<PAGE>
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 March 29, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File 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 offices) (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 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, 2,816,785 shares as of May 7, 1996.
Exhibits - None
<PAGE> 1<PAGE>
Part I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Reflectone, Inc. & Subsidiaries
Consolidated Balance Sheets
As of March 29, 1996 and December 31, 1995
<TABLE>
<CAPTION>
(Unaudited)
March 29, December 31,
ASSETS 1996 1995
<S> <C> <C>
Current assets
Cash and cash equivalents $ 3,756,586 $ 4,582,021
Receivables - non affiliate 31,223,016 26,101,185
Receivables - affiliate 2,162,655 628,922
Current installments of long-term
note receivable - 3,558,000
Net deferred tax assets 1,214,000 1,050,000
Prepaid expenses and other
current assets 2,109,545 1,480,190
------------ ------------
Total current assets 40,465,802 37,400,318
Property, plant & equipment, net 7,852,923 7,881,699
Investments - restricted 5,000,000 5,000,000
Other assets 417,047 441,568
------------ ------------
$ 53,735,772 $ 50,723,585
============ ============
</TABLE>
<PAGE> 2<PAGE>
<TABLE>
LIABILITIES & SHAREHOLDERS' EQUITY
<S> <C> <C>
Current liabilities
Accounts payable $ 5,894,608 $ 9,980,857
Due to affiliate 1,419,360 1,995,079
Borrowings on line of credit - affiliate 15,141,921 6,513,666
Advance billings 6,092,460 7,832,601
Accrued employee compensation and benefits 3,038,668 4,218,694
Federal and state income taxes payable 1,142,966 827,263
Accrued settlement expenses 1,068,415 1,068,415
Other accrued expenses and liabilities 1,805,782 1,807,763
------------ ------------
Total current liabilities 35,604,180 34,244,338
------------ ------------
Deferred gain on sale of equipment 2,385,430 2,503,747
------------ ------------
Commitments and contingencies (Note 2)
Shareholders' equity
Convertible preferred stock - par value
$1.00; authorized - 50,000 shares;
issued 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 - 2,813,454 and
2,750,255 shares 281,345 275,025
Additional paid-in capital 32,026,686 31,741,011
Cumulative translation adjustment 768,509 734,705
Accumulated deficit (17,380,378) (18,825,241)
------------ ------------
Total shareholders' equity 15,746,162 13,975,500
------------ ------------
$ 53,735,772 $ 50,723,585
============ ============
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE> 3<PAGE>
Reflectone, Inc. & Subsidiaries
Consolidated Statements of Income
For the Quarters Ended March 29, 1996 and March 31, 1995
(Unaudited)
<TABLE>
<CAPTION>
Quarter Ended
March 29, March 31,
1996 1995
<S> <C> <C>
Revenues
Non-affiliate $ 14,230,744 $ 13,952,558
Affiliate 7,096,319 1,849,314
------------ ------------
21,327,063 15,801,872
------------ ------------
Cost and expenses
Cost of sales
Non-affiliate 13,256,298 12,864,990
Affiliate 5,170,276 961,464
------------ ------------
18,426,574 13,826,454
General and administrative 939,377 987,124
------------ ------------
19,365,951 14,813,578
------------ ------------
Income from operations 1,961,112 988,294
------------ ------------
Other income (expense)
Interest income 106,992 183,500
Interest expense (119,221) (512,978)
Other 85,008 83,278
------------ ------------
72,779 (246,200)
------------ ------------
Income before income taxes 2,033,891 742,094
Provision for income taxes 413,030 100,000
Net income 1,620,861 642,094
Preferred stock dividends 176,000 176,000
------------ ------------
Net income applicable to
common shareholders $ 1,444,861 $ 466,094
============ ============
Income per common and common
equivalent share
Primary $ .49 $ .17
============ ============
Fully diluted $ .47 $ -
============ ============
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE> 4<PAGE>
Reflectone, Inc. & Subsidiaries
Consolidated Statements of Cash Flows
For the Quarters Ended March 29, 1996 and March 31, 1995
(Unaudited)
<TABLE>
1996 1995
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,620,861 $ 642,094
Depreciation and amortization 435,285 569,241
Deferred income taxes (164,000) -
Change in assets and liabilities:
Decrease (increase) in receivables
Non-affiliate (5,179,925) 5,047,968
Affiliate (1,541,195) (1,834,693)
Decrease in inventory - (660,702)
Increase (decrease) in accounts payable (4,043,914) (3,378,174)
Decrease in due to affiliate (562,183) (541,292)
Increase (decrease) in advance billings (1,739,907) 228,825
Decrease in accrued employee compensation
and benefits (1,172,631) (198,198)
Other (374,273) (908,846)
------------ ------------
Net cash used in operating activities (12,721,882) (1,033,777)
------------ ------------
Cash flows from investing activities:
Capital expenditures (415,619) (250,383)
Settlement of long-term note receivable 3,558,284 -
------------ ------------
Net cash provided by (used in)
investing activities 3,142,665 (250,383)
Cash flows from financing activities:
Paydowns under line-of-credit agreements (12,793,140) (57,550,000)
Borrowings under line-of-credit agreements 21,421,395 53,439,018
Dividends on preferred stock (176,000) (176,000)
Other 291,995 22,428
------------ ------------
Net cash provided by (used in)
financing activities 8,744,250 (4,264,554)
------------ ------------
Net decrease in cash (834,967) (5,548,714)
Cash and cash equivalents at beginning
of period 4,582,021 7,329,914
Effect of exchange rate changes on cash 9,532 18,839
------------ ------------
Cash and cash equivalents at end of period $ 3,756,586 $ 1,800,039
============ ============
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE> 5<PAGE>
Reflectone, Inc. & Subsidiaries
Notes to Consolidated Financial Statements
Quarter Ended March 29, 1996
(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 quarter March 29, 1996 are not necessarily indicative
of the results that may be expected for the year ending December 31, 1996. 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, 1995.
