SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File No. 0-14059
REFLECTONE, INC.
(Exact name of Registrant as specified in its charter)
Florida 06-0663546
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4908 Tampa West Boulevard, Tampa, Florida 33634-2481
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (813) 885-7481
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding twelve months (or for such shorter
period that the registrant was required to file such reports) and (2)
has been subject to such filing requirements for at least the past
ninety days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date:
Common Stock, par value $.10 per share, 2,813,695 shares as of
August 12, 1996.
1
Part I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Reflectone, Inc. & Subsidiaries
Consolidated Balance Sheets
As of June 30, 1996 and December 31, 1995
(Unaudited)
June 30, December 31,
ASSETS 1996 1995
Current assets
Cash and cash equivalents $ 5,205,084 $ 4,582,021
Receivables - non affiliate 32,765,403 26,101,185
Receivables - affiliate 4,381,911 628,922
Current installments of long-term
note receivable - 3,558,000
Net deferred tax assets 1,050,000 1,050,000
Prepaid expenses and other
current assets 1,673,524 1,480,190
____________ ____________
Total current assets 45,075,922 37,400,318
Property, plant & equipment, net 8,179,250 7,881,699
Investments - restricted 5,000,000 5,000,000
Other assets 426,088 441,568
____________ ____________
$ 58,681,260 $ 50,723,585
============ ============
2
LIABILITIES & SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 4,609,613 $ 9,980,857
Due to affiliate 2,630,498 1,995,079
Borrowings on line of credit
- affiliate 20,146,717 6,513,666
Advance billings 4,341,962 7,832,601
Accrued employee compensation
and benefits 3,915,415 4,218,694
Federal and state taxes payable 604,720 827,263
Accrued settlement expenses 1,068,415 1,068,415
Other accrued expenses and
liabilities 1,150,522 1,807,763
____________ ____________
Total current liabilities 38,467,862 34,244,338
____________ ____________
Deferred gain on sale of equipment 2,323,809 2,503,747
____________ ____________
Commitments and contingencies (Note 2)
Shareholders' equity
Convertible preferred stock - par
value $1.00; authorized - 50,000
shares; issued and outstanding -
50,000 shares of 8% cumulative
convertible preferred stock
(liquidating preference $176 per
share, aggregating $8,800,000) 50,000 50,000
Common stock - par value $.10;
authorized - 10,000,000 shares;
issued and outstanding - 2,852,445
and 2,750,255 shares 285,244 275,025
Additional paid-in capital 32,576,611 31,741,011
Cumulative translation adjustment 736,616 734,705
Accumulated deficit (15,758,882) (18,825,241)
____________ ____________
Total shareholders' equity 17,889,589 13,975,500
____________ ____________
$ 58,681,260 $ 50,723,585
============ ============
See accompanying notes to consolidated financial statements.
3
Reflectone, Inc. & Subsidiaries
Consolidated Statements of Income
For the Six and Three Months Ended June 30, 1996 and 1995
(Unaudited)
Six Months
1996 1995
Revenues
Non-affiliate $32,062,037 $33,348,998
Affiliate 12,317,875 4,357,538
___________ ___________
44,379,912 37,706,536
___________ ___________
Costs and expenses
Cost of sales
Non-affiliate 28,437,225 29,917,379
Affiliate 10,019,255 3,402,581
___________ ___________
38,456,480 33,319,960
General and administrative 2,017,690 1,910,444
___________ ___________
40,474,170 35,230,404
___________ ___________
Income from operations 3,905,742 2,476,132
___________ ___________
Other income (expense)
Interest income 240,063 380,110
Interest expense (192,892) (1,064,011)
Other 133,771 14,554
___________ ___________
180,942 (669,347)
___________ ___________
Income before income taxes 4,086,684 1,806,785
Provision for income taxes 668,325 250,000
___________ ___________
Net income 3,418,359 1,556,785
Preferred stock dividends 352,000 352,000
___________ ___________
Net income applicable
to common shareholders $ 3,066,359 $ 1,204,785
=========== ===========
Income per common and
common equivalent share
Primary $ 1.04 $ .44
=========== ===========
Fully diluted $ .99 $ -
=========== ===========
See accompanying notes to consolidated financial statements.
