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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-K
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(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED
MARCH 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-21773
FIREARMS TRAINING SYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 57-0777018
(State or other jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or organization)
7340 MCGINNIS FERRY ROAD 30024
SUWANEE, GEORGIA (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (770) 813-0180
Name of exchange on which registered: NONE
Securities pursuant to Section 12(g) of the Act: CLASS A COMMON STOCK,
$0.000006 PAR VALUE PER SHARE
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 12 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 the 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 June 27, 2001: $3,193,990 (based on 10,303,192 shares of
non-affiliates Class A common stock outstanding at $0.31 per share; the last
sale price on the Over-The-Counter Bulletin Board ("OTC:BB") on June 27, 2001)
As of June 27, 2001, there were issued and outstanding 70,153,139 shares of
Class A Common Stock, par value $0.000006 per share.
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PART I
Statements in this document, other than statements of historical
information, are forward-looking statements that are made pursuant to the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995 (the
"1995 Act"). Such forward-looking statements made by or on behalf of Firearms
Training Systems, Inc. (the "Company") from time to time, including statements
contained in the Company's filings with the Commission and its reports to
stockholders, involve known and unknown risks and other factors which may cause
the Company's actual results in future periods to differ materially from those
expressed in any forward-looking statements. Any such statement is qualified by
reference to the risks and factors discussed below under the headings "Business
- -- Customers," "-- Research and Development," "-- Proprietary Operating System;
Raw Materials and Suppliers," "-- Government Contracts and Regulations" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operation -- General," and "-- Liquidity and Capital Resources" and in the
Company's filings with the Commission, which are available from the Commission
or which may be obtained upon request from the Company. The Company cautions
that the factors and risks discussed herein and therein are not exclusive. The
Company does not undertake to update any forward-looking statement that may be
made from time to time by or on behalf of the Company.
ITEM 1. BUSINESS
RESTRUCTURE TRANSACTION
On August 25, 2000, the Company, its lenders and its largest
shareholders (a group of entities affiliated with Centre Partners Management LLC
(the "Centre Entities") completed a restructuring transaction, which
significantly reduced the Company's outstanding indebtedness.
In connection with the restructuring, the Company and holders of its
outstanding debt and preferred stock exchanged all such debt and preferred stock
for the following:
- - A new senior secured revolving credit line in the amount of
approximately $882,000 to support existing letters of credit and future
working capital requirements.
- - $12 million of senior secured debt with cash interest payable at prime
plus 1% and no principal payments due until maturity in 2003, with a
one year extension at the Company's option.
- - $23 million of junior secured debt with 10% interest payable in
additional notes or cash, depending on the Company's profitability, and
no principal payments until maturity in 2003, with a one year extension
at the Company's option.
- - Approximately $21 million of new preferred stock with a 10% cumulative
dividend rate payable in additional shares of preferred stock. This new
preferred stock must be redeemed by the Company when junior secured
debt is repaid.
- - 48,695,212 additional shares of Class A Voting Common Stock (the "Class
A Common Stock"). As a result of this share issuance, the Company's
senior lenders have the power to vote a majority of the Company's
voting common stock. See Change of Control.
- - Warrants to purchase 2,000,000 shares of Class A Common Stock with an
exercise price of $0.25 issued to the Centre Entities.
- - Amended warrants already held by the Centre Entities to purchase
3,246,164 shares of Class A Common stock at $1.00 per share by
providing for payment of the exercise price in cash rather than the
Series A Preferred Stock and making a slight adjustment in the original
exercise price of $1.03 per share.
Certain of the securities described above were issued to the Centre
Entities. See Item 13 Certain Relationships and Related Transactions.
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CHANGE OF CONTROL
In connection with the Restructure, 40,235,548 shares of Class A Common
Stock constituting 58.53 % of the Class A Common Stock as of August 31, 2000
were issued to the Lenders under the Company's senior credit agreement (the
"Senior Credit Agreement"), as partial consideration of the exchange by the
Lenders of the Company's senior indebtedness at March 31, 2000 as follows:
(1) CLASS A VOTING COMMON STOCK (2) NAME OF BENEFICIAL OWNER (3) NUMBER OF SHARES (4) PERCENT OF CLASS AS
BENEFICIALLY OWNED OF AUGUST 31, 2000
Class A Voting Common Stock Bank of America(1) 12,307,203 shares 17.90 %
Class A Voting Common Stock BHF Capital Corporation(1) 7,100,391 shares 10.33 %
Class A Voting Common Stock U.S. Bank National Association(1) 4,260,375 shares 6.20 %
Class A Voting Common Stock First Source Financial LLP(1) 9,467,188 shares 13.77 %
Class A Voting Common Stock Centre Entities(2) 7,100,391 shares 10.33 %
(1) Form 13-D's filed by the first four listed entities below on September 6,
2000 indicate that the following additional entities affiliated with the
respective named party also claim beneficial ownership of such entity's shares:
(a) Bank of America, N.A.: Bank of America Corporation and NB Holdings
Corporation; (b) BHF (USA) Capital Corporation: ING Groep NV, BHF Bank
Aktiengesellschaft, and BHF (USA) Holdings, Inc.; and (c) First Source Financial
LLP: Dominion Resources, Inc., Dominion Capital, Inc., Virginia Financial
Ventures, Inc., and N.H. Capital, Inc.
(2) The foregoing shares are registered in the names of various of the Centre
Entities and were received as a result of the acquisition by such entities of
the senior obligations held by one member of the original Lender group.
All of the foregoing shares are held pursuant to a Voting and Stock
Restriction Agreement dated as of April 1, 2000 (the "Voting Agreement") and
entered into on August 25, 2000 whereby the Lenders agreed to vote such shares
as determined by Lenders holding a majority of the commitments to provide
revolving credit advances (the "Required Lenders") and granted an irrevocable
proxy to Bank of America, N.A., the Agent, to vote as so directed. In addition,
three of the four Directors of the Company affiliated with the Centre Entities
resigned. The Required Lenders agreed for so long as the Voting Agreement was in
effect to vote their shares for election of one qualified person affiliated with
the Centre Entities nominated by the Centre Entities to the Board of Directors
such that one such person was serving on the Board at all times. The Centre
Entities also agreed to cooperate with the Lenders to identify and urge the
selection of mutually acceptable, qualified candidates to constitute a majority
of the current Board of Directors to serve in the interim before the next
election of Directors. In addition, all parties agreed to cooperate to identify
and urge the selection of a mutually acceptable, qualified candidate to serve as
an active Chairman of the Board of Directors and to give due consideration in
that regard to selection of a representative of the management consultant
required to be retained by the Company pursuant to the Senior Credit Agreement.
COMPANY OVERVIEW
Over its 17-year history, FATS(R) has developed over 200 types of
simulated weapons, manufactured and delivered over 30,000 simulated weapons,
developed over 1,000 training scenarios, and has delivered over 4,000 simulators
to 50 countries. FATS continues to be a world leader in the development and
production of interactive simulation systems designed to provide training for
and in the use of small and supporting arms for dismounted and mounted military
operations, and judgmental and use of force for law enforcement and military
peacekeeping activities. The Company has broadened its array of products to
accommodate the current tactics, training and equipment available to both law
enforcement and military communities. Examples include the provision of
simulators and courseware to support indirect fire, less than lethal weapon
applications, and multiple room engagements. Every system features embedded
capabilities to support customer authoring of scenarios and comprehensive
performance evaluation. Keeping pace with national and international concerns,
FATS has added significant improvements to courseware and software that focus on
situations that require extraordinary judgment - including operations in peace
keeping/making, crowd control and hostage negotiations. Additional emphasis has
been placed on night operations in all environments - in most cases allowing the
customers to utilize their organic night vision equipment.
FATS software and hardware technologies have evolved along with
advances in the computer industry. Recognizing that commercial technological
capabilities are moving faster than any one company can replicate, the Company
takes advantage of commercially available off the shelf ("COTS") components that
ensure reuse and upgrade capability as well as commonality and the ability to
integrate with other simulation systems. This philosophy seeks to provide each
customer the best technical
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and economical solutions for its training needs while providing options for life
cycle management of their systems. FATS also partners with each customer to
ensure that each training solution is complete, integrated and functional from
the embedded technology and courseware to the unique language requirements. The
goal is to ensure that each simulated firearm or weapons system is integrated
and compatible with the customer's training programs and replicates precise
weapon ballistic data, desired environmental effects, and target damage realism.
The Company has focused its sales efforts for small arms simulators primarily in
the U.S. and international military and law enforcement market through its
principal facilities near Atlanta, Georgia. Larger gunnery simulation systems
are developed and manufactured by its Canada based subsidiary, Simtran
Technologies, located in Montreal, Canada. Simtran contracts to develop and
deliver four unique products: an air defense missile trainer; an appended
armored vehicle crew trainer; a stand-alone armored vehicle crew trainer: and,
an appended light armored vehicle crew trainer. Other smaller subsidiaries
located in the United Kingdom, the Netherlands, Singapore and Australia provide
sales, service and limited manufacturing support.
INDUSTRY OVERVIEW
While the simulation industry has principally been focused on large
weapon systems such as flight simulators and large, expensive mainframe
computing simulations, FATS has focused on the application of affordable
technology for individual and small unit gunnery and use of force requirements.
FATS has developed low cost simulators with high fidelity graphics that provide
training in realistic environments. During the last few years, rapid
advancements in commercial computer technology have allowed replacement of
FATS-proprietary approach with commercial technology that supports the need to
meet contemporary combat training objectives. FATS simulators use highly
interactive three-dimensional computer-generated scenarios that allow battles to
take place in virtual environments with computer-generated "semi-automated
forces".
FATS has teamed with law enforcement agencies to develop courseware and
training tools that assist "first responders" for today's challenges with
techniques that seek to teach a measured correct response.
FATS understands that the current military climate of joint and
combined operations is very complex, and has developed, and continues to improve
its capability to interface with other types of simulators through the use of
networking techniques as confirmed by recent certification as High Level
Architecture (HLA) compliant. Management believes that no company is better
suited for this - given FATS' international deployment of systems. FATS
currently enables forces of varied countries to rehearse incident reaction at
home station prior to deployment to areas where peacekeeping and law enforcement
types of actions can easily escalate to full-scale military operations. FATS
systems have proven well suited for these situations as evidenced through the
several years of use by numerous customers before and during deployments to
theaters of operation including Somalia, Bosnia and Kosovo.
Because more military and law enforcement agencies are deployed
throughout the world today than at any other time in history, with different
missions and methods to respond, management believes that the focus of the
Company on simulation of state of the art munitions, weaponry and tactics will
increase the use of simulation both in preparation for operations and for
sustainment training once deployed. In the law enforcement arena, social issues
centered on levels of force used by police and increased school violence all
require extraordinary training. Political and social unrest, expansive media
coverage coupled with the increasing application of technology to apply measured
responses are adding daily challenges to operating force personnel. . Today, the
professionals put in these environments have more tools available than they have
time to train, making simulation more a necessity than a desired supplement.
Management believes that FATS is well positioned to take advantage of these
conditions.
