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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)
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<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)
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Registrant's telephone number, including area code: (813) 885-7481
Securities registered pursuant to Section 12(b) of the Act:
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Title of Each Class Name of Each Exchange on Which Registered
------------------- -----------------------------------------
None
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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
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TABLE OF CONTENTS
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PART I PAGE NO.
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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
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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
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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
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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.
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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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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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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:
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1996 1995
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Quarter High Low High Low
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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
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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.
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Years Ended December 31,
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1996 1995 1994 1993 1992
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(Dollars in thousands, except per share amounts)
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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
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(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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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> 12
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> 13
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> 14
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> 15
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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<PAGE> 16
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.
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<PAGE> 17
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.
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<PAGE> 18
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.
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<PAGE> 19
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.
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<PAGE> 20
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> 21
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> 22
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> 23
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 $175,000 per year, and the
supplemental retirement benefits described at "Other Compensation
Arrangements - Supplemental Retirement Arrangements."
(5) Mr. Tobin's employment with the Company terminated on January 15,
1997.
23
<PAGE> 24
The following table sets forth information concerning options granted
during the year ended December 31, 1996, under the Company's 1994 Stock Option
Plan to the Named Executive Officers. The Company did not grant any stock
appreciation rights during the year.
<TABLE>
<CAPTION>
OPTION GRANTS IN LAST YEAR
Potential Realizable
Value at Assumed Annual
Rates
of Stock Price
Appreciation
Individual Grant for Option Term
---------------------------------------------------------------- -----------------------
Number of
Securities % of Total
Underlying Options Granted
Options to Employees in Exercise or
Granted Base Price Expiration
Name (#) 1996 ($/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> 25
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> 26
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> 27
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> 28
(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> 29
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> 30
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> 31
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> 32
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> 33
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> 34
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> 35
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> 36
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> 37
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> 38
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> 39
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> 40
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> 41
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> 42
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> 43
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> 44
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> 45
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> 46
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> 47
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> 48
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> 49
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> 50
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> 51
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> 52
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> 53
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> 54
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> 55
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> 56
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> 57
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> 58
(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> 59
<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> 60
<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> 61
(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> 62
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> 63
<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> 64
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> 65
<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> 66
<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> 1
EXHIBIT 10.2
REFLECTONE, INC.
1990 STOCK OPTION PLAN
<PAGE> 2
As adopted
February 8, 1990
and amended through
November 7, 1991
REFLECTONE, INC.
1990 STOCK OPTION PLAN
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C> <C>
ARTICLE I DEFINITIONS 1
(a) "Board" 1
(b) "Code" 1
(c) "Committee" 1
(d) "Company" 1
(e) "Director" 1
(f) "Disinterested Person" 1
(g) "Employee" 1
(h) "Employer" 1
(i) "Fair Market Value" 2
(j) "ISO" 2
(k) "1934 Act" 2
(l) "Officer" 3
(m) "Option" 3
(n) "Optionee" 3
(o) "Option Price" 3
(p) "Parent" 3
(q) "Plan" 3
(r) "Purchasable" 3
(s) "Reload Option" 3
(t) "Stock" 3
(u) "Stock Option Agreement" 4
(v) "Subsidiary" 4
ARTICLE II THE PLAN 4
Section 2.1 Name 4
Section 2.2 Purpose 4
Section 2.3 Effective Date 4
Section 2.4 Termination Date 4
ARTICLE III ELIGIBILITY 4
</TABLE>
<PAGE> 3
TABLE OF CONTENTS (Cont'd)
<TABLE>
<S> <C> <C>
ARTICLE IV ADMINISTRATION 5
Section 4.1 Duties and Powers of the Committee 5
Section 4.2 Interpretation; Rules 5
Section 4.3 No Liability 5
Section 4.4 Majority Rule 5
Section 4.5 Company Assistance 6
ARTICLE V SHARES OF STOCK SUBJECT TO PLAN 6
Section 5.1 Limitations 6
Section 5.2 Antidilution 6
ARTICLE VI OPTIONS 8
Section 6.1 Types of Options Granted 8
Section 6.2 Option Grant and Agreement 8
Section 6.3 Optionee Limitations 8
Section 6.4 $100,000 Limitation 8
Section 6.5 Option Price 9
Section 6.6 Exercise Period 9
Section 6.7 Option Exercise 9
Section 6.8 Nontransferability of Option 10
Section 6.9 Termination of Employment 11
Section 6.10 Employment Rights 11
Section 6.11 Certain Successor Options 11
ARTICLE VII CONDITIONS TO ISSUING STOCK 11
ARTICLE VIII TERMINATION, AMENDMENT AND 12
MODIFICATION OF PLAN
ARTICLE IX MISCELLANEOUS 12
Section 9.1 Replacement Option Grants 12
Section 9.2 Forfeiture for Competition 12
Section 9.3 Plan Binding on Successors 13
Section 9.4 Gender 13
Section 9.5 Headings No Part of Plan 13
</TABLE>
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<PAGE> 4
REFLECTONE, INC.
1990 STOCK OPTION PLAN
ARTICLE I
DEFINITIONS
As used herein, the following terms have the meanings
hereinafter set forth unless the context clearly indicates to the contrary:
(a) "Board" shall mean the Board of Directors of the
Company.
(b) "Code" shall mean the United States Internal Revenue
Code of 1986, as amended, including effective date and transition rules
(whether or not codified). Any reference herein to a specific section or
sections of the Code shall be deemed to include a reference to any
corresponding provision of future law.
(c) "Committee" shall mean a committee of Directors
appointed from time to time by the Board, having the duties and authority set
forth herein in addition to any other authority granted by the Board; provided,
however, that the Committee shall include at least two members who are
Disinterested Persons, and that all members of the Committee who exercise any
authority or discretion, with respect to any Options granted to an Employee who
is also an Officer or Director, shall be Disinterested Persons.
(d) "Company" shall mean Reflectone, Inc., a Florida
corporation.
(e) "Director" shall mean a member of the Board.
(f) "Disinterested Person" shall have the meaning set forth
in Rule 16b-3 under the 1934 Act, as the same may be in effect from time to
time, or in any successor rule thereto, and shall be determined for all
purposes under the Plan according to interpretative or "no-action" positions
with respect thereto issued by the Securities and Exchange Commission.
(g) "Employee" shall mean any employee of the Company or any
Subsidiary of the Company, and any Director who also serves as an Officer and
whose duties as such involve a significant time commitment beyond that
associated with preparation for and attendance at meetings of the Board and
Committees thereof.
(h) "Employer" shall mean the corporation that employs an
Optionee.
<PAGE> 5
(i) "Fair Market Value" of the shares of Stock on any date
shall mean
(i) the closing sales price, regular way, or in the
absence thereof the mean of the last reported bid and
asked quotations, on such date on the exchange having
the greatest volume of trading in the shares during the
thirty-day period preceding such date (or if such
exchange was not open for trading on such date, the next
preceding date on which it was open); or
(ii) if there is no price as specified in (i), the
final reported sales price, or if not reported in the
following manner, the mean of the closing high bid and
low asked prices, in the over-the-counter market for the
shares as reported by the National Association of
Securities Dealers Automatic Quotation System or, if not
so reported, then as reported by the National Quotation
Bureau Incorporated, or if such organization is not in
existence, by an organization providing similar
services, on such date (or if such date is not a date
for which such system or organization generally provides
reports, then on the next preceding date for which it
does so); or
(iii) if there also is no price as specified in (ii),
the price determined by the Committee by reference to
bid-and-asked quotations for the shares provided by
members of an association of brokers and dealers
registered pursuant to subsection 15(b) of the 1934 Act,
which members make a market in the shares, for such
recent dates as the Committee shall determine to be
appropriate for fairly determining current market value;
or
(iv) if there also is no price as specified in
(iii), the amount determined in good faith by the
Committee based on such relevant facts, which may
include opinions of independent experts, as may be
available to the Committee.
(j) "ISO" shall mean an Option that complies with and is
subject to the terms, limitations and conditions of Code section 422A and any
regulations promulgated with respect thereto.
(k) "1934 Act" shall mean the Securities Exchange Act of
1934, as the same may be amended from time to time.
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<PAGE> 6
(l) "Officer" shall mean a person who constitutes an officer
of the Company for the purposes of Section 16 of the 1934 Act, as determined by
reference to such Section 16 and to the rules, regulations, judicial decisions,
and interpretative or "noaction" positions with respect thereto of the
Securities and Exchange Commission, as the same may be in effect or set forth
from time to time.
(m) "Option" shall mean a contractual right to purchase
Stock granted pursuant to the provisions of Article VI hereof.
(n) "Optionee" shall mean a person to whom an Option has
been granted hereunder.
(o) "Option Price" shall mean the price at which an Optionee
may purchase a share of Stock pursuant to an Option.
(p) "Parent" shall mean any corporation (other than the
corporation with respect to which the determination is being made) in an
unbroken chain of corporations ending with the corporation with the respect to
which the determination is being made if, at the time of the grant (or
modification) of the Option, each of the corporations other than the
corporation with respect to which the determination is being made owns stock
possessing 50% or more of the total combined voting power of all classes of
stock in one of the other corporations in such chain.
(q) "Plan" shall mean the 1990 Stock Option Plan of the
Company.
(r) "Purchasable," when used to describe Stock, shall refer
to Stock that may be purchased by an Optionee under the terms of this Plan on
or after a certain date specified in the applicable Stock Option Agreement.
(s) "Reload Option" shall mean an Option that is granted,
without further action of the Committee, (i) to an Optionee who surrenders or
authorizes the withholding of shares of Stock in payment of amounts specified
in paragraphs 6.7(c) or 6.7(d) hereof, (ii) for the same number of shares as is
so paid, (iii) as of the date of such payment and at an Option Price equal to
the Fair Market Value of the Stock on such date, and (iv) otherwise on the same
terms and conditions as the Option whose exercise has occasioned such payment,
subject to such contingencies, conditions or other terms as the Committee shall
specify at the time such exercised Option is granted,
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<PAGE> 7
(t) "Stock" shall mean the $.10 par value common stock of
the Company or, in the event that the outstanding shares of such stock are
hereafter changed into or exchanged for shares of a different class of stock or
securities of the Company or some other corporation, such other stock or
securities.
(u) "Stock Option Agreement" shall mean an agreement between
the Company and an Optionee setting forth the terms of an Option.
(v) "Subsidiary" shall mean any corporation (other than the
corporation with respect to which the determination is being made) in an
unbroken chain of corporations beginning with the corporation with respect to
which the determination is being made if, at the time of the grant (or
modification) of the Option, each of the corporations other than the last
corporation in the unbroken chain owns stock possessing 50% or more of the
total combined voting power of all classes of stock in one of the other
corporations in such chain.
ARTICLE II
THE PLAN
2.1 Name. This plan shall be known as the "Reflectone, Inc.
1990 Stock Option Plan."
2.2 Purpose. The purpose of the Plan is to advance the
interests of the Company, its shareholders, and any Subsidiary of the Company,
by offering certain Employees an opportunity to acquire or increase their
proprietary interests in the Company by granting such persons Options to
purchase Stock. The Options will promote the growth and profitability of the
Company, and any Subsidiary of the Company, because Optionees will be provided
with an additional incentive to achieve the Company's objectives through
participation in its success and growth.
2.3 Effective Date. The Plan shall become effective on
February 8, 1990.
2.4 Termination Date. No further Options shall be granted
hereunder on or after February 8, 2000, but all Options granted prior to that
time shall remain in effect in accordance with their terms; provided, however,
that the Plan shall terminate, and all options theretofore granted shall become
void and may not be exercised, on February 8, 1991, if the shareholders of the
Company shall not by that date have approved the Plan's adoption.
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<PAGE> 8
ARTICLE III
ELIGIBILITY
The persons eligible to participate in this Plan shall consist
only of Employees (which may include a person who is a Director, if he is
otherwise an Employee) whose participation the Committee determines is in the
best interests of the Company.
ARTICLE IV
ADMINISTRATION
4.1 Duties and Powers of the Committee. The Plan shall be
administered by the Committee. The Committee shall select one of its members
as its Chairman and shall hold its meetings at such times and places as it may
determine. The Committee shall keep minutes of its meetings and shall make
such rules and regulations for the conduct of its business as it may deem
necessary. The Committee shall have the power to act by unanimous written
consent in lieu of a meeting, and shall have the right to meet telephonically.
In administering the Plan, the Committee's actions and determinations shall be
binding on all interested parties. The Committee shall have the power to grant
Options in accordance with the provisions of the Plan. Subject to the
provisions of the Plan, the Committee shall have the discretion and authority
to determine those individuals to whom Options will be granted and whether such
Options shall be accompanied by the right to receive Reload Options, the number
of shares of Stock subject to each Option, such other matters as are specified
herein, and any other terms and conditions of a Stock Option Agreement. To the
extent not inconsistent with the provisions of the Plan, the Committee shall
have the authority to amend or modify an outstanding Stock Option Agreement, or
to waive any provision thereof, provided that the Optionee consents to such
action.
4.2 Interpretation; Rules. Subject to the express
provisions of the Plan, the Committee also shall have complete authority to
interpret the Plan, to prescribe, amend and rescind rules and regulations
relating to it, to determine the details and provisions of each Stock Option
Agreement, and to make all other determinations necessary or advisable in the
administration of the Plan, including, without limitation, the amending or
altering of any Options granted hereunder as may be required to comply with or
to conform to any federal, state or local laws or regulations.
4.3 No Liability. Neither any member of the Board nor any
member of the Committee shall be liable to any person for any act or
determination made in good faith with respect to the Plan or any Option granted
hereunder.
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<PAGE> 9
4.4 Majority Rule. A majority of the members of the
Committee shall constitute a quorum, and any action taken by a majority at a
meeting at which a quorum is present, or any action taken without a meeting
evidenced by a writing executed by all the members of the Committee, shall
constitute the action of the Committee.
4.5 Company Assistance. The Company shall supply full and
timely information to the Committee on all matters relating to eligible
persons, their employment, death, retirement, disability or other termination
of employment, and such other pertinent facts as the Committee may require.
The Company shall furnish the Committee with such clerical and other assistance
as is necessary in the performance of its duties.
ARTICLE V
SHARES OF STOCK SUBJECT TO PLAN
5.1 Limitations. Subject to any antidilution adjustment
pursuant to the provisions of Section 5.2 hereof, the maximum number of shares
of Stock that may be issued and sold hereunder shall be 200,000. Shares
subject to an Option may be either authorized and unissued shares or shares
issued and later acquired by the Company; provided, however, that shares of
Stock with respect to which an Option has been exercised shall not again be
available for issuance hereunder. The shares covered by any unexercised
portion of an Option that has terminated for any reason may again be optioned
under this Plan, and such shares shall not be considered as having been
optioned or issued in computing the number of shares of Stock remaining
available for option hereunder.
5.2 Antidilution.
(a) In the event that the outstanding shares of
Stock are changed into or exchanged for a different number or kind of shares or
other securities of the Company by reason of merger, consolidation,
reorganization, recapitalization, reclassification, combination or exchange of
shares, stock split or stock dividend, or in the event that any spin-off,
spin-out or other distribution of assets materially affects the price of the
Company's stock:
(i) The aggregate number and kind of
shares of Stock for which Options may be granted
hereunder shall be adjusted proportionately by the
Committee; and
(ii) The rights of Optionees (concerning
the number of shares subject to Options and the Option
Price) under outstanding Options shall be adjusted
proportionately by the Committee.
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<PAGE> 10
(b) If the Company shall be a party to any
reorganization in which it does not survive, involving merger, consolidation,
or acquisition of the stock or substantially all the assets of the Company, the
Committee, in its discretion, may:
(i) declare that all Options granted
under the Plan shall become exercisable immediately
notwithstanding the provisions of the respective Stock
Option Agreements regarding exercisability, and that all
such Options shall terminate 30 days after the Committee
gives written notice of the immediate right to exercise
all such Options and of the decision to terminate all
Options not exercised within such 30-day period; or
(ii) notify all Optionees that all Options
granted under the Plan shall be assumed by the successor
corporation or substituted with options issued by such
successor corporation.
(c) If the Company is to be liquidated or dissolved
in connection with a reorganization described in paragraph 5.2(b), the
provisions of such paragraph shall apply. In all other instances, the adoption
of a plan of dissolution or liquidation of the Company shall cause every Option
outstanding under the Plan to terminate to the extent not exercised prior to
the adoption of the plan of dissolution or liquidation by the shareholders,
provided that the Committee in its discretion may declare all Options granted
under the Plan to be exercisable at any time on or before the fifth business
day following such adoption notwithstanding the provisions of the respective
Stock Option Agreements regarding exercisability. The Committee's actions
under this provision and the Optionee's exercise of Options under this
provision shall be subject, however, to the limitations set forth in Article VI
hereof.
(d) The adjustments described in paragraphs (a)
through (c) of this Section 5.2, and the manner of their application, shall be
determined solely by the Committee, and any such adjustment may provide for the
elimination of fractional share interests. The adjustments required under this
Article V shall apply to any successors of the Company and shall be made
regardless of the number or type of successive events requiring such
adjustments.
ARTICLE VI
OPTIONS
6.1 Types of Options Granted. Within the limitations
provided herein, Options may be granted to one Employee at one or several times
or to different Employees at the same time or at different times, in either
case under different terms and
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<PAGE> 11
conditions, as long as the terms and conditions of each Option are consistent
with the provisions of the Plan. Without limitation of the foregoing, Options
may be granted subject to conditions based on the financial performance of the
Company or any other factor the Committee deems relevant.
6.2 Option Grant and Agreement. Each Option granted or modified
hereunder shall be evidenced (a) by either minutes of a meeting or a written
consent of the Committee, and (b) by a written Stock Option Agreement executed
by the Company and the Optionee. The terms of the Option, including the
Option's duration, time or times of exercise, exercise price, whether the
Option is intended to be an ISO, and whether the Option is to be accompanied by
the right to receive a Reload Option, shall be stated in the Stock Option
Agreement. Separate Stock Option Agreements shall be used for Options intended
to be ISO's and those not so intended.
6.3 Optionee Limitations. The Committee shall not grant an ISO to any
person who, at the time the ISO would be granted:
(a) is not an Employee; or
(b) owns or is considered to own stock possessing more than 10% of
the total combined voting power of all classes of stock of the Employer, or any
Parent or Subsidiary of the Employer; provided, however, that this limitation
shall not apply if at the time an ISO is granted the Option Price is at least
110% of the Fair Market Value of the Stock subject to such Option and such
Option by its terms would not be exercisable after the expiration of five years
from the date on which the Option is granted. For the purpose of this
paragraph (b), a person shall be considered to own (i) the stock owned,
directly or indirectly, by or for his brothers and sisters (whether by the
whole or half blood), spouse, ancestors and lineal descendants, (ii) the stock
owned, directly or indirectly, by or for a corporation, partnership, estate, or
trust in proportion to such person's stock interest, partnership interest or
beneficial interest herein, and (iii) the stock which such person may purchse
under any outstanding options of the Employer or of any Parent or Subsidiary of
the Employer.
6.4 $100,000 Limitation. Except as provided below, the Committee shall
not grant an ISO to, or modify the exercise provisions of outstanding ISO's
held by, any person who, at the time the ISO is granted (or modified), would
thereby receive or hold any incentive stock options (as described in Code
section 422A) of the Employer and any Parent or Subsidiary of the Employer,
such that the aggregate Fair Market Value (determined as of the respective
dates of grant or modification of each option) of the stock with respect to
which such incentive stock options are exercisable for the first time during
any calendar year is in excess of $100,000; provided, that the foregoing
restriction on
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<PAGE> 12
modification of outstanding ISO's shall not preclude the Committee from
modifying an outstanding ISO if, as a result of such modification and with the
consent of the Optionee, such Option no longer constitutes an ISO; and provided
that, if the $100,000 limitation described in this Section 6.4 is exceeded, an
Option that otherwise qualifies as an ISO shall be treated as an ISO up to the
limitation and the excess shall be treated as an Option not qualifying as an
ISO. The preceding sentence shall be applied by taking options intended to be
ISO's into account in the order in which they were granted.
6.5 Option Price. The Option Price under each Option shall
be determined by the Committee. However, the Option Price shall not be less
than 50% of the Fair Market Value of the Stock, or in the case of an ISO less
than the Fair Market Value of the Stock, in each case on the date that the
Option is granted (or, in the case of an ISO that is subsequently modified, on
the date of such modification).
6.6 Exercise Period. The period for the exercise of each
Option granted hereunder shall be determined by the Committee, but the Stock
Option Agreement with respect to each Option intended to be an ISO shall
provide that such option shall not be exercisable after the expiration of ten
years from the date of grant (or modification) of the Option. In addition, no
Option granted to an Employee who is also an Officer or Director shall be
exercisable prior to the expiration of six months from the date such Option is
granted, other than in the case of the death or disability of such Employee.
6.7 Option Exercise.
(a) Unless otherwise provided in the Stock Option
Agreement, an Option may be exercised at any time or from time to time during
the term of the Option as to any or all whole shares that have become
Purchasable under the provisions of the Option, but not at any time as to less
than 100 shares unless the remaining shares that have become so Purchasable are
less than 100 shares. The Committee shall have the authority to prescribe in
any Stock Option Agreement that the Option may be exercised only in accordance
with a vesting schedule during the term of the Option.
(b) An Option shall be exercised by (i) delivery to
the Treasurer of the Company at its principal office of written notice of
exercise with respect to a specified number of shares of Stock, and (ii)
payment to the Company at that office of the full amount of the Option Price
for such number of shares.
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<PAGE> 13
(c) The Option Price shall be paid in full upon the
exercise of the Option; provided, however, that the Committee may provide in a
Stock Option Agreement that, in lieu of cash, all or any portion of the Option
Price may be paid by tendering to the Company shares of Stock duly endorsed for
transfer and owned by the Optionee, to be credited against the Option Price at
the Fair Market Value of such shares on the date of exercise (however, no
fractional shares may be so transferred, and the Company shall not be obligated
to make any cash payments in consideration of any excess of the aggregate Fair
Market Value of shares transferred over the aggregate option price).
(d) In addition to and at the time of payment of
the Option Price, the Optionee shall pay to the Company in cash the full amount
of any federal, state and local income, employment or other taxes required to
be withheld from the income of such Optionee as a result of such exercise;
provided, however, that in the discretion of the Committee any Stock Option
Agreement may provide that all or any portion of such tax obligations, together
with additional taxes not exceeding the actual additional taxes to be owed by
the Optionee as a result of such exercise, may, upon the irrevocable election
of the Optionee, be paid by tendering to the Company whole shares of Stock duly
endorsed for transfer and owned by the Optionee, or by authorization to the
Company to withhold shares of Stock otherwise issuable upon exercise of the
Option, in either case in that number of shares having a Fair Market Value on
the date of exercise equal to the amount of such taxes thereby being paid, and
subject to such restrictions as to the approval and timing of any such election
as the Committee may from time to time determine to be necessary or appropriate
to satisfy the conditions of the exemption set forth in Rule 16b-3 under the
1934 Act.
(e) The holder of an Option shall not have any of
the rights of a stockholder with respect to the shares of Stock subject to the
Option until such shares have been issued and transferred to him upon the
exercise of the Option.
6.8 Nontransferability of Option. No Option or any rights
therein shall be transferable by an Optionee otherwise than by will or the laws
of descent and distribution. During the lifetime of an Optionee, an Option
granted to that Optionee shall be exercisable only by such Optionee (or by such
Optionee's guardian or other legal representative, should one be appointed).
6.9 Termination of Employment. The Committee shall have the
power to specify, with respect to the Options granted to any particular
Optionee, the effect upon such Optionee's right to exercise an Option of the
termination of such Optionee's employment under various circumstances, which
effect may include immediate or deferred termination of such Optionee's rights
under an Option, or
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<PAGE> 14
acceleration of the date at which an Option may be exercised in full.
6.10 Employment Rights. Options granted under the Plan shall
not be affected by any change of employment so long as the Optionee continues
to be an Employee. Nothing in the Plan or in any Stock Option Agreement shall
confer on any person any right to continue in the employ of the Company or any
Subsidiary of the Company, or shall interfere in any way with the right of the
Company or any such Subsidiary to terminate such person's employment at any
time.
6.11 Certain Successor Options. To the extent not
inconsistent with the terms, limitations and conditions of Code section 422A,
and any regulations promulgated with respect thereto, an Option issued in
respect of an option held by an employee to acquire stock of any entity
acquired, by merger or otherwise, by the Company (or any Subsidiary of the
Company) may contain terms that differ from those stated in this Article VI,
but solely to the extent necessary to preserve for any such employee the rights
and benefits contained in such predecessor option, or to satisfy the
requirements of Code section 425(a).
ARTICLE VII
CONDITIONS TO ISSUING STOCK
The Company shall not be required to issue or deliver any Stock
purchased upon the full or partial exercise of any Option granted hereunder
prior to fulfillment of all of the following conditions:
(a) The admission of such shares to listing on all stock
exchanges on which the Stock is then listed;
(b) The completion of any registration or other
qualification of such shares that the Company shall determine to be necessary
or advisable under any federal or state law or under the rulings or regulations
of the Securities and Exchange Commission or any other governmental regulatory
body, or the Company's determination that an exemption is available from such
registration or qualification;
(c) The obtaining of any approval or other clearance from
any federal or state governmental agency that the Company shall determine to be
necessary or advisable; and
(d) The lapse of such reasonable period of time following
exercise as shall be appropriate for reasons of administrative convenience.
- 11 -
<PAGE> 15
Unless the shares of Stock covered by the Plan shall be the
subject of an effective registration statement under the Securities Act of
1933, as amended, stock certificates issued and delivered to Optionees shall
bear such restrictive legends as the Company shall deem necessary or advisable
pursuant to applicable federal and state securities laws.
ARTICLE VIII
TERMINATION, AMENDMENT AND MODIFICATION OF PLAN
The Board may at any time, (i) cause the Committee to cease
granting Options, (ii) terminate the Plan, or (iii) in any respect amend or
modify the Plan; provided, however, that the Board (unless its actions are
approved or ratified by the shareholders of the Company within twelve months of
the date the Board amends the Plan) may not amend the Plan to:
(a) Increase the number of shares of Stock subject
to the Plan beyond the amount previously approved or ratified by the
shareholders; or
(b) Change or modify the class of persons that may
participate in the Plan.
No termination, amendment or modification of the Plan shall
affect adversely the rights of an Optionee under any outstanding Option without
the consent of the Optionee or his legal representative.
ARTICLE IX
MISCELLANEOUS
9.1. Replacemgnt Option Grants. At the sole discretion of
the Committee, an Optionee may be given an election to surrender an Option in
exchange for a new Option.
9.2 Forfeiture for Competition. If an Optionee provides
services to a competitor of the Company or, any of its Subsidiaries, whether as
an employee, officer, director, independent contractor, consultant, agent or
otherwise, such services being of a nature that can reasonably be expected to
involve the skills and experience used or developed by the Optionee while an
Employee, then that Optionee's rights under any Options outstanding hereunder
shall be forfeited and terminated, subject to a determination to the contrary
by the Committee.
9.3 Plan Binding on Successors. The Plan shall be binding
upon the successors of the Company.
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<PAGE> 16
9.4 Gender. Whenever used herein, the masculine pronoun
shall include the feminine gender.
9.5 Headings No Part of Plan. Headings of Articles and
Sections hereof are inserted for convenience and reference, and do not
constitute a part of the Plan.
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<PAGE> 1
EXHIBIT 10.6
VARIABLE INCENTIVE COMPENSATION PLAN (VICP)
REFLECTONE, INC.
1.0 Policy Statement
1.1 It is the policy of the Company to encourage outstanding performance
from senior executive management and to provide a consistent means to reward
accomplishment against defined objectives.
2.0 Objectives - This plan is designed to:
2.1 Provide a direct incentive to executive management to improve Company
performance, thus tieing management to Company goals, values and
shareholder interests.
2.2 Reward and compensate executives for outstanding individual
performance.
2.3 Compensate executives in a manner to maintain Reflectone's competitive
position in the market place.
3.0 Variable Incentive Compensation Plan (VICP)
3.1 Eligibility
3.1.1 Employees eligible for award under the Plan shall be
approved by the Compensation Committee of the Board of
Directors on an annual basis.
3.1.2 Each eligible individual must be a full time employee before
September 1 of the fiscal year for which the award is being
made.
3.1.3 To receive a 100% award the eligible individual must be a
full time employee before January 1 of the fiscal year for
which the award is being made.
3.1.3a Those individuals who become full time employees
between January 1 and September 1 of the fiscal
year will receive a pro-rated award based on the
ratio of months worked divided by 12.
3.1.3b To receive a full month an individual must be
employed before the 15th of the month.
<PAGE> 2
3.1.4 Individuals who are reclassified to and/or from an eligible
position will qualify for a pro-rated award provided they are
eligible on September 1 of the current plan year.
3.1.5 Qualified participants must be full time employees through the
date awards are paid.
3.2 Award Criteria and Value
3.2.1 There are two criteria to be used in determining the amount of the
award.
3.2.1.a Company performance criteria will be established
annually by the Board of Directors based upon
recommendations of the Compensation Committee, and
the Company performance factor will be determined
at year end considering such criteria.
3.2.1.b Employee performance appraisals will be against
goals and milestones established in writing between
each eligible employee and his direct report
superior and approved by the CEO.
3.3 Cash Award Determination
3.3.1 Those employees and/or positions eligible for this program, as
well as the amount of the VICP award will be briefed to and
approved by the Compensation Committee of the Board of Directors
at the first Board meeting following fiscal year end.
3.3.2 The VICP award will be paid in February against prior year-end
results.
3.3.3 Base salary will be salary of record on 31 December of the award
year.
3.3.4 No VICP award will be paid unless the Board of Directors
determines that at least the minimum Company performance criteria,
as a whole, have been met.
<PAGE> 1
EXHIBIT 10.7
REFLECTONE, INC.
1997 LONG-TERM INCENTIVE PLAN
WHEREAS, it is in the best interest of Reflectone, Inc. (Reflectone) to attract
and retain executives and other key employees who can contribute to
Reflectone's long-term success; and
WHEREAS, Reflectone finds that it is in its best interest to establish a direct
link between the increase in the value of the business and the compensation of
executives and other key employees;
NOW THEREFORE, Reflectone hereby establishes the following 1997 Long-Term
Incentive Plan:
1
<PAGE> 2
ARTICLE I
I.1 Name of the Plan. The name of the plan is the Reflectone, Inc. 1997
Long-Term Incentive Plan (the "Plan").
I.2 Purpose. The purpose of the Plan is to reward selected employees of
Reflectone, Inc. and its consolidated subsidiaries (the "Company") for
increasing the value of the business as measured over a period of
years.
ARTICLE II
II.1 Administration The Plan shall be administered by the Compensation
Committee (the "Committee") of the Board of Directors of the Company,
or such other Committee comprised of two or more Directors, none of
whom shall be officers or employees of the Company, as the Board may
designate.
The Committee shall have authority in its discretion, but subject to
the express provisions of the Plan, to: 1) determine the Participants
(as defined in Section II.3); 2) approve the awards to all
Participants; 3) approve all calculations made according to the Plan
and determine the Earned Awards (as defined in Section IV.2) for all
Participants; 4) approve the payments, in whole or in part, for any
Earned Awards; 5) amend or modify the terms of any Earned Award with
the written consent of the Participant; 6) accelerate the time at
which all or any part of an award may be paid; 7) prescribe, amend and
rescind rules and regulations relating to the Plan and its
administration; 8) interpret the Plan and make any and all
determinations necessary or appropriate for the administration of the
Plan, subject to the authority of the Board of Directors to amend,
suspend, or terminate the Plan. The Committee's determinations on the
foregoing matters shall be final and conclusive.
II.2 Eligibility. Executive officers and selected other key employees of
the Company, as determined by the Committee, are eligible to
participate in the Plan.
II.3 Participation. Individuals will be selected from among the eligible
employees and approved by the Committee to participate in the Plan
(the "Participant" or "Participants"). The Committee will determine
the participation of the President and Chief Executive Officer. The
President and Chief Executive Officer will recommend other
Participants for the Committee's review and approval. Participants
will be selected based on their ability to contribute to the long-term
increase in the value of the Company. Participants shall be notified
of their selection to participate in the Plan as soon as is
practicable after their selection as a Participant. Selection of
Participants shall apply only to the applicable Performance Period;
selection to participate in one Performance Period does not create an
entitlement to or guarantee of participation in future Performance
Periods. The Company will maintain a list of Participants and their
Target Awards (as defined in Section IV.1) for
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<PAGE> 3
each Performance Period. Except as provided for in Section II.4,
Participants must be employed full-time by the Company on the date of
the Target Award and maintain continuous employment in the same
position, a similar position, or a position of increased
responsibility due to promotion, through the end of the Performance
Period. The Committee, in its sole discretion, and based on the
recommendation of the President and Chief Executive Officer, may
approve the participation of an executive officer or other key
employee in the Plan for any Performance Period, after the date of a
Target Award but prior to the end of the first year of the Performance
Period if the Committee determines that, as the result of internal
promotion, outside recruitment or other reasons, such employee may
have a significant impact on the value of the Company by the end of
the Performance Period (a "New Participant").
In that event, the New Participant may receive a full or pro-rata
award, as determined by the Committee.
II.4 Termination of Employment. Participants of this Plan whose employment
with the Company terminates for any reason forfeit all unearned Target
Awards outstanding under the Plan. The Committee may approve the
payment of pro-rata awards (to be paid at the end of the Performance
Period) for a Plan Year (as defined in Section III.1) to Participants
who, due to death, disability, retirement or involuntary termination
of employment by the Company other than for cause have their
employment with the Company terminated.. No such payments may be
authorized under the Plan to a Participant whose employment is
terminated for cause.
ARTICLE III
III.1 Performance Period. For each January 1st this Plan is in effect, the
"Plan Year" shall be the period of time from January 1st through
December 31st of the same year. The dates for measurement of
performance shall be the three-year period beginning January 1st of
each Plan Year and ending thirty-six months thereafter (the
"Performance Period").
ARTICLE IV
IV.1 Target Award. For each Plan Year the Committee will establish a
Target Award for each Participant. The Target Award may vary from
Participant to Participant at the discretion of the Committee. The
Target Award may be expressed as a stated dollar amount or as a
percentage of salary. The Company will maintain a list of
Participants and their Target Awards for each Plan Year. The
President and Chief Executive Officer may recommend Target Awards for
Participants other than himself, subject to the review and approval of
the Committee. Only the Committee may establish the Target Award for
the President and Chief Executive Officer. The sum total of all
Target Awards for a Plan Year constitutes
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<PAGE> 4
the "Target Award Pool" for that Plan Year. The Target Award Pool
will be calculated consistent with the methodology employed to
calculate the Earned Award Pool (as defined in Section V.1), except
the calculation of the Target Award Pool will be based upon the
Company's budget for the Plan Year and the projections for the
following two years (the "Targeted Performance Criteria") as detailed
in the Company's latest Strategic Plan or Ten Year Forecast.
IV.2 Earned Award. The Target Award establishes each Participant's
incentive opportunity for a given Performance Period. The actual
incentive earned by a Participant for a Performance Period (the
"Earned Award"), may be less than, equal to, or greater than the
Target Award; however, the Participants Earned Award will bear the
same relationship to the Earned Award Pool as the Participants Target
Award has to the Target Award Pool.
IV.3 Notification. For each Plan Year the Committee will, as soon as
practical after the Target Awards have been calculated in accordance
with Section IV.1 of the Plan, notify each Participant of their Target
Award. Such notification shall include, but need not be limited to,
the Target Award, the Performance Period, and the Targeted Performance
Criteria.
As soon as practical after Earned Awards for a Plan Year have been
calculated in accordance with Section V.1 of the Plan, the Committee
will notify each Participant of their Earned Award.
ARTICLE V
V.1 Performance. Performance under the Plan shall be calculated as soon as
practical after the end of the Performance Period. It is anticipated
that performance under the Plan will be calculated during the month of
February immediately following the end of the Performance Period.
Performance for a Plan Year will be calculated using the following
criteria:
AVERAGE NET INCOME - The algebraic sum of the Company's annual Net
Income (income after dividends and taxes) for each of the
three years in the Performance Period divided by three. Where
N = Net Income for one year in the Performance Period the
calculation would be:
(N1+N2+N3) / 3 = AVERAGE NET INCOME
AVERAGE CAPITAL EMPLOYED - The algebraic sum of the value of the
Company's shareholders' equity on the first day of each of the
three years in the Performance Period plus the value of
shareholders' equity on the last day of the Performance Period
divided by four. Where E = the value of shareholders' equity
the calculation would be:
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<PAGE> 5
(E1+E2+E3+E4) / 4 = AVERAGE CAPITAL EMPLOYED
THE SUM TOTAL OF THE EARNED AWARDS FOR ALL PARTICIPANTS (THE
"EARNED AWARD POOL") SHALL BE CALCULATED AS FOLLOWS:
- Divide the Average Net Income by the Average Capital Employed
to determine the Average Return On Capital ("AROC").
- Where the AROC is less than or equal to 15%, the Earned Award
Pool shall be ZERO and no further calculations are necessary.
- Where the AROC is greater than 15% but is less than or equal
to 20%; the Earned Award Pool shall be equal to 10% of the
return above 15% calculated as:
EARNED AWARD POOL = AVERAGE CAPITAL EMPLOYED (.10 (AROC - .15))
- Where AROC is greater than 20% but is less than or equal to
30%; the Earned Award Pool shall be the sum of 10% of the
return between 15% and 20% plus 20% of the return between 20%
and 30% calculated as:
EARNED AWARD POOL = AVERAGE CAPITAL EMPLOYED (.10 (.05)) PLUS
AVERAGE CAPITAL EMPLOYED (.20 (AROC - .20)).
- Where AROC is greater than 30%; the Earned Award Pool shall
be the SUM of 10% of the return between 15% and 20% PLUS 20%
of the return between 20% and 30% plus 25% of the return above
30% calculated as:
EARNED AWARD POOL = AVERAGE CAPITAL EMPLOYED (.10 (.05)) PLUS
AVERAGE CAPITAL EMPLOYED (.20 (.10)) PLUS
AVERAGE CAPITAL EMPLOYED (.25 (AROC - .30))
THE EARNED AWARD FOR EACH PARTICIPANT SHALL BE CALCULATED AS
FOLLOWS:
- Each Participant's Earned Award will be calculated by taking
the percentage the Participant's Target Award is of the Target
Award Pool times the Earned Award Pool.
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<PAGE> 6
ARTICLE VI
VI.1 Effective Date. The Plan shall become effective as of the date it
is first approved by the Board of Directors of the Company.
Awards may be made under the Plan retroactive to the first day of
the fiscal year in which the Board approves the Plan, subject to
the Committee's approval of the Target Awards.
VI.2 Life of the Plan. The Plan shall continue in effect until such
time as the Board of Directors of the Company shall choose to
amend, terminate, or suspend the Plan.
VI.3 Amendment or Termination of the Plan. The Board of Directors of
the Company may amend, terminate, or suspend the Plan at any time
and for any reason.
VI.4 No Retroactive Effect on Earned Awards. No amendment, suspension
or termination will affect the rights of any Participant to any
Earned Award which was not yet paid, in whole or in part, prior to
the amendment, termination, or suspension of the Plan.
ARTICLE VII
VII.1 Determination of Earned Award. Subject to the Participation
requirements of Section II.2 of the Plan, for each Plan Year a
Participant shall be deemed to have earned and shall have the
right to receive their Earned Award at the end of the Performance
Period for that Plan Year which shall be distributed to each
Participant in accordance with Section VII.2 below.
VII.2 Distributions. Earned Awards shall be paid to Participants as
follows:
- 50% (the "Initial Distribution") to be paid as soon as
practical after the calculation of Earned Awards. It is
anticipated payments to Participants of the Initial
Distribution would be made in the month of February following
the Performance Period.
- 50% (the "Final Distribution") to be paid in February of the
year following the Initial Distribution.
All distributions shall be paid in cash. Participants are not
entitled to interest or any other compensation for the time value of
money on Earned Awards pending payment.
Earned Awards shall be payable to Participants in accordance with this
Section VII.2 regardless of the continued employment of the
Participant with the Company. Initial Distributions and Final
Distributions from different Plan Years may be made concurrently.
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<PAGE> 7
ARTICLE VIII
VIII.1 Corporate Obligation. The Company shall be solely responsible for the
payment of all Earned Awards under the Plan. Such obligations
represent only a general corporate commitment and each Participant
must rely upon the general credit of the Company for the fulfillment
of its obligations hereunder. Under all circumstances, the rights of
Participants to any asset held by the Company will be no greater than
the rights expressed in the Plan. Nothing contained in the Plan will
constitute a guarantee by the Company that the assets will be
sufficient to pay Earned Awards under the Plan or place the
Participant in a secured position ahead of general creditors of the
Company. No policy or other specific asset of the Company has been or
will be set aside, or will in any way be transferred to any trust or
will be pledged for the performance of the Company's obligations under
the Plan which would remove the policy or asset from being subject to
the general creditors of the Company.
ARTICLE IX
IX.1 Limitation of Rights. Nothing in the Plan will be construed:
a) to give a Participant any right with respect to any benefit except
in accordance with the terms of the Plan;
b) to limit in any way the right of the Company to terminate a
Participant's employment;
c) to evidence any agreement or understanding, expressed or implied,
that the Company will employ a Participant in any particular
position or for any particular remuneration;
d) to give a Participant or any other person claiming through the
Participant any interest or right under the Plan other than that
of any unsecured general creditor of the Company.
IX.2 Distributions to Incompetents or Minors. Should a Participant become
incompetent or should a Participant designate a beneficiary who is a
minor or incompetent, the Company is authorized to pay the funds due
to the parent of the minor or to apply those funds for the benefit of
the minor or incompetent in any manner the Committee determines in its
sole discretion.
IX.3 Nonalienation of Benefits. No right or benefit provided in the Plan
will be transferable by the Participant except, upon his or her death,
to a named beneficiary as provided in the Plan. No right or benefit
under the Plan will be subject to anticipation, alienation, sale,
assignment, pledge, encumbrance or charge, and any attempt to
anticipate, alienate, sell, assign, pledge, encumber, or charge the
same will be void. No right or benefit under the
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<PAGE> 8
Plan will in any manner be liable for or subject to any debts,
contracts, liabilities, or torts of the person entitled to such
benefits.
IX.4 Reliance Upon Information. The Committee will not be liable for any
decision or action taken in good faith in connection with the
administration of the Plan. Without limiting the generality of the
foregoing, any decision or action taken by the Committee when it
relies upon the information supplied by any officer of the Company or
the Company's legal counsel, independent accountants or other advisors
in connection with the administration of the Plan will be deemed to
have been taken in good faith.
IX.5 Severability. If any term, provision, covenant or condition of the
Plan is held to be invalid, void or otherwise unenforceable, the
remainder of the Plan will remain in full force and effect and will in
no way be affected, impaired or invalidated.
IX.6 Notice. Any notice or filing required or permitted to be given to the
Committee or a Participant will be sufficient if in writing and hand
delivered or sent by U.S. mail to the principal office of the Company
or to the residential mailing address of the Participant as set forth
in the Company's employment records.. Notice will be deemed to be
given as of the date of hand delivery, or, if delivery is by mail, as
of the date shown on the postmark.
IX.7 Corporate Re-structure. In the event that the Company or a subsidiary
shall merge or consolidate with any other corporation or organization,
or permit its business activities to be taken over by any other
organization, including a going private transaction or a leverage buy
out, any Earned Awards which have not yet been paid shall be paid in
full in a lump sum as of the date the transaction closes. Any
unearned awards for Performance Periods extending beyond the date the
transaction closes shall be forfeited. In lieu of such forfeitures,
the Committee, in its sole discretion, may authorize the payment of
such awards in full, or on a pro-rated basis based upon the portion of
the Performance Period completed as of the transaction date.
Alternatively, the Committee may arrange for Target Awards to remain
outstanding and for performance to be measured and Earned Awards to be
determined and paid according to Plan.
In determining the increase in the value of the business under the
foregoing circumstances, the Committee may consider the net proceeds
of the transaction in lieu of the valuation methodology established if
such transaction value is greater than the calculated business value.
IX.8 Adjustments. Any other provision of the Plan to the contrary
notwithstanding, the Committee, in its sole discretion, may take such
action as it shall deem reasonable and appropriate in the
determination of the Target Awards, performance measures, business
valuation methodology, performance evaluation, and determination and
payment of Earned Awards to adjust for the distortive effects, if any,
of any singular event(s) and/or extraordinary item(s) arising in the
conduct of the business of the Company, including, but
8
<PAGE> 9
not limited to, a change in accounting method, tax policy, or capital
structure, and/or the sale of assets and/or business operations,
including or excluding gains or losses from such activities.
IX.9 Corporate Rights. The existence of the Plan shall not affect the
right or power of the Company to make adjustments, recapitalizations,
reorganization, or other changes to the Company's capital structure or
its business(es); issue bonds or debentures, common or preferred stock
or warrants; repurchase outstanding shares; dissolve or liquidate the
Company, or sell or transfer any assets or parts of its business, or
any other corporate act, whether of a similar character or otherwise.
IX.10 Gender. Whenever any words are used in the Plan in the masculine,
feminine, or neuter gender, they are to be construed as though they
were also used in another gender in all cases where they would so
apply.
IX.11 Governing Law. The Plan will be construed, administered and governed
in all respects by the laws of the State of Florida.
IN WITNESS WHEREOF, the Company has executed this document to evidence the Plan
as adopted by the Board of Directors of Reflectone, Inc. on February 12, 1997
.
REFLECTONE, INC.
/s/Richard W Welshhans
------------------------------------
As Its: Vice President & CFO
----------------------------
9
<PAGE> 1
EXHIBIT 10.14
AGREEMENT FOR CREDIT AVAILABILITY
THIS AGREEMENT FOR CREDIT AVAILABILITY ("Agreement") is made and
entered into as of the 20TH day of NOVEMBER, 1996, by and between REFLECTONE,
INC., a corporation organized and existing under the laws of the state of
Florida ("Reflectone"), and BRITISH AEROSPACE PUBLIC LIMITED COMPANY, a public
limited company organized and existing under the laws of England ("BAe").
W I T N E S S E T H:
WHEREAS, BAe currently guarantees or provides certain of Reflectone's
credit facilities;
WHEREAS, the parties believe that it is in their best interests to set
forth their mutual understandings with respect to BAe's continuing guarantee of
these credit facilities.
NOW, THEREFORE, in consideration of the mutual promises and agreements
contained herein, the receipt and sufficiency of which are hereby acknowledged,
the parties hereto, intending to be legally bound thereby, agree as follows:
1. Credit Facilities.
(a) Guaranteed Facilities. Reflectone and BAe hereby
acknowledge that BAe currently guarantees an aggregate of U.S.
$37,000,000 of credit facilities provided to Reflectone by third-party
lenders, which facilities are more fully described on Exhibit A hereto
(the "Guaranteed Facilities"). The Guaranteed Facilities provide
Reflectone with access to an aggregate of U.S. $2,000,000 for working
capital purposes and an aggregate of U.S. $35,000,000 for the
provision of letters of credit, bonds and over-draft facilities.
Subject to the terms and conditions set forth herein, BAe hereby
agrees to continue to guarantee the Guaranteed Facilities throughout
the term of this Agreement.
(b) BAeF Facilities. In addition, Reflectone and BAe
hereby acknowledge that BAe, through its subsidiary British Aerospace
Finance, Inc. ("BAeF"), provides Reflectone with two Borrowing
Facilities totalling U.S. $50,000,000 for working capital purposes
(the
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<PAGE> 2
"BAeF Facilities"). Subject to the terms and conditions set forth
herein and in the related Borrowing Facility Agreements between
Reflectone and BAeF, BAe hereby agrees to continue to provide the BAeF
Facilities throughout the term of this Agreement.
2. Fees.
(a) Facility Fee. As compensation for the provision of
credit facilities described in Section 1 of this Agreement, Reflectone
shall pay to BAe a quarterly fee (the "Facility Fee") equal to one
eighth of one percent of the maximum amount of the Guaranteed and BAeF
Facilities available during the relative quarter to be paid in the
manner set forth in Section 2(c) hereof. This fee will be adjusted
prorata for early termination.
(b) Guaranty Fee. As compensation for the guaranty of
the US$2,000,000. Working Capital Facility described in Exhibit A of
this Agreement, Reflectone shall pay in the manner set forth in
Section 2(c) hereof, to BAe a guarantee fee (the "Guaranty Fee") based
on the drawings made under the Guaranteed Facility equal to 3.5
percent per annum, less the margin charged by Wachovia Bank of
Georgia, N.A. as more fully described in the Agreement establishing
the Working Capital Facility. The Guaranty Fee due in respect of
drawings under the Working Capital Facility shall accrue from day to
day commencing on the date of each drawing and shall be computed on
the basis of the actual days elapsed using a 360-day year.
(c) Payment. The Credit Availability Fee and Guaranty
Fee shall each be paid by Reflectone to BAe quarterly in arrears,
payable on March 31, June 30, September 30, and December 31 of each
year during the term of this Agreement.
3. Financial Reporting Matters.
(a) Monthly Reporting. During the term of this
Agreement, Reflectone shall submit to BAe or British Aerospace
Holdings, Inc. ("BAeI") its monthly financial reports ("Monthly
Report") in accordance with the timetables and formats specified by
Bae from time to time.
(b) Annual Budget and Business (5-year Strategic) Plan.
During the term of this Agreement, on or before the due dates
specified by BAe, Reflectone shall submit to BAe or BAeI its annual
budget ("Annual Budget") and Business (5-year Strategic) Plan
("Business Plan"). Each Annual Budget and Business Plan shall be
prepared in accordance with the format and timetable specified by BAe
from time to time. In addition, Reflectone shall supply annual
supplementary management information in a format and timetable
specified by BAe from time to time.
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<PAGE> 3
(c) Annual Audited Reporting Package. During the term of
this Agreement Reflectone shall submit to BAe or BAeI an audited
reporting package for the previous fiscal year, in a format and
timetable specified by BAe from time to time.
4. Capital Expenditure Review.
During the term of this Agreement Reflectone shall provide for
prior review and approval by BAe or BAeI all capital investment
expenditure in excess of sterling L.50,000. where such expenditure has
been reflected in Reflectone's annual budget. If such capital
investment has not been reflected in Reflectone's annual budget and is
not wholly substitutional, prior review by BAe or BAeI is required for
amounts above sterling L.10,000. All acquisitions and disposals of
businesses, including joint ventures, shall require prior review by
BAe or BAeI. Reflectone undertakes not to proceed with any such
investment without prior approval from BAe or BAeI. All investment
reviews submitted to BAe or BAeI must comply with the form, content
and timetable as specified by BAe from time to time.
5. Other Contractual Agreements.
During the term of this Agreement Reflectone shall not
knowingly or willfully take any action, or omit to take any action, or
enter into any agreement which would cause BAe to be in violation of
any law, regulation or any financial or contractual covenants provided
by BAe in any agreement to which it is a party or which would
otherwise place BAe in default of any such agreement.
6. Term.
This Agreement shall expire on August 7, 1997 provided,
however, that this Agreement may be terminated by either party hereto
upon thirty (30) days' written notice in the event that:
(a) BAe shall at any time cease to have the ability to
hold through the exercise of conversion rights and warrants, a
majority interest in Reflectone, or
(b) credit facilities in the amounts set forth in Section
1 hereof shall become obtainable by Reflectone on terms substantially
the same as the Facilities through third parties, without the
requirement that BAe guarantee or otherwise become obligated for such
other facilities.
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<PAGE> 4
7. Representation and Warranties.
Reflectone represents and warrants as follows as of the date
hereof and as of the date of each utilization of the Facilities.
8.1 Existence. It is a corporation duly organized,
validly existing, and in good standing under the laws of the State of
Florida.
8.2 Authority. It has full corporate power and authority
to execute and deliver this Agreement and to perform and observe the
provisions thereof, all of which have been duly authorized by all
necessary corporate action. By executing and delivering this
Agreement and by performing and observing the provisions thereof, it
will not (a) violate any existing provisions of its Certificate of
Incorporation or By-laws or violate or otherwise become in default
under any contract, law, order, regulation, or other obligation
binding upon it, or (b) cause the creation or imposition of any lien,
charge, or encumbrance of any nature whatsoever, upon any of its
property, except as provided herein. This Agreement has been duly
authorized, and executed and is valid, enforceable, and legally
binding upon it, except as such enforcement may be limited by
bankruptcy, insolvency, and other laws of general application
affecting the rights and remedies of creditors and by equitable
principles which may render certain remedies unavailable. It has all
requisite corporate power and authority to own its properties and to
carry on its business as now or proposed to be conducted.
8.3. Consents or Approvals. No consent, approval, or
authorization of, or filing, registration, or qualification with, any
governmental authority or any other Person is required to be obtained
by it in connection with the execution, delivery, performance, or
enforceability of this Agreement.
8. Miscellaneous.
(a) Notices. Any notices or other communications
required or permitted hereunder shall be given in writing and shall be
delivered or sent by certified or registered mail, postage prepaid,
addressed as follows:
If to Reflectone, to:
Reflectone, Inc.
4908 Tampa West Boulevard
P.O. Box 15000
Tampa, Florida 33684
Attn: Vice President Finance
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<PAGE> 5
If to BAe, to:
c/o British Aerospace Holdings, Inc.
Washington Technology Park
15000 Conference Center Drive, Suite 200
Chantilly, Virginia 20151-3819
Attn: Sr. Vice President and General Manager
or to such other address as shall be furnished in writing by such
party, and any such notice or communication shall be effective and be
deemed to have been given as of two (2) days following the date so
mailed; provided that any notice or communications changing any of the
addresses set forth above shall be effective and deemed given only
upon its receipt.
(b) Assignment. This Agreement and all of the provisions
hereof shall be binding upon and inure to the benefit of the parties
hereto and their respective successors and permitted assigns, but
neither this Agreement nor any of the rights, interests, or
obligations hereunder shall be assigned by either of the parties
hereto without the prior written consent of the other party.
(c) Entire Agreement. This Agreement, including the
exhibits and other documents referred to herein which form a part
hereof, contains the entire understanding of the parties with respect
to the transactions contemplated hereby and supersedes all prior
arrangements or understandings with respect thereto. There are no
restrictions, agreements, promises, warranties, covenants, or
undertakings other than those expressly set forth herein or therein.
(d) Modifications and Amendments. No change,
modification or termination of any terms, provisions, or conditions of
this Agreement shall be effective unless made in writing and signed or
initialed by all parties hereto, their successor and assigns.
(e) Counterparts. This Agreement may be executed in two
or more counterparts, all of which shall be considered one and the
same Agreement and each of which shall be deemed an original.
(f) Governing Law. This Agreement shall be governed by
the laws of the Commonwealth of Virginia, United States of America
(regardless of the laws that might be applicable under principles of
conflicts of law) as to all matters, including but not limited to,
matters of validity, construction, effect, and performance.
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<PAGE> 6
(g) Headings and Captions. The titles or captions of
sections and subsections contained in this Agreement are provided for
convenience of reference only, and shall not be considered a part
hereof for purposes of interpreting or applying this Agreement, and,
therefore, such titles or captions do not define, limit, extend,
explain, or describe the scope or extent of this Agreement or any of
its terms, provisions, representations, warranties, conditions, etc.,
in any manner or way whatsoever.
IN WITNESS WHEREOF, each of the parties hereto has executed this
Agreement individually or by its duly authorized officers, as of the day and
year first above-written.
WITNESSES:
REFLECTONE, INC.
By: /s/R W Welshhans
- ----------------------------- -----------------------------
Name: R W Welshhans
- ----------------------------- ---------------------------
Title: Vice President & CFO
--------------------------
"Reflectone"
BRITISH AEROSPACE
PUBLIC LIMITED COMPANY
By: /s/ David P Loose
- ----------------------------- -----------------------------
Name: David P Loose
- ----------------------------- ---------------------------
Title: Treasurer - Operations
--------------------------
"BAe"
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EXHIBIT A
REFLECTONE CREDIT FACILITIES
PROVIDED OR GUARANTEED BY BAE
- a Working Capital Facility consisting of $2 million Revolving
Line of Credit Agreement between Wachovia Bank of Georgia,
N.A., BAe and Reflectone to be used for working capital
purposes;
- a $35 million Letter of Credit Agreement with Lloyds Bank PLC;
<PAGE> 8
EXHIBIT B
DESCRIPTION OF BRITISH AEROSPACE
FINANCE FACILITY
- a $10 million Borrowing Facility Agreement with BAeF for
working capital purposes
- a $40 million Borrowing Facility Agreement with BAeF to
provide working capital in respect to Reflectone's C130-J
contract with Lockheed Aeronautics Corporation.
<PAGE> 1
EXHIBIT 10.15
BORROWING FACILITY AGREEMENT C-130J PROGRAM
BY AND BETWEEN BRITISH AEROSPACE FINANCE, INC. AS LENDER
AND REFLECTONE, INC. AS BORROWER
DATED NOVEMBER 20, 1996
British Aerospace Finance Inc. ("BAFI") doing business at Washington
Technology Park, Suite 200, 15000 Conference Center Drive, Virginia 20151-3819,
hereby agrees to make available to Reflectone, Inc.("Reflectone") doing
business at 4908 Tampa West Boulevard, Tampa, Florida 33634, a Facility for
short term advances (each advance a "Drawing") up to the equivalent of
US$40,000,000 (Forty Million United States Dollars) ("the Facility").
SECTION 1. TERMS OF DRAWINGS
Each Drawing will be for a Term as defined herein and as agreed
between BAFI and Reflectone but which Term shall not extend beyond the
Termination Date as defined herein. Each Drawing will be in United States
Dollars or such other currency as is acceptable to BAFI and Reflectone and will
be subject to the availability to BAFI of the currency concerned. Total
Drawing shall be limited to actual costs incurred on the UK C-130J program and
shall be subject to written verification and audit. Each Drawing will be
conditional upon Reflectone's not being in default hereunder and there being no
cumulation of undeclared or unpaid dividends on Reflectone's 8% preferred
stock. Notice of Drawings is required by 11:00 a.m. New York, NY time on the
day that funds are required in U.S. Dollars, or two days prior to that date for
U.K. Pounds Sterling, or any other major foreign currency. Signed
confirmations in respect of each Drawing are required within two business days
of the date thereof.
SECTION 2. TERMINATION
The Facility shall expire on the date which is 365 days from the date
hereof ("Termination Date"). Except as provided in Section 5 hereof, all
amounts borrowed under the Facility shall be repaid in full on the Termination
Date.
-1-
<PAGE> 2
SECTION 3. RATES ON BORROWINGS
Reflectone hereby agrees to pay interest on each Drawing under the
Facility at the relevant LIBOR plus a margin of 1.50% per annum ("the Margin").
In the case of U.S. Dollar Drawings, the relevant U.S. Dollar LIBOR plus the
Margin shall apply. In the case of U.K. Pound Sterling Drawings, the relevant
U.K. Pound Sterling LIBOR plus the Margin shall apply. The relevant LIBOR rate
will be as determined by BAFI (based upon the amount of the Drawing and the
Term thereof) agreed between the parties hereto by reference to Telerate Page
3750 at 11:00 a.m. New York, NY time for U.S. Dollar Drawings and at 11:00
a.m. London, England time for U.K. Pound Sterling Drawings or any other major
foreign currency Drawings, or if the Telerate Page 3750 is not generally
available to such other reference quotation as may be agreed between the
parties hereto. Interest due in respect of Drawings made under the Facility
shall accrue from day to day commencing on the Drawing date and shall be
computed on the basis of the actual number of days elapsed using a 360 day
year, or in the case of Pound Sterling Drawings, using a 365 day year. All
payments made by Reflectone to BAFI shall be made to the order of BAFI, as
directed by BAFI, in immediately available funds.
Reflectone promises to pay interest on overdue amounts of principal
and interest (as permitted by applicable law) at a rate equal to the rate
publicly announced from time to time by Citibank, N.A. (New York) as its prime
rate plus 3% (three percent).
SECTION 4. TERM OF BORROWINGS: MINIMUM BORROWING AMOUNTS
By execution hereof, Reflectone promises to pay, at the end of each
Term as defined herein, any unpaid principal amount disbursed by BAFI to
Reflectone plus interest thereon. The term (the "Term") of any Drawing
hereunder shall be stipulated by Reflectone prior to such Drawing, and the Term
may be either 15, 30, 45, or 60 days in duration. Such Term shall apply unless
otherwise mutually agreed between the parties. Amounts repaid shall be
available for further drawing in accordance with the terms hereof.
Each U.S. Dollar Drawing shall be in an amount of not less than U.S.
$100,000 (One Hundred Thousand United States Dollars). Each U.K. Pound
Sterling Drawing shall be in an amount of not less than U.K. L.100,000 (One
Hundred Thousand U.K. Pounds Sterling). Any other major foreign currency
Drawing shall be in an equivalent amount of not less than U.K. L.100,000.
-2-
<PAGE> 3
SECTION 5. PAYMENTS
All payments of principal and interest due under the Facility shall be
made at the end of the Term for each Drawing (or earlier in the case of an
Event of Termination or a Default) without deduction or withholding for or on
account of any present or future taxes, duties or governmental charges of any
nature whatsoever imposed, levied or collected by or in or on behalf of the
United States of America or the United Kingdom or by or on behalf of any
political subdivision or authority therein having power to tax, unless such
deduction or withholding is required by law. In such event, and if the tax,
duty or charge is the result of an assessment or levy on a transaction arising
out of this Agreement, then Reflectone shall pay such additional amounts of
principal and interest as may be necessary in order to ensure that the net
amounts received by BAFI shall equal the respective amounts of principal and
interest which would have been receivable had no such deduction or withholding
been required and no such payment of any additional amount been made.
SECTION 6. EVENT OF TERMINATION
If at any time between the date hereof and the Termination Date (i)
BAe PLC, directly or indirectly, shall at any time cease to have the ability to
hold through the exercise of conversion rights and warrants, a majority
interest in Reflectone or (ii) as a result of changes in applicable law or
regulation, advances by BAFI are or may be illegal, then BAFI may give notice
of its intent to terminate this agreement. Upon the giving of such notice
BAFI's obligation to make advances hereunder shall terminate, and 60 days from
the giving of such notice all amounts of principal owing hereunder together
with accrued interest thereupon shall be payable to BAFI.
SECTION 7. REPRESENTATION AND WARRANTIES
Reflectone represents and warrants as follows as of the date hereof
and as of the date of each Drawing:
7.1 Existence. It is a corporation duly organized, validly
existing, and in good standing under the laws of the State of its
incorporation.
-3-
<PAGE> 4
7.2 Authority. It has full corporate power and authority to execute
and deliver this Agreement and to perform and observe the provisions thereof,
all of which have been duly authorized by all necessary corporate action. By
executing and delivering this Agreement and by performing and observing the
provisions thereof, it will not (a) violate any existing provisions of its
Certificate of Incorporation or By-laws or violate or otherwise become in
default under any contract, law, order, regulation, or other obligation binding
upon it, or (b) cause the creation or imposition of any lien, charge, or
encumbrance of any nature whatsoever, upon any of it's property, except as
provided herein. This Agreement has been duly authorized and executed and is
valid, enforceable, and legally binding upon Reflectone, except as such
enforcement may be limited by bankruptcy, insolvency, and other laws of general
application affecting the rights and remedies of creditors and by equitable
principles which may render certain remedies unavailable. It has all requisite
corporate power and authority to own its properties and to carry on its
business as now or proposed to be conducted.
7.3 Consents or Approvals. No consent, approval, or authorization
of, or filing, registration, or qualification with, any governmental authority
or any other person is required to be obtained by it in connection with the
execution, delivery, performance, or enforceability of this Agreement.
SECTION 8. GOVERNING LAW
This Agreement shall be governed and construed in accordance with the
Law of the Commonwealth of Virginia.
In Witness Hereof, the parties have duly and properly executed this
Facility as of even date herewith.
For and on behalf of
BRITISH AEROSPACE FINANCE, INC. /s/M Newton
-----------------------------------
Vice President & Treasurer
For and on behalf of
REFLECTONE, INC. /s/R W Welshhans
-----------------------------------
Vice President & Treasurer
-4-
<PAGE> 1
EXHIBIT 10.18
FIRST AMENDMENT TO LETTER OF CREDIT AGREEMENT
This FIRST AMENDMENT ("THIS AMENDMENT") is made as of the 20th day of
November, 1996 to that certain LETTER OF CREDIT AGREEMENT, dated as of the 1st
day of November, 1996 ("THE EXISTING AGREEMENT"), between LLOYDS BANK PLC (the
"Bank") and REFLECTONE, INC. (the "Applicant").
WHEREAS, the Applicant and the Bank wish to amend the Existing
Agreement in certain respects.
NOW, THEREFORE, the Applicant and the Bank hereby agree that the
Existing Agreements hereby amended by deleting the reference to "$20,000,000" as
the defined "Commitment" in clause (a) of the proviso to the 2nd paragraph on
page 1 of the Existing Agreement, and by inserting the figure "$35,000,000" in
lieu thereof. Except as so amended, the Existing Agreement shall remain in
full force and effect.
THIS AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH,
THE LAWS OF THE STATE OF NEW YORK.
IN WITNESS WHEREOF, the parties have signed this Amendment as of the
date set forth in the preamble of This Amendment.
REFLECTONE INC.
By: /s/ Richard W. Welshhans
-------------------------------------
As Its: Vice President & CFO
LLOYDS BANK PLC,
ACTING THROUGH ITS ISSUING BRANCH
By: /s/ Windsor R. Davies
-------------------------------------
By: /s/ T. R. Walser
-------------------------------------
<PAGE> 1
EXHIBIT 10.19
[LETTERHEAD] BRITISH AEROSPACE COMPANY HEADQUARTERS
31 January 1997
Mr R W Welshhans
Vice President & Chief Financial Officer
Reflectone Inc
4908 Tampa West Blvd
Tampa, FL 33634
United States of America
Dear Richard
In connection with your preparation of the consolidated financial statements of
Reflectone Inc. and subsidiaries (the "Company") for the purpose of preparing
the consolidated financial statements which present fairly the financial
position, results of operations and cash flows of the Company in conformity
with generally accepted accounting principles, and further for the purpose of
making disclosures in documents required to be filed with the Securities and
Exchange Commission (the "SEC"), which are considered necessary by the SEC for
a fair and accurate presentation; I confirm that it is the present intention of
British Aerospace Plc ("BAe") to continue to renew annually the corporate
guarantee for the $2 million Wachovia credit facility for so long as financing
without recourse to BAe is not available to the Company and BAe continues to
hold, or has the ability to hold, through the exercise of conversion rights and
warrants, a majority ownership position in the Company. It is also our present
intention to continue to renew annually the $10 million British Aerospace
Finance Inc. financing facility and to continue annually to renew the guarantee
of the $35 million Letter of Credit facility with Lloyds Bank Plc for so long
as BAe continues to hold, or has the ability to hold through the exercise of
conversion rights and warrants, a majority interest in the Company and other
more attractive financing alternatives are not available to the Company.
I also confirm, that it is the present intention of BAe to provide the Company
annual debt financing for the C-130J programme with Lockheed Aeronautical
Systems Company ("LASC") for as long as BAe continues to hold, or has the
ability to hold, through the exercise of conversion rights and warrants, a
majority ownership position in the Company and until payment is received from
LASC, currently scheduled for the fourth quarter of 1997.
This letter is provided as a confirmation of BAe's present intention by way of
comfort only and is not intended to create a legally binding obligation.
Yours sincerely
/s/ David P. Loose
DAVID P LOOSE
TREASURER OPERATIONS
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We consent to the incorporation by reference in this registration statement of
Reflectone, Inc., and Subsidiaries on Form S-8 (File No. 2-82048, 33-3059,
33-37077 and 33-79912) of our report dated February 14, 1997 on our audits of
the consolidated financial statements and financial statement schedules of
Reflectone, Inc. and Subsidiaries, as of December 31, 1996 and 1995, and for
each of the three years in the period ended December 31, 1996, which report is
included in the Company's Annual Report on Form 10-K.
COOPERS & LYBRAND L.L.P.
Tampa, Florida
March 3, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF REFLECTONE, INC. FOR THE YEAR ENDED DECEMBER 31, 1996,
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 8,540,201
<SECURITIES> 0
<RECEIVABLES> 42,058,651
<ALLOWANCES> 131,985
<INVENTORY> 0
<CURRENT-ASSETS> 7,219,080
<PP&E> 19,822,154
<DEPRECIATION> 10,586,559
<TOTAL-ASSETS> 69,081,460
<CURRENT-LIABILITIES> 45,121,770
<BONDS> 0
0
50,000
<COMMON> 286,423
<OTHER-SE> 21,982,794
<TOTAL-LIABILITY-AND-EQUITY> 69,081,460
<SALES> 100,269,431
<TOTAL-REVENUES> 100,269,431
<CGS> 88,457,689
<TOTAL-COSTS> 92,610,095
<OTHER-EXPENSES> (1,260,189)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 386,517
<INCOME-PRETAX> 8,533,008
<INCOME-TAX> 771,437
<INCOME-CONTINUING> 7,761,571
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,761,571
<EPS-PRIMARY> 2.38
<EPS-DILUTED> 2.23
</TABLE>
