<PAGE> 1
SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE
SECURITIES EXCHANGE ACT OF 1934 (AMENDMENT NO. 1)
Filed by the Registrant /X/
Filed by a Party other than the Registrant / /
Check the appropriate box:
<TABLE>
<S> <C>
/X/ Preliminary Proxy Statement / / Confidential, For Use of the Commission
/ / Definitive Proxy Statement Only (as Permitted by Rule 14a-6(e)(2))
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
</TABLE>
REFLECTONE, INC.
(Name of Registrant as Specified In Its Charter)
---------------------------------------------
(Name of Person(s) Filing Proxy Statement if Other Than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/ / No Fee Required
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and
0-11.
(1) Title of each class of securities to which transaction
applies:
Common Stock, par value $0.10 per share
(2) Aggregate number of securities to which transaction applies:
2,864,448 shares
(3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
The filing fee was determined based upon (a) 1,489,448 issued
and outstanding shares of Common Stock, par value $0.10 per
share (the "Shares"), of Reflectone, Inc. as of February 25,
1997, excluding 1,375,000 Shares and warrants to purchase
78,261 Shares owned by British Aerospace Holdings, Inc., for
which no consideration will be paid upon consummation of the
transaction; and (b) the Merger Consideration of $24.00 per
Share (the "Merger Consideration"), plus
<PAGE> 2
$3,248,869 payable to holders of options to purchase Shares in
exchange for the cancellation of such options. The payment of
the filing fee, calculated in accordance with Regulation
240.0-11 under the Securities Exchange Act of 1934, as amended,
equals one-fiftieth of one percent of the value of the Shares
(and options to purchase Shares) for which the Merger
Consideration will be paid.
(4) Proposed maximum aggregate value of transaction: $38,995,621
(5) Total fee paid: $7,799.12
/X/ Fee Paid Previously With Preliminary Materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11 (a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the Form or Schedule and the date of its filing.
(1) Amount Previously Paid: $7,799.12
(2) Form, Schedule or Registration Statement No.: Schedule 13E-3
(3) Filing Party: Reflectone, Inc.; British Aerospace Holdings,
Inc.; and Bar Mergerco, Inc.
(4) Date Filed: March 4, 1997
<PAGE> 3
REFLECTONE, INC.
4908 TAMPA WEST BOULEVARD
TAMPA, FLORIDA 33634
April ____, 1997
Dear Shareholder:
You are cordially invited to attend a special meeting of Shareholders
(including any adjournment or postponement thereof, the "Meeting") of
Reflectone, Inc. (the "Company") to be held at the Company's principal
executive offices at 4908 Tampa West Boulevard, Tampa, Florida, on May 20, 1997
at 10:00 a.m., local time.
At the Meeting, you will be asked to consider and vote upon a proposal
to approve and adopt an Agreement and Plan of Merger dated as of February 13,
1997 (the "Merger Agreement"), by and among the Company, Bar Mergerco, Inc., a
Florida corporation ("Mergerco"), and British Aerospace Holdings, Inc., a
Delaware corporation ("Holdings"), providing for the merger (the "Merger") of
Mergerco with and into the Company, with the Company continuing as the
surviving corporation and a wholly-owned subsidiary of Holdings (the "Surviving
Corporation.").
Pursuant to the Merger Agreement, all holders of shares of the common
stock, par value $0.10 per share, of the Company ("Common Shares"), other than
Holdings, will be entitled to receive $24.00 in cash in exchange for each
outstanding Common Share held by them at the effective time of the Merger.
Each Common Share held by Mergerco will be canceled without consideration and
each share of common stock of Mergerco will be converted into and exchangeable
for one fully paid and non-assessable share of common stock of the Surviving
Corporation.
All of the capital stock of Mergerco is beneficially owned by
Holdings. Holdings is a wholly-owned subsidiary of British Aerospace Public
Limited Company ("British Aerospace"). As of April 14, 1997 (the "Record
Date"), three of the eight members of the Company's Board of Directors were
affiliated with Holdings. Since 1987, the Company, Holdings and British
Aerospace (and other affiliates of British Aerospace) have engaged in a number
of business and financial relationships. As of the Record Date, Holdings had
beneficial ownership of 1,375,000 Common Shares (which is approximately 48.0%
of the outstanding Common Shares). As of the Record Date, Holdings had
beneficial ownership of warrants to purchase an additional 78,261 Common Shares
(the "Warrants") and had beneficial ownership of all of the outstanding shares
(50,000 shares) of the Company's 8% Cumulative Convertible Preferred Stock, par
value $1.00 per share (the "Preferred Stock"), which Preferred Stock is
convertible into 500,000 Common Shares. On a fully-diluted basis (assuming
conversion of the Preferred Stock and the exercise of the Warrants and all
outstanding options to purchase Common Shares), as of the Record Date, Holdings
had beneficial ownership of 53.3% of the outstanding Common Shares. In
connection with the Merger, Holdings will not exercise the Warrants or convert
the Preferred Stock and will receive no consideration for the Warrants or the
Preferred Stock, all of which will be canceled upon the consummation of the
Merger pursuant to the Merger Agreement.
The affirmative vote of holders of at least a majority of all of the
outstanding Common Shares and the affirmative vote of the sole holder of all of
the outstanding shares of Preferred Stock, each voting as a separate class, is
required by Florida law to approve and adopt the Merger Agreement. In
addition, pursuant to the Merger Agreement, the affirmative vote of at least a
majority of the Common Shares voting on the Merger in person or by proxy held
by holders other than Holdings is required to approve and adopt the Merger
Agreement.
Mergerco was recently formed by Holdings in order to enable it to
acquire through the Merger all of the outstanding Common Shares not already
owned by Holdings or its affiliates (the "Public
<PAGE> 4
Shares"). If the Merger is approved, immediately prior to the effective time
thereof, Holdings will contribute to Mergerco the 1,375,000 Common Shares of
the Company that it beneficially owns and will fund Mergerco with sufficient
capital to purchase all of the Public Shares and to pay all amounts owed to
holders of options to purchase Common Shares.
If the Merger is approved and consummated, all of the outstanding
Common Shares of the Company will be held by Holdings and the holders of the
Public Shares will no longer have any equity interest in the Company or rights
as shareholders.
A Special Independent Committee of the Company's Board of Directors
(the "Special Independent Committee"), comprised of the directors of the
Company that are not officers of the Company or affiliated with Holdings or
British Aerospace, has, among other things, reviewed and considered the
proposed Merger. In connection with its review and consideration of the
proposed Merger, the Special Independent Committee retained Robert W. Baird &
Co. Incorporated ("Baird") to act as its financial advisor. Baird has rendered
its opinion to the Special Independent Committee to the effect that as of the
date of such opinion the Merger Consideration was fair, from a financial point
of view, to the holders of the Public Shares. Such opinion is attached to the
accompanying Proxy Statement as an exhibit and, together with the analyses
supporting it, is discussed in greater detail in the Proxy Statement.
The Special Independent Committee has unanimously recommended to the
Board of Directors of the Company that the Board approve the Merger.
Accordingly, the Board of Directors (with all Holdings-affiliated directors
abstaining upon advice of Holdings' counsel) has unanimously approved the
Merger as being in the best interests of the Company and its shareholders, and
the Board of Directors recommends that you vote FOR adoption of the Merger
Agreement.
Attached is a Notice of Meeting of Shareholders and a Proxy Statement
containing a discussion of the background of, reasons for and terms of the
Merger. We urge you to read this material carefully. Your vote is important.
Whether or not you plan to attend the Meeting, please complete, sign and date
the accompanying Proxy Card and return it in the enclosed postage prepaid
envelope as soon as possible. If you attend the Meeting, you may vote in
person if you wish, even if you have previously returned your Proxy Card. Your
prompt cooperation will be greatly appreciated.
If you require assistance in voting your shares or have questions,
please call MacKenzie Partners, Inc. who is assisting us with our solicitation
of proxies, at (800) 322-2885.
Very truly yours,
Richard G. Snyder,
President and Chief Executive Officer
2
<PAGE> 5
REFLECTONE, INC.
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD MAY 20, 1997
To Our Shareholders:
NOTICE IS HEREBY GIVEN that a Special Meeting of Shareholders of
Reflectone, Inc., a Florida corporation (the "Company"), will be held at the
Company's principal executive offices at 4908 Tampa West Boulevard, Tampa,
Florida, on May 20, 1997, at 10:00 a.m., local time (the "Meeting") as it may
be postponed or adjourned, for the following purposes:
1. To consider and act upon a proposal to approve and adopt an
Agreement and Plan of Merger dated as of February 13, 1997 (the "Merger
Agreement"), by and among the Company, Bar Mergerco, Inc., a Florida
corporation ("Mergerco"), and British Aerospace Holdings, Inc., a Delaware
corporation ("Holdings"), providing for the merger (the "Merger") of Mergerco
with and into the Company, with the Company continuing as the surviving
corporation and a wholly-owned subsidiary of Holdings.
2. To transact such other business as may properly come before
the Meeting or any postponements or adjournments thereof.
All of the capital stock of Mergerco, which was recently formed by
Holdings solely for the purpose of effecting the Merger, is beneficially owned
by Holdings. Holdings is a wholly-owned subsidiary of British Aerospace Public
Limited Company, a public limited company organized and existing under the laws
of England ("British Aerospace"). As of the Record Date (as defined below),
three of the eight members of the Company's Board of Directors were affiliated
with Holdings. Since 1987, the Company, Holdings and British Aerospace (and
other affiliates of British Aerospace) have engaged in a number of business and
financial relationships. As of the Record Date, Holdings had beneficial
ownership of 1,375,000 shares of common stock, par value $0.10 per share (the
"Common Shares"), of the Company (which is approximately 48.0% of the
outstanding Common Shares). As of the Record Date, Holdings had beneficial
ownership of warrants to purchase an additional 78,261 Common Shares (the
"Warrants") and had beneficial ownership of all of the outstanding shares
(50,000 shares) of the Company's 8% Cumulative Convertible Preferred Stock, par
value $1.00 per share (the "Preferred Stock"), which Preferred Stock is
convertible into 500,000 shares of Common Stock. On a fully-diluted basis
(assuming conversion of the Preferred Stock and the exercise of the Warrants
and all outstanding options to purchase Common Shares), as of the Record Date,
Holdings had beneficial ownership of 53.3% of the outstanding Common Shares.
In connection with the Merger, Holdings will not exercise the Warrants or
convert the Preferred Stock and will receive no consideration for the Warrants
or the Preferred Stock, all of which will be canceled upon the consummation of
the Merger pursuant to the Merger Agreement.
The affirmative vote of holders of at least a majority of all of the
outstanding Common Shares and the affirmative vote of the sole holder of all of
the outstanding shares of Preferred Stock, each voting as a separate class, is
required by Florida law to approve and adopt the Merger Agreement. Holdings
has advised the Company that it will vote the 1,375,000 Common Shares that it
beneficially owns in favor of the Merger Proposal. Holdings, as the sole owner
of all of the outstanding shares of Preferred Stock, has also advised the
Company that it will vote the Preferred Stock in favor of the Merger Proposal.
In addition, pursuant to the Merger Agreement, the affirmative vote of at least
a majority of the Common Shares voting on the Merger in person or by proxy held
by holders other than Holdings is required to approve and adopt the Merger
Agreement. If the Merger is approved, immediately prior to the effective time
thereof, Holdings will contribute to Mergerco the 1,375,000 Common Shares of
the Company that it beneficially owns and will fund Mergerco with sufficient
capital to purchase all of the outstanding Common Shares not already owned by
it and to pay all amounts owed to holders of options to purchase Common Shares.
As a result of the Merger, each outstanding Common Share, other than shares
held by Mergerco and treasury shares, if any, will be converted into the right
to receive $24.00 per share in cash, and the Company will be wholly-owned by
Holdings.
<PAGE> 6
The Board of Directors has fixed the close of business on April 14,
1997 as the record date (the "Record Date") of the Meeting. Only shareholders
of record on the stock transfer books of the Company at the close of business
on the Record Date are entitled to notice of, and to vote at, the Meeting.
THE BOARD OF DIRECTORS OF THE COMPANY UNANIMOUSLY (WITH THE
HOLDINGS-AFFILIATED DIRECTORS ABSTAINING UPON ADVICE OF HOLDINGS' COUNSEL)
RECOMMENDS THAT YOU VOTE FOR PROPOSAL 1.
PLEASE DO NOT SEND IN ANY STOCK CERTIFICATES AT THIS TIME. IF THE
MERGER IS APPROVED, YOU WILL BE SENT INSTRUCTIONS REGARDING THE PROCEDURES TO
EXCHANGE YOUR EXISTING CERTIFICATES EVIDENCING COMMON SHARES OF THE COMPANY FOR
THE ABOVE-MENTIONED CONSIDERATION.
WHETHER OR NOT YOU EXPECT TO BE PRESENT AT THE MEETING, YOU ARE URGED
TO FILL IN, DATE, SIGN AND RETURN THE ENCLOSED PROXY IN THE ENVELOPE PROVIDED,
WHICH REQUIRES NO POSTAGE IF MAILED IN THE UNITED STATES. IF A SHAREHOLDER
DECIDES TO ATTEND THE SPECIAL MEETING, HE OR SHE MAY, IF SO DESIRED, REVOKE THE
PROXY AND VOTE THE SHARES IN PERSON.
By Order of the Board of Directors
Richard W. Welshhans,
Secretary
Dated: April ____, 1997
2
<PAGE> 7
TABLE OF CONTENTS
<TABLE>
<CAPTION>
SUBJECT PAGE
- ------- ----
<S> <C>
INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
AVAILABLE INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
The Parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
The Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Mergerco . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Holdings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
The Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Effective Time of Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Certain Conditions to the Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Certain Effects of the Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Payment of the Merger Consideration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Appraisal Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
The Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Time, Date and Place . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Purpose of the Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Record Date; Quorum . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Required Vote . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Proxies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Special Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Background of the Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Structure of the Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Potential Business Prospects; British Aerospace Influence . . . . . . . . . . . . . . . . . . . . . 10
Purpose of and Reasons for the Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Recommendation of the Board of Directors; Fairness of the Merger . . . . . . . . . . . . . . . . . . 10
Opinion of Financial Advisor to the Special Independent Committee . . . . . . . . . . . . . . . . . 11
Opinion of Financial Advisor to British Aerospace . . . . . . . . . . . . . . . . . . . . . . . . . 11
Position of Holdings and British Aerospace as to Fairness . . . . . . . . . . . . . . . . . . . . . 11
Conflict of Interests of Holdings and Certain Members of the Board of
Directors of the Company in the Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Certain Effects of the Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Future Plans for the Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Certain U.S. Federal Income Tax Consequences of the Merger . . . . . . . . . . . . . . . . . . . . . 12
Estimated Fees and Expenses; Sources of Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Accounting Treatment of the Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Regulatory Approvals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
SPECIAL FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Background of the Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Overview and Current Condition of Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Potential Business Prospects; British Aerospace Influence . . . . . . . . . . . . . . . . . . . . . . . . . 20
Purpose of and Reasons For The Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
</TABLE>
i
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<TABLE>
<S> <C>
Determination of Fairness of the Merger by the
Special Independent Committee and the Board of Directors . . . . . . . . . . . . . . . . . . . . . . . 22
Opinion of Financial Advisor to the Special Independent Committee . . . . . . . . . . . . . . . . . . . . . 25
Opinion of Financial Advisor to British Aerospace. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Position of Holdings and British Aerospace as to Fairness . . . . . . . . . . . . . . . . . . . . . . . . . 33
Conflict of Interests of Holdings and Certain Members of the
Board of Directors of the Company in the Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Certain Effects of the Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Future Plans for the Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Certain U.S. Federal Income Tax Consequences of the Merger . . . . . . . . . . . . . . . . . . . . . . . . . 35
Estimated Fees and Expenses; Sources of Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Accounting Treatment of the Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Regulatory Approvals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
THE MEETING; MECHANICS OF VOTING AND PROXIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Time, Date and Place . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Record Date; Voting Securities; Quorum . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Required Vote . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Voting of Proxies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
THE MERGER AGREEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Effective Time of the Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
The Surviving Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Consideration to be Paid to Shareholders; Conversion of Common Shares . . . . . . . . . . . . . . . . . . . 40
Representations and Warranties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
Additional Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
Solicitation of Acquisition Proposals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
Conditions to Consummation of the Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
Fees and Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
Access to Information; Notices of Certain Events . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
Waiver and Amendments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
Assignment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
MARKET PRICE AND SHAREHOLDER INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
DIVIDENDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
SELECTED CONSOLIDATED FINANCIAL DATA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
CERTAIN INFORMATION REGARDING THE BUSINESS OF
THE COMPANY; RECENT DEVELOPMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
OPTION CANCELLATION INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
PURCHASES OF COMMON SHARES BY AND OTHER
</TABLE>
ii
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<TABLE>
<S> <C>
TRANSACTIONS WITH CERTAIN PERSONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
TRANSACTION OF OTHER BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
INDEPENDENT ACCOUNTANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
EXHIBITS:
- --------
EXHIBIT A - Agreement and Plan of Merger
EXHIBIT B - Annual Report on Form 10-K for the Fiscal Year Ended December 31, 1996 and Amendment No. 1 to
Annual Report on Form 10-K/A for the Fiscal Year Ended December 31, 1996 filed April 11, 1997
EXHIBIT C - Current Report on Form 8-K Dated February 24, 1997
EXHIBIT D - Opinion of the Special Independent Committee's Financial Advisor--Robert W. Baird & Co.
Incorporated
EXHIBIT E - Opinion of British Aerospace Public Limited Company's Financial Advisor--J.P. Morgan Securities
Inc.
</TABLE>
iii
<PAGE> 10
PROXY STATEMENT
FOR
SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD MAY 20, 1997
----------------------
INTRODUCTION
This Proxy Statement is being furnished to the holders of outstanding
shares of Common Stock, par value $0.10 per share (the "Common Shares"), and to
the sole holder of all of the outstanding shares of the 8% Cumulative
Convertible Preferred Stock, par value $1.00 per share (the "Preferred Stock"),
of Reflectone, Inc., a Florida corporation (the "Company"), in connection with
the solicitation of the accompanying Proxy by the Board of Directors of the
Company on behalf of the Company, for use at the Special Meeting of
Shareholders of the Company to be held at the Company's principal executive
offices at 4908 Tampa West Boulevard, Tampa, Florida on May 20, 1997 at 10:00
a.m., local time, or at any adjournments or postponements thereof (the
"Meeting"). The approximate date on which this Proxy Statement, the foregoing
Notice and the accompanying Proxy will first be sent or given to shareholders
is April ___, 1997.
At the Meeting, holders of the Common Shares and the sole holder of
the Preferred Stock on April 14, 1997 (the "Record Date") will consider and
vote upon a proposal to approve and adopt an Agreement and Plan of Merger dated
as of February 13, 1997 (the "Merger Agreement"), by and among the Company, Bar
Mergerco, Inc., a Florida corporation ("Mergerco"), and British Aerospace
Holdings, Inc., a Delaware corporation ("Holdings"). The Merger Agreement
provides, subject to the approval of the shareholders of the Company at the
Meeting and subject to the satisfaction or waiver of certain other conditions,
that: (a) Mergerco will be merged with and into the Company (the "Merger"),
with the Company continuing as the surviving corporation (the "Surviving
Corporation") of the Merger and a wholly-owned subsidiary of Holdings; (b) each
Common Share that is outstanding at the Effective Time (as hereinafter defined)
of the Merger, excluding Common Shares held by Holdings, will be converted into
the right to receive $24.00 per share in cash, without interest, subject to
applicable back-up withholding taxes (the "Merger Consideration"); (c) each
existing option (whether vested or unvested) to purchase Common Shares shall be
terminated in exchange for a cash payment equal to $24.00 per Common Share
purchasable thereunder less the exercise price with respect thereto; and (d)
Holdings will own 100% of the Surviving Corporation (collectively, the "Merger
Proposal").
Mergerco was recently formed by Holdings solely to enable it to
acquire through the Merger all of the outstanding Common Shares not already
owned by Holdings or its affiliates (the "Public Shares"). All of the capital
stock of Mergerco is beneficially owned by Holdings.
As of the Record Date, three of the eight members of the Company's
Board of Directors were affiliated with Holdings. Holdings is a Delaware
corporation which is a wholly-owned subsidiary of British Aerospace Public
Limited Company, a public limited company organized and existing under the laws
of England ("British Aerospace"). Since 1987, the Company, Holdings and
British Aerospace (and other affiliates of British Aerospace) have engaged in a
number of business and financial relationships. As of the Record Date,
Holdings had beneficial ownership of 1,375,000 Common Shares (which is
approximately 48.0% of the outstanding Common Shares). In addition, as of the
Record Date, Holdings had beneficial ownership of warrants to purchase an
additional 78,261 Common Shares (the "Warrants") and had beneficial ownership
of all of the outstanding shares (50,000 shares) of the Preferred Stock, which
are convertible into an aggregate of 500,000 Common Shares. On a fully-diluted
basis (assuming conversion of the Preferred Stock and the exercise of the
Warrants and all outstanding options to purchase Common Shares), as of the
Record Date, Holdings had beneficial ownership of 53.3% of the outstanding
Common Shares. In connection with the Merger, Holdings will not exercise the
Warrants or convert the Preferred Stock and will receive no consideration for
the Warrants or the Preferred Stock, all of which will be canceled upon the
consummation of the Merger pursuant to the Merger Agreement.
<PAGE> 11
Immediately prior to the effective time of the Merger, Holdings will
contribute to Mergerco the 1,375,000 Common Shares of the Company that it
beneficially owns and will fund Mergerco with sufficient capital to purchase
all of the Public Shares and to pay all amounts owed to holders of options to
purchase Common Shares.
Pursuant to the Florida Business Corporation Act (the "FBCA"), the
affirmative vote of holders of at least a majority of all of the outstanding
Common Shares and the affirmative vote of the sole holder of all of the
outstanding shares of Preferred Stock, each voting as a separate class, is
required to approve and adopt the Merger Agreement. In addition, pursuant to
the Merger Agreement, the affirmative vote of at least a majority of the Common
Shares voting on the Merger in person or by proxy held by holders other than
Holdings is required to approve and adopt the Merger Agreement. Holdings has
advised the Company that it will vote the 1,375,000 Common Shares that it
beneficially owns in favor of the Merger Proposal. Holdings, as the sole owner
of all of the outstanding shares of Preferred Stock, has also advised the
Company that it will vote the Preferred Stock in favor of the Merger Proposal.
The Board of Directors of the Company has fixed the close of business
on April 14, 1997 as the date for the determination of shareholders entitled to
notice of and to vote at the Meeting and any adjournments or postponements
thereof. At the close of business on the Record Date, there were 2,864,448
Common Shares (held by [____] shareholders of record) outstanding and entitled
to vote at the Meeting and 50,000 shares of Preferred Stock (held by one
shareholder, Holdings) outstanding and entitled to vote at the Meeting. Each
holder of record of Common Shares on the Record Date, and each holder of record
of Preferred Stock, is entitled to cast one vote per share in person or by
Proxy at the Meeting and any adjournments or postponements thereof.
Pursuant to the FBCA, the Merger must be approved and recommended to
the shareholders of the Company by the Board of Directors of the Company. The
Board of Directors appointed a Special Independent Committee comprised solely
of four members of the Board who are not affiliated with Holdings and are not
officers of the Company (the "Special Independent Committee") to review the
proposed Merger. Based upon the unanimous recommendation of the Special
Independent Committee, the Board of Directors of the Company (with the
Holdings-affiliated directors abstaining upon advice of Holdings' counsel) has
unanimously approved the Merger as being in the best interests of the Company
and its shareholders (including those who are not affiliated with Holdings) and
has recommended to the Company's shareholders that they approve the Merger
Agreement.
Pursuant to Section 607.1302(4) of the FBCA, the shareholders of the
Company do not have dissenter's rights of appraisal in connection with the
Merger because the Common Shares are designated as a "national market system
security" by The Nasdaq Stock Market. In addition, neither the Company's
Amended and Restated Articles of Incorporation, the Company's Bylaws, as
amended, nor the Merger Agreement, provide for dissenter's rights of appraisal.
Shareholders of the Company have no other express rights to object to the
Merger under Florida law. See "SUMMARY--The Merger--Appraisal Rights."
All Common Shares and shares of Preferred Stock represented by
properly executed Proxies received prior to or at the Meeting and not revoked
will be voted in accordance with the instructions indicated in such Proxies.
If no instructions are indicated, such Proxies will be voted FOR the Merger
Proposal and in the discretion of the persons named in the Proxy with respect
to such other matters as may properly come before the Meeting. For purposes of
obtaining the approval of at least a majority of all of the outstanding Common
Shares, abstentions and broker non-votes (where a broker or other record owner
submits a Proxy but does not have the authority to vote the beneficial owner's
Common Shares) will have the effect of a vote against the Merger Proposal. For
purposes of obtaining the approval of at least a majority of the Common Shares
voting on the Merger in person or by proxy held by holders other than Holdings,
abstentions and broker non-votes shall have no effect. A shareholder may
revoke his or her Proxy at any time prior to its use by delivering to the
Secretary
2
<PAGE> 12
of the Company a signed notice of revocation or a later dated and signed Proxy
or by attending the Meeting and voting in person.
THIS TRANSACTION HAS NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE
FAIRNESS OR MERITS OF SUCH TRANSACTION NOR UPON THE ACCURACY OR ADEQUACY OF THE
INFORMATION CONTAINED IN THIS PROXY STATEMENT. ANY REPRESENTATION TO THE
CONTRARY IS UNLAWFUL.
The Board of Directors of the Company knows of no additional matters
that will be presented for consideration at the Meeting. Execution of the
accompanying Proxy, however, confers on the designated proxy holders
discretionary authority to vote the Common Shares and shares of Preferred Stock
covered thereby in accordance with their best judgment on such other business,
if any, that may properly come before, and all matters incident to the conduct
of, the Meeting or any adjournments or postponements thereof.
The date of this Proxy Statement is April ____, 1997.
3
<PAGE> 13
AVAILABLE INFORMATION
The Company, Holdings and British Aerospace have filed with the
Securities and Exchange Commission (the "SEC") a Rule 13E-3 Transaction
Statement on Schedule 13E-3 (including any amendments thereto, the "Schedule
13E-3") under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), with respect to the Merger. This Proxy Statement does not contain all
the information set forth in the Schedule 13E-3 and the exhibits thereto,
certain parts of which are omitted in accordance with the rules and regulations
of the SEC. The Company is subject to the informational requirements of the
Exchange Act and, in accordance therewith, files reports, proxy statements and
other information with the SEC.
The Schedule 13E-3 and the exhibits thereto (including the opinion of
the Special Independent Committee's financial advisor, Robert W. Baird & Co.
Incorporated, and the opinion of British Aerospace's financial advisor, J.P.
Morgan Securities Inc., as hereinafter discussed), as well as such reports,
proxy statements and other information filed by the Company, can be inspected
and copied at the public reference facilities maintained by the SEC at Room
1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the SEC's Regional
Offices at Suite 1300, Seven World Trade Center, New York, New York 10048, and
Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661.
Copies of such materials also can be obtained at prescribed rates from
the Public Reference Section of the SEC at Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549. The SEC maintains an Internet site on the World Wide
Web at "http://www.sec.gov." which contains reports, proxy and information
statements and other information regarding issuers that file electronically
with the SEC.
Copies of the Schedule 13E-3 and the exhibits thereto (including the
opinion of the Special Independent Committee's financial advisor, Robert W.
Baird & Co. Incorporated and the opinion of British Aerospace's financial
advisor, J.P. Morgan Securities Inc.) are available for inspection and copying
at, and can be obtained directly from, the Company at its offices located at
4908 Tampa West Boulevard, Tampa, Florida 33634, Attention: Corporate
Secretary, or from Holdings at its offices located at Washington Technology
Park, 15000 Conference Center Drive, Suite 200, Chantilly, Virginia 20151-0080,
Attention: Charles E. Gaba, Vice President--General Counsel.
Except as otherwise indicated herein, all information appearing in
this Proxy Statement concerning the Company has been supplied by the Company,
and all information appearing in this Proxy Statement concerning Mergerco,
Holdings and British Aerospace has been supplied by Holdings or is based upon
publicly available documents on file with the SEC and other public records.
The Company assumes no responsibility for the accuracy or completeness of the
information furnished by Holdings or contained in such documents and records
other than those filed by the Company or for any failure of Mergerco, Holdings
or British Aerospace to disclose events that may have occurred and may affect
the significance or accuracy of such information and that are unknown to the
Company. Likewise, Holdings, Mergerco and British Aerospace assume no
responsibility for the accuracy or completeness of the information furnished by
the Company or contained in such documents and records other than those
provided by Holdings, Mergerco or British Aerospace or for any failure by the
Company to disclose events that may have occurred and that may affect the
significance or accuracy of such information and that are unknown to Holdings,
Mergerco and British Aerospace.
NO PERSONS HAVE BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROXY STATEMENT IN
CONNECTION WITH THE SOLICITATION OF PROXIES MADE HEREBY, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR ANY OTHER PERSON.
4
<PAGE> 14
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Company's Current Report on Form 8-K filed on February 24, 1997,
the Company's Annual Report on Form 10-K for the Fiscal Year Ended December 31,
1996, and the Company's Amendment No. 1 to Annual Report on Form 10-K/A for the
Fiscal Year Ended December 31, 1996 filed April 11, 1997, are attached as
exhibits to this Proxy Statement and shall be deemed to be incorporated herein
by reference and made a part hereof.
Any statement contained in a document incorporated by reference herein
shall be deemed to be modified or superseded for purposes hereof to the extent
that a statement contained herein modifies or supersedes such previous
statement. Any statement so modified shall not be deemed to constitute a part
hereof except as so modified or superseded.
5
<PAGE> 15
SUMMARY
The following is a brief summary of certain information contained
elsewhere in this Proxy Statement including the Exhibits hereto (the "Proxy
Statement"). This summary is not intended to be a complete description of the
matters covered in this Proxy Statement and is subject to and qualified in its
entirety by reference to the more detailed information contained elsewhere in
this Proxy Statement, including the Exhibits attached hereto and incorporated
by reference herein. This Proxy Statement contains certain statements of a
forward-looking nature relating to future events and future performance of the
Company. Shareholders are cautioned that such statements are only predictions
and that actual events or results may differ materially. In evaluating such
statements, shareholders should specifically consider the various factors
identified in this Proxy Statement which could cause actual results to differ
materially from those indicated by such forward-looking statements.
Shareholders are urged to read carefully the entire Proxy Statement, including
the Exhibits attached hereto.
THE PARTIES
THE COMPANY. The Company designs, manufactures and sells flight
simulators, weapon system trainers, tactical air defense trainers, maintenance
trainers, part-task trainers, and other sophisticated training devices for U.S.
Government, commercial and international customers, as well as simulation-based
entertainment devices for the entertainment industry. The Company also
provides a variety of simulator-related training services at customer-owned
facilities, its Tampa training center, and the Holdings-owned Dulles flight
training facility. The Company's business is conducted through its three
primary business segments: the Training Devices Segment, the Training Services
Segment, and the Systems Management Segment.
The Company is a Florida corporation with its principal executive
offices located at 4908 Tampa West Boulevard, Tampa, Florida, and its telephone
number is (813) 885-7481. For a further discussion of the Company, its
business and its current financial condition, see "SPECIAL FACTORS--Background
of the Merger," "CERTAIN INFORMATION REGARDING THE BUSINESS OF THE COMPANY;
RECENT DEVELOPMENTS" and the following exhibits which are attached hereto and
incorporated herein by reference: Exhibits B (the Company's Annual Report on
Form 10-K for the Fiscal Year Ended December 31, 1996 and Amendment No. 1 to
Annual Report on Form 10-K/A for the Fiscal Year Ended December 31, 1996 filed
April 11, 1997), C (the Company's Current Report on Form 8-K dated February 24,
1997), D (Opinion of the Special Independent Committee's Financial
Advisor--Robert W. Baird & Co. Incorporated), and E (Opinion of British
Aerospace Public Limited Company's Financial Advisor--J.P. Morgan Securities
Inc.).
MERGERCO. Mergerco is a Florida corporation recently organized by
Holdings solely for the purpose of effecting the Merger. Mergerco is a
wholly-owned subsidiary of Holdings. Mergerco has no material assets, and will
have no material assets other than 1,375,000 Common Shares (representing
approximately 48.0% of the outstanding Common Shares of the Company, as of the
Record Date) which will be contributed to Mergerco by Holdings, and additional
capital to be made available by Holdings in amounts sufficient to purchase the
Public Shares of the Company and to pay all amounts owed to holders of options
to purchase Common Shares. Mergerco has not engaged in any activities except
in connection with the Merger and will cease to exist upon the consummation of
the Merger. Mergerco's address is c/o British Aerospace Holdings, Inc.,
Washington Technology Park, 15000 Conference Center Drive, Suite 200,
Chantilly, Virginia 20151-0080, and its telephone number is (703) 802-0080.
HOLDINGS. Holdings is a Delaware corporation which is a wholly-owned
subsidiary of British Aerospace. British Aerospace is the U.K.'s largest
military and civil aircraft manufacturer and is involved in the design,
development, manufacture, and sale of both military and commercial aerospace
products and associated services. Holdings' principal business is the
marketing, leasing and support of commercial aircraft and related products
manufactured by British Aerospace or its affiliates. As of the Record Date,
three of the eight members of the Company's Board of Directors were affiliated
with Holdings. See
6
<PAGE> 16
"SPECIAL FACTORS--Conflict of Interests of Holdings and Certain Members of the
Board of Directors of the Company in the Merger." Since 1987, the Company,
Holdings and British Aerospace (and other affiliates of British Aerospace) have
engaged in a number of business and financial relationships. See "SPECIAL
FACTORS--Background of the Merger." As of the Record Date, Holdings had
beneficial ownership of 1,375,000 Common Shares (which is approximately 48.0%
of the outstanding Common Shares). In addition, as of the Record Date,
Holdings had beneficial ownership of Warrants to purchase an additional 78,261
Common Shares and had beneficial ownership of all of the outstanding shares
(50,000 shares) of the Preferred Stock which are convertible into 500,000
Common Shares. The Warrants are exercisable at any time prior to August 7,
2005 at an exercise price equal to the lesser of $11.50 per share and the
market price of the Common Shares on the date of exercise. On a fully-diluted
basis (assuming conversion of the Preferred Stock and the exercise of the
Warrants and all outstanding options to purchase Common Stock), as of the
Record Date, Holdings had beneficial ownership of 53.3% of the outstanding
Common Shares. See "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT."
The business address of Holdings is Washington Technology Park, 15000
Conference Center Drive, Suite 200, Chantilly, Virginia 20151-0080, and its
telephone number is (703) 802-0080.
THE MERGER
GENERAL. Upon consummation of the Merger, Mergerco will be merged
with and into the Company and the Company will be the Surviving Corporation and
a wholly-owned subsidiary of Holdings. The Surviving Corporation will succeed
to all the rights and obligations of the Company and Mergerco. Holdings will,
from and after the Effective Time (as defined below), nominate and elect the
entire board of directors of the Surviving Corporation until their successors
have been duly elected or appointed and qualified in the manner provided in the
Articles of Incorporation and Bylaws of the Surviving Corporation. It is
currently anticipated that the Company's existing Board of Directors will
comprise the Board of Directors of the Company immediately after the Effective
Time. It is anticipated that the current executive officers of the Company
will be the executive officers of the Surviving Corporation immediately after
the Effective Time. See "THE MERGER AGREEMENT--General--The Surviving
Corporation."
EFFECTIVE TIME OF MERGER. Pursuant to Section 1.1 of the Merger
Agreement, the effective time of the Merger (the "Effective Time") will occur
after the satisfaction or waiver of all conditions to the Merger, upon the
filing of Articles of Merger with the Secretary of State of the State of
Florida. The Company, Mergerco and Holdings anticipate that the Merger will be
consummated as promptly as practicable following the Meeting and the
satisfaction or waiver of the conditions set forth in the Merger Agreement.
See "THE MERGER AGREEMENT--Effective Time of the Merger."
CERTAIN CONDITIONS TO THE MERGER. Under Article 5 of the Merger
Agreement, the Merger is subject to the approval of the holders of at least a
majority of all of the outstanding Common Shares, the approval of Holdings as
the sole holder of the outstanding Preferred Stock, the approval of the holders
of at least a majority of the Public Shares voting on the Merger in person or
by proxy, and the satisfaction or waiver of certain additional conditions.
Holdings, with voting power for approximately 48.0% of the outstanding Common
Shares, has advised the Company that it intends to vote such Common Shares in
favor of the Merger. Holdings, as the sole owner of all of the outstanding
shares of Preferred Stock, has also advised the Company that it will vote the
Preferred Stock in favor of the Merger Proposal. See "SUMMARY--The Special
Meeting" and "THE MERGER AGREEMENT--Conditions to Consummation of the Merger."
Assuming the satisfaction or waiver of all such conditions, the Merger is
expected to be consummated on or about May 20, 1997.
CERTAIN EFFECTS OF THE MERGER. Under Article 2 of the Merger
Agreement, upon consummation of the Merger, each Public Share will be converted
into the right to receive the Merger Consideration of $24.00 in cash, subject
to back-up withholding taxes, if applicable, payable to the holder thereof,
without interest thereon, upon surrender of the certificate representing such
Public Share. Each Common Share outstanding immediately prior to the Effective
Time which is then owned by Mergerco or Holdings shall,
7
<PAGE> 17
by virtue of the Merger and without any action on the part of the holder
thereof, be canceled and retired and cease to exist, without any conversion
thereof. Each share of common stock of Mergerco outstanding immediately prior
to the Effective Time shall, by virtue of the Merger and without any action on
the part of the holder thereof, be converted into and exchangeable for one
fully paid and non-assessable share of Common Stock of the Surviving
Corporation. In connection with the Merger, Holdings will not exercise the
Warrants or convert the Preferred Stock and will receive no consideration for
the Warrants or the Preferred Stock, all of which will be canceled upon the
consummation of the Merger. See "THE MERGER AGREEMENT--Consideration to be
Paid to Shareholders; Conversion of Common Shares."
Under Section 2.3 of the Merger Agreement, holders of options will
agree to the cancellation of such options as a result of the Merger without any
consideration therefor, except such holders shall have the right to be paid the
difference between the Merger Consideration and the per share exercise price of
each such option, to the extent such difference is a positive number. See
"SPECIAL FACTORS--Estimated Fees and Expenses; Sources of Funds" and "OPTION
CANCELLATION INFORMATION."
Following the Effective Time, Holdings will own 100% of the Surviving
Corporation's outstanding shares of common stock. At such time, the holders of
the Public Shares (the "Public Shareholders") will cease to have any ownership
interest in the Company or rights as shareholders. The Public Shareholders
will no longer benefit from any increases in the value of the Company or the
payment of dividends on the Common Shares and will no longer bear the risk of
any decreases in value of the Company. No cash dividends have been paid on the
Company's Common Shares during the last two years.
As a result of the Merger, the Surviving Corporation will be privately
held and there will be no public market for its common stock. Upon
consummation of the Merger, the Common Shares will cease to be quoted on the
Nasdaq National Market. In addition, registration of the Common Shares under
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), will be
terminated.
Subsequent to the Merger, Holdings intends to contribute additional
funds to the Surviving Corporation to allow the Surviving Corporation to pay
the fees and expenses related to the transaction. See "SPECIAL
FACTORS--Estimated Fees and Expenses; Sources of Funds."
PAYMENT OF THE MERGER CONSIDERATION. Promptly after the Effective
Time, under Section 2.2 of the Merger Agreement, the Surviving Corporation will
deposit with ChaseMellon Shareholder Services, as paying agent (the "Paying
Agent"), monies sufficient to pay the aggregate Merger Consideration, and the
Paying Agent shall mail to each holder of record, as of the Effective Time, of
an outstanding certificate or certificates for Common Shares (other than
Mergerco), a letter of transmittal and instructions for use (the "Letter of
Transmittal") in effecting the surrender of such certificates for payment of
such Merger Consideration in accordance with the terms of the Merger Agreement.
In order to receive the Merger Consideration, Public Shareholders must send
their certificates representing Public Shares to the Paying Agent along with
the Letter of Transmittal. All certificates so surrendered will be canceled
and the Merger Consideration relating thereto will be paid by the Paying Agent
to the holders thereof.
Under Section 2.2 of the Merger Agreement, upon surrender of a
certificate representing Public Shares together with a duly executed Letter of
Transmittal, a Public Shareholder will receive $24.00 in cash in exchange for
each Public Share, without interest, subject to applicable back-up withholding
taxes. Any cash held by the Paying Agent that remains unclaimed by Public
Shareholders for six months after the Effective Time of the Merger will be
returned to the Surviving Corporation and any Public Shareholder who has not
exchanged his Public Shares for the Merger Consideration prior to that time
shall look thereafter only to the Surviving Corporation for payment of the
Merger Consideration in respect of his Public Shares. Any amounts remaining
unclaimed by Public Shareholders two years after the Effective Time will become
the property of the Surviving Corporation, to the extent permitted by
applicable abandoned property, escheat and other similar laws. Until
surrendered pursuant to the procedures described above, each certificate (other
than certificates representing Common Shares owned by Mergerco) shall represent
for all purposes solely the right to receive the Merger Consideration
multiplied by the number of Common Shares evidenced by
8
<PAGE> 18
such certificate. Shareholders should NOT submit any stock certificates for
Common Shares at the present time. See "THE MERGER AGREEMENT--Consideration to
be Paid to Shareholders; Conversion of Common Shares."
APPRAISAL RIGHTS. Pursuant to Section 607.1302(4) of the FBCA, the
shareholders of the Company do not have dissenter's rights of appraisal in
connection with the Merger because the Common Shares are designated as a
"national market system security" by The Nasdaq Stock Market. In addition,
neither the Company's Amended and Restated Articles of Incorporation, the
Company's Bylaws, as amended, nor the Merger Agreement provide for dissenter's
rights of appraisal. Shareholders of the Company have no other express rights
to object to the Merger under Florida law.
THE MEETING
TIME, DATE AND PLACE. A Special Meeting of shareholders of the
Company will be held on May 20, 1997 at 10:00 a.m., local time, at the
Company's principal executive offices at 4908 Tampa West Boulevard, Tampa,
Florida.
PURPOSE OF THE MEETING. The purpose of the Meeting is to (i) consider
and vote upon the Merger Proposal, and to approve and adopt the Merger
Agreement, a copy of which is attached to this Proxy Statement as Exhibit A and
incorporated by reference herein and (ii) to consider and vote upon such other
matters as may properly come before the Meeting. See "SPECIAL FACTORS--Purpose
of and Reasons for the Merger." For a brief discussion of the terms of the
Merger Agreement, see "THE MERGER AGREEMENT."
RECORD DATE; QUORUM. The close of business on April 14, 1997 has been
fixed as the Record Date for determining holders of Common Shares and the
holder of the Preferred Stock entitled to vote at the Meeting. Each Common
Share and each share of Preferred Stock outstanding on the Record Date is
entitled to one vote at the Meeting. As of the Record Date, 2,864,448 Common
Shares were outstanding and held of record by approximately [___________]
holders and 50,000 shares of Preferred Stock were outstanding and held of
record by one holder, Holdings. The presence, in person or by Proxy, of the
holders of a majority of the Common Shares entitled to vote at the Meeting and
of the sole holder of the Preferred Stock is necessary to constitute a quorum
for the transaction of business at the Meeting. See "THE MEETING, MECHANICS OF
VOTING AND PROXIES."
REQUIRED VOTE. Pursuant to the FBCA, the affirmative vote of holders
of at least a majority of all of the outstanding Common Shares and the
affirmative vote of the sole holder of all of the outstanding shares of
Preferred Stock, each voting as a separate class, is required to approve and
adopt the Merger Agreement. In addition, pursuant to the Merger Agreement, the
affirmative vote of at least a majority of the Public Shares voting on the
Merger in person or by proxy is required to approve and adopt the Merger
Agreement. Holdings has advised the Company that it will vote the 1,375,000
Common Shares that it beneficially owns in favor of the Merger Proposal.
Holdings, as the sole owner of all of the outstanding shares of Preferred
Stock, has also advised the Company that it will vote the Preferred Stock in
favor of the Merger Proposal. In addition, the executive officers and
directors of the Company, who collectively own 1.6% of the outstanding Common
Shares (without giving effect to the exercise of any options to purchase Common
Shares), have advised the Company that each will vote all of their Common
Shares in favor of the Merger Proposal. See "THE MEETING, MECHANICS OF VOTING
AND PROXIES." For further information concerning the terms and conditions of
the Merger, see "THE MERGER AGREEMENT--Conditions to Consummation of the
Merger."
PROXIES. A Proxy Card is enclosed for use at the Meeting. A Proxy
may be revoked at any time prior to its exercise at the Meeting if written
notice of revocation is given to the Secretary of the Company prior to the vote
being taken at the Meeting, or by execution of a subsequent Proxy which is
presented at the Meeting, or if the shareholder attends the Meeting and votes
by ballot, except as to any matter or matters upon which a vote shall have been
cast pursuant to the authority conferred by such Proxy prior to
9
<PAGE> 19
such revocation. Common Shares and shares of Preferred Stock represented by
properly executed Proxies received at or prior to the Meeting and which have
not been revoked will be voted in accordance with the instructions indicated
therein. If no instructions are indicated on a properly executed Proxy, such
Proxy will be voted FOR the Merger Proposal to approve and adopt the Merger
Agreement and in the discretion of the proxies on all other matters that may
properly come before the Meeting or any postponements or adjournments thereof.
See "THE MEETING, MECHANICS OF VOTING AND PROXIES."
SPECIAL FACTORS
BACKGROUND OF THE MERGER. For a description of the events leading to
the approval and adoption of the Merger Agreement by the Company's Board of
Directors, see "SPECIAL FACTORS--Background of the Merger."
STRUCTURE OF THE MERGER. Holdings is seeking to effect the Merger,
which will allow it to acquire all of the remaining equity interest in the
Company not currently owned by Holdings. The acquisition of Public Shares from
the Public Shareholders is structured as a cash merger in order to transfer
ownership of that equity interest to Holdings in a single transaction. See
"SPECIAL FACTORS--Purpose of and Reasons for the Merger."
POTENTIAL BUSINESS PROSPECTS; BRITISH AEROSPACE INFLUENCE. In
reviewing the fairness of the Merger to the Public Shareholders, both the
Special Independent Committee and Baird made extensive inquiries of management
of the Company as to the likelihood that contract awards would be made pursuant
to the Company's many outstanding bids and proposals and took into
consideration management's opinions as to the likelihood of actual contract
awards that might result from bids or proposals that have been submitted.
Prior to the date of the Merger Agreement, the Company had submitted one bid
for a major U.K. Ministry of Defence procurement of a training system for the
EH-101 and CH-47 Medium Support Helicopters (the "MSH Program"). After
considering the extremely high level of competition for this program and
related factors, based upon the recommendations of management, the Special
Independent Committee and Baird determined not to assume or project that the
Company will be awarded a contract for the MSH program in their evaluation of
the fairness of the Merger Proposal to the Public Shareholders. On March 11,
1997, the U.K. Ministry of Defense announced that the Company had not been
selected as the preferred bidder on the MSH Program. Accordingly, it is now
highly unlikely that the Company will be awarded a contract for the MSH
Program.
Because of the extensive marketing assistance provided by British
Aerospace and the influence that British Aerospace has with existing and
potential customers of the Company, British Aerospace's willingness to support
the Company in bids or proposals is often extremely important or determinative
in the Company's ultimate award of a contract. Additionally, it is possible
that certain contract awards, may become more likely if the Merger is completed
and the Company becomes wholly-owned by British Aerospace through Holdings.
See "SPECIAL FACTORS--Potential Business Prospects; British Aerospace
Influence."
PURPOSE OF AND REASONS FOR THE MERGER. The principal purposes for the
Merger are: (a) for Holdings to acquire all of the equity interest in the
Company represented by the Public Shares; (b) to rationalize the investment of
Holdings and British Aerospace in the Company, by balancing Holdings' and
British Aerospace's support of, and business relationships with, the Company
with the economic benefits derived therefrom; (c) to eliminate potential
conflicts between the interests of Public Shareholders and the interests of
Holdings; (d) to give the Public Shareholders the opportunity to receive a
significantly greater return than they had previously received on their Common
Shares; (e) to allow the Company to become more competitive in light of the
recent consolidations in the aerospace and defense industries by closer
association with one of the world's few prime airframe manufacturers; and (f)
to enable management of the Company to react with greater flexibility to
changing conditions and opportunities, all as more fully described herein. See
"SPECIAL FACTORS--Background of the Merger" and "SPECIAL FACTORS--Purpose of
and Reasons for the Merger."
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<PAGE> 20
RECOMMENDATION OF THE BOARD OF DIRECTORS; FAIRNESS OF THE MERGER. The
Board of Directors (with the Holdings-affiliated directors abstaining)
unanimously recommends a vote FOR approval and adoption of the Merger
Agreement. Based upon the consideration of a number of factors, the Special
Independent Committee determined that the Merger, including the Merger
Consideration, was fair from a financial point of view, to the Public
Shareholders. The Special Independent Committee believes that the Merger was
considered in a manner that was procedurally fair to the Public Shareholders.
For a discussion of the factors considered by the Board of Directors in making
its recommendation (including the factors considered by the Special Independent
Committee in making its recommendation to the Board of Directors), see "SPECIAL
FACTORS--Determination of Fairness of the Merger by the Special Independent
Committee and the Board of Directors."
At the present time, three of the eight members of the Board of
Directors are affiliated with Holdings, which has formed Mergerco for the
purpose of acquiring all of the equity interest in the Company. These
directors abstained from evaluating and voting on the Merger because each has
an indirect economic interest in the consummation of the Merger because of his
relationship with Holdings or British Aerospace. See "SPECIAL
FACTORS--Conflict of Interests of Holdings and Certain Members of the Board of
Directors of the Company in the Merger."
OPINION OF FINANCIAL ADVISOR TO THE SPECIAL INDEPENDENT COMMITTEE.
Pursuant to an engagement letter dated January 17, 1997, the Special Committee
retained Robert W. Baird & Co. Incorporated ("Baird") as its financial advisor
in connection with the proposed Merger. On February 13, 1997, Baird rendered
its opinion to the Special Independent Committee of the Board of Directors, to
the effect that, as of such date, the Merger Consideration was fair, from a
financial point of view, to the Public Shareholders. The full text of Baird's
written opinion, which sets forth assumptions made, matters considered, the
scope of and limitations on the review undertaken and procedures followed by
Baird in rendering its opinion, is attached hereto as Exhibit D and is
incorporated herein by reference. HOLDERS OF PUBLIC SHARES ARE URGED TO, AND
SHOULD, READ SUCH OPINION CAREFULLY IN ITS ENTIRETY. BETWEEN THE DATE OF
BAIRD'S OPINION AND THE DATE OF THE MEETING. EVENTS MAY OCCUR THAT COULD
MATERIALLY AFFECT THE COMPANY'S RESULTS OF OPERATIONS, FINANCIAL CONDITION,
MARKET PRICE OF THE COMMON SHARES OR OTHER MATTERS WHICH COULD MATERIALLY
AFFECT THE ANALYSES PERFORMED BY BAIRD IN CONNECTION WITH THE RENDERING OF ITS
OPINION OR THE CONCLUSIONS STATED THEREIN. BAIRD IS UNDER NO OBLIGATION AND
DOES NOT INTEND TO UPDATE ITS FEBRUARY 13, 1997 OPINION. See "SPECIAL
FACTORS--Opinion of Financial Advisor to the Special Independent Committee."
OPINION OF FINANCIAL ADVISOR TO BRITISH AEROSPACE. Pursuant to an
engagement letter dated December 23, 1996, British Aerospace retained J.P.
Morgan Securities Inc. ("J.P. Morgan") as its financial advisor in connection
with the proposed Merger. On February 26, 1997, J.P. Morgan delivered its
written opinion to the Board of Directors of British Aerospace, dated as of
such date, that, as of such date, the consideration to be paid by Holdings in
the proposed Merger was fair from a financial point of view to British
Aerospace. No limitations were imposed upon J.P. Morgan with respect to the
investigations made or procedures followed by it in rendering its opinion. The
full text of the written opinion of J.P. Morgan dated February 26, 1997, which
sets forth the assumptions made, matters considered and limits on the review
undertaken is attached as Exhibit E to this Proxy Statement and is incorporated
herein by reference. See "SPECIAL FACTORS--Opinion of Financial Advisor to
British Aerospace."
POSITION OF HOLDINGS AND BRITISH AEROSPACE AS TO FAIRNESS. Holdings
and British Aerospace considered the analyses of and the factors examined by
J.P. Morgan, and has adopted those analyses and conclusions as its own. See
"SPECIAL FACTORS-Background of the Merger" and "SPECIAL FACTORS-Opinion of
Financial Advisor to British Aerospace." Holdings and British Aerospace
determined the amount of the Merger Consideration by taking into account these
analyses and other factors, and believe that these analyses and factors, when
considered together, provide a reasonable basis to believe that the Merger is
fair from a financial point of view to the Public Shareholders. The other
factors which Holdings and British Aerospace considered were trading ranges of
the Common Shares (how Reflectone's Common Shares had traded over various time
periods), the implied premiums to the then-current and historical market prices
of the Common Shares which would be generated by payment of the Merger
Consideration to the Public Shareholders, and the stand alone ability of the
Company to compete in its industry (including British Aerospace's belief that
as a result of the significant level of financial support given by British
Aerospace to the Company, without which support, the Company could not
effectively compete).
11
<PAGE> 21
See "SPECIAL FACTORS--Position of Holdings and British Aerospace as to
Fairness."
CONFLICT OF INTERESTS OF HOLDINGS AND CERTAIN MEMBERS OF THE BOARD OF
DIRECTORS OF THE COMPANY IN THE MERGER. In considering the recommendation of
the Board of Directors with respect to the Merger, the Public Shareholders
should be aware that the three of the eight directors of the Company affiliated
with Holdings abstained from evaluating and voting on the Merger. As the sole
shareholder of Mergerco, Holdings has a direct economic interest in the Merger
which creates a conflict of interest for the Holdings-affiliated directors. In
addition, since 1987, the Company, Holdings and British Aerospace (and other
affiliates of British Aerospace) have engaged in a number of business and
financial relationships. See "SPECIAL FACTORS--Background of the Merger."
Holdings, therefore, has certain interests summarized below that present actual
economic conflicts of interest in connection with the Merger. For a more
detailed discussion of such interests, see "SPECIAL FACTORS--Conflict of
Interests of Holdings and Certain Members of the Board of Directors of the
Company in the Merger."