PRODUCTS
The corporation offers an entire spectrum of products to meet the
training needs of our customers, ranging from small handguns to armored vehicle
and missile system weaponry. Appropriate software, courseware and scenarios
accompany all our products. The entire product line has evolved and now uses the
latest technology that allows customers to develop their own training materials
or courseware using the simulator. COTS components ensure that each product is
capable of being upgraded as technology advances by means of the most affordable
and cost effective strategy for the customer. Each user interface is customized
to the owner requirements incorporating operator friendly applications common to
computing such as keyboard and mouse actions by following simple prompts during
operation and training on the system.
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Simulators. The major simulator products encompass Law Enforcement
Judgmental Trainers, Military Small Arms Trainers, Indirect Fire Trainers,
deployable appended and standalone Armored Vehicle Trainers, Missile Trainers,
Naval Shipboard Trainers (including large bore cannons), Live Fire systems, and
Sportsman Archery and Firearms Handling Trainers. Hardware and software
components have been standardized across multiple FATS product lines, to ensure
that system compatibility in maximize and supportability requirements are
minimized and reasonable. The Company has the capability to utilize many means
to deliver visual imagery including laser disc, DVD and computer-generated
imagery. Images can be displayed on standard computer monitors or on large
screens ranging from 10 to 50 feet and surround screen up to 150x45-degrees.
Small Arms Trainer. The FATS small arms trainer ("SAT"), the core
product, allows training from individual marksmanship to unit collective
training on weapons ranging from pistols through anti-tank missiles.
Capabilities encompass archery, sports shooting, live fire, non-lethal
weaponry/munitions to include the non-lethal mortar round, OC spray, batons,
rubber bullets and bean bag shotgun rounds.. To address the wide range of
customer training needs, the SAT offers multiple training modes, including the
Marksmanship, Judgmental Video, and 3-D Computer Generated Imagery ("CGI")
Collective Training Mode, all of which capitalize on the strengths of various
display formats, media, and varying levels of scenario interactivity. This is a
versatile trainer offering our customers individual, team, unit and leadership
training in safety, basic marksmanship, fire discipline, fire coordination and
judgmental decision-making.
Indirect Fire Trainer. The indirect fire trainer ("IFT") has the
capability to accurately portray the call for fire procedures and effects of all
artillery, mortars, naval gunfire, close air support, and attack helicopter
supporting arms platforms. These systems may be integrated into a combined arms
battle space while conducting direct fire engagements against simulated forces.
The IFT package further supports the training with real or simulated fire
direction center personnel and equipment, and facilitates the use of fully
simulated 60mm and 81mm mortars. Forward Observer training is conducted in the
3-dimensional CGI terrain database using all the associated tools available to
the observer (maps, modified military binoculars, laser range finders and laser
target markers).
Law Enforcement Trainer. This simulator provides training to the Law
Enforcement community from the individual patrolman through the team/section and
SWAT teams applying the entire force continuum spectrum of options. Weapons
include small arms, semi-automatic weapons, shotguns and non-lethal munitions.
Systems begin with the 100DP - low end limited features - to the Weapons Team
Engagement Trainer that allows multiple room team engagements. Courseware spans
the spectrum of conflict that an officer may encounter, from marksmanship, to
hostage rescue/negotiations, to domestic encounters all requiring judgment and
measured response. Each system has complete diagnostics and data feedback.
Weaponry. FATS has fielded over 200 types of simulated weapons with
features ranging from stand-alone weapons using simple laser inserts to fully
sensored weapons that detect user behavior by measuring data collected from butt
pressure, cant of the firearm, trigger pressure, and the actual dispersion of
the rounds. Fully sensored weapons with recoil are available with backpacks
allowing the student to move more freely than the tethered versions. In the
Company's history over 30,000 FATS simulated weapons have been sold.
Simtran. Simtran offers four unique products: a hand held/shoulder
launched anti-armor missile trainers ("EVIGS/TVIGS"); a stand-alone classroom
armored vehicle crew trainer ("CCGT"); an air defense crew missile trainer
("JDT"); an appended armored vehicle crew trainer. Simtran is also under
contract to upgrade the EVIGS system to include thermal imagery. Simtran's
primary focus is on heavy weapons/systems for the military and scenarios are
developed and tailored to the customer and are provided in the medium
(interactive video, CGI, Dynamic CGI) requested. Simtran's engineering group
seeks to control obsolescence and sustain all systems throughout their life
cycle. The Company believes the market is not as substantial as once thought and
is now in decline.
Dart. The Company believes Dart's product line of video simulation
technology to be a part of the shooting sports industry, which includes portable
and mobile firearms and archery applications. Dart plays a role in hunter and
sportsman development and training. In FY 2001, the Company consolidated
operations of the stand-alone Dart International, Inc. facility in Colorado into
a product line of FATS, Inc., based in Suwanee, GA.
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TARGET MARKETS
The Company currently targets three principal market components: (i)
U.S. military; (ii) U.S. law enforcement; and (iii) international, which include
military and law enforcement authorities. The following table sets forth dollar
amounts (in thousands) and percentages of sales for each of the Company's major
markets on an historic basis for the fiscal years ended March 31st.
Actual Actual Actual
FY01 FY00 FY99
------------------------- ------------------------ -------------------------
Sales % Sales % Sales %
------- ----- ------- ----- ------- -----
International $21,875 52.7% $27,419 70.5% $35,615 64.2%
U.S. Military 11,224 27.0% 4,268 11.0% 9,507 17.1%
U.S. Law Enforcement 7,419 17.9% 5,560 14.3% 7,868 14.2%
Hunter / Sports 983 2.4% 1,642 4.2% 2,524 4.5%
------- ----- ------- ----- ------- -----
Total $41,501 100.0% $38,889 100.0% $55,514 100.0%
======= ===== ======= ===== ======= =====
International. The Company believes that many international military
and law enforcement agencies have begun to recognize the benefits of
cost-effective and realistic small arms simulation training. The Company has
sold FATS systems to customers in more than 40 countries, including Canada,
Great Britain, the Netherlands, Italy, Australia, and Singapore. Interest in the
Company's products tends to be greatest in countries in which limited land is
available for live fire training or in which budgetary constraints or interest
in technological upgrades support a decision to purchase the Company's systems.
Recent procurement decisions have been supported by FATS expanded capabilities,
particularly in the areas that are supported by the Company's introduction of
the IFT product and the HLA networking capabilities. See Customers. Unlike the
U.S., most other countries have centralized law enforcement organizations. As a
result, procurement and purchasing decisions for both military and law
enforcement are typically centralized and in some instances both functions are
managed through the same command structure. The procurement processes vary
substantially depending upon the requirements of the particular jurisdiction.
For fiscal 2001, 52.7% of the Company's total revenues were
attributable to sales to military and law enforcement authorities outside the
U.S. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and Note 8 of Notes to Consolidated Financial Statements.
U.S. Military. The desire to provide realistic training while
significantly reducing costs have been the primary reasons for the adoption of
simulation for small and supporting arms training by U.S. military authorities.
The relatively high costs of live fire training considering the use of
ammunition, wear and tear on weapons, the need to transport soldiers and
equipment to the firing range and legal requirements for remediation of
environmental damage to the firing range encourages military forces to use
simulation to ensure proper readiness. Moreover, according to budget estimates
of the U.S. Department of Defense ("DOD") for the Government's fiscal 1999 and
2000, certain elements of the U.S. armed forces have accumulated a substantial
shortfall relative to desired inventory levels of ammunition, which shortfall
has provided an impetus to certain organizations within the U.S. armed forces to
adopt or expand simulation training.
While all the U.S. military forces have embraced the use of simulation,
each major branch of the U.S. military is at a different stage of implementation
The U.S. Marine Corps has adopted simulation as a fundamental part of its small
arms training activities. In fiscal years 1990, 1995 and again 2000, through
competitive bidding, the Company was awarded contracts by the U.S. Marine Corps
for the supply of small and supporting arms simulators. The U.S. Army has also
purchased systems under GSA, competitive awards and the Company's contract with
the U.S. Marine Corps while the U.S. Air Force has purchased systems from the
Company through the procedures of the U.S. General Services Administration
("GSA"). The Company believes that it has been the primary supplier of
interactive small and supporting arms simulation systems to the U.S. Marine
Corps, the U.S. Air Force and the U.S. Army. The past year has seen a
significant growth in support of the U.S. Army in Europe where the Company now
maintains and supports simulators in support of the Army's Deployed Operational
Group. The Company is part of a contractor team that was selected for a
multi-year contract to support the U.S. Army
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Engagement Skills Trainer ("EST") procurement with ECC International as prime
contractor and the Company as its sole provider of weapon simulators.
For fiscal 2001, 27.0% of the Company's total revenues and 57.2% of the
Company's U.S. revenues were attributable to sales to U.S. military authorities.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
U.S. Law Enforcement. The U.S. law enforcement segment of the market is
highly diversified but can be divided into four principal components: (i) U.S.
government entities including the U.S. Department of Treasury (including its
agencies and bureaus such as the Federal Law Enforcement Training Center, Secret
Service, Bureau of Alcohol, Tobacco and Firearms and the Internal Revenue
Service), the U.S. Postal Service, the Federal Bureau of Investigation, the Drug
Enforcement Administration and the Central Intelligence Agency; (ii) state and
local law enforcement departments such as the Los Angeles and New York City
Police Departments, and smaller urban and rural counterparts, (iii) colleges and
universities offering criminal justice training programs; (iv) federal, state,
and private correctional facilities. The federal agencies generally use a
centralized procurement process and are typically headquartered in or near
Washington, D.C. By contrast, the state and local law enforcement agencies are
widely dispersed, with more than 17,000 different law enforcement departments in
the U.S. Given this diversity, the procurement process varies substantially
depending upon the requirements of the particular jurisdiction. The Company
believes that its most likely potential local law enforcement customers may be
found among the approximately 3,600 law enforcement agencies and departments
with more than 25 officers. With only approximately 1,000 systems sold to U.S.
federal and local law enforcement authorities to date (of which approximately
900 are FATS systems), the Company believes that this market can provide
additional opportunities to the Company in the future. Law enforcement
authorities face increasing budgetary constraints as well as increasing threats
of litigation and damage awards relating to claims concerning the excessive or
improper use of force, lethal or otherwise, by law enforcement personnel.
Accordingly, the Company believes that there are opportunities for increased
sales to U.S. law enforcement and correctional authorities of cost-effective
simulation products designed to enhance tactical skills and judgment and to
lower liability costs.
For fiscal 2001, 17.9% of the Company's total revenues and 37.8% of the
Company's U.S. revenues were attributable to sales to U.S. law enforcement
authorities. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
Hunter and Sports Training. The Company has continued to reduce its
focus on the U.S. hunter and sports training component of the market. The
customers for firearms training in this market component include state and
federal hunting agencies, various state agencies and several conservation
associations. Given the existence of more than 16,000 firearms dealers in the
U.S., the widespread interest in the ownership and use of firearms and the
growing desire to find ways of better assuring the safe use of firearms, the
Company believes that business opportunities may still exist in the hunter and
sports training component of the market.
