ORIGINAL
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
(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 27, 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 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, 2,863,733 shares as of October
23,1996.
<PAGE> 1
<PAGE>
This Amendment to Quarterly Report on Form 10-Q/A is filed to amend certain
information set forth in Item 1 of the Company's Quarterly Report on
Form 10-Q for the quarterly period ended September 27, 1996, which was filed
with the Securities and Exchange Commission on November 12, 1996.
<PAGE> 2
Part I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Reflectone, Inc. & Subsidiaries
Consolidated Balance Sheets
As of September 27, 1996 and December 31, 1995
<TABLE>
<CAPTION>
(Unaudited)
September 27, December 31,
<S> <C> <C>
ASSETS 1996 1995
Current assets
Cash and cash equivalents $ 3,899,089 $ 4,582,021
Receivables - non affiliate 43,677,216 26,101,185
Receivables - affiliate 2,991,101 628,922
Current installments of long-term
note receivable - 3,558,000
Net deferred tax assets 1,638,930 1,050,000
Prepaid expenses and other current assets 1,827,079 1,480,190
------------ ------------
Total current assets 54,033,415 37,400,318
Property, plant & equipment, net 8,271,859 7,881,699
Investments - restricted 5,000,000 5,000,000
Other assets 401,182 441,568
------------ ------------
$ 67,706,456 $ 50,723,585
============ ============
</TABLE>
<PAGE> 3
<PAGE>
<TABLE>
<CAPTION>
LIABILITIES & SHAREHOLDERS' EQUITY
<S> <C> <C>
Current liabilities
Accounts payable $ 5,568,901 $ 9,980,857
Due to affiliate 2,121,778 1,995,079
Borrowings on line of credit - affiliate 27,806,184 6,513,666
Advance billings 3,346,171 7,832,601
Accrued employee compensation and benefits 3,499,650 4,218,694
Federal and state taxes payable 157,486 827,263
Accrued settlement expenses 1,068,414 1,068,415
Other accrued expenses and liabilities 2,260,996 1,807,763
------------ ------------
Total current liabilities 45,829,580 34,244,338
------------ ------------
Deferred gain on sale of equipment 2,262,189 2,503,747
------------ ------------
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 -
2,863,733 and 2,750,255 shares 286,373 275,025
Additional paid-in capital 32,622,531 31,741,011
Cumulative translation adjustment 734,360 734,705
Accumulated deficit (14,078,577) (18,825,241)
------------ ------------
Total shareholders' equity 19,614,687 13,975,500
------------ ------------
$ 67,706,456 $ 50,723,585
============ ============
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE> 4
<PAGE>
Reflectone, Inc. & Subsidiaries
Consolidated Statements of Income
For the Nine and Three Months Ended September 27, 1996 and September 29,1995
(Unaudited)
<TABLE>
<CAPTION>
Nine Months
1996 1995
<S> <C> <C>
Revenues
Non-affiliate $52,256,269 $48,604,361
Affiliate 17,985,362 14,422,630
----------- -----------
70,241,631 63,026,991
----------- -----------
Costs and expenses
Cost of sales
Non-affiliate 46,693,241 44,525,470
Affiliate 14,593,591 11,146,979
----------- -----------
61,286,832 55,672,449
General and administrative 2,879,708 2,484,817
----------- -----------
64,166,540 58,157,266
----------- -----------
Income from operations 6,075,091 4,869,725
----------- -----------
Other income (expense)
Interest income 389,419 600,330
Interest expense (339,127) (1,847,779)
Other 19,946 20,655
----------- -----------
70,238 (1,226,794)
----------- -----------
Income before income taxes 6,145,329 3,642,931
Provision for income taxes 870,665 606,000
----------- -----------
Net income 5,274,664 3,036,931
Preferred stock dividends 528,000 528,000
----------- -----------
Net income applicable
to common shareholders $ 4,746,664 $ 2,508,931
=========== ===========
Income per common and
common equivalent share
Primary $ 1.60 $ .89
=========== ===========
Fully diluted $ 1.52 $ -
=========== ===========
</TABLE>
<PAGE> 5
<PAGE>
<TABLE>
<CAPTION>
Three Months
1996 1995
<C> <C>
$20,194,232 $15,255,363
5,667,487 10,065,092
----------- -----------
25,861,719 25,320,455
----------- -----------
18,256,016 14,608,091
4,574,336 7,744,398
----------- -----------
22,830,352 22,352,489
