UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_____________
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002
OR
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
COMMISSION FILE NUMBER: 333-13105
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
SUWANEE, GEORGIA 30024
(Address of principal executive offices)
TELEPHONE NUMBER (770) 813-0180
(Registrant’s telephone number, including area code)
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 [ ] |
As of November 6, 2002, there were 70,153,139 shares of the Registrant’s Class A Common Stock outstanding.
Page 1
FIREARMS TRAINING SYSTEMS, INC.
INDEX
| Page number | ||||
| PART I. | FINANCIAL INFORMATION | 3 | ||
| ITEM 1. | CONDENSED CONSOLIDATED FINANCIAL STATEMENTS: | |||
|
Condensed Consolidated Statements of Operations Three and six months ended September 30, 2002 and 2001 |
3 | |||
|
Condensed Consolidated Balance Sheets September 30, 2002 and March 31, 2002 |
4 | |||
|
Condensed Consolidated Statements of Cash Flows Six months ended September 30, 2002 and 2001 |
5 | |||
| Notes to Condensed Consolidated Financial Statements | 6 | |||
| ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | 11 | ||
| ITEM 3. |
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
16 | ||
| ITEM 4. | CONTROLS AND PROCEDURES | 17 | ||
| PART II. | OTHER INFORMATION | 17 | ||
| ITEM 1. | LEGAL PROCEEDINGS | 17 | ||
| ITEM 6. | EXHIBITS AND REPORTS ON FORM 10-K | 17 | ||
| SIGNATURES | 18 |
Page 2
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FIREARMS TRAINING SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited and in thousands, except per share data)
| Three months ended | Six months ended | ||||||||||||||||||
| September 30, | September 30, | ||||||||||||||||||
| 2002 | 2001 | 2002 | 2001 | ||||||||||||||||
Revenues |
$ | 17,005 | $ | 16,897 | $ | 30,197 | $ | 28,536 | |||||||||||
Cost of Revenues |
11,203 | 12,210 | 20,560 | 19,369 | |||||||||||||||
Gross margin |
5,802 | 4,687 | 9,637 | 9,167 | |||||||||||||||
Operating expenses: |
|||||||||||||||||||
Selling, general and administrative expenses |
3,010 | 3,051 | 5,450 | 5,696 | |||||||||||||||
Research and development expenses |
714 | 563 | 1,550 | 1,577 | |||||||||||||||
Depreciation and amortization |
244 | 459 | 510 | 939 | |||||||||||||||
Total operating expenses |
3,968 | 4,073 | 7,510 | 8,212 | |||||||||||||||
Operating income |
1,834 | 614 | 2,127 | 955 | |||||||||||||||
Other income (expense), net: |
|||||||||||||||||||
Interest income |
15 | 23 | 48 | 192 | |||||||||||||||
Interest expense |
(59 | ) | (24 | ) | (108 | ) | (48 | ) | |||||||||||
Other income (expense), net |
(19 | ) | (64 | ) | 54 | (31 | ) | ||||||||||||
Total other income (expense), net |
(63 | ) | (65 | ) | (6 | ) | 113 | ||||||||||||
Income before provision for income taxes |
1,771 | 549 | 2,121 | 1,068 | |||||||||||||||
Provision for income taxes |
602 | 186 | 721 | 482 | |||||||||||||||
Net income |
1,169 | 363 | 1,400 | 586 | |||||||||||||||
Accretion of preferred stock |
(74 | ) | (67 | ) | (146 | ) | (132 | ) | |||||||||||
Net income applicable to common shareholders |
$ | 1,095 | $ | 296 | $ | 1,254 | $ | 454 | |||||||||||
Basic earnings per common share |
$ | 0.02 | $ | 0.00 | $ | 0.02 | $ | 0.01 | |||||||||||
Diluted earnings per common share |
$ | 0.02 | $ | 0.00 | $ | 0.02 | $ | 0.01 | |||||||||||
Weighted average common shares outstanding — basic |
70,153 | 70,153 | 70,153 | 70,150 | |||||||||||||||
Weighted average common shares outstanding — diluted |
71,953 | 70,894 | 72,139 | 70,635 | |||||||||||||||
The accompanying notes are an integral part of these condensed consolidated statements
Page 3
FIREARMS TRAINING SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
| September 30, | March 31, | |||||||||||
| ASSETS | 2002 | 2002 | ||||||||||
| (unaudited) | ||||||||||||
Current assets: |
||||||||||||
Cash and cash equivalents |
$ | 4,498 | $ | 4,252 | ||||||||
Restricted cash |
979 | 1,434 | ||||||||||
Accounts receivable, net |
12,437 | 10,500 | ||||||||||
Income tax receivable |
17 | 4,488 | ||||||||||
Unbilled receivables |
836 | 1,378 | ||||||||||
Costs and estimated earnings in excess of billings on uncompleted contracts |
2,536 | 1,816 | ||||||||||
Inventories, net |
10,441 | 9,434 | ||||||||||
Prepaid expenses and other current assets |
1,388 | 1,444 | ||||||||||
Total current assets |
33,132 | 34,746 | ||||||||||
Property and equipment, net |
2,039 | 1,579 | ||||||||||
Intangible assets |
186 | 26 | ||||||||||
Total assets |
$ | 35,357 | $ | 36,351 | ||||||||
LIABILITIES AND STOCKHOLDERS’ DEFICIT |
||||||||||||
Current liabilities: |
||||||||||||
Accounts payable |
$ | 3,144 | $ | 4,430 | ||||||||
Accrued liabilities |
3,107 | 5,053 | ||||||||||
Accrued interest |
895 | 861 | ||||||||||
Income taxes payable |
1,007 | — | ||||||||||
Deferred revenue |
1,142 | 902 | ||||||||||
Billings in excess of costs and estimated earnings on uncompleted contracts |
521 | 285 | ||||||||||
Warranty and contract costs provision reserve — current |
2,411 | 2,258 | ||||||||||
Current portion of long-term debt and capital lease obligations |
41,938 | — | ||||||||||
Total current liabilities |
54,165 | 13,789 | ||||||||||
Long-term debt and capital lease obligations |
149 | 42,977 | ||||||||||
Noncurrent deferred income taxes |
18 | 22 | ||||||||||
Warranty and contract costs provision reserve — noncurrent |
1,298 | 1,467 | ||||||||||
Other noncurrent liabilities |
675 | 579 | ||||||||||
Total liabilities |
56,305 | 58,834 | ||||||||||
Mandatory redeemable preferred stock |
27,465 | 27,319 | ||||||||||
Stockholders’ deficit: |
||||||||||||
Common stock |
— | — | ||||||||||
Stock warrants |
613 | 613 | ||||||||||
Additional paid-in-capital |
122,314 | 122,314 | ||||||||||
Accumulated deficit |
(171,096 | ) | (172,350 | ) | ||||||||
Cumulative foreign currency translation adjustment |
(244 | ) | (379 | ) | ||||||||
Total stockholders’ deficit |
(48,413 | ) | (49,802 | ) | ||||||||
Total liabilities and stockholders’ deficit |
$ | 35,357 | $ | 36,351 | ||||||||
The accompanying notes are an integral part of these condensed consolidated statements.
Page 4
FIREARMS TRAINING SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited and in thousands)
| Six months ended | |||||||||||
| September 30, | |||||||||||
| 2002 | 2001 | ||||||||||
OPERATING ACTIVITIES: |
|||||||||||
Net income applicable to common shareholders |
$ | 1,254 | $ | 454 | |||||||
Adjustments to reconcile net income to net cash provided by operating activities: |
|||||||||||
Noncash employee compensation |
— | 10 | |||||||||
Change in inventory reserve |
(1,925 | ) | |||||||||
Noncash reduction of debt restructuring liability |
(1,756 | ) | (1,756 | ) | |||||||
Accretion of mandatory redeemable preferred stock |
146 | 132 | |||||||||
Depreciation |
510 | 846 | |||||||||
Amortization of goodwill |
— | 93 | |||||||||
Amortization of loan costs and other intangible assets |
90 | — | |||||||||
(Gain) / loss on disposal of assets |
23 | (45 | ) | ||||||||
Deferred income taxes |
(4 | ) | 88 | ||||||||
Changes in assets and liabilities: |
|||||||||||
Accounts receivable, net |
(1,935 | ) | (2,704 | ) | |||||||
Unbilled receivables |
542 | 2,540 | |||||||||
Costs and earnings in excess of billings on uncompleted contracts |
(711 | ) | (2,340 | ) | |||||||
Inventories |
926 | (214 | ) | ||||||||
Prepaid expenses and other current assets |
(193 | ) | (134 | ) | |||||||
Accounts payable |
(1,289 | ) | 2,278 | ||||||||
Accrued liabilities |
(1,297 | ) | 1,499 | ||||||||
Income taxes payable / receivable |
5,532 | 1,477 | |||||||||
Deferred revenue |
331 | (97 | ) | ||||||||
Billings in excess of costs and earnings on uncompleted contracts |
135 | (277 | ) | ||||||||
Warranty and contracts costs provision |
(17 | ) | (931 | ) | |||||||
Noncurrent liabilities |
69 | 232 | |||||||||
Total adjustments |
(823 | ) | 697 | ||||||||
Net cash provided by operating activities |
431 | 1,151 | |||||||||
Cash flows from investing activities: |
|||||||||||
Change in restricted cash |
455 | 146 | |||||||||
Additions to property and equipment, net |
(757 | ) | (263 | ) | |||||||
Proceeds from disposal of property and equipment |
— | 45 | |||||||||
Net cash used in investing activities |
(302 | ) | (72 | ) | |||||||
Cash flows from financing activities: |
|||||||||||
Repayments of long-term debt |
(170 | ) | |||||||||
Net cash used in financing activities |
— | (170 | ) | ||||||||
Effect of changes in foreign exchange rates |
117 | 45 | |||||||||
Net Increase in Cash and Cash Equivalents |
246 | 954 | |||||||||
Cash and Cash Equivalents at the Beginning of the Period |
