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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, 2000
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.)
89 HEADQUARTERS PLAZA NORTH, SUITE 1421
MORRISTOWN, NJ 07960
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
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ISSUER'S TELEPHONE NUMBER, INCLUDING AREA CODE: (973) 631-6190
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
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COMMON STOCK, $.015 PAR VALUE
(TITLE OF CLASS)
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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 $40,409,568.
The aggregate market value of voting stock held by non-affiliates of the
registrant on December 13, 2000 was approximately $29,048,447. On such date, the
closing price of the issuer's common stock was $2.19 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 13, 2000 was 17,058,878.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Company's Proxy Statement in connection with its Annual
Meeting scheduled to be held on March 22, 2001 are incorporated by reference in
Part III. The Company's Proxy Statement will be filed within 120 days after
September 30, 2000.
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, 2000
TABLE OF CONTENTS
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PART I
Item 1. Description of Business..................................... 3
Item 2. Description of Property..................................... 13
Item 3. Legal Proceedings........................................... 13
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.... 14
Item 6. Management's Discussion and Analysis of Financial Condition
and Results of Operation.................................. 14
Item 7. Financial Statements........................................ 25
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................. 25
PART III
Item 9. Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the Exchange
Act....................................................... 26
Item 10. Executive Compensation...................................... 26
Item 11. Security Ownership of Certain Beneficial Owners and
Management................................................ 26
Item 12. Certain Relationships and Related Transactions.............. 26
Item 13. Exhibits and Reports on Form 8-K............................ 26
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Paravant Inc. (the 'Company' or 'Paravant') serves the defense and national
security industry with a range of electronic commercial off-the shelf ('COTS')
products engineered to meet applications within aircraft support, fire control,
communications, radar 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 rugged computers, digital signal processing ('DSP') boards, DSP
application specific integrated circuits ('ASIC'), telecommunications recording
and storage systems, signal processing hardware 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
primarily to U.S. and foreign military establishments and government prime
contractors. The Company operates its business through its five wholly owned
subsidiaries, Paravant Computer Systems, Inc. ('PCS'), Engineering Development
Laboratories, Incorporated ('EDL'), STL of Ohio, Inc. ('STL'), Tri-Plex Systems
Corporation ('Tri-Plex') and Catalina Systems Research, Inc. ('CRI').
HISTORY
The Company, which was incorporated in Florida as Paravant Computer Systems,
Inc. in June 1982, consummated an initial public offering of common stock and
redeemable warrants in June 1996.
In 1996 the Company began to focus on providing the medical market with a
line of programmer products to provide programming information to medical pumps,
and related devices that are surgically implanted into the human body.
Management has since elected to discontinue the medical product line. In early
2000 the Company's medical resources were directed into opportunities to serve
Command, Control, Communications, Computers and Intelligence ('C4I') initiatives
put in place by the U.S. Army in an effort to better leverage its skills in the
marketing of products to the military and its ability to serve the U.S.
Department of Defense ('DoD').
Consistent with the long range plans of the Board of Directors to further
diversify the business activities of the Company in the defense, intelligence
and related electronics industry, in 1998 the Company changed its name from
Paravant Computer Systems, Inc. to Paravant Inc. Shortly after the corporate
name change the Company established its Command, Control, Communications and
Computers ('C4') operations as a wholly owned subsidiary under the name Paravant
Computer Systems, Inc.
Effective as of October 1, 1998, Paravant completed the acquisition
('EDL-STL Acquisition') of two related defense electronics companies, EDL and
the assets of STL, EDL's majority-owned subsidiary (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 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.
On January 1, 2000 Mr. William R. Craven was appointed President and Chief
Operating Officer of the Company. On December 7, 2000 Mr. Craven was appointed
Chief Executive Officer, a position previously held by Mr. Krishan K. Joshi.
Mr. Joshi continues to serve as non-executive Chairman of the Company.
Effective as of May 27, 2000, Paravant completed the acquisition ('Tri-Plex
Acquisition') of Tri-Plex, located in Columbia, Maryland. Tri-Plex engineers and
produces specialized telecommunication interfaces and recorders utilized in the
signal intelligence industry.
Effective as of June 30, 2000, Paravant completed the acquisition ('CRI
Acquisition') of CRI, located in Colorado Springs, Colorado. CRI designs and
produces digital signal processers ('DSP'),
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ASIC, system and board level products utilized in signal intelligence, radar,
electronic intelligence and satellite ground station applications.
See 'MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION' for a more complete description of the Tri-Plex and CRI
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 and electronic devices 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
to downsize the military, and U.S. military spending declined. The Company
believes, however, that increases in spending on defense electronics will occur
during the next five years.
The downward trend in overall defense spending was a positive development
for some sales to the U.S. military in recent years in the following three
general areas: (1) less than full Mil-Spec militarized computers in general and
rugged computers specifically; (2) the upgrading of older weapons and aircraft
systems that could not be replaced due to budget restraints; and (3) 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 the Company will
benefit as it has repositioned itself to take advantage of the purchase of newer
C4 systems. These systems will be required as part of the Army's digitization
initiatives by 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 2000 the
Company secured a sub-contract with TRW for a key part of the digital
battlefield with its Applique rugged vehicle system. Management hopes that
continued focus on this area will allow its position in the Applique program to
be broadened into other programs related to the Army digitization effort.
INDUSTRY BACKGROUND -- SIGNAL INTELLIGENCE
In recent years, accurate and comprehensive information regarding foreign
affairs has become increasingly important to the U.S. Government. The reduction
in U.S. military tactical forces overseas has heightened the need of the U.S.
Government and its allies 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, the Middle East,
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 collects
and analyzes telecommunication signals emanating from foreign countries. In
recent years, the use of established
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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 a wider bandwidth of signals and an increased volume of signals and
encoding variations 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 new telecommunications
technologies that had evolved during the development process were not addressed
in the final product. 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,
with a focus on COTS solutions.
As former Soviet Union 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 DSP
arena will be able to continue to serve this vital strategic need for
intelligence.
PRODUCTS
The Company's products include a line of rugged computers that includes
hand-held devices, laptops and portable systems used on desktops, outdoor
man-portable applications and in vehicles, DSP systems and equipment that are
used to collect and process data files in signal intelligence and avionics
related equipment.
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 of the production process. The computer
systems are designed with an open architecture configuration for maximum
flexibility. Most of 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.
The Company's computers are available with standard serial and parallel
communications capabilities which allow Paravant's computers to transmit and
receive electronic signals and messages to and from other electronic systems.
These 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 can be made to link 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 communications systems operating on the
battlefield with one another.
Typical applications of the Company's computers include aircraft and
shipboard diagnostic, testing and maintenance systems, controller and radar
displays for missile systems, performance recorders in training exercises,
mission loaders and verifiers of data and field command control systems.
In the DSP area, the Company designs and produces more than thirty products,
which are marketed to the military and intelligence organizations of the U.S.
Government. These products can
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generally be separated into the following four categories: routing and
switching; data reformatting; data processing; and recording.
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 data to accommodate a different architecture. The
Company's products switch and route serial and parallel buses in multiple
channel configurations. As the requirements have evolved, the Company has
developed larger systems that perform this switching/routing function at higher
speeds with more input and output signals.
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.
Modern DSP technology involves both specialized hardware and software. 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 complex ASIC's to very complex systems. The Company
typically works with other prime government contractors to develop these
instruments. The prime contractors generally write the end application software
with Paravant engineers designing or providing the hardware and the Application
Programmer Interface ('API') software to control the developed instruments.
The Company works to maintain a close liaison with its technical customers
to become aware of new requirements, and in response, to develop new products.
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 while 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. The Company works
toward designs that 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 provides the software development and
integration activities for the H-60 helicopter 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 the following: embedded software development; Windows
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 employees in the field supporting this system. In addition, the Company
offers equipment, in conjunction with a major prime contractor that is
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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 involve varying degrees of customization.
The range of engineering services furnished by Paravant includes special
rugged packaging design, miniaturization of electronics, development of
ultra-low power systems, DSP board design, ASIC design, DSP system design,
communication design. 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.
It is very common for customers to need small changes to standard products.
In most cases, these changes can be accommodated through circuit board and
software upgrades. This ability enhances and extends the life of the product
line.
In the early phase of a military program, Paravant will often design,
engineer and fabricate a prototype. Once this is successfully done, the Company
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.
Management believes that by providing custom engineering services and
producing prototypes 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
COTS, 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. Customization services are of
significant value to Paravant's customers and, accordingly, management intends
to continue to offer such services on a reduced or no-charge basis, where
offering such services will lead to production orders. The Company generally
expenses the associated costs as they are incurred.
NEW PRODUCTS
The Company has new products in development targeted to its historical
customer base. The products can generally be said to be faster, more powerful
and more portable and cost less than existing products. The Company also has an
ongoing effort to upgrade the capability of its DSP systems to simultaneously
process more input signals. Any enhanced capability is typically made part of
the standard product line.
Paravant developed a new system, the RNB 550, which could be used either in
portable mode or can be mounted in military vehicles. In 2000 the RNB 550 was
redesigned to fit the needs of the Army FBCB2 program and designated the
Applique rugged vehicle system. The product design incorporates a case
fabrication methodology that will allow Paravant to reduce its costs 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 be the Army's battlefield digitization initiative
through the FBCB2 program, with variations of the system being offered to
military forces of U.S. allies in the future.
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
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Company's products, have to be continually 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 a customer's
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 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
and assembly. Given the rapid changes in board production technology, management
believes its subcontractors best serve its needs in this specialized area.
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.
