(B) BUSINESS
The Company is engaged in the design, development, production and sale of
military electronic hardware. The products include computer and communication
systems, specializing in rugged, hand-held and laptop computer products with
primarily military applications, airborne and avionics systems for the U.S.
Department of Defense ('DoD') and electronic signal conditioning and analysis
systems for foreign and domestic intelligence agencies. In addition, the Company
has expanded into the medical market and now provides a line of programmers that
are used to provide programming information to medical pumps and related
devices.
The principal customers of the Company are U.S. 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.
(C) CASH AND CASH EQUIVALENTS
Cash and cash equivalents include all highly liquid debt instruments
purchased with a maturity of three months or less.
(D) MARKETABLE SECURITIES
Marketable securities at September 30, 1999 consist of mutual funds. The
Company classifies its mutual funds as available-for-sale. Available-for-sale
securities are recorded at fair value.
(E) ACCOUNTS RECEIVABLE
Management has provided an allowance for doubtful accounts receivable for
$79,495 and $88,993 as of September 30, 1999 and 1998, respectively.
(F) 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.
(G) 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 and are
being amortized over the estimated useful lives of the technology of five to ten
years and the estimated lives of the non-compete agreements of eight and
one-half 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 ten
years using the straight-line method. When events and circumstances so indicate,
all long-term assets, including
F-7
<PAGE>
PARAVANT INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1999 AND 1998
goodwill, are assessed for recoverability based upon cash flow forecasts. This
assessment is generally made on an annual basis. An impairment loss would be
recorded in the period such determination is made based on the fair value of the
related business.
(H) 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 charged to
operations in the period that such losses are determined.
At September 30, 1999 and 1998, the Company had military computer and
medical programmer product sales of $3,524,063 and $43,996, respectively, for
which title had been transferred to a customer although physical product
remained on Company premises at the convenience of the customer.
Federal government contract 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 will not have a material adverse effect on the consolidated financial
position or the results of operations.
The Company allows customers to return military computers and medical
programmers 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
$84,142 and $78,000 as of September 30, 1999 and 1998, respectively.
(I) 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.
(J) STOCK-BASED COMPENSATION
The Company continues to account for its stock-based compensation using the
intrinsic value method prescribed in Accounting Principles Board ('APB') Opinion
No. 25, 'Accounting for Stock Issued to Employees', and related interpretations.
Compensation expense for stock options, if any, would be recorded on the date of
grant only if the current market price of the underlying stock exceeded the
exercise price.
Statement of Financial Accounting Standards ('SFAS') No. 123, 'Accounting
for Stock-Based Compensation', established accounting and disclosure
requirements using a fair-value-based method of accounting for stock-based
employee compensation plans. The Company has elected to continue to apply the
provisions of APB Opinion No. 25 as described above, and has adopted the
disclosure requirements of SFAS No. 123.
F-8
<PAGE>
PARAVANT INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1999 AND 1998
(K) SEGMENT AND RELATED INFORMATION
In June 1997, the FASB issued SFAS 131, 'Disclosures about Segments of an
Enterprise and Related Information.' The standard requires that companies
disclose 'operating segments' based on the way management disaggregates the
company for making internal operating decisions. The Company believes that all
of its material operations are part of the military electronic hardware industry
and it currently reports a single industry segment.
(L) COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board ('FASB') issued SFAS
130, 'Reporting Comprehensive Income,' which established standards for reporting
and display of comprehensive income and its components. This statement requires
a separate statement to report the components of comprehensive income for each
period reported. The provisions of this statement were effective for fiscal
years beginning after December 15, 1997. The Company's only item of other
comprehensive income is unrealized gains on marketable securities, which have
been reported separately in Stockholders' Equity.
(M) BASIC AND DILUTED EARNINGS PER SHARE
Basic earnings per share for the years ended September 30, 1999 and 1998
has been computed by dividing net income by the weighted average number of
common shares outstanding for the year. Diluted earnings per share for the years
ended September 30, 1999 and 1998 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>
1999 1998
---- ----
<S> <C> <C>
Basic:
Weighted average number of common shares
outstanding........................... 13,978,583 8,174,111
---------- ----------
---------- ----------
Diluted:
Weighted average number of common shares
outstanding........................... 13,978,583 8,174,111
Dilutive stock options.................. 398,834 482,065
Dilutive warrants....................... 14,835 1,795,232
---------- ----------
14,392,252 10,451,408
---------- ----------
---------- ----------
</TABLE>
Options to purchase 625,100 and 643,750 shares of Common Stock were
excluded from the calculation of diluted earnings per share for the years ended
September 30, 1999 and 1998, respectively, because their exercise prices
exceeded the average market price of common shares for the period.
Warrants to purchase 45,000 shares of Common Stock were excluded from the
calculation of diluted earnings per share for the year ended September 30, 1999
because their exercise prices exceeded the average market price of common shares
for the period.
(N) FINANCIAL INSTRUMENTS
The fair values of cash equivalents, accounts receivable, accounts payable
and accrued expenses approximate their carrying amounts due to the short
maturity of those instruments. The fair values of notes receivable, long-term
debt and capital lease obligations approximate their carrying amounts
F-9
<PAGE>
PARAVANT INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1999 AND 1998
because these financial instruments bear interest at borrowing rates currently
available to the Company for similar issues or leases with similar terms and
maturities.
(O) 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.
(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 Signal Technology
Laboratories, Inc. ('STL'), EDL's majority-owned subsidiary. Pursuant to the
Acquisition Agreement the Company paid an aggregate 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 valued at $5,925,000.
In connection with the Acquisition a contingent cash earn-out may 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 additional goodwill and will be amortized over the remaining life of the
asset. 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 Notes 7 and 8).
The aggregate purchase price of the Acquisition was approximately
$20,621,400, which included related acquisition costs of approximately
$1,196,400, was allocated as follows:
<TABLE>
<S> <C>
Goodwill............................................... 12,885,300
Non-competition agreements............................. 5,867,250
Equipment.............................................. 225,300
Demonstration pool and custom molds.................... 557,350
Cash................................................... 850,000
Current assets......................................... 1,960,600
Current liabilities.................................... (1,724,400)
-----------
$20,621,400
-----------
-----------
</TABLE>
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>
YEARS ENDED SEPTEMBER 30
-------------------------
1999 1998
---- ----
<S> <C> <C>
Net revenues............................... $42,279,478 $51,251,903
----------- -----------
----------- -----------
Net income................................. $ 5,885,642 $10,376,309
----------- -----------
----------- -----------
Basic earnings per share................... $.42 $.86
---- ----
---- ----
</TABLE>
F-10
<PAGE>
PARAVANT INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1999 AND 1998
(3) MARKETABLE SECURITIES
The cost basis, gross unrealized gains, gross unrealized losses and fair
value for available-for-sale securities as of September 30, 1999 were as
follows:
<TABLE>
<CAPTION>
GROSS GROSS
COST UNREALIZED UNREALIZED FAIR
BASIS GAINS LOSSES VALUE
----- ----- ------ -----
<S> <C> <C> <C> <C>
Available-for-sale:
Mutual Funds...................... $429,312 $10,981 $(184) $440,109
-------- ------- ----- --------
-------- ------- ----- --------
</TABLE>
(4) EMPLOYEE NOTE RECEIVABLE
The Company holds an unsecured note receivable of $215,684 from an officer
and director of the Company. The note was originated in June 1998, bears
interest at the prime rate currently available under the Company's existing
revolving line of credit and matures in June 2003.
(5) COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
Contracts in progress and advance billings on such contracts consist of the
following as of September 30, 1999:
<TABLE>
<CAPTION>
1999
----
<S> <C>
Costs incurred on uncompleted contracts................ $23,647,987
Estimated earnings thereon............................. 18,020,932
-----------
41,668,919
Billings to date....................................... 38,317,983
-----------
$ 3,350,936
-----------
-----------
</TABLE>
The above amount is included in the accompanying consolidated balance sheet
under the following captions:
<TABLE>
<CAPTION>
1999
----
<S> <C>
Costs and estimated earnings in excess of billings on
uncompleted contracts................................. $ 6,028,502
Billings in excess of costs and estimated earnings on
uncompleted contracts................................. (2,527,566)
Reserve for future losses on uncompleted contracts...... (150,000)
-----------
$ 3,350,936
-----------
-----------
</TABLE>
(6) INVENTORY
The following is a summary of inventory at September 30, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Raw materials................................ $4,029,660 $3,142,646
Work in process.............................. 754,653 394,212
Finished goods............................... 394,171 52,714
---------- ----------
5,178,484 3,589,572
Reserve for obsolete inventory............... (561,994) (429,000)
---------- ----------
$4,616,490 $3,160,572
---------- ----------
---------- ----------
</TABLE>
F-11
<PAGE>
PARAVANT INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1999 AND 1998
(7) PROPERTY, PLANT AND EQUIPMENT
The following is a summary of property, plant and equipment at
September 30, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Office equipment............................. $1,853,885 $1,050,343
Factory equipment............................ 921,643 776,841
Leasehold improvements....................... 326,273 231,760
---------- ----------
Total costs.................................. 3,101,801 2,058,944
Less accumulated depreciation................ (1,454,312) (819,765)
---------- ----------
$1,647,489 $1,239,179
---------- ----------
---------- ----------
</TABLE>
Depreciation and amortization expense on these assets amounted to $581,753
and $331,053 for the years ended September 30, 1999 and 1998, respectively.
(8) INTANGIBLE ASSETS
These assets consist of exclusive rights to a printed circuit board,
certain software and non-compete agreements. Cost and accumulated amortization
of these assets at September 30, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
1998 ADDITIONS DELETIONS 1999
---- --------- --------- ----
<S> <C> <C> <C> <C>
Cost............................ $ 302,500 $5,867,250 -- $6,169,750
Accumulated amortization........ (238,625) (723,140) -- (961,765)
--------- ---------- -------- ----------
$ 63,875 $5,144,110 -- $5,207,985
--------- ---------- -------- ----------
--------- ---------- -------- ----------
</TABLE>
Total amortization expense on these assets was $723,140 and $31,000 for the
years ended September 30, 1999 and 1998, respectively.
(9) 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, 1999
and 1998 are as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Cost.......................................... $1,081,648 $ 480,403
Accumulated amortization...................... (440,227) (227,533)
---------- ---------
$ 641,421 $ 252,870
---------- ---------
---------- ---------
</TABLE>
Total amortization expense on these assets was $212,694 and $82,942 for the
years ended September 30, 1999 and 1998, respectively.
(10) GOODWILL
Goodwill represents the excess of cost over the net tangible and
identifiable intangible assets of the Company's wholly owned subsidiaries. Cost
and accumulated amortization of these assets at September 30, 1999 is as
follows:
<TABLE>
<S> <C>
Cost................................................... $12,885,330
Accumulated amortization............................... (1,278,384)
-----------
$11,606,946
-----------
-----------
</TABLE>
F-12
<PAGE>
PARAVANT INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1999 AND 1998
(11) REVOLVING LINE OF CREDIT
The Company has floating rate financing with 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
receivable, contract rights, inventory, equipment and other security reasonably
requested by the lender. As of September 30, 1999, there were no borrowings
outstanding under this line of credit.
(12) NOTE PAYABLE TO BANK
As of September 30, 1998 the Company had a note payable to bank bearing an
initial interest rate of 7.25%; interest adjusted monthly to 1.50% above the
prime rate; interest and principal were due in sixty monthly installments
including principal of $9,167 per payment, final payment was made in October of
1998.
(13) NOTES PAYABLE TO RELATED PARTIES
The following is a summary of notes payable to related parties at
September 30, 1999:
<TABLE>
<CAPTION>
1999
----
<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.............. $2,462,500
Less current maturities................................. (985,000)
----------
Notes payable to related parties, less current
maturities.................................. $1,477,500
----------
----------
</TABLE>
(14) LEASES
The Company is obligated under various capital leases for office equipment
and building improvements. At September 30, 1999 and 1998, respectively,
property, plant and equipment included net capital lease assets of $200,771 and
$256,347.
The Company also has several noncancellable operating leases. Under these
arrangements, the Company leases its current office facilities at a rate of
$9,461 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 December
of 2002. Rent expense under operating lease agreements totaled $382,858 and
$147,409 for the years ended September 30, 1999 and 1998, respectively.
F-13
<PAGE>
PARAVANT INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1999 AND 1998
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 for capital lease obligations as of September 30, 1999:
<TABLE>
<CAPTION>
CAPITAL OPERATING
YEAR ENDING SEPTEMBER 30, LEASES LEASES
- ------------------------- ------ ------
<S> <C> <C>
2000.................................................. $ 76,376 $ 461,392
2001.................................................. 65,636 474,100
2002.................................................. -- 393,831
2003.................................................. -- 356,254
2004.................................................. -- 331,003
-------- ----------
Total minimum lease payments................ 142,012 $2,016,580
----------
----------
Less amounts representing interest.................... (22,474)
--------
Present value of net minimum lease
payments.................................. 119,538
Less current maturities............................... 64,270
--------
Capital lease obligations............................. $ 55,268
--------
--------
</TABLE>
(15) STOCK OPTIONS
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.
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 provided that the options were
exercisable through November 22, 2004. These options were exercised on
April 28, 1998.
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 and on March 12, 1998, the Company increased the options
reserved under the qualified plan from 1,455,000 to 2,955,000. The terms of
these options provide that the options are exercisable at 33 percent 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'). On March 12, 1998, the Company increased the
options reserved under the directors nonqualified plan from 45,000 to 135,000.
On March 11, 1999 the Company increased the options reserved under the directors
nonqualified plan from 135,000 to 225,000 and the Company amended the plan to
increase the number of shares automatically granted to the nonemployee directors
on the date of the director's election to the Board and on the date of each of
the Board's annual meetings thereafter. 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.
F-14
<PAGE>
PARAVANT INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1999 AND 1998
The directors nonqualified plan provides that each nonemployee director be
granted options to purchase 10,000 shares at the fair market value on the date
of the director's election to the Board and on the date of each of the Board's
annual meetings thereafter.
On November 19, 1998, the Company granted options under its qualified plan
to employees to purchase 312,400 shares of the Company's Common Stock at an
exercise price of $1.938 per share which was the market price of the shares at
the date of issuance. In addition, on November 19, 1998, the Company granted
options under its qualified plan to one employee to purchase 25,000 shares of
the Company's Common Stock at an exercise price of $2.132 per share which was
110 percent of the market price of the shares at the date of issuance.
On December 15, 1998, the Company granted options under its qualified plan
to one employee to purchase 100,000 shares of the Company's Common Stock at an
exercise price of $2.338 per share which was the 110 percent of the market price
of the shares at the date of issuance. In addition, on December 15, 1998, the
Company granted special options one nonemployee director ('1998 special option
plan') exercisable for ten years from the date of issuance for the purchase of
11,000 shares at an exercise price of $2.125 per share which was the market
price of the shares at the date of issuance. Although not issued under the
existing directors' nonqualified plan, the 1998 special option plan is subject
to terms substantially similar to those applicable to options granted under the
directors' nonqualified plan. The 1998 special options are evidenced by a stock
option agreement between the Company and the director.
On March 11, 1999, the Company granted options under its directors'
nonqualified plan to its nonemployee directors to purchase 20,000 shares of the
Company's Common Stock at an exercise price of $2.156 per share, which was the
market price of the shares on the date of issuance.
At September 30, 1999, there were 1,170,909 and 148,000 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 1999 where exercise
price equals the market price of the stock on the grant date and exercise price
is greater than the market price of the stock on the grant date was $1.75 and
$0.62, respectively. The per share weighted-average fair value of stock options
granted during 1998 where exercise price equals the market price of the stock on
the grant date and exercise price is greater than the market price of the stock
on the grant date was $3.86 and $4.68, respectively.
The following weighted average assumptions were used:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Exercise price equal to market price on grant date
Expected risk-free interest rate................ 4.52% 5.75%
Expected life................................... 7.1 years 7.9 years
Expected volatility............................. 116.3% 110.9%
Expected dividend yield......................... 0.00% 0.00%
Exercise price greater than market price on grant
date
Expected risk-free interest rate................ 4.49% 5.78%
Expected life................................... 5.0 years 5.0 years
Expected volatility............................. 116.9% 110.0%
Expected dividend yield......................... 0.00% 0.00%
</TABLE>
The Company applies APB Opinion No. 25 in accounting for its option plans
and, accordingly, no compensation cost has been recognized 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
F-15
<PAGE>
PARAVANT INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1999 AND 1998
under SFAS No. 123, the Company's net income and earnings per share would have
been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C> <C>
Net income As reported.............................. $5,885,642 $1,459,597
Pro forma................................ 5,253,854 413,014
Basic earnings per As reported.............................. 0.42 0.18
share
Pro forma................................ 0.38 0.34
</TABLE>
Pro forma net income reflects only options granted after September 30,
1995. 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, 1997......................... 1,169,754 $1.76
Granted.............................................. 461,500 4.13
Exercised............................................ (226,061) .72
Forfeited............................................ (18,650) 4.95
--------- -----
Outstanding at September 30, 1998......................... 1,386,543 2.68
Granted.............................................. 468,400 2.05
Exercised............................................ (161,328) .77
Forfeited............................................ (11,600) 3.58
--------- -----
Outstanding at September 30, 1998......................... 1,682,015 2.68
--------- -----
--------- -----
</TABLE>
At September 30, 1999, the range of exercise prices and weighted-average
remaining contractual lives of outstanding options was $.24 to $.72 for 220,615
shares; $.73 to $.1.34 for 270,000 shares; $1.47 to $1.94 for 418,000 shares;
$2.13 to $4.25 for 413,150 shares and $4.68 to $6.00 for 360,250 shares at 4.97
years, 6.45 years, 7.57 years, 7.05 years and 5.49 years, respectively.
At September 30, 1999 and 1998, the number of options exercisable was
914,190 and 731,711, respectively, and the weighted-average exercise price of
those options was $2.37 and $1.60, respectively.
(16) WARRANTS
In connection with the Company's initial public offering ('IPO') of Common
Stock in June of 1996, the Company issued 4,830,000 warrants ('redeemable
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 closing
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. During the year ended September 30, 1998, this condition was met
as the closing sale price of the Company's Common Stock exceeded $2.83 per share
from December 1, 1997 through March 26, 1998 and these warrants were called on
April 12, 1999. See additional discussion below.
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 to purchase redeemable warrants at $.04 per warrant.
The underwriter's warrants are exercisable during
F-16
<PAGE>
PARAVANT INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1999 AND 1998
the four-year period commencing June 3, 1997. As of September 30, 1999, 12,000
underwriter's warrants have been exercised, 250,000 underwriter's warrants have
been retired, and 372,018 underwriter's warrants to purchase warrants have been
exercised. Upon exercise, the underwriter's warrants to purchase warrants
increase the number of redeemable warrants outstanding.
In connection with the Company's bridge financing in August 1995, the
Company sold to a group of investors, warrants ('bridge warrants'), to purchase
480,000 shares of Common Stock, exercisable until June 3, 2001 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 bridge warrants, may
redeem the bridge warrants at a price of $.0167 per bridge warrant provided that
the average of the closing bid prices of the Company's Common Stock on the
Nasdaq National Market has exceeded $2.00 for any consecutive 20 trading days,
and then only upon written notice of not less than 30 days, given within 60 days
of this period. These requirements were met and these warrants were called on
April 23, 1999. See additional discussion below.
On April 15, 1998, the Company issued warrants to The Equity Group, Inc. to
purchase 45,000 unregistered shares of Common Stock. These warrants are
exercisable until April 14, 2003 at an exercise price of $2.75 per share,
subject to adjustment in certain circumstances. The Equity Group, Inc. is the
Company's financial public relations and investor relations consultant and the
warrants were issued in conjunction with the signing of a one-year contract.
On April 12, 1999, the Company called for redemption of its redeemable
Common Stock purchase warrants issued in connection with its initial public
offering in June 1996. On April 23, 1999, the Company called for redemption all
of its redeemable Common Stock purchase warrants issued in connection with its
August 1995 private placement offering. The redemption date for these warrants
was June 8, 1999, and the redemption price was $0.0167 per warrant; the exercise
price was $2.00 per share of Common Stock. Prior to the redemption date, a total
of 5,125,837 warrants were exercised, resulting in net proceeds to the Company
of $10,218,653 and increasing the number of shares of Common Stock outstanding
to 17,544,208 as of September 30, 1999. The Company used the net proceeds it
received from the exercise of the warrants (1) to reduce the indebtedness owed
to the former shareholders of EDL and STL (including Messrs. Stefanko, Clifford
and Schooley, directors of the Company) under promissory notes issued to them in
connection with the October 1998 acquisition of EDL and STL as required by the
acquisition agreement, and (2) to repay indebtedness to the Bank under the
revolving line of credit. The remainder of the net proceeds from the exercise of
the warrants are being used for general corporate purposes, including working
capital requirements. The Company may also use a portion of these proceeds to
fund growth through acquisition; however, no agreements for any acquisitions
exist at this time.
(17) REGISTRATION COSTS
The Company incurred $47,662 of registration costs related to the
registration of shares held by UES Inc, the shareholders of EDL and STL and the
stock underlying the Equity Group warrants. These costs have been reflected as a
reduction of additional paid-in capital in the accompanying financial
statements.
F-17
<PAGE>
PARAVANT INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1999 AND 1998
(18) INCOME TAXES
The components of income tax expense (benefit) for the years ended
September 30, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
------- -------- -----
<S> <C> <C> <C>
1999:
Federal.............................. $4,119,391 $(749,591) $3,369,800
State................................ 562,595 (138,437) 424,158
---------- --------- ----------
$4,681,986 $(888,028) $3,793,958
---------- --------- ----------
---------- --------- ----------
1998:
Federal.............................. $ 640,691 $ 61,383 $ 702,074
State................................ 37,457 10,507 47,964
---------- --------- ----------
$ 678,148 $ 71,890 $ 750,038
---------- --------- ----------
---------- --------- ----------
</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, 1999
and 1998:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Computed 'expected' tax expense....................... $3,291,064 $751,276
Increase (decrease) in income taxes resulting from:
State income taxes, net of federal income tax
benefit........................................ 242,532 30,125
Nondeductible meals and entertainment expense.... 9,311 3,250
Research and experimentation credit.............. 25,367 --
Other, net....................................... 225,684 (34,613)
---------- --------
$3,793,958 $750,038
---------- --------
---------- --------
</TABLE>
Deferred income taxes as of September 30, 1999 and 1998 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, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Deferred tax liabilities:
Capitalized costs................................ $ -- $(113,416)
Accumulated depreciation......................... (105,516) (93,651)
Other............................................ (21,808)
----------
Total deferred tax liabilities.............. (127,324) (207,067)
---------- ---------
Deferred tax assets:
Inventory........................................ 329,084 287,993
Accrued deferred compensation.................... 209,686 --
Accrued vacation and sick leave.................. 129,322 84,347
Accrued incentive compensation................... 321,196 39,149
Capitalized costs................................ 65,731 --
Intangible assets................................ 120,002 --
Other............................................ 115,884 71,131
---------- ---------
Total deferred tax assets................... 1,290,905 482,620
---------- ---------
Total net deferred tax assets............... $1,163,581 $ 275,553
---------- ---------
---------- ---------
</TABLE>
F-18
<PAGE>
PARAVANT INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1999 AND 1998
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 September 30, 1999 and
1998, no valuation allowance has been recognized in the accompanying financial
statements for the deferred tax assets because the Company believes that
sufficient future taxable income will be generated to fully utilize the benefits
of these deductible amounts.
(19) 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 $221,388 and $80,558 for the years ended
September 30, 1999 and 1998, respectively.
(20) CONTINGENCIES
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 this matter 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 this lawsuit, as it believes the Company will prevail. In the event a
court finds in favor of the plaintiffs, additional costs will be incurred.
(21) CONCENTRATION OF CREDIT RISK
The Company has a high concentration of sales to a few customers who
accounted for 83% and 87% of revenues for the years ended September 30, 1999 and
1998, respectively. A summary of sales and accounts receivable to the customers
that exceed 10% of sales or accounts receivable as of or for the years ended
September 30, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
1999 1998
--------------------- --------------------
SALES % TOTAL SALES % TOTAL
----- ------- ----- -------
<S> <C> <C> <C> <C>
Customer A................................. $17,542,370 41% $ -- -- %
Customer B................................. 6,037,930 14 3,368,953 22
Customer C................................. 4,499,924 11 -- --
Customer D................................. 3,224,160 8 7,888,760 51
Customer E................................. 3,197,064 8 -- --
Customer F................................. 476,398 1 1,754,976 11
Customer G................................. -- -- 488,750 3
</TABLE>
<TABLE>
<CAPTION>
ACCOUNTS ACCOUNTS
RECEIVABLE % TOTAL RECEIVABLE % TOTAL
---------- ------- ---------- -------
<S> <C> <C> <C> <C>
Customer A.................................. $1,911,436 21% $ -- -- %
Customer B.................................. 3,028,160 33 33,126 1
Customer C.................................. 176,726 2 -- --
Customer D.................................. 1,156,300 13 2,813,017 69
Customer E.................................. 1,777,404 19 -- --
Customer F.................................. 8,850 -- 308,482 8
Customer G.................................. -- -- 431,250 11
</TABLE>
F-19
<PAGE>
PARAVANT INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1999 AND 1998
(22) SUBSEQUENT EVENTS
On December 3, 1999, the Company granted options under its qualified plan
to employees to purchase 297,500 shares of the Company's Common Stock at an
exercise price of $2.625 per share which was the market price of the shares at
the date of issuance.
On November 2, 1999, the Board of Directors authorized the Company to
repurchase up to 1,000,000 of its outstanding shares of Common Stock within the
twelve month period following such date for a maximum purchase price, including
commissions, not to exceed $3,500,000 in the aggregate. Through December 7,
1999, the Company repurchased 19,273 shares of its Common Stock for a total cost
of $53,675 at an average purchase price of $2.625 per share.
F-20
<PAGE>
EXHIBIT 10.54
PARAVANT INC.
NONEMPLOYEE DIRECTOR
AGREEMENT GRANTING SPECIAL STOCK OPTION
This Nonemployee Director Agreement Granting Special Stock Option (this
'Agreement') evidences and sets forth the terms of the special stock option
granted by Paravant Inc. (the 'Company') to John P. Singleton, a nonemployee
director of the Company (the 'Grantee') by action of the Company's Board of
Directors on December 15, 1998 (the 'Grant Date').
1. Option. As of the Grant Date the Company has granted to the Grantee an
option for the purchase of up to eleven thousand (11,000) shares of common
stock, par value $0.15 per share (the 'Option'), at the exercise price of $2.125
per share (the 'Option Price') subject to the terms and conditions hereinafter
set forth.
2. Provisions Incorporated by Reference from Existing Nonemployee
Directors' Stock Option Plan. Although the Option is not granted under the
Company's currently existing Nonemployee Directors' Stock Option Plan (the
'NDSOP'), the following provisions of the NSDOP are hereby incorporated by
reference as terms of the Option:
(a) Status of Option. As set forth in Section 2 of the NDSOP, the
Option shall not constitute an incentive stock option.
(b) Interpretation of the Option. The interpretation of the terms of
the Option shall be as interpreted by the Committee referred to in Section
5 of the NDSOP.
(c) Medium and Time of Payment of Option Price. The conditions with
respect to the medium and time of payment of the Option Price required to
exercise the Option shall be as set forth in subsection (b) of Section 7 of
the NDSOP.
(d) Term and Exercise of Option. The conditions with respect to the
term and exercise of the Option shall be as set forth in subsection (c) of
Section 7 of the NDSOP.
(e) as set forth in subsection (d) of Section 7 of the NDSOP.
(f) Investment Purpose. The exercise of the Option shall be subject to
the investment purpose requirements set forth in subsection (e) of Section
7 of the NDSOP.
(g) Adjustment of Number of Shares. The number of shares subject to
the Option shall be adjusted for the events and in the manner set forth in
Section 8 of the NDSOP.