4
Three Months
1996 1995
$17,831,293 $19,396,440
5,221,556 2,508,224
___________ ___________
23,052,849 21,904,664
___________ ___________
15,180,927 17,052,389
4,848,979 2,441,117
___________ ___________
20,029,906 19,493,506
1,078,313 923,320
___________ ___________
21,108,219 20,416,826
___________ ___________
1,944,630 1,487,838
___________ ___________
133,071 196,610
(73,671) (551,033)
48,763 (68,724)
___________ ___________
108,163 (423,147)
___________ ___________
2,052,793 1,064,691
255,295 150,000
___________ ___________
1,797,498 914,691
176,000 176,000
___________ ___________
$ 1,621,498 $ 738,691
=========== ===========
$ .55 $ .27
=========== ===========
$ .51 $ -
=========== ===========
5
Reflectone, Inc. & Subsidiaries
Consolidated Statements of Cash Flows
Six Months ended June 30, 1996
(Unaudited)
1996 1995
Cash flows from operating activities:
Net income $ 3,418,359 $ 1,556,785
Depreciation and amortization 889,119 1,136,843
Change in assets and liabilities:
Decrease (increase) in receivables
Non-affiliate (6,620,067) 1,492,958
Affiliate (3,761,279) (29,380)
Decrease in inventory - 219,736
Decrease in accounts payable (5,338,331) (1,438,523)
Increase (decrease) in due to
affiliate 634,103 (1,568,710)
Increase (decrease) in advance
billings (3,491,534) 3,266,668
Increase (decrease) in accrued employee
compensation and benefits (302,502) 634,993
Other (1,275,007) (2,042,198)
____________ ____________
Net cash provided by (used for)
operating activities (15,847,139) 3,229,172
_____________ ____________
Cash flows from investing activities:
Capital expenditures (1,206,938) (514,955)
Settlement of long-term note receivable 3,558,284 485,876
____________ ____________
Net cash provided by (used for)
investing activities 2,351,346 (29,079)
_____________ ____________
Cash flows from financing activities:
Paydowns under line-of-credit
agreements (59,713,905) (104,970,848)
Borrowings under line-of-credit
agreements 73,346,956 97,425,791
Dividends on preferred stock (352,000) (352,000)
Other 845,819 30,209
_____________ ____________
Net cash provided by financing activities 14,126,870 7,866,848
_____________ ____________
Net increase (decrease) in cash 631,077 (4,666,755)
Cash and cash equivalents at beginning
of period 4,582,021 7,329,914
Effect of exchange rate changes on cash (8,014) 9,546
____________ ____________
Cash and cash equivalents at end of
period $ 5,205,084 $ 2,672,705
============ ============
See accompanying notes to consolidated financial statements.
6
Reflectone, Inc. & Subsidiaries
Notes to Consolidated Financial Statements
Six Months ended June 30, 1996
(Unaudited)
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions
to Form 10-Q. Accordingly, they do not include all of the information
and notes required by generally accepted accounting principles for
complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results
for the six months ended June 30, 1996 are not necessarily indicative of
the results that may be expected for the year ending December 31, 1996.
For further information, refer to the consolidated financial statements
and notes thereto included in the Company's Annual Report on Form 10-K
for the year ended December 31, 1995.
All intercompany transactions have been eliminated.
Note 1 - Receivables
Component elements of receivables consist of the following:
June 30, December 31,
1996 1995
Receivables
U.S. Government
Billed $ 4,882,752 $ 5,363,973
Unbilled 3,150,268 1,932,588
Unrecovered costs subject to future
negotiation -- not billed 1,400,000 1,400,000
____________ ____________
9,433,020 8,696,561
____________ ____________
Lockheed Martin Corporation
Billed 1,247,709 -
Unbilled 21,967,605 14,780,610
____________ ____________
23,215,314 14,780,610
____________ ____________
7
Commercial
Billed 605,617 2,554,538
Unbilled - 558,023
Provision for doubtful accounts (488,548) (488,547)
____________ ____________
117,069 2,624,014
____________ ____________
$ 32,765,403 $ 26,101,185
============ ============
Affiliates
Billed $ 2,592,330 $ 545,729
Unbilled 1,789,581 83,193
____________ ____________
$ 4,381,911 $ 628,922
============ ============
8
Reflectone, Inc. & Subsidiaries
Notes to Consolidated Financial Statements
Six Months ended June 30, 1996
(Unaudited)
Note 1 - 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.
Unrecovered costs subject to furture negotiation include incremental
costs arising out of customer-occasioned unforeseen development work and
amounts for work performed not specified in express contract provisions.
The amounts recorded represent only a portion of the total compensation
sought by the Company from customers. Therefore, while any and all
recoveries are subject to future negotiations, the actual recoveries
could be more or less than those currently anticipated in the Company's
consolidated financial statements. Management has made provision for
future costs associated with these actions as described in Note 2.
Under the terms of the Company's contract 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 the contractual payments from LMC until
delivery and acceptance of the devices currently scheduled for the
fourth quarter of 1997.
It is anticipated that approximately $23.4 million of receivables will
not be collected within one year.
An allowance for doubtful accounts is provided based on historical
experience and after consideration of specific accounts and current
economic conditions.
Note 2 - Commitments and Contingencies
The Company has asserted its rights to recovery of certain incremental
costs arising out of customer-occasioned unforeseen development work and
amounts for work performed not specified in express contract provisions
as more fully described in Note 1. Management has made provision for
future costs associated with these actions and believes the provision
established is adequate for this purpose.
Note 3 - Earnings Per Common Share
Primary earnings per share are based on the weighted average number of
common shares and common share equivalents outstanding and give effect
to the recognition of preferred dividend requirements. Common share
equivalents include dilutive stock options and warrants using the
treasury stock method.
9
Reflectone, Inc. & Subsidiaries
Notes to Consolidated Financial Statements
Six Months ended June 30, 1996
(Unaudited)
Note 3 - Earnings Per Common Share (continued)
Fully diluted earnings per share assumes, in addition to the above, i)
that the Convertible Preferred Stock was converted at the beginning of
each period, ii) that earnings were increased for preferred dividends
that would not have been incurred had conversion taken place, and, iii)
the additional dilutive effect of stock options and warrants.
The numbers of shares used in the earnings per share computations are as
follows:
Six Months Three Months
1996 1995 1996 1995
Primary
Weighted average common
shares outstanding 2,792,955 2,684,085 2,813,459 2,686,077
Stock options 143,713 83,834 158,012 61,416
_________ _________ _________ _________
Average common shares
outstanding 2,936,668 2,767,919 2,971,471 2,747,493
Convertible preferred stock 500,000 500,000 500,000 500,000
Additional dilutive effect
of stock options 32,627 9,299 48,159 -
_________ _________ _________ _________
Fully diluted assumed common
shares outstanding 3,469,295 3,277,218 3,519,630 3,247,493
========= ========= ========= =========
Fully diluted per share data is not disclosed for the six months and
three months ended June 30, 1995 since the effect would be antidilutive.
Note 4 - Stock Options
In February 1996, the Company granted options under the Company's 1994
Stock Option Plan to purchase 41,500 shares of the Company's common
stock at $18.50 per share. At June 30, 1996 none of these options were
exercisable, and there were 62,500 shares of common stock available for
future stock options under this plan.