For fiscal 2001, 2.4% of the Company's total revenues were attributable
to sales in the hunter and sports training component of the market. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
SALES AND MARKETING
The Company's marketing and sales efforts are organized to service its
principal customers, with separate sales operations for domestic and
international customers. The Company's marketing strategy focuses on developing
relationships with potential customers very early in their decision-making
processes and educating them about the benefits of training through simulation.
The Company then works with training and procurement personnel to identify and
develop solutions for each customer's specific training needs.
By becoming involved with customers at an early stage in their analysis
of potential training solutions, the Company can often sell its training systems
without any significant competition from other providers. In addition, the
Company often has an advantage in competitive situations because the Company's
systems provide standard specifications that are frequently incorporated into
the request for proposal used by the customer in soliciting bids from suppliers
of small and supporting arms simulators. The Company's consultative approach
with customers has often helped it achieve favorable results in competitive
bidding situations.
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Marketing staffs for each company, FATS and Simtran develop business
opportunities, capture plans and provide appropriate collateral material. FATS
international sales staff is responsible for FATS' products as well as Simtran
as both companies serve the same customer base. FATS continues to support the
international sales effort with a network of agents and business
representatives.
CUSTOMERS
The Company's principal customers historically have been in the public
sector of the U.S., including the federal, state and local governments, and in
the public sectors of a number of other countries. Approximately 52.7% of the
Company's revenues for fiscal 2001 were attributable to sales to military and
law enforcement authorities internationally, 27.0% were attributable to sales to
military authorities in the U.S. and 17.9% were attributable to sales to law
enforcement authorities in the U.S. Sales to public sector customers are subject
to a multiplicity of detailed regulatory requirements and public policies. Such
contracts may be conditioned upon the continuing availability of public funds,
which in turn depends upon lengthy and complex budgetary procedures, and may be
subject to certain pricing constraints. Moreover, U.S. government contracts and
those of many international government customers may generally be terminated for
a variety of factors when it is in the best interests of the government. There
can be no assurance that these factors or others unique to government contracts
will not have a material adverse effect on the Company's future results of
operations and financial condition.
The following table lists certain of the Company's customers in fiscal
2001 in each of its principal market components:
U.S. MILITARY U.S. LAW ENFORCEMENT INTERNATIONAL
------------- -------------------- -------------
U.S. Air Force ANG Ontario Police College Carabinieri - Italian Police
U.S. Air Force Reserves South Carolina Criminal Justice System Singapore Army
U.S. Army Texas Department of Public Safety British Ministry of Defense
In fiscal 2001, the Company's five largest customers accounted for
approximately 34.9% of the Company's revenues, with no customer accounting for
more than 10% of revenues. In fiscal 2000, the Company's five largest customers
accounted for approximately 58.2% of the Company's revenues, with the Canadian
Army and Australian Army accounting for approximately 27.7% and 13.6%,
respectively. No other customer accounted for more than 10% of revenues in
either period. Given the nature of the Company's contracts, revenues
attributable to specific customers are likely to vary from year to year, and a
significant customer in one year may not be a significant customer in a
subsequent year. In order to reach its growth objectives, the Company will be
required to seek contracts from new domestic and international customers as well
as orders from existing customers for additional types of simulated firearms or
increased quantities of previously ordered systems and simulated weapons. A
significant decrease in demand by or the loss of one or more significant
customers could have a material adverse effect on the Company's results of
operations or financial condition. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and Note 8 of Notes to
Consolidated Financial Statements.
RESEARCH AND DEVELOPMENT
The Company engages in the research and development (R&D) of new and
enhanced simulation and training technology using internally generated funds.
Electrical and mechanical R&D expenditures totaled $4.8 million, $4.0 million
and $4.0 million in fiscal 2001, 2000, and 1999, respectively. The Company's R&D
efforts are divided into four separate disciplines: electronics, mechanical,
training, and audio-visual. The continued success of the Company will depend on
its ability to incorporate in its products changing technologies in such areas
and to develop and introduce new technology that meets the increasingly
sophisticated training needs of the Company's customers. Although the Company
continuously pursues research and development, there can be no assurance that it
will be successful in adapting technology in a timely fashion.
The role of mechanical R&D is to design and develop specialized
assemblies as required for specific training scenarios per customer needs.
Within this discipline are motion platforms training stations which
realistically simulate the movement of
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various land, sea, and air vehicles. Also, the development of specialized system
packages as well as electrode/mechanical camera and lens drives controlling
flexible lighting environments, which expand and enhance training scenarios.
Management believes that FATS small arms weapon simulators excel in the
simulation industry for fidelity and reliability. The FATS weapon R&D team of
engineers and technicians carefully evaluates the operational characteristics
and functions inherent in each live weapon to be converted for simulation. These
operational characteristics are then replicated within the simulator so as to
provide the utmost degree of realism in form, fit, and function. The post
development process includes test evaluation to ensure long term reliability and
cost effectiveness.
Electrical R&D combines the engineering disciplines of system,
software, hardware, and embedded software design as well as other
electro-optical fields to produce programs and equipment responsive to specific
training needs. The Company's electrical R&D capabilities include real-time
system hardware design object-oriented software design, simulation system
development, video and audio, interactive computer generated graphics, High
Level Architecture (HLA), display technologies, video special effects, lasers,
weapon ballistics, optics, image processing, target modeling and motion
simulations. On an ongoing basis, the engineering staff works with training
development personnel (subject matter experts) and customers to improve
continuously the technology and features of the Company's various product lines
and associated training modes offered.
Training R&D focuses on the interpretation and translation of customer
training requirements into quantifiable objectives and the development of
simulation programs to meet those objectives. The Company's training R&D
department is staffed with world-class competitive shooters, each of whom has
extensive military or law enforcement experience. Specialized experience on the
part of the Company's employees in such areas as the U.S. military, law
enforcement, hunting and competitive shooting helps ensure an understanding of
customer requirements.
Audio-visual R&D focuses on the production of specialized audio-visual
programs and a range of media support activities, from full production of
training programs to customer assistance in user-produced programs. The
Company's audio-visual technology is very important for creating a life-like
training environment. The Company has assembled a team of experienced
audio-visual engineers, cinematographers and specialists who have pioneered the
use of multi-screen projection in small arms simulation.
MANUFACTURING OPERATIONS
The Company's manufacturing operations are conducted primarily at its
Suwanee headquarters near Atlanta, Georgia, and to a limited extent at the
facility of its U.K. subsidiary, Firearms Training Systems Ltd. in Lincolnshire,
England. Simtran's products are manufactured at its facility in Montreal,
Canada. Atlanta manufacturing operations are divided into two groups, systems
manufacturing and weapons manufacturing. The systems manufacturing group
assembles the simulator components of the FATS systems. As the components are
completed, they are tested for both function and durability and are subjected to
a comprehensive ISO 9000 certified, quality assurance program. Systems
manufacturing occur at the Company's headquarters where electrical assemblers
and technicians can assemble 30 primary simulation computers and other unique
simulator components per month on a single-shift basis. The Company believes
that this capacity can be expanded to 75 simulation computers per month by
adding additional personnel, using a second shift or to an even greater capacity
by acquisition of the requisite workstations and floor space for manufacturing
and warehouse operations.
Weapons manufacturing involves the production of simulated firearms and
non-lethal simulators by either modifying actual firearms and other devices into
simulators or assembling simulators from kits manufactured to the Company's
specifications by a variety of outside sources. The assembly process encompasses
the fitting of modified weapons or kits with the Company's pneumatic and
electrical components, followed by the functional testing of the completed
assembly. The combined weapon manufacturing activities in the U.S. and the U.K.
have a capacity of 400 simulated firearms per month on a single-shift basis. As
with systems manufacturing, this capacity can readily be expanded to 700 by
using additional shifts and/or by acquiring additional facilities and
workstations.
PRODUCT SUPPORT
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The Company has established a worldwide customer service network
consisting of personnel at its Suwanee, Georgia headquarters near Atlanta,
Georgia and a Field Service Office on the West Coast. The Company's
subsidiaries, subcontractors and agents provide worldwide support. Accessories,
parts, service, system upgrades/enhancements and training are available through
the 24-hour customer service hotline, or through the customer service electronic
mail, either direct or through the Company's web site. The Company's
headquarters, and the Company's U.K., Netherlands, Singapore and Australian
subsidiaries, maintains an inventory of repair parts, tools, test equipment, and
trained technicians to respond to customer requirements. Simtran maintains a
fully equipped service department to support its individual product lines and is
equipped and trained to support the full Company product line in Canada.
Technical assistance is available through the FATS Helpdesk hotline. The Company
seeks to provide customer service as quickly as possible after notification by
the customer. In addition to its traditional service role, the Company's service
department administers a U.S. Government-owned inventory of spare components.
This assures that when a U.S. Marine Corps or U.S. Army customer experiences a
failure, they are returned to service within 24 to 48 hours by express shipping
a spare component from this inventory. This same concept has been applied
successfully to support the British Ministry of Defense, the Royal Netherlands
Land Army, the Belgian Army, the Swiss Army, the Canadian Department of National
Defense, the Australian Department of Defense and the Singapore Military through
local subsidiaries.
PROPRIETARY OPERATING SYSTEM; RAW MATERIALS AND SUPPLIERS
The Company currently purchases from numerous suppliers on both a
competitive bid and long-term contract basis. The Company's current products use
a Windows-based operating system; however, some of the Company's earlier model
simulators use a software operating system known as OS-9 which is an operating
system developed and owned by Microware Corporation. The Company has licensed
the OS-9 system from Microware on a non-exclusive, royalty-paying basis for a
term currently expiring October 31, 2001. The Company has begun negotiations to
extend the license; however, the Company does not believe that the loss of its
OS-9 license would have a material adverse effect on the future conduct of its
business operations and financial condition. The Company believes that there are
viable alternative sources for all of its raw materials. In addition, the
Company has a sophisticated machine shop in which it can convert actual weapons
into simulated weapons and produce certain weapon and simulator parts. This
ability provides the Company with the flexibility to produce a large portion of
its principal components if they become unavailable or it becomes economically
advantageous to do so.
BACKLOG
As of March 31, 2001, the Company had a backlog of approximately $55.4
million compared with $25.8 million as of March 31, 2000. Management expects
that approximately $41.6 million of backlog will be delivered in fiscal 2002.
Revenue from sales of standard products is recorded when title transfers, which
is typically upon shipment. Revenue from development programs under contract is
recorded on the percentage-of-completion method of accounting, measured on the
basis of costs incurred to estimated total costs, which approximates contract
performance to date (see Note 3 to the accompanying consolidated financial
statements). Contracts with U.S. and other governments may generally be
terminated by the customer, in whole or in part, for default or convenience if
such termination would be in the best interest of the customer. Accordingly,
there can be no assurance that the Company's backlog will result in future
revenues. However, these contracts generally provide for reimbursement of actual
cost incurred through the date of termination.