862,018 574,373
----------- -----------
23,692,370 22,926,862
----------- -----------
2,169,349 2,393,593
----------- -----------
149,356 220,220
(146,235) (783,768)
(113,825) 6,101
----------- -----------
(110,704) (557,447)
----------- -----------
2,058,645 1,836,146
202,340 356,000
----------- -----------
1,856,305 1,480,146
176,000 176,000
----------- -----------
$ 1,680,305 $ 1,304,146
=========== ===========
$ .56 $ .45
=========== ===========
$ .53 $ .43
=========== ===========
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE> 6
<PAGE>
Reflectone, Inc. & Subsidiaries
Consolidated Statements of Cash Flows
Nine Months ended September 27, 1996 and September 29,1995
(Unaudited)
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Cash flows from operating activities:
Net income $ 5,274,664 $ 3,036,931
Depreciation and amortization 1,353,402 1,709,005
Change in assets and liabilities:
Increase in receivables
Non-affiliate (17,558,553) (185,394)
Affiliate (2,367,422) (4,998,366)
Decrease in inventory - 4,267,295
Decrease in accounts payable (4,401,606) (1,560,776)
Increase (decrease) in due to affiliate 115,678 (1,293,039)
Increase (decrease) in advance billings (4,487,496) 3,312,379
Increase (decrease) in accrued employee
compensation and benefits (721,296) 238,521
Other (1,256,487) (2,179,042)
------------ ------------
Net cash provided by (used for)
operating activities (24,049,116) 2,347,514
------------ ------------
Cash flows from investing activities:
Capital expenditures (1,759,628) (490,917)
Settlement of long-term note receivable 3,558,000 485,876
------------ ------------
Net cash provided by (used for)
investing activities 1,798,372 (5,041)
------------ ------------
Cash flows from financing activities:
Paydowns under line-of-credit agreements (140,125,285) (131,700,531)
Borrowings under line-of-credit agreements 161,417,803 124,802,769
Dividends on preferred stock (528,000) (528,000)
Proceeds from sales of common stock 552,215 159,678
Other 340,653 -
------------ ------------
Net cash provided by financing activities 21,657,386 (7,266,084)
------------ ------------
Net decrease in cash (593,358) (4,923,611)
Cash and cash equivalents at beginning
of period 4,582,021 7,329,914
Effect of exchange rate changes on cash (89,574) 7,674
------------ ------------
Cash and cash equivalents at end of period $ 3,899,089 $ 2,413,977
============ ============
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE> 7
<PAGE>
Reflectone, Inc. & Subsidiaries
Notes to Consolidated Financial Statements
Nine months ended September 27, 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 nine months ended September 27, 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>
September 27, December 31,
1996 1995
<S> <C> <C>
Receivables
U.S. Government
Billed $ 5,033,485 $ 5,363,973
Unbilled 2,418,913 1,932,588
Unrecovered costs subject to future
negotiation -- not billed 1,400,000 1,400,000
------------ ------------
8,852,398 8,696,561
------------ ------------
Lockheed Martin Corporation
Billed 547,190 -
Unbilled 32,315,796 14,780,610
------------ ------------
32,862,986 14,780,610
------------ ------------
</TABLE>
<PAGE> 8
<PAGE>
<TABLE>
<S> <C> <C>
Commercial
Billed 2,462,662 2,554,538
Unbilled - 558,023
Provision for doubtful accounts (500,830) (488,547)
------------ ------------
1,961,832 2,624,014
------------ ------------
$ 43,677,216 $ 26,101,185
============ ============
Affiliates
Billed $ 2,250,038 $ 545,729
Unbilled 741,063 83,193
------------ ------------
$ 2,991,101 $ 628,922
============ ============
</TABLE>
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
as described in Note 2.
Subsequent to the end of the third quarter of 1996, the Company negoiated
modifications to the C-130J contract providing for a milestone payment of
$15.0 million in the fourth quarter of 1996 and a payment of $6.0 million in
the second quarter of 1997. Remaining payments under the contract are billable
upon the achievement of certain contractual milestones, currently scheduled
for the third and fourth quarters of 1997.
It is anticipated that approximately $12.7 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.
<PAGE> 9
<PAGE>
Reflectone, Inc. & Subsidiaries
Notes to Consolidated Financial Statements
Nine Months ended September 27, 1996
(Unaudited)
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 as more fully
described in 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.
The numbers of shares used in the earnings per share computations are as
follows:
<TABLE>
<CAPTION>
Nine Months Three Months
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Primary
Weighted average common
shares outstanding 2,814,682 2,689,174 2,858,134 2,699,351
Stock options 142,872 132,847 158,382 169,665
--------- --------- --------- ---------
Average common shares
outstanding 2,957,554 2,822,021 3,016,516 2,869,016
Convertible preferred stock 500,000 500,000 500,000 500,000
Additional dilutive effect
of stock options 21,600 19,051 - 41,544
--------- --------- --------- ---------
Fully diluted assumed common
shares outstanding 3,479,154 3,341,072 3,516,516 3,410,560
========= ========= ========= =========
</TABLE>
<PAGE> 10
<PAGE>
Reflectone, Inc. & Subsidiaries
Notes to Consolidated Financial Statements
Nine Months ended September 27, 1996
(Unaudited)
Note 3 - Earnings Per Common Share (continued)
Fully diluted per share data is not disclosed for the nine months ended
September 29, 1995 since the effect would be antidilutive.
Note 4 - Stock Options
In February 1996, the Company granted options to purchase 41,500 shares of the
Company's common stock at $18.50 per share under the Company's 1994 Stock
Option Plan. At September 27, 1996 none of these options were exercisable, and
there were 62,500 shares of common stock available for issuance upon the
exercise of stock options granted in the future under this plan.
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 Plc. or its affiliates
(collectively, "British Aerospace"). However, pursuant to the terms of an
Agreement for Credit Availability dated as of August 7, 1996, British
Aerospace agreed, subject to its continued ownership of a majority of the
Company, to continue to provide or guarantee the Company's credit facilities
through August 7, 1997. Renewal of the Company's credit facilities beyond
August 7, 1997 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 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 the Company: i)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) to pay British
Aerospace a facility fee of 50 basis points per annum on the maximum aggregate
availability ($87.0 million) of the credit facilities provided or guaranteed
by British Aerospace, and iii) to pay British Aerospace a guarantee fee of
<PAGE> 11
<PAGE>
Reflectone, Inc. & Subsidiaries
Notes to Consolidated Financial Statements
Nine Months ended September 27, 1996
(Unaudited)
Note 5 - Credit Agreements and Borrowings (continued)
3.25% per annum on amounts outstanding under the Company's $2.0 million
revolving line of credit facility with Wachovia Bank of Georgia, N.A. In
addition, the Company's Agreement for Credit Availability requires the Company
to obtain the prior approval of British Aerospace for all material capital
investment expenditures as defined in the Agreement for Credit Availability.
During the second quarter of 1996 the company reduced its revolving line of
credit facility with Wachovia Bank of Georgia, N.A. from $10.0 million to $2.0
million. The 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. The agreement matures on August 7, 1997, and is supported by the
corporate guarantee of British Aerospace. At September 27, 1996, no borrowings
were outstanding under this line and therefore the full amount of this facility
was available.
Under the Lloyds Bank Plc letter of credit facility, the Company may issue
irrevocable standby letters of credit and bank guarantees aggregating up to
$20.0 million. The agreement is supported by the corporate guarantee of
British Aerospace. Subsequent to the end of the third quarter of 1996, this
facility was renewed for another one year period, maturing on October 31,
1997. With the renewal, fees charged under the facility were reduced from
.55% to .25% per annum on the amount of credits issued for the actual number
of days outstanding. At September 27, 1996, letters of credit and guarantees
issued under this facility approximated $1.9 million.
During the third quarter of 1996, the Company reduced its revolving line of
credit facility with British Aerospace Finance, Inc. from $20.0 million to
$10.0 million. The agreement provides for working capital borrowings, and an
interest rate of LIBOR plus 3.50% per annum is charged under this facility.
The agreement matures on August 7, 1997 and permits the Company to specify,
within limits, the period during which the borrowings will mature. At
September 27, 1996, borrowings under this facility approximated $1.3 million.
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. During the third quarter of 1996 the C-130J Facility
was increased from $40.0 million to $55.0 million. The agreement matures on
August 7, 1997. Draws under this facility are limited to actual costs incurred
by the Company and Reflectone UK, Ltd. ("RUKL"), a wholly-owned subsidiary of
the Company, on the LMC C-130J program. Interest rates charged under the
C-130J Facility are at LIBOR plus 1.50% per annum. 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 September 27, 1996, borrowings under this facility approximated $26.5
million.
<PAGE> 12
<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-month period ended September 27, 1996, the Company used $24.0
million in cash, net, for operating activities while in the comparable period
of 1995, the Company generated $2.3 million in cash, net, from operating
activities. Operating cash flow was negatively impacted during the nine-
month period ended September 27, 1996 primarily by increases in non-affiliate
and affiliate receivables, and reductions in accounts payable, advance billings
and other changes in assets and liabilities, net. 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. The increase in affiliate
receivables primarily relates to three full-flight simulator programs with
affiliates.
During the nine-month period ended September 27, 1996, the Company increased
its net short-term borrowings by $21.3 million and reduced its cash by $593,000
before reflecting the effect of changes in exchange rates on cash. During the
same period, gross borrowings of $161.4 million, and cash received upon
settlement of the long-term note receivable were used primarily to fund $140.1
million in scheduled maturities of borrowings under the Company's credit
facilities and to fund operating activities and capital expenditures during
the nine-month period.
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, 1996, British
Aerospace agreed, subject to its continued ownership of a majority of the
Company, to continue to provide or guarantee the Company's credit facilities
through August 7, 1997. Renewal of the Company's credit facilities beyond
August 7, 1997 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,
<PAGE> 13
<PAGE>
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 credit facilities will be renewed
annually. Specific discussion of the Company's credit facilities is included
in Note 5 to the Consolidated Financial Statements.
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. During the third quarter of 1996, the
C-130J Facility was increased from $40.0 million to $55.0 million. The
agreement matures on August 7, 1997. Draws under this facility are limited to
actual costs incurred by the Company 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. Through September 27, 1996, funding related to
this program has approximated $32.9 million. Based on current schedules, the
contract is estimated to require additional funding of $8.0 million during the
fourth quarter of 1996 and $22.0 million in 1997. Subsequent to the end of the
third quarter of 1996, the Company negotiated modifications to the
C-130J contract providing for a milestone payment of $15.0 million in the
fourth quarter of 1996 and a payment of $6.0 million in the second quarter of
1997. Remaining payments under the contract are billable upon the achievement
of certain contractual milestones, currently scheduled for the third and fourth
quarters of 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
<PAGE> 14
<PAGE>
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.
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; and expected resolution and recovery of costs subject to future
negotiation as described in Notes 1 and 2 to the Consolidated Financial
Statements management believes that the Company's capital resources are
adequate to meet its short- and long-term business needs.
Results of Operations
During the three- and nine-month periods ended September 27, 1996, the
Company's consolidated revenues increased by $541,000 and $7.2 million, or
2.1% and 11.4%, respectively, from comparable periods in 1995.
Revenues of the Training Devices Segment increased by 29.5% during the nine-
month period ended September 27, 1996 as compared to the comparable period in
1995. The increase in revenues of the Training Devices Segment primarily
resulted from revenues generated by the C-130J program with LMC and three
full-flight simulator programs with affiliates.
Revenues of the Training Services Segment decreased by 19.8% during the
nine-month period ended September 27, 1996 as compared to the comparable period
in 1995. The decrease primarily related to the 1995 loss of reprocurements
relating to four training services contracts in which the Company was the
incumbent contractor. Revenues for the nine-month period ended September 27,
1996 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
Training Center.
Revenues of the Systems Management Segment were approximately $4.9 million
million for the nine-month period ended September 27, 1996 as compared to $6.0
million for the comparable period in 1995. Revenues in both periods primarily
relate to the 1995 third quarter award of a contract from an affiliate for a
C-130H simulator for ultimate delivery to an international customer. The
decrease in revenues relate to lower levels of material throughput on the
contract in 1996 from that experienced in 1995.
<PAGE> 15
<PAGE>
The Company's income from operations was approximately $2.2 million and $6.1
million for the three- and nine-month periods ended September 27, 1996,
respectively. This compares to income from operations of $2.4 million and $4.9
million for the comparable periods in 1995. The operating profit of the
Training Devices Segment was $3.1 million and $1.1 million for the nine-
month periods ended September 27, 1996 and 1995, respectively. The increased
profitability primarily related to profits recognized during the 1996 periods
on two large affiliate programs and an international military program.
Operating profits of the Training Services Segment declined by $455,000 or
16.5% to $2.3 million during the nine-month period ended September 27, 1996 as
compared to the comparable period in 1995. The reduced profitability primarily
related to the decline in revenues resulting from the 1995 loss of
reprocurements of four training services contracts in which the Company was
the incumbent contractor.
Operating profits of the Systems Management Segment were $630,000 for the
nine-month period ended September 27, 1996 compared to $961,000 for the
comparable period in 1995. The decrease in operating profits of the systems
management segment resulted from a decrease in revenues during the period on a
contract from an affiliate for the sale of a C-130H simulator.
Interest income approximated $389,000 and $600,000 during the nine-month
periods ended September 27, 1996 and 1995, respectively. Interest income is
primarily interest earned on long-term notes receivable, restricted
investments and temporary cash investments. The decrease in interest income
primarily related to the 1996 first quarter settlement of the long-term note
receivable.
Interest expense for the nine-month period ended September 27, 1996,
approximated $339,000 as compared to $1.8 million for the comparable period in
1995. The reduction in interest expense results from lower average levels of
borrowings as compared to the previous year. In addition, during the nine-
month period ended September 27, 1996, interest costs of $1.2 million
associated with the Company's financing of the C-130J program were charged to
the C-130J program and are reflected in cost of sales rather than as interest
expense. In the comparable period in 1995, interest cost charged to the
C-130J program approximated $59,000.
The provision for income taxes increased to $871,000 during the nine-month
period ended September 27, 1996 as compared with $606,000 for the 1995 period.
The increase in the provision for income taxes in the nine-month period ended
September 27, 1996 as compared to the comparable 1995 period resulted from a
higher estimate of taxable income for federal and state income tax purposes
and the unavailability of net operating loss carryforwards in 1996. The
Company has recorded a deferred tax asset of $1.6 million, for which recovery
in future periods is not dependent upon future taxable income.
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Backlog
Contractual backlog decreased to $89.8 million at September 27, 1996, from
$121.1 million at December 31, 1995. Of the contractual backlog at September
27, 1996, 85.1% consisted of orders of the Training Devices Segment, 2.6%
consisted of orders of the Training Services Segment and 12.3% 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 LMC C-130J program in the amount of $43.5
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 of each year. 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 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.
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In the pursuit of new business, the Company may make contract price proposals
to potential customers which, if awarded, could result in the recording of
loss provisions to the consolidated financial statements. The Company also
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.
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 $7.1 million to reduce the Company's exposure to foreign
currency exchange risk associated with the cost of subcontractors and other
requirements of the C-130J program denominated in British pounds. These
contracts mature quarterly in varying amounts from December 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.
This Quarterly Report on Form 10-Q contains forward-looking comments that
involve risks and uncertainties. The Company's actual results could differ
materially from those anticipated in these forward-looking comments as a
result of certain factors, including those set forth under "Factors That May
Affect Future Results" and elsewhere in this Quarterly Report.
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From time to time, the Company may publish forward-looking statements relating
to such matters as anticipated financial performance, business prospects,
technological developments, new products, research and development activities
and similar matters. The Private Securities Litigation Reform Act of 1995
provides a safe harbor for forward-looking statements. In order to comply with
the terms of the safe harbor, the Company notes that a variety of factors
could cause the Company's actual results and experience to differ materially
from the anticipated results or other expectations expressed in the Company's
forward-looking statements. The risks and uncertainties that may affect the
operations, performance, development and results of the Company's business
include those set forth under "Factors That May Affect Future Results" and
elsewhere in this Quarterly Report.
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Part II OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits.
The following documents are filed as exhibits to this Report:
10.16 $20,000,000 Letter of Credit Agreement between Lloyds
Bank Plc and Reflectone, Inc. dated November 1, 1996.
(b) The Registrant did not file any reports on Form 8-K
during the three-month period ended September 27, 1996.
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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 26, 1996 By: /s/Richard G. Snyder
Richard G. Snyder
President and Chief Executive
Officer
Date: November 26, 1996 By: /s/ Richard W. Welshhans
Richard W. Welshhans
Vice President - Finance and
Chief Financial Office (Principal
Financial and Accounting Officer)
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