10
Reflectone, Inc. & Subsidiaries
Notes to Consolidated Financial Statements
Six Months ended June 30, 1996
(Unaudited)
Note 5 - Credit Agreements and Borrowings
To date the Company has been unable to obtain adequate financing on
acceptable terms without recourse to British Aerospace Plc. or its
affiliates (collectively, "British Aerospace"). However, pursuant to the
terms of an Agreement for Credit Availability dated as of August 7,
1996, British Aerospace has agreed, subject to its continued ownership
of a majority of the Company, to continue to provide or guarantee the
Company's credit facilities through August 7, 1997. Renewal of the
Company's credit facilities beyond August 7, 1997 is, in large part,
dependent upon British Aerospace's willingness to continue to provide or
guarantee these facilities. By means of a letter dated February 27,
1996, British Aerospace has represented to the Company that it intends
to continue to provide or guarantee the Company's credit facilities, as
long as financing is not available to the Company without recourse to
British Aerospace and British Aerospace continues to hold, or has the
ability to hold through the exercise of preferred stock conversion
rights and warrants to purchase common stock, a majority ownership
position in the Company. Based on the foregoing representations of
British Aerospace, management anticipates that the Company's credit
facilities will be renewed annually. The Company's credit facilities and
the Agreement for Credit Availability with British Aerospace contain
certain covenants which, among other things, require the Company: i) to
be current with respect to the payment of dividends on its 8% Cumulative
Convertible Preferred Stock prior to any draw under the British
Aerospace provided facilities, ii) to pay British Aerospace a facility
fee of 50 basis points per annum on the maximum aggregate availability
($87.0 million) of the credit facilities provided or guaranteed by
British Aerospace, and iii) to pay British Aerospace a guarantee fee of
3.25% per annum on amounts outstanding under the Company's $2.0 million
revolving line of credit facility with Wachovia Bank of Georgia, N.A. In
addition, the Company's Agreement for Credit Availability requires that
the Company obtain the prior approval of British Aerospace for all
material capital investment expenditures as defined in the Agreement for
Credit Availability.
During the second quarter of 1996 the Company reduced its revolving line
of credit facility with Wachovia Bank of Georgia, N.A. from $10.0
million to $2.0 million. The facility permits the Company to select
loans bearing interest at a floating prime rate or at a fixed rate of
LIBOR plus .25% and to specify, within limits, the period during which
the selected fixed interest rate will be in effect. The agreement
matures on August 7, 1997, and is supported by the corporate guarantee
of British Aerospace. At June 30, 1996, no borrowings were outstanding
under this line and therefore the full amount of this facility was
available.
11
Reflectone, Inc. & Subsidiaries
Notes to Consolidated Financial Statements
Six Months ended June 30, 1996
(Unaudited)
Note 5 - Credit Agreements and Borrowings (continued)
Under the Lloyds Bank Plc letter of credit facility, the Company may
issue irrevocable standby letters of credit and bank guarantees
aggregating up to $20.0 million. The Company pays a non-refundable
commission on the stated amount of credits issued for the actual number
of days outstanding at 0.55% per annum. The agreement is supported by
the corporate guarantee of British Aerospace and matures on October 31,
1996. At June 30, 1996, there were approximately $17.9 million of credit
available under this agreement.
Subsequent to the end of the second quarter, the Company reduced its
revolving line of credit facility with British Aerospace Finance, Inc.
from $20.0 million to $10.0 million. The agreement provides for working
capital borrowings and an interest rate of LIBOR plus 3.50% per annum is
charged under this facility. The agreement matures on August 7, 1997 and
permits the Company to specify, within limits, the period during which
the borrowings will mature. At June 30, 1996, borrowings under this
facility approximated $416,000.
As discussed in Note 1, the Company will not receive payments from LMC
under the terms of the C-130J contract until the achievement of certain
contractual milestones, currently scheduled for the fourth quarter of
1997. Accordingly, during the third quarter of 1995, the Company
negotiated a second credit facility (the "C-130J Facility") with British
Aerospace to finance the Company's working capital needs with respect to
the C-130J contract with LMC. Subsequent to the end of the second
quarter of 1996 the C-130J Facility was increased from $40.0 million to
$55.0 million. The agreement matures on August 7, 1997. Draws under this
facility are limited to actual costs incurred by the Company and
Reflectone UK, Ltd., ("RUKL") a wholly-owned subsidiary of the Company
on the LMC C-130J program. Interest rates charged under the C-130J
Facility are at LIBOR plus 1.50%. By means of a letter dated February
27, 1996, British Aerospace has further represented that, as long as
British Aerospace continues to hold, or has the ability to hold through
the exercise of preferred stock conversion rights and warrants to
purchase common stock, a majority ownership position in the Company, it
intends to continue to provide annual financing for the C-130J program
until payment is received from LMC. At June 30, 1996, borrowing under
this facility approximated $19.7 million.