$ | 4,252 | $ | 1,864 | |||||||
Cash and Cash Equivalents at the End of the Period |
$ | 4,498 | $ | 2,818 | |||||||
Supplemental disclosures of cash paid (received) for: |
|||||||||||
Interest |
$ | 1,076 | $ | 547 | |||||||
Income taxes |
$ | (4,766 | ) | $ | (1,020 | ) | |||||
Supplemental disclosures of non-cash investing and financing activities: |
|||||||||||
Vehicles acquired through capital leases |
$ | 222 | $ | — | |||||||
The accompanying notes are an integral part of these condensed consolidated statements
Page 5
FIREARMS TRAINING SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION.
The accompanying condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation have been included. Operating results for the three-month and six-month periods ended September 30, 2002 are not necessarily indicative of the results that may be expected for the year ending March 31, 2003. For further information, refer to the Company’s consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K/A for the year ended March 31, 2002.
2. REVENUE RECOGNITION
A significant amount of the Company’s revenue is derived from the sale of small and supporting arms training simulators and accessories. Revenue from sales to commercial customers and small governmental agencies is primarily recognized upon shipment when title passes; as all material commitments have been fulfilled, the sales price is fixed and determinable and collectibility is reasonably assured.
A large portion of the Company’s small and supporting arms training simulator revenue is derived from contracts with various large governmental agencies. Governmental contracts that involve high volume purchases of the Company’s standard systems and related accessories are accounted for as multiple-element arrangements. These contracts require little or no modifications to the existing proprietary platform, specify pricing terms by product and billings generally correspond to the underlying shipment schedule. Advanced billings related to these contracts are recorded as deferred revenue and are recognized ratably as units are delivered.
Other governmental contracts require significant customization of the Company’s existing proprietary platform or require the development of new systems to meet required customer specifications. These contracts are accounted for under the percentage of completion method, measured by the percentage of cost incurred to date to the estimated total cost for each contract. Contract costs include all direct material, direct labor and other costs directly related to the contract. Selling, general, and administrative costs are charged to expense as incurred. Changes in job performance, job conditions, and estimated profitability, including those arising from contract penalty provisions, and final contract settlements may result in revisions to costs and income and are recognized in the period in which the revisions are determined.
Provisions for estimated losses on uncompleted contracts accounted for under both methods described above are made in the period in which such losses are determined.
Revenue from extended warranty sales and customer logistics support sales is recorded as deferred revenue and is recognized ratably as income over the lives of the related service agreements, which generally range from one to three years. Costs associated with these sales are recorded in the period incurred.
Page 6
3. INVENTORY
Inventories consist primarily of simulators, computer hardware, projectors, and component parts. Inventories are valued at the lower of cost on a moving weighted average or market basis. Cost includes materials, labor, and factory overhead. Market is defined as net realizable value.
Inventories consist of the following (in thousands):
| September 30, | March 31, | ||||||||
| 2002 | 2002 | ||||||||
Raw materials |
$ | 6,570 | $ | 8,874 | |||||
Work in process |
4,795 | 2,668 | |||||||
Finished goods |
677 | 1,412 | |||||||
Inventories, gross |
12,042 | 12,954 | |||||||
Less reserves |
(1,601 | ) | (3,520 | ) | |||||
Inventories, net |
$ | 10,441 | $ | 9,434 | |||||
4. LONG-TERM CONTRACTS
| Costs and estimated earnings on uncompleted contracts and related amounts billed as of September 30, 2001 and March 31, 2001, respectively, are as follows (in thousands): |
| September 30, | March 31, | |||||||