COMPETITION
The recent increase in sales and acceptance of small arms simulation
products has brought about an increase in competition from both domestic and
international companies. The Company competes with divisions or subsidiaries of
larger companies solely dedicated to simulation for sales of the Company's small
and supporting arms simulation products, which currently include indirect fire,
air defense and armored vehicles. Principal among the competitors for military
business are: CAE Invetron Ltd., a U.K. division of Thales; Short Brothers, a
division of Bombardier; Simtech, a subsidiary of TADIRAN; Solatron, a subsidiary
of Lockheed Martin; and ECC International. In the U.S. law enforcement and
commercial component of the market, the Company's principal competitors include,
among others, Advanced Interactive Systems and I.E.S., Incorporated. The
international law enforcement component of the market has also seen an increase
in competition from small European companies. The growing awareness of
simulation budgets, combined with the competitive nature of the
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marketplace, have contributed to the formation of teaming arrangements by
competitors that present potent competitive challenges. Many of FATS' current
and potential competitors have significantly greater financial, technical and
marketing resources than the Company.
EMPLOYEES
As of March 31, 2001, the Company and its subsidiaries employed 327
employees, of which 215 were employed at FATS, Inc., 53 were employed at
Simtran, 34 were employed at FATS-Australia, and 25 were employed by
FATS-Europe. None of the Company's employees are represented by unions. The
Company considers relations with its employees to be satisfactory.
GOVERNMENT CONTRACTS AND REGULATION
Sales to public sector customers are subject to a multiplicity of
detailed regulatory requirements and public policies that may affect the ability
of the Company to increase or even maintain such sales. In particular, the
choice of a contractor by a customer may be affected by the size of the
contractor, the place of manufacture of the contractor's products or whether the
contractor is given preferential consideration based upon socioeconomic factors.
Furthermore, contracts with government agencies are conditioned upon the
continuing availability of public funds, which in turn depends upon lengthy and
complex public budgetary procedures whose outcome is difficult to predict. In
particular, contracts with the U.S. Government are conditioned upon the
continuing availability of Congressional appropriations.
Government contracts may generally be terminated by the U.S. Government
or the relevant agency in whole or in part for its convenience if such
termination would be in the best interest of the U.S. Government. Furthermore,
any contractor who is suspected of, or found to have engaged in, commission of
fraud or a criminal offense in connection with a government contract or
subcontract, a serious violation of the terms of a government contract or
subcontract, unfair trade practices, or any other offense indicating moral
turpitude or a lack of business integrity or business honesty faces the
possibility of being suspended or debarred from all further government
contracting. The decision to suspend or debar a contractor is generally at the
discretion of the government. Any such suspension or debarment could have a
material adverse effect on the Company's future results of operations and
financial condition.
The type of government contracts awarded to the Company in the future
may affect its financial performance. A number of the Company's contracts have
been obtained on a sole source basis while others were obtained through a
competitive bidding process. The extent to which the Company's contracts and
orders are obtained through a competitive bidding process rather than as sole
source contracts may affect the Company's profit margins. There can be no
assurance that changes in the type of government contracts and other contracts
entered into by the Company in the future will not have a material adverse
effect on future results of operations or financial condition of the Company.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
The Company is subject to export licensing jurisdiction of the U.S.
Department of State ("State Department") and the U.S. Department of Commerce
("Commerce Department") with respect to the temporary or permanent export of
certain of its products and the import of certain other products based on the
Arms Export Control Act and the Export Administration Act which, though expired,
is carried out by Presidential Executive Order issued under the auspices of the
International Emergency Economic Powers Act. In addition to application to
transfer of information and products to customers, such regulations also may
from time to time require a license for the transfer of technical information
from the Company to its foreign subsidiaries, such as information necessary to
enable a subsidiary to modify simulated weapons for use in systems being
supplied by the subsidiary to customers. The respective jurisdictional statutes
provide the State Department and the Commerce Department with the discretion to
change their policies with respect to whether particular products can be
licensed for export to particular countries. In certain circumstances, export
licenses and other authorizations may be revoked, suspended or amended without
notice. Both the State Department and the Commerce Department has the authority
in certain circumstances to debar persons or deny them export privileges. Such
action may be taken for, among other reasons, commission of civil violations and
criminal offenses in connection with exports. Any loss, suspension or revocation
of the Company's export licenses could have a material adverse effect on the
Company's future results of operations and financial condition.
The Company has a license from the U.S. Treasury Department's Bureau of
Alcohol, Tobacco and Firearms ("ATF") to import destructive devices and certain
other materials. This license also authorizes the Company to be a dealer in
regulated
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firearms and other destructive devices. The Company also has a license from ATF
that authorizes it to be a manufacturer of destructive devices and certain other
materials. The Company is registered with the Director of ATF as a person
engaged in the business of importing articles enumerated on the U.S. Munitions
Import List. ATF may revoke licenses or deny their renewal for failure to follow
the prescribed regulations or as a result of the commission of criminal
offenses. Certain of the Company's subsidiaries also have similar licenses in
their jurisdictions of incorporation. Any revocation of or refusal to renew the
Company's ATF license or any such foreign license could have a material adverse
effect on the conduct of the Company's operations and financial condition since
it must possess such licenses and comply with ATF regulations in order to
import, possess and modify the authentic firearms used in its FATS systems.
Certain FATS simulation systems use laser-emitting devices to locate
the user's aiming point in relation to the target. Such products must be
manufactured and operated in accordance with safety standards adopted to protect
human eyesight. In the United States, such standards are included as part of
Food and Drug Administration regulations currently administered by the Center
for Devices and Radiological Health. Systems sold to many international
customers, including those in Europe and Canada, however, must comply with
international standard IEC 825-1, as recently revised, which contains more
rigorous criteria than the present U.S. standards. Depending on the amount of
laser energy emitted, room safety precautions, warning signs and labels, special
shut-off devices, special training for personnel and related safety measures may
be required, which increase costs and can create administrative concerns for the
Company's customers.
ITEM 2. PROPERTIES
OWNED OR SQUARE LEASE MONTH OF
FACILITY LOCATION LEASED FOOTAGE EXPIRATION EXPIRATION
-------- -------- -------- ------- ---------- ----------
FATS, Inc. Suwanee, Georgia Leased 98,100 2008 May
FATS, LTD. Lincolnshire, England Leased 12,000 2003 July
FATS, B.V. Waardenburg, Netherlands Leased 4,800 2002 August
Simtran Montreal, Canada Leased 38,800 2001 August
FATS Australia Lavington, Australia Leased 10,005 2005 February
The Company believes its manufacturing, warehouse, and office
facilities are suitable, adequate, and afford sufficient manufacturing capacity
for current and anticipated requirements. The Company believes it maintains
adequate insurance coverage for its properties and their contents.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in legal proceedings in the ordinary course of
its business, which in the opinion of management will not have a materially
adverse effect on the Company's financial position, liquidity, or results of
operation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the security holders of the
Company during the fourth quarter of the fiscal year.
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PART II
ITEM 5. MARKET COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The common stock of Firearms Training Systems, Inc. is traded on the
Over-The-Counter Bulletin Board (OTC:BB) under the symbol FATS. Prior to March
8, 2000, the Company's common stock was traded on the NASDAQ Small Cap Market.
The listing of the Company's stock was moved from the NASDAQ Small Cap Market as
the Company's stock price performance fell below NASDAQ criteria for market
capitalization and minimum share price value. During the period August 23, 2000
to October 31, 2000 the Company's stock for the Second and Third Quarters of
fiscal year 2001 was not eligible for listing on the OTC:BB and quotations
listed were obtained from the web site: http://chart.yahoo.com, based on
information supplied by Commodity Systems, Inc. (CSI). As of June 27, 2001,
there were 172 holders of record of the Company's common stock. The Company
believes its shares are beneficially held by several thousand additional
stockholders based on broker dealer demand for proxy materials in 2000.
The table shows the high and low closing prices of the common stock
during the period from April 1, 1998 through the year ended March 31, 2001:
Quarterly Stock Price Range
HIGH LOW
------------ ------------
FISCAL 1999
----------------------
First Quarter $ 8.88 $ 2.44
Second Quarter 4.00 0.69
Third Quarter 3.25 0.75
Fourth Quarter 1.75 1.03
FISCAL 2000
----------------------
First Quarter 1.28 0.88
Second Quarter 1.00 0.63
Third Quarter 0.75 0.44
Fourth Quarter 1.13 0.53
FISCAL 2001
----------------------
First Quarter 0.59 0.14
Second Quarter 0.55 0.09
Third Quarter 0.34 0.08
Fourth Quarter 0.27 0.13
The Company currently intends to retain any earnings to finance
operations and expansion and, therefore, does not anticipate paying any
dividends on the common stock in the foreseeable future. Future dividends, if
any, will be determined by the Board of Directors of the Company and will depend
upon the Company's earnings, capital requirements, financial condition, level of
indebtedness and other factors deemed relevant by the Board of Directors. The
Company's Credit Agreement prohibits the payment of any dividends in respect of
the common stock. The closing price of Firearms Training Systems, Inc. (FATS)
common stock on June 27, 2001 as reported by OTC:BB, was $0.31 per share.
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RECENT SALES OF UNREGISTERED SECURITIES
In connection with the Restructure, the Company issued on August 25,
2000 the following securities:
(1) 40,235,548 shares of Class A Common Stock to the Lenders pursuant
to the Senior Credit Agreement as partial consideration for the exchange by the
Lenders of the Company's senior indebtedness at March 31, 2000. See Item 1-
Restructure and Change of Control.
(2) 20,463.716 shares of Series B Preferred Stock having a liquidation
value of $20,463,716 to the Lenders pursuant to the Senior Credit Agreement as
partial consideration for the exchange by the Lenders of the Company's senior
indebtedness at March 31, 2000. See Item 1 Restructure.
(3) 1,764,452 shares of Class A Common Stock to the Centre Entities in
partial satisfaction of the obligations owed to such entities as a result of
their repayment of a revolving promissory note in the amount of $3,000,000
including a guarantee fee of $250,000 (the "Guarantee Obligations"). See Item 1
Restructure and Item 13 Certain Relationships and Related Transactions.
(4) 897.397 shares of Series B Preferred Stock, having a liquidation
value of $897,397 to the Centre Entities in partial satisfaction of the
Guarantee Obligation. See Item 1 Restructure and Item 13 Certain Relationships
and Related Transactions.
(5) Warrants to purchase 2,000,000 shares of Class A Common Stock at
$0.25 per share expiring March 31, 2005 to the Centre Entities. See Item 1
Restructure and Item 13 Certain Relationships and Related Transactions.
(6) Amended Warrants to purchase 3,246,164 shares of Class A Common
Stock at $1.00 per share. See Item 1 Restructure and Item 13 Certain
Relationships and Related Transactions.
(7) 6,695,212 shares of Class A Common Stock to the Centre Entities in
exchange for the Series A Preferred Stock previously held by them. See Item 1
Restructure and Item 13 Certain Relationships and Related Transactions.
Exemptions for all such transactions from registration under the
Securities Act of 1933 is claimed in reliance on an exemption from registration
under Section 4(2) of the Act.
