10-Q 1 a33180.txt PARAVANT INC. UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended: June 30, 2002 [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period ________ to ______ Commission file number: 0-28114 PARAVANT INC. (Exact name of Registrant as specified in its charter) ~~Florida 59-2209179 (State or other jurisdiction of (I.R.S. Employer Identification Number) incorporation or organization)~~

89 Headquarters Plaza North, Suite 1421 Morristown, New Jersey 07960 (Address of principal executive offices) (973)631-6190 (Registrant's telephone number, including area code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days [X] Yes [ ] No On August 8, 2002, there were 17,345,872 shares of the Registrant's common stock outstanding. PARAVANT INC. INDEX PART I - FINANCIAL INFORMATION Item 1. Financial Statements: Condensed Consolidated Balance Sheet - June 30, 2002 (Unaudited) and September 30, 2001.........................2 Condensed Consolidated Statements of Operations (Unaudited) for the three months ended June 30, 2002 and 2001........................................................................4 Condensed Consolidated Statements of Operations (Unaudited) for the nine months ended June 30, 2002 and 2001........................................................................5 Condensed Consolidated Statements of Cash Flows (Unaudited) for the nine months ended June 30, 2002 and 2001.............................................................................. 6 Notes to Condensed Consolidated Financial Statements (Unaudited)................................................7 Item 2. Management's Discussion and Analysis of Operations....................................................14 Item 3. Quantitative and Qualitative Disclosures About Market Risk............................................21 PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K......................................................................22 SIGNATURES ....................................................................................................23

PARAVANT INC. AND SUBSIDIARIES Condensed Consolidated Balance Sheets

See accompanying notes to unaudited condensed consolidated financial statements. Page 2 Liabilities and Stockholders' Equity (Unaudited)

See accompanying notes to unaudited condensed consolidated financial statements. Page 3 PARAVANT INC. AND SUBSIDIARIES Condensed Consolidated Statements of Operations For the three months ended June 30, 2002 and 2001 (Unaudited)

See accompanying notes to unaudited condensed consolidated financial statements. Page 4 PARAVANT INC. AND SUBSIDIARIES Condensed Consolidated Statements of Operations For the nine months ended June 30, 2002 and 2001 (Unaudited)

See accompanying notes to unaudited condensed consolidated financial statements. Page 5 PARAVANT INC. AND SUBSIDIARIES Condensed Consolidated Statements of Cash Flows For the nine months ended June 30, 2002 and 2001

See accompanying notes to unaudited condensed consolidated financial statements. Page 6 PARAVANT INC. AND SUBSIDIARIES Notes to Unaudited Condensed Consolidated Financial Statements June 30, 2002 and 2001 (1) Description of Business and Summary of Significant Accounting Policies (a) Basis of Presentation The accompanying unaudited Condensed Consolidated Financial Statements of Paravant Inc. and subsidiaries (the "Company") have been prepared in accordance with accounting principles generally accepted in the United States of America and with the instructions to Form 10-Q and Article 10 of Regulation S-X. The Company has continued to follow the accounting policies set forth in the consolidated financial statements included in its fiscal 2001 Annual Report on Form 10-K filed with the Securities and Exchange Commission, except for the adoption of the provisions of Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets (see Note 5 of Notes to Condensed Consolidated Financial Statements). In the opinion of management, the interim financial information provided herein reflects all adjustments (consisting of normal and recurring adjustments) necessary for a fair presentation of the Company's consolidated financial position as of June 30, 2002, and the results of operations for the three and nine month periods ending June 30, 2002 and 2001, and the cash flows for the nine month periods ending June 30, 2002 and 2001. The results of operations for the three and nine months ended June 30, 2002 are not necessarily indicative of the results to be expected for the full year. These unaudited condensed consolidated financial statements and footnotes should be read in conjunction with the Company's audited financial statements for the fiscal year ended September 30, 2001, included in the Company's Annual Report on Form 10-K as filed with the Securities and Exchange Commission. (b) Basic and Diluted Earnings Per Share Basic earnings per share have been computed by dividing net income by the weighted average number of common shares outstanding. Diluted earnings per share have 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:

Page 7

Options and warrants to purchase 568,800 and 2,028,262 shares of common stock were excluded from the calculation of diluted earnings per share for the three months ended June 30, 2002 and 2001, respectively, because their exercise prices exceeded the average market price of outstanding common shares for the period, and therefore, would be considered anti-dilutive. Options and warrants to purchase 705,800 and 1,780,882 shares of common stock were excluded from the calculation of diluted earnings per share for the nine months ended June 30, 2002 and 2001, respectively, because their exercise prices exceeded the average market price of common shares for the period, and therefore, would be considered anti-dilutive. (2) Contracts Contracts in progress and advance billings on such contracts consist of the following:

The above amount is included in the accompanying unaudited condensed consolidated balance sheet under the following captions:

Page 8 (3) Inventories Inventories consist of:

General and administrative costs included in work in process finished goods inventory were approximately $558,000 and $75,000 at June 30, 2002 and September 30, 2001, respectively. (4) Property, plant, and equipment Property, plant and equipment consists of:

(5) Goodwill and Intangible Assets In July 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards Nos. 141 and 142 (SFAS 141 and SFAS 142), Business Combinations and Goodwill and Other Intangible Assets, respectively. SFAS 141 replaces APB 16 and requires the use of the purchase method for all business combinations initiated after June 30, 2001. It also provides guidance on purchase accounting related to the recognition of intangible assets, noting that any purchase price allocated to an assembled workforce may not be accounted for separately, and accounting for negative goodwill. SFAS 142 changes the accounting for goodwill from an amortization method to an impairment-only approach. Under SFAS 142, goodwill will be tested annually and whenever events or circumstances occur indicating that goodwill might be impaired. Page 9 The Company elected to adopt the provisions of SFAS 141 as of June 30, 2001, and 142 as of October 1, 2001. The Company has identified reporting units to be its operating segments and has determined the carrying value of each reporting unit by assigning assets and liabilities, including the existing goodwill and intangible assets, to those reporting units as of October 1, 2001. Upon adoption of SFAS 142, amortization of goodwill recorded for business combinations consummated prior to July 1, 2001 ceased. The Company has completed the transitional analysis to determine the impact. The Company has concluded that there will not be an impairment charge relating to goodwill or intangible assets, and that the intangible assets estimated useful lives do not have to be adjusted. The annual impairment test will be performed in the fourth quarter of each fiscal year, after completion of the Company's annual plan. Goodwill represents the excess of cost over the net tangible and identifiable and identifiable intangible assets of the Company's wholly owned subsidiaries. Goodwill by segment at June 30, 2002, consists of:

Intangible assets consist of exclusive rights to a printed circuit board, and non-compete agreements. All intangible assets are being amortized over their estimated useful lives, as indicated below. Intangible assets consist of:

The aggregate estimated acquired intangible amortization expense for the nine month period ended June 30, 2002 was approximately $568,000. The estimated acquired intangible amortization expense for the fiscal year ending September 30, 2002 is $750,000. Estimated acquired amortization expense for each of the four fiscal years ending September 30, 2006 is $700,000. Page 10 The following pro-forma information reconciles the net earnings reported for the period ended June 30, 2002 and 2001, respectively, to adjusted net earnings reflecting the adoption of SFAS 142:

(6) Comprehensive Earnings The components of comprehensive income for the three and nine month periods ending June 30, 2002 and 2001 consisted of the following:

Page 11 (7) Segment and Related Information The Company operates in two segments, each of which are strategic businesses that are managed separately because each business develops, manufactures and sells distinct products and services. The segments and a description of their business are as follows: (i) tactical systems which includes two operating components, Paravant Computer Systems (PCS) and Engineering Development Laboratories (EDL). They design, manufacture, integrate and service products that are deployed into fixed wing and rotary aircraft. These products are used for diagnostic, communication, navigation, and flight control purposes. Both PCS and EDL service customers in the U.S. and foreign military establishments, prime defense contractors and government agencies, and (ii) intelligence systems which is comprised of three operating components Signal Technology Laboratories (STL), Triplex Systems Corporation (TPX) and Catalina Research Incorporated (CRI). These operating components design, manufacture and service high speed signal processing products that are utilized and integrated primarily by the U.S. intelligence agencies. They are sometimes sold directly or through prime defense contractors. These products are used to monitor, route, enhance, process, store, and archive various electronic signals. The Company evaluates performance of and allocates resources to the segments. The accounting policies of the segments are substantially the same as those described in the summary of significant accounting policies (See 2001 Annual Report on Form 10-K).