In light of these conflicts, the Board of Directors formed the Special
Independent Committee comprised of four directors who are not affiliated with
Holdings and are not officers of the Company.
In making its determination with respect to the Merger Proposal in
accordance with its fiduciary duties to the shareholders, the Special
Independent Committee and the Board of Directors considered the actual
conflicts of interest of certain of the Board's members, along with the other
matters described under "SPECIAL FACTORS--Determination of Fairness of the
Merger by the Special Independent Committee and the Board of Directors."
As of the date of this Proxy Statement, Holdings has beneficial
ownership of approximately 48.0% of the outstanding Common Shares. On a
fully-diluted basis (assuming conversion of the Preferred Stock and the
exercise of the Warrants and all outstanding options to purchase Common Stock),
Holdings has beneficial ownership of approximately 53.3% of the Common Shares.
If the Merger is consummated, Holdings will own the entire outstanding
equity interest of the Surviving Corporation. Holdings will, in its sole
discretion, have the power and authority to change any or all of the officers
or directors of the Surviving Corporation.
CERTAIN EFFECTS OF THE MERGER. Following the Merger, Holdings will
own 100% of the Surviving Corporation's outstanding shares of common stock.
Holdings will be the sole beneficiary of any future earnings and growth of the
Surviving Corporation (until shares of common stock, if any, are issued to
other shareholders), and the Public Shareholders will no longer benefit from
any increases in the value of the Company or the payment of dividends on the
Common Shares and will no longer bear the risk of any decreases in value of the
Company. See "DIVIDENDS." As a result of the Merger, (i) the Surviving
Corporation will be privately held, (ii) there will be no public market for its
Common Stock, (iii) the Common Shares will cease to be quoted on the Nasdaq
National Market, and (iv) registration of the Common Shares under the Exchange
Act will be terminated and the Company will no longer be required to file
periodic reports with the SEC. With the exception of the Company's stock
option plans and the Reflectone, Inc. Stock Purchase Plan, all employee benefit
and compensation plans of the Surviving Corporation are expected to be
substantially the same as the Company's present benefit plans, but the
Surviving Corporation may determine to amend present benefit plans or to
initiate additional employee benefit plans in the future. See "SPECIAL
FACTORS--Certain Effects of the Merger."
FUTURE PLANS FOR THE COMPANY. It is expected that following the
Merger, the business and operations of the Company will be continued by the
Company, as the Surviving Corporation in the Merger, substantially as they are
currently being conducted. However, Holdings and the management of the
Surviving Corporation will continue to evaluate the Company's business and
operations after the consummation of the Merger and make such changes as are
deemed appropriate.
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<PAGE> 22
Holdings does not have any present plans or proposals subsequent to
the Merger which relate to or would result in any extraordinary corporate
transaction, such as a merger, reorganization or liquidation, involving the
Company, a sale or transfer of a material amount of assets of the Company or
any material change in the Company's corporate structure. See "SPECIAL
FACTORS--Future Plans for the Company."
CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER. The
receipt of cash for Public Shares pursuant to the Merger will be a taxable
transaction to the holders of the Public Shares for U.S. federal income tax
purposes under the Internal Revenue Code of 1986, as amended (the "Code"), and
may be a taxable transaction for foreign, state and local income tax purposes
as well. Public Shareholders should consult their own tax advisors regarding
the U.S. federal income tax consequences of the Merger, as well as any tax
consequences under state, local or foreign laws. See "SPECIAL FACTORS--Certain
U.S. Federal Income Tax Consequences of the Merger."
ESTIMATED FEES AND EXPENSES; SOURCES OF FUNDS. It is currently
expected that $35,746,752 will be required to pay the Merger Consideration to
the Public Shareholders, $3,248,869 will be paid to holders of options to
purchase Common Shares (which constitutes the difference between the Merger
Consideration and the option exercise prices), and approximately $2,000,000
will be required to pay the expenses of the Company, Mergerco and Holdings in
connection with the Merger Agreement and the transactions contemplated thereby.
Such funds will be furnished from available funds of Holdings. See "SPECIAL
FACTORS--Estimated Fees and Expenses; Sources of Funds" and "OPTION
CANCELLATION INFORMATION."
ACCOUNTING TREATMENT OF THE MERGER. The Merger will be accounted for
as a "purchase" as such term is used under generally accepted accounting
principles for accounting and financial reporting purposes. See "SPECIAL
FACTORS--Accounting Treatment of the Merger."
REGULATORY APPROVALS. No federal or state regulatory approvals are
required to be obtained, nor are any regulatory requirements required to be
complied with, in connection with consummation of the Merger, by any party to
the Merger Agreement, except for waivers or approvals under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976 and the Exon-Florio
Amendment to the Defense Production Act of 1950, as amended, which have been
obtained. See "SPECIAL FACTORS--Regulatory Approvals."
13
<PAGE> 23
SPECIAL FACTORS
BACKGROUND OF THE MERGER
OVERVIEW AND CURRENT CONDITION OF COMPANY. The Company has various
relationships, contracts, and agreements with British Aerospace, the parent of
Holdings, and other affiliates thereof. British Aerospace is the U.K.'s
largest military and civil aircraft manufacturer and is involved in the design,
development, manufacture, and sale of both military and commercial aerospace
products and associated services. As a result of transactions occurring
between 1987 and 1989, Holdings holds an aggregate of 1,375,000 Common Shares,
or approximately 48.0% of the Company's outstanding Common Shares, and 50,000
shares of Preferred Stock which are convertible into an additional 500,000
Common Shares. On May 15, 1987, pursuant to a Stock Purchase Agreement with
the Company dated May 15, 1987, British Aerospace purchased 100,000 Common
Shares for an aggregate cost of $2,800,000. British Aerospace transferred
these 100,000 Common Shares to Holdings by means of a capital contribution on
May 23, 1988. On May 19, 1988, pursuant to a Stock Purchase Agreement with the
Company dated May 19, 1988, Holdings purchased 500,000 Common Shares and 50,000
shares of Preferred Stock for an aggregate purchase price of $17,800,000. On
September 15, 1989, pursuant to a Stock Purchase Agreement with the Company
dated September 15, 1989, Holdings purchased an additional 500,000 Common
Shares for an aggregate purchase price of $3,226,562.50. In addition to the
foregoing, Holdings acquired 275,000 Common Shares pursuant to a 25% stock
dividend declared by the Company in 1993. During 1995, as a result of its
support of the Company's credit facilities, Holdings was issued Warrants to
purchase 78,261 Common Shares 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 Shares on the Nasdaq National Market on August 7, 1995) and (ii) the per
share market price of the Common Shares on the date of the exercise of the
Warrants. On a fully-diluted basis (assuming conversion of the Preferred Stock
and the exercise of the Warrants and all outstanding options to purchase Common
Shares and no additional shares were issued or reacquired by the Company),
Holdings would beneficially own 53.3% of the outstanding Common Shares.
Thus, as the holder of approximately 48.0% of the outstanding Common
Shares and on a fully-diluted basis, approximately 53.3%, Holdings effectively
has the power to decide all matters submitted for shareholder approval. In
addition, Holdings has the power to determine the membership of the Company's
Board of Directors; however, Holdings is subject to restrictions contained in a
Special Security Agreement by and among the Company, Holdings, British
Aerospace and the United States Department of Defense dated effective June 10,
1988 (the "SSA"). The SSA was required by the United States Department of
Defense because of the Company's need to maintain a U.S. Government Secret
Level Security Clearance and ownership position in the Company held by British
Aerospace (through Holdings) as a foreign corporation. The stated purpose of
the SSA is to exclude British Aerospace, Holdings, and their respective
subsidiaries and representatives from any unauthorized access to and influence
over classified information in the possession of the Company, as well as to
prevent unauthorized access to export-controlled technical data in the
Company's possession. One of the precautions set forth by the Department of
Defense under the SSA is the requirement that no more than three of the
Company's eight directors may be individuals affiliated with British Aerospace.
The Company's relationship with Holdings and British Aerospace has
significantly expanded the Company's access to international markets, as well
as provided the Company with the opportunity to assist a major airframe
manufacturer with its internal simulation requirements. This, in turn, has
strengthened the Company's capacity to serve its existing military and
commercial markets, and provided collaborative access to an expanding European
and worldwide market for simulation and training systems.
British Aerospace and its affiliates (including Holdings) have been
important customers for the Company. During the Company's most recent two full
fiscal years, the Company has been awarded contracts by British Aerospace and
its affiliates relating to (i) the design and manufacture of three full
14
<PAGE> 24
flight simulators (pursuant to separate contract awards); (ii) the design and
manufacture of a full flight simulator, including the construction of a
facility to house the simulator and the provision of maintenance support; (iii)
the sale of a simulator from Company-owned assets; and (iv) management by the
Company of the Holdings-owned Dulles Training Center. In addition, British
Aerospace and its affiliates (including Holdings) have provided the Company
with extensive marketing assistance and support for European and other
international simulation and training opportunities.
During the last three fiscal years, the Company's strategy has been to
minimize the incurrence of debt. In addition, the Company has been unable to
obtain necessary financing other than financing guaranteed or provided by
British Aerospace. British Aerospace has elected to guarantee or provide
financing arrangements for maximum periods of twelve months and, as a result,
long-term financing has been unavailable to the Company.
The Company's working capital requirements are impacted by the volume
and nature of contracts which it receives. Certain contracts require the
Company to make significant capital outlays prior to the receipt of payments
from customers. The largest current commitments relate to approximately $22.0
million of working capital for the C-130J program with Lockheed Martin
Corporation ("LMC") and commitments to provide approximately $27.0 million of
stand-by letters of credit and bank guarantees as security against performance
and advance payments on various long-term contracts. In order to finance the
working capital required to perform on existing and future large simulation
programs, management of the Company believes that the Company must currently
maintain financing facilities of approximately $90.0 million. To date, based
upon proposals from and management's discussions with lending institutions, the
Company has been unable to obtain adequate financing on acceptable terms
without recourse to British Aerospace. Subject to the terms and conditions
contained in the Agreement for Credit Availability dated as of November 20,
1996 between the Company and British Aerospace (the "Agreement for Credit
Availability"), which replaced prior Agreements for Credit Availability dated
August 7, 1995 and August 7, 1996, British Aerospace agreed to continue to
provide or guarantee the Company's credit facilities at their then-current
levels 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 January 31, 1997, British Aerospace represented to the Company
that it intended to continue to provide or guarantee the Company's credit
facilities, as long as (i) financing was not available to the Company without
recourse to British Aerospace and (ii) British Aerospace continues to hold, or
has the ability to hold through the exercise of Preferred Stock conversion
rights and Warrants to purchase Common Shares, a majority ownership position in
the Company. Without British Aerospace's willingness to continue to support
the Company's credit facilities, the Company would not be able to perform on
existing contracts or compete for additional large simulation programs.
Certain of these contracts may require significant capital outlays by the
Company prior to its receipt of any payments from its customers. Furthermore,
the Company's management believes (based upon discussions with the Company's
independent auditors) that the letter provided by British Aerospace confirming
British Aerospace's intent to continue to support the Company's credit
facilities would be required by the Company's independent auditors in order for
the auditors to express an opinion on the Company's financial statements
without expressing substantial doubt about the Company's ability to continue as
a going concern.
The Company's credit facilities and the Agreement for Credit
Availability with British Aerospace contain certain covenants and agreements
which, among other things, require: (i) the Company to be current with respect
to the payment of dividends on the Preferred Stock prior to any draw under the
British Aerospace provided credit facilities; (ii) the Company to pay British
Aerospace a guarantee fee of 3.50% per annum, less the margin over the prime
rate charged by Wachovia Bank of Georgia, N.A. ("Wachovia Bank"), on amounts
outstanding under the Company's $2.0 million revolving line of credit facility
with Wachovia Bank; and (iii) the Company to pay British Aerospace a quarterly
fee equal to one-eighth of one percent of the maximum amount of the credit
facilities guaranteed by British Aerospace or provided by British Aerospace or
its affiliates. In addition, the Agreement for Credit Availability requires
that the Company obtain the prior approval of British
15
<PAGE> 25
Aerospace for all material capital investment expenditures (as determined in
accordance with the Agreement for Credit Availability). In addition, pursuant
to the terms of a prior Agreement for Credit Availability dated August 7, 1995,
covering a period from August 7, 1995 to July 22, 1996, the Company issued to
Holdings the Warrants on August 28, 1995.
The Company has a $2.0 million revolving line of credit facility with
Wachovia Bank, supported by the corporate guarantee of British Aerospace. The
Company has a $35.0 million letter of credit facility with Lloyds Bank Plc.,
supported by the corporate guarantee of British Aerospace. The Company has a
revolving line of credit facility provided by British Aerospace Finance, Inc.,
a wholly-owned subsidiary of Holdings, for up to $10.0 million.
The Company has a special credit facility (the "C-130J Facility") with
British Aerospace Finance, Inc. to finance the Company's working capital needs
with respect to the United Kingdom (UK) C-130J contract with Lockheed Martin
Corporation ("LMC"). At December 31, 1996, the Company had $4.3 million drawn
under the C-130J Facility. Draws under this facility are limited to actual
costs incurred by the Company and Reflectone UK Limited, a wholly-owned
subsidiary of the Company ("RUKL"), on the UK C-130J program. By means of a
letter dated January 31, 1997, British Aerospace has 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
Shares, a majority ownership position in the Company, it intends to continue to
provide annual financing for the UK C-130J program until payment is received
from LMC for delivery of the training system. During 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 to be made in the second quarter of 1997. Based on current schedules,
the contract is estimated to require additional funding during 1997 of $22.0
million prior to LMC's payments for delivery of the training system. 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.
At March 28, 1997, the Company had borrowings of $15.1 million drawn
under the C-130J Facility with British Aerospace and $400,000 drawn under the
revolving line of credit facility with British Aerospace. Letters of credit
and bank guarantees outstanding or committed totaled approximately $27.0
million at March 28, 1997. At March 28, 1997, the Company had not incurred any
additional short- or long-term debt, other than that disclosed herein.
In 1994, Holdings considered the sale of its Common Shares and
Preferred Stock. At that time, the Company formed a special committee of its
Board of Directors to consider the interests of the Public Shareholders.
During Holdings' consideration of a possible sale, such special committee met
several times and engaged a financial advisor to assist it in considering the
potential impact of a sale by Holdings on the Company and the Public
Shareholders. After final consideration and advice from financial advisors
with respect to the potential market for its Common Shares and Preferred Stock,
Holdings determined not to sell its Common Shares and Preferred Stock and,
accordingly, such special committee took no action.
In the course of conducting its business, the Company enters into
contracts and agreements with British Aerospace, and its affiliates, for the
sale of simulation equipment and services. These sales to British Aerospace
and its affiliates consist of both products and services intended to be used by
British Aerospace and its affiliates as well as products and services intended
for resale by British Aerospace and its affiliates to their customers. Sales
of simulation equipment and training services to British Aerospace and its
affiliates approximated 24.3%, 24.7% and 7.3% of total revenues in 1996, 1995
and 1994, respectively. In the year ended December 31, 1996, revenues and cost
of sales derived from these transactions was approximately $24.4 million and
$19.9 million, respectively. At December 31, 1996, receivables and advance
billings included approximately $4.3 million and $3.7 million, respectively,
arising from transactions with British Aerospace and its affiliates. The
Company's sales backlog from contracts or agreements with British Aerospace and
its affiliates, approximates $18.9
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<PAGE> 26
million at December 31, 1996. The following is a list of contracts and
transactions between the Company and British Aerospace and its affiliates,
since January 1, 1995, in which the aggregate amount paid by British Aerospace
or its affiliates to the Company in such transaction or required to be paid by
British Aerospace or its affiliates to the Company under such contract was
greater than one percent of the Company's consolidated revenues for the fiscal
year in which such transaction occurred or such contract payment was required:
<TABLE>
<CAPTION>
AMOUNT
YEAR TRANSACTION OR CONTRACT DESCRIPTION (IN THOUSANDS)
<S> <C> <C>
1993 Management Agreement for the management of the British $ 6,960
Aerospace owned Dulles Training Center (1995 Revenues)
1995 Design and manufacture one Full Flight Simulator $ 7,668
1995 Design and manufacture one Full Flight Simulator, $26,130
construction of facility to house simulator and provision of
maintenance support
1995 Design and manufacture one Full Flight Simulator $ 6,900
1995 Sale of one Full Flight Simulator from Company-owned assets $ 8,600
1995 Revised Management Agreement for management of the British $ 3,584
Aerospace owned Dulles Training Center (1996 Revenues)
1996 Design and manufacture one Full Flight Simulator $ 6,590
</TABLE>
In addition, the Company paid to British Aerospace, or its affiliates,
$550,000, $305,000 and $109,000 during 1995, 1996, and the first quarter of
1997, respectively, under the Agreement for Credit Availability (or predecessor
agreements) whereby British Aerospace agrees to continue to guaranty or provide
the Company's credit facilities. In addition, the Company paid interest to
British Aerospace, or its affiliates, of $1.4 million, $1.5 million and
$200,000 during 1995, 1996, and the first quarter of 1997, respectively, under
direct borrowing agreements with British Aerospace or its affiliates, with a
maximum aggregate availability of $50.0 million.
British Aerospace, and its affiliates, and the Company have certain
other business relationships which are more particularly described in Exhibit
B--"Annual Report on Form 10-K for the Fiscal Year Ended December 31, 1996,
Part I, Item 1, Business, and Amendment No. 1 to Annual Report on Form 10-K/A
for the Fiscal Year Ended December 31, 1996 filed April 11, 1997," which is
incorporated herein by reference.
For further discussion of the Company's business and strategy, see
"CERTAIN INFORMATION REGARDING THE BUSINESS OF THE COMPANY; RECENT
DEVELOPMENTS" and Exhibit B--Annual Report on Form 10-K for the Fiscal Year
Ended December 31, 1996, Part I, Item 1, Business and Part II, Item 7,
Management's Discussion and Analysis of Financial Condition and Results of
Operation, and Amendment No. 1 to Annual Report on Form 10-K/A for the Fiscal
Year Ended December 31, 1996 filed April 11, 1997.
The Company's continuing inability to obtain financing without credit
support from British Aerospace prompted Holdings to re-evaluate its
relationship with the Company and the Public Shareholders. In December 1996,
Holdings began to focus its attention on possible alternatives for the Company,
including a going-private transaction in which Holdings would acquire all of
the Common Shares.
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To assist in this evaluation, pursuant to an engagement letter dated
December 23, 1996 (the "J.P. Morgan Engagement Letter"), British Aerospace
retained J.P. Morgan to advise British Aerospace in analyzing the Company's
financial and operational condition and business prospects for the purpose of
determining the advisability of a going-private transaction, and to render
financial advisory services to British Aerospace in the event that British
Aerospace determined to seek to acquire the Public Shares. Between December
1996 and February 1997, J.P. Morgan reviewed certain public and non-public
information with respect to the Company and generally conducted a financial
analysis of the Company.
On January 7, 1997, Richard Lapthorne, the Group Finance Director, and
Iain Ferguson, the Treasurer-Corporate Finance, of British Aerospace met with
Stella F. Thayer, the Chairman of the Board, and Richard G. Snyder, the
President and Chief Executive Officer, of the Company to informally express
Holdings' possible interest in acquiring the Public Shares in a merger. On
January 8, 1997, the Board of Directors of the Company met and formed the
Special Independent Committee which is comprised of Edward W. Bettke, Robert F.
Schoultz, Dale R. States, and Stella F. Thayer (Chairman); such directors are
unaffiliated with the Company or British Aerospace (other than in their
capacity as directors of the Company). The Special Independent Committee's
consensus was that the Company's prospects for the future were favorable and
that, while the Special Independent Committee was willing to explore a sale of
the Company to Holdings, the Special Independent Committee would recommend such
a transaction only if it resulted in a price or value to the Company's
shareholders that was fair from a financial point of view and sufficiently
attractive to justify the Company in changing from its current course of
operating and growing on an independent, but British Aerospace-supported,
basis. On January 13, 1997, the Special Independent Committee retained Baird
to act as the financial advisor to the Special Independent Committee. The
Special Independent Committee selected Baird primarily on the basis of Baird's
familiarity with the Company, its experience and knowledge of the industry in
which the Company competes, and the quality of the personnel that Baird
committed to the assignment. Baird has made a market in the Company's Common
Shares since October 1, 1991, and provided financial advisory services to the
Company in connection with the Company's 1993 acquisition of Reflectone UK,
Ltd. and the Company's negotiation of a management agreement for the Reflectone
Dulles Training Center in 1993, for which Baird has received customary
compensation. See "SPECIAL FACTORS--Opinions of Financial Advisor to the
Special Independent Committee--Compensation." During January and February,
1997, various combinations of Holdings, J.P. Morgan, management of the Company,
the Special Independent Committee, Baird and their respective counsel, held
several meetings and telephonic conferences to discuss and negotiate the terms
of a going-private transaction, and to prepare the documentation in connection
therewith, including the Merger Agreement.
During January and February, 1997, the Special Independent Committee
met formally as an entire committee four times and convened informally by
telephone on several other occasions. At each meeting, the Special Independent
Committee and whichever of its advisors were then present discussed the
proposed going-private transaction and considered one or more of the factors
described in "SPECIAL FACTORS--Determination of Fairness of the Merger by the
Special Independent Committee and the Board of Directors." In addition,
certain members of the Special Independent Committee met with Baird and
representatives of Holdings and J.P. Morgan to discuss the Merger and related
transactions, during which Baird and J.P. Morgan discussed in general their
preliminary views of the possible valuation of the Company with those present.
During meetings with Holdings and its advisors, the Special Independent
Committee and its advisors were informed by Holdings that if the Merger was not
consummated, British Aerospace would consider its alternatives. In response to
inquiries from representatives of the Special Independent Committee, British
Aerospace informed such representatives that these alternatives included, among
other things, British Aerospace's withdrawal of its continued support of the
Company's credit facilities and business operations, the possible sale of the
entire Company or other alternatives. These alternatives would, of course, be
considered by British Aerospace over a period of time. The Merger
Consideration was determined by the Company and Holdings in arm's-length
negotiations. During negotiations between representatives of the Special
Independent Committee and Holdings, the Special Independent Committee attempted
to negotiate a
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per share consideration in excess of the Merger Consideration, but Holdings was
only willing to pay the Merger Consideration. There is no arrangement between
the parties to reconsider the Merger Consideration should the market price of
the Common Shares exceed the Merger Consideration at any time prior to the
Meeting.
On February 13, 1997, the Special Independent Committee met to
consider the approval of the Merger Agreement. At such meeting, Baird rendered
its written opinion to the Special Independent Committee, to the effect that,
as of the date of such opinion, the Merger Consideration was fair, from a
financial point of view, to the Public Shareholders. Following discussion, the
Special Independent Committee unanimously agreed to recommend to the Board of
Directors that the Board approve the Merger and recommend to the Company's
shareholders that they approve the Merger Agreement. On February 13, 1997, the
members of the Board (with Holdings-affiliated Directors of the Company
abstaining upon advice of Holdings' counsel) unanimously approved the Merger as
being in the best interests of the Company and its shareholders. The Merger
Agreement was executed on February 13, 1997, and a press release announcing the
proposed transaction was issued on such date.
With respect to the non-public information regarding the Company, J.P.
Morgan and Baird received certain confidential information from the Company,
including certain summaries prepared by management setting forth five year
forecasts regarding operating results of the Company and internally generated
projected cash flow forecasts. The forecasts provided for Total Revenues of
$110.8 million, $119.1 million, $127.6 million, $137.5 million and $144.5
million for the fiscal years ending December 31, 1997, 1998, 1999, 2000 and
2001, respectively. Gross Profit was projected to be $41.4 million, $40.0
million, $43.5 million, $47.1 million and $50.5 million for the same periods,
respectively. Income from Operations was forecasted to be $6.2 million, $10.8
million, $13.1 million, $17.6 million and $20.0 million for the same periods,
respectively. Net Income was projected to be $4.5 million, $7.2 million, $8.9
million, $12.0 million and $13.7 million for the same periods, respectively.
While the actual results for 1996 did not vary materially from the forecasted
data, management provided J.P. Morgan and Baird with updated forecasts based
upon this information, which provided for Total Revenues of $110.8 million,
$119.1 million, $127.8 million, $137.7 million and $144.7 million for the
fiscal years ending December 31, 1997, 1998, 1999, 2000 and 2001, respectively.
Gross Profit was projected to be $41.7 million, $40.3 million, $44.0 million,
$47.6 million and $50.5 million for the same periods, respectively. Income
from Operations was forecasted to be $6.2 million, $10.3 million, $13.0
million, $17.4 million and $19.4 million for the same periods, respectively.
Net Income was projected to be $4.7 million, $6.9 million, $8.8 million, $11.9
million and $13.4 million for the same periods, respectively. In addition,
J.P. Morgan and Baird were provided with certain information regarding the
Company's forecasts for the years 2002 through 2006.
An abnormal gross profit margin in 1997 is forecasted as a result of
the recognition of profits upon the completion of anticipated program
milestones on the prototype C-130J program with LMC. Gross profit margins in
1998 and beyond reflect management's estimate of margins to be realized on
future business and consider management's plans to streamline business
processes and reduce costs. A substantial amount of the Company's forecasted
revenues are derived from prototype programs and their follow-on programs. The
recognition of profit, based upon anticipated final program costs, is made only
after the evaluation of the program risks and status at critical program
milestones. The recognition of profit on follow-on programs with little change
from the prototype is made based upon the percentage that each contract's cost
to date bears to the total estimated cost.
The following sets forth the material assumptions upon which the
forecasts were based:
- British Aerospace will continue to provide or guarantee
adequate credit facilities at current rates to ensure that the
Company has sufficient resources to bid and perform on large
simulation programs.
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- British Aerospace will continue to support the Company's
military strategy, particularly as it relates to the support
of bids on large simulation programs in the United Kingdom.
- The Company will be able to target and win large military
training system programs with contract values ranging from
$50.0 million to $150.0 million.
- For certain prototype programs in the forecast for which the
Company would like to develop and own the design data, the
Company will contract for the delivery of products at below
cost. Upon award of these programs, the Company would record
loss provisions in the financial statements.
- The Company will continue to incur research and development
costs comparable to 1996 levels under independent
Company-initiated programs.
- The Military Training Systems division of the Training
Services Segment will reflect continued growth.
- No recovery has been assumed with regard to the Company's
claim with the United States Air Force for the C-141/C-5
Aerial Refueling Part Task Trainers.
The forecasts described above were developed by management of the
Company and are based upon assumptions that the Company believes to be
reasonable. The Company's assumptions may be incomplete or incorrect. Actual
results achieved during any future period may vary from the forecasts, and the
variations may be material and adverse.
POTENTIAL BUSINESS PROSPECTS; BRITISH AEROSPACE INFLUENCE
The Company carries out an aggressive marketing program for its
complete line of products and services on a worldwide basis. In addition, the
Company routinely responds to bid and proposal requests and at any time has a
large number of bids and proposals outstanding for a variety of products and
services. In reviewing the fairness of the Merger to the Public Shareholders,
both the Special Independent Committee and Baird made extensive inquiries of
management of the Company as to the likelihood that contract awards would be
made pursuant to outstanding bids and proposals and took into consideration
management's opinions as to the likelihood of actual contract awards that might
result from bids or proposals that have been submitted. There can be no
assurance that management's opinion of the outcome of such bids or proposals
will ultimately prove to be correct.
Prior to the date of the Merger Agreement, the Company had submitted
one bid for a very large U.K. Ministry of Defence program that required an
unusually large bid and proposal expenditure, the majority of which was
expended during 1996. In this connection, the Company was one of three bidders
for a major U.K. Ministry of Defence procurement of a training system for the
EH-101 and CH-47 Medium Support Helicopters (the "MSH Program"). The scope
included manufacture and operation of a new-purpose built training center for
twenty years (with a renewal right on the part of the U.K. Ministry of Defence
for up to an additional twenty-year term). In the view of the Company's
management, British Aerospace guarantees and marketing assistance are essential
to the Company's success in this competition. After considering the extremely
high level of competition for this program and related factors, based upon the
recommendations of management, the Special Independent Committee determined not
to assume or project that the Company will be awarded a contract for the MSH
program in their evaluation of the fairness of the Merger Proposal to the
Public Shareholders and instructed Baird not to assume or project that the
Company will be awarded a contract for the MSH Program in rendering their
opinion. On March 11, 1997, the U.K. Ministry of Defense announced that the
Company had not been selected as the preferred bidder on the MSH Program.
Accordingly, it is now highly unlikely that the Company will be awarded a
contract for the MSH Program.
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British Aerospace has provided the Company with marketing assistance
with respect to a variety of possible European and other international business
opportunities. In addition, British Aerospace often has influence or control
over certain of the Company's business opportunities either as the result of
existing or prior business relationships between the Company's potential
customer and British Aerospace or because of financial or other support needed
by the Company to undertake a particular project. Accordingly, in the view of
the Company's management, British Aerospace's willingness to support the
Company in bids or proposals is often extremely important or determinative in
the Company's ultimate award of a contract. Additionally, it is possible that
certain contract awards, may become more likely if the Merger is completed and
the Company becomes wholly-owned by British Aerospace through Holdings.
PURPOSE OF AND REASONS FOR THE MERGER
The principal purposes for the Merger are: (a) for Holdings to acquire
all of the equity interest in the Company represented by the Public Shares; (b)
to rationalize the investment of Holdings and British Aerospace in the Company,
by balancing Holdings' and British Aerospace's support of, and business
relationships with, the Company with the economic benefits derived therefrom;
(c) to eliminate potential conflicts between the interests of Public
Shareholders and the interests of Holdings; (d) to give the Public Shareholders
the opportunity to receive a significantly greater return than they had
previously received on their Common Shares; (e) to allow the Company to become
more competitive in light of the recent consolidations in the aerospace and
defense industries by closer association with one of the world's few prime
airframe manufacturers; and (f) to enable management of the Company to react
with greater flexibility to changing conditions and opportunities, all as more
fully described below. Other than as set forth herein, Holdings has no reason
for proposing the Merger at this particular time (as opposed to any other time)
and is unaware of any material development affecting the future value of the
Common Shares which is not described in this Proxy Statement.
As a result of the proposed Merger, the Surviving Corporation, whose
common stock will be entirely owned by Holdings, will continue the business of
the Company. The resulting ownership position of Holdings will permit Holdings
to manage the Surviving Corporation on behalf of Holdings without concern for
the positions of minority or unaffiliated holders of Common Shares, and it will
permit Holdings to receive all of the cash flow of the Company in excess of the
cash flow required to service indebtedness or by operations of the Company.
Currently, British Aerospace either provides or guarantees all of the
Company's credit facilities. The Public Shareholders have not had to do the
same. Hence, British Aerospace has carried, and continues to carry, the entire
risk as a corporate guarantor or direct lender, but has shared the economic
benefit of those financing arrangements with the Public Shareholders who bear
no such risk. Only as a result of British Aerospace's continued agreement to
provide these credit facilities has the Company been able to maintain and
expand its business operations and, in management's opinion, receive a report
from its independent auditors on its financial statements which does not
contain an explanatory paragraph expressing the substantial concern of the
auditors about the Company's ability to continue as a going concern. As a
private company wholly-owned by Holdings, Holdings believes that a more
equitable allocation of risk and benefit will be achieved. In exchange for
carrying the entire risk as the corporate guarantor, Holdings will receive the
full economic benefit of the financing arrangements it guarantees. See
"SPECIAL FACTORS--Background of the Merger."
The proposed Merger will eliminate the potential conflicts between the
interests of Holdings and the Public Shareholders. As a company with public
common shareholders, the management of the Company considers the short-range
desires of such shareholders for earnings due to its impact on the market price
of the Common Shares, which is not a concern of a privately-held company. As a
private company, the Company can be managed with a greater emphasis on long
term growth than on short-term profits. In addition, as a public company,
conflicts may also arise over the divergent interests of Holdings and the
Public Shareholders in respect of the management of the Company, as
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<PAGE> 31
well as in the nature and amount of the compensation of management and the
methods of financing the activities of the Company.
Because the per share book equity of the Common Shares as of December
31, 1996 was $4.52, the proposed Merger would result in the Public Shareholders
receiving a price per share which is $19.48 in excess of that amount. In
addition, as is detailed hereafter, the Merger Consideration represents a 25.5%
premium over the closing sale price on February 13, 1997, the last date in
which the Common Shares traded prior to the public announcement of the Merger.
See "Market Price and Shareholder Information."
The simulation and training industry has been extremely competitive
over the past several years as a result of continued consolidation, with
several large suppliers emerging from within the airframe prime contractor
community. Some of the more significant business combinations include the
purchase by Loral Corporation of both Goodyear Aerospace and IBM's Federal
Systems businesses; the acquisition by Martin Marietta Corporation of General
Electric Corporation's simulator operations; the subsequent acquisition of
Loral Corporation by Lockheed Corporation; the consummation of the merger
between Lockheed Corporation and Martin Marietta Corporation; and the
acquisition by Hughes Aircraft Corporation ("Hughes"), a subsidiary of General
Motors Corporation, of the Link military simulation operations of CAE
Industries Ltd. and Hughes' subsequent pending acquisition by The Raytheon
Corporation, and the proposed merger of McDonnell Douglas and Boeing
Corporation have also resulted in a continuation of the trend toward large,
well financed, competition within the industry. Management believes that a
strong alliance with one of the leading airframe manufacturers is essential to
continuing to effectively compete in this industry.
Holdings believes that the proposed Merger will benefit the Company by
enabling it to react with greater speed and flexibility to changing conditions
and opportunities, although the benefit of any such improvement will be
realized solely by Holdings as a result of its ownership of all of the equity
interest in the Company.
The assumption by the Company of the status of a private company will
allow the Company to eliminate certain overhead costs (including the time
devoted by its employees and the fees and expenses of various professional
advisors and service providers of the Company) which relate exclusively to the
Company's being a public company. Some of those costs include the following:
the costs of certain accounting, auditing and SEC counsel activities, the cost
of preparing, printing and mailing corporate reports and proxy statements, the
expense of a transfer agent and the cost of investor relations activities. The
Company estimates that these costs approximated $230,000 for each of the last
two years, exclusive of unquantifiable management time.
In connection with the Merger Proposal and the discussions relating
thereto, Holdings has advised the Company that, relating to the structure of
the Merger, it did not consider any alternative that would have allowed the
Public Shareholders to maintain an equity interest in the Company. Holdings
did consider a cash tender offer for all of the Public Shares as one
alternative structure to the going-private transaction. Holdings ultimately
rejected this alternative due to the possibility that such tender offer might
have needed to be followed by a long-form merger which would require the
preparation, filing with and clearance by the SEC and mailing to all
shareholders of an information statement similar to this Proxy Statement. This
two-step transaction could take significantly longer.
The possible detriment to the Company and the Public Shareholders if
the proposed transaction is not consummated is (i) that British Aerospace might
choose to discontinue providing the Company with all or a portion of its
essential credit facilities or guarantees necessary to obtain such credit
facilities, which would most likely result in a material adverse effect upon
the Company's business or (ii) that British Aerospace might choose to sell its
interests in the Company or vote its shares to cause the Company to merge with
a third party which might cause cultural and synergistic disadvantages to the
Company and cause the Company to lose business momentum as the result of the
Company integrating with a party that is not already familiar with the
Company's business and
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operations, and might cause competitive disadvantages in certain markets where
the Company has previously stressed its affiliation with British Aerospace and
enlisted the support of British Aerospace in marketing its products.
DETERMINATION OF FAIRNESS OF THE MERGER BY THE SPECIAL INDEPENDENT COMMITTEE
AND THE BOARD OF DIRECTORS
At its February 13, 1997 meeting, the Special Independent Committee of
the Board of Directors unanimously determined (i) that the Merger, including
the Merger Consideration, is fair, from a financial point of view, to, and in
the best interests of, the Company and the Public Shareholders of the Company,
and (ii) to recommend that the Board of Directors approve the Merger Agreement.
At its February 13, 1997 meeting, the Board of Directors of the Company, by
unanimous vote (with Holdings-affiliated Directors abstaining upon the advice
of Holdings counsel) and after receiving the recommendations of the Special
Independent Committee, determined that the Merger, including the Merger
Consideration, is fair, from a financial point of view, to, and in the best
interests of, the Company and the Public Shareholders and resolved to recommend
to the Company's Public Shareholders that they approve and adopt the Merger
Agreement and the transactions contemplated thereby and that they accept the
Merger Consideration in exchange for their Common Shares.
The Special Independent Committee's and the Board's respective
recommendations are the product of the business judgment of the respective
members thereof. In making its determination with respect to the fairness,
from a financial point of view, of the Merger, including the Merger
Consideration, and in determining to recommend approval of the Merger Agreement
and the transactions contemplated thereby to the full Board, the Special
Independent Committee considered a number of factors, including those listed
below. In making its determination with respect to the fairness, from a
financial point of view, of the Merger, including the Merger Consideration, and
in approving the Merger Agreement, the full Board (except for the
Holdings-affiliated directors) considered a number of factors, including those
listed below. In its consideration of the following factors, the Special
Independent Committee met formally as an entire committee four times and
convened informally by telephone on several other occasions. At each meeting,
one or more of the factors were discussed among the members of the Special
Independent Committee and whichever of its advisors were then present. In
addition, certain members of the Special Independent Committee met with Baird
and representatives of Holdings and J.P. Morgan to discuss the Merger.
(i) The Special Independent Committee and the Board considered the
historical market prices and recent trading activity of the Common Shares and
the fact that the Merger Consideration would enable the Public Shareholders to
realize a significant premium over (a) the prices at which the Common Shares
have traded in the last year (the ten-day average of reported closing prices
for the Common Shares ending with the date of the Company's press release
reporting the Merger (the "Public Announcement Date") was $19.59; and the
Merger Consideration represents a 22.5% premium over the ten day average price
and a 25.3% premium over the average of the closing prices during the 120 days
prior to the Public Announcement Date), (b) the $4.52 book value per Common
Share at December 31, 1996 and (c) the net present value of the Company's
projected cash flows, which was $23.60 per Common Share at December 31, 1996,
and which the Special Independent Committee and the Board believed to be equal
to or greater than the Company's actual liquidation value. The historical
market prices of the Common Shares for the past year were deemed relevant
because they indicate what the arms-length trading prices of the Common Shares
were for that period as determined in the open market. The fact that the
Merger Consideration represents a significant premium over such prices gave the
Special Independent Committee and the Board one indication that the Merger
Consideration represents an attractive value for the Public Shareholders.
(ii) The Special Independent Committee and the Board considered the
oral opinion (subsequently confirmed in writing) of Baird to the effect that,
as of the date of such opinion, the Merger Consideration is fair, from a
financial point of view, to the Public Shareholders, and also considered the
analyses underlying such opinion. See "SPECIAL FACTORS--Opinion of Financial
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<PAGE> 33
Advisor to the Special Independent Committee." A copy of such opinion, setting
forth the assumptions made, matters considered, scope of and limitation of the
review undertaken and procedures followed by Baird, is attached as Exhibit D to
this Proxy Statement and should be read carefully in its entirety. With
respect to the matters contained in the Baird opinion, the Special Independent
Committee and the Board adopted the analyses contained therein and considered
the other factors set forth herein in determining that the Merger, including
the Merger Consideration, is fair, from a financial point of view, to the
Public Shareholders.
(iii) The Special Independent Committee and the Board considered
information with respect to the financial condition, results of operations,
business and prospects of the Company, as well as the risks involved in
achieving those prospects, and current industry, economic and market
conditions.
(iv) The Special Independent Committee and the Board considered a
comparison of the financial terms of certain other transactions which have
recently been effected in the industry (including transactions involving
Berkshire Hathaway Inc./FlightSafety International, Inc.; UNC Inc./Garrett
Aviation Services; Vernitron Corporation/Precision Aerotech Inc.; Litton
Industries, Inc./PRC Inc.; Lockheed Corporation/Martin Marietta; Northrop
Corporation/Grumman Corporation and Loral Corporation/Federal Systems that were
stated to be comparable to the Company in the Baird presentation), reviewing
the multiples or premiums, as the case may be, of purchase price paid to each
of earnings per share or net income, book value per share, market value per
share, and cash flow per share. The Baird analysis showed, among other things,
that such companies were sold at premiums over market value (prior to
announcement that the respective buyers had indicated their intention to make a
proposal) that ranged from 4.4% to 12.7%.
(v) The Special Independent Committee also evaluated the Merger
Consideration in light of the following factors: price, ability to consummate
the proposed transactions, the significant percentage of Common Shares owned by
Holdings, the proposed structure of the transaction and anticipated closing
date, the amount of equity being invested by Holdings, the impact on the
Company of a time delay or further uncertainty both with respect to the market
for the Common Shares and the Company's employees, and the fiduciary
obligations of the Special Independent Committee and the Board to the Company
and the Public Shareholders. The Special Independent Committee also considered
that the Merger Agreement permits the Special Independent Committee to withdraw
its approval of the Merger Agreement in accordance with the fiduciary duties of
its members.
(vi) The Special Independent Committee also considered the
possibility that, if the Merger were not consummated, Holdings may decide to
pursue any one or more of the following: (a) a sale of its Common Shares,
Warrants or Preferred Stock, (b) a discontinuation of Holdings' existing
financial and business relationships with the Company (including financial
support), or (c) a decision to not develop any future financial and business
relationships with the Company. The Special Independent Committee evaluated
the prospects and future of the Company should any one or more of the foregoing
occur including, but not limited to, the likely adverse effects upon the
Company's earnings and the resulting likely adverse effect upon the market
price of the Company's Common Shares. The Special Independent Committee took
into consideration that it had been advised by Holdings during meetings with
Holdings, that if the Merger was not consummated, British Aerospace would
consider its alternatives. In response to inquiries from representatives of
the Special Independent Committee, British Aerospace informed such
representatives that these alternatives included, among other things, British
Aerospace's withdrawal of its continued support of the Company's credit
facilities and business operations, the possible sale of the entire Company or
other alternatives. These alternatives would, of course, be considered by
British Aerospace over a period of time.
(vii) The Special Independent Committee and the Board also evaluated
certain potential benefits that might accrue to the Company if the Merger were
consummated, including (a) the competitive advantages, in light of the recent
consolidation in the aerospace and defense industries, associated with a closer
affiliation with one of the world's several prime airframe manufacturers or
larger suppliers of simulation systems and services complimentary to those
offered by the Company,
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(b) the additional new business available to the Company directly from, or with
the assistance and support of, British Aerospace and its affiliates, (c) the
corporate cultural and synergistic advantages of integrating with a party that
is already familiar with the Company's business and operations and the ability
to maintain business momentum, (d) the benefits associated with continued
management autonomy, (e) the potential for growth in the business of RUKL, the
Company's U.K.-based subsidiary, and (f) the elimination of the time and
expense associated with the Company's public reporting obligations.
(viii) The Special Independent Committee and the Board concluded that
the Merger is in the best interests of the employees, customers, suppliers and
other constituents of the Company and its subsidiaries.
(ix) The Special Independent Committee and the Board recognized
that the Merger will not be consummated unless it receives the affirmative vote
of a majority of the Public Shareholders voting on the Merger, which is a
greater vote than is required under the FBCA.
(x) In addition to the above, the Special Independent Committee
and the Board of Directors discussed and considered the alternatives that might
be available to the Merger Proposal. Because of the fact that Holdings has the
power to control the Company, it was the conclusion of the Special Independent
Committee and the Board of Directors that any such alternatives would require
the consent and cooperation of Holdings, and therefore the Special Independent
Committee did not consider any alternatives to the Merger and accordingly did
not discuss any alternatives with Holdings.
In view of the wide variety of these factors considered by the Special
Independent Committee of the Board of Directors in connection with its
evaluation of the Merger and the Merger Consideration, the Special Independent
Committee of the Board of Directors did not find it practicable to quantify or
otherwise attempt to assign relative weights to the specific factors considered
in making its determination, nor did it evaluate whether such factors were of
equal weight. However, based upon these factors, the evaluation of all the
relevant information provided to them by the Company's financial advisors and
taking into account the existing trading ranges for the Common Shares, the
Special Independent Committee determined that the Merger, including the Merger
Consideration, was fair from a financial point of view, to the Public
Shareholders. The Special Independent Committee believes that the Merger was
considered in a manner that was procedurally fair to the Public Shareholders.
Because of the appointment of the Special Independent Committee and
the engagement by the Special Independent Committee of Baird, neither the Board
nor the Special Independent Committee considered it necessary to retain an
unaffiliated representative to act solely on behalf of the Public Shareholders
for the purpose of negotiating the terms of the Merger Agreement or preparing a
report concerning the fairness to such shareholders of the Merger
Consideration.
Fowler, White, Gillen, Boggs, Villareal and Banker, P.A., which has
served as legal counsel to the Special Independent Committee, also serves as
legal counsel to the Company. The Special Independent Committee and the Board
of Directors determined that there was no conflict of interest in this
representation.
The following members of the Board of Directors are affiliated with
Holdings: David R. Fish, Paul L. Harris, and Sydney Gillibrand. See
"--Conflict of Interests of Holdings and Certain Members of the Board of
Directors of the Company in the Merger." None of these directors participated
on the Special Independent Committee. In addition, such directors abstained
from evaluating and voting on the Merger. Richard G. Snyder, the Company's
President and Chief Executive Officer and a director of the Company, was not a
member of the Special Independent Committee because of his position as an
executive officer of the Company. However, Mr. Snyder did participate in the
Board's evaluation and vote on the Merger Proposal.
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OPINION OF FINANCIAL ADVISOR TO THE SPECIAL INDEPENDENT COMMITTEE
Baird has acted as financial advisor to the Special Independent
Committee in connection with the Merger and has assisted the Special
Independent Committee in its examination of whether or not the Merger
Consideration is fair, from a financial point of view, to the Public
Shareholders. On February 13, 1997, Baird rendered its opinion to the Special
Independent Committee to the effect that, as of such date, the Merger
Consideration was fair, from a financial point of view, to the Public
Shareholders.
THE FULL TEXT OF BAIRD'S OPINION, DATED FEBRUARY 13, 1997, WHICH SETS
FORTH THE ASSUMPTIONS MADE, GENERAL PROCEDURES FOLLOWED, MATTERS CONSIDERED AND
LIMITATIONS ON THE SCOPE OF REVIEW UNDERTAKEN BY BAIRD IN RENDERING ITS
OPINION, IS ATTACHED AS EXHIBIT D TO THIS PROXY STATEMENT AND IS INCORPORATED
HEREIN BY REFERENCE. BAIRD'S OPINION IS DIRECTED ONLY TO THE FAIRNESS, AS OF
FEBRUARY 13, 1997 AND FROM A FINANCIAL POINT OF VIEW, OF THE MERGER
CONSIDERATION TO THE PUBLIC SHAREHOLDERS AND DOES NOT CONSTITUTE A
RECOMMENDATION TO ANY OF THE COMPANY'S SHAREHOLDERS AS TO HOW SUCH SHAREHOLDER
SHOULD VOTE WITH RESPECT TO THE MERGER AGREEMENT. BAIRD DID NOT RECOMMEND TO
THE SPECIAL INDEPENDENT COMMITTEE THE AMOUNT OF CONSIDERATION TO BE PAID TO THE
PUBLIC SHAREHOLDERS. THE SUMMARY OF BAIRD'S OPINION SET FORTH BELOW IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF SUCH OPINION
ATTACHED AS EXHIBIT D. SHAREHOLDERS OF THE COMPANY ARE URGED TO READ THE
OPINION CAREFULLY IN ITS ENTIRETY. BETWEEN THE DATE OF BAIRD'S OPINION AND THE
DATE OF THE MEETING, EVENTS MAY OCCUR THAT COULD MATERIALLY AFFECT THE
COMPANY'S RESULTS OF OPERATIONS, FINANCIAL CONDITION, MARKET PRICE OF THE
COMMON SHARES OR OTHER MATTERS WHICH COULD MATERIALLY AFFECT THE ANALYSES
PERFORMED BY BAIRD IN CONNECTION WITH THE RENDERING OF ITS OPINION OR THE
CONCLUSIONS STATED THEREIN. BAIRD IS UNDER NO OBLIGATION AND DOES NOT INTEND
TO UPDATE ITS OPINION, WHICH WAS RENDERED ON FEBRUARY 13, 1997.
In conducting its investigation and analysis in arriving at its
opinion attached as Exhibit D, Baird reviewed such information and took into
account such financial and economic factors as it deemed relevant under the
circumstances. In that connection, Baird among other things (i) reviewed
certain internal information, primarily financial in nature, including
projections concerning the business and operations of the Company furnished to
Baird by or on behalf of the Company for purposes of its analysis, as well as
publicly available information including, but not limited to, the Company's
recent filings with the SEC and an equity analyst research report prepared by
an investment banking firm; (ii) reviewed the Merger Agreement in the form
presented to the Special Independent Committee; (iii) compared the historical
market prices and trading activity of the Company's Common Shares with those of
certain other publicly traded companies Baird deemed relevant; (iv) compared
the financial position and operating results of the Company with those of other
publicly traded companies Baird deemed relevant; and (v) compared the proposed
financial terms of the Merger with the financial terms of certain other
business combinations that it deemed relevant. Baird held discussions with
certain members of the Company's senior management concerning the Company's
historical and current financial condition and operating results as well as the
future prospects of the Company. Baird also considered such other information,
financial studies, analysis and investigations and financial, economic and
market criteria which it deemed relevant for the preparation of its opinion.
Baird was not requested to, and did not, solicit third party indications of
interest in acquiring all or any part of the Company. The Merger Consideration
was determined by the Company and Holdings in arm's length negotiations. The
Company did not place any limitation upon Baird with respect to the procedures
followed or factors considered by Baird in rendering its opinion.
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In arriving at its opinion, Baird assumed and relied upon the accuracy
and completeness of all of the financial and other information provided to it
by or on behalf of the Company, or publicly available, and was not engaged, and
did not attempt, to verify any such information. Baird also assumed, with the
Company's consent, that all material assets and liabilities (contingent or
otherwise, known or unknown) of the Company are as set forth in the
consolidated financial statements of the Company. Baird assumed that the
financial forecasts examined by it were reasonably prepared on bases reflecting
the best available estimates and good faith judgments of the Company's
management as to the future performance of the Company. In conducting its
review, Baird did not undertake nor obtain an independent evaluation or
appraisal of any of the assets or liabilities (contingent or otherwise) of the
Company, nor did Baird make a physical inspection of the properties or
facilities of the Company. Baird's opinion was based upon economic, monetary
and market conditions as they existed and could be evaluated on the date of
such opinion and did not predict or take into account any changes which may
occur, or information which may become available, thereafter.
In connection with preparing its opinion on February 13, 1997, Baird
conducted a variety of financial analyses summarized below with respect to the
Company.
ANALYSIS OF THE COMPANY'S VALUATION PREMIUMS. Baird compared the
premium which it calculated to holders of the Company's Common Shares
represented by the Merger Consideration of $24.00 per share, to the closing
prices for the Company's Common Shares on February 12, 1997 (one business day
prior to the rendering of the opinion) and on the dates 30 days and 90 days
prior thereto, as well as to the daily average closing price for the Company's
Common Shares during the latest twelve months ("LTM") and to each of the
52-week high and low closing prices for the Company's Common Shares. Baird
calculated that the Merger Consideration represented the following premiums to
holders of the Company's Common Shares: (i) a premium of 20.0% over the closing
price of $20.00 for the Company's Common Shares one day prior to the rendering
of its opinion; (ii) a premium of 25.5% over the closing bid of $19.125 for the
Company's Common Shares one day prior to the rendering of the opinion; (iii) a
premium of 24.7% over the closing price of $19.25 for the Company's Common
Shares 30 days prior thereto; (iv) a premium of 26.3% over the closing price of
$19.00 for the Company's Common Shares 90 days prior thereto; (v) a premium of
18.3% over the LTM average closing price of $20.29 for the Company's Common
Shares; (vi) a premium of 5.5% over the 52-week high closing price of $22.75
for the Company's Common Shares; and (vii) a premium of 39.1% over the 52-week
low closing price of $17.25 for the Company's Common Shares.
ANALYSIS OF THE COMPANY VALUATION MULTIPLES. Baird calculated the
aggregate "Equity Value" to be $88.0 million, obtained by multiplying the
$24.00 per share Merger Consideration by the total number of outstanding shares
of common stock, including shares issuable upon the exercise of stock options
and warrants and convertible preferred stock. In performing its analyses,
Baird used, among other items, operating statistics for the Company's LTM
results through December 31, 1996, and calendar year 1997 forecasted earnings,
in each case as provided by the Company's management. Baird calculated
multiples of the Merger Consideration to the Company's LTM fully diluted
earnings per share (adjusted for a normal tax rate) and its projected fully
diluted earnings per share (adjusted for a normal tax rate) for calendar year
1997 (based on management's estimates) and multiples of the Company's
"Enterprise Value" (defined as the Equity Value plus the book value of total
debt less cash and cash equivalents) to its LTM revenues, its LTM operating
income before depreciation and amortization, interest and taxes ("EBITDA") and
its LTM operating income before interest and taxes ("EBIT"). The calculations
resulted in ratios of the Merger Consideration to fully taxed earnings per
share ("P/E Ratios") of 15.3x based on LTM results, and 21.3x based on
projected 1997 results. The ratio of Enterprise Value to LTM revenues was
0.8x, the ratio of Enterprise Value to LTM EBITDA was 8.6x and the ratio of
Enterprise Value to EBIT was 10.6x.
ANALYSIS OF SELECTED PUBLICLY TRADED COMPARABLE COMPANIES. Baird
reviewed certain publicly available financial information as of the most
recently reported period and stock market information as of February 12, 1997,
for certain selected publicly traded companies which Baird
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deemed relevant. Such comparable companies consisted of: Aeroflex Inc.,
Analysis & Technology Inc., CAE Inc., Curtiss-Wright Corporation,
Diagnostic/Retrieval Systems, Inc., ECC International Corporation, Evans &
Sutherland Computer Corporation, Logicon, Inc., Tech-Sym Corporation and United
Industrial Corporation. For each comparable company, Baird calculated
multiples as of February 12, 1997, of Enterprise Value to LTM revenues, LTM
EBITDA and LTM EBIT. Baird then compared these multiples to the relevant
Company multiples. An analysis of the multiples of Enterprise Value to LTM
revenues, LTM EBITDA and LTM EBIT yielded 0.8x, 8.6x and 10.6x, respectively,
for the Company compared to medians of 0.8x, 8.1x and 11.8x, respectively, for
such comparable companies. For the Company and each comparable company, Baird
also calculated P/E Ratios as of February 12, 1997, based on market stock
prices as of such date and LTM earnings per share and estimated earnings per
share (as provided by the Company's management, adjusted for a normalized tax
rate) for calendar years 1996 and 1997. An analysis of the P/E Ratios based on
earnings per share for the LTM and calendar years 1996 and 1997 yields 15.3x,
15.3x and 21.3x, respectively, for the Company compared to medians of 16.0x,
15.2x and 13.5x, respectively, for the Company's comparable companies. Baird
applied a range of multiples derived from such analysis to the Company's LTM
revenues, LTM EBITDA, LTM EBIT, and LTM earnings per share and estimated
earnings per share (as provided by the Company's management, adjusted for a
normalized tax rate) for calendar years 1996 and 1997, and calculated a range
of implied equity values for the Company's Common Shares of $13.50 to $29.20
per share.
ANALYSIS OF SELECTED COMPARABLE ACQUISITION TRANSACTIONS. Baird
reviewed selected business combination transactions which it deemed relevant.
Such comparable acquisition transactions, which were consummated between
January 1994 and December 1996, consisted of (acquiror/acquired company):
Berkshire Hathaway Inc./FlightSafety International, Inc.; UNC Inc./Garrett
Aviation Services; Vernitron Corporation/Precision Aerotech Inc.; Litton
Industries, Inc./PRC Inc.; Lockheed Corporation/Martin Marietta; Northrop
Corporation/Grumman Corporation and Loral Corporation/Federal Systems. Such
transactions were chosen based on a review of acquired companies which
possessed general business, operating and financial characteristics
representative of companies in the industry in which the Company operates.
Baird noted that none of the selected transactions reviewed was identical to
the Merger and that, accordingly, the analysis of comparable acquisition
transactions necessarily involves complex consideration and judgments
concerning differences in financial and operating characteristics of the
Company and other factors that would affect the acquisition value of comparable
acquisition transactions. For each comparable acquisition transaction, Baird
calculated multiples of Enterprise Value to LTM revenues, LTM EBITDA and LTM
EBIT; calculated the P/E Ratio based on LTM earnings per share; and calculated
the premium paid for the equity in these transactions over the public market
value of the equity at various times prior to the announcement of such
transaction. Baird then compared those multiples and premiums to the relevant
Company multiples and premiums based on the Merger Consideration. For the
transactions selected, these calculations yielded multiples of Enterprise Value
to LTM revenues, LTM EBITDA and LTM EBIT of 0.8x, 8.6x and 10.6x, respectively,
for the Company compared to medians of 0.6x, 7.7x and 11.9x, respectively, for
the comparable acquisition transactions. An analysis of the P/E Ratios based
on LTM earnings per share yielded 15.3x for the Company compared to a median of
16.6x for the comparable acquisition transactions. An analysis of the Merger
Consideration to the market value of the Company's Common Shares as of February
12, 1997, 30 days and 90 days prior thereto, compared to the prices paid for
the equity in the comparable acquisition transactions relative to the market
value of equity one day, 30 days and 90 days prior to the announcement date of
such transactions, yielded premiums of 20.0%, 24.7% and 26.3%, respectively,
for the Company, compared to median premiums of 11.4%, 13.5% and 15.1%,
respectively, for the comparable acquisition transactions. Separately, Baird
also reviewed the premiums paid in a different group of selected transactions
involving owners of majority interest acquiring the remaining outstanding
shares to achieve complete ownership. An analysis of the Merger Consideration
to the market value of the Company's Common Shares as of February 12, 1997 and
30 days prior thereto, compared to the prices paid for the equity in the
minority acquisition transactions relative to the market value of equity one
day and 30 days prior to the announcement date of such transactions, yielded
premiums of 20.0% and
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24.7%, respectively, for the Company, compared to median premiums of 22.3% and
37.3%, respectively, for the minority acquisition transactions. Baird applied
a range of multiples derived from such analysis to the Company's LTM revenues,
LTM EBITDA, LTM EBIT, and LTM earnings per share and calculated a range of
implied equity values for the Company's Common Shares of $13.50 to $29.00 per
share.
DISCOUNTED CASH FLOW ANALYSIS. Baird performed a discounted cash flow
analysis of the Company on a stand alone basis using the Company's management
projections of future EBIT and free cash flow for fiscal years 1997 through
2001. In such analysis, Baird assumed terminal value multiples of 6.0x to 8.0x
EBIT in the year 2001 and discount rates of 16.0% to 18.0%. Such analyses
produced implied values of the Company's Common Shares ranging from $23.20 to
$29.70 per share.
EARNINGS ACCRETION/DILUTION ANALYSIS. Baird prepared a pro forma
analysis of the financial impact to a potential acquiror's income statement
based on certain assumptions regarding the structure and financing of such a
transaction. Using earnings estimates for the Company (prepared by management)
for the years 1997 and 1998, Baird analyzed the amount of net income available
to a hypothetical acquiror after considering the costs of financing the
acquisition. For purposes of such analysis, Baird assumed that such an
acquisition would: (i) occur as of January 1, 1997; (ii) be accounted for under
the purchase method of accounting, with goodwill being amortized over 30 years;
and (iii) be financed entirely with indebtedness accruing interest at a current
market rate. On the basis of such assumptions, Baird calculated a range of per
share prices that such an acquiror could pay for the Company's Common Shares
without incurring earnings dilution. Such analysis resulted in a range of
implied equity values for the Company's Common Shares of $15.70 to $24.90 per
share.
OTHER FACTORS. In rendering its opinion, Baird considered certain
other factors, including an analysis of restricted investments consisting of
$5.0 million of short-term highly liquid investments held in escrow as
collateral for the Company's lease of a C-130H simulator used in its training
center in Tampa, Florida. Under the terms of the lease agreement, $3.0 million
of the restricted investments was to be (and was subsequently) released in
March 1997 based upon the Company's attainment of certain income and net worth
levels at December 31, 1996. The remaining $2.0 million is to be released over
the remaining term of the lease. Baird also considered litigation involving
the Company's pending claim against the United States Air Force on a contract
with the United States Air Force involving Company-manufactured C-141/C-5
Aerial Refueling Part Task Trainers. Such analysis produced a range of
incremental implied equity values for the Company's Common Shares of $1.30 to
$1.60 per share.
The foregoing summary does not purport to be a complete description of
the analyses performed by Baird or of its presentation to the Special
Independent Committee. The preparation of financial analyses and a fairness
opinion is a complex process and is not necessarily susceptible to partial
analyses or summary description. Baird believes that its analyses (and the
summary set forth above) must be considered as a whole, and that selecting
portions of such analyses and of the factors considered by Baird, without
considering all of such analyses and factors, could create an incomplete view
of the processes underlying the analyses conducted by Baird and its opinion.
Baird did not attempt to assign specific weights to particular analyses. Any
estimates contained in Baird's analyses are not necessarily indicative of
actual values, which may be significantly more or less favorable than as set
forth therein. Estimates of values of companies do not purport to be
appraisals or to necessarily reflect the prices at which companies may actually
be sold. Because such estimates are inherently subject to uncertainty, Baird
does not assume responsibility for their accuracy.
Baird, as part of its investment banking business, is continually
engaged in the evaluation of businesses and their securities in connection with
mergers and acquisitions, negotiated underwritings, competitive biddings,
secondary distributions of listed and unlisted securities, private placements,
and valuations for estate, corporate and other purposes. In the ordinary
course of business, Baird may from time to time trade the securities of the
Company or British Aerospace for its own account and
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for accounts of its customers and, accordingly, may at any time hold a long or
short position in such securities. As of February 12, 1997, the day prior to
rendering its opinion, Baird held in its own account 1,453 of the Company's
Common Shares which shares were also held immediately following the
announcement of the proposed Merger. Baird held no shares of British Aerospace
either immediately before or after rendering its opinion.
COMPENSATION. Pursuant to an engagement letter dated January 17,
1997, between the Special Independent Committee and Baird, it was agreed that
the Company would pay Baird: (a) financial advisory fees equal to: (i) $50,000
per month through the execution of the Merger Agreement; and (ii) $25,000 per
month for each month following the execution of such Merger Agreement through
the consummation of the Merger; and (b) a fee of $150,000, payable upon
delivery of its opinion, regardless of the conclusions reached by Baird in such
opinion. The Company has also agreed to reimburse Baird for its reasonable
out-of-pocket expenses, including fees and disbursements of counsel. The
Company has also agreed to indemnify Baird, its affiliates and their respective
directors, officers, employees and agents and controlling persons against
certain liabilities relating to or arising out of its engagement, including
liabilities under federal securities laws. In the past, Baird has provided
financial advisory services to the Company for which Baird has received
customary compensation. However, Baird has not received any compensation from
the Company during the last two years.
OPINION OF FINANCIAL ADVISOR TO BRITISH AEROSPACE
Pursuant to the J.P. Morgan Engagement Letter, British Aerospace
retained J.P. Morgan Securities Inc. ("J.P. Morgan") as its financial advisor
in connection with the proposed Merger.
On February 26, 1997, J.P. Morgan delivered its written opinion to the
Board of Directors of British Aerospace, dated as of such date, that, as of
such date, the consideration to be paid by Holdings in the proposed Merger was
fair from a financial point of view to British Aerospace. No limitations were
imposed upon J.P. Morgan with respect to the investigations made or procedures
followed by it in rendering its opinion.
The full text of the written opinion of J.P. Morgan dated February 26,
1997, which sets forth the assumptions made, matters considered and limits on
the review undertaken is attached as Exhibit E to this Proxy Statement and is
incorporated herein by reference. J.P. Morgan's written opinion is addressed
to the Board of Directors of British Aerospace, is directed only to the
consideration to be paid in the Merger and does not constitute a recommendation
to any shareholder of the Company as to how such shareholder should vote at the
Company's special shareholder's meeting to which this Proxy Statement relates.
J.P. Morgan has consented to the inclusion of its written opinion in this Proxy
Statement. The summary of the opinion of J.P. Morgan set forth in this Proxy
Statement is qualified in its entirety by reference to the full text of such
opinion attached hereto as Exhibit E.
In arriving at its opinion, J.P. Morgan reviewed, among other things,
the Merger Agreement and certain related documents, a draft of this Proxy
Statement, the audited financial statements of the Company for the fiscal year
ended December 31, 1995, and the unaudited financial statements of the Company
for the fiscal year ended December 31, 1996; current and historical trading
prices of the Company's Common Shares; certain publicly available information
concerning the business of the Company and of certain other companies engaged
in businesses comparable to those of the Company, and the reported trading
prices for certain other companies' securities deemed comparable; publicly
available terms of certain transactions involving companies comparable to the
Company; the terms of other business combinations deemed relevant by J.P.
Morgan; certain internal financial analyses and forecasts prepared by British
Aerospace and the Company and their respective management and certain
agreements with respect to outstanding indebtedness or obligations of British
Aerospace and the Company. J.P. Morgan also held discussions with certain
members of the management of British Aerospace with respect to certain aspects
of the Merger, and the past and current business operations of British
Aerospace and the Company, the financial condition and future prospects and
operations
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of British Aerospace and the Company, and certain other matters believed
necessary or appropriate to J.P. Morgan's inquiry. In addition, J.P. Morgan
reviewed such other financial studies and analyses and considered such other
information as it deemed appropriate for the purposes of its opinion.
J.P. Morgan relied upon and assumed, without independent verification,
the accuracy and completeness of all information that was publicly available or
that was furnished to it by British Aerospace or the Company or otherwise
reviewed by or discussed with J.P.Morgan, and J.P. Morgan has not assumed any
responsibility or liability therefor. J.P. Morgan has not conducted any
valuation or appraisal of any assets or liabilities, nor have any valuations or
appraisals been provided to J.P. Morgan. In relying on financial analyses and
forecasts provided to J.P. Morgan, J.P. Morgan has assumed that they have been
reasonably prepared based on assumptions reflecting the best currently
available estimates and judgments by management of British Aerospace and the
Company as to the expected future results of operations and financial condition
of British Aerospace and the Company. J.P. Morgan has also assumed that the
Merger will have the tax consequences described in this Proxy Statement and in
discussions with, and materials furnished to J.P. Morgan by, representatives of
British Aerospace and the Company, and that the other transactions contemplated
by the Merger Agreement will be consummated on the terms and as described in
the Merger Agreement and this Proxy Statement.
The projections furnished to J.P. Morgan for the Company were prepared
by the management of the Company. For a description of such projections (which
were identical to those provided to Baird) see, "SPECIAL FACTORS--Background of
the Merger--Overview and Current Condition of the Company." Neither British
Aerospace nor the Company publicly discloses internal management projections of
the type provided to J.P. Morgan in connection with J.P. Morgan's analysis of
the Merger, and such projections were not prepared with a view toward public
disclosure. These projections were based on numerous variables and assumptions
that are inherently uncertain and may be beyond the control of management,
including, without limitation, factors related to general economic and
competitive conditions and prevailing interest rates. Accordingly, actual
results could vary significantly from those set forth in such projections.
J.P. Morgan's opinion is based on economic, market and other
conditions as in effect on, and the information made available to J.P. Morgan
as of, the date of such opinion, including the Company's ability to continue on
a stand alone basis without British Aerospace. Subsequent developments may
affect the written opinion dated February 26, 1997, and J.P. Morgan does not
have any obligation to update, revise, or reaffirm such opinion.
In accordance with customary investment banking practice, J.P. Morgan
employed generally accepted valuation methods in reaching its opinion. The
following is a summary of the material financial analyses utilized by J.P.
Morgan in connection with providing its opinion.
SELECTED TRANSACTION ANALYSIS. Using publicly available information,
J.P. Morgan examined selected transactions with respect to the aerospace and
defense industry sector. Specifically, J.P. Morgan reviewed the following
fifteen transactions; (1) Berkshire Hathaway's 1997 acquisition of Flight
Safety, (2) The Boeing Co.'s 1996 acquisition of Rockwell International Corp.,
(3) GEC Marconi Electronic Systems Corporation's 1996 acquisition of Hazeltine
Corporation, (4) Tracor Inc.'s 1995 acquisition of AEL Industries Inc., (5)
Hughes Electronics Corporation's 1995 acquisition of Magnavox Electronic
Systems Co., (6) Loral Corp.'s 1995 acquisition of Unisys Corporation Defense
Operations, (7) Alliant Techsystems' 1994 acquisition of Hercules Incorporated,
(8) Loral Corp.'s 1994 acquisition of IBM Corporation Federal Systems
Divisions, (9) Orbital Sciences Corporation's 1994 acquisition of Fairchild
Space and Defense Corporation, (10) Martin Marietta's 1994 acquisition of
General Electric Co.'s Aerospace Division, (11) Lockheed Corporation's 1993
acquisition of General Dynamic's Fort Worth Division, (12) Southern Air
Transport Inc.'s 1991 acquisition of Simuflite, (13) Thomson-CSF's 1990
acquisition of Link-Miles, Ltd., (14) CAE Inc.'s 1988 acquisition of
Singer-Link's Domestic Simulation & Training Division, (15) British Aerospace's
1988 acquisition of equity interests
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in the Company. J.P. Morgan applied a range of multiples derived from such
analysis to the Company's revenue, EBIT and EBITDA, and arrived at an estimated
range of equity values for the Company's Common Shares of approximately $16.00
to $25.00 per share.
PUBLIC TRADING MULTIPLES. Using publicly available information, J.P.
Morgan compared selected financial data of the Company with similar data for
selected publicly traded companies engaged in businesses which J.P. Morgan, in
consultation with British Aerospace, judged to be analogous to the Company.
The companies used in this analysis by J.P. Morgan were CAE, Inc. and Evans &
Sutherland. These companies were used, among other reasons, because of the
comparable nature of their business segments and the markets they serve. For
each comparable company, publicly available financial performance through the
twelve months ended September 30, 1996 was measured. J.P. Morgan applied a
value range for each multiple, specifically; firm value/revenue, firm
value/operating profit, firm value/EBITDA and price/earnings. These multiples
were then applied to the Company's revenue, operating profit, EBITDA and net
income, yielding an implied trading value for the Company's Common Shares of
approximately $24.00 to $30.00 per share.
DISCOUNTED CASH FLOW ANALYSIS. J.P. Morgan conducted a discounted
cash flow analysis for the purpose of determining the fully diluted equity
value per share for the Company's Common Shares. J.P. Morgan calculated the
un-levered free cash flows that the Company expected to generate during fiscal
years 1996 through 2005 based upon financial projections prepared by the
management of the Company through the years ended December 31st (the
"Management Case"), and as subsequently revised by the management of the
Company (the "Revised Management Case"), and upon management projections
adjusted by J.P. Morgan to reflect more moderate growth in revenues and lower
operating margins during the 10-year period (the "Alternative Case"). Under
the Alternative Case, J.P. Morgan calculated a range of terminal values for the
Company at the end of the 10-year period ending December 31st by applying a
terminal EBITDA multiple from 5x to 8x to the EBITDA of the Company during the
final year of the 10-year period for the Alternative Case. The un-levered free
cash flows and the range of terminal values were then discounted to present
values using a range of discount rates from 9% to 10%, which were chosen by
J.P. Morgan based upon an analysis of the current weighted average cost of
capital of the Company and selected publicly traded companies engaged in
businesses judged to be analogous to the Company. The present value of the
un-levered free cash flows and the range of terminal values were then adjusted
for the Company's September 30, 1996 quarter-end cash and total debt and the
estimated option exercise proceeds by virtue of the Merger. Based on the
Alternative Case and a discount rate of 9% to 10%, the discounted cash flow
analysis indicated a range of equity values of approximately $22.00 to $25.00
per share of the Company's Common Shares on a stand-alone basis.
J.P. Morgan also calculated a range of terminal values for the Company
at the end of the 10-year period ending December 31st by applying the terminal
net income multiple of 11x to 13x creating a range around the 12x terminal net
income multiple furnished by management to the net income of the Company during
the final year of the 10-year period for both the Management Case and the
Revised Management Case. The un-levered free cash flows and the range of
terminal values were then discounted to present values using a range of
discount rates from 17% to 19% creating a range based upon the 18% discount
rate which was furnished by the management of the Company. The present value
of the un-levered free cash flows and the range of terminal values were then
adjusted for the Company's September 30, 1996 quarter-end cash and total debt
balances and the estimated option exercise proceeds by virtue of the Merger.
Based on the Management Case as described above, the discounted cash flow
analysis produced by the Management Case produced a range of equity values of
approximately $24.00 to $30.00 per share of the Company's Common Shares on a
stand-alone basis. Based on the Revised Management Case as described above,
the discounted cash flow analysis produced by the Revised Management Case
produced a range of equity values of approximately $27.00 to $30.00 per share
of the Company's Common Shares on a stand-alone basis.
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The summary set forth above does not purport to be a complete
description of the analyses or data presented by J.P. Morgan. The preparation
of a fairness opinion is a complex process and is not necessarily susceptible
to partial analysis or summary description. J.P. Morgan believes that the
summary set forth above and its analyses must be considered as a whole and that
selecting portions thereof, without considering all of its analyses, could
create an incomplete view of the processes underlying its analyses and opinion.
J.P. Morgan based its analyses on assumptions that it deemed reasonable,
including assumptions concerning general business and economic conditions and
industry-specific factors. The other principal assumptions upon which J.P.
Morgan based its analyses are set forth above under the description of each
such analysis. J.P. Morgan's analyses are not necessarily indicative of actual
values or actual future results that might be achieved, which values may be
higher or lower than those indicated. Moreover, J.P. Morgan's analyses are not
and do not purport to be appraisals or otherwise reflective of the prices at
which businesses actually could be bought or sold.
As a part of its investment banking business, J.P. Morgan and its
affiliates are continually engaged in the valuation of businesses and their
securities in connection with mergers and acquisitions, investments for passive
and control purposes, negotiated underwritings, secondary distributions of
listed and unlisted securities, private placements, and valuations for estate,
corporate and other purposes. J.P. Morgan was selected to advise British
Aerospace with respect to the Merger and to deliver an opinion to British
Aerospace's Board of Directors with respect to the Merger on the basis of such
experience and its familiarity with British Aerospace.
For services rendered in connection with the Merger and the delivery
of its opinion, British Aerospace has agreed to pay J.P. Morgan a fee of
$750,000 if the Merger is consummated; J.P. Morgan will be paid a fee of
$100,000 if the Merger is not consummated. In addition, British Aerospace has
agreed to reimburse J.P. Morgan for its expenses incurred in connection with
its services, including the fees and disbursements of counsel, and will
indemnify J.P. Morgan against certain liabilities, including liabilities
arising under the Federal securities laws.
J.P. Morgan and its affiliates maintain banking and other business
relationships with British Aerospace and its affiliates, for which they receive
customary fees. In the ordinary course of its businesses, affiliates of J.P.
Morgan may actively trade the debt and equity securities of British Aerospace
or the Company for their own accounts or for the accounts of customers and,
accordingly, they may at any time hold long or short positions in such
securities. J.P. Morgan did not own as principal any of the Company's Common
Shares or any shares of British Aerospace either immediately before or after
rendering its opinion.
POSITION OF HOLDINGS AND BRITISH AEROSPACE AS TO FAIRNESS
Holdings and British Aerospace considered the analyses of and the
factors examined by J.P. Morgan, and has adopted those analyses and conclusions
as its own. See "SPECIAL FACTORS--Background of the Merger" and "SPECIAL
FACTORS--Opinion of Financial Advisor to British Aerospace." Holdings and
British Aerospace determined the amount of the Merger Consideration by taking
into account these analyses and other factors, and believe that these analyses
and factors, when considered together, provide a reasonable basis to believe
that the Merger is fair from a financial point of view to the Public
Shareholders. The other factors which Holdings and British Aerospace
considered were trading ranges of the Common Shares (how Reflectone's Common
Shares had traded over various time periods), the implied premiums to the
then-current and historical market prices of the Common Shares which would be
generated by payment of the Merger Consideration to the Public Shareholders,
and the stand alone ability of the Company to compete in its industry
(including British Aerospace's belief that as a result of the significant
level of financial support given by British Aerospace to the Company, without
which support, the Company could not effectively compete).
In light of the appointment of the Special Independent Committee of
the Board of Directors comprised solely of members of the Board of Directors of
the Company who are not affiliated with
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<PAGE> 43
Holdings or officers of the Company, the retention by that Special Independent
Committee of an independent financial adviser, Baird, and of legal counsel, in
light of the condition in the Merger Agreement that the Merger be approved by a
majority of the Public Shareholders, and in light of the arm's-length nature of
the negotiations between Holdings and the Special Independent Committee,
Holdings and British Aerospace believe that the manner in which the Merger was
considered by the Company was procedurally fair to the Public Shareholders.
The foregoing should not, however, be construed as a recommendation by
Holdings or British Aerospace to the Public Shareholders to vote to approve the
Merger Agreement. Holdings and British Aerospace did not assign specific
relative weight to the analyses and factors considered in reaching their belief
as to fairness.
CONFLICT OF INTERESTS OF HOLDINGS AND CERTAIN MEMBERS OF THE BOARD OF DIRECTORS
OF THE COMPANY IN THE MERGER
Currently, as the holder of approximately 48.0% of the outstanding
Common Shares (approximately 53.3% on a fully-diluted basis (assuming
conversion of the Preferred Stock and the exercise of the Warrants and all
outstanding options to purchase Common Stock)), Holdings effectively has the
power to determine the membership of the entire Board of Directors of the
Company; however, Holdings is subject to restrictions contained in the SSA.
Under the terms of the SSA, only three of a total of eight directors of the
Company may have a past or present affiliation with Holdings or its affiliates.
Accordingly, as of the Record Date, three individuals (David R. Fish, Paul L.
Harris, and Sydney Gillibrand) who are affiliated with Holdings serve on the
Company's Board of Directors. Since 1987, the Company, Holdings and British
Aerospace (and other affiliates of British Aerospace) have engaged in a number
of business and financial relationships. See "SPECIAL FACTORS--Background of
the Merger." In addition, as a result of its significant ownership in the
Company, Holdings effectively has the power to decide other matters submitted
for shareholder approval.
If the Merger is consummated, Holdings will be the sole shareholder of
the Surviving Corporation. Accordingly, Holdings, and the members of the
Company's Board of Directors who are affiliated with Holdings, have a direct
economic interest in the Merger. This creates a conflict of interest with the
role of these Board members as Board members in making the determination
whether the Merger is in the best interests of the Company and the Public
Shareholders. In light of these inherent conflicts of interest, the Board of
Directors of the Company appointed the Special Independent Committee comprised
solely of Board members who are not affiliated with Holdings and are not
officers of the Company. In addition, the Holdings-affiliated directors
abstained from evaluating and voting on the Merger.
While pursuant to the terms of the Merger Agreement, the current
officers and directors of the Company will become the officers and directors of
the Surviving Corporation immediately following the consummation of the Merger,
Holdings in its sole discretion may change all or some of the officers and
directors of the Surviving Corporation, subject to the SSA.
CERTAIN EFFECTS OF THE MERGER
Following the Merger, Holdings will own 100% of the Surviving
Corporation's outstanding capital stock. Holdings will be the sole beneficiary
of any future earnings and growth of the Surviving Corporation (until shares of
capital stock, if any, are issued to other shareholders) and will have the
ability to benefit from any divestitures, strategic acquisitions or other
corporate opportunities that may be pursued by the Company in the future. Upon
the consummation of the Merger, the Public Shareholders will cease to have any
ownership interest in the Company or rights as shareholders. The Public
Shareholders will no longer benefit from any increases in the value of the
Company or the payment of dividends on the Common Shares and will no longer
bear the risk of any decreases in value of the Company.
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<PAGE> 44
As a result of the Merger, the Surviving Corporation will be privately
held and there will be no public market for its common stock. Upon
consummation of the Merger, the Common Shares will cease to be quoted on the
Nasdaq National Market. In addition, registration of the Common Shares under
the Exchange Act will be terminated, and accordingly, the Company will no
longer be required to file periodic reports with the SEC.
With the exception of the Company's stock option plans and the
Reflectone, Inc. Stock Purchase Plan, all employee benefit and compensation
plans of the Surviving Corporation are expected to be substantially the same as
the Company's present benefit plans. The Surviving Corporation may determine
to amend present benefit plans or to initiate additional employee benefit plans
in the future to compensate and motivate key employees.
FUTURE PLANS FOR THE COMPANY
It is expected that following the Merger, the business and operations
of the Company will be continued by the Company, as the Surviving Corporation
in the Merger, substantially as they are currently being conducted. However,
Holdings and the management of the Surviving Corporation will continue to
evaluate the Company's business and operations after the consummation of the
Merger and make such changes as are deemed appropriate. The Company's
corporate headquarters is expected to remain at its current location in Tampa,
Florida.
Except as otherwise indicated in this Proxy Statement, Holdings does
not have any present plans or proposals subsequent to the Merger which relate
to or would result in an extraordinary corporate transaction, such as a merger,
reorganization or liquidation, involving the Company, a sale or transfer of a
material amount of assets of the Company or any material change in the
Company's corporate structure.
CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
The following discussion summarizes certain United States federal
income tax consequences of the Merger to shareholders of the Company other than
Holdings (and certain related parties, if any). It is based upon laws,
regulations (whether final, temporary, or proposed), rulings and judicial
decisions now in effect, all of which are subject to change, including changes
to a taxpayer's detriment with retroactive effect. It does not address all
aspects of federal income taxation that may be relevant to a particular
shareholder in light of that shareholder's personal circumstances, nor does it
address federal income tax consequences to types of taxpayers subject to
special treatment under the federal income tax laws (e.g., life insurance
companies, tax exempt organizations, foreign taxpayers, securities dealers, and
persons who have entered into hedging transactions with respect to the Common
Shares), nor does it address any aspect of state, local, or foreign tax laws.
The Company has not requested any ruling from the Internal Revenue Service with
respect to the Merger. SHAREHOLDERS ARE ADVISED TO CONSULT WITH THEIR OWN TAX
ADVISORS AS TO THE CONSEQUENCES TO THEM OF THE MERGER UNDER FEDERAL AND
APPLICABLE STATE, LOCAL, AND FOREIGN TAX LAWS.
The receipt of cash for Common Shares pursuant to the Merger will be a
taxable transaction to the Holders of Public Shares for federal income tax
purposes under the Internal Revenue Code of 1986, as amended (the "Code"), and
also may be a taxable transaction under applicable state, local, foreign and
other tax laws.
In general, for federal income tax purposes a shareholder will
recognize gain or loss equal to the difference between the tax basis for the
Common Shares held by such shareholder and the amount of cash received in
exchange therefor. Such gain or loss will be capital gain or loss if the
Common Shares are capital assets in the hands of the shareholder and will be
long-term capital gain or loss if the holding period for the Common Shares is
more than one year. As of the date of this Proxy Statement, long-term capital
gains recognized in 1997 by shareholders who are individuals are taxable
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<PAGE> 45
at a maximum statutory rate of 28% (as compared with a maximum statutory rate
of 39.6% on ordinary income). Corporations generally are subject to tax at a
maximum statutory rate of 35% on both capital gains and ordinary income. The
distinction between capital gain and ordinary income may be relevant for
certain other purposes, including the taxpayer's ability to utilize capital
losses or capital loss carryovers to offset any gain recognized.
The foregoing discussion may not be applicable to shareholders who
acquired their Common Shares pursuant to the exercise of options or other
compensation arrangements or who are not citizens or residents of the United
States or who are otherwise subject to special tax treatment under the Code.
In the case of shareholders who acquired their Common Shares upon the
exercise of qualified incentive stock options granted to employees of the
Company ("ISO Shares"), such shareholders will receive the treatment described
above only with respect to ISO Shares as to which both of the following
conditions apply: (1) the date of transfer of the ISO Shares following exercise
of the applicable options was more than one year prior to the Effective Time,
and (2) the applicable options were granted to the employee more than two years
prior to the Effective Time. As to all other ISO Shares, the receipt of cash
for such ISO Shares in the Merger will be a disqualifying disposition of such
ISO Shares. Such shareholders will recognize ordinary income equal to the
excess, if any, of (a) the lesser of (i) the fair market value of the
applicable ISO Shares on the date such ISO Shares were transferred pursuant to
the exercise of the options, or (ii) the cash received with respect to such ISO
Shares in the Merger, over (b) the exercise price paid to acquire such ISO
Shares. The federal income tax withholding applicable to wages will apply to
such ordinary income. Such shareholders' adjusted basis in such ISO Shares
will include the exercise price paid to acquire such ISO Shares and any
ordinary income recognized by reason of the disqualifying disposition, and such
shareholders will also recognize capital gain or loss equal to the difference
between the cash received for the applicable ISO Shares in the Merger and the
adjusted basis of such ISO Shares in their hands. Such gain or loss will be
long-term gain or loss if the applicable options were exercised more than one
year prior to the Effective Time.
Persons who receive cash payments in the Merger in settlement of
employee options outstanding under the Company's stock option plans will
recognize ordinary income in the amount of such cash payments. The federal
income and employment tax withholding applicable to wages will apply to such
ordinary income.
Effective with the Merger, the Company will no longer file tax returns
as its own consolidated group. Rather it will join Holdings as its subsidiary
and file under Holdings' consolidated group.
Cash payments to shareholders pursuant to the Merger may be subject to
a backup withholding tax at a rate of 31% on the gross amount of such payments
unless the shareholder has complied with certain reporting and/or certification
procedures. The Letter of Transmittal, which will be sent to the former
shareholders of the Company following the Effective Time if the Merger is
consummated, will include a substitute Form W-9 on which shareholders can
provide the information required to avoid the backup withholding provisions of
federal income tax law. Any amount withheld from a shareholder under the
backup withholding rules will be allowed as a credit against such shareholder's
federal income tax liability and may entitle the shareholder to a refund,
provided that the required information is furnished to the Internal Revenue
Service. Shareholders should consult their tax advisors regarding the
application of information reporting and backup withholding in their particular
circumstances and the availability of an exemption therefrom if the
shareholders cannot or do not make the certifications required by the
substitute Form W-9.
THE FOREGOING DISCUSSION OF CERTAIN U.S. FEDERAL INCOME TAX
CONSEQUENCES OF THE MERGER IS INCLUDED FOR GENERAL INFORMATION ONLY AND IS
BASED ON EXISTING TAX LAWS AS OF THE DATE OF THIS PROXY STATEMENT, WHICH MAY
DIFFER AT THE EFFECTIVE TIME. PROPOSED LEGISLATION, IF ENACTED, MAY ALTER THE
RATES OF TAXATION SHOWN ABOVE. EACH SHAREHOLDER IS URGED TO
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<PAGE> 46
CONSULT SUCH SHAREHOLDER'S OWN TAX ADVISOR TO DETERMINE THE PARTICULAR TAX
CONSEQUENCES TO SUCH SHAREHOLDER OF THE MERGER, INCLUDING THE APPLICABILITY AND
EFFECT OF STATE, LOCAL, FOREIGN AND OTHER TAX LAWS AND BACK-UP WITHHOLDING.
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<PAGE> 47
ESTIMATED FEES AND EXPENSES; SOURCES OF FUNDS
Estimated fees and expenses incurred or to be incurred by the Company,
Mergerco and Holdings in connection with the Merger Agreement and the
transactions contemplated thereby are approximately as follows:
<TABLE>
<S> <C>
Payment of Merger Consideration (1) . . . . . . . . . . . . . . . . . . $ 35,746,752
Consideration payable to option holders (2) . . . . . . . . . . . . . . 3,248,869
Financial advisory fees and expenses (3) . . . . . . . . . . . . . . . 1,070,000
Legal fees and expenses (4) . . . . . . . . . . . . . . . . . . . . . . 775,000
Accounting fees and expenses . . . . . . . . . . . . . . . . . . . . . 10,000
SEC filing fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,799
Printing and mailing expenses . . . . . . . . . . . . . . . . . . . . . 60,000
Paying Agent fees and expenses . . . . . . . . . . . . . . . . . . . . 10,000
Proxy Solicitor fees and expenses . . . . . . . . . . . . . . . . . . . 20,000
Miscellaneous expenses . . . . . . . . . . . . . . . . . . . . . . . . 51,580
----------------
TOTAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 41,000,000
================
</TABLE>
- ----------------------
(1) Includes payment for all outstanding Common Shares other than those owned
by Mergerco.
(2) Consists of cash consideration equal to $24.00 per share less the exercise
price of options (which ranges from $1.75 to $18.50 per share) held by
current and former employees and former directors of the Company, to
purchase 219,071 Common Shares of the Company. See "OPTION CANCELLATION
INFORMATION" for such consideration to be paid to the Company's executive
officers.
(3) Includes the fees and estimated expenses of Baird and J.P. Morgan. See
"SPECIAL FACTORS--Opinion of Financial Advisor to British Aerospace and
--Opinion of Financial Advisor to the Special Independent Committee;
Summary of Financial Analyses."
(4) Includes the estimated fees and expenses of legal counsel for the Company,
the Special Independent Committee and legal counsel for Holdings and
British Aerospace.
The total amount of funds required to pay the Merger Consideration,
the consideration to be paid to option holders, and the expenses incident to
the Merger Agreement and the consummation of the transactions contemplated
thereby will be contributed by Holdings to the Surviving Corporation. British
Aerospace is the U.K.'s largest military and civil aircraft manufacturer; for
the fiscal year ended December 31, 1996, British Aerospace earned approximately
$500 million (U.S.) and clearly has the financial wherewithal to provide,
directly or indirectly, Holdings with the funds to pay the Merger
Consideration. Other than the Merger Consideration and funds necessary to pay
current option holders, which will be contributed to Mergerco as equity
immediately before the Merger, such funding may take the form of either a
variety of debt financing arrangements, additional contributions to equity
capital or a combination of both. Each party shall pay its own expenses if the
Merger is not consummated.
ACCOUNTING TREATMENT OF THE MERGER
The Merger will be accounted for as a "purchase" as that term is used
under generally accepted accounting principles for accounting and financial
reporting purposes.
REGULATORY APPROVALS
No federal or state regulatory approvals are required to be obtained,
nor are any regulatory requirements required to be complied with, in connection
with consummation of the Merger, by any party to the Merger Agreement, except
for waivers or approvals under the Hart-Scott-Rodino Antitrust Improvements Act
of 1976 and the Exon-Florio Amendment to the Defense Production Act of 1950, as
amended, which have been obtained.
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<PAGE> 48
THE MEETING; MECHANICS OF VOTING AND PROXIES
TIME, DATE AND PLACE
The Meeting of the shareholders of the Company to consider and vote
upon the Merger Proposal will be held on May 20, 1997 at 10:00 a.m., local
time, at 4908 Tampa West Boulevard, Tampa, Florida.
RECORD DATE; VOTING SECURITIES; QUORUM
Only shareholders of record at the close of business on April 14,
1997, the Record Date for the Meeting, will be entitled to notice of, and to
vote at, the Meeting and any adjournments or postponements thereof. At the
close of business on the Record Date, there were 2,864,448 Common Shares (held
by [____] shareholders of record) outstanding and entitled to vote at the
Meeting and 50,000 shares of Preferred Stock (held by one shareholder,
Holdings) outstanding and entitled to vote at the Meeting. Each holder of
record of Common Shares on the Record Date, and each holder of record of
Preferred Stock, is entitled to cast one vote per share in person or by Proxy
at the Meeting and any adjournments or postponements thereof. There was no
other class of voting securities of the Company outstanding on the Record Date.
The presence, in person or by Proxy, of the holders of a majority of the total
outstanding Common Shares entitled to vote and the holders of a majority of the
total outstanding shares of Preferred Stock, is necessary to constitute a
quorum for the transaction of business at the Meeting. Abstentions and broker
non-votes (where a broker or other record holder submits a Proxy but does not
have authority to vote a beneficial owner's Common Shares) will be considered
present for purposes of establishing a quorum.
REQUIRED VOTE
Pursuant to the FBCA, the affirmative vote of holders of at least a
majority of all of the outstanding Common Shares and the affirmative vote of
the sole holder of all of the outstanding shares of Preferred Stock, each
voting as a separate class, is required to approve and adopt the Merger
Agreement. In addition, pursuant to the Merger Agreement, the affirmative vote
of at least a majority of the Public Shares voting on the Merger in person or
by proxy is required to approve and adopt the Merger Agreement. Holdings will
vote the 1,375,000 Common Shares that it beneficially owns in favor of the
Merger Proposal. Holdings, as the sole owner of all of the outstanding shares
of Preferred Stock, will vote the Preferred Stock in favor of the Merger
Proposal. In addition, the executive officers and directors of the Company,
who collectively own 1.6% of the outstanding Common Shares (without giving
effect to the exercise of any options to purchase Common Shares), have advised
the Company that each will vote all of their Common Shares in favor of the
Merger Proposal.
VOTING OF PROXIES
Common Shares and shares of Preferred Stock represented by Proxies, in
the accompanying form of Proxy, which are properly executed, duly returned and
not revoked, will be voted in accordance with the instructions contained
therein. If no specification is indicated on the Proxy, the Common Shares or
shares of Preferred Stock represented thereby will be voted (i) FOR the Merger
Proposal, and (ii) in the discretion of the proxies on all other matters to
properly come before the Meeting. The execution of a Proxy will in no way
affect a shareholder's right to attend the Meeting and vote in person.
Attendance at the Meeting will not in and of itself constitute the revocation
of a Proxy.
For purposes of obtaining the approval of at least a majority of all
of the outstanding Common Shares, abstentions and broker non-votes (where a
broker or other record owner submits a Proxy but does not have the authority to
vote the beneficial owner's Common Shares) will have the effect of a vote
against the Merger Agreement. For purposes of obtaining the approval of at
least a majority of the Common Shares voting on the Merger in person or by
proxy held by holders other than Holdings, abstentions and broker non-votes
shall have no effect.
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<PAGE> 49
Any Proxy executed and returned by a shareholder may be revoked at any
time thereafter if written notice of revocation is given to the Secretary of
the Company prior to the vote to be taken at the Meeting, or by execution of a
subsequent Proxy which is presented at the Meeting, or if the shareholder
attends the Meeting and votes by ballot, except as to any matter or matters
upon which a vote shall have been cast pursuant to the authority conferred by
such Proxy prior to such revocation.
The cost of solicitation of Proxies from the shareholders on behalf of
the Board of Directors will be paid by the Company. Pursuant to an engagement
letter dated February 24, 1997, the Company has retained MacKenzie Partners,
Inc. (the "Proxy Solicitor") as a proxy solicitor in connection with the
Merger. Under the engagement letter, the Proxy Solicitor's duties include
developing an effective communications strategy with respect to the
solicitation of Proxies, performing the broker search, distributing Proxy
materials, and soliciting voted proxies from all banks, brokers, nominees, and
intermediaries. The Proxy Solicitor will be paid a fee of $10,000 plus
customary out-of-pocket expenses for its services. In addition to the Proxy
Solicitor, directors, officers and regular employees of the Company may solicit
Proxies by telephone, telegram, facsimile transmission or by personal
interviews. Such persons will receive no additional compensation for such
services but may be reimbursed for out-of-pocket expenses incurred in
connection therewith.
THE MERGER AGREEMENT
GENERAL
The Merger Agreement provides for the Merger of Mergerco with and into
the Company at the Effective Time, when the separate corporate existence of
Mergerco shall cease and the Company shall continue as the Surviving
Corporation to be governed by the laws of the State of Florida. As a result of
the Merger, Holdings will own all of the Surviving Corporation's common stock.
In the Merger, the shareholders of the Company, other than Holdings, will
receive the Merger Consideration described below. See "SPECIAL
FACTORS--Purpose of and Reasons for the Merger."
EFFECTIVE TIME OF THE MERGER
The Effective Time of the Merger will occur upon duly filing Articles
of Merger with the Secretary of State of the State of Florida (as required by
the FBCA) or at such later time as is specified in such Articles of Merger. It
is anticipated that such Articles of Merger will be filed as promptly as
practicable on or after the Closing Date. Such filing will be made, however,
only upon satisfaction or waiver of all conditions to the Merger contained in
Article 5 of the Merger Agreement. The following discussion of the Merger
Agreement is qualified in its entirety by reference to the complete text of the
Merger Agreement, which is attached to this Proxy Statement as Exhibit A and is
incorporated herein by reference.
THE SURVIVING CORPORATION
Under Article 1 of the Merger Agreement, at the Effective Time, the
effect of the Merger will be as provided in Section 607.1106 of the FBCA. The
Surviving Corporation will possess all of the rights, privileges, immunities,
powers and franchises, of a public and private nature, of the Company and
Mergerco, and all property, real, personal and mixed, and all other causes of
action and all and every other interest of, or belonging to or due to, the
Company or Mergerco, will be deemed to be transferred to and vested in such
Surviving Corporation without further act or deed; and the title to any real
estate, or any interest therein, vested in either of the merged companies shall
not revert or in any way be impaired by reason of the Merger. The Surviving
Corporation will thereafter be responsible and liable for all of the
liabilities and obligations of the Company and Mergerco; any claim existing or
action or proceeding pending by or against either of the merged companies may
be prosecuted to judgment as if such Merger had not taken place, or the
Surviving Corporation may be substituted in the place of the Company or
Mergerco. Section 1.4 of the Merger Agreement provides
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<PAGE> 50
that the directors and the executive officers of the Company immediately prior
to the Effective Time will become the initial directors and executive officers
of the Surviving Corporation after the Effective Time, until their respective
successors have been duly elected or appointed and qualified in the manner
provided in the Articles of Incorporation and Bylaws of the Surviving
Corporation, or as otherwise provided by law. In addition, Sections 1.2 and
1.3 of the Merger Agreement provide that the Surviving Corporation will adopt
as its Articles of Incorporation and Bylaws, the Articles of Incorporation and
Bylaws of Mergerco as in effect immediately prior to the Effective Time, until
duly amended in accordance with the terms thereof and the FBCA.
CONSIDERATION TO BE PAID TO SHAREHOLDERS; CONVERSION OF COMMON SHARES
Under Section 2.1 of the Merger Agreement, as a result of the Merger,
each Common Share (except Common Shares held by the Company as treasury stock
and Common Shares owned by Holdings) issued and outstanding immediately prior
to the Effective Time will be converted into and represent the right to receive
the Merger Consideration of $24.00 in cash, without interest, subject to
applicable back-up withholding taxes. Upon conversion, each such Common Share
will no longer be outstanding and will automatically be canceled and retired
and cease to exist, and certificates previously evidencing such Common Shares
immediately prior to the Effective Time will thereafter represent only the
right to receive the Merger Consideration. Each Common Share and each share of
Preferred Stock owned by Holdings and all other shares of capital stock of the
Company that are held in the treasury of the Company immediately prior to the
Effective Time, if any, will be canceled without any conversion rights or
consideration. Each share of common stock, par value $0.01 per share, of
Mergerco issued and outstanding immediately prior to the Effective Time will
automatically be converted into one newly and validly issued, fully paid and
nonassessable share of common stock, par value $0.01 per share, of the
Surviving Corporation.
Under Section 2.3 of the Merger Agreement, at the Effective Time,
except as otherwise provided in the Merger Agreement, each option (whether or
not vested) granted by the Company to purchase Common Shares, which is
outstanding immediately prior to the Effective Time, will be canceled and
retired and will cease to exist, subject to the written agreement of each
option holder. Each holder of an option (whether or not vested) will, in
settlement thereof, receive from the Surviving Corporation for each Common
Share subject to such option an amount in cash (subject to applicable
withholding tax) equal to the difference between the Merger Consideration and
the per share exercise price of such option, to the extent such difference is a
positive number. Upon receipt of such consideration, the option will be
canceled.
As described above, upon consummation of the Merger, subject to the
provisions described below, each Common Share outstanding immediately prior to
the Effective Time (except shares held by the Company as treasury stock and
shares owned by Holdings) will be converted into the right to receive the
Merger Consideration. Under Section 2.2 of the Merger Agreement, if the Merger
is consummated, promptly after the Effective Time, the Surviving Corporation
shall deposit with the Paying Agent monies sufficient to pay the aggregate
Merger Consideration (the "Payment Fund"). In addition, instructions with
regard to the surrender of certificates formerly representing Common Shares,
together with the Letter of Transmittal to be used for that purpose, will be
mailed by the Paying Agent to the holders of Common Shares as soon as
practicable after the Effective Time. The Paying Agent, as soon as practicable
following receipt from a holder of Common Shares of a duly executed Letter of
Transmittal, together with certificates formerly representing Common Shares and
any other items required by the Surviving Corporation or the Paying Agent,
shall pay to such holder of Common Shares the product of (x) the number of
Common Shares previously evidenced by such certificates and (y) the Merger
Consideration, out of the Payment Fund and the certificates so surrendered will
be canceled. If payment is to be made to a person other than the person in
whose name the certificate surrendered is registered, it will be a condition of
payment that the certificate so surrendered be properly endorsed or otherwise
in proper form for transfer and that the person requesting such payment pay any
transfer or other taxes required by reason of such payment or
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<PAGE> 51
establish to the satisfaction of the Surviving Corporation that such taxes have
been paid or are not applicable.
Under Section 2.2(b) of the Merger Agreement, until surrendered, in
accordance with provisions of the Merger Agreement, from and after the
Effective Time, each certificate previously evidencing the Common Shares (other
than certificates previously evidencing shares held in treasury of the Company
or held by Holdings) shall represent for all purposes only the right to receive
the Merger Consideration to which such holder is entitled and shall cease to
have any rights with respect to the Company Common Stock formerly represented
thereby except as otherwise provided by the Merger Agreement or by law.
Under Section 2.2(c) of the Merger Agreement, any funds remaining in
the Payment Fund that remain unclaimed by holders of Common Shares for six
months after the Effective Time will be returned to the Surviving Corporation
and any holder of Common Shares who has not exchanged his Common Shares for the
Merger Consideration prior to that time shall look thereafter only to the
Surviving Corporation for payment of the Merger Consideration in respect of his
Common Shares. Any amounts remaining unclaimed by holders of the Common Shares
two years after the Effective Time will, to the extent permitted by abandoned
property and any other applicable law, become the property of the Surviving
Corporation without further action or request, free and clear of all claims or
interest of any person previously entitled to such claims. All interest
accrued in respect of the Payment Fund shall inure to the benefit of and be
paid to the Surviving Corporation. Notwithstanding the foregoing, neither
Mergerco nor the Surviving Corporation shall be liable to any holder of Common
Shares for any amount paid to a public official pursuant to applicable
abandoned property, escheat or similar law.
Under Section 2.2(d) of the Merger Agreement, the Surviving
Corporation will be entitled to deduct and withhold from consideration payable
to any holder of Common Shares such amounts as the Surviving Corporation is
required to deduct and withhold with respect to the making of such payment
under applicable tax law. See "SPECIAL FACTORS--Certain U.S. Federal Income
Tax Consequences of the Merger." To the extent that amounts are so withheld by
the Surviving Corporation, such amounts will be treated for all purposes of the
Merger Agreement as having been paid to the relevant holder of Common Shares.
Under Section 2.2(e) of the Merger Agreement, at the Effective Time,
the stock transfer books will be closed and there will be no further
registration of transfer of Common Shares thereafter on the records of the
Company.
REPRESENTATIONS AND WARRANTIES
Article 4 of the Merger Agreement contains various representations and
warranties of the Company, Holdings and Mergerco relating to, among other
things, the following matters (which representations and warranties are
subject, in certain cases, to specified exceptions and, generally, apply only
to facts and circumstances existing as of the date of the Merger Agreement):
(a) due incorporation, corporate existence, good standing and power of, and
similar corporate matters with respect to, each of the Company, the Company's
subsidiaries (the "Subsidiaries"), Holdings and Mergerco; (b) corporate power
and authority to enter into, and the valid and binding execution and delivery
of, the Merger Agreement by each such party; (c) the absence of any
governmental authorization, consent or approval required to consummate the
Merger, except as disclosed; (d) the Merger Agreement and the Merger not
resulting in contraventions or conflicts with respect to the Articles of
Incorporation or Bylaws of the Company or Mergerco and violations of laws,
regulations, judgments, injunctions, orders or decrees relating to the Company,
Holdings and Mergerco; and (e) the accuracy of information supplied by the
Company, Holdings and Mergerco included in this Proxy Statement and the
Schedule 13E-3.
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<PAGE> 52
In Section 4.1 of the Merger Agreement, the Company has made certain
additional representations and warranties to Holdings and Mergerco relating to
the following matters (which representations and warranties are subject, in
certain cases, to specified exceptions and, generally, apply only to facts and
circumstances existing as of the date of the Merger Agreement): (a) the capital
structure of the Company and the Subsidiaries; (b) the delivery to Holdings of
certain documents filed by the Company with the SEC and the accuracy of the
information contained in such documents; (c) the fair presentation of the
financial statements of the Company; (d) the vote of the Special Independent
Committee and the Board of Directors of the Company to approve the Merger
Agreement and the Merger, to satisfy any applicable corporate law and to
recommend the approval and adoption of the Merger Agreement and the Merger by
the holders of the Common Shares; (e) the absence of any material adverse
changes to the Company's business operations or financial conditions resulting
in a Material Adverse Effect to the Company; (f) the delivery of a fairness
opinion from Baird; (g) the absence of any undisclosed litigation which would
result in a Material Adverse Effect (as defined in the Merger Agreement); and
(h) certain tax and employee benefit plan matters.
In Section 4.2 of the Merger Agreement, Holdings and Mergerco have
made certain additional representations and warranties to the Company relating
to the following matters (which representations and warranties are subject, in
certain cases, to specified exceptions and, generally, apply only to facts and
circumstances existing as of the date of the Merger Agreement): (a) the vote of
the Board of Directors and the sole shareholder of Mergerco to approve the
Merger Agreement and the Merger; (b) the vote of the Board of Directors of
Holdings to approve the Merger Agreement and the Merger; and (c) at the Closing
Date, the sufficiency of available funds to provide all of the requisite Merger
Consideration.
COVENANTS
In Section 6.1 of the Merger Agreement, the Company has agreed that
during the period from the date of the Merger Agreement to the Effective Time,
except as otherwise provided in the Merger Agreement or consented to by
Mergerco, the Company and the Subsidiaries will conduct their business only in
the regular and ordinary course of business consistent with past practice and
shall use commercially reasonable efforts to preserve substantially intact
their business organizations and preserve their relationships with third
parties with whom they have business dealings. The Company has further agreed
that neither the Special Independent Committee nor the Board of Directors of
the Company shall, or shall authorize or direct the Company or any Subsidiary,
directly or indirectly, to:
(a) adopt or propose any change in its Articles of Incorporation
or Bylaws;
(b) except in the ordinary course of business consistent with past
practices and except pursuant to existing agreements or arrangements (i)
acquire (by merger, consolidation or acquisition of stock or assets) any
material corporation, partnership or other business organization or division
thereof, or sell, lease or otherwise dispose of a material Subsidiary or a
material amount of assets or securities; (ii) make any investment in an amount
in excess of $25,000 in the aggregate whether by purchase of stock or
securities, contributions to capital or any property transfer, or purchase for
an amount in excess of $25,000 in the aggregate, any property or assets of any
other individual or entity; (iii) waive, release, grant, or transfer any rights
of material value; (iv) modify or change in any material respect any existing
material license, lease, contract, or other document; (v) except to refund or
refinance commercial paper, incur, assume or prepay an amount of long-term or
short-term debt in excess of $25,000 in the aggregate; (vi) assume, guarantee,
endorse or otherwise become liable or responsible (whether directly,
contingently or otherwise) for the obligations of any other Person which are in
excess of $25,000 in the aggregate; (vii) make any loans, advances or capital
contributions to, or investments in, any other Person which are in excess of
$25,000 in the aggregate or (viii) authorize any new capital expenditures which
individually exceed $25,000, or in the aggregate, exceed $50,000;
(c) take any action that would make any representation and
warranty of the Company hereunder inaccurate in any respect at, or as of any
time prior to, the Effective Time, or omit to take
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<PAGE> 53
any action necessary to prevent any such representation or warranty from being
inaccurate in any respect at any such time;
(d) split, combine or reclassify any shares of its capital stock,
declare, set aside or pay any dividend or other distribution (whether in cash,
stock or property or any combination thereof) in respect of its capital stock,
or redeem or otherwise acquire or offer to acquire any of its securities or any
securities of its Subsidiaries;
(e) adopt or amend any bonus, profit sharing, compensation,
severance, termination, stock option, pension, retirement, deferred
compensation, employment or employee benefit plan, agreement, trust, plan, fund
or other arrangement for the benefit and welfare of any director, officer or
employee, or increase in any manner the compensation or fringe benefits of any
director, officer or employee or pay any benefit not required by any existing
plan or arrangement (including, without limitation, the granting of stock
options or stock appreciation rights or the removal of existing restrictions in
any benefit plans or agreements);
(f) revalue in any material respect any of its assets, including,
without limitation, writing down the value of inventory or writing off notes or
accounts receivable, other than in the ordinary course of business;
(g) pay, discharge or satisfy any material claims, liabilities or
obligations (whether absolute, accrued, asserted or unasserted, contingent or
otherwise) other than the payment, discharge or satisfaction in the ordinary
course of business, consistent with past practices, of liabilities reflected or
reserved against in the consolidated financial statements of the Company or
incurred in the ordinary course of business, consistent with past practices;
(h) make any tax election or settle or compromise any material
income tax liability;
(i) take any action other than in the ordinary course of business
and consistent with past practices with respect to accounting policies or
procedures; or
(j) agree or commit to do any of the foregoing.
Section 6.2 of the Merger Agreement provides that Holdings and
Mergerco will vote at the Meeting all of their Common Shares and the Preferred
Stock in favor of adoption of the Merger Agreement and the Merger.
Under Section 6.3 of the Merger Agreement, Mergerco and the Company
agreed (i) to use their best efforts to consummate the transactions
contemplated by the Merger Agreement and (ii) to consult with each other before
making any public statement. In addition, pursuant to Section 6.3(c) of the
Merger Agreement, at and after the Effective Time, the officers and directors
of the Surviving Corporation will be authorized to execute and deliver, in the
name and on behalf of the Company or Mergerco, any deeds, bills of sale,
assignments or assurances and to take and do, in the name and on behalf of the
Company or Mergerco, any other actions and things to vest, perfect or confirm
of record or otherwise in the Surviving Corporation any and all right, title
and interest in, to and under any of the rights, properties or assets of the
Company acquired or to be acquired by the Surviving Corporation as a result of,
or in connection with, the Merger.
ADDITIONAL AGREEMENTS
Under Section 7.1 of the Merger Agreement, as soon as practicable, (i)
the Company and Holdings shall file the Schedule 13E-3 with respect to the
Merger and (ii) the Company, with the cooperation of Mergerco, will prepare and
file with SEC this Proxy Statement. The Company shall use commercially
reasonable efforts to respond to all SEC comments with respect to this Proxy
Statement and to cause the Proxy Statement to be mailed to the Company's
shareholders at the
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<PAGE> 54
earliest practicable date. The Company will, as soon as practicable, use
commercially reasonable efforts to duly call, give notice of, convene and hold
the Meeting of the Company's Shareholders for the purpose of approving the
Merger Agreement and the Merger.
Under Section 7.2 of the Merger Agreement, from time to time, as and
when required by the Surviving Corporation or by its successors or assigns,
there shall be executed and delivered on behalf of the Company such deeds and
other instruments, and there shall be taken or caused to be taken by all such
further and other action, as shall be appropriate, advisable or necessary in
order to vest, perfect or confirm, or record or otherwise, in the Surviving
Corporation the title to and possession of all property interest, assets,
rights, privileges, immunities, powers, franchises and authority of the Company
and Mergerco, and otherwise to carry out the purposes of these resolutions.
The officers and directors of the Surviving Corporation are fully authorized in
the name and on behalf of the Company and Mergerco or otherwise, to take any
and all such action and to execute and deliver any and all such deeds and other
instruments.
In addition, under Section 7.3 of the Merger Agreement, the Company
will take such commercially reasonable steps as are appropriate, including the
giving of required notices, to preserve its rights under the Agreements (as
defined in the Merger Agreement) and to ensure that such rights will be
transferred to the Surviving Corporation.
Section 7.5 of the Merger Agreement provides that, until the Effective
Time, the Company, Holdings and Mergerco will use commercially reasonable
efforts to maintain the confidentiality and not disclose to any person or
entity, other than its employees, agents, attorneys and financial advisors who
are participating in the Merger, and will not use, other than in connection
with the Agreement, any proprietary and confidential information of the
Company; provided, however, Mergerco may make such disclosures if and to the
extent required by applicable law, legal process or other regulatory
requirements and agreed to by both parties. In the event that the Merger is
not consummated and the Merger Agreement is terminated, the Company, Holdings
and Mergerco agree to keep confidential all such confidential information for a
period of two years after such termination.
SOLICITATION OF ACQUISITION PROPOSALS
Section 7.7 of the Merger Agreement provides that, from and after the
date thereof until the termination thereof, the Company and the Subsidiaries
(as defined in the Merger Agreement) and the officers, directors, employees or
other agents of the Company and the Subsidiaries will not, directly or
indirectly, (i) take any action to solicit, initiate or encourage any
Acquisition Proposal (as defined below) or (ii) subject to the fiduciary duties
of the Special Independent Committee and the Board of Directors under
applicable law as advised by counsel, engage in negotiations or discussions
with, or disclose any non-public information relating to the Company or any
Subsidiary or afford access to the properties, books or records of the Company
or any Subsidiary to, or otherwise assist, facilitate or encourage, any person,
corporation, entity or group (as such term is defined in Section 13(d) of the
Exchange Act), other than Holdings or Mergerco or any of their affiliates
("Third Party") that may be considering making, or has made, an Acquisition
Proposal. "Acquisition Proposal" means any offer or proposal for, or any
indication of interest in, a merger or other business combination involving the
Company or any Subsidiary or the acquisition of any equity interest in, or a
substantial portion of the assets of, the Company or any Subsidiary, other than
the transactions contemplated by the Merger Agreement.
INDEMNIFICATION
Section 8.1 of the Merger Agreement provides that, from and after the
Effective Time, the Surviving Corporation shall, to the fullest extent provided
by law, indemnify and hold harmless (i) Mergerco and Holdings, any affiliate of
Mergerco and Holdings and any of their respective partners, members, directors
and officers to the extent Mergerco and Holdings would be required to provide
indemnification to such persons and their fiduciaries and agents ("Mergerco
Indemnified Parties"), and
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<PAGE> 55
(ii) the directors and officers of the Company on the date of the Merger
Agreement ("Company Indemnified Parties"), from and against any costs or
expenses (including reasonable attorneys' fees), judgments, fines, losses,
claims, damages, liabilities and amounts paid in settlement in connection with
any pending, threatened or completed claim, action, suit, proceeding or
investigation (whether civil, criminal, administrative, or investigative)
arising out of or pertaining to any of the transactions contemplated by the
Merger Agreement. Notwithstanding the preceding, Section 8.1 of the Merger
Agreement provides that no Company Indemnified Party shall be entitled to
indemnification for any costs or expenses, judgments, fines, losses, claims,
damages, liabilities, or amounts paid in settlement arising primarily from its
or any other Company Indemnified Party's gross negligence, bad faith or willful
misconduct, and no Mergerco Indemnified Party shall be entitled to
indemnification for any costs or expenses, judgments, fines, losses, claims,
damages, liabilities, or amounts paid in settlement arising primarily from its
or any other Mergerco Indemnified Party's gross negligence, bad faith or
willful misconduct.
Section 8.2 of the Merger Agreement provides that, for a period of six
years after the Effective Time, the Surviving Corporation, at its sole
discretion, shall either (i) maintain the Surviving Corporation's existing
directors' and officers' liability insurance (or substitute equivalent
liability insurance) for those persons who are directors and officers of the
Company immediately prior to the Effective Time (the "Existing Directors") or
(ii) cause British Aerospace to indemnify the Existing Directors in the same
manner that British Aerospace currently provides indemnification for its
employees, officers and directors. Notwithstanding the foregoing, no Existing
Director will be entitled to be indemnified for any costs or expenses,
judgments, fines, losses, claims, damages, liabilities or amounts paid in
settlement arising primarily from its or any other Existing Director's gross
negligence, bad faith or willful misconduct.
CONDITIONS TO CONSUMMATION OF THE MERGER
The respective obligations of the Company, on the one hand, and
Holdings and Mergerco, on the other hand, to consummate the Merger are set
forth in Article 5 of the Merger Agreement and are subject to the satisfaction
or waiver (except for shareholder approval), at or prior to the Effective Time,
of the following conditions, among others: (a) approval and adoption of the
Merger Agreement and the Merger by the holders of a majority of the outstanding
shares of Common Shares and, if required, Preferred Stock at the Meeting; (b)
the absence of any claim, action, suit, proceeding, arbitration or litigation
which has been threatened to be filed, has been filed or is proceeding which
has arisen in whole or in part out of, or pertaining to the approval of the
Special Independent Committee and the Board of Directors of any party of the
Merger Agreement and the transactions contemplated thereby, the negotiation,
execution or delivery of the Merger Agreement, the performance of obligations
thereunder or the consummation of the transactions contemplated thereby; (c)
the absence of any statute, rule, regulation, executive order, decree,
injunction or other order (whether temporary, preliminary or permanent)
enacted, issued, promulgated, enforced or entered prohibiting or restricting
the consummation of the Merger; (d) the receipt of SEC clearance of the Proxy
Statement, all state securities laws and "Blue Sky" permits and other necessary
authorizations, consents and approvals of governmental authorities; (e) the
recommendations of the Special Independent Committee and the Board of Directors
that the Company's shareholders approve the Merger or the opinion of Baird to
the effect that the Merger Consideration is fair to the Company's shareholders,
from a financial point of view, shall not have been withdrawn or modified; (f)
the performance of and compliance with, in all material respects, all
agreements and obligations contained in the Merger Agreement and required to be
performed or complied with at or prior to the Effective Time by the respective
parties to the Merger Agreement; (g) the material truth and correctness of all
representations and warranties of the parties to the Merger Agreement; (h) the
furnishing of officers' certificates as to the matters covered in clauses (f)
and (g) above; (i) the holders of outstanding options and warrants (other than
Holdings) agree in writing to the cancellation of such options and warrants
solely for the consideration set forth in the Merger Agreement; (j) a majority
of the shares of Common Stock voting on the Merger (other than shares held by
Holdings or any affiliates of Holdings) shall have been voted to approve and
adopt the Merger Agreement and the Merger; (k) any applicable waiting period
under the Hart-Scott-Rodino
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Antitrust Improvements Act of 1976 relating to the Merger shall have expired or
been terminated or that required by any other governmental entity; and (l) that
British Aerospace shall have confirmed in writing its agreement to provide, for
a period of six years after consummation of the Merger, indemnification of the
Existing Directors in the event that the Surviving Corporation shall
discontinue its existing officer and director liability insurance (or
substitute equivalent liability insurance) for the Existing Directors.
Under Section 5.2 of the Merger Agreement, the obligations of Holdings
and Mergerco to consummate the Merger are further subject to the satisfaction
or waiver of the following conditions, among others: (a) the Company shall have
carried on its business, between the date of the Agreement and the Closing
Date, in the usual, regular and ordinary course in substantially the same
manner as heretofore conducted and there shall not be any adverse change to the
Company's business operations or financial condition which has resulted in a
Material Adverse Effect with respect to the Company; and (b) the Company shall
have obtained and delivered evidence to Holdings of all material third party
consents and approvals necessary, proper and advisable to consummate the Merger
and to enable the Surviving Corporation to continue to carry on the business of
the Company as it is presently being conducted.
TERMINATION
Under Section 9.1 of the Merger Agreement, the Merger Agreement may be
terminated and the Merger may be abandoned at any time prior to the Effective
Time, whether before or after approval of the matters presented in connection
with the Merger by the shareholders of the Company or Mergerco by: (a) the
Company, Holdings or Mergerco if the Merger Agreement and the Merger fail to
receive the requisite vote for approval and adoption by the shareholders of the
Company at the Company's Shareholders Meeting; (b) mutual written consent of
the Company, on the one hand, and Holdings and Mergerco, on the other hand, if
authorized or taken by mutual action of their respective Boards of Directors
and the Special Independent Committee, in the case of the Company; (c) either
the Company, on the one hand, or Mergerco, on the other hand, (i) if there has
been a material breach of any representation, warranty, covenant or agreement
on the part of the other party, which breach has not been cured within five (5)
business days following receipt by the breaching party of notice of such
breach, or (ii) if a claim, action, suit, proceeding, arbitration or litigation
has been threatened to be filed, has been filed or is proceeding which has
arisen in whole or in part out of, or pertaining to the approval of the Board
of Directors (including the Special Independent Committee) of the Merger
Agreement or the transactions contemplated thereby, the negotiation, execution,
or delivery of the Merger Agreement, the performance of obligations thereunder
or the consummation of the transactions and contemplated thereby; (d) either
the Company or Mergerco, so long as such party has not breached its obligations
under the Merger Agreement, if the Merger shall not have been consummated on or
before July 31, 1997; provided that such right to terminate the Merger
Agreement is not available to any party whose failure to fulfill any obligation
under the Merger Agreement has been the cause of or resulted in the failure of
the Merger to occur on or before such date; (e) the Special Independent
Committee acting on behalf of the Company if prior to the Effective Time (i)
the Board of Directors of the Company or the Special Independent Committee
shall have withdrawn its approval or recommendation of the Merger Agreement and
the Merger or its recommendation that shareholders of the Company adopt and
approve the Merger Agreement based upon the receipt by the Board of Directors
or the Special Independent Committee of an Acquisition Proposal from a Third
Party which the Board of Directors of the Company or the Special Independent
Committee believes is more favorable to the Public Shareholders, or (ii) Baird
shall have withdrawn or modified or amended, in a manner adverse to the Company
or the Public Shareholders, its opinion at any time prior to the Effective
Time; or (f) Mergerco if (i) the Board of Directors of the Company or the
Special Independent Committee shall have withdrawn or modified or amended, in a
manner adverse to, its approval or recommendation of the Merger Agreement and
the Merger or its recommendation that shareholders of the Company adopt and
approve the Merger Agreement and the Merger, or approved, recommended or
endorsed any proposal for a transaction other than the Merger (including a
tender or exchange offer for Common Shares) or (ii) J.P. Morgan shall have
withdrawn or modified or amended, in a manner
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<PAGE> 57
adverse to Mergerco, its opinion at any time prior to the Effective Time. In
the event of termination of the Merger Agreement by either the Company or
Mergerco as provided therein, the Merger Agreement shall forthwith become void
and there shall be no liability or obligation on the part of Mergerco or the
Company or their respective affiliates, officers, directors or shareholders,
except as provided in the Merger Agreement.
FEES AND EXPENSES
Section 7.4 of the Merger Agreement provides that, if the Merger is
not consummated, all fees and expenses related to the consummation of the
transactions contemplated by the Merger (including attorneys' and consultants'
fees and expenses) incurred by the parties to the Merger Agreement shall be
borne by the party incurring such fees and expenses. If the Merger is
consummated, all such fees and expenses will be paid by the Surviving
Corporation from the funds provided by Holdings for such purpose, as discussed
in "SPECIAL FACTORS--Estimated Fees and Expenses; Sources of Funds."
ACCESS TO INFORMATION; NOTICES OF CERTAIN EVENTS
Pursuant to Section 7.6 of the Merger Agreement, the parties agree
that until the Effective Time, the Company will give Holdings and Mergerco,
their counsel, financial advisors, auditors and other authorized
representatives full access to the offices, properties, books and records of
the Company and the Subsidiaries, will furnish to Holdings and Mergerco, their
counsel, financial advisors, auditors and other authorized representatives such
financial and operating data and other information as such Persons may
reasonably request and will instruct the Company's employees, counsel and
financial advisors to cooperate with Holdings and Mergerco in their
investigation of the business of the Company and the Subsidiaries.
Section 7.8 of the Merger Agreement provides that the Company shall
promptly notify Mergerco of (a) any notice or other communication from any
person alleging that the consent of such person is or may be required in
connection with the transactions contemplated by the Merger Agreement; (b) any
notice or other communication from any governmental or regulatory agency or
authority in connection with the transactions contemplated by the Merger
Agreement; and (c) any actions, suits, claims, investigations or proceedings
commenced or, to the best of its knowledge threatened against, relating to or
involving or otherwise affecting the Company or any Subsidiary which, if
pending on the date of the Merger Agreement, would have been required to have
been disclosed pursuant to Section 4(j) of the Merger Agreement or which relate
to the consummation of the transactions contemplated by the Merger Agreement.
The Company is also required to provide prompt notice, pursuant to Section 7.7
of the Merger Agreement, to Mergerco after receipt of any Acquisition Proposal
or any indication that any Third Party is considering making an Acquisition
Proposal or any request for non-public information relating to the Company or
any Subsidiary or for access to the properties, books or records of the Company
or any Subsidiary by any third party that may consider making, or has made, an
Acquisition Proposal.
WAIVER AND AMENDMENTS
Section 9.2 of the Merger Agreement provides that any provision of the
Merger Agreement may be, at any time prior to the Effective Time: (i) waived by
the party benefitted by the provision or by both parties by a writing executed
by an executive officer of such party, or (ii) amended or modified at any time
(including the structure of the transaction) by an agreement in writing between
the parties approved by their respective Boards of Directors and the Special
Independent Committee, in the case of the Company.
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ASSIGNMENT
Section 10.3 of the Merger Agreement provides that neither the Merger
Agreement nor any rights, interests or obligations thereunder may be assigned
by any party thereto without the prior written consent of the other party.
MARKET PRICE AND SHAREHOLDER INFORMATION
The Common Shares are quoted on the Nasdaq National Market ("Nasdaq")
under the symbol "RFTN." The table below sets forth, for the calendar quarters
indicated, the quarterly high and low closing sale prices for the Common
Shares.
<TABLE>
<CAPTION>
High Low
<S> <C> <C>
FISCAL 1995
First Quarter $ 11.50 $ 8.00
Second Quarter 10.75 9.50
Third Quarter 13.75 9.50
Fourth Quarter 14.63 13.13
FISCAL 1996
First Quarter $ 19.00 $ 13.75
Second Quarter 22.50 17.50
Third Quarter 22.75 18.75
Fourth Quarter 22.00 17.25
FISCAL 1997
First Quarter $ 24.00 $ 17.88
Second Quarter (through April 11, 1997) 23.63 23.25
</TABLE>
On February 12, 1997, the last full trading day prior to the public
announcement of the proposed Merger, the reported high and low sales prices
quoted by Nasdaq were $20.00 and $20.00 per Common Share, respectively. On
April 11, 1997, the most recent practicable date prior to the printing of this
Proxy Statement, the last reported sales price quoted by Nasdaq was $23.25 per
Common Share. As of the Record Date, there were ____ holders of record of
Common Shares of the Company. No cash dividends have been paid on the Common
Shares during the last two years. The Company's shareholders are urged to
obtain a current market quotation for the Common Shares.
All of the outstanding shares of the Preferred Stock are held by
Holdings. The Preferred Stock is not listed or quoted on any national
securities exchange or quotation system.
DIVIDENDS
The Company pays quarterly cash dividends to Holdings in the amount of
$176,000 on the Preferred Stock. The Company paid Preferred Stock dividends to
Holdings of $704,000, $704,000, and $176,000 during 1995, 1996, and the first
quarter of 1997, respectively. The Company paid no cash dividends on the
Common Shares during such periods. The Company is prohibited from paying any
cash dividends on the Common Stock, if any dividends on the Preferred Stock are
accrued but unpaid. In addition, the terms of the Company's credit agreements
with British Aerospace provide that the Company may not make draws under those
facilities if there is any cumulation of undeclared or unpaid dividends on the
Preferred Stock.
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SELECTED CONSOLIDATED FINANCIAL DATA
See Item 6 (Selected Financial Data) of the Company's Annual Report on
Form 10-K for the year ended December 31, 1996 and Amendment No. 1 to Annual
Report on Form 10-K/A for the Fiscal Year Ended December 31, 1996 filed April
11, 1997, attached hereto as Exhibit B (the "1996 Form 10-K") for selected
consolidated financial data of the Company for the five years ended December
31, 1996. Such selected consolidated financial data have been derived from the
consolidated financial statements of the Company which have been audited by
Coopers & Lybrand L.L.P., independent auditors. The selected consolidated
financial data should be read in conjunction with, and are qualified by
reference to "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and the Company's Consolidated Financial Statements and
Notes thereto and related schedules included in Items 7 and 14 of the 1996 Form
10-K.
CERTAIN INFORMATION REGARDING THE BUSINESS OF
THE COMPANY; RECENT DEVELOPMENTS
For a description of the Company's business and operations and certain
recent developments related thereto, see Item 1 (Business), Item 2
(Properties), and Item 3 (Legal Proceedings) of the Company's 1996 Form 10-K
and "SPECIAL FACTORS--Background of the Merger" and "SPECIAL FACTORS--Potential
Business Prospects; British Aerospace Influence" herein.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The following table sets forth, as of April 1, 1997 (but without
taking into account the contribution of Common Shares to Mergerco by Holdings):
(i) certain information concerning the ownership of the Common Shares by, and
the addresses of, each person who is known by the Company to own of record or
beneficially more than 5% of the outstanding Common Shares; and (ii) certain
information concerning ownership of the Common Shares by each of the Company's
directors and executive officers and all directors and executive officers as a
group, based upon reports filed by such persons. Except as otherwise
indicated, the shareholders listed in the table have sole voting and investment
power with respect to the shares indicated.
<TABLE>
<CAPTION>
Number of
Name and Address of Common Shares Percentage
Beneficial Owners Beneficially Owned(l) of Class
- ------------------- --------------------- ----------
<S> <C> <C>
British Aerospace Public Limited Company
Farnborough Aerospace Centre
Farnborough, Hampshire GU14 6YU
ENGLAND
- ------and------
British Aerospace Holdings, Inc.
Washington Technology Park
15000 Conference Center Drive
Suite 200
Chantilly, Virginia 20151-0080 . . . . . . . . . . . . . . 1,375,000(2) 48.0%(3)
Fidelity Management & Research Company . . . . . . . . . . 205,500(4) 7.2%
82 Devonshire Street
Boston, Massachusetts 02109
Richard G. Snyder**/*** . . . . . . . . . . . . . . . . . . 36,000(5) 1.3%
Anthony S. Brancato*** . . . . . . . . . . . . . . . . . . 24,216(6) *
Richard W. Welshhans*** . . . . . . . . . . . . . . . . . . -- *
Robert D. Webster*** . . . . . . . . . . . . . . . . . . . -- *
Edward W. Bettke** . . . . . . . . . . . . . . . . . . . . 1,978 *
David R. Fish** . . . . . . . . . . . . . . . . . . . . . . -- *
Sydney Gillibrand** . . . . . . . . . . . . . . . . . . . . -- *
Paul L. Harris** . . . . . . . . . . . . . . . . . . . . . -- *
Robert F. Schoultz** . . . . . . . . . . . . . . . . . . . 1,000 *
Dale R. States** . . . . . . . . . . . . . . . . . . . . . -- *
Stella F. Thayer** . . . . . . . . . . . . . . . . . . . . 6,750(7) *
All Directors and
Executive Officers as
a group (14 persons)(8) . . . . . . . . . . . . . . . . . . 91,053 3.2%
</TABLE>
- --------------------------
* Less than one percent.
** Indicates member of the Board of Directors
*** Indicates executive officer of the Company
(1) Beneficial ownership is determined in accordance with Rule 13d-3(d)
promulgated by the SEC under the Exchange Act. Common Shares issuable
pursuant to options, warrants and convertible securities, to the extent
such securities are currently exercisable or convertible, or are
exercisable or convertible within 60 days after the Record Date, June 13,
1997, are treated as outstanding for computing the percentage of the
person holding such securities but are not treated as outstanding for
computing the
51
<PAGE> 61
percentage of any other person (regardless of whether such options or
warrants are currently in-the-money).
(2) Holdings may be deemed to share voting and investment power with British
Aerospace. In addition to the Common Shares, Holdings beneficially owns
the Preferred Stock and the Warrants and may be deemed to share voting and
investment power with respect thereto with British Aerospace.
(3) If all of the Preferred Stock were converted to Common Shares and all
Warrants were exercised for Common Shares, Holdings would hold 1,953,261
Common Shares, representing approximately 56.7% of the then-outstanding
Common Shares. If currently outstanding options for an aggregate of
219,071 Common shares were also exercised by third parties, Holdings would
hold approximately 53.3% of the then outstanding Common Shares. The
Warrants are exercisable at any time prior to August 7, 2005 at an
exercise price equal to the lesser of $11.50 per share and the market
price of the Common Shares on the date of exercise.
(4) Based upon a Schedule 13G dated February 14, 1997 filed by Fidelity
Management & Research Company.
(5) Includes 13,750 shares issuable upon exercise of options exercisable
within 60 days of the Record Date, 21,000 shares owned by Mr. Snyder, and
1,250 shares held by his children, as to which shares Mr. Snyder disclaims
beneficial ownership.
(6) Includes 14,875 shares issuable upon exercise of options exercisable
within 60 days of the Record Date, 8,091 shares owned by Mr. Brancato, and
1,250 shares held by his spouse, as to which shares Mr. Brancato disclaims
beneficial ownership.
(7) Includes 2,500 shares owned by Mrs. Thayer and 4,250 shares owned by a
member of her immediate family, as to which shares Mrs. Thayer disclaims
beneficial ownership.
(8) Includes 44,750 shares issuable upon exercise of options exercisable
within sixty days of the Record Date.
52
<PAGE> 62
OPTION CANCELLATION INFORMATION
The following table sets forth certain information regarding the
number of Common Shares covered by outstanding vested and unvested options to
purchase Common Shares held by executive officers of the Company to be canceled
in connection with the Merger and the consideration to be paid to each of such
executive officers as a result thereof. Pursuant to the Merger Agreement, each
existing option (whether vested or unvested) to purchase Common Shares shall be
terminated in exchange for a cash payment equal to $24.00 per Common Share
purchasable thereunder less the exercise price with respect thereto.
<TABLE>
<CAPTION>
OPTIONS OPTIONS TOTAL VALUE TO
EXERCISABLE UNEXERCISABLE BE RECEIVED
<S> <C> <C> <C>
Derek R. Alden 16,125 22,000 $ 564,375
Anthony S. Brancato 14,875 22,000 542,500
Kelley L. Rexroad --- 4,500 24,750
Richard G. Snyder 13,750 40,000 750,375
Robert Webster --- 22,000 280,375
Richard W. Welshhans --- 21,000 270,500
44,750 131,500 $ 2,432,875
</TABLE>
PURCHASES OF COMMON SHARES BY AND OTHER
TRANSACTIONS WITH CERTAIN PERSONS
Neither the Company, Holdings, any affiliate thereof nor, to the
Company's knowledge, any of the executive officers or directors of the Company
have purchased Common Shares within sixty days of the date of this Proxy
Statement. On March 21, 1997, the Company's 401(k) plan purchased 1,000 Common
Shares at the direction of the participants of the plan.
In addition to such purchases of Common Shares by Holdings and British
Aerospace as are described in the section of this Proxy Statement entitled
"SPECIAL FACTORS--Background of the Merger--Overview and Current Condition of
Company," the following affiliates of the Company have purchased Common Shares
on or subsequent to January 1, 1995, in the amounts and at the prices set forth
below:
DEREK R. ALDEN. On February 22, 1996, Mr. Alden, the Vice
President-Commercial and Entertainment Products of the Company, purchased 3,750
Common Shares at a purchase price of $3.50 per share pursuant to the exercise
of a stock option, but such Common Shares were sold by Mr. Alden on the same
day for $17.50 per share.
ANTHONY S. BRANCATO. On May 16, 1996, Mr. Brancato, the Vice
President-Training Services of the Company, purchased 5,000 Common Shares at a
purchase price of $3.50 per share pursuant to the exercise of a stock option.
ROBERT L. KIRK. On August 17, 1995, Mr. Kirk, a former director of
the Company, purchased 5,000 Common Shares at a purchase price of $2.50 per
share pursuant to the exercise of a stock option. On August 27, 1995, Mr. Kirk
purchased 4,000 Common Shares at a purchase price of $2.4002 per share pursuant
to the exercise of a stock option. On November 13, 1995, Mr. Kirk purchased
1,207 Common Shares at a purchase price of $2.4002 per share and 3,793 Common
Shares at a purchase
53
<PAGE> 63
price of $3.25 per share, all pursuant to the exercise of stock options.
During March of 1996, pursuant to the exercise of stock options, Mr. Kirk
purchased 3,377 Common Shares at a purchase price of $3.7005 per share, 52
Common Shares at a purchase price of $3.25 per share, and 1,571 Common Shares
at a purchase price of $3.6003 per share.
KELLEY L. REXROAD. During the first, second, third, and fourth
quarters of 1995, Ms. Rexroad, the Vice President-Human Resources of the
Company, purchased 12, 11, 10, and 12 Common Shares, respectively, pursuant to
the Company's Employee Stock Purchase Plan. The purchase prices paid for such
Common Shares were $9.45, $8.55, $11.25, and $12.375 per share, respectively.
During the first, second, third, and fourth quarters of 1995, Ms. Rexroad
purchased 10, 8, 10, and 7 Common Shares, respectively, pursuant to the
Company's Employee Stock Purchase Plan. The purchase prices paid for such
Common Shares were $16.0875, $18.675, $18.225, and $16.20 per share,
respectively. During the first quarter of 1997, Ms. Rexroad purchased 3 Common
Shares at a purchase price of $21.0375 per share pursuant to the Company's
Employee Stock Purchase Plan.
RICHARD G. SNYDER. On February 27, 1996, Mr. Snyder, the Company's
President and Chief Executive Officer, purchased 11,500 Common Shares at a
purchase price of $3.80 per share pursuant to the exercise of a stock option,
but such Common Shares were sold by Mr. Snyder on the same day for $18.00 per
share. On February 29, 1996, Mr. Snyder purchased 15,000 Common Shares at a
purchase price of $3.80 per share pursuant to the exercise of a stock option,
but such Common Shares were sold by Mr. Snyder on the same day for $18.00 per
share. On March 6, 1996, Mr. Snyder purchased 10,000 Common Shares at a
purchase price of $3.80 per share pursuant to the exercise of a stock option.
On May 29, 1996, Mr. Snyder purchased 12,500 Common Shares and 15,000 at a
purchase price of $6.00 per share and $3.80 per share, respectively, pursuant
to the exercise of stock options, but such Common Shares were sold by Mr.
Snyder on the same day for $21.50 per share and $21.75 per share, respectively.
FRANK T. TOBIN, SR. On February 2, 1996, Mr. Tobin, formerly the
Vice-President-Military Products of the Company, purchased 5,000 Common Shares
at a purchase price of $6.70 per share pursuant to the exercise of an option.
Mr. Tobin is no longer employed by the Company.
ROBERT D. WEBSTER. On February 23, 1996, Mr. Webster, the Vice
President-Operations of the Company, purchased 3,750 Common Shares and 4,375
Common Shares at a purchase price of $6.00 per share and $6.70 per share,
respectively, pursuant to the exercise of a stock option, but such Common
Shares were sold by Mr. Webster on the same day for $18.06 per share.
RICHARD W. WELSHHANS. On February 23, 1996, Mr. Welshhans, the Chief
Financial Officer and Secretary of the Company, purchased 4,375 Common Shares
at a purchase price of $6.70 per share pursuant to the exercise of a stock
option, but such Common Shares were sold by Mr. Welshhans on the same day for
$18.00 per share.
In addition to the above, during August 1995, as a result of its
support of the Company's credit facilities, Holdings was issued Warrants to
purchase 78,621 Common Shares exercisable 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 Shares on the Nasdaq National Market on August 7, 1995) and (ii) the
per share market price of the Common Shares on the date of the exercise of the
Warrants.
TRANSACTION OF OTHER BUSINESS
The Board of Directors knows of no other matters which may be
presented at the Meeting, but if other matters do properly come before the
Meeting, it is intended that the persons named in the Proxy will vote, pursuant
to their discretionary authority, according to their best judgment in the
interest of the Company.
54
<PAGE> 64
INDEPENDENT ACCOUNTANTS
The financial statements of the Company as of December 31, 1996 and
for the year then ended included in the Company's Annual Report on Form 10-K
for the Fiscal Year Ended December 31, 1996, and Amendment No. 1 to Annual
Report on Form 10-K/A for the Fiscal Year Ended December 31, 1996 filed April
11, 1997, attached as Exhibit B to this Proxy Statement have been audited by
Coopers & Lybrand L.L.P., independent accountants, as stated in their report
appearing therein.
It is expected that representatives of Coopers & Lybrand L.L.P. will
be present at the Meeting, where they will have an opportunity to respond to
appropriate questions of shareholders and to make a statement if they so
desire.
MISCELLANEOUS
If the Merger is not consummated for any reason, proposals of
shareholders intended to be presented at the 1997 Annual Meeting of
Shareholders must be received by the Company at its principal executive offices
on or prior to November 7, 1997, to be eligible for inclusion in the Company's
Proxy Statement and form of Proxy relating to that meeting. Shareholders
should mail any proposals by certified mail--return receipt requested.
By Order of the Board of Directors
Richard W. Welshhans,
Secretary
PLEASE COMPLETE AND RETURN YOUR PROXY CARD PROMPTLY IN THE ENCLOSED
ENVELOPE. NO POSTAGE IS REQUIRED IF MAILED IN THE UNITED STATES.
55
<PAGE> 65
EXHIBIT A
AGREEMENT AND PLAN OF MERGER
----------------------------------------------------
AGREEMENT AND PLAN OF MERGER, dated as of the 13th day of February, 1997
("Agreement"), by and among Reflectone, Inc., a Florida corporation (the
"Company"), British Aerospace Holdings, Inc., a Delaware corporation
("Parent") and Bar Mergerco, Inc., a Florida corporation ("Mergerco"), 100%
of whose capital stock is owned by Parent.
WHEREAS, the respective Boards of Directors of the Company and Mergerco
deem it advisable and in the best interests of each corporation that Mergerco
be merged with and into the Company (the "Merger"); and
WHEREAS, the respective Boards of Directors of the Company and Mergerco
(i) have approved the Merger pursuant to and subject to the terms and
conditions of this Agreement and (ii) have recommended approval of the Merger
to the shareholders of each corporation; and
NOW THEREFORE, in consideration of the foregoing premises and of the
mutual covenants, representations, warranties and agreements herein
contained, the parties, intending to be legally bound hereby, agree as
follows:
1. THE MERGER AND RELATED MATTERS
1.1 The Merger
(a) Upon the terms and subject to the conditions of this
Agreement, and in accordance with the Florida Business Corporation Act (the
"FBCA"), at the Effective Time (as defined in Section 1.1(b) hereof) Mergerco
shall be merged with and into the Company and the separate corporate
existence of Mergerco shall cease, and the Company shall continue as the
surviving corporation of the Merger to be governed by the laws of the State
of Florida (the "Surviving Corporation").
(b) Subject to the provisions of this Agreement, the parties
hereto shall cause the Merger to be consummated by duly filing articles of
merger (the "Articles of Merger"), in the form attached hereto as Exhibit A
and acknowledged by Mergerco and the Company, with the Secretary of State of
the State of Florida, as provided by the FBCA, as soon as practicable on
or after the Closing Date (as defined in Section 3.1 hereof). The Merger
shall become effective upon such filing or at such time thereafter as is
provided in the Articles of Merger (the "Effective Time").
<PAGE> 66
(c) At the Effective Time, the effect of the Merger shall be as
provided in Section 607.1106 of the FBCA. Without limiting the generality of
the foregoing, and subject thereto, the Surviving Corporation shall thereupon
and thereafter possess all the rights, privileges, immunities, powers and
franchises, of a public as well as of a private nature, of the Company and
Mergerco; and all property, real, personal and mixed, and all debts due on
whatever account and all other causes of action and all and every other
interest of, or belonging to or due to, Company or Mergerco, shall be deemed
to be transferred to and vested in such Surviving Corporation without further
act or deed; and the title to any real estate, or any interest therein,
vested in either of the merged companies shall not revert or in any way be
impaired by reason of the Merger. The Surviving Corporation shall thereafter
be responsible and liable for all of the liabilities and obligations of the
Company and Mergerco; any claim existing or action or proceeding pending by
or against either of the merged companies may be prosecuted to judgment
as if such Merger had not taken place, or the Surviving Corporation may be
substituted in the place of the Company or Mergerco.
1.2 Articles of Incorporation. The Articles of Incorporation of
Mergerco as in effect immediately prior to the Effective Time shall be the
Articles of Incorporation of the Surviving Corporation until duly amended in
accordance with the terms thereof and the FBCA.
1.3 By-Laws. The By-Laws of Mergerco as in effect immediately prior to
the Effective Time shall be the By-Laws of the Surviving Corporation until
duly amended in accordance with the terms thereof and the FBCA.
1.4 Directors and Officers. The directors of the Company immediately
prior to the Effective Time, shall be, from and after the Effective Time, the
directors of the Surviving Corporation, and the executive officers of the
Company immediately prior to the Effective Time will be the initial officers
of the Surviving Corporation, in each case until their successors have
been duly elected or appointed and qualified in the manner provided in the
Articles of Incorporation and By-Laws of the Surviving Corporation, or as
otherwise provided by law.
2. CONVERSION OF SHARES
2.1 Conversion of Shares. At the Effective Time, by virtue of the
Merger and without any action on the part of the holders of any shares of
Common Stock, $.10 par value, of the Company ("Company Common Stock") or the
holder of any shares of Common Stock, $.01 par value, of Mergerco ("Mergerco
Common Stock"):
<PAGE> 67
(a) Each share of Mergerco Common Stock issued and outstanding
immediately prior to the Effective Time shall be converted into and exchanged
for one newly and validly issued, fully paid and nonassessable share of
common stock, $.10 per value, of the Surviving Corporation ("Surviving
Corporation Common Stock").
(b) Each share of Company Common Stock and 8% Cumulative
Convertible Preferred Stock, par value $1.00 per share, of the Company
("Convertible Preferred Stock") owned by Parent and all other shares of
capital stock of the Company that are held in the treasury of the Company
immediately prior to the Effective Time, if any, shall be canceled and
extinguished without any conversion right thereof and no consideration shall
be delivered or deliverable in exchange therefor.
(c) Each share of Company Common Stock issued and outstanding
immediately prior to the Effective Time (other than any shares of Company
Common Stock described in Subsection (b) above) shall be converted into and
represent the right to receive an amount in cash equal to $24.00, payable to
the holder thereof, without any interest thereon, less any required back-up
withholding taxes (the "Merger Consideration"). At and after the
Effective Time, all such shares of Company Common Stock, when converted as
provided in this Section 2.1(c), no longer shall be outstanding and shall
automatically be canceled and retired and shall cease to exist, and
certificates previously evidencing shares of Company Common Stock
immediately prior to the Effective Time, taking into account all certificates
of a holder of Company Common Stock delivered by such holder at any one time
(taken together, a "Company Certificate" or "Company Certificates") shall
thereafter represent only the right to receive the Merger Consideration.
2.2 Payment Procedures
(a) As of the Effective Time, the Surviving Corporation shall
deposit or cause to be deposited with a paying agent to be selected jointly
by Mergerco and the Company (the "Paying Agent"), in a separate fund
established for the benefit of the holders of shares of Company Common Stock,
for payment in accordance with this Section 2.2 (the "Payment Fund"),
immediately available funds in amounts necessary to make the payments
pursuant to Section 2.1(c) to the holders of Company Common Stock entitled
thereto pursuant to Section 2.1(c). As soon as reasonably practicable after
the Effective Time, the Surviving Corporation shall mail to each holder of
record entitled to the Merger Consideration, (i) a form of letter of
transmittal (which shall specify that delivery shall be effected, and risk of
loss and title to the Company Certificates shall pass, only upon proper
delivery of the Company Certificates to the Surviving Corporation, and shall
be in such form and have such other provisions as the Surviving Corporation
<PAGE> 68
reasonably may specify) and (ii) instructions for use in effecting the
surrender of the Company Certificates in exchange for payment therefor. Upon
the proper surrender of a Company Certificate to the Surviving Corporation,
together with such letter of transmittal and any additional documentation as
the Surviving Corporation may reasonably require, the holder of such Company
Certificate shall be entitled to receive in exchange therefor a check
representing the amount of cash equal to the product of: (x) the number of
shares of Company Common Stock represented by such Company Certificate and
(y) the Merger Consideration, and the Company Certificate so surrendered
shall forthwith be canceled. If payment is to be made to a person other than
the person in whose name the surrendered Company Certificate is registered,
it shall be a condition of payment that the Certificate so surrendered shall
be promptly endorsed or otherwise in proper form for transfer and that the
person requesting such payment shall pay any transfer or other taxes required
by reason of the payment to a person other than the registered holder of the
surrendered Company Certificate or established to the satisfaction of the
Surviving Corporation that such tax has been paid or is not applicable. For
purposes of this Agreement,"Person" means an individual, a corporation, a
limited liability company, a partnership, an association, a trust or any
other entity or organization, including a government or political subdivision
or any agency or instrumentality thereof.
(b) Until surrendered in accordance with the provisions of this
Section 2.2, from and after the Effective Time, each Company Certificate
(other than Certificates representing shares held in the treasury of the
Company or held by Parent) shall represent for all purposes only the right to
receive the Merger Consideration and shall cease to have any rights with
respect to the shares of Company Common Stock formerly represented thereby,
except as otherwise provided herein or by law.
(c) Any portion of the Payment Fund which remains undistributed to
the holders of Company Common Stock for six months after the Effective Time
will be returned to the Surviving Corporation and any shareholder who has not
exchanged his shares of Company Common Stock for the Merger Consideration
prior to such time shall look thereafter only to the Surviving Corporation
for payment of the Merger Consideration in respect of his shares. Any
amounts remaining unclaimed by shareholders of the Company two years after
the Effective Time shall, to the extent permitted by abandoned property and
any other applicable law, become the property of the Surviving Corporation,
free and clear of all claims or interest of any Person previously entitled to
such claims. All interest accrued in respect of the Payment Fund shall
inure to the benefit of and be paid to the Surviving Corporation.
Notwithstanding the foregoing, the Surviving Corporation shall not be liable
to any former holder of Company Common Stock for any amount delivered to a
public official pursuant to applicable abandoned property, escheat or similar
laws.
<PAGE> 69
(d) The Surviving Corporation shall be entitled to deduct and
withhold from the consideration otherwise payable pursuant to this Agreement
to any holder of shares of Company Common Stock such amounts as the Surviving
Corporation is required to deduct and withhold with respect to the making of
such payment under the Internal Revenue Code of 1986, as amended (the
"Code"), or any provision of state, local or foreign tax law. To the extent
that amounts are so withheld by the Surviving Corporation, such withheld
amounts shall be treated for all purposes of this Agreement as having been
paid to the holder of the shares of Company Common Stock in respect of which
such deduction and withholding was made by the Surviving Corporation.
(e) At the Effective Time, the stock transfer books of the Company
shall be closed and there shall be no further registration of transfers of
shares of Company Common Stock thereafter on the records of the Company.
2.3 Options and Warrants
(a) At the Effective Time, except as otherwise provided in this
Section 2.3, each option and warrant granted by the Company to purchase
shares of Company Common Stock, which is outstanding immediately prior
thereto (an "Option" or, collectively, the "Options"), shall be canceled and
retired and shall cease to exist and no consideration shall be delivered or
deliverable in exchange therefor, except to the extent that (i) any such
Option granted by the Company to purchase shares of Company Common Stock has
vested and is exercisable immediately prior to the Effective Time, whether as
a result of the passing of time, the Merger or otherwise, or (ii) any such
Option was granted pursuant to a Company stock option plan and such option
has not yet vested. In such event, each holder of such an Option (excluding
Parent) shall, individually, in settlement thereof, receive from the
Surviving Corporation for each share subject to such an Option an amount
(subject to any applicable back-up withholding taxes) in cash equal to the
difference between: (i) the Merger Consideration and (ii) the per share
exercise price of such Option, to the extent such difference is a positive
number (the "Option Consideration").
(b) Upon receipt of the Option Consideration, the Option shall be
canceled. The surrender of an Option to the Surviving Company in exchange for
the Option Consideration shall be deemed a release of any and all rights the
holder had or may have had in respect of such Options.
(c) Prior to the Effective Time, the Company shall use its best
efforts to obtain all necessary consents or releases from holders of Options
under any and all Company stock option plan(s) and take all such other lawful
action as may be necessary to give effect to the transactions contemplated by
this Section (except for such action that may require the approval of the
<PAGE> 70
Company's shareholders). Except as otherwise agreed to by the parties: (i)
any and all Company stock option plan(s) shall terminate as of the Effective
Time and the provisions in any other plan, program or arrangement providing
for the issuance or grant of any other interest in respect of the capital
stock of the Company shall be canceled as of the Effective Time and (ii) the
Company shall take all commercially reasonable action in an effort to provide
that following the Effective Time no participant in any stock option plan(s)
or other plans, programs or arrangements shall have any right thereunder to
acquire equity securities of the Company or the Surviving Corporation and to
terminate all such plans.
3. CLOSING
3.1 Closing. The closing of the Merger (the "Closing") shall take
place at the offices of Fowler, White, Gillen, Boggs, Villareal and Banker,
P.A. , Suite 1700, 501 East Kennedy Boulevard, Tampa, Florida, at 10:00 a.m.,
local time, on the day which is the third business day after the day on which
the last of the conditions set forth in Section 5 hereof is fulfilled or
waived (subject to applicable law), or at such other time and place and on
such other date as Mergerco, Parent and the Company shall mutually agree (the
"Closing Date").
4. REPRESENTATIONS AND WARRANTIES
4.1 Representations and Warranties of the Company. The Company
represents and warrants to Parent and Mergerco as follows:
(a) Corporate Existence. The Company is a corporation duly
organized, validly existing and in good standing under the laws of the State
of Florida, has all requisite power and authority to own, lease and operate
its properties and to carry on its business as now being conducted, and is
duly qualified and in good standing to conduct business in each jurisdiction
in which the business it is conducting, or the operation, ownership or
leasing of its properties, makes such qualification necessary, other than in
such jurisdictions where the failure so to qualify could not reasonably be
expected to have a Material Adverse Effect (as defined below) which respect
to the Company. As used in this Agreement, a "Material Adverse Effect"
shall mean, with respect to a particular party, the result of one or more
events, changes or effects which, individually or in the aggregate, would
have a material adverse effect on the condition (financial or otherwise),
business, results of operations, assets or prospects of such party.
(b) Articles and By-Laws. The Company has heretofore made
available to Parent complete and correct copies of its Amended and Restated
Articles of Incorporation and By-Laws. The Company is not in violation of
any provisions of its Amended and Restated Articles of Incorporation or
By-Laws.
<PAGE> 71
(c) Capitalization. As of the date hereof, the authorized capital
stock of the Company consists of 10,000,000 shares of Common Stock and 50,000
shares of Convertible Preferred Stock. At the close of business on February
12, 1997: (i) 2,864,216 shares of Company Common Stock were issued and
outstanding and there were outstanding employee and director stock options to
purchase an aggregate of not more than 229,821 shares of Common Stock (of
which options to purchase an aggregate of at least 76,321 shares of Common
Stock were exercisable), (ii) 50,000 shares of Convertible Preferred Stock
were issued and outstanding, (iii) Warrants to purchase 78,261 shares of
Common Stock at an exercise price equal to the lesser of $11.50 per share or
the per share market price of the Company's Common Stock on the date
of exercise were outstanding, and (iv) no bonds, debentures, notes or other
instruments or evidence of indebtedness having the right to vote (or
convertible into, or exercisable or exchangeable for, securities having the
right to vote) on any matters on which the Company shareholders may vote
("Company Voting Debt") were issued or outstanding. There are no employment,
executive termination or similar agreements providing for the issuance of
shares of Common Stock. All outstanding shares of Company Common Stock are
validly issued, fully paid and nonassessable and are not subject to
preemptive or other similar rights. Except as set forth in this Section, or
as otherwise disclosed on Schedule 4.1(c), there are outstanding: (i) no
shares of capital stock, Company Voting Debt or other voting securities of
the Company; (ii) no securities of the Company convertible into, or
exchangeable or exercisable for, shares of capital stock, Company Voting Debt
or other voting securities of the Company; and (iii) no options, warrants,
calls, rights (including preemptive rights), commitments or agreements to
which the Company is a party or by which it is bound, in any case obligating
the Company to issue, deliver, sell, purchase, redeem or acquire, or cause to
be issued, delivered, sold, purchased, redeemed or acquired, additional
shares of capital stock or any Company Voting Debt or other voting securities
of the Company, or obligating the Company to grant, extend or enter into any
such option, warrant, call, right, commitment or agreement. Between January
1, 1996 and the date hereof, the Company has not: (i) granted any options,
warrants or rights to purchase shares of Company Common Stock or (ii) amended
or repriced any Option or Company stock option plan. There are not as of the
date hereof and there will not be at the Effective Time any shareholder
agreements, voting trusts or other agreements or understandings to which the
Company is a party or by which it is bound relating to the voting of any
shares of the capital stock of the Company which will limit in any way the
solicitation of proxies by or on behalf of the Company from, or the casting
of votes by, the shareholders of the Company with respect to the Merger.
<PAGE> 72
(d) Corporate Authorization and Non-contravention.
(i) The Company has all requisite corporate power and
authority to enter into this Agreement and, subject to the Company
Shareholder Approval (as defined in Section 4.1(d)(iii)), to consummate the
transactions contemplated hereby. The execution and delivery of this
Agreement and the consummation of the transactions contemplated hereby have
been duly authorized by all necessary corporate action on the part of the
Company, subject to the Company Shareholder Approval. This Agreement has
been duly executed and delivered by the Company and, subject to the Company
Shareholder Approval, and assuming that this Agreement constitutes the valid
and binding agreement of Parent and Mergerco, constitutes a valid and
binding obligation of the Company enforceable in accordance with its terms
except that the enforcement hereof may be limited by: (a) bankruptcy,
insolvency, reorganization, moratorium or other similar laws now or hereafter
in effect relating to creditors' rights generally and (b) general principles
of equity (regardless of whether enforceability is considered in a proceeding
at law or in equity).
(ii) The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby by the Company and its
Subsidiaries (as defined in Section 4.1(f)) will not conflict with, or result
in any violation of, or default (with or without notice or lapse of time, or
both) under, or give rise to a right of termination, cancellation or
acceleration of any obligation or the creation of a lien, pledge, security
interest or other encumbrance on assets or property ("Lien"), or any right of
first refusal with respect to any asset or property (any such conflict,
violation, default, Lien, right of termiation or cancellation, collectively,
"Violation"), pursuant to any provision of the Amended and Restated Articles
of Incorporation or By-Laws of the Company or, except as to which requisite
waivers or consents have been obtained, and except as disclosed on Schedule
4.1(d), and assuming the consents, approvals, authorizations or permits and
filings or notifications referred to in paragraph (iii) of this Section
4.1(d) are duly and timely obtained or made and, if required, the Company
Shareholder Approval has been obtained, result in any Violation of any loan
or credit agreement, note, mortgage, indenture, lease, employee benefit plan
or other agreement, obligation, instrument, permit, concession, franchise,
license (collectively, "Agreements") to which the Company is a party, or any
judgment, order, decree, statute, law, ordinance, rule or regulation
(collectively, "Laws") applicable to the Company or its respective properties
or assets, in each case which could reasonably be expected to have a Material
Adverse Effect with respect to the Company.
<PAGE> 73
(iii) No consent, approval, order or authorization of, or
registration, declaration or filing with, notice to, or permit from any
court, administrative agency or commission or other governmental authority or
instrumentality, domestic or foreign (a "Governmental Entity"), including
such other such filings and consents as may be required under any
environmental, health or safety law or regulation pertaining to any
notification, disclosure or required approval necessitated by the Merger or
the transactions contemplated by this Agreement, is required by or with
respect to the Company in connection with the execution and delivery of this
Agreement by the Company or the consummation by the Company of the
transactions contemplated hereby, which if not obtained or made could
reasonably be expected to have a Material Adverse Effect with respect to the
Company, except for: (a) the filing with and clearance by the United States
Securities and Exchange Commission ("SEC") of: (x) a Transaction Statement
on Schedule 13E-3 (such Schedule 13E-3 as amended or supplemented from time
to time being hereinafter referred to as the "Transaction Statement") and
Proxy Statement on Schedule 14A in definitive form (such Proxy Statement as
amended or supplemented from time to time being hereinafter referred to as
the "Proxy Statement") relating to a special meeting of the shareholders of
the Company ("Company's Shareholders Meeting") to approve the Merger
("Company Shareholder Approval"), and (y) such reports under and such other
compliance with the Securities Exchange Act of 1934, as amended (the
"Exchange Act") and the rules and regulations thereunder, as may be required
in connection with this Agreement and the transactions contemplated hereby:
(b) the filing of the Articles of Merger with the Secretary of State of the
State of Florida; (c) such filings and approvals as may be required by any
applicable state securities, "blue sky" or takeover laws; (d) compliance with
any applicable requirements of the Hart-Scott-Rodino Antitrust Improvements
Act of 1976 (the "HSR Act") and (e) such other necessary consents, approvals
and authorizations of Governmental Entities as may be required.
(e) SEC Filings.
(i) The Company has made available to Mergerco a true and
complete copy of each report, schedule, effective registration statement
(other than preliminary registration statements which later became effective)
and definitive proxy statement filed by the Company with the SEC since
January 1, 1994 and prior to the date of this Agreement (the "Company SEC
Documents") which are all the documents (other than preliminary material)
that the Company was required to file with the SEC since such date. As of
their respective dates, the Company SEC Documents complied in all material
respects with the requirements of the Securities Act of 1933, as amended (the
"Securities Act"), or the Exchange Act, as the case may be, and the rules
and regulations of the SEC thereunder applicable to such Company SEC
Documents, and none of the Company SEC Documents contained any untrue
<PAGE> 74
statement of a material fact or omitted to state a material fact required to
be stated therein or necessary to make the statements therein, in light of
the circumstances under which they were made, not misleading. The financial
statements of the Company included in the Company SEC Documents and the
audited financial statements for the fiscal year ended December 31, 1996
complied as to form in all material respects with the published rules and
regulations of the SEC with respect thereto, were prepared in accordance
with generally accepted accounting principles ("GAAP") applied on a
consistent basis during the periods involved (except as may be indicated in
the notes thereto or, in the case of the unaudited statements, as permitted
by Rule 10-01 of Regulation S-X of the SEC) and fairly present in accordance
with applicable requirements of GAAP (subject, in the case of the unaudited
statements, to normal recurring adjustments, none of which will be material)
the consolidated financial position of the Company and its consolidated
subsidiaries as of their respective dates and the consolidated results of
operations and the consolidated cash flows of the Company and its
consolidated subsidiaries for the periods presented therein. For purposes of
this Agreement, "Balance Sheet" means the audited consolidated balance sheet
of the Company and its subsidiaries as of December 31, 1996 and "Balance
Sheet Date" means December 31, 1996.
(ii) None of the information supplied or to be supplied by the
Company in writing expressly for inclusion or incorporation by reference in
the Proxy Statement, on the date first mailed to the holders of the Company
Common Stock or at the time of the Company's Shareholders Meeting, and in the
Transaction Statement, on the date it is filed with the SEC, will contain any
untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they are made, not
misleading.
(f) Subsidiaries.
(i) Each Subsidiary (as defined below) that is a corporation
is a corporation duly incorporated, validly existing and in good standing
under the laws of its jurisdiction of incorporation, has all corporate powers
and all material governmental licenses, authorizations, consents and
approvals required to carry on its business as now conducted and is duly
qualified to do business as a foreign corporation and is in good standing in
each jurisdiction where the character of the property owned or leased by it
or the nature of its activities makes such qualification necessary, except
for those jurisdictions where failure to be so qualified would not,
individually or in the aggregate, have a Material Adverse Effect. For
purposes of this Agreement, "Subsidiary" means any corporation or other
entity (including any partnership referred to in Section 4.1(f)(ii) below) of
<PAGE> 75
which securities or other ownership interests having ordinary voting power to
elect a majority of the board of directors or other persons performing
similar functions are directly or indirectly owned by the Company. All
Subsidiaries and their respective jurisdictions of incorporation are
identified in the Company's annual report on Form 10-K for the fiscal year
ended December 31, 1995.
(ii) Each partnership (whether or not a limited partnership)
in which the Company directly or indirectly owns a partnership interest
entitling it to 50% or more of the voting interest therein, and each limited
partnership for which the Company or a Subsidiary is general partner, has
been duly organized and is in good standing under the laws of its
jurisdiction of organization and has all material governmental licenses,
authorizations, consents and approvals required to carry on its business as
now conducted and is duly qualified to do business and is in good standing in
each jurisdiction where the character of the property owned or leased by it
or the nature of its activities makes such qualification necessary, except
for those jurisdictions where failure to be so qualified would not,
individually or in the aggregate, have a Material Adverse Effect. The
Company has previously delivered to Parent a list of all such partnerships.
(iii) All of the outstanding capital stock of, or other
ownership interests in, each Subsidiary, is owned by the Company, directly or
indirectly, free and clear of any Lien and free of any other limitation or
restriction (including any restriction on the right to vote, sell or
otherwise dispose of such capital stock or other ownership interests). There
are no outstanding (a) securities of the Company or any Subsidiary
convertible into or exchangeable for shares of capital stock or other voting
securities or ownership interests in any Subsidiary, and (b) options or other
rights to acquire from the Company or any Subsidiary, and no other obligation
of the Company or any Subsidiary to issue, any capital stock, voting
securities or other ownership interests in, or any securities convertible
into or exchangeable for any capital stock, voting securities or ownership
interests in, any Subsidiary (the items in clauses 4.1(f)(iii)(a) and
4.1(f)(iii)(b) being referred to collectively as the "Subsidiary
Securities"). There are no outstanding obligations of the Company or any
Subsidiary to repurchase, redeem or otherwise acquire any outstanding
Subsidiary Securities.
(g) Board of Directors Approval. The Company hereby consents to
the Merger and represents that: (a) its Board of Directors (at a meeting duly
called and held and acting on the unanimous recommendation of a special
committee of the Board of Directors of the Company comprised entirely of
non-management, non-affiliate independent directors (the "Special Independent
Committee")) has (i) unanimously determined that each of this Agreement and
<PAGE> 76
the Merger are fair to and in the best interests of the non-Parent affiliated
shareholders of the Company (the "Unaffiliated Shareholders"), (ii) approved
this Agreement and the transactions contemplated hereby and thereby,
including the Merger, and such approval constitutes approval of this
Agreement and the transactions contemplated hereby and thereby,
including the Merger, and such approval is sufficient to satisfy the
provisions of any applicable laws of the State of Florida, including without
limitation Section 607.0901 of the FBCA, if applicable, and (iii) resolved to
recommend the approval and adoption of this Agreement and approval of the
Merger by the holders of the Company Common Stock, and (b) Robert W. Baird
& Co. Incorporated has delivered to the Board of Directors of the Company its
written opinion that the Merger, including the Merger Consideration to be
received by the holders of Company Common Stock, is fair, from a financial
point of view, to such Unaffiliated Shareholders, a signed, true and complete
copy of which has been delivered to Mergerco and is attached hereto as
Exhibit B, and such opinion has not been withdrawn or modified.
(h) Absence of Certain Changes. Since the Balance Sheet Date, the
Company and Subsidiaries have conducted their business in the ordinary course
consistent with past practice and there has not been:
(i) any event, occurrence or development of a state of
circumstances or facts which has had or reasonably could be expected to have
a Material Adverse Effect;
(ii) any declaration, setting aside or payment of any
dividend or other distribution with respect to any shares of capital stock of
the Company, or any repurchase, redemption or other acquisition by the
Company or any Subsidiary of any outstanding shares of capital stock or other
securities of, or other ownership interests in, the Company or any
Subsidiary;
(iii) any amendment of any material term of any outstanding
security of the Company or any Subsidiary;
(iv) any occurrence, assumption or guarantee by the Company
or any Subsidiary of any indebtedness for borrowed money other than in the
ordinary course of business and in amounts and on terms consistent with past
practices;
(v) any creation or assumption by the Company or any
Subsidiary of any Lien on any material asset other than in the ordinary
course of business consistent with past practices;
(vi) any making of any loan, advance or capital contributions
to or investment in any Person other than loans, advances or capital
contributions to or investments in wholly-owned Subsidiaries made in the
ordinary course of business consistent with past practices;
<PAGE> 77
(vii) any damage, destruction or other casualty loss (whether
or not covered by insurance) affecting the business or assets of the Company
or any Subsidiary which, individually or in the aggregate, has had or would
reasonably be expected to have a Material Adverse Effect;
(viii)except as set forth on Schedule 4.1 (h)(viii), any
transaction or commitment made, or any contract or agreement entered into, by
the Company or any Subsidiary relating to its assets or business (including
the acquisition or disposition of any assets) or any relinquishment by the
Company or any Subsidiary of any contract or other right, in either case,
material to the Company and the Subsidiaries taken as a whole, other than
transactions and commitments in the ordinary course of business consistent
with past practice and those contemplated by this Agreement;
(ix) any change in any method of accounting or accounting
practice by the Company or any Subsidiary, except for any such change
required by reason of a concurrent change in generally accepted accounting
principles;
(x) except as set forth on Schedule 4.1(h)(x), any (a) grant
of any severance or termination pay to any director, officer or employee of
the Company or any Subsidiary, (b) entering into of any employment, deferred
compensation or other similar agreement (or any amendment to any such
existing agreement) with any director, officer or employee of the Company or
any Subsidiary, (c) increase in benefits payable under any existing severance
or termination pay policies or employment agreements or (d) increase in
compensation, bonus or other benefits payable to directors, officers or
employees of the Company or any Subsidiary, other than in the ordinary course
of business consistent with past practice;
(xi) any labor dispute, other than routine individual
grievances, or any activity or proceeding by a labor union or representative
thereof to organize any employees of the Company or any Subsidiary, which
employees were not subject to a collective bargaining agreement at the
Balance Sheet Date, or any lockouts, strikes, slowdowns, work stoppages or
threats thereof by or with respect to such employees; or
(xii) any cancellation of any licenses, sublicenses,
franchises, permits or agreements to which the Company or any Subsidiary is a
party, or any notification to the Company or any Subsidiary that any party to
any such arrangements intends to cancel or not renew such arrangements beyond
its expiration date as in effect on the date hereof, which cancellation or
notification, individually or in the aggregate, has had or reasonably could
be expected to have a Material Adverse Effect.
<PAGE> 78
(i) No Undisclosed Material Liabilities. There are no liabilities
of the Company or any Subsidiary of any kind whatsoever, whether accrued,
contingent, absolute, determined, determinable or otherwise, and there is no
existing condition, situation or set of circumstances which could reasonably
be expected to result in such a liability, other than:
(i) liabilities disclosed or provided for in the Balance
Sheet;
(ii) liabilities incurred in the ordinary course of business
consistent with past practice since the Balance Sheet Date, which in the
aggregate would not have a Material Adverse Effect upon the Company and the
Subsidiaries, taken as a whole; and
(iii) liabilities under this Agreement.
(j) Litigation. Except as set forth in the Company SEC Documents,
there is no action, suit, investigation or proceeding (or any basis therefor)
pending against, or to the knowledge of the Company threatened against or
affecting, the Company or any Subsidiary or any of their respective
properties before any court or arbitrator or any governmental body,
agency or official which, if determined or resolved adversely to the Company
or any Subsidiary in accordance with the plaintiff's demands, would
reasonably be expected to have a Material Adverse Effect or which in any
manner challenges or seeks to prevent, enjoin, alter or materially
delay the Merger or any of the other transactions contemplated hereby.
(k) Taxes. The Company and each Subsidiary have properly completed
and filed on a timely basis all Tax Returns required to be filed on or prior
to the day hereof, and as of the date of filing, each of the Tax Returns was
substantially accurate and complete. The Company and each Subsidiary have
paid or accrued in full all Taxes, if any, due to or claimed to be due by any
governmental entity. The Tax Returns are not subject to penalties under
Section 6662 of the Code relating to accuracy-related penalties (or any
corresponding provision of the state, local or foreign Tax law) or any
predecessor provision of law. An extension of time within which to file any
Tax Return that has not been filed has not been requested or granted. With
respect to all amounts and respective Taxes imposed on the Company and each
Subsidiary or for which the Company or each Subsidiary are or could be liable
to taxing authorities or to other persons or entities with respect to all
taxable periods or portion of periods ending on or before the Closing Date,
all applicable tax laws and agreements have been fully complied with and all
such amounts required to be paid by the Company or any Subsidiary to tax
authorities or others on or before the date hereof have been paid. Schedule
4.1(k) sets forth the taxable years of the Company or any Subsidiaries as to
<PAGE> 79
which the respective statute of limitations with respect to Taxes has not
expired, and with respect to such taxable years, those periods for which
examinations have been completed, those periods for which examinations are
presently being conducted, those periods for which examinations have not been
initiated and those years for which the required Tax Returns have not yet
been filed. All deficiencies asserted or assessments made as a result of any
examination have been fully paid or are fully reflected as a liability in the
financial statements of the Company or Subsidiary or are being contested and
an adequate reserve therefor has been established and is fully reflected in
the financial statements of the Company or Subsidiary. Except as does not
involve or would not result in liability to the Company that could reasonably
be expected to have a Material Adverse Effect on the Company, (i) there are
no tax liens on any assets of the Company; and (ii) the Company has not been
granted any waiver of any statute of limitations with respect to, or any
extension of a period for the assessment of, any tax. The accruals and
reserves for taxes (including deferred taxes) reflected in the Balance Sheet
are adequate in all material respects to cover all taxes accruable through
the date thereof (including interest and penalties, if any, thereon and taxes
being contested) in accordance with GAAP (excluding any reserve for deferred
taxes established to reflect timing differences between books and tax
income). The Company has previously delivered or made available to Parent
true and complete copies of its federal income tax returns for each of the
fiscal years ended December 31, 1990 through December 31, 1995. The
Company is not a party to or bound by any agreement providing for the
allocation or sharing of taxes with any entity which is not, either directly
or indirectly, a Subsidiary. The Company has not filed a consent pursuant to
or agreed to the application of Section 341(f) of the Code. The Company is
not a "United States real property holding corporation" as defined in Section
897(c)(2) of the Code during the applicable period specified in Section
897(1)(A)(ii) of the Code. Except for the group of which the Company is
presently the common parent, neither the Company nor any Subsidiary has ever
been a member of any affiliated group of corporations within the meaning of
Section 1504 of the Code. Neither the Company nor any Subsidiary has
agreed to make or is required to make any adjustments under Section 481(a) of
the Code by reason of a change in accounting method or otherwise. Neither
the Company nor any Subsidiary participated in, and will not participate in,
an international boycott within the meaning of Section 999 of the Code.
Neither the Company nor any Subsidiary is a party to any agreement, contract,
arrangement or other plan that resulted or would result separately or in the
aggregate in the payment of any excess parachute payment within the meaning
of Section 280G of the Code. Except as set forth in Schedule 4.1(k), neither
the Company nor any Subsidiary is a partner to any joint venture, partnership
or other arrangement or contract that could be treated as a partnership for
federal income tax purposes. For the purpose of this Agreement, (i) the term
"Tax" (and, with correlative meaning, the terms "taxes" and "taxable") shall
<PAGE> 80
include all federal, state, local and foreign income, profits, franchise,
gross receipts, payroll, sales, employment, use, property, withholding,
excise and other taxes, duties or assessments of any nature whatsoever,
together with all interest, penalties and additions imposed with respect to
such amounts, and (ii) the term "Tax Returns" shall mean returns, reports and
information statements with respect to taxes to be filed with the Internal
Revenue Service or any other taxing authority, domestic or foreign, including
without limitation consolidated combined and unitary tax returns.
(l) ERISA.
(i) Schedule 4.1(l)(i) sets forth a list identifying each
"employee benefit plan", as defined in Section 3(3) of the Employee
Retirement Income Security Act of 1974 ("ERISA"), which (A) is subject to any
provision of ERISA and (B) is maintained, administered or contributed to by
the Company or any affiliate (as defined below) and covers any employee or
former employee of the Company or any affiliate or under which the Company or
any affiliate has any liability. Copies of such plans (and, if applicable,
related trust agreement or other funding arrangements) and all amendments
thereto and written interpretations thereof have been furnished or made
available to Parent together with the three most recent annual reports (Form
5500 including, if applicable, Schedule B thereto) prepared in connection
with any such plan. Such plans are referred to collectively herein as the
"Employee Plans". For purposes of this Section, "affiliate" of any Person
means any other Person which, together with such Person, would be treated as
a single employer under Section 414 of the Code. None of the Employee Plans
individually or collectively constitute an "employee pension benefit plan" as
defined in Section 3(2) of ERISA.
(ii) Except as otherwise identified in Schedule 4.1(l)(i) no
Employee Plan constitutes a "multiemployer plan", as defined in Section 3(37)
of ERISA (a "Multiemployer Plan"), and no Employee Plan is maintained in
connection with any trust described in Section 501(c)(9) of the Code. None
of the Employee Plans are subject to Title IV of ERISA. The Company knows of
no "reportable event", within the meaning of Section 4043 of ERISA, and no
event described in Section 4041, 4042, 4062 or 4063 of ERISA has occurred
in connection with any Employee Plan, other than a "reportable event" that
will not have a Material Adverse Effect. No condition exists and no event
has occurred that could constitute grounds for termination of any Retirement
Plan or, with respect to any Employee Plan which is a Multiemployer Plan,
presents a risk of a complete or partial withdrawal under Title IV of ERISA
and neither the Company nor any of its affiliates has incurred any liability
under Title IV of ERISA arising in connection with the termination of, or
complete or partial withdrawal from, any plan covered or previously covered
by Title IV of ERISA. If a "complete withdrawal" or "partial withdrawal" by
<PAGE> 81
the Company and all of its affiliates were to occur as of the Effective
Time with respect to all Employee Plans which are Multiemployer Plans,
neither the Company nor any affiliate would incur any withdrawal liability
under Title IV of ERISA. Nothing done or omitted to be done and no
transaction or holding of any asset under or in connection with any
Employee Plan has or will make the Company or any Subsidiary, any officer or
director of the Company or any Subsidiary subject to any liability under
Title I of ERISA or liable for any tax pursuant to Section 4975 of the Code
that could have a Material Adverse Effect.
(iii) Each Employee Plan which is intended to be qualified
under Section 401(a) of the Code is so qualified and has been so qualified
during the period from its adoption to date, and each trust forming a part
thereof is exempt from tax pursuant to Section 501 (a) of the Code. The
Company has furnished or made available to Parent copies of the most recent
Internal Revenue Service determination letters with respect to each such
Plan. Each Employee Plan has been maintained in compliance with its terms
and with the requirements prescribed by any and all statutes, orders, rules
and regulations, including but not limited to ERISA and the Code, which are
applicable to such Plan.
(iv) There is no contract, agreement, plan or arrangement
covering any employee or former employee of the Company or any affiliate
that, individually or collectively, could give rise to the payment of any
amount that would not be deductible pursuant to the terms of Section 280G of
the Code.
(v) Schedule 4.1(l)(v) sets forth a list of each employment,
severance or other similar contract, arrangement or policy and each plan or
arrangement (written or oral) providing for insurance coverage (including any
self-insured arrangements), workers' compensation, disability benefits,
supplemental unemployment benefits, vacation benefits, retirement benefits or
for deferred compensation, profit-sharing, bonuses, stock options, stock
appreciation or other forms of incentive compensation or post-retirement
insurance, compensation or benefits which (A) is not an Employee Plan, (B) is
entered into, maintained or contributed to, as the case may be, by the
Company or any of its affiliates and (C) covers any employee or former
employee of the Company or any of its affiliates. Such contracts, plans and
arrangements as are described above, copies or descriptions of all of which
have been furnished previously to Parent are referred to collectively herein
as the "Benefit Arrangements". Each Benefit Arrangement has been maintained
in compliance with its terms and with the requirements prescribed by any and
all statutes, orders, rules and regulations that are applicable to such
Benefit Arrangement.
<PAGE> 82
(vi) Neither the Company nor its affiliates maintains or has
any obligation to contribute to (or any other liability with respect to) any
plan or arrangement which provides medical, health, life or other
welfare-type benefits for current or future retired or terminated employees
(except for COBRA coverage or other coverage as required under applicable
state law).
(vii) There has been no amendment to, written interpretation
or announcement (whether or not written) by the Company or any of its
affiliates relating to, or change in employee participation or coverage
under, any Employee Plan or Benefit Arrangement which would increase
materially the expense of maintaining such Employee Plan or Benefit
Arrangement above the level of the expense incurred in respect thereof for
the fiscal year ended on the Balance Sheet Date.
(viii) Except as set forth on Schedule 4.01(l)(viii), neither
the Company nor any Subsidiary is a party to or subject to any union contract
or any employment contract or arrangement providing for annual future
compensation of $100,000 or more with any officer, consultant, director or
employee.
(m) Finders' Fees. With the exception of fees payable to Robert
W. Baird & Co. Incorporated, a copy of whose engagement agreement has been
provided to Parent and Mergerco, there is no investment banker, broker,
finder or other intermediary which has been retained by or is authorized to
act on behalf, of the Company or any Subsidiary who might be entitled to any
fee or commission from the Company or any Subsidiary or any of its affiliates
upon consummation of the transactions contemplated by this Agreement.
(n) Labor Matters. The Company is in compliance with all
currently applicable laws respecting employment practices, terms and
conditions of employment and wages and hours, and is not engaged in any
unfair labor practice, failure to comply with which or engagement in which,
as the case may be, would reasonably be expected to have a Material
Adverse Effect. There is no unfair labor practice complaint pending or, to
the knowledge of Company, threatened against the Company before the National
Labor Relations Board or otherwise. There are no strikes, slowdowns, union
organizational campaigns or other protected concerted activity under the
National Labor Relations Act or, to the knowledge of Company, threats
thereof, by or with respect to any employees of the Company.
<PAGE> 83
4.2 Representations and Warranties of Parent and Mergerco. Parent and
Mergerco represents and warrants to the Company as follows:
(a) Corporate Existence. Each of Parent and Mergerco is a
corporation duly organized, validly existing and in good standing under the
laws of its jurisdiction of incorporation, has all requisite power and
authority to own, lease and operate its properties and to carry on its
business as now conducted, and is duly qualified and in good standing to
conduct business in each jurisdiction in which the business it is conducting,
or the operation, ownership or leasing of its properties, makes such
qualification necessary, other than in such jurisdictions where the failure
so to qualify could not reasonably be expected to have a Material Adverse
Effect with respect to Parent or Mergerco.
(b) Articles and By-Laws. Each of Parent and Mergerco has hereto
made available to the Company complete and correct copies of its Articles of
Incorporation or Certificate of Incorporation, as applicable, and By-Laws.
Parent is not in violation of any provision of its Certificate of
Incorporation or By-Laws. Mergerco is not in violation of any provisions of
its Articles of Incorporation or By-Laws.
(c) Corporate Authorization, Non-contravention and Governmental
Authorization.
(i) Each of Parent and Mergerco has all requisite corporate
power and authority to enter into this Agreement and to consummate the
transactions contemplated hereby. The execution and delivery of this
Agreement and the consummation of the transactions contemplated hereby have
been duly authorized by all necessary corporate action on the part of
each of Parent and Mergerco. This Agreement has been duly executed and
delivered by each of Parent and Mergerco and, assuming this Agreement
constitutes the valid and binding agreement of the Company, constitutes a
valid and binding obligation of each of Parent and Mergerco enforceable in
accordance with its terms except that the enforcement hereof may be limited
by: (a) bankruptcy, insolvency, reorganization, moratorium or other similar
laws now or hereafter in effect relating to creditors' rights generally and
(b) general principles of equity (regardless of whether enforceability is
considered in a proceeding at law or in equity).
(ii) The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby by each of Parent and
Mergerco will not conflict with, or result in any Violation pursuant to any
provision of the Certificate of Incorporation or Articles of Incorporation,
as applicable, or By-Laws of Parent or Mergerco or, except as to which
requisite waivers or consents have been obtained, and assuming the consents,
approvals, authorizations or permits and filings or notifications referred to
<PAGE> 84
in paragraph (iii) of this Section 4.2(c) are duly and timely obtained or
made, result in any Violation of any Agreements to which Parent or Mergerco
is a party, or any Laws applicable to Parent or Mergerco or its respective
properties or assets, in each case which could reasonably be expected
to have a Material Adverse Effect with respect to Parent or Mergerco.
(iii) No consent, approval, order or authorization of, or
registration, declaration or filing with, notice to, or permit from any
Governmental Entity, including such other such filings and consents as may be
required under any environmental, health or safety law or regulation
pertaining to any notification, disclosure or required approval necessitated
by the Merger or the transactions contemplated by this Agreement, is required
by or with respect to Parent or Mergerco in connection with the execution and
delivery of this Agreement by each of Parent or Mergerco or the consummation
by Parent or Mergerco of the transactions contemplated hereby, which if not
obtained or made could reasonably be expected to have a Material Adverse
Effect with respect to Parent or Mergerco, except for: (a) the filing with
and clearance by the SEC of such reports under and such other compliance with
the Exchange Act and the rules and regulations thereunder, as may be required
in connection with this Agreement and the transactions contemplated hereby;
(b) the filing of the Articles of Merger with the Secretary of State of the
State of Florida; (c) such filings and approvals as may be required by any
applicable state securities, "blue sky" or takeover laws; (d) compliance with
any applicable requirements of the Hart-Scott-Rodino Antitrust Improvements
Act of 1976 (the "HSR Act") and (e) such other necessary consents, approvals
and authorizations of Governmental Entities as may be required.
(d) Disclosure Documents. None of the information supplied or to
be supplied by Parent or Mergerco in writing expressly for inclusion or
incorporation by reference in the Proxy Statement, on the date first mailed
to the holders of the Company Common Stock or at the time of the Company's
Shareholders Meeting, and in the Transaction Statement, on the date it is
filed with the SEC, will contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary in
order to make the Statements therein, in light of the circumstances under
which they are made, not misleading.
(e) Mergerco Board and Shareholder Approval. Mergerco hereby
consents to the Merger and represents that (I) its Board of Directors (at a
meeting duly called and held) has (A) unanimously determined that each of
this Agreement and the Merger are fair to and in the best interests of the
sole shareholder of Mergerco; and (B) approved this Agreement and the
transactions contemplated hereby and thereby, including the Merger; an (II)
its sole shareholder has by written consent, unanimously determined that each
of this Agreement and the Merger are fair to and in the best interest of
Mergerco and has approved the same.
<PAGE> 85
(f) Parent Board Approval. Parent hereby consents to the Merger
and represents that its Board of Directors by unanimous written consent has
approved this Agreement and the transactions contemplated hereby and thereby,
including the Merger.
(g) Merger Consideration. Mergerco was formed solely for the
purpose of effecting the Merger, and has undertaken no business other than in
connection with the transactions contemplated by this Agreement. Prior to
the Closing Date, the sole shareholder of Mergerco shall have sufficiently
capitalized Mergerco such that the monies available to Mergerco are
sufficient in amount to make the payment of all Merger Consideration.
(h) Finders' Fees. With the exception of fees payable to JP
Morgan & Co. Incorporated, whose fees will be paid by Mergerco, there is no
investment banker, broker, finder or other intermediary which has been
retained by or is authorized to act on behalf, of Parent or Mergerco or any
Subsidiary who might be entitled to any fee or commission from Parent or
Mergerco upon consummation of the transactions contemplated by this
Agreement.
5. CONDITIONS PRECEDENT TO MERGER
5.1 Conditions Precedent to Obligations of Parent, Mergerco and the
Company. The respective obligations of Mergerco and the Company to effect
the Merger are subject to the satisfaction or waiver (subject to applicable
law) at or prior to the Effective Time of each of the following conditions:
(a) This Agreement and the Merger shall have been approved and
adopted by the affirmative vote of the holders of a majority of the shares of
the Company Common Stock entitled to vote thereon and the affirmative vote of
the holders of a majority of the shares of the Convertible Preferred Stock if
such vote is required by applicable law;
(b) No claim, action, suit, proceeding, arbitration or litigation
has been threatened to be filed, has been filed or is proceeding which has
arisen in whole or in part out of, or pertains to the approval of the Special
Independent Committee and the Board of Directors of any party to this
Agreement and the transactions contemplated hereby, the negotiation,
execution or delivery of this Agreement, the performance of obligations
hereunder or the consummation of the transactions contemplated hereby;
(c) No statute, rule, regulation, executive order, decree,
injunction or order of any kind shall have been enacted, issued, entered,
promulgated or enforced by any Governmental Entity which prohibits the
consummation of the Merger and which is in effect at the Effective
Time;
<PAGE> 86
(d) The Company shall have received SEC clearance of the
Transaction Statement and Proxy Statement, all state securities laws and
"Blue Sky" permits and other necessary consents, approvals and authorizations
of Governmental Entities;
(e) Neither the recommendation of the Special Independent
Committee and the Board of Directors that the Company's shareholders approve
the Merger nor the opinion from Robert W. Baird & Co. Incorporated to the
effect that the Merger Consideration is fair to the Company's shareholders
from a financial point of view, shall have been withdrawn or modified;
(f) The holders of all Options (other than Holdings), the per
share exercise price of which is greater than the Merger Consideration, shall
have entered into written agreements terminating such Options as set forth in
Section 2.3 hereof;
(g) Any applicable waiting period under the HSR Act relating to
the Merger shall have expired or been terminated;
(h) A majority of the shares of Common Stock voting on the Merger
(other than shares held by Parent or any affiliates of Parent) shall have
been voted to approve and adopt this Agreement and the Merger; and
(i) The Board of Directors of the Company as of the date of this
Agreement shall have received an agreement from British Aerospace plc, in a
form reasonably satisfactory to the Special Independent Committee, agreeing
to cause the Surviving Corporation to comply with the provisions of Section
8.2 hereof.
5.2 Conditions to the Obligations of Parent and Mergerco. The
obligations of Parent and Mergerco to effect the Merger are subject to the
satisfaction or waiver (subject to applicable law) at or prior to the
Effective Time of each of the following conditions:
(a) The Company shall have performed in all material respects all
of its obligations hereunder required to be performed by it at or prior to
the Closing Date, the representations and warranties of the Company contained
in this Agreement and in any certificate or other writing delivered by the
Company pursuant hereto shall be true in all material respects at
and as of the Closing Date as if made at and as of such time and Mergerco
shall have received a certificate signed by the chief executive officer of
the Company to the foregoing effect;
(b) From and after the date hereof, the Company shall carry on its
business in the usual, regular and ordinary course in substantially the same
manner as heretofore conducted, there shall not be any adverse change to the
Company's business, operations or financial condition which has resulted in a
Material Adverse Effect with respect to the Company;
<PAGE> 87
(c) There shall not be instituted or pending any action or
proceeding by any government or governmental authority or agency, domestic or
foreign, or by any other Person, domestic or foreign, before any court or
governmental authority or agency, domestic or foreign, (i) challenging or
seeking to make illegal, to delay materially or otherwise directly or
indirectly to restrain or prohibit the consummation of the Merger or seeking
to obtain material damages or otherwise directly or indirectly relating to
the transactions contemplated by this Agreement, (ii) seeking to restrain or
prohibit Parent's or Mergerco's ownership or operation (or that of Parent's
respective Subsidiaries or affiliates) of all or any material portion of the
business or assets of the Company and its Subsidiaries, taken as a whole, or
of Parent and its Subsidiaries or affiliates, taken as a whole, or to compel
Parent or Mergerco or any of their Subsidiaries or affiliates to dispose of
or hold separate all or any material portion of the business or assets of the
Company and its Subsidiaries, taken as a whole, or of Parent and its
Subsidiaries, taken as a whole or any of their respective affiliates, (iii)
(except for the Special Security Agreement among the Company, Parent, British
Aerospace plc and the United States Department of Defense as it exists
on the date hereof,) seeking to impose or confirm material limitations on the
ability of Parent or Mergerco or any of their Subsidiaries or affiliates to
effectively control the business or operations of the Company and its
Subsidiaries, taken as a whole, or effectively to exercise full rights of
ownership of the shares of Common Stock, including, without limitation, the
right to vote any shares of Common Stock acquired or owned by Mergerco or any
of its Subsidiaries or affiliates on all matters properly presented to the
Company's shareholders, or (iv) seeking to require divestiture by Parent or
Mergerco or any of their Subsidiaries or affiliates of any shares of
Common Stock, or (v) that otherwise is likely to materially adversely affect
the Company and its Subsidiaries, taken as a whole, or Mergerco, Parent or
their respective Subsidiaries or affiliates; and no court, arbitrator or
governmental body, agency or official shall have issued any judgment,
order, decree or injunction, and there shall not be any statute, rule or
regulation, that, in the sole judgment of the Mergerco, is likely, directly
or indirectly, to result in any of the consequences referred to in the
preceding clauses (i) through (v);
(d) Parent and Mergerco shall have received a copy of the Report
of Independent Accountants, without qualification, from Coopers & Lybrand
LLP, the Company's independent accountants, with respect to the audited
consolidated financial statements of the Company for the fiscal year ended
December 31, 1996; and
(e) Parent and Mergerco shall have received all documents it may
reasonably request relating to the existence of the Company and the
Subsidiaries and the authority of the Company for this Agreement, all in form
and substance satisfactory to Parent and Mergerco.
<PAGE> 88
5.3 Conditions to the Obligations of the Company. The obligation of
the Company to effect the Merger are subject to the satisfaction or waiver
(subject to applicable law) at or prior to the Effective Time of each of the
following conditions:
(a) Parent and Mergerco shall have performed in all material
respects all of their respective obligations hereunder required to be
performed by either of them at or prior to the Closing Date, the
representations and warranties of Parent and Mergerco contained in this
Agreement and in any certificate or other writing delivered by the Company
pursuant hereto shall be true in all material respects at and as of the
Closing Date as if made at and as of such time and the Company shall have
received a certificate signed by the chief executive officer of each of
Mergerco and Parent to the foregoing effect;
(b) There shall not be instituted or pending any action or
proceeding by any government or governmental authority or agency, domestic or
foreign, or by any other Person, domestic or foreign, before any court or
governmental authority or agency, domestic or foreign, challenging or seeking
to make illegal, to delay materially or otherwise directly or indirectly to
restrain or prohibit the consummation of the Merger or seeking to obtain
material damages or otherwise directly or indirectly relating to the
transactions contemplated by this Agreement; and
(c) The Company shall have received all documents it may
reasonably request relating to the existence of Parent and Mergerco and the
authority of Parent and Mergerco for this Agreement, all in form and
substance satisfactory to the Company.
6. COVENANTS RELATING TO THE CONDUCT OF THE BUSINESS
6.1 Covenants of the Company. Except as otherwise specifically
provided in this Agreement, from the date hereof to the Effective Time,
neither the Special Independent Committee nor the Board of Directors of the
Company shall approve or authorize any action that would allow the Company
and its Subsidiaries to carry on their respective businesses other than
in the ordinary and usual course of business and consistent with past
practice or any action that would prevent the Company and its Subsidiaries
from using their best efforts to (i) preserve intact its present business
organization, (ii) maintain in effect all federal, state, local and foreign
licenses, approvals and authorizations that are required for the Company or
any of its Subsidiaries to carry on their business, (iii) keep available the
services of its key officers and employees and (iv) maintain satisfactory
relationships with its lenders, suppliers and others having business
relationships with it. Without limiting the generality of the foregoing, and
<PAGE> 89
except as otherwise specifically provided in this Agreement, without the
prior written consent of Mergerco, prior to the Effective Time, neither the
Special Independent Committee nor the Board of Directors of the Company
shall, or shall authorize or direct the Company or any Subsidiary,
directly or indirectly, to:
(a) adopt or propose any change in its Articles of Incorporation
or By-laws;
(b) except in the ordinary course of business consistent with past
practices and except pursuant to existing agreements or arrangements or as
set forth on Schedule 6.1(b), (i) acquire (by merger, consolidation or
acquisition of stock or assets) any material corporation, partnership or
other business organization or division thereof, or sell, lease or otherwise
dispose of a material Subsidiary or a material amount of assets or
securities; (ii) make any investment in an amount in excess of $25,000 in the
aggregate whether by purchase of stock or securities, contributions to
capital or any property transfer, or purchase for an amount in excess of
$25,000 in the aggregate, other than in the ordinary course of business and
consistent with past practices, any property or assets of any other
individual or entity; (iii) except in the ordinary course of business and
consistent with past practices, waive, release, grant, or transfer any rights
of material value; (iv) except in the ordinary course of business and
consistent with past practices, modify or change in any material respect any
existing material license, lease, contract, or other document; (v) except to
refund or refinance commercial paper, incur, assume or prepay an amount of
long-term or short-term debt in excess of $25,000 in the aggregate; (vi)
assume, guarantee, endorse or otherwise become liable or responsible (whether
directly, contingently or otherwise) for the obligations of any other Person
which, are in excess of $25,000 in the aggregate; (vii) make any loans,
advances or capital contributions to, or investments in, any other
Person which are in excess of $25,000 in the aggregate or (viii) take any
action in violation of the Agreement for Credit Availability dated as of
November 20, 1996 by and between the Company and British Aerospace plc;
(c) take any action that would make any representation and
warranty of the Company hereunder inaccurate in any respect at, or as of any
time prior to, the Effective Time, or omit to take any action necessary to
prevent any such representation or warranty from being inaccurate in any
respect at any such time;
(d) split, combine or reclassify any shares of its capital stock,
declare, set aside or pay any dividend or other distribution (whether in
cash, stock or property or any combination thereof) in respect of its capital
stock, or redeem or otherwise acquire or offer to acquire any of its
securities or any securities of its Subsidiaries;
<PAGE> 90
(e) adopt or amend any bonus, profit sharing, compensation,
severance, termination, stock option, pension, retirement, deferred
compensation, employment or employee benefit plan, agreement, trust, plan,
fund or other arrangement for the benefit and welfare of any director,
officer or employee, or increase in any manner the compensation or fringe
benefits of any director, officer or employee or pay any benefit not required
by any existing plan or arrangement (including, without limitation, the
granting of stock options or stock appreciation rights or the removal of
existing restrictions in any benefit plans or agreements);
(f) revalue in any material respect any of its assets, including,
without limitation, writing down the value of inventory or writing off notes
or accounts receivable, other than in the ordinary course of business;
(g) pay, discharge or satisfy any material claims, liabilities or
obligations (whether absolute, accrued, asserted or unasserted, contingent or
otherwise) other than the payment, discharge or satisfaction in the ordinary
course of business, consistent with past practices, of liabilities reflected
or reserved against in the consolidated financial statements of the
Company or incurred in the ordinary course of business, consistent with past
practices;
(h) make any tax election or settle or compromise any material
income tax liability;
(i) take any action other than in the ordinary course of business
and consistent with past practices with respect to accounting policies or
procedures; or
(j) agree or commit to do any of the foregoing.
6.2 Covenant of Parent and Mergerco-Voting of Shares. Each of Parent
and Mergerco agrees to vote all shares of Company Common Stock and
Convertible Preferred Stock beneficially owned by it in favor of adoption of
this Agreement and the Merger at the Company's Shareholders Meeting.
6.3 Covenants of Mergerco and the Company. The parties hereto agree
that:
(a) Best Efforts. Subject to the terms and conditions of this
Agreement, each party will use its best efforts to take, or cause to be
taken, all actions and to do, or cause to be done, all things necessary,
proper or advisable under applicable laws and regulations to consummate the
transactions contemplated by this Agreement. Each party shall also refrain
from taking, directly or indirectly, any action contrary to or inconsistent
<PAGE> 91
with the provisions of this Agreement, including action which would impair
such party's ability to consummate the Merger and the other transactions
contemplated hereby. Without limiting the foregoing, the Company
and its Board of Directors shall use their best efforts to (a) take all
action necessary so that no state takeover statute or similar statute or
regulation is or becomes applicable to the Merger or any of the other
transactions contemplated by this Agreement and (b) if any state takeover
statute or similar statute or regulation becomes applicable to any of the
foregoing, take all action necessary so that the Merger and the other
transactions contemplated by this Agreement may be consummated as promptly as
practicable on the terms contemplated by this Agreement and otherwise to
minimize the effect of such statute or regulation on the Merger and the other
transactions contemplated by this Agreement.
(b) Public Announcements. Mergerco and the Company will consult
with each other before issuing any press release or making any public
statement with respect to this Agreement and the transactions contemplated
hereby and, except with respect to any press release or public statement as
may be required by applicable law or any listing agreement with any national
securities exchange, will not issue any such press release or make any such
public statement prior to such consultation.
(c) Further Assurances. At and after the Effective Time, the
officers and directors of the Surviving Corporation will be authorized to
execute and deliver, in the name and on behalf of the Company or Mergerco,
any deeds, bills of sale, assignments or assurances and to take and do, in
the name and on behalf of the Company or Mergerco, any other actions and
things to vest, perfect or confirm of record or otherwise in the Surviving
Corporation any and all right, title and interest in, to and under any of the
rights, properties or assets of the Company acquired or to be acquired by the
Surviving Corporation as a result of, or in connection with, the Merger.
7. ADDITIONAL AGREEMENTS
7.1 Preparation of Proxy Statement and Transaction Statement. As soon
as practicable after the date of announcement of the execution of the Merger
Agreement, the Company and Parent shall prepare and file the Transaction
Statement with respect to the Merger. Parent and the Company each agrees to
correct any information provided by it for use in the Transaction Statement
if and to the extent that it shall have become false or misleading in any
material respect. The responsible party agrees to take all steps necessary
(and bear all costs associated therewith to cause the Transaction Statement
as so corrected to be filed with the SEC and to be disseminated to holders of
shares of Common Stock, in each case as and to the extent required by
applicable federal securities laws. Each of the Parent and the Company and
<PAGE> 92
their respective counsel shall be given an opportunity to review and comment
on the Transaction Statement prior to its being filed with the SEC. As soon
as practicable after the date hereof, the Company, with the cooperation of
Mergerco, shall prepare and file with the SEC the Proxy Statement. The
Company shall use commercially reasonable efforts to respond to all SEC
comments with respect to the Proxy Statement and to cause the Proxy Statement
to be mailed to the Company's shareholders at the earliest practicable date.
The Company will, as soon as practicable, use commercially reasonable efforts
to duly call, give notice of, convene and hold the Company's Shareholders
Meeting for the purpose of approving this Agreement and the transactions
contemplated hereby and will otherwise comply with all legal requirements
applicable to such meeting. The Company will use its best efforts to obtain
the necessary approvals by its shareholders of this Agreement and the
transactions contemplated hereby.
7.2 Further Assistance. After the Effective Time, from time to time,
as and when required by the Surviving Corporation or by its successors or
assigns, there shall be executed and delivered on behalf of the Company such
deeds or other instruments, and there shall be taken or caused to be taken by
all such further and other action, as shall be appropriate, advisable or
necessary in order to vest, perfect or confirm, or record or otherwise, in
the Surviving Corporation the title to and possession of all property
interests, assets, rights, privileges, immunities, powers, franchises and
authority of the Company and Mergerco, and otherwise to carry out the
purposes of this Agreement. The officers and directors of the Surviving
Corporation are fully authorized in the name and on behalf of the Company and
Mergerco or otherwise, to take any and all such action and to execute and
deliver any and all such deeds and other instruments.
7.3 Agreements. The Company will take such commercially reasonable
steps as are appropriate, including the giving of required notices, to
preserve its rights under the Agreements and to ensure that such rights will
be transferred to the Surviving Corporation.
7.4 Fees and Expenses. All fees and expenses (including attorneys' and
consultants' fees and expenses) incurred by the parties hereto in connection
with or related to the authorization, preparation, negotiation, execution and
performance of this Agreement and all other matters related to the closing of
the transactions contemplated hereby shall be borne solely and entirely by
the party which has incurred the same. Notwithstanding the foregoing, in the
event that the transactions contemplated hereby are consummated, all of such
fees and expenses will be paid by the Surviving Corporation from the funds
provided by the sole shareholder of Mergerco for such purpose.
<PAGE> 93
7.5 Confidentiality. From the date hereof and until the Effective
Time, and for a period of two years after the effective date of any
termination of this Agreement, the Company, Parent and Mergerco: (i) shall
use commercially reasonable efforts (x) to maintain the confidentiality and
(y) not disclose any material information to any Person or entity other than
its employees, agents, attorneys and financial advisors who are participating
in the transactions contemplated by this Agreement, and (ii) shall not use,
other than in connection with this Agreement, any proprietary and
confidential information of the Parent or Mergerco, in the case
of the Company, and the Company, in the case of Parent and Mergerco.
Notwithstanding the foregoing, the Company, Parent and Mergerco may make such
disclosures if and to the extent required by applicable law, legal process or
other regulatory requirements.
7.6 Access to Information. From the date hereof and until the
Effective Time, the Company will give Parent and Mergerco, their counsel,
financial advisors, auditors and other authorized representatives full access
to the offices, properties, books and records of the Company and the
Subsidiaries, will furnish to Parent and Mergerco, their counsel, financial
advisors, auditors and other authorized representatives such financial and
operating data and other information as such Persons may reasonably request
and will instruct the Company's employees, counsel and financial advisors to
cooperate with Parent and Mergerco in their investigation of the business of
the Company and the Subsidiaries; provided that no investigation pursuant to
this Section shall affect any representation or warranty given by the Company
to Parent and Mergerco hereunder.
7.7 Other Offers.
From the date hereof until the termination pursuant to Section 9.1
hereof, the Company and the Subsidiaries and the officers, directors,
employees or other agents of the Company and the Subsidiaries will not,
directly or indirectly, (i) take any action to solicit, initiate
or encourage any Acquisition Proposal (as hereinafter defined) or (ii)
subject to the fiduciary duties of the Special Independent Committee and the
Board of Directors under applicable law as advised by counsel to the Special
Independent Committee, engage in negotiations or discussions with, or
disclose any nonpublic information relating to the Company or any Subsidiary
or afford access to the properties, books or records of the Company or any
Subsidiary to, or otherwise assist, facilitate or encourage, any Third Party
(as defined below) that may be considering making, or has made, an
Acquisition Proposal. The Company will promptly notify Mergerco
after receipt of any Acquisition Proposal or any indication that any Third
Party is considering making an Acquisition Proposal or any request for
nonpublic information relating to the Company or any Subsidiary or for access
<PAGE> 94
to the properties, books or records of the Company or any Subsidiary by any
Third Party that may be considering making, or has made, an Acquisition
Proposal and will keep Mergerco fully informed of the status and details of
any such Acquisition Proposal, indication or request. If otherwise permitted
under this Section 7.7, prior to furnishing any non-public information to, or
entering into negotiations or discussions with, any Person, the Company will
obtain an executed confidentiality agreement from such Person on terms which
are normally contained in such agreement used for such purpose. For purposes
of this Agreement, "Acquisition Proposal" means any offer or proposal for, or
any indication of interest in, a merger or other business combination
involving the Company or any Subsidiary or the acquisition of any equity
interest in, or a substantial portion of the assets of, the Company or
any Subsidiary, other than the transactions contemplated by this Agreement.
As used in this Agreement, the term "Third Party" means any person,
corporation, entity or "group," as defined in Section 13(d) of the Exchange
Act, other than Parent or Mergerco or any of their affiliates.
7.8 Notices of Certain Events. The Company shall promptly notify
Mergerco of:
(a) any notice or other communication from any Person alleging
that the consent of such Person is or may be required in connection with the
transactions contemplated by this Agreement;
(b) any notice or other communication from any governmental or
regulatory agency or authority in connection with the transactions
contemplated by this Agreement; and
(c) any actions, suits, claims, investigations or proceedings
commenced or, to the best of its knowledge threatened against, relating to or
involving or otherwise affecting the Company or any Subsidiary which, if
pending on the date of this Agreement, would have been required to have been
disclosed pursuant to Section 4.1(j) or which relate to the consummation of
the transactions contemplated by this Agreement.
8. INDEMNIFICATION
8.1 Indemnification. It is understood and agreed that, from and after
the Effective Time, the Surviving Corporation shall, to the fullest extent
permitted under applicable law (subject to the penultimate sentence of this
Section 8.1), indemnify and hold harmless, Mergerco and Parent, any affiliate
of any such person and any of their respective partners, members, directors
and officers and each other person, if any, controlling such persons, to the
extent Mergerco and Parent would be required to provide indemnification
thereto, fiduciaries and agents of such persons (all such persons are
<PAGE> 95
referred to collectively as "Mergerco Indemnified Parties") and the directors
and officers of the Company as in existence on the date of this Agreement
("Company Indemnified Parties" and collectively with Mergerco Indemnified
Parties, "Indemnified Parties") from and against any costs or expenses
(including reasonable attorneys' fees), judgments, fines, losses, claims,
damages, liabilities and amounts paid in settlement in connection with any
pending, threatened or completed claim, action, suit, proceeding or
investigation, whether civil, criminal, administrative or investigative,
arising out of or pertaining to any of the transactions contemplated by this
Agreement; provided, however, that the Surviving Corporation shall not be
obligated pursuant to this Section to pay the fees and expenses of more than
one counsel for all Indemnified Parties in any single action except to the
extent that counsel for the Indemnified Parties shall have advised that two
or more of such Indemnified Parties may have conflicting interests in the
outcome of such action. In the event of any such claim, action, suit,
proceeding or investigation (whether arising before or after the
Effective Time and whether or not such Indemnified Party is a party thereto),
(x) the Surviving Corporation shall advance expenses to each such Indemnified
Party, including the payment of the reasonable fees and expenses of counsel
selected by such Indemnified Party (as and to the extent permitted by the
preceding sentence), which counsel shall be reasonably satisfactory to the
Surviving Corporation, promptly after statements therefor are received;
provided, however, that the obligation to advance expenses pursuant to this
Section shall arise only to the extent that the Indemnified Party requesting
such advancement shall execute an undertaking (in form and substance
reasonably satisfactory to the Surviving Corporation, as the case may be) to
repay all amounts so advanced in the event and to the extent that it shall
ultimately be determined that such Indemnified Party was not entitled to be
so indemnified, and (y) the Indemnified Party will fully cooperate in the
defense of any such matter and will promptly furnish the Surviving
Corporation with any information and documents within such person's
possession or control necessary to defend such matter. The Surviving
Corporation shall not be liable for any settlement effected without its
written consent (which consent shall not be unreasonably withheld).
Notwithstanding anything to the contrary contained in the foregoing, (i) no
Company Indemnified Party shall be entitled to be indemnified under this
Section 8.1 for any costs or expenses, judgments, fines, losses, claims,
damages, liabilities or amounts paid in settlement arising primarily from its
or any other Company Indemnified Party's gross negligence, bad faith
or willful misconduct and (ii) no Mergerco Indemnified Party shall be
entitled to be indemnified under this Section 8.1 for any costs or expenses,
judgments, fines, losses, claims, damages, liabilities or amounts paid in
settlement arising primarily from its or any other Mergerco Indemnified
Party's gross negligence, bad faith or willful misconduct. This Section 8.1
shall survive any termination of this Agreement, however caused.
<PAGE> 96
8.2 Directors' and Officers' Liability Insurance. For a period of six
years after the Effective Time, the Surviving Corporation, at its sole
discretion, shall either: (i) maintain the Surviving Corporation's existing
directors' and officers' liability insurance (or substitute equivalent
liability insurance) for those persons who are directors and officers of the
Company immediately prior to the Effective Time (the "Existing Directors") or
(ii) cause British Aerospace plc to indemnify the Existing Directors in the
same manner that British Aerospace plc currently provides indemnification for
its employees, officers and directors. Any Existing Director who is
indemnified pursuant to the foregoing provisions shall fully cooperate in the
defense of any such matter and shall promptly furnish the Surviving
Corporation and British Aerospace plc with any information and documents
within such person's possession or control necessary to defend such matter.
Notwithstanding anything to the contrary contained in the foregoing, no
Existing Director shall be entitled to be indemnified under this Section 8.2
for any costs or expenses, judgments, fines, losses, claims, damages,
liabilities or amounts paid in settlement arising primarily from its or any
other Existing Director's gross negligence, bad faith or willful misconduct.
9. TERMINATION AND AMENDMENT
9.1 Abandonment and Termination
(a) This Agreement may be terminated and the Merger may be
abandoned at any time prior to the Effective Time, whether before or after
approval of the matters presented in connection with the Merger by the
shareholders of the Company or Mergerco:
(i) by the Company, Parent or Mergerco if the Merger
Agreement and the Merger fail to receive the requisite vote for approval and
adoption by the shareholders of the Company at the Company's Shareholders
Meeting;
(ii) by mutual written consent of the Company, on the one
hand, and Parent and Mergerco, on the other hand, if authorized or taken by
mutual action of their respective Boards of Directors and the Special
Independent Committee, in the case of the Company;
(iii) by either the Company, on the one hand, and Parent or
Mergerco, on the other hand: (A) if there has been a material breach of any
representation, warranty, covenant or agreement on the part of the other set
forth in this Agreement which breach has not been cured within five (5)
business days following receipt by the breaching party of notice of
such breach, or (B) if a claim, action, suit, proceeding, arbitration or
litigation has been threatened to be filed, has been filed or is proceeding
<PAGE> 97
which has arisen in whole or in part out of, or pertaining to the approval of
the Board of Directors (including the Special Independent Committee) of any
party to this Agreement and the transactions contemplated hereby, the
negotiation, execution or delivery of this Agreement, the performance of
obligations hereunder or the consummation of the transactions contemplated
hereby;
(iv) by either the Company or Mergerco, so long as such party
has not breached its obligations hereunder, if the Merger shall not have been
consummated on or before July 31, 1997; provided, that the right to terminate
this Agreement under this subsection shall not be available to any party
whose failure to fulfill any obligation under this Agreement has been
the cause of or resulted in the failure of the Merger to occur on or before
such date; or
(v) By the Special Independent Committee acting on behalf of
the Company if prior to the Effective Time (A) the Board of Directors of the
Company or the Special Independent Committee shall have withdrawn its
approval or recommendation of this Agreement and the Merger or its
recommendation that shareholders of the Company adopt and approve this
Agreement and the Merger based upon the receipt by the Board of Directors or
the Special Independent Committee of an Acquisition Proposal from a Third
Party which the Board of Directors of the Company or the Special Committee
believes is more favorable to the Unaffiliated Shareholders, or (B) Robert W.
Baird & Co. Incorporated shall have withdrawn or modified or amended, in a
manner adverse to the Company or the Unaffiliated Shareholders, its
opinion at any time prior to the Effective Time;
(vi) By Mergerco if (A) the Board of Directors of the Company
or the Special Independent Committee shall have withdrawn or modified or
amended, in a manner adverse to Mergerco, its approval or recommendation of
this Agreement and the Merger or its recommendation that shareholders of the
Company adopt and approve this Agreement and the Merger, or approved,
recommended or endorsed any proposal for a transaction other than the
Merger (including a tender or exchange offer for shares of Common Stock) or
(B) J.P. Morgan & Co. Incorporated shall have withdrawn or modified or
amended, in a manner adverse to Mergerco, its opinion at any time prior to
the Effective Time.
(b) In the event of termination of this Agreement by either the
Company or Mergerco as provided in this Agreement, this Agreement shall
forthwith become void and there shall be no liability or obligation or the
part of Mergerco or the Company or their respective affiliates, officers,
directors or shareholders except (i) the provisions of Sections 7.5 and 8.1
shall continue in full force and effect, and (ii) to the extent that such
termination results from the willful breach by a party hereto of any of its
representations or warranties, or of any of its covenants or agreements, in
each case, as set forth in this Agreement.
<PAGE> 98
9.2 Waiver; Amendment. At any time prior to the Effective Time, any
provision of this Agreement may be: (i) waived by the party benefitted by
the provision or by both parties by a writing executed by an executive
officer of such party, or (ii) amended or modified at any time (including the
structure of the transaction) by an agreement in writing between the parties
hereto approved by their respective Boards of Directors and the Special
Independent Committee, in the case of the Company.
10. MISCELLANEOUS
10.1 Survival. Only those agreements and covenants of the parties that
are applicable in whole or in part after the Effective Time shall survive the
Effective Time. All representations and warranties and other agreements and
covenants shall be deemed to be conditions of this Agreement and shall not
survive the Effective Time.
10.2 Entire Agreement; Etc. This Agreement represents the entire
understanding of the parties hereto with reference to the transactions
contemplated hereby and supersedes any and all other oral or written
agreements heretofore or contemporaneously made. All terms and
provisions of this Agreement shall be binding upon and shall inure to the
benefit of the parties thereto and their respective successors and assigns.
10.3 Assignment. Neither this Agreement nor any rights, interests or
obligations hereunder may be assigned by any party hereto (whether by
operation or law or otherwise) without the prior written consent of the other
party.
10.4 Headings. The descriptive headings of the several Articles and
Sections of this Agreement are inserted for convenience only, do not
constitute a part of this Agreement and shall not affect in any way the
meaning or interpretation of this Agreement.
10.5 Counterparts. This Agreement may be executed in two (2) or more
counterparts, and by different parties hereto in separate counterparts, each
of which shall be deemed to be an original, and all of which taken together
shall be deemed to be one and the same instrument.
10.6 Applicable Law. This Agreement and the legal relations between the
parties hereto shall be governed by and construed in accordance with the laws
of the State of Florida, regardless of the laws that might otherwise govern
under applicable principles of conflicts laws thereof. In the event that it
becomes necessary for any party to this Agreement to enforce this Agreement
through legal proceedings, each party hereby agrees that the Circuit Court
for the Thirteenth Judicial Circuit in and for Hillsborough County, Florida,
<PAGE> 99
Tampa Division, and the United States District Court for the Middle District
of Florida, Tampa Division, shall have exclusive jurisdiction to hear and
determine any such matters and, in connection therewith, each party hereby
expressly submits and consents in advance to such jurisdiction and venue in
any action or proceeding whether commenced by or brought against them in
either of the Courts. Each party further agrees that any service of process
in connection with any dispute arising out of this Agreement or the Merger
may be given to any other party hereto at the respective addresses and
pursuant to the notice provisions set forth in Section 10.8 below. In any
such court proceeding, the prevailing party shall be entitled to
reimbursement of all costs and expenses, which may be reasonably incurred or
paid in connection therewith, including, without limitation, attorney's fees
and costs at the trial and appellate court levels.
10.7 Severability. If any term, provision, covenant or restriction
contained in this Agreement is held by a court of competent jurisdiction or
other authority to be invalid, void, unenforceable or against its regulatory
policy, the remainder of the terms, provisions, covenants and restrictions
contained in this Agreement shall remain in full force and effect and shall
in no way be affected, impaired or invalidated.
10.8 Notices. Any notice or communication required or permitted
hereunder shall be in writing and either delivered personally, telegraphed or
telecopied or sent by certified or registered mail, postage prepaid, and
shall be deemed to be given, dated and received when so delivered personally,
telegraphed or telecopied or, if mailed, five (5) business days after the
date of mailing to the following address or telecopy number, or to such other
address or addresses as such person may subsequently designate by notice
given hereunder:
(a) if to Mergerco or Parent, to:
British Aerospace Holdings, Inc.
15000 Conference Center Drive
Suite 200
Chantilly, VA 20151-3819
Attn: Charles E. Gaba, Esq.
with copies to:
Davis Polk & Wardwell
450 Lexington Ave.
New York, NY 10017
Attn: Peter R. Douglas, Esq.
and to:
Steel Hector & Davis LLP
200 South Biscayne Blvd.
40th Floor
Miami, FL 33131
Attn: Harvey Goldman, Esq.
<PAGE> 100
(b) if to the Company, to:
Reflectone, Inc.
P.O. Box 15000
Tampa, Florida 33684
Attn: Richard Snyder
with copies to:
Fowler, White, Gillen, Boggs, Villareal and Banker, P.A.
501 East Kennedy Blvd.
Tampa, FL 33601
Attn: R. Alan Higbee, Esq.
IN WITNESS WHEREOF, the parties hereto, intending to be legally bound
hereby, have caused this Agreement to be executed as of this day and year
first above written.
REFLECTONE, INC.
By: /s/R. G. Snyder
Name: Richard G. Snyder
Title: President and CEO
BRITISH AEROSPACE HOLDINGS, INC.
By: /s/Charles E. Gaba
Name: Charles E. Gaba
Title: Vice President
BAR MERGERCO., INC.
By: /s/Charles E. Gaba
Name: Charles E. Gaba
Title: Vice President
MIA9510/126371-9
<PAGE> 101
ARTICLES OF MERGER
These ARTICLES OF MERGER, dated as of____________, 1997, provide for
the merger of Bar Mergerco, Inc., a Florida corporation ("Mergerco"), with and
into Reflectone, Inc., a Florida corporation ("Reflectone"), which shall be the
surviving corporation.
ARTICLE I - PLAN OF MERGER
A copy of the Plan of Merger pursuant to which Mergerco will be merged
with and into Reflectone is attached hereto as Appendix A and incorporated
herein by this reference.
ARTICLE II - EFFECTIVE DATE
The merger of Mergerco with and into Reflectone shall be effective as
of the date of filing of these Articles of Merger with the Secretary of State of
the State of Florida.
ARTICLE III - ADOPTION OF PLAN OF MERGER
The Plan of Merger was adopted by the Board of Directors of Mergerco by
written consent dated as of February 13, 1997 pursuant to Section 607.0821 of
the Florida Business Corporation Act and approved by the sole shareholder of
Mergerco by written consent dated as of February 13, 1997 pursuant to Section
607.0704 of the Florida Business Corporation Act..
The Plan of Merger was adopted by the Board of Director of Reflectone
at a meeting duly held on________________________,1997, and approved by the
holders of a majority of the outstanding shares of each class of capital stock
of Reflectone entitled to vote at a special meeting duly held on
_____________________, 1997.
The Articles of Merger may be executed in counterparts, each of which
shall be deemed an original but all of which together shall constitute one and
the same instrument.
IN WITNESS WHEREOF, these Articles of Merger have been duly executed on
behalf of each of Mergerco and Reflectone by their duly authorized officers as
of the date first above written.
BAR MERGERCO, INC.
By:
----------------------------------------
Charles E. Gaba, Esq.
Vice President and Secretary
REFLECTONE, INC.
By:
----------------------------------------
Richard G. Snyder
President and Chief Executive Officer
<PAGE> 102
EXHIBIT B
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 1996 Commission File No. 0-14059
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________________ to ______________________
REFLECTONE, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C>
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)
</TABLE>
Registrant's telephone number, including area code: (813) 885-7481
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<S> <C>
Title of Each Class Name of Each Exchange on Which Registered
------------------- -----------------------------------------
None
</TABLE>
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.10 per share
--------------------------------------
(Title of Class)
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 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [ ]
Aggregate market value of the voting stock held by non-affiliates of the
Registrant as of February 25, 1997: $33,262,559 (assuming, for these purposes
only, that 1,426,378 shares of common stock beneficially owned by all executive
officers and directors as a group, and by British Aerospace, Plc. and its
subsidiaries, are held by affiliates of the Registrant).
The number of shares outstanding of the Registrant's class of common stock, as
of February 25, 1997: 2,864,448.
DOCUMENTS INCORPORATED BY REFERENCE
None
Page 1 of 109
Exhibit Index on Page 64
<PAGE> 103
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I PAGE NO.
--------
<S> <C> <C>
Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . . . . 9
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters . . . . . . . . . . 9
Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Item 7. Management's Discussion and Analysis of Financial Conditions and Results of Operations . . . 11
Item 8. Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . 16
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . . . 16
PART III
Item 10. Directors and Executive Officers of the Registrant . . . . . . . . . . . . . . . . . . . . . 17
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Item 12. Security Ownership of Certain Beneficial Owners and Management . . . . . . . . . . . . . . . 27
Item 13. Certain Relationships and Related Transactions . . . . . . . . . . . . . . . . . . . . . . . 28
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K . . . . . . . . . . . . . . 31
</TABLE>
2
<PAGE> 104
PART I
ITEM 1. BUSINESS
GENERAL BUSINESS DESCRIPTION
Reflectone, Inc. ("Reflectone" or the "Company") is a Florida
corporation whose business involves the design, manufacture and sale of flight
simulators, weapon system trainers, tactical air defense trainers, maintenance
trainers, part-task trainers, and other sophisticated training devices for U.S.
Government, commercial and international customers, as well as simulation-based
entertainment devices for the entertainment industry. The Company also provides
a variety of simulator-related training services at customer-owned facilities,
its Tampa training center, and the British Aerospace-owned Dulles flight
training facility. As used herein, unless the context requires otherwise,
"Reflectone" or the "Company" includes Reflectone, Inc. and its operating
subsidiaries. Reflectone's business is conducted through its three primary
business segments: the Training Devices Segment, the Training Services Segment,
and the Systems Management Segment.
The manufacture of simulators and other training and entertainment
devices is conducted through the Training Devices Segment. In recent years the
product mix of training devices designed and manufactured by Reflectone's
Training Devices Segment has evolved from one primarily comprised of military
aircraft simulators to one which additionally includes commercial aircraft
simulators and simulation devices for the entertainment industry.
In 1993, the Company acquired British Aerospace Simulation, Ltd.,
which was subsequently renamed Reflectone UK Limited ("RUKL"). RUKL, with
facilities in Filton, England, historically designed, developed and
manufactured, through sophisticated electronic computer simulation, tactical
air defense trainers, small-arms trainers, electronic warfare training systems
and visual air traffic control simulators. During 1995, RUKL also played a key
role in the Company's flight simulator business, securing a major subcontract
with Lockheed Martin Corporation ("LMC") worth approximately $77.0 million with
training and maintenance extending into the year 2002. Under the contract, the
Company is providing a complete training system to the U.K. Ministry of Defence
in connection with its purchase of new Lockheed C-130J transport aircraft. The
actual performance by the Company under the Lockheed C-130J subcontract is
being split between the Company's U.S. and U.K. operations, thus expanding the
design and manufacturing capabilities of RUKL into the flight simulator market.
The operations of RUKL are reported in the Company's Training Devices Segment.
Through a wholly owned subsidiary, Reflectone Training Systems, Inc.
("RTS"), Reflectone's Training Services Segment provides flight and ground
school instruction for pilots and aircrews which may include development of
training syllabus and courseware, as well as simulator operation and
maintenance. Currently, the Training Services Segment provides services at 18
field sites in the United States and one field site in Japan. In addition,
Reflectone's Training Services Segment provides C-130H training in Tampa and
manages the British Aerospace Holdings, Inc. owned Dulles flight training
center located near Washington D.C.'s Dulles International Airport.
Reflectone's third business segment, the Systems Management Segment,
manages complex training programs which require the services of both the
Training Devices and Training Services Segments.
During the years ended December 31, 1996, 1995 and 1994, revenues from
the Training Devices Segment were $66.3 million, $48.7 million and $26.9
million, respectively, inclusive of intersegment transactions. These revenues
include revenues from the operations of RUKL of $29.7 million, $18.6 million
and $4.9 million, respectively. Revenues from the Training Services Segment
during these periods were $30.3 million, $38.7 million and $33.4 million,
respectively, inclusive of intersegment transactions. Revenues for the Systems
Management Segment were $5.7 million, $12.8 million and $9.2 million for the
years ended December 31, 1996, 1995 and 1994, respectively, inclusive of
intersegment transactions. See
3
<PAGE> 105
Note 12 to the Consolidated Financial Statements, which are included in Part IV
of this Report for additional segment and geographic information.
The Company has various relationships, contracts and agreements with
British Aerospace, Plc. ("BAe") and its direct and indirect subsidiaries (BAe
and such subsidiaries herein collectively referred to as "British Aerospace").
Approximately 48.0% of the common stock of the Company is owned by British
Aerospace Holdings, Inc. ("BAeHI"), a wholly owned subsidiary of British
Aerospace, Plc.
PRODUCTS, SERVICES AND RECENT BUSINESS DEVELOPMENTS
TRAINING DEVICES. Reflectone's flight simulators, weapon system
trainers, maintenance trainers and other training devices are full-scale
reproductions, including instrumentation and controls, of the cockpit, mission
operator station(s), or maintenance bays of specific aircraft. Reflectone's
training devices are marketed to both commercial and military (U.S. and
international) customers and are used to train flight and ground crews in
normal and emergency procedures, to develop tactics, and to achieve a state of
operational readiness in a cost-effective manner.
Reflectone's flight simulators are designed to convey to the pilot and
other crew members the sensations of actually operating a specific aircraft
through the full range of taxiing, take-off, local area operations, in-flight
maneuvering, emergencies, weather conditions (including wind shear), landing
and post-flight procedures. All of these tasks (including emergency situation
training) may be accomplished through simulation without risk to life or damage
to equipment, and without the costly consumption of fuel which accompanies
performance of similar functions in the aircraft. The prices of full flight
simulators produced by the Company currently are in the range of $4 million to
$8 million without a visual system, or from $5 million to $12 million or more
with Reflectone supplying a visual system manufactured by a third-party vendor.
Computer-based visual simulation systems can provide the pilot with
high-resolution multicolored images, including depth-of-field, to create the
illusion of a realistic out-the-window scene. The systems can display clear and
low visibility daytime, twilight and nighttime situations, with varying weather
conditions. They also provide for horizon glow, landing light illumination
strobes, air traffic, weapons delivery effects, ground vehicle movements, and
variable fog/cloud obscuration effects, as well as lights, building surfaces,
mountains and other terrain distinctions with appropriate occulting features.
While the Company does not build computer-generated image visual systems, it
has extensive experience in integrating visual systems produced by other
companies into its simulators. The breadth of Reflectone's experience permits
it to assume full responsibility for all or any part of the design
specification, procurement and integration efforts, including hardware
upgrades and software enhancements, as well as overall responsibility for
final performance of the simulator/visual system combination. The RUKL
acquisition expanded the products of the Training Devices Segment to include
tactical air defense trainers, electronic warfare training systems and visual
air traffic control simulators. In addition, RUKL has provided the Company with
valuable international marketing synergies, especially with respect to
international government customers, for both the Company's new and traditional
product lines.
The Company's commercial simulator product development has been in
support of both British Aerospace aircraft and certain other commercial
aircraft. The Company actively pursues opportunities for commercial training
devices in both domestic and international markets. Management believes that
the production of simulators for British Aerospace has enhanced the Company's
standing in the commercial simulator market. This work has included the design
and development of international flight simulation Acceptance Test Guides
("ATG") to meet specified performance standards, automatic lesson plan
instructional features, glass cockpit presentations, global navigation systems,
color weather radar presentations, wind shear and Terrain Collision Avoidance
Systems ("TCAS"), and dual purpose cockpit procedures simulators. Most of the
Company's commercial simulators are built to both customer
4
<PAGE> 106
specifications and the standards of the Federal Aviation Administration ("FAA")
Advanced Simulation Plan or other applicable international governmental
standards.
The Company continues to apply flight simulation technology to the
entertainment and leisure industry. Its engineering and manufacturing expertise
enable it to offer a broad range of motion based ride simulators in a variety
of configurations and guest capacities, including small pods, multi-seat closed
and open capsule styles, and multi-sensory theater systems, complete with
hardware and software, custom theming and special effects. The Company can
provide show components for an attraction, or deliver a turnkey attraction
from concept to installation. In addition to its simulation products, the
Company provides project management, concept design, prototype development,
manufacturing and installation services for the entertainment industry.
The Company incurs research and development costs under both
independent Company initiated programs and customer funded programs. Research
and development costs incurred under independent Company initiated programs
approximated $2.85 million, $777,000 and $1.0 million for the years ended
December 31, 1996, 1995 and 1994, respectively. In 1996 expenditures for
research and development primarily related to a multi-year research and
development program to develop low-cost and reconfigurable training devices.
This program was initiated by customer demand for low-cost, limited-fidelity
devices that can serve multiple training functions for use in multi-ship
collective training or unit training of battlefield tactical/engagement skills.
TRAINING SERVICES. The Company's Training Services Segment is composed
of three divisions: Military Training Systems; Reflectone Training
Center-Tampa; and the Dulles Training Center. The Military Training Systems
Division was formed in response to a growing military market for contractor
provided flight training services. This Division's business has recently been
focused on contracts requiring the Company to provide flight simulator
instruction, simulator maintenance and repair services, and courseware
development at military bases. The Military Training Systems Division provides
flight simulator manpower services at Air Force, Army, Navy and Marine Corps Air
Stations throughout the United States and one Marine Corps Air Station in
Japan.
The Reflectone Training Center-Tampa provides a full-service training
facility which includes classroom and simulator training for both C-130H flight
and ground crews. Using state-of-the-art teaching aids, aircrews receive
initial, refresher and pilot upgrade training courses including engine
operation, crew resource management, and maintenance practices. The Tampa
Center currently operates two C-130H flight simulators. One of the devices is
leased by the Company under a 12 year operating lease, and the second device is
being stored by the Company under an agreement with a customer until the
customer's facility which will house the device is completed. To defray storage
costs, the agreement provides that the Company may sell training time on the
device. Factors affecting shipment of this simulator are being negotiated with
the customer.
The Dulles Training Center is a British Aerospace-owned facility which
the Company has managed and operated since April 1, 1993 under an agreement
with British Aerospace. The Dulles Center is located near Washington, D.C.'s
Dulles International Airport and houses three full-flight simulators used to
train pilots of commercial airlines and corporations. One of the simulators, a
Jetstream 41 simulator, was owned by the Company until December 21, 1995 when
it was sold to British Aerospace for $8.6 million. The other two simulators (a
Jetstream 31/32 and a BAe 146-200/300, both of which were manufactured by the
Company) are also provided by British Aerospace. Prior to January 1, 1996, the
management agreement required the Company to pay to British Aerospace a fee
based, in part, on the achievement of specified levels of revenues on the
British Aerospace owned simulators. Effective on January 1, 1996, under the
terms of a revised management agreement, the Company receives a fixed fee of
$500,000 annually and is reimbursed by British Aerospace for the Company's
costs associated with the Dulles Center.
5
<PAGE> 107
SYSTEMS MANAGEMENT. The Company's Systems Management Segment was
formed to pursue opportunities to develop, operate and maintain complex flight
training systems which require the services of both the Training Devices and
Training Services Segments and sometimes major subcontractors. Such contracts
can involve the design, development and production of hardware and software
associated with flight simulators, flight training devices and cockpit
procedures trainers; formation of a training syllabus and interactive
computer-aided instructional systems with instructors to provide full-flight
crew training for specified aircraft, and/or complete training system operation
and maintenance.
BACKLOG
The Company's contractual backlog was $129.9 million at December 31,
1996, representing a $8.8 million increase from the $121.1 million level at
December 31, 1995. Contractual backlog for RUKL, included in the Training
Devices Segment backlog, approximated $46.4 million at December 31, 1996,
compared to $61.1 million at December 31, 1995. The contractual backlog at
December 31, 1996, was comprised of approximately 80.5%, 12.1% and 7.4% of
Training Devices, Training Services and Systems Management programs,
respectively, exclusive of intersegment work. In addition, 14.8% of contractual
backlog at December 31, 1996, consisted of United States Government prime
contracts and subcontracts as compared to 17.8% at December 31, 1995.
Approximately 23.1% of the contractual backlog at December 31, 1996 is not
reasonably expected to be realized as revenues in 1997. See also Item 7,
Management's Discussion and Analysis of Financial Condition and Results of
Operations for further discussion of changes in the Company's backlog.
U.S. Government contracts are subject to termination at the election
of the government and contain specific procedures for equitable settlement in
the event of termination. It is not possible to predict whether, or to what
extent, the present backlog may be reduced or postponed in the event of
reductions or changes in U.S. Government programs. Some U.S. Government
contracts contain fixed price options for future performance and are subject to
exercise by the government within specified time periods. These options are not
included in the Company's contractual backlog.
BRITISH AEROSPACE RELATIONSHIP
As a result of transactions occurring between 1987 and 1989, British
Aerospace holds an aggregate of 1,375,000 shares at December 31, 1996, or
approximately 48.0%, of the Company's common stock, and 50,000 shares of
preferred stock which are convertible into an additional 500,000 shares of
common stock. During 1995, British Aerospace was granted warrants to purchase
78,261 shares of the Company's common stock at any time prior to August 7,
2005. If British Aerospace were to convert its preferred shares to common
shares and to exercise its warrants, British Aerospace would beneficially own
56.7% of the Company's then-outstanding shares of common stock, assuming no
shares were otherwise acquired or disposed of by British Aerospace, and no
additional shares were issued or reacquired by the Company.
As the holder of nearly 50% of the outstanding shares of the Company's
common stock, British Aerospace effectively has the power to determine the
membership of the Company's Board of Directors; however, British Aerospace is
subject to restrictions contained in a Special Security Agreement ("SSA")
between the Company, British Aerospace and the United States Department of
Defense. Under the terms of the SSA, only three of a total of eight directors
may have a past or present affiliation with British Aerospace. In addition as a
result of their significant ownership in the Company, British Aerospace
effectively has the power to decide other matters submitted for shareholder
approval.
Management believes that the Company's relationship with British
Aerospace has expanded its access to international markets, as well as provided
the Company with the opportunity to assist a major airframe manufacturer with
its internal simulation requirements. This, in turn, has strengthened
Reflectone's capacity to serve its existing military and commercial markets,
and provided collaborative access to an expanding European market for
simulation and training systems.
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<PAGE> 108
For further discussion of the Company's relationship with British
Aerospace, including discussion of financing arrangements which British
Aerospace provides or guarantees, see Item 7, Management's Discussion and
Analysis of Financial Condition and Results of Operations, and Notes 4, 10 and
13, to the Consolidated Financial Statements included in Item 14.
CUSTOMERS
U.S. Government prime contracts and subcontracts accounted for
approximately 31.9% of the Company's consolidated revenues for the year ended
December 31, 1996. The Company's business is conducted under complex terms and
conditions involving changing technology, and is subject to intense competition
and many uncertainties, including the risks inherent in fixed price contracts.
In addition, government-related business is affected by rapidly changing
program needs and is sometimes dependent upon levels of government spending and
program funding. At December 31, 1996, approximately $19.2 million of the
Company's contractual backlog was attributable to U.S. Government programs.
Contracts between the Company and British Aerospace accounted for
approximately 24.3% of consolidated revenues for the year ended December 31,
1996. The terms and conditions of the contracts with British Aerospace are
comparable to those with unrelated commercial customers. At December 31, 1996,
approximately $18.9 million of the Company's contractual backlog was
attributable to British Aerospace programs.
During 1995 the Company was awarded a major contract from Lockheed
Martin Corporation ("LMC"), worth approximately $77.0 million for delivery of
two dynamic mission simulators, other training devices and a training facility
in 1997 and with training and maintenance services extending into the year
2002. At December 31, 1996, approximately $40.5 million of the Company's
contractual backlog was attributable to the C-130J programs with LMC.
Financial information about foreign and domestic operations and export
sales is included in Note 12 to the Consolidated Financial Statements which are
included in Part IV of this Report.
COMPETITION
TRAINING DEVICES. Competitive conditions remain keen in the flight
simulator and training device field, which is led by CAE Industries, Ltd. of
Canada, Thomson CSF of France and Hughes Aircraft Corporation. Many of the
Company's competitors have substantially greater financial and other resources
than the Company. The focus of competition in the simulation training devices
industry is not only price, but also the capacity to apply a broad range of
technologies, including avionics, electronics, hydraulics, audio and visual
effects, and computer programming and control. In addition, competition on
larger programs often focus on the capacity to provide a "total training
system" approach, emphasizing curriculum development and simulator currency in
parallel with the development of the primary weapons platform or aircraft
system.
Competition in the entertainment market for large capacity three- and
six-degrees-of-freedom motion-based simulation products includes traditional
flight simulator companies. Competition for lower-cost, less complex, moving
seat technology-based rides includes various large and small competitors with
backgrounds from a variety of industries.
Performance history and product quality, particularly with respect to
cost and schedule performance, have become significant competitive
discriminators for both government and commercial business. In recognition of
its commitment to Total Quality Management, the Company has been certified to
be in compliance with International Standards Organization 9001 Quality System
Standard ("ISO 9001").
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In addition to its individual marketing initiatives, the Company
continues to seek to exploit opportunities for the sale of its technology and
capability as a team member with other contractors for major United States and
international military contracts.
Reflectone's ability to be competitive in its Training Devices Segment
is based upon its expertise in the fields of fixed-wing and helicopter
simulation, its three- and six-degrees-of-freedom motion systems, its ability
to manage major subcontractors in engineering disciplines outside its own
capabilities, and its experience in contractor logistics support.
TRAINING SERVICES. Competition for contracts requiring the contractor
to provide maintenance and/or flight simulator and ground support instruction
at both customer and company-owned training centers is intense and involves a
broad range of companies with varying levels of capabilities. Primarily as a
result of this intense competition, the company which provides the lowest-price
solution to the customer's requirements is generally successful in receiving
the award. As evidenced by awards in the past several years, management
believes that the Company is well positioned to pursue opportunities to provide
training services in this cost competitive market.
SYSTEMS MANAGEMENT. Competition for large total training system
programs has traditionally been concentrated in the large aerospace companies
such as Lockheed Martin Corporation, McDonnell-Douglas, and Hughes Aircraft
Corporation. These large aerospace companies often team with niche suppliers
to provide comprehensive solutions in response to highly complex proposal
requests, and the Company continues to pursue opportunities to selectively
participate in such teaming arrangements.
EMPLOYEES
As of December 31, 1996, the Company had a total of 785 full-time
employees. Of this total, 103 (13%) were in engineering and project management,
146 (19%) were in manufacturing and quality assurance, 94 (12%) were in
administrative support, 364 (46%) were associated with RTS training activities
and 78 (10%) were employed by RUKL in the United Kingdom.
ITEM 2. PROPERTIES
Reflectone leases a building in Tampa, Florida, containing
approximately 210,000 square feet of useable floor space under leases which
expire in 1999. Reflectone also leases approximately two acres of land adjacent
to its present facility, which may be used for future expansion requirements.
Both the building and land leases have provisions for subsequent five-year
renewal periods. The Company considers its present facilities and expansion
land adequate for its immediate and foreseeable needs. The Company's executive
offices and main facilities are located at 4908 Tampa West Blvd., Tampa,
Florida 33634.
The Company leases from British Aerospace approximately 22,000 square
feet of usable floor space at its RUKL operations in Filton, England.
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<PAGE> 110
ITEM 3. LEGAL PROCEEDINGS
In January 1991, the Company filed a Notice of Appeal with the Armed
Services Board of Contract Appeals ("ASBCA") in response to a final decision by
a U.S. Government Contracting Officer denying the Company's claim in excess of
$10 million on a contract with the United States Air Force for C-141/C-5 Aerial
Refueling Part Task Trainers. The primary basis of the Company's claim was
that performance under the contract was commercially impracticable in that it
required technology beyond the state-of-the-art, and that the Government had
superior knowledge in this regard prior to contract award which it failed to
divulge to the Company. The case is complex and factually intensive and thereby
reliant on extensive factual and expert testimony. A formal claim hearing was
completed in March 1994 before the ASBCA judge assigned, and a decision on
entitlement continues to be delayed by the ASBCA judge, but is expected during
1997. For further discussion of the financial treatment of these costs in the
Consolidated Financial Statements and the financial effects of a future
resolution of this matter see Item 7, Management's Discussion and Analysis of
Financial Condition and Results of Operations, and Note 2 to the Consolidated
Financial Statements included in Item 14.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the
fourth quarter of the year covered by this report.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
No cash dividends have been paid on the Company's common stock during
the last two years. The Company is prohibited from paying any cash dividends on
its common stock if any dividends on the preferred stock owned by British
Aerospace are accrued but unpaid. The payment of future dividends, if any, on
the Company's common stock and the amount thereof will be dependent upon the
Company's earnings, financial requirements, and other factors deemed relevant
by the Company's Board of Directors. The Company's common stock is quoted on
the Nasdaq National Market under the symbol "RFTN". The following table sets
forth the quarterly high and low closing sale prices for the last two years:
<TABLE>
<CAPTION>
1996 1995
---------------- -----------------
Quarter High Low High Low
------- ------ ------ ------ ------
<S> <C> <C> <C> <C>
First 19 13-3/4 11-1/2 8
Second 22-1/2 17-1/2 10-3/4 9-1/2
Third 22-3/4 18-3/4 13-3/4 9-1/2
Fourth 22 17-1/4 14-5/8 13-1/8
</TABLE>
There were approximately 397 shareholders of record of the Company's
common stock as of February 25, 1997, on which date the closing sale price for
the common stock as reported on the Nasdaq National Market was $23.13 per
share.
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ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data for the five years in the period
ended December 31, 1996 have been derived from the Company's Consolidated
Financial Statements.
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------------------------------------
1996 1995 1994 1993 1992
- -----------------------------------------------------------------------------------------------------------------------
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues $ 100,269 $93,524 $ 65,138 $63,118 $66,651
Income (loss) from operations 7,659 7,195 (1,908) 3,106 (1,003)
Interest income 590 734 244 229 438
Interest expense 387 2,412 1,193 324 549
Foreign currency transaction
gain (loss) 465 (97) (63) 61 (231)
Net income (loss) 7,762 4,542 (3,049) 3,093 (1,690)
Net income (loss) applicable
to common shareholders 7,058 3,838 (3,753) 2,389 (2,394)
- -----------------------------------------------------------------------------------------------------------------------
PER SHARE DATA:(1)
Net income (loss) per common
and common equivalent shares:
Primary $ 2.38 $ 1.36 $ (1.35) $ .86 $ (.88)
Fully Diluted $ 2.23 - - - -
BALANCE SHEET DATA:
Working capital (deficit) $ 12,564 $ 3,156 $(13,365) $(5,527) $(5,866)
Current ratio 1.28 1.09 .74 .84 .83
Property, plant & equipment, net $ 9,236 $ 7,882 $ 17,428 $18,624 $11,208
Total assets $ 69,081 $50,724 $ 63,794 $47,090 $40,985
Shareholders' equity $ 21,759 $13,976 $ 9,562 $13,247 $ 6,253
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Per share data is based upon the weighted average number of shares
outstanding retroactively adjusted to reflect a 25% stock dividend
issued in September 1993. The calculation for all fiscal periods
reflects the assumed exercise of outstanding stock options and
warrants using the treasury stock method if the effect would be
dilutive. Fully diluted per share data is not disclosed for 1995
through 1992 since the effect was antidilutive.
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<PAGE> 112
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction
with the Company's Consolidated Financial Statements and notes thereto included
elsewhere herein.
The Company has various relationships, contracts and agreements with
British Aerospace, Plc. ("BAe") and its direct and indirect subsidiaries
(herein collectively referred to as "British Aerospace"). Approximately 48.0%
of the common stock of the Company is owned by British Aerospace Holdings, Inc.
("BAeHI"), a wholly owned subsidiary of BAe.
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 and the
issuance of equity securities.
Net cash generated from operating activities during 1996 was $5.3
million, compared to $16.0 million in 1995. During 1996, cash was generated
primarily by net income plus noncash-expending depreciation and amortization,
and minus deferred income taxes; increases in advance billings, and
other accrued expenses and liabilities. Increases in non-affiliate and
affiliate receivables partially offset the cash generated. During 1995, cash
was generated primarily by net income plus noncash-expending depreciation
and amortization, and minus deferred income taxes; increases in advance
billings, accounts payable, and accrued employee compensation and benefits; and
reductions in inventory and affiliate receivables. Increases in non-affiliate
receivables and reductions in other accrued expenses and liabilities partially
offset the cash generated.
Capital expenditures during 1996 include approximately $1.2 million
for the implementation of new fully integrated manufacturing and financial
information systems. The significant capital expenditures during 1994 primarily
related to the construction of two simulators used in the Company's Tampa
Training Center and the British Aerospace owned training center managed by the
Company. Based on current plans for capital expenditures, management does not
anticipate constructing full flight simulators for its training centers during
1997.
In December 1995, the Company sold to British Aerospace, the
Company-owned Jetstream 41 simulator used in the British Aerospace-owned Dulles
Training Center for $8.6 million. In December 1994, the Company completed a
sale and leaseback of the Company-owned C-130H full flight simulator utilized
in the Tampa Training Center. Under the terms of the lease agreement, the
Company was required to escrow $5.0 million of the $10.0 million proceeds from
the transaction to be held as collateral in the event of a default under the
lease agreement. Under the terms of the lease agreement, $3.0 million is
scheduled to be released from escrow in early 1997 based on the Company's
attainment of certain income and net worth levels at December 31, 1996. The
remaining $2.0 million will be released over the term of the lease. Rental
payments under the lease approximate $1.4 million annually.
During the year ended December 31, 1996, the Company increased its
cash by $3.8 million. During the same period, gross borrowings of $277.6
million, and funding from operating activities were used to fund $279.5
million in scheduled maturities of borrowings under the Company's credit
facilities, resulting in a reduction in its short-term borrowings by $1.8
million.
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<PAGE> 113
During the year ended December 31, 1995, the Company reduced its cash
by $2.7 million. During the same period, gross borrowings of $191.4 million,
reductions in cash balances and cash provided by the sale of the Company-owned
Jetstream 41 simulator and cash flows from operating activities were used to
fund $217.6 million in scheduled maturities of borrowings under the Company's
credit facilities, resulting in a reduction in its short-term borrowings by
$26.2 million.
To date the Company has been unable to obtain adequate financing on
acceptable terms without recourse to British Aerospace. However, pursuant to
the terms and conditions contained in the Agreement for Credit Availability
dated as of November 20, 1996, British Aerospace has agreed to continue to
provide or guarantee the Company's current credit facilities at their current
levels 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 January 31, 1997, 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 4 to the Consolidated Financial Statements.
As discussed in Note 4 to the Company's 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 United Kingdom (UK) C-130J contract with LMC. At December 31,
1996, the Company had $4.3 million drawn under the C-130J Facility. Draws
under this facility are limited to actual costs incurred by the Company and RUKL
on the UK C-130J program. By means of a letter dated January 31, 1997,
British Aerospace has 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 UK C-130J program until payment is received from LMC for delivery of the
training system. During 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. Based on current schedules, the contract is estimated to
require additional funding during 1997 of $22.0 million prior to LMC's payments
for delivery of the training system. 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 Note 2 to the Consolidated Financial Statements,
management has not assumed recovery of certain costs incurred arising out of
customer-occasioned contract delays or for work performed but not specified in
express contract provisions. Therefore, while any and all recoveries are
subject to future negotiations, actual recoveries would represent an additional
capital resource to the Company.
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<PAGE> 114
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; and future income tax benefits in the
United Kingdom, 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 $6.7 million, or 7.2% during 1996
as compared to 1995, which reflected a 43.6% increase from the 1994 year.
Revenues of the Training Devices Segment inclusive of intersegment
transactions, increased by $17.6 million, or 36.0% during 1996 as compared to
1995, which represented an 81.1% increase from 1994. Revenues of the Training
Devices Segment during 1996 and 1995 included approximately $27.6 million and
$15.1 million, respectively, from the 1995 award of the LMC C-130J program.
Affiliate revenues of the Training Devices Segment were $7.0 million higher in
1996 compared to 1995 and $5.2 million higher in 1995 compared to 1994. The
1996 and 1995 increases in affiliate revenues reflect revenues from three
programs in varying stages of completion for the construction of commercial
aircraft simulators.
Revenues of the Training Services Segment inclusive of intersegment
transactions, decreased by $8.4 million, or 21.7% during 1996 as compared to
1995, which represented a 15.9% increase from 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 1996
decrease in revenues of the Training Services Segment relates to the 1995 loss
of reprocurements relating to four training services contracts in which the
Company was the incumbent contractor, and 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 receives a fixed fee of $500,000 annually and is reimbursed by
British Aerospace for the Company's costs associated with the Dulles Training
Center. The increase in revenues of the Training Services Segment in 1995 was
primarily the result of increased revenues on contracts with the U.S.
Government and revenues earned on the Jetstream 41 simulator installed during
1995 at the British Aerospace-owned, Company-managed training center near
Dulles International Airport.
Revenues of the Systems Management Segment decreased by $7.1 million,
or 55.6% during 1996 as compared to 1995, which reflected a $3.6 million, or
39.5% increase from 1994. The Systems Management Segment manages complex
programs requiring the services of both the Training Devices and Training
Services segments. The 1996 and 1995 revenues primarily relate to the 1995
award of a contract from an affiliate for a C-130H simulator for ultimate
delivery to an international customer. The higher 1995 revenues include the
recognition of revenues resulting from the recognition by this program of the
cost of a partially completed full flight simulator previously held in
inventory.
The Company's income (loss) from operations was $7.7 million, $7.2
million and ($1.9) million in 1996, 1995 and 1994, respectively. The 1996
increase in income from operations reflects increased profitability in the
Company's Training Devices Segment partially offset by decreases in operating
profits of the Training Services and Systems Management Segments.
The income (loss) before income taxes of the Training Devices Segment
was $6.8 million, $3.1 million and ($786,000) for the years ended December 31,
1996, 1995 and 1994, respectively. The 1996 operating results of the Training
Devices Segment reflect the favorable results associated with the achievement
of critical program milestones, primarily on two large international military
programs, three affiliate programs for commercial aircraft simulators, and a
domestic military program. These favorable results were, in part, offset by a
charge of $2.0 million to operations for estimated losses on a recently awarded
international military program. The 1996 and 1995 operating results also
include charges of $1.4 million and $1.6 million, respectively, reflecting a
reduction in management's estimate of amounts
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<PAGE> 115
recoverable from customers for customer-occasioned contract delays and work
performed but not specified in express contract provisions. The 1996 charge was
partially offset by a $1.1 million reduction in the settlement expenses accrued
in prior years to resolve these matters. Operating profits of the Training
Devices Segment often reflect large profit margin swings as a result of profit
recognition occurring late in the lives of programs with developmental risk.
Profit recognition on developmental programs results from revisions to
management's risk assessments based on evaluations of each program's status at
critical program milestones. Operating results of the Training Devices Segment
for the years ended December 31, 1996, 1995 and 1994, include income (losses)
before income taxes of RUKL of $311,000, $36,000 and ($1.7 million),
respectively. The increased profitability of RUKL results from the recognition
of profits on several smaller programs and increased business base to absorb
indirect costs. The losses of RUKL in 1994 primarily resulted from the
recording of loss provisions due to escalations of costs on three large
prototype programs to develop tactical air defense trainers. These programs
were completed during 1995. The 1994 operating results of the Training Devices
Segment also reflect losses resulting from insufficient business base to fully
absorb indirect costs of the Company's Tampa operation and RUKL.
The income before income taxes of the Training Services Segment was
$4.0 million, $5.0 million and $4.9 million for the years ended December 31,
1996, 1995 and 1994, respectively. The reduced profitability in 1996 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.
The income (loss) before income taxes of the Systems Management
Segment was $990,000, $2.5 million and ($662,000) for the years ended December
31, 1996, 1995 and 1994, respectively. The 1996 and 1995 operating profits
reflect profit recognition on a contract with an affiliate awarded in 1995. The
1994 operating losses reflect the recognition of program losses on a large
international program.
The income (loss) before income taxes in 1994 was also 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 from customers for customer-occasioned contract
delays and work performed but not specified in express contract provisions.
Interest income approximated $590,000, $734,000 and $244,000 during
1996, 1995 and 1994, respectively. Interest income is primarily interest
earned on long-term notes receivable, restricted investments and temporary cash
investments. The decrease in interest income during 1996 primarily relates to
the 1996 first quarter settlement of a long-term note receivable.
Interest expense for 1996 approximated $387,000 as compared to $2.4
million for 1995 and $1.2 million for 1994. The reduction in interest expense
during 1996 results from lower average levels of borrowings as compared to the
previous year. In addition, during 1996, interest costs of $1.6 million
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. In the comparable period in 1995, interest cost charged to the C-130J
program approximated $306,000. Interest expense in 1995 increased by $1.2
million over 1994's amount primarily as a result of higher borrowings
outstanding during the year and higher interest rates on those borrowings.
The provision for income taxes during 1996 and 1995 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
carryforwards to reduce taxable income and investment tax credits to reduce the
tax provision. In 1994, 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 carryforwards also contributed
to the difference in the provision for income taxes from the federal statutory
tax rate. During 1996 and 1995, the Company recorded deferred tax benefits of
$1.5 million and $1.1 million, respectively, for which recovery in future
periods is not dependent upon future taxable income. At December 31, 1996,
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<PAGE> 116
the Company had available net operating loss carryforwards in the United
Kingdom of $3.2 million, which can generally be carried forward indefinitely.
Specific discussion of the Company's income tax provision and net deferred tax
assets is included in Note 5 to the Consolidated Financial Statements.
BACKLOG
Contractual backlog increased to $129.9 million at December 31, 1996,
from $121.1 million at December 31, 1995. Of the contractual backlog at
December 31, 1996, 80.5% consisted of orders of the Training Devices Segment,
12.1% consisted of orders of the Training Services Segment and 7.4% consisted
of orders of the Systems Management Segment. This compares to 71.3%, 15.6% and
13.1%, respectively at December 31, 1995. Contractual backlog for RUKL,
included in the Training Devices Segment backlog, was $46.4 million at December
31, 1996 compared to $61.1 million at December 31, 1995. The contractual
backlog of RUKL includes $38.8 million at December 31, 1996 related to the UK
C-130J program with LMC. Contractual backlog of the Systems Management Segment
at December 31, 1996 and 1995 primarily represents the 1995 award of a contract
from an affiliate to manufacture a C-130H simulator for ultimate delivery to an
international customer and to provide related maintenance support and training
services. Contract awards within the Training Services Segment to provide
training to U.S. Military personnel are generally awarded annually and recorded
during the fourth calendar quarter. This results in a declining backlog for the
Training Services Segment during the first three calendar quarters. The Company
faces intense competition for training services contracts, and the company
providing the lowest-price solution to the customer's requirements is
generally successful in receiving the award. Despite recent losses in
competitive procurements for training service contracts, management believes
that the Company is well positioned to continue to pursue opportunities to
provide training services in this cost competitive market. 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. This teaming arrangement with LMC resulted in an award
during 1995 worth $77.0 million, and subsequently increased to $81.5 million.
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
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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 its 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. In 1996,
the Company recorded foreign currency gains of approximately $465,000 for
unhedged exposures resulting from changes in the actual timing of program
payments from those forecasted and hedged. During 1995 and 1994, the Company
similarly recorded losses of approximately $97,000 and $63,000, respectively,
related to these activities.
The Company has entered into contracts to buy forward British pounds
with an equivalent value of $4.3 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 through 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.
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 Annual Report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information for this Item has been filed as Item 14(a)(1) in Part
IV of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
16
<PAGE> 118
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table shows the names and ages of the Company's
executive officers and directors, and the positions and offices with the
Company currently held by each of them:
<TABLE>
<CAPTION>
Name Age Present Position
---- --- ----------------
<S> <C> <C>
Richard G. Snyder 64 President, Chief Executive Officer and Director
Anthony S. Brancato 60 Executive Vice President-International Military
Marketing and Training Services
Richard W. Welshhans 50 Vice President, Chief Financial Officer and Secretary
Derek R. Alden 52 Vice President-Commercial and Entertainment Products
Robert D. Webster 54 Vice President-Operations
Kelley L. Rexroad 39 Vice President-Human Resources
Paul G. Waring, Jr. 35 Corporate Controller and Treasurer
Edward W. Bettke 69 Director
David R. Fish 49 Director
Sydney Gillibrand 62 Director
Paul L. Harris 51 Director
Robert F. Schoultz 72 Director
Dale R. States 69 Director
Stella F. Thayer 56 Director and Chairman of the Board
</TABLE>
The following sets forth a summary of the business experience, during
at least the most recent five years, of each executive officer and director of
the Company:
Richard G. Snyder was elected to the Board of Directors and appointed
as President and Chief Executive Officer in February 1990. He also serves on
the Government Security Committee. In September 1994, Mr. Snyder was elected to
the Board of Directors of Cleaners Hangers Co., a wire hanger and products
company. From 1985 until he joined the Company, Mr. Snyder served as President
of the Link Tactical Simulation Division of CAE Industries, Ltd., a major
producer of commercial and military simulation and training devices. For the 30
years between 1954 and 1985, Mr. Snyder served in various capacities with the
Kearfott Division of General Precision, Inc., which was acquired by the Singer
Company, and the Link Tactical Simulation Division of The Singer Company (which
Division was acquired by CAE Industries, Inc.). His experience in these
positions included broad responsibilities for missile and space programs,
international business development, program management and contracts.
Anthony S. Brancato was elected Executive Vice President-Training
Services of the Company in September 1990. From 1988 to 1990, Mr. Brancato
served as Executive Vice President-Operations of the Company; from 1987 to 1988
as Senior Vice President of RTS; and from 1979 to 1987 as Vice
President-Program Management of the Company.
Richard W. Welshhans was elected Chief Financial Officer and Secretary
of the Company in August 1988, in addition to the position of Vice
President-Finance that he held since 1987 and the position of Treasurer that he
held until 1995. From 1984 to 1987 he served as Treasurer and Controller of the
Company.
17
<PAGE> 119
Derek R. Alden was elected Vice President-Commercial and Entertainment
Products in April 1994. From 1990 to 1994 he served as Vice
President-Engineering. Between 1975 and his joining the Company, Mr. Alden
served in a number of marketing and engineering capacities with various
divisions of The Singer Company, at that time a major producer of aircraft
simulation and training devices. Most recently Mr. Alden held the position of
Director Marketing/Business Development.
Robert D. Webster joined the Company as Vice President-Operations in
September 1990. During the previous 15 years Mr. Webster held various positions
with Lockheed-Sanders, a company that primarily manufactures countermeasure
equipment for the U.S. Government, last serving as Director of Manufacturing
for its Operations Division.
Kelley L. Rexroad was appointed Vice President-Human Resources in
August 1992. Since joining the Company in 1990, Ms. Rexroad has served in
various capacities within the Company's Human Resources Department, including
service as its Senior Director from March through August 1992. Previously, she
held increasingly responsible positions at Link Tactical Simulation, a division
of then, The Singer Company, in its Public Relations and Human Resources
Departments.
Paul G. Waring, Jr. was elected Treasurer in November 1995, in
addition to the position of Corporate Controller that he held since 1993.
Previously, Mr. Waring worked nine years with Coopers & Lybrand L.L.P., most
recently as Business Assurance Manager.
Edward W. Bettke has served as a director of the Company since 1981
and is the Chairman of the Audit Committee and a member of the Compensation and
Government Security Committees. Mr. Bettke is the former Vice
President-Finance and Treasurer of Wyman-Gordon Company, having resigned that
position in 1987, in contemplation of his retirement in 1988. Mr. Bettke was
also a director of Wyman-Gordon Company until 1988. Wyman-Gordon Company is
engaged principally in the engineering, production and marketing of technically
advanced forgings. Mr. Bettke had been associated with Wyman-Gordon since
1954. Mr. Bettke was also a director of Quabaug Corporation and regional
director of Shawmut Bank, N.A. until 1995. Mr. Bettke is 69 years old.
David R. Fish has served as a director of the Company since August 3,
1995 and is a member of the Audit and Compensation Committees. Mr. Fish joined
British Aerospace in 1967 and served in a number of senior positions before
appointment to his current position of Finance Director of the Systems and
Services Division of British Aerospace Defence Ltd., a wholly-owned subsidiary
of British Aerospace Plc. Mr. Fish is 49 years old.
Sydney Gillibrand has served as a director of the Company since August
3, 1995 and is a member of the Compensation Committee. Mr. Gillibrand was first
employed by British Aerospace in 1950 and held a number of senior positions in
production, engineering and international affairs throughout his employment. He
was elected to the Board of British Aerospace Plc. in 1987 and most recently,
Mr. Gillibrand was Vice Chairman of the Board of Directors of British Aerospace
Plc., a position he retired from in June 1995. Mr. Gillibrand is a
non-executive director of AMEC Plc., LUCAS Industries Plc. and ICL Plc. Mr.
Gillibrand is 62 years old.
18
<PAGE> 120
Paul L. Harris, a United States citizen, has served as a director
of the Company since June, 1996, and is Chairman of the Compensation Committee
and a member of the Audit Committee. He is Senior Vice President and General
Manager of British Aerospace Holdings, Inc. and is responsible for managing the
company's investments in North America. From 1989-1992 Mr. Harris served as
Finance Director of the Commercial Aircraft Division of British Aerospace in
London. He currently serves on the Board of Governors of the National Aviation
Club in Washington, D.C. and on the Board of Directors of the Washington Dulles
Task Force. Mr. Harris is 51 years old.
Robert F. Schoultz has served as a director of the Company since 1990
and is a member of the Compensation and Government Security Committees. Since
1987, Mr. Schoultz has served as President of Rosco, Inc., a consulting firm
providing design, procurement strategy and marketing guidance to firms within
the aerospace industry. Prior to that time, Mr. Schoultz enjoyed a
distinguished career in the United States Navy, from which he retired with the
rank of Vice Admiral after serving as the U.S. Commander Eastern Atlantic, and
Deputy Commander in Chief, U.S. Naval Forces, Europe. Mr. Schoultz is 72 years
old.
Dale R. States has served as a director of the Company since 1989 and
as a member of the Audit and Compensation Committees and the Chairman of the
Government Security Committee. In January 1995, Mr. States was appointed
President of Air 4000, Inc. During 1994 and 1995, Mr. States was a director and
served in the position of Chief Technical Officer of Astraea Aviation Services,
d/b/a Dalfort Aviation, an aircraft maintenance and modification company.
During 1992 and 1993, Mr. States was self-employed as a consultant to the
aerospace industry. From 1988 to 1992, Mr. States served as President of
Astraea Airline Services. Previously, Mr. States served as Executive Vice
President and General Manager of Dalfort Corporation, which at that time was
the parent company of Braniff, Inc., a major scheduled airline, and President
of Dalfort Aviation Services, a leading independent aircraft maintenance, fixed
base and training organization. Mr. States is 69 years old.
Stella F. Thayer has served as Chairman of the Board of the Company
since June 1992 and is a member of the Audit, Compensation and Government
Security Committees. Mrs. Thayer is a shareholder of the law firm of
Macfarlane, Ferguson and McMullen. She also serves as Chairman of the
Hillsborough County Aviation Authority. Mrs. Thayer also serves on the Board of
Directors of Lykes Energy, Inc. and Tampa Bay Downs, Inc. Mrs. Thayer is 56
years old.
There are no family relationships among any of the Company's executive
officers and directors. Executive officers of the Company serve at the pleasure
of the Board of Directors, subject to the terms of any employment agreements
with the Company. The term of office of each director of the Company ends at
the next annual meeting of the Company's shareholders or when his successor
is elected and qualified.
During 1996, the executive officers and directors of the Company filed
with the Securities and Exchange Commission ("the SEC") on a timely basis all
required reports relating to transactions involving equity securities of the
Company beneficially owned by them. The Company has relied on written
representation of executive officers and directors and copies of the reports
they have filed with the SEC in providing this information.
19
<PAGE> 121
ITEM 11. EXECUTIVE COMPENSATION
COMPENSATION COMMITTEE REPORT
The Compensation Committee of the Board of Directors of the Company
(the "Committee"), comprised solely of non-management directors of the
Company, is responsible for establishing and reviewing each component of the
total compensation of the executive officers of the Company and its
subsidiaries. Executive officer compensation decisions of the Committee are
submitted for approval to the full Board of Directors. The compensation
package of each executive officer of the Company is made up of three principal
components: base salary; annual variable incentive cash compensation; and
long-term incentive compensation. In establishing each of the components of the
compensation package for an executive officer, the Committee considers the
factors described below but also makes subjective determinations as to ultimate
compensation levels.
The following is a brief description of the Company's current
compensation system for executive officers.
In establishing and maintaining the compensation system for the
executive officers of the Company, the Committee makes use of a system in which
each executive office of the Company is assigned a Salary Grade range ("Salary
Grade") which, among other things corresponds to the level of responsibility
associated with the office. This Salary Grade system and the Salary Grade for
each executive officer within the Company was developed by the Committee in
1991 with the assistance of an independent compensation consultant and is
reviewed periodically by the Committee. Each executive officer of the Company
is assigned a Salary Grade upon employment by the Company (or in certain cases
upon the adoption of the Salary Grade system in 1991) based upon, among other
things, the individual responsibilities of the position. The Salary Grade of an
executive officer of the Company is subject to review and revision by the
Committee from time to time based upon the experience level of the officer and
any changes in the level of responsibility of the office.
BASE SALARY. For the purpose of determining the base salary component
of the Company's executive compensation program, the Committee (with the
initial assistance of an independent compensation consultant) assigned a salary
range for each Salary Grade. The Committee periodically reviews and revises
these salary ranges. In reviewing the applicable salary range for each Salary
Grade, the Committee considers, among other factors, salary ranges of
comparable positions on both a local and a national scale. The base salary for
each executive officer, and any increase or decrease therein, is determined and
re-evaluated by the Committee on an annual basis taking into account the
applicable salary range of the executive officer's designated Salary Grade and
in the case of each executive officer other than the Chief Executive Officer
after consideration of the recommendations of the Chief Executive Officer. In
establishing and revising the base salary of each executive officer within a
Salary Grade, the Committee considers, among other factors, the duties and
responsibilities of the position in relation to what individuals with
comparable responsibilities earn both locally and nationally, the individual's
experience and expertise in the specified disciplines and the individual's
annual performance evaluation.
During 1994 and early 1995, management and the Board of Directors of
the Company were concerned with delays experienced in the award of new programs
in the Company's Training Devices and Systems Management segments. As a part
of the response to the declining backlog and based upon the recommendation of
the management of the Company, the Committee delayed base salary increases in
1995 and continued from 1994 the temporary five percent reduction in base
salary of each executive officer of the Company whose base salary was in excess
of $50,000. Effective April 1, 1995, the temporary five percent reduction in
base salary was terminated and the increases in base salary were granted, based
primarily upon the booking of a significant program in the Company's Training
Device Segment.
20
<PAGE> 122
ANNUAL VARIABLE CASH INCENTIVE COMPENSATION. With the assistance of
an independent compensation consultant, in 1991, the Company established the
Reflectone, Inc. Variable Incentive Compensation Plan ("VICP Plan"), the stated
goals of which are to:
(1) Provide a direct incentive to executive management to improve
Company performance, thus tying management to Company goals,
values and shareholder interests.
(2) Reward and compensate executives for outstanding individual
performance.
(3) Compensate executives in a manner to maintain Reflectone's
competitive position in the marketplace.
The overall philosophy of the VICP Plan is that a specified portion of
each executive's compensation should be at risk subject to both Company and
individual performance, with higher Salary Grades having a higher percentage of
overall compensation at risk. Under the VICP Plan, executive officers of the
Company are paid cash bonuses based upon a pre-determined formula which takes
into account both objective and subjective measurements by the Committee. The
measurements include both individual performance and Company performance
measured against pre-determined performance goals approved by the Board. During
1996, VICP Plan Awards took into consideration the following factors of
Company performance, each of which were weighed equally: (i) bookings of new
business, (ii) income from operations and (iii) the net summation of cash and
borrowings at December 31, 1996. Based upon a review of the Company's
performance during 1996, the Committee established a 1996 performance factor of
1.14 within an overall range of zero to 1.20. Each executive officer of the
Company was then assigned an individual performance factor based upon a review
by the Chief Executive Officer and/or the Board of Directors.
LONG-TERM INCENTIVE COMPENSATION. Prior to 1997, the long-term
incentive component of the Company's compensation system consisted primarily of
the grant of incentive stock options. To date, stock options have been awarded
under the Company's 1994 Stock Option Plan, 1990 Stock Option Plan and 1982
Incentive Stock Option Plan, all of which have been approved by the
shareholders of the Company. Awards of stock options to date have been at the
discretion of the Committee taking into consideration numerous factors,
including the individual's Salary Grade, salary and performance. The Committee
granted stock options for an aggregate of 41,500 and 56,000 shares of common
stock in 1996 and 1995, respectively, under the Company's 1994 Stock Option
Plan.
Effective January 1, 1997, the Company established the Reflectone,
Inc. 1997 Long-Term Incentive Plan ("LTIP") to replace future grants of stock
options under the Company's 1994 Stock Option Plan. The objective of the LTIP
is to reward each executive of the Company for increasing the value of the
business as measured over a period of three years. Awards earned under the
plan are paid in cash, one-half after the completion of the three-year
performance period and one-half one year later. The LTIP provides for an award
pool consisting of a portion of the return on shareholders' equity above an 18%
three-year average return on equity. The award escalates with increases in the
average three-year return on equity to a maximum of 25% of the earnings above a
30% average return on equity. Based upon earnings forecasted in the Company's
strategic plans, the targeted award pool for the 1997 through 1999 period has
been established at $412,000. If earned, this award will be paid to the
executives one-half in each of the years 2000 and 2001.
21
<PAGE> 123
COMPENSATION OF THE CHIEF EXECUTIVE OFFICER. As with all executive
officers of the Company, Mr. Snyder's compensation consists primarily of base
salary, annual variable incentive cash compensation and long-term incentive
compensation in the form of stock options. Mr. Snyder's employment with the
Company is pursuant to a one-year employment agreement. Mr. Snyder's base
compensation was established pursuant to arm's-length negotiations between the
Company and Mr. Snyder in 1990 and is reviewed by both Mr. Snyder and the
Committee annually. Mr. Snyder's base salary was increased to $240,000 in 1996
from $205,000. During 1994 and until April 1995, Mr. Snyder was subject to the
temporary five percent salary reduction discussed above. Mr. Snyder's VICP
award for 1996 was established at $125,000 by the Committee taking into account
his performance and the overall performance of the Company. Mr. Snyder was
awarded 10,000 stock options in 1996 under the 1994 Stock Option Plan.
Paul L. Harris, Chairman
Stella F. Thayer
Edward W. Bettke
David R. Fish
Sydney Gillibrand
Robert F. Schoultz
Dale R. States
22
<PAGE> 124
The following table summarizes the annual compensation and long-term
compensation paid or accrued by the Company during the years indicated to the
Company's chief executive officer and the Company's other four most highly
compensated executive officers (the "Named Executive Officers"). The Company
did not grant any restricted stock awards or stock appreciation rights or make
any long-term incentive plan payments during the years indicated.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Long-Term
Compensation
Annual Compensation Awards
------------------------------------------------ ------------
Securities
Name Other Annual Underlying All Other
and Principal Position Year Salary(1) Bonus Compensation(2) Options Compensation(3)
- ---------------------- ---- --------- -------- --------------- ------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
PRESIDENT AND
CHIEF EXECUTIVE OFFICER
Richard G. Snyder(4) 1996 $238,665 $125,000 $10,916 10,000 $47,873
1995 202,047 106,600 11,969 14,000 45,669
1994 195,145 - 12,364 16,000 42,370
EXECUTIVE OFFICERS
Anthony S. Brancato 1996 148,845 52,200 - 5,500 18,424
Executive Vice President - 1995 141,433 53,800 - 8,500 14,318
International Military 1994 133,682 - - 8,000 10,263
Marketing and Training
Services
Frank T. Tobin, Sr. (5) 1996 144,594 47,900 - 5,500 16,219
Vice President - Military 1995 130,988 49,850 - 8,500 12,873
Products 1994 123,823 - - 8,000 9,226
Robert D. Webster 1996 141,740 46,900 - 5,500 15,197
Vice President - Operations 1995 131,822 47,050 - 8,500 12,146
1994 119,401 - - 8,000 8,257
Richard W. Welshhans 1996 124,250 38,600 - 5,000 13,045
Vice President, Chief 1995 117,978 37,600 - 8,000 10,598
Financial Officer and 1994 112,255 - - 8,000 7,443
Secretary
</TABLE>
_______________
(1) For a portion of 1994 and 1995 salaries reflect a temporary five
percent reduction as described in "Compensation Committee Report."
(2) Includes memberships and automobile allowance.
(3) Includes Company contributions to the Reflectone, Inc. Savings,
Investment and Employee Benefit Plan, supplemental retirement
arrangements, excess group term life insurance and additional
insurance policies.
(4) The Company has an agreement with Mr. Snyder, dated as of January 18,
1990, which provides for his employment and was recently extended for
another year, at a minimum annual compensation of $180,000. In
addition, the agreement provides for a $10,000 annual non-accountable
automobile allowance, a $500,000 term life insurance policy for the
benefit of the estate or other designated beneficiary of Mr. Snyder, a
supplemental long-term disability policy payable to age 65 such that a
total disability benefit would be at least $175,000 per year, and the
supplemental retirement benefits described at "Other Compensation
Arrangements - Supplemental Retirement Arrangements."
(5) Mr. Tobin's employment with the Company terminated on January 15,
1997.
23
<PAGE> 125
The following table sets forth information concerning options granted
during the year ended December 31, 1996, under the Company's 1994 Stock Option
Plan to the Named Executive Officers. The Company did not grant any stock
appreciation rights during the year.
<TABLE>
<CAPTION>
OPTION GRANTS IN LAST YEAR
Potential Realizable
Value at Assumed Annual
Rates
of Stock Price
Appreciation
Individual Grant for Option Term
---------------------------------------------------------------- -----------------------
Number of
Securities % of Total
Underlying Options Granted
Options to Employees in Exercise or
Granted Base Price Expiration
Name (#) 1996 ($/Share) Date 5% ($) 10% ($)
- ----------------------- ---------- --------------- ----------- ----------------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Richard G. Snyder 10,000 24.1% $18.50 February 13, 2006 $131,400 $342,800
Anthony S. Brancato 5,500 13.3 18.50 February 13, 2006 72,300 188,600
Frank T. Tobin, Sr. (2) 5,500 13.3 18.50 February 13, 2006 72,300 188,600
Robert D. Webster 5,500 13.3 18.50 February 13, 2006 72,300 188,600
Richard W. Welshhans 5,000 12.0 18.50 February 13, 2006 65,700 171,400
</TABLE>
________________________
(1) The dollar amounts under these columns are the result of calculations at
the hypothetical 5% and 10% rates set by the SEC and therefore are not
intended to forecast possible future appreciation, if any, of the
Company's common stock price. The option term is 10 years.
(2) Mr. Tobin's employment with the Company terminated on January 15, 1997.
The following table provides certain information concerning aggregate
stock option exercises in 1996 and stock option values as of December 31, 1996,
for unexercised stock options held by each of the Named Executive Officers. No
stock appreciation rights are outstanding.
<TABLE>
<CAPTION>
AGGREGATED OPTION EXERCISES LAST FISCAL YEAR AND
YEAR-END OPTION VALUES
Shares
Acquired on Number of Unexercised Value of Unexercised
Exercise Value Options at In-The-Money Options
Name (#) Realized Year End (#) at Year-End (1)
- ------------------------ ------------ ----------- ------------------------------ ------------------------------
Exercisable Unexercisable Exercisable Unexercisable
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Richard G. Snyder 75,000 $1,164,500 13,750 40,000 $155,375 $272,500
Anthony S. Brancato 5,000 93,750 14,875 22,000 172,875 148,375
Frank T. Tobin, Sr. (2) 5,000 49,000 - 22,000 - 148,375
Robert D. Webster 8,125 94,925 - 22,000 - 148,375
Richard W. Welshhans 4,375 49,438 - 21,000 - 144,500
</TABLE>
________________________
(1) Based upon the closing sale price of $18.00 per share of common stock on
December 31, 1996, as reported in the Nasdaq National Market.
(2) Mr. Tobin's employment with the Company terminated on January 15, 1997.
24
<PAGE> 126
COMMON STOCK PERFORMANCE
As part of the executive compensation information presented in this
Annual Report on Form 10-K, the SEC requires a five-year comparison of stock
performance for the Company with stock performance of a broad equity index such
as the Dow Jones Industrial Average and either a published index or a
Company-constructed peer group index.
The following graph compares the cumulative total stockholder return on
the common stock of the Company for the last five calendar years, with the
cumulative total return on the Dow Jones Industrial Average and the Dow Jones
Aerospace and Defense Sector for the same period. (Assuming the investment of
$100 in the Company's common stock, the Dow Jones Industrial Average and the
Dow Jones Aerospace and Defense Sector on December 31, 1991):
<TABLE>
<CAPTION>
1991 1992 1993 1994 1995 1996
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Reflectone, Inc. 100.00 108.20 151.64 139.34 225.41 286.89
Dow Jones Aerospace
& Defense Sector 100.00 104.27 134.74 151.53 263.51 350.18
Dow Jones Industrial
Average 100.00 107.33 125.52 131.83 180.54 232.37
</TABLE>
The average annual compound growth rate for the Company's stock over the
last five year period was 23.46% compared to 28.49% for the Aerospace and
Defense Sector, and 18.37% for the Dow Jones Industrial Average.
There can be no assurance that the Company's stock performance will
continue into the future with the same or similar trends depicted in the graph
above. The Company will not make nor endorse any predictions as to future stock
performance.
OTHER COMPENSATION ARRANGEMENTS
I. VARIABLE INCENTIVE COMPENSATION PLAN
The Company maintains a Variable Incentive Compensation Plan pursuant to
which senior personnel, including each of the Named Executive Officers, are
entitled to receive cash bonuses. Under the current plan, the amount of the
bonuses cannot exceed 60% of base salary in the case of the President, and 38%
in the case of other executive officers. The amount of the bonus is based on a
pre-determined formula which takes into account both objective and subjective
measurements by the Compensation Committee. The measurements include both
individual performance and Company performance measured against pre-determined
performance goals approved by the Board. During 1996, VICP Plan Awards took
into consideration the following factors of Company performance, each of which
were weighed equally: (i) bookings of new business, (ii) income from
operations and (iii) the net summation of cash and borrowings at December 31,
1996. Bonus amounts earned under the Plan for the year ended December 31, 1996
are provided in the Summary Compensation Table.
25
<PAGE> 127
II. RETIREMENT PLANS
The Company maintains the Reflectone, Inc. Savings, Investment and
Employee Benefit Plan (the "Plan") which covers all eligible employees of the
Company and certain employees of its subsidiary, Reflectone Training Systems,
Inc. The Plan provides for the Company to make contributions, the amount of
which are at the discretion of the Board of Directors, which may not exceed
applicable federal income tax limitations. Participants may also make
voluntary contributions. Each employee who has completed at least six months of
continuous employment and 1,000 hours of service is eligible to participate.
Directors who are not also full-time employees of the Company are not eligible
to participate in the Plan. Allocations are made to each participant employed
on the last day of each plan year based on years of service and annual
compensation, excluding discretionary bonuses, and are subject to graduated
vesting during the first seven years of employment. The Plan also provides for
contributory profit sharing contributions in an amount equal to 50% of the
employee's participation to a maximum of 3% of eligible wages, subject to
applicable federal income tax limitations. The employee's interest in the
Company's matching contribution is subject to graduated vesting during the
first five years of employment.
The Company's contributions to the accounts of the Named Executive
Officers, during the year ended December 31, 1996, under the Plan are included
in the Summary Compensation Table.
III. SUPPLEMENTAL RETIREMENT ARRANGEMENTS
The Company currently has an agreement with Mr. Snyder to provide
retirement benefits substantially equal to those that would have been provided
by his previous employer. Pursuant to the agreement, the Company maintains a
trust for the benefit of Mr. Snyder and a designated beneficiary, and
contributes amounts to fund the agreement not later than 90 days subsequent to
each year-end. During 1996, the Company accrued $7,680 and funded $20,471 of
previously accrued amounts with respect to this arrangement.
EMPLOYEE STOCK PURCHASE PLAN
Employees of the Company (including officers and those directors who
are also employees) and its subsidiary are currently eligible to participate in
the Reflectone, Inc. Employee Stock Purchase Plan ("ESPP"). Each eligible
employee may purchase shares through payroll deductions at a maximum rate of
10%. The purchase price is 90% of the closing price on the designated dates of
purchase. None of the Named Executive Officers participated in the ESPP.
26
<PAGE> 128
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of February 25, 1997: (i) certain
information concerning the ownership of the common stock of the Company, and
the addresses of, each person who is known by the Company to own of record or
beneficially more than 5% of the outstanding common stock of the Company; and
(ii) certain information concerning ownership of the common stock of the
Company by each of the Company's named officers and directors and all directors
and executive officers as a group, based upon reports filed by such persons.
Except as otherwise indicated, (i) the shareholders listed in the table have
sole voting and investment power with respect to the shares indicated and (ii)
the address of each shareholder is to the care of Reflectone, Inc., 4908 Tampa
West Boulevard, Tampa, Florida 33634.
<TABLE>
<CAPTION>
Name and Address of Number of Shares Percentage
Beneficial Owners Beneficially Owned (1) of Class
- ----------------- ---------------------- ----------
<S> <C> <C>
British Aerospace, Plc.
Farnborough Aerospace Centre
Farnborough, Hampshire GU14 6YU
England
- ------and------
British Aerospace Holdings, Inc.
1500 Conference Center Drive
Suite 200
Chantilly, VA 20151-3819 1,375,000(2) 48.0%(3)
Fidelity Management & Research Company
82 Devonshire Street
Boston, MA 02109 205,500(4) 7.2%
Edward W. Bettke 1,978 *
David R. Fish 0 *
Sydney Gillibrand 0 *
Paul L. Harris 0 *
Robert F. Schoultz 1,000 *
Richard G. Snyder 36,000(5) 1.3%
Dale R. States 0 *
Stella F. Thayer 6,750(6) *
Anthony S. Brancato(7) 24,216 *
Frank T. Tobin(8) 5,075 *
Robert D. Webster 0 *
Richard W. Welshhens 0 *
All Directors and
Executive Officers as
a group (15 persons)(9) 96,128 3.4%
</TABLE>
________________________
* Less than one percent.
(1) Beneficial ownership is determined in accordance with Rule 13d-3(d)
promulgated by the SEC under the Securities and Exchange Act of 1934, as
amended. Shares of the Company's common stock issuable pursuant to
options, warrants and convertible securities, to the extent such
securities are currently exercisable or convertible, or are exercisable
or convertible within 60 days of February 25, 1997, are treated as
outstanding for computing the percentage of the person holding such
securities but are not treated as outstanding for computing the
percentage of any other person (regardless of whether such options or
warrants are currently in-the-money).
(2) British Aerospace Holdings, Inc. ("Holdings") may be deemed to share
voting and investment power with British Aerospace Plc. In addition to
the shares of common stock, Holdings beneficially owns 50,000 shares of
the Company's 8% ($14.08 per share annual dividend) cumulative preferred
stock and warrants to purchase 78,261 shares of the Company's common
stock. The preferred stock is convertible by British Aerospace into
500,000 shares of common stock.
27
<PAGE> 129
(3) If all the shares of preferred stock held by British Aerospace were
converted to common stock and all warrants to purchase common stock were
exercised, British Aerospace would hold 1,953,261 shares of common
stock, representing approximately 56.7% of the then-outstanding shares
of common stock. If currently outstanding options for an aggregate of
219,071 shares were also exercised by third parties, British Aerospace
would hold approximately 53.3% of the then-outstanding common stock.
(4) Based upon a Schedule 13G dated February 14, 1997, filed by Fidelity
Management & Research Company.
(5) Includes 13,750 shares issuable upon the exercise of options exercisable
within 60 days of February 25, 1997, 21,000 shares owned by him, and
1,250 shares held by his children, as to which Mr. Snyder disclaims
beneficial ownership.
(6) Includes 2,500 shares currently owned by Mrs. Thayer and 4,250 shares
held by members of her immediate family, as to which Mrs. Thayer
disclaims beneficial ownership.
(7) Includes 14,875 shares issuable upon the exercise of options exercisable
within 60 days of February 25, 1997, 8,091 shares owned by him and 1,250
shares held by his spouse, as to which Mr. Brancato disclaims beneficial
ownership.
(8) Mr. Tobin's employment with the Company terminated on January 15, 1997.
(9) Includes 44,750 shares issuable upon exercise of options exercisable
within sixty days of February 25, 1997.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
From time to time, the Company enters into various transactions with
British Aerospace. British Aerospace Holdings, Inc. ("BAeHI") a wholly owned
subsidiary of British Aerospace Plc. ("BAe") is the Company's principal
shareholder, see Item 12 of this report. All contracts and agreements with
British Aerospace are reviewed and approved by a subcommittee comprising all
members of the Audit Committee other than Mr. Fish. The Company's management
and the members of the Board responsible for reviewing the various
transactions, believe that each transaction has been or is on terms no less
favorable to the Company than if unaffiliated parties had been involved.
ACQUISITION. On June 21, 1993, the Company purchased from BAe all of
the issued and outstanding shares of common stock of British Aerospace
Simulation, Ltd. which had been a wholly owned subsidiary of BAe. The acquired
entity has been renamed Reflectone UK Limited ("RUKL"). RUKL, with its
facilities in Filton, England, designs, develops and manufactures, through
sophisticated electronic computer simulation, tactical air defense trainers,
electronic warfare training systems and visual air traffic control simulators.
RUKL's products are complementary to other products produced in the Company's
Training Devices Segment and are marketed worldwide to government and
commercial customers.
RTC - DULLES MANAGEMENT AGREEMENT. Prior to January 1, 1996, the
Company's management agreement with British Aerospace to manage its flight
training center near Washington D.C.'s Dulles International Airport required
the Company to pay a facility fee based, in part, on the achievement of
specified levels of revenues at the training center. For the years ended
December 31, 1995 and 1994, the Company paid facility fees in the amount of
approximately $2.2 million and $1.7 million, respectively, which included fees
approximating $1,385,000 and $966,000, respectively, based on revenues. In
addition, during 1995 and 1994 the Company recognized approximately $2.9
million and $1.5 million, respectively, in revenues at the Dulles Training
Center from the sale of training services to British Aerospace.
Effective January 1, 1996 the management agreement to manage the British
Aerospace owned training center was modified. Under the terms of the revised
management agreement, the Company receives a fixed fee of $500,000 annually and
is reimbursed by British Aerospace for the Company's costs associated with
operating the Dulles Center. For the year ended December 31, 1996, the Company
recognized approximately $3.6 million in revenues from managing the Dulles
Training Center.
28
<PAGE> 130
SIMULATION EQUIPMENT. The Company enters into contracts or reaches
agreements for the sale of military and commercial simulation equipment with
various entities within British Aerospace. The aggregate amount of such
contracts received subsequent to 1987, and their associated backlog at December
31, 1996, approximated $129.2 million and $16.3 million, respectively. During
the year ended December 31, 1996, new program awards were received from British
Aerospace approximating $11.3 million. Revenues derived from such contracts
during the year approximated $19.9 million and the related cost of sales
approximated $16.6 million. On all British Aerospace simulation device
programs through December 31, 1996, revenues have aggregated $112.9 million and
the cost of sales have aggregated $92.5 million.
INSURANCE COVERAGE. The Company has an arrangement with British
Aerospace whereby the majority of the Company's commercial insurance coverages
are provided as an additional named insured under policies and programs
providing like coverages to British Aerospace. Some of the coverage is
underwritten by BAe Insurance, Ltd., a captive insurer wholly owned by British
Aerospace. In future renewals the Company expects to continue to obtain its
insurance coverage in conjunction with British Aerospace under similar
arrangements. For coverage provided by British Aerospace or by third party
insurers as an additional named insured on British Aerospace policies during
1996, the Company incurred premium costs totaling approximately $949,000.
FORWARD EXCHANGE CONTRACTS. The Company has entered into forward
exchange contracts to purchase British pounds to which British Aerospace is the
counterparty. These agreements were entered into to reduce the Company's
exposure to foreign currency exchange risk associated with payments for major
subcontractor elements and other requirements of the C-130J program with
Lockheed Martin Corporation ("LMC"). At December 31, 1996, the Company had $4.3
million of forward exchange contracts outstanding to purchase British pounds.
LOAN AGREEMENTS. BAe fully guarantees the Company's revolving credit
facility with Wachovia Bank of Georgia, N.A. The facility provides for maximum
borrowings of $2 million and expires on August 7, 1997. In addition, British
Aerospace fully guarantees the Company's letter of credit facility with Lloyds
Bank, Plc., New York. Under this facility, the Company may issue irrevocable
standby letters of credit and bank guarantees aggregating to a maximum of $35
million. The Lloyds' facility matures on October 31, 1997. Also, the Company
maintains two loan facilities (the "working capital facility" and the "C-130J
facility") with BAe Finance, Inc. ("BAe Finance"), a wholly owned subsidiary of
BAeHI. The working capital facility provides for borrowings aggregating up to
$10.0 million and the C-130J facility provides for borrowings aggregating up to
$40.0 million. Draws under the C-130J facility are limited to actual costs
incurred by the Company and RUKL on the United Kingdom C-130J contract with
LMC. The BAe Finance agreements mature on August 7, 1997.
Pursuant to the terms of an Agreement for Credit Availability dated as
of November 20, 1996, 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 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 January 31,
1997, British Aerospace has represented to the Company that it intends to
continue to provide or guarantee the Company's credit facilities and to provide
sufficient financing for the C-130J program until payment is received from LMC,
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%
29
<PAGE> 131
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
($87.0 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 $2.0 million
revolving line of credit facility with Wachovia Bank of Georgia, N.A. As
required under the Company's 1995 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 current 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.
30
<PAGE> 132
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) CONSOLIDATED FINANCIAL STATEMENTS :
<TABLE>
<CAPTION>
Sequential
Description Page Number
----------- -----------
<S> <C>
Report of Independent Certified Public Accountants 32
Consolidated Balance Sheets as of December 31, 1996 and 1995 33
Consolidated Statements of Operations for the years ended
December 31, 1996, 1995 and 1994 34
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994 35
Consolidated Statements of Changes in Shareholders' Equity
for the years ended December 31, 1996, 1995 and 1994 36
Notes to the Consolidated Financial Statements 37
Reports of Other Auditor 56
</TABLE>
(a)(2) FINANCIAL STATEMENT SCHEDULES:
All schedules have been omitted inasmuch as the required information is
not present or not present in amounts sufficient to require submission of the
schedule, or because the information required is included in the Company's
Consolidated Financial Statements, including the notes thereto.
31
<PAGE> 133
REPORT OF INDEPENDENT ACCOUNTANTS
______________
To the Board of Directors and Shareholders
Reflectone, Inc.
We have audited the consolidated financial statements of Reflectone, Inc. and
Subsidiaries listed in Item 14(a)(1) of this Form 10-K. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. We did not audit the financial statements of Reflectone UK, Ltd.,
a wholly owned subsidiary, which statements reflect total assets constituting
44 and 33 percent of the related consolidated totals as of December 31, 1996
and 1995, respectively, and total revenues constituting 30, 20, and 8 percent
of the related consolidated totals for each of the three years in the period
ended December 31, 1996. Those statements were audited by other auditors whose
report has been furnished to us, and our opinion, insofar as it relates to the
amounts included for Reflectone UK, Ltd., is based solely on the report of the
other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits and the report of the other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors, the
financial statements referred to above present fairly, in all material
respects, the consolidated financial position of Reflectone, Inc. and
Subsidiaries as of December 31, 1996 and 1995, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1996, in conformity with generally accepted accounting
principles.
COOPERS & LYBRAND L.L.P.
Tampa, Florida
February 14, 1997
32
<PAGE> 134
Reflectone, Inc. and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31
- --------------------------------------------------------------------------------------------------------------
ASSETS 1996 1995
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 8,540,201 $ 4,582,021
Investments - restricted 3,000,000 -
Receivables - non-affiliate 37,638,004 26,101,185
Receivables - affiliate 4,288,662 628,922
Current installments of long-term
note receivable - 3,558,000
Net deferred tax assets 2,504,000 1,050,000
Prepaid expenses and other current assets 1,715,080 1,480,190
------------ ------------
Total current assets 57,685,947 37,400,318
PROPERTY, PLANT & EQUIPMENT, NET 9,235,595 7,881,699
INVESTMENTS - RESTRICTED 2,000,000 5,000,000
OTHER ASSETS 159,918 441,568
------------ ------------
$ 69,081,460 $ 50,723,585
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------------------------------------
CURRENT LIABILITIES
Accounts payable $ 10,334,520 $ 9,980,857
Due to affiliate 2,089,777 1,995,079
Borrowings on line of credit - affiliate 4,669,713 6,513,666
Advance billings 18,897,097 7,832,601
Accrued employee compensation and benefits 4,595,564 4,218,694
Federal and state taxes payable 751,209 827,263
Other accrued expenses and liabilities 3,783,890 2,876,178
------------ ------------
Total current liabilities 45,121,770 34,244,338
------------ ------------
DEFERRED GAIN ON SALE OF EQUIPMENT 2,200,567 2,503,747
------------ ------------
COMMITMENTS AND CONTINGENCIES (Notes 6 and 11)
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 -
2,864,235 and 2,750,255 shares 286,423 275,025
Additional paid-in capital 32,630,276 31,741,011
Cumulative translation adjustment 560,094 734,705
Accumulated deficit (11,767,670) (18,825,241)
------------ ------------
Total shareholders' equity 21,759,123 13,975,500
------------ ------------
$ 69,081,460 $ 50,723,585
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
33
<PAGE> 135
REFLECTONE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended December 31
- --------------------------------------------------------------------------------------------------------------
1996 1995 1994
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES
Non-affiliate $ 75,917,174 $ 70,442,485 $ 60,405,499
Affiliate 24,352,257 23,081,754 4,732,685
------------ ------------ ------------
100,269,431 93,524,239 65,138,184
------------ ------------ ------------
COST AND EXPENSES
Cost of sales
Non-affiliate 68,595,153 64,530,189 57,576,313
Affiliate 19,862,536 18,402,800 4,061,986
------------ ------------ ------------
88,457,689 82,932,989 61,638,299
General and administrative 4,152,406 3,396,243 5,408,289
------------ ------------ ------------
92,610,095 86,329,232 67,046,588
------------ ------------ ------------
INCOME (LOSS) FROM OPERATIONS 7,659,336 7,195,007 (1,908,404)
------------ ------------ ------------
OTHER INCOME (EXPENSE)
Interest income 590,243 734,397 243,679
Interest expense (386,517) (2,411,978) (1,193,459)
Foreign currency transactions
gain (loss) 464,616 (97,425) (62,729)
Other 205,330 (107,909) 71,612
------------ ------------ ------------
873,672 (1,882,915) (940,897)
------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES 8,533,008 5,312,092 (2,849,301)
PROVISION FOR INCOME TAXES 771,437 770,553 200,000
------------ ------------ ------------
NET INCOME (LOSS) 7,761,571 4,541,539 (3,049,301)
PREFERRED STOCK DIVIDENDS 704,000 704,000 704,000
------------ ------------ ------------
NET INCOME (LOSS) APPLICABLE TO
COMMON SHAREHOLDERS $ 7,057,571 $ 3,837,539 $ (3,753,301)
============ ============ ============
NET INCOME (LOSS) PER COMMON AND
COMMON EQUIVALENT SHARE
Primary $ 2.38 $ 1.36 $ (1.35)
============ ============ ============
Fully diluted $ 2.23 $ - $ -
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
34
<PAGE> 136
REFLECTONE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31
- ---------------------------------------------------------------------------------------------------------------
1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 7,761,571 $ 4,541,539 $ (3,049,301)
Depreciation and amortization 1,833,257 2,306,590 1,894,038
Deferred income taxes (1,454,000) (1,050,000) -
Issuance of warrants 340,653 243,323 -
Change in assets and liabilities:
Decrease (increase) in receivables
Non-affiliate (11,508,200) (5,434,367) (7,519,764)
Affiliate (3,655,622) 2,352,096 50,518
Decrease in inventory - 4,268,842 141,189
Decrease (increase) in prepaid expenses
and other current assets (218,630) 24,686 (799,820)
Increase in accounts payable 24,715 2,993,026 2,028,299
Increase (decrease) in due to affiliate 32,821 (784,317) (880,385)
Increase (decrease) in advance billings 10,975,745 6,040,108 (758,673)
Increase (decrease) in accrued employee
compensation and benefits 346,416 1,177,779 (45,167)
Increase(decrease) in other accrued
expenses and liabilities 840,707 (1,125,970) (612,141)
Other (12,364) 460,981 (461,644)
------------ ------------- -------------
NET CASH PROVIDED BY (USED FOR)
OPERATING ACTIVITIES 5,307,069 16,014,316 (10,012,851)
------------ ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (3,120,098) (1,427,178) (7,743,609)
Collection of long-term notes receivable 3,558,000 535,053 1,030,790
Proceeds from sale and leaseback of
equipment - - 10,000,000
Proceeds from sale of equipment - 8,648,963 -
Escrow of funds as required by
lease agreement - - (5,000,000)
------------ ------------- -------------
NET CASH PROVIDED BY (USED FOR)
INVESTING ACTIVITIES 437,902 7,756,838 (1,712,819)
------------ ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Paydowns under line-of-credit
agreements (279,463,085) (217,562,984) (153,787,650)
Borrowings under line-of-credit
agreements 277,619,132 191,402,453 171,287,050
Proceeds from sales of common stock 560,010 349,263 95,054
Dividends on preferred stock (704,000) (704,000) (704,000)
------------ ------------- -------------
NET CASH PROVIDED BY (USED FOR)
FINANCING ACTIVITIES (1,987,943) (26,515,268) 16,890,454
------------ ------------- -------------
NET INCREASE (DECREASE) IN CASH 3,757,028 (2,744,114) 5,164,784
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 4,582,021 7,329,914 2,160,241
EFFECT OF EXCHANGE RATE CHANGES ON CASH 201,152 (3,779) 4,889
------------ ------------- -------------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 8,540,201 $ 4,582,021 $ 7,329,914
============ ============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
35
<PAGE> 137
REFLECTONE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Convertible Foreign
Preferred Stock Common Stock Additional Currency
----------------- -------------------- Paid-In Translation Accumulated
Shares Amount Shares Amount Capital Adjustment Deficit
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993 50,000 $50,000 2,665,108 $266,511 $31,765,886 $778,193 $(19,613,479)
Shares issued
- exercise of stock options - - 9,900 990 49,173 - -
- employee stock plans - - 6,325 632 44,258 - -
Cash dividends
- preferred at $14.08 per share - - - - (704,000) - -
Translation adjustment - - - - - (26,700) -
Net loss - - - - - - (3,049,301)
-------------------------------------------------------------------------------------------------
Balance at December 31, 1994 50,000 50,000 2,681,333 268,133 31,155,317 751,493 (22,662,780)
Shares issued
- exercise of stock options - - 65,711 6,571 310,214 - -
- employee stock plans - - 3,211 321 32,157 - -
Warrants issued - - - - 243,323 - -
Cash dividends
- preferred at $14.08 per share - - - - - - (704,000)
Translation adjustment - - - - - (16,788) -
Net income - - - - - - 4,541,539
------------------------------------------------------------------------------------------------
Balance at December 31, 1995 50,000 50,000 2,750,255 275,025 31,741,011 734,705 (18,825,241)
SHARES ISSUED
- EXERCISE OF STOCK OPTIONS - - 112,500 11,250 523,994 - -
- EMPLOYEE STOCK PLANS - - 1,480 148 24,618 - -
WARRANTS ISSUED - - - - 340,653 - -
CASH DIVIDENDS
- PREFERRED AT $14.08 PER SHARE - - - - - - (704,000)
TRANSLATION ADJUSTMENT - - - - - (174,611) -
NET INCOME - - - - - - 7,761,571
------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1996 50,000 $50,000 2,864,235 $286,423 $32,630,276 $560,094 $(11,767,670)
================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
36
<PAGE> 138
REFLECTONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business - Reflectone, Inc. designs and manufactures high fidelity,
full-flight simulators and electronic training systems and provides a broad
range of simulator-based training and training support services. The Company's
products and services are marketed worldwide to military, commercial,
entertainment and industrial customers. The Company's two manufacturing
facilities are located in Tampa, Florida and Filton, England.
Estimates Reflected in the Financial Statements - The preparation of financial
statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosures of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues
and expenses during the period. Actual results could differ from those
estimates.
Principles of Consolidation - The consolidated financial statements include the
accounts of Reflectone, Inc. and its wholly owned subsidiaries, Reflectone
Training Systems, Inc. and Reflectone UK Limited ("RUKL"), (the Company). All
significant intercompany transactions and balances have been eliminated in
consolidation. The Company is approximately 48% owned by British Aerospace
Holdings, Inc., and has various relationships, contracts and agreements with
entities affiliated with British Aerospace, Plc. which are herein singularly or
collectively referred to as "British Aerospace".
Foreign Currency Translation - The financial information of the Company's
foreign subsidiary in the United Kingdom is translated to U.S. dollars in
accordance with the Statement of Financial Accounting Standards No. 52,
"Foreign Currency Translation." All balance sheet accounts are translated at
the current exchange rate, and statement of operations items are translated at
the average exchange rate for the applicable period. Any resulting translation
adjustments are made directly to a separate component of shareholders' equity.
Foreign currency gains and losses resulting from transactions are included in
results of operations.
Statement of Cash Flows - Cash and cash equivalents for purposes of reporting
consolidated cash flows include cash on deposit and amounts due from banks
maturing within 90 days of purchase. Cash flows associated with items intended
as hedges of identifiable transactions or events are classified in the same
category as the cash flows from the items being hedged. Cash paid for interest,
net of amounts capitalized, was approximately $427,000, $2,476,000, and
$1,205,000 in the years ended December 31, 1996, 1995 and 1994, respectively.
Cash paid for federal and state income taxes was approximately $2,313,000 and
$1,276,000 in the years ended December 31, 1996 and 1995, respectively. In the
year ended December 31, 1994 there was no cash paid for federal or state income
taxes. Financing and investing activities not affecting cash during the
periods reported included the June 1994 receipt of a promissory note for
approximately $4.4 million resulting from the sale of a simulator.
37
<PAGE> 139
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Revenue Recognition - For financial reporting purposes, long-term contract
revenue is recognized using the percentage of completion method of accounting,
under which the sales value of performance is recognized on the basis of the
percentage each contract's cost to date bears to the total estimated cost. The
recognition of profit, based upon anticipated final program costs, is made only
after evaluation of the program status at critical program milestones.
Revisions in estimated program costs at completion are reflected in the period
during which facts and circumstances necessitating such change first become
known. Due to uncertainties inherent in the estimation process, it is
reasonably possible that estimated costs at completion on programs currently in
process will be revised in the near-term. When the current contract estimate
indicates a loss, provision is made for the total anticipated loss. Revisions
in projected costs and earnings on contracts which extend beyond one year are
accounted for as changes in estimates. All other revenue is recorded on the
basis of shipments of products or performance of services.
The Company derives a significant portion of its revenues from fixed price,
long-term government contracts on a prime contractor and subcontractor basis.
Under certain government contracts, revenues may be increased or decreased in
accordance with cost or performance incentive provisions. Such fee awards or
penalties are included in operations at the time they can be reasonably
determined. When appropriate, increased contract values are assumed based on
expected adjustments of contract prices for increased scope ordered or caused
by the customer. Costs incurred under contracts are subject to routine audit by
government audit agencies.
Receivables - In accordance with industry practice, receivables include amounts
relating to contracts and programs having production cycles longer than one
year, and a portion thereof may not be realized within one year.
Property, Plant and Equipment - Property, plant and equipment is recorded at
cost and depreciated using the straight-line method over the estimated useful
lives of the respective assets. Improvements to leased premises are amortized
over the related lease term. Cost and accumulated depreciation on assets
retired or disposed of are removed from the accounts and any gains or losses
resulting therefrom are credited or charged to income.
Investments - restricted - Investments - restricted represents short-term
highly liquid investments held in escrow as collateral for the Company's lease
of the C-130H simulator used in its training center in Tampa, Florida. The
carrying amount of investments - restricted approximates fair value. The terms
of the lease agreement are more fully described in Note 6.
38
<PAGE> 140
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Capitalized Interest - Interest is capitalized on the construction cost of
major capital additions during the period of construction. As a result of the
Company's long-term financing of the C-130J program with Lockheed Martin
Corporation ("LMC") as discussed in Note 4, interest cost related to this
financing is being charged to the program rather than interest expense. For the
year ended December 31, 1996, total interest costs incurred, interest
capitalized to the C-130J program, and net interest expense were approximately
$2,000,000, $1,613,000, and $387,000, respectively. For the year ended December
31, 1995, total interest costs incurred, interest capitalized to the C-130J
program and net interest expense were approximately $2,718,000, $306,000, and
$2,412,000, respectively. For the year ended December 31, 1994, total interest
costs incurred, interest capitalized for major capital additions and net
interest expense were approximately $1,350,000, $157,000, and $1,193,000,
respectively.
Research and Development Costs - Research and development costs are incurred
under independent Company-initiated programs and customer funded programs.
Research and development costs incurred under independent Company-initiated
programs and charged through cost of sales approximated $2,852,000, $777,000,
and $1,031,000 for the years ended December 31, 1996, 1995 and 1994,
respectively.
Income Taxes - Income taxes are provided based on the liability method of
accounting pursuant to Statement of Financial Accounting Standards No. 109
("Statement No. 109"), "Accounting for Income Taxes." The adoption of Statement
No. 109 did not materially impact the Company's consolidated financial position
or results of operations. Deferred income taxes are recorded to reflect the tax
consequences on future years of differences between the tax basis of assets and
liabilities and their financial reporting amounts at each year-end. Because the
Company intends to continue to finance foreign operations by reinvestment of
undistributed earnings of its foreign subsidiary, U.S. income taxes are not
provided on such earnings and losses.
Reclassification - Certain prior year amounts have been reclassified to conform
to 1996 presentations.
39
<PAGE> 141
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 - RECEIVABLES
Component elements of receivables consist of the following at December 31:
<TABLE>
<CAPTION>
1996 1995
----------------------------------
<S> <C> <C>
Receivables
U.S. Government
Billed $ 5,280,559 $ 5,363,973
Unbilled 6,165,476 1,932,588
Unrecovered costs subject to future
negotiation -- not billed - 1,400,000
----------- -----------
11,446,035 8,696,561
----------- -----------
Lockheed Aeronautical Systems Company
Billed 190,523 -
Unbilled 24,222,728 14,780,610
----------- -----------
24,413,251 14,780,610
----------- -----------
Commercial
Billed 1,910,703 2,554,538
Unbilled - 558,023
Allowance for doubtful accounts (131,985) (488,547)
----------- -----------
1,778,718 2,624,014
----------- -----------
$37,638,004 $26,101,185
=========== ===========
Affiliates
Billed $ 3,338,568 $ 545,729
Unbilled 950,094 83,193
----------- -----------
$ 4,288,662 $ 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 completion of the contract. Unbilled
amounts are net of related progress payments in the aggregate of approximately
$29.8 million and $33.0 million as of December 31, 1996 and 1995,
respectively.
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. In the fourth
quarter of 1996, management revised downward its estimate of the amounts
recoverable under these actions through a charge of $1.4 million to cost of
sales. Offsetting this charge, in part, was a $1.1 million reduction in
settlement expenses accrued in prior years for these actions. Therefore, while
all recoveries are subject to future negotiations, any actual recoveries could
represent a gain in future periods.
Under the terms of the Company's contract with Lockheed Martin Corporation
("LMC"), as amended, to design and manufacture two C-130J dynamic mission
simulators and other related training devices, the Company will not receive a
substantial portion of contractual payments from LMC until the delivery and
acceptance of the devices currently scheduled for the fourth quarter of 1997.
40
<PAGE> 142
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 - RECEIVABLES (CONTINUED)
An allowance for doubtful accounts is provided based on historical experience
and after consideration of specific accounts and current economic conditions.
NOTE 3 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following at December 31:
<TABLE>
<CAPTION>
1996 1995
----------------------------------
<S> <C> <C>
Machinery and equipment $ 8,793,337 $ 8,819,569
Furniture and office equipment 8,036,418 7,095,117
Leasehold improvements 2,992,399 2,355,227
----------- -----------
19,822,154 18,269,913
Less accumulated depreciation and amortization 10,586,559 10,388,214
----------- -----------
$ 9,235,595 $ 7,881,699
=========== ===========
</TABLE>
NOTE 4 - 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 November 20, 1996, 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 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 January 31, 1997, 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 ($87.0 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 $2.0 million revolving line of credit facility with
Wachovia Bank of Georgia, N.A. As required under the Company's 1995 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
41
<PAGE> 143
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4 - CREDIT AGREEMENTS AND BORROWINGS (CONTINUED)
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 current Agreement for
Credit Availability requires that the Company obtain the prior approval of
British Aerospace for all material capital investment expenditures as defined
in the Agreement for Credit Availability.
The estimated fair value of the warrants are reflected in interest expense as a
cost of financing. Financing cost for these warrants was approximately $341,000
and $243,000 for the years ended December 31, 1996 and 1995, respectively.
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.
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. During all of 1996, no borrowings were outstanding under this line
and therefore the full amount of this facility was available. The weighted
average interest rate on borrowings under this facility for the years ended
December 31, 1995 and 1994 was 6.42% and 4.93%, respectively. The agreement
matures on August 7, 1997, and is supported by the corporate guarantee of
British Aerospace.
During the third quarter, the Company reduced its revolving line of credit
facility provided directly by British Aerospace Finance, Inc. from $20.0
million to $10.0 million. This agreement provides for working capital
borrowings aggregating up to $10.0 million 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 December 31, 1996 and 1995, the weighted
average interest rate on these borrowings was 8.88% and 6.13%, respectively.
The weighted average interest rate on these borrowings for the years ended
December 31, 1996, 1995 and 1994 was 8.90%, 8.70% and 4.45%, respectively. At
December 31, 1996 there were approximately $9.6 million of additional credit
available under this facility.
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 fourth quarter of 1996 the C-130J facility
was reduced from $55.0 million to $40.0 million. The agreement matures on
August 7, 1997. 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 January
31, 1997, British Aerospace has further represented that, as long as British
Aerospace
42
<PAGE> 144
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4 - CREDIT AGREEMENTS AND BORROWINGS (CONTINUED)
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
December 31, 1996 and 1995, the weighted average interest rate on these
borrowings was 7.0% and 7.39%, respectively. The weighted average interest
rate on these borrowings for the years ended December 31, 1996 and 1995 was
6.973% and 7.75%, respectively. At December 31, 1996, there were approximately
$35.7 million of additional credit available under this facility.
During the fourth quarter of 1996, the Lloyds Bank Plc (Lloyds) letter of
credit facility was increased from $20.0 million to $35.0 million. Under the
Lloyds facility, the Company may issue irrevocable standby letters of credit
and bank guarantees. The Company pays a non-refundable commission on the stated
or committed amount of credits issued for the actual number of days
outstanding. The agreement matures on October 31, 1997 and is supported by the
corporate guarantee of British Aerospace. At December 31, 1996, there were
approximately $7.8 million of credit available under this agreement.
NOTE 5 - INCOME TAXES
The income (loss) before income taxes, by domestic and foreign source is as
follows:
<TABLE>
<CAPTION>
1996 1995 1994
------------------------------------------------------
<S> <C> <C> <C>
United States $ 8,222,114 $ 5,275,716 $(1,166,730)
United Kingdom 310,894 36,376 (1,682.571)
----------- ----------- -----------
$ 8,533,008 $ 5,312,092 $(2,849,301)
=========== =========== ===========
</TABLE>
The components of the provision for income taxes for the three years in the
period ended December 31, 1996 are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------------------------------------------------------
<S> <C> <C> <C>
Current provision (benefit):
Federal $ 3,300,969 $ 2,554,700 $ 105,000
State 200,000 120,000 95,000
Foreign (107,501) 118,853 -
Benefit of net operating loss - (700,000) -
Benefit of investment
and AMT tax credits (1,168,031) (273,000) -
----------- ----------- -----------
Total current provision 2,225,437 1,820,553 200,000
Deferred income tax benefit 1,454,000 1,050,000 -
----------- ----------- -----------
$ 771,437 $ 770,553 $ 200,000
=========== =========== ===========
</TABLE>
43
<PAGE> 145
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 - INCOME TAXES (CONTINUED)
The provision for income taxes differs from the amounts computed by applying
the federal statutory tax rate to income (loss) before taxes for the following
reasons:
<TABLE>
<CAPTION>
1996 1995 1994
------------------------------------------------------
<S> <C> <C> <C>
Statutory federal tax rate 34.00% 34.00% (34.00%)
Alternative minimum tax - - 3.70
Foreign tax differentials (1.73) 2.00 20.10
Composite effective state tax rate 1.55 1.49 3.30
Investment tax credits (13.69) (5.13) -
Tax benefit not currently utilizable - - 12.70
Adjustment of deferred tax asset for
change in estimated future benefit (7.93) - -
Utilized operating losses - (13.17) -
Other (3.16) (4.68) 1.20
------ ------- ------
9.04% 14.51% 7.00%
====== ====== ======
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The following is a
summary of the tax effect of the significant components of the Company's
deferred tax assets and liabilities as of December 31:
<TABLE>
<CAPTION>
1996 1995
--------------------------------
<S> <C> <C>
Income recognition on long-term contracts $ 2,120,000 $ 676,000
Depreciation (855,000) (415,000)
Accruals not deducted for tax purposes 1,427,000 1,460,000
Other 539,000 595,000
Investment tax credits - 461,000
Alternative minimum tax credits - 540,000
Net operating loss carryforwards in the
United Kingdom 1,100,000 1,300,000
----------- -----------
4,331,000 4,617,000
Valuation allowance for net deferred
tax assets (1,827,000) (3,567,000)
----------- -----------
Net deferred tax assets $ 2,504,000 $ 1,050,000
=========== ===========
</TABLE>
The Company has approximately $3.2 million of loss carryforwards for tax
purposes in the United Kingdom, which are generally not limited by an
expiration date.
The Company has recorded a valuation allowance with respect to the future
federal tax benefits, due to the uncertainty of their ultimate realization.
Reductions in the valuation allowance are based on management's periodic
evaluation of the utilization of future federal tax benefits and result in a
reduction to the Company's income tax expense.
44
<PAGE> 146
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6 - COMMITMENTS AND CONTINGENCIES
During December 1994, the Company entered into an agreement for the sale and
leaseback of the Company's self constructed C-130H full flight simulator,
located at the Company's training center in Tampa, Florida. The Company has a
purchase option at fair market value at expiration of the lease, and an early
termination option which permits the Company to purchase the simulator,
contingent upon cancellation or failure to renew an existing training contract
or sale of the simulator to a third party by the Company. The lease is
classified as an operating lease in accordance with Statement of Financial
Accounting Standards No. 13, "Accounting for Leases."
The book value and associated depreciation of the simulator were removed from
the accounts and the gain realized on the sale, approximating $2,916,000, was
deferred. The deferred gain is being credited to income as other income over
the 12-year lease term. Payments under the lease approximate $1,396,000
annually.
The lease agreement requires the Company to escrow specified funds to be held
as collateral in the event of a default under the lease agreement. The escrowed
funds are held by British Aerospace Finance, Inc., as Escrow Agent. The initial
amount of funds held in escrow equals $5.0 million. Under the terms of the
lease agreement, $3.0 million is scheduled to be released from escrow in early
1997 based on the Company's attainment of certain income and net worth levels
at December 31, 1996. The remaining $2.0 million will be released over the term
of the lease.
Total minimum rental payments at December 31, 1996, under agreements classified
as operating leases with noncancelable terms in excess of one year, are as
follows:
<TABLE>
<CAPTION>
Years Ending December 31 Amount
------------------------ -----------
<S> <C>
1997 $ 2,255,000
1998 2,199,000
1999 1,928,000
2000 1,539,000
2001 1,522,000
Thereafter 4,245,000
-----------
$13,688,000
===========
</TABLE>
The Company is obligated for payment of all operating expenses associated with
these leases. Lease expense for the years ended December 31, 1996, 1995 and
1994 was approximately $2,288,000, $2,277,000, and $1,197,000, respectively.
The Company is committed to future purchases, primarily for materials for
long-term contracts, of approximately $2,867,000.
45
<PAGE> 147
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7 - EARNINGS (LOSS) PER COMMON SHARE
Primary earnings (loss) 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 computation are detailed
below:
<TABLE>
<CAPTION>
1996 1995 1994
-----------------------------------------------------
<S> <C> <C> <C>
Primary
Weighted average common shares
outstanding 2,826,946 2,699,375 2,676,862
Dilutive effect of stock options
and warrants 144,058 129,124 102,688
---------- ---------- ----------
Average common shares outstanding 2,971,004 2,828,499 2,779,550
Fully diluted
Convertible preferred stock 500,000 500,000 500,000
Additional dilutive effect of
stock options and warrants 16,200 15,173 9,806
---------- ---------- ----------
Fully diluted assumed common shares
outstanding 3,487,204 3,343,672 3,289,356
========== ========== ==========
</TABLE>
Fully diluted per share data is not disclosed for 1995 and 1994 since the
effect would be antidilutive.
NOTE 8 - STOCK OPTIONS AND PURCHASE PLAN
The Company has three fixed option plans: the 1982 Incentive Stock Option Plan
("1982 Plan"), the 1990 Stock Option Plan ("1990 Plan"), and the 1994 Stock
Option Plan ("1994 Plan"). The 1982 Plan permitted the granting of options to
key employees to purchase the Company's common stock at not less than the fair
value at the time the options were granted. The Company was authorized to
grant options to acquire up to 282,716 shares under the 1982 Plan. By its term,
effective March 31, 1992, no further options may be granted pursuant to the
1982 Plan. Both the 1990 Plan and the 1994 Plan permits the granting of options
to key employees to purchase the Company's common stock at not less than 50% of
the fair value at the time the options are granted. The Company is authorized
to grant options to acquire up to 250,000 shares under the 1990 Plan and up to
200,000 shares under the 1994 Plan. Both the 1990 Plan and the 1994 Plan permit
the granting of incentive stock options as defined under Section 422 of the
Internal Revenue Code
46
<PAGE> 148
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8 - STOCK OPTIONS AND PURCHASE PLAN (CONTINUED)
at an exercise price for each option equal to the market price of the Company's
common stock on the date of grant and a maximum term of 10 years. Options not
qualifying as incentive stock options under these plans may be granted at an
exercise price equal to as low as 50% of the market price of the Company's
common stock on the date of grant and with no limit on the term of the option.
Vesting of options granted under all three plans is determined by the Company's
Board of Directors, and has generally been set at the end of three years.
A summary of the status of the Company's three fixed stock option plans as of
December 31, 1996, 1995 and 1994 and changes during the years ending on those
dates is presented below:
<TABLE>
<CAPTION>
1996 1995 1994
-----------------------------------------------------------------------------
WEIGHTED Weighted Weighted
AVERAGE Average Average
EXERCISE Exercise Exercise
SHARES PRICE Shares Price Shares Price
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year 300,821 6.33 310,532 5.24 273,182 4.65
Granted 41,500 18.50 56,000 9.75 56,000 7.88
Exercised 112,500 4.46 65,711 4.13 9,900 2.57
Terminated 5,250 11.10 - - 8,750 6.45
-----------------------------------------------------------------------------
Outstanding at end
of year 224,571 9.40 300,821 6.33 310,532 5.24
=============================================================================
Options exercisable
at year end 71,071 183,571 174,907
=============================================================================
</TABLE>
The following table summarizes information about stock options outstanding at
December 31, 1996:
<TABLE>
<CAPTION>
Weighted
Average Weighted Weighted
Range of Number Remaining Average Number Average
Exercise Outstanding Contractual Exercise Exercisable Exercise
Prices at 12/31/96 Life Price at 12/31/96 Price
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1.75 - 3.25 19,421 3 1.75 19,421 1.75
3.50 - 5.00 6,900 4 4.61 6,900 4.61
6.00 - 7.88 100,750 7 7.26 44,750 6.48
9.75 56,000 8 9.75 - -
18.50 41,500 9 18.50 - -
- ------------------------------------------------------------------------------------------------------------------
224,571 7 9.40 71,071 5.01
==============================================================================================
</TABLE>
47
<PAGE> 149
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8 - STOCK OPTIONS AND PURCHASE PLAN (CONTINUED)
During 1994, the Reflectone, Inc. Employee Stock Purchase Plan was amended to
reduce the maximum number of shares of the Company's common stock that
employees may acquire under this plan to 112,500 shares. Employees are
permitted to acquire shares of the Company's common stock on a regular basis,
through payroll deductions not exceeding 10% of base wages, at a 10% discount
from market price on the date of exercise. Options under the plan are granted
for an indeterminable number of shares on the first day of each plan year, and
normally will be exercised automatically on the last day of each calendar
quarter. Transactions related to the plan are summarized as follows:
<TABLE>
<CAPTION>
Weighted-Average
Shares Exercise Price
-----------------------------
<S> <C> <C>
Available at December 31, 1993 159,516
Plan amendment (75,000)
Exercised (6,325) $ 7.10
--------
Available at December 31, 1994 78,191
Exercised (3,211) $10.11
--------
Available at December 31, 1995 74,980
EXERCISED (1,480) $16.73
--------
AVAILABLE AT DECEMBER 31, 1996 73,500
========
</TABLE>
The estimated per share fair value of options granted during 1996 and 1995 was
$10.76 and $6.42, respectively. The Company applies Accounting Principles Board
Opinion No. 25 and related Interpretations in accounting for its stock option
and purchase plans. Accordingly, no compensation cost has been recognized for
its fixed stock option plans and its stock purchase plan. Had compensation cost
for the Company's stock option plans and its stock purchase plan been
determined based on the fair value at the grant dates for awards under those
plans consistent with the method of FASB Statement 123, the Company's net
income and earnings per share for the years ended December 31, 1996 and 1995
would have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1996 1995
-----------------------------
<S> <C> <C>
Net income to common shareholders
As reported $7,057,571 $3,837,539
Pro forma $6,798,767 $3,723,918
Net income per common and common equivalent share
Primary
As reported $ 2.38 $ 1.36
Pro forma $ 2.29 $ 1.32
Fully diluted
As reported $ 2.23 -
Pro forma $ 2.15 -
</TABLE>
48
<PAGE> 150
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8 - STOCK OPTIONS AND PURCHASE PLAN (CONTINUED)
The fair value of options granted under the Company's fixed stock option plans
during 1995 was estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted-average assumptions for 1996
and 1995, respectively: no dividend yield for all years, expected volatility of
74% and 85%, risk free interest rates of 5.1% and 7.4%, and expected lives of 4
years for all years. Pro forma compensation cost of options granted under the
Employee Stock Purchase Plan is measured based on the discount from market
value.
NOTE 9 - EMPLOYEE BENEFIT PLANS
The Company maintains an employee benefit plan covering substantially all
employees of Reflectone, Inc. and selected employees of the Company's Training
Services Segment who meet established eligibility requirements. The plan
provides for the Company to make contributions, the amount of which are at the
discretion of the Board of Directors, which may not exceed applicable federal
income tax limitations. Amounts charged to expense were approximately
$1,200,000, $826,000 and $441,000 in 1996, 1995 and 1994, respectively. The
plan also provides for employee savings, on which the Company contributes an
amount equal to 50% of the employee's participation to a maximum of 3% of
eligible wages. Company contributions charged to expense were approximately
$500,000, $359,000 and $362,000 in 1996, 1995 and 1994, respectively. The
Company's policy is to fund benefit costs quarterly as accrued.
The Company maintains a contributory savings plan for substantially all field
service employees of its Training Services Segment. Effective October 1, 1993,
the Company no longer contributes to this plan.
RUKL participates in the British Aerospace Pension Plan which, under Financial
Accounting Standard No. 87, "Employers' Accounting for Pensions," is a defined
benefit pension plan administered by British Aerospace. The assets of the plan
are held in trustee administered funds. The Company incurred pension expense of
approximately $199,000, $176,000, and $158,000 for the years ended December 31,
1996, 1995 and 1994, respectively. The pension liability at December 31, 1996
and 1995 was approximately $421,000 and $457,000 respectively.
NOTE 10 - RELATED PARTY TRANSACTIONS
The Company is a majority owned subsidiary of British Aerospace and in the
course of its operations transacts business with various entities of British
Aerospace. At December 31, 1996, British Aerospace held 1,375,000 shares, or
48% of the outstanding common stock of the Company, together with 100% of the
outstanding convertible preferred stock. As the holder of nearly 50% of the
outstanding shares of common stock, British Aerospace effectively, has the
power to determine the membership of the Company's Board of Directors; however,
British Aerospace is subject to restrictions contained in a Special Security
Agreement ("SSA") between the Company, British Aerospace and the Department of
Defense. Under the terms of the SSA, British Aerospace is limited to the
selection or approval of three directors who may be affiliated with British
Aerospace. As the major shareholder, British Aerospace effectively, has the
power to decide other matters submitted for shareholder approval.
49
<PAGE> 151
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10 - RELATED PARTY TRANSACTIONS (CONTINUED)
Each share of the preferred stock has a liquidation preference of $176 plus
accrued and unpaid dividends, accrues dividends at a rate of 8% on the
liquidation preference, is callable by the Company after June 1, 1998 and is
convertible into ten shares of common stock. As further discussed in Note 4,
during 1995 British Aerospace was issued warrants to purchase 78,261 shares of
the Company's common stock at any time prior to August 7, 2005. At December 31,
1996, a total of 578,261 shares of unissued common stock were reserved for
issuance upon conversion of preferred stock and exercise of warrants. After
conversion of the preferred stock and exercise of warrants, British Aerospace
would hold approximately 56.7% of the Company's outstanding shares, assuming no
additional common shares had been issued. During the years ended December 31,
1996, 1995 and 1994 cash dividends paid by the Company on the preferred stock
were $704,000 per year.
Subject to the terms and conditions of the Agreement for Credit Availability
dated as of November 20, 1996, British Aerospace has agreed to continue to
provide or guarantee the Company's current credit facilities through August 7,
1997. By means of a letter dated January 31, 1997, British Aerospace has
further 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. These credit arrangements are more
fully described in Note 4.
In the course of conducting its business, the Company enters into contracts and
agreements with British Aerospace for the sale of simulation equipment. During
the year ended December 31, 1996, revenues and cost of sales derived from these
transactions approximated $24.4 million and $19.9 million, respectively. In the
year ended December 31, 1995, revenues and cost of sales derived from these
transactions approximated $23.1 million and $18.4 million, respectively. In the
year ended December 31, 1994, revenues and costs of sales derived from these
transactions approximated $4.7 million and $4.1 million, respectively. At
December 31, 1996, the Company's receivables and advance billings from such
transactions approximated $4.3 million and $3.7 million, respectively. At
December 31, 1995, the Company's receivables and advance billings included
approximately $629,000 and $4.6 million, respectively, arising from
transactions with British Aerospace. The Company's sales backlog from contracts
or agreements with British Aerospace approximated $18.9 million at December 31,
1996.
The Company leases the RUKL facilities from British Aerospace and receives
certain administrative services on a fee-for- service basis. For the years
ended December 31, 1996, 1995, and 1994, the Company paid British Aerospace
approximately $613,000, $487,000, and $491,000, respectively, for the
facilities lease and administrative services.
The Company's employees at RUKL participate in the British Aerospace Pension
Plan (Note 9).
50
<PAGE> 152
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10 - RELATED PARTY TRANSACTIONS (CONTINUED)
The escrow of funds required by the Company's lease of the C-130H Simulator
(Note 6) is administrated by British Aerospace Finance, Inc., as Escrow Agent,
under the terms and conditions of the escrow agreement between the Company, the
lessor and British Aerospace. The amount held in escrow at December 31, 1996
and 1995 was $5.0 million.
Prior to January 1, 1996, the Company's management agreement with British
Aerospace to manage its flight training center near Washington D.C.'s Dulles
International Airport required the Company to pay a facility fee based, in
part, on the achievement of specified levels of revenues at the training
center. For the years ended December 31, 1995 and 1994, the Company paid
facility fees in the amount of approximately $2.2 million and $1.7 million,
respectively, which included fees approximating $1,385,000 and $966,000,
respectively, based on revenues. In addition, during 1995 and 1994 the Company
recognized approximately $2.9 million and $1.5 million, respectively, in
revenues at the Dulles Training Center from the sale of training services to
British Aerospace.
Effective January 1, 1996 the management agreement to manage the British
Aerospace owned training center was modified. Under the terms of the revised
management agreement, the Company receives a fixed fee of $500,000 annually and
is reimbursed by British Aerospace for the Company's costs associated with
operating the training center. For the year ended December 31, 1996, the
Company recognized approximately $3.6 million in revenues from managing the
Dulles Training Center. Concurrently with the revision of the management
agreement, on December 21, 1995 the Company sold to British Aerospace, for
approximately $8.6 million, its Jetstream 41 full flight simulator used at the
training center. No significant gain or loss resulted from the sale.
During 1996, 1995, and 1994, the Company incurred interest costs of
approximately $1,941,000, $1,951,000, and $784,000, respectively, resulting
from borrowings under the revolving line of credit agreement and C-130J
Facility with British Aerospace Finance, Inc.
As more fully described in Note 11, the Company has entered into forward
exchange contracts to which British Aerospace is the counterparty to these
instruments.
The Company has an arrangement with British Aerospace whereby the majority of
the Company's commercial insurance coverages are provided as an additional
named insured under preexisting policies and programs providing like coverages
to British Aerospace and its subsidiaries. Some of the coverage is underwritten
by BAE Insurance, Ltd., a captive insurer wholly owned by British Aerospace.
For coverage provided during the years ended December 31, 1996, 1995 and 1994,
the Company incurred premium costs totaling approximately $949,000, $666,000
and $591,000, respectively.
51
<PAGE> 153
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11 -FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK, CONCENTRATIONS OF
CREDIT RISK AND FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company is a party to financial instruments with off-balance-sheet risk in
the normal course of business to help meet financing needs and to reduce
exposure to fluctuating foreign currency exchange rates. The Company is exposed
to credit loss in the event of nonperformance by the other parties to the
financial instruments described below. However, the Company does not anticipate
nonperformance by the other parties.
The Company's hedging strategy is facilitated by its ability to borrow in
foreign currencies under its revolving line of 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 forward exchange contracts to reduce the Company's exposure to foreign
currency exchange risk associated with payments for major subcontractor
elements and other requirements of the C-130J program. 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. At December 31, 1996 and 1995, the Company had $4.3 million and
$15.1 million, respectively, of forward exchange contracts outstanding to
purchase British pounds. These contracts mature quarterly in varying amounts
through June 1997. British Aerospace is the counterparty to these instruments.
During the years ended December 31, 1996, 1995 and 1994, the Company recorded
gains and (losses) of approximately $465,000, ($97,000) and ($63,000),
respectively, related to its hedging activities.
At December 31, 1996 and 1995, the Company had outstanding or committed standby
letters of credit of approximately $27.2 million and $5.1 million,
respectively, issued under an agreement expiring in October 1997 and maintained
primarily as security against performance and advances received on long-term
contracts. The agreement provides a maximum aggregate commitment for $35.0
million.
The Company's financial instruments that are exposed to concentrations of
credit risk consist primarily of cash equivalents, investments - restricted and
receivables. The Company's cash equivalents and restricted investments are high
quality securities placed with financial institutions or an affiliate.
Concentrations of credit risk with respect to receivables from customers are
disclosed in Note 2.
52
<PAGE> 154
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11 -FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK, CONCENTRATIONS OF
CREDIT RISK AND FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The following table presents the carrying value and estimated fair value as of
December 31, 1996 and 1995, of the Company's financial instruments reportable
pursuant to Statement of Financial Accounting Standards No. 107, "Disclosures
about Fair Value of Financial Instruments."
<TABLE>
<CAPTION>
1996 1995
-------------------------------------------------------------------
CARRYING ESTIMATED Carrying Estimated
VALUE FAIR VALUE Value Fair Value
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
Assets:
Cash and cash equivalents $8,540,201 $8,540,201 $4,582,021 $4,582,021
Investments - restricted 5,000,000 5,000,000 5,000,000 5,000,000
Long-term note receivable - - 3,558,000 3,558,000
Forward currency contracts 374,000 312,000 - -
Liabilities:
Borrowings on line of credit
- affiliate $4,669,713 $4,669,713 $6,513,666 $6,513,666
Forward currency contracts - - 329,000 460,000
</TABLE>
The carrying amount of cash equivalents, investments - restricted, borrowings
on bank line of credit, and borrowing on line of credit - affiliate
approximates fair value because of the short maturity of these instruments. The
fair values of the Company's forward currency contracts are based on quoted
market prices of these or similar instruments, adjusted for maturity
differences. In management's opinion, the cost to obtain replacement standby
letters of credit for those currently outstanding would not significantly vary
from the present fee structure.
NOTE 12 - SEGMENT AND GEOGRAPHIC INFORMATION
The Company operates in three business segments: Training Devices, Training
Services and Systems Management. The Training Devices Segment designs and
manufactures flight simulators, weapon system trainers, tactical air defense
trainers, small arms trainers, entertainment devices, maintenance trainers and
other sophisticated training devices. The Training Services Segment provides a
full range of training support, including device maintenance, training system
development and operation, and flight and ground school instruction. The
Systems Management Segment manages complex programs requiring the services of
both the Training Devices and Training Services segments. Intersegment sales
are accounted for at cost. Segment income represents sales, less related
expenses, and excludes interest and corporate expense. Identifiable assets
represent those assets used in the operation of each segment. Corporate assets
are principally cash.
53
<PAGE> 155
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12 - SEGMENT AND GEOGRAPHIC INFORMATION (CONTINUED)
Sales to the United States Government (primarily the Navy and Air Force) under
prime contracts and subcontracts approximated $32.0 million, $34.6 million and
$31.8 million for 1996, 1995 and 1994, respectively. Sales to LMC during 1996
and 1995 approximated $27.6 million and $15.1 million, respectively. In 1996
and 1995, sales by the Training Devices Segment and Systems Management Segment
to affiliates exceeded 10% of total revenue, as more fully described in Note
10.
United States sales to unaffiliated customers include exports to the Asia
Pacific region of $2.6 million, $5.3 million and $8.4 million in 1996, 1995
and 1994, respectively.
The following tabulation summarizes certain information relating to the
Company's business segments:
<TABLE>
<CAPTION>
1996 1995 1994
-----------------------------------------------------------
<S> <C> <C> <C>
REVENUES
Training Devices
Non-affiliate $ 49,242,783 $ 33,735,013 $ 19,480,721
Affiliate 15,377,003 8,422,355 3,245,362
Intersegment 1,678,639 6,584,837 4,183,744
Training Services
Non-affiliate 25,946,505 35,386,913 31,752,370
Affiliate 4,009,440 3,171,010 1,487,323
Intersegment 344,982 127,880 150,173
Systems Management
Non-affiliate 724,967 1,320,559 9,172,408
Affiliate 4,968,733 11,488,389 -
Intersegment - 5,873 13,685
Eliminations (2,023,621) (6,718,590) (4,347,602)
------------ ------------ ------------
$100,269,431 $ 93,524,239 $ 65,138,184
============ ============ ============
INCOME (LOSS) BEFORE INCOME TAXES
Training Devices $ 6,797,683 $ 3,092,719 $ (785,917)
Training Services 4,024,251 5,011,535 4,947,745
Systems Management 989,808 2,486,996 (661,943)
Interest and corporate expenses (3,278,734) (5,279,158) (6,349,186)
------------ ------------ ------------
$ 8,533,008 $ 5,312,092 $ (2,849,301)
============ ============ ============
IDENTIFIABLE ASSETS AT END OF PERIOD
Training Devices $ 49,606,707 $ 38,948,730 $ 39,828,376
Training Services 12,582,489 7,640,933 12,283,457
Corporate and other 6,892,264 4,133,922 11,682,552
------------ ------------ ------------
$ 69,081,460 $ 50,723,585 $ 63,794,385
============ ============ ============
</TABLE>
54
<PAGE> 156
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12 - SEGMENT AND GEOGRAPHIC INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
1996 1995 1994
-----------------------------------------------------------
<S> <C> <C> <C>
DEPRECIATION AND AMORTIZATION
Training Devices $ 1,678,249 $ 2,151,450 $ 1,412,733
Training Services 150,108 149,292 466,566
Corporate and other 4,900 5,848 14,739
------------ ------------ ------------
$ 1,833,257 $ 2,306,590 $ 1,894,038
============ ============ ============
CAPITAL EXPENDITURES
Training Devices $ 3,074,408 $ 1,401,485 $ 1,690,060
Training Services 45,690 17,623 6,050,141
Corporate and other - 8,070 3,408
============ ============ ------------
$ 3,120,098 $ 1,427,178 $ 7,743,609
============ ============ ============
</TABLE>
Sales and transfers between geographic areas are generally priced to recover
costs plus an appropriate mark-up for profit. A summary of the Company's
operations by geographic area is presented below:
<TABLE>
<CAPTION>
1996 1995 1994
-----------------------------------------------------------
<S> <C> <C> <C>
REVENUES
United States
Non-affiliate $ 46,211,457 $ 51,844,186 $ 55,458,698
Affiliate 24,352,257 23,081,754 4,732,685
Intraenterprise 11,712,814 7,930,132 405,109
United Kingdom
Non-affiliate 29,705,717 18,598,299 4,946,801
Affiliate - - -
Eliminations (11,712,814) (7,930,132) (405,109)
------------ ------------ ------------
$100,269,431 $ 93,524,239 $ 65,138,184
============ ============ ============
INCOME (LOSS) BEFORE INCOME TAXES
United States $ 8,222,114 $ 5,275,716 $ (1,166,730)
United Kingdom 310,894 36,376 (1,690,643)
Eliminations - - 8,072
------------ ------------ ------------
$ 8,533,008 $ 5,312,092 $ (2,849,301)
============ ============ ============
IDENTIFIABLE ASSETS AT END OF PERIOD
United States $ 40,687,561 $ 33,963,793 $ 59,965,978
United Kingdom 28,393,899 16,759,792 3,828,407
------------ ------------ ------------
$ 69,081,460 $ 50,723,585 $ 63,794,385
============ ============ ============
</TABLE>
NOTE 13 - SUBSEQUENT EVENT
On February 13, 1997, British Aerospace and the Company, based on the
recommendation of a special independent committee of the Company's directors,
signed a merger agreement providing for the acquisition of the Company's common
stock not currently owned by British Aerospace at a price of $24 in cash per
share. The transaction is subject to, among other things, approval by the
shareholders of the Company and regulatory agencies.
55
<PAGE> 157
REPORT OF INDEPENDENT ACCOUNTANTS
We have audited the balance sheet of Reflectone UK Limited as of 31 December
1996 and 1995 and the profit and loss account and cash flow statement for the
years ended 31 December 1996 and 1995 together with the accompanying notes, set
out on pages 5 to 16 in the attached document. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion of these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Reflectone UK Limited as 31
December 1996 and 1995, the results of their operations and their cash flow
statement for the years ended 31 December 1996 and 1995 in conformity with
generally accepted accounting principles.
KPMG Audit Plc 14 February 1997
Bristol, England
56
<PAGE> 158
REPORT OF INDEPENDENT ACCOUNTANTS
We have audited the balance sheet of Reflectone UK Limited as of 31 December
1995 and 1994 and the profit and loss account and cash flow statement for the
years ended 31 December 1995 and 1994 together with the accompanying notes, set
out on pages 5 to 18 in the attached document. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion of these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Reflectone UK Limited as 31
December 1995 and 1994, the results of their operations and their cash flow
statement for the years ended 31 December 1995 and 1994 in conformity with
generally accepted accounting principles.
KPMG Audit Plc 15 March 1996
Bristol, England
57
<PAGE> 159
(a)(3) EXHIBITS
The following documents are filed as exhibits to this Report:
<TABLE>
<S> <C>
2.1 Agreement and Plan of Merger dated February 13, 1997, among the Registrant, British Aerospace Holdings,
Inc., and Bar Mergerco, Inc. (incorporated by reference to Exhibit 10.1 filed with the current Report on
Form 8-K of the Registrant filed on February 24, 1997)
3.1 Amended and Restated Articles of Incorporation of the Registrant, as amended and restated through August
15, 1988 (incorporated by reference to Exhibit 3.1 filed with Report on Form 10-K of Reflectone, Inc. for
the year ended December 31, 1993)
3.2 Designation of Relative Rights and Preferences and Other Terms of 8% Cumulative Convertible Preferred Stock
(incorporated by reference to Exhibit 3.2 filed with Report on Form 10-K of Reflectone, Inc. for the year
ended December 31, 1993)
3.3 Bylaws of the Registrant, as amended and restated through August 7, 1992 (incorporated by reference to
Exhibit 3.3 filed with Report on Form 10-K of Reflectone, Inc. for the year ended December 31, 1993)
4.1 Agreement pursuant to Item 601(b)(4)(iii)(A) of Regulation S-K with respect to documents evidencing
certain long-term debt of the Registrant (incorporated by reference to Exhibit 4.2 filed with the Report on
Form 10-K of Reflectone, Inc. for the year ended December 31, 1991)
10.1 1982 Incentive Stock Option Plan, as amended through April 27, 1987 (incorporated by reference to Exhibit
10.1 filed with Report on Form 10-K of Reflectone, Inc. for the year ended December 31, 1992)
10.2 Reflectone, Inc. 1990 Stock Option Plan, as amended through November 7, 1991.
10.3 Reflectone, Inc. 1994 Stock Option Plan (incorporated by reference to Exhibit 10.3 filed with Report on
Form 10-K of Reflectone, Inc. for the year ended December 31, 1994)
10.4 Stock Option Agreement with Richard G. Snyder under the Reflectone, Inc. 1990 Stock Option Plan dated as of
February 8, 1990 (incorporated by reference to Exhibit 10.4 filed with Report on Form 10-K of Reflectone,
Inc. for the year ended December 31, 1994)
10.5 Form of Stock Option Agreement with Robert L. Kirk under the Reflectone, Inc. 1990 Stock Option Plan
(incorporated by reference to Exhibit 10.5 filed with Report on Form 10-K of Reflectone, Inc. for the year
ended December 31, 1994)
10.6 Reflectone, Inc. Variable Incentive Compensation Plan, as in effect for the year ending December 31, 1992
10.7 Reflectone, Inc. 1997 Long-term Incentive Plan dated February 12, 1997
10.8 Lease to Build Agreement dated December 28, 1978, between Reflectone, Inc. and Tampa West Industrial Park,
Inc. (incorporated by reference to Exhibit 10.7 on Form 10-K of Reflectone, Inc. for the year ended
December 31, 1995)
</TABLE>
58
<PAGE> 160
<TABLE>
<S> <C>
10.9 Amendments to Exhibit 10.6 dated March 26, 1979 (Amend. No. 1), May 10, 1979 (Amend. No. 2), February 15,
1980 (Amend. No. 3), June 4, 1980 (letter agreement), and July 10, 1980 (Amend. No. 4) (incorporated by
reference to Exhibit 5(b)(2) to the Registration Statement of Reflectone, Inc. on Form S-7 filed with the
Commission on September 9, 1980)
10.10 Amendments No. 5 and 6, dated August 11, 1982 and June 8, 1984, respectively, to Exhibit 10.6, together
with Memorandum of Building Addition Lease dated August 11, 1982 (incorporated by reference to Exhibit 10.9
on Form 10-K of Reflectone, Inc. for the year ended December 31, 1995)
10.11 Lease to Build Addition Agreement dated August 11, 1982 between Reflectone, Inc. and Tampa West Industrial
Park, Inc. and First Amendment to Lease to Build Addition Agreement dated December 29, 1982 between
Reflectone, Inc. and Tampa West Industrial Park, Inc. (incorporated by reference to Exhibit 10.10 on Form
10-K of Reflectone, Inc. for the year ended December 31, 1995)
10.12 Basic Agreement dated August 11, 1982 between Reflectone, Inc. and Tampa West Industrial Park, Inc. and
First Amendment to Basic Agreement dated December 29, 1982 (incorporated by reference to Exhibit 10.11 on
Form 10-K of Reflectone, Inc. for the year ended December 31, 1995)
10.13 $10,000,000 Borrowing Facility Agreement between Reflectone, Inc. and British Aerospace Finance, Inc. dated
as of August 7, 1996 (incorporated by reference to Exhibit 10.12 filed with Report on Form 10-Q of
Reflectone, Inc. for the quarter ended June 30, 1996)
10.14 Agreement for Credit Availability between Reflectone, Inc. and British Aerospace Plc. dated as of November
20, 1996
10.15 $40,000,000 Borrowing Facility Agreement C-130J Program between Reflectone, Inc. and British Aerospace
Finance, Inc. dated as of November 20, 1996
10.16 $2,000,000 Revolving Line of Credit Agreement between Reflectone, Inc. and Wachovia Bank of Georgia, N.A.
dated August 7, 1996 (incorporated by reference to Exhibit 10.15 filed with Report on Form 10-Q of
Reflectone, Inc. for the quarter ended June 30, 1996)
10.17 $20,000,000 Letter of Credit Agreement between Lloyds Bank Plc and Reflectone, Inc. dated November 1, 1996
Incorporated by reference to Exhibit 10.16 filed with Report on Form 10-Q of Reflectone, Inc. for the
quarter ended September 30, 1996)
10.18 First Amendment to Letter of Credit Agreement between Lloyds Bank Plc and Reflectone, Inc. dated as of
November 20, 1996
10.19 Representation from British Aerospace Public Limited Company that it intends to continue to provide or
guarantee Reflectone, Inc.'s credit facilities dated January 31, 1997
10.20 Form of Indemnification Agreement between the Registrant and its directors (incorporated by reference to
Exhibit 10.18 on Form 10-K of Reflectone, Inc. for the year ended December 31, 1995)
10.21 Form of Indemnification Agreement between the Registrant and certain of its officers (incorporated by
reference to Exhibit 10.19 on Form 10-K of Reflectone, Inc. for the year ended December 31, 1995)
</TABLE>
59
<PAGE> 161
<TABLE>
<S> <C>
10.22 Subscription Agreement between British Aerospace Holdings, Inc. and Reflectone, Inc., dated as of May 23,
1988 (incorporated by reference to Exhibit 10.20 filed with Report on Form 10-K of Reflectone, Inc. for the
year ended December 31, 1994)
10.23 Stock Purchase Agreement between British Aerospace Holdings, Inc. and Reflectone, Inc. dated as of
September 15, 1989 (incorporated by reference to Exhibit 10.21 filed with Report on Form 10-K of
Reflectone, Inc. for the year ended December 31, 1994)
10.24 Summary of Special Security Agreement Among British Aerospace Public Limited Company, British Aerospace
Holdings, Inc., Reflectone, Inc., and the Department of Defense (incorporated by reference to Exhibit 10.19
filed with the Report on Form 10-K of Reflectone, Inc. for the year ended December 31, 1993)
10.25 Flight Training Center Management Agreement between British Aerospace Holdings, Inc. and Reflectone
Training Systems, Inc. dated as of January 1, 1996 (incorporated by reference to Exhibit 10.2 filed with
the Report on Form 8-K of Reflectone, Inc. dated December 21, 1995)
10.26 Purchase Agreement between Reflectone, Inc. and British Aerospace Plc. dated June 21, 1993 (incorporated by
reference to Exhibit 2.1 filed with the Report on Form 8-K of Reflectone as of June 21, 1993)
10.27 Purchase Agreement between British Aerospace Holdings, Inc. and Reflectone, Inc. dated December 21, 1995
(incorporated by reference to Exhibit 10.1 on Form 8-K of Reflectone, Inc. dated December 21, 1995)
10.28 Employment Agreement between the Company and Richard G. Snyder dated January 16, 1990 (incorporated by
reference to Exhibit 10.22 filed with the Report on Form 10-K of Reflectone, Inc. for the year ended
December 31, 1993)
10.29 Purchase Agreement Between MDFC Equipment Leasing Corporation and Reflectone Training Systems, Inc. dated
December 29, 1994 (incorporated by reference to Exhibit 10.26 filed with Report on Form 10-K of Reflectone,
Inc. for the year ended December 31, 1994)
10.30 Equipment Lease Agreement, Amendment No. 1, and Lease Rider No. 1, between MDFC Equipment Leasing
Corporation and Reflectone Training Systems, Inc. dated December 29, 1994 (incorporated by reference to
Exhibit 10.27 filed with Report on Form 10-K of Reflectone, Inc. for the year ended December 31, 1994)
10.31 Escrow Agreement between Reflectone Training Systems, Inc., MDFC Equipment Leasing Corporation, and British
Aerospace Finance, Inc. dated December 29, 1994 (incorporated by reference to Exhibit 10.28 filed with
Report on Form 10-K of Reflectone, Inc. for the year ended December 31, 1994)
22.1 Subsidiaries of Reflectone, Inc. (incorporated by reference to Exhibit 22.1 filed with the Report on Form
10-K of Reflectone, Inc. for the year ended December 31, 1993)
23.1 Accountants' Consent to Incorporation by reference in the Registrant's Registration Statements Nos.
2-82048, 33-3059, 33-37077, and 33-79912 on Form S-8
27 Financial Data Schedule (for SEC use only)
</TABLE>
60
<PAGE> 162
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed by the Registrant during the
quarter ended December 31, 1996.
61
<PAGE> 163
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: March 3, 1997 By: /s/ Richard G. Snyder
---------------- ------------------------------
Richard G. Snyder
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<S> <C>
Date: March 3, 1997 By: /s/ Richard G. Snyder
--------------- -------------------------------------------
Richard G. Snyder
President, Chief Executive Officer,
and Director (Principal Executive Officer)
Date: March 3, 1997 By: /s/ Richard W. Welshhans
--------------- -------------------------------------------
Richard W. Welshhans
Vice President- Finance and Chief Financial
Officer (Principal Financial and Accounting
Officer)
Date: March 3, 1997 By: /s/ Stella F. Thayer
--------------- -------------------------------------------
Stella F. Thayer
Chairman of the Board
</TABLE>
62
<PAGE> 164
<TABLE>
<S> <C>
Date: March 3, 1997 By: /s/ Edward W. Bettke
------------------ ------------------------
Edward W. Bettke
Director
Date: March 3, 1997 By: /s/ David R. Fish
------------------ ------------------------
David R. Fish
Director
Date: March 3, 1997 By: /s/ Sydney Gillibrand
------------------ ------------------------
Sydney Gillibrand
Director
Date: March 3, 1997 By: /s/ Robert F. Schoultz
------------------ ------------------------
Robert F. Schoultz
Director
Date: March 3, 1997 By: /s/ Dale R. States
------------------ ------------------------
Dale R. States
Director
Date: March 3, 1997 By: /s/ Paul L. Harris
------------------ ------------------------
Paul L. Harris
Director
</TABLE>
63
<PAGE> 165
REFLECTONE, INC.
FORM 10-K
(For the Year Ended December 31, 1996)
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- ------
<S> <C>
2.1 Agreement and Plan of Merger dated February 13, 1997, among the Registrant, British Aerospace Holdings,
Inc., and Bar Mergerco, Inc. (incorporated by referen ce to Exhibit 10.1 filed with the current Report on
Form 8-K of the Registrant filed on February 24, 1997)
3.1 Amended and Restated Articles of Incorporation of the Registrant, as amended and restated through August
15, 1988 (incorporated by reference to Exhibit 3.1 filed with Report on Form 10-K of Reflectone, Inc. for
the year ended December 31, 1993)
3.2 Designation of Relative Rights and Preferences and Other Terms of 8% Cumulative Convertible Preferred Stock
(incorporated by reference to Exhibit 3.2 filed with Report on Form 10-K of Reflectone, Inc. for the year
ended December 31, 1993)
3.3 Bylaws of the Registrant, as amended and restated through August 7, 1992 (incorporated by reference to
Exhibit 3.3 filed with Report on Form 10-K of Reflectone, Inc. for the year ended December 31, 1993)
4.1 Agreement pursuant to Item 601(b)(4)(iii)(A) of Regulation S-K with respect to documents evidencing
certain long-term debt of the Registrant (incorporated by reference to Exhibit 4.2 filed with the Report on
Form 10-K of Reflectone, Inc. for the year ended December 31, 1991)
10.1 1982 Incentive Stock Option Plan, as amended through April 27, 1987 (incorporated by reference to Exhibit
10.1 filed with Report on Form 10-K of Reflectone, Inc. for the year ended December 31, 1992)
10.2 Reflectone, Inc. 1990 Stock Option Plan, as amended through November 7, 1991.
10.3 Reflectone, Inc. 1994 Stock Option Plan (incorporated by reference to Exhibit 10.3 filed with Report on
Form 10-K of Reflectone, Inc. for the year ended December 31, 1994)
10.4 Stock Option Agreement with Richard G. Snyder under the Reflectone, Inc. 1990 Stock Option Plan dated as of
February 8, 1990 (incorporated by reference to Exhibit 10.4 filed with Report on Form 10-K of Reflectone,
Inc. for the year ended December 31, 1994)
10.5 Form of Stock Option Agreement with Robert L. Kirk under the Reflectone, Inc. 1990 Stock Option Plan
(incorporated by reference to Exhibit 10.5 filed with Report on Form 10-K of Reflectone, Inc. for the year
ended December 31, 1994)
10.6 Reflectone, Inc. Variable Incentive Compensation Plan, as in effect for the year ending December 31, 1992
10.7 Reflectone, Inc. 1997 Long-term Incentive Plan dated February 12, 1997
</TABLE>
64
<PAGE> 166
<TABLE>
<S> <C>
10.8 Lease to Build Agreement dated December 28, 1978, between Reflectone, Inc. and Tampa West Industrial Park,
Inc. (incorporated by reference to Exhibit 10.7 on Form 10-K of Reflectone, Inc. for the year ended
December 31, 1995)
10.9 Amendments to Exhibit 10.6 dated March 26, 1979 (Amend. No. 1), May 10, 1979 (Amend. No. 2), February 15,
1980 (Amend. No. 3), June 4, 1980 (letter agreement), and July 10, 1980 (Amend. No. 4) (incorporated by
reference to Exhibit 5(b)(2) to the Registration Statement of Reflectone, Inc. on Form S-7 filed with the
Commission on September 9, 1980)
10.10 Amendments No. 5 and 6, dated August 11, 1982 and June 8, 1984, respectively, to Exhibit 10.6, together
with Memorandum of Building Addition Lease dated August 11, 1982 (incorporated by reference to Exhibit 10.9
on Form 10-K of Reflectone, Inc. for the year ended December 31, 1995)
10.11 Lease to Build Addition Agreement dated August 11, 1982 between Reflectone, Inc. and Tampa West Industrial
Park, Inc. and First Amendment to Lease to Build Addition Agreement dated December 29, 1982 between
Reflectone, Inc. and Tampa West Industrial Park, Inc. (incorporated by reference to Exhibit 10.10 on Form
10-K of Reflectone, Inc. for the year ended December 31, 1995)
10.12 Basic Agreement dated August 11, 1982 between Reflectone, Inc. and Tampa West Industrial Park, Inc. and
First Amendment to Basic Agreement dated December 29, 1982 (incorporated by reference to Exhibit 10.11 on
Form 10-K of Reflectone, Inc. for the year ended December 31, 1995)
10.13 $10,000,000 Borrowing Facility Agreement between Reflectone, Inc. and British Aerospace Finance, Inc. dated
as of August 7, 1996 (incorporated by reference to Exhibit 10.12 filed with Report on Form 10-Q of
Reflectone, Inc. for the quarter ended June 30, 1996)
10.14 Agreement for Credit Availability between Reflectone, Inc. and British Aerospace Plc. dated as of November
20, 1996
10.15 $40,000,000 Borrowing Facility Agreement C-130J Program between Reflectone, Inc. and British Aerospace
Finance, Inc. dated as of November 20, 1996
10.16 $2,000,000 Revolving Line of Credit Agreement between Reflectone, Inc. and Wachovia Bank of Georgia, N.A.
dated August 7, 1996 (incorporated by reference to Exhibit 10.15 filed with Report on Form 10-Q of
Reflectone, Inc. for the quarter ended June 30, 1996)
10.17 $20,000,000 Letter of Credit Agreement between Lloyds Bank Plc and Reflectone, Inc. dated November 1, 1996
Incorporated by reference to Exhibit 10.16 filed with Report on Form 10-Q of Reflectone, Inc. for the
quarter ended September 30, 1996)
10.18 First Amendment to Letter of Credit Agreement between Lloyds Bank Plc and Reflectone, Inc. dated as of
November 20, 1996
10.19 Representation from British Aerospace Public Limited Company that it intends to continue to provide or
guarantee Reflectone, Inc.'s credit facilities dated January 31, 1997
10.20 Form of Indemnification Agreement between the Registrant and its directors (incorporated by reference to
Exhibit 10.18 on Form 10-K of Reflectone, Inc. for the year ended December 31, 1995)
</TABLE>
65
<PAGE> 167
<TABLE>
<S> <C>
10.21 Form of Indemnification Agreement between the Registrant and certain of its officers (incorporated by
reference to Exhibit 10.19 on Form 10-K of Reflectone, Inc. for the year ended December 31, 1995)
10.22 Subscription Agreement between British Aerospace Holdings, Inc. and Reflectone, Inc., dated as of May 23,
1988 (incorporated by reference to Exhibit 10.20 filed with Report on Form 10-K of Reflectone, Inc. for the
year ended December 31, 1994)
10.23 Stock Purchase Agreement between British Aerospace Holdings, Inc. and Reflectone, Inc. dated as of
September 15, 1989 (incorporated by reference to Exhibit 10.21 filed with Report on Form 10-K of
Reflectone, Inc. for the year ended December 31, 1994)
10.24 Summary of Special Security Agreement Among British Aerospace Public Limited Company, British Aerospace
Holdings, Inc., Reflectone, Inc., and the Department of Defense (incorporated by reference to Exhibit 10.19
filed with the Report on Form 10-K of Reflectone, Inc. for the year ended December 31, 1993)
10.25 Flight Training Center Management Agreement between British Aerospace Holdings, Inc. and Reflectone
Training Systems, Inc. dated as of January 1, 1996 (incorporated by reference to Exhibit 10.2 filed with
the Report on Form 8-K of Reflectone, Inc. dated December 21, 1995)
10.26 Purchase Agreement between Reflectone, Inc. and British Aerospace Plc. dated June 21, 1993 (incorporated by
reference to Exhibit 2.1 filed with the Report on Form 8-K of Reflectone as of June 21, 1993)
10.27 Purchase Agreement between British Aerospace Holdings, Inc. and Reflectone, Inc. dated December 21, 1995
(incorporated by reference to Exhibit 10.1 on Form 8-K of Reflectone, Inc. dated December 21, 1995)
10.28 Employment Agreement between the Company and Richard G. Snyder dated January 16, 1990 (incorporated by
reference to Exhibit 10.22 filed with the Report on Form 10-K of Reflectone, Inc. for the year ended
December 31, 1993)
10.29 Purchase Agreement Between MDFC Equipment Leasing Corporation and Reflectone Training Systems, Inc. dated
December 29, 1994 (incorporated by reference to Exhibit 10.26 filed with Report on Form 10-K of Reflectone,
Inc. for the year ended December 31, 1994)
10.30 Equipment Lease Agreement, Amendment No. 1, and Lease Rider No. 1, between MDFC Equipment Leasing
Corporation and Reflectone Training Systems, Inc. dated December 29, 1994 (incorporated by reference to
Exhibit 10.27 filed with Report on Form 10-K of Reflectone, Inc. for the year ended December 31, 1994)
10.31 Escrow Agreement between Reflectone Training Systems, Inc., MDFC Equipment Leasing Corporation, and British
Aerospace Finance, Inc. dated December 29, 1994 (incorporated by reference to Exhibit 10.28 filed with
Report on Form 10-K of Reflectone, Inc. for the year ended December 31, 1994)
22.1 Subsidiaries of Reflectone, Inc. (incorporated by reference to Exhibit 22.1 filed with the Report on Form
10-K of Reflectone, Inc. for the year ended December 31, 1993)
23.1 Accountants' Consent to Incorporation by reference in the Registrant's Registration Statements Nos.
2-82048, 33-3059, 33-37077, and 33-79912 on Form S-8
27 Financial Data Schedule (for SEC use only)
</TABLE>
66
<PAGE> 168
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
Amendment No. 1 to FORM 10-K
For the fiscal year ended December 31, 1996
Commission File No. 0-14059
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
--------------- -------------------------
REFLECTONE, INC.
(Exact name of Registrant as specified in its charter)
Florida 06-0663546
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
- ------------------- -----------------------------------------
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.10 per share
---------------------------------------
(Title of Class)
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 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]
Aggregate market value of the voting stock held by non-affiliates of
the Registrant as of February 25, 1997: $33,262,559 (assuming, for
these purposes only, that 1,426,378 shares of common stock beneficially
owned by all executive officers and directors as a group, and by
British Aerospace, Plc. and its subsidiaries, are held by affiliates of
the Registrant).
The number of shares outstanding of the Registrant's class of common
stock, as of February 25, 1997: 2,864,448.
DOCUMENTS INCORPORATED BY REFERENCE
None
<PAGE> 169
REFLECTONE, INC. AND SUBSIDIARIES
This amendment of Form 10-K/A is being filed solely to file pages 56
and 57, Report of Independent Accountants on the financial statements
of Reflectone UK Limited for the years ended December 31, 1996 and
1995, and Report of Independent Accountants on the financial statements
of Reflectone UK Limited for the years ended December 31, 1994 and
1993.
The reports from KPMG Audit Plc on the financial statements of
Reflectone UK Limited are being refiled to state that the audits were
conducted in accordance with generally accepted auditing standards in
the USA and that the financial statements have been prepared in
conformity with generally accepted accounting principles in the USA.
2
<PAGE> 170
REPORT OF INDEPENDENT ACCOUNTANTS
We have audited the balance sheet of Reflectone UK Limited as of 31
December 1996 and 1995 and the profit and loss account and cash flow
statement for the years ended 31 December 1996 and 1995 together with
the accompanying notes, set out on pages 5 to 16 in the attached
document. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion of
these financial statements based on our audits.
We conducted our audits in accordance with auditing standards
generally accepted in the USA. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Reflectone
UK Limited as 31 December 1996 and 1995, the results of their
operations and their cash flow statement for the years ended 31
December 1996 and 1995 in conformity with accounting principles
generally accepted in the USA.
/s/KPMG
KPMG Audit Plc 14 February 1997
Bristol, England
3
<PAGE> 171
REPORT OF INDEPENDENT ACCOUNTANTS
We have audited the balance sheet of Reflectone UK Limited as of 31
December 1994 and 1993 and the profit and loss account and cash flow
statement for the years ended 31 December 1994 and 1993 together with
the accompanying notes, set out on pages 5 to 18 in the attached
document. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion of
these financial statements based on our audits.
We conducted our audits in accordance with auditing standards
generally accepted in the USA. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Reflectone
UK Limited as 31 December 1994 and 1993, the results of their
operations and their cash flow statement for the years ended 31
December 1994 and 1993 in conformity with accounting principles
generally accepted in the USA.
/s/ KPMG
KPMG Audit Plc 7 February 1995
Bristol, England
4
<PAGE> 172
EXHIBIT C
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported) February 13, 1997
REFLECTONE, INC.
(Exact name of registrant as specified in its charter)
Florida 0-14059 06-0663546
(State or Other Jurisdiction (Commission (IRS Employer
of Incorporation) File Number) Identification No.)
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
Not Applicable.
(Former name or former address, if changed since last report.)
<PAGE> 173
Item 5. Other Events
On February 13, 1997, Reflectone, Inc., a Florida corporation (the
"Company"), British Aerospace Holdings, Inc., a Delaware corporation
("Holdings"), and Bar Mergerco, Inc., a Florida corporation and a wholly
owned subsidiary of Holdings ("Mergerco"), entered into an Agreement and
Plan of Merger (the "Merger Agreement"). The Merger Agreement provides,
subject to the approval of the shareholders of the Company and subject
to other conditions set forth in the Merger Agreement, that: (a) Mergerco
will be merged with and into the Company (the "Merger"), with the Company
continuing as the surviving corporation of the Merger; (b) each share of the
Company's common stock that is outstanding at the Effective Time (as defined
in the Merger Agreement) of the Merger, excluding shares of the Company's
common stock held by Holdings, will be converted into the right to receive
$24.00 per share in cash, without interest, subject to applicable back-up
withholding taxes; and (c) Holdings, as a practical matter, will own 100% of
the Company. Completion of the transactions contemplated by the Merger
Agreement is subject to, among other things, approval by the Company's
shareholders and certain regulatory agencies.
A copy of the Merger Agreement is attached hereto as Exhibit 10.1.
A copy of the Company's press release announcing the execution of the Merger
Agreement is attached hereto as Exhibit 99.1.
Item 7. Financial Statements and Exhibits
(A) Exhibits
Exhibit 10.1 Agreement and Plan of Merger dated February 13, 1997,
among Reflectone, Inc., British Aerospace Holdings, Inc.,
and Bar Mergerco, Inc.
Exhibit 99.1 Press Release of the Company announcing execution of the
Merger Agreement.
<PAGE> 174
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 hereunto duly authorized.
REFLECTONE, INC.
(Registrant)
Date: February 21, 1997 By: /s/ Richard W. Welshhans
Richard W. Welshhans
Vice President and Chief Financial Officer
<PAGE> 175
EXHIBIT D
[LETTERHEAD OF ROBERT W. BAIRD & CO. INCORPORATED]
February 13, 1997
Special Independent Committee of the Board of Directors
Reflectone, Inc.
4908 Tampa West Boulevard
Tampa, FL 33634
Members of the Special Independent Committee:
Reflectone, Inc. (the "Company") proposes to enter into an Agreement and plan
of Merger (the "Agreement") with British Aerospace Holdings, Inc. ("Parent"), a
wholly-owned subsidiary of British Aerospace Plc, and Bar Mergerco, Inc., a
wholly-owned subsidiary of Parent ("Mergerco"). Pursuant to the Agreement, at
the Effective Time (as defined in the Agreement), Mergerco will be merged with
and into the Company (the "Merger") and each outstanding share of common stock,
par value $0.10 per share ("Company Common Stock"), of the Company (other than
shares (i) owned by Parent and (ii) held in the treasury of the Company) will
be converted solely into the right to receive $24.00 in cash (the
"Consideration").
You have requested our opinion as to the fairness, from a financial point of
view, to the holders of Company Common Stock (other than Parent and its
affiliates) of the Consideration.
Robert W. Baird & Co. Incorporated ("Baird"), as part of its investment banking
business, is engaged in the evaluation of businesses and their securities in
connection with mergers and acquisitions, negotiated underwritings, competitive
biddings, secondary distributions of listed and unlisted securities, private
placements, and valuations for estate, corporate and other purposes.
In conducting our investigation and analysis and in arriving at our opinion
herein, we have reviewed such information and taken into account such financial
and economic factors as we have deemed relevant under the circumstances. In
that connection, we have, among other things: (i) reviewed certain internal
information, primarily financial in nature, including projections, concerning
the business and operations of the Company furnished to us for purposes of our
analysis, as well as publicly available information including but not limited
to the Company's recent filings with the Securities and Exchange Commission
(the "SEC") and an equity analyst research report prepared by an investment
banking firm; (ii) reviewed the Agreement in the form presented to the Special
Independent Committee of the Company's Board of Directors (the "Special
Independent Committee"); (iii) compared the historical market prices and
trading activity of the Company Common Stock with those of certain other
publicly traded companies we deemed relevant; (iv) compared the financial
position and operating results of the Company with those of other publicly
traded companies we deemed relevant; and (v) compared the proposed financial
terms of the Merger with the financial terms of certain other business
combinations we deemed relevant. We have held discussions with certain members
of the Company's senior management concerning the Company's historical and
current financial condition and operating results, as well as the future
prospects of the Company. We have not been requested to, and did not, solicit
third party indications of interest in acquiring all or any part of the
Company. We have also considered such other
<PAGE> 176
Special Independent Committee of the Board of Directors
February 13, 1997
Page 2
information, financial studies, analysis and investigations and financial,
economic and market criteria which we deemed relevant for the preparation of
this opinion.
In arriving at our opinion, we have assumed and relied upon the accuracy and
completeness of all of the financial and other information provided us by or on
behalf of the Company, or publicly available, and have not attempted
independently to verify any such information. We have also assumed, with your
consent, that all material assets and liabilities (contingent or otherwise,
known or unknown) of the Company are as set forth in the Company's financial
statements. We have assumed that the financial forecasts examined by us were
reasonably prepared on bases reflecting the best available estimates and good
faith judgements of the Company's senior management as to future performance of
the Company. In conducting our review, we have not undertaken nor obtained an
independent evaluation or appraisal of any of the assets or liabilities
(contingent or otherwise) of the Company nor have we made a physical inspection
of the properties or facilities of the Company. Our opinion necessarily is
based upon economic, monetary and market conditions as they exist and can be
evaluated on the date hereof, and does not predict or take into account any
changes which may occur, or information which may become available, after the
date hereof.
Our opinion has been prepared and the request of and for the information of
the Special Independent Committee, and shall not be used for any other purpose
or disclosed to any other party without the prior written consent of Baird;
provided, however, that this letter may be reproduced in full in the Proxy
Statement to be provided to the Company's stockholders in connection with the
Merger. This opinion does not address the relative merits of the Merger and any
other potential transactions or business strategies considered by the Company's
Board of Directors or the Special Independent Committee, and does not constitute
a recommendation to any shareholder of the Company as to how any such
shareholder should vote with respect to the Merger. Baird will receive a fee
for rendering this opinion. In the past, we have provided financial advisory
services to the Company, for which we received our customary compensation.
In the ordinary course of our business, we may from time to time trade the
securities of the Company or British Aerospace Plc for our own account or the
accounts of our customers and, accordingly, may at any time hold long or short
positions in such securities.
Based upon and subject to the foregoing, we are of the opinion that, as of the
date hereof, the Consideration is fair, from a financial point of view, to the
holders of Company Common Stock (other than the Parent and its affiliates).
Very truly yours,
/s/ Robert W. Baird & Co. Incorporated
<PAGE> 177
EXHIBIT E
[LETTERHEAD OF J. P. MORGAN SECURITIES INC.]
February 26, 1997
The Board of Directors
British Aerospace Plc
Warwick House
P.O. Box 87
Farnborough Aerospace Centre
Farnborough, Hants GU1 46YU
Attention: Richard Lapthorne
Finance Director
Gentlemen:
You have requested our opinion as to the fairness, from a financial point of
view, to British Aerospace Plc (the "Company") of the consideration proposed to
be paid by British Aerospace Holdings, Inc., a wholly-owned subsidiary of the
Company ("Holdings") in connection with the proposed merger (the "Merger") of
Bar Mergerco, Inc., a wholly-owned subsidiary of Holdings ("Mergerco") with
Reflectone, Inc. (the "Seller"). Pursuant to the terms and subject to the
conditions of the Agreement and Plan of Merger, dated as of February 13, 1997
(the "Agreement"), by and among the Seller, Holdings and Mergerco, the Seller
will become an indirect wholly-owned subsidiary of the Company through the
merger of Mergerco with and into the Seller with the Seller as the surviving
corporation, and each outstanding share of Common Stock, $0.10 par value per
share, of the Seller (other than shares held by the Company or held in the
treasury of the Seller) will be converted solely into the right to receive an
amount in cash equal to $24.00 per share (the "Merger Consideration").
In arriving at our opinion, we have reviewed (i) the Agreement and certain
related documents; (ii) the draft Proxy Statement of the Seller with respect to
the Merger (the "Proxy Statement"); (iii) certain publicly available
information concerning the business of the Seller and of certain other
companies engaged in businesses comparable to those of the Seller, and the
reported trading prices for certain other companies' securities deemed
comparable; (iv) publicly available terms of certain transactions involving
companies comparable to the Seller; (v) current and historical trading prices
of the common stock of the Seller; (vi) the audited financial statements of the
Seller for the fiscal year ended December 31, 1995, and the unaudited financial
statements of the Seller for the fiscal year ended December 31, 1996; (vii)
certain agreements with respect to outstanding indebtedness or obligations of
the Seller; (viii) certain internal financial analyses and forecasts prepared
by the Company and the Seller and their respective managements; and (ix) such
other information that we deemed relevant.
In addition, we have held discussions with certain members of the management of
the Company with respect to certain aspects of the Merger, and the past and
current business operations of the Company and the Seller, the financial
condition and future prospects and operations of the
<PAGE> 178
- 2 -
Company and the Seller, the effects of the Merger on the Company and the
Seller, and certain other matters we believed necessary or appropriate to our
inquiry. We have also reviewed such other financial studies and analyses and
considered such other information as we deemed appropriate for the purposes of
this opinion.
In rendering our opinion, we have relied upon and assumed, without independent
verification, the accuracy and completeness of all information that was
publicly available or was furnished to us by the Company or the Seller or
otherwise reviewed by or discussed with us, and we have not assumed any
responsibility or liability therefor. We have not conducted any valuation or
appraisal of any assets or liabilities, nor have any such valuations or
appraisals been provided to us. In relying on financial analyses and forecasts
provided to us, we have assumed that they have been reasonably prepared based
on assumptions reflecting the best currently available estimates and judgments
by management of the Company and the Seller as to the expected future results
of operations and financial condition of the Company and the Seller. We have
also assumed that the Merger will have the tax consequences described in the
Proxy Statement, and in discussions with, and materials furnished to us by,
representatives of the Company, and that the other transactions contemplated by
the Agreement will be consummated on the terms and as described in the
Agreement and the Proxy Statement. We have relied as to all legal matters
relevant to rendering our opinion upon the advice of counsel.
Our opinion is necessarily based on economic, market and other conditions as in
effect on, and the information made available to us as of, the date hereof. It
should be understood that subsequent developments may affect this opinion and
that we do not have any obligation to update, revise, or reaffirm this opinion.
We have acted as financial advisor to the Company with respect to the proposed
Merger and will receive a fee from the Company for our services. We will also
receive an additional fee if the proposed Merger is consummated. We have
provided customary investment banking services to the Company in the past. In
the ordinary course of their businesses, our affiliates may actively trade the
debt and equity securities of the Company or the Seller for their own account
or for the accounts of customers and, accordingly, they may at any time hold
long or short positions in such securities.
On the basis of and subject to the foregoing, it is our opinion as of the date
hereof that the Merger Consideration to be paid by the Company in the proposed
Merger is fair, from a financial point of view, to the Company.
This letter is provided to the Board of Directors of the Company in connection
with and for the purposes of its evaluation of the Merger. This opinion may
not be disclosed, referred to, or communicated (in whole or in part) to any
third party for any purpose whatsoever except with
<PAGE> 179
- 3 -
our prior written consent in each instance. This opinion may be reproduced in
full in any proxy or information statement mailed to stockholders of the Seller
subject to our review of any accompanying disclosure but may not otherwise be
disclosed publicly in any manner without our prior written approval and must be
treated as confidential.
Very truly yours,
J.P. MORGAN SECURITIES INC.
By: /s/ Nicholas B. Paumgarten
-----------------------------------
Name: Nicholas B. Paumgarten
Title: Managing Director
<PAGE> 180
APPENDIX A
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF
REFLECTONE, INC.
The undersigned hereby appoints Stella F. Thayer and Richard G. Snyder
and or any one of them acting singly, with full power of substitution, as the
proxy or proxies of the undersigned to attend the Special Meeting of
Shareholders of Reflectone, Inc., to be held on May 20, 1997, and any
adjournments or postponements thereof, to vote all shares of stock that the
undersigned would be entitled to vote if personally present in the manner
indicated below and on the reverse side, and on any other matters properly
brought before the meeting or any adjournments or postponements hereof, all as
set forth in the Proxy Statement.
This proxy or proxies may be revoked by the undersigned at any time
prior to the meeting if written notice of revocation is given to the Secretary
of the Company prior to the vote being taken at the meeting, or by execution of
a subsequent proxy or proxies which are presented at the meeting, or if the
shareholder attends the meeting and votes by ballot, except as to any matter or
matters upon which a vote shall have been cast pursuant to the authority
conferred by such proxy or proxies prior to such revocation.
1. Approval and adoption of the Agreement and Plan of Merger
dated as of February 13, 1997, by and among Reflectone, Inc., a Florida
corporation, Bar Mergerco, Inc., a Florida corporation and British Aerospace
Holdings, Inc., a Delaware corporation.
/ / FOR / / AGAINST / / ABSTAIN
THE BOARD OF DIRECTORS (WITH BRITISH AEROSPACE HOLDINGS,
INC.-AFFILIATED DIRECTORS ABSTAINING) UNANIMOUSLY RECOMMENDS THAT YOU VOTE FOR
PROPOSAL 1.
2. Upon such other matters as may properly come before the
meeting or any postponement or adjournment thereof.
(Please date and sign on reverse side) (Continued on other side)
Unless otherwise indicated, the Proxy will be voted FOR Proposal 1 and
in the discretion of the proxies on all other matters properly brought before
the meeting.
THE UNDERSIGNED HEREBY ACKNOWLEDGES RECEIPT OF THE NOTICE OF SPECIAL
MEETING AND PROXY STATEMENT OF REFLECTONE, INC., INCLUDING THE EXHIBITS
THERETO.
Date:_____________________________,1997
Signature:______________________________
Signature:______________________________
NOTE: Please sign exactly as name
appears hereon. Joint owners
should each sign. When
signing as attorney,
executor, administrator,
trustee or guardian, please
give full title as such.
Please sign, date and return in the enclosed postage-prepaid envelope.
