-----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, H21Y9zdaAHlnqWDuClXJGxWTIdt9BvYaEnA6Z4MC5NZV7axCSqZTk2tJPUAaXmEb znXwkK6aw4vhWjz2MB6sjw== 0000950144-97-005244.txt : 19970509 0000950144-97-005244.hdr.sgml : 19970509 ACCESSION NUMBER: 0000950144-97-005244 CONFORMED SUBMISSION TYPE: DEFA14A PUBLIC DOCUMENT COUNT: 1 FILED AS OF DATE: 19970508 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: 1231 FILING VALUES: FORM TYPE: DEFA14A SEC ACT: 1934 Act SEC FILE NUMBER: 000-14059 FILM NUMBER: 97597691 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 STREET 2: 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 DEFA14A 1 REFLECTONE, INC. SUPPLEMENTAL PROXY 1 SCHEDULE 14A (RULE 14a-101) INFORMATION REQUIRED IN PROXY STATEMENT SCHEDULE 14A INFORMATION PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES EXCHANGE ACT OF 1934 (AMENDMENT NO. 3) Filed by the Registrant [X] Filed by a Party other than the Registrant [ ] Check the appropriate box: [ ] Preliminary Proxy Statement [ ] Confidential, For Use of the [ ] Definitive Proxy Statement Commission Only (as Permitted by [X] Definitive Additional Materials Rule 14a-6(e)(2)) [ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12 REFLECTONE, INC. - -------------------------------------------------------------------------------- (Name of Registrant as Specified In Its Charter) - -------------------------------------------------------------------------------- (Name of Person(s) Filing Proxy Statement if Other Than the Registrant) Payment of Filing Fee (Check the appropriate box): [ ] No Fee Required [ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11. (1) Title of each class of securities to which transaction applies: Common Stock, par value $0.10 per share (2) Aggregate number of securities to which transaction applies: 2,864,448 shares (3) Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee is calculated and state how it was determined): The filing fee was determined based upon (a) 1,489,448 issued and outstanding shares of Common Stock, par value $0.10 per share (the "Shares"), of Reflectone, Inc. as of February 25, 1997, excluding 1,375,000 Shares and warrants to purchase 78,261 Shares owned by British Aerospace Holdings, Inc., for which no consideration will be paid upon consummation of the transaction; and (b) the Merger Consideration of $24.00 per Share (the "Merger Consideration"), plus $3,248,869 payable to holders of options to purchase Shares in exchange for the cancellation of such options. The payment of the filing fee, calculated in accordance with Regulation 240.0-11 under the Securities Exchange Act of 1934, as amended, equals one-fiftieth of one percent of the value of the Shares (and options to purchase Shares) for which the Merger Consideration will be paid. (4) Proposed maximum aggregate value of transaction: $38,995,621 (5) Total fee paid: $7,799.12 [ ] Fee Paid Previously With Preliminary Materials. [X] Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11 (a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing. (1) Amount Previously Paid: $7,799.12 (2) Form, Schedule or Registration Statement No.: Schedule 13E-3 (3) Filing Party: Reflectone, Inc.; British Aerospace Holdings, Inc.; and Bar Mergerco, Inc. (4) Date Filed: March 4, 1997 2 REFLECTONE, INC. 4908 TAMPA WEST BOULEVARD TAMPA, FLORIDA 33634 May 8, 1997 Dear Shareholder: By now you have probably received our Proxy Statement dated April 28, 1997, relating to the special meeting of shareholders (including any adjournment or postponement thereof, the "Meeting") of Reflectone, Inc. (the "Company") to be held at the Company's principal executive offices at 4908 Tampa West Boulevard, Tampa, Florida, on May 20, 1997, at 10:00 a.m., local time. At the Meeting, you will be asked to consider and vote upon a proposal to approve and adopt an Agreement and Plan of Merger dated as of February 13, 1997, by and among the Company, Bar Mergerco, Inc., a Florida corporation ("Mergerco"), and British Aerospace Holdings, Inc., a Delaware corporation ("Holdings"), providing for the merger of Mergerco with and into the Company, with the Company continuing as the surviving corporation and a wholly-owned subsidiary of Holdings. Enclosed with this letter is a Supplement to the Proxy Statement which contains a copy of the Company's Quarterly Report on Form 10-Q for the three months ended March 28, 1997 (the "Form 10-Q"), which the Company filed with the Securities and Exchange Commission on May 8, 1997. We urge you to give the Supplement, as well as the Proxy Statement, your careful consideration. Your vote is important. For your convenience, we have enclosed another copy of our Proxy Card. If you have not already sent back the Proxy Card we previously mailed to you, or if you previously sent back the Proxy Card but wish to change the manner in which your shares are voted, please sign and date the accompanying Proxy Card and return it in the enclosed postage prepaid envelope as soon as possible. If you previously sent back the Proxy Card and do not wish to change the manner in which your shares are voted, you need not return the accompanying Proxy Card. If you attend the Meeting, you may vote in person if you wish, even if you have previously returned a Proxy Card. Your prompt cooperation will be greatly appreciated. If you require assistance in voting your shares or have questions, please call MacKenzie Partners, Inc., who is assisting us with our solicitation of proxies, at (800) 322-2885. Very truly yours, /s/ RICHARD G. SNYDER ------------------------------ RICHARD G. SNYDER, President and Chief Executive Officer 3 SUPPLEMENT TO PROXY STATEMENT FOR SPECIAL MEETING OF SHAREHOLDERS TO BE HELD MAY 20, 1997 S S S S S S S GENERAL This Supplement supplements the Proxy Statement dated April 28, 1997 (the "Proxy Statement"), furnished by the Board of Directors of Reflectone, Inc. (the Company") in connection with the special meeting of shareholders (including any adjournment or postponement thereof, the "Meeting") of the Company to be held at the Company's principal executive offices at 4908 Tampa West Boulevard, Tampa, Florida, on May 20, 1997, at 10:00 a.m., local time. At the Meeting, the Company's shareholders of record as of the close of business on April 14, 1997, will consider and vote upon a proposal to approve and adopt an Agreement and Plan of Merger dated as of February 13, 1997, by and among the Company, Bar Mergerco, Inc., a Florida corporation ("Mergerco"), and British Aerospace Holdings, Inc., a Delaware corporation ("Holdings"), providing for the merger of Mergerco with and into the Company, with the Company continuing as the surviving corporation and a wholly-owned subsidiary of Holdings. Capitalized terms used but not defined in this Supplement have the respective meanings ascribed to them in the Proxy Statement. Cross-references in this Supplement are to the cited sections of the Proxy Statement. This Supplement is intended to be read in conjunction with the Proxy Statement. All information contained in the Proxy Statement is hereby incorporated by reference into this Supplement. CERTAIN ADDITIONAL INFORMATION On May 8, 1997, the Company filed with the Securities and Exchange Commission the Company's Quarterly Report on Form 10-Q for the three months ended March 28, 1997 (the "Form 10-Q"). A copy of the Form 10-Q is attached as Exhibit A to this Supplement. The Form 10-Q should be read in conjunction with the Company's Annual Report on Form 10-K for the Fiscal Year Ended December 31, 1996, and Amendment No. 1 to Annual Report on Form 10-K/A for the Fiscal Year Ended December 31, 1996 (filed April 11, 1997), which are attached as Exhibit B to the Proxy Statement. See "SELECTED CONSOLIDATED FINANCIAL DATA" and "CERTAIN INFORMATION REGARDING THE BUSINESS OF THE COMPANY; RECENT DEVELOPMENTS." INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE The Form 10-Q attached as Exhibit A to this Supplement shall be deemed to be incorporated herein by reference and made a part of the Proxy Statement. Any statement contained in a document incorporated by reference in the Proxy Statement or this Supplement shall be deemed to be modified or superseded for purposes hereof to the extent that a statement contained herein (including the exhibits hereto) modifies or supersedes such previous statement. Any statement so modified shall not be deemed to constitute a part of the Proxy Statement or this Supplement except as so modified or superseded. 4 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 (Mark One) [x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 28, 1997 ----------------------------------------------- [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to -------------------- ---------------------- Commission File 0-14059 ------------------------------------------------------------- REFLECTONE, INC. - ----------------------------------------------------------------------------- (Exact name of Registrant as specified in its charter) Florida 06-0663546 - -------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 4908 Tampa West Boulevard, Tampa, Florida 33634-2481 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (813)885-7481 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past ninety days. Yes [X] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: Common Stock, par value $.10 per share, 2,864,448 shares as of May 5, 1997. Page 1 of 15 Pages Exhibits - None 5 PART I - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS REFLECTONE, INC. & SUBSIDIARIES CONSOLIDATED BALANCE SHEETS As of March 28, 1997 and December 31, 1996
(Unaudited) March 28, December 31, ASSETS 1997 1996 - ----------------------------------------------------------------------------------------------------------------- CURRENT ASSETS Cash and cash equivalents $ 7,060,055 $ 8,540,201 Investments - restricted - 3,000,000 Receivables - non affiliate 38,642,970 37,638,004 Receivables - affiliate 2,263,363 4,288,662 Inventory 2,436,595 - Net deferred tax assets 2,904,000 2,504,000 Prepaid expenses and other current assets 1,603,063 1,715,080 ----------- ----------- Total current assets 54,910,046 57,685,947 PROPERTY, PLANT & EQUIPMENT, NET 9,126,433 9,235,595 INVESTMENTS - RESTRICTED 2,000,000 2,000,000 OTHER ASSETS 160,518 159,918 ----------- ----------- $66,196,997 $69,081,460 =========== =========== LIABILITIES & SHAREHOLDERS' EQUITY - ----------------------------------------------------------------------------------------------------------------- CURRENT LIABILITIES Accounts payable $ 4,182,109 $10,334,520 Due to affiliate 719,559 2,089,777 Borrowings on line of credit - affiliate 14,774,175 4,669,713 Advance billings 13,228,725 18,897,097 Accrued employee compensation and benefits 2,907,694 4,595,564 Federal and state income taxes payable 825,314 751,209 Other accrued expenses and liabilities 4,085,671 3,783,890 ----------- ----------- Total current liabilities 40,723,247 45,121,770 ----------- ----------- DEFERRED GAIN ON SALE OF EQUIPMENT 2,138,499 2,200,567 ----------- ----------- SHAREHOLDERS' EQUITY Convertible preferred stock - par value $1.00; authorized - 50,000 shares; issued and outstanding - 50,000 shares of 8% cumulative convertible preferred stock (liquidating preference $176 per share, aggregating $8,800,000) 50,000 50,000 Common stock - par value $.10; authorized - 10,000,000 shares; issued and outstanding - 2,864,448 and 2,864,235 shares 286,445 286,423 Additional paid-in capital 32,634,757 32,630,276 Cumulative translation adjustment 615,117 560,094 Accumulated deficit (10,251,068) (11,767,670) ----------- ----------- Total shareholders' equity 23,335,251 21,759,123 ----------- ----------- $66,196,997 $69,081,460 =========== ===========
See accompanying notes to consolidated financial statements. 2 6 REFLECTONE, INC. & SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME For the Quarters Ended March 28, 1997 and March 29, 1996 (Unaudited)
Quarter Ended --------------------------------------- March 28, March 29, 1997 1996 - ----------------------------------------------------------------------------------------------------------------- REVENUES Non-affiliate $ 15,813,912 $ 14,230,744 Affiliate 4,085,331 7,096,319 ------------ ------------ 19,899,243 21,327,063 ------------ ------------ COST AND EXPENSES Cost of sales Non-affiliate 13,913,659 13,256,298 Affiliate 2,744,494 5,170,276 ------------ ------------ 16,658,153 18,426,574 General and administrative 1,090,741 939,377 ------------ ------------ 17,748,894 19,365,951 ------------ ------------ INCOME FROM OPERATIONS 2,150,349 1,961,112 ------------ ------------ OTHER INCOME (EXPENSE) Interest income 81,660 106,992 Interest expense (119,458) (119,221) Other (163,949) 85,008 ------------ ------------ (201,747) 72,779 ------------ ------------ INCOME BEFORE INCOME TAXES 1,948,602 2,033,891 PROVISION FOR INCOME TAXES 256,000 413,030 ------------ ------------ NET INCOME 1,692,602 1,620,861 PREFERRED STOCK DIVIDENDS 176,000 176,000 ------------ ------------ NET INCOME APPLICABLE TO COMMON SHAREHOLDERS $ 1,516,602 $ 1,444,861 ============ ============ INCOME PER COMMON AND COMMON EQUIVALENT SHARE Primary $ .50 $ .49 ============ ============ Fully diluted $ .48 $ .47 ============ ============
See accompanying notes to consolidated financial statements. 3 7 REFLECTONE, INC. & SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS For the Quarters Ended March 28, 1997 and March 29, 1996 (Unaudited)
1997 1996 - ----------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 1,692,602 $ 1,620,861 Depreciation and amortization 290,147 435,285 Deferred income taxes (400,000) (164,000) Change in assets and liabilities: Decrease (increase) in receivables Non-affiliate (1,001,200) (5,179,925) Affiliate 2,025,311 (1,541,195) Increase in inventory (2,436,595) Decrease in accounts payable (6,157,244) (4,043,914) Decrease in due to affiliate (1,372,507) (562,183) Decrease in advance billings (5,667,223) (1,739,907) Increase (decrease) in accrued employee compensation and benefits (1,687,941) (1,172,631) Other 424,873 (374,273) ------------ ------------ NET CASH USED IN OPERATING ACTIVITIES (14,289,777) (12,721,882) ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (181,100) (415,619) Release of escrowed funds under lease agreement 3,000,000 Settlement of long-term note receivable - 3,558,284 ------------ ------------ NET CASH PROVIDED BY INVESTING ACTIVITIES 2,818,900 3,142,665 ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Paydowns under line-of-credit agreements (40,279,430) (12,793,140) Borrowings under line-of-credit agreements 50,383,892 21,421,395 Dividends on preferred stock (176,000) (176,000) Other 4,503 291,995 ------------ ------------ NET CASH PROVIDED BY FINANCING ACTIVITIES 9,932,965 8,744,250 ------------ ------------ NET DECREASE IN CASH (1,537,912) (834,967) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 8,540,201 4,582,021 EFFECT OF EXCHANGE RATE CHANGES ON CASH 57,766 9,532 ------------ ------------ CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 7,060,055 $ 3,756,586 ============ ============
See accompanying notes to consolidated financial statements. 4 8 REFLECTONE, INC. & SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Quarter Ended March 28, 1997 (Unaudited) The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the quarter March 28, 1997 are not necessarily indicative of the results that may be expected for the year ending December 31, 1997. For further information, refer to the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 1996. All intercompany transactions have been eliminated. NOTE 1 - MERGER AGREEMENT On February 13, 1997, British Aerospace Holdings, Inc. and a newly formed, wholly owned, subsidiary of British Aerospace Holdings, Inc., signed a merger agreement providing for the acquisition of the Company's common stock not currently owned by British Aerospace Holdings, Inc. at a price of $24 per share in cash. The transaction is subject to approval by the shareholders of the Company. British Aerospace Holdings, Inc. is a wholly owned subsidiary of British Aerospace, Plc. British Aerospace, Plc. and its affiliates are herein collectively referred to as "British Aerospace". NOTE 2 - RECEIVABLES Component elements of receivables consist of the following:
March 28, December 31, 1997 1996 ------------ ------------ Receivables U.S. Government Billed $ 7,404,720 $ 5,280,559 Unbilled 3,019,277 6,165,476 ------------ ------------ 10,423,997 11,446,035 ------------ ------------ Lockheed Aeronautical Systems Company Billed 7,135,086 190,523 Unbilled 20,428,069 24,222,728 ------------ ------------ 27,563,155 24,413,251 ------------ ------------ Commercial Billed 436,932 1,910,703 Unbilled 347,794 - Allowance for doubtful accounts (128,908) (131,985) ------------ ------------ 655,818 1,778,718 ------------ ------------ $ 38,642,970 $ 37,638,004 ============ ============ Affiliates Billed $ 1,186,670 $ 3,338,568 Unbilled 1,076,693 950,094 ------------ ------------ $ 2,263,363 $ 4,288,662 ============ ============
5 9 REFLECTONE, INC. & SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Quarter Ended March 28, 1997 (Unaudited) NOTE 2 - RECEIVABLES (CONTINUED) Unbilled amounts represent the difference between revenue recognized for financial reporting purposes and amounts contractually permitted to be billed to customers. These amounts will be billed in subsequent periods as progress billings, upon shipment of the product, or upon completion of the contract. Under the terms of the Company's contract, as amended, with Lockheed Martin Corporation ("LMC") to design and manufacture two dynamic mission simulators and other related training devices, the Company will not receive a substantial portion of contractual payments from LMC until the delivery and acceptance of the devices. Delivery and acceptance of the devices is scheduled for the fourth quarter of 1997, however, as a result of changes in our customer's aircraft delivery schedule, a revised contract schedule reflecting delays in delivery is currently being discussed and negotiated with the customer. An allowance for doubtful accounts is provided based on historical experience and after consideration of specific accounts and current economic conditions. NOTE 3 - EARNINGS PER COMMON SHARE Primary earnings per share are based on the weighted average number of common shares and common share equivalents outstanding and give effect to the recognition of preferred dividend requirements. Common share equivalents include dilutive stock options and warrants using the treasury stock method. Fully diluted earnings per share assumes, in addition to the above, (i) that the Convertible Preferred Stock was converted at the beginning of each period (ii) that earnings were increased for preferred dividends that would not have been incurred had conversion taken place, and, (iii) the additional dilutive effect of stock options and warrants. The numbers of shares used in the earnings per share computation are as follows:
Quarter Ended ------------------------- 1997 1996 --------- --------- Primary Weighted average common shares outstanding 2,864,299 2,772,451 Stock options 156,864 157,089 --------- --------- Average common shares outstanding 3,021,163 2,929,540 Convertible preferred stock 500,000 500,000 Additional dilutive effect of stock options 16,480 18,374 --------- --------- Fully diluted assumed common shares outstanding 3,537,643 3,447,914 ========= =========
6 10 REFLECTONE, INC. & SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Quarter ended March 28, 1997 (Unaudited) NOTE 4 - CREDIT AGREEMENTS AND BORROWINGS The Company's working capital requirements are impacted by the volume and nature of contracts which it receives. Certain contracts require the Company to make significant capital outlays prior to the receipt of payments from customers. The largest current commitments relate to approximately $22.0 million of working capital for the C-130J program with LMC and commitments to provide approximately $27.0 million of stand-by letters of credit and bank guarantees as security against performance and advance payments on various long-term contracts. In order to finance the working capital required to perform on existing and future large simulation programs, management of the Company believes the Company must currently maintain financing facilities of approximately $90.0 million. To date, based upon proposals from and management's discussions with lending institutions, the Company has been unable to obtain adequate financing on acceptable terms without recourse to British Aerospace, Plc. or its affiliates. However, pursuant to the terms of an Agreement for Credit Availability dated as of August 7, 1996, British Aerospace has agreed, subject to its continued ownership of a majority of the Company, to continue to provide or guarantee the Company's current credit facilities at their current levels through August 7, 1997. Renewal of the Company's credit facilities beyond August 7, 1997 is, in large part, dependent upon British Aerospace's willingness to continue to provide or guarantee these facilities. By means of a letter dated January 31, 1997, British Aerospace has represented to the Company that it intends to continue to provide or guarantee the Company's credit facilities, as long as financing is not available to the Company without recourse to British Aerospace and British Aerospace continues to hold, or has the ability to hold through the exercise of preferred stock conversion rights and warrants to purchase common stock, a majority ownership position in the Company. Without British Aerospace's willingness to continue to support the Company's credit facilities, the Company would not be able to perform on existing contracts or compete for additional large simulation programs. Certain of these contracts may require significant capital outlays by the Company prior to receipt of any payments from its customers. The Company's credit facilities and the Agreement for Credit Availability with British Aerospace contain certain covenants which, among other things, require: (i) the Company to be current with respect to the payment of dividends on its 8% Cumulative Convertible Preferred Stock prior to any draw under the British Aerospace provided facilities, (ii) the Company to pay British Aerospace a facility fee of 50 basis points per annum on the maximum aggregate availability (currently $87.0 million) of the credit facilities provided or guaranteed by British Aerospace, and (iii) the Company to pay British Aerospace a guarantee fee of 3.25% per annum on amounts outstanding under the Company's $2.0 million revolving line of credit facility with Wachovia Bank of Georgia, N.A. Pursuant to the terms of the Company's 1995 Agreement for Credit Availability, on August 7, 1995, the Company issued to 7 11 REFLECTONE, INC. & SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Quarter ended March 28, 1997 (Unaudited) NOTE 4 - CREDIT AGREEMENTS AND BORROWINGS (CONTINUED) British Aerospace warrants to purchase 78,261 shares of the Company's common stock at any time prior to August 7, 2005, at an exercise price equal to the lesser of (i) $11.50 per share (the price of the common stock on the Nasdaq National Market on August 7, 1995, or (ii) the per share market price of the Company's common stock on the date(s) of the exercise of the warrants. In addition, the Company's current Agreement for Credit Availability requires that the Company obtain the prior approval of British Aerospace for all material capital investment expenditures as defined in the Agreement for Credit Availability. The Company's $2.0 million revolving line of credit facility with Wachovia Bank of Georgia, N.A. permits the Company to select loans bearing interest at a floating prime rate or at a fixed rate of LIBOR plus .25% and to specify, within limits, the period during which the selected fixed interest rate will be in effect. The agreement matures on August 7, 1997, and is supported by the corporate guarantee of British Aerospace. At March 28, 1997, there were $2.0 million of credit available under this facility. The Company's revolving line of credit facility with British Aerospace Finance, Inc. provides for working capital borrowings aggregating up to $10.0 million. An interest rate of LIBOR plus 3.50% per annum is charged under this facility. The agreement matures on August 7, 1997 and permits the Company to specify, within limits, the period during which the borrowings will mature. At March 28, 1997 there were approximately $9.6 million of additional credit available under this facility. The Company has a special credit facility (the "C-130J Facility") with British Aerospace to finance the Company's working capital needs with respect to the C-130J contract with LMC. The C-130J Facility currently provides for borrowings aggregating up to $40.0 million and matures on August 7, 1997. Draws under this facility are limited to actual costs incurred by the Company on the LMC C-130J program. Interest rates charged under the C-130J Facility are at LIBOR plus 1.50%. At March 28, 1997 there were approximately $25.6 million of additional credit available under this facility. Under the Company's Lloyds Bank Plc letter of credit facility, the Company may issue standby letters of credit and bank guarantees aggregating up to $35.0 million. The Company pays a non-refundable commission on the stated amount of credits issued for the actual number of days outstanding. The agreement is supported by the corporate guarantee of British Aerospace and matures on October 31, 1997. At March 28, 1997, there were approximately $7.8 million of credit available under this agreement. 8 12 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Liquidity and Capital Resources Management considers liquidity to be the Company's ability to generate adequate cash to meet its short- and long-term business needs. The principal internal source of such cash is the Company's operations, while external sources include borrowings under the Company's credit facilities and the issuance of equity securities. During the quarter ended March 28, 1997, the Company used $14.3 million in cash, net, for operating activities while in the comparable quarter of 1996, the Company used $12.7 million in cash, net, for operating activities. Operating cash flow was negatively impacted during the quarter ended March 28, 1997 by increases in non-affiliate receivables and inventory, and reductions in accounts payable, due to affiliate, advance billings and accrued employee compensation and benefits. Operating cash flow was negatively impacted during the quarter ended March 29, 1996 by increases in non-affiliate and affiliate receivables, and reductions in accounts payable, advance billings, and accrued employee compensation and benefits. The increase in non-affiliate receivables during both periods primarily related to the contract with LMC to design and manufacture two C-130J dynamic mission simulators and other related training devices. The increase in inventory during the first quarter of 1997 related to the acquisition and modification of a used MD-88 full flight simulator for ultimate delivery to Trans World Airlines, Inc. Contract revenues for the sale are being recognized when cash payments are received from the customer. During the quarter ended March 28, 1997, the Company increased its net short-term borrowings by $10.1 million and reduced its cash by $1.5 million. During the same period, gross borrowings of $50.4 million, reductions in cash balances and cash received from the release of $3.0 million of escrowed funds under the Company's lease agreement for its C-130H full flight simulator were used primarily to fund $40.3 million in scheduled maturities of borrowings under the Company's credit facilities and to fund operating activities during the quarter. The Company's working capital requirements are impacted by the volume and nature of contracts which it receives. Certain contracts require the Company to make significant capital outlays prior to the receipt of payments from customers. The largest current commitments relate to approximately $19.0 million of additional working capital for the C-130J program with LMC and commitments to provide approximately $27.0 million of stand-by letters of credit and bank guarantees as security against performance and advance payments on various long-term contracts. In order to finance the working capital required to perform on existing and future simulation programs, management of the Company believes the Company must currently maintain financing facilities of approximately $90.0 million. To date, based upon proposals from and management's discussions with lending institutions, the Company has been unable to obtain adequate financing on acceptable terms 9 13 without recourse to British Aerospace, Plc. or its affiliates (collectively "British Aerospace"). However, pursuant to the terms of an Agreement for Credit Availability dated as of November 20, 1996, British Aerospace has agreed, subject to its continued ownership of a majority of the Company, to continue to provide or guarantee the Company's current credit facilities at their current levels through August 7, 1997. Renewal of the Company's credit facilities beyond August 7, 1997 is, in large part, dependent upon British Aerospace's willingness to continue to provide or guarantee these facilities. By means of a letter dated January 31, 1997, British Aerospace has represented to the Company that it intends to continue to provide or guarantee the Company's credit facilities, as long as financing is not available to the Company without recourse to British Aerospace and British Aerospace continues to hold, or has the ability to hold through the exercise of preferred stock conversion rights and warrants to purchase common stock, a majority ownership position in the Company. Without British Aerospace's willingness to continue to support the Company's credit facilities, the Company would not be able to perform on existing contracts or compete for additional large simulation programs. Furthermore, the Company's management believes that the letter provided by British Aerospace confirming British Aerospace's intent to continue to support the Company's credit facilities would be required by the Company's independent auditors in order for the auditors to express an opinion on the Company's financial statements without expressing substantial doubt about the Company's ability to continue as a going concern. Specific discussion of the Company's credit facilities is included in Note 4 to the Consolidated Financial Statements. As discussed in Note 2 to the Company's Consolidated Financial Statements, the Company will not receive certain substantial payments from Lockheed Martin Corporation ("LMC") under the existing terms of the C-130J contract until the achievement of certain contractual milestones. Accordingly, the Company has a special credit facility (the "C-130J Facility") with British Aerospace to finance the Company's working capital needs with respect to the C-130J contract with LMC. The C-130J Facility currently provides for borrowings aggregating up to $40.0 million and matures on November 20, 1997. Draws under this facility are limited to actual costs incurred by the Company and its wholly-owned subsidiary, Reflectone UK Limited ("RUKL"), on the LMC C-130J program. Based on current schedules, the contract is estimated to require incremental funding of $19.0 million during the remainder of 1997. While the cost of financing this program is being recovered through the contract with LMC, an increase in interest rates or an uncompensated extension of the scheduled delivery dates could result in financing costs in excess of that priced into the contract. The Company's cash flows are impacted, in the normal course of business, by the Company's ability to book new profitable business and achieve scheduled program milestones on a timely basis. The achievement of program milestones, in turn, provides for and enables contractually defined amounts to be billed to the customer. Often these amounts are significant and, as a result, failure to achieve payment milestones can dramatically impact the Company's credit requirements. 10 14 Management has not assumed recovery of certain costs incurred arising out of customer-occasioned contract delays or for work performed but not specified in express contract provisions. Therefore, while any and all recoveries are subject to future negotiations, actual recoveries would represent an additional capital resource to the Company. Management believes that the Company's capital resources are adequate to meet its foreseeable business needs, on both a short- and long-term basis, based upon the availability under its current credit facilities and anticipated renewals thereof; projected cash flows from current and future programs with achievement of projected program milestones; anticipated reductions in restricted investments; and future income tax benefits in the United Kingdom. Results of Operations Consolidated revenues decreased by $1.4 million, or 6.7% during the first quarter of 1997 as compared to the comparable quarter in 1996. Revenues of the Training Devices Segment increased by 11.0% during the quarter ended March 28, 1997 as compared to the comparable quarter in 1996. The increase in revenues primarily resulted from non-affiliate revenues generated by two large international military programs. Revenues of the Training Services Segment decreased by 19.8% during the quarter ended March 28, 1997 as compared to the comparable quarter in 1996. The decrease primarily relates to the 1996 loss of a reprocurement relating to a training services contract with the U.S.Government in which the Company was the incumbent contractor and lower levels of training for the U.S.Government at the Company's training center in Tampa, Florida. These decreases in U.S. Government revenues are considered by management to be temporary and not indicative of any general trend. Revenues of the Systems Management Segment were approximately $800,000 for the quarter ended March 28, 1997 as compared to $1.9 million for the comparable quarter in 1996. The decrease in revenues related to lower levels of scheduled performance on a contract from an affiliate for delivery of a C-130H simulator to an international customer. The Company's income from operations was approximately $2.2 million and $2.0 million in the first quarter of 1997 and 1996, respectively. The operating profit of the Training Devices Segment was $1.9 million and $404,000 for the first quarter of 1997 and 1996, respectively. During the first quarter of 1997, operating profits of the Training Devices Segment include approximately $2.2 million of profit recognized upon the achievement of a significant program milestone on an international military program which was offset, in part, by the recognition of additional losses of approximately $1.3 million on another international military program for a prototype simulator which was awarded in the fourth quarter of 1996. Total losses recognized on this program during the fourth quarter of 1996 and first quarter of 1997 approximate $3.3 million and reflect management's estimate of the excess of costs to complete the program over its contract value. 11 15 Operating profits of the Training Services Segment decreased by $850,000 or 77.0%, to $250,000 during the quarter ended March 28, 1997 as compared to the comparable quarter in 1996. The reduced profitability was primarily the result of decreases in revenues from contracts with the U.S. Government and reduced operating margins on those contracts. Operating profits of the Systems Management Segment were $25,000 for the quarter ended March 28, 1997 compared to $439,000 for the comparable quarter in 1996. The 1996 operating profit reflects profit recognition on a contract from an affiliate for the sale of a C-130H simulator. Interest income approximated $82,000 and $107,000 during the first quarter of 1997 and 1996, respectively. Interest income is primarily interest earned on restricted investments and temporary cash investments. Interest expense was approximately $119,000 in each of the first quarters of 1997 and 1996. Interest costs of $524,000 and $156,000 during the first quarters of 1997 and 1996, respectively, associated with the Company's financing of the C-130J program were charged to the C-130J program and reflected in cost of sales rather than as interest expense. The provision for income taxes during the first quarter of 1997 differs from the amount computed by applying the federal statutory tax rate of 34% to income before taxes primarily as a result of the reduction of the valuation allowance for net deferred tax assets. The reduction in the valuation allowance reflects management's evaluation of the utilization of future federal tax benefits for which recovery is not dependent upon future taxable income. The provision for income taxes during the first quarter of 1996 differs from the amount computed by applying the federal statutory tax rate to income before taxes primarily as a result of the availability of investment and alternative minimum tax credits to reduce the tax provision. At March 28, 1997, the Company has recorded a deferred tax asset of $2.9 million. Backlog Contractual backlog increased to $138.5 million at March 28, 1997, from $129.9 million at December 31, 1996. Of the contractual backlog at March 28, 1997, 86.5% consisted of orders of the Training Devices Segment, 6.7% consisted of orders of the Training Services Segment and 6.8% consisted of orders of the Systems Management Segment. This compares to 80.5%, 12.1% and 7.4%, respectively at December 31, 1996. At March 28, 1997, the contractual backlog of the Training Devices Segment includes the LMC C-130J program in the amount of $35.7 million. Annual contract awards within the Training Services Segment to provide training to U.S. Military personnel are generally recorded during the fourth calendar quarter. This results in a declining backlog for the Training Services Segment during the first three calendar quarters. Not included in contractual backlog are announced orders for which definitive contracts have not been executed and unobligated contract options under U.S. Government contracts. 12 16 Factors That May Affect Future Results The Company's future operating results may be affected by a number of factors, many of which are beyond the Company's control, including uncertainties relative to global economic conditions; political instability; the economic strength of governments; levels of U.S. Government and international defense spending; military and commercial aircraft industry trends; and the Company's ability to successfully increase market share in its Training Devices Segment while expanding its product base into other markets. In recent years, the markets into which the Company sells its training device products have been depressed, and the number of units sold into these markets has decreased from prior periods. As a result, competition for available training device opportunities has increased, resulting in lower margins on devices constructed. In addition, the simulation and training industry has been characterized by continuing industry consolidation, rapid technological advances resulting in frequent introduction of new products and product enhancements, and very competitive pricing practices. The Company has responded to these market conditions by diversifying into new markets and by seeking the formation of strategic teaming arrangements with airframe manufacturers and prime contractors for weapon systems. As in prior years, the Company continues its diversification strategy of pursuing a greater number of opportunities in the training services market. In addition, with the acquisition of RUKL in June 1993 and the purchase of certain assets of the Microflite product line in early 1994, the Company expanded the product lines of the Training Devices Segment and increased the number of opportunities available to it in the European and commercial airline simulation markets. In November 1993, RUKL was selected by LMC as its training systems teammate for the C-130J program. This teaming arrangement with LMC resulted in an award during 1995 worth $77.0 million, which subsequently increased to $81.5 million. In the pursuit of new business, the Company may make contract price proposals to potential customers which, if awarded, could result in the recording of loss provisions to the Consolidated Financial Statements. The Company also sometimes designs and manufactures prototype training devices which by their nature involve unforeseen design and development risks and exposures. The Company attempts to price these risks in the contract value but nonetheless, the frequency of losses historically experienced on prototype training devices exceed those experienced on follow-on devices. The Company attempts to recover its investment in the design and development of prototype devices by winning subsequent programs for follow-on devices. While the LMC program involves the development of prototype C-130J training devices, management believes that this program has been appropriately priced for unforeseen risks and exposures and anticipates profits in future periods on the program. The Company is also pursuing several other programs which, if awarded, could involve risks associated with prototype devices. 13 17 The Company may experience transaction gains and losses from currency fluctuations related to its international operations. In order to minimize foreign exchange risk, the Company selectively hedges certain of its foreign exchange exposures principally relating to foreign currency accounts payable and accounts receivable. The Company's hedging strategy is facilitated by its ability to borrow foreign currencies under the revolving credit facility and the C-130J Facility provided by British Aerospace. This strategy has reduced the Company's vulnerability to certain of its foreign currency exposures, and the Company expects to continue this practice in the future to the extent appropriate. The Company does not engage in speculative hedging activities, nor does the Company hedge nontransaction-related balance sheet exposure. The Company has a contract to buy forward British pounds with an equivalent value of $1.3 million at March 28, 1997 to reduce the Company's exposure to foreign currency exchange risk associated with the cost of subcontractors and other requirements of the C-130J program denominated in British pounds. The forward contract matures on June 30, 1997. British Aerospace is the counterparty to this instrument. The forward contract should not subject the Company to risk from exchange movements because gains and losses on this contract offset losses and gains on the transactions being hedged. However, the amount and timing of the program costs were estimated and in recent periods changes in these estimates have resulted in significant gains and losses from exchange rate movements. During the first quarter of 1997, the Company recorded losses of approximately $232,000 on these transactions, compared to a gain of $22,000 in the comparable quarter of 1996. Certain Statements From time to time, the Company may publish forward-looking statements relating to such matters as anticipated financial performance, business prospects, technological developments, new products, research and development activities and similar matters. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. In order to comply with the terms of the safe harbor, the Company notes that a variety of factors could cause the Company's actual results and experiences to differ materially from the anticipated results or other expectations expressed in the Company's forward-looking statements. The risks and uncertainties that may affect the operations, performance, development and results of the Company's business include those set forth under "Factors That May Affect Future Results" and elsewhere in this Quarterly Report. 14 18 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. REFLECTONE, INC. (Registrant) Date: May 8, 1997 By: /s/ Richard G. Snyder -------------------------------- Richard G. Snyder President and Chief Executive Officer Date: May 8, 1997 By: /s/ Richard W. Welshhans -------------------------------- Richard W. Welshhans Vice President - Finance and Chief Financial Officer (Principal Financial and Accounting Officer) 15 19 APPENDIX A THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF REFLECTONE, INC. The undersigned hereby appoints Stella F. Thayer and Richard G. Snyder and or any one of them acting singly, with full power of substitution, as the proxy or proxies of the undersigned to attend the Special Meeting of Shareholders of Reflectone, Inc., to be held on May 20, 1997, and any adjournments or postponements thereof, to vote all shares of stock that the undersigned would be entitled to vote if personally present in the manner indicated below and on the reverse side, and on any other matters properly brought before the meeting or any adjournments or postponements hereof, all as set forth in the Proxy Statement. This proxy or proxies may be revoked by the undersigned at any time prior to the meeting if written notice of revocation is given to the Secretary of the Company prior to the vote being taken at the meeting, or by execution of a subsequent proxy or proxies which are presented at the meeting, or if the shareholder attends the meeting and votes by ballot, except as to any matter or matters upon which a vote shall have been cast pursuant to the authority conferred by such proxy or proxies prior to such revocation. 1. Approval and adoption of the Agreement and Plan of Merger dated as of February 13, 1997, by and among Reflectone, Inc., a Florida corporation, Bar Mergerco, Inc., a Florida corporation and British Aerospace Holdings, Inc., a Delaware corporation. [ ] FOR [ ] AGAINST [ ] ABSTAIN THE BOARD OF DIRECTORS (WITH BRITISH AEROSPACE HOLDINGS, INC.-AFFILIATED DIRECTORS ABSTAINING) UNANIMOUSLY RECOMMENDS THAT YOU VOTE FOR PROPOSAL 1. 2. Upon such other matters as may properly come before the meeting or any postponement or adjournment thereof. (Please date and sign on reverse side) (Continued on other side) Unless otherwise indicated, the Proxy will be voted FOR Proposal 1 and in the discretion of the proxies on all other matters properly brought before the meeting. THE UNDERSIGNED HEREBY ACKNOWLEDGES RECEIPT OF THE NOTICE OF SPECIAL MEETING AND PROXY STATEMENT OF REFLECTONE, INC., INCLUDING THE EXHIBITS THERETO. Date:_______________________________, 1997 Signature:________________________________ Signature:________________________________ NOTE: Please sign exactly as name appears hereon. Joint owners should each sign. When signing as attorney, executor, administrator, trustee or guardian, please give full title as such. Please sign, date and return in the enclosed postage-prepaid envelope. -----END PRIVACY-ENHANCED MESSAGE-----