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, the sale of Company-owned assets and the issuance of equity
securities.
During the six-month period ended June 30, 1996, the Company used $15.8
million in cash, net, for operating activities while in the comparable
period of 1995, the Company generated $3.2 million in cash, net, from
operating activities. Operating cash flow was negatively impacted during
the six-month period ended June 30, 1996 primarily by increases in non-
affiliate and affiliate receivables, and reductions in accounts payable,
advance billings and other changes in assets and liabilities, net. The
increase in non-affiliate receivables primarily related to the contract
with Lockheed Martin Corporation ("LMC")to design and manufacture two
C-130J dynamic mission simulators and other related training devices.
The increase in affiliate receivables primarily relates to three full-
flight simulator programs with affiliates.
During the six-month period ended June 30, 1996, the Company increased
its net short-term borrowings by $13.6 million and increased its cash by
$631,000. During the same period, gross borrowings of $73.3 million, and
cash received upon settlement of the long-term note receivable were used
primarily to fund $59.7 million in scheduled maturities of borrowings
under the Company's credit facilities and to fund operating activities
during the six-month period.
To date the Company has been unable to obtain adequate financing on
acceptable terms without recourse to British Aerospace. However,
pursuant to the terms of an Agreement for Credit Availability dated as
of August 7, 1996, British Aerospace has agreed, subject to its
continued ownership of a majority of the Company, to continue to provide
or guarantee the Company's credit facilities through August 7, 1997.
Renewal of the Company's credit facilities beyond August 7, 1997 is, in
large part, dependent upon British Aerospace's willingness to continue
to provide or guarantee these facilities. By means of a letter dated
February 27, 1996, British Aerospace has represented to the Company that
it intends to continue to provide or guarantee the Company's credit
facilities, as long as financing is not available to the Company without
recourse to British Aerospace and British Aerospace continues to hold,
or has the ability to hold through the exercise of preferred stock
conversion rights and warrants to purchase common stock, a majority
13
ownership position in the Company. Based on the foregoing
representations of British Aerospace, management anticipates that the
Company's credit facilities will be renewed annually. Specific
discussion of the Company's credit facilities is included in Note 5 to
the Consolidated Financial Statements.
As discussed in Note 1 to the Company's Consolidated Financial
Statements, the Company will not receive payments from LMC under the
terms of the C-130J contract until the achievement of certain
contractual milestones, currently scheduled for the fourth quarter of
1997. Accordingly, 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.
Subsequent to the end of the second quarter the C-130J Facility was
increased from $40.0 million to $55.0 million. The agreement matures on
August 7, 1997. Draws under this facility are limited to actual costs
incurred by the Company on the LMC C-130J program. By means of a letter
dated February 27, 1996, British Aerospace has further represented that
as long as British Aerospace continues to hold, or has the ability to
hold through the exercise of preferred stock conversion rights and
warrants to purchase common stock, a majority ownership position in the
Company, it intends to continue to provide annual financing for the
C-130J program until payment is received from LMC. Based on current
schedules, the contract is estimated to require incremental funding of
$25.0 million during 1996 and $22.0 million in 1997. While the cost of
financing this program is being recovered through the contract with LMC,
an increase in interest rates or an extension of the scheduled delivery
dates could result in financing costs in excess of that priced into the
contract.
The Company's cash flows are impacted, in the normal course of business,
by the Company's ability to book new profitable business and achieve
scheduled program milestones on a timely basis. The achievement of
program milestones, in turn, provides for and enables contractually
defined amounts to be billed to the customer. Often these amounts are
significant and, as a result, failure to achieve payment milestones can
dramatically impact the Company's credit requirements.