3. Assumption of No Requirement of Shareholder Approval. The Board of
Directors of the Company has granted the Option based upon its understanding
that, because of the limited number of shares covered by the Option, shareholder
approval of the grant is not required under the requirements of Nasdaq or any
applicable federal or state statute, rule or regulation. In the event that it is
determined that such shareholder approval is required and such shareholder
approval is not obtained within twelve (12) months from the Grant Date the
Option shall be deemed to be rescinded, void ab initio, and of no further force
and effect. Any exercise of the Option shall be subject to the receipt by the
Company of an opinion of its legal counsel that no such shareholder approval is
required, or if required, that such shareholder approval has been obtained.
1
<PAGE>
4. Purpose. The Option is granted to provide motivation and incentive to
the Grantee to continue his service as a nonemployee director of the Company and
to motivate him, in such capacity, to exert his best efforts on behalf of the
Company by enlarging his personal stake in the Company. The Option is, and shall
be, in addition to any director's fees, other stock options under the NDSOP or
any other plan or award, or any other compensation or benefits made available to
or paid to the Grantee by the Company or any other party in consideration of the
Grantee's service to the Company as a nonemployee director or in any other
capacity.
IN WITNESS WHEREOF, the Company and the Grantee have executed and delivered
this Agreement as of the Grant Date.
The Company:
Paravant Inc.
By: /s/ KRISHAN K. JOSHI
----------------------------
Kris Joshi, Chief Executive Officer
Grantee:
By: /s/ John P. Singleton
-------------------------------------
John P. Singleton
2
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF PARAVANT INC.
Engineering Development Laboratories, Incorporated (Ohio)
STL of Ohio, Inc. (Ohio)
Paravant Computer Systems, Inc. (Florida)
1
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
Board of Directors:
Paravant Inc. and Subsidiaries
We consent to the incorporation by reference in the registration statement
(No. 333-82649) on Form S-3 of Paravant Inc. of our report dated November 9,
1999 relating to the consolidated balance sheets of Paravant Inc. and
subsidiaries as of September 30, 1999 and 1998 and the related consolidated
statements of operations, changes in stockholders' equity and accumulated other
comprehensive income and cash flows for the years then ended, which report
appears in the September 30, 1999 annual report on Form 10-KSB of Paravant Inc.
/s/ KPMG LLP
Orlando, Florida
December 14, 1999
1
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the balance
sheets and statements of changes in stockholders' equity of Paravant Inc. as of
September 30, 1999 and the related statements of operations and cash flows for
years ended September 30, 1999 and 1998 and is qualified in its entirety by
reference to such financial statements
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> SEP-30-1999 SEP-30-1998
<PERIOD-START> OCT-01-1998 OCT-01-1997
<PERIOD-END> SEP-30-1999 SEP-30-1998
<CASH> 949,414 1,187,788
<SECURITIES> 440,109 0
<RECEIVABLES> 9,247,838 4,239,453
<ALLOWANCES> 79,495 88,993
<INVENTORY> 10,644,992 3,160,573
<CURRENT-ASSETS> 22,768,736 9,881,729
<PP&E> 3,101,801 2,058,944
<DEPRECIATION> 1,454,312 819,764
<TOTAL-ASSETS> 42,972,813 12,695,577
<CURRENT-LIABILITIES> 8,587,317 2,225,683
<BONDS> 2,462,500 0
<COMMON> 263,718 125,157
0 0
0 0
<OTHER-SE> 31,938,269 10,110,599
<TOTAL-LIABILITY-AND-EQUITY> 42,972,813 12,695,577
<SALES> 42,279,478 15,507,727
<TOTAL-REVENUES> 42,279,478 15,507,727
<CGS> 20,840,615 7,606,874
<TOTAL-COSTS> 20,840,615 7,606,874
<OTHER-EXPENSES> 11,201,837 5,776,312
<LOSS-PROVISION> 13,510 22,538
<INTEREST-EXPENSE> 777,076 19,954
<INCOME-PRETAX> 9,679,600 2,209,635
<INCOME-TAX> 3,793,958 750,038
<INCOME-CONTINUING> 5,885,642 1,459,597
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 5,885,642 1,459,597
<EPS-BASIC> 0.421 0.184
<EPS-DILUTED> 0.409 0.144
</TABLE>