With the exception of a small number of major programs such as Applique, 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 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, Dayton, Ohio, Columbia, Maryland and Colorado Springs,
Colorado. Certain of 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 DoD. The Company believes that such
certification will enable it to increase its marketing opportunities in the
domestic and international military markets for ruggedized computers.
The Company has entered into licensing arrangements for certain hardware and
software elements contained in, or used in conjunction with, its devices. These
agreements are usually non-exclusive, provide for minimum fees and royalties
related to sales to be paid by the Company to the particular licensor, run for a
limited term and are subject to other terms, conditions and restrictions.
Paravant receives its basic operating software systems, MS-DOS and various
Window versions from Microsoft, Inc. pursuant to such licensing arrangements. It
also obtains from Phoenix Technologies, Inc.
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its BIOS (Basic Input/Output System) pursuant to a separate license agreement.
Under either arrangement, the Company may modify such software and occasionally
alters the BIOS for special situations. The termination, suspension or
curtailment of these or other licensing arrangements to which the Company is a
party may have a material adverse impact on its business and operations.
WARRANTY AND CUSTOMER SERVICE
For both computer products and signal intelligence equipment, the Company
usually provides either 90-day or one-year warranties covering both parts and
labor, although customers may purchase extended warranties. 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 a
Paravant facility. The Company's 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 facilities, and it charges its customers a fee for those
service items that are not covered by warranty.
Some personnel in the Company's 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 equipment.
MARKETING AND SALES
The Company markets its products and services through an internal sales
force, manufacturers' representatives in the U.S. and a small number of
distributors abroad. Its foreign distributors serve in several countries,
including England, France, Japan, Australia and Germany. However, direct sales
to foreign customers for the years ended September 30, 2000 and 1999 were only
5% and 1% 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 right as well as discounts based on the list price, which
vary based 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 products in their inventory until
specific orders are obtained. The term of these agreements generally run from 1
to 3 years but are terminable on short (30-90 days) 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, exhibition at trade shows, web pages, seminars, news
releases, and newsletters. Paravant does little advertising in trade
periodicals. A significant portion of the Company's sales leads has historically
been generated by referrals.
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 and services, directly or indirectly, to the
U.S. and foreign military establishments, large aerospace and military
contractors supplying these establishments, and government agencies. The
principal customers of the Company are the U.S. Government and DoD
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contractors, which are subject to federal budgetary constraints. For the fiscal
year ended September 30, 2000, TRW accounted for 30% of the Company's total
sales. For the fiscal years ended September 30, 2000 and 1999, the National
Reconnaissance Office accounted for 10% and 41% of the Company's total sales,
respectively. For those same periods, Raytheon, Lockheed Martin, and the U.S.
Air Force accounted for 15% and 8%, 10% and 14%, and 0% and 11% of the Company's
total sales, respectively. The loss of any significant customers could have a
material adverse impact on Paravant's business.
COMPETITION
The military electronics products market is highly competitive and the
Company expects that competition will continue to be strong 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 business, the Company encounters competition
from Litton Data Systems, Phoenix, CDC (division of General Dynamics) and
Miltope in military applications along with Dolch, General Electric, Cyberchron
and DRS (formerly 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 into the commercial sector
is limited by the entry of such manufacturers into the ruggedized computer
market. However, Paravant makes extensive modifications and refinements of its
computers for its military 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 avionics equipment business, the primary competition is with a wide
variety of organizations ranging from the largest aerospace corporations such as
Lockheed Martin and Sikorsky Aircraft, to small 8-A (disadvantaged and
minority-owned, as defined by the DoD) companies. The Company's ability to win
competitive procurements is based upon technical competence in selected areas, a
demonstration of low risk to the program schedule and a reasonable cost basis.
In the DSP business, the Company often competes with internal project
engineers of primary government contractors, who make decisions to provide
internally developed solutions or to outsource their requirements to the
Company.
Paravant engages in both competitive bid contracts and sole source
contracts. The competition for competitively bid contracts differs from the
competition for sole source contracts. Companies vying for competitive bid
contracts prepare bids and proposals in response to 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. Management believes the Company competes favorably in each of these
factors.
BACKLOG
As of September 30, 2000, the Company's backlog was approximately $27.1
million, including approximately $6.5 million for the two subsidiaries acquired
during the current fiscal year. The Company's backlog as of September 30, 1999
was approximately $13.9 million. Five customers accounted for approximately 39%,
20%, 8%, 5% and 5% of the backlog as of September 30, 2000. As of December 13,
2000, the Company's backlog was approximately $19.2 million, and the Company
currently expects to manufacture and deliver substantially all of the products
in backlog within the next 12 months. In addition to the firm fixed price
purchase orders, the Company has $7.9 million in unfunded, deliverables from an
Indefinite Delivery, Indefinite Quantity ('IDIQ') contract. This
10
<PAGE>
additional $7.9 million of products in backlog should be completed over the next
36 months. As of December 7, 1999, the Company's backlog was approximately $7.8
million. This increase in backlog may not result in increased revenues and net
income for the fiscal year ending September 30, 2001.
Substantially all the Company's backlog figures are based on purchase orders
executed by the customer. All orders are subject to cancellation, but in that
event, Paravant is generally entitled to reimbursement of its cost and
negotiated profits, provided that such contract would have been profitable.
RESEARCH, DEVELOPMENT AND ENGINEERING
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. Future success will depend on the Company's 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, development and engineering activities are
primarily accomplished on an in-house basis.
Research, development and engineering expenses during the fiscal years ended
September 30, 2000 and 1999 were $2,848,566 and $2,536,530, and represented 7%
and 6% of total sales, respectively. These amounts do not include research and
development funded by customers, which is included in the cost of sales of
certain products to those 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, and only certain senior executive officers and
subsidiary officers have signed non-competition agreements.
The Company also has non-competition agreements with former principals of
its acquired subsidiaries who are not employed by the Company.
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, loss of necessary security clearances
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
11
<PAGE>
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.
EMPLOYEES
As of November 30, 2000, the Company had 224 employees including its
officers, of whom 77 were engaged in manufacturing and repair services, 38 in
administration and financial control, 89 in research, development and
engineering and 20 in marketing and sales.
None of the Company's employees are 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 management succession plan that is updated 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 software programming, 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.
12
<PAGE>
ITEM 2. DESCRIPTION OF PROPERTY
The Company's principal executive offices are located in Morristown, New
Jersey. The following table sets forth certain information concerning the
Company's facilities:
<TABLE>
<CAPTION>
PROPERTY LEASED OR OWNED USAGE SQUARE FEET EXPIRATION
-------- --------------- ----- ----------- ----------
<S> <C> <C> <C> <C>
Morristown, NJ......... Leased Corporate (5) January 31, 2001
Headquarters
Dayton, OH (1)......... Leased Operating 27,033 August 31, 2004
Facility
Columbia, MD (2)....... Leased Operating 5,500 December 31, 2000
Facility
Colorado Springs,
CO (3)............... Leased Operating 15,000 April 30, 2004
Facility
Melbourne, FL (4)...... Owned Operating 53,500 n/a
Facility
Melbourne, FL.......... Leased Operating 17,300 December 31, 2001
Facility
</TABLE>
---------
(1) This space is leased from Beavercreek Enterprises, an entity controlled by
Paravant's Chairman.
(2) Following expiration this property will be leased on a month-to-month basis.
(3) A new lease for a 20,000 square foot facility will commence on or about
May 1, 2001 and expire on April 30, 2011.
(4) The Company acquired this facility during fiscal 2000 and has moved certain
Melbourne operations to this facility. The Company expects to move the
remainder of its Melbourne operations to this facility during fiscal 2001.
The acquisition of this facility and subsequent renovations were financed
pursuant to a mortgage note payable to First Union National Bank providing
for borrowings of up to $3,560,000 at a variable interest rate equal to one
month LIBOR plus 1.65%. See 'Management's Discussion and Analysis of
Financial Condition and Results of Operation -- Liquidity and Capital
Resources.'
(5) The rental agreement is for an executive office suite and also includes the
rental of office furniture and secretarial and other administrative
services.
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 is seeking damages for approximately $1 million, plus fees
and costs. Plaintiff alleges that he was improperly terminated in December 1994
as a result of his refusal to account for certain transactions in a specified
manner. On March 7, 2000 the Court entered final partial summary judgment in the
Company's favor with respect to one of the two counts of the plaintiff's amended
complaint. 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.
On November 14, 2000, a former business development manager of Paravant
filed an action in the Circuit Court of the State of Florida, Brevard County,
entitled, William Langford v. Paravant Inc. (Case No. 05-2000-CA-18142), against
the Company alleging beach of contract. Plaintiff is seeking damages for
approximately $7.4 million, plus fees and costs. Plaintiff alleges that he was
improperly terminated in July 2000 in an effort by the Company to avoid paying
commissions due to plaintiff under an employment contract. The Company has filed
a motion to dismiss the complaint and will 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.
13
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) Market Information.
The shares of common stock of the Company trade on the Nasdaq Stock Market
National Market under the symbol 'PVAT'. 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, 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 31, 1999........................ $3 5/8 $2 7/32
January 1, 2000 to March 31, 2000........................... $3 21/32 $2 17/32
April 1, 2000 to June 30, 2000.............................. $3 $2 1/8
July 1, 2000 to September 30, 2000.......................... $3 $2 1/2
October 1, 2000 to December 13, 2000........................ $2 15/16 $2 1/8
</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 13, 2000, as reported by the Company's transfer agent, shares of
common stock were held by 212 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. 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 Tri-Plex Acquisition, the Company issued warrants to
purchase up to 120,000 shares of common stock to the former shareholders of
Tri-Plex in an exempt transaction in reliance upon Section 4(2) under the
Securities Act of 1933.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
OVERVIEW
Paravant Inc. is a defense electronics company engaged in the design,
development, production and sale of electronic hardware for military and
intelligence applications. The products include C4 systems, specializing in
rugged, hand-held and laptop computer products primarily for 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.
The principal customers of the Company are U.S. Government agencies,
governments of U.S. allies and contractors who are subject to federal budgetary
constraints. The work is generally performed under fixed price orders.
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
14
<PAGE>
1% of the Company's revenues are derived from cost plus reimbursement contracts,
which provide that the Company receives 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.
Revenues from fixed price contracts to design, develop and manufacture
complex electronic equipment to a buyer's specification or to provide services
related to the performance of such contracts are recognized using the
percentage-of-completion method of accounting. Under this method, revenues are
measured by the ratio of costs incurred to date to the estimated total costs to
complete each contract. This method is used because management believes costs
incurred to be the best measure of progress on these contracts. Profit
incentives are included in revenues when earned.
Cost of revenues includes all direct costs and those indirect costs that
relate to contract performance or product or service delivery. Selling, general
and administrative costs are charges to expense as incurred. Provisions for
estimated losses on uncompleted contracts are made in the period in which such
losses are determined. Changes in job performance, job conditions and estimated
profitability, including those arising from contract penalty provisions and
final contract settlements, may result in revisions to cost and income and are
recognized in the period in which the revisions are determined.
The Company generally recognizes revenue on other products sales or services
when an order has been received, the product has been shipped or services
rendered, pricing is fixed or determinable, and collectibility is reasonably
assured. Cost of sales includes the Company's estimate of any warranty, re-work,
or other concessions the Company expects to incur in connection with a sale.
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, 2000 VS. SEPTEMBER 30, 1999
Revenues for 2000 were $40,409,568, a decrease of $1,869,910 or 4% from 1999
revenues of $42,279,478. This decrease is due to a $14.1 million decrease in
sales of its signal intelligence products primarily attributable to reduced
purchases of a significant customer. Sales of the Company's medical products, a
market which management has elected to exit, decreased by $2.0 million. The
decrease was offset by an increase of $10.7 million in sales of the Company's
C4I products due primarily to revenue recognized under a $13.6 million military
contract and revenues of $3.5 million from acquired operations (See Note 2 of
Consolidated Financial Statements).
Cost of revenues was $22,353,902 in 2000, or 55% of revenues, compared to
$20,840,615 or 45% in 1999, a total increase of $1,513,287 or 7%. The increase
resulted from a change in the sales mix toward the Company's military products,
which have higher material and production costs than the Company's other
products.
Sales and marketing expense of $2,032,449 in 2000 decreased by $263,648 or
12% from 1999 expense of $2,296,097. As a percentage of revenues, sales and
marketing expense was 5% in both 2000 and 1999. The decrease in sales and
marketing expense is due primarily to decreased sales and commission expense.
Research, development and engineering expense of $2,848,566 in 2000
increased by $312,036 or 12% from 1999 expense of $2,536,530. As a percentage of
revenues, research, development and engineering expense was 7% and 6% in 2000
and 1999, respectively. The increase is attributable to $543,948 from acquired
operations offset by certain engineering direct costs charged to a significant
contract accounted for under the percentage-of-completion method of accounting.
15
<PAGE>
General and administrative expense of $6,610,807 in 2000 increased by
$2,210,246 or 50% from 1999 expense of $4,400,561. As a percentage of revenues,
general and administrative expense was 16% and 10% in 2000 and 1999,
respectively. $857,911 of the increase is attributable to acquired operations.
The remaining increase is primarily due to increases in salaries, incentive
compensation, professional fees, and public relations expense.
Amortization of goodwill and other intangible assets increased by $522,452
or 27% to $2,491,100 in 2000 from 1999 expense of $1,968,648. As a percentage of
revenues, amortization of goodwill and other intangible assets was 6% and 5% in
2000 and 1999, respectively. The increase is due to amortization of goodwill and
intangible assets recorded in 2000 as result of the Tri-Plex and CRI
acquisitions.
Non-recurring expenses of $685,813 in 2000 represent negotiated amendments
and separation agreements related to certain employment contracts during the
quarter ended March 31, 2000.
Income from operations decreased to $3,386,930 for 2000 from $10,237,026 in
1999, a decline of $6,850,095 or 67%. As a percentage of revenues, income from
operations decreased to 8% in 2000 from 24% in 1999. The decrease in income from
operations overall resulted primarily from the decrease in revenues, increase in
cost of revenues, and increase in selling and administrative expense as
discussed above.
Investment income for 2000 increased by $183,746 or 304% to $244,162 in 2000
from $60,416 in 1999. The increase is primarily due to unrealized appreciation
of marketable securities of $160,219 recorded in 2000.
Interest expense for 2000 decreased by $175,522 or 23% to $601,554 from
$777,076 in 1999. The decrease is due to a decrease in the average outstanding
credit balances during the year.
Income tax expense as a percent of revenues increased to 48% in 2000 from
39% in 1999. The increase in the effective tax rate is due primarily to an
increase in the proportion of non-deductible goodwill amortization in 2000
relative to pre-tax net income.
The Company's net income declined by 73% to $1,584,425 in 2000 from
$5,885,642 in 1999, a decrease of $4,301,217. Net income as a percentage of
revenues was 4% in 2000 compared to 14% in 1999. The decrease in net income
resulted primarily from decreased revenues, increased cost of revenues, and
increased selling and administrative expenses.
QUARTERLY RESULTS
The following table sets forth certain unaudited quarterly financial data
for the eight quarters ending September 30, 2000. 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 quarter of fiscal year 2000 reflects a reclassification between research,
development and engineering expenses and general and administrative expenses
which was not reflected in the unaudited income statement filed with the
Form 10-QSB for the quarter ended December 31, 1999. Management has determined
that this reclassification was necessary to provide presentation of these
expenses that is consistent with that of the subsequent three quarters. 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.
16
<PAGE>
<TABLE>
<CAPTION>
FISCAL YEAR 2000
-------------------------------------
Q1 Q2 Q3 Q4
-- -- -- --
<S> <C> <C> <C> <C>
Revenues................................................ $ 7,705 $ 7,895 $ 8,067 $16,742
Cost of revenues........................................ 3,692 4,472 4,532 9,658
Sales and marketing..................................... 504 492 519 517
Research, development & engineering..................... 617 470 563 1,199
General and administrative.............................. 1,157 1,342 1,385 2,727
Amortization of goodwill & intangible assets General and
administrative........................................ 508 508 527 948
Non-recurring expense................................... -- 686 -- --
------- ------- ------- -------
Total costs and expenses............................ 6,478 7,970 7,526 15,048
------- ------- ------- -------
Income from operations.......................... 1,227 (75) 541 1,694
Other income (expense):
Investment income................................... 13 233 (14) 12
Interest expense.................................... (47) (46) (74) (434)
Miscellaneous....................................... 6 3 1 7
------- ------- ------- -------
Income before income taxes...................... 1,199 115 454 1,279
Income tax expense...................................... 573 55 217 617
------- ------- ------- -------
Net income...................................... $ 626 $ 60 $ 237 $ 662
------- ------- ------- -------
------- ------- ------- -------
Net income per common share:
Basic............................................... $0.04 $0.00 $0.01 $0.04
Diluted............................................. 0.04 0.00 0.01 0.04
Weighted average shares outstanding:
Basic............................................... 17,548 17,506 17,371 17,134
Diluted............................................. 17,990 18,088 17,796 17,582
</TABLE>
<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
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 costs and expenses............................ 6,751 8,655 7,265 9,372
------- ------- ------- -------
Income from operations.......................... 1,731 3,643 2,694 2,169
Other income (expense):
Investment income................................... 57 1 40 (33)
Interest expense.................................... (247) (240) (203) (87)
Miscellaneous....................................... 2 15 20 117
------- ------- ------- -------
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>
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
17
<PAGE>
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 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
The Company has floating rate financing with National City Bank in an amount
up to $23 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 National City Bank. 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, 2000, there were borrowings of $18,448,847 outstanding under this
arrangement with National City Bank.
The Company has subordinated notes, payable to each of the previous
shareholders of EDL and STL, aggregating $1,477,500, as of September 30, 2000.
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. In addition, the Company has notes payable to each of the
previous shareholders of Tri-Plex aggregating $250,000. These notes bear
interest at prime and are payable, with accrued interest, on January 26, 2001.
During the year ended September 30, 2000, the Company incurred $2,878,516 of
costs, including capitalized interest of $60,466, for the acquisition and
renovation of an office and manufacturing facility for its PCS subsidiary in
Melbourne, Florida. The first phase of the renovation, housing PCS's
manufacturing operations, was completed during the quarter ended June 30, 2000.
Completion of the second and final phase of the renovation is expected during
the second quarter of fiscal 2001 at additional cost of approximately $1.7
million. The acquisition and subsequent renovations were financed by a mortgage
note payable to First Union National Bank ('First Union'). The mortgage note
provides up to $3,560,000 at a variable interest rate equal to the one month
LIBOR plus 1.65%. At September 30, 2000, there were borrowings of $1,945,000
under the mortgage note payable. Interest on the mortgage note is payable
monthly through December 2001, after which monthly principal and interest
payments will be made through December 1, 2016.
The Company also has capital lease obligations of $50,583 at September 30,
2000. 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. 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.
Management believes this concentration will not adversely affect operating
results in the future. The profit margin contributions of the Company's major
customers are not generally different from those of its other customers as a
whole.
The Company's operating cash flow was $6,556,762 and $2,340,132 for 2000 and
1999, respectively. The increase in the Company's operating cash flow resulted
primarily from a decrease in accounts receivable and an increase in accounts
payable, offset by increases to contracts in progress and inventory.
Net cash used by investing activities during 2000 was $25,365,140 compared
with $10,057,916 in 1999. Investing activities include $19,741,635 expended for
the Triplex and CRI Acquisitions in 2000 and
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<PAGE>
$9,046,376 expended in 1999 for the EDL-STL Acquisition. Capital expenditures
for 2000 and 1999 were $4,952,304 and $1,377,227, respectively. Capital
expenditures during 2000 were primarily for real estate, demonstration equipment
and molds, and office equipment and furniture. Capital expenditures during 1999
were primarily for demonstration equipment and molds and office equipment and
furniture. Purchases of marketable securities related to deferred compensation
agreements was $674,101 for 2000 and $488,670 for 1999.
As of September 30, 2000, 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 was $9,069,459 at September 30, 2000. The Company has
provided an allowance for certain older balances of $149,260. This allowance is
believed to be sufficient to address any uncollectible balances outstanding as
of September 30, 2000.
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, 2000 and 1999, the Company's backlog was approximately
$27.1 million and $13.9 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
substantially all of the products in backlog within the next 12 months. In
addition to the firm fixed price orders, the Company has $7.9 million in
unfunded, deliverables from an IDIQ contract. This additional $7.9 million of
products in backlog will be completed over the next 36 months.
Although the backlog as of September 30, 2000 shows an increase over the
backlog as of September 30, 1999, the prior year backlog does not include any
purchase orders for the two subsidiaries acquired in the current fiscal year. As
previously noted, the backlog as of December 7, 1999 was approximately $7.8
million compared to the Company's current backlog of approximately $19.2
million. See 'BUSINESS -- BACKLOG.' This increase in backlog may not result in
increased revenues and net income for the fiscal year ending September 30, 2001.
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 through
November 2, 2000 for a maximum purchase price, including commissions, not to
exceed $3,500,000 in the aggregate. Through September 30, 2000, the Company
repurchased 640,681 shares of its common stock for a total cost of $1,815,201 at
an average purchase price of $2.83 per share. No repurchases were made from
October 1, 2000 through November 2, 2000. The Board of Directors has extended
the repurchase program through November 2, 2001.
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.
TRI-PLEX ACQUISITION
On May 26, 2000 the Company consummated a purchase business combination of
all outstanding common stock of Tri-Plex. Tri-Plex, whose customers include the
National Security Administration
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<PAGE>
('NSA'), provides specialized telecom interfaces and telecom recorders that are
engineered to meet specific markets in the signal intelligence business.
Pursuant to the acquisition agreement the Company paid an aggregate
consideration consisting of (i) $6,300,000 in cash, (ii) $250,000 of notes
payable, due January 26, 2001 and bearing interest at prime and (iii) warrants
to purchase 120,000 shares of the Company's common stock valued at $223,200. In
connection with the acquisition a contingent cash earn-out may be payable by the
Company under specified circumstances based on future profits of the acquired
operation over a two-year period. The earn-out, if any, will be recorded as
additional consideration, increasing the amount of goodwill, and will be
amortized over the remaining life of this asset. The cash portion of the
consideration paid by the Company was financed by borrowings under the revolving
line of credit agreement with National City Bank, as previously discussed.
CRI ACQUISITION
On July 11, 2000 the Company consummated a purchase business combination,
effective July 1, 2000, of all outstanding common stock of CRI. CRI, whose
customers include the U.S. Navy and large government prime contractors, designs
and builds digital signal processor chips and board products that are used for
signal intelligence, radar, and electronic intelligence applications as well as
satellite ground station processing systems. Pursuant to the acquisition
agreement the Company paid an aggregate consideration of (i) $13,800,000 in cash
and (ii) up to $2,500,000 in subordinated promissory notes covering a contingent
earn-out based on future earnings of the acquired operation over a thirty-nine
month period. The earn-out, if any, will be recorded as additional
consideration, increasing the amount of goodwill, and will amortized over the
remaining life of this asset. The Company also paid $200,000 to the selling
shareholders for certain covenants not to compete. The cash portion of the
consideration paid by the Company was financed by borrowings under the revolving
line of credit agreement with National City Bank.
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,
as well as those specifically enumerated in the following section: 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,' 'should', 'plan', 'potential','predict', 'forecast' 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 intelligence
community. Our future success depends on the military's continued purchase of
our portable computers or equipment manufactured by others that contain our
devices and the signal intelligence community's continued purchase of our DSP
equipment. Many governments have
20
<PAGE>
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. 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 National Security Agency have suggested
spending patterns within that agency may be shifted away from the data
collection and analysis products we provide and toward infrastructure products
(such as large scale information technology devices and systems), which we do
not provide. Such changes in buying patterns could reduce our revenues.
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, TRW, Raytheon, the National Reconnaissance
Office and Lockheed Martin have accounted for a significant portion of our total
sales. In addition, as of September 30, 2000, our backlog was approximately
$27.1 million, consisting of firm fixed price purchase orders, 77% 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 expect
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.
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.
Integration of our recently acquired operations is important to our success:
During fiscal 2000 we completed the Tri-Plex and CRI acquisitions. Each of the
companies acquired was previously operating as an independent entity. The
synergies expected to be developed include cross-selling products, cross-
fertilization of technology, and sharing of customers. Development of these
synergies and retention of their key employees and customers is critical to our
future success.
The completion of our backlog may not be profitable and could adversely
affect 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 that 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 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 DoD. Our other
facilities are not so certified, nor do we intend to
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<PAGE>
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.
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.
Significant portions 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 renegotiations, 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
renegotiations, 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 that 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.
We must develop new products and enhance current products to keep up with
rapid technological change: Rapid advances in technology, 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 is this cycle lengthy, but also it is susceptible to failure at
each crucial point.
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
22
<PAGE>
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 military and intelligence
electronics market is highly competitive and we expect competition will continue
to be strong in the future. Some of our current and potential competitors have
significantly greater technical, manufacturing, financial and marketing
resources than us. 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 circuit boards for our DSP equipment. We subcontract
the fabrication of our computer boards to a few third party manufacturers. 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 expertise. Others may develop this information and expertise
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. 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.
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
23
<PAGE>
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.
Our directors and officers can exercise control through their ownership of
common stock: As of September 30, 2000, our directors and executive officers
beneficially owned approximately 26% of our common stock. With the additional
holdings of key employees, insiders beneficially owned approximately 29% 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
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: The Company's
ability to execute its 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. Each employment agreement has terms
expiring more than twelve months from September 30, 2000. In addition, the
Company has prepared a management succession plan that is updated as
circumstances require.
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<PAGE>
Foreign sales entail unique risks: We derived approximately 5% and 1% of our
total sales from foreign markets for the fiscal years ended September 30, 2000
and 1999. 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
burden 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.
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
25
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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' 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
22, 2001, which section is incorporated herein by reference.
ITEM 10. EXECUTIVE COMPENSATION
See the sections captioned 'Executive Compensation' included in the
Company's Proxy Statement in connection with its Annual Meeting scheduled to be
held on March 22, 2001, 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' included
in the Company's Proxy Statement in connection with its Annual Meeting scheduled
to be held on March 22, 2001, which section is incorporated herein by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See the sections captioned 'Certain Transactions' included in the Company's
Proxy Statement in connection with its Annual Meeting scheduled to be held on
March 22, 2001, 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).
2.2 --Stock Purchase Agreement by and among Paravant Inc.,
Harry J. Binck, David E. Bowles and John B. Dillon
(incorporated by reference to Exhibit 2.2 to the
Registrant's Current Report on Form 8-K dated May 26,
2000).
2.3 --Stock Purchase Agreement by and among Paravant Inc., Jay
Perry and Lawrence B. Scally (incorporated by reference to
Exhibit 2.3 to the Registrant's Current Report on Form 8-K
dated July 11, 2000).
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.
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).
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------ -----------------------
<C> <S>
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).
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).
10.39 --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).
10.43 --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).
10.49 --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).
10.51 --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).
10.53 --Employment Agreement between Paravant Inc. and William R.
Craven.
10.54 --Agreements Granting Special Stock Option between the
Registrant and John P. Singleton dated as of December 15,
1998 (incorporated by reference to Exhibit 10.54 of the
Registrant's Annual Report on Form 10-KSB for the fiscal
year ended September 30, 1999).
10.55 --Lease Agreement between Beavercreek Enterprises and STL
of Ohio, Inc. (incorporated by reference to Exhibit 10.55
to the Registrant's Quarterly Report on Form 10-QSB for
the period ended December 31, 1999).
10.56 --Lease Agreement between Beavercreek Enterprises and
Engineering Development Laboratories, Incorporated
(incorporated by reference to Exhibit 10.56 to the
Registrant's Quarterly Report on Form 10-QSB for the
period ended December 31, 1999).
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------ -----------------------
<C> <S>
10.57 --Amendment to Employment Agreement between Edward W.
Stefanko and Paravant Inc. (incorporated by reference to
Exhibit 10.57 to the Registrant's Quarterly Report on Form
10-QSB for the period ended March 31, 1999).
10.58 --Severance Agreement between Kevin J. Bartczak and
Paravant Inc. (incorporated by reference to Exhibit 10.58
to the Registrant's Quarterly Report on Form 10-QSB for
the period ended March 31, 1999).
10.59 --Employment Agreement between Paravant, Inc. and Krishan
K. Joshi.
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
Form 8-K dated July 11, 2000 was filed on July 14, 2000 reporting under Item
2 a stock purchase agreement by and among Paravant Inc., Jay Perry and Lawrence
B. Scally and was amended on September 25, 2000.
On August 9, 2000 an amendment was filed to a Form 8-K dated May 26, 2000
reporting under Item 2 a stock purchase agreement by and among Paravant Inc.,
Harry J. Binck, David E. Bowles and John B. Dillon.
28
<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/ WILLIAM R. CRAVEN
..................................
WILLIAM R. CRAVEN,
PRESIDENT AND CHIEF EXECUTIVE OFFICER
December 20, 2000
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 and Director December 20, 2000
.........................................
KRISHAN K. JOSHI
/s/ WILLIAM R. CRAVEN President, Chief Executive Officer, December 20, 2000
......................................... and Director (Principal Executive
WILLIAM R. CRAVEN Officer)
/s/ JOHN C. ZISKO Vice President, Chief Financial December 20, 2000
......................................... Officer, Treasurer (Principal
JOHN C. ZISKO Financial Officer and Principal
Accounting Officer)
/s/ JAMES E. CLIFFORD Vice President, Mergers and December 20, 2000
......................................... Acquisitions, Secretary and
JAMES E. CLIFFORD Director
/s/ RICHARD P. MCNEIGHT President, Paravant Computer December 20, 2000
......................................... Systems, Inc., and Director
RICHARD P. MCNEIGHT
/s/ C. HYLAND SCHOOLEY President, STL of Ohio, Inc. and December 20, 2000
......................................... Director
C. HYLAND SCHOOLEY
/s/ MICHAEL F. MAGUIRE Director December 20, 2000
.........................................
MICHAEL F. MAGUIRE
/s/ JOHN P. SINGLETON Director December 20, 2000
.........................................
JOHN P. SINGLETON
/s/ PAUL E. BLACKWELL Director December 20, 2000
.........................................
PAUL E. BLACKWELL
</TABLE>
29
<PAGE>
PARAVANT INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000 AND 1999
(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 Stockholders' Equity and
Comprehensive Income................................... F-5
Consolidated Statements of Cash Flows................... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors:
PARAVANT INC.:
We have audited the accompanying consolidated balance sheets of Paravant
Inc. and subsidiaries as of September 30, 2000 and 1999, and the related
consolidated statements of operations, stockholders' equity and comprehensive
income and cash flows for the years then ended. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. 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, 2000 and 1999, and the results of
their operations and their cash flows for the years then ended in conformity
with accounting principles generally accepted in the United States of America.
/S/ KPMG LLP
Orlando, Florida
November 10, 2000
F-2
<PAGE>
PARAVANT INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2000 AND 1999
<TABLE>
<CAPTION>
2000 1999
ASSETS ---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents............................... $ 265,408 $ 949,414
Marketable securities (Note 3).......................... 1,263,633 440,109
Accounts receivable, net of allowance for doubtful
accounts of $149,260 in 2000 and $75,495 in 1999...... 9,069,459 9,168,343
Employee receivables and advances....................... 21,818 94,165
Costs and estimated earnings in excess of billings on
uncompleted contracts (Note 4)........................ 8,079,427 6,028,502
Inventories (Note 5).................................... 6,711,043 4,616,490
Prepaid expenses........................................ 292,258 180,808
Deferred income taxes (Note 13)......................... 1,014,115 1,290,905
----------- -----------
Total current assets................................ 26,717,161 22,768,736
----------- -----------
Property, plant and equipment, net (Note 6)................. 7,466,821 2,938,296
Goodwill and intangible assets, net (Notes 2 and 7)......... 31,942,502 16,814,931
Other assets................................................ 330,315 450,850
Deferred income taxes (Note 13)............................. 1,063,632 --
----------- -----------
Total assets........................................ $67,520,431 $42,972,813
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable (Note 8).................................. $ 750,774 $ --
Current maturities of long-term obligations (Note 9).... 1,001,630 985,000
Current maturities of capital lease obligations (Note
10)................................................... 48,517 64,270
Accounts payable........................................ 5,735,830 1,928,593
Billings in excess of costs and estimated earnings on
uncompleted contracts (Note 4)........................ 718,059 2,527,566
Provision for future losses on uncompleted contracts
(Note 4).............................................. 657,909 150,000
Income taxes payable.................................... 749,131 484,117
Accrued commissions..................................... 306,033 553,952
Accrued expenses........................................ 2,180,437 1,024,643
Accrued incentive compensation.......................... 734,221 869,176
Deferred revenue........................................ 76,540 --
----------- -----------
Total current liabilities........................... 12,959,081 8,587,317
----------- -----------
Long-term obligations, net of current maturities (Note 9)... 20,919,779 1,477,500
Capital lease obligations, net of current maturities (Note
10)....................................................... 2,066 55,268
Deferred compensation (Note 14)............................. 1,315,342 523,417
Deferred income taxes, net (Note 13)........................ -- 127,324
----------- -----------
Total liabilities................................... 35,196,268 10,770,826
----------- -----------
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 17,764,029 and outstanding
17,039,378 shares in 2000 and issued 17,581,193 and
outstanding 17,544,208 shares in 1999................. 266,453 263,718
Additional paid-in capital.............................. 22,161,694 21,660,379
Unrealized gain on available-for-sale securities........ -- 10,797
Retained earnings....................................... 11,952,014 10,367,589
----------- -----------
34,380,161 32,302,483
Less treasury stock, at cost, 724,651 shares in 2000 and
36,985 shares in 1999 (Note 15)....................... (2,055,998) (100,496)
----------- -----------
Total stockholders' equity.......................... 32,324,163 32,201,987
----------- -----------
Commitments and contingencies (Note 17)
Total liabilities and stockholders' equity.......... $67,520,431 $42,972,813
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
PARAVANT INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED SEPTEMBER 30, 2000 AND 1999
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Revenues.................................................... $40,409,568 $42,279,478
Cost of revenues............................................ 22,353,902 20,840,615
Sales and marketing......................................... 2,032,449 2,296,097
Research, development & engineering......................... 2,848,566 2,536,530
General and administrative.................................. 6,610,807 4,400,561
Amortization of goodwill and intangible assets (Note 7)..... 2,491,100 1,968,649
Non-recurring expense (Note 16)............................. 685,813 --
----------- -----------
Total costs and expenses................................ 37,022,637 32,042,452
----------- -----------
Income from operations.............................. 3,386,931 10,237,026
Other income (expense):
Investment income....................................... 244,161 60,416
Interest expense........................................ (601,554) (777,076)
Miscellaneous........................................... 17,433 159,234
----------- -----------
Income before income taxes.......................... 3,046,971 9,679,600
Income tax expense.......................................... 1,462,546 3,793,958
----------- -----------
Net income.......................................... $ 1,584,425 $ 5,885,642
----------- -----------
----------- -----------
Basic earnings per share.................................... $.09 $.42
---- ----
---- ----
Diluted earnings per share.................................. $.09 $.41
---- ----
---- ----
Weighted average number of shares:
Basic................................................... 17,409,377 13,978,583
----------- -----------
----------- -----------
Diluted................................................. 17,847,296 14,392,252
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
PARAVANT INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
YEARS ENDED SEPTEMBER 30, 2000 AND 1999
<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, 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 options for 161,328
shares of common stock for
cash of $24,371 and 36,985
shares of treasury stock...... 124,343 2,420 122,447 -- -- (100,496) 24,371
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
Issuance of common stock
warrants for acquisition...... -- -- 223,200 -- -- -- 223,200
Exercise of options for 182,836
shares of common stock for
cash of $120,360 and 46,985
shares of treasury stock...... 135,851 2,735 257,925 -- -- (140,300) 120,360
Tax benefit of exercise of
nonqualified stock options.... -- -- 20,190 -- -- -- 20,190
Purchases of Treaury Stock..... (640,681) -- -- -- -- (1,815,202) (1,815,202)
Comprehensive income:
Net income.................. -- -- -- 1,584,425 -- -- 1,584,425
Unrealized loss on
securities, net of tax.... -- -- -- -- (10,797) -- (10,797)
-----------
Total comprehensive income..... -- -- -- -- -- -- 1,573,628
---------- -------- ----------- ----------- ------- ----------- -----------
Balances, September 30, 2000... 17,039,378 $266,453 $22,161,694 $11,952,014 $-- $(2,055,998) $32,324,163
---------- -------- ----------- ----------- ------- ----------- -----------
---------- -------- ----------- ----------- ------- ----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
PARAVANT INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 2000 AND 1999
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income............................................... $ 1,584,425 $ 5,885,642
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization......................... 3,538,513 2,795,970
Deferred income taxes................................. (914,166) (888,028)
Unrealized appreciation of marketable securities...... (160,219) --
Non-recurring expense................................. 685,813 --
Increase (decrease) in cash caused by changes in:
Accounts receivable............................... 1,707,224 (4,762,778)
Employee receivables and advances................. 76,065 (44,910)
Contracts in progress............................. (3,352,523) (1,893,473)
Inventory......................................... (845,016) (1,239,772)
Prepaid expenses.................................. (42,557) (102,133)
Other assets...................................... 262,738 808,734
Accounts payable.................................. 3,315,990 1,432,633
Income taxes payable.............................. 285,204 (238,194)
Accrued commissions............................... (263,323) 29,916
Accrued expenses.................................. 359,696 (481,262)
Accrued incentive compensation.................... (134,956) 514,370
Deferred revenue.................................. 469,683 --
Deferred compensation revenue..................... (15,829) 523,417
------------ ------------
Net cash provided by operating activities...... 6,556,762 2,340,132
------------ ------------
Cash flows from investing activities:
Payments for acquired subsidiaries, net of cash acquired
of $1,220,000 in 2000 and
$850,000 in 1999 (Note 2).............................. (19,741,635) (9,046,377)
Purchase of marketable securities........................ (674,101) (488,670)
Proceeds from sale of property, plant and equipment...... 2,900 --
Acquisitions of property, plant and equipment............ (4,952,304) (1,377,227)
Proceeds from sale of investments........................ -- 59,358
Proceeds from collection of note receivable.............. -- 750,000
------------ ------------
Net cash used by investing activities.......... (25,365,140) (10,057,916)
------------ ------------
Cash flows from financing activities:
Proceeds from note payable............................... 500,774 --
Borrowings under long-term obligations................... 20,393,847 --
Repayments under long-term obligations................... (990,281) (2,571,647)
Repayments on capital lease obligations.................. (85,126) (97,062)
Proceeds from exercise of common stock options........... 120,360 27,697
Proceeds from exercise of warrants....................... -- 10,218,653
Payments for redemption of warrants...................... -- (569)
Stock registration fees.................................. -- (47,662)
Payment for retirement of underwriters' warrants......... -- (50,000)
Payments for purchase of treasury stock.................. (1,815,202) --
------------ ------------
Net cash provided by financing activities...... 18,124,372 7,479,410
------------ ------------
Net decrease in cash and cash equivalents...... (684,006) (238,374)
Cash and cash equivalents at beginning of year.............. 949,414 1,187,788
------------ ------------
------------ ------------
Cash and cash equivalents at end of the period.............. $ 265,408 $ 949,414
------------ ------------
------------ ------------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest, excluding $60,466 of interest capitalized in
2000................................................ $ 613,522 $ 806,143
------------ ------------
------------ ------------
Income taxes.......................................... $ 2,098,235 $ 3,400,255
------------ ------------
------------ ------------
Supplemental disclosure of noncash investing and financing
activities:
The Company entered into capital lease agreements for
factory and office equipment........................... $ 6,558 $ 125,859
------------ ------------
------------ ------------
The Company had a fair value adjustment to securities
held for sale.......................................... $ (10,797) $ 10,797
------------ ------------
------------ ------------
The Company entered into notes payable agreements with
related parties totaling $250,000 and issued common
stock warrants totaling $223,200 in connection with a
purchase business combination during the year ended
September 30, 2000.
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 through the exercise of
nonqualified stock options............................. $ 20,190 $ --
------------ ------------
------------ ------------
The Company issued stock through a cashless exercise of
stock options and received
treasury stock......................................... $ 140,300 $ 97,170
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
PARAVANT INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2000 AND 1999
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) DESCRIPTION OF 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.
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 fixed price orders and on a general production basis.
(b) PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements of Paravant Inc. (the
'Company' or 'Paravant') include the financial statements of its wholly owned
subsidiaries, Paravant Computer Systems, Inc. ('PCS'), Engineering Development
Laboratories, Incorporated ('EDL'), STL of Ohio, Inc. ('STL'), Tri-Plex Systems
Corporation ('Tri-Plex') and Catalina Systems Research, Inc. ('CRI').
Intercompany transactions and accounts have been eliminated upon consolidation.
(c) CASH EQUIVALENTS
Cash equivalents include all highly liquid debt instruments purchased with a
maturity of three months or less.
(d) MARKETABLE SECURITIES
Marketable securities consist of mutual funds related to the Company's
deferred compensation plan. The Company classifies these marketable securities
as trading securities and records them at fair value.
(e) INVENTORIES
Inventories are stated at the lower of cost or market using the weighted
average cost method. The Company provides an provision for inventory as it
becomes unusable or obsolete.
(f) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Property, plant and
equipment under capital leases are stated at the present value of the minimum
lease payments. Depreciation of property, plant and equipment is calculated on
the straight-line method over the estimated useful lives of the related assets
ranging from three to thirty years.
(g) GOODWILL AND INTANGIBLE ASSETS
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. 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 three to eight and one-half years using the
straight-line method.
F-7
<PAGE>
PARAVANT INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 2000 AND 1999
(h) REVENUE AND COST RECOGNITION
Revenues from fixed price contracts to design, develop and manufacture
complex electronic equipment to a buyer's specification or to provide services
related to the performance of such contracts are recognized using the
percentage-of-completion method of accounting. Under this method, revenues are
measured by the ratio of costs incurred to date to the estimated total costs to
complete each contract. This method is used because management believes costs
incurred to be the best measure of progress on these contracts. Profit
incentives are included in revenues when earned.
Cost of revenues includes all direct costs and those indirect costs that
relate to contract performance or product or service delivery. Selling, general
and administrative costs are charges to expense as incurred. Provisions for
estimated losses on uncompleted contracts are made in the period in which such
losses are determined. Changes in job performance, job conditions and estimated
profitability, including those arising from contract penalty provisions and
final contract settlements, may result in revisions to cost and income and are
recognized in the period in which the revisions are determined.
The asset 'Costs and estimated earnings in excess of billings on uncompleted
contracts' represents revenue recognized in excess of amounts billed under these
types of contracts. The liability 'Billings in excess of costs and estimated
earnings on uncompleted contracts' represents billings in excess of revenues
recognized.
The Company generally recognizes revenue on other products sales or services
when an order has been received, the product has been shipped or services
rendered, pricing is fixed or determinable, and collectibility is reasonably
assured. Cost of sales includes the Company's estimate of any warranty, re-work,
or other concessions the Company expects to incur in connection with a sale.
At September 30, 2000 and 1999, the Company had sales of $642,467 and
$3,524,063, respectively, for which title had been transferred to a customer
although the physical product remained on Company premises at the convenience of
the customer. The Company follows the guidance of Staff Accounting Bulletin
No. 101 in accounting for such 'bill and hold' transactions.
The warranty provision related to product sales was $83,826 and $84,142 as
of September 30, 2000 and 1999 respectively.
(i) INCOME TAXES
Income taxes are accounted for under 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 applies the intrinsic value-based method of accounting
prescribed by Accounting Principles Board ('APB') Opinion No. 25, 'Accounting
for Stock Issued to Employees', and related interpretations, including FASB
Interpretation No. 44, 'Accounting for Certain Transactions involving Stock
Compensation an interpretation of APB Opinion No. 25' issued in March 2000, to
account for its fixed option plans. Under this method, compensation expense is
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. As allowed by SFAS
No. 123, the Company has elected to continue to
F-8
<PAGE>
PARAVANT INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 2000 AND 1999
apply the intrinsic value-based method of accounting described above, and has
adopted the disclosure requirements of SFAS No. 123.
(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) BASIC AND DILUTED EARNINGS PER SHARE
Basic earnings per share has been computed by dividing net income by the
weighted average number of common shares outstanding. Diluted earnings per share
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>
2000 1999
---- ----
<S> <C> <C>
Basic:
Weighted average number of common shares
outstanding............................ 17,409,377 13,978,583
---------- ----------
---------- ----------
Diluted:
Weighted average number of common shares
outstanding............................ 17,409,377 13,978,583
Dilutive stock options................... 410,856 398,834
Dilutive warrants........................ 27,863 14,835
---------- ----------
17,847,296 14,392,252
---------- ----------
---------- ----------
</TABLE>
Options to purchase 645,584 and 625,100 shares of common stock were excluded
from the calculation of diluted earnings per share for the years ended
September 30, 2000 and 1999, 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.
(m) FINANCIAL INSTRUMENTS
The Company believes 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 Company believes the
fair values of notes receivable, long-term debt and capital lease obligations
approximate their carrying amounts because these financial instruments bear
interest at borrowing rates currently available to the Company for similar
issues or leases with similar terms and maturities.
(n) USE OF ESTIMATES
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these financial statements in
conformity with generally accepted accounting principles. Actual results could
differ from those estimates.
F-9
<PAGE>
PARAVANT INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 2000 AND 1999
(o) IMPAIRMENT OF LONG-LIVED ASSETS AND ASSETS TO BE DISPOSED OF
The Company accounts for long-lived assets in accordance with the provision
of SFAS No. 121, 'Accounting for the Impairment of Long-lived Assets and for
Long-lived Assets to be Disposed Of'. This statement requires that long-lived
assets and certain identifiable intangibles be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Recoverability of assets to be held and used is measured
by a comparison of the carrying amount of an asset to future net cash flows
expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceeds the fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying amount of fair value less
costs to sell.
(p) RECLASSIFICATION
Certain amounts for the year ended September 30, 1999 have been reclassified
to conform to the current year presentation.
(2) ACQUISITIONS
On May 26, 2000 the Company consummated a purchase business combination of
all outstanding common stock of Tri-Plex Systems Corporation ('Tri-Plex').
Pursuant to the acquisition agreement the Company paid an aggregate
consideration consisting of (i) $6,300,000 in cash, (ii) $250,000 of notes
payable, due January 26, 2001 and bearing interest at prime and (iii) Warrants
to purchase 120,000 shares of the Company's common stock valued at $223,200.
(See note 12). In connection with the acquisition a contingent cash earn-out may
be payable by the Company under specified circumstances based on future profits
of the acquired operation over a two-year period. The earn-out, if any, 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 was
financed by borrowings under a revolving line of credit agreement with National
City Bank. (See note 9).
The aggregate purchase price of approximately $7,057,300, including related
acquisition costs of approximately $243,700, was allocated as follows:
<TABLE>
<S> <C>
Cash.................................................... $ 201,400
Current assets.......................................... 1,549,000
Equipment............................................... 229,000
Goodwill................................................ 5,495,000
Current liabilities..................................... (345,600)
Non-current liabilities................................. (71,500)
----------
$7,057,300
----------
----------
</TABLE>
On July 11, 2000 the Company consummated a purchase business combination,
effective July 1, 2000, of all outstanding common stock of Catalina Systems
Research, Inc. ('CRI'). Pursuant to the acquisition agreement the Company paid
an aggregate consideration of (i) $13,800,000 in cash and (ii) up to $2,500,000
in subordianated promissory notes covering a contingent earn-out based on future
earnings of the acquired operation over a thirty-nine month period. The
earn-out, if any, will be recorded as additional goodwill and amortized over the
remaining life of the asset. The Company also paid $200,000 to the selling
shareholders for certain covenants not to compete. (See note 7). The cash
portion of the consideration paid by the Company was financed by borrowings
under a revolving line of credit agreement with National City Bank. (See
note 10).
F-10
<PAGE>
PARAVANT INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 2000 AND 1999
The aggregate purchase price of $14,376,300, including related acquisition
costs of approximately $376,300, was allocated as follows:
<TABLE>
<S> <C>
Cash................................................... $ 1,018,600
Current assets......................................... 1,385,800
Equipment.............................................. 530,900
Non-competition agreements............................. 200,000
Goodwill............................................... 11,923,700
Current liabilities.................................... (682,700)
-----------
$14,376,300
-----------
-----------
</TABLE>
The following unaudited pro forma financial information presents the
combined results of operations of the Company, Tri-Plex and CRI as if the
acquisitions had occurred as of October 1, 1999 and 1998, after giving effect to
certain adjustments, including amortization of goodwill, 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, Tri-Plex and CRI
constituted a single entity during such periods.
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30
-------------------------
2000 1999
---- ----
<S> <C> <C>
Net revenues............................... $49,285,661 $55,606,451
----------- -----------
----------- -----------
Net income................................. $ 1,201,036 $ 6,182,568
----------- -----------
----------- -----------
Basic earnings per share................... $ .07 $ .44
----------- -----------
----------- -----------
Diluted earnings per share................. $ .07 $ .43
----------- -----------
----------- -----------
</TABLE>
(3) MARKETABLE SECURITIES
The cost basis, gross unrealized gains, gross unrealized losses and fair
value for trading securities are as follows:
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Mutual funds:
Cost basis................................ $1,103,414 $429,312
Gross unrealized gains.................... 170,259 10,981
Gross unrealized losses................... (10,040) (184)
---------- --------
Fair value................................ $1,263,633 $440,109
---------- --------
---------- --------
</TABLE>
(4) COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
Costs and estimated earnings on uncompleted contracts consist of the
following:
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Costs incurred on uncompleted contracts.................... $17,075,232 $ 7,241,952
Estimated earnings thereon................................. 1,522,471 4,934,202
----------- -----------
18,597,704 12,176,154
Billings to date........................................... 11,894,245 8,825,218
----------- -----------
$ 6,703,459 $ 3,350,936
----------- -----------
----------- -----------
</TABLE>
The above amount is included in the accompanying consolidated balance sheet
under the following captions:
F-11
<PAGE>
PARAVANT INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 2000 AND 1999
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Costs and estimated earnings in excess of billings on
uncompleted contracts..................................... $8,079,427 $ 6,028,502
Billings in excess of costs and estimated earnings on
uncompleted contracts..................................... (718,059) (2,527,566)
Provision for future losses on uncompleted contracts........ (657,909) (150,000)
---------- -----------
$6,703,459 $ 3,350,936
---------- -----------
---------- -----------
</TABLE>
(5) INVENTORIES
Inventories consist of:
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Raw materials............................................... $5,070,340 $4,029,660
Work in process............................................. 741,827 754,653
Finished goods.............................................. 1,540,707 394,171
---------- ----------
7,352,874 5,178,484
Reserve for obsolete inventory.............................. (641,831) (561,994)
---------- ----------
$6,711,043 $4,616,490
---------- ----------
---------- ----------
</TABLE>
(6) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of:
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Land........................................................ $ 420,330 $ --
Building.................................................... 2,005,889 --
Office equipment............................................ 4,158,694 1,853,885
Factory equipment........................................... 1,128,517 921,643
Leasehold improvements...................................... 320,481 326,273
Vehicles.................................................... 88,230 --
Demonstration pool and custom molds......................... 2,718,352 1,731,304
Construction in progress.................................... 452,627 --
---------- ----------
Total costs............................................. 11,293,120 4,832,835
Less accumulated depreciation............................... (3,826,299) (1,894,539)
---------- ----------
$7,466,821 $2,938,296
---------- ----------
---------- ----------
</TABLE>
Depreciation and amortization expense on property, plant and equipment was
$1,047,206 in 2000 and $794,447 in 1999.
(7) GOODWILL AND INTANGIBLE ASSETS
Goodwill represents the excess of cost over the net tangible and
identifiable intangible assets of the Company's wholly owned subsidiaries.
Intangible assets consist of exclusive rights to a printed circuit board,
certain software and non-compete agreements. Goodwill and intangible assets
consist of:
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Goodwill................................................... $30,304,001 $12,885,330
Non-compete agreements..................................... 6,067,250 5,867,250
License rights............................................. 285,000 302,500
Accumulated amortization................................... (4,713,749) (2,240,149)
----------- -----------
$31,942,502 $16,814,931
----------- -----------
----------- -----------
</TABLE>
Total amortization expense on goodwill and intangible assets was $2,491,100
in 2000 and $1,968,649 in 1999.
F-12
<PAGE>
PARAVANT INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 2000 AND 1999
(8) NOTES PAYABLE
Notes payable consists of:
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Notes payable to related parties bearing interest at prime
rate; principal and interest due January 26, 2001......... 250,000 --
Note payable to bank, secured by furniture and equipment,
bearing interest at a variable rate equal to the one month
LIBOR rate plus 1.75% (8.37% at September 30, 2000);
interest payable monthly through March, 2001. Principal
and interest due April 30, 2001........................... 500,774 --
-------- --------
$750,774 $ --
-------- --------
-------- --------
</TABLE>
(9) LONG-TERM OBLIGATIONS
Long-term obligations consist of:
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Notes payable to related parties bearing a fixed rate of
interest of 8%; interest and principal due in quarterly
installments beginning April 1, 1999; final payment due
January 1, 2002. These notes are subordinate to a
revolving line of credit payable to Bank.................. $ 1,477,500 $2,462,500
Borrowings under revolving line of credit agreement, secured
by accounts receivable, inventory, and contract rights,
bearing interest (8.31% at September 30, 2000) at a rate
equal to a stated rate (the lender's prime rate, the
federal funds rate, or the one month LIBOR rate) plus a
margin ranging from 1.5%-2% (1.75% at September 30, 2000)
based on the ratio of debt to tangible net worth at the
beginning of the applicable LIBOR rate contract period.
The agreement matures December 31, 2001, at which time it
is convertible to five-year term debt..................... 18,448,847 --
Mortgage note payable to bank, secured by real estate,
bearing interest at a variable rate equal to the one month
LIBOR rate plus 1.65% (8.27% at September 30, 2000).
Interest payable monthly through November 2001. Principal
and interest payable monthly beginning December 1, 2001
through December 1, 2016.................................. 1,945,000 --
Notes payable to bank, secured by vehicles, bearing interest
at 7.25%; principal and interest of $1,642 payable monthly
through July 20, 2003..................................... 50,062 --
----------- ----------
21,921,409 2,462,500
Less current maturities..................................... (1,001,630) (985,000)
----------- ----------
Long-term obligations, less current maturities...... $20,919,779 $1,477,500
----------- ----------
----------- ----------
</TABLE>
F-13
<PAGE>
PARAVANT INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 2000 AND 1999
The following is a schedule of maturities of long-term obligations as of
September 30, 2000:
<TABLE>
<CAPTION>
YEAR ENDING SEPTEMBER 30,
-------------------------
<S> <C>
2001........................................................ $ 1,001,630
2002........................................................ 19,008,820
2003........................................................ 86,639
2004........................................................ 77,190
2005........................................................ 83,821
Thereafter.................................................. 1,663,309
-----------
$21,921,409
-----------
-----------
</TABLE>
(10) LEASES
The Company is obligated under various capital leases for office equipment
and building improvements. At September 30, 2000 and 1999, respectively,
property, plant and equipment included net capital lease assets of $241,147 and
$200,771.
The Company also has several noncancellable operating leases for office and
manufacturing facilities, vehicles and equipment, including office and
manufacturing facilities in Dayton Ohio that are owned by Beavercreek
Enterprises, an affiliated company of which the Chairman of the Company is
majority owner. Rent expense under operating lease agreements totaled $536,018
and $382,858 for the years ended September 30, 2000 and 1999, respectively.
The following is a schedule 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, 2000:
<TABLE>
<CAPTION>
CAPITAL OPERATING
YEAR ENDING SEPTEMBER 30, LEASES LEASES
------------------------- ------ ------
<S> <C> <C>
2001........................................................ $50,937 $ 534,000
2002........................................................ 2,151 380,000
2003........................................................ -- 333,000
2004........................................................ -- 302,000
------- ----------
Total minimum lease payments............................ 53,088 $1,549,000
----------
----------
Less amounts representing interest.......................... (2,505)
-------
Present value of net minimum lease payments............. 50,583
-------
Less current maturities..................................... 48,517
-------
Capital lease obligations................................... $ 2,066
-------
-------
</TABLE>
(11) STOCK OPTIONS
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
F-14
<PAGE>
PARAVANT INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 2000 AND 1999
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. 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 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 on the date the grant. 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.
At September 30, 2000, there were 706,536 and 118,000 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 2000 where exercise
price equals the market price of the stock on the grant date was $2.11. During
2000, no options were granted where the exercise price did not equal the market
price of the stock on the grant date. 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 following weighted average assumptions were used:
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Exercise price equal to market price on grant date
Expected risk-free interest rate........................ 6.33% 4.52%
Expected life........................................... 7.2 years 7.1 years
Expected volatility..................................... 80.6% 116.3%
Expected dividend yield................................. 0.00 0.00
Exercise price greater than market price on grant date
Expected risk-free interest rate........................ -- 4.49%
Expected life........................................... -- 5.0 years
Expected volatility..................................... -- 116.9%
Expected dividend yield................................. -- 0.00%
</TABLE>
The Company applies APB Opinion No. 25 in accounting for its option plans
and, accordingly, no compensation cost has been recognized 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, 2000 AND 1999
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>
2000 1999
---- ----
<S> <C> <C> <C>
Net income As reported....................... $1,584,425 $5,885,642
Pro forma......................... 1,029,860 4,813,262
Basic earnings per share As reported....................... 0.09 0.42
Pro forma......................... 0.06 0.34
Diluted earnings per share As reported....................... 0.09 0.41
Pro forma......................... 0.06 0.33
</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, 1998................. 1,386,543 $2.68
Granted....................................... 468,400 2.05
Exercised..................................... (161,328) .77
Forfeited..................................... (11,600) 3.58
---------
Outstanding at September 30, 1999................. 1,682,015 2.68
Granted....................................... 525,000 2.72
Exercised..................................... (182,836) 1.43
Forfeited..................................... (97,295) 3.77
---------
Outstanding at September 30, 2000................. 1,926,884 $2.75
--------- -----
--------- -----
</TABLE>
At September 30, 2000, the range of exercise prices and weighted-average
remaining contractual lives of outstanding options was $.72 to $1.34 for 383,000
shares; $1.47 to $2.13 for 389,300 shares; $2.16 to $2.63 for 389,000 shares;
$2.81 to $4.25 for 429,284 shares and $4.68 to $6.00 for 336,300 shares at 5.0
years, 5.9 years, 7.6 years, 8.4 years and 4.4 years, respectively.
At September 30, 2000 and 1999, the number of options exercisable was
1,109,935 and 914,190, respectively, and the weighted-average exercise price of
those options was $2.77 and $2.37, respectively.
(12) WARRANTS
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
F-16
<PAGE>
PARAVANT INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 2000 AND 1999
under the revolving line of credit. The remainder of the net proceeds from the
exercise of the warrants was used for general corporate purposes, including
working capital requirements.
On May 26, 2000, the Company issued warrants to purchase up to 120,000
shares of the Company's common stock to the shareholders of Tri-Plex as
consideration for the Tri-Plex Acquisition. These warrants are exercisable until
May 26, 2010 at an exercise price of $2.75 per share.
(13) INCOME TAXES
The components of income tax expense (benefit) for the years ended September
30, 2000 and 1999 are as follows:
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
------- -------- -----
<S> <C> <C> <C>
2000:
Federal............................... $2,064,915 $(789,228) $1,275,687
State................................. 311,794 (124,935) 186,859
---------- --------- ----------
$2,376,709 $(914,163) $1,462,546
---------- --------- ----------
---------- --------- ----------
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
---------- --------- ----------
---------- --------- ----------
</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, 2000 and
1999:
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Computed 'expected' tax expense...................... $1,035,970 $3,291,064
Increase (decrease) in income taxes resulting from:
State income taxes, net of federal income tax
benefit........................................ 123,327 242,532
Nondeductible meals and entertainment expense.... 11,922 9,311
Research and experimentation credit.............. (83,756) 25,367
Nondeductible goodwill........................... 397,424 397,424
Other, net....................................... (22,341) (171,740)
---------- ----------
$1,462,546 $3,793,958
---------- ----------
---------- ----------
</TABLE>
Deferred income taxes as of September 30, 2000 and 1999 reflect the impact
of 'temporary differences' between amounts of assets and liabilities for
financial statement purposes and such
F-17
<PAGE>
PARAVANT INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 2000 AND 1999
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, 2000
and 1999:
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Deferred tax liabilities:
Capitalized costs................................ $ (62,456) $ --
Accumulated depreciation......................... -- (105,516)
Other............................................ (90,415) (21,808)
---------- ----------
Total deferred tax liabilities............... (152,871) (127,324)
---------- ----------
Deferred tax assets:
Inventory........................................ 337,940 329,084
Accrued deferred compensation.................... 604,965 209,686
Accrued vacation and sick leave.................. 60,967 129,322
Accrued incentive compensation................... 196,723 321,196
Capitalized costs................................ 214,985 65,731
Intangible assets................................ 306,138 120,002
Accrued contract costs........................... 240,277 --
Other............................................ 268,623 115,884
---------- ----------
Total deferred tax assets.................... 2,230,615 1,290,905
---------- ----------
Total net deferred tax assets................ $2,077,747 $1,163,581
---------- ----------
---------- ----------
</TABLE>
A valuation allowance for deferred tax assets is provided when it is more
likely than not that some portion or all of the deferred tax assets will not be
realized. Realization is dependent upon the generation of future taxable income
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, 2000 and
1999, 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.
(14) RETIREMENT PLANS
The Company has a defined contribution retirement plan covering
substantially all employees who have completed 1,000 hours of service.
Retirement plan expense was $236,814 and $221,388 for the years ended September
30, 2000 and 1999, respectively.
The Company has deferred compensation agreements with certain executives and
key management employees. Under the provisions of the agreements, the Company
funds a percentage of each participants salary, as determined by the Board of
Directors, to an investment account which is used to purchase marketable
securities. These investments are a general asset of the Company and as such are
reported as trading securities in the accompanying financial statements. For the
year ended September 30, 2000, deferred compensation expense was $559,975,
including $160,219 in net unrealized gains on marketable securities. For the
year ended September 30, 1999, deferred compensation expense was $291,763.
(15) TREASURY STOCK
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 through
November 2, 2000 for a maximum purchase price, including commissions, not to
exceed $3,500,000 in the aggregate. During the year ended
F-18
<PAGE>
PARAVANT INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 2000 AND 1999
September 30, 2000, the Company repurchased 640,681 shares of its common stock
for a total cost of $1,815,201 at an average purchase price of $2.83 per share.
No repurchases were made from October 1, 2000 through November 2, 2000. The
Board of Directors has extended the repurchase program through November 2, 2001.
(16) NON-RECURRING EXPENSE
The company incurred costs related to the renegotiation of certain
employment contracts and separation agreements as a result of management changes
during the year ended September 30, 2000. The costs were of a non-recurring
nature and thus have been reported as a non-recurring expense separate from
recurring operating costs on the accompanying consolidated statement of
operations.
(17) 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
attorney's fees. On March 7, 2000 the Court entered final partial summary
judgment in the Company's favor with respect to one of the two counts of the
plaintiff's amended complaint. The Company will continue to vigorously defend
this lawsuit.
In November 2000, a former Company employee filed an action against the
Company alleging breach of employment contract by the Company. The plaintiff is
seeking from the Company an amount of $7.4 million plus interest, related costs
and attorney's fees. The Company has filed a motion to dismiss the plaintiff's
complaint and will vigorously defend this lawsuit.
Management, after consultation with counsel, is of the opinion that the
ultimate resolution of these matters will not have a material adverse effect on
the Company's financial position, results of operations, or liquidity.
Management has not accrued any liability relating to the tortious portion of
these lawsuits, as it believes the Company will prevail.
(18) CONCENTRATION OF CREDIT RISK
The Company has a high concentration of sales to a few customers who
accounted for 70% and 82% of revenues for the years ended September 30, 2000 and
1999, respectively. A summary of sales, accounts receivable and costs in excess
of billings for customers that exceed 10% of sales, accounts receivable or costs
in excess of billings as of or for the years ended September 30, 2000 and 1999
are as follows:
<TABLE>
<CAPTION>
2000 1999
------------------------- -------------------------
SALES % TOTAL SALES % TOTAL
----- ------- ----- -------
<S> <C> <C> <C> <C>
Customer A.............................. $11,929,135 30% $ -- --%
Customer B.............................. 6,183,349 15 3,224,160 8
Customer C.............................. 4,141,222 10 17,542,370 41
Customer D.............................. 4,137,329 10 6,037,930 14
Customer E.............................. 2,003,240 5 3,197,064 8
Customer F.............................. -- -- 4,499,924 11
</TABLE>
F-19
<PAGE>
PARAVANT INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 2000 AND 1999
<TABLE>
<CAPTION>
ACCOUNTS ACCOUNTS
RECEIVABLE % TOTAL RECEIVABLE % TOTAL
---------- ------- ---------- -------
<S> <C> <C> <C> <C>
Customer A.............................. $2,584,598 28% $ -- --%
Customer B.............................. 796,574 9 1,156,300 13
Customer C.............................. 300,000 3 1,911,436 21
Customer D.............................. 573,837 6 3,028,160 33
Customer E.............................. 987,949 11 1,777,404 19
Customer F.............................. -- -- 176,726 2
<CAPTION>
COSTS IN EXCESS COSTS IN EXCESS
OF BILLINGS % TOTAL OF BILLINGS % TOTAL
----------- ------- ----------- -------
<S> <C> <C> <C> <C>
Customer A.............................. $5,375,724 67% $ -- --%
Customer B.............................. 232,716 3 118,851 2
Customer C.............................. 705,766 9 1,665,788 28
Customer D.............................. 131,503 2 247,970 4
Customer E.............................. -- -- -- --
Customer F.............................. -- -- -- --
</TABLE>
F-20