As described in Notes 1 and 2 to the Consolidated Financial Statements,
management has anticipated recovery of certain costs incurred arising
out of customer-occasioned contract delays and amounts for work
performed but not specified in express contract provisions. The amounts
included in the Consolidated Financial Statements represent only a
portion of the total compensation sought by the Company from the
customers. Therefore, while any and all recoveries are subject to future
negotiations, and actual recoveries could be less than those currently
anticipated, any amounts awarded in excess of that anticipated in the
Company's Consolidated Financial Statements represent an additional
capital resource to the Company. It is anticipated that any actual
recoveries of the projected amounts may not be collected within the next
twelve months.
14
Based upon the availability under its current credit facilities and
anticipated renewals thereof; anticipated increases in the C-130J
Facility; projected cash flows from current and future programs with
achievement of projected program milestones; anticipated reductions in
restricted investments; expected resolution and recovery of costs
subject to future negotiation as described in Notes 1 and 2 to the
Consolidated Financial Statements; and income tax benefits available for
future use, management believes that the Company's capital resources are
adequate to meet its short- and long-term business needs.
Results of Operations
During the three- and six-month periods ended June 30, 1996, the
Company's consolidated revenues increased by $1.1 million and $6.7
million, or 5.2% and 17.7%, respectively, from comparable periods in
1995.
Revenues of the Training Devices Segment increased by 32.7% during the
six-month period ended June 30, 1996 as compared to the comparable
period in 1995. The increase in revenues primarily resulted from
revenues generated by the C-130J program with LMC and three full-flight
simulator programs with affiliates.
Revenues of the Training Services Segment decreased by 15.3% during the
six-month period ended June 30, 1996 as compared to the comparable
period in 1995. The decrease primarily relates to the 1995 loss of
reprocurements relating to four training services contracts in which the
Company was the incumbent contractor. Revenues for the six-month period
ended June 30, 1996 were also negatively impacted by the revision of the
management agreement pursuant to which the Company manages the British
Aerospace-owned Dulles Training Center. Under the terms of the revised
management agreement, the Company will receive a fixed fee of $500,000
annually and will be reimbursed by British Aerospace for the Company's
costs associated with the Dulles Training Center.
Revenues of the Systems Management Segment were approximately $4.2
million for the six-month period ended June 30, 1996 as compared to
$900,000 for the comparable period in 1995. The increase in revenues
related to the third quarter 1995 award of a contract from an affiliate
for a C-130H simulator for ultimate delivery to an international
customer.
The Company's income from operations was approximately $1.9 million and
$3.9 million for the three- and six-month periods ended June 30, 1996,
respectively. This compares to income from operations of $1.5 million
and $2.5 million for the comparable periods in 1995. The operating
profit of the Training Devices Segment was $1.7 million and $784,000 for
the six-month periods ended June 30, 1996 and 1995, respectively. The
increased profitability primarily relates to profits recognized during
the 1996 period on two large affiliate programs and an international
military program.
15
Operating profits of the Training Services Segment declined by $100,000
or 5.8%, to $1.6 million during the six-month period ended June 30, 1996
as compared to the comparable period in 1995. The reduced profitability
primarily related to the decline in revenues resulting from the 1995
loss of reprocurements of four training services contracts in which the
Company was the incumbent contractor.
Operating profits of the Systems Management Segment were $576,000 for
the six-month period ended June 30, 1996 compared to a loss of $19,000
for the comparable period in 1995. The 1996 operating profit reflects
profit recognition on a contract from an affiliate for the sale of a
C-130H simulator.
Interest income approximated $240,000 and $380,000 during the six-month
periods ended June 30, 1996 and 1995, respectively. Interest income is
primarily interest earned on long-term notes receivable, restricted
investments and temporary cash investments.