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ITEM 6. SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The selected financial data of the Company for each of the last five
years set forth below have been derived from the Company's consolidated
financial statements for each of the five fiscal years ended March 31, 2001,
which financial statements have been audited by Arthur Andersen LLP. The
selected consolidated financial data set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" set forth below and the financial statements of the
Company included elsewhere in this Report and referred to in the "Index to
Financial Statements" (together with the notes and other reports relating to
such financial statements).
FISCAL YEARS ENDED MARCH 31,
---------------------------------------------------------------------
2001 2000 1999 1998 1997
-------- -------- -------- ------- -------
STATEMENT OF OPERATIONS DATA:
Total Revenue $ 41,501 $ 38,889 $ 55,514 $73,547 $90,806
Gross Margin 7,442 8,200 19,977 39,680 46,592
Gross Margin % 17.9% 21.1% 36.0% 54.0% 51.3%
Operating Expenses $ 19,370 $ 19,275 $ 16,975 $26,553 $19,713
Non-Recurring Expenses 0 (143) 870 0 0
Operating (Loss) Income (11,928) (11,075) 3,002 13,127 26,879
Interest Expense, Net 4,444 8,056 7,316 5,905 6,069
Other Expense 257 325 400 97 1,110
Net (Loss) Income (14,108) (18,902) (3,107) 3,233 9,014
Basic Earnings Per Share (0.26) (0.91) (0.15) 0.16 0.55
Diluted Earnings Per Share (0.26) (0.91) (0.15) 0.15 0.50
BALANCE SHEET DATA:
Working Capital 15,893 21,020 27,010 18,907 20,350
Total Assets 32,173 41,575 60,150 56,380 42,121
Total Debt 43,990 73,772 72,200 63,000 58,600
Stockholders' Deficit 54,086 48,201 29,633 28,231 31,378
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This analysis of the Company's results of operations should be viewed
in conjunction with the accompanying financial statements, including notes
thereto, contained in Item 8 of the Annual Report on Form 10K. This report may
contain certain forward-looking statements within the meaning of Section 27A of
the Securities Act and Section 21E of the Exchange Act. Statements that are
predictive in nature, that depend upon or refer to future events or conditions,
are forward looking statements. Although the Company believes that these
statements are based upon reasonable expectations, we can give no assurance that
their goals will be achieved.
Actual results may differ from those expressed or implied in
forward-looking statements. With respect to any forward looking statements
contained in this report, the Company believes that it is subject to a number of
competition risk factors, including: the inherent unpredictability of currency
fluctuations; actions of its competitors, including pricing; the ability to
realize cost reductions and operating efficiencies, and in a manner that does
not unduly disrupt business operations and the ability to identify and to
realize other cost-reduction opportunities; and general economic and business
conditions. Any forward-looking statements in this report should be evaluated in
light of these important risk factors and those enumerated below in "Liquidity
and Capital Resources."
COMPANY OVERVIEW
The Company is a leading worldwide producer of interactive simulation
systems designed to provide training for multiple markets to include the
handling and use of small and supporting arms. It also competes in air defense
and armored vehicle
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weaponry; and commercial hunter and sports activities. The Company derives most
of its revenue from the sale of its products, which include simulators,
simulated firearms, scenarios, integrated software, auxiliary equipment, and
service operations. The Company receives commitments for its products and
services from its customers largely through purchase orders and contracts
principally with governmental entities and law enforcement agencies. Revenues
are recognized primarily upon shipment with milestone billings related to
contracts recorded as deferred revenue and recognized primarily as units are
delivered or on a percentage of completion method for contracts in which
significant customized systems development is required and completion and
delivery exceeds one year. Service revenues are comprised of revenues from
individual purchase orders, which are recognized as services are provided, and
revenues from extended service contracts, which are recognized over the life of
the service contracts.
Although the Company sells its products and services to a large number
of military and law enforcement agencies both in the U.S. and abroad, the top
five customers accounted for approximately 34.9%, 58.2% and 62.3% of the
Company's revenues in fiscal 2001, 2000, and 1999, respectively. A significant
increase or decrease in demand by a major customer can have a substantial effect
on the Company's revenues and cash flow. Revenue from any one customer can vary
materially from period to period. In addition, a significant decrease in the
overall level or allocation of defense spending in the U.S. or other countries
could have a material adverse effect on the Company's future results of
operations and financial condition. Significant portions of the Company's
revenue are derived from customers located outside the U.S., primarily in
Canada, Europe and Asia. During fiscal 2001, 2000, and 1999, approximately
52.7%, 70.5%, and 64.2%, respectively, of the Company's revenues were derived
from sales to international customers. The Company expects that sales to
international customers will continue to account for a significant percentage of
future revenues, as the worldwide acceptance for simulation-based training
systems continues to grow and U.S. military orders become less significant.
Sales to international customers may be subject to political and economic risks,
including political instability, currency controls, exchange rate fluctuations
and changes in import/export regulations and tariff rates. In addition, various
forms of protectionist trade legislation have been and in the future may be
proposed in the U.S. and certain other countries. The Company, from time to
time, experiences significant delays in receipt of payment for the delivery of
products from certain international customers. Any resulting changes in current
tariff structures or other trade and monetary policies could adversely affect
the Company's sales to international customers. Certain of the Company's
international sales are denominated in foreign currencies. The Company does not
currently hedge these foreign currency transactions, since it believes its
exposure to foreign exchange rate fluctuations has not been material.
Cost of revenues generally includes materials, direct labor, overhead,
and other direct costs. Operating expenses include selling, general and
administrative expenses, R&D costs, bid and proposal expenses, plus depreciation
and amortization. Selling, general and administrative expenses consist primarily
of salaries, wages, benefits, international agents' commissions, and marketing
expenses. R&D expenses are largely comprised of salaries, wages, benefits,
prototype equipment and project supplies. The Company expenses all R&D costs in
the period in which they are incurred and has funded all of its R&D efforts over
the past 17 years primarily through internally generated funds.
RESTRUCTURE TRANSACTION
On August 25, 2000, the Company, its lenders and the "Centre Entities
completed a restructuring transaction which significantly reduced the Company's
outstanding indebtedness.
In connection with the restructuring, the Company and holders of its
outstanding debt and preferred stock exchanged all such debt and preferred stock
for the following:
- - A new senior secured revolving credit line in the amount of
approximately $882,000 to support existing letters of credit and future
working capital requirements.
- - $12 million of senior secured debt with cash interest payable at prime
plus 1% and no principal payments due until maturity in 2003, with a
one year extension at the Company's option.
- - $23 million of junior secured debt with 10% interest payable in
additional notes or cash, depending on the Company's profitability, and
no principal payments until maturity in 2003, with a one year extension
at the Company's option.
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- - Approximately $21 million of new preferred stock with a 10% cumulative
dividend rate payable in additional shares of preferred stock. This new
preferred stock must be redeemed by the Company when junior secured
debt is repaid.
- - 48,695,212 additional shares of Class A Common Stock. As a result of
this share issuance, the Company's senior lenders have the power to
vote a majority of the Company's voting common stock. See Item 1 Change
of Control.
- - Warrants to purchase 2,000,000 shares of Class A Common Stock with an
exercise price of $0.25 issued to the Centre Entities.
- - Amended warrants already held by the Centre Entities to purchase
3,246,164 shares of Class A Common Stock at $1.00 per share by
providing for payment of the exercise price in cash rather than the
Series A Preferred Stock and making a slight adjustment in the original
exercise price of $1.03 per share.
Certain of the securities described above were issued to the Centre Entities.
See Item 13 Certain Relationships and Related Transactions.
RESULTS OF OPERATIONS
The following table sets forth selected data as a percentage of gross
revenues for the periods indicated:
FISCAL YEAR ENDED MARCH 31,
------------------------------------
2001 2000 1999
---- ---- ----
Total Revenue 100% 100% 100%
Gross Margin 18% 21% 36%
Operating Expenses:
Selling, General & Administrative 27% 28% 18%
Research & Development 11% 10% 7%
Depreciation and Amortization 6% 6% 4%
Nonrecurring restructuring charge 0% 0% 2%
Impairment of Assets 3% 5% 0%
---- ---- ----
Total Operating Expense 47% 50% 31%
---- ---- ----
Operating (Loss) Income -29% -28% 5%
Interest Expense, net 11% 21% 13%
Other Expense, net 1% 1% 1%
---- ---- ----
Net Loss Before Tax -40% -50% -9%
Benefit for Tax -3% -2% -3%
Accretion of Preferred Stock 1% 1% 0%
Net Loss -34% -49% -6%
Adjusted EBITDA(1) -21% -18% 10%
(1) Adjusted EBITDA consists of net loss before tax excluding interest expense,
net and depreciation and amortization, as further adjusted to exclude non-cash
impairment of assets and nonrecurring restructuring charges. This metric is used
to evaluate the Company's overall operational performance and should not be
considered as an alternative to net loss as a measure of operating results or to
cash flow as a measure of liquidity.
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FISCAL YEAR ENDED MARCH 31, 2001 COMPARED TO THE FISCAL YEAR ENDED
MARCH 31, 2000
Revenues. Revenues increased $2.6 million, or 6.7%, to $41.5 million
for fiscal 2001 as compared to $38.9 million for fiscal 2000. International
revenues decreased $5.5 million, or 20.2% to $21.9 million. U.S. Military
increased $7.0 million, or 162.9% to $11.2 million. U.S. Law Enforcement
increased $1.9 million, or 33.4%, to $7.4 million. Hunter/Sports decreased $0.7
million, or 40.1%, to $1.0 million. Sales in the Hunter/Sports market declined
primarily due to an expected softened demand for the product line. Reduced
revenues in the International market are primarily due to completion of
contracts in Canada and Australia. By contrast, the U.S. Law Enforcement and
Military sales increased significantly due to contract awards delayed in fiscal
year 2000 being awarded and completed in fiscal 2001 as the Company restructured
its debt facilities in August 2000 and renewed confidence of its customers.
Gross Margin. As a percentage of revenues, cost of revenues increased
to 82.1% for fiscal 2001 as compared to 78.9% for fiscal 2000. An accrual of
approximately $4.0 million was charged to cost of revenues during the fiscal
year associated with costs to complete the warranty provisions of certain
contracts as well as to accrue for anticipated losses on existing contracts.
These accruals are primarily due to recent increases in costs associated with
delivery of products and warranty services not originally anticipated at the
time the warranty program or related contract were entered into. The Company
estimates that the related revenue from these programs is no longer expected to
offset the anticipated expenses. Therefore, an accrual for this loss contingency
was made when the loss was determined and when it was reasonably estimable. As a
result of the foregoing, gross margin decreased $0.8 million, or 9.2% to $7.4
million, or 17.8% of revenues, for fiscal 2001 as compared to $8.2 million, or
21.1% of revenues, for fiscal 2000.
