-----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, Oxt8hIxO5j6sdhAQa5G+tL9BfGuIohhkfj1HTtcTnyiDM+9FyoZJMiStsZ+4mZjJ Ne05l3V5//Jsb1bLild6dw== 0000950144-97-002003.txt : 19970304 0000950144-97-002003.hdr.sgml : 19970304 ACCESSION NUMBER: 0000950144-97-002003 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970303 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-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-14059 FILM NUMBER: 97549729 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-K 1 REFLECTONE, INC. FORM 10-K 1 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) Florida 06-0663546 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 4908 Tampa West Boulevard, Tampa, Florida 33634-2481 (Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (813) 885-7481 Securities registered pursuant to Section 12(b) of the Act: Title of Each Class Name of Each Exchange on Which Registered ------------------- ----------------------------------------- None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $.10 per share -------------------------------------- (Title of Class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] Aggregate market value of the voting stock held by non-affiliates of the Registrant as of February 25, 1997: $33,262,559 (assuming, for these purposes only, that 1,426,378 shares of common stock beneficially owned by all executive officers and directors as a group, and by British Aerospace, Plc. and its subsidiaries, are held by affiliates of the Registrant). The number of shares outstanding of the Registrant's class of common stock, as of February 25, 1997: 2,864,448. DOCUMENTS INCORPORATED BY REFERENCE None Page 1 of 109 Exhibit Index on Page 64 2 TABLE OF CONTENTS
PART I PAGE NO. -------- 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
2 3 PART I ITEM 1. BUSINESS GENERAL BUSINESS DESCRIPTION Reflectone, Inc. ("Reflectone" or the "Company") is a Florida corporation whose business involves the design, manufacture and sale of flight simulators, weapon system trainers, tactical air defense trainers, maintenance trainers, part-task trainers, and other sophisticated training devices for U.S. Government, commercial and international customers, as well as simulation-based entertainment devices for the entertainment industry. The Company also provides a variety of simulator-related training services at customer-owned facilities, its Tampa training center, and the British Aerospace-owned Dulles flight training facility. As used herein, unless the context requires otherwise, "Reflectone" or the "Company" includes Reflectone, Inc. and its operating subsidiaries. Reflectone's business is conducted through its three primary business segments: the Training Devices Segment, the Training Services Segment, and the Systems Management Segment. The manufacture of simulators and other training and entertainment devices is conducted through the Training Devices Segment. In recent years the product mix of training devices designed and manufactured by Reflectone's Training Devices Segment has evolved from one primarily comprised of military aircraft simulators to one which additionally includes commercial aircraft simulators and simulation devices for the entertainment industry. In 1993, the Company acquired British Aerospace Simulation, Ltd., which was subsequently renamed Reflectone UK Limited ("RUKL"). RUKL, with facilities in Filton, England, historically designed, developed and manufactured, through sophisticated electronic computer simulation, tactical air defense trainers, small-arms trainers, electronic warfare training systems and visual air traffic control simulators. During 1995, RUKL also played a key role in the Company's flight simulator business, securing a major subcontract with Lockheed Martin Corporation ("LMC") worth approximately $77.0 million with training and maintenance extending into the year 2002. Under the contract, the Company is providing a complete training system to the U.K. Ministry of Defence in connection with its purchase of new Lockheed C-130J transport aircraft. The actual performance by the Company under the Lockheed C-130J subcontract is being split between the Company's U.S. and U.K. operations, thus expanding the design and manufacturing capabilities of RUKL into the flight simulator market. The operations of RUKL are reported in the Company's Training Devices Segment. Through a wholly owned subsidiary, Reflectone Training Systems, Inc. ("RTS"), Reflectone's Training Services Segment provides flight and ground school instruction for pilots and aircrews which may include development of training syllabus and courseware, as well as simulator operation and maintenance. Currently, the Training Services Segment provides services at 18 field sites in the United States and one field site in Japan. In addition, Reflectone's Training Services Segment provides C-130H training in Tampa and manages the British Aerospace Holdings, Inc. owned Dulles flight training center located near Washington D.C.'s Dulles International Airport. Reflectone's third business segment, the Systems Management Segment, manages complex training programs which require the services of both the Training Devices and Training Services Segments. During the years ended December 31, 1996, 1995 and 1994, revenues from the Training Devices Segment were $66.3 million, $48.7 million and $26.9 million, respectively, inclusive of intersegment transactions. These revenues include revenues from the operations of RUKL of $29.7 million, $18.6 million and $4.9 million, respectively. Revenues from the Training Services Segment during these periods were $30.3 million, $38.7 million and $33.4 million, respectively, inclusive of intersegment transactions. Revenues for the Systems Management Segment were $5.7 million, $12.8 million and $9.2 million for the years ended December 31, 1996, 1995 and 1994, respectively, inclusive of intersegment transactions. See 3 4 Note 12 to the Consolidated Financial Statements, which are included in Part IV of this Report for additional segment and geographic information. The Company has various relationships, contracts and agreements with British Aerospace, Plc. ("BAe") and its direct and indirect subsidiaries (BAe and such subsidiaries herein collectively referred to as "British Aerospace"). Approximately 48.0% of the common stock of the Company is owned by British Aerospace Holdings, Inc. ("BAeHI"), a wholly owned subsidiary of British Aerospace, Plc. PRODUCTS, SERVICES AND RECENT BUSINESS DEVELOPMENTS TRAINING DEVICES. Reflectone's flight simulators, weapon system trainers, maintenance trainers and other training devices are full-scale reproductions, including instrumentation and controls, of the cockpit, mission operator station(s), or maintenance bays of specific aircraft. Reflectone's training devices are marketed to both commercial and military (U.S. and international) customers and are used to train flight and ground crews in normal and emergency procedures, to develop tactics, and to achieve a state of operational readiness in a cost-effective manner. Reflectone's flight simulators are designed to convey to the pilot and other crew members the sensations of actually operating a specific aircraft through the full range of taxiing, take-off, local area operations, in-flight maneuvering, emergencies, weather conditions (including wind shear), landing and post-flight procedures. All of these tasks (including emergency situation training) may be accomplished through simulation without risk to life or damage to equipment, and without the costly consumption of fuel which accompanies performance of similar functions in the aircraft. The prices of full flight simulators produced by the Company currently are in the range of $4 million to $8 million without a visual system, or from $5 million to $12 million or more with Reflectone supplying a visual system manufactured by a third-party vendor. Computer-based visual simulation systems can provide the pilot with high-resolution multicolored images, including depth-of-field, to create the illusion of a realistic out-the-window scene. The systems can display clear and low visibility daytime, twilight and nighttime situations, with varying weather conditions. They also provide for horizon glow, landing light illumination strobes, air traffic, weapons delivery effects, ground vehicle movements, and variable fog/cloud obscuration effects, as well as lights, building surfaces, mountains and other terrain distinctions with appropriate occulting features. While the Company does not build computer-generated image visual systems, it has extensive experience in integrating visual systems produced by other companies into its simulators. The breadth of Reflectone's experience permits it to assume full responsibility for all or any part of the design specification, procurement and integration efforts, including hardware upgrades and software enhancements, as well as overall responsibility for final performance of the simulator/visual system combination. The RUKL acquisition expanded the products of the Training Devices Segment to include tactical air defense trainers, electronic warfare training systems and visual air traffic control simulators. In addition, RUKL has provided the Company with valuable international marketing synergies, especially with respect to international government customers, for both the Company's new and traditional product lines. The Company's commercial simulator product development has been in support of both British Aerospace aircraft and certain other commercial aircraft. The Company actively pursues opportunities for commercial training devices in both domestic and international markets. Management believes that the production of simulators for British Aerospace has enhanced the Company's standing in the commercial simulator market. This work has included the design and development of international flight simulation Acceptance Test Guides ("ATG") to meet specified performance standards, automatic lesson plan instructional features, glass cockpit presentations, global navigation systems, color weather radar presentations, wind shear and Terrain Collision Avoidance Systems ("TCAS"), and dual purpose cockpit procedures simulators. Most of the Company's commercial simulators are built to both customer 4 5 specifications and the standards of the Federal Aviation Administration ("FAA") Advanced Simulation Plan or other applicable international governmental standards. The Company continues to apply flight simulation technology to the entertainment and leisure industry. Its engineering and manufacturing expertise enable it to offer a broad range of motion based ride simulators in a variety of configurations and guest capacities, including small pods, multi-seat closed and open capsule styles, and multi-sensory theater systems, complete with hardware and software, custom theming and special effects. The Company can provide show components for an attraction, or deliver a turnkey attraction from concept to installation. In addition to its simulation products, the Company provides project management, concept design, prototype development, manufacturing and installation services for the entertainment industry. The Company incurs research and development costs under both independent Company initiated programs and customer funded programs. Research and development costs incurred under independent Company initiated programs approximated $2.85 million, $777,000 and $1.0 million for the years ended December 31, 1996, 1995 and 1994, respectively. In 1996 expenditures for research and development primarily related to a multi-year research and development program to develop low-cost and reconfigurable training devices. This program was initiated by customer demand for low-cost, limited-fidelity devices that can serve multiple training functions for use in multi-ship collective training or unit training of battlefield tactical/engagement skills. TRAINING SERVICES. The Company's Training Services Segment is composed of three divisions: Military Training Systems; Reflectone Training Center-Tampa; and the Dulles Training Center. The Military Training Systems Division was formed in response to a growing military market for contractor provided flight training services. This Division's business has recently been focused on contracts requiring the Company to provide flight simulator instruction, simulator maintenance and repair services, and courseware development at military bases. The Military Training Systems Division provides flight simulator manpower services at Air Force, Army, Navy and Marine Corps Air Stations throughout the United States and one Marine Corps Air Station in Japan. The Reflectone Training Center-Tampa provides a full-service training facility which includes classroom and simulator training for both C-130H flight and ground crews. Using state-of-the-art teaching aids, aircrews receive initial, refresher and pilot upgrade training courses including engine operation, crew resource management, and maintenance practices. The Tampa Center currently operates two C-130H flight simulators. One of the devices is leased by the Company under a 12 year operating lease, and the second device is being stored by the Company under an agreement with a customer until the customer's facility which will house the device is completed. To defray storage costs, the agreement provides that the Company may sell training time on the device. Factors affecting shipment of this simulator are being negotiated with the customer. The Dulles Training Center is a British Aerospace-owned facility which the Company has managed and operated since April 1, 1993 under an agreement with British Aerospace. The Dulles Center is located near Washington, D.C.'s Dulles International Airport and houses three full-flight simulators used to train pilots of commercial airlines and corporations. One of the simulators, a Jetstream 41 simulator, was owned by the Company until December 21, 1995 when it was sold to British Aerospace for $8.6 million. The other two simulators (a Jetstream 31/32 and a BAe 146-200/300, both of which were manufactured by the Company) are also provided by British Aerospace. Prior to January 1, 1996, the management agreement required the Company to pay to British Aerospace a fee based, in part, on the achievement of specified levels of revenues on the British Aerospace owned simulators. Effective on January 1, 1996, under the terms of a revised management agreement, the Company receives a fixed fee of $500,000 annually and is reimbursed by British Aerospace for the Company's costs associated with the Dulles Center. 5 6 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. 6 7 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"). 7 8 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. 8 9 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:
1996 1995 ---------------- ----------------- Quarter High Low High Low ------- ------ ------ ------ ------ 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
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. 9 10 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.
Years Ended December 31, ---------------------------------------------------------------------------- 1996 1995 1994 1993 1992 - ----------------------------------------------------------------------------------------------------------------------- (Dollars in thousands, except per share amounts) 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 - -----------------------------------------------------------------------------------------------------------------------
(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. 10 11 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. 11 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. 12 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 13 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, 14 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 15 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. 16 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:
Name Age Present Position ---- --- ---------------- 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
The following sets forth a summary of the business experience, during at least the most recent five years, of each executive officer and director of the Company: Richard G. Snyder was elected to the Board of Directors and appointed as President and Chief Executive Officer in February 1990. He also serves on the Government Security Committee. In September 1994, Mr. Snyder was elected to the Board of Directors of Cleaners Hangers Co., a wire hanger and products company. From 1985 until he joined the Company, Mr. Snyder served as President of the Link Tactical Simulation Division of CAE Industries, Ltd., a major producer of commercial and military simulation and training devices. For the 30 years between 1954 and 1985, Mr. Snyder served in various capacities with the Kearfott Division of General Precision, Inc., which was acquired by the Singer Company, and the Link Tactical Simulation Division of The Singer Company (which Division was acquired by CAE Industries, Inc.). His experience in these positions included broad responsibilities for missile and space programs, international business development, program management and contracts. Anthony S. Brancato was elected Executive Vice President-Training Services of the Company in September 1990. From 1988 to 1990, Mr. Brancato served as Executive Vice President-Operations of the Company; from 1987 to 1988 as Senior Vice President of RTS; and from 1979 to 1987 as Vice President-Program Management of the Company. Richard W. Welshhans was elected Chief Financial Officer and Secretary of the Company in August 1988, in addition to the position of Vice President-Finance that he held since 1987 and the position of Treasurer that he held until 1995. From 1984 to 1987 he served as Treasurer and Controller of the Company. 17 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. 18 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. 19 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 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 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 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.
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) - ---------------------- ---- --------- -------- --------------- ------------ --------------- 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
_______________ (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 $175,000 per year, and the supplemental retirement benefits described at "Other Compensation Arrangements - Supplemental Retirement Arrangements." (5) Mr. Tobin's employment with the Company terminated on January 15, 1997. 23 24 The following table sets forth information concerning options granted during the year ended December 31, 1996, under the Company's 1994 Stock Option Plan to the Named Executive Officers. The Company did not grant any stock appreciation rights during the year.
OPTION GRANTS IN LAST YEAR Potential Realizable Value at Assumed Annual Rates of Stock Price Appreciation Individual Grant for Option Term ---------------------------------------------------------------- ----------------------- Number of Securities % of Total Underlying Options Granted Options to Employees in Exercise or Granted Base Price Expiration Name (#) 1996 ($/Share) Date 5% ($) 10% ($) - ----------------------- ---------- --------------- ----------- ----------------- -------- -------- 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
________________________ (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.
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 ----------- ------------- ----------- ------------- 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
________________________ (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 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):
1991 1992 1993 1994 1995 1996 ------ ------ ------ ------ ------ ------ 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
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 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 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.
Name and Address of Number of Shares Percentage Beneficial Owners Beneficially Owned (1) of Class - ----------------- ---------------------- ---------- 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%
________________________ * 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 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 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 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 31 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a)(1) CONSOLIDATED FINANCIAL STATEMENTS :
Sequential Description Page Number ----------- ----------- 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
(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 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 33 Reflectone, Inc. and Subsidiaries Consolidated Balance Sheets
December 31 - -------------------------------------------------------------------------------------------------------------- ASSETS 1996 1995 - -------------------------------------------------------------------------------------------------------------- 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 ============ ============
See accompanying notes to consolidated financial statements. 33 34 REFLECTONE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31 - -------------------------------------------------------------------------------------------------------------- 1996 1995 1994 - -------------------------------------------------------------------------------------------------------------- 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 $ - $ - ============ ============ ============
See accompanying notes to consolidated financial statements. 34 35 REFLECTONE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31 - --------------------------------------------------------------------------------------------------------------- 1996 1995 1994 - --------------------------------------------------------------------------------------------------------------- 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 ============ ============= =============
See accompanying notes to consolidated financial statements. 35 36 REFLECTONE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Convertible Foreign Preferred Stock Common Stock Additional Currency ----------------- -------------------- Paid-In Translation Accumulated Shares Amount Shares Amount Capital Adjustment Deficit - ----------------------------------------------------------------------------------------------------------------------------------- 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) ================================================================================================
See accompanying notes to consolidated financial statements. 36 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 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 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 40 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 2 - RECEIVABLES Component elements of receivables consist of the following at December 31:
1996 1995 ---------------------------------- 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 =========== ===========
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 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:
1996 1995 ---------------------------------- 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 =========== ===========
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 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 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:
1996 1995 1994 ------------------------------------------------------ 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) =========== =========== ===========
The components of the provision for income taxes for the three years in the period ended December 31, 1996 are as follows:
1996 1995 1994 ------------------------------------------------------ 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 =========== =========== ===========
43 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:
1996 1995 1994 ------------------------------------------------------ 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% ====== ====== ======
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:
1996 1995 -------------------------------- 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 =========== ===========
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 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:
Years Ending December 31 Amount ------------------------ ----------- 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 ===========
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 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:
1996 1995 1994 ----------------------------------------------------- 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 ========== ========== ==========
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 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:
1996 1995 1994 ----------------------------------------------------------------------------- WEIGHTED Weighted Weighted AVERAGE Average Average EXERCISE Exercise Exercise SHARES PRICE Shares Price Shares Price ----------------------------------------------------------------------------- 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 =============================================================================
The following table summarizes information about stock options outstanding at December 31, 1996:
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 - --------------------------------------------------------------------------------------------------------------------- 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 ==============================================================================================
47 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:
Weighted-Average Shares Exercise Price ----------------------------- 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 ========
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:
1996 1995 ----------------------------- 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 -
48 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 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 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 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 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."
