-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Hhz8ZFbJ6lMAZ+zXTrpaV8HwylS49Z9RCtGV4KmMwhZgGVHZKgxRXsdeldbW9Cet tgli63/SZsSvo2HZJ2Gc8A== 0000785037-96-000020.txt : 19961121 0000785037-96-000020.hdr.sgml : 19961121 ACCESSION NUMBER: 0000785037-96-000020 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19960927 FILED AS OF DATE: 19961120 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: REFLECTONE INC /FL/ CENTRAL INDEX KEY: 0000785037 STANDARD INDUSTRIAL CLASSIFICATION: RADIO & TV BROADCASTING & COMMUNICATIONS EQUIPMENT [3663] IRS NUMBER: 060663546 STATE OF INCORPORATION: FL FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-Q/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-14059 FILM NUMBER: 96669633 BUSINESS ADDRESS: STREET 1: P.O. BOX 15000 CITY: TAMPA STATE: FL ZIP: 33684-5000 BUSINESS PHONE: 8138871451 MAIL ADDRESS: STREET 1: P.O. BOX 15000 CITY: TAMPA STATE: FL ZIP: 33684-5000 FORMER COMPANY: FORMER CONFORMED NAME: REFLECTONE MERGER SUBSIDIARY INC/FL DATE OF NAME CHANGE: 19880828 10-Q/A 1 ORIGINAL SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q/A (Mark One) [x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 27, 1996 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File No. 0-14059 REFLECTONE, INC. (Exact name of Registrant as specified in its charter) Florida 06-0663546 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 4908 Tampa West Boulevard, Tampa, Florida 33634-2481 (Address of principal executive office) (Zip Code) Registrant's telephone number, including area code: (813) 885-7481 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for at least the past ninety days. Yes [X] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: Common Stock, par value $.10 per share, 2,863,733 shares as of October 23,1996. 1 This Amendment to Quarterly Report on Form 10-Q/A is filed to amend certain information set forth in Items 1 and 2 of the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 27, 1996, which was filed with the Securities and Exchange Commission on November 12, 1996. 2 Part I - FINANCIAL INFORMATION Item 1 - Financial Statements Reflectone, Inc. & Subsidiaries Consolidated Balance Sheets As of September 27, 1996 and December 31, 1995
(Unaudited) September 27, December 31, ASSETS 1996 1995 Current assets Cash and cash equivalents $ 3,899,089 $ 4,582,021 Receivables - non affiliate 43,677,216 26,101,185 Receivables - affiliate 2,991,101 628,922 Current installments of long-term note receivable - 3,558,000 Net deferred tax assets 1,638,930 1,050,000 Prepaid expenses and other current assets 1,827,079 1,480,190 ------------ ------------ Total current assets 54,033,415 37,400,318 Property, plant & equipment, net 8,271,859 7,881,699 Investments - restricted 5,000,000 5,000,000 Other assets 401,182 441,568 ------------ ------------ $ 67,706,456 $ 50,723,585 ============ ============
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LIABILITIES & SHAREHOLDERS' EQUITY Current liabilities Accounts payable $ 5,568,901 $ 9,980,857 Due to affiliate 2,121,778 1,995,079 Borrowings on line of credit - affiliate 27,806,184 6,513,666 Advance billings 3,346,171 7,832,601 Accrued employee compensation and benefits 3,499,650 4,218,694 Federal and state taxes payable 157,486 827,263 Accrued settlement expenses 1,068,414 1,068,415 Other accrued expenses and liabilities 2,260,996 1,807,763 ------------ ------------ Total current liabilities 45,829,580 34,244,338 ------------ ------------ Deferred gain on sale of equipment 2,262,189 2,503,747 ------------ ------------ Commitments and contingencies (Note 2) Shareholders' equity Convertible preferred stock - par value $1.00; authorized - 50,000 shares; issued and outstanding - 50,000 shares of 8% cumulative convertible preferred stock (liquidating preference $176 per share, aggregating $8,800,000) 50,000 50,000 Common stock - par value $.10; authorized - 10,000,000 shares; issued and outstanding - 2,863,733 and 2,750,255 shares 286,373 275,025 Additional paid-in capital 32,622,531 31,741,011 Cumulative translation adjustment 734,360 734,705 Accumulated deficit (14,078,577) (18,825,241) ------------ ------------ Total shareholders' equity 19,614,687 13,975,500 ------------ ------------ $ 67,706,456 $ 50,723,585 ============ ============ See accompanying notes to consolidated financial statements.
4 Reflectone, Inc. & Subsidiaries Consolidated Statements of Income For the Nine and Three Months Ended September 27, 1996 and September 29,1995 (Unaudited)
Nine Months 1996 1995 Revenues Non-affiliate $52,256,269 $48,604,361 Affiliate 17,985,362 14,422,630 ----------- ----------- 70,241,631 63,026,991 ----------- ----------- Costs and expenses Cost of sales Non-affiliate 46,693,241 44,525,470 Affiliate 14,593,591 11,146,979 ----------- ----------- 61,286,832 55,672,449 General and administrative 2,879,708 2,484,817 ----------- ----------- 64,166,540 58,157,266 ----------- ----------- Income from operations 6,075,091 4,869,725 ----------- ----------- Other income (expense) Interest income 389,419 600,330 Interest expense (339,127) (1,847,779) Other 19,946 20,655 ----------- ----------- 70,238 (1,226,794) ----------- ----------- Income before income taxes 6,145,329 3,642,931 Provision for income taxes 870,665 606,000 ----------- ----------- Net income 5,274,664 3,036,931 Preferred stock dividends 528,000 528,000 ----------- ----------- Net income applicable to common shareholders $ 4,746,664 $ 2,508,931 =========== =========== Income per common and common equivalent share Primary $ 1.60 $ .89 =========== =========== Fully diluted $ 1.52 $ - =========== ===========
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Three Months 1996 1995 $20,194,232 $15,255,363 5,667,487 10,065,092 ----------- ----------- 25,861,719 25,320,455 ----------- ----------- 18,256,016 14,608,091 4,574,336 7,744,398 ----------- ----------- 22,830,352 22,352,489 862,018 574,373 ----------- ----------- 23,692,370 22,926,862 ----------- ----------- 2,169,349 2,393,593 ----------- ----------- 149,356 220,220 (146,235) (783,768) (113,825) 6,101 ----------- ----------- (110,704) (557,447) ----------- ----------- 2,058,645 1,836,146 202,340 356,000 ----------- ----------- 1,856,305 1,480,146 176,000 176,000 ----------- ----------- $ 1,680,305 $ 1,304,146 =========== =========== $ .56 $ .45 =========== =========== $ .53 $ .43 =========== =========== See accompanying notes to consolidated financial statements.
6 Reflectone, Inc. & Subsidiaries Consolidated Statements of Cash Flows Nine Months ended September 27, 1996 and September 29,1995 (Unaudited)
1996 1995 Cash flows from operating activities: Net income $ 5,274,664 $ 3,036,931 Depreciation and amortization 1,353,402 1,709,005 Change in assets and liabilities: Increase in receivables Non-affiliate (17,558,553) (185,394) Affiliate (2,367,422) (4,998,366) Decrease in inventory - 4,267,295 Decrease in accounts payable (4,401,606) (1,560,776) Increase (decrease) in due to affiliate 115,678 (1,293,039) Increase (decrease) in advance billings (4,487,496) 3,312,379 Increase (decrease) in accrued employee compensation and benefits (721,296) 238,521 Other (1,256,487) (2,179,042) ------------ ------------ Net cash provided by (used for) operating activities (24,049,116) 2,347,514 ------------ ------------ Cash flows from investing activities: Capital expenditures (1,759,628) (490,917) Settlement of long-term note receivable 3,558,000 485,876 ------------ ------------ Net cash provided by (used for) investing activities 1,798,372 (5,041) ------------ ------------ Cash flows from financing activities: Paydowns under line-of-credit agreements (140,125,285) (131,700,531) Borrowings under line-of-credit agreements 161,417,803 124,802,769 Dividends on preferred stock (528,000) (528,000) Proceeds from sales of common stock 552,215 159,678 Other 340,653 - ------------ ------------ Net cash provided by financing activities 21,657,386 (7,266,084) ------------ ------------ Net decrease in cash (593,358) (4,923,611) Cash and cash equivalents at beginning of period 4,582,021 7,329,914 Effect of exchange rate changes on cash (89,574) 7,674 ------------ ------------ Cash and cash equivalents at end of period $ 3,899,089 $ 2,413,977 ============ ============ See accompanying notes to consolidated financial statements.