Total Operating Expenses. Total operating expenses remained constant at
$19.3 million for fiscal 2001. Total operating expenses as a percentage of
revenues decreased to 46.7% for fiscal 2001 from 49.6% for fiscal 2000. Selling,
general and administrative expenses decreased as a percentage of revenue to
26.7% for fiscal 2001 from 28.2% for fiscal 2000. Selling, general and
administrative ("SG&A") expenses increased $0.1 million or (1.0%). This decrease
in SG&A as a percentage of revenue is due primarily to improved management of
time and resource allocations in fiscal year 2001 and a one-time charge for
deferred compensation associated with severance pay to the former President and
CEO that was included in fiscal year 2000. R&D expenses increased $0.8 million
to $4.8 million in fiscal 2001 from $4.0 million in fiscal 2000 primarily
attributable to the Company's expenditures for research and development
activities relating to new products and product lines.
During the third quarter of fiscal year 2001, management began an
evaluation of the operations of Simtran in response to Simtran's declining
customer order backlog. As a result of the strategic repositioning plan for
Simtran, management performed an evaluation of the recoverability of the assets
of Simtran by estimating the future undiscounted cash flows expected to result
from future Simtran operations and determined that an impairment of long-lived
assets had occurred. The Company then recorded an impairment loss of $1,244,000,
which was equal to the difference between the carrying value of the long-lived
assets and associated goodwill of Simtran and the expected discounted future
cash flows.
Operating Loss. As a result of the foregoing, operating loss increased
$0.8 million to a loss of $11.9 million, or (28.7%) of revenues, for fiscal 2001
as compared to a loss of $11.1 million, or (28.5%) of revenues, for fiscal 2000.
Other Expense, net. Net interest expense totaled $4.4 million, or 10.7%
of revenues for fiscal 2001 as compared to net interest expense of $8.1 million,
or 20.7% for fiscal 2000. Other income (expense), net for fiscal 2001 primarily
includes a charge of $0.2 million related to foreign currency exchange cost
associated with international revenues. In conjunction with the Restructure
Transaction (see Footnote 4 of the Notes to the Consolidated Financial
Statements) completed in August 2000, the Company's outstanding indebtedness was
exchanged for new borrowings, common stock, and mandatory redeemable preferred
stock. The sum of all future principal and interest payments due under the new
agreements exceeded the carrying value of the old debt, and thus no gain was
recognized on the transaction in accordance with SFAS No. 15. The excess of the
carrying amount of the old borrowings exceeded the fair value of the new
borrowings, common stock, and mandatory redeemable preferred stock and was
allocated proportionately to the new debt and preferred stock. During the year,
the excess amount allocated to debt was reduced by approximately $2.0 million,
resulting in a corresponding reduction of interest expense. Interest expense
will continue to be recognized at a much lower effective interest rate until the
debt matures in March of 2003.
Benefit from Income Taxes. The effective tax rate increased to 6.3% of
income before income taxes for fiscal 2001 compared to 4.2% of income before
taxes for fiscal 2000. The Company is no longer recording a tax benefit for the
majority of
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its operating losses due to uncertainty of future realization. However, the
Company recorded a $1.0 million tax benefit for fiscal year 2001, which was
related to an anticipated refund due to the Company for carrybacks of net
operating losses.
Accretion of Preferred Stock. The expense for the accretion of the
preferred stock issued in November 2000 was a total of $260,000 for fiscal year
2001 compared to $254,000 for fiscal year 2001.
Gain on Extinguishment of Preferred Stock. This represents the excess
of the value of the Series A Mandatory Redeemable Preferred Stock over the fair
value of the common stock and warrants exchanged. A gain of $1,729,000 was
recorded during fiscal year 2001 as a result of the Restructure Transaction.
Net Loss. As a result of the foregoing, the net loss decreased $4.8
million, to a loss of $14.1 million or ($0.26) per diluted share, or -34.0% of
revenues for fiscal 2001 as compared to a loss of $18.9 million or ($0.91) per
diluted share, or -48.6% of revenues for fiscal 2000. Net loss prior to a
one-time charge of $1.2 million for impairment of long-lived assets related to
Simtran would have resulted in a net loss of $12.9 million, or -31.0% of
revenues.
FISCAL YEAR ENDED MARCH 31, 2000 COMPARED TO THE FISCAL YEAR ENDED
MARCH 31, 1999
Revenues. Revenues decreased $16.6 million, or 29.9%, to $38.9 million
for fiscal 2000 as compared to $55.5 million for fiscal 1999. Each of the four
principal market components experienced a decline. International revenue
decreased $8.2 million, or 23.0% to $27.4 million. U.S. Military decreased $5.2
million, or 55.1% to $4.3 million. U.S. Law Enforcement decreased $2.3 million,
or 29.3%, to $5.6 million. Hunter/Sports decreased $.9 million, or 34.9%, to
$1.6 million. This decline was attributable to several factors: (1) significant
delays in contract awards from major customers including both the U.S. Army
subcontract supporting the Engagement Skills Trainer program and U.S. Air Force
Reserve contracts. These programs have now been awarded to the Company for
delivery in the current fiscal year; (2) loss in a competitive bidding process
of a major competition for the U.K. Caddet air defense trainer program proposed
by Simtran; (3) reduction in investment and development activities, due to lack
of financing; (4) delays in competitive awards due to lengthy government process
exacerbated by uncertainty of the financial status of the Company.
Gross Margin. As a percentage of revenues, cost of revenues increased
to 78.9% for fiscal 2000 as compared to 64.0% for fiscal 1999. This increase was
due to product mix changes consisting of low margin, non-standard engineering
development programs, the effect of greater competition eroding traditionally
high international gross margins, greater content of low margin maintenance
contracts, and cost overruns on design & development programs. As a result of
the foregoing, gross margin decreased $11.8 million, or 59.0% to $8.2 million,
or 21.1% of revenues, for fiscal 2000 as compared to $20.0 million, or 36.0% of
revenues, for fiscal 1999.
Total Operating Expenses. Total operating expenses increased $2.3
million, or 13.5% to $19.3 million for fiscal 2000 as compared to $17.0 million
for fiscal 1999. Total operating expenses as a percentage of revenues increased
to 49.6% for fiscal 2000 from 30.6% for fiscal 1999. Selling, general and
administrative expenses increased as a percentage of revenue to 28.2% for fiscal
2000 from 18.4% for fiscal 1999. The increase in selling, general, and
administrative expenses was primarily due to the inclusion of certain expenses
related to management changes within the organization. Expenses for fiscal year
2000 included approximately $1.0 million related to costs associated with the
resignation agreements of the former President and CEO and Vice President of
Sales and Marketing. Selling, general, and administrative expenses also
increased as a result of higher volume of international agents' commission based
sales and an increase in D&O insurance. Research and development costs remained
at the same level of $4.0 million for fiscal year 2000 and 1999. In fiscal year
2000, management analyzed the goodwill of Dart in accordance with SFAS No. 121
and wrote-off the remaining $1.9 million balance of its goodwill due to a
limited potential in the market because of a softened product demand.
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Non-Recurring Expenses. In fiscal year 1999, the Company recognized a
nonrecurring restructuring charge of $870,000 related to a workforce reduction
and certain other measures implemented to enhance future profitability. The
Company had completed these measures as of March 31, 2000. Of the $870,000 total
expense, approximately $727,000 had been incurred as of March 31, 2000. The
Company did not anticipate incurring any additional costs and thus reduced
expenses by the remaining $143,000 of the charge during fiscal year 2000. The
reduction of $143,000 was included in nonrecurring restructuring charge.
Operating (Loss) / Income. As a result of the foregoing, operating
income decreased $14.1 million to a loss of $11.1 million, or -28.5% of
revenues, for fiscal 2000 as compared to an income of $3.0 million, or 5.4% of
revenues, for fiscal 1999.
Other Expense, net. Net interest expense totaled $8.1 million, or 20.7%
of revenues for fiscal 2000 as compared to net interest expense of $7.3 million,
or 13.2% for fiscal 1999. Other income (expense), net for fiscal 2000 primarily
included a charge of $.1 million related to foreign currency exchange cost
associated with international revenues. The Company incurred higher amounts of
interest expense because of additional borrowings at higher interest rates.
Benefit from Income Taxes. The effective tax rate decreased to 4.2% of
income before income taxes for fiscal 2000 compared to 36.0% of income before
taxes for fiscal 1999. This change in effective tax rate primarily reflected the
establishment of a valuation allowance against the Company's net operating loss
carryforwards and certain other deferred tax assets.
Net Loss. As a result of the foregoing, the net loss increased $15.8
million, to a loss of $18.9 million or ($0.91) per diluted share, or -48.6% of
revenues for fiscal 2000 as compared to a loss of $3.1 million or ($0.15) per
diluted share, or -5.6% of revenues for fiscal 1999.
QUARTERLY RESULTS OF OPERATIONS
The following table presents certain unaudited quarterly statements of
operations data for each of the eight quarters beginning April 1, 1999 and
ending March 31, 2001. Such information, in the opinion of management, includes
all adjustments consisting only of normal recurring adjustments necessary for a
fair presentation of that information. The results of operations for any quarter
are not necessarily indicative of the results to be expected for any future
quarter.
Quarter Ended
(In thousands, except per share data)
--------------------------------------------------------------------------------------------
Fiscal Year 2001 Fiscal Year 2000
-------------------------------------------- ---------------------------------------------
June 30 Sept 30 Dec 31 Mar 31 June 30 Sept 30 Dec 31 Mar 31
-------- ------- ------- -------- -------- ------- ------- -------
Revenues $ 10,271 $ 7,368 $ 9,109 $ 14,753 $ 15,196 $ 8,328 $ 9,920 $ 5,445
Gross Margin 3,191 (2,137) 860 5,528 5,451 1,511 2,415 (1,177)
Gross Margin % 31% -29% 9% 37% 36% 18% 24% -22%
Operating Expense $ 4,148 $ 3,806 $ 5,907 $ 5,509 $ 3,627 $ 5,168 $ 4,014 $ 6,466
-------- ------- ------- -------- -------- ------- ------- -------
Operating (Loss) Income (957) (5,943) (5,047) 19 1,824 (3,657) (1,599) (7,643)
Interest Expense, Net 2,346 2,225 64 (191) 1,783 1,937 1,866 2,470
Other Expense 22 284 (6) (43) 243 104 60 (82)
-------- ------- ------- -------- -------- ------- ------- -------
Pre-Tax (Loss) Income (3,325) (8,452) (5,105) 253 (202) (5,698) (3,525) (10,031)
Tax (Benefit) Provision (116) 54 54 (1,044) (69) (1,949) (1,022) 2,232
-------- ------- ------- -------- -------- ------- ------- -------
Net (Loss) Income (3,209) (8,506) (5,159) 1,297 (133) (3,749) (2,503) (12,263)
Accretion of Preferred Stock 66 74 57 63 62 63 64 65
Gain on extinguish. of Pref. Stock 0 (1,729) 0 0 0 0 0 0
-------- ------- ------- -------- -------- ------- ------- -------
Net (Loss) Income applicable to (3,275) (6,851) (5,216) 1,234 (195) (3,812) (2,567) (12,328)
common stockholders
Earnings per common share
Basic (0.16) (0.13) (0.07) 0.02 (0.01) (0.18) (0.12) (0.59)
Diluted (0.16) (0.13) (0.07) 0.02 (0.01) (0.18) (0.12) (0.59)
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The Company's revenues and results of operations historically have
varied substantially from quarter to quarter, and the Company expects these
variations to continue. Among the factors causing these variations have been the
number, timing and scope of the Company's contracts and purchase orders,
concentration of shipments under large orders and the uneven timing of the
receipt by the Company of necessary authorizations from government customers.