All intercompany transactions have been eliminated.
Note 1 - Receivables
Component elements of receivables consist of the following:
<TABLE>
<CAPTION>
March 29, December 31,
1996 1995
Receivables
<S> <C> <C>
U.S. Government
Billed $ 5,384,021 $ 5,363,973
Unbilled 3,958,067 1,932,588
Unrecovered costs subject to future
negotiation -- not billed 1,400,000 1,400,000
------------ ------------
10,742,088 8,696,561
------------ ------------
Lockheed Aeronautical Systems Company
Billed - -
Unbilled 19,875,216 14,780,610
------------ ------------
19,875,216 14,780,610
------------ ------------
Commercial
Billed 1,094,259 2,554,538
Unbilled - 558,023
Allowance for doubtful accounts (488,547) (488,547)
------------ ------------
605,712 2,624,014
------------ ------------
$ 31,223,016 $ 26,101,185
============ ============
Affiliates
Billed $ 479,956 $ 545,729
Unbilled 1,682,699 83,193
------------ ------------
$ 2,162,655 $ 628,922
============ ============
</TABLE> <PAGE> 6<PAGE>
Reflectone, Inc. & Subsidiaries
Notes to Consolidated Financial Statements
Quarter Ended March 29, 1996
(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.
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. The amounts
recorded represent only a portion of the total compensation sought by the
Company from customers. Therefore, while any and all recoveries are subject to
future negotiations, the actual recoveries could be more or less than those
currently anticipated in the Company's consolidated financial statements.
Management has made provision for future costs associated with these actions.
(See Note 2)
Under the terms of the Company's contract with Lockheed Martin Corporation
("LMC") to design and manufacture two dynamic mission simulators and other
related training devices, the Company will not receive a substantial portion
of the contractual payments from LMC until delivery and acceptance of the
devices currently scheduled for the fourth quarter of 1997.
It is anticipated that approximately $21.3 million of receivables will not be
collected within one year.
An allowance for doubtful accounts is provided based on historical experience
and after consideration of specific accounts and current economic conditions.
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.
<PAGE> 7<PAGE>
Reflectone, Inc. & Subsidiaries
Notes to Consolidated Financial Statements
Quarter ended March 29, 1996
(Unaudited)
Note 3 - Earnings Per Common Share continued
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 or date of issuance, if later, (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.
The numbers of shares used in the earnings per share computation are as
follows:
<TABLE>
<CAPTION>
Quarter Ended
1996 1995
<S> <C> <C>
Primary
Weighted average common shares outstanding 2,772,451 2,682,094
Stock options 157,089 106,252
--------- ---------
Average common shares outstanding 2,929,540 2,788,346
Convertible preferred stock 500,000 500,000
Additional dilutive effect of
stock options 18,374 18,598
--------- ---------
Fully diluted assumed common
shares outstanding 3,447,914 3,306,944
========= =========
</TABLE>
Fully diluted per share data is not disclosed for the quarter ended March 31,
1995 since the effect would be antidilutive.
Note 4 - Stock Options
In February 1996, the Company granted options under the Company's 1994 Stock
Option Plan to purchase 41,500 shares of the Company's common stock at $18.50
per share. At March 29, 1996, none of these options were exercisable, and there
were 62,500 shares of common stock available for future stock options under
this plan.
<PAGE> 8<PAGE>
Reflectone, Inc. & Subsidiaries
Notes to Consolidated Financial Statements
Quarter ended March 29, 1996
(Unaudited)
Note 5 - Credit Agreements and Borrowings
To date the Company has been unable to obtain adequate financing on acceptable
terms without recourse to 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 February 27, 1996, 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, or has the ability to hold through the exercise of preferred stock
conversion rights and warrants to purchase common stock, 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. As required under the Company's current
Agreement for Credit Availability, the Company issued 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 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.
<PAGE> 9<PAGE>
Reflectone, Inc. & Subsidiaries
Notes to Consolidated Financial Statements
Quarter ended March 29, 1996
(Unaudited)
Note 5 - Credit Agreements and Borrowings (continued)
The estimated fair value of the warrants are reflected in interest expense as
a cost of financing. Fair value was estimated using the Black-Scholes option-
pricing model with the following weighted-average assumptions used: no dividend
yield, expected volatility of 85%, risk free interest rate of 6.2%, and
expected lives of 4 years.
The Company's $10.0 million revolving line of credit facility with Wachovia
Bank of Georgia, N.A. 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. The agreement matures on June 28, 1996, and is supported by the
corporate guarantee of British Aerospace. At March 29, 1996, no borrowings were
outstanding under this line and therefore the full amount of this facility was
available.
Under the Lloyds Bank Plc (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 and matures on October 31, 1996. At March 29, 1996, there were
approximately $17.9 million of credit available under this agreement.
The Company's revolving line of credit facility with British Aerospace Finance,
Inc. 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 March 29,
1996 there were approximately $19.6 million of additional credit available
under this facility.
<PAGE> 10<PAGE>
Reflectone, Inc. & Subsidiaries
Notes to Consolidated Financial Statements
Quarter ended March 29, 1996
(Unaudited)
Note 5 - Credit Agreements and Borrowings (continued)
As discussed in Note 1, the Company will not receive payments from LMC under
the terms of the C-130J contract until the fourth quarter of 1997. Accordingly,
during the third quarter of 1995, 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 LMC.
The C-130J 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 RUKL on the LMC C-130J program.
Interest rates charged under the C-130J Facility are at LIBOR plus 1.50%. By
means of a letter dated February 27, 1996, British Aerospace has further
represented that, as long as British Aerospace continues to hold, or has the
ability to hold through the exercise of preferred stock conversion
rights and warrants to purchase common stock, 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 LMC. At March 29, 1996 there were
approximately $25.3 million of additional credit available under this facility.
<PAGE> 11<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 quarter ended March 29, 1996, the Company used $12.7 million in
cash, net, for operating activities while in the comparable quarter of 1995,
the Company used $1.0 million in cash, net, for operating activities. Operating
cash flow was negatively impacted during the quarter ended March 29, 1996 by
increases in non-affiliate and affiliate receivables, and reductions in
accounts payable, advance billings, and accrued employee compensation and
benefits. The increase in non-affiliate receivables primarily related to the
contract with Lockheed Martin Corporation ("LMC")to design and manufacture two
C-130J dynamic mission simulators and other related training devices.
During the quarter ended March 29, 1996, the Company increased its net short-
term borrowings by $8.6 million and reduced its cash by $835,000. During the
same period, gross borrowings of $21.4 million, reductions in cash balances and
cash received upon settlement of the long-term note receivable were used
primarily to fund $12.8 million in scheduled maturities of borrowings under the
Company's credit facilities and to fund operating activities during the
quarter.
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 February 27, 1996, 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, or has the ability to hold through the exercise of preferred stock
conversion rights and warrants to purchase common stock, 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 5 to the Consolidated Financial Statements.
<PAGE> 12<PAGE>
As discussed in Note 1 to the Company's Consolidated Financial Statements, the
Company will not receive payments from LMC under the terms of the C-130J
contract until the achievement of certain contractual milestones, currently
scheduled for the fourth quarter of 1997. Accordingly, the Company has a
special 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 LMC. The C-130J 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 its wholly-owned
subsidiary, Reflectone UK Limited ("RUKL"), on the LMC C-130J program. By
means of a letter dated February 27, 1996, British Aerospace has further
represented that as long as British Aerospace continues to hold, or has the
ability to hold through the exercise of preferred stock conversion rights and
warrants to purchase common stock, 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 LMC. Based on current schedules, the
contract is estimated to require incremental funding of $25.0 million in 1996
and $22.0 million in 1997. While the cost of financing this program is being
recovered through the contract with LMC, an increase in interest rates or an
extension of the scheduled delivery dates could result in financing costs in
excess of that priced into the contract.
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.
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> 13<PAGE>
Based upon the availability under its current credit facilities and anticipated
renewals thereof; anticipated increases in the C-130J Facility; 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 income tax benefits
available for future use, 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
Consolidated revenues increased by $5.5 million, or 35.0% during the first
quarter of 1996 as compared to the comparable quarter in 1995.
Revenues of the Training Devices Segment increased by 92.4% during the quarter
ended March 29, 1996 as compared to the comparable quarter in 1995. The
increase in revenues primarily resulted from revenues generated by the C-130J
program with LMC and two full-flight simulator programs with affiliates.
Revenues of the Training Services Segment decreased by 16.6% during the quarter
ended March 29, 1996 as compared to the comparable quarter in 1995. The
decrease primarily relates to the 1995 loss of reprocurements relating to four
training services contracts in which the Company was the incumbent contractor.
The 1996 first quarter revenues were also negatively impacted by the revision
of the management agreement pursuant to which the Company manages the British
Aerospace-owned Dulles Training Center. Under the terms of the revised
management agreement, the Company will receive a fixed fee of $500,000 annually
and will be reimbursed by British Aerospace for the Company's costs associated
with the Dulles Center.
Revenues of the Systems Management Segment were approximately $1.9 million for
the quarter ended March 29, 1996 as compared to $424,000 for the comparable
quarter in 1995. The increase in revenues related to the third quarter 1995
award of a contract from an affiliate for a C-130H simulator for ultimate
delivery to an international customer.
The Company's income from operations was approximately $1.9 million and
$988,000 in the first quarter of 1996 and 1995, respectively. The operating
profit of the Training Devices Segment was $404,000 and $217,000 for the first
quarter of 1996 and 1995, respectively. The increased profitability primarily
relates to profits recognized during the quarter on two affiliate programs.
<PAGE> 14<PAGE>
Operating profits of the Training Services Segment increased by $347,000 or
46.0%, to $1.1 million during the quarter ended March 29, 1996 as compared to
the comparable period in 1995. The increased profitability was primarily the
result of increased profits on existing contracts with the U.S. Government.
Operating profits of the Systems Management Segment were $439,000 for the
quarter ended March 29, 1996 compared to break-even for the comparable quarter
in 1995. The 1996 operating profit reflects profit recognition on a contract
from an affiliate for the sale of a C-130H simulator.
Interest income approximated $107,000 and $184,000 during the first quarter of
1996 and 1995, respectively. Interest income is primarily interest earned on
long-term notes receivable, restricted investments and temporary cash
investments.
Interest expense for the quarter ended March 29, 1996, approximated $119,000
as compared to $513,000 for the comparable quarter in 1995. During the first
quarter of 1996, interest costs of $156,000 associated with the Company's
financing of the C-130J program were charged to the C-130J program and
reflected in cost of sales rather than as interest expense.
The increase in the provision for income taxes in the quarter ended March 29,
1996 as compared to the comparable 1995 quarter resulted from a higher estimate
of taxable income for federal and state income tax purposes and the
availability of net operating losses in 1995. The Company has recorded a
deferred tax asset of $1.2 million, for which recovery in future periods is not
dependent upon future taxable income.
Backlog
Contractual backlog decreased to $108.5 million at March 29, 1996, from $121.1
million at December 31, 1995. Of the contractual backlog at March 29, 1996,
75.8% consisted of orders of the Training Devices Segment, 11.3% consisted of
orders of the Training Services Segment and 12.9% consisted of orders of the
Systems Management Segment. This compares to 71.3%, 15.6% and 13.1%,
respectively at December 31, 1995. The contractual backlog of the Training
Devices Segment includes the Lockheed C-130J program in the amount of $56.5
million. 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. 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.
<PAGE> 15<PAGE>
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
continuing industry consolidation, 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 LMC as its training systems teammate for
the C-130J program. This teaming arrangement with LMC resulted in an award
during 1995 worth $77.0 million over the life of the program.
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 subsequent programs for follow-on
devices. While the LMC 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.
<PAGE> 16<PAGE>
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. The Company's hedging strategy is facilitated by its
ability to borrow foreign currencies under the revolving credit facility and
the C-130J 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 does not engage in speculative hedging activities, nor
does the Company hedge nontransaction-related balance sheet exposure.
The Company has entered into contracts to buy forward British pounds with an
equivalent value of $12.3 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 June 1996 to June
1997. British Aerospace is the counterparty to these instruments. The forward
contracts should not subject the Company to risk from exchange movement because
gains and losses on these contracts offset losses and gains on the transactions
being hedged. However, the amount and timing of the program costs were
estimated and changes in these estimates could result in future gains or losses
from exchange rate movements.
Certain Statements
This Quarterly Report on Form 10-Q contains forward-looking staements that
involve risks and uncertainties. The Company's actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including those set forth under "Factors That May
Affect Future Results" and elsewhere in this Quarterly Report.
<PAGE> 17<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: May, 13, 1996 By: /s/ Richard G. Snyder
Richard G. Snyder
President and Chief Executive
Officer
Date: May 13, 1996 By: /s/ Richard W. Welshhans
Richard W. Welshhans
Vice President - Finance and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
<PAGE> 18<PAGE>
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