7 Reflectone, Inc. & Subsidiaries Notes to Consolidated Financial Statements Nine months ended September 27, 1996 (Unaudited) The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the nine months ended September 27, 1996 are not necessarily indicative of the results that may be expected for the year ending December 31, 1996. For further information, refer to the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 1995. All intercompany transactions have been eliminated. Note 1 - Receivables Component elements of receivables consist of the following:
September 27, December 31, 1996 1995 Receivables U.S. Government Billed $ 5,033,485 $ 5,363,973 Unbilled 2,418,913 1,932,588 Unrecovered costs subject to future negotiation -- not billed 1,400,000 1,400,000 ------------ ------------ 8,852,398 8,696,561 ------------ ------------ Lockheed Martin Corporation Billed 547,190 - Unbilled 32,315,796 14,780,610 ------------ ------------ 32,862,986 14,780,610 ------------ ------------
8 Commercial Billed 2,462,662 2,554,538 Unbilled - 558,023 Provision for doubtful accounts (500,830) (488,547) ------------ ------------ 1,961,832 2,624,014 ------------ ------------ $ 43,677,216 $ 26,101,185 ============ ============ Affiliates Billed $ 2,250,038 $ 545,729 Unbilled 741,063 83,193 ------------ ------------ $ 2,991,101 $ 628,922 ============ ============
Unbilled amounts represent the difference between revenue recognized for financial reporting purposes and amounts contractually permitted to be billed to customers. These amounts will be billed in subsequent periods as progress billings, upon shipment of the product, or upon completion of the contract. Unrecovered costs subject to future negotiation include incremental costs arising out of customer-occasioned unforeseen development work and amounts for work performed not specified in express contract provisions. The amounts recorded represent only a portion of the total compensation sought by the Company from customers. Therefore, while any and all recoveries are subject to future negotiations, the actual recoveries could be more or less than those currently anticipated in the Company's consolidated financial statements. Management has made provision for future costs associated with these actions as described in Note 2. Subsequent to the end of the third quarter of 1996, the Company negoiated modifications to the C-130J contract providing for a milestone payment of $15.0 million in the fourth quarter of 1996 and a payment of $6.0 million in the second quarter of 1997. Remaining payments under the contract are billable upon the achievement of certain contractual milestones, currently scheduled for the third and fourth quarters of 1997. It is anticipated that approximately $12.7 million of receivables will not be collected within one year. An allowance for doubtful accounts is provided based on historical experience and after consideration of specific accounts and current economic conditions. 9 Reflectone, Inc. & Subsidiaries Notes to Consolidated Financial Statements Nine Months ended September 27, 1996 (Unaudited) Note 2 - Commitments and Contingencies The Company has asserted its rights to recovery of certain incremental costs arising out of customer-occasioned unforeseen development work and amounts for work performed not specified in express contract provisions as more fully described in Note 1. Management has made provision for future costs associated with these actions and believes the provision established is adequate for this purpose. Note 3 - Earnings Per Common Share Primary earnings per share are based on the weighted average number of common shares and common share equivalents outstanding and give effect to the recognition of preferred dividend requirements. Common share equivalents include dilutive stock options and warrants using the treasury stock method. Fully diluted earnings per share assumes, in addition to the above, i) that the Convertible Preferred Stock was converted at the beginning of each period, ii) that earnings were increased for preferred dividends that would not have been incurred had conversion taken place, and, iii) the additional dilutive effect of stock options and warrants. The numbers of shares used in the earnings per share computations are as follows:
Nine Months Three Months 1996 1995 1996 1995 Primary Weighted average common shares outstanding 2,814,682 2,689,174 2,858,134 2,699,351 Stock options 142,872 132,847 158,382 169,665 --------- --------- --------- --------- Average common shares outstanding 2,957,554 2,822,021 3,016,516 2,869,016 Convertible preferred stock 500,000 500,000 500,000 500,000 Additional dilutive effect of stock options 21,600 19,051 - 41,544 --------- --------- --------- --------- Fully diluted assumed common shares outstanding 3,479,154 3,341,072 3,516,516 3,410,560 ========= ========= ========= =========
10 Reflectone, Inc. & Subsidiaries Notes to Consolidated Financial Statements Nine Months ended September 27, 1996 (Unaudited) Note 3 - Earnings Per Common Share (continued) Fully diluted per share data is not disclosed for the nine months ended September 29, 1995 since the effect would be antidilutive. Note 4 - Stock Options In February 1996, the Company granted options to purchase 41,500 shares of the Company's common stock at $18.50 per share under the Company's 1994 Stock Option Plan. At September 27, 1996 none of these options were exercisable, and there were 62,500 shares of common stock available for issuance upon the exercise of stock options granted in the future under this plan. Note 5 - Credit Agreements and Borrowings To date the Company has been unable to obtain adequate financing on acceptable terms without recourse to British Aerospace Plc. or its affiliates (collectively, "British Aerospace"). However, pursuant to the terms of an Agreement for Credit Availability dated as of August 7, 1996, British Aerospace agreed, subject to its continued ownership of a majority of the Company, to continue to provide or guarantee the Company's credit facilities through August 7, 1997. Renewal of the Company's credit facilities beyond August 7, 1997 is, in large part, dependent upon British Aerospace's willingness to continue to provide or guarantee these facilities. By means of a letter dated February 27, 1996, British Aerospace has represented to the Company that it intends to continue to provide or guarantee the Company's credit facilities, as long as financing is not available to the Company without recourse to British Aerospace and British Aerospace continues to hold, or has the ability to hold through the exercise of preferred stock conversion rights and warrants to purchase common stock, a majority ownership position in the Company. Based on the foregoing representations of British Aerospace, management anticipates that the Company's credit facilities will be renewed annually. The Company's credit facilities and the Agreement for Credit Availability with British Aerospace contain certain covenants which, among other things, require the Company: i)to be current with respect to the payment of dividends on its 8% Cumulative Convertible Preferred Stock prior to any draw under the British Aerospace-provided facilities, ii) to pay British Aerospace a facility fee of 50 basis points per annum on the maximum aggregate availability ($87.0 million) of the credit facilities provided or guaranteed by British Aerospace, and iii) to pay British Aerospace a guarantee fee of 11 Reflectone, Inc. & Subsidiaries Notes to Consolidated Financial Statements Nine Months ended September 27, 1996 (Unaudited) Note 5 - Credit Agreements and Borrowings (continued) 3.25% per annum on amounts outstanding under the Company's $2.0 million revolving line of credit facility with Wachovia Bank of Georgia, N.A. In addition, the Company's Agreement for Credit Availability requires the Company to obtain the prior approval of British Aerospace for all material capital investment expenditures as defined in the Agreement for Credit Availability. During the second quarter of 1996 the company reduced its revolving line of credit facility with Wachovia Bank of Georgia, N.A. from $10.0 million to $2.0 million. The facility permits the Company to select loans bearing interest at a floating prime rate or at a fixed rate of LIBOR plus .25% and to specify, within limits, the period during which the selected fixed interest rate will be in effect. The agreement matures on August 7, 1997, and is supported by the corporate guarantee of British Aerospace. At September 27, 1996, no borrowings were outstanding under this line and therefore the full amount of this facility was available. Under the Lloyds Bank Plc letter of credit facility, the Company may issue irrevocable standby letters of credit and bank guarantees aggregating up to $20.0 million. The agreement is supported by the corporate guarantee of British Aerospace. Subsequent to the end of the third quarter of 1996, this facility was renewed for another one year period, maturing on October 31, 1997. With the renewal, fees charged under the facility were reduced from .55% to .25% per annum on the amount of credits issued for the actual number of days outstanding. At September 27, 1996, letters of credit and guarantees issued under this facility approximated $1.9 million. During the third quarter of 1996, the Company reduced its revolving line of credit facility with British Aerospace Finance, Inc. from $20.0 million to $10.0 million. The agreement provides for working capital borrowings, and an interest rate of LIBOR plus 3.50% per annum is charged under this facility. The agreement matures on August 7, 1997 and permits the Company to specify, within limits, the period during which the borrowings will mature. At September 27, 1996, borrowings under this facility approximated $1.3 million. The Company has a special credit facility (the "C-130J Facility") with British Aerospace to finance the Company's working capital needs with respect to the C-130J contract with LMC. During the third quarter of 1996 the C-130J Facility was increased from $40.0 million to $55.0 million. The agreement matures on August 7, 1997. Draws under this facility are limited to actual costs incurred by the Company and Reflectone UK, Ltd. ("RUKL"), a wholly-owned subsidiary of the Company, on the LMC C-130J program. Interest rates charged under the C-130J Facility are at LIBOR plus 1.50% per annum. By means of a letter dated February 27, 1996, British Aerospace has further represented that, as long as British Aerospace continues to hold, or has the ability to hold through the exercise of preferred stock conversion rights and warrants to purchase common stock, a majority ownership position in the Company, it intends to continue to provide annual financing for the C-130J program until payment is received from LMC. At September 27, 1996, borrowings under this facility approximated $26.5 million. 12 Reflectone, Inc. & Subsidiaries Notes to Consolidated Financial Statements Nine Months ended September 27, 1996 Note 5 - Credit Agreements and Borrowings (continued) Under the Lloyds Bank Plc letter of credit facility, the Company may issue irrevocable standby letters of credit and bank guarantees aggregating up to $20.0 million. The Company pays a non-refundable commission on the stated amount of credits issued for the actual number of days outstanding at 0.55% per annum. The agreement is supported by the corporate guarantee of British Aerospace. Subsequent to the end of the third quarter of 1996, this facility was renewed for another one year period, maturing on October 31, 1996. At September 27, 1996, letters of credit and guarantees issued under this facility approximated $1.0 million. During the third quarter of 1996, the Company reduced its revolving line of credit facility with British Aerospace Finance, Inc. from $20.0 million to $10.0 million. The agreement provides for working capital borrowings, and an interest rate of LIBOR plus 3.50% per annum is charged under this facility. The agreement matures on August 7, 1996 and permits the Company to specify, within limits, the period during which the borrowings will mature. At September 27, 1996, borrowings under this facility approximated $1.0 million. As discussed in Note 1, the Company will not receive payments from LMC under the terms of the C-130J contract until the achievement of certain contractual milestones, currently scheduled for the fourth quarter of 1997. Accordingly, during the third quarter of 1995, the Company negotiated a second credit facility (the "C-130J Facility") with British Aerospace to finance the Company's working capital needs with respect to the C-130J contract with LMC. During the third quarter of 1996 the C-130J Facility was increased from $40.0 million to $55.0 million. The agreemnt matures on August 7, 1997. Draws under this facility are limited to actual costs incurred by the Company and Reflectone UK, Ltd. ("RUKL"), a wholly-owned subsidiary of the Company, on the LMC C-130J program. Interest rates charged under th C-130J Facility are at LIBOR plus 1.50% per annum. By means of a letter dated February 27, 1996, British Aerospace has further represented that, as long as British Aerospace continues to hold, or has the ability to hold through the exercise of perferred stock conversion rights and warrants to purchase common stock, a majority ownership position in the Company, its intends to continue to provide annual financing for the C-130J program until payment is received from LMC. At September 27, 1996, borrowings under this facility approximated $26.5 million. 13 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Liquidity and Capital Resources Management considers liquidity to be the Company's ability to generate adequate cash to meet its short- and long-term business needs. The principal internal source of such cash is the Company's operations, while external sources include borrowings under the Company's credit facilities, the sale of Company-owned assets and the issuance of equity securities. During the nine-month period ended September 27, 1996, the Company used $23.7 million in cash, net, for operating activities while in the comparable period of 1995, the Company generated $2.3 million in cash, net, from operating activities. Operating cash flow was negatively impacted during the nine- month period ended September 27, 1996 primarily by increases in non-affiliate and affiliate receivables, and reductions in accounts payable, advance billings and other changes in assets and liabilities, net. The increase in non-affiliate receivables primarily related to the contract with Lockheed Martin Corporation ("LMC")to design and manufacture two C-130J dynamic mission simulators and other related training devices. The increase in affiliate receivables primarily relates to three full-flight simulator programs with affiliates. During the nine-month period ended September 27, 1996, the Company increased its net short-term borrowings by $21.3 million and reduced its cash by $593,000 before reflecting the effect of changes in exchange rates on cash. During the same period, gross borrowings of $161.4 million, and cash received upon settlement of the long-term note receivable were used primarily to fund $140.1 million in scheduled maturities of borrowings under the Company's credit facilities and to fund operating activities and capital expenditures during the nine-month period. To date the Company has been unable to obtain adequate financing on acceptable terms without recourse to British Aerospace. However, pursuant to the terms of an Agreement for Credit Availability dated as of August 7, 1996, British Aerospace agreed, subject to its continued ownership of a majority of the Company, to continue to provide or guarantee the Company's credit facilities through August 7, 1997. Renewal of the Company's credit facilities beyond August 7, 1997 is, in large part, dependent upon British Aerospace's willingness to continue to provide or guarantee these facilities. By means of a letter dated February 27, 1996, British Aerospace has represented to the Company that it intends to continue to provide or guarantee the Company's credit facilities, as long as financing is not available to the Company without recourse to British Aerospace and British Aerospace continues to hold, 14 or has the ability to hold through the exercise of preferred stock conversion rights and warrants to purchase common stock, a majority ownership position in the Company. Based on the foregoing representations of British Aerospace, management anticipates that the Company's credit facilities will be renewed annually. Specific discussion of the Company's credit facilities is included in Note 5 to the Consolidated Financial Statements. The Company has a special credit facility (the "C-130J Facility") with British Aerospace to finance the Company's working capital needs with respect to the C-130J contract with LMC. During the third quarter of 1996, the C-130J Facility was increased from $40.0 million to $55.0 million. The agreement matures on August 7, 1997. Draws under this facility are limited to actual costs incurred by the Company on the LMC C-130J program. By means of a letter dated February 27, 1996, British Aerospace has further represented that as long as British Aerospace continues to hold, or has the ability to hold through the exercise of preferred stock conversion rights and warrants to purchase common stock, a majority ownership position in the Company, it intends to continue to provide annual financing for the C-130J program until payment is received from LMC. Through September 27, 1996, funding related to this program has approximated $32.9 million. Based on current schedules, the contract is estimated to require additional funding of $8.0 million during the fourth quarter of 1996 and $22.0 million in 1997. Subsequent to the end of the third quarter of 1996, the Company negotiated modifications to the C-130J contract providing for a milestone payment of $15.0 million in the fourth quarter of 1996 and a payment of $6.0 million in the second quarter of 1997. Remaining payments under the contract are billable upon the achievement of certain contractual milestones, currently scheduled for the third and fourth quarters of 1997. While the cost of financing this program is being recovered through the contract with LMC, an increase in interest rates or an extension of the scheduled delivery dates could result in financing costs in excess of that priced into the contract. The Company's cash flows are impacted, in the normal course of business, by the Company's ability to book new profitable business and achieve scheduled program milestones on a timely basis. The achievement of program milestones, in turn, provides for and enables contractually defined amounts to be billed to the customer. Often these amounts are significant and, as a result, failure to achieve payment milestones can dramatically impact the Company's credit requirements. As described in Notes 1 and 2 to the Consolidated Financial Statements, management has anticipated recovery of certain costs incurred arising out of customer-occasioned contract delays and amounts for work performed but not specified in express contract provisions. The amounts included in the Consolidated Financial Statements represent only a portion of the total compensation sought by the Company from the customers. Therefore, while any 15 and all recoveries are subject to future negotiations, and actual recoveries could be less than those currently anticipated, any amounts awarded in excess of that anticipated in the Company's Consolidated Financial Statements represent an additional capital resource to the Company. It is anticipated that any actual recoveries of the projected amounts may not be collected within the next twelve months. Based upon the availability under its current credit facilities and anticipated renewals thereof; anticipated increases in the C-130J Facility; projected cash flows from current and future programs with achievement of projected program milestones; anticipated reductions in restricted investments; and expected resolution and recovery of costs subject to future negotiation as described in Notes 1 and 2 to the Consolidated Financial Statements management believes that the Company's capital resources are adequate to meet its short- and long-term business needs. Results of Operations During the three- and nine-month periods ended September 27, 1996, the Company's consolidated revenues increased by $541,000 and $7.2 million, or 2.1% and 11.4%, respectively, from comparable periods in 1995. Revenues of the Training Devices Segment increased by 29.5% during the nine- month period ended September 27, 1996 as compared to the comparable period in 1995. The increase in revenues of the Training Devices Segment primarily resulted from revenues generated by the C-130J program with LMC and three full-flight simulator programs with affiliates. Revenues of the Training Services Segment decreased by 19.8% during the nine-month period ended September 27, 1996 as compared to the comparable period in 1995. The decrease primarily related to the 1995 loss of reprocurements relating to four training services contracts in which the Company was the incumbent contractor. Revenues for the nine-month period ended September 27, 1996 were also negatively impacted by the revision of the management agreement pursuant to which the Company manages the British Aerospace-owned Dulles Training Center. Under the terms of the revised management agreement, the Company will receive a fixed fee of $500,000 annually and will be reimbursed by British Aerospace for the Company's costs associated with the Dulles Training Center. Revenues of the Systems Management Segment were approximately $4.9 million million for the nine-month period ended September 27, 1996 as compared to $6.0 million for the comparable period in 1995. Revenues in both periods primarily relate to the 1995 third quarter award of a contract from an affiliate for a C-130H simulator for ultimate delivery to an international customer. The decrease in revenues relate to lower levels of material throughput on the contract in 1996 from that experienced in 1995. 16 The Company's income from operations was approximately $2.2 million and $6.1 million for the three- and nine-month periods ended September 27, 1996, respectively. This compares to income from operations of $2.4 million and $4.9 million for the comparable periods in 1995. The operating profit of the Training Devices Segment was $3.1 million and $1.1 million for the nine- month periods ended September 27, 1996 and 1995, respectively. The increased profitability primarily related to profits recognized during the 1996 periods on two large affiliate programs and an international military program. Operating profits of the Training Services Segment declined by $455,000 or 16.5% to $2.3 million during the nine-month period ended September 27, 1996 as compared to the comparable period in 1995. The reduced profitability primarily related to the decline in revenues resulting from the 1995 loss of reprocurements of four training services contracts in which the Company was the incumbent contractor. Operating profits of the Systems Management Segment were $630,000 for the nine-month period ended September 27, 1996 compared to $961,000 for the comparable period in 1995. The decrease in operating profits of the systems management segment resulted from a decrease in revenues during the period on a contract from an affiliate for the sale of a C-130H simulator. Interest income approximated $389,000 and $600,000 during the nine-month periods ended September 27, 1996 and 1995, respectively. Interest income is primarily interest earned on long-term notes receivable, restricted investments and temporary cash investments. The decrease in interest income primarily related to the 1996 first quarter settlement of the long-term note receivable. Interest expense for the nine-month period ended September 27, 1996, approximated $339,000 as compared to $1.8 million for the comparable period in 1995. The reduction in interest expense results from lower average levels of borrowings as compared to the previous year. In addition, during the nine- month period ended September 27, 1996, interest costs of $1.2 million associated with the Company's financing of the C-130J program were charged to the C-130J program and are reflected in cost of sales rather than as interest expense. In the comparable period in 1995, interest cost charged to the C-130J program approximated $59,000. The provision for income taxes increased to $871,000 during the nine-month period ended September 27, 1996 as compared with $606,000 for the 1995 period. The increase in the provision for income taxes in the nine-month period ended September 27, 1996 as compared to the comparable 1995 period resulted from a higher estimate of taxable income for federal and state income tax purposes and the unavailability of net operating loss carryforwards in 1996. The Company has recorded a deferred tax asset of $1.6 million, for which recovery in future periods is not dependent upon future taxable income. 17 Backlog Contractual backlog decreased to $89.8 million at September 27, 1996, from $121.1 million at December 31, 1995. Of the contractual backlog at September 27, 1996, 85.1% consisted of orders of the Training Devices Segment, 2.6% consisted of orders of the Training Services Segment and 12.3% consisted of orders of the Systems Management Segment. This compares to 71.3%, 15.6% and 13.1%, respectively at December 31, 1995. The contractual backlog of the Training Devices Segment includes the LMC C-130J program in the amount of $43.5 million. Annual contract awards within the Training Services Segment to provide training to U.S. Military personnel are generally recorded during the fourth calendar quarter. This results in a declining backlog for the Training Services Segment during the first three calendar quarters of each year. Not included in contractual backlog are announced orders for which definitive contracts have not been executed and unobligated contract options under U.S. Government contracts. Factors That May Affect Future Results The Company's future operating results may be affected by a number of factors, many of which are beyond the Company's control, including uncertainties relative to global economic conditions; political instability; the economic strength of governments; levels of U.S. Government and international defense spending; military and commercial aircraft industry trends; and the Company's ability to successfully increase market share in its Training Devices Segment while expanding its product base into other markets. In recent years, the markets into which the Company sells its training device products have been depressed, and the number of units sold into these markets has decreased from prior periods. As a result, competition for available training device opportunities has increased, resulting in lower margins on devices constructed. In addition, the simulation and training industry has been characterized by continuing industry consolidation, rapid technological advances resulting in frequent introduction of new products and product enhancements, and very competitive pricing practices. The Company has responded to these market conditions by diversifying into new markets and by seeking the formation of strategic teaming arrangements with airframe manufacturers and prime contractors for weapon systems. As in prior years, the Company continues its diversification strategy of pursuing a greater number of opportunities in the training services market. In addition, with the acquisition of RUKL in June 1993 and the purchase of certain assets of the Microflite product line in early 1994, the Company expanded the product lines of the Training Devices Segment and increased the number of opportunities available to it in the European and commercial airline simulation markets. In November 1993, RUKL was selected by LMC as its training systems teammate for the C-130J program. 18 In the pursuit of new business, the Company may make contract price proposals to potential customers which, if awarded, could result in the recording of loss provisions to the consolidated financial statements. The Company also sometimes designs and manufactures prototype training devices which by their nature involve unforeseen design and development risks and exposures. The Company attempts to price these risks in the contract value but nonetheless, the frequency of losses historically experienced on prototype training devices exceed those experienced on follow-on devices. The Company attempts to recover its investment in the design and development of prototype devices by winning subsequent programs for follow-on devices. While the LMC program involves the development of prototype C-130J training devices, management believes that this program has been appropriately priced for unforeseen risks and exposures and anticipates profits in future periods on the program. The Company is also pursuing several other programs which, if awarded, could involve risks associated with prototype devices. The Company may experience transaction gains and losses from currency fluctuations related to its international operations. In order to minimize foreign exchange risk, the Company selectively hedges certain of its foreign exchange exposures principally relating to foreign currency accounts payable and accounts receivable. The Company's hedging strategy is facilitated by its ability to borrow foreign currencies under the revolving credit facility and the C-130J Facility provided by British Aerospace. This strategy has reduced the Company's vulnerability to certain of its foreign currency exposures, and the Company expects to continue this practice in the future to the extent appropriate. The Company does not engage in speculative hedging activities, nor does the Company hedge nontransaction-related balance sheet exposure. The Company has entered into contracts to buy forward British pounds with an equivalent value of $7.1 million to reduce the Company's exposure to foreign currency exchange risk associated with the cost of subcontractors and other requirements of the C-130J program denominated in British pounds. These contracts mature quarterly in varying amounts from December 1996 to June 1997. British Aerospace is the counterparty to these instruments. The forward contracts should not subject the Company to risk from exchange movement because gains and losses on these contracts offset losses and gains on the transactions being hedged. However, the amount and timing of the program costs were estimated and changes in these estimates could result in future gains or losses from exchange rate movements. This Quarterly Report on Form 10-Q contains forward-looking comments that involve risks and uncertainties. The Company's actual results could differ materially from those anticipated in these forward-looking comments as a result of certain factors, including those set forth under "Factors That May Affect Future Results" and elsewhere in this Quarterly Report. 19 From time to time, the Company may publish forward-looking statements relating to such matters as anticipated financial performance, business prospects, technological developments, new products, research and development activities and similar matters. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. In order to comply with the terms of the safe harbor, the Company notes that a variety of factors could cause the Company's actual results and experience to differ materially from the anticipated results or other expectations expressed in the Company's forward-looking statements. The risks and uncertainties that may affect the operations, performance, development and results of the Company's business include those set forth under "Factors That May Affect Future Results" and elsewhere in this Quarterly Report. 20 Part II OTHER INFORMATION Item 6 - Exhibits and Reports on Form 8-K (a) Exhibits. The following documents are filed as exhibits to this Report: 10.16 $20,000,000 Letter of Credit Agreement between Lloyds Bank Plc and Reflectone, Inc. dated November 1, 1996. (b) The Registrant did not file any reports on Form 8-K during the three-month period ended September 27, 1996. 21 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. REFLECTONE, INC. (Registrant) Date: November 20, 1996 By: /s/Richard G. Snyder Richard G. Snyder President and Chief Executive Officer Date: November 20, 1996 By: /s/ Richard W. Welshhans Richard W. Welshhans Vice President - Finance and Chief Financial Office (Principal Financial and Accounting Officer) 22 -----END PRIVACY-ENHANCED MESSAGE-----