The Company recognizes revenues primarily upon shipment of its products to its
customers, while a high percentage of the Company's operating expenses,
including personnel, rent and debt service, are relatively fixed in advance of
any particular quarter. As a result the concentration of several order
deliveries in a particular quarter, unanticipated variations in the number and
timing of shipments or customer delays in proceeding to succeeding stages of a
contract could have a material adverse effect on the Company's quarterly results
of operations and financial condition.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal liquidity and capital needs are to fund working
capital, provide debt service, and make capital expenditures necessary to
support and grow its business. The Company has entered into a restructured
Credit Agreement as discussed above under "Restructure Transaction." The new
capital structure provides approximately $882,000 to support existing letters of
credit and future working capital requirements in connection therewith.
Therefore, the Company's primary source of liquidity and capital resources is
cash generated from its operating activities. The Company's future operations
will be constrained unless it can achieve new business revenue targets necessary
to finance working capital needs.
The Company is subject to several business and market risks. The risks
are (1) the Company's financial position has significantly improved as a result
of the Restructure Transaction both in terms of a reduction in total amount and
a deferral of maturity dates of its debt, but it must continue to achieve its
current business revenue targets in the current fiscal year in order to
discharge its interest obligations in a timely manner and expand its business
opportunities and (2) the Company must receive new contracts for production to
be delivered in the current fiscal year in order to achieve its revenue
projections. Thus, the Company's continuation as a going concern is dependent
upon its ability to (a) continue production work on existing contracts; (b)
obtain new contracts for future delivery; and (c) generate sufficient cash flow
to meet working capital obligations on a timely basis. Management's plans in
response to the above objectives are (1) continue to reinforce cost control
measures to assure operations are conducted at the lowest cost possible at all
locations; (2) remain focused on revenue maximization of standard products with
higher margin potentials within the domestic and international law enforcement
business segment; (3) minimize capital expenditures in non-strategic areas; (4)
continue to improve inventory turns and lower inventory investment and; (5)
continually negotiate more favorable terms and conditions to reduce extended or
prolonged payment cycles.
The Company believes that this business strategy may achieve positive
operating results provided that the Company collects on past due receivables
outstanding, and achieves the new business revenue targets necessary to finance
working capital needs. There can be no assurances that this strategy, and the
objectives cited above, will be successful or that the new contracts will be
awarded to the Company.
As of March 31, 2001, the Company had working capital of $15.9 million
compared to $21.0 million as of March 31, 2000. The Company's spending for its
fiscal 2001 capital expenditures was $0.7 million. Such expenditures include
leasehold improvements, computer equipment and software, marketing product
demonstration equipment, and manufacturing machinery.
The Company had essentially no change in cash and cash equivalents in
fiscal 2001 compared to a net decrease of $0.9 million and a net decrease of
$0.6 million in fiscal 2000 and 1999, respectively. For fiscal 2001, the
Company's operating activities used cash of approximately $0.2 million. The
Company's investing activities essentially had no change as it liquidated $0.7
million in restricted cash, which had been used to secure contract performance
guarantees, thus offsetting $0.7 million in capital expenditures. The Company
generated $0.2 million from financing activities in fiscal 2001.
RECENT ACCOUNTING PRONOUNCEMENTS
In 1998, the Financial Accounting Standards Board issued Statement No.
133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No.
133 will be effective for the Company's fiscal year ending March 31, 2002.
Management does not believe that the adoption of this pronouncement will have a
material impact on the Company's financial position or results of operations.
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In 1999, the staff of the Securities and Exchange Commission ("SEC")
issued Staff Accounting Bulletin ("SAB") No. 101 "Revenue Recognition in
Financial Statements." SAB No. 101 summarizes the SEC staff's view in applying
generally accepted accounting principles to the recognition of revenues. The
Company adopted SAB No. 101 during fiscal year 2001. The adoption of SAB No. 101
did not have a material impact on its consolidated results of operations,
financial position, or cash flows.
In 2000, the Emerging Issues Task Force ("EITF") issued EITF No. 00-21,
"Accounting for Multiple Element Revenue Arrangements," which addresses (1)
determining whether an arrangement contains multiple components or deliverables
that should be evaluated separately for revenue recognition purposes; (2) how
consideration should be allocated, if separate accounting for a deliverable is
appropriate; and (3) the accounting for direct costs when it is concluded that
those costs are not associated with any single deliverable or are associated
with a specific deliverable that does not qualify as a separate unit. In April
2001, the EITF reached a tentative consensus on this issue. The Company is
currently evaluating the impact that EITF 00-21 will have on its financial
position and results of operations.
In 2001, the Financial Accounting Standards Board issued a revised
exposure draft entitled "Business Combinations and Intangibles Assets --
Accounting for Goodwill." This exposure draft, if adopted as proposed, would
eliminate the amortization of goodwill against earnings. Instead, goodwill would
be written down against earnings only in the periods in which the recorded value
is more than its fair value. The FASB is expected to issue a final statement on
business combinations and intangible assets in June 2001. The impact of this
statement may be significant if it is issued as currently proposed, as the
Company would no longer recognize goodwill amortization expense. As of March 31,
2001, the Company has unamortized goodwill of approximately $1.2 million.
However, the Company would be required to test goodwill for impairment under new
standards, which could have an adverse effect on future results of operations if
impairment occurs.
YEAR 2000 ISSUES
During the Year 2000 the Company did not experience any significant
disruptions to our business nor are we aware of any significant Year
2000-related disruptions that impacted our customers and suppliers. The Company
continues to monitor its systems and operations and is reasonably assured that
no significant business interruptions have, nor will, occur as a result of any
Year 2000-related issues.
ITEM 7(A) QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to a number of market risks in the ordinary
course of business, such as, foreign currency exchange risk in the fulfillment
of international contracts and interest rate risk associated with non trading
assets utilized to manage the interest rate cost of the outstanding long term
liabilities. The majority of the Company's contracts are denominated in U.S.
dollars, thus reducing foreign exchange risk. The Company's net exposure to
interest rate risk consists of its floating rate senior debt and working capital
borrowings which are tied to changes in the prime rate. Assuming a 10% increase
in interest rates, interest expense, net related to the senior debt and working
capital borrowings for fiscal year 2001 would have increased by approximately
$0.1 million.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Report of Independent Public Accountants, the Consolidated
Financial Statements, Financial Statement Schedule and Notes to Consolidated
Financial Statements that appear on pages F-1 through F-21 and S-1 of this Form
10-K are incorporated herein by reference.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
INFORMATION IN THIS ITEM SHOULD BE READ IN CONJUNCTION WITH ITEM 1
CHANGE OF CONTROL CONCERNING THE AGREEMENT BY CERTAIN DIRECTORS AFFILIATED WITH
THE CENTRE ENTITIES TO RESIGN AT THE REQUEST OF THE LENDERS, THE LENDERS
AGREEMENT TO VOTE THEIR CONTROLLING INTEREST IN FAVOR OF THE ELECTION OF ONE
DIRECTOR AFFILIATED WITH THE CENTRE ENTITIES, THE JOINT AGREEMENT TO RECOMMEND
SELECTION OF QUALIFIED CANDIDATES TO SERVE UNTIL THE NEXT ANNUAL MEETING OF THE
COMPANY AND THEIR JOINT AGREEMENT TO RECOMMEND APPOINTMENT OF AN ADDITIONAL
DIRECTOR OR ACTIVE CHAIRMAN.
The following table sets forth the name, age, and position of each
director and executive officer as of March 31, 2001. The Board currently
consists of seven directors, Robert F. Mecredy having resigned as of May 16,
2001. The Company divides the Board of Directors into three classes, each of
which is elected for a three-year term. Executive officers of the Company are
elected by the Board of Directors annually and hold office until the next annual
meeting of stockholders or until they sooner resign or are removed from office
by the Board of Directors.
NAME AGE POSITION
- -------------------------------- ------ --------------------------------------------------------------
Randy Sugarman 59 Chairman of the Board of Directors (and Interim President
and CEO since May 11, 2001)
William J. Bratton 53 Director
Mary Ann Gilleece 60 Director
Ronovan Mohling 59 Director
Scott Perekslis 33 Director
Ronald C. Whitaker 53 Director
Robert F. Mecredy - RESIGNED 54 President, Chief Executive Officer and Director
John A. Morelli 52 Vice President, Chief Financial Officer, Chief Operating
Officer and Treasurer
Class I directors were elected in fiscal 2001 and their present terms expire
with the Annual Meeting of Stockholders in 2003:
ROBERT F. MECREDY
PRESIDENT, CHIEF EXECUTIVE OFFICER AND DIRECTOR
FIREARMS TRAINING SYSTEMS, INC.
Robert F. Mecredy, age 54, served as President, Chief Executive
Officer, and Director from October 1,1999 to May 16, 2001. Prior thereto, Mr.
Mecredy served as Executive Vice President from July 18, 1997 to September 30,
1999, as Vice President, Domestic from 1996 to 1997, Director of the Company
from 1993 to 1996, as Director of Domestic Sales and Marketing from 1994 to 1996
and as Director of U.S. Military Marketing from 1990 to 1994.
On May 16, 2001, Mr. Mecredy resigned from his positions as President,
Chief Executive Officer and Director. Mr. Randy Sugarman, Chairman of the Board
of Directors, has replaced Mr. Mecredy as Interim President and CEO until a
successor is named.
SCOTT PEREKSLIS
DIRECTOR
CENTRE PARTNERS MANAGEMENT LLC
Scott Perekslis, age 33, has served as a Director of the Company since
July 31, 1996. Mr. Perekslis also served as a Vice President of the Company from
July 31, 1996 through July 18, 1997. Since 1995, Mr. Perekslis has been a
Principal of Centre Partners Management LLC and a Principal of Corporate
Advisors, L.P. From 1991 to 1995, Mr. Perekslis was an Associate of Corporate
Advisors, LP. Mr. Perekslis also serves as a director of Hyco International,
Inc. and KIK Corporation Holdings, Inc. Mr. Perekslis is a member of the
Compensation Committee of the Board of Directors.
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R. C. WHITAKER
PRESIDENT AND CEO
STRATEGIC DISTRIBUTION
R.C. Whitaker, age 53, was named as a Director of the Company in
October 2000 to fill a vacancy that was due to resignation of a director
following the Restructure Transaction in FY 2001. Mr. Whitaker has been with
Strategic Distribution Inc. since September 2000. Prior to joining SDI, he was
an Operating Partner with Pegasus Investors (a private equity funds group) from
1999 to 2000. Previous operational positions were President and CEO of Johnson
Worldwide Associates (a sporting goods manufacturer) from 1996 to 1999,
President and CEO of EWI, Inc. (an automotive tier 1 supplier) from 1995 to
1996, Chairman, President and CEO of Colt's Manufacturing Company (a designer
and producer of military firearms) from 1992 to 1995, and President & CEO of
Wheelabrator Corporation (an industrial equipment manufacturer). In addition to
Strategic Distribution Inc., he serves on the Board of Directors of Weirton
Steel Corporation, Precision Navigation, Inc., and Code-Alarm Inc. as well as a
member of the Board of Trustees for The College of Wooster. Mr. Whitaker is a
member of the Audit Committee of the Board of Directors.