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For the nine months ended June 30, approximately 98% in 2002 and 97% in 2001 of the Company's revenues were derived from domestic customers. The Company attributes revenues to countries based upon where the customers' assets are located. All of the Company's assets are located domestically. (8) 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. Page 13 PART I - FINANCIAL INFORMATION Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Results Of Operations Three Months ended June 30, 2002 vs June 30, 2001 Revenues for the three months ended June 30, 2002 were $15,496,665, an increase of $3,275,555 or 27% from revenues of $12,221,110 for the three months ended June 30, 2001. Revenues from the Company's tactical systems products increased by $2,009,001 primarily due to product sales supporting the C4 markets, as well as aircraft support. Revenues from the Company's intelligence systems products increased by $1,269,807 primarily due to revenue from increased demand for signal processing equipment and new product introductions. Cost of revenues was $8,932,393 in 2002, or 58% of revenues, compared to $7,316,706 or 60% of revenues in 2001, an increase of $1,615,687. The decrease in cost of sales as a percentage of revenues was a result of a change in the sales mix towards products that have a lower cost associated with them. Sales and marketing expense of $855,990 in 2002 increased by $207,999 or 32% from 2001 expense of $647,991. As a percentage of revenues, sales and marketing expense was approximately 6% in 2002 and 5% in 2001. The increase in 2002 was mainly attributable to compensation related employee costs. Research, development and engineering expense of $1,178,105 in 2002 increased by $141,711 or 14% from 2001 expense of $1,036,394 due to heightened activity in research in support of new products related primarily to the Scorpion rugged notebook computer product and the Eagle data recorder product. As a percentage of revenues, research, development, and engineering expense was 8% in 2002 and 9% in 2001. General and administrative expense of $2,512,949 in 2002 increased by $244,813 or 11% from 2001 expense of $2,268,136. As a percentage of revenues, general and administrative expense was 16% in 2002 compared to 18% in 2001. The increase of $244,813 in general and administrative expense was primarily attributed to increased compensation related employee costs, facility costs, and professional fees. Amortization of goodwill and intangible assets was $189,233 in 2002 compared to $950,635 in 2001, a decrease of $761,402 or 80%. The decrease was attributable to the adoption of SFAS 142, whereby goodwill is no longer amortized. Income from operations was $1,827,995 in 2002 compared to $1,247 in 2001, an increase of $1,826,748. The increase in income from operations resulted mainly from increased revenue and lower cost of revenues, the cessation of amortization of goodwill related to the adoption of SFAS 142 on October 1, 2001, offset by higher operating costs referenced above. Investment expense was $91,791 in 2002 compared to income of $49,915 in 2001. The change was due primarily to unrealized losses on trading securities recorded in 2002 compared to unrealized gains on trading securities recorded in 2001. Page 14 Interest expense was $186,582 in 2002 compared to $293,723 in 2001, a decrease of $107,141. This decrease was due to a decrease in interest rates associated with the National City credit line, coupled with a decreased average outstanding credit balance in 2002. As prescribed by FAS 109, Accounting for Income Taxes, the computation for the interim tax expense (benefit) reflects the anticipated effective tax rate for the entire fiscal year on expected pretax income. This computation has produced a tax expense of $619,555 in 2002, compared to a tax benefit of $354,827 in 2001. The increase of $974,382 of income tax expense was directly associated with taxable income in 2002, compared to a loss before taxes in 2001. The Company's net income was $929,333 in 2002 compared to $165,577 in 2001. Net income as a percentage of revenues was 6% in 2002, compared to 1% in 2001. The increase in net income resulted primarily from increased revenue and increased operating income from both the tactical and intelligence systems' segments, offset by lower amortization costs and interest costs, in addition to the factors noted above. Nine Months ended June 30, 2002 vs June 30, 2001. Revenues for the nine months ended June 30, 2002 were $40,062,776, an increase of $3,928,131 or 11% from revenues of $36,134,645 for the nine months ended June 30, 2001. Revenues from the Company's tactical systems products increased by $2,119,551 primarily due to product sales supporting the C4 markets, as well as aircraft support products, offset by a decrease of revenue recognized under a significant firm fixed price contract with annual award options with a prime contractor for the U.S. Army due to the delay of approval of the Defense Appropriations bill. Revenues from the Company's intelligence systems products increased by $2,800,580 primarily due to revenue from increased demand for signal processing equipment and new product introductions. Cost of revenues was $22,876,789 in 2002, or 57% of revenues, compared to $21,801,978 or 60% of revenues in 2001, an increase of $1,074,811. The decrease in cost of sales as a percentage of revenues was a result of a change in the sales mix towards products that have a lower cost associated with them. Sales and marketing expense of $2,236,852 in 2002 increased by $222,115 or 11% from 2001 expense of $2,014,737. As a percentage of revenues, sales and marketing expense was approximately 6% in both 2002 and 2001. The increase in sales and marketing expenses in 2002 was primarily a result of compensation related employee costs. Research, development and engineering expense of $3,217,814 in 2002 increased by $266,771 or 9% from 2001 expense of $2,951,043 due to heightened activity in research in support of new products, including the Scorpion rugged notebook computer product and the Eagle data recorder product. As a percentage of revenues, research, development, and engineering expense was 8% in both 2002 and 2001. General and administrative expense of $6,813,541 in 2002 increased by $1,159,215 or 21% from 2001 expense of $5,654,326. As a percentage of revenues, general and administrative expense was 17% in 2002 compared to 16% in 2001. The increase in general and administrative expense was primarily attributed to increase in compensation related employee costs, facility costs, professional fees, and the impact of deferred compensation related to the unrealized losses on trading securities. Amortization of goodwill and intangible assets was $567,698 in 2002 compared to $2,850,304 in 2001, a decrease of $2,282,606 or 80%. The decrease was attributable to the adoption of SFAS 142, whereby goodwill is no longer amortized. Page 15 Income from operations was $4,350,082 in 2002 compared to $862,257 in 2001, an increase of $3,487,825. The increase in income from operations resulted mainly from increased revenue and lower cost of revenues and the cessation of amortization of goodwill related to the adoption of SFAS 142 on October 1, 2001, offset by higher operating costs referenced above. Investment expense was $56,527 in 2002 compared to $295,536 in 2001. The change was due primarily to smaller unrealized losses on trading securities recorded in 2002, which was directly associated with a smaller portfolio of trading securities held. Interest expense was $714,501 in 2002 compared to $1,239,859 in 2001, a decrease of $525,358. This decrease was due to a decrease in interest rates associated with the National City credit line, coupled with a decreased average outstanding balance in 2002. As prescribed by FAS 109, Accounting for Income Taxes, the computation for the interim tax expense (benefit) reflects the anticipated effective tax rate for the entire fiscal year on expected pretax income. This computation has produced a tax expense of $1,426,044 in 2002, compared to a tax benefit of $647,671. The increase of $2,073,715 of income tax expense was directly associated with taxable income in 2002, compared to a loss before tax benefit in 2001. The Company's net income was $2,139,067 in 2002 compared to $32,842 in 2001. Net income as a percentage of revenues was 5% in 2002, compared to nil in 2001. The increase in net income resulted primarily from increased revenue and increased operating income from both the tactical and intelligence systems' segments, offset by lower amortization costs and interest costs, in addition to the factors noted above. Liquidity and Capital Resources At June 30, 2002, the Company had $2,001,244 in cash and cash equivalents and marketable securities. The Company has floating rate financing agreement with National City Bank in an amount up to $23 million under a revolving line of credit with a maturity date of May 1, 2003, with an annual renewable term thereafter. 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 with which the Company is in compliance at June 30, 2002. These include limits on the ability of the Company to pay cash dividends, undertake additional acquisitions, or otherwise limits on obligations undertaken by, or operations of, the Company. As of June 30, 2002, there were borrowings of $12,000,000 outstanding under this arrangement with the Bank. The available borrowings balance was $11,000,000 at June 30, 2002. Page 16 During the year ended September 30, 2001, the Company completed the acquisition and renovation of an office and manufacturing facility in its PCS subsidiary in Palm Bay, Florida for a total cost of $4,926,004. The acquisition and subsequent renovations were financed by cash and a mortgage note payable to First Union National Bank ("First Union"). The mortgage note provided $3,560,000 at a variable interest rate equal to the one month LIBOR plus 1.65%. Effective April 1, 2001, the Company entered into an interest rate swap agreement to convert the interest rate to a fixed 7.85% per annum. At September 30, 2001, there were borrowings of $3,195,498 under the mortgage note payable. The impact of the fair value of the interest rate swap of $266,598 resulted in the total mortgage value of $3,395,088 at June 30, 2002. Interest on the mortgage note was payable monthly through December 2001, after which monthly principal and interest payments will be made through December 1, 2016. The Company's operating cash flow was $7,371,209 for the nine months ended June 30, 2002, compared to $2,903,226 for the nine months ended June 30, 2001. The increase in the Company's operating cash flow is due primarily to an increase in net income, a decrease in accounts receivable compared to the same period in 2001, due to timing of payments on accounts receivable, and a net increase in accounts payable and other accruals compared to net decreases in those accounts for the same period in 2001. 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 gross margin contributions of the Company's major customers are not generally different from those from its other customers as a whole. As of June 30, 2002, 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 $5,475,795 at June 30, 2002. The Company has provided an allowance for certain older balances of $20,000. This allowance is believed to be sufficient to address any uncollectible balances outstanding as of June 30, 2002. 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 June 30, 2002 and 2001, the Company's backlog was approximately $39.0 million and $28.7 million, respectively, consisting of firm fixed price purchase orders. All of these purchase orders are expected to generate profits within the Company's historical levels. 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 $5.6 million in unfunded, deliverables from an IDIQ contract. This additional $5.6 million of products in backlog will be completed over the next 36 months. Page 17 On November 2, 1999, the Board of Directors authorized the Company to repurchase up to 1,000,000 of its outstanding shares of common stock within the twelve-month period following such date for a maximum purchase price, including commissions, not to exceed $3,500,000 in the aggregate. The Board has extended the repurchase program through November 2, 2002. No repurchases were made during the nine months ended June 30, 2002. Since the inception of the program, the Company has repurchased 659,681 shares of its common stock for a total cost of $1,838,108 at an average purchase price of $2.79 per share. 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, 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. Page 18 Critical Accounting Policies The Company's significant accounting policies are described in Note 1 to the audited September 30, 2001 consolidated financial statements included in Form 10-K for fiscal 2001. The Company believes that its most critical accounting policies include revenue recognition and cost estimation on its contracts and the valuation of long-lived and intangible assets. The preparation of financial statements and related disclosures requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and revenue and expense during the period reported. Estimates are used in determining the inventory allowance. The Company regularly evaluates current information available to it to determine whether such accruals should be adjusted. Revenue recognition and cost estimation The Company's revenue is almost entirely derived from fixed priced contracts, which provide that the Company perform a contract for a fixed price and assume the cost of any cost overruns. Under fixed price contracts, unexpected increases in the cost to develop or manufacture a product, whether due to a buyer's specification or to 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 included all direct costs and those indirect costs that relate to contract performance or product or service delivery. Provisions for estimated losses on uncompleted contracts are made in the period in which 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. Under fixed-price contracts, unexpected increases in the cost to develop or manufacture a product such as increases in material costs, inaccurate estimates during the bidding process, or other unforeseen factors could have a material effect on the Company's results of operations and financial condition. The Company generally recognizes revenue on other products sales or services upon shipment of product or when services have been rendered. Customer performed or customer specific pre-acceptance testing is stipulated under certain contracts accounted for under a units shipped basis. The Company does not recognize revenue with respect to these contracts until the customer has successfully completed the pre-acceptance test, and acknowledged as such, or by the Company itself in conjunction with customer specifications. These contracts do not contain acceptance clauses after shipment of the product. In all other contracts, product is not subjected to pre-acceptance testing. In all of the Company's sales transactions, the terms of sale do not include any subjective right of return, exchange, or replacement. The Company also does not ship products that do not meet the specifications of a customer's order. Page 19 Valuation of long-lived and intangible assets and goodwill The Company assesses the impairment of identifiable assets and long-lived assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors that management considers important which could trigger an impairment review include significant underperformance relative to projected operating results, significant changes in the manner of use of the acquired assets, or the strategy of the overall business, or any significant negative industry or economic trends. When the Company determines that the carrying value of intangibles and long-lived assets, management measures any impairment based on a projected discounted cash flow method using a discount rate consistent with the risk inherent in the industry. Net intangible assets and long-lived assets were $12,675,580 as of June 30, 2002, and goodwill was $24,281, 319 as of June 30, 2002. Statement 142 will require the Company annually to perform an assessment of whether there is an indication that goodwill or intangible assets are impaired Inventory Inventory purchases and commitments are based upon future demand forecasts. If there is a sudden and significant decrease in demand for the Company's products or there is a higher risk of inventory obsolescence because of rapidly changing technology and customer requirements, the Company may be required to increase its inventory allowances and its gross margin could be adversely affected. New Accounting Pronouncements In August 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 143 ("SFAS 143") , "Accounting for Asset Retirement Obligations," which addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. SFAS 143 requires an enterprise to record the fair value on an asset retirement obligation as a liability in the period in which it incurs a legal obligation associated with the retirement of tangible long-lived assets. Since the requirement if to recognize the obligation when incurred, approaches that have been used in the past to accrue the asset retirement obligation over the life of the asset are no longer acceptable. SFAS 143 also requires the enterprise to record the contra to the initial obligation as an increase to the carrying amount of the related long-lived asset (i.e., the associated asset retirement costs) to reflect the passage of time (i.e., accretion expense) and changes in the estimated future cash flows underlying the initial fair value measurement. Enterprises are required to adopt SFAS 143 for fiscal years beginning after June 15, 2002. The Company is in the process of evaluating this Statement and the effect it will have on our consolidated financial statements and current impairment policy. In October 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 144, ("SFAS 144"), "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS 144 supersedes SFAS 121 but retains its fundamental provisions for (a) recognition/ measurement of long-lived assets to be held and used and (b) measurement of long-lived assets to be disposed of by sale. SFAS 144 also supersedes accounting/ reporting provisions of APB Opinion No. 30 for segments of a business to be disposed of but retains the requirement to report discontinued operations separately from continuing operations and extends that reporting to a component of an entity that either has been disposed of or is classified as held for sale. SFAS 144 is effective for us on October 1, 2002. We are currently evaluating the impact of this new standard. Page 20 In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections" (SFAS 145). SFAS 145 updates, clarifies and simplifies existing accounting pronouncements. SFAS 145 rescinds Statement No. 4, which required all gains and losses from extinguishment of debt to be aggregated and, if material, classified as an extraordinary item, net of related income tax effect. As a result, the criteria in APB No. 30 will now be used to classify those gains and losses because Statement No. 4 has been rescinded. Statement No. 44 was issued to establish accounting requirements for the effects of transition to provisions of the Motor Carrier Act of 1980. Because the transition has been completed, Statement No. 44 is no longer necessary. SFAS 145 amends Statement No.13 to require that certain lease modifications that have economic effects similar to sale-leaseback transactions be accounted for in the same manner as sale-leaseback transactions. This amendment is consistent with the FASB's goal of requiring similar accounting treatment for transactions that have similar economic effects. SFAS 145 also makes technical corrections to existing pronouncements. While those corrections are not substantive in nature, in some instances, they may change accounting practice. We are required to adopt SFAS 145, effective for fiscal 2003. We do not expect the adoption of SFAS 145 to have a material impact on our consolidated financial statements. In July 2002, the Financial Accounting Standards Board ("FASB") issued FAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. This Standard supercedes the accounting guidance provided by Emerging Issues Task Force Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). FAS No. 146 requires companies to recognize costs associated with exit activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. FAS No. 146 is to be applied prospectively to exit or disposal activities initiated after December 31, 2002. The Company is currently evaluating this Standard. Item 3. Quantitative and Qualitative Disclosures about Market Risk The Company is subject to market risk from exposure to changes in interest rates based on its financing activities. The principal credit facility is a $23 million revolving credit facility with variable interest rates ranging from 1.5% to 2.0% over the Fed Funds rate on the balance up to the $23 million facility cap. At June 30, 2002, borrowings under the agreement were $12.0 million. A 50 basis point increase in interest rates with an annual outstanding balance of $12.0 million would result in increased annual interest expense of $60,000. The Company does not expect changes in interest rates to have a material effect on income or cash flows during fiscal year 2002, although there can be no assurances that interest rates will not significantly change. Page 21 Cautionary Statement This Quarterly Report on Form 10-Q contains certain forward-looking statements that involve a number of risks and uncertainties. Such forward-looking statements are within the meaning of that term in Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Act of 1934, as amended. Factors that could cause actual results to differ materially from those projected in such forward-looking statements include the following: the budgetary and appropriations policies of the Company's governmental customers, the competitive environment for the Company's products and services, the timing of new orders, the degree of market penetration of the Company's new products and other factors set forth in the Company's Annual Report on 10-K. 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. Part II- Other Information Item 6. Exhibits and Reports on Form 8-K (a) Exhibits The following exhibits are filed as part of this Quarterly Report on Form 10-Q: 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). 99.1 CEO certification pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxly Act of 2002. 99.2 CFO certification pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxly Act of 2002. (b) Reports on Form 8-K: The Registrant filed no reports on Form 8-K during the quarter ended June 30, 2002. Page 22 SIGNATURES In accordance with the requirements of the Securities Exchange Act of 1934, the Registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. PARAVANT INC. By /s/ John C. Zisko ------------------------------------------------- John C. Zisko, Vice President, Treasurer and Chief Financial Officer as both a duly authorized officer of Registrant and as principal financial officer of Registrant) Date: August 13, 2002 Page 23 STATEMENT OF DIFFERENCES ------------------------ The section symbol shall be expressed as ................................. 'SS'

PARAVANT INC 10-Q