1996 1995 ------------------------------------------------------------------- CARRYING ESTIMATED Carrying Estimated VALUE FAIR VALUE Value Fair Value ------------------------------------------------------------------- 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
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 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:
1996 1995 1994 ----------------------------------------------------------- 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 ============ ============ ============
54 55 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 12 - SEGMENT AND GEOGRAPHIC INFORMATION (CONTINUED)
1996 1995 1994 ----------------------------------------------------------- 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 ============ ============ ============
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:
1996 1995 1994 ----------------------------------------------------------- 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 ============ ============ ============
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 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 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 58 (a)(3) EXHIBITS The following documents are filed as exhibits to this Report: 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)
58 59 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)
59 60 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)
60 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 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. 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
62 63 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
63 64 REFLECTONE, INC. FORM 10-K (For the Year Ended December 31, 1996) EXHIBIT INDEX
EXHIBIT NUMBER - ------ 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
64 65 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)
65 66 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)
66 EX-10.2 2 REFLECTONE, INC. 1990 STOCK OPTION PLAN 1 EXHIBIT 10.2 REFLECTONE, INC. 1990 STOCK OPTION PLAN 2 As adopted February 8, 1990 and amended through November 7, 1991 REFLECTONE, INC. 1990 STOCK OPTION PLAN TABLE OF CONTENTS
Page 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
3 TABLE OF CONTENTS (Cont'd) 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
- ii - 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. 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. - 2 - 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, - 3 - 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. - 4 - 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. - 5 - 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. - 6 - 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 - 7 - 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 - 8 - 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. - 9 - 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 - 10 - 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 - 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. - 12 - 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. - 13 - EX-10.6 3 REFLECTONE, INC. VARIABLE INCENTIVE COMP. PLAN 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. 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. EX-10.7 4 REFLECTONE, INC. 1997 LONG-TERM INCENTIVE PLAN 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 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 2 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 3 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: 4 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. 5 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. 6 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 7 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 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 EX-10.14 5 AGREEMENT FOR CREDIT AVAILABILITY 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 -1- 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. -2- 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. -3- 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 -4- 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. -5- 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" -6- 7 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; 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. EX-10.15 6 $40,000,000 BORROWING FACILITY AGREEMENT 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- 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- 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- 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- EX-10.18 7 FIRST AMENDMENT TO LETTER OF CREDIT AGREEMENT 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 ------------------------------------- EX-10.19 8 REPRESENTATION FROM BRITISH AEROSPACE PLC 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 EX-23.1 9 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS 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 EX-27 10 FINANCIAL DATA SCHEDULE (FOR SEC USE ONLY)
5 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. YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 8,540,201 0 42,058,651 131,985 0 7,219,080 19,822,154 10,586,559 69,081,460 45,121,770 0 0 50,000 286,423 21,982,794 69,081,460 100,269,431 100,269,431 88,457,689 92,610,095 (1,260,189) 0 386,517 8,533,008 771,437 7,761,571 0 0 0 7,761,571 2.38 2.23
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