Class II directors were elected in fiscal 1999 and their present terms expire
with the Annual Meeting of Stockholders in 2001; Mr. Mohling was named as a
director in October 2000 to fill a vacancy that was due to resignation of a
director following the Restructure Transaction in FY 2001:
WILLIAM J. BRATTON
PRESIDENT
THE BRATTON GROUP LLC
William J. Bratton, age 53, has served as a Director of the Company
since September 17, 1996. He has been the President of The Bratton Group LLC
since 1999. From 1997 to 1999, he served as the President and Chief Operating
Officer of CARCO Group, Inc. From 1996 to 1997, Mr. Bratton served as Vice
Chairman of First Security Services Corporation and President of its new
subsidiary First Security Consulting, Inc. From 1994 to 1996, Mr. Bratton served
as Police Commissioner of the City of New York. In 1991, he served as
Superintendent in Chief of the Boston Police Department and was appointed Police
Commissioner of the Boston Police Department in 1993. From 1990 to 1991, Mr.
Bratton served as Chief of the New York City Transit Police. Mr. Bratton also
serves as a director of Rite Aid Corporation, First Security Services
Corporation and Smart Cop Corporation. Mr. Bratton is a member of the
Compensation Committee and the Stock Options Sub-Committee of the Board of
Directors.
RONOVAN MOHLING
PARTNER AND PRINCIPAL
CAPITOL PLACES, LLC
Ronovan Mohling, age 59, was named as a Director of the Company in
October 2000. Mr. Mohling, a Partner and Principal of Capitol Places, LLC (a
private real estate group) since 1998, recently served for ten years with
Bristol-Myers Squibb Company in Europe, the Middle East, and Africa from 1988 to
1998. From 1995 to 1998, he was the Vice President of Business Development,
responsible for acquisitions and divestitures, for the company's Consumer
Medicines Division and, from 1992 to 1995 was President of the Consumer Products
Division with responsibility for the regions of Europe, the Middle East, and
Africa. From 1972 to 1988, Mr. Mohling served in the capacities of President and
Vice-President with Schering-Plough Corporation where he was responsible for
overseeing the company's Consumer Products Division. Mr. Mohling is a member of
the Audit Committee of the Board of Directors.
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Class III directors were elected in fiscal 2000 and their present terms expire
with the Annual Meeting of Stockholders in 2002; Mr. Sugarman was named as a
director in October 2000 to fill a vacancy that was due to resignation of a
director following the Restructure Transaction in FY 2001 and Ms. Gilleece was
named as a director in March 2001 to replace a vacancy due to the resignation of
Craig I. Fields:
MARY ANN GILLEECE, J.D., L.L.M.
PARTNER
MANATT PHELPS & PHILLIPS LLP
Mary Ann Gilleece, age 60, was named as a Director of the Company in March 2001.
Ms. Gilleece is a Partner in the law firm of Manatt Phelps & Phillips, LLP,
which has offices in Washington, D.C., Los Angeles, Palo Alto, Sacramento,
Mexico City and Monterrey, Mexico. The firm is organized in four business units:
Litigation; Business, Finance, and Real Estate; Government and International
Trade and Policy; and, entertainment, Media, and Intellectual Property.
RANDY SUGARMAN, CPA
MANAGING PARTNER
SUGARMAN & COMPANY, LLP
Randy Sugarman, age 59, was named as a Director of the Company and as
Chairman of the Board of Directors in October 2000. Randy Sugarman is the
managing partner of Sugarman & Company LLP (Financial Consultants), which he
founded in 1977. Mr. Sugarman is a member of the Compensation Committee. Mr.
Sugarman has replaced Mr. Mecredy, who resigned his positions as President,
Chief Executive Officer and Director on May 16, 2001, on an interim basis until
a successor is named.
JOHN A. MORELLI
VICE PRESIDENT, CHIEF FINANCIAL OFFICER, CHIEF OPERATING OFFICER AND TREASURER
John A. Morelli, age 52, has served as Chief Financial Officer and
Treasurer since March 1999. Mr. Morelli was named Chief Operating Officer in
fiscal year 2001. Mr. Morelli previously served as Corporate Controller from
September 1996 to March 1999. Prior to joining the Company, Mr. Morelli served
as Financial Liaison from January 1996 to August 1996 with General Dynamics
during their acquisition of Teledyne Continental Motors, a major weapons defense
contractor. From April 1990 to December 1995, Mr. Morelli served as Division
Controller with Sparton Electronics, Inc., an electronics-manufacturing firm
with the defense industry. From 1979 to 1990, Mr. Morelli served as Controller
for Fairchild-ASD, an aircraft manufacturing & modification company. From 1974
to 1979, Mr. Morelli served as Finance Manager with Fairchild-Republic, an
aircraft manufacturing company.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE:
Based solely upon a review of Forms 3 and 4 and amendments thereto
furnished to the Company pursuant to Rule 16a-3(e) during the fiscal year ended
March 31, 2001 and Form 5 and amendments thereto furnished to the Company with
respect to such fiscal year, the Company has identified the following persons
who during such fiscal year were beneficial owners of more than 10 percent of
its Class A Common Stock and which failed to file on a timely basis reports
required by Section 16(a) of the Exchange Act during such fiscal year, in each
case related to the August 25, 2000 Restructure: (1) although the various
partnerships described herein as the Centre Entities filed a Form 13-G reporting
changes in beneficial ownership of the common stock in connection with the
Restructure, they did not file Form 4's amending previous Form 3's and 4's filed
with respect to the Company to reflect certain changes in their share ownership
as a result of the Restructure; and (2) although the various entities described
herein as Dominion Resources/First Source Financial filed a Form 13-D reporting
acquisition of beneficial ownership of more than 10% of the Class A Common Stock
in connection with the Restructure, they did not file a Form 3 with respect to
acquisition of Class A Common Stock in exchange for certain debt securities in
connection with the Restructure.
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ITEM 11. EXECUTIVE COMPENSATION
DIRECTORS' COMPENSATION
Each director of the Company who is not an employee of the Company is
entitled to receive annual compensation of $20,000, payable quarterly. In
addition, directors of the Company are reimbursed for their reasonable expenses
incurred in attending meetings of the Board of Directors or committees thereof.
Directors who are also employees of the Company are not separately compensated
for their services as directors.
Pursuant to the Securities Purchase Agreement dated November 13, 1998
with Centre Capital Investors II, L.P., Centre Partners Coinvestment, L.P.,
Centre Capital Tax-Exempt Investors II, L.P., and Centre Capital Offshore
Investors II, L.P., Messrs. Pollack, Kagan, and Zepf, former directors of the
Company who resigned in connection with the fiscal year 2001 Restructure, and
Mr. Perekslis, who remains a director, all of whom are affiliated with the
Centre Partnerships agreed to receive in lieu of annual director's fees of
$20,000, for each director, options to purchase at $1.03125 per share an
aggregate of 106,700 shares of Class A Common Stock, exercisable in equal
quarterly installments beginning December 31, 1998 which such directors assigned
to Centre Partners Management LLC. As of June 27, 2001, 106,700 shares of Class
A Common Stock are exercisable from this grant.
SUMMARY COMPENSATION TABLE
The following summary compensation table sets forth information
concerning the annual and long-term compensation earned by the Chief Executive
Officer and each of the other highly compensated executive officers whose annual
salary and bonus during fiscal 2001 exceeded $100,000.
ANNUAL COMPENSATION Long Term Compensation
------------------------------------------------- ------------------------------
Other RESTRICTED SECURITIES
OFFICER NAME AND FISCAL SALARY BONUS Annual STOCK UNDERLYING
PRINCIPAL POSITION YEAR ( $ ) ( $ ) Compensation AWARDS ($) OPTIONS ( # )
- ------------------ ---- ----- ----- ------------ ---------- -------------
Robert F. Mecredy 2001 200,000 0 5,998(2) 0 0(1)
President and Chief 2000 160,000 0 5,049(2) 0 0
Executive Officer - RESIGNED 1999 158,000 0 4,740(2) 0 20,000
1998 155,000 120,000 2,435(2) 0 10,000
John A. Morelli 2001 125,000 0 3,089(2) 0 0(5)
Chief Financial Officer & 2000 105,000 0 5,689(2) 18,750 90,000(4)
Chief Operating Officer 1999 84,950 0 2,482(2) 0 13,000(3)
1998 72,000 6,000 1,170(2) 0 3,000
(1) Mr. Mecredy became the Company's President and Chief Executive Officer
on October 1, 1999. He resigned effective May 16, 2001.
(2) Matching contributions made by the Company to its 401(k) plan.
(3) Mr. Morelli had 3,000 options repriced at $3.253 per share during
fiscal 1999. He was not an executive officer at the time.
(4) Mr. Morelli received 30,000 grants priced at $0.625 per share during
fiscal 2000.
(5) Mr. Morelli assumed the duties of Chief Operating Officer in addition
to his role as Chief Financial Officer of the Company.
OPTIONS GRANTED IN FISCAL 2001
The following table contains certain information regarding stock options granted
to Executive Officers during fiscal 2001.
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POTENTIAL REALIZABLE
NUMBER OF % OF TOTAL VALUE AT ASSUMED
SECURITIES OPTIONS EXERCISE OF ANNUAL RATES OF STOCK
UNDERLYING GRANTED TO BASE PRICE PRICE APPRECIATION
OPTIONS/SARS EMPLOYEES IN ($/SHARE) EXPIRATION FOR OPTION TERMS(2)
OFFICER NAME GRANTED FISCAL YEAR (1) DATE 5% 10%
- ------------------- --------------- ------------- -------------- -------------- --------- --------
Robert F. Mecredy 240,000 19.89% 0.01000 04/01/2007 $ 64,164 $ 88,861
Robert F. Mecredy 480,000 39.77% 0.50000 04/01/2007 0 0
John A. Morelli 150,000 12.43% 0.01000 04/01/2007 40,102 55,538
John A. Morelli 300,000 24.86% 0.50000 04/01/2007 0 0
(1) Options were granted at the market value based on the last sale price
on the date of grant of the common stock.
(2) The dollar amounts are the result of calculations at the 5% and 10%
rates set by the Securities and Exchange Commission and, therefore, are
not intended to forecast possible future appreciation, if any, of the
price of the Company's common stock or the present or future value of
the options.
FISCAL YEAR-END OPTION VALUES
The following table contains certain formation regarding stock options
exercised during the fiscal year and options to purchase common stock held as of
March 31, 2001 by each of the Executive Officers.
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT I