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: March 31, 2001 [ ] 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 May 11, 2001, there were outstanding 17,772,348 shares of the Registrant's common stock outstanding. PARAVANT INC. INDEX PART I - FINANCIAL INFORMATION Item 1. Financial Statements: Condensed Consolidated Balance Sheet - March 31, 2001 and September 30, 2000......................2 Condensed Consolidated Statements of Operations for the three months ended March 31, 2001 and 2000.........................................................4 Condensed Consolidated Statements of Operations for the six months ended March 31, 2001 and 2000.........................................................5 Condensed Consolidated Statements of Cash Flows for the six months ended March 31, 2001 and 2000................................................................6 Notes to Condensed Consolidated Financial Statements..............................................7 Item 2. Management's Discussion and Analysis of Operations......................................12 Item 3. Quantitative and Qualitative Disclosures about Market Risk..............................18 PART II - OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders.....................................19 Item 6. Exhibits and Reports on Form 8-K........................................................19 SIGNATURES.......................................................................................20

PARAVANT INC. AND SUBSIDIARIES Condensed Consolidated Balance Sheets Assets

~~December~~March 31, September 30, ~~2000~~2001 2000 ----~~--------~~ ----~~---------~~ (Unaudited) Current assets: Cash and cash equivalents $ ~~313~~278,~~587~~027 $ 265,408 Marketable securities 1812,~~221,947~~158 1,263,633 Accounts receivable, net of allowance for doubtful accounts of $124,227 at March 31, 2001 and $149,260 at September 30, ~~respectively~~2000 89,~~217~~766,~~297~~789 9,069,459 Employee receivables and advances 2420,~~756~~896 21,818 Costs and estimated earnings in excess of billings on uncompleted contracts 54,~~841~~718,~~498~~697 8,079,427 Inventories 6,~~716~~826,~~769~~041 6,711,043 Prepaid expenses ~~303~~277,~~380~~550 292,258 Deferred income taxes 1,012,325 1,014,115 Income taxes receivable 916,424 -- --------- -- ---------- Total current assets 2324,~~653~~628,~~349~~90 26,717,161 ----------- ----------- Property, plant and equipment, net 79,~~869~~294,~~354~~497 7,466,821 Goodwill and intangible assets, net 3130,~~023~~088,~~804~~534 31,942,502 Other assets ~~288~~515,~~844~~363 330,315 Deferred income taxes 1,065,422 1,063,632 ----------- ----------- Total assets $6365,~~898~~592,~~983~~723 $67,520,431 =========== ===========

See accompanying notes to condensed consolidated financial statements Page 2 Liabilities and Stockholders' Equity

~~December~~March 31, September 30, ~~2000~~2001 2000 ----~~--------~~ ----~~---------~~ (Unaudited) Current liabilities: Notes payable $ ~~791~~832,~~337~~450 $ 750,774 Current ~~installments~~maturities of long-term obligations ~~997~~993,~~640~~465 1,001,630 Current ~~installments~~maturities of capital lease obligations 284,~~853~~462 48,517 Accounts payable 2,~~528~~704,~~652~~298 5,735,830 Billings in excess of costs and estimated earnings on uncompleted contracts 1742,~~134,372~~532 718,059 Provision for future losses on uncompleted contracts ~~110~~464,~~711~~550 657,909 Income taxes payable ~~639~~(916,~~317~~424) 749,131 Accrued commissions 204,149 306,033 Accrued expenses 21,~~146~~527,~~125~~060 2,~~486~~180,~~470~~437 Accrued incentive compensation ~~211~~233,~~048~~957 734,221 Deferred revenue 5988,~~927~~726 76,540 ----------- ----------- Total current liabilities 87,~~647~~795,~~982~~649 12,959,081 ----------- ----------- Long-term obligations, net of current ~~installments~~maturities 2124,~~156~~628,~~015~~993 20,919,779 Capital lease obligations, net of current maturities 2,123 2,066 Deferred compensation 1924,~~306,238~~605 1,315,342 ----------- ----------- Total liabilities 3133,~~110~~351,~~235~~370 35,196,268 ----------- ----------- Stockholders' equity: Preferred stock -- -- Common stock 268,~~095~~557 266,453 Additional paid-in capital 22,~~311~~341,~~607~~545 22,161,694 Retained earnings 1211,~~397~~819,~~072~~277 11,952,014 ----------- ----------- 34,~~976~~429,~~774~~379 34,~~830~~380,161 Less treasury stock ~~at cost~~, 772,661 shares at March 31, 2001 and 724,651 shares at September 30, ~~respectively~~2000 (2,188,026) (2,055,998) ----------- ----------- Total stockholders' equity 32,~~788~~241,~~748~~353 32,324,163 ----------- ----------- Commitments and contingencies Total liabilities and stockholders' equity $6365,~~898~~592,~~983~~723 $67,520,431 =========== ===========

