FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 29, 1995
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File No. 0-14059
REFLECTONE, INC.
(Exact name of Registrant as specified in its charter)
Florida 06-0663546
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
4908 Tampa West Boulevard, Tampa, Florida 33634-2481
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (813) 885-7481
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve 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 at least the past ninety days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Common Stock, par value $.10 per share, 2,714,616 shares as of October 23,
1995.
Page 1 of 19 Pages
Exhibits - None
PAGE
<PAGE>
<TABLE>
Part I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Reflectone, Inc. & Subsidiaries
Consolidated Balance Sheets
As of September 29, 1995 and December 31, 1994
<CAPTION>
(Unaudited)
September 29, December 31,
ASSETS 1995 1994
<S> <C> <C>
Current assets
Cash and cash equivalents $ 2,413,977 $ 7,329,914
Receivables - non affiliate 20,817,973 20,615,154
Receivables - affiliate 7,981,160 2,980,625
Current installments of long-term
note receivable 1,589,724 1,249,128
Inventory - 4,268,842
Prepaid expenses and other current assets 1,732,876 1,506,955
____________ ____________
Total current assets 34,535,710 37,950,618
Property, plant & equipment, net 16,193,400 17,427,870
Long-term note receivable 2,036,353 2,843,925
Investments - restricted 5,000,000 5,000,000
Other assets 465,830 571,972
____________ ____________
$ 58,231,293 $ 63,794,385
============ ============
</TABLE>
<PAGE>
<TABLE>
Reflectone, Inc. & Subsidiaries
Consolidated Balance Sheets
As of September 29, 1995 and December 31, 1994
<CAPTION>
(Unaudited)
September 29, December 31,
LIABILITIES & SHAREHOLDERS' EQUITY 1995 1994
<S> <C> <C>
Current liabilities
Accounts payable $ 5,429,519 $ 6,984,756
Due to affiliate 1,501,918 2,786,075
Borrowings on bank line of credit 10,000,000 10,000,000
Borrowings on line of credit - affiliate 15,776,435 22,674,197
Advance billings 5,113,755 1,796,539
Accrued employee compensation and benefits 3,290,149 3,045,187
Federal and state income taxes payable 332,151 469,081
Accrued settlement expenses 1,068,415 1,068,415
Other accrued expenses and liabilities 1,032,265 2,491,834
____________ ____________
Total current liabilities 43,544,607 51,316,084
Deferred gain on sale of equipment 2,520,444 2,916,138
Commitments and contingencies (Note 2)
Shareholders' equity
Convertible preferred stock - par value $1.00;
authorized - 50,000 shares; issued and
outstanding - 50,000 shares of 8% cumulative
convertible preferred stock (liquidating
preference $176 per share, aggregating
$8,800,000) 50,000 50,000
Common stock - par value $.10; authorized -
10,000,000 shares; issued and outstanding -
2,714,616 and 2,681,333 shares 271,462 268,133
Additional paid-in capital 31,311,666 31,155,317
Cumulative translation adjustment 686,960 751,493
Accumulated deficit (20,153,846) (22,662,780)
____________ ____________
Total shareholders' equity 12,166,242 9,562,163
____________ ____________
$ 58,231,293 $ 63,794,385
============ ============
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
PAGE
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<TABLE>
Reflectone, Inc. & Subsidiaries
Consolidated Statements of Income
For the Nine and Three Months Ended September 29, 1995 and September 30, 1994
(Unaudited)
<CAPTION>
Nine Months Three Months
1995 1994 1995 1994
<S> <C> <C> <C> <C>
Revenues
Non-affiliate $48,604,361 $44,659,617 $15,255,363 $14,412,376
Affiliate 14,422,630 3,808,521 10,065,092 1,060,648
___________ ___________ ___________ ___________
63,026,991 48,468,138 25,320,455 15,473,024
Costs and expenses
Cost of sales
Non-affiliate 44,525,470 42,927,089 14,608,091 14,908,357
Affiliate 11,146,979 2,966,469 7,744,398 387,226
___________ ___________ ___________ ___________
55,672,449 45,893,558 22,352,489 15,295,583
General and administrative 2,484,817 4,006,929 574,373 1,916,522
___________ ___________ ___________ ___________
58,157,266 49,900,487 22,926,862 17,212,105
___________ ___________ ___________ ___________
Income (loss) from
operations 4,869,725 (1,432,349) 2,393,593 (1,739,081)
Other income (expense)
Interest income 600,330 143,913 220,220 86,486
Interest expense (1,847,779) (760,078) (783,768) (342,483)
Foreign currency
transaction gain (loss) (146,934) 25,357 (2,789) (961)
Other 167,589 67,215 8,890 16,745
___________ ___________ ___________ ___________
(1,226,794) (523,593) (557,447) (240,213)
___________ ___________ ___________ ___________
Income (loss) before
income taxes 3,642,931 (1,955,942) 1,836,146 (1,979,294)
Provision for income taxes 606,000 - 356,000 -
___________ ___________ ___________ ___________
Net income (loss) 3,036,931 (1,955,942) 1,480,146 (1,979,294)
Preferred stock dividends 528,000 352,000 176,000 -
___________ ___________ ___________ ___________
Net income (loss) applicable
to common shareholders $ 2,508,931 $(2,307,942) $ 1,304,146 $(1,979,294)
=========== =========== =========== ===========
Income (loss) per common and
common equivalent share
Primary $ .89 $ (.83) $ .45 $ (.71)
Fully diluted $ .43
=========== =========== =========== ===========
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
PAGE
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<TABLE>
Reflectone, Inc. & Subsidiaries
Consolidated Statements of Cash Flows
Nine Months ended September 29, 1995 and September 30, 1994
(Unaudited)
<CAPTION>
1995 1994
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 3,036,931 $ (1,955,942)
Depreciation and amortization 1,709,005 1,425,307
Change in assets and liabilities:
Increase in receivables
Non-affiliate (185,394) (2,818,851)
Affiliate (4,998,366) (623,651)
Decrease in inventory 4,267,295 554,813
Decrease in accounts payable (1,560,776) (733,494)
Decrease in due to affiliate (1,293,039) (1,514,867)
Increase (decrease)in advance billings 3,312,379 (1,723,817)
Increase decrease in accrued employee
compensation and benefits 238,521 (491,225)
Other (2,179,042) 47,043
_____________ ____________
Net cash provided by (used for)
operating activities 2,347,514 (7,834,684)
_____________ ____________
Cash flows from investing activities:
Capital expenditures (490,917) (5,083,333)
Other 485,876 764,816
_____________ ____________
Net cash used for investing activities (5,041) (4,318,517)
Cash flows from financing activities:
Paydowns under line-of-credit agreements (131,700,531) (125,096,512)
Borrowings under line-of-credit agreements 124,802,769 137,024,232
Dividends on preferred stock (528,000) (352,000)
Other 159,678 14,639
_____________ ____________
Net cash provided by (used for)
financing activities (7,266,084) 11,590,359
_____________ ____________
Net decrease in cash (4,923,611) (562,842)
Cash and cash equivalents at beginning of period 7,329,914 2,160,241
Effect of exchange rate changes on cash 7,674 2,315
_____________ ____________
Cash and cash equivalents at end of period $ 2,413,977 $ 1,599,714
============= ============
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
PAGE
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Reflectone, Inc. & Subsidiaries
Notes to Consolidated Financial Statements
Nine Months ended September 29, 1995
(Unaudited)
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q.
Accordingly, they do not include all of the information and notes required by
generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the nine months ended September 29, 1995 are not
necessarily indicative of the results that may be expected for the year
ending December 31, 1995. For further information, refer to the consolidated
financial statements and notes thereto included in the Company's Annual
Report on Form 10-K for the year ended December 31, 1994.
All intercompany transactions have been eliminated.
PAGE
<PAGE>
Reflectone, Inc. & Subsidiaries
Notes to Consolidated Financial Statements
Nine Months ended September 29, 1995
(Unaudited)
Note 1 - Receivables
<TABLE>
Component elements of receivables consist of the following:
<CAPTION>
Receivables September 29, December 31,
1995 1994
<S> <C> <C>
U.S. Government
Billed $ 7,676,843 $ 7,071,251
Unbilled 602,491 1,850,825
Unrecovered costs subject to future
negotiation -- not billed 3,000,000 3,000,000
____________ ____________
11,279,334 11,922,076
____________ ____________
Commercial
Billed 2,005,739 7,846,807
Unbilled - 928,851
____________ ____________
2,005,739 8,775,658
Lockheed Aeronautical Systems Company
Billed 284,940 -
Unbilled 7,531,261 -
____________ ____________
7,816,201 -
____________ ____________
Allowance for doubtful accounts (283,301) (82,580)
____________ ____________
$ 20,817,973 $ 20,615,154
============ ============
Affiliate
Billed $ 7,981,160 $ 630,927
Unbilled - 2,349,698
____________ ____________
$ 7,981,160 $ 2,980,625
============ ============
</TABLE>
U.S. Government receivables include amounts from contracts on which the
Company performs on a prime contractor or subcontractor basis.
PAGE
<PAGE>
Reflectone, Inc. & Subsidiaries
Notes to Consolidated Financial Statements
Nine Months ended September 29, 1995
(Unaudited)
Note 1 - Receivables (continued)
Unbilled amounts represent the difference between revenue recognized for
financial reporting purposes and amounts contractually permitted to be billed
to customers. These amounts will be billed in subsequent periods as progress
billings, upon shipment of the product, or upon completion of the contract.
Revisions in estimated program costs at completion are reflected in the
period during which facts and circumstances necessitating such a change first
become known.
Unrecovered costs subject to future negotiation include incremental costs
arising out of customer-occasioned unforeseen development work and amounts
for work performed not specified in express contract provisions. Management
has made provision for future costs associated with these actions.
(See Note 2)
Under the terms of the Company's contract with Lockheed Aeronautical Systems
Company ("LASC") to design and manufacture two C-130J dynamic mission
simulators and other related training devices, the Company will not receive
payments from LASC until delivery and acceptance of the devices currently
scheduled for the fourth quarter of 1997.
It is anticipated that approximately $10.5 million of receivables will not be
collected within one year.
Note 2 - Commitments and Contingencies
The Company has asserted its rights to recovery of certain incremental costs
arising out of customer-occasioned unforeseen development work and amounts
for work performed not specified in express contract provisions. (See Note 1)
Management has made provision for future costs associated with these actions
and believes the provision established is adequate for this purpose.
Note 3 - Earnings Per Common Share
Primary earnings per share are based on the weighted average number of common
shares and common share equivalents outstanding and give effect to the
recognition of preferred dividend requirements. Common share equivalents
include dilutive stock options and warrants using the treasury stock method.
Fully diluted earnings per share assumes, in addition to the above, i) that
the Convertible Preferred Stock was converted at the beginning of each period
ii) that earnings were increased for preferred dividends that would not have
been incurred had conversion taken place, and, iii) the additional dilutive
effect of stock options and warrants.
PAGE
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Reflectone, Inc. & Subsidiaries
Notes to Consolidated Financial Statements
Nine Months ended September 29,, 1995
(Unaudited)
Note 3 - Earnings Per Common Share (continued)
<TABLE>
The numbers of shares used in the earnings per share computation are as
follows:
<CAPTION>
Nine Months Three Months
1995 1994 1995 1994
<S> <C> <C> <C> <C>
Primary
Weighted average common
shares outstanding 2,689,174 2,675,706 2,699,351 2,678,473
Stock options and warrants 132,847 102,386 169,665 93,546
_________ _________ _________ _________
Average common shares
outstanding 2,822,021 2,778,092 2,869,016 2,772,019
Convertible preferred stock 500,000 500,000 500,000 500,000
Additional dilutive effect
of stock options and warrants 19,051 - 41,544 -
_________ _________ _________ _________
Fully diluted assumed
common shares outstanding 3,341,072 3,278,092 3,410,560 3,272,019
========= ========= ========= =========
</TABLE>
Fully diluted per share data is not disclosed for the nine months ended
September 29, 1995 and September 30, 1994 and for the three month period
ended September 30, 1994 since the effect would be antidilutive.
Note 4 - Investing Activities Not Affecting Cash
In June 1994, the Company accepted a promissory note receivable of
approximately $4,352,000 resulting from the sale of a Boeing 737 flight
simulator to Pan Am International Flight Academy, Inc. The note bears simple
interest at a rate of six and one-half percent (6-1/2%) payable in six semi-
annual payments of graduating amounts beginning December 15, 1994. At
September 29, 1995, total assets include a note receivable of approximately
$3,626,000 of which approximately $1,590,000 is classified as a current
asset. The Company retains a security interest in the simulator until all
payments under the agreement have been received. Annual future anticipated
payments are as follows:
1995 $ 900,000
1996 1,968,000
1997 1,068,000
Less unearned interest income (310,000)
__________
$3,626,000
==========
PAGE
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Reflectone, Inc. & Subsidiaries
Notes to Consolidated Financial Statements
Nine Months ended September 29, 1995
(Unaudited)
Note 5 - Stock Options
In February 1995, the Company granted options under the 1994 Stock Option
Plan to purchase an aggregate of 56,000 shares of the Company's common stock
at $9.75 per share. At June 30, 1995 none of these options were exercisable,
and there were 104,000 shares of common stock available for future stock
options under this plan.
Note 6 - Credit Agreements and Borrowings
To date the Company has been unable to obtain adequate financing on
acceptable terms without recourse to British Aerospace, Plc. or its
affiliates (collectively, "British Aerospace"). However, pursuant to the
terms of an Agreement for Credit Availability dated as of August 7, 1995,
British Aerospace has agreed, subject to its continued ownership of a
majority of the Company, to continue to provide or guarantee the Company's
current credit facilities at their current levels through July 21, 1996.
Renewal of the Company's credit facilities beyond July 21, 1996 is, in large
part, dependent upon British Aerospace's willingness to continue to provide
or guarantee these facilities. By means of a letter dated January 30, 1995,
British Aerospace has represented to the Company that it intends to continue
to provide or guarantee the Company's credit facilities, as long as financing
is not available to the Company without recourse to British Aerospace and
British Aerospace continues to hold a majority ownership position in the
Company. Based on the foregoing representations of British Aerospace,
management anticipates that the Company's current credit facilities will be
renewed annually.
The Company's credit facilities and the Agreement for Credit Availability
with British Aerospace contain certain covenants which, among other things,
require: i) the Company to be current with respect to the payment of
dividends on its 8% Cumulative Convertible Preferred Stock prior to any draw
under the British Aerospace provided facilities, ii) the Company to pay
British Aerospace a facility fee of 50 basis points per annum on the maximum
aggregate availability ($90.0 million) of the credit facilities provided or
guaranteed by British Aerospace, and iii) the Company to pay British
Aerospace a guarantee fee of 3.25% per annum on amounts outstanding under the
Company's $10.0 million revolving line of credit facility with Wachovia Bank
of Georgia, N.A. In addition, the Company's current Agreement for Credit
Availability required that the Company issue to British Aerospace warrants to
purchase 78,261 shares of the Company's common stock at any time prior to
August 7, 2005, at an exercise price equal to the lesser of i) $11.50 per
share (the price of the common stock of the Nasdaq National Market on August
7, 1995, the date of the execution of the Agreement for Credit Availability),
or ii) the per share market price of the company's common stock on the
date(s) of the exercise of the warrants. In addition, the Company's Agreement
PAGE
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Reflectone, Inc. & Subsidiaries
Notes to Consolidated Financial Statements
Nine Months ended September 29, 1995
(Unaudited)
Note 6 - Credit Agreements and Borrowings (continued)
for Credit Availability requires that the Company obtain the prior approval
by British Aerospace for all material capital investment expenditures as
defined in the Agreement for Credit Availability.
During the second quarter of 1995, the Company renegotiated its $10.0 million
revolving line of credit facility with Wachovia Bank of Georgia, N.A. The
Wachovia facility permits the Company to select loans bearing interest at a
floating prime rate or at a fixed rate of LIBOR plus .25% and to specify,
within limits, the period during which the selected fixed interest rate will
be in effect. At September 29, 1995, the interest rate on borrowings under
the Wachovia facility was 6.17%. The agreement matures on June 28, 1996, and
is supported by the corporate guarantee of British Aerospace. At September
29, 1995, the full amount of this line was outstanding and therefore no
additional credit was available under this arrangement.
Subsequent to the quarter end, the Company renewed the Lloyds facility
through October 31, 1996. Under the Lloyds letter of credit facility, the
Company may issue irrevocable standby letters of credit and bank guarantees
aggregating up to $20.0 million. The Company pays a non-refundable commission
on the stated amount of credits issued for the actual number of days
outstanding at 0.55% per annum. The agreement is supported by the corporate
guarantee of British Aerospace. At September 29, 1995, there were
approximately $14.9 million of credit available under this agreement.
During the third quarter, the Company renegotiated its revolving line of
credit facility provided directly by British Aerospace. This facility
provides for working capital borrowings aggregating up to $20.0 million. An
interest rate of LIBOR plus 3.50% per annum is charged under this facility.
The agreement matures on July 21, 1996 and permits the Company to specify,
within limits, the period during which the borrowings will mature. At
September 29, 1995, the interest rate on these borrowings was 9.375% and
there were approximately $10.0 million of additional credit available.
PAGE
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Reflectone, Inc. & Subsidiaries
Notes to Consolidated Financial Statements
Nine Months ended September 29,, 1995
(Unaudited)
Note 6 - Credit Agreements and Borrowings (continued)
As discussed in Note 1, the Company will not receive payments from LASC under
the terms of the C-130J contract until the fourth quarter of 1997.
Accordingly, during the third quarter, the Company negotiated a second credit
facility (the "C-130J Facility") with British Aerospace to finance the
Company's working capital needs with respect to the C-130J contract with
LASC. The financing facility currently provides for borrowings aggregating up
to $40.0 million and matures on July 21, 1996. Draws under this facility are
limited to actual costs incurred by the Company and Reflectone UK Limited
("RUKL") on the LASC C-130J program. Interest rates charged under the C-130J
facility are at LIBOR plus 1.50%. By means of a letter dated May 11, 1995,
British Aerospace has further represented that as long as British Aerospace
continues to hold a majority ownership position in the Company, it intends to
continue to provide annual financing for the C-130J program until payment is
received from LASC. At September 29, 1995, the interest rate on these
borrowings was 7.375% and there were approximately $34.1 million of
additional credit available.
Note 7 - Financial Instruments with Off-Balance-Sheet Risk
The Company may experience transaction and translation gains and losses from
currency fluctuations related to its international operations. In order to
minimize foreign exchange risk, the Company selectively hedges certain of its
foreign exchange exposures principally relating to foreign currency accounts
payable and accounts receivable. As of September 29, 1995, the aggregate of
hedged assets and liabilities was less than 5.0% of the Company's total
assets, and gains (losses) from the Company's hedging activities approximated
$(147,000) and $25,000 for the nine months ended September 29, 1995 and 1994,
respectively. The Company's hedging strategy is facilitated by its ability to
borrow in foreign currencies under the revolving credit facility and the
C-130J credit facility provided by British Aerospace. This strategy has
reduced the Company's vulnerability to certain of its foreign currency
exposures, and the Company expects to continue this practice in the future to
the extent appropriate.
The Company has entered into contracts to buy forward British pounds with an
equivalent value of $16.5 million to reduce the Company's exposure to foreign
currency exchange risk associated with the cost for certain major
subcontractors and other program requirements of the C-130J program being
denominated in British pounds. These contracts mature quarterly in varying
amounts from December 1995 to June 1997. British Aerospace is the
counterparty to these instruments.
PAGE
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Liquidity and Capital Resources
Management considers liquidity to be the Company's ability to generate
adequate cash to meet its short- and long-term business needs. The principal
internal source of such cash is the Company's operations, while external
sources include borrowings under the Company's credit facilities, the sale of
Company-owned assets and the issuance of equity securities.
During the nine months ended September 29, 1995, the Company generated $2.3
million in cash, net, from operating activities while in the comparable
period of 1994, the Company used $7.8 million in cash, net, for operating
activities. During the nine month period ended September 29, 1995, cash was
generated primarily by net income plus noncash-expending depreciation and
amortization, and increases in advance billings. Reductions in inventory were
offset by an increase in affiliate receivables reflecting the award of a
contract from British Aerospace for the sale of the Company's partially
completed C-130H simulator. Operating cash was used, in part, to reduce
accounts payable, amounts due to affiliate, and other accrued expenses and
liabilities. In the nine months ended September 30, 1994, the Company's cash
requirement was primarily generated by work associated with the production
and delivery of a Boeing 737-300, Level C flight simulator which was financed
by the Company, and changes in receivables due to affiliates, advance
billings, accounts payable, and other accrued expenses and liabilities.
During the nine-month period ended September 29, 1995, the Company reduced
its short-term borrowings and cash by $6.9 million and $4.9 million,
respectively. During the same period, gross borrowings of $124.8 million,
reductions in cash balances and cash flows from operating activities were
used primarily to fund $131.7 million in scheduled maturities of borrowings
under the Company's credit facilities.
To date the Company has been unable to obtain adequate financing on
acceptable terms without recourse to British Aerospace, Plc. or its
affiliates (collectively, "British Aerospace"). However, pursuant to the
terms of an Agreement for Credit Availability dated as of August 7, 1995,
British Aerospace has agreed, subject to its continued ownership of a
majority of the Company, to continue to provide or guarantee the Company's
current credit facilities at their current levels through July 21, 1996.
Renewal of the Company's credit facilities beyond July 21, 1996 is, in large
part, dependent upon British Aerospace's willingness to continue to provide
or guarantee these facilities. By means of a letter dated January 30, 1995,
British Aerospace has represented to the Company that it intends to continue
to provide or guarantee the Company's credit facilities, as long as financing
is not available to the Company without recourse to British Aerospace and
British Aerospace continues to hold a majority ownership position in the
Company. Based on the foregoing representations of British Aerospace,
management anticipates that the Company's current credit facilities will be
renewed annually. Specific discussion of the Company's credit facilities is
included in Note 6 to the consolidated Financial Statements.
PAGE
<PAGE>
As discussed in Note 1, the Company will not receive payments from LASC under
the terms of the C-130J contract until the fourth quarter of 1997.
Accordingly, during the third quarter, the Company negotiated a second credit
facility (the "C-130J Facility") with British Aerospace to finance the
Company's working capital needs with respect to the C-130J contract with
LASC. The financing facility currently provides for borrowings aggregating up
to $40.0 million and matures on July 21, 1996. Draws under this facility are
limited to actual costs incurred by the Company and Reflectone UK Limited
("RUKL") on the LASC C-130J program. By means of a letter dated May 11, 1995,
British Aerospace has further represented that as long as British Aerospace
continues to hold a majority ownership position in the Company, it intends to
continue to provide annual financing for the C-130J program until payment is
received from LASC.
The Company's cash flows are impacted, in the normal course of business, by
the Company's ability to book new profitable business and achieve scheduled
program milestones on a timely basis. The achievement of program milestones,
in turn, provides for and enables contractually defined amounts to be billed
to the customer. Often these amounts are significant and, as a result,
failure to achieve payment milestones can dramatically impact the Company's
credit requirements.
During June 1995, one of the Company's wholly-owned subsidiaries, Reflectone
UK Limited (RUKL) received a contract from LASC worth $77.0 million to design
and manufacture two C-130J dynamic mission simulators and other related
training devices, and to provide training services and a training facility
for the UK Royal Air Force. While not expected to generate profits in 1995,
the program is expected to provide approximately $14.3 million in revenues
and provide both RUKL and the Company's Tampa operations with a larger direct
cost base to absorb indirect costs. Under the terms of the contract, the
Company does not receive payment from LASC until delivery and acceptance of
the devices currently scheduled for the fourth quarter of 1997. Based on
current schedules, the contract is estimated to require incremental funding
of $14.3 million in 1995, $27.6 million in 1996 and $17.7 million in 1997.
During the third quarter, the Company reduced its estimate of 1995 revenues
and related costs to be incurred under this program by approximately $7.4
million as a result of definitization of payment terms to subcontractors and
a slower than anticipated startup which is not expected to affect performance
to schedule.
As described in Notes 1 and 2 to the Consolidated Financial Statements,
management has anticipated recovery of certain costs incurred arising out of
customer-occasioned contract delays and amounts for work performed but not
specified in express contract provisions. The amounts included in the
Consolidated Financial Statements represent only a portion of the total
compensation sought by the Company from the customers. Therefore, while any
and all recoveries are subject to future negotiations, and actual recoveries
could be less than those currently anticipated, any amounts awarded in excess
of that anticipated in the Company's Consolidated Financial Statements
represent an additional capital resource to the Company. It is anticipated
that any actual recoveries of the projected amounts may not be collected
within the next twelve months.
PAGE
<PAGE>
Based upon the availability under its current credit facilities and
anticipated renewals thereof; projected cash flows from current and future
programs with achievement of projected program milestones; anticipated
reductions in restricted investments; expected resolution and recovery of
costs subject to future negotiation as described in Notes 1 and 2 to the
Consolidated Financial Statements; and the benefits of available federal
income tax credits and net operating loss carry-forwards, management believes
that the Company's capital resources are adequate to meet its foreseeable
business needs, on both a short- and long-term basis.
Results of Operations
During the three- and nine-month periods ended September 29, 1995, the
Company's consolidated revenues increased by $9.8 million and $14.6 million,
or 63.6% and 30.0%, respectively, from the comparable periods in 1994.
Revenues of the Training Devices Segment increased by 42.6% during the nine-
month period ended September 29, 1995 as compared to the comparable period in
1994. The increase in revenues primarily resulted from revenues generated by
the recent award of the C-130J program.
Revenues of the Systems Management Segment were approximately $6.0 million
for the nine-month period ended September 29, 1995 as compared to $4.4
million for the comparable period in 1994. The increase in revenues related
to the third quarter award of a contract from an affiliate for a C-130H
simulator for ultimate delivery to an international customer. This long
awaited contract is for the sale of the partially completed C-130H simulator
from the Company's inventory.
Revenues of the Training Services Segment increased by 42.8% during the nine-
month period ended September 29, 1995 as compared to the comparable period in
1994. The Training Services Segment provides training services on customer
and Company-owned or leased devices to the U. S. Government and commercial
aircraft operators. The increase in revenues of the Training Services Segment
in the nine months ended September 29, 1995 was primarily the result of
increased revenues on existing contracts with the U.S. Government and
revenues earned on the Jetstream 41 simulator recently installed at the
Company-managed training center near Dulles International Airport.
The Company's income from operations was approximately $2.4 million and $4.9
million for the three and nine months ended September 29, 1995, respectively.
This compares to losses from operations of $1.7 million and $1.4 million for
the comparable periods in 1994. The 1994 third quarter results were impacted
by recording a provision of $1.0 million to general and administrative
costs for future costs associated with the Company's assertion of its rights
to recovery of certain amounts claimed on a contract with the United States
Air Force. Operating profits of the Training Devices Segment increased by
$0.6 to $1.1 million during the nine months ended September 29, 1995 as
compared to the comparable period in 1994. Operating profits of the Training
Devices Segment reflect atypical profit margins as a result of a contract
modification on a non-affiliate international program and profit recognition
PAGE
<PAGE>
on an affiliate program occurring late in the life of the program. Profits
are often recognized late in the lives of programs as a result of
management's risk assessments which are revised based on evaluations of each
program's status at later stage critical program milestones.
Operating profits of the Systems Management Segment were $961,000 for the
nine months ended September 29, 1995 compared to losses of $930,000 for the
comparable period in 1994. The 1995 operating profit reflects profit
recognition upon the award of a contract from British Aerospace for the sale
of the Company's partially completed C-130H simulator. The 1994 losses
reflect the recognition of program losses on a large international program.
Operating profits of the Training Services Segment increased by $1.5 million
or 86%, to $2.8 million during the nine months ended September 29, 1995 as
compared to the comparable period in 1994. The increased profitability was
primarily the result of increased profits on existing contracts with the U.S.
Government and profits associated with training on the Jetstream 41 simulator
recently installed at the Company-managed training center near Dulles
International Airport.
Interest income primarily consists of interest earned on long-term notes
receivable, investments - restricted and temporary cash investments.
Interest expense for the nine months ended September 29, 1995, increased by
$1.1 million over that of the comparable period in 1994 as a result of higher
borrowings outstanding during the period and higher interest rates on those
borrowings.
The increase in the provision for income taxes in the nine-month period ended
September 29, 1995 as compared to the comparable 1994 period resulted from a
higher estimate of taxable income for federal and state income tax purposes.
The provision for income taxes differs from the amounts computed by applying
the federal statutory tax rate to income before taxes primarily as a result
of the availability of net operating loss carry-forwards to reduce taxable
income, and alternative minimum tax liability arising from timing
differentials associated with the depreciation of fixed assets and specific
limitations on the usage of net operating loss carry-forwards for tax
purposes.
Backlog
Contractual backlog increased to $120.1 million at September 29, 1995, from
$44.1 million at December 31, 1994. Of the contractual backlog at September
29, 1995, 76.6% consisted of orders of the Training Devices Segment, 18.9%
consisted of orders of the Systems Management Segment, and 4.5% consisted of
orders of the Training Services Segment. This compares to 48.0%, 6.3% and
45.7%, respectively at December 31, 1994. The increase in contractual backlog
of the Training Devices Segment primarily relates to the award of the
Lockheed C-130J program for $77.0 million during the nine months ended
September 29, 1995. Contractual backlog of the Systems Management Segment
includes the September 1995 award of a contract from an affiliate to produce
PAGE
<PAGE>
a C-130H simulator for delivery to an international customer. Annual contract
awards within the Training Services Segment to provide training to U.S.
Military personnel are generally recorded during the fourth calendar quarter.
This results in a declining backlog for the Training Services Segment during
the first three calendar quarters. During the third quarter the Company lost
in competition reprocurements of four of its training services contracts on
which it was the incumbent contractor. These contracts represent
approximately $7.3 million of annual revenues. Not included in contractual
backlog are announced orders for which definitive contracts have not been
executed and unobligated contract options under U.S. Government contracts.
Factors That May Affect Future Results
The Company's future operating results may be affected by a number of
factors, many of which are beyond the Company's control, including
uncertainties relative to global economic conditions; political instability;
the economic strength of governments; levels of U.S. Government and
international defense spending; military and commercial aircraft industry
trends; and the Company's ability to successfully increase market share in
its Training Devices Segment while expanding its product base into other
markets. In recent years, the markets into which the Company sells its
training device products have been depressed, and the number of units sold
into these markets has decreased from prior periods. As a result, competition
for available training device opportunities has increased, resulting in lower
margins on devices constructed. In addition, the simulation and training
industry has been characterized by rapid technological advances resulting in
frequent introduction of new products and product enhancements, and very
competitive pricing practices.
The Company has responded to these market conditions by diversifying into new
markets and by seeking the formation of strategic teaming arrangements with
airframe manufacturers and prime contractors for weapon systems. As in prior
years, the Company continues its diversification strategy of pursuing a
greater number of opportunities in the training services market. In addition,
with the acquisition of RUKL in June 1993 and the purchase of certain assets
of the Microflite product line in early 1994, the Company expanded the
product lines of the Training Devices Segment and increased the number of
opportunities available to it in the European and commercial airline
simulation markets. In November 1993, RUKL was selected by LASC as its
training systems teammate for the C-130J program. This teaming arrangement
with LASC resulted in an award worth $77.0 million during the nine months
ended September 29, 1995.
In the pursuit of new business, the Company sometimes designs and
manufactures prototype training devices which by their nature involve
unforeseen design and development risks and exposures. The Company attempts
to price these risks in the contract value but nonetheless, the frequency of
losses historically experienced on prototype training devices exceed those
experienced on follow-on devices. The Company attempts to recover its
investment in the design and development of prototype devices by winning
PAGE
<PAGE>
subsequent programs for follow-on devices. While the LASC program involves
the development of prototype C-130J training devices, management believes
that this program has been appropriately priced for unforeseen risks and
exposures and anticipates profits in future periods on the program. The
Company is also pursuing several other programs which, if awarded, could
involve risks associated with prototype devices.
The Company may experience transaction gains and losses from currency
fluctuations related to its international operations. In order to minimize
foreign exchange risk, the Company selectively hedges certain of its foreign
exchange exposures principally relating to foreign currency accounts payable
and accounts receivable. As of September 29, 1995, the aggregate of hedged
assets and liabilities was less than 5.0% of the Company's total assets, and
gains (losses) from the Company's hedging activities approximated $(147,000)
and $25,000 for the nine months ended September 29, 1995 and 1994,
respectively. The Company's hedging strategy is facilitated by its ability to
borrow foreign currencies under the revolving credit facility and the C-130J
credit facility provided by British Aerospace. This strategy has reduced the
company's vulnerability to certain of its foreign currency exposures, and the
Company expects to continue this practice in the future to the extent
appropriate.
The Company has entered into contracts to buy forward British pounds with an
equivalent value of $16.5 million to reduce the Company's exposure to foreign
currency exchange risk associated with the cost of subcontractors and other
programs requirements of the C-130J program denominated in British pounds.
These contracts mature quarterly in varying amounts from December 1995 to
June 1997. British Aerospace is the counterparty to these instruments.
PAGE
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
REFLECTONE, INC.
(Registrant)
Date: November 7, 1995 By:/s/Richard G. Snyder
Richard G. Snyder
President and Chief Executive Officer
Date: November 7, 1995 By:/s/ Richard W. Welshhans
Richard W. Welshhans
Vice President - Finance and
Chief Financial Officer (Principal
Financial and Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND THE CONSOLIDATED STATEMENT OF INCOME FILED AS
PART OF THE ANNUAL REPORT ON FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH ANNUAL REPORT ON FORM 10-Q
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> SEP-29-1995
<CASH> 2,413,977
<SECURITIES> 0
<RECEIVABLES> 29,082,434
<ALLOWANCES> 283,301
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<CURRENT-ASSETS> 3,322,600
<PP&E> 27,669,607
<DEPRECIATION> 11,476,207
<TOTAL-ASSETS> 58,231,293
<CURRENT-LIABILITIES> 43,544,607
<BONDS> 0
<COMMON> 271,462
0
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<OTHER-SE> 11,844,780
<TOTAL-LIABILITY-AND-EQUITY> 58,231,293
<SALES> 63,026,991
<TOTAL-REVENUES> 63,026,991
<CGS> 55,672,449
<TOTAL-COSTS> 58,157,266
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<INCOME-CONTINUING> 3,036,931
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