Interest expense for the six-month period ended June 30, 1996,
approximated $193,000 as compared to $1.1 million for the comparable
period in 1995. The reduction in interest expense results from lower
average levels of borrowings as compared to the previous year. In
addition, during the six-month period ended June 30, 1996, interest
costs of $560,000 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 increased to $668,000 during the six-
month period ended June 30, 1996 as compared with $250,000 for the 1995
period. The increase in the provision for income taxes in the six-month
period ended June 30, 1996 as compared to the comparable 1995 period
resulted from a higher estimate of taxable income for federal and state
income tax purposes and the unavailability of net operating loss
carryforwards in 1996. The Company has recorded a deferred tax asset of
$1.1 million, for which recovery in future periods is not dependent upon
future taxable income.
Backlog
Contractual backlog decreased to $102.9 million at June 30, 1996, from
$121.1 million at December 31, 1995. Of the contractual backlog at June
30, 1996, 83.0% consisted of orders of the Training Devices Segment,
5.6% consisted of orders of the Training Services Segment and 11.4%
consisted of orders of the Systems Management Segment. This compares to
71.3%, 15.6% and 13.1%, respectively at December 31, 1995. The
contractual backlog of the Training Devices Segment includes the
Lockheed C-130J program in the amount of $49.0 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.
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 over the life
of the program.
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.
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 entered into contracts to buy forward British pounds
with an equivalent value of $9.5 million to reduce the Company's
exposure to foreign currency exchange risk associated with the cost of
subcontractors and other requirements of the C-130J program denominated
in British pounds. These contracts mature quarterly in varying amounts
from September 1996 to June 1997. British Aerospace is the counterparty
to these instruments. The forward contracts should not subject the
Company to risk from exchange movement because gains and losses on these
contracts offset losses and gains on the transactions being hedged.
However, the amount and timing of the program costs were estimated and
changes in these estimates could result in future gains or losses from
exchange rate movements.
This Quarterly Report on Form 10-Q contains forward-looking comments
that involve risks and uncertainties. The Company's actual results could
differ materially from those anticipated in these forward-looking
comments as a result of certain factors, including those set forth
under "Factors That May Affect Future Results" and elsewhere in this
Quarterly Report.
18
Part II OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits.
The following documents are filed as exhibits to this Report:
10.12 $10,000,000 Borrowing Facility Agreement between Reflectone,
Inc. and British Aerospace Finance, Inc. dated as of
August 7, 1996.
10.13 Agreement for Credit Availability between Reflectone, Inc.
and British Aerospace Plc dated as of August 7, 1996.
10.15 $2,000,000 Revolving Line of Credit Agreement between
Reflectone, Inc. and Wachovia Bank of Georgia, N.A. dated as
of August 7, 1996.
10.30 $55,000,000 Borrowing Facility Agreement C-130J Program
between Reflectone, Inc. and British Aerospace Finance, Inc.
dated as of August 7, 1996.
(b) The Registrant did not file any reports on Form 8-K
during the three-month period ended June 30, 1996.
19
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: August 13, 1996 By: /s/Richard G. Snyder
Richard G. Snyder
President and Chief Executive
Officer
Date: August 13, 1996 By: /s/ Richard W. Welshhans
Richard W. Welshhans
Vice President - Finance and
Chief Financial Office (Principal
Financial and Accounting Officer)
20
REFLECTONE, INC.
FORM 10-Q
For the Six Months Ended June 30, 1996
EXHIBIT INDEX
EXHIBIT
NUMBER
10.12 $10,000,000 Borrowing Facility Agreement between
Reflectone, Inc. and British Aerospace Finance, Inc.
dated as of August 7, 1996.
10.13 Agreement for Credit Availability between Reflectone,
Inc. and British Aerospace Plc dated as of
August 7, 1996.
10.15 $2,000,000 Revolving Line of Credit Agreement between
Reflectone, Inc. and Wachovia Bank of Georgia, N.A.
dated as of August 7, 1996.
10.30 $55,000,000 Borrowing Facility Agreement C-130J
Program between Reflectone, Inc. and British Aerospace
Finance, Inc. dated as of August 7, 1996.
21