Page 3 PARAVANT INC. AND SUBSIDIARIES Condensed Consolidated Statements of Operations For the three months ended March 31, 2001 and 2000

2001 2000 ~~1999~~ ---- ---- (Unaudited) Revenues $1211,~~620~~293,~~319~~216 $ 7,~~705~~894,~~029~~805 ----------- ----------- Cost of revenues 7,~~100~~384,~~649~~622 34,~~691~~472,~~564~~090 Sales and marketing ~~627~~739,~~195~~393 ~~504~~492,~~228~~388 Research, development &and engineering 1874,~~040,254~~396 ~~616~~469,~~459~~540 General and administrative 1,~~481~~893,~~466~~418 1,~~170~~341,~~761~~910 Amortization of goodwill and intangible assets ~~949~~950,~~618~~051 ~~494~~508,~~981~~181 Non-recurring expense -- 685,813 -------- --- ---------- Total costs and expenses 11,~~199~~841,~~182~~880 67,~~477~~969,~~993~~922 ----------- ---------- ~~Income~~Loss from operations 1(548,~~421,137~~664) 1(75,~~227,036~~117) Other income (expense): Investment ~~income~~ (expense) income (~~192~~164,~~147~~610) 13232,~~104~~859 Interest expense (~~422~~523,~~430~~705) (4746,~~427~~464) Miscellaneous 2,~~635~~363 62,~~368~~752 ----------- ---------- Income (loss) before income taxes ~~809,195~~ (1,~~199~~234,~~081~~616) 114,030 Income tax expense ~~364~~(benefit) (657,~~138~~105) ~~573~~54,~~161~~506 ----------- ---------- Net income (loss) $ ~~445~~(577,~~057~~511) ~~$ 625~~59,~~920~~524 =========== ========== Basic earnings (loss) per share $ (.03) $ .0400 =========== ========== Diluted earnings (loss) per share $ (.03) $ .0300 =========== ========== Weighted average number of shares: Basic 17,~~073~~122,~~921~~305 17,~~547~~506,~~610~~124 =========== =========== Diluted 17,~~388~~122,~~785~~305 1718,~~989~~087,~~580~~544 =========== ===========

See accompanying notes to condensed consolidated financial statements. Page 4 PARAVANT INC. AND SUBSIDIARIES Condensed Consolidated Statements of Operations For the six months ended March 31, 2001 and 2000

2001 2000 ~~1999~~ ---- ---- (Unaudited) ~~Net~~Revenues ~~cash provided by operating activities:~~ $ ~~766~~23,~~734~~913,535 $415,~~430~~599,~~578~~835 ----------- ---------- ~~Cash~~Cost ~~flows~~of ~~from~~revenues ~~investing~~14,485,272 ~~activities:~~8,163,655 ~~Purchases~~Sales ofand ~~marketable~~marketing ~~securities~~1,366,316 ~~(158~~996,~~743)~~615 ~~(116~~Research,~~104)~~ ~~Acquisitions~~development ofand ~~property~~engineering 1,914,650 ~~plant~~1,085,999 General and ~~equipment~~administrative ~~(799~~3,~~500)~~374,884 ~~(72~~2,~~739)~~499,471 ~~Acquisition~~Amortization ~~costs~~of ~~(30~~goodwill and intangible assets 1,~~920)~~899,668 1,016,363 Non-recurring expense -- 685,813 ----------- ---------- ~~Net~~Total ~~cash~~costs ~~used~~and byexpenses ~~investing activities (989~~23,~~163)~~040,790 ~~(188~~14,~~843)~~447,916 ----------- ---------- ~~Cash~~Income ~~flows~~ from ~~financing~~operations ~~activities: Proceeds from note payable 40~~872,~~564~~745 ~~-- Proceeds from long-term obligations 478~~1,~~496~~151,919 --Other ~~Repayments~~income on(expense): ~~long-term~~Investment ~~obligations~~ (~~246,250~~expense) income (~~246~~356,~~250~~757) ~~Repayments~~245,963 onInterest ~~capital~~expense ~~lease obligations~~ (21946,~~730~~135) (2393,~~078~~891) ~~Proceeds~~Miscellaneous ~~from exercise of common stock options 19~~4,~~528~~998 209,~~833~~120 ~~Payments for purchase of treasury stock~~ -- ~~(150,951)~~ ---------- ---------- ~~Net~~Income ~~cash provided~~ (~~used~~loss) bybefore ~~financing~~income ~~activities~~taxes ~~270,608~~ (~~399~~425,~~446~~149) ~~---------- ---------- Net increase in cash and cash equivalents 48~~1,~~179 3~~313,~~842,289~~111 ~~Cash~~Income ~~and~~tax ~~cash~~expense ~~equivalents~~(benefit) ~~at beginning of the period 265~~(292,~~408~~844) ~~949~~627,~~414~~667 ----------- ---------- ~~Cash~~Net ~~and~~income ~~cash~~(loss) ~~equivalents at end of the period~~ $ ~~313~~(132,~~587~~305) $4685,~~791,703~~444 =========== ========== ~~Supplemental~~Basic ~~disclosures~~earnings ofper ~~cash~~share ~~flow information: Cash paid during the period for: Interest~~ $ ~~473,952~~(.01) $.04 ~~52,903~~ =========== ========== ~~Income~~Diluted ~~taxes~~earnings $per ~~429,277~~share $ --(.01) .04 =========== ========== ~~Supplemental~~Weighted ~~disclosure~~average number of ~~noncash investing and financing activities~~shares: ~~The~~Basic ~~Company~~17,097,847 ~~issued~~17,539,163 ~~stock~~=========== ~~through~~========== aDiluted ~~cashless exercise of stock options and received treasury stock $ 132~~17,~~028~~097,847 ~~$ 4~~18,~~583~~043,873 =========== ==========

See accompanying notes to condensed consolidated financial statements. Page 5 PARAVANT INC. AND SUBSIDIARIES Condensed Consolidated Statements of Cash Flows For the six months ended March 31, 2001 and 2000

~~December~~2001 312000 ---- ---- (Unaudited) Net cash provided by operating activities: (1,276,156) ~~December~~3,793,038 31Cash flows from investing activities: Purchases (sales) of marketable securities 68,762 ~~2000~~(384,470) ~~1999~~Acquisitions of property, plant and equipment (2,522,942) (1,366,335) Proceeds from sale of property, plant and equipment -- 2,900 Acquisition costs (45,700) -- ------------ ~~Basic~~------------ Net cash used in investing activities (2,499,880) (1,747,905) ------------ ------------ Cash flows from financing activities: ~~Weighted~~Proceeds ~~average~~from ~~number~~note ofpayable ~~common~~81,676 ~~shares~~-- ~~outstanding~~Proceeds from long-term obligations 17,~~073~~490,~~921~~092 17956,~~547~~418 Repayments on long-term obligations (13,~~610~~780,878) ~~==========~~(517,516) ~~==========~~Repayments ~~Diluted:~~on ~~Weighted~~capital ~~average~~lease ~~number~~obligations (52,163) (45,070) Proceeds from exercise of common ~~shares~~stock ~~outstanding~~options 1749,~~073~~928 50,~~921~~314 17Payments for purchase of treasury stock -- (279,~~547~~832) ------------ ------------ Net cash provided by financing activities 3,~~610~~788,655 ~~Dilutive~~164,313 ~~stock~~------------ ~~options~~------------ ~~300~~Net increase in cash and cash equivalents 12,~~175~~619 ~~422~~2,~~458~~209,446 ~~Dilutive~~Cash ~~warrants~~and 14cash equivalents at beginning of the period 265,~~689~~408 19949,~~512~~414 ------------ ------------ 17Cash and cash equivalents at end of the period $ 278,~~388~~027 3,~~785~~158,860 17============ ============ Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 896,~~989~~180 106,~~580~~000 ============ ============ Income taxes $ 1,372,711 1,422,000 ============ ============ Supplemental disclosure of noncash investing and financing activities: The Company issued stock through a cashless exercise of stock options and received treasury stock $ 132,028 4,583 ============ ============ See accompanying notes to condensed consolidated financial statements

Page 6 PARAVANT INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements March 31, 2001 and 2000 (1) Description of Business and Summary of Significant Accounting Policies (a) Basis of Presentation The accompanying unaudited condensed consolidated financial statements of Paravant Inc. and Subsidiaries (the "Company") have been prepared in accordance with the instructions and requirements of Form 10-Q and Regulation S-X and, therefore, do not include all information and footnotes necessary for a fair presentation of financial position, results of operations and cash flows in conformity with generally accepted accounting principles. In the opinion of management, such financial statements reflect all adjustments (consisting of normal recurring accruals) considered necessary for a fair statement of financial position, results of operations and cash flows for the interim periods presented. Operating results for the interim periods are not necessarily indicative of the results that may be expected for the full fiscal years. These condensed consolidated financial statements and footnotes should be read in conjunction with the Company's audited financial statements for the fiscal year ended September 30, 2000 included in the Company's Annual Report on Form 10-KSB as filed with the Securities and Exchange Commission. The accounting principles used in preparing these condensed consolidated financial statements are the same as those described in such statements, or as discussed below. (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:

~~December~~Three ~~31,~~Months ~~September~~Ended ~~30,~~March ~~2000~~31 2001 2000 ---- ---- ~~Costs~~Basic: ~~incurred~~Weighted onaverage ~~uncompleted~~number ~~contracts~~of $common 19shares outstanding 17,~~537~~122,~~786~~305 $ 17,~~075~~506,~~232~~124 ~~Estimated~~=========== ~~earnings~~=========== ~~thereon~~Diluted: ~~2,593,264~~Weighted ~~1,522,472~~average ~~------------~~number ~~------------~~of 22common shares outstanding 17,~~131~~122,~~050~~305 1817,~~597~~506,~~704~~124 ~~Billings~~Dilutive tostock ~~date~~options ~~(17,534,635)~~-- ~~(11~~545,~~894,245)~~711 Dilutive warrants -- 35,709 ----------- ------------ ~~$ 4~~17,~~596~~122,~~415~~305 ~~$ 6~~18,~~703~~087,~~459~~544 ============ ============

Page 7 PARAVANT INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements-(Continued) Six Months Ended March 31

~~Inventories~~2001 ~~consist of: December 31, September 30,~~ 2000 ~~2000~~ ---- ----- ~~Raw~~Basic: ~~materials~~Weighted $average 4number of common shares outstanding 17,~~695~~097,~~805~~847 $517,~~070~~539,~~340~~163 ~~Work~~=========== in=========== ~~process~~Diluted: ~~1,272,517~~Weighted ~~741,827~~average ~~Finished~~number ~~goods~~of 1common shares outstanding 17,~~417~~097,~~778~~847 117,~~540~~539,~~707~~163 ~~----------~~Dilutive stock options --~~--------~~ 7477,~~386,100~~505 ~~7,352,874~~Dilutive ~~Provision~~warrants ~~for~~-- ~~obsolete inventories (669~~27,~~331)~~205 ~~(641,831)~~ ------------ ----------- ~~$ 6~~17,~~716~~097,~~769~~847 $618,~~711,~~043,873 =========== ===========

Options and warrants to purchase 2,055,273 and 620,017 shares of common stock were excluded from the calculation of diluted earnings per share for the three months ended March 31, 2001 and 2000, respectively, because their exercise prices exceeded the average market price of common shares for the period. Options and warrants to purchase 1,718,710 and 647,017 shares of common stock were excluded from the calculation of diluted earnings per share for the six months ended March 31, 2001 and 2000, respectively, because their exercise prices exceeded the average market price of common shares for the period. (c) Change in Accounting Estimate During the quarter ended March 31, 2000, the Company made a change in accounting estimate totaling $150,000 ($77,250 after tax) due to a change in the estimated useful life of certain tooling and engineering assets related to the Company's medical products. (d) Reclassification Certain amounts for 2000 have been reclassified to conform to the current year presentation. (e) Derivative Instruments and Hedging Activities In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Certain Hedging Activities." In June 2000, the FASB issued SFAS No. 138 "Accounting for Certain Derivative Instruments and Certain Hedging Activities, An Amendment of SFAS 133." SFAS No. 133 and SFAS No. 138 require that all derivatives instruments be recorded on the balance sheet at their respective fair values. Changes in the fair value of derivative financial instruments are either recognized periodically in income or Stockholder's Equity (as a component of other comprehensive income), depending on whether the derivative is being used to hedge changes in fair value or cash flows. Changes in the fair value of derivative financial instruments not qualifying as SFAS No. 133 hedges are recognized in income. SFAS No. 133 and SFAS No. 138 are effective for all fiscal quarters of all fiscal years beginning after June 30, 2000; the Company adopted SFAS No. 133 and SFAS No. 138 on January 1, 2001. Effective April 1, 2001, the Company entered an interest rate swap agreement which the Company intends to designate as a hedging instrument as it relates to the variability of cash flows associated with the Company's variable rate mortgage note payable. The Company expects to formally document the relationship between the hedging instrument and the hedged item, as well as its risk-management objective and strategy for undertaking this hedge transaction by June 1, 2001. Until such documentation is complete, the Company will recognize any changes in the fair value of the derivative in the results of operations. Upon completion of the required documentation, changes in the fair value of the derivative will be recognized as a component of other comprehensive income, subject to effectiveness testing. Page 8 PARAVANT INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements-(Continued) (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, paid on 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 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. 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. 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. (3) Contracts Contracts in progress and advance billings on such contracts consist of the following:

~~Property,~~March ~~plant and equipment consists of: December~~ 31, September 30, ~~2000~~2001 2000 ---- ---- ~~Land~~Costs $incurred ~~420,330~~on $uncompleted ~~420,330~~contracts ~~Building~~$ 224,~~005~~863,~~889~~859 217,~~005~~075,~~889~~232 ~~Office~~Estimated ~~equipment~~earnings ~~4,293,543~~thereon ~~4,158,694 Factory equipment 1,119,825 1,128,517 Leasehold improvements 320,481 320,481 Vehicles 88,230 88,230 Demonstration pool and custom molds~~ 2,~~646~~563,~~357~~968 ~~2,718,352 Construction in progress~~ 1,~~106~~522,~~659~~472 ~~452,627~~ ------------ ----------- 1227,~~001~~427,~~314~~827 1118,~~293~~597,~~120~~704 ~~Less~~Billings ~~accumulated~~to ~~depreciation~~date 4(23,~~131~~916,~~960~~212) 3(11,~~826~~894,~~299~~245) ------------ ----------- $ 73,~~869~~511,~~354~~615 ~~$ 7~~6,~~466~~703,~~821~~459 ============ ===========

Page 9 PARAVANT INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements-(Continued) The above amount is included in the accompanying condensed consolidated balance sheet under the following captions: Costs and estimated earnings in excess of billings on uncompleted contracts $4,718,697 8,079,427 Billings in excess of costs and estimated earnings on uncompleted contracts (742,532) (718,059) Provision for future losses on uncompleted contracts (464,550) (657,909) ---------- --------- $3,511,615 6,703,459 ========== =========

(4) Inventories Inventories consist of:

~~Goodwill~~March ~~and intangible assets consist of: December~~ 31, September 30, ~~2000~~2001 2000 ---- ---- ~~Goodwill~~Raw materials $304,~~334~~371,~~921~~420 ~~$30~~5,~~304~~070,~~001~~340 ~~Non-compete~~Work ~~agreements~~in 6process 2,~~067~~516,~~250~~290 6741,~~067,250~~827 ~~License~~Finished ~~rights~~goods ~~285~~607,~~000~~662 ~~285~~1,~~000~~540,707 ----------- ----------- 367,~~687~~495,~~171~~372 367,~~656~~352,~~251~~874 ~~Less~~Provision ~~accumulated~~for ~~amortization~~obsolete 5inventory (669,~~663,367~~331) 4(641,~~713,749~~831) ----------- ----------- $316,~~023~~826,~~804~~041 ~~$31~~6,~~942~~711,~~502~~043 =========== ===========

(5) Property, plant, and equipment Property, plant and equipment consists of:

~~Exhibit~~March ~~Description~~31, ofSeptember ~~Exhibit~~30, 2001 2000 ---- ---- Land $ 420,330 420,330 Building 2,005,889 2,005,889 Office equipment 4,744,038 4,158,694 Factory equipment 1,321,876 1,128,517 Leasehold improvements 320,480 320,481 Vehicles 88,230 88,230 Demonstration pool and custom molds 2,655,871 2,718,352 Construction in progress 2,166,826 452,627 ----------- ---------- 13,723,540 11,293,120 Less accumulated depreciation 4,429,043 3,826,299 ----------- 27---------- ~~Financial~~$ ~~Data~~9,294,497 ~~Schedule.~~7,466,821 =========== ==========

Page 10 (6) Goodwill and intangible assets Goodwill and intangible assets consist of:

(7) Segment and Related Information In June 1997, the FASB issued SFAS 131, "Disclosures about segments of an enterprise and related information." The standard requires the 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. Revenues by major product, within the electronics hardware industry are as follows:

Approximately 97% in 2001 and 100% in 2000 of the Company's revenues are 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. Page 11 PART I - FINANCIAL INFORMATION Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Results Of Operations Three Months ended March 31, 2001 vs March 31, 2000 Revenues for the three months ended March 31, 2001 were $11,293,216, an increase of $3,398,411 or 43% from revenues of $7,894,805 for the three months ended March 31, 2000. Revenues from the Company's military products increased by $3,214,909 primarily due to $4,096,368 of revenue recognized under a significant contract. Revenues from the Company's medical products, a market which management has elected to exit, decreased by $498,519. An increase of $682,020 in revenues from the Company's signal intelligence products is attributable to revenues of $2,040,503 from operations that were acquired during the third and fourth quarters of the Company's fiscal year ended September 30, 2000, offset by a decrease in purchases of a significant existing customer. Cost of revenues was $7,384,622 in 2001, or 65% of revenues, compared to $4,472,090 or 57% of revenues in 2000, an increase of $2,912,531. Of this increase, $602,321 is attributable to acquired operations. The increase in cost of sales as a percentage of revenues is a result of 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 $739,393 in 2001 increased by $247,006 or 50% from 2000 expense of $492,388. As a percentage of revenues, sales and marketing expense was approximately 7% in 2001 and 6% in 2000. $188,003 of the increase is attributable to expense from acquired operations. Research, development and engineering expense of $874,396 in 2001 increased by $404,856 or 86% from 2000 expense of $469,540. As a percentage of revenues, research, development and engineering expense was 8% in 2001 and 6% in 2000. The increase in research, development and engineering expense is attributable to $503,138 of expense from acquired operations. General and administrative expense of $1,893,418 in 2001 increased by $551,508 or 41% from 2000 expense of $1,341,910. As a percentage of revenues, general and administrative expense was 17% in both years. The increase in general and administrative expense is attributable to $638,450 of expense from acquired operations, offset by a decrease in deferred compensation expense associated with $182,283 in unrealized losses on trading securities recorded in 2001. Amortization of goodwill and intangible assets was $950,051 in 2001 compared to $508,181 in 2000, an increase of $473,547 or 87%. The increase is attributable to amortization of goodwill and intangible assets that were recorded in the Company's fiscal year ended September 30, 2000 relating to acquired operations as previously discussed. Page 12 Loss from operations was $548,664 in 2001 compared to a loss of $75,117 in 2000, an increase of $539,661. As a percentage of revenues, the loss from operations increased to 5% in 2001 from 1% in 2000. The increased loss from operations as a percentage of revenues resulted primarily from increased cost of revenues, increased general and administrative, and research, development and engineering costs, and amortization of goodwill and intangible assets as discussed above. Investment expense was $164,610 in 2001 compared to investment income of $232,859 in 2000. The change is due primarily to unrealized losses on trading securities recorded of $182,283 in 2001 compared to unrealized gains of $221,297 in 2000. Interest expense was $523,705 in 2001 compared to $46,464 in 2000, an increase of $477,241. This increase is due to an increase in outstanding credit balances for the period ended March 31, 2001. The Company's net loss was $577,511 in 2001 compared to net income of $59,524 in 2000. Net loss as a percentage of revenues was 6% in 2001 compared to net income of 1% of revenues in 2000. The net loss overall resulted from the items discussed above. Six Months ended March 31, 2001 vs March 31, 2000 Revenues for the six months ended March 31, 2001 were $23,913,535, an increase of $8,313,701 or 53% from revenues of $15,599,835 for the six months ended March 31, 2000. Revenues from the Company's military products increased by $7,842,370, primarily due to $10,053,969 of revenue recognized under a significant military contract. Revenues from the Company's medical products, a market which management has elected to exit, decreased by $1,043,750. An increase of $1,515,080 in revenues from the Company's signal intelligence products is attributable to revenues of $4,620,131 from operations that were acquired during the third and fourth quarters of the Company's fiscal year ended September 30, 2000, offset by a decrease in purchases of a significant existing customer. Cost of revenues was $14,485,272 in 2001, or 61% of revenues, compared to $8,163,655 or 52% of revenues in 2000, an increase of $6,321,617. Of this increase, $1,383,807 is attributable to acquired operations. The increase in cost of sales as a percentage of revenues is a result of 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 $1,366,316 in 2001 increased by $369,701 or 37% from 2000 expense of $996,615. As a percentage of revenues, sales and marketing expense was approximately 6% both years. The increase is mainly attributable to $338,408 of expense from acquired operations. Research, development and engineering expense of $1,914,650 in 2001 increased by $828,651 or 76% from 2000 expense of $1,085,999. As a percentage of revenues, research, development and engineering expense was 8% in 2001 and 7% in 2000. The increase in research, development and engineering expense is mainly attributable to $963,430 of expense from acquired operations. General and administrative expense of $3,374,884 in 2001 increased by $875,413 or 35% from 2000 expense of $2,499,471. As a percentage of revenues, general and administrative expense declined to 14% in 2001 from 16% in 2000. The increase in general and administrative expense is attributable to $1,187,906 of expense from acquired operations, offset by a decrease in deferred compensation expense associated with $382,712 in unrealized losses on trading securities recorded in 2001. Page 13 Amortization of goodwill and intangible assets was $1,899,668 in 2001 compared to $1,016,363 in 2000, an increase of $883,305 or 87%. The increase is attributable to amortization of goodwill and intangible assets recorded in the Company's fiscal year ended September 30, 2000 relating to acquired operations as previously discussed. Income from operations was $872,745 in 2001 compared to $1,151,919 in 2000, a decrease of $279,174. As a percentage of revenues, income from operations decreased to 4% in 2001 from 7% in 2000. The reduction in income from operations as a percentage of revenues resulted primarily from increased cost of revenues, increased general and administrative, research, development and engineering costs, and amortization of goodwill and intangible assets as discussed above. Investment expense was $356,757 in 2001 compared to investment income of $245,693 in 2000. The change is due primarily to unrealized losses on trading securities recorded in 2001 of $382,712 compared to unrealized gains of $221,297 in 2000. Interest expense was $946,135 in 2001 compared to $93,891 in 2000, an increase of $852,244. This increase is due to an increase in outstanding credit balances for the period ended March 31, 2001. The Company's net loss was $132,305 in 2001 compared to net income of $685,444 in 2000. Net loss as a percentage of revenues was nil in 2001 compared to net income of 4% of revenues in 2000. The net loss overall resulted primarily from the items discussed above. 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 May 1, 2003, 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 March 31, 2001, there were borrowings of $21,325,371 outstanding under this arrangement with the Bank. In addition, the Company has subordinated notes, payable to each of the previous shareholders of EDL and STL, aggregating $985,000 as of March 31, 2001. These notes bear interest at 8%, are payable in quarterly payments through January 1, 2002. These notes are subordinate to the rights of the Bank. Page 14 During the six months ended March 31, 2001, the Company incurred costs of $1,714,198, including capitalized interest of $27,388, for the 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. The second and final phase of the renovation was completed during the quarter ended March 31, 2001. The acquisition and subsequent renovations were financed by a mortgage note payable to First Union National Bank . The mortgage note provides up to $3,560,000 at an interest rate of LIBOR + 1.65% per annum. Effective April 1, 2001, the Company entered into an interest rate swap agreement to convert the interest rate to afixed 7.85% per annum. At March 31, 2001, there were borrowings of $3,270,133 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 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. The Company's operating cash flow was $(1,276,156) in 2001 compared to $3,408,568 in 2000. This resulted primarily from reductions in accounts payable, accrued incentive compensation, income taxes payable and accrued expenses, coupled with increased accounts receivable, inventories, partially offset by a reduction in contracts in progress. As of March 31, 2001, management believes inventory balances are not in excess of requirements for deliveries and normal minimum stocking levels. Page 15 Generally, accounts receivable at the end of each quarter are collected within the following quarter. The Company's total outstanding accounts receivable balance was $9,891,016 at March 31, 2001. The Company has provided an allowance for certain older balances of $124,227. This allowance is believed to be sufficient to address any uncollectible balances outstanding as of March 31, 2001. On June 3, 1998, the Company entered into a loan agreement with an officer and director of the Company. The note receivable of $215,685 bears interest at the rate of interest then applicable for borrowings by the Company under the Company's then-existing line of credit or other primary lending arrangement with its primary lender, with interest payable annually, and matures on June 3, 2003. As of March 31, 2001 and 2000, the Company's backlog was approximately $30.2 million and $17.4 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 33 months. Page 16 Although the backlog as of March 31, 2001 shows an increase over the backlog as of March 31, 2000, the prior year backlog does not include any purchase orders for the two subsidiaries acquired in the fiscal year ended September 30, 2000. 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 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, 2001. No repurchases were made during the six months ended March 31, 2001. Since the inception of the program, the Company has 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. 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. Derivative Instruments and Hedging Activities In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Certain Hedging Activities." In June 2000, the FASB issued SFAS No. 138 "Accounting for Certain Derivative Instruments and Certain Hedging Activities, An Amendment of SFAS 133." SFAS No. 133 and SFAS no. 138 require that all derivatives instruments be recorded on the balance sheet at their respective fair values. Changes in the fair value of derivative financial instruments are either recognized periodically in income or Stockholder's Equity (as a component of other comprehensive income), depending on whether the derivative is being used to hedge changes in fair value or cash flows. Changes in the fair value of derivative financial instruments not qualifying as SFAS No. 133 hedges are recognized in income. SFAS No. 133 and SFAS No. 138 are effective for all fiscal quarters of all fiscal years beginning after June 30, 2000; the Company adopted SFAS No. 133 and SFAS No. 138 on January 1, 2001. Effective April 1, 2001, the Company entered an interest rate swap agreement which the Company intends to designate as a hedging instrument as it relates to the variability of cash flows associated with the Company's variable rate mortgage note payable. The Company expects to formally document the relationship between the hedging instrument and the hedged item, as well as its risk-management objective and strategy for undertaking this hedge transaction by June 1, 2001. Until such documentation is complete, the Company will recognize any changes in the fair value of the derivative in the results of operations. Upon completion of the required documentation, changes in the fair value of the derivative will be recognized as a component of other comprehensive income, subject to effectiveness testing. Page 17 Item 3. Quantitative and Qualitative Disclosures about Market Risk The company held no derivative securities as of March 31, 2001. Effective April 1, 2001, the Company entered an interest rate swap agreement to convert LIBOR +1.65% interest payment to 7.85% fixed interest payment related to its $3,560,000 mortgage note payable. The Company intends to designate the interest rate swap as a hedging instrument related to the variability of cash flows associated with the Company's variable rate mortgage note payable. The Company expects to formally document the relationship between the hedging instrument and the hedged item, as well as its risk-management objective and strategy for undertaking this hedge transaction by June 1, 2001. The Company's exposure to market risk relates to changes in interest rates and their potential impact on its variable rate debt instruments. Due to the short-term maturity of such instruments, the Company does not expect exposure to market risk to have a material impact on its results of operations, financial position, or liquidity. 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 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. Page 18 Part II - OTHER INFORMATION Item 4.Submission of Matters to a Vote of Security Holders. The Annual Meeting of the Shareholders of the Company (the "Annual Meeting") was held on March 22, 2001. At the Annual Meeting, the shareholders of the Company voted upon the election of eight directors, and all eight nominees were elected, with the votes being cast as follows:

No other director's term of office continued after the Annual Meeting. In addition, the shareholders voted to approve the Paravant Inc. Employee Stock Purchase Plan and the Paravant Inc. Stock Incentive Plan. With respect to the Paravant Inc. Employee Stock Purchase Plan, 7,643,861 votes were cast for approval, 1,165,609 votes were cast against approval, and 954,623 shares abstained from voting. With respect to the Paravant Inc. Stock Incentive Plan, 6,519,976 votes were cast for approval, 2,318,044 votes were cast against approval, and 926,073 shares abstained from voting. These items were the only matters voted upon at the Annual Meeting. 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: 10.60 Paravant Inc. Stock Plan Incentive Plan. 10.61 Paravant Inc. Employee Stock Purchase Plan 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). Page 19 (b) Reports on Form 8-K: The Registrant filed no reports on Form 8-K during the quarter ended March 31, 2001. 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: May 15, 2001 Page 20

Filing Compare · DRS Tactical Systems Global Services, Inc.