<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. 3)
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement [ ] Confidential, For Use of the
[ ] Definitive Proxy Statement Commission Only (as Permitted by
[X] Definitive Additional Materials Rule 14a-6(e)(2))
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
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 $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
[ ] Fee Paid Previously With Preliminary Materials.
[X] 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> 2
REFLECTONE, INC.
4908 TAMPA WEST BOULEVARD
TAMPA, FLORIDA 33634
May 8, 1997
Dear Shareholder:
By now you have probably received our Proxy Statement dated April 28, 1997,
relating to the 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, 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 of Mergerco with and into the Company, with the Company continuing as the
surviving corporation and a wholly-owned subsidiary of Holdings.
Enclosed with this letter is a Supplement to the Proxy Statement which
contains a copy of the Company's Quarterly Report on Form 10-Q for the three
months ended March 28, 1997 (the "Form 10-Q"), which the Company filed with the
Securities and Exchange Commission on May 8, 1997. We urge you to give the
Supplement, as well as the Proxy Statement, your careful consideration. Your
vote is important.
For your convenience, we have enclosed another copy of our Proxy Card. If
you have not already sent back the Proxy Card we previously mailed to you, or if
you previously sent back the Proxy Card but wish to change the manner in which
your shares are voted, please sign and date the accompanying Proxy Card and
return it in the enclosed postage prepaid envelope as soon as possible. If you
previously sent back the Proxy Card and do not wish to change the manner in
which your shares are voted, you need not return the accompanying Proxy Card. If
you attend the Meeting, you may vote in person if you wish, even if you have
previously returned a 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,
/s/ RICHARD G. SNYDER
------------------------------
RICHARD G. SNYDER,
President and Chief Executive Officer
<PAGE> 3
SUPPLEMENT TO PROXY STATEMENT
FOR
SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD MAY 20, 1997
S S S S S S S
GENERAL
This Supplement supplements the Proxy Statement dated April 28, 1997 (the
"Proxy Statement"), furnished by the Board of Directors of Reflectone, Inc. (the
Company") in connection with the special meeting of shareholders (including any
adjournment or postponement thereof, the "Meeting") 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. At the Meeting, the
Company's shareholders of record as of the close of business on April 14, 1997,
will consider and vote upon a proposal to approve and adopt an Agreement and
Plan of Merger dated as of February 13, 1997, 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 of
Mergerco with and into the Company, with the Company continuing as the surviving
corporation and a wholly-owned subsidiary of Holdings.
Capitalized terms used but not defined in this Supplement have the
respective meanings ascribed to them in the Proxy Statement. Cross-references in
this Supplement are to the cited sections of the Proxy Statement.
This Supplement is intended to be read in conjunction with the Proxy
Statement. All information contained in the Proxy Statement is hereby
incorporated by reference into this Supplement.
CERTAIN ADDITIONAL INFORMATION
On May 8, 1997, the Company filed with the Securities and Exchange
Commission the Company's Quarterly Report on Form 10-Q for the three months
ended March 28, 1997 (the "Form 10-Q"). A copy of the Form 10-Q is attached as
Exhibit A to this Supplement.
The Form 10-Q should be read in conjunction with 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), which are attached as Exhibit B to the Proxy
Statement. See "SELECTED CONSOLIDATED FINANCIAL DATA" and "CERTAIN INFORMATION
REGARDING THE BUSINESS OF THE COMPANY; RECENT DEVELOPMENTS."
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Form 10-Q attached as Exhibit A to this Supplement shall be deemed to
be incorporated herein by reference and made a part of the Proxy Statement. Any
statement contained in a document incorporated by reference in the Proxy
Statement or this Supplement shall be deemed to be modified or superseded for
purposes hereof to the extent that a statement contained herein (including the
exhibits hereto) modifies or supersedes such previous statement. Any statement
so modified shall not be deemed to constitute a part of the Proxy Statement or
this Supplement except as so modified or superseded.
<PAGE> 4
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 28, 1997
-----------------------------------------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
-------------------- ----------------------
Commission File 0-14059
-------------------------------------------------------------
REFLECTONE, INC.
- -----------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Florida 06-0663546
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
4908 Tampa West Boulevard, Tampa, Florida 33634-2481
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (813)885-7481
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past ninety days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Common Stock, par value $.10 per share, 2,864,448 shares as of May 5, 1997.
Page 1 of 15 Pages
Exhibits - None
<PAGE> 5
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
REFLECTONE, INC. & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of March 28, 1997 and December 31, 1996
<TABLE>
<CAPTION>
(Unaudited)
March 28, December 31,
ASSETS 1997 1996
<S> <C> <C>
- -----------------------------------------------------------------------------------------------------------------
CURRENT ASSETS
Cash and cash equivalents $ 7,060,055 $ 8,540,201
Investments - restricted - 3,000,000
Receivables - non affiliate 38,642,970 37,638,004
Receivables - affiliate 2,263,363 4,288,662
Inventory 2,436,595 -
Net deferred tax assets 2,904,000 2,504,000
Prepaid expenses and other current assets 1,603,063 1,715,080
----------- -----------
Total current assets 54,910,046 57,685,947
PROPERTY, PLANT & EQUIPMENT, NET 9,126,433 9,235,595
INVESTMENTS - RESTRICTED 2,000,000 2,000,000
OTHER ASSETS 160,518 159,918
----------- -----------
$66,196,997 $69,081,460
=========== ===========
LIABILITIES & SHAREHOLDERS' EQUITY
- -----------------------------------------------------------------------------------------------------------------
CURRENT LIABILITIES
Accounts payable $ 4,182,109 $10,334,520
Due to affiliate 719,559 2,089,777
Borrowings on line of credit - affiliate 14,774,175 4,669,713
Advance billings 13,228,725 18,897,097
Accrued employee compensation and benefits 2,907,694 4,595,564
Federal and state income taxes payable 825,314 751,209
Other accrued expenses and liabilities 4,085,671 3,783,890
----------- -----------
Total current liabilities 40,723,247 45,121,770
----------- -----------
DEFERRED GAIN ON SALE OF EQUIPMENT 2,138,499 2,200,567
----------- -----------
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 - 2,864,448 and
2,864,235 shares 286,445 286,423
Additional paid-in capital 32,634,757 32,630,276
Cumulative translation adjustment 615,117 560,094
Accumulated deficit (10,251,068) (11,767,670)
----------- -----------
Total shareholders' equity 23,335,251 21,759,123
----------- -----------
$66,196,997 $69,081,460
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE> 6
REFLECTONE, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the Quarters Ended March 28, 1997 and March 29, 1996
(Unaudited)
<TABLE>
<CAPTION>
Quarter Ended
---------------------------------------
March 28, March 29,
1997 1996
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
REVENUES
Non-affiliate $ 15,813,912 $ 14,230,744
Affiliate 4,085,331 7,096,319
------------ ------------
19,899,243 21,327,063
------------ ------------
COST AND EXPENSES
Cost of sales
Non-affiliate 13,913,659 13,256,298
Affiliate 2,744,494 5,170,276
------------ ------------
16,658,153 18,426,574
General and administrative 1,090,741 939,377
------------ ------------
17,748,894 19,365,951
------------ ------------
INCOME FROM OPERATIONS 2,150,349 1,961,112
------------ ------------
OTHER INCOME (EXPENSE)
Interest income 81,660 106,992
Interest expense (119,458) (119,221)
Other (163,949) 85,008
------------ ------------
(201,747) 72,779
------------ ------------
INCOME BEFORE INCOME TAXES 1,948,602 2,033,891
PROVISION FOR INCOME TAXES 256,000 413,030
------------ ------------
NET INCOME 1,692,602 1,620,861
PREFERRED STOCK DIVIDENDS 176,000 176,000
------------ ------------
NET INCOME APPLICABLE TO COMMON SHAREHOLDERS $ 1,516,602 $ 1,444,861
============ ============
INCOME PER COMMON AND COMMON EQUIVALENT SHARE
Primary $ .50 $ .49
============ ============
Fully diluted $ .48 $ .47
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 7
REFLECTONE, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Quarters Ended March 28, 1997 and March 29, 1996
(Unaudited)
<TABLE>
<CAPTION>
1997 1996
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,692,602 $ 1,620,861
Depreciation and amortization 290,147 435,285
Deferred income taxes (400,000) (164,000)
Change in assets and liabilities:
Decrease (increase) in receivables
Non-affiliate (1,001,200) (5,179,925)
Affiliate 2,025,311 (1,541,195)
Increase in inventory (2,436,595)
Decrease in accounts payable (6,157,244) (4,043,914)
Decrease in due to affiliate (1,372,507) (562,183)
Decrease in advance billings (5,667,223) (1,739,907)
Increase (decrease) in accrued employee
compensation and benefits (1,687,941) (1,172,631)
Other 424,873 (374,273)
------------ ------------
NET CASH USED IN OPERATING ACTIVITIES (14,289,777) (12,721,882)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (181,100) (415,619)
Release of escrowed funds under
lease agreement 3,000,000
Settlement of long-term note receivable - 3,558,284
------------ ------------
NET CASH PROVIDED BY INVESTING
ACTIVITIES 2,818,900 3,142,665
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Paydowns under line-of-credit agreements (40,279,430) (12,793,140)
Borrowings under line-of-credit agreements 50,383,892 21,421,395
Dividends on preferred stock (176,000) (176,000)
Other 4,503 291,995
------------ ------------
NET CASH PROVIDED BY FINANCING
ACTIVITIES 9,932,965 8,744,250
------------ ------------
NET DECREASE IN CASH (1,537,912) (834,967)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 8,540,201 4,582,021
EFFECT OF EXCHANGE RATE CHANGES ON CASH 57,766 9,532
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 7,060,055 $ 3,756,586
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 8
REFLECTONE, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Quarter Ended March 28, 1997
(Unaudited)
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q.
Accordingly, they do not include all of the information and notes required by
generally accepted accounting principles for complete financial statements. In
the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the quarter March 28, 1997 are not necessarily indicative
of the results that may be expected for the year ending December 31, 1997. For
further information, refer to the consolidated financial statements and notes
thereto included in the Company's Annual Report on Form 10-K for the year ended
December 31, 1996.
All intercompany transactions have been eliminated.
NOTE 1 - MERGER AGREEMENT
On February 13, 1997, British Aerospace Holdings, Inc. and a newly formed,
wholly owned, subsidiary of British Aerospace Holdings, Inc., signed a merger
agreement providing for the acquisition of the Company's common stock not
currently owned by British Aerospace Holdings, Inc. at a price of $24 per share
in cash. The transaction is subject to approval by the shareholders of the
Company. British Aerospace Holdings, Inc. is a wholly owned subsidiary of
British Aerospace, Plc. British Aerospace, Plc. and its affiliates are herein
collectively referred to as "British Aerospace".
NOTE 2 - RECEIVABLES
Component elements of receivables consist of the following:
<TABLE>
<CAPTION>
March 28, December 31,
1997 1996
------------ ------------
<S> <C> <C>
Receivables
U.S. Government
Billed $ 7,404,720 $ 5,280,559
Unbilled 3,019,277 6,165,476
------------ ------------
10,423,997 11,446,035
------------ ------------
Lockheed Aeronautical Systems Company
Billed 7,135,086 190,523
Unbilled 20,428,069 24,222,728
------------ ------------
27,563,155 24,413,251
------------ ------------
Commercial
Billed 436,932 1,910,703
Unbilled 347,794 -
Allowance for doubtful accounts (128,908) (131,985)
------------ ------------
655,818 1,778,718
------------ ------------
$ 38,642,970 $ 37,638,004
============ ============
Affiliates
Billed $ 1,186,670 $ 3,338,568
Unbilled 1,076,693 950,094
------------ ------------
$ 2,263,363 $ 4,288,662
============ ============
</TABLE>
5
<PAGE> 9
REFLECTONE, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Quarter Ended March 28, 1997
(Unaudited)
NOTE 2 - RECEIVABLES (CONTINUED)
Unbilled amounts represent the difference between revenue recognized for
financial reporting purposes and amounts contractually permitted to be billed
to customers. These amounts will be billed in subsequent periods as progress
billings, upon shipment of the product, or upon completion of the contract.
Under the terms of the Company's contract, as amended, with Lockheed Martin
Corporation ("LMC") to design and manufacture two dynamic mission simulators
and other related training devices, the Company will not receive a substantial
portion of contractual payments from LMC until the delivery and acceptance of
the devices. Delivery and acceptance of the devices is scheduled for the
fourth quarter of 1997, however, as a result of changes in our customer's
aircraft delivery schedule, a revised contract schedule reflecting delays in
delivery is currently being discussed and negotiated with the customer.
An allowance for doubtful accounts is provided based on historical experience
and after consideration of specific accounts and current economic conditions.
NOTE 3 - EARNINGS PER COMMON SHARE
Primary earnings per share are based on the weighted average number of common
shares and common share equivalents outstanding and give effect to the
recognition of preferred dividend requirements. Common share equivalents
include dilutive stock options and warrants using the treasury stock method.
Fully diluted earnings per share assumes, in addition to the above, (i) that
the Convertible Preferred Stock was converted at the beginning of each period
(ii) that earnings were increased for preferred dividends that would not have
been incurred had conversion taken place, and, (iii) the additional dilutive
effect of stock options and warrants.
The numbers of shares used in the earnings per share computation are as
follows:
<TABLE>
<CAPTION>
Quarter Ended
-------------------------
1997 1996
--------- ---------
<S> <C> <C>
Primary
Weighted average common shares outstanding 2,864,299 2,772,451
Stock options 156,864 157,089
--------- ---------
Average common shares outstanding 3,021,163 2,929,540
Convertible preferred stock 500,000 500,000
Additional dilutive effect of stock options 16,480 18,374
--------- ---------
Fully diluted assumed common shares outstanding 3,537,643 3,447,914
========= =========
</TABLE>
6
<PAGE> 10
REFLECTONE, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Quarter ended March 28, 1997
(Unaudited)
NOTE 4 - CREDIT AGREEMENTS AND BORROWINGS
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 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 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, Plc. or its affiliates. However, pursuant to the terms of an
Agreement for Credit Availability dated as of August 7, 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. 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 receipt of any payments from its customers.
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
(currently $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. Pursuant
to the terms of the Company's 1995 Agreement for Credit Availability, on August
7, 1995, the Company issued to
7
<PAGE> 11
REFLECTONE, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Quarter ended March 28, 1997
(Unaudited)
NOTE 4 - CREDIT AGREEMENTS AND BORROWINGS (CONTINUED)
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 on the Nasdaq
National Market on August 7, 1995, 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 Company's $2.0 million revolving line of credit facility with Wachovia Bank
of Georgia, N.A. permits the Company to select loans bearing interest at a
floating prime rate or at a fixed rate of LIBOR plus .25% and to specify,
within limits, the period during which the selected fixed interest rate will be
in effect. The agreement matures on August 7, 1997, and is supported by the
corporate guarantee of British Aerospace. At March 28, 1997, there were $2.0
million of credit available under this facility.
The Company's revolving line of credit facility with British Aerospace Finance,
Inc. provides for working capital borrowings aggregating up to $10.0 million.
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 March 28,
1997 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. The C-130J Facility currently provides for borrowings
aggregating up to $40.0 million and matures on August 7, 1997. Draws under this
facility are limited to actual costs incurred by the Company on the LMC C-130J
program. Interest rates charged under the C-130J Facility are at LIBOR plus
1.50%. At March 28, 1997 there were approximately $25.6 million of additional
credit available under this facility.
Under the Company's Lloyds Bank Plc letter of credit facility, the Company may
issue standby letters of credit and bank guarantees aggregating up to $35.0
million. The Company pays a non-refundable commission on the stated amount of
credits issued for the actual number of days outstanding. The agreement is
supported by the corporate guarantee of British Aerospace and matures on
October 31, 1997. At March 28, 1997, there were approximately $7.8 million of
credit available under this agreement.
8
<PAGE> 12
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Liquidity and Capital Resources
Management considers liquidity to be the Company's ability to generate adequate
cash to meet its short- and long-term business needs. The principal internal
source of such cash is the Company's operations, while external sources include
borrowings under the Company's credit facilities and the issuance of equity
securities.
During the quarter ended March 28, 1997, the Company used $14.3 million in
cash, net, for operating activities while in the comparable quarter of 1996,
the Company used $12.7 million in cash, net, for operating activities.
Operating cash flow was negatively impacted during the quarter ended March 28,
1997 by increases in non-affiliate receivables and inventory, and reductions in
accounts payable, due to affiliate, advance billings and accrued employee
compensation and benefits. Operating cash flow was negatively impacted during
the quarter ended March 29, 1996 by increases in non-affiliate and affiliate
receivables, and reductions in accounts payable, advance billings, and accrued
employee compensation and benefits. The increase in non-affiliate receivables
during both periods primarily related to the contract with LMC to design and
manufacture two C-130J dynamic mission simulators and other related training
devices. The increase in inventory during the first quarter of 1997 related to
the acquisition and modification of a used MD-88 full flight simulator for
ultimate delivery to Trans World Airlines, Inc. Contract revenues for the sale
are being recognized when cash payments are received from the customer.
During the quarter ended March 28, 1997, the Company increased its net
short-term borrowings by $10.1 million and reduced its cash by $1.5 million.
During the same period, gross borrowings of $50.4 million, reductions in cash
balances and cash received from the release of $3.0 million of escrowed funds
under the Company's lease agreement for its C-130H full flight simulator were
used primarily to fund $40.3 million in scheduled maturities of borrowings
under the Company's credit facilities and to fund operating activities during
the quarter.
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 $19.0
million of additional working capital for the C-130J program with 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 simulation programs, management of
the Company believes 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
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without recourse to British Aerospace, Plc. or its affiliates (collectively
"British Aerospace"). However, pursuant to the terms of an Agreement for Credit
Availability dated as of 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. 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.
Furthermore, the Company's management believes 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. Specific discussion of the Company's
credit facilities is included in Note 4 to the Consolidated Financial
Statements.
As discussed in Note 2 to the Company's Consolidated Financial Statements, the
Company will not receive certain substantial payments from Lockheed Martin
Corporation ("LMC") under the existing terms of the C-130J contract until the
achievement of certain contractual milestones. Accordingly, the Company has a
special credit facility (the "C-130J Facility") with British Aerospace to
finance the Company's working capital needs with respect to the C-130J contract
with LMC. The C-130J Facility currently provides for borrowings aggregating up
to $40.0 million and matures on November 20, 1997. Draws under this facility
are limited to actual costs incurred by the Company and its wholly-owned
subsidiary, Reflectone UK Limited ("RUKL"), on the LMC C-130J program. Based on
current schedules, the contract is estimated to require incremental funding of
$19.0 million during the remainder of 1997. While the cost of financing this
program is being recovered through the contract with LMC, an increase in
interest rates or an uncompensated 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.
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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.
Management believes that the Company's capital resources are adequate to meet
its foreseeable business needs, on both a short- and long-term basis, 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.
Results of Operations
Consolidated revenues decreased by $1.4 million, or 6.7% during the first
quarter of 1997 as compared to the comparable quarter in 1996.
Revenues of the Training Devices Segment increased by 11.0% during the quarter
ended March 28, 1997 as compared to the comparable quarter in 1996. The
increase in revenues primarily resulted from non-affiliate revenues generated
by two large international military programs.
Revenues of the Training Services Segment decreased by 19.8% during the quarter
ended March 28, 1997 as compared to the comparable quarter in 1996. The
decrease primarily relates to the 1996 loss of a reprocurement relating to a
training services contract with the U.S.Government in which the Company was the
incumbent contractor and lower levels of training for the U.S.Government at the
Company's training center in Tampa, Florida. These decreases in U.S. Government
revenues are considered by management to be temporary and not indicative of any
general trend.
Revenues of the Systems Management Segment were approximately $800,000 for the
quarter ended March 28, 1997 as compared to $1.9 million for the comparable
quarter in 1996. The decrease in revenues related to lower levels of scheduled
performance on a contract from an affiliate for delivery of a C-130H simulator
to an international customer.
The Company's income from operations was approximately $2.2 million and $2.0
million in the first quarter of 1997 and 1996, respectively. The operating
profit of the Training Devices Segment was $1.9 million and $404,000 for the
first quarter of 1997 and 1996, respectively. During the first quarter of 1997,
operating profits of the Training Devices Segment include approximately $2.2
million of profit recognized upon the achievement of a significant program
milestone on an international military program which was offset, in part, by
the recognition of additional losses of approximately $1.3 million on another
international military program for a prototype simulator which was awarded in
the fourth quarter of 1996. Total losses recognized on this program during the
fourth quarter of 1996 and first quarter of 1997 approximate $3.3 million and
reflect management's estimate of the excess of costs to complete the program
over its contract value.
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Operating profits of the Training Services Segment decreased by $850,000 or
77.0%, to $250,000 during the quarter ended March 28, 1997 as compared to the
comparable quarter in 1996. The reduced profitability was primarily the result
of decreases in revenues from contracts with the U.S. Government and reduced
operating margins on those contracts.
Operating profits of the Systems Management Segment were $25,000 for the
quarter ended March 28, 1997 compared to $439,000 for the comparable quarter in
1996. The 1996 operating profit reflects profit recognition on a contract from
an affiliate for the sale of a C-130H simulator.
Interest income approximated $82,000 and $107,000 during the first quarter of
1997 and 1996, respectively. Interest income is primarily interest earned on
restricted investments and temporary cash investments.
Interest expense was approximately $119,000 in each of the first quarters of
1997 and 1996. Interest costs of $524,000 and $156,000 during the first
quarters of 1997 and 1996, respectively, associated with the Company's
financing of the C-130J program were charged to the C-130J program and
reflected in cost of sales rather than as interest expense.
The provision for income taxes during the first quarter of 1997 differs from
the amount computed by applying the federal statutory tax rate of 34% to income
before taxes primarily as a result of the reduction of the valuation allowance
for net deferred tax assets. The reduction in the valuation allowance reflects
management's evaluation of the utilization of future federal tax benefits for
which recovery is not dependent upon future taxable income. The provision for
income taxes during the first quarter of 1996 differs from the amount computed
by applying the federal statutory tax rate to income before taxes primarily as
a result of the availability of investment and alternative minimum tax credits
to reduce the tax provision. At March 28, 1997, the Company has recorded a
deferred tax asset of $2.9 million.
Backlog
Contractual backlog increased to $138.5 million at March 28, 1997, from $129.9
million at December 31, 1996. Of the contractual backlog at March 28, 1997,
86.5% consisted of orders of the Training Devices Segment, 6.7% consisted of
orders of the Training Services Segment and 6.8% consisted of orders of the
Systems Management Segment. This compares to 80.5%, 12.1% and 7.4%,
respectively at December 31, 1996. At March 28, 1997, the contractual backlog
of the Training Devices Segment includes the LMC C-130J program in the amount
of $35.7 million. Annual contract awards within the Training Services Segment
to provide training to U.S. Military personnel are generally recorded during
the fourth calendar quarter. This results in a declining backlog for the
Training Services Segment during the first three calendar quarters. Not
included in contractual backlog are announced orders for which definitive
contracts have not been executed and unobligated contract options under U.S.
Government contracts.
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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, which 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 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.
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<PAGE> 17
The Company may experience transaction gains and losses from currency
fluctuations related to its international operations. In order to minimize
foreign exchange risk, the Company selectively hedges certain of its foreign
exchange exposures principally relating to foreign currency accounts payable
and accounts receivable. The Company's hedging strategy is facilitated by its
ability to borrow foreign currencies under the revolving credit facility and
the C-130J Facility provided by British Aerospace. This strategy has reduced
the Company's vulnerability to certain of its foreign currency exposures, and
the Company expects to continue this practice in the future to the extent
appropriate. The Company does not engage in speculative hedging activities, nor
does the Company hedge nontransaction-related balance sheet exposure.
The Company has a contract to buy forward British pounds with an equivalent
value of $1.3 million at March 28, 1997 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. The
forward contract matures on June 30, 1997. British Aerospace is the
counterparty to this instrument. The forward contract should not subject the
Company to risk from exchange movements because gains and losses on this
contract offset losses and gains on the transactions being hedged. However,
the amount and timing of the program costs were estimated and in recent periods
changes in these estimates have resulted in significant gains and losses from
exchange rate movements. During the first quarter of 1997, the Company recorded
losses of approximately $232,000 on these transactions, compared to a gain of
$22,000 in the comparable quarter of 1996.
Certain Statements
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 experiences to differ materially from
the anticipated results or other expectations expressed in the Company's
forward-looking statements. The risks and uncertainties that may affect the
operations, performance, development and results of the Company's business
include those set forth under "Factors That May Affect Future Results" and
elsewhere in this Quarterly Report.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
REFLECTONE, INC.
(Registrant)
Date: May 8, 1997 By: /s/ Richard G. Snyder
--------------------------------
Richard G. Snyder
President and Chief
Executive Officer
Date: May 8, 1997 By: /s/ Richard W. Welshhans
--------------------------------
Richard W. Welshhans
Vice President - Finance and
Chief Financial Officer
(Principal Financial
and Accounting